<PAGE>
As filed with the Securities and Exchange Commission on December 17, 1997
1933 Act Registration No. 33-10438
1940 Act Registration No. 811-4919
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-lA
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [_]
Post-Effective Amendment No. 25 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 24
--
(Check appropriate box or boxes.)
MITCHELL HUTCHINS SERIES TRUST
(formerly PaineWebber Series Trust)
(Exact name of registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000
DIANNE E. O'DONNELL, Esq.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
Copies to:
ELINOR W. GAMMON, Esq.
BENJAMIN J. HASKIN, Esq.
Kirkpatrick & Lockhart LLP
Second Floor
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036-1800
Telephone: (202) 778-9000
It is proposed that this filing will become effective:
[_] Immediately upon filing pursuant to Rule 485(b)
[_] On pursuant to Rule 485(b)
[_] 60 days after filing pursuant to Rule 485(a)(i)
[_] On pursuant to Rule 485(a)(i)
[X] 75 days after filing pursuant to Rule 485(a)(ii)
[_] On pursuant to Rule 485(a)(ii)
If appropriate, check the following box:
[_] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Title of Securities Being Registered: Shares of Beneficial Interest.
<PAGE>
Mitchell Hutchins Series Trust
Contents of Registration Statement
This registration statement consists of the following papers and documents:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheet
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
Mitchell Hutchins Series Trust
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Part A Item No. and Caption Prospectus Caption
----------------------------------- -----------------------------------------------------------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Investment Objectives and Policies; Description of
Securities, Related Risks and Investment Techniques;
General Information
5. Management of the Fund Management; General Information
5A. Management's Discussion of Fund Financial Highlights
Performance
6. Capital Stock and Other Securities Cover Page; Dividends, Other Distributions and Federal
Tax; General Information
7. Purchase of Securities Being Offered Purchases, Redemptions and Exchanges; Valuation of Shares
8. Redemption or Repurchase Purchases, Redemptions and Exchanges
9. Pending Legal Proceedings Not Applicable
<CAPTION>
Part B - Item No. and Caption Statement of Additional Information Caption
------------------------------------- ------------------------------------------------------------
<S> <C> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Other Information
13. Investment Objective and Policies Investment Policies and Limitations; Hedging and Related
Strategies Using Derivative Instruments; Portfolio
Transactions
14. Management of the Fund Trustees and Officers; Principal Holders of Securities
15. Control Persons and Principal Trustees and Officers; Principal Holders of Securities
Holders of Securities
16. Investment Advisory and Other Investment Advisory Services; Other Information
Services
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Part B - Item No. and Caption Statement of Additional Information Caption
----------------------------- -------------------------------------------
<S> <C> <C>
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Other Securities Dividends; Other Information
19. Purchase, Redemption and Pricing of Additional Purchase and Redemption Information; Valuation
Securities Being Offered of Shares
20. Tax Status Taxes
21. Underwriters Not Applicable
22. Calculation of Performance Data Not Applicable
23. Financial Statements Financial Statements
</TABLE>
Part C
- - ------
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
MITCHELL HUTCHINS SERIES TRUST
1285 Avenue of the Americas
New York, New York 10019
Mitchell Hutchins Series Trust ("Fund") is a professionally managed, open-end
investment company that offers shares in the Portfolios listed below. All the
Portfolios except Strategic Income Portfolio and Global Income Portfolio are
diversified, and each has its own investment objective and policies. 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. 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 S&P 500 Composite Stock Price
Index.
* SMALL CAP PORTFOLIO invests primarily in equity securities of small
capitalization ("small cap") companies.
* GLOBAL GROWTH PORTFOLIO invests primarily in common stocks of companies
based in the United States, Europe, Japan and the Pacific Basin.
This Prospectus concisely sets forth information about the Fund that a
prospective investor should know before investing. Investors are advised to
read this Prospectus and the applicable Contract prospectus and retain them for
future reference. A Statement of Additional Information dated 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 or your PaineWebber investment executive or by calling toll free 1-800-
986-0088.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 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. Further information
about the performance of each Portfolio is also included in the Annual Report
to Shareholders, which may be obtained without charge by calling 1-800-986-
0088. The information appearing below for periods prior to the year ended
December 31, 1993 also has been audited by Ernst & Young LLP, whose reports
thereon were unqualified.
The 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 Account prospectus for additional information
regarding such charges.
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------ ------- ------- ------- ------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning
of period.............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 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 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 the separate account,
however, will affect the actual return to the holder of a Contract. A separate
account may also impose certain restrictions or limitations on the allocation
of purchase payments or Contract value to one or more Portfolios, and not all
Portfolios may be available in connection with a particular Contract.
Prospective investors should consult the applicable Contract prospectus for
information regarding fees and expenses of the Contract and separate account
and any applicable restrictions or limitations.
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") and may serve
as the underlying investments for both annuity and life insurance Contracts
("mixed funding"). Due to differences in tax treatment or other considerations,
the interests of various Contract owners might at some time be in conflict. The
Fund currently does not foresee any such conflict. However, the Fund's board of
trustees ("board") intends to monitor events to identify any material
irreconcilable conflict that may arise and to determine what action, if any,
should be taken in response to such conflict. If such a conflict were to occur,
one or more insurance companies' separate accounts might be required to
withdraw its investments in one or more Portfolios. This might force a
Portfolio to sell securities at disadvantageous prices.
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 the Portfolio to achieve a higher level of investment return than
if the Portfolio invested exclusively in any one investment or allocated a
fixed proportion of its assets to each investment sector. The Portfolio is,
however, more dependent on the ability of Mitchell Hutchins to evaluate
successfully the relative values of the Portfolio's three investment sectors
that is the case with a fund that does not seek to adjust market sector
allocations over time.
Strategic Income Portfolio is "non-diversified" as that term is defined in the
Investment Company Act of 1940 ("1940 Act"). That term and the associated risks
are described under "Description of Securities, Related Risks and Investment
Techniques--Risks--Non-Diversified Status" below.
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.
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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, 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). [Once its assets have reached $ million,] the Portfolio
expects to hold approximately 450 of the 500 stocks in the S&P 500 Index.
Asset reallocations are made on the first business day of each month. In
addition to any reallocation of assets directed by the Tactical Allocation
Model, any material amounts resulting from appreciation or receipt of
dividends, 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 the proprietary Factor Valuation Model. The
Portfolio may invest in companies of large market capitalizations, medium-sized
companies and smaller companies that are aggressively expanding their
businesses. This flexibility allows the Portfolio to invest more of its assets
in companies that have greater earnings growth potential regardless of their
market capitalizations. When investing in small cap companies, the Team places
more emphasis on 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 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
MH 23
<PAGE>
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 interest in such
stripped debt obligations and coupons. A zero coupon security pays no cash
interest to its holder prior to maturity. The buyer of a zero coupon security
receives a rate of return from the gradual appreciation of the securities that
occurs because it will be redeemed at face value on a specified maturity date.
Federal tax law requires that the holder of a zero coupon security and other
securities issued with original issue discount ("OID") include in gross income
each year the OID that accrues on the security for the year.
Because zero coupon 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 valve 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 of the Portfolios 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 of the Portfolios' 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) or to realize gains. 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. 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. With the exception of Money Market
Portfolio, each 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) 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. Each Portfolio may make additional
distributions, if necessary, to avoid a 4% excise tax on certain undistributed
income and capital gain.
Money Market Portfolio declares as dividends on each Business Day all of its
net investment income, payable to shareholders of record as of the close of
regular trading on the New York Stock Exchange ("NYSE") (currently 4:00 p.m.,
Eastern time) on the preceding Business Day; those dividends are paid monthly.
A "Business Day" is any day, Monday through Friday, on which the NYSE is open
for business. Net investment income of Money Market Portfolio consists of
accrued interest and earned discount (including both OID and market discount),
less amortization of premium and accrued expenses. The Portfolio generally
distributes to its shareholders any net short-term capital gain annually but
may make more frequent distributions of that gain if necessary to maintain its
net asset value per share at $1.00 or to avoid income or excise taxes. The
Portfolio does not expect to realize long-term capital gain and thus does not
anticipate payment of any net capital gain distributions.
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 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 Accounts that fund the Contracts. Under
the Internal Revenue Code, no tax is imposed on an insurance company with
respect to income of a qualifying separate account properly allocable to the
value of eligible variable annuity or variable life insurance contracts. See
the applicable Contract prospectus for a discussion of the federal income tax
status of (1) the Accounts that purchase and hold shares of the Portfolios and
(2) the holders of Contracts funded through those Accounts.
Each Portfolio intends to comply or continue to comply with the diversification
requirements imposed 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 Account--and,
because section 817(h) and those regulations treat the assets of each Portfolio
as assets of the related Account, of each Portfolio--that may be invested in
securities of a single issuer. Specifically, the regulations provide that,
except as permitted by the "safe harbor" described below, as of the end of each
calendar quarter or within 30 days thereafter no more than 55% of the total
assets of a Portfolio may be represented by any one investment, no more than
70% by any two investments, no more than 80% by any three investments and no
more than 90% by any four investments. For this purpose, all securities of the
same issuer are considered a single investment, and each U.S. government agency
and instrumentality is considered a separate issuer. Section 817(h) provides,
as a safe harbor, that a separate account will be treated as being adequately
diversified if the diversification requirements under Subchapter M are
satisfied and no more than 55% of the value of the account's total assets are
cash and cash items, government securities and securities of other regulated
investment companies. Failure of a Portfolio to satisfy the section 817(h)
requirements would result in taxation of the insurance company issuing the
Contracts and treatment of the Contract holders other than as described in the
applicable Contract prospectus.
The foregoing is only a summary of some of the important federal income tax
considerations generally affecting the Portfolios and their shareholders; see
the Statement of Additional Information for a more detailed discussion.
Prospective shareholders are urged to consult their tax advisers.
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 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. All investments denominated in foreign
currencies are valued daily in U.S. dollars based on the then-prevailing
exchange rate.
MANAGEMENT
The board, as part of its overall management responsibility, oversees various
organizations responsible for each Portfolio's day-to-day management. Mitchell
Hutchins, the investment adviser and administrator for each Portfolio, makes
and implements all investment decisions and supervises all aspects of the
operations of all the Portfolios except Strategic Fixed Income, Aggressive
Growth and Global Growth Portfolios. The Sub-Advisers for these Portfolios
make and implement all investment decisions for these Portfolios. Mitchell
Hutchins supervises the activities of the Sub-Advisers and supervises all
other aspects of these Portfolios' operations.
In accordance with procedures adopted by the board, brokerage transactions for
the Portfolios may be conducted through PaineWebber or its affiliates and the
Portfolios may pay fees, including fees calculated as a percentage of
earnings, to PaineWebber for its services as lending agent in their portfolio
securities lending programs. 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 January 31, 1998 Mitchell Hutchins was adviser or
sub-adviser to 30 investment companies with 65 separate portfolios and
aggregate assets of approximately $37.4 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.
MH 33
<PAGE>
Mitchell Hutchins (not the Fund) pays Nicholas-Applegate a fee for its services
as sub-adviser for Aggressive Growth Portfolio in the amount of 0.50% of the
Portfolio's average daily net assets. Nicholas-Applegate is located at 600 West
Broadway, 29th Floor, San Diego, California 92101 and is a California limited
partnership. Nicholas-Applegate's general partner is Nicholas-Applegate Capital
Management Holdings, L.P., a California limited partnership controlled by
Arthur E. Nicholas. He and 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 global fixed income investments of Mitchell
Hutchins. He has been with Mitchell Hutchins since 1983. Mr. King joined
Mitchell Hutchins in November 1995. Previously, he was at IBM Corporation where
he was responsible for the management of IBM Pension Fund's global bond
portfolio. Both Mr. Waugh and Mr. King are Chartered Financial Analysts. Other
members of Mitchell Hutchins' international fixed income group provide input on
market outlook, interest rate forecasts and other considerations relating to
global fixed income investments.
Thomas J. Libassi, a senior vice president of Mitchell Hutchins, is responsible
for the day-to-day management of High Income Portfolio and is the sector
manager responsible for the day-to-day management of Strategic Income
Portfolio's U.S. high yield, high risk securities. Prior to May 1994, Mr.
Libassi was a vice president of Keystone Custodian Funds Inc. with portfolio
management responsibility for approximately $900 million in assets primarily
invested in high yield, high risk bonds. Mr. Libassi has held his day-to-day
portfolio management responsibilities for each Portfolio since its inception.
Mark A. Tincher is primarily responsible for the day-to-day management of
Growth and Income Portfolio 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
MH 34
<PAGE>
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
<PAGE>
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 PaineWebber 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 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.
The Fund does not hold annual meetings of shareholders. There normally will be
no meetings of shareholders to elect trustees unless fewer than a majority of
the trustees holding office have been elected by shareholders. Shareholders of
record of no less than two-thirds of the outstanding shares of the Fund may
remove a trustee by votes cast in person or by proxy at a meeting called for
that purpose. The trustees are required to call a meeting of shareholders for
the purpose of voting upon the question of removal of any trustee when so
requested in writing by the shareholders of record of not less than 10% of the
Fund's outstanding shares. Each share of a Portfolio has equal voting, dividend
and liquidation rights. The shares of each Portfolio will be voted separately
except when an aggregate vote of all series is required by the 1940 Act.
CUSTODIAN AND TRANSFER AGENT. Brown Brothers Harriman & Co., 40 Water Street,
Boston, Massachusetts 02109, is custodian of the assets of Global Income
Portfolio. State Street Bank and Trust Company, One Heritage Drive, North
Quincy, Massachusetts 02171, is custodian of the assets of the other
Portfolios. Both custodians employ foreign sub-custodians approved by the board
of trustees to provide custody of the foreign assets of the Portfolios that
invest outside the United States. PFPC Inc., a subsidiary of PNC Bank, N.A.,
whose principal business address is 400 Bellevue Parkway, Wilmington, Delaware
19809, is the Fund's transfer and dividend disbursing agent.
CONFIRMATIONS AND STATEMENTS. Shareholders receive confirmations of purchases
and redemptions of Portfolio shares. Monthly statements sent to each separate
account report that account's Portfolio activity.
MH 37
<PAGE>
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,
MH 38
<PAGE>
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well; BA. Bonds which are rated Ba are
judged to have speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments my be very
moderate and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class; B. Bonds
which are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small; CAA. Bonds which are
rated Caa are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest; CA. Bonds
which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings; C.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Moody's apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category, the modifier 2 indicates a mid-range ranking, and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to pay interest and repay principal is extremely strong; AA.
An obligation rated AA differs from the highest rated issues only in small
degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong; A. An obligation rated A is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories, however, the obligor's
capacity to meet its financial commitment on the obligation is still strong;
BBB. An obligation rated BBB exhibits adequate protection parameters, however
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to meet its financial commitment on the obligation; BB,
B, CCC, CC, C. Obligations rated BB, B, CCC,CC and C are regarded, as having
significant speculative characteristics. BB indicates the least degree of
speculation and C the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major risk exposures to adverse conditions.
"BB" An obligation rated "BB" is less vulnerable to nonpayment that other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" An obligation rated "B' is more vulnerable to nonpayment than obligations
rated "BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" An obligation rated "CCC" is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
"CC" An obligation rated "CC" is currently highly vulnerable to nonpayment.
MH 39
<PAGE>
"C" The "C" rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on the obligation
are being continued.
"D" An obligation rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due over the
applicable grace period has not expired unless Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating also will
be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MH 40
<PAGE>
MAY 1, 1998
MITCHELL HUTCHINS SERIES TRUST
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
Mitchell Hutchins Series Trust ("Fund") is a professionally managed, open-end
investment company that offers shares in the Portfolios listed below. Shares of
each Portfolio are offered only to insurance company separate accounts that
fund benefits under certain variable annuity contracts and/or variable life
insurance contracts (collectively, "Contracts"). Mitchell Hutchins Asset
Management Inc. ("Mitchell Hutchins"), a wholly owned asset management
subsidiary of PaineWebber Incorporated ("PaineWebber"), serves as investment
adviser and administrator of each Portfolio and also serves as distributor of
each Portfolio's Class I shares. Certain Portfolios have sub-advisers ("Sub-
Advisers").
*MONEY MARKET PORTFOLIO invests in high grade money market instruments
and repurchase agreements secured by such instruments.
*HIGH GRADE FIXED INCOME PORTFOLIO invests primarily in U.S. government
bonds, including those backed by mortgages, and high quality corporate
bonds and mortgage-backed and asset-backed securities of private issuers.
*STRATEGIC FIXED INCOME PORTFOLIO invests primarily in bonds and other
fixed income securities of varying maturities with a dollar-weighted
average portfolio duration between three and eight years.
*STRATEGIC INCOME PORTFOLIO strategically allocates its investments among
three bond market categories: U.S. government and investment grade
corporate bonds; U.S. high yield, high risk corporate bonds; and foreign
and emerging market bonds.
*GLOBAL INCOME PORTFOLIO invests principally in high quality bonds of
foreign and U.S. issuers.
*HIGH INCOME PORTFOLIO invests primarily in a diversified range of high
yield, high risk U.S. and foreign corporate bonds.
*BALANCED PORTFOLIO invests primarily in a combination of equity
securities, investment grade bonds and money market instruments.
*GROWTH AND INCOME PORTFOLIO invests primarily in dividend-paying equity
securities believed to have the potential for rapid earnings growth.
*TACTICAL ALLOCATION PORTFOLIO follows a disciplined investment strategy
that allocates its assets between common stocks and U.S. Treasury notes or
U.S. Treasury bills.
*GROWTH PORTFOLIO invests primarily in equity securities of companies
believed to have substantial potential for capital growth.
*AGGRESSIVE GROWTH PORTFOLIO invests primarily in the common stocks of
U.S. companies expected to grow faster in assets and stock prices than the
average rate of companies in the S&P 500 Composite Stock Price Index.
*SMALL CAP PORTFOLIO invests primarily in equity securities of small
capitalization ("small cap") companies.
*GLOBAL GROWTH PORTFOLIO invests primarily in common stocks of companies
based in the United States, Europe, Japan and the Pacific Basin.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Fund's current Prospectus, dated May 1, 1998.
A copy of the Prospectus may be obtained by contacting the Fund or your
PaineWebber investment executive or by calling toll free 1-800-986-0088.
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TABLE OF CONTENTS
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Investment Policies and Limitations........................................ 3
Hedging and Related Strategies Using Derivative Instruments................ 21
Trustees and Officers; Principal Holders of Securities..................... 30
Investment Advisory Services............................................... 38
Portfolio Transactions..................................................... 41
Additional Purchase and Redemption Information............................. 44
Valuation of Shares........................................................ 44
Taxes...................................................................... 46
Dividends.................................................................. 48
Other Information.......................................................... 48
Financial Statements....................................................... 49
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INVESTMENT POLICIES AND LIMITATIONS
The following supplements the information contained in the Fund's Prospectus
concerning the investment policies and limitations of its thirteen Portfolios.
Except as otherwise indicated in the Prospectus or the Statement of Additional
Information, there are no policy limitations on a Portfolio's ability to use
the investments or techniques discussed in these documents.
RISK CONSIDERATIONS RELATING TO FOREIGN SECURITIES. Investing in non-U.S.
securities involve certain risks and special considerations, including those
set forth below, which are not typically associated with investing in
securities of U.S. companies. Investments in securities of foreign issuers or
securities denominated in a foreign currency involve risks relating to
political, social and economic developments abroad as well as risks resulting
from the differences between the regulations to which U.S. and foreign issuers
and markets are subject. These risks may include expropriation, confiscatory
taxation, withholding taxes, limitations on the use or transfer of Portfolio
assets and political or social instability or diplomatic developments.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments positions. Securities of many foreign companies may be less liquid and
their prices more volatile than those of securities of comparable U.S.
companies. From time to time, foreign securities may be difficult to liquidate
rapidly without significantly depressing the price of such securities.
Transactions in foreign securities may be subject to less efficient settlement
practices. Foreign securities trading practices, including those involving
securities settlement where a Portfolio's assets may be released prior to
receipt of payment, may expose that Portfolio to increased risk in the event of
a failed trade or the insolvency of a foreign broker-dealer. Legal remedies for
defaults and disputes may have to be pursued in foreign courts, whose
procedures differ substantially from those of U.S. courts.
Securities of foreign issuers may not be registered with the Securities and
Exchange Commission ("SEC"), and the issuers thereof may not be subject to its
reporting requirements. Accordingly, there may be less publicly available
information concerning foreign issuers of securities held by the Portfolios
than is available concerning U.S. companies. Foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory requirements comparable to those applicable to
U.S. companies.
The Portfolios may invest in depository receipts, including American
Depository Receipts ("ADRs"), European Depository Receipts ("EDRs"), global
depository receipts ("GDRs") or other securities convertible into securities of
companies based in foreign countries. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities. They are generally in
registered form, are denominated in U.S. dollars and are designed for use in
the U.S. securities markets and EDRs are European receipts evidencing a similar
arrangement, may be denominated in other currencies and are designed for use in
European securities markets. GDRs are similar to EDRs and are designed for use
in several international financial markets. For purposes of each Portfolio's
investment policies, ADRs, EDRs or GDRs are deemed to have the same
classification as the underlying securities they represent. Thus, an ADR, EDR
or GDR evidencing ownership of common stock will be treated as common stock.
ADRs are publicly traded on exchanges or over-the-counter ("OTC") in the
United States and are issued through "sponsored" or "unsponsored" arrangements.
In a sponsored ADR arrangement, the foreign issuer assumes the obligation to
pay some or all of the depositary's transaction fees, whereas under an
unsponsored arrangement, the foreign issuer assumes no obligations and the
depositary's transaction fees are paid directly by the ADR holders. In
addition, less information is available in the United States about an
unsponsored ADR than about a sponsored ADR.
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The Portfolios that may invest outside the United States anticipate that
their brokerage transactions involving securities of companies headquartered in
countries other than the United States will be conducted primarily on the
principal exchanges of such countries. Although each Portfolio will endeavor to
achieve the best net results in effecting its portfolio transactions,
transactions on foreign exchanges are usually subject to fixed commissions that
are generally higher than negotiated commissions on U.S. transactions. There is
generally less government supervision and regulation of exchanges and brokers
in foreign countries than in the United States.
The costs attributable to foreign investing frequently are higher than those
attributable to domestic investing; this is particularly true with respect to
emerging capital markets. For example, the cost of maintaining custody of
foreign securities exceeds custodian costs for domestic securities, and
transaction and settlement costs of foreign investing also frequently are
higher than those attributable to domestic investing. Costs associated with the
exchange of currencies also make foreign investing more expensive than domestic
investing.
Investment income on certain foreign securities may be subject to foreign
withholding on interest and/or dividends or other taxes that could reduce the
return on these securities. Tax treaties between the United States and foreign
countries, however, may reduce or eliminate the amount of foreign taxes to
which a Portfolio would be subject. In addition, substantial limitations may
exist in certain countries with respect to the Portfolios' ability to
repatriate investment capital or the proceeds of sales of securities.
All or a substantial portion of High Income Portfolio's or Strategic Income
Portfolio's investments in foreign and emerging market securities may be rated
below investment grade or may be unrated securities with credit characteristics
that are comparable to securities that are rated below investment grade.
Strategic Income Portfolio may invest without limit in securities of issuers in
emerging market countries and in non-U.S. dollar-denominated fixed income
securities, including securities denominated in the local currencies of
emerging market countries.
EMERGING MARKET SECURITIES. Disclosure and regulatory standards in many
respects are less stringent in emerging market countries than in the U.S. and
other major markets. There also may be a lower level of monitoring and
regulation of emerging markets and the activities of investors in such markets,
and enforcement of existing regulations may be extremely limited. A Portfolio
net investment income and capital gains from a Portfolio's foreign investment
activities may be subject to non-U.S. withholding taxes.
Foreign markets also have different clearance and settlement procedures, and
in certain markets there have been times when settlements have failed to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Delays in settlement could result in the temporary periods
when assets of a Portfolio are uninvested and no return is earned thereon. The
inability of a Portfolio to make intended security purchases due to settlement
problems could cause the Portfolio to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result either in losses to the Portfolio due to subsequent declines in the
value of such portfolio security or, if the Portfolio has entered into a
contract to sell the security, could result in possible liability to the
purchaser.
Foreign investment in the securities markets of several emerging market
countries is restricted or controlled to varying degrees. These restrictions or
controls may at times limit or preclude foreign investment and increase the
costs and expenses of a Portfolio. Certain countries in which a Portfolio may
invest require governmental approval prior to investments by foreign persons,
limit the amount of investment by foreign persons in a particular issuer, limit
the investment by foreign persons only to a specific class of securities of
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an issuer that may have less advantageous rights than the classes available for
purchase by domiciliaries of the countries or impose additional taxes on
foreign investors. Certain issuers may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in a
country's balance of payments the country could impose temporary restrictions
on foreign capital remittances. A Portfolio could be adversely affected by
delays in, or a refusal to grant, any required governmental approval for
repatriation of capital, as well as by the application to the Portfolio of any
restrictions on investments. Investing in local markets may require a Portfolio
to adopt special procedures, seek local government approvals or take other
actions, each of which may involve additional costs to the Portfolio.
SOVEREIGN DEBT. Investment in debt securities issued by foreign governments
and their political subdivisions or agencies ("Sovereign Debt") involves
special risks. Sovereign Debt differs from debt obligations issued by private
entities in that, generally, remedies for defaults must be pursued in the
courts of the defaulting party. Legal recourse is, therefore, somewhat
diminished. Political conditions, especially a sovereign entity's willingness
to meet the terms of its debt obligations, are of considerable significance.
Also, there can be no assurance that the holders of commercial bank debt issued
by the same sovereign entity may not contest payments to the holders of
Sovereign Debt in the event of default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and interest
due in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
principal international lenders and the political constraints to which a
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local
government or agency.
The occurrence of political, social or diplomatic changes in one or more of
the countries issuing Sovereign Debt could adversely affect a Portfolio's
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their Sovereign Debt. While Mitchell Hutchins or the applicable Sub-Adviser
manages the Portfolios' investments in a manner that is intended to minimize
the exposure to such risks, there can be no assurance that adverse political
changes will not cause a Portfolio to suffer a loss of interest or principal on
any of its holdings.
Another factor bearing on the ability of a country to repay sovereign debt is
the level of the country's international reserves. Fluctuations in the level of
these reserves can affect the amount of foreign exchange readily available for
external debt payments and, thus, could have a bearing on the capacity of the
country to make payments on its sovereign debt.
To the extent that a country has a current account deficit (generally when
exports of merchandise and services are less than the country's imports of
merchandise and services plus net transfers (e.g., gifts of currency and goods)
to foreigners), it will need to depend on loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and inflows of foreign investment. The access of a country
to these forms of external funding may not be certain, and a withdrawal of
external funding could adversely affect the capacity of a government to make
payments on its obligations. In addition, the cost of servicing debt
obligations can be affected by a change in international interest rates, since
the majority of these obligations carry interest rates that are adjusted
periodically based upon international rates.
With respect to sovereign debt of emerging market issuers, investors should
be aware that certain emerging market countries are among the largest debtors
to commercial banks and foreign governments. At
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times certain emerging market countries have declared moratoria on the payment
of principal and interest on external debt; such moratoria are currently in
effect in certain Latin American countries.
Certain emerging market countries have experienced difficulty in servicing
their sovereign debt on a timely basis which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit
agreements or converting outstanding principal and unpaid interest to Brady
Bonds (discussed below), and obtaining new credit to finance interest
payments. Holders of sovereign debt, including the Portfolios, may be
requested to participate in the rescheduling of such debt and to extend
further loans to sovereign debtors. The interests of holders of sovereign debt
could be adversely affected in the course of restructuring arrangements or by
certain other factors referred to below. Furthermore, some of the participants
in the secondary market for sovereign debt may also be directly involved in
negotiating the terms of these arrangements and may, therefore, have access to
information not available to other market participants. Obligations arising
from past restructuring agreements may affect the economic performance and
political and social stability of certain issuers of sovereign debt. There is
no bankruptcy proceeding by which sovereign debt on which a sovereign has
defaulted may be collected in whole or in part.
BRADY BONDS. Brady Bonds are sovereign debt securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness. In
restructuring its external debt under the Brady Plan framework, a debtor
nation negotiates with its existing bank lenders as well as multilateral
institutions such as the International Monetary Fund ("IMF"). The Brady Plan
framework, as it has developed, contemplates the exchange of commercial bank
debt for newly issued Brady Bonds. Brady Bonds may also be issued in respect
of new money being advanced by existing lenders in connection with the debt
restructuring. The World Bank and the IMF support the restructuring by
providing funds pursuant to loan agreements or other arrangements which enable
the debtor nation to collateralize the new Brady Bonds or to repurchase
outstanding bank debt at a discount.
There can be no assurance that the circumstances regarding the issuance of
Brady Bonds by these countries will not change. Investors should recognize
that Brady Bonds have been issued only recently and accordingly do not have a
long payment history. Agreements implemented under the Brady Plan to date are
designed to achieve debt and debt-service reduction through specific options
negotiated by a debtor nation with its creditors. As a result, the financial
packages offered by each country differ. The types of options have included
the exchange of outstanding commercial bank debt for bonds issued at 100% of
face value of such debt, which carry a below-market stated rate of interest
(generally known as par bonds), bonds issued at a discount from the face value
of such debt (generally known as discount bonds), bonds bearing an interest
rate which increases over time and bonds issued in exchange for the
advancement of new money by existing lenders. Regardless of the stated face
amount and stated interest rate of the various types of Brady Bonds, a
Portfolio will purchase Brady Bonds in secondary markets, as described below,
in which the price and yield to the investor reflect market conditions at the
time of purchase.
Certain Brady Bonds have been collateralized as to principal due at maturity
by U.S. Treasury zero coupon bonds with maturities equal to the final maturity
of such Brady Bonds. Collateral purchases are financed by the IMF, the World
Bank and the debtor nations' reserves. In the event of a default with respect
to collateralized Brady Bonds as a result of which the payment obligations of
the issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity of the
defaulted Brady Bonds, which will continue to be outstanding, at which time
the face amount of the collateral will equal the principal payments which
would have then been due on the Brady Bonds in the normal course. In addition,
interest payments on certain types of Brady Bonds may be collateralized by
cash or high grade securities in amounts that typically represent between 12
and 18 months of interest accruals on these instruments, with the balance of
the interest accruals
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being uncollateralized. Brady Bonds are often viewed as having several
valuation components: (1) the collateralized repayment of principal, if any, at
final maturity, (2) the collateralized interest payments, if any, (3) the
uncollateralized interest payments and (4) any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constitute the "residual
risk"). In light of the residual risk of Brady Bonds and, among other factors,
the history of defaults with respect to commercial bank loans by public and
private entities of countries issuing Brady Bonds, investments in Brady Bonds
are to be viewed as speculative. A Portfolio may purchase Brady Bonds with no
or limited collateralization, and will be relying for payment of interest and
(except in the case of principal collateralized Brady Bonds) repayment of
principal primarily on the willingness and ability of the foreign government to
make payment in accordance with the terms of the Brady Bonds. Brady Bonds
issued to date are purchased and sold in secondary markets through U.S.
securities dealers and other institutions and are generally maintained through
European transnational securities depositories.
STRUCTURED FOREIGN INVESTMENTS. This term refers to interests in U.S. and
foreign entities organized and operated solely for the purpose of securitizing
or restructuring the investment characteristics of foreign securities. This
type of securitization or restructuring involves the deposit with or purchase
by a U.S. or foreign entity, such as a corporation or trust, of specified
instruments (such as commercial bank loans or Brady Bonds) and the issuance by
that entity of one or more classes of securities backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued structured foreign
investments to create securities with different investment characteristics such
as varying maturities, payment priorities and interest rate provisions, and the
extent of the payments made with respect to structured foreign investments is
dependent on the extent of the cash flow on the underlying instruments.
Structured foreign investments frequently involve no credit enhancement.
Accordingly, their credit risk generally will be equivalent to that of the
underlying instruments. In addition, classes of structured foreign investments
may be subordinated to the right of payment of another class. Subordinated
structured foreign investments typically have higher yields and present greater
risks than unsubordinated structured foreign investments. Structured foreign
investments are typically sold in private placement transactions, and there
currently is no active trading market for structured foreign investments.
FOREIGN CURRENCY TRANSACTIONS. Although each Portfolio that invests in
securities denominated in foreign currencies values its assets daily in U.S.
dollars, none of these Portfolios intends to convert its holdings of foreign
currencies to U.S. dollars on a daily basis. The Portfolios' foreign currencies
may be held as "foreign currency call accounts" at foreign branches of foreign
or domestic banks. These accounts bear interest at negotiated rates and are
payable upon relatively short demand periods. If a bank became insolvent, a
Portfolio could suffer a loss of some or all of the amounts deposited. The
Portfolios may convert foreign currency to U.S. dollars from time to time.
Although foreign exchange dealers generally do not charge a stated commission
or fee for conversion, the prices posted generally include a "spread," which is
the difference between the prices at which the dealers are buying and selling
foreign currencies.
The value of the foreign currency-denominated assets of a Portfolio, as
measured in U.S. dollars, may be affected favorably or unfavorably by
fluctuations in currency rates and exchange control regulations. Further, a
Portfolio may incur costs in connection with conversions between various
currencies. Currency exchange dealers realize a profit based on the difference
between the prices at which they are buying and selling various currencies.
Thus, a dealer normally will offer to sell a foreign currency to a Portfolio at
one rate, while offering a lesser rate of exchange should a Portfolio desire
immediately to resell that currency to the dealer. Each Portfolio conducts its
currency exchange transactions either on a spot (i.e. cash) basis at the spot
rate prevailing in the foreign currency exchange market, or through entering
into forward, futures or options contracts to purchase or sell foreign
currencies.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. From time to time, investments in
other investment companies may be the most effective available means by which a
Portfolio may invest in securities of issuers
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in certain countries. Investment in such investment companies may involve the
payment of management expenses and, in connection with some purchases, sales
loads and payment of substantial premiums above the value of such companies'
portfolio securities. At the same time, a Portfolio would continue to pay its
own management fees and other expenses. Each Portfolio that may invest outside
the United States may invest in such investment companies when, in the judgment
of Mitchell Hutchins or the applicable Sub-Adviser, the potential benefits of
such investment outweigh the payment of any applicable premium, sales load and
expenses. In addition, a Portfolio's investments in such investment companies
are subject to limitations under the Investment Company Act of 1940 ("1940
Act") and market availability and may result in special federal income tax
consequences.
SELECTION OF SECURITIES--STRATEGIC INCOME PORTFOLIO. In selecting U.S.
government and investment grade securities for Strategic Income Portfolio,
Mitchell Hutchins considers factors such as the general level of interest
rates, changes in the perceived creditworthiness of the issuers, the prepayment
outlook for the mortgage market and changes in general economic conditions and
business conditions affecting the issuers and their respective industries.
In selecting U.S. high yield securities for Strategic Income Portfolio's
portfolio, Mitchell Hutchins seeks to identify issuers and industries that
Mitchell Hutchins believes are more likely to experience stable or improving
financial conditions. Many corporations are in the process of strengthening, or
have recently improved, their financial positions through cost-cutting,
restructuring or refinancing with lower cost debt. Mitchell Hutchins expects
that, at times when the U.S. economy is improving, these factors and others may
lead many issuers to experience financial improvement and possible credit
upgrades. Mitchell Hutchins seeks to identify these issuers through detailed
credit research. Mitchell Hutchins' analysis may include consideration of
general industry trends, the issuer's experience and managerial strength,
changing financial conditions, borrowing requirements or debt maturity
schedules, the issuer's responsiveness to changes in business conditions and
interest rates, and other terms and conditions. Mitchell Hutchins may also
consider relative values based on anticipated cash flow, interest or dividend
coverage, asset coverage and earnings prospects.
Mitchell Hutchins selectively invests Strategic Income Portfolio's assets
allocated to foreign and emerging market securities in securities of issuers in
countries where the combination of income market yields, the price appreciation
potential of fixed income securities and, with respect to non-U.S. dollar-
denominated securities, currency exchange rate movements present opportunities
for high current income and, secondarily, capital appreciation. Determinations
as to the foreign markets in which the Portfolio invests are based on an
evaluation of total debt levels, currency reserve levels, net exports/imports,
overall economic growth, level of inflation, currency fluctuation, political
and social climate and payment history of the country in which the issuer is
located. Particular securities are selected based upon credit risk analysis of
potential issuers, the characteristics of the security and interest rate
sensitivity of the various issues by a single issuer, analysis of volatility
and liquidity of these particular instruments and the tax implications to the
Portfolio of various instruments.
SELECTION OF INVESTMENTS BY BALANCED PORTFOLIO. The money market instruments
in which Balanced Portfolio may invest include U.S. Treasury bills and other
obligations issued or guaranteed as to interest and principal by the U.S.
government, its agencies and instrumentalities; obligations of U.S. banks
(including certificates of deposit and bankers' acceptances) having total
assets at the time of purchase in excess of $1.5 billion and interest-bearing
savings deposits in U.S. commercial and savings banks in principal amounts at
each such bank not greater than are fully insured by the Federal Deposit
Insurance Corporation, provided that the aggregate amount of such deposits does
not exceed 5% of the value of the Portfolio's assets; commercial paper and
other short-term corporate obligations; and variable and floating rate
securities and repurchase agreements. The Portfolio may also hold cash.
The commercial paper and other short-term corporate obligations purchased by
Balanced Portfolio will consist only of obligations of U.S. corporations that
are (1) rated at least Prime-2 by Moody's Investors
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Service, Inc. ("Moody's") or A-2 by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P"), (2) comparably rated by another nationally
recognized statistical rating organization ("NRSRO") or (3) unrated and
determined by Mitchell Hutchins to be of comparable quality. These obligations
may include variable amount master demand notes, which are unsecured
obligations redeemable upon notice that permit investment of fluctuating
amounts at varying rates of interest pursuant to direct arrangements with the
issuer of the instrument. Such obligations are usually unrated by a rating
agency.
MONEY MARKET INVESTMENTS. The money market investments of the Portfolios
other than Balanced Portfolio and Money Market Portfolio (which are described
elsewhere in the Prospectus or Statement of Additional Information) include,
among other things, (1) securities issued or guaranteed by the U.S. government
or one of its agencies or instrumentalities, (2) debt obligations of banks,
savings and loan institutions, insurance companies and mortgage bankers, (3)
commercial paper and notes, including those with variable and floating rates of
interest, (4) debt obligations of foreign branches of U.S. banks, U.S. branches
of foreign banks, and foreign branches of foreign banks, (5) debt obligations
issued or guaranteed by one or more foreign governments or any of their foreign
political subdivisions, agencies or instrumentalities, including obligations of
supranational entities, (6) debt securities issued by foreign issuers, (7)
repurchase agreements and (8) other investment companies that invest
exclusively in money market instruments. Only those Portfolios that may invest
outside the United States may invest in money market instruments that are
denominated in foreign currencies.
Global Growth Portfolio may invest up to 25% of its assets in the GEIM Short-
Term Investment Fund ("Investment Fund"), an investment fund created
specifically to serve as a vehicle for the collective investment of cash
balances of Global Growth Portfolio and other accounts advised by either GE
Investment Management or its affiliate, General Electric Investment
Corporation. The Investment Fund invests exclusively in the money market
instruments described in (1) through (7) above. The Investment Fund is advised
by GEIM. No advisory fee is charged by GEIM to the Investment Fund, nor will
Global Growth Portfolio incur any sales charge, redemption fee, distribution
fee or service fee in connection with its investments in the Investment Fund.
YIELD FACTORS AND RATINGS. Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), and
other nationally recognized statistical rating organizations ("NRSROs") are
private services that provide ratings of the credit quality of debt
obligations. A description of the ratings assigned to debt obligations by S&P
and Moody's is included in the Appendix to the Prospectus. The process by which
S&P and Moody's determine ratings for mortgage- and asset-backed securities
includes consideration of the likelihood of the receipt by security holders of
all distributions, the nature of the underlying securities, the credit quality
of the guarantor, if any, and the structural, legal and tax aspects associated
with such securities. Not even the highest such ratings represent an assessment
of the likelihood that principal prepayments will be made by mortgagors or the
degree to which such prepayments may differ from that originally anticipated,
nor do such ratings address the possibility that investors may suffer a lower
than anticipated yield or that investors in such securities may fail to recoup
fully their initial investment due to prepayments.
A Portfolio may use these ratings in determining whether to purchase, sell or
hold a security. It should be emphasized, however, that ratings are general and
are not absolute standards of quality. Consequently, debt obligations with the
same maturity, interest rate and rating may have different market prices. Also,
rating agencies may fail to make timely changes in credit ratings in response
to subsequent events so that an issuer's current financial condition may be
better or worse than the rating indicates. The rating assigned to a security by
a NRSRO does not reflect an assessment of the volatility of the security's
market value or of the liquidity of an investment in the security. Subsequent
to its purchase by any Portfolio, an issue of debt obligations may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by that Portfolio.
In addition to ratings assigned to individual bond issues, Mitchell Hutchins
or a Sub-Adviser, as applicable, will analyze interest rate trends and
developments that may affect individual issuers, including
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factors such as liquidity, profitability and asset quality. The yields on debt
securities in which the Portfolios invest are dependent on a variety of
factors, including general money market conditions, general conditions in the
bond market, the financial condition of the issuer, the size of the offering,
the maturity of the obligation and its rating. There is a wide variation in the
quality of bonds, both within a particular classification and between
classifications. An issuer's obligations under its bonds are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of bond holders or other creditors of an issuer; litigation or other
conditions may also adversely affect the power or ability of issuers to meet
their obligations for the payment of interest and principal on their bonds.
Debt securities rated Ba or lower by Moody's, BB or lower by S&P, comparably
rated by another NRSRO or determined by Mitchell Hutchins or a Sub-Adviser, as
applicable, to be of comparable quality are below investment grade, are deemed
by those agencies to be predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal and may involve major risk
exposure to adverse conditions. Lower rated debt securities generally offer a
higher current yield than that available for investment grade issues, but they
involve higher risks, in that they especially subject to adverse changes in
general economic conditions and in the industries in which the issuers are
engaged, to changes in the financial condition of the issuers and to price
fluctuations in response to changes in interest rates. During periods of
economic downturn or rising interest rates, highly leveraged issuers may
experience financial stress which could adversely affect their ability to make
payments of interest and principal and increase the possibility of default. In
addition, such issuers may not have more traditional methods of financing
available to them and may be unable to repay debt at maturity by refinancing.
The risk of loss due to default by such issuers is significantly greater
because such securities frequently are unsecured and subordinated to the prior
payment of senior indebtedness.
The market for lower rated debt securities, especially those of foreign
issuers, has expanded rapidly in recent years, which has been a period of
generally expanding growth and lower inflation. These securities will be
susceptible to greater risk when economic growth slows or reverses and when
inflation increases or deflation occurs. This has been reflected in the recent
volatility in emerging market securities, particularly in Asia. In the past,
the prices of many lower rated debt securities declined substantially,
reflecting an expectation that many issuers of such securities might experience
financial difficulties. As a result, the yields on lower rated debt securities
rose dramatically. However, such higher yields did not reflect the value of the
income stream that holders of such securities expected, but rather the risk
that holders of such securities could lose a substantial portion of their value
as a result of the issuers' financial restructuring or defaults. There can be
no assurance that such declines will not recur. The market for lower rated debt
issues generally is thinner or less active than that for higher quality
securities, which may limit a Portfolio's ability to sell such securities at
fair value in response to changes in the economy or financial markets. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of lower rated securities,
especially in a thinly traded market.
ASSET-BACKED SECURITIES. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed in more
detail below. However, the underlying assets are not first lien mortgage loans
or interests therein, but include assets such as motor vehicle installment sale
contracts, other installment sale contracts, home equity loans, leases of
various types of real and personal property and receivables from revolving
credit (credit card) agreements. Such assets are securitized through the use of
trusts or special purpose corporations. Payments or distributions of principal
and interest may be guaranteed up to a certain amount and for a certain time
period by a letter of credit or pool insurance policy issued by a financial
institution unaffiliated with the issuer, or other credit enhancements may be
present.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent direct or
indirect participations in, or are secured by and payable from, mortgage loans
secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Foreign mortgage-backed
securities may
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employ different structures. Multi-class pass-through securities and
collateralized mortgage obligations are collectively referred to herein as
CMOs. The U.S. government mortgage-backed securities in which the Portfolios
may invest include mortgage-backed securities issued or guaranteed as to the
payment of principal and interest (but not as to market value) by the
Government National Mortgage Association ("Ginnie Mae"), Fannie Mae (also known
as, the Federal National Mortgage Association), or Freddie Mac, (also known as
the Federal Home Loan Mortgage Corporation) or other government-sponsored
enterprises. Other mortgage-backed securities are issued by private issuers,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and
special purpose entities (collectively "Private Mortgage Lenders"). Payments of
principal and interest (but not the market value) of such private mortgage-
backed securities may be supported by pools of mortgage loans or other
mortgage-backed securities that are guaranteed, directly or indirectly, by the
U.S. government or one of its agencies or instrumentalities, or they may be
issued without any government guarantee of the underlying mortgage assets but
with some form of non-government credit enhancement. New types of mortgage-
backed securities are developed and marketed from time to time and, consistent
with its investment limitations, each Portfolio expects to invest in those new
types of mortgage-backed securities that Mitchell Hutchins or a Sub-Adviser
believes may assist a Portfolio in achieving its investment objective.
Similarly, a Portfolio may invest in mortgage-backed securities issued by new
or existing governmental or private issuers other than those identified herein.
Ginnie Mae Certificates. Ginnie Mae guarantees certain mortgage pass-through
certificates ("Ginnie Mae certificates") that are issued by Private Mortgage
Lenders and that represent ownership interests in individual pools of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. Timely payment of interest
and principal is backed by the full faith and credit of the U.S. government.
Each mortgagor's monthly payments to his lending institution on his residential
mortgage are "passed through" to certificateholders such as a Portfolio.
Mortgage pools consist of whole mortgage loans or participations in loans. The
terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. Lending institutions that originate
mortgages for the pools are subject to certain standards, including credit and
other underwriting criteria for individual mortgages included in the pools.
Fannie Mae Certificates. Fannie Mae facilitates a national secondary market
in residential mortgage loans insured or guaranteed by U.S. government agencies
and in privately insured or uninsured residential mortgage loans (sometimes
referred to as "conventional mortgage loans" or "conventional loans") through
its mortgage purchase and mortgage-backed securities sales activities. Fannie
Mae issues guaranteed mortgage pass-through certificates ("Fannie Mae
certificates"), which represent pro rata shares of all interest and principal
payments made and owed on the underlying pools. Fannie Mae guarantees timely
payment of interest and principal on Fannie Mae certificates. The Fannie Mae
guarantee is not backed by the full faith and credit of the U.S. government.
Freddie Mac Certificates. Freddie Mac also facilitates a national secondary
market for conventional residential and U.S. government-issued mortgage loans
through its mortgage purchase and mortgage-backed securities sales activities.
Freddie Mac issues two types of mortgage pass-through securities: mortgage
participation certificates ("PCs") and guaranteed mortgage certificates
("GMCs"). Each PC represents a pro rata share of all interest and principal
payments made and owed on the underlying pool. Freddie Mac generally guarantees
timely monthly payment of interest on PCs and the ultimate payment of
principal, but it also has a PC program under which it guarantees timely
payment of both principal and interest. GMCs also represent a pro rata interest
in a pool of mortgages. These instruments, however, pay interest semi-annually
and return principal once a year in guaranteed minimum payments. The Freddie
Mac guarantee is not backed by full faith and credit of the U.S. government.
Private, RTC and Similar Mortgage-Backed Securities. Mortgage-backed
securities issued by Private Mortgage Lenders are structured similarly to the
CMOs or single class mortgage-backed securities issued or guaranteed by Ginnie
Mae, Fannie Mae and Freddie Mac. Such mortgage-backed securities may be
supported
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by pools of U.S. government or agency insured or guaranteed mortgage loans or
by other mortgage-backed securities issued by a government agency or
instrumentality, but they generally are supported by pools of conventional
(i.e., non-government guaranteed or insured) mortgage loans. Since such
mortgage-backed securities normally are not guaranteed by an entity having the
credit standing of Ginnie Mae, Fannie Mae or Freddie Mac, they normally are
structured with one or more types of credit enhancement. See "--Types of Credit
Enhancement." Such credit enhancements do not protect investors from changes in
market value.
The Resolution Trust Corporation ("RTC"), which was organized by the U.S.
government in connection with the savings and loan crisis, held assets of
failed savings associations as either a conservator or receiver for such
associations, or it acquired such assets in its corporate capacity. These
assets included, among other things, single family and multi-family mortgage
loans, as well as commercial mortgage loans. In order to dispose of such assets
in an orderly manner, RTC established a vehicle registered with the SEC through
which it sold mortgage-backed securities. RTC mortgage-backed securities
represent pro rata interests in pools of mortgage loans that RTC held or had
acquired, as described above, and are supported by one or more of the types of
private credit enhancements used by Private Mortgage Lenders.
Collateralized Mortgage Obligations and Multi-Class Mortgage Pass-
Throughs. CMOs are debt obligations that are collateralized either by mortgage
loans, mortgage pass-through securities or other CMOs (such collateral
collectively being called "Mortgage Assets"). CMOs may be issued by Private
Mortgage Lenders or by government entities such as Fannie Mae or Freddie Mac.
Multi-class mortgage pass-through securities are interests in trusts that are
comprised of Mortgage Assets and that have multiple classes similar to those of
CMOs. Unless the context indicates otherwise, references herein to CMOs include
multi-class mortgage pass-through securities. Payments of principal of and
interest on the Mortgage Assets (and, in the case of CMOs, any reinvestment
income thereon) provide the funds to pay debt service on the CMOs or to make
scheduled distributions on the multi-class mortgage pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of a CMO, also referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrued on all classes of a CMO (other than any principal-
only or PO class) on a monthly, quarterly or semi-annual basis. The principal
and interest on the Mortgage Assets may be allocated among the several classes
of a CMO in many ways. In one structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of a
CMO in the order of their respective stated maturities or final distribution
dates so that no payment of principal will be made on any class of the CMO
until all other classes having an earlier stated maturity or final distribution
date have been paid in full. In some CMO structures, all or a portion of the
interest attributable to one or more of the CMO classes may be added to the
principal amounts attributable to such classes, rather than passed through to
certificateholders on a current basis, until other classes of the CMO are paid
in full.
Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier.
Some CMO classes are structured to pay interest at rates that are adjusted in
accordance with a formula, such as a multiple or fraction of the change in a
specified interest rate index, so as to pay at a rate that will be attractive
in certain interest rate environments but not in others. For example, an
inverse floating rate CMO class pays interest at a rate that increases as a
specified interest rate index decreases but decreases as that index increases.
For other CMO classes, the yield may move in the same direction as market
interest rates--i.e. the yield may increase as rates increase and decrease as
rates decrease--but may do so more rapidly or to a greater degree. The market
value of such securities generally is more volatile than that of a fixed rate
obligation. Such interest rate formulas may be combined with other CMO
characteristics. For example, a
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CMO class may be an "inverse IO," on which the holders are entitled to receive
no payments of principal and are entitled to receive interest at a rate that
will vary inversely with a specified index or a multiple thereof.
Types of Credit Enhancement. To lessen the effect of failures by obligors on
Mortgage Assets to make payments, mortgage-backed securities may contain
elements of credit enhancement. Such credit enhancement falls into two
categories: (1) liquidity protection and (2) protection against losses
resulting after default by an obligor on the underlying assets and collection
of all amounts recoverable directly from the obligor and through liquidation of
the collateral. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets (usually the bank,
savings association or mortgage banker that transferred the underlying loans to
the issuer of the security), to ensure that the receipt of payments on the
underlying pool occurs in a timely fashion. Protection against losses resulting
after default and liquidation ensures ultimate payment of the obligations on at
least a portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches. A Portfolio will not
pay any additional fees for such credit enhancement, although the existence of
credit enhancement may increase the price of a security. Credit enhancements do
not provide protection against changes in the market value of a security.
Examples of credit enhancement arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "spread accounts" or "reserve funds" (where cash or investments,
sometimes funded from a portion of the payments on the underlying assets, are
held in reserve against future losses) and "over-collateralization" (where the
scheduled payments on, or the principal amount of, the underlying assets exceed
that required to make payment of the securities and pay any servicing or other
fees). The degree of credit enhancement provided for each issue generally is
based on historical information regarding the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in such a security.
Special Characteristics of Mortgage- and Asset-Backed Securities. The yield
characteristics of mortgage- and asset-backed securities differ from those of
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans or
other obligations generally may be prepaid at any time. Prepayments on a pool
of mortgage loans are influenced by a variety of economic, geographic, social
and other factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. Generally, however, prepayments on fixed-rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Similar factors apply to prepayments
on asset-backed securities, but the receivables underlying asset-backed
securities generally are of a shorter maturity and thus are less likely to
experience substantial prepayments. Such securities, however, often provide
that for a specified time period the issuers will replace receivables in the
pool that are repaid with comparable obligations. If the issuer is unable to do
so, repayment of principal on the asset-backed securities may commence at an
earlier date. Mortgage- and asset-backed securities may decrease in value as a
result of increases in interest rates and may benefit less than other fixed-
income securities from declining interest rates because of the risk of
prepayment.
The rate of interest on mortgage-backed securities is lower than the interest
rates paid on the mortgages included in the underlying pool due to the annual
fees paid to the servicer of the mortgage pool for passing through monthly
payments to certificateholders and to any guarantor, and due to any yield
retained by the issuer. Actual yield to the holder may vary from the coupon
rate, even if adjustable, if the mortgage-backed securities are purchased or
traded in the secondary market at a premium or discount. In addition, there is
normally some delay between the time the issuer receives mortgage payments from
the servicer and the time the issuer makes the payments on the mortgage-backed
securities, and this delay reduces the effective yield to the holder of such
securities.
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Yields on pass-through securities are typically quoted by investment dealers
and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools
of fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. However, these effects may not be present, or may
differ in degree, if the mortgage loans in the pools have adjustable interest
rates or other special payment terms, such as a prepayment charge. Actual
prepayment experience may cause the yield of mortgage-backed securities to
differ from the assumed average life yield. Reinvestment of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting the yield of a Portfolio.
Additional Information on ARM and Floating Rate Mortgage-Backed
Securities. Adjustable rate mortgage ("ARM") securities are mortgage-backed
securities that represent a right to receive interest payments at a rate that
is adjusted to reflect the interest earned on a pool of mortgage loans bearing
variable or adjustable rates of interest (such mortgage loans are referred to
as "ARMs"). Floating rate mortgage-backed securities are classes of mortgage-
backed securities that have been structured to represent the right to receive
interest payments at rates that fluctuate in accordance with an index but that
generally are supported by pools comprised of fixed-rate mortgage loans.
Because the interest rates on ARM and floating rate mortgage-backed
securities are reset in response to changes in a specified market index, the
values of such securities tend to be less sensitive to interest rate
fluctuations than the values of fixed-rate securities. As a result, during
periods of rising interest rates, ARMs generally do not decrease in value as
much as fixed rate securities. Conversely, during periods of declining rates,
ARMs generally do not increase in value as much as fixed rate securities. ARM
mortgage-backed securities represent a right to receive interest payments at a
rate that is adjusted to reflect the interest earned on a pool of ARMs. ARMs
generally specify that the borrower's mortgage interest rate may not be
adjusted above a specified lifetime maximum rate or, in some cases, below a
minimum lifetime rate. In addition, certain ARMs specify limitations on the
maximum amount by which the mortgage interest rate may adjust for any single
adjustment period. ARMs also may limit changes in the maximum amount by which
the borrower's monthly payment may adjust for any single adjustment period. In
the event that a monthly payment is not sufficient to pay the interest accruing
on the ARM, any such excess interest is added to the mortgage loan ("negative
amortization"), which is repaid through future payments. If the monthly payment
exceeds the sum of the interest accrued at the applicable mortgage interest
rate and the principal payment that would have been necessary to amortize the
outstanding principal balance over the remaining term of the loan, the excess
reduces the principal balance of the ARM. Borrowers under ARMs experiencing
negative amortization may take longer to build up their equity in the
underlying property and may be more likely to default.
ARMs also may be subject to a greater rate of prepayments in a declining
interest rate environment. For example, during a period of declining interest
rates, prepayments on ARMs could increase because the availability of fixed
mortgage loans at competitive interest rates may encourage mortgagors to "lock-
in" at a lower interest rate. Conversely, during a period of rising interest
rates, prepayments on ARMs might decrease. The rate of prepayments with respect
to ARMs has fluctuated in recent years.
The rates of interest payable on certain ARMs, and therefore on certain ARM
mortgage-backed securities, are based on indices, such as the one-year constant
maturity Treasury rate, that reflect changes in market interest rates. Others
are based on indices, such as the 11th District Federal Home Loan Bank Cost of
Funds Index ("COFI"), that tend to lag behind changes in market interest rates.
The values of ARM
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mortgage-backed securities supported by ARMs that adjust based on lagging
indices tend to be somewhat more sensitive to interest rate fluctuations than
those reflecting current interest rate levels, although the values of such ARM
mortgage-backed securities still tend to be less sensitive than fixed-rate
securities.
Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. As with ARM
mortgage-backed securities, interest rate adjustments on floating rate
mortgage-backed securities may be based on indices that lag behind market
interest rates. Interest rates on floating rate mortgage-backed securities
generally are adjusted monthly. Floating rate mortgage-backed securities are
subject to lifetime interest rate caps, but they generally are not subject to
limitations on monthly or other periodic changes in interest rates or monthly
payments.
CONVERTIBLE SECURITIES. Before conversion, convertible securities have
characteristics similar to non-convertible debt securities in that they
ordinarily provide a stable stream of income with generally higher yields than
those of common stocks in the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure but are
usually subordinated to comparable non-convertible securities.
The value of a convertible security is a function of its "investment value"
(determined by its yield comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
its "conversion value" (the security's worth, at market value, if converted
into the underlying common stock). The investment value of a convertible
security is influenced by changes in interest rates, with investment value
declining as interest rates increase and increasing as interest rates decline.
The credit standing of the issuer and other factors also may have an effect on
the convertible security's investment value. The conversion value of a
convertible security is determined by the market price of the underlying common
stock. If the conversion value is low relative to the investment value, the
price of the convertible security is governed principally by its investment
value, and generally the conversion value decreases as the convertible security
approaches maturity. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition,
a convertible security generally will sell at a premium over its conversion
value, determined by the extent to which investors place value on the right to
acquire the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Portfolio is called for
redemption, the Portfolio will be required to permit the issuer to redeem the
security, convert it into the underlying common stock or sell it to a third
party. The Portfolios that may invest in convertible securities may hold any
equity securities they acquire upon conversion subject only to their
limitations on holding equity securities.
DURATION. Duration is a measure of the expected life of a fixed income
security that was developed as a more precise alternative to the concept "term
to maturity." Traditionally, a debt security's "term to maturity" has been used
as a proxy for the sensitivity of the security's price to changes in interest
rates (which is the "interest rate risk" or "volatility" of the security).
However, "term to maturity" measures only the time until a debt security
provides for a final payment, taking no account of the pattern of the
security's payments prior to maturity.
For any fixed income security with interest payments occurring prior to the
payment of principal, duration is always less than maturity. For example,
depending upon its coupon and the level of market yields, a U.S. Treasury note
with a remaining maturity of five years might have a duration of 4.5 years. For
mortgage-backed and other securities that are subject to prepayments, put or
call features or adjustable coupons, the difference between the remaining
stated maturity and the duration is likely to be much greater.
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Futures, options and options on futures have durations that, in general, are
closely related to the duration of the securities that underlie them. Holding
long futures or call option positions (backed by a segregated account of cash
and cash equivalents) will lengthen a Portfolio's duration by approximately the
same amount as would holding an equivalent amount of the underlying securities.
Short futures or put options have durations roughly equal to the negative
duration of the securities that underlie these positions and have the effect of
reducing portfolio duration by approximately the same amount as would selling
an equivalent amount of the underlying securities.
There are some situations in which the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the frequency
of the coupon reset. Another example where the interest rate exposure is not
properly captured by the standard duration calculation is the case of mortgage-
backed securities. The stated final maturity of such securities is generally 30
years, but current prepayment rates are critical in determining the securities'
interest rate exposure. In these and other similar situations, Mitchell
Hutchins and the Sub-Advisers, as applicable, will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its duration and, therefore, its interest rate exposure.
WARRANTS. Warrants are securities permitting but not obligating their holder
to subscribe for other securities or commodities. Warrants do not carry with
them the right to dividends or voting rights with respect to the securities
that they entitle their holder to purchase, and they do not represent any
rights in the assets of the issuer. As a result, warrants may be considered
more speculative than certain other types of investments. In addition, the
value of a warrant does not necessarily change with the value of the underlying
securities, and a warrant ceases to have value if it is not exercised prior to
its expiration date.
ILLIQUID SECURITIES. Each Portfolio may invest up to 10% or 15% of its net
assets in illiquid securities. The term "illiquid securities" for this purpose
means securities that cannot be disposed of within seven days in the ordinary
course of business at approximately the amount at which a Portfolio has valued
the securities and includes, among other things, purchased over-the-counter
("OTC") options, repurchase agreements maturing in more than seven days and
restricted securities other than those securities Mitchell Hutchins or the
applicable Sub-Adviser has determined are liquid pursuant to guidelines
established by the Fund's board of trustees (sometimes referred to as the
"board"). The assets used as cover for OTC options written by a Portfolio will
be considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Portfolio may repurchase any OTC options it writes at a maximum
price to be calculated by a formula set forth in the option agreements. The
cover for an OTC option written subject to this procedure will be considered
illiquid only to the extent that the maximum repurchase price under the option
formula exceeds the intrinsic value of the option. Under current SEC
guidelines, interest-only ("IO") and principal-only ("PO") classes of mortgage-
backed securities are considered illiquid. However, IO and PO classes of fixed-
rate mortgage-backed securities issued by the U.S. government or one of its
agencies or instrumentalities will not be considered illiquid if Mitchell
Hutchins or the applicable Sub-Adviser has determined that they are liquid
pursuant to guidelines established by the board. To the extent a Portfolio
invests in illiquid securities, it may not be able to readily liquidate such
investments and may have to sell other investments if necessary to raise cash
to meet its obligations. Where registration is required, a Portfolio may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time it may
be permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the Portfolio
might obtain a less favorable price than prevailed when it decided to sell.
Restricted securities are not registered under the Securities Act of 1933
("1933 Act") and may be sold only in privately negotiated or other exempted
transactions or after a 1933 Act registration statement has become effective.
However, not all restricted securities are illiquid. To the extent that foreign
securities are freely tradeable in the country in which they are principally
traded, they are not considered illiquid even if they are restricted in the
United States. A large institutional market has developed for many U.S. and
foreign
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securities that are not registered under the 1933 Act. Institutional investors
generally will not seek to sell these instruments to the general public, but
instead will often depend either on an efficient institutional market in which
such unregistered securities can be readily resold or on an issuer's ability
to honor a demand for repayment. Therefore, the fact that there are
contractual or legal restrictions on resale to the general public or certain
institutions is not dispositive of the liquidity of such investments.
Institutional markets for restricted securities have developed as a result
of Rule 144A, which establishes a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. Such markets include automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc. An insufficient number of qualified buyers interested
in purchasing Rule 144A-eligible restricted securities held by a Portfolio,
however, could affect adversely the marketability of such securities and a
Portfolio might be unable to dispose of the securities promptly or at
favorable prices.
The board has delegated the function of making day-to-day determinations of
liquidity to Mitchell Hutchins or the applicable Sub-Adviser, pursuant to
guidelines approved by the board. Mitchell Hutchins or the applicable Sub-
Adviser takes into account a number of factors in reaching liquidity
decisions, including but not limited to (1) the frequency of trades for the
security, (2) the number of dealers that make quotes for the security, (3) the
number of dealers that have undertaken to make a market in the security, (4)
the number of other potential purchasers and (5) the nature of the security
and how trading is effected (e.g., the time needed to sell the security, how
bids are solicited and the mechanics of transfer). Mitchell Hutchins or the
applicable Sub-Adviser monitors the liquidity of restricted securities in each
Portfolio and reports periodically on such decisions to the board.
ZERO COUPON, OID AND PIK SECURITIES; TREASURY INFLATION PROTECTED
SECURITIES. Federal tax law requires that a holder of a security with original
issue discount ("OID") accrue a portion of the OID on the security as income
each year, even though the holder may receive no interest payment on the
security during the year. Accordingly, although a Portfolio will receive no
payments on its zero coupon securities prior to their maturity or disposition,
it will have income each year attributable to such securities. Similarly,
while payment-in-kind ("PIK") securities may pay interest in the form of
additional securities rather than cash, that interest must be included in a
Portfolio's annual income. Similarly, the amount of any principal increase in
a Treasury Inflation Protected Security ("TIPS") also must be included in a
Portfolio's annual income.
To qualify for pass-through federal income tax treatment as regulated
investment companies, the Portfolios must distribute substantially all of
their net investment income each year, including non-cash income. Accordingly,
each Portfolio will be required to include in its dividends an amount equal to
the income attributable to its zero coupon, other OID and PIK securities and
any amounts attributable to principal increases on TIPS. See "Taxes." Those
dividends will be paid from the cash assets of a Portfolio or by liquidation
of portfolio securities, if necessary, at a time when the Portfolio otherwise
might not have done so.
Certain zero coupon securities are U.S. Treasury notes and bonds that have
been stripped of their unmatured interest coupon receipts or interests in such
U.S. Treasury securities or coupons. The staff of the SEC currently takes the
position that "stripped" U.S. government securities that are not issued
through the U.S. Treasury are not U.S. government securities. This technique
is frequently used with U.S. Treasury bonds to create CATS (Certificate of
Accrual Treasury Securities), TIGRs (Treasury Income Growth Receipts) and
similar securities. As long as the SEC takes this position, CATS and TIGRs,
which are not issued through the U.S. Treasury, will not be counted as U.S.
government securities for purposes of the 65% investment requirement
applicable to Strategic Fixed Income Portfolio.
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REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Portfolio purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date or upon demand and at a price reflecting a market rate of
interest unrelated to the coupon rate or maturity of the purchased securities.
The Portfolio maintains custody of the underlying securities prior to their
repurchase; thus, the obligation of the bank or dealer to pay the repurchase
price on the date agreed to is, in effect, secured by such securities. If the
value of these securities is less than the repurchase price, plus any agreed-
upon additional amount, the other party to the agreement must provide
additional collateral so that at all times the collateral is at least equal to
the repurchase price plus any agreed-upon additional amount. The difference
between the total amount to be received upon repurchase of the securities and
the price that was paid by the Portfolio upon their acquisition is accrued as
interest and included in the Portfolio's net investment income. Repurchase
agreements carry certain risks not associated with direct investments in
securities, including possible declines in the market value of the underlying
securities and delays and costs to a Portfolio if the other party to a
repurchase agreement becomes insolvent.
Each Portfolio intends to enter into repurchase agreements only with banks
and dealers in transactions believed by Mitchell Hutchins or the applicable
Sub-Adviser to present minimum credit risks in accordance with guidelines
established by the board. Mitchell Hutchins reviews and monitors the
creditworthiness of those institutions under the board's general supervision.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. Strategic Fixed Income,
Strategic Income and Global Income Portfolios may enter into arbitraged reverse
repurchase agreements with banks and securities dealers. Strategic Fixed Income
and Strategic Income Portfolios also may invest in arbitraged dollar rolls.
Such transactions involve the sale of securities held by a Portfolio subject to
its agreement to repurchase the securities at an agreed-upon date or upon
demand and at a price reflecting a market rate of interest. Such transactions
are considered to be borrowings and may be entered into only for temporary
purposes. While a reverse repurchase agreement or dollar roll is outstanding, a
Portfolio's custodian segregates assets to cover the amount of its obligations
under the reverse repurchase agreement or dollar roll. See "Investment Policies
and Restrictions--Segregated Accounts."
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. A security purchased on a when-
issued or delayed delivery basis is recorded as an asset on the commitment date
and is subject to changes in market value, generally based upon changes in the
level of interest rates. Thus, fluctuation in the value of the security from
the time of the commitment date will affect a Portfolio's net asset value. When
a Portfolio commits to purchase securities on a when-issued or delayed delivery
basis, its custodian segregates assets to cover the amount of the commitment.
See "Investment Policies and Limitations--Segregated Accounts." The Portfolios
purchase when-issued securities only with the intention of taking delivery, but
may sell the right to acquire the security prior to delivery if Mitchell
Hutchins or the applicable Sub-Adviser deems it advantageous to do so, which
may result in a capital gain or loss to a Portfolio.
LENDING OF PORTFOLIO SECURITIES. Each Portfolio is authorized to lend
portfolio securities valued at up to 33 1/3% of its total assets to broker-
dealers or institutional investors that Mitchell Hutchins deems qualified, but
only when the borrower maintains acceptable collateral with the Portfolio's
custodian, marked to market daily, in an amount at least equal to the market
value of the securities loaned, plus accrued interest and dividends. Acceptable
collateral is limited to cash, U.S. government securities and irrevocable
letters of credit that meet certain guidelines established by Mitchell
Hutchins. Each Portfolio may reinvest any cash collateral in money market
investments or other short-term liquid investments. In determining whether to
lend securities to a particular broker-dealer or institutional investor,
Mitchell Hutchins will consider, and during the period of the loan will
monitor, all relevant facts and circumstances, including the creditworthiness
of the borrower. The Portfolios will retain authority to terminate any of its
loans at any time. A Portfolio may pay reasonable fees in connection with a
loan and may pay a negotiated portion of the interest earned on the
reinvestment of cash held as collateral to the borrower or placing broker. A
Portfolio will receive reasonable interest on a loan or a flat fee from the
borrower and amounts equivalent to any dividends, interest or other
distributions on the securities loaned. A Portfolio will regain record
ownership of loaned securities to exercise
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beneficial rights, such as voting and subscription rights and rights to
dividends, interest or other distributions, when regaining such rights is
considered to be in the Portfolio's interest.
Pursuant to procedures adopted by the board governing each Portfolio's
securities lending program, the board has approved retention of PaineWebber to
serve as lending agent for each Portfolio. The board also has authorized the
payment of fees (including fees calculated as a percentage of invested cash
collateral) to PaineWebber for these services. The board periodically reviews
all portfolio securities loan transactions for which PaineWebber acted as
lending agent.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Strategic Fixed Income Portfolio, High
Income Portfolio and Global Income Portfolio each may invest up to 5% of its
net assets, and Strategic Income Portfolio may invest without limit, in secured
or unsecured fixed or floating rate loans ("Loans") arranged through private
negotiations between a borrowing corporation and one or more financial
institutions ("Lenders"). A Portfolio's investments in Loans are expected in
most instances to be in the form of participations ("Participations") in Loans
and assignments ("Assignments") of all or a portion of Loans from third
parties. Participations typically result in the Portfolio's having a
contractual relationship only with the Lender, not with the borrower. A
Portfolio has the right to receive payments of principal, interest and any fees
to which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the borrower. In connection
with purchasing Participations, a Portfolio generally has no direct right to
enforce compliance by the borrower with the terms of the loan agreement
relating to the Loan, nor any rights of set-off against the borrower, and a
Portfolio may not directly benefit from any collateral supporting the Loan in
which it has purchased the Participation. As a result, the Portfolio assumes
the credit risk of both the borrower and the Lender that is selling the
Participation. In the event of the insolvency of the Lender selling a
Participation, a Portfolio may be treated as a general creditor of the Lender
and may not benefit from any set-off between the Lender and the borrower. A
Portfolio will acquire Participations only if the Lender interpositioned
between the Portfolio and the borrower is determined by Mitchell Hutchins to be
creditworthy.
When a Portfolio purchases Assignments from Lenders, it acquires direct
rights against the borrower on the Loan. However, because Assignments are
arranged through private negotiations between potential assignees and
assignors, the rights and obligations acquired by a Portfolio as the purchaser
of an Assignment may differ from, and be more limited than, those held by the
assigning Lender.
Assignments and Participations are generally not registered under the 1933
Act and thus are subject to each Portfolio's limitation on investment in
illiquid securities. Because there is no liquid market for such securities, the
Portfolios anticipate that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market will
have an adverse impact on the value of such securities and on a Portfolio's
ability to dispose of particular Assignments or Participations when necessary
to meet its liquidity needs or in response to a specific economic event, such
as a deterioration in the creditworthiness of the borrower.
SHORT SALES "AGAINST THE BOX". Each Portfolio (other than Money Market
Portfolio) may engage in short sales of securities it owns or has the right to
acquire at no added cost through conversion or exchange of other securities it
owns (short sales "against the box"). To make delivery to the purchaser in a
short sale, the executing broker borrows the securities being sold short on
behalf of the Portfolio, and the Portfolio is obligated to replace the
securities borrowed at a date in the future. When a Portfolio sells short, it
establishes a margin account with the broker effecting the short sale, and
deposits collateral with the broker. In addition, the Portfolio maintains with
its custodian, in a segregated account, the securities that could be used to
cover the short sale. A Portfolio will incur transaction costs, including
interest expense, in connection with opening, maintaining and closing short
sales against the box.
A Portfolio might make a short sale "against the box" in order to hedge
against market risks when Mitchell Hutchins or a Sub-Adviser believes that the
price of a security may decline, thereby causing a decline in the value of a
security owned by the Portfolio or a security convertible into or exchangeable
for a security
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owned by the Portfolio. In such case, any loss in the Portfolio's long position
after the short sale should be reduced by a corresponding gain in the short
position. Conversely, any gain in the long position after the short sale should
be reduced by a corresponding loss in the short position. The extent to which
gains or losses in the long position are reduced will depend upon the amount of
the securities sold short relative to the amount of the securities the
Portfolio owns, either directly or indirectly, and in the case where the
Portfolio owns convertible securities, changes in the investment values or
conversion premiums of such securities. None of the Portfolios currently
intends to have obligations under short sales that at any time during the
coming year exceed 5% of the Portfolio's net assets.
SEGREGATED ACCOUNTS. When a Portfolio enters into certain transactions that
involve obligations to make future payments to third parties, including dollar
rolls, reverse repurchase agreements or the purchase of securities on a when-
issued or delayed delivery basis, the Portfolio will maintain with an approved
custodian in a segregated account cash or liquid securities, marked to market
daily, in an amount at least equal to the Portfolio's obligation or commitment
under such transactions. As described below under "Hedging and Related
Strategies Using Derivative Instruments," segregated accounts may also be
required in connection with certain transactions involving options or futures
contracts, interest rate swaps or forward currency contracts.
FUNDAMENTAL INVESTMENT LIMITATIONS. The foregoing fundamental investment
limitations cannot be changed for a Portfolio without the affirmative vote of
the lesser of (a) more than 50% of the outstanding shares of the Portfolio or
(b) 67% or more of the Portfolio's shares present at a meeting of its
shareholders if more than 50% of the outstanding shares of the Portfolio are
represented at the meeting in person or by proxy. If a percentage restriction
is adhered to at the time of an investment or transaction, a later change in
percentage resulting from a change in values of portfolio securities or amount
of total assets will not be considered a violation of any of the foregoing
limitations.
Each Portfolio will not:
(1) purchase any security if, as a result of that purchase, 25% or more
of the Portfolio's total assets would be invested in securities of issuers
having their principal business activities in the same industry, except
that this limitation does not apply to securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities or to municipal
securities (or, in the case of Money Market Portfolio, to certificates of
deposit and bankers' acceptances of domestic branches of U.S. banks).
For Money Market Portfolio only--the following interpretation applies to,
but is not a part of, this fundamental restriction: With respect to this
limitation, domestic and foreign banking will be considered to be different
industries.
(2) issue senior securities or borrow money, except as permitted under
the 1940 Act and then not in excess of 33 1/3% of the Portfolio's total
assets (including the amount of the senior securities issued but reduced by
any liabilities not constituting senior securities) at the time of the
issuance or borrowing, except that the Portfolio may borrow up to an
additional 5% of its total assets (not including the amount borrowed) for
temporary or emergency purposes.
(3) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers'
acceptances or similar instruments will not be considered the making of a
loan.
(4) engage in the business of underwriting securities of other issuers,
except to the extent that the Portfolio might be considered an underwriter
under the federal securities laws in connection with its disposition of
portfolio securities.
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(5) purchase or sell real estate, except that investments in securities
of issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by
interests in real estate are not subject to this limitation, and except
that the Portfolio may exercise rights under agreements relating to such
securities, including the right to enforce security interests and to hold
real estate acquired by reason of such enforcement until that real estate
can be liquidated in an orderly manner.
(6) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the Portfolio may purchase,
sell or enter into financial options and futures, forward and spot currency
contracts, swap transactions and other financial contracts or derivative
instruments.
The following investment restriction applies to all Portfolios except Global
Income Portfolio and Strategic Income Portfolio.
(7) purchase securities of any one issuer if, as a result, more than 5%
of the Portfolio's total assets would be invested in securities of that
issuer or the Portfolio would own or hold more than 10% of the outstanding
voting securities of that issuer, except that up to 25% of the Portfolio's
total assets may be invested without regard to this limitation, and except
that this limitation does not apply to securities issued or guaranteed by
the U.S. government, its agencies and instrumentalities or to securities
issued by other investment companies.
The following interpretation applies to, but is not a part of, this
fundamental limitation: Mortgage- and asset-backed securities will not be
considered to have been issued by the same issuer by reason of the
securities having the same sponsor, and mortgage- and asset-backed
securities issued by a finance or other special purpose subsidiary that are
not guaranteed by the parent company will be considered to be issued by a
separate issuer from the parent company.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions may be
changed by the board without shareholder approval.
Each Portfolio will not:
(1) hold assets of any issuers, at the end of any calendar quarter (or
within 30 days thereafter), to the extent such holdings would cause the
Portfolio to fail to comply with the diversification requirements imposed
by section 817(h) of the Internal Revenue Code and the Treasury regulations
issued thereunder on segregated asset accounts used to fund variable
annuity and/or variable life insurance contracts.
(2) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the Portfolio may
make margin deposits in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
(3) engage in short sales of securities or maintain a short position,
except that the Portfolio may (a) sell short "against the box" and (b)
maintain short positions in connection with its use of financial options
and futures, forward and spot currency contracts, swap transactions and
other financial contracts or derivative instruments.
(4) purchase securities of other investment companies, except to the
extent permitted by the 1940 Act and except that this limitation does not
apply to securities received or acquired as dividends, through offers of
exchange, or as a result of reorganization, consolidation, or merger.
(5) purchase portfolio securities while borrowings in excess of 5% of its
total assets are outstanding.
HEDGING AND RELATED STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. As discussed in the
Prospectus, Mitchell Hutchins or the applicable Sub-Adviser may use a variety
of financial instruments ("Derivative Instruments"), including
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certain options, futures contracts (sometimes referred to as "futures") and
options on futures contracts, to attempt to hedge the Portfolios' investments
or attempt to enhance the Portfolios' income or realize gains. For Portfolios
that are permitted to invest outside the United States, Mitchell Hutchins or
the applicable Sub-Adviser also may use forward currency contracts, foreign
currency options and futures and options thereon. Portfolios that invest
primarily in bonds also may enter into interest rate swaps. A Portfolio may
enter into transactions using one or more type s of Derivative Instruments
under which the full value of its portfolio is at risk. Under normal
circumstances, however, a Portfolio's use of these instruments will place at
risk a much smaller portion of its assets. Money Market Portfolio is not
authorized to use these Derivative Instruments. The particular Derivative
Instruments used by the other Portfolios are described below.
OPTIONS ON EQUITY AND DEBT SECURITIES AND FOREIGN CURRENCIES--A call option
is a short-term contract pursuant to which the purchaser of the option, in
return for a premium, has the right to buy the security or currency underlying
the option at a specified price at any time during the term of the option. The
writer of the call option, who receives the premium, has the obligation, upon
exercise of the option during the option term, to deliver the underlying
security or currency against payment of the exercise price. A put option is a
similar contract that gives its purchaser, in return for a premium, the right
to sell the underlying security or currency at a specified price during the
option term. The writer of the put option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to buy the
underlying security or currency at the exercise price.
OPTIONS ON STOCK INDICES--A stock index assigns relative values to the stocks
included in the index and fluctuates with changes in the market values of those
stocks. A stock index option operates in the same way as a more traditional
stock option, except that exercise of a stock index option is effected with
cash payment and does not involve delivery of securities. Thus, upon exercise
of a stock index option, the purchaser will realize, and the writer will pay,
an amount based on the difference between the exercise price and the closing
price of the stock index.
STOCK INDEX FUTURES CONTRACTS--A stock index futures contract is a bilateral
agreement pursuant to which one party agrees to accept, and the other party
agrees to make, delivery of an amount of cash equal to a specified dollar
amount times the difference between the stock index value at the close of
trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the stocks comprising the index is
made. Generally, contracts are closed out prior to the expiration date of the
contract.
INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS--Interest rate and
foreign currency futures contracts are bilateral agreements pursuant to which
one party agrees to make, and the other party agrees to accept, delivery of a
specified type of debt security or currency at a specified future time and at a
specified price. Although such futures contracts by their terms call for actual
delivery or acceptance of debt securities or currency, in most cases the
contracts are closed out before the settlement date without the making or
taking of delivery.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to
options on securities or currencies, except that an option on a futures
contract gives the purchaser the right, in return for the premium, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell a
security or currency, at a specified price at any time during the option term.
Upon exercise of the option, the delivery of the futures position to the holder
of the option will be accompanied by delivery of the accumulated balance that
represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the future. The writer of an option, upon
exercise, will assume a short position in the case of a call and a long
position in the case of a put.
FORWARD CURRENCY CONTRACTS--A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into.
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GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS. Hedging
strategies can be broadly categorized as "short hedges" and "long hedges." A
short hedge is a purchase or sale of a Derivative Instrument intended partially
or fully to offset potential declines in the value of one or more investments
held by a Portfolio. Thus, in a short hedge a Portfolio takes a position in a
Derivative Instrument whose price is expected to move in the opposite direction
of the price of the investment being hedged. For example, a Portfolio might
purchase a put option on a security to hedge against a potential decline in the
value of that security. If the price of the security declined below the
exercise price of the put, the Portfolio could exercise the put and thus limit
its loss below the exercise price to the premium paid plus transaction costs.
In the alternative, because the value of the put option can be expected to
increase as the value of the underlying security declines, the Portfolio might
be able to close out the put option and realize a gain to offset the decline in
the value of the security.
Conversely, a long hedge is a purchase or sale of a Derivative Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that a Portfolio intends to acquire. Thus, in a
long hedge a Portfolio takes a position in a Derivative Instrument whose price
is expected to move in the same direction as the price of the prospective
investment being hedged. For example, a Portfolio might purchase a call option
on a security it intends to purchase in order to hedge against an increase in
the cost of the security. If the price of the security increased above the
exercise price of the call, the Portfolio could exercise the call and thus
limit its acquisition cost to the exercise price plus the premium paid and
transaction costs. Alternatively, the Portfolio might be able to offset the
price increase by closing out an appreciated call option and realizing a gain.
A Portfolio may purchase and write (sell) covered straddles on securities and
stock indices. A long straddle is a combination of a call and a put option
purchased on the same security or on the same futures contract, where the
exercise price of the put is equal to the exercise price of the call. A
Portfolio might enter into a long straddle when Mitchell Hutchins or the
applicable Sub-Adviser believes it likely that interest rates will be more
volatile during the term of the option than the option pricing implies. A short
straddle is a combination of a call and a put written on the same security
where the exercise price of the put is equal to the exercise price of the call.
A Portfolio might enter into a short straddle when Mitchell Hutchins or the
applicable Sub-Adviser believes it unlikely that interest rates will be as
volatile during the term of the option as the option pricing implies.
Derivative Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that a Portfolio
owns or intends to acquire. Derivative Instruments on stock indices, in
contrast, generally are used to hedge against price movements in broad equity
market sectors in which the Portfolio has invested or expects to invest.
Derivative Instruments on debt securities may be used to hedge either
individual securities or broad fixed income market sectors.
Income strategies include the writing of covered options to obtain the
related option premiums. Return strategies include the use of Derivative
Instruments to increase or reduce a Portfolio's exposure to an asset class
without buying or selling the underlying instruments.
The use of Derivative Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded and
the Commodity Futures Trading Commission ("CFTC"). In addition, a Portfolio's
ability to use Derivative Instruments will be limited by tax considerations.
See "Taxes."
In addition to the products, strategies and risks described below and in the
Prospectus, Mitchell Hutchins or the applicable Sub-Adviser may discover
additional opportunities in connection with Derivative Instruments and with
hedging, income and gain strategies. These new opportunities may become
available as regulatory authorities broaden the range of permitted transactions
and as new Derivative Instruments and techniques are developed. Mitchell
Hutchins or the applicable Sub-Adviser may utilize these opportunities to the
extent that they are consistent with a Portfolio's investment objectives and
permitted by the Portfolio's
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investment limitations and applicable regulatory authorities. The Fund's
Prospectus or this Statement of Additional Information will be supplemented to
the extent that new products or techniques involve materially different risks
than those described below or in the Prospectus.
SPECIAL RISKS OF STRATEGIES USING DERIVATIVES INSTRUMENTS. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.
(1) Successful use of most Derivative Instruments depends upon Mitchell
Hutchins' or the applicable Sub-Adviser's ability to predict movements of
the overall securities, interest rate or currency exchange markets, which
requires different skills than predicting changes in the prices of
individual securities. While Mitchell Hutchins or the applicable Sub-
Adviser is experienced in the use of Derivative Instruments, there can be
no assurance that any particular strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Derivative Instrument and price movements of the
investments being hedged. For example, if the value of a Derivative
Instrument used in a short hedge increased by less than the decline in
value of the hedged investment, the hedge would not be fully successful.
Such a lack of correlation might occur due to factors affecting the markets
on which Derivative Instruments are traded rather than the value of the
investments being hedged. The effectiveness of hedges using Derivative
Instruments on indices will depend on the degree of correlation between
price movements in the index and price movements in the securities being
hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly
or partially offsetting the negative effect of unfavorable price movements
in the investments being hedged. However, hedging strategies can also
reduce opportunity for gain by offsetting the positive effect of favorable
price movements in the hedged investments. For example, if a Portfolio
entered into a short hedge because Mitchell Hutchins or the applicable Sub-
Adviser projected a decline in the price of a security held by a Portfolio,
and the price of that security increased instead, the gain from that
increase might be wholly or partially offset by a decline in the price of
the Derivative Instrument. Moreover, if the price of the Derivative
Instrument declined by more than the increase in the price of the security,
the Portfolio could suffer a loss. In either such case, the Portfolio would
have been in a better position had it not hedged at all.
(4) As described below, a Portfolio might be required to maintain assets
as "cover," maintain segregated accounts or make margin payments when it
takes positions in Derivative Instruments involving obligations to third
parties (i.e., Derivative Instruments other than purchased options). If a
Portfolio were unable to close out its positions in such Derivative
Instruments, it might be required to continue to maintain such assets or
accounts or make such payments until the position expired or matured. These
requirements might impair a Portfolio's ability to sell a portfolio
security or make an investment at a time when it would otherwise be
favorable to do so, or require that a Portfolio sell a portfolio security
at a disadvantageous time. A Portfolio's ability to close out a position in
a Derivative Instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a market,
the ability and willingness of a contra party to enter into a transaction
closing out the position. Therefore, there is no assurance that any
position can be closed out at a time and price that is favorable to the
Portfolio.
COVER FOR STRATEGIES USING DERIVATIVES INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose a Portfolio to an
obligation to another party. A Portfolio will not enter into any such
transactions unless it owns either (1) an offsetting ("covered") position in
securities, currencies or other options, futures contracts or forward currency
contracts or (2) cash and liquid securities, with a value sufficient at all
times to cover its potential obligations to the extent not covered as provided
in (1) above. Each Portfolio will comply with SEC guidelines regarding cover
for such transactions and will, if the guidelines so require, set aside cash or
liquid securities in a segregated account with its custodian in the prescribed
amount.
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Assets used as cover or held in a segregated account cannot be sold while the
position in the corresponding Derivative Instrument is open, unless they are
replaced with similar assets. As a result, committing a large portion of a
Portfolio's assets to cover positions or to segregated accounts could impede
portfolio management or the Portfolio's ability to meet redemption requests or
other current obligations.
OPTIONS. Each Portfolio that may use options may purchase put and call
options, and write (sell) covered put and call options, on equity and debt
securities. Portfolios that may invest outside the United States also may
purchase put and call options, and write covered options, on foreign
currencies. Each Portfolio that may use options may purchase put and call
options and write (sell) covered call options on stock indices. The purchase of
call options may serve as a long hedge, and the purchase of put options may
serve as a short hedge. In addition, the Portfolios may purchase options to
enhance return by increasing or reducing its exposure to an asset class without
purchasing or selling the underlying securities. Writing covered put or call
options can enable a Portfolio to enhance income by reason of the premiums paid
by the purchasers of such options. Writing covered put options serves as a
limited long hedge because increases in the value of the hedged instrument
would be offset to the extent of the premium received for writing the option.
However, if the market price of the security underlying a covered put option
declines to less than the exercise price of the option, minus the premium
received, the Portfolio would expect to suffer a loss. Writing covered call
options serves as a limited short hedge, because declines in the value of the
hedged investment would be offset to the extent of the premium received for
writing the option. However, if the security appreciates to a price higher than
the exercise price of the call option, it can be expected that the option will
be exercised and the Portfolio will be obligated to sell the security at less
than its market value. The securities or other assets used as cover for OTC
options written by a Portfolio would be considered illiquid to the extent
described under "Investment Policies and Restrictions--Illiquid Securities."
The value of an option position will reflect, among other things, the current
market value of the underlying investment, the time remaining until expiration,
the relationship of the exercise price to the market price of the underlying
investment, the historical price volatility of the underlying investment and
general market conditions. Options normally have expiration dates of up to nine
months. Options that expire unexercised have no value.
A Portfolio may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, a Portfolio may terminate
its obligation under a call option that it had written by purchasing an
identical call option; this is known as a closing purchase transaction.
Conversely, a Portfolio may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a
closing sale transaction. Closing transactions permit a Portfolio to realize
profits or limit losses on an option position prior to its exercise or
expiration.
The Portfolios may purchase or write both exchange-traded and OTC options.
Currently, many options on equity securities are exchange-traded. Exchange
markets for options on debt securities and foreign currencies exist but are
relatively new, and these instruments are primarily traded on the OTC market.
Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction.
In contrast, OTC options are contracts between the Portfolio and its contra
party (usually a securities dealer or a bank) with no clearing organization
guarantee. Thus, when the Portfolio purchases or writes an OTC option, it
relies on the contra party to make or take delivery of the underlying
investment upon exercise of the option. Failure by the contra party to do so
would result in the loss of any premium paid by the Portfolio as well as the
loss of any expected benefits of the transaction. A Portfolio will enter into
OTC option transactions only with contra parties that have a net worth of at
least $20 million.
Generally, the OTC debt and foreign currency options used by the Portfolios
are European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
25
<PAGE>
A Portfolio's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. Each Portfolio intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although a
Portfolio will enter into OTC options only with contra parties that are
expected to be capable of entering into closing transactions with the
Portfolio, there is no assurance that the Portfolio will in fact be able to
close out an OTC option position at a favorable price prior to expiration. In
the event of insolvency of the contra party, the Portfolio might be unable to
close out an OTC option position at any time prior to its expiration.
If a Portfolio were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call
option written by a Portfolio could cause material losses because the Portfolio
would be unable to sell the investment used as cover for the written option
until the option expires or is exercised.
A Portfolio may purchase and write put and call options on indices in much
the same manner as the more traditional options discussed above, except the
index options may serve as a hedge against overall fluctuations in a securities
market (or market sector) rather than anticipated increases or decreases in the
value of a particular security.
LIMITATIONS ON THE USE OF OPTIONS. The Portfolios' use of options is governed
by the following guidelines, which can be changed by the board without
shareholder vote:
(1) A Portfolio may purchase a put or call option, including any straddle
or spread, only if the value of its premium, when aggregated with the
premiums on all other options held by the Portfolio, does not exceed 5% of
the Portfolio's total assets.
(2) The aggregate value of securities underlying put options written by a
Portfolio, determined as of the date the put options are written, will not
exceed 50% of its net assets.
(3) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock or bond indices and options on
futures contracts) purchased by a Portfolio that are held at any time will
not exceed 20% of its net assets.
FUTURES. The purchase of futures or call options thereon can serve as a long
hedge, and the sale of futures or the purchase of put options thereon can serve
as a short hedge. Writing covered call options on futures contracts can serve
as a limited short hedge, using a strategy similar to that used for writing
covered call options on securities and indices. In addition, the Portfolios may
purchase or sell futures contracts or purchase options thereon to enhance
return by increasing or reducing exposure to an asset class without purchasing
or selling the underlying securities.
Futures strategies also can be used to manage the average duration of a
Portfolio. If Mitchell Hutchins or the applicable Sub-Adviser wishes to shorten
the average duration of a Portfolio, the Portfolio may sell a futures contract
or a call option thereon, or purchase a put option on that futures contract. If
Mitchell Hutchins or the applicable Sub-Adviser wishes to lengthen the average
duration of a Portfolio, the Portfolio may buy a futures contract or a call
option thereon.
The Portfolios that may invest outside the United States may also write put
options on foreign currency futures contracts while at the same time purchasing
call options on the same futures contracts in order synthetically to create a
long futures contract position. Such options would have the same strike prices
and expiration dates. A Portfolio will engage in this strategy only when it is
more advantageous to the Portfolio than purchasing the futures contract.
26
<PAGE>
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Portfolio is required to deposit in a
segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash,
obligations of the United States or obligations fully guaranteed as to
principal and interest by the United States, in an amount generally equal to
10% or less of the contract value. Margin must also be deposited when writing
an option on a futures contract, in accordance with applicable exchange rules.
Unlike margin in securities transactions, initial margin on futures contracts
does not represent a borrowing, but rather is in the nature of a performance
bond or good-faith deposit that is returned to the Portfolio at the termination
of the transaction if all contractual obligations have been satisfied. Under
certain circumstances, such as periods of high volatility, the Portfolio may be
required by an exchange to increase the level of its initial margin payment,
and initial margin requirements might be increased generally in the future by
regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Portfolio's obligations to or from a
futures broker. When a Portfolio purchases an option on a future, the premium
paid plus transaction costs is all that is at risk. In contrast, when a
Portfolio purchases or sells a futures contract or writes a call option
thereon, it is subject to daily variation margin calls that could be
substantial in the event of adverse price movements. If the Portfolio has
insufficient cash to meet daily variation margin requirements, it might need to
sell securities at a time when such sales are disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
Each Portfolio intends to enter into futures transactions only on exchanges or
boards of trade where there appears to be a liquid secondary market. However,
there can be no assurance that such a market will exist for a particular
contract at a particular time.
Under certain circumstances, futures exchanges may establish daily limits on
the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a Portfolio were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Portfolio would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, the Portfolio would continue to be required to make
daily variation margin payments and might be required to maintain the position
being hedged by the future or option or to maintain cash or securities in a
segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options
markets are subject to daily variation margin calls and might be compelled to
liquidate futures or related options positions whose prices are moving
unfavorably to avoid being subject to further calls. These liquidations could
increase price volatility of the instruments and distort the normal price
relationship between the futures or options and the investments being hedged.
Also, because initial margin deposit requirements in the futures market are
less onerous than margin requirements in the securities markets, there might be
increased participation by speculators in the futures markets. This
participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.
27
<PAGE>
LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. The Portfolios' use
of futures is governed by the following guidelines, which can be changed by
the board without shareholder vote.
(1) To the extent a Portfolio enters into futures contracts, options on
futures contracts or options on foreign currencies traded on a commodities
exchange that are not for bona fide hedging purposes (as defined by the
CFTC), the aggregate initial margin and premiums on those positions
(excluding the amount by which options are "in-the-money") may not exceed
5% of its net assets.
(2) The aggregate premiums on all options (including options on
securities, foreign currencies and stock indices and options on futures
contracts) purchased by a Portfolio that are held at any time will not
exceed 20% of its net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by a Portfolio will not exceed 5% of its total
assets.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. Each Portfolio
that may invest outside the United States may use options and futures on
foreign currencies, as described above, and forward currency contracts, as
described below, to hedge against movements in the values of the foreign
currencies in which the Portfolio's securities are denominated. Such currency
hedges can protect against price movements in a security that a Portfolio owns
or intends to acquire that are attributable to changes in the value of the
currency in which it is denominated. Such hedges do not, however, protect
against price movements in the securities that are attributable to other
causes.
A Portfolio might seek to hedge against changes in the value of a particular
currency when no Derivative Instruments on that currency are available or such
Derivative Instruments are more expensive than certain other Derivative
Instruments. In such cases, a Portfolio may hedge against price movements in
that currency by entering into transactions using Derivative Instruments on
another foreign currency or a basket of currencies, the value of which
Mitchell Hutchins or the applicable Sub-Adviser believes will have a high
degree of positive correlation to the value of the currency being hedged. In
addition, the Portfolios may use forward currency contracts to shift exposure
to foreign currency fluctuations from one country to another. For example, if
a Portfolio owns securities denominated in a foreign currency and Mitchell
Hutchins or the applicable Sub-Adviser believes that currency will decline
relative to another currency, it might enter into a forward contract to sell
an appropriate amount of the first foreign currency, with payment to be made
in the second foreign currency. Transactions that use two foreign currencies
are sometimes referred to as "cross hedging." The risk that movements in the
price of the Derivative Instrument will not correlate perfectly with movements
in the price of the currency being hedged is magnified when this strategy is
used.
The value of Derivative Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Derivative
Instruments, the Portfolios could be disadvantaged by having to deal in the
odd-lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than
for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Quotation information generally is representative of very large transactions
in the interbank market and thus might not reflect odd-lot transactions where
rates might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain
open, significant price and rate movements might take place in the underlying
markets that cannot be reflected in the markets for the Derivative Instruments
until they reopen.
28
<PAGE>
Settlement of hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency.
Thus, a Portfolio might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S. residents
and might be required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
FORWARD CURRENCY CONTRACTS. Portfolios that may invest outside the United
States may enter into forward currency contracts to purchase or sell foreign
currencies for a fixed amount of U.S. dollars or another foreign currency.
Such transactions may serve as long hedges--for example, a Portfolio may
purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the Portfolio intends to
acquire. Forward currency contract transactions may also serve as short
hedges--for example, a Portfolio may sell a forward currency contract to lock
in the U.S. dollar equivalent of the proceeds from the anticipated sale of a
security denominated in a foreign currency. The Portfolios may use forward
currency contracts to realize gains from favorable changes in exchange rates.
The cost to a Portfolio of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. When a Portfolio enters into a forward currency contract, it relies
on the contra party to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the contra party to do so would result in
the loss of any expected benefit of the transaction.
As is the case with future contracts, parties to forward currency contracts
can enter into offsetting closing transactions, similar to closing
transactions on futures, by entering into an instrument identical to the
instrument held or written, but in the opposite direction. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the contra party. Thus, there can be no assurance
that a Portfolio will in fact be able to close out a forward currency contract
at a favorable price prior to maturity. In addition, in the event of
insolvency of the contra party, the Portfolio might be unable to close out a
forward currency contract at any time prior to maturity. In either event, the
Portfolio would continue to be subject to market risk with respect to the
position and would continue to be required to maintain a position in
securities denominated in the securities or currencies that are the subject of
the hedge or to maintain cash or securities in a segregated account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the
foreign currency contract has been established. Thus, a Portfolio might need
to purchase or sell foreign currencies in the spot (cash) market to the extent
such foreign currencies are not covered by forward contracts. The projection
of short-term currency market movements is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain.
LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS. Portfolios that may
invest outside the United States may enter into forward currency contracts or
maintain a net exposure to such contracts only if (1) the consummation of the
contracts would not obligate the Portfolio to deliver an amount of foreign
currency in excess of the value of the position being hedged by such contracts
or (2) the Portfolio maintains appropriate assets in a segregated account in
an amount not less than the value of its total assets committed to the
consummation of the contract and not covered as provided in (1) above, as
described above in "Investment Policies and Limitations--Segregated Accounts."
SWAP TRANSACTIONS. A Portfolio that invests primarily in bonds may enter
into interest swap transactions, including swaps, caps, floors and collars.
Interest rate swaps involve an agreement between two parties to exchange
payments that are based, for example, on variable and fixed rates of interest
and that are calculated on the basis of a specified amount of principal (the
"notional principal amount") for a specified
29
<PAGE>
period of time. Interest rate cap and floor transactions involve an agreement
between two parties in which the first party agrees to make payments to the
contra party when a designated market interest rate goes above (in the case of
a cap) or below (in the case of a floor) a designated level on predetermined
dates or during a specified time period. Interest rate collar transactions
involve an agreement between two parties in which payments are made when a
designated market interest rate either goes above a designated ceiling level or
goes below a designated floor level on predetermined dates or during a
specified time period.
Each Portfolio expects to enter into interest rate swap transactions to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities it
anticipates purchasing at a later date. The Portfolios intend to use these
transactions as a hedge and not as a speculative investment. Interest rate swap
transactions are subject to risks comparable to those described above with
respect to other hedging strategies.
The Portfolios each may enter into interest rate swaps, caps, floors and
collars on either an asset-based or liability-based basis, depending on whether
it is hedging its assets or its liabilities, and will usually enter into
interest rate swaps on a net basis, i.e., the two payment streams are netted
out, with a Portfolio receiving or paying, as the case may be, only the net
amount of the two payments. Inasmuch as these interest rate swap transactions
are entered into for good faith hedging purposes, and inasmuch as segregated
accounts will be established with respect to such transactions, Mitchell
Hutchins and the applicable Sub-Adviser believe such obligations do not
constitute senior securities and, accordingly, will not treat them as being
subject to any Portfolio's borrowing restrictions. The net amount of the
excess, if any, of a Portfolio's obligations over its entitlements with respect
to each interest rate swap will be accrued on a daily basis, and appropriate
Portfolio assets having an aggregate net asset value at least equal to the
accrued excess will be maintained in a segregated account as described above in
"Investment Policies and Restrictions--Segregated Accounts." Each Portfolio
also will establish and maintain such segregated accounts with respect to its
total obligations under any swaps that are not entered into on a net basis and
with respect to any caps, floors and collars that are entered into by the
Portfolio.
Each Portfolio will enter into swap transactions only with banks and
recognized securities dealers believed by Mitchell Hutchins or the Sub-Adviser
to present minimal credit risks in accordance with guidelines established by
the board. If there is a default by the other party to such a transaction, the
Portfolio will have to rely on its contractual remedies (which may be limited
by bankruptcy, insolvency or similar laws) pursuant to the agreements related
to the transaction.
TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
The trustees and executive officers of the Fund, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND ADDRESS*; AGE POSITION WITH THE FUND AND OTHER DIRECTORSHIPS
---------------------- ---------------------- -----------------------
<C> <C> <S>
Margo N. Alexander**; 51 Trustee and President Mrs. Alexander is presi-
dent, chief executive of-
ficer and a director of
Mitchell Hutchins (since
January 1995) and an ex-
ecutive vice president
and director of
PaineWebber. Mrs. Alexan-
der is president and a
director or trustee of 30
investment companies for
which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND ADDRESS*; AGE POSITION WITH THE FUND AND OTHER DIRECTORSHIPS
---------------------- ---------------------- -----------------------
<C> <C> <S>
Richard Q. Armstrong; 62 Trustee Mr. Armstrong is chairman
78 West Brother Drive and principal of RQA En-
Greenwich, CT 06830 terprises (management
consulting firm) (since
April 1991 and principal
occupation since March
1995). Mr. Armstrong is
also a director of Hi Lo
Automotive, Inc. He was
chairman of the board,
chief executive officer
and co-owner of Adiron-
dack Beverages (producer
and distributor of soft
drinks and
sparkling/still waters)
(October 1993-March
1995). He was a partner
of The New England Con-
sulting Group (manage-
ment consulting firm)
(December 1992-September
1993). He was managing
director of LVMH U.S.
Corporation (U.S. sub-
sidiary of the French
luxury goods conglomer-
ate, Louis Vuitton Moet
Hennessey Corporation)
(1987-1991) and chairman
of its wine and spirits
subsidiary, Schieffelin
& Somerset Company
(1987-1991). Mr. Arm-
strong is a director or
trustee of 29 investment
companies for which
Mitchell Hutchins or
PaineWebber serves as
investment adviser.
E. Garrett Bewkes, Jr.**; 71 Trustee and Chairman Mr. Bewkes is a director
of the Board of of Paine Webber Group
Trustees Inc. ("PW Group") (hold-
ing company of
PaineWebber and Mitchell
Hutchins). Prior to De-
cember 1995, he was a
consultant to PW Group.
Prior to 1988, he was
chairman of the board,
president and chief ex-
ecutive officer of Amer-
ican
Bakeries Company. Mr.
Bewkes is also a direc-
tor of Interstate Baker-
ies Corporation and
NaPro BioTherapeutics,
Inc. Mr. Bewkes is a di-
rector or trustee of 30
investment companies for
which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Richard R. Burt; 51 Trustee Mr. Burt is chairman of
1275 Pennsylvania Avenue, IEP Advisors, Inc. (in-
N.W. ternational investments
Washington, D.C. 20004 and consulting firm)
(since March 1994) and a
partner of McKinsey &
Company (management con-
sulting firm) (since
1991). He is also a di-
rector of American Pub-
lishing Company and
Archer-Daniels-Midland
Co. (agricultural com-
modities). He was the
chief negotiator in the
Strategic Arms Reduction
Talks with the former
Soviet Union (1989-1991)
and the U.S. Ambassador
to the
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND ADDRESS*; AGE POSITION WITH THE FUND AND OTHER DIRECTORSHIPS
---------------------- ---------------------- -----------------------
<C> <C> <S>
Federal Republic of
Germany (1985-1989).
Mr. Burt is a director
or trustee of 29 in-
vestment companies for
which Mitchell Hutchins
or PaineWebber serves
as investment adviser.
Mary C. Farrell**; 48 Trustee Ms. Farrell is a manag-
ing director, senior
investment strategist
and member of the In-
vestment Policy Commit-
tee of PaineWebber. Ms.
Farrell joined
PaineWebber in 1982.
She is a member of the
Financial Women's Asso-
ciation and Women's
Economic Roundtable and
appears as a regular
panelist on Wall $treet
Week with Louis
Rukeyser. She also
serves on the Board of
Overseers of New York
University's Stern
School of Business. Ms.
Farrell is a director
or trustee of 29 in-
vestment companies for
which Mitchell Hutchins
or PaineWebber serves
as investment adviser.
Meyer Feldberg; 55 Trustee Mr. Feldberg is Dean and
Columbia University Professor of Management
101 Uris Hall of the Graduate School
New York, New York 10027 of Business, Columbia
University. Prior to
1989, he was president
of the Illinois Insti-
tute of Technology.
Dean Feldberg is also a
director of K-III Com-
munications Corpora-
tion, Federated Depart-
ment Stores Inc., and
Revlon, Inc. Dean
Feldberg is a director
or trustee of 29 in-
vestment companies for
which Mitchell Hutchins
or PaineWebber serves
as investment adviser.
George W. Gowen; 68 Trustee Mr. Gowen is a partner
666 Third Avenue in the law firm of Dun-
New York, New York 10017 nington, Bartholow &
Miller. Prior to May
1994 he was a partner
in the law firm of Fry-
er, Ross & Gowen.
Mr. Gowen is also a di-
rector of Columbia Real
Estate Investments,
Inc. Mr. Gowen is a di-
rector or trustee of 29
investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Frederic V. Malek; 61 Trustee Mr. Malek is Chairman of
1455 Pennsylvania Avenue, N.W. Thayer Capital Partners
Suite 350 (merchant bank). From
Washington, D.C. 20004 January 1992 to Novem-
ber 1992 he was cam-
paign manager of Bush-
Quayle '92. From 1990
to 1992, he was vice
chairman and, from 1989
to 1990, he was presi-
dent of Northwest Air-
lines Inc., NWA Inc.
(holding
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND ADDRESS*; AGE POSITION WITH THE FUND AND OTHER DIRECTORSHIPS
---------------------- ---------------------- -----------------------
<C> <C> <S>
company of Northwest
Airlines Inc.) and Wings
Holdings Inc. (holding
company of NWA Inc.).
Prior to 1989, he was
employed by the Marriott
Corporation (hotels,
restaurants, airline ca-
tering and contract
feeding), where he most
recently was an execu-
tive vice president and
president of Marriott
Hotels and Resorts.
Mr. Malek is also a di-
rector of American Man-
agement Systems, Inc.
(management consulting
and computer related
services), Automatic
Data Processing, Inc.,
CB Commercial Group,
Inc. (real estate serv-
ices), Choice Hotels In-
ternational (hotel and
hotel franchising), FPL
Group, Inc. (electric
services), Integra, Inc.
(bio-medical), Manor
Care, Inc. (health
care), National Educa-
tion Corporation and
Northwest Airlines Inc.
Mr. Malek is a director
or trustee of 29 invest-
ment companies for which
Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Carl W. Schafer; 62 Trustee Mr. Schafer is president
P.O. Box 1164 of the Atlantic Founda-
Princeton, NJ 08542 tion (charitable founda-
tion supporting mainly
oceanographic explora-
tion and research). He
is a director of Roadway
Express, Inc. (truck-
ing), The Guardian Group
of Mutual Funds, Evans
Systems, Inc. (motor fu-
els, convenience store
and diversified compa-
ny), Electronic Clearing
House, Inc. (financial
transactions process-
ing), Wainoco Oil Corpo-
ration and Nutraceutix
Inc. (biotechnology com-
pany). Prior to January
1993, he was chairman of
the Investment Advisory
Committee of the Howard
Hughes Medical Insti-
tute. Mr. Schafer is a
director or trustee of
29 investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment ad-
viser.
T. Kirkham Barneby; 51 Vice President Mr. Barneby is a managing
director and chief in-
vestment officer--quan-
titative investment of
Mitchell Hutchins. Prior
to September 1994, he
was a senior vice presi-
dent at Vantage Global
Management. Prior to
June 1993, he was a se-
nior vice president at
Mitchell Hutchins.
Mr. Barneby is a vice
president of six invest-
ment companies for which
Mitchell Hutchins or
PaineWebber serves as
investment adviser.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND ADDRESS*; AGE POSITION WITH THE FUND AND OTHER DIRECTORSHIPS
---------------------- ---------------------- -----------------------
<C> <C> <S>
Ellen R. Harris; 51 Vice President Ms. Harris is a managing
director and a portfolio
manager of Mitchell
Hutchins. Ms. Harris is a
vice president of two in-
vestment companies for
which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Donald R. Jones; 37 Vice President Mr. Jones is a first vice
president and a portfolio
manager of Mitchell
Hutchins. Prior to Febru-
ary 1996, he was a vice
president in the asset
management group of First
Fidelity Bancorporation.
Mr. Jones is a vice pres-
ident of two investment
companies for which
Mitchell Hutchins or
PaineWebber serves as in-
vestment adviser.
James F. Keegan; 37 Vice President Mr. Keegan is a senior
vice president and a
portfolio manager of
Mitchell Hutchins. Prior
to March 1996, he was di-
rector of fixed income
strategy and research of
Merrion Group, L.P. From
1987 to 1994, he was a
vice president of global
investment management of
Bankers Trust. Mr. Keegan
is a vice president of
three investment compa-
nies for which Mitchell
Hutchins or PaineWebber
serves as investment ad-
viser.
Thomas J. Libassi; 39 Vice President Mr. Libassi is a senior
vice president and a
portfolio manager of
Mitchell Hutchins. Prior
to May 1994, he was a
vice president of Key-
stone Custodian Funds
Inc. with portfolio man-
agement responsibility.
Mr. Libassi is a vice
president of six invest-
ment companies for which
Mitchell Hutchins or
PaineWebber serves as in-
vestment adviser.
Dennis McCauley; 51 Vice President Mr. McCauley is a managing
director and chief in-
vestment officer--fixed
in-come of Mitchell
Hutchins. Prior to Decem-
ber 1994, he was director
of fixed income
investments of IBM Corpo-
ration. Mr. McCauley is a
vice president of 19 in-
vestment companies for
which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Ann E. Moran; 40 Vice President and Ms. Moran is a vice presi-
Assistant Treasurer dent and a manager of the
mutual fund finance divi-
sion of Mitchell
Hutchins. Ms. Moran is a
vice president and assis-
tant treasurer of 30 in-
vestment companies for
which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND ADDRESS*; AGE POSITION WITH THE FUND AND OTHER DIRECTORSHIPS
---------------------- ---------------------- -----------------------
<C> <C> <S>
Dianne E. O'Donnell; 45 Vice President and Ms. O'Donnell is a senior
Secretary vice president and deputy
general counsel of Mitch-
ell Hutchins. Ms.
O'Donnell is a vice pres-
ident and secretary of 29
investment companies and
vice president and assis-
tant secretary of one in-
vestment company for
which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Emil Polito; 37 Vice President Mr. Polito is a senior
vice president and direc-
tor of operations and
control for Mitchell
Hutchins. From March 1991
to September 1993 he was
director of the mutual
funds sales support and
service center for Mitch-
ell Hutchins and
PaineWebber. Mr. Polito
is a vice president of 30
investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Susan Ryan; 37 Vice President Ms. Ryan is a senior vice
president and portfolio
manager of Mitchell
Hutchins and has been
with Mitchell Hutchins
since 1982. Ms. Ryan is a
vice president of five
investment companies for
which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Victoria E. Schonfeld; 47 Vice President Ms. Schonfeld is a manag-
ing director and general
counsel of Mitchell
Hutchins. Prior to May
1994, she was a partner
in the law firm of Arnold
& Porter. Ms. Schonfeld
is a vice president of 29
investment companies and
a vice president and sec-
retary of one investment
company for which Mitch-
ell Hutchins or
PaineWebber serves as in-
vestment adviser.
Paul H. Schubert; 35 Vice President and Mr. Schubert is a first
Treasurer vice president and the
director of the mutual
fund finance division of
Mitchell Hutchins. From
August 1992 to August
1994, he was a vice pres-
ident at BlackRock Finan-
cial Management L.P. Mr.
Schubert is a vice presi-
dent and treasurer of 30
investment companies for
which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Nirmal Singh; 41 Vice President Mr. Singh is a senior vice
president and portfolio
manager of Mitchell
Hutchins. Prior to 1993,
he was a member of
the portfolio management
team at Merrill
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND ADDRESS*; AGE POSITION WITH THE FUND AND OTHER DIRECTORSHIPS
---------------------- ---------------------- -----------------------
<C> <C> <S>
Lynch Asset Management,
Inc. Mr. Singh is a vice
president of four invest-
ment companies for which
Mitchell Hutchins or
PaineWebber serves as in-
vestment adviser.
Barney A. Taglialatela; 36 Vice President and Mr. Taglialatela is a vice
Assistant Treasurer president and a manager of
the mutual fund finance
division of Mitchell
Hutchins. Prior to Febru-
ary 1995, he was a manager
of the mutual fund finance
division of Kidder Peabody
Asset Management, Inc. Mr.
Taglialatela is a vice
president and assistant
treasurer of 30 investment
companies for which Mitch-
ell Hutchins or
PaineWebber serves as in-
vestment adviser.
Mark A. Tincher; 42 Vice President Mr. Tincher is a managing
director and chief invest-
ment officer--equities of
Mitchell Hutchins. Prior
to March 1995, he was a
vice president and di-
rected the U.S. funds man-
agement and equity re-
search areas of Chase Man-
hattan Private Bank. Mr.
Tincher is a vice presi-
dent of 14 investment com-
panies for which Mitchell
Hutchins or PaineWebber
serves as investment ad-
viser.
Craig M. Varrelman; 39 Vice President Mr. Varrelman is a senior
vice president and a port-
folio manager of Mitchell
Hutchins. Mr. Varrelman is
a vice president of four
investment companies for
which Mitchell Hutchins or
PaineWebber serves as in-
vestment adviser.
Stuart Waugh; 42 Vice President Mr. Waugh is a managing di-
rector and a portfolio
manager of Mitchell
Hutchins responsible for
global fixed income in-
vestments and currency
trading. Mr. Waugh is a
vice president of five in-
vestment companies for
which Mitchell Hutchins or
PaineWebber serves as in-
vestment adviser.
Keith A. Weller; 36 Vice President and Mr. Weller is a first vice
Assistant Secretary president and associate
general counsel of Mitch-
ell Hutchins. Prior to May
1995, he was an attorney
in private practice. Mr.
Weller is a vice president
and assistant secretary of
29 investment companies
for which Mitchell
Hutchins or PaineWebber
serves as investment ad-
viser.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME AND ADDRESS*; AGE POSITION WITH THE FUND AND OTHER DIRECTORSHIPS
---------------------- ---------------------- -----------------------
<C> <C> <S>
Ian W. Williams; 40 Vice President and Mr. Williams is a vice president
Assistant Treasurer and a manager of the mutual
fund finance division of Mitch-
ell Hutchins. Mr. Williams is a
vice president and assistant
treasurer of 30 investment com-
panies for which Mitchell
Hutchins or PaineWebber serves
as investment adviser.
</TABLE>
- - --------
*Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
**Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of the
Fund as defined in the 1940 Act by virtue of their positions with Mitchell
Hutchins, PaineWebber and/or PW Group.
The Fund pays trustees who are not "interested persons" of the Fund $500
annually for each Portfolio and $150 for each board meeting and for each
separate meeting of a board committee with respect to that Portfolio. The Fund
presently has 13 Portfolios and thus pays each such trustee $6,500 annually,
plus any additional amounts due for board or committee meetings. Each chairman
of the audit and contract review committees of individual funds within the
PaineWebber fund complex receives additional compensation aggregating $15,000
annually from the relevant funds. All trustees are reimbursed for any expenses
incurred in attending meetings. Because Mitchell Hutchins and the applicable
Sub-Advisers perform substantially all of the services necessary for the
operation of the Fund, the Fund requires no employees. No officer, director or
employee of Mitchell Hutchins or PaineWebber receives any compensation from the
Fund for acting as a trustee or officer.
The table below includes certain information relating to the compensation of
the Fund's current trustees who held office with the Fund or other PaineWebber
funds during the fiscal year ended December 31, 1997.
COMPENSATION TABLE+
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM THE FUND AND
NAME OF PERSON, POSITION FROM THE FUND* THE FUND COMPLEX**
------------------------ -------------- ------------------
<S> <C> <C>
Richard Q. Armstrong,
Trustee.................................... $12,600 $ 94,885
Richard R. Burt,
Trustee.................................... 11,250 87,085
Meyer Feldberg,
Trustee.................................... 12,600 117,853
George W. Gowen,
Trustee.................................... 14,209 101,567
Frederic V. Malek,
Trustee.................................... 12,600 95,845
Carl W. Schafer,
Trustee.................................... 12,600 94,885
</TABLE>
- - --------
+ Only independent members of the board of trustees are compensated by the
Fund and identified above; trustees who are "interested persons," as defined
by the 1940 Act, do not receive compensation.
* Represents fees paid to each trustee during the fiscal year ended December
31, 1997.
** Represents total compensation paid to each trustee by the fund complex
during the twelve months ended December 31, 1997; no fund within the complex
has a bonus, pension, profit sharing or retirement plan.
37
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
The following shareholders are shown in the Fund's records as owning more
than 5% of the Class H shares of the Portfolios as of February 20, 1998, as
indicated below:
<TABLE>
<CAPTION>
AMERICAN AMERICAN
PAINEWEBBER REPUBLIC BENEFIT
LIFE VARIABLE VARIABLE VARIABLE
ANNUITY ANNUITY ANNUITY
ACCOUNT ACCOUNT ACCOUNT
------------- ----------- --------
<S> <C> <C> <C>
Money Market Portfolio....................... 67% 31% 2%
High Grade Fixed Income Portfolio............ 100% 0% 0%
Strategic Fixed Income Portfolio............. 60% 36% 4%
Global Income Portfolio...................... 53% 31% 2%
Balanced Portfolio........................... 69% 29% 2%
Growth and Income Portfolio.................. 67% 31% 2%
Growth Portfolio............................. 60% 39% 1%
Aggressive Growth Portfolio.................. 100% 0% 0%
Global Growth Portfolio...................... 72% 27% 1%
Total Fund Shares............................ 15,584,989 939,170,248 363,697
</TABLE>
PaineWebber Life Variable Annuity Account is a segregated investment account
of PaineWebber Life Insurance Company. 1200 Harbor Blvd., Weehawken, New Jersey
07087. American Republic Variable Annuity Account is a segregated investment
account of American Republic Insurance Company, 601 6th Avenue, Des Moines,
Iowa 50309. American Benefit Variable Annuity Account (to be renamed Keyport
Benefit Variable Annuity Account) is a segregated investment account of Keyport
Benefit Life Insurance Company (no address yet). Keyport Benefit Life Insurance
Company is a wholly owned subsidiary of Keyport Life Insurance Company, 125
High Street, Boston, Massachusetts 02110-2712.
INVESTMENT ADVISORY SERVICES
Mitchell Hutchins acts as the investment adviser and administrator of each
Portfolio pursuant to a contract with the Fund dated April 21, 1988 as
supplemented by Fee Agreements dated May 1, 1989, December 30, 1991, September
1, 1993 and May 1, 1998 ("Advisory Contract"). Under the Advisory Contract, the
Fund pays Mitchell Hutchins a fee for each Portfolio, computed daily and
payable monthly, according to the schedule set forth in the Prospectus.
During each of the three years in the period ended December 31, 1997,
Mitchell Hutchins earned (or accrued) advisory fees (net of any waivers) in the
amounts set forth below for the Portfolios that had operations during that
period:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
PORTFOLIO 1997 1996 1995
- - --------- -------- -------- --------
<S> <C> <C> <C>
Money Market Portfolio............................... $ 56,346 $ 79,283 $128,777
High Grade Fixed Income Portfolio.................... 39,763 44,461 48,852
Strategic Fixed Income Portfolio..................... 53,270 62,785 90,046
Global Income Portfolio.............................. 165,480 230,262 351,681
Balanced Portfolio................................... 252,729 249,995 110,377
Growth and Income Portfolio.......................... 138,089 111,599 94,315
Growth Portfolio..................................... 299,373 325,065 334,603
Aggressive Growth Portfolio.......................... 170,723 155,896 133,956
Global Growth Portfolio.............................. 182,141 198,128 257,692
</TABLE>
38
<PAGE>
The Advisory Contract authorizes Mitchell Hutchins to retain one or more Sub-
Advisers but does not require Mitchell Hutchins to do so. Under a Sub-Advisory
Contract dated September 21, 1995, Pacific Investment Management Company
("PIMCO") serves as Sub-Adviser to Strategic Fixed Income Portfolio and was
paid (or accrued) by Mitchell Hutchins (not the Portfolio) sub-advisory fees of
$26,635, $31,393 and $11,324 for the fiscal years ended December 31, 1997,
December 31, 1996 and December 31, 1995, respectively. Under a Sub-Advisory
Contract dated September 1, 1993, Nicholas-Applegate Capital Management serves
as Sub-Adviser to Aggressive Growth Portfolio and was paid (or accrued) by
Mitchell Hutchins (not the Portfolio) sub-advisory fees of $106,702, $97,434
and $83,723 for the fiscal years ended December 31, 1997, December 31, 1996 and
December 31, 1995, respectively. Under a Sub-Advisory Contract dated March 23,
1995, GEIM serves as Sub-Adviser to Global Growth Portfolio and was paid (or
accrued) by Mitchell Hutchins (not the Portfolio) sub-advisory fees of $70,428,
$76,609 and $74,893 for the fiscal years ended December 31, 1997, December 31,
1996 and December 31, 1995, respectively.
Under a Sub-Advisory Contract dated September 1, 1993, Wolf, Webb, Burk &
Campbell served as Sub-Adviser to High Grade Fixed Income Portfolio until July
21, 1995 and was paid (or accrued) by Mitchell Hutchins (not the Portfolio)
sub-advisory fees of $15,832 for the fiscal year ended December 31, 1995. Under
a Sub-Advisory Contract dated May 26, 1994, Mitchell Hutchins Institutional
Investors Inc. served as Sub-Adviser to Growth and Income Portfolio until April
3, 1995 and was paid (or accrued) by Mitchell Hutchins (not the Portfolio) sub-
advisory fees of $7,400 for the fiscal year ended December 31, 1995.
Under the terms of the Advisory Contract, each Portfolio bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Fund not readily identifiable as belonging to
one of the Portfolios are allocated among the Portfolios by or under the
direction of the Fund's board of trustees in such manner as the board
determines to be fair and equitable. Expenses borne by each Portfolio include,
but are not limited to, the following (or the Portfolio's allocated share of
the following): (1) the cost (including brokerage commissions, if any) of
securities purchased or sold by the Portfolio and any losses incurred in
connection therewith; (2) fees payable to and expenses incurred on behalf of
the Portfolio by Mitchell Hutchins; (3) organizational expenses; (4) filing
fees and expenses relating to the registration and qualification of the Fund or
the shares of a Portfolio under federal and state securities laws and
maintenance of such registrations and qualifications; (5) fees and salaries
payable to the trustees who are not "interested persons" of the Fund or
Mitchell Hutchins; (6) all expenses incurred in connection with the trustees'
services, including travel expenses; (7) taxes (including any income or
franchise taxes) and governmental fees; (8) costs of any liability,
uncollectible items of deposit and other insurance and fidelity bonds; (9) any
costs, expenses or losses arising out of a liability of or claim for damages or
other relief asserted against the Fund or Portfolio for violation of any law;
(10) legal, accounting and auditing expenses, including legal fees of special
counsel for the trustees who are not interested persons of the Fund; (11)
charges of custodians, transfer agents and other agents; (12) costs of
preparing share certificates, if any; (13) expenses of setting in type and
printing prospectuses and supplements thereto, statements of additional
information and supplements thereto, reports and proxy materials for existing
shareholders and costs of mailing such materials to shareholders; (14) any
extraordinary expenses (including fees and disbursements of counsel) incurred
by the Fund or Portfolio; (15) fees, voluntary assessments and other expenses
incurred in connection with membership in investment company organizations;
(16) costs of mailing and tabulating proxies and costs of meetings of
shareholders, the board and any committees thereof; (17) the cost of investment
company literature and other publications provided to the trustees and
officers; and (18) costs of mailing, stationery and communications equipment.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. Under each Sub-Advisory
Contract, the Sub-Adviser will not be liable for any error of judgment or
mistake of law or for any
39
<PAGE>
loss suffered by the Fund, the Portfolio, its shareholders or Mitchell Hutchins
in connection with the Sub-Advisory Contract, except any liability to the Fund,
the Portfolio, its shareholders or Mitchell Hutchins to which the Sub-Adviser
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under the Sub-Advisory Contract.
The Advisory Contract terminates automatically upon assignment and is
terminable at any time without penalty by the board or by vote of the holders
of a majority of the Portfolio's outstanding voting securities on 60 days'
written notice to Mitchell Hutchins or by Mitchell Hutchins on 60 days' written
notice to the Fund. Each Sub-Advisory Contract terminates automatically upon
its assignment or the termination of the Advisory Contract and is terminable at
any time without penalty by the board or by vote of the holders of a majority
of the Portfolio's outstanding voting securities on 60 days' notice to the Sub-
Adviser, or by the Sub-Adviser on 120 days' written notice to Mitchell
Hutchins. The Sub-Advisory Contract may also be terminated by Mitchell Hutchins
(1) upon material breach by the Sub-Adviser of its representations and
warranties; (2) if the Sub-Adviser becomes unable to discharge its duties and
obligations under the Sub-Advisory Contract or (3) on 120 days' notice to the
Sub-Adviser.
Mitchell Hutchins personnel may invest in securities for their own accounts
pursuant to a code of ethics that describes the fiduciary duty owed to
shareholders of the PaineWebber funds and other Mitchell Hutchins' advisory
accounts by all Mitchell Hutchins' directors, officers and employees,
establishes procedures for personal investing and restricts certain
transactions. For example, employee accounts generally must be maintained at
PaineWebber, personal trades in most securities require pre-clearance and
short-term trading and participation in initial public offerings generally are
prohibited. In addition, the code of ethics puts restrictions on the timing of
personal investing in relation to trades by PaineWebber funds and other
Mitchell Hutchins advisory clients.
Personnel of each Sub-Adviser also may invest in securities for their own
accounts pursuant to the applicable Sub-Adviser's code of ethics, which
establishes procedures for personal investing and restricts certain
transactions.
Subsequent to August 1, 1997, PFPC (not the fund) pays PaineWebber for
certain transfer agency related services that PFPC has delegated to
PaineWebber.
DISTRIBUTION ARRANGEMENTS
Mitchell Hutchins acts as the distributor of the Class I shares of each
Portfolio under a distribution contract with the Fund ("Distribution Contract")
that requires Mitchell Hutchins to use its best efforts, consistent with its
other businesses, to sell Class I shares of each Portfolio. Class H shares have
no distributor or distribution contract. Shares of both Class H and Class I
shares are offered continuously to separate accounts of insurance companies.
Under a plan of distribution pertaining to the Class I shares adopted by the
Fund in the manner prescribed under Rule 12b-1 under the 1940 Act ("Class I
Plan"), each Portfolio pays Mitchell Hutchins a distribution fee, accrued daily
and payable monthly, at the annual rate of 0.25% of the average daily net
assets attributable to its Class I shares. Among other things, the Class I Plan
provides (1) that Mitchell Hutchins will submit to the board at least
quarterly, and the board will review, reports regarding all amounts expended
under the Class I Plan and the purposes for which such expenditures were made,
(2) the Class I Plan will continue in effect only so long as it is approved at
least annually, and any material amendment thereto is approved, by the board,
including those trustees who are not "interested persons" of the Fund and who
have no direct or indirect financial interest in the operation of the Class I
Plan or any agreement related to the Class I Plan, acting in person at a
meeting called for that purpose, (3) payments by a Portfolio under the Plan
shall not be materially increased without the affirmative vote of the holders
of a majority of the
40
<PAGE>
outstanding Class I shares of that Portfolio and (4) while the Class I Plan
remains in effect, the election and nomination of trustees who are not
"interested persons" of the Fund shall be committed to the discretion of the
trustees who are not "interested persons" of the Fund.
In approving the Class I Plan for each Portfolio, the board considered all
the features of the distribution system for the Class I shares, including (1)
the expectation that Class I shares would be sold primarily to the separate
accounts of insurance companies unaffiliated with Mitchell Hutchins or
PaineWebber, (2) the expenses those unaffiliated insurance companies were
likely to incur in indirectly marketing Class I shares to the owners of
Contracts issued by their separate accounts, (3) the need to encourage those
unaffiliated insurance companies to educate their agents concerning the
Portfolio and to compensate their agents for selling its Class I shares and (4)
the need to encourage those unaffiliated insurance companies to educate their
Contract owners concerning the Portfolio, to respond to Contract owner
inquiries concerning the Portfolio and to provide personal and account
maintenance services to Contract owners with respect to Class I shares of the
Portfolio attributable to their accounts.
The board also considered all compensation that Mitchell Hutchins would
receive under the Class I Plan and the Distribution Contract and the benefits
that would accrue to Mitchell Hutchins under the Class I Plan in that Mitchell
Hutchins would receive distribution and advisory fees that are calculated based
on a percentage of the average net assets of each Portfolio and would increase
if the Class I Plan were successful and the Portfolio attained and maintained
significant asset levels.
PORTFOLIO TRANSACTIONS
Subject to policies established by the board, Mitchell Hutchins or the
applicable Sub-Adviser is responsible for the execution of portfolio
transactions and the allocation of brokerage transactions for each Portfolio.
In executing portfolio transactions, Mitchell Hutchins or the applicable Sub-
Adviser seeks to obtain the best net results for each Portfolio taking into
account such factors as the price (including the applicable brokerage
commission or dealer spread), size of the order, difficulty of execution and
operational facilities of the firm involved. While Mitchell Hutchins or the
applicable Sub-Adviser generally seeks reasonably competitive commission rates,
payment of the lowest commission is not necessarily consistent with obtaining
the best net results. Prices paid to dealers in principal transactions through
which most debt securities and some equity securities are traded generally
include a "spread," which is the difference between the prices at which the
dealer is willing to purchase and sell a specific security at that time. Each
Portfolio may invest in securities traded in the OTC markets and will engage
primarily in transactions with the dealers who make markets in such securities,
unless a better price or execution could be obtained by using a broker.
During each of the three years in the period ended December 31, 1997, the
Portfolios that had operations paid the brokerage commissions set forth below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
PORTFOLIO 1997 1996 1995
- - --------- ----------- ---------- -----------
<S> <C> <C> <C>
Money Market Portfolio...................... $ 0 $ 0 $ 0
High Grade Fixed Income Portfolio........... 0 0 0
Strategic Fixed Income Portfolio............ 1,149 2,729 0
Global Income Portfolio..................... 0 0 0
Balanced Portfolio.......................... 51,556 65,857 39,766
Growth and Income Portfolio................. 39,178 31,792 34,846
Growth Portfolio............................ 71,334 33,885 52,967
Aggressive Growth Portfolio................. 45,023 53,904 57,802
Global Growth Portfolio..................... 110,979 78,261 341,107
</TABLE>
41
<PAGE>
The Fund has no obligation to deal with any broker or group of brokers in
the execution of portfolio transactions. The Fund contemplates that,
consistent with the policy of obtaining the best net results, a substantial
amount of the Portfolios' brokerage transactions may be conducted through
Mitchell Hutchins or its affiliates, including PaineWebber. The Fund's board
of trustees has adopted procedures in conformity with Rule 17e-1 under the
1940 Act to ensure that all brokerage commissions paid to Mitchell Hutchins or
its affiliates are fair and reasonable. Specific provisions included in the
Advisory Contract authorize Mitchell Hutchins and any of its affiliates that
is a member of a national securities exchange to effect securities
transactions for the Portfolios on such exchange and to retain compensation in
connection with such transactions. Any such transactions will be effected and
related compensation paid in accordance with applicable SEC regulations.
During each of the three years in the period ended December 31, 1997, the
Portfolios that had operations paid to PaineWebber the brokerage commissions
set forth below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
PORTFOLIO 1997 1996 1995
- - --------- ---------- ----------- -----------
<S> <C> <C> <C>
Money Market Portfolio...................... $ 0 $ 0 $ 0
High Grade Fixed Income Portfolio........... 0 0 0
Strategic Fixed Income Portfolio............ 0 0 0
Global Income Portfolio..................... 0 0 0
Balanced Portfolio.......................... 1,992 1,320 504
Growth and Income Portfolio................. 558 852 1,400
Growth Portfolio............................ 4,020 300 900
Aggressive Growth Portfolio................. 1,621 186 0
Global Growth Portfolio..................... 0 0 0
</TABLE>
The $4,020 in brokerage commissions paid by Growth Portfolio to PaineWebber
during the fiscal year ended December 31, 1997 represented 5.64% of the
aggregate brokerage commissions paid by that Portfolio and 6.70% of the
aggregate dollar amount of transactions involving the payment of commissions.
The $1,992 in brokerage commissions paid by Balanced Portfolio to PaineWebber
during the fiscal year ended December 31, 1997 represented 3.86% of the
aggregate brokerage commissions paid by that Portfolio and 3.32% of the
aggregate dollar amount of transactions involving the payment of commissions.
The $558 in brokerage commissions paid by Growth and Income Portfolio to
PaineWebber during the fiscal year ended December 31, 1997 represented 1.42%
of the aggregate brokerage commissions paid by that Portfolio and 1.12% of the
aggregate dollar amount of transactions involving the payment of commissions.
The $1,621 in brokerage commissions paid by Aggressive Growth Portfolio to
PaineWebber during the fiscal year ended December 31, 1997 represented 3.60%
of the aggregate brokerage commissions paid by that Portfolio and 3.79% of the
aggregate dollar amount of transactions involving the payment of commissions.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs") who receive brokerage commissions for their services. The
Fund's procedures in selecting FCMs to execute the Portfolios' transactions in
futures contracts, including procedures permitting the use of Mitchell
Hutchins and its affiliates, are similar to those in effect with respect to
brokerage transactions in securities.
Consistent with the interest of each Portfolio and subject to the review of
the board, Mitchell Hutchins or the applicable Sub-Adviser may cause a
Portfolio to purchase and sell portfolio securities from and to brokers who
provide the Portfolio with research, analysis, advice and similar services. In
return for such services, the Portfolio may pay to those brokers a higher
commission than may be charged by other brokers, provided that Mitchell
Hutchins or the applicable Sub-Adviser determines in good faith that such
commission is reasonable in terms either of that particular transaction or of
the overall responsibility of Mitchell Hutchins or the applicable Sub-Adviser
to the Portfolio and its other clients and that the total commissions paid by
the Portfolio will be reasonable in relation to the benefits to the Portfolio
over the long term. During the fiscal year ended December 31, 1997, the
Portfolios that had operations directed the portfolio transactions indicated
below to brokers chosen because they provide research and analysis, for which
the Portfolios paid the brokerage commissions indicated below:
42
<PAGE>
<TABLE>
<CAPTION>
AMOUNT OF PORTFOLIO BROKERAGE
PORTFOLIO TRANSACTIONS COMMISSIONS PAID
- - --------- ------------------- ----------------
<S> <C> <C>
Money Market Portfolio..................... $ 0 $ 0
High Grade Fixed Income Portfolio.......... $ 0 $ 0
Strategic Fixed Income Portfolio........... $ 0 $ 0
Global Income Portfolio.................... $ 0 $ 0
Balanced Portfolio......................... $10,806,216 $12,374
Growth and Income Portfolio................ $ 3,272,033 $ 3,843
Growth Portfolio........................... $ 8,727,539 $10,179
Aggressive Growth Portfolio................ $28,830,873 $42,851
Global Growth Portfolio.................... $ 0 $ 0
</TABLE>
For purchases or sales with broker-dealer firms that act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with these transactions,
Mitchell Hutchins or the applicable Sub-Adviser will not purchase securities
at a higher price or sell securities at a lower price than would otherwise be
paid if no weight was attributed to the services provided by the executing
dealer. Moreover, Mitchell Hutchins or the applicable Sub-Adviser will not
enter into any explicit soft dollar arrangements relating to principal
transactions and will not receive in principal transactions the types of
services which could be purchased for hard dollars. Mitchell Hutchins or the
applicable Sub-Adviser may engage in agency transactions in OTC equity and
debt securities in return for research and execution services. These
transactions are entered into only in compliance with procedures ensuring that
the transaction (including commissions) is at least as favorable as it would
have been if effected directly with a market-maker that did not provide
research or execution services. These procedures include Mitchell Hutchins or
the applicable Sub-Adviser receiving multiple quotes from dealers before
executing the transaction on an agency basis.
Information and research received from such brokers and dealers will be in
addition to, and not in lieu of, the services required to be performed by
Mitchell Hutchins or the applicable Sub-Adviser under the Advisory Contract or
Sub-Advisory Contract. Research services furnished by brokers or dealers
through which or with which the Portfolios effect securities transactions may
be used by Mitchell Hutchins or the applicable Sub-Adviser in advising other
funds or accounts and, conversely, research services furnished to Mitchell
Hutchins or the applicable Sub-Adviser in connection with these other funds or
accounts may be used in advising the Portfolios.
Investment decisions for each Portfolio and for other investment accounts
managed by Mitchell Hutchins or the applicable Sub-Adviser are made
independently of each other in light of differing considerations for the
various accounts. However, the same investment decision may occasionally be
made for a Portfolio and one or more of such accounts. In such cases,
simultaneous transactions are inevitable. Purchases or sales are then averaged
as to price and allocated between the Portfolio and such other account(s) as
to amount according to a formula deemed equitable to the Portfolio and such
account(s). While in some cases this practice could have a detrimental effect
upon the price or value of the security as far as a Portfolio is concerned, or
upon its ability to complete its entire order, in other cases it is believed
that coordination and the ability to participate in volume transactions will
be beneficial to the Portfolio.
The Portfolios will not purchase securities that are offered in
underwritings in which Mitchell Hutchins, the applicable Sub-Adviser or any of
their affiliates is a member of the underwriting or selling group, except
pursuant to procedures adopted by the Fund's board pursuant to Rule 10f-3
under the 1940 Act. Among other things, these procedures require that the
commission or spread paid in connection with such a purchase be reasonable and
fair, that the purchase be at not more than the public offering price prior to
the end of the first business day after the date of the public offering and
that Mitchell Hutchins, the applicable Sub-Adviser or any affiliate thereof
not participate in or benefit from the sale to the Fund.
43
<PAGE>
PORTFOLIO TURNOVER. The turnover rate may vary greatly from year to year for
any Portfolio and will not be a limiting factor when Mitchell Hutchins or the
applicable Sub-Adviser deems portfolio changes appropriate. The annual
portfolio turnover rate is calculated by dividing the lesser of a Portfolio's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of securities whose maturities at the time of acquisition were one year
or less) by the monthly average value of the securities except short-term
securities in the Portfolio during the year. For the fiscal years ended
December 31, 1997 and December 31, 1996, respectively, the portfolio turnover
rates were as set forth below:
<TABLE>
<CAPTION>
PORTFOLIO TURNOVER RATES
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
PORTFOLIO 1997 1996
- - --------- ---- ----
<S> <C> <C>
Money Market Portfolio............................ n/a n/a
High Grade Fixed Income Portfolio................. 95% 282%
Strategic Fixed Income Portfolio.................. 175% 317%
Global Income Portfolio........................... 142% 134%
Balanced Portfolio................................ 169% 235%
Growth and Income Portfolio....................... 92% 99%
Growth Portfolio.................................. 89% 53%
Aggressive Growth Portfolio....................... 89% 115%
Global Growth Portfolio........................... 81% 44%
</TABLE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The insurance company separate accounts purchase and redeem shares of each
Portfolio on each day on which the New York Stock Exchange ("NYSE") is open for
trading ("Business Day") based on, among other things, the amount of premium
payments to be invested and surrendered and transfer requests to be effected on
that day pursuant to the variable contracts. Currently, the NYSE is closed on
the observance of New Year's Day, Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Such purchases and redemptions of the shares of each Portfolio
are effected at their respective net asset values per share determined as of
the close of regular trading (currently 4:00 p.m., Eastern time) on the NYSE on
that Business Day. Payment for redemptions are made by the Fund within seven
days thereafter. No fee is charged the separate accounts when they purchase or
redeem Portfolio shares.
The Fund may suspend redemption privileges of shares of any Portfolio or
postpone the date of payment during any period (1) when the NYSE is closed or
trading on the NYSE is restricted as determined by the SEC, (2) when an
emergency exists, as defined by the SEC, that makes it not reasonably
practicable for the Fund to dispose of securities owned by it or fairly to
determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of the Portfolio's securities at the time.
VALUATION OF SHARES
Each Portfolio determines its net asset value separately for each class of
shares as of the close of regular trading (currently 4:00 p.m., Eastern time)
on the NYSE on each Monday through Friday when the NYSE is open.
Securities that are listed on U.S. and foreign stock exchanges are valued at
the last sale price on the day the securities are being valued or, lacking any
sales on such day, at the last available bid price. In cases where securities
are traded on more than one exchange, the securities are generally valued on
the exchange considered by Mitchell Hutchins or the applicable Sub-Adviser as
the primary market. Securities traded in
44
<PAGE>
the OTC market and listed on the Nasdaq Stock Market ("Nasdaq") are valued at
the last available sale price listed on Nasdaq at 4:00 p.m., Eastern time;
other OTC securities are valued at the last available bid price prior to the
time of valuation.
When market quotations are readily available, the debt securities of the
Portfolios (with the exception of Money Market Portfolio) are valued based
upon market quotations, provided such quotations adequately reflect, in the
judgment of Mitchell Hutchins or the applicable Sub-Adviser, the fair value of
the securities. The amortized cost method of valuation generally is used with
respect to debt obligations with 60 days or less remaining to maturity unless
the board determines that this does not represent fair value. When market
quotations for options and futures positions held by the Portfolios are
readily available, those positions are valued based upon such quotations.
Market quotations are not generally available for options traded in the OTC
market. When market quotations for options and futures positions, or any other
securities or assets of the Portfolios, are not available, they are valued at
fair value as determined in good faith by or under the direction of the board.
When practicable, such determinations are based upon appraisals received from
a pricing service using a computerized matrix system or appraisals derived
from information concerning the security or similar securities received from
recognized dealers in those securities. In valuing thinly traded securities
and lower rated corporate bonds, it should be recognized that judgment often
plays a greater role than is the case with respect to securities for which a
broader range of dealer quotations and last-sale information is available.
All investments quoted in foreign currencies are valued daily in U.S.
dollars on the basis of the foreign currency exchange rates prevailing at the
time such valuation is determined. Foreign currency exchange rates generally
are determined prior to the close of regular trading on the NYSE.
Occasionally, events affecting the value of foreign securities and such
exchange rates occur between the time at which they are determined and the
close of the NYSE, which events would not be reflected in the computation of a
Portfolio's net asset value. If events materially affecting the value of such
securities or currency exchange rates occurred during such time period, the
securities will be valued at their fair value as determined in good faith by
or under the direction of the board of trustees. The foreign currency exchange
transactions conducted on a spot (that is, cash) basis for the Portfolios that
invest outside the United States are valued at the spot rate for purchasing or
selling currency prevailing on the foreign exchange market. This rate under
normal market conditions differs from the prevailing exchange rate in an
amount generally less than one-tenth of one percent due to the costs of
converting from one currency to another.
Money Market Portfolio values its portfolio securities in accordance with
the amortized cost method of valuation under Rule 2a-7 under the 1940 Act. To
use amortized cost to value its portfolio securities, the Portfolio must
adhere to certain conditions under that Rule relating to its investments, some
of which are discussed in the Prospectus. Amortized cost is an approximation
of market value, whereby the difference between acquisition cost and value at
maturity is amortized on a straight-line basis over the remaining life of the
instrument. The effect of changes in the market value of a security as a
result of fluctuating interest rates is not taken into account and thus the
amortized cost method of valuation may result in the value of a security being
higher or lower than its actual market value. In the event that a large number
of redemptions takes place at a time when interest rates have increased, the
Portfolio might have to sell portfolio securities prior to maturity and at a
price that might not be as desirable as the value at maturity.
The board has established procedures for the purpose of maintaining a
constant net asset value of $1.00 per share for Money Market Portfolio, which
include a review of the extent of any deviation of net asset value per share,
based on available market quotations, from the $1.00 amortized cost per share.
Should that deviation exceed 1/2 of 1%, the trustees will promptly consider
whether any action should be initiated to eliminate or reduce material
dilution or other unfair results to shareholders. Such action may include
redeeming shares in kind, selling portfolio securities prior to maturity,
reducing or withholding dividends and utilizing a net asset value per share as
determined by using available market quotations. Money Market Portfolio will
maintain a dollar-weighted average portfolio maturity of 90 days or less and
will not purchase any instrument with a remaining maturity greater than 13
months (as calculated under Rule 2a-7) and except that securities subject
45
<PAGE>
to repurchase agreements may have maturities in excess of 13 months, will
limit portfolio investments, including repurchase agreements, to those U.S.
dollar-denominated instruments that are of high quality and that the trustees
determine present minimal credit risks as advised by Mitchell Hutchins and
will comply with certain reporting and recordkeeping procedures. There is no
assurance that constant net asset per share value will be maintained. In the
event amortized cost ceases to represent fair value, the board will take
appropriate action.
In determining the approximate market value of portfolio investments, the
Fund may employ outside organizations, which may use a matrix or formula
method that takes into consideration market indices, matrices, yield curves
and other specific adjustments. This may result in the securities being valued
at a price different from the price that would have been determined had the
matrix or formula method not been used. All cash, receivables and current
payables are carried at their face value. Other assets, if any, are valued at
fair value as determined in good faith by or under the direction of the board.
TAXES
Shares of the Portfolios are offered only to insurance company separate
accounts that fund benefits under the Contracts. See the applicable Contract
prospectus for a discussion of the special taxation of insurance companies
with respect to such accounts and of the Contract holders.
Each Portfolio is treated as a separate corporation for federal income tax
purposes. In order to qualify or continue to qualify for treatment as a
regulated investment company ("RIC") under the Internal Revenue Code, each
Portfolio must distribute to its shareholders for each taxable year at least
90% of its investment company taxable income (consisting generally of net
investment income, net short-term capital gain and, for certain Portfolios,
net gains from certain foreign currency transactions) ("Distribution
Requirement") and must meet several additional requirements. With respect to
each Portfolio, these requirements include the following: (1) the Portfolio
must derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of securities or foreign currencies, or other income
(including gains from options, futures or forward currency contracts) derived
with respect to its business of investing in securities or those currencies
("Income Requirement"); (2) at the close of each quarter of the Portfolio's
taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. government securities, securities of
other RICs and other securities, with these other securities limited, in
respect of any one issuer, to an amount that does not exceed 5% of the value
of the Portfolio's total assets and that does not represent more than 10% of
the issuer's outstanding voting securities; and (3) at the close of each
quarter of the Portfolio's taxable year, not more than 25% of the value of its
total assets may be invested in securities (other than U.S. government
securities or the securities of other RICs) of any one issuer.
As noted in the Prospectus, each Portfolio intends to comply or continue to
comply with the diversification requirements imposed on it by section 817(h)
of the Internal Revenue Code and the regulations thereunder. These
requirements, which are in addition to the diversification requirements
mentioned above, place certain limitations on the proportion of each
Portfolio's assets that may be represented by any single investment (which
includes all securities of the same issuer). For these purposes, each U.S.
government agency or instrumentality is treated as a separate issuer.
The use of hedging and related strategies, such as selling (writing) and
purchasing options and futures contracts and entering into forward currency
contracts, involves complex rules that will determine for income tax purposes
the amount, character and timing of recognition of the gains and losses a
Portfolio realizes in connection therewith. Gains from the disposition of
foreign currencies (except certain gains therefrom that may be excluded by
future regulations), and gains from options, futures and forward currency
contracts derived by a Portfolio with respect to its business of investing in
securities or foreign currencies, will qualify as permissible income under the
Income Requirement.
46
<PAGE>
Dividends and interest received by a Portfolio, and gains realized thereby,
may be subject to income, withholding or other taxes imposed by foreign
countries and U.S. possessions that would reduce the yield and/or total return
on its securities. Tax conventions between certain countries and the United
States may reduce or eliminate these foreign taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by
foreign investors.
Any Portfolio that may purchase or hold equity securities may invest in the
stock of "passive foreign investment companies" ("PFICs"). A PFIC is a foreign
corporation--other than a "controlled foreign corporation" (i.e., a foreign
corporation in which, on any day during its taxable year, more than 50% of the
total voting power of all voting stock therein or the total value of all stock
therein is owned, directly, indirectly, or constructively, by "U.S.
shareholders," defined as U.S. persons that individually own, directly,
indirectly, or constructively, at least 10% of that voting power) as to which a
Portfolio is a U.S. shareholder --that, in general, meets either of the
following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, a Portfolio will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock of a PFIC or of any gain from disposition of such stock (collectively
"PFIC income"), plus interest thereon, even if the Portfolio distributes the
PFIC income as a taxable dividend to its shareholders. The balance of the PFIC
income will be included in each Portfolio's investment company taxable income
and, accordingly, will not be taxable to it to the extent that income is
distributed to its shareholders.
If a Portfolio invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the Portfolio would be required to include in income each year its
pro rata share of the QEF's annual ordinary earnings and net capital gain (the
excess of net long-term capital gain over net short-term capital loss)--which
most likely would have to be distributed to the Portfolio's shareholders to
satisfy the Distribution Requirement--even if those earnings and gain were not
distributed to the Portfolio by the QEF. In most instances it will be very
difficult, if not impossible, to make this election because of certain
requirements thereof.
Each Portfolio may elect to "mark-to-market" its stock in any PFIC. "Marking-
to-market," in this context, means including in ordinary income each taxable
year the excess, if any, of the fair market value of a PFIC's stock over a
Portfolio's adjusted basis therein as of the end of that year. Pursuant to the
election, a Portfolio also would be allowed to deduct (as an ordinary, not
capital, loss) the excess, if any, of its adjusted basis in PFIC stock over the
fair market value thereof as of the taxable year-end, but only to the extent of
any net mark-to-market gains with respect to that stock included by the
Portfolio for prior taxable years. A Portfolio's adjusted basis in each PFIC's
stock with respect to which it makes this election will be adjusted to reflect
the amounts of income included and deductions taken under the election.
Regulations proposed in 1992 would provide a similar election with respect to
the stock of certain PFICs.
If a Portfolio has an "appreciated financial position"--generally, an
interest (including an interest through an option, future or forward contract,
or short sale) with respect to any stock, debt instrument (other than "straight
debt"), or partnership interest the fair market value of which exceeds its
adjusted basis--and enters into a "constructive sale" of the same or
substantially similar property, the Portfolio will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract, or futures or forward contract entered into by a Portfolio
or a related person with respect to the same or substantially similar property.
In addition, if the appreciated financial position is itself a short sale or
such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale.
A Portfolio may acquire zero coupon or other securities issued with original
issue discount or Treasury Inflation Protected Securities ("TIPS"), on which
principal is adjusted based on changes in the Consumer Price Index. A Portfolio
must include in its gross income the portion of the original issue discount or
amount of any principal increases on TIPS that accrues on such securities
during the taxable year, even if the Portfolio
47
<PAGE>
receives no corresponding payment on them during the year. Because a Portfolio
annually must distribute substantially all of its investment company taxable
income, including any accrued original issue discount or amount of principal
increases on TIPS, to satisfy the Distribution Requirement, it may be required
in a particular year to distribute as a dividend an amount that is greater than
the total amount of cash it actually receives. Those distributions will be made
from a Portfolio's cash assets or from the proceeds of sales of portfolio
securities, if necessary.
The foregoing is only a general summary of some of the important federal
income tax considerations generally affecting the Portfolios and their
shareholders. No attempt is made to present a complete explanation of the
federal tax treatment of the Portfolios' activities, and this discussion is not
intended as a substitute for careful tax planning. Accordingly, potential
investors are urged to consult their own tax advisers for more detailed
information and for information regarding any state, local or foreign taxes
applicable to the Portfolios and to dividends and other distributions
therefrom.
DIVIDENDS
MONEY MARKET PORTFOLIO. Shares begin earning dividends on the day of
purchase; dividends are accrued to shareholder accounts daily and are
automatically reinvested in Portfolio shares monthly. The Portfolio does not
expect to realize net capital gain. In the event of a redemption of all of the
Portfolio's shares held by a shareholder, all accrued dividends declared on the
shares up to the date of redemption are credited to the shareholder's account.
The board may revise the above dividend policy, or postpone the payment of
dividends, if the Portfolio has or anticipates any large unexpected expense,
loss or fluctuation in net assets that, in the opinion of the board, might have
a significant adverse effect on shareholders. To date, no situation has arisen
to cause the board to take any such action.
OTHER INFORMATION
Prior to August 14, 1995, the name of Growth and Income Portfolio was
"Dividend Growth Portfolio." Prior to September 21, 1995, the name of Strategic
Fixed Income Portfolio was "Government Portfolio" and the name of High Grade
Fixed Income Portfolio was "Fixed Income Portfolio." Prior to January 26, 1996,
the name of Balanced Portfolio was "Asset Allocation Portfolio." Prior to
November 19, 1997, the Fund was known as "PaineWebber Series Trust."
The Fund is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund or a
Portfolio. However, the Fund's Declaration of Trust disclaims shareholder
liability for acts or obligations of the Fund or any Portfolio and requires
that notice of such disclaimer be given in each note, bond, contract,
instrument, certificate or undertaking made or issued by the trustees or by any
officers or officer by or on behalf of the Fund, the trustees or any of them in
connection with the Fund. The Declaration of Trust provides for indemnification
from Fund or Portfolio property, as appropriate, for all losses and expenses of
any shareholder held personally liable for the obligations of the Fund or
Portfolio. Thus, the risk of a shareholder's incurring financial loss on
account of shareholder liability is limited to circumstances in which the Fund
or Portfolio itself would be unable to meet its obligations, a possibility that
Mitchell Hutchins believes is remote and not material. Upon payment of any
liability incurred by a shareholder of a Portfolio, the shareholder paying such
liability will be entitled to reimbursement from the general assets of the
Portfolio. The board intends to conduct the operations of the Fund so as to
avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Fund and the Portfolios.
48
<PAGE>
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the Fund.
Kirkpatrick & Lockhart LLP also acts as counsel to Mitchell Hutchins and
PaineWebber in connection with other matters.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for the Fund.
FINANCIAL STATEMENTS
The Fund's Annual Report to shareholders for the fiscal year ended December
31, 1997 is a separate document supplied with this Statement of Additional
Information, and the financial statements, accompanying notes and report of
independent auditors appearing therein are incorporated by reference in this
Statement of Additional Information.
49
<PAGE>
PART C. OTHER INFORMATION
--------------------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements (filed herewith):
Included in Part A of this Registration Statement:
- - --------------------------------------------------
Financial Highlights for each of Global Growth Portfolio, Growth Portfolio
and Money Market Portfolio for each of the ten years in the period ended
December 31, 1997.
Financial Highlights for Global Income Portfolio for each of the nine years
in the period ended December 31, 1997 and for the period May 1, 1988
(commencement of operations) to December 31, 1988.
Financial Highlights for Balanced Portfolio for each of the nine years in the
period ended December 31, 1997 and for the period June 1, 1988 (commencement
of operations) to December 31, 1988.
Financial Highlights for Strategic Fixed Income Portfolio for each of the
eight years in the period ended December 31, 1997 and for the period July 5,
1989 (commencement of operations) to December 31, 1989.
Financial Highlights for Growth and Income Portfolio for each of the five
years in the period ended December 31, 1997 and for the period January 2,
1992 (commencement of operations) to December 31, 1992.
Financial Highlights for Aggressive Growth Portfolio for each of the four
years in the period ended December 31, 1997 and for the period November 2,
1993 (commencement of operations) to December 31, 1993.
Financial Highlights for High Grade Fixed Income Portfolio for each of the
four years in the period ended December 31, 1997 and for the period November
8, 1993 (commencement of operations) to December 31, 1993.
Included in Part B of this Registration Statement through incorporation by
reference from the Annual Report to Shareholders (previously filed with the
Securities and Exchange Commission through EDGAR on February , 1998,
Accession No. :
Portfolio of Investments at December 31, 1997
Statement of Assets and Liabilities at December 31, 1997
Statement of Operations for the year ended December 31, 1997
Statement of Changes in Net Assets for each of the two years in the period
ended December 31, 1997
Notes to Financial Statements
Financial Highlights for each of the five years in the period ended December
31, 1997 for Balanced Portfolio, Global Growth Portfolio, Global Income
Portfolio, Growth Portfolio, Growth and Income Portfolio, Money Market and
Strategic Fixed Income Portfolio.
Financial Highlights for each of the four years in the period ended December
31, 1997 and for the period November 2, 1993 (commencement of operations) to
December 31, 1993 for Aggressive Growth Portfolio.
C-1
<PAGE>
Financial Highlights for each of the four years in the period ended December
31, 1997 and for the period November 8, 1993 (commencement of operations) to
December 31, 1993 for High Grade Fixed Income Portfolio.
Report of Ernst & Young LLP, Independent Auditors, dated February 13, 1998.
(b) Exhibits:
(1) Amended and Restated Declaration of Trust (filed herewith)
(2) Restated By-Laws (filed herewith)
(3) Voting trust agreement - none
(4) Instruments defining the rights of holders of the Registrant's shares of
beneficial interest 1/
-
(5) (a) Investment Advisory and Administration Contract (filed herewith)
(b) Investment Advisory and Administration Fee Agreement with respect to
Strategic Fixed Income Portfolio (formerly Government Portfolio)
(filed herewith)
(c) Investment Advisory and Administration Fee Agreement with respect to
Growth and Income Portfolio (formerly Dividend Growth Portfolio)
(filed herewith)
(d) Form of Investment Advisory and Administration Fee Agreement with
respect to Aggressive Growth Portfolio (filed herewith)
(e) Investment Advisory and Administration Fee Agreement with respect to
High Grade Fixed Income Portfolio (formerly Fixed Income Portfolio)
(filed herewith)
(f) Form of Investment Advisory and Administration Fee Agreement with
respect to High Income Portfolio, Small Cap Portfolio, Strategic
Income Portfolio and Tactical Allocation Portfolio (filed herewith)
(g) Sub-Investment Advisory Contract with respect to Aggressive Growth
Portfolio (filed herewith)
(h) Sub-Advisory Agreement with respect to the Global Growth Portfolio 2/
-
(i) Sub-Advisory Agreement with respect to the Strategic Fixed Income
Portfolio 2/
-
(6) Form of Distribution Contract with respect to Class I shares (filed
herewith)
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement
(a) Custodian Agreement with State Street Bank and Trust Company (filed
herewith)
(b) Custodian Agreement with Brown Brothers Harriman & Co. (filed
herewith)
(9) Transfer Agency Services and Shareholder Services Agreement (filed
herewith)
(10) Opinion and Consent of Counsel (filed herewith)
(11) Consent of Ernst & Young LLP (filed herewith)
(12) Financial statements omitted from prospectus-none
(13) Letter of investment intent (filed herewith)
(14) Prototype Retirement Plan - none
(15) Form of Plan of Distribution pursuant to Rule 12b-1with respect to Class I
shares (filed herewith)
(16) Schedule of Computation for Performance Quotations - not applicable
(17) and (27) Financial Data Schedule (filed herewith)
(18) Plan pursuant to Rule 18f-3 (filed herewith)
______________________
1/ Incorporated by reference from Articles III, VIII, IX, X, and XI of
- - -
Registrant's Amended and Restated Declaration of Trust and from Articles II,
VII and X of Registrant's Restated By-Laws.
2/ Incorporated by reference to Post-Effective Amendment No. 23, SEC File No.
- - -
10438, filed May 1, 1996.
Item 25. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
As of February 15, 1998, more than 99% of the outstanding shares of
beneficial interest of each of the nine operating portfolios of the Registrant
were owned by American Republic Variable Annuity Account, a segregated
investment account of American Republic Insurance Company, American Benefit
Variable Annuity Account, a segregated investment account of American Benefit
Life Insurance Company and PaineWebber Life Variable
C-2
<PAGE>
Annuity Account, a segregated investment account of PaineWebber Life Insurance
Company. More than 99% of the outstanding shares of beneficial interest of each
of Fixed Income, Balanced and Aggressive Growth Portfolios is, at the date of
this Prospectus, owned by PaineWebber Life Variable Annuity Account. Information
about persons controlled by or under common control of American Republic
Insurance Company is set forth under Item 26 of the most recent Post-Effective
Amendment to the Registration Statement of American Republic Variable Annuity
Account, File No. 33-10417, and is hereby incorporated herein by reference.
Information about persons controlled by or under common control of American
Benefit Life Insurance Company is set forth under Item 26 of the most recent
Post-Effective Amendment to the Registration Statement of American Benefit
Variable Annuity Account, File No. 33-19254, and is hereby incorporated herein
by reference. Information about persons controlled by or under common control of
PaineWebber Life Insurance Company is set forth under Item 26 of the most recent
Post-Effective Amendment to the Registration Statements of the PaineWebber Life
Separate Account, File No. 33-58808 and File No. 33-61488, and is hereby
incorporated by reference.
Item 26. Number of Holders of Securities
-------------------------------
<TABLE>
<CAPTION>
Title of Class of Shares Number of Record Holders
of Beneficial Interest as of January 15, 1998
---------------------- ----------------------
<S> <C>
Money Market Portfolio 4
Global Growth Portfolio 4
Growth Portfolio 4
Balanced Portfolio 4
Global Income Portfolio 4
Strategic Income Portfolio 4
Growth and Income Portfolio 4
High Grade Fixed Income Portfolio 2
Aggressive Growth Portfolio 2
High Income Portfolio 0
Small Cap Portfolio 0
Strategic Income Portfolio 0
Tactical Allocation Portfolio 0
</TABLE>
Item 27. Indemnification
---------------
Section 2 of "Indemnification" in Article X of the Declaration of Trust
provides that the appropriate series of the Registrant will indemnify its
trustees and officers to the fullest extent permitted by law against claims and
expenses asserted against or incurred by them by virtue of being or having been
a trustee or officer; provided that no such person shall be indemnified where
there has been an adjudication or other determination, as described in Article
X, that such person is liable to the Registrant or its shareholders by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office or did not act in good faith
in the reasonable belief that his action was in the best interest of the
Registrant. Section 2 of "Indemnification" in Article X also provides that the
Registrant may maintain insurance policies covering such rights of
indemnification.
Additionally, "Limitation of Liability" in Article X of the Declaration of
Trust provides that the trustees or officers of the Registrant shall not be
personally liable to any person extending credit to, contracting with or having
a claim against the Trust or a particular series thereof; and that, provided
they have exercised reasonable care and have acted under the reasonable belief
that their actions are in the best interest of the Registrant, the trustees and
officers shall not be liable for neglect or wrongdoing by them or any officer,
agent, employee or investment adviser of the Registrant.
Section 2 of Article XI of the Declaration of Trust additionally provides
that, subject to the provisions of Section 1 of Article XI and to Article X,
trustees shall not be liable for errors of judgment or mistakes of fact or law,
C-3
<PAGE>
or for any act or omission in accordance with the advice of counsel or other
experts, or failing to follow such advice, with respect to the meaning and
operation of the Declaration of Trust.
Article XI of the By-Laws provides that the Registrant may purchase and
maintain insurance on behalf of any person who is or was a trustee, officer or
employee of the Trust, or is or was serving at the request of the Trust as a
trustee, officer or employee of a corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against him or her and
incurred by him or her in any such capacity or arising out of his or her status
as such, whether or not the Registrant would have the power to indemnify him or
her against such liability, provided that the Registrant may not acquire
insurance protecting any trustee or officer against liability to the Registrant
or the Registrant or its shareholders to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his or her office.
Section 9 of the Investment Advisory and Administration Contract between
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") and the Registrant
provides that Mitchell Hutchins shall not be liable for any error of judgment or
mistake of law or for any loss suffered by Registrant in connection with the
matters to which the Contract relates, except for a loss resulting from the
willful misfeasance, bad faith, or gross negligence of Mitchell Hutchins in the
performance of its duties or from its reckless disregard of its obligations and
duties under the Contract. Section 10 of the Contract provides that the
trustees shall not be liable for any obligations of the Registrant or any series
under the Contract and that Mitchell Hutchins shall look only to the assets and
property of the Registrant in settlement of such right or claim and not to the
assets and property of the trustees.
Section 7 of each Sub-Advisory Agreement provides that the applicable sub-
adviser shall not be liable for any error of judgment or mistake of law or for
any loss suffered by the applicable Portfolio, the Registrant or its
shareholders or by Mitchell Hutchins in connection with the matters to which the
Sub-Advisory Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the sub-adviser's part in the
performance of its duties or from reckless disregard by it of its obligations
and duties under the Sub-Advisory Agreement.
Section 9 of the Distribution Contract provides that the Trust will
indemnify Mitchell Hutchins and its officers, directors and controlling persons
against all liabilities arising from any alleged untrue statement of material
fact in the Registration Statement or from any alleged omission to state in the
Registration Statement a material fact required to be stated in it or necessary
to make the statements in it, in light of the circumstances under which they
were made, not misleading, except insofar as liability arises from untrue
statements or omissions made in reliance upon and in conformity with information
furnished by Mitchell Hutchins to the Trust for use in the Registration
Statement; and provided that this indemnity agreement shall not protect any such
persons against liabilities arising by reason of their bad faith, gross
negligence or willful misfeasance; and shall not inure to the benefit of any
such persons unless a court of competent jurisdiction or controlling precedent
determines that such result is not against public policy as expressed in the
Securities Act of 1933. Section 9 of the Distribution Contract also provides
that Mitchell Hutchins agrees to indemnify, defend and hold the Trust, its
officers and Trustees free and harmless of any claims arising out of any alleged
untrue statement or any alleged omission of material fact contained in
information furnished by Mitchell Hutchins for use in the Registration Statement
or arising out of an agreement between Mitchell Hutchins and any retail dealer,
or arising out of supplementary literature or advertising used by Mitchell
Hutchins in connection with the Contract.
Section 10 of the Distribution Contract contains provisions similar to
Section 10 of the Investment Advisory and Administration Contract.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be provided to trustees, officers and controlling
persons of the Registrant, pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding or payment pursuant to any insurance policy) is
asserted against the Registrant by such
C-4
<PAGE>
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
Mitchell Hutchins, a Delaware corporation, is a registered investment adviser
and is wholly owned by PaineWebber Incorporated ("PaineWebber"), which is, in
turn, a wholly owned subsidiary of Paine Webber Group Inc. Mitchell Hutchins is
primarily engaged in the investment advisory business. Information as to the
officers and directors of Mitchell Hutchins is included in its Form ADV filed on
as filed with the Securities and Exchange Commission (registration number 801-
13219) and is incorporated herein by reference.
Nicholas-Applegate Capital Management ("Nicholas-Applegate"), a California
limited partnership, is a registered investment adviser. Nicholas-Applegate's
general partner is Nicholas-Applegate Capital Management Inc., a California
corporation owned by Arthur E. Nicholas, its director and sole shareholder.
Nicholas-Applegate is primarily engaged in the investment advisory business and
provides investment advisory services to corporate, institutional and individual
clients as well as serving as adviser or sub-adviser to a number of registered
investment companies. Information as to the officers and directors of Nicholas-
Applegate is included in its Form ADV as filed with the Securities and Exchange
Commission (registration number 801-21442) and is incorporated herein by
reference.
GE Investment Management Incorporated ("GEIM"), a Delaware corporation, is a
registered investment adviser and is wholly owned by General Electric Company.
GEIM is primarily engaged in the investment advisory business. Information as
to the officers and directors of GEIM is included in its Form ADV as filed with
the Securities and Exchange Commission (registration number 801-31947) and is
incorporated herein by reference.
Pacific Investment Management Company ("PIMCO"), a Delaware partnership, is a
registered investment adviser and a subsidiary general partnership of PIMCO
Advisors L.P. ("PIMCO Advisors"). A majority interest in PIMCO Advisors is held
by PIMCO Partners, G.P., a general partnership between Pacific Investment
Management Company, a California corporation and an indirect wholly owned
subsidiary of Pacific Life Insurance Company ("Pacific Life") and PIMCO
Partners, L.L.C., a limited liability company controlled by the PIMCO Managing
Directors. PIMCO is primarily engaged in the investment advisory business.
Information as to the officers and Managing Directors and partners of PIMCO is
included in its Form ADV as filed with the Securities and Exchange Commission
(registration number 801-48187) and is incorporated herein by reference.
Item 29. Principal Underwriters
----------------------
(a) Mitchell Hutchins serves as principal underwriter and/or investment
adviser for the following investment companies:
ALL-AMERICAN TERM TRUST INC.
GLOBAL HIGH INCOME DOLLAR FUND INC.
GLOBAL SMALL CAP FUND INC.
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
MANAGED HIGH YIELD FUND INC.
MITCHELL HUTCHINS PORTFOLIOS
MITCHELL HUTCHINS SERIES TRUST
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INDEX TRUST
PAINEWEBBER INVESTMENT SERIES
C-5
<PAGE>
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER MASTER SERIES, INC.
PAINEWEBBER MUNICIPAL SERIES
PAINEWEBBER MUTUAL FUND TRUST
PAINEWEBBER OLYMPUS FUND
PAINEWEBBER SECURITIES TRUST
STRATEGIC GLOBAL INCOME FUND, INC.
2002 TARGET TERM TRUST INC.
(b) Mitchell Hutchins is the Registrant's principal underwriter. The directors
and officers of Mitchell Hutchins, their principal business addresses, and
their positions and offices with Mitchell Hutchins are identified in its
Form ADV, as filed with the Securities and Exchange Commission
(registration number 801-13219). The foregoing information is hereby
incorporated herein by reference. The information set forth below is
furnished for those directors and officers of Mitchell Hutchins who also
serve as trustees or officers of the Registrant. Unless otherwise
indicated, the principal business address of each person named is 1285
Avenue of the Americas, New York, NY 10019.
<TABLE>
<CAPTION>
Positions and Office With
Name Registrant Positions and Offices With Underwriter
- - ------------------------------ ------------------------- ------------------------------------------------
<S> <C> <C>
Margo N. Alexander Trustee and President President, Chief Executive Officer and Director
of Mitchell Hutchins
T. Kirkham Barneby Vice President Managing Director and Chief Investment Officer
Quantitative Investments of Mitchell Hutchins
Ellen R. Harris Vice President Managing Director and a Portfolio Manager of
Mitchell Hutchins
Donald R. Jones Vice President First Vice President and a Portfolio Manager of
Mitchell Hutchins
James F. Keegan Vice President Senior Vice President and a Portfolio Manager of
Mitchell Hutchins
Thomas J. Libassi Vice President Senior Vice President and a Portfolio Manager of
Mitchell Hutchins
Dennis McCauley Vice President Managing Director and Chief Investment Officer
Fixed Income of Mitchell Hutchins
Ann E. Moran Vice President and Assistant Vice President and a Manager of the Mutual Fund
Treasurer Finance Division of Mitchell Hutchins
Dianne E. O'Donnell Vice President and Secretary Senior Vice President and Deputy General Counsel
of Mitchell Hutchins
Emil Polito Vice President Senior Vice President and Director of Operations
and Control of Mitchell Hutchins
Susan Ryan Vice President Senior Vice President and a Portfolio Manager of
Mitchell Hutchins
Victoria E. Schonfeld Vice President Managing Director and General Counsel of Mitchell
Hutchins
Paul H. Schubert Vice President and Treasurer First Vice President and Director of the Mutual
Fund Finance Division of Mitchell Hutchins
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
Positions and Office With
Name Registrant Positions and Offices With Underwriter
- - ------------------------------ ------------------------- ------------------------------------------------
<S> <C> <C>
Nirmal Singh Vice President Senior Vice President and a Portfolio Manager of
Mitchell Hutchins
Barney A. Taglialatela Vice President and Assistant Vice President and a Manager of the Mutual Fund
Treasurer Finance Division of Mitchell Hutchins
Mark A. Tincher Vice President Managing Director and Chief Investment Officer -
U.S. Equity Investments of Mitchell Hutchins
Craig M. Varrelman Vice President Senior Vice President and a Portfolio Manager of
Mitchell Hutchins
Stuart Waugh Vice President Managing Director and a Portfolio Manager of
Mitchell Hutchins
Keith A. Weller Vice President and Assistant First Vice President and Associate Counsel of
Secretary Mitchell Hutchins
Ian W. Williams Vice President and Assistant Vice President and Manager of the Mutual Fund
Treasurer Finance Division of Mitchell Hutchins
</TABLE>
(c) None.
Item 30. Location of Accounts and Records
The books and other documents required by paragraphs (b)(4), (c) and (d) of
Rule 31a-1 under the Investment Company Act of 1940 are maintained in the
physical possession of Registrant's investment adviser and administrator,
Mitchell Hutchins, 1285 Avenue of the Americas, New York, New York 10019. All
other accounts, books and documents required by Rule 31a-1 are maintained in the
physical possession of Registrant's transfer agent and custodians.
Item 31. Management Services
-------------------
Not applicable.
Item 32. Undertakings
------------
Registrant hereby undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders
upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York and State of New
York, on the 25th day of February, 1998.
MITCHELL HUTCHINS SERIES TRUST
By: /s/ Dianne E. O'Donnell
--------------------------------------------
Dianne E. O'Donnell
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- - --------- ----- ----
<S> <C> <C>
/s/ Margo N. Alexander
- - -------------------------------------------- President and Trustee February 25, 1998
Margo N. Alexander * (Chief Executive Officer)
/s/ E. Garrett Bewkes, Jr.
- - -------------------------------------------- Trustee and Chairman February 25, 1998
E. Garrett Bewkes, Jr. * of the Board of Trustees
/s/ Richard Q. Armstrong
- - -------------------------------------------- Trustee February 25, 1998
Richard Q. Armstrong *
/s/ Richard R. Burt
- - -------------------------------------------- Trustee February 25, 1998
Richard R. Burt *
/s/ Mary C. Farrell
- - -------------------------------------------- Trustee February 25, 1998
Mary C. Farrell *
/s/ Meyer Feldberg
- - -------------------------------------------- Trustee February 25, 1998
Meyer Feldberg *
/s/ George W. Gowen
- - -------------------------------------------- Trustee February 25, 1998
George W. Gowen *
/s/ Frederic V. Malek
- - -------------------------------------------- Trustee February 25, 1998
Frederic V. Malek *
/s/ Carl W. Schafer
- - -------------------------------------------- Trustee February 25, 1998
Carl W. Schafer *
/s/ Paul H. Schubert
- - -------------------------------------------- Vice President and Treasurer (Chief February 25, 1998
Paul H. Schubert Financial and Accounting Officer)
</TABLE>
<PAGE>
SIGNATURES (CONTINUED)
* Signature affixed by Elinor W. Gammon pursuant to powers of attorney dated
May 21, 1996 and incorporated by reference from Post-Effective Amendment
No. 30 to the registration statement of PaineWebber Managed Municipal
Trust, SEC File 2-89016, filed June 27, 1996.
<PAGE>
MITCHELL HUTCHINS SERIES TRUST
EXHIBIT INDEX
-------------
Exhibits
- - --------
(1) Amended and Restated Declaration of Trust (filed herewith)
(2) Restated By-Laws (filed herewith)
(3) Voting trust agreement - none
(4) Instruments defining the rights of holders of the Registrant's shares of
beneficial interest 1/
-
(5) (a) Investment Advisory and Administration Contract (filed herewith)
(b) Investment Advisory and Administration Fee Agreement with respect to
Strategic Fixed Income Portfolio (formerly Government Portfolio)
(filed herewith)
(c) Investment Advisory and Administration Fee Agreement with respect to
Growth and Income Portfolio (formerly Dividend Growth Portfolio)
(filed herewith)
(d) Form of Investment Advisory and Administration Fee Agreement with
respect to Aggressive Growth Portfolio (filed herewith)
(e) Investment Advisory and Administration Fee Agreement with respect to
High Grade Fixed Income Portfolio (formerly Fixed Income Portfolio)
(filed herewith)
(f) Form of Investment Advisory and Administration Fee Agreement with
respect to High Income Portfolio, Small Cap Portfolio, Strategic
Income Portfolio and Tactical Allocation Portfolio (filed herewith)
(g) Sub-Investment Advisory Contract with respect to Aggressive Growth
Portfolio (filed herewith)
(h) Sub-Advisory Agreement with respect to the Global Growth Portfolio 2/
-
(i) Sub-Advisory Agreement with respect to the Strategic Fixed Income
Portfolio 2/
-
(6) Form of Distribution Contract with respect to Class I shares (filed
herewith)
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement
(a) Custodian Agreement with State Street Bank and Trust Company (filed
herewith)
(b) Custodian Agreement with Brown Brothers Harriman & Co. (filed
herewith)
(9) Transfer Agency Services and Shareholder Services Agreement (filed
herewith)
(10) Opinion and Consent of Counsel (filed herewith)
(11) Consent of Ernst & Young LLP (filed herewith)
(12) Financial statements omitted from prospectus-none
(13) Letter of investment intent (filed herewith)
(14) Prototype Retirement Plan - none
(15) Form of Plan of Distribution pursuant to Rule 12b-1with respect to Class I
shares (filed herewith)
(16) Schedule of Computation for Performance Quotations - not
applicable
(17) and (27) Financial Data Schedule (filed herewith)
(18) Plan pursuant to Rule 18f-3 (filed herewith)
______________________
1/ Incorporated by reference from Articles III, VIII, IX, X, and XI of
- - -
Registrant's Amended and Restated Declaration of Trust and from Articles II,
VII and X of Registrant's Restated By-Laws.
2/ Incorporated by reference to Post-Effective Amendment No. 23, SEC File No.
- - -
10438, filed May 1, 1996.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> MONEY MARKET
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 8,927
<INVESTMENTS-AT-VALUE> 8,927
<RECEIVABLES> 72
<ASSETS-OTHER> 2
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,001
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 95
<TOTAL-LIABILITIES> 95
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,916
<SHARES-COMMON-STOCK> 8,915
<SHARES-COMMON-PRIOR> 12,296
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 10
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 8,906
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 636
<OTHER-INCOME> 0
<EXPENSES-NET> 138
<NET-INVESTMENT-INCOME> 498
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 498
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 498
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,100
<NUMBER-OF-SHARES-REDEEMED> 9,982
<SHARES-REINVESTED> 501
<NET-CHANGE-IN-ASSETS> 3,381
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 10
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 56
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 138
<AVERAGE-NET-ASSETS> 11,269
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .04
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.22
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> GROWTH PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 30,063
<INVESTMENTS-AT-VALUE> 41,387
<RECEIVABLES> 301
<ASSETS-OTHER> 5
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 41,693
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 11,107
<TOTAL-LIABILITIES> 11,107
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 19,065
<SHARES-COMMON-STOCK> 1957
<SHARES-COMMON-PRIOR> 2080
<ACCUMULATED-NII-CURRENT> (1)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 197
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,325
<NET-ASSETS> 30,586
<DIVIDEND-INCOME> 154
<INTEREST-INCOME> 314
<OTHER-INCOME> 0
<EXPENSES-NET> 417
<NET-INVESTMENT-INCOME> 51
<REALIZED-GAINS-CURRENT> 9,230
<APPREC-INCREASE-CURRENT> (3,535)
<NET-CHANGE-FROM-OPS> 5,973
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 53
<DISTRIBUTIONS-OF-GAINS> 8,882
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 109
<NUMBER-OF-SHARES-REDEEMED> 633
<SHARES-REINVESTED> 401
<NET-CHANGE-IN-ASSETS> (5,771)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 150
<GROSS-ADVISORY-FEES> 299
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 417
<AVERAGE-NET-ASSETS> 39,916
<PER-SHARE-NAV-BEGIN> 17.48
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> 2.69
<PER-SHARE-DIVIDEND> .03
<PER-SHARE-DISTRIBUTIONS> 4.54
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.63
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> GLOBAL GROWTH
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 19,119
<INVESTMENTS-AT-VALUE> 21,353
<RECEIVABLES> 35
<ASSETS-OTHER> 170
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 21,558
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 343
<TOTAL-LIABILITIES> 343
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 19,107
<SHARES-COMMON-STOCK> 1,451
<SHARES-COMMON-PRIOR> 1,870
<ACCUMULATED-NII-CURRENT> (17)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (107)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,232
<NET-ASSETS> 21,215
<DIVIDEND-INCOME> 311
<INTEREST-INCOME> 12
<OTHER-INCOME> 0
<EXPENSES-NET> 261
<NET-INVESTMENT-INCOME> 62
<REALIZED-GAINS-CURRENT> 2,881
<APPREC-INCREASE-CURRENT> (1,174)
<NET-CHANGE-FROM-OPS> 1,769
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 62
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 90
<NUMBER-OF-SHARES-SOLD> 78
<NUMBER-OF-SHARES-REDEEMED> 508
<SHARES-REINVESTED> 10
<NET-CHANGE-IN-ASSETS> (4,486)
<ACCUMULATED-NII-PRIOR> (48)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 2,867
<GROSS-ADVISORY-FEES> 182
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 261
<AVERAGE-NET-ASSETS> 24,286
<PER-SHARE-NAV-BEGIN> 13.74
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> .94
<PER-SHARE-DIVIDEND> .04
<PER-SHARE-DISTRIBUTIONS> .06
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.62
<EXPENSE-RATIO> 1.07
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> GLOBAL INCOME
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 18,913
<INVESTMENTS-AT-VALUE> 18,541
<RECEIVABLES> 422
<ASSETS-OTHER> 271
<OTHER-ITEMS-ASSETS> 7
<TOTAL-ASSETS> 241
<PAYABLE-FOR-SECURITIES> 15
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,495
<TOTAL-LIABILITIES> 1,510
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 18,112
<SHARES-COMMON-STOCK> 1,648
<SHARES-COMMON-PRIOR> 2,194
<ACCUMULATED-NII-CURRENT> (128)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (253)
<NET-ASSETS> 17,731
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,737
<OTHER-INCOME> 0
<EXPENSES-NET> 335
<NET-INVESTMENT-INCOME> 1,402
<REALIZED-GAINS-CURRENT> (178)
<APPREC-INCREASE-CURRENT> (532)
<NET-CHANGE-FROM-OPS> 692
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,168
<DISTRIBUTIONS-OF-GAINS> 21
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 48
<NUMBER-OF-SHARES-REDEEMED> 755
<SHARES-REINVESTED> 152
<NET-CHANGE-IN-ASSETS> (6,706)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (163)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 165
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 335
<AVERAGE-NET-ASSETS> 22,095
<PER-SHARE-NAV-BEGIN> 11.14
<PER-SHARE-NII> .75
<PER-SHARE-GAIN-APPREC> .36
<PER-SHARE-DIVIDEND> .71
<PER-SHARE-DISTRIBUTIONS> .01
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.81
<EXPENSE-RATIO> 1.52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> STRATEGIC FIXED INCOME
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 11,408
<INVESTMENTS-AT-VALUE> 11,739
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<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11,855
<PAYABLE-FOR-SECURITIES> 1,256
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 708
<TOTAL-LIABILITIES> 1,964
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,685
<SHARES-COMMON-STOCK> 930
<SHARES-COMMON-PRIOR> 1,047
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 8
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 118
<ACCUM-APPREC-OR-DEPREC> 332
<NET-ASSETS> 9,891
<DIVIDEND-INCOME> 0
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<OTHER-INCOME> 0
<EXPENSES-NET> 107
<NET-INVESTMENT-INCOME> 644
<REALIZED-GAINS-CURRENT> 153
<APPREC-INCREASE-CURRENT> 302
<NET-CHANGE-FROM-OPS> 1,099
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 648
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 128
<NUMBER-OF-SHARES-REDEEMED> 318
<SHARES-REINVESTED> 72
<NET-CHANGE-IN-ASSETS> (798)
<ACCUMULATED-NII-PRIOR> (3)
<ACCUMULATED-GAINS-PRIOR> (272)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<PER-SHARE-NAV-BEGIN> 10.21
<PER-SHARE-NII> .69
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<PER-SHARE-NAV-END> 10.64
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> BALANCED
<MULTIPLIER> 1,000
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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<PAYABLE-FOR-SECURITIES> 255
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<TOTAL-LIABILITIES> 6,353
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 23,257
<SHARES-COMMON-STOCK> 2,491
<SHARES-COMMON-PRIOR> 2,669
<ACCUMULATED-NII-CURRENT> (7)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (13)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,974
<NET-ASSETS> 28,211
<DIVIDEND-INCOME> 313
<INTEREST-INCOME> 772
<OTHER-INCOME> 0
<EXPENSES-NET> 401
<NET-INVESTMENT-INCOME> 684
<REALIZED-GAINS-CURRENT> 5,140
<APPREC-INCREASE-CURRENT> 1,635
<NET-CHANGE-FROM-OPS> 7,459
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<DISTRIBUTIONS-OF-INCOME> 697
<DISTRIBUTIONS-OF-GAINS> 5,138
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 132
<NUMBER-OF-SHARES-REDEEMED> 688
<SHARES-REINVESTED> 378
<NET-CHANGE-IN-ASSETS> (1,012)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (9)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 401
<AVERAGE-NET-ASSETS> 33,697
<PER-SHARE-NAV-BEGIN> 10.95
<PER-SHARE-NII> .28
<PER-SHARE-GAIN-APPREC> 2.44
<PER-SHARE-DIVIDEND> .28
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<PER-SHARE-NAV-END> 11.33
<EXPENSE-RATIO> 1.19
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> GROWTH & INCOME
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
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<PERIOD-START> JAN-01-1997
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<INVESTMENTS-AT-VALUE> 22,089
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<OTHER-ITEMS-LIABILITIES> 3,677
<TOTAL-LIABILITIES> 3,677
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 13,290
<SHARES-COMMON-STOCK> 1,351
<SHARES-COMMON-PRIOR> 1,184
<ACCUMULATED-NII-CURRENT> (3)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (11)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,217
<NET-ASSETS> 18,493
<DIVIDEND-INCOME> 264
<INTEREST-INCOME> 72
<OTHER-INCOME> 0
<EXPENSES-NET> 205
<NET-INVESTMENT-INCOME> 131
<REALIZED-GAINS-CURRENT> 3,317
<APPREC-INCREASE-CURRENT> 2,030
<NET-CHANGE-FROM-OPS> 5,478
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 141
<DISTRIBUTIONS-OF-GAINS> 3,320
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 306
<NUMBER-OF-SHARES-REDEEMED> 349
<SHARES-REINVESTED> 210
<NET-CHANGE-IN-ASSETS> 3,973
<ACCUMULATED-NII-PRIOR> 3
<ACCUMULATED-GAINS-PRIOR> (9)
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<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 205
<AVERAGE-NET-ASSETS> 19,727
<PER-SHARE-NAV-BEGIN> 12.27
<PER-SHARE-NII> .10
<PER-SHARE-GAIN-APPREC> 3.88
<PER-SHARE-DIVIDEND> .10
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<PER-SHARE-NAV-END> 13.69
<EXPENSE-RATIO> 1.04
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
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<TABLE> <S> <C>
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<ARTICLE> 6
<CIK> 0000806591
<NAME> MITCHELL HUTCHINS SERIES TRUST
<SERIES>
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<NAME> AGGRESSIVE GROWTH
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<INVESTMENTS-AT-VALUE> 22,423
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<ACCUMULATED-NET-GAINS> 0
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<ACCUM-APPREC-OR-DEPREC> 5,509
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<OTHER-INCOME> 0
<EXPENSES-NET> 252
<NET-INVESTMENT-INCOME> (127)
<REALIZED-GAINS-CURRENT> 3,517
<APPREC-INCREASE-CURRENT> 560
<NET-CHANGE-FROM-OPS> 3,950
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 3,393
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 191
<NUMBER-OF-SHARES-REDEEMED> 357
<SHARES-REINVESTED> 125
<NET-CHANGE-IN-ASSETS> (91)
<ACCUMULATED-NII-PRIOR> (3)
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<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 252
<AVERAGE-NET-ASSETS> 21,340
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<PER-SHARE-NII> .09
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<PER-SHARE-NAV-END> 13.40
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<NAME> MITCHELL HUTCHINS SERIES TRUST
<SERIES>
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<NAME> HIGH GRADE FIXED INCOME
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
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<SHARES-COMMON-PRIOR> 868
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<SHARES-REINVESTED> 50
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<GROSS-EXPENSE> 114
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<PER-SHARE-NAV-BEGIN> 9.10
<PER-SHARE-NII> .55
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<EXPENSE-RATIO> 1.43
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</TABLE>
<PAGE>
Exhibit No. 1
MITCHELL HUTCHINS SERIES TRUST
------------------------------
AMENDED AND RESTATED DECLARATION OF TRUST
-----------------------------------------
DECLARATION OF TRUST, made at Boston, Massachusetts, this 21st day of
November1986 and amended and restated this 11th day of February, 1998 by the
Trustees:
WHEREAS, the Trustees desire to establish a trust fund for the investment and
reinvestment of funds contributed thereto;
NOW, THEREFORE, the Trustees declare that all money and property contributed
to the trust fund hereunder shall be held and managed in trust under this
Declaration of Trust as herein set forth below.
ARTICLE I
---------
NAME AND DEFINITIONS
--------------------
NAME
- - ----
Section 1. This Trust shall be known as "Mitchell Hutchins Series Trust."
The resident agent for the Trust in Massachusetts shall be CT Corporation
System, whose address is 2 Oliver Street, Boston, Massachusetts, or such other
person as the Trustees may from time to time designate.
DEFINITIONS
- - -----------
Section 2. Wherever used herein, unless otherwise required by the context or
specifically provided:
(a) The Terms "Affiliated Person", "Assignment", "Commission",
"Interested Person", "Majority Shareholder Vote" (the 67% or 50% requirement of
the third sentence of Section 2(a)(42) of the 1940 Act, whichever may be
applicable) and "Principal Underwriter" shall have the meanings given them in
the 1940 Act, as amended from time to time;
(b) The "Trust" refers to Mitchell Hutchins Series Trust and reference
to the Trust, when applicable to one or more Series of the Trust, shall refer to
any such Series;
(c) "Net Asset Value" means the net asset value of each Series of the
Trust determined in the manner provided in Article IX, Section 3;
(d) "Shareholder" means a record owner of Shares of the Trust;
(e) The "Trustees" means the person who has signed this Declaration of
Trust so long as he shall continue in office in accordance with the terms
hereof, and all other persons who may from time to time be duly elected or
appointed, qualified and serving as Trustees in accordance with the provisions
of Article IV hereof, and reference herein to a Trustee or the Trustees shall
refer to such person or persons in his capacity or their capacities as trustees
hereunder.
(f) "Shares" means the equal proportionate transferable units of
interest into which the beneficial interest of each Series or Class thereof
shall be divided from time to time and includes
<PAGE>
fractions of shares as well as whole shares (all of the transferable units of a
Series or of a single Class may be referred to as "Shares" as the context may
require);
(g) The "1940 Act" refers to the Investment Company Act of 1940, as
amended from time to time;
(h) "Series" refers to series of Shares of the Trust established in
accordance with the provisions of Article III;
(i) "Class" refers to the class of Shares of a Series of the Trust
established in accordance with the Provisions of Article III.
ARTICLE II
----------
PURPOSE OF TRUST
----------------
The purpose of this Trust is to provide investors a continuous source of
managed investment in securities.
ARTICLE III
-----------
BENEFICIAL INTEREST
-------------------
SHARES OF BENEFICIAL INTEREST
- - -----------------------------
Section 1. The beneficial interest in the Trust shall be divided into such
transferable Shares of one or more separate and distinct Series or Classes
thereof as the Trustees shall from time to time create and establish. The
number of Shares is unlimited and each Share shall have a par value of $0.001
per Share and upon issuance in accordance with the terms hereof shall be fully
paid and nonassessable. The Trustees shall have full power and authority, in
their sole discretion and without obtaining any prior authorization or vote of
the Shareholders of the Trust, to create and establish (and to change in any
manner) Shares with such preferences, terms of conversion, voting powers, rights
and privileges as the Trustees may from time to time determine, to divide or
combine the Shares into a greater or lesser number, to classify or reclassify
any unissued Shares into one or more Series or Classes of Shares, to abolish any
one or more Series or Classes of Shares, and to take such other action with
respect to the Shares as the Trustees may deem desirable. The Trustees, in
their discretion without a vote of the Shareholders, may divide the Shares of
any Series into Classes. In such event, each Class of a Series shall represent
interests in the assets of that Series and have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that
expenses allocated to a Class of a Series may be borne solely by such Class as
shall be determined by the Trustees and a Class of a Series may have exclusive
voting rights with respect to matters affecting only that Class. Without
limiting the authority of the Trustees set forth in this Section 1 to establish
and designate any further Series or Classes, the Trustees have established and
designated the Series of Shares and Classes listed in Schedule A attached hereto
and made a part hereof.
ESTABLISHMENT OF SERIES OR CLASS
- - --------------------------------
Section 2. The establishment of any Series or Class in addition to those set
forth in Section 1 shall be effective upon the adoption of a resolution by a
majority of the then Trustees setting forth such establishment and designation
and the relative rights and preferences of the Shares of such
2
<PAGE>
Series or Class thereof. At any time that there are no Shares outstanding of any
particular Series previously established and designated, the Trustees may by a
majority vote abolish that Series and the establishment and designation thereof.
At any time that there are no shares outstanding of any particular Class of a
Series, the Trustees may by a majority vote abolish that Class and the
establishment and designation thereof. The Trustees by a majority vote may
change the name of any Series or Class.
OWNERSHIP OF SHARES
- - -------------------
Section 3. The ownership of Shares shall be recorded in the books of the
Trust. The Trustees may make such rules as they consider appropriate for the
transfer of Shares and similar matters. The record books of the Trust shall be
conclusive as to who are the holders of Shares and as to the number of Shares
held from time to time by each Shareholder.
INVESTMENT IN THE TRUST
- - -----------------------
Section 4. The Trustees shall accept investments in the Trust from such
persons and on such terms as they may from time to time authorize. Such
investments may be in the form of cash or securities in which the appropriate
Series is authorized to invest, valued as provided in Article IX, Section 3.
After the date of the initial contribution of capital, the number of Shares to
represent the initial contribution may in the Trustees' discretion be considered
as outstanding and the amount received by the Trustees on account of the
contribution shall be treated as an asset of the Trust or a Series thereof, as
appropriate. Subsequent investments in the Trust shall be credited to each
Shareholder's account in the form of full Shares at the Net Asset Value per
Share next determined after the investment is received; provided, however, that
the Trustees may, in their sole discretion, (a) impose a sales charge upon
investments in the Trust or Series and (b) issue fractional Shares. The
Trustees shall have the right to refuse to accept investments in the Trust or
any Series at any time without any cause or reason therefor whatsoever.
ASSETS AND LIABILITIES OF SERIES
- - --------------------------------
Section 5. All consideration received by the Trust for the issue or sale of
Shares of a particular Series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall be
referred to as "assets belonging to" that Series. In addition, any assets,
income, earnings, profits, and proceeds thereof, funds, or payments which are
not readily identifiable as belonging to any particular Series shall be
allocated by the Trustees between and among one or more of the Series in such
manner as they, in their sole discretion, deem fair and equitable. Each such
allocation shall be conclusive and binding upon the Shareholders of all Series
for all purposes, and shall be referred to as assets belonging to that Series.
The assets belonging to a particular Series shall be so recorded upon the books
of the Trust, and shall be held by the Trustees in Trust for the benefit of the
holders of Shares of that Series. The assets belonging to each particular
Series shall be charged with the liabilities of that Series and all expenses,
costs, charges and reserves attributable to that Series except that liabilities
and expenses allocated solely to a particular Class shall be borne by that
Class. Any general liabilities, expenses, costs, charges or reserves of the
Trust or Series which are not readily identifiable as belonging to any
particular Series or Class shall be allocated and charged by the Trustees
between or among any one or more of the Series or Classes in such manner as the
Trustees in their sole discretion deem fair and equitable. Each such allocation
shall be conclusive and binding upon the Shareholders of all Series or Classes
for all purposes. Any creditor of any Series may look only to the assets of
that Series to satisfy such creditor's debt. See Article X, Section 1.
3
<PAGE>
NO PREEMPTIVE RIGHTS
- - --------------------
Section 6. Shareholders shall have no preemptive or other right to subscribe
to any additional Shares or other securities issued by the Trust or the
Trustees.
STATUS OF SHARES AND LIMITATION OF PERSONAL LIABILITY
- - -----------------------------------------------------
Section 7. Shares shall be deemed to be personal property giving only the
rights provided in this Declaration of Trust. Every Shareholder by virtue of
having become a Shareholder shall be held expressly to have assented and agreed
to the terms of this Declaration of Trust and to have become a party hereto.
The death of a Shareholder during the continuance of the Trust shall not operate
to terminate the Trust nor entitle the representative of any deceased
Shareholder to an accounting or to take any action in court or elsewhere against
the Trust or the Trustees, but only to the rights of said decedent under this
Trust. Ownership of Shares shall not entitle the Shareholder to any title in or
to the whole or any part of the Trust property or right to call for a partition
or division of the same or for an accounting, nor shall the ownership of Shares
constitute the Shareholders partners. Neither the Trust nor the Trustees shall
have any power to bind any Shareholder personally or to call upon any
Shareholder for the payment of any sum of money or assessment whatsoever other
than such as the Shareholder may at any time personally agree to pay by way of
subscription for any Shares or otherwise.
ARTICLE IV
----------
THE TRUSTEES
------------
MANAGEMENT OF THE TRUST
- - -----------------------
Section 1. The business and affairs of the Trust shall be managed by the
Trustees, and they shall have all powers necessary and desirable to carry out
that responsibility. A Trustee shall not be required to be a Shareholder of the
Trust.
ELECTION OF TRUSTEES AND APPOINTMENT OF INITIAL TRUSTEE
- - -------------------------------------------------------
Section 2. On a date fixed by the Trustees, the Shareholders shall elect the
Trustees. Until such election, the Trustees shall be the initial Trustee and
such other persons as may be hereafter appointed pursuant to Section 4 of this
Article IV. The initial Trustee shall be Dianne E. O'Donnell.
TERM OF OFFICE OF TRUSTEES
- - --------------------------
Section 3. The Trustees shall hold office during the lifetime of this Trust,
and until its termination as hereinafter provided; except (a) that any Trustee
may resign his trust by written instrument signed by him and delivered to the
other Trustees or to any officer of the Trust, which shall take effect upon such
delivery or upon such later date as is specified therein; (b) that any Trustee
may be removed with or without cause at any time by written instrument, signed
by at least two-thirds of the number of Trustees prior to such removal,
specifying the date when such removal shall become effective; (c) that any
Trustee who requests in writing to be retired or who has become incapacitated by
illness or injury may be retired by written instrument signed by a majority of
other Trustees, specifying the date of his retirement; and (d) that any Trustee
may be removed at any Special Meeting of the Trust by a vote of at least two-
thirds of the outstanding Shares.
4
<PAGE>
RESIGNATION AND APPOINTMENT OF TRUSTEES
- - ---------------------------------------
Section 4. In case of the declination, death, resignation, retirement,
removal, incapacity, or inability of any of the Trustees, or in case a vacancy
shall exist by reason of an increase in number or for any other reason, the
remaining Trustees shall fill such vacancy by appointment of such other person
as they in their discretion shall see fit consistent with the limitations under
the 1940 Act. Such appointment shall be evidenced by a written instrument
signed by a majority of the Trustees in office or by a recording in the records
of the Trust, whereupon the appointment shall take effect. An appointment of a
Trustee may be made by the Trustees then in office as aforesaid in anticipation
of a vacancy to occur by reason of retirement, resignation or increase in number
of Trustees effective at a later date, provided that said appointment shall
become effective only at or after the effective date of said retirement,
resignation or increase in number of Trustees. As soon as any Trustee so
appointed shall have accepted this trust, the trust estate shall vest in the new
Trustee or Trustees, together with the continuing Trustees, without any further
act or conveyance, and he shall be deemed a Trustee hereunder. The power of
appointment is subject to the provisions of Section 16(a) of the 1940 Act.
TEMPORARY ABSENCE OF TRUSTEE
- - ----------------------------
Section 5. Any Trustee may, by power of attorney, delegate his power for a
period not exceeding six months at any one time to any other Trustee or
Trustees, provided that in no case shall less than two Trustees personally
exercise the other powers hereunder except as herein otherwise expressly
provided.
NUMBER OF TRUSTEES
- - ------------------
Section 6. The number of Trustees shall initially be one (1) and thereafter
shall be such number as shall be fixed from time to time by a written instrument
signed by a majority of the Trustees (or by an officer of the Trust pursuant to
a vote of the majority of such Trustees); provided, however, that the number of
Trustees serving hereunder at any time shall in no event be less than one (1)
nor more than fifteen (15).
Whenever a vacancy in the Board of Trustees shall occur, until such vacancy is
filled, or while any Trustee is absent from his state of domicile (unless said
Trustee has made arrangements to be informed about, and to participate in, the
affairs of the Trust during such absence), or is physically or mentally
incapacitated by reason of disease or otherwise, the other Trustees shall have
all the powers hereunder and the certificate of the other Trustees of such
vacancy, absence or incapacity, shall be conclusive.
EFFECT OF DEATH, RESIGNATION, ETC. OF A TRUSTEE
- - -----------------------------------------------
Section 7. The death, declination, resignation, retirement, removal,
incapacity, or inability of the Trustee, or any one of them, shall not operate
to annul the Trust or to revoke any existing agency created pursuant to the
terms of this Declaration of Trust.
OWNERSHIP OF ASSETS OF THE TRUST
- - --------------------------------
Section 8. The assets of the Trust shall be held separate and apart from any
assets now or hereafter held in any capacity other than as Trustee hereunder by
the Trustees or any successor Trustees. All of the assets of the Trust shall at
all times be considered as vested in the Trustees.
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ARTICLE V
---------
POWERS OF THE TRUSTEES
----------------------
POWERS
- - ------
Section 1. The Trustees in all instances shall act as principals, and are and
shall be free from the control of the Shareholders. The Trustees shall have
full power and authority to do any and all acts and to make and execute any and
all contracts and instruments that they may consider necessary or appropriate in
connection with the management of the Trust. The Trustees shall not in any way
be bound or limited by present or future laws or customs in regard to trust
investments, but shall have full authority and power to make any and all
investments which they, in their uncontrolled discretion, shall deem proper to
accomplish the purposes of this Trust. Subject to any applicable limitation in
this Declaration of Trust or the By-Laws of the Trust, the Trustees shall have
power and authority, without limitation:
(a) To invest and reinvest cash and other property, and to hold cash or
other property uninvested, without in any event being bound or limited by any
present or future law or custom in regard to investments by trustees, and to
sell, exchange, lend, pledge, mortgage, hypothecate, write options on and lease
any or all of the assets of the Trust; to purchase and sell (or write) options
on securities, currencies, indices, futures contracts and other financial
instruments and enter into closing transactions in connection therewith; to
enter into all types of commodities contracts, including without limitation the
purchase and sale of futures contracts and forward contracts on securities,
indices, currencies, and other financial instruments; to engage in forward
commitment, "when issued" and delayed delivery transactions; to enter into
repurchase agreements and reverse repurchase agreements; and to employ all kinds
of hedging techniques and investment management strategies.
(b) To adopt By-Laws not inconsistent with this Declaration of Trust
providing for the conduct of the business of the Trust and to amend and repeal
them to the extent that they do not reserve the right to the Shareholders.
(c) To elect and remove such officers and appoint and terminate such
agents as they consider appropriate.
(d) To employ as custodian of any assets of the Trust subject to any
conditions set forth in this Declaration of Trust or in the By-Laws, if any, a
bank, trust company, or other entity permitted by the Commission to serve as
such.
(e) To retain a transfer agent and Shareholder servicing agent, or
both.
(f) To provide for the distribution of interests of the Trust either
through a principal underwriter in the manner hereinafter provided for or by the
Trust itself, or both.
(g) To set record dates in the manner hereinafter provided for.
(h) To delegate such authority as they consider desirable to any
officers of the Trust and to any agent, independent contractor, custodian or
underwriter.
(i) To sell or exchange any or all of the assets of the Trust, subject
to the provisions of Article XI, Section 4(b) hereof.
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(j) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property; and to execute and deliver
powers of attorney to such person or persons as the Trustees shall deem proper,
granting to such person or persons such power and discretion with relation to
securities or property as the Trustees shall deem proper.
(k) To exercise powers and rights of subscription or otherwise which in
any manner arise out of ownership of securities.
(l) To hold any security or property in a form not indicating any
trust, whether in bearer, unregistered or other negotiable form; or either in
its own name or in the name of a custodian or a nominee or nominees, subject in
either case to proper safeguards according to the usual practice of
Massachusetts trust companies or investment companies.
(m) To establish separate and distinct Series with separately defined
investment objectives and policies and distinct investment purposes in
accordance with the provisions of Article III and to establish separate Classes
thereof.
(n) To allocate assets, liabilities and expenses of the Trust to a
particular Series and liabilities and expenses to a particular Class thereof or
to apportion the same between or among two or more Series or Classes, provided
that any liabilities or expenses incurred by a particular Series or Class shall
be payable solely out of the assets belonging to that Series or Class as
provided for in Article III.
(o) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or concern, any security of which is
held in the Trust; to consent to any contract, lease, mortgage, purchase, or
sale of property by such corporation or concern, and to pay calls or
subscriptions with respect to any security held in the Trust.
(p) To compromise, arbitrate, or otherwise adjust claims in favor of or
against the Trust or any matter in controversy including, but not limited to,
claims for taxes.
(q) To make distributions of income and of capital gains to
Shareholders in the manner hereinafter provided for.
(r) To borrow money.
(s) To establish, from time to time, a minimum total investment for
Shareholders, and to require the redemption of the Shares of any Shareholders
whose investment is less than such minimum upon giving notice to such
Shareholder.
No one dealing with the Trustees shall be under any obligation to make
any inquiry concerning the authority of the Trustees, or to see to the
application of any payments made or property transferred to the Trustees or upon
their order.
TRUSTEES AND OFFICERS AS SHAREHOLDERS
- - -------------------------------------
Section 2. Any Trustee, officer, other agent or independent contractor
of the Trust may acquire, own and dispose of Shares to the same extent as if he
were not a Trustee, officer, agent or independent contractor; and the Trustees
may issue and sell or cause to be issued and sold Shares to and buy such Shares
from any such person or any firm or company in which he is interested, subject
only to the general limitations herein contained as to the sale and purchase of
such Shares; and all subject to any restrictions which may be contained in the
By-Laws.
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ACTION BY THE TRUSTEES
- - ----------------------
Section 3. The Trustees shall act by majority vote at a meeting duly called
or by unanimous written consent without a meeting or by telephone consent
provided a quorum of Trustees participate in any such telephonic meeting, unless
the 1940 Act requires that a particular action be taken only at a meeting in
person of the Trustees. At any meeting of the Trustees, a majority of the
Trustees shall constitute a quorum. Meetings of the Trustees may be called
orally or in writing by the Chairman of the Trustees or by any two other
Trustees. Notice of the time, date and place of all meetings of the Trustees
shall be given by the party calling the meeting to each Trustee by telephone or
telegram sent to his home or business address at least twenty-four hours in
advance of the meeting or by written notice mailed to his home or business
address at least seventy-two hours in advance of the meeting. Notice need not
be given to any Trustee who attends the meeting without objecting to the lack of
notice or who executes a written waiver of notice with respect to the meeting
either before or after such meeting. Subject to the requirements of the 1940
Act, the Trustees by majority vote may delegate to any one of their number their
authority to approve particular matters or take particular actions on behalf of
the Trust.
CHAIRMAN OF THE TRUSTEES
- - ------------------------
Section 4. The Trustees may appoint one of their number to be Chairman of the
Board of Trustees. The Chairman shall preside at all meetings of the Trustees,
shall be responsible for the execution of policies established by the Trustees
and the administration of the Trust, and may be the chief executive, financial
and/or accounting officer of the Trust.
ARTICLE VI
----------
EXPENSES OF THE TRUST
---------------------
TRUSTEE REIMBURSEMENT
- - ---------------------
Section 1. Subject to the provisions of Article III, Section 5, the Trustees
shall be reimbursed from the Trust estate or the assets belonging to the
appropriate Series for their expenses and disbursements, including, without
limitation, fees and expenses of Trustees who are not Interested Persons of the
Trust, interest expense, taxes, fees and commissions of every kind, expenses of
pricing Trust portfolio securities, expenses of issue, repurchase and redemption
of Shares including expenses attributable to a program of periodic repurchases
or redemptions, expenses of distributing its Shares and providing services to
Shareholders, expenses of registering and qualifying the Trust and its Shares
under Federal and State laws and regulations, charges of investment advisers,
administrators, custodians, transfer agents, and registrars, expenses of
preparing and setting in type prospectuses and statements of additional
information, expenses of printing and distributing prospectuses and statements
of additional information sent to existing Shareholders, auditing and legal
expenses, reports to Shareholders, expenses of meetings of Shareholders and
proxy solicitations therefor, insurance expense, association membership dues and
for such non-recurring items as may arise, including litigation to which the
Trust is a party (except those losses and expenses the indemnification of which
is not permitted under Article X hereof), and for all losses and liabilities by
them incurred in administering the Trust; and for the payment of such expenses,
disbursements, losses and liabilities the Trustees shall have a lien on the
assets belonging to the appropriate Series prior to any rights or interests of
the Shareholders thereto. This section shall not preclude the Trust from
directly paying any of the aforementioned fees and expenses.
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<PAGE>
ARTICLE VII
-----------
INVESTMENT ADVISER, PRINCIPAL UNDERWRITER AND TRANSFER AGENT
------------------------------------------------------------
INVESTMENT ADVISER
- - ------------------
Section 1. Subject to a Majority Shareholder Vote, the Trustees may in their
discretion from time to time enter into an investment advisory or management
contract(s) with respect to the Trust or any Series thereof whereby the other
party(ies) to such contract(s) shall undertake to furnish the Trustees such
management, investment advisory, statistical and research facilities and
services and such other facilities and services, if any, and all upon such terms
and conditions, as the Trustees may in their discretion determine.
Notwithstanding any provisions of this Declaration of Trust, the Trustees may
authorize the investment adviser(s) (subject to such general or specific
instruments as the Trustees may from time to time adopt) to effect purchases,
sales or exchanges of portfolio securities and other investment instruments of
the Trust on behalf of the Trustees or may authorize any officer, agent, or
Trustee to effect such purchases, sales or exchanges pursuant to recommendations
of the investment adviser (and all without further action by the Trustees). Any
such purchases, sales and exchanges shall be deemed to have been authorized by
all of the Trustees.
The Trustees may, subject to applicable requirements of the 1940 Act,
including those relating to Shareholder approval, authorize the investment
adviser to employ one or more sub-advisers from time to time to perform such of
the acts and services of the investment adviser, and upon such terms and
conditions, as may be agreed upon between the investment adviser and sub-
adviser.
PRINCIPAL UNDERWRITER
- - ---------------------
Section 2. The Trustees may in their discretion from time to time enter into
one or more contract(s) providing for the sale of the Shares, whereby the Trust
may either agree to sell the Shares to the other party to the contract or
appoint such other party its sales agent for such Shares. In either case, the
contract shall be on such terms and conditions as may be prescribed in the By-
Laws, if any, and such further terms and conditions as the Trustees may in their
discretion determine not inconsistent with the provisions of this Article VII,
or of the By-Laws, if any; and such contract may also provide for the repurchase
or sale of Shares by such other party as principal or as agent of the Trust.
The Trustees may in their discretion adopt a plan or plans of distribution and
enter into any related agreements whereby the Trust finances directly or
indirectly any activity that is primarily intended to result in sales of Shares.
Such plan or plans of distribution and any related agreements may contain such
terms and conditions as the Trustees may in their discretion determine subject
to the requirements of Section 12 of the 1940 Act, Rule 12b-1 thereunder and any
other applicable rules and regulations.
TRANSFER AGENT
- - --------------
Section 3. The Trustees may in their discretion from time to time enter into
a transfer agency and Shareholder service contract whereby the other party shall
undertake to furnish the Trustees and Trust with transfer agency and shareholder
services. The contract shall be on such terms and conditions as the Trustees
may in their discretion determine not inconsistent with the provisions of this
Declaration of Trust or of the By-Laws, if any. Such services may be provided
by one or more entities, including one or more agents of such other party.
9
<PAGE>
PARTIES TO CONTRACT
- - -------------------
Section 4. Any contract of the character described in Sections 1, 2 and 3 of
this Article VII or that relates to the provision of custodian services to the
Trust may be entered into with any corporation, firm, partnership, trust or
association, although one more of the Trustees or officers of the Trust may be
an officer, director, trustee, shareholder, or member of such other party to the
contract, and no such contract shall be invalidated or rendered voidable by
reason of the existence of any relationship, nor shall any person holding such
relationship be liable merely by reason of such relationship for any loss or
expense to the Trust under or by reason of said contract or accountable for any
profit realized directly or indirectly therefrom, provided that the contract
when entered into was reasonable and fair and not inconsistent with the
provisions of this Article VII or the By-Laws, if any. The same person
(including a firm, corporation, partnership, trust, or association) may be the
other party to contracts entered into pursuant to Sections 1, 2 and 3 above or
with respect to the provision of custodian services to the Trust, and any
individual may be financially interested in or otherwise affiliated with persons
who are parties to any or all of the contracts mentioned in this Section 4.
PROVISIONS AND AMENDMENTS
- - -------------------------
Section 5. Any contract entered into pursuant to Sections 1 and 2 of this
Article VII shall be consistent with and subject to the applicable requirements
of Sections 12 and 15 of the 1940 Act and the rules and orders thereunder
(including any amendments thereto or other applicable Act of Congress hereafter
enacted) with respect to its continuance in effect, its termination, and the
method of authorization and approval of such contract or renewal thereof.
ARTICLE VIII
------------
SHAREHOLDERS' VOTING POWERS AND MEETINGS
----------------------------------------
VOTING POWERS
- - -------------
Section 1. The Shareholders shall have power to vote (i) for the election of
Trustees as provided in Article IV, Section 2, (ii) for the removal of Trustees
as provided in Article IV, Section 3(d), (iii) with respect to any investment
advisory or management contract as provided in Article VII, Section 1, (iv) with
respect to any termination or reorganization of the Trust as provided in Article
XI, Section 4, (v) with respect to the amendment of this Declaration of Trust to
the extent and as provided in Article XI, Section 7, (vi) to the same extent as
the shareholders of a Massachusetts business corporation, as to whether or not a
court action, proceeding or claim should be brought or maintained derivatively
or as a class action on behalf of the Trust or the Shareholders, provided,
however, that a Shareholder of a particular Series shall not be entitled to
bring any derivative or class action on behalf of any other Series of the Trust,
and provided further that, within a Series, a Shareholder of a particular Class
shall not be entitled to bring any derivative or class action on behalf of any
other Class except with respect to matters sharing a common fact pattern with
said Shareholder's own Class; and (vii) with respect to such additional matters
relating to the Trust as may be required or authorized by law, by this
Declaration of Trust, or the By-Laws of the Trust, if any, or any registration
of the Trust with the Commission or any State, or as the Trustees may consider
desirable. On any matter submitted to a vote of the Shareholders, all Shares
shall be voted by individual Series, except (i) when required by the 1940 Act,
Shares shall be voted in the aggregate and not by individual Series; and (ii)
when the Trustees have determined that the matter affects only the interests of
one or more Classes, then only the Shareholders of such Class or Classes shall
be entitled to vote thereon. Each whole Share shall be entitled to one vote as
to any matter on which it is entitled to vote, and each fractional Share shall
be entitled to a proportionate fractional vote. There shall be no cumulative
voting in the election of Trustees. Shares may be
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<PAGE>
voted in person or by proxy. Until Shares are issued, the Trustees may exercise
all rights of Shareholders and may take any action required or permitted by law,
this Declaration of Trust or any By-Laws of the Trust to be taken by
Shareholders.
MEETINGS
- - --------
Section 2. The first Shareholders' meeting shall be held as specified in
Section 2 of Article IV at the principal office of the Trust or such other place
as the Trustees may designate. Special meetings of the Shareholders or any
Series or Class thereof may be called by the Trustees and shall be called by the
Trustees upon the written request of Shareholders owning at least one-tenth of
the outstanding Shares entitled to vote. Whenever ten or more Shareholders
meeting the qualifications set forth in Section 16(c) of the 1940 Act, as the
same may be amended from time to time, seek the opportunity of furnishing
materials to the other Shareholders with a view to obtaining signatures on such
a request for a meeting, the Trustees shall comply with the provisions of said
Section 16(c) and any rules or orders thereunder with respect to providing such
Shareholders access to the list of the Shareholders of record of the Trust or
the mailing of such materials to such Shareholders of record. Shareholders
shall be entitled to at least fifteen days' notice of any meeting.
QUORUM AND REQUIRED VOTE
- - ------------------------
Section 3. A majority of Shares entitled to vote in person or by proxy shall
be a quorum for the transaction of business at a Shareholders' meeting, except
that where any provision of law or of this Declaration of Trust permits or
requires that holders of any Series or Class thereof shall vote as a Series or
Class, then a majority of the aggregate number of Shares of that Series or Class
thereof entitled to vote shall be necessary to constitute a quorum for the
transaction of business by that Series or Class. Any lesser number shall be
sufficient for adjournments. Any adjourned session or sessions may be held,
within a reasonable time after the date set for the original meeting, without
the necessity of further notice. Except when a larger vote is required by any
provision of this Declaration of Trust or the By-Laws, a majority of the Shares
voted in person or by proxy shall decide any questions and a plurality shall
elect a Trustee, provided that where any provision of law or of this Declaration
of Trust permits or requires that the holders of any Series or Class shall vote
as a Series or Class, then a majority of the Shares of that Series or Class
voted on the matter shall decide that matter insofar as that Series or Class is
concerned.
ARTICLE IX
----------
DISTRIBUTIONS AND REDEMPTIONS
-----------------------------
DISTRIBUTIONS
- - -------------
Section 1.
(a) The Trustees may from time to time declare and pay dividends and
other distributions. The amount of such dividends and other distributions and
the payment of them shall be wholly in the discretion of the Trustees.
(b) The Trustees shall have power, to the fullest extent permitted by
the laws of the Commonwealth of Massachusetts, at any time to declare and cause
to be paid dividends and other distributions on Shares of a particular Series,
from the assets belonging to that Series, which dividends and other
distributions, at the election of the Trustees, may be paid daily or otherwise
pursuant to a standing resolution or resolutions adopted only once or with such
frequency as the Trustees may determine, and may be payable in Shares of that
Series or Class thereof, as appropriate, at the election of each Shareholder of
that Series or Class. All dividends and
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<PAGE>
distributions on Shares of a particular Series shall be distributed pro rata to
the holders of that Series in proportion to the number of Shares of that Series
held by such holders at the date and time of record established for the payment
of such dividends or distributions, except that such dividends and distributions
shall appropriately reflect expenses allocated to a particular Class of such
Series.
(c) Anything in this instrument to the contrary notwithstanding, the
Trustees may at any time declare and distribute a "stock dividend" pro rata
among the Shareholders of a particular Series or of a Class thereof as of the
record date of that Series (fixed as provided in Section 3 of Article XI
hereof).
REDEMPTIONS
- - -----------
Section 2. In case any holder of record of Shares of a particular Series or
Class desires to dispose of his Shares, he may deposit at the office of the
transfer agent or other authorized agent of that Series a written request or
such other form of request as the Trustees may from time to time authorize,
requesting that the Series purchase the Shares in accordance with this Section
2; and the Shareholder so requesting shall be entitled to require the Series to
purchase, and the Series or the principal underwriter of the Series shall
purchase his said Shares, but only at the Net Asset Value of the Series or Class
held by the Shareholder (as described in Section 3 hereof) minus any applicable
sales charge or redemption or repurchase fee. The Series shall make payment for
any such Shares to be redeemed, as aforesaid, in cash or property from the
assets of that Series and payment for such Shares shall be made by the Series or
the principal underwriter of the Series to the Shareholder of record within
seven (7) days after the date upon which the request is effective; provided,
however, that if Shares being redeemed have been purchased by check, the Trust
may postpone payment until the Trust has assurance that good payment has been
collected for the purchase of the Shares. The Trust may require Shareholders to
pay a sales charge to the Trust, the underwriter or any other person designated
by the Trustees upon redemption or repurchase of Shares of any Series or Class
thereof, in such amount as shall be determined from time to time by the
Trustees. The amount of such sales charge may but need not vary depending on
various factors, including without limitation the holding period of the redeemed
or repurchased Shares. The Trustees may also charge a redemption or repurchase
fee in such amount as may be determined from time to time by the Trustees.
DETERMINATION OF NET ASSET VALUE AND VALUATION OF PORTFOLIO ASSETS
- - ------------------------------------------------------------------
Section 3. The term "Net Asset Value" of any Series shall mean that amount by
which the assets of that Series exceed its liabilities, all as determined by or
under the direction of the Trustees. Net Asset Value per Share shall be
determined separately for each Series of Shares and shall be determined on such
days and at such times as the Trustees may determine. Such determination may be
made on a Series-by-Series or Class-by-Class basis, as appropriate, and shall
include any expenses allocated to a specific Series or Class. The determination
shall be made with respect to securities for which market quotations are readily
available at the market value of such securities; and with respect to other
securities and assets, at the fair value as determined in good faith by the
Trustees, provided, however, that the Trustees, without Shareholder approval,
may alter the method of appraising portfolio securities insofar as permitted
under the 1940 Act and the rules, regulations and interpretations thereof
promulgated or issued by the Commission or insofar as permitted by any order of
the Commission applicable to the Series. The Trustees may delegate any of their
powers and duties under this Section 3 with respect to appraisal of assets and
liabilities. At any time the Trustees may cause the Net Asset Value per Share
last determined to be determined again in a similar manner and may fix the time
when such redetermined values shall become effective.
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SUSPENSION OF THE RIGHT OF REDEMPTION
- - -------------------------------------
Section 4. Notwithstanding Section 2 hereof, the Trustees may declare a
suspension of the right of redemption or postpone the date of payment as
permitted under the 1940 Act. Such suspension shall take effect at such time as
the Trustees shall specify but not later than the close of business on the
business day next following the declaration of suspension, and thereafter there
shall be no right of redemption or payment until the Trustees shall declare the
suspension at an end. In the case of a suspension of the right of redemption, a
Shareholder may either withdraw his request for redemption or receive payment
based on the Net Asset Value per Share existing after the termination of the
suspension.
ARTICLE X
---------
LIMITATION OF LIABILITY AND INDEMNIFICATION
-------------------------------------------
LIMITATION OF LIABILITY
- - -----------------------
Section 1. All persons extending credit to, contracting with or having any
claim against the Trust or a particular Series shall look only to the assets of
the Trust or such Series, as the case may be, for payment under such credit,
contract or claim; and neither the Shareholders nor the Trustees, nor any of the
Trust's officers, employees or agents, whether past, present or future, nor any
other Series shall be personally liable therefor.
Every note, bond, contract, instrument, certificate or undertaking and every
other act or thing whatsoever executed or done by or on behalf of the Trust, any
Series, or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been executed or done only in or with respect to
their or his capacity as Trustees or Trustee and neither such Trustees or
Trustee nor the Shareholders shall be personally liable thereon. Every note,
bond, contract, instrument, certificate or undertaking made or issued by the
Trustees or by any officers or officer shall give notice that the same was
executed or made by them on behalf of the Trust or by them as Trustees or
Trustee or as officers or officer and not individually and that the obligations
of such instrument are not binding upon any of them or the Shareholders
individually but are binding only upon the assets and property of the Trust or
the particular Series in question, as the case may be, but the omission thereof
shall not operate to bind any Trustees or Trustee or officers or officer or
Shareholders or Shareholder individually.
Section 2. Provided they have exercised reasonable care and have acted under
the reasonable belief that their actions are in the best interest of the Trust,
the Trustees and officers of the Trust shall not be responsible for or liable in
any event for neglect or wrongdoing of them or any officer, agent, employee,
investment adviser or independent contractor of the Trust, but nothing contained
in this Declaration of Trust shall protect any Trustee or officer against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
INDEMNIFICATION
- - ---------------
Section 3.
(a) Subject to the exceptions and limitations contained in Section 3(b) below:
(i) every person who is, or has been a Trustee or officer of the Trust
(hereinafter referred to as "Covered Person") shall be indemnified by the
appropriate Series to the fullest extent permitted by law against liability and
against all expenses reasonably incurred or paid by him in
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<PAGE>
connection with any claim, action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of his being or having been a Trustee
or officer and against amounts paid or incurred by him in the settlement
thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall apply to
all claims, actions, suits or proceedings (civil, criminal or other, including
appeals), actual or threatened while in office or thereafter, and the words
"liability" and "expenses" shall include, without limitation, attorneys' fees,
costs, judgments, amounts paid in settlement, fines, penalties and other
liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before which the
proceeding was brought (A) to be liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office or (B) not to have acted in
good faith in the reasonable belief that his action was in the best interest of
the Trust; or
(ii) in the event of a settlement, unless there has been a determination
that such Trustee or officer did not engage in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office,
(A) by the court or other body approving the settlement;
(B) by at least a majority of those Trustees who are neither
interested persons of the Trust nor are parties to the matter based
upon a review of readily available facts (as opposed to a full trial-
type inquiry); or
(C) by written opinion of independent legal counsel based upon a
review of readily available facts (as opposed to a full trial-type
inquiry);
provided, however, that any Shareholder may, by appropriate legal proceedings,
challenge any such determination by the Trustees, or by independent counsel.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not be
exclusive of or affect any other rights to which any Covered Person may now or
hereafter be entitled, shall continue as to a person who has ceased to be such
Trustee or officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Trustees and
officers, and other persons may be entitled to by contract or otherwise under
law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding of the character described in
paragraph (a) of this Section 3 may be paid by the applicable Series from time
to time prior to final disposition thereof upon receipt of an undertaking by or
on behalf of such Covered Person that such amount will be paid over by him to
the applicable Series if it is ultimately determined that he is not entitled to
indemnification under this Section 3; provided, however, that either (a) such
Covered Person shall have provided appropriate security for such undertaking,
(b) the Trust is insured against losses arising out of any such advance payments
or (c) either a majority of the Trustees who are neither interested persons of
the Trust nor parties to the matter, or independent legal counsel in a written
opinion, shall have determined, based upon a review of readily available facts
(as opposed to a trial-type inquiry or full investigation), that there is reason
to believe that such Covered Person will not be disqualified from
indemnification under this Section 3.
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<PAGE>
SHAREHOLDERS
- - ------------
Section 4. In case any Shareholder or former Shareholder of any Series of the
Trust shall be held to be personally liable solely by reason of his being or
having been a Shareholder and not because of his acts or omissions or for some
other reason, the Shareholder or former Shareholder (or his heirs, executors,
administrators or other legal representatives or in the case of a corporation or
other entity, its corporate or other general successor) shall be entitled out of
the assets belonging to the applicable Series to be held harmless from and
indemnified against all loss and expense arising from such liability. The
Series shall, upon request by the Shareholder, assume the defense of any claim
made against the Shareholder for any act or obligation of the Series and satisfy
any judgment thereon.
ARTICLE XI
----------
MISCELLANEOUS
-------------
TRUST NOT A PARTNERSHIP
- - -----------------------
Section 1. It is hereby expressly declared that a trust and not a partnership
is created hereby. No Trustee hereunder shall have any power to bind personally
either the Trust's officers or any Shareholder. Nothing in this Declaration of
Trust shall protect a Trustee or officer against any liability to which the
Trustee or officer would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office hereunder.
TRUSTEE'S GOOD FAITH ACTION, EXPERT ADVICE, NO BOND OR SURETY
- - -------------------------------------------------------------
Section 2. The exercise by the Trustees of their powers and discretion
hereunder in good faith and with reasonable care under the circumstances then
prevailing, shall be binding upon everyone interested. Subject to the
provisions of Section 1 of this Article XI and to Article X, the Trustees shall
not be liable for errors of judgment or mistakes of fact or law. The Trustees
may take advice of counsel or other experts with respect to the meaning and
operation of this Declaration of Trust, and subject to the provisions of Section
1 of this Article XI and to Article X, shall be under no liability for any act
or omission in accordance with such advice or for failing to follow such advice.
The Trustees shall not be required to give any bond as such, nor any surety if a
bond is obtained.
ESTABLISHMENT OF RECORD DATES
- - -----------------------------
Section 3. The Trustees may close the stock transfer books of the Trust for a
period not exceeding sixty (60) days preceding the date of any meeting of
Shareholders, or the date for the payment of any dividends, or the date for the
allotment of rights, or the date when any change or conversion or exchange of
Shares shall go into effect; or in lieu of closing the stock transfer books as
aforesaid, the Trustees may fix in advance a date, not exceeding ninety (90)
days preceding the date of any meeting of Shareholders, or the date for payment
of any dividend, or the date for the allotment of rights, or the date when any
change or conversion or exchange of Shares shall go into effect, as a record
date for the determination of the Shareholders entitled to notice of, and to
vote at, any such meeting, or to receive payment of such dividend, or to receive
such allotment or rights, or to exercise such rights in respect of any such
change, conversion or exchange of Shares, and in such case such Shareholders and
only such Shareholders as shall be Shareholders of record on the date so fixed
shall be entitled to such notice of, and to vote at, such meeting, or to receive
payment of such dividend, or to receive such allotment of rights, or to exercise
such rights, as the case may be,
15
<PAGE>
notwithstanding any transfer of any Shares on the books of the Trust after any
such record date fixed or aforesaid.
TERMINATION OF TRUST
- - --------------------
Section 4.
(a) This Trust shall continue without limitation of time but subject to
the provisions of sub-section (b) of this Section 4.
(b) Subject to a Majority Shareholder Vote of each Series affected by
the matter or, if applicable, to a Majority Shareholder Vote of the Trust, the
Trustees may
(i) sell, convey, merge and transfer all or substantially all
of the assets of the Trust or any affected Series to another Series or to a
trust, partnership, association or corporation organized under the laws of any
state which is an investment company as defined in the 1940 Act, for adequate
consideration which may include the assumption of all outstanding obligations,
taxes and other liabilities, accrued or contingent, of the Trust or any affected
Series, and which may include shares of beneficial interest or stock of such
Series, trust, partnership, association or corporation; or
(ii) at any time sell and convert into money all or
substantially all of the assets of the Trust or any affected Series.
Upon making provision for the payment of all known liabilities of the Trust or
any affected Series in either (i) or (ii), by such assumption or otherwise, the
Trustees shall distribute the remaining proceeds or assets (as the case may be)
ratably among the holders of the Shares of the Trust or any affected Series then
outstanding; however, the payment to any particular Class within such Series may
be reduced by any fees, expenses or charges allocated to that Class. Nothing in
this Declaration of Trust shall preclude the Trustees from distributing such
remaining proceeds or assets so that holders of the Shares of a particular Class
of the Trust or any affected Series receive as their ratable distribution shares
solely of an analogous class, as determined by the Trustees, of such trust,
partnership, association or corporation.
The Trustees may take any of the actions specified in clauses (i) and (ii)
above without obtaining a Majority Shareholder Vote of any Series or the Trust
if a majority of the Trustees makes a determination that the continuation of a
Series or the Trust is not in the best interests of such Series, the Trust or
their respective Shareholders as a result of factors or events adversely
affecting the ability of such Series or the Trust to conduct its business and
operations in an economically viable manner. Such factors and events may
include the inability of a Series or the Trust to maintain its assets at an
appropriate size, changes in laws or regulations governing the Series or Trust
or affecting assets of the type in which such Series or the Trust invests or
economic developments or trends having a significant adverse impact on the
business or operations of such Series or the Trust.
(c) Upon completion of the distribution of the remaining proceeds or
the remaining assets as provided in sub-section (b), the Trust or any affected
Series shall terminate and the Trustees shall be discharged of any and all
further liabilities and duties hereunder with respect thereto and the right,
title and interest of all parties therein shall be canceled and discharged.
16
<PAGE>
FILING OF COPIES, REFERENCES, HEADINGS
- - --------------------------------------
Section 5. The original or a copy of this instrument and of each amendment
hereto shall be kept at the office of the Trust where it may be inspected by any
shareholder. A copy of this instrument and of each amendment hereto shall be
filed by the Trustees with the Secretary of the Commonwealth of Massachusetts
and the Boston City Clerk, as well as any other governmental office where such
filing may from time to time be required. Anyone dealing with the Trust may
rely on a certificate by an officer or Trustee of the Trust as to whether or not
any such amendments to this Declaration of Trust have been made and as to any
matters in connection with the Trust hereunder, and with the same effect as if
it were the original, may rely on a copy certified by an officer or Trustee of
the Trust to be a copy of this instrument or of any such amendments. In this
instrument or in any such amendments, references to this instrument, and all
expressions like "herein," "hereof" and "hereunder," shall be deemed to refer to
this instrument as amended from time to time. The masculine gender shall
include the feminine and neuter genders. Headings are placed herein for
convenience of reference only, and in case of any conflict, the text of this
instrument, rather than the headings, shall control. This instrument may be
executed in any number of counterparts each of which shall be deemed an
original.
APPLICABLE LAW
- - --------------
Section 6. The Trust set forth in this instrument is made in the Commonwealth
of Massachusetts, and it is created under and is to be governed by and construed
and administered according to the laws of said Commonwealth. The Trust shall be
of the type commonly called a Massachusetts business trust, and, without
limiting the provisions hereof, the Trust may exercise all powers which are
ordinarily exercised by such a trust.
AMENDMENTS
- - ----------
Section 7. All rights granted to the Shareholders under this Declaration of
Trust are granted subject to the reservation of the right to amend this
Declaration of Trust as herein provided, except that no amendment shall repeal
the limitations on personal liability of any Shareholder or Trustee or repeal
the prohibition of assessment upon the Shareholders without the express consent
of each Shareholder or Trustee involved. Subject to the foregoing, the
provisions of this Declaration of Trust (whether or not related to the rights of
Shareholders) may be amended at any time, so long as such amendment does not
adversely affect the rights of any Shareholder with respect to which such
amendment is or purports to be applicable and so long as such amendment is not
in contravention of applicable law, including the 1940 Act, by an instrument in
writing signed by a majority of the then Trustees (or by an officer of the Trust
pursuant to the vote of a majority of such Trustees). Except as provided in the
first sentence of this Section 7, any amendment to this Declaration of Trust
that adversely affects the rights of Shareholders may be adopted at any time by
an instrument signed in writing by a majority of the then Trustees (or by an
officer of the Trust pursuant to the vote of a majority of such Trustees) when
authorized to do so by Majority Shareholder Vote; provided, however, that an
amendment that shall affect the Shareholders of one or more Series (or of one or
more Classes), but not the Shareholders of all outstanding Series (or Classes),
shall be authorized by a Majority Shareholder Vote of each Series (or Class, as
the case may be) affected, and no vote of a Series (or Class) not affected shall
be required. Subject to the foregoing, any such amendment shall be effective as
provided in the instrument containing the terms of such amendment or, if there
is no provision therein with respect to effectiveness, upon the execution of
such instrument and of a certificate (which may be a part of such instrument)
executed by a Trustee or officer to the effect that such amendment has been duly
adopted. Copies of the amendment to this Declaration of Trust shall be filed as
specified in Section 5 of this Article XI. A restated Declaration of Trust,
integrating into a single instrument all of the provisions of the Declaration of
17
<PAGE>
Trust which are then in effect and operative, may be executed from time to time
by a majority of the Trustees and shall be effective upon filing as specified in
such Section 5.
FISCAL YEAR
- - -----------
Section 8. The fiscal year of the Trust shall be determined by the Trustees
in accordance with the By-Laws, provided, however, that the Trustees may,
without Shareholder approval, change the fiscal year of the Trust.
18
<PAGE>
SCHEDULE A
Series of the Trust
- - -------------------
Aggressive Growth Portfolio
Balanced Portfolio
Global Growth Portfolio
Global Income Portfolio
Growth and Income Portfolio
Growth Portfolio
High Grade Fixed Income Portfolio
High Income Portfolio
Money Market Portfolio
Small Cap Portfolio
Strategic Fixed Income Portfolio
Strategic Income Portfolio
Tactical Allocation Portfolio
Classes of Shares of Each Series
- - --------------------------------
An unlimited number of shares of beneficial interest have been established by
the Board as Class H shares and Class I shares of each of the above Series.
Each of the Class H shares and Class I shares of a Series represents interests
in the assets of only that Series and has the same preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of shares, except as
provided in the Trust's Declaration of Trust.
19
<PAGE>
IN WITNESS WHEREOF, the undersigned, being the all the Trustees of the Trust,
have executed this Amended and Restated Declaration of Trust as of the day and
year first above written.
<TABLE>
<CAPTION>
<S> <C>
/s/ Margo N. Alexander /s/ Meyer Feldberg
- - ----------------------------- ---------------------------
Margo N. Alexander Meyer Feldberg
/s/ E. Garrett Bewkes, Jr. /s/ George W. Gowen
- - ----------------------------- ---------------------------
E. Garrett Bewkes, Jr. George W. Gowen
/s/ Richard Q. Armstrong /s/ Frederic V. Malek
- - ----------------------------- ---------------------------
Richard Q. Armstrong Frederic V. Malek
/s/ Richard R. Burt /s/ Carl W. Schafer
- - ----------------------------- ---------------------------
Richard R. Burt Carl W. Schafer
/s/ Mary C. Farrell
- - -----------------------------
Mary C. Farrell
</TABLE>
20
<PAGE>
Exhibit No. 2
MITCHELL HUTCHINS SERIES TRUST
A Massachusetts Business Trust
RESTATED BY-LAWS
February 11, 1998
<PAGE>
BY-LAWS OF MITCHELL HUTCHINS SERIES TRUST
ARTICLE I
---------
DECLARATION OF TRUST,
---------------------
LOCATION OF OFFICES AND SEAL
----------------------------
Section 1.01. Declaration of Trust: These By-Laws shall be subject to the
--------------------
Declaration of Trust, as from time to time in effect (the "Declaration of
Trust"), of Mitchell Hutchins Series Trust, the Massachusetts business trust
established by the Declaration of Trust (the "Trust").
Section 1.02. Principal Office of the Trust: Resident Agent: The
---------------------------------------------
principal office of the Trust shall be located in the City of New York, New
York. Its resident agent in Massachusetts shall be CT Corporation System, 2
Oliver Street, Boston, Massachusetts, or such other person as the Trustees may
from time to time designate. The Trust may establish and maintain such other
offices and places of business as the Trustees may, from time to time,
determine.
Section 1.03. Seal: The seal of the Trust shall be circular in form and
----
shall bear the name of the Trust. The form of the seal shall be subject to
alteration by the Trustees and the seal may be used by causing it or a facsimile
to be impressed or affixed or printed or otherwise reproduced. Any officer or
Trustee of the Trust shall have authority to affix the seal of the Trust to any
document, instrument or other paper executed and delivered by or on behalf of
the Trust; however, unless otherwise required by the Trustees, the seal shall
not be necessary to be placed on and its absence shall not impair the validity
of any document, instrument, or other paper executed by or on behalf of the
Trust.
ARTICLE II
----------
SHAREHOLDERS
------------
Section 2.01. Shareholder Meetings: Meetings of the shareholders may be
--------------------
called at any time by the Trustees or, if the Trustees shall fail to call any
meeting for a period of 30 days after written request of Shareholders owning at
least one-tenth of the outstanding shares entitled to vote, then such
Shareholders may call such meeting. Each call of a meeting shall state the
place, date, hour and purposes of the meeting.
Section 2.02. Place of Meetings: All meetings of the Shareholders shall
-----------------
be held at the principal office of the Trust, except that the Trustees may
designate a different place of meeting within the United States.
Section 2.03. Notice of Meeting: The secretary or an assistant secretary
-----------------
or such other officer as may be designated by the Trustees shall cause notice of
the place, date and hour, and purpose or purposes for which the meeting is
called, to be mailed, not less than fifteen days before the date of the meeting,
to each Shareholder entitled to vote at such meeting, at his address as it
appears on the records of the Trust at the time of such mailing. Notice of any
Shareholders' meeting need not be given to any Shareholder if a written waiver
of notice, executed before or after such meeting, is filed with the records of
such meeting, or to any Shareholder who shall attend such
<PAGE>
meeting in person or by proxy. Notice of adjournment of a Shareholders' meeting
to another time or place need not be given, if such time and place are announced
at the meeting.
Section 2.04. Ballots: The vote upon any question shall be by ballot
-------
whenever requested by any person entitled to vote, but, unless such a request is
made, voting may be conducted in any way approved by the meeting.
Section 2.05. Voting; Proxies: Shareholders entitled to vote may vote
---------------
either in person or by proxy, provided that such proxy to act is authorized to
act by (1) a written instrument, dated not more than eleven months before the
meeting and executed either by the Shareholder or by his or her duly authorized
attorney in fact (who may be so authorized by a writing or by any non-written
means permitted by the laws of the Commonwealth of Massachusetts) or (2) such
electronic, telephonic, computerized or other alternative means as may be
approved by a resolution adopted by the Trustees. Proxies shall be delivered to
the secretary of the Trust or other person responsible for recording the
proceedings before being voted. A proxy with respect to shares held in the name
of two or more persons shall be valid if executed by one of them unless at or
prior to exercise of such proxy the Trust receives a specific written notice to
the contrary from any one of them. Unless otherwise specifically limited by
their terms, proxies shall entitle the holder thereof to vote at any adjournment
of a meeting. A proxy purporting to be exercised by or on behalf of a
Shareholder shall be deemed valid unless challenged at or prior to its exercise
and the burden of proving invalidity shall rest on the challenger. At all
meetings of the Shareholders, unless the voting is conducted by inspectors, all
questions relating to the qualifications of voters, the validity of proxies, and
the acceptance or rejection of votes shall be decided by the chairman of the
meeting.
Section 2.06. Action Without a Meeting: Any action to be taken by
------------------------
Shareholders may be taken without a meeting if all Shareholders entitled to vote
on the matter consent to the action in writing and the written consents are
filed with the records of meetings of Shareholders of the Trust. Such consent
shall be treated for all purposes as a vote at a meeting.
ARTICLE III
-----------
TRUSTEES
--------
Section 3.01. Regular Meetings: Regular meetings of the Trustees may be
----------------
held without further call or notice at such places and at such times as the
Trustees may from time to time determine, provided that notice of the first
regular meeting following any such determination shall be given to absent
Trustees. A regular meeting of the Trustees may be held without further call or
notice immediately after and at the same place as any meeting of the
Shareholders.
Section 3.02. Special Meetings: Special meetings of the Trustees may be
----------------
held at any time and at any place designated in the call of the meeting, when
called by the chairman of the Trustees or by two or more Trustees, provided that
notice thereof shall being given to each Trustee as set forth in the Declaration
of Trust.
Section 3.03. Committees: The Trustees, by vote of a majority of the
----------
Trustees then in office, may elect from their number an executive committee or
other committees and may delegate thereto some or all of their powers except
those which by law, by the Declaration of Trust, or by
2
<PAGE>
these By-Laws may not be delegated. Except as the Trustees may otherwise
determine, any such committee may make rules for the conduct of its business,
but unless otherwise provided by the Trustees or in such rules, its business
shall be conducted so far as possible in the same manner as is provided by these
By-Laws for the Trustees themselves. All members of such committees shall hold
such offices at the pleasure of the Trustees. The Trustees may abolish any such
committee at any time. Any committee to which the Trustees delegate any of their
powers or duties shall keep records of its meetings and shall report its actions
to the Trustees. The Trustees shall have power to rescind any action of any
committee, but no such rescission shall have retroactive effect. Any such
committee may act by meeting in person, by unanimous written consent, or by
telephonic meeting provided a quorum of members participates in any such
telephonic meeting.
Section 3.04. Other Committees: The Trustees may appoint other
----------------
committees, each consisting of one or more persons, who need not be Trustees.
Each such committee shall have such powers and perform such duties and abide by
such procedures as may be determined from time to time by the Trustees, but
shall not exercise any power which may lawfully be exercised only by the
Trustees or a committee of Trustees.
Section 3.05. Compensation: Each Trustee and each committee member may
------------
receive such compensation for his services and reimbursement for his expenses as
may be fixed from time to time by resolution of the Trustees.
ARTICLE IV
----------
OFFICERS
--------
Section 4.01. General: The officers of the Trust shall be a president, a
-------
treasurer, a secretary and such other officers, if any, as the Trustees from
time to time may in their discretion elect or appoint. The Trust may also have
such agents, if any, as the Trustees from time to time may in their discretion
appoint. Any officer may be but need not be a Trustee or shareholder. Any two
or more offices may be held by the same person.
Section 4.02. Election and Term of Office: The president, the treasurer
---------------------------
and the secretary shall be elected annually by the Trustees at their first
meeting in each calendar year or at such later meeting in such year as the
Trustees shall determine ("Annual Meeting"). Other officers or agents, if any,
may be elected or appointed by the Trustees at said meeting or at any other
time. The president, treasurer and secretary shall hold office until the next
Annual Meeting and until their respective successors are chosen and qualified,
or in each case until he dies, resigns, is removed or become disqualified. Each
other officer shall hold office and each agent shall retain his authority at the
pleasure of the Trustees.
Section 4.03. Powers: Subject to the other provisions of these By-Laws,
------
each officer shall have, in addition to the duties and powers herein and in the
Declaration of Trust set forth, such duties and powers as are commonly incident
to his office as if the Trust were organized as a Massachusetts business
corporation and such other duties and powers as the Trustees may from time to
time designate.
3
<PAGE>
Section 4.04. Chairman of the Board: The chairman of the Board of
---------------------
Trustees, if one is so appointed, shall be chosen from among the Trustees and
may hold office only so long as he continues to be a Trustee. Unless the
Trustees otherwise provide, the chairman, if any is so appointed, shall preside
at all meetings of the Shareholders and of the Trustees at which he is present;
may be ex officio a member of all committees established by the Trustees; and
-- -------
shall have such other duties and powers as specified herein and as may be
assigned to him by the Trustees.
Section 4.05. President: The president shall be the chief executive
---------
officer of the Trust and, subject to the supervision of the Trustees, shall have
general charge of the business, affairs and property of the Trust and general
supervision over its officers, employees and agents. He shall exercise such
other powers and perform such other duties as from time to time may be assigned
to him by the Trustees.
Section 4.06. Vice Presidents: The Trustees may from time to time
---------------
designate and elect one or more vice presidents who shall have such powers and
perform such duties as from time to time may be assigned to them by the Trustees
or the president. At the request or in the absence or disability of the
president, the vice president (or, if there are two or more vice presidents,
then the senior of the vice presidents present and able to act) may perform all
the duties of the president and, when so acting, shall have all the powers of
and be subject to all the restrictions upon the president.
Section 4.07. Treasurer and Assistant Treasurers: The treasurer shall be
----------------------------------
the principal financial and accounting officer of the Trust and shall have
general charge of the finances and books of account of the Trust. Except as
otherwise provided by the Trustees, he shall have general supervision of the
funds and property of the Trust and of the performance by the custodian of its
duties with respect thereto. He shall render to the Trustees, whenever directed
by the Trustees, an account of the financial condition of the Trust and of all
his transactions as treasurer; and as soon as possible after the close of each
financial year he shall make and submit to the Trustees a like report for such
financial year. He shall perform all the acts incidental to the office of
treasurer, subject to the control of the Trustees.
Any assistant treasurer may perform such duties of the treasurer as the
treasurer or the Trustees may assign, and, in the absence of the treasurer, (or,
if there are two or more assistant treasurers, then the senior of the assistant
treasurers present and able to act) may perform all the duties of the treasurer,
subject to the control of the Trustees.
Section 4.08. Secretary and Assistant Secretaries: The secretary shall
-----------------------------------
attend to the giving and serving of all notices of the Trust and shall record
all proceedings of the meetings of the Shareholders and Trustees in books to be
kept for that purpose. He shall keep in safe custody the seal of the Trust, and
shall have charge of the records of the Trust, all of which shall at all
reasonable times be open to inspection by the Trustees. He shall perform such
other duties as appertain to his office or as may be required by the Trustees.
Any assistant secretary may perform such duties of the secretary as the
secretary or the Trustees may assign, and, in the absence of the secretary, (or,
if there are two or more assistant secretaries. then the senior of the assistant
secretaries present and able to act) may perform all the duties of the
secretary.
4
<PAGE>
Section 4.09. Subordinate Officers: The Trustees from time to time may
--------------------
appoint such other officers or agents as they may deem advisable, each of whom
shall have such title, hold office for such period, have such authority and
perform such duties as the Trustees may determine. The Trustees from time to
time may delegate to one or more officers or agents the power to appoint any
such subordinate officers or agents and to prescribe their respective rights,
terms of office, authorities and duties.
Section 4.10. Remuneration: The salaries or other compensation of the
------------
officers of the Trust shall be fixed from time to time by resolution of the
Trustees, except that the Trustees may by resolution delegate to any person or
group of persons the power to fix the salaries or other compensation of any
subordinate officers or agents appointed in accordance with the provisions of
Section 4.09 hereof.
Section 4.11. Surety Bonds: The Trustees may require any officer or agent
------------
of the Trust to execute a bond (including, without limitation, any bond required
by the Investment Company Act of 1940, as amended, ("1940 Act") and the rules
and regulations of the Securities and Exchange Commission ("Commission")) to the
Trust in such sum and with such surety or sureties as the Trustees may
determine, conditioned upon the faithful performance of his duties to the Trust
including responsibility for negligence and for the accounting of any of the
Trust's property, funds or securities that may come into his hands.
Section 4.12. Resignation: Any officer may resign his office at any time
-----------
by delivering a written resignation to the Trustees, the president, the
secretary, or any assistant secretary. Unless otherwise specified therein, such
resignation shall take effect upon delivery.
Section 4.13. Removal: Any officer may be removed from office whenever in
-------
the judgment of the Trustees the best interest of the Trust will be served
thereby, by the vote of a majority of the Trustees given at a regular meeting or
any special meeting of the Trustees called for such purpose. In addition, any
officer or agent appointed in accordance with the provision of Section 4.09
hereof may be removed, either with or without cause, by any officer upon whom
such power of removal shall have been conferred by the Trustees.
Section 4.14. Vacancies and Newly Created Offices: If any vacancy shall
-----------------------------------
occur in any office by reason of death, resignation, removal, disqualification
or other cause, or if any new office shall be created, such vacancies or newly
created offices may be filled by the Trustees at any regular or special meeting
of the Trustees or, in the case of any office created pursuant to Section 4.09
hereof, by any officer upon whom such power shall have been conferred by the
Trustees.
ARTICLE V
---------
CUSTODIAN
---------
Section 5.01. Employment of Custodian: The Trustees shall at all times
-----------------------
employ one or more banks or trust companies organized under the laws of the U.S.
or one of the states thereof provided that each such bank or trust company has
capital, surplus and undivided profits of at least two million dollars
($2,000,000) as custodian with authority as the Trust's agent, but subject to
such restrictions, limitations and other requirements, if any, as may be
contained in these By-Laws:
5
<PAGE>
(1) to hold the securities owned by the Trust and deliver the same upon
written order, or oral order if confirmed in writing, or order
delivered by such electromechanical or electronic devices as are
agreed to by the Trust and the custodian, if such procedures have been
authorized in writing by the Trust;
(2) to receive and give receipt for any moneys due to the Trust and
deposit the same in its own banking department or elsewhere as the
Trustees may direct; and
(3) to disburse such moneys upon orders or vouchers;
and the Trust may also enjoy such custodian as its agent:
(1) to keep the books and accounts of the Trust and furnish clerical and
accounting services; and
(2) to compute, if authorized to do so by the Trustees, the Net Asset
Value of any Series or Class (which terms are defined in the
Declaration of Trust) in accordance with the provisions of the
Declaration of Trust;
all upon such basis of compensation as may be agreed upon between the Trustees
and the custodian. If so directed by a vote of a majority of the outstanding
shares of the Trust entitled to vote, the custodian shall deliver and pay over
all property of the Trust held by it as specified in such vote.
The Trustees may also authorize the custodian to employ one or more sub-
custodians from time to time to perform such of the acts and services of the
custodian, and upon such terms and conditions, as may be agreed upon between the
custodian and such sub-custodian and approved by the Trustees, provided that in
every case such sub-custodian shall be a bank or trust company organized under
the laws of the United States or one of the states thereof and having capital,
surplus and undivided profits of at least two million dollars ($2,000,000) or
such other person as may be permitted by the Commission, or otherwise in
accordance with the 1940 Act.
Section 5.02. Use of Central Securities Handling System: Subject to such
-----------------------------------------
rules, regulations and orders as the Commission may adopt, the Trustees may
direct the custodian to deposit any or all of the securities owned by the Trust
(1) in a system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, pursuant to which system
all securities of any particular class or series of any issuer deposited within
the system are treated as fungible and may be transferred or pledged by
bookkeeping entry without physical delivery of such securities, provided that
all such deposits shall be subject to withdrawal only upon the order of the
Trust; or (2) with such other person as may be permitted by the Commission, or
otherwise in accordance with the 1940 Act.
6
<PAGE>
ARTICLE VI
----------
EXECUTION OF PAPERS
-------------------
Section 6.01. General: Except as the Trustees may generally or in particular
-------
cases authorize the execution thereof in some other manner, all deeds, leases,
transfers, contracts, bonds, notes, checks, drafts, and other obligations made,
accepted, or endorsed by the Trust shall be executed by the president, any vice
president, or the treasurer, or by whomever else shall be designated for that
purpose by the Trustees, and need not bear the seal of the Trust.
ARTICLE VII
-----------
SHARES OF BENEFICIAL INTEREST
-----------------------------
Section 7.01. Share Certificates: No certificates certifying the ownership
------------------
of Shares shall be issued except as the Trustees may otherwise authorize. In
the event that the Trustees authorize the issuance of Share certificates,
subject to the provisions of Section 7.03, each Shareholder shall be entitled to
a certificate stating the number of shares owned by him, in such form as shall
be prescribed from time to time by the Trustees. Such certificate shall be
signed by the president or a vice president and by the treasurer, assistant
treasurer, secretary or assistant secretary. Such signatures may be facsimiles
if the certificate is signed by a transfer or shareholder services agent or by a
registrar, other than a Trustee, officer or employee of the Trust. In case any
officer who has signed or whose facsimile signature has been placed on such
certificate shall have ceased to be such officer before such certificate is
issued, it may be issued by the Trust with the same effect as if he were such
officer at the time of its issue.
In lieu of issuing certificates for shares, the Trustees, the transfer agent
or shareholder services agent may either issue receipts therefor or may keep
accounts upon the books of the Trust for the record holders of such shares, who
shall in either case be deemed, for all purposes hereunder, to be the holders of
certificates for such shares as if they had accepted such certificates and shall
be held to have expressly assented and agreed to the terms hereof.
Section 7.02. Loss of Certificates: In the case of the alleged loss or
--------------------
destruction or the mutilation of a Share certificate, a duplicate certificate
may be issued in place thereof, upon such terms as the Trustees may prescribe.
Section 7.03. Discontinuance of Issuance of Certificates: The Trustees may
------------------------------------------
at any time discontinue the issuance of Share certificates and may, by written
notice to each Shareholder, require the surrender of Share certificates to the
Trust for cancellation. Such surrender and cancellation shall not affect the
ownership of Shares in the Trust.
Section 7.04. Equitable Interest Not Recognized: The Trust shall be entitled
---------------------------------
to treat the holder of record of any Share or Shares of the Trust as the holder
in fact thereof, and shall not be bound to recognize any equitable or other
claim of interest in such Share or Shares on the part of any other person except
as may be otherwise expressly provided by law.
7
<PAGE>
Section 7.05. Transfer of Shares: The Shares of the Trust shall be
------------------
transferable only by transfer recorded on the books of the Trust, in person or
by attorney.
ARTICLE VIII
------------
FISCAL YEAR; ACCOUNTANT
-----------------------
Section 8.01. Fiscal Year: The fiscal year of the Trust shall end on such
-----------
date in each year as the Trustees shall from time to time determine.
Section 8.02. Accountant:
----------
(a) The Trust shall employ an independent public accountant or firm of
independent public accountants as its accountant to examine the accounts of the
Trust and to sign and certify the financial statements of the Trust. The
accountant's certificates and reports shall be addressed both to the Trustees
and to the Shareholders of the Trust.
(b) Any vacancy occurring due to the death or resignation of the accountant
may be filled by a majority vote of the Trustees who are not interested persons
of the Trust.
ARTICLE IX
----------
INSURANCE
---------
Section 9.01. Insurance of Officers, Trustees, and Employees: The Trust may
----------------------------------------------
purchase and maintain insurance on behalf of any person who is or was a Trustee,
officer or employee of the Trust, or is or was serving at the request of the
Trust as a Trustee, officer or employee of a corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity or arising out of his status as such,
whether or not the Trust would have the power to indemnify him against such
liability.
The Trust may not acquire or obtain a contract for insurance that protects or
purports to protect any Trustee or officer of the Trust against any liability to
the Trust or its Shareholders to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office.
ARTICLE X
---------
AMENDMENTS; REPORTS; MISCELLANEOUS
----------------------------------
Section 10.1. Amendments: These By-Laws may be amended or repealed, in whole
----------
or in part, by a majority of the Trustees then in office at any meeting of the
Trustees, or by one or more writings signed by such majority.
Section 10.2. Reports: The Trustees shall at least semiannually submit to
-------
the Shareholders a written report of the transactions of the Trust, including
financial statements that shall at least annually be certified by independent
public accountants.
8
<PAGE>
Section 10.3. Gender: As used in these By-Laws, the masculine gender shall
------
include the feminine and neuter genders.
Section 10.3. Headings: Headings are placed in these bylaws for convenience
--------
of reference only and in case of any conflict, the text of these By-Laws rather
than the headings shall control.
Section 10.4. Inspection of Books: The Trustees shall from time to time
-------------------
determine whether and to what extent, and at what times and places, and under
what conditions and regulations the accounts and books of the Trust or any of
them shall be open to the inspection of the Shareholders, and no Shareholder
shall have any right to inspect any account or book or document of the Trust
except as conferred by law or otherwise by the Trustees.
9
<PAGE>
Exhibit No. 5(a)
INVESTMENT ADVISORY AND ADMINISTRATION CONTRACT
Contract made as of April 21, 1988, between PAINEWEBBER SERIES TRUST, a
Massachusetts business trust ("Trust"), and MITCHELL HUTCHINS ASSET MANAGEMENT
INC. ("Mitchell Hutchins"), a Delaware corporation registered as a broker-dealer
under the Securities Exchange Act of 1934, as amended ("1934 Act"), and as an
investment adviser under the Investment Advisers Act of 1940, as amended.
WHEREAS the Trust is registered under the Investment Company Act of 1940,
as amended ("1940 Act"), as an open-end management investment company, and
intends to offer for public sale distinct series of shares of beneficial
interest ("Series"), each corresponding to a distinct portfolio; and
WHEREAS the Trust desires to retain Mitchell Hutchins as investment adviser
and administrator to furnish certain administrative, investment advisory and
portfolio management services to the Trust and each Series as now exists and as
hereafter may be established, and Mitchell Hutchins is willing to furnish such
services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Trust hereby appoints Mitchell Hutchins as investment
-----------
adviser and administrator of the Trust and each Series for the period and on the
terms set forth in this Contract. Mitchell Hutchins accepts such appointment
and agrees to render the services herein set forth, for the compensation herein
provided.
2. Duties as Investment Adviser.
----------------------------
(a) Subject to the supervision of the Trust's Board of Trustees ("Board"),
Mitchell Hutchins will provide a continuous investment program for each Series,
including investment research and management with respect to all securities and
investments and cash equivalents in each Series. Mitchell Hutchins will
determine from time to time what securities and other investments will be
purchased, retained or sold by each Series.
(b) Mitchell Hutchins agrees that in placing orders with brokers and
dealers, it will attempt to obtain the best net result in terms of price and
execution; provided that, on behalf
<PAGE>
of any Series, Mitchell Hutchins may, in its discretion, purchase and sell
portfolio securities to and from brokers and dealers who provide the Series with
research, analysis, advice and similar services, and Mitchell Hutchins may pay
to those brokers and dealers, in return for research and analysis, a higher
compensation or spread than may be charged by other brokers and dealers, subject
to Mitchell Hutchins' determining in good faith that such commission or spread
is reasonable in terms either of the particular transaction or of the overall
responsibility of Mitchell Hutchins to such Series and its other clients and
that the total commissions or spreads paid by such Series will be reasonable in
relation to the benefits to the Series over the long term. In no instance will
portfolio securities be purchased from or sold to Mitchell Hutchins, or any
affiliated person thereof, except in accordance with the federal securities laws
and the rules and regulations thereunder. Whenever Mitchell Hutchins
simultaneously places orders to purchase or sell the same security on behalf of
a Series and one or more other accounts advised by Mitchell Hutchins, such
orders will be allocated as to price and amount among all such accounts in a
manner believed to be equitable to each account. The Trust recognizes that in
some cases this procedure may adversely affect the results obtained for the
Series.
(c) Mitchell Hutchins will oversee the maintenance of all books and records
with respect to the securities transactions of each Series, and will furnish the
Board with such periodic and special reports as the Board reasonably may
request. In compliance with the requirements of Rule 31a-3 under the 1940 Act,
Mitchell Hutchins hereby agrees that all records which it maintains for the
Trust are the property of the Trust, agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any records which it maintains for
the Trust and which are required to be maintained by Rule 31a-1 under the 1940
Act, and further agrees to surrender promptly to the Trust any records which it
maintains for the Trust upon request by the Trust.
(d) Mitchell Hutchins will oversee the computation of the net asset value
and the net income of each Series as described in the currently effective
registration statement of the Trust under the Securities Act of 1933, as
amended, and 1940 Act and any supplements thereto ("Registration Statement") or
as more frequently requested by the Board.
(e) The Trust hereby authorizes Mitchell Hutchins and any entity or person
associated with Mitchell Hutchins which is a member of a national securities
exchange to effect any transaction on such exchange for the account of any
Series, which transaction is permitted by Section 11(a) of the 1934 Act and Rule
11a2-2(T) thereunder, and the Trust hereby consents to the
-2-
<PAGE>
retention of compensation by Mitchell Hutchins or person or entity associated
with Mitchell Hutchins for such transactions in accordance with Rule 11a2-
2(T)(a)(2)(iv).
3. Duties as Administrator. Mitchell Hutchins will administer the affairs
-----------------------
of the Trust and each Series subject to the supervision of the Board and the
following understandings:
(a) Mitchell Hutchins will supervise all aspects of the operations of the
Trust and each Series, including the oversight of transfer agency, custodial and
accounting services, except as hereinafter set forth; provided, however, that
nothing herein contained shall be deemed to relieve or deprive the Board of its
responsibility for and control of the conduct of the affairs of the Trust and
each Series.
(b) Mitchell Hutchins will provide the Trust and each Series with such
corporate, administrative and clerical personnel (including officers of the
Trust) and services as are reasonably deemed necessary or advisable by the
Board, including the maintenance of certain books and records of the Trust and
each Series.
(c) Mitchell Hutchins will arrange, but not pay, for the periodic
preparation, updating, filing and dissemination (as applicable) of the Trust's
Registration Statement, proxy material, tax returns and required reports to each
Series' shareholders and the Securities and Exchange Commission and other
appropriate federal or state regulatory authorities.
(d) Mitchell Hutchins will provide the Trust and each Series with, or
obtain for it, adequate office space and all necessary office equipment and
services, including telephone service, heat, utilities, stationery supplies and
similar items.
(e) Mitchell Hutchins will provide the Board on a regular basis with
economic and investment analyses and reports and make available to the Board
upon request any economic, statistical and investment services normally
available to institutional or other customers of Mitchell Hutchins.
4. Further Duties. In all matters relating to the performance of this
--------------
Contract, Mitchell Hutchins will act in conformity with the Declaration of
Trust, By-Laws and Registration Statement of the Trust and with the instructions
and directions of the Board and will comply with the requirements of the 1940
Act, the rules thereunder, and all other applicable federal and state laws and
regulations.
-3-
<PAGE>
5. Delegation of Mitchell Hutchins' Duties as Investment Adviser and
-----------------------------------------------------------------
Administrator. With respect to any or all Series, Mitchell Hutchins may enter
- - -------------
into one or more contracts ("Sub-Advisory or Sub-Administration Contract") with
a sub-adviser or sub-administrator in which Mitchell Hutchins delegates to such
sub-adviser or sub-administrator any or all its duties specified in Paragraph 2
and 3 of this Contract, provided that each Sub-Advisory or Sub-Administration
Contract imposes on the sub-adviser or sub-administrator bound thereby all the
duties and conditions to which Mitchell Hutchins is subject by Paragraph 2, 3
and 4 of this Contract, and further provided that each Sub-Advisory or Sub-
Administration Contract meets all requirements of the 1940 Act and rules
thereunder.
6. Services Not Exclusive. The services furnished by Mitchell Hutchins
----------------------
hereunder are not to be deemed exclusive and Mitchell Hutchins shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired thereby. Nothing in this Contract shall limit or restrict the
right of any director, officer or employee of Mitchell Hutchins, who may also be
a Trustee, officer or employee of the Trust, to engage in any other business or
to devote his or her time and attention in part to the management or other
aspects of any other business, whether of a similar nature or a dissimilar
nature.
7. Expenses.
--------
(a) During the term of this Contract, each Series will bear all expenses,
not specifically assumed by Mitchell Hutchins, incurred in its operations and
the offering of its shares.
(b) Expenses borne by each Series will include but not be limited to the
following (or each Series' proportionate share of the following): (i) the cost
(including brokerage commissions) of securities purchased or sold by the Series
and any losses incurred in connection therewith; (ii) fees payable to and
expenses incurred on behalf of the Series by Mitchell Hutchins under this
Contract; (iii) expenses of organizing the Trust and the Series; (iv) filing
fees and expenses relating to the registration and qualification of the Series'
shares and the Trust under federal and/or state securities laws and maintaining
such registrations and qualifications; (v) fees and salaries payable to the
Trust's Trustees who are not interested persons of the Trust or Mitchell
Hutchins; (vi) all expenses incurred in connection with the Trustees' services,
including travel expenses; (vii) taxes (including any income or franchise taxes)
and governmental fees; (viii) costs of any liability, uncollectible items of
deposit and other insurance and fidelity bonds; (ix) any costs, expenses or
losses arising out of a
-4-
<PAGE>
liability of or claim for damages or other relief asserted against the Trust or
Series for violation of any law; (x) legal, accounting and auditing expenses,
including legal fees of special counsel for those Trustees of the Trust who are
not interested persons of the Trust; (xi) charges of custodians, transfer agents
and other agents; (xii) costs of preparing share certificates; (xiii) expenses
of setting in type and printing prospectuses and supplements thereto, reports
and proxy materials for existing shareholders; (xiv) costs of mailing
prospectuses and supplements thereto, statements of additional information and
supplements thereto, reports and proxy materials to existing shareholders; (xv)
any extraordinary expenses (including fees and disbursements of counsel, costs
of actions, suits or proceedings to which the Trust is a party and the expenses
the Trust may incur as a result of its legal obligation to provide
indemnification to its officers, Trustees, agents and shareholders) incurred by
the Trust or Series; (xvi) fees, voluntary assessments and other expenses
incurred in connection with membership in investment company organizations;
(xvii) costs of mailing and tabulating proxies and costs of meetings of
shareholders, the Board and any committees thereof; (xviii) the cost of
investment company literature and other publications provided by the Trust to
its Trustees and officers; and (xix) costs of mailing, stationery and
communications equipment.
(c) The Trust or a Series may pay directly any expense incurred by it in
its normal operations and, if any such payment is consented to by Mitchell
Hutchins and acknowledged as otherwise payable by Mitchell Hutchins pursuant to
this Contract, the Series may reduce the fee payable to Mitchell Hutchins
pursuant to Paragraph 8 hereof by such amount. To the extent that such
deductions exceed the fee payable to Mitchell Hutchins on any monthly payment
date, such excess shall be carried forward and deducted in the same manner from
the fee payable on succeeding monthly payment dates.
(d) Mitchell Hutchins will assume the cost of any compensation for services
provided to the Trust received by the officers of the Trust and by those
Trustees who are interested persons of the Trust.
(e) The payment or assumption by Mitchell Hutchins of any expense of the
Trust or a Series that Mitchell Hutchins is not required by this Contract to pay
or assume shall not obligate Mitchell Hutchins to pay or assume the same or any
similar expense of the Trust or a Series on any subsequent occasion.
-5-
<PAGE>
8. Compensation.
------------
(a) For the services provided and the expenses assumed pursuant to this
Contract, the Money Market Portfolio will pay to Mitchell Hutchins a fee,
computed daily and paid monthly, at an annual rate of .50% of that Series'
average daily net assets; the Growth and Income Portfolio will pay to Mitchell
Hutchins a fee, computed daily and paid monthly, at an annual rate of .70% of
that Series' average daily net assets; the Global Growth Portfolio will pay to
Mitchell Hutchins a fee, computed daily and paid monthly, at an annual rate of
.75% of that Series' average daily net assets; the Growth Portfolio will pay to
Mitchell Hutchins a fee, computed daily and paid monthly, at an annual rate of
.75% of that Series' average daily net assets; the corporate Bond Portfolio will
pay to Mitchell Hutchins a fee, computed daily and paid monthly at an annual
rate of .50% of that Series' average daily net assets; the High Yield Bond
Portfolio will pay to Mitchell Hutchins a fee, computed daily and paid monthly,
at an annual rate of .50% of that Series' average daily net assets; the Asset
Allocation Portfolio will pay to Mitchell Hutchins a fee, computed daily and
paid monthly, at an annual rate of .75% of that Series' average daily net
assets; and the Global Income Portfolio will pay to Mitchell Hutchins a fee,
computed daily and paid monthly, at an annual rate of .75% of that Series'
average daily net assets.
(b) For the services provided and the expenses assumed pursuant to this
Contract with respect to any Series hereafter established, the Trust will pay to
Mitchell Hutchins from the assets of such Series a fee in an amount to be agreed
upon in a written fee agreement ("Fee Agreement") executed by the Trust on
behalf of such Series and by Mitchell Hutchins. All such Fee Agreements shall
provide that they are subject to all terms and conditions of this Contract.
(c) The fee shall be computed daily and paid monthly Mitchell Hutchins on
or before the last business day of the next succeeding calendar month.
(d) If this Contract becomes effective or terminates before the end of any
month, the fee for the period from the effective date to the end of the month or
from the beginning of such month to the date of termination, as the case may be,
shall be prorated according to the proportion which such period bears to the
full month in which such effectiveness or termination occurs.
9. Limitation of Liability of Mitchell Hutchins. Mitchell Hutchins shall
--------------------------------------------
not be liable for any error of judgment or mistake of law or for any loss
suffered by any Series or the Trust in connection with the matters to which this
Contract relates except a loss resulting from willful misfeasance, bad faith or
gross negligence on its part in the performance of its duties or from
-6-
<PAGE>
reckless disregard by it of its obligations and duties under this Contract. Any
person, even though also an officer, partner, employee, or agent of Mitchell
Hutchins, who may be or become an officer, Trustee, employee or agent of the
Trust shall be deemed, when rendering services to any Series or the Trust, to be
rendering such service to or acting solely for the Series or the Trust and not
as an officer, partner, employee, or agent or one under the control or direction
of Mitchell Hutchins even though paid by it.
10. Limitation of Liability of Trustees and Shareholders of the Trust.
-----------------------------------------------------------------
The Trustees of the Trust and the shareholders of any Series shall not be liable
for any obligations of any Series or the Trust under this Contract, and Mitchell
Hutchins agrees that, in asserting any rights or claims under this Contract, it
shall look only to the assets and property of the Trust in settlement of such
right or claim, and not to such Trustees or shareholders.
11. Duration and Termination.
------------------------
(a) This Contract shall become effective upon the date hereabove written
provided that, with respect to any Series, this Contract shall not take effect
unless it has first been approved (i) by a vote of a majority of those Trustees
of the Trust who are not parties to this Contract or interested persons of any
such party, cast in person at a meeting called for the purpose of voting on such
approval, and (ii) by vote of a majority of that Series' outstanding voting
securities.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for two years from the above written date. Thereafter, if
not terminated, this Contract shall continue automatically for successive
periods of twelve months each, provided that such continuance is specifically
approved at least annually (i) by a vote of a majority of those Trustees of
persons of any such party, cast in person at a meeting called for the purpose of
voting on such approval, and (ii) by the board or with respect to any given
Series by vote of a majority of the outstanding voting securities of such
Series.
(c) Notwithstanding the foregoing, with respect to any Series this Contract
may be terminated at any time, without the payment of any penalty, by vote of
the Board or by a vote of a majority of the outstanding voting securities of
such Series on sixty days' written notice to Mitchell Hutchins or by Mitchell
Hutchins at any time, without the payment of any penalty, on sixty days' written
notice to the Trust. Termination of this Contract with respect to any given
Series shall in no way effect the continued validity of this Contract or the
performance
-7-
<PAGE>
thereunder with respect to any other Series. This Contract will automatically
terminate in the event of its assignment.
12. Amendment to this Contract. No provision of this Contract may be
--------------------------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Contract as to any
given Series shall be effective until approved by vote of a majority of such
Series' outstanding voting securities.
13. Governing Law. This Contract shall be construed in accordance with
-------------
the laws of the State of Delaware and the 1940 Act, provided, however, that
Section 10 above will be construed in accordance with the laws of the
Commonwealth of Massachusetts.
14. Miscellaneous. The captions in this Contract are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors. As used in this Contract,
the terms "majority of the outstanding voting securities," "interested person,"
"assignment," "broker," "dealer," "investment adviser," "national securities
exchange," "net assets," "prospectus," "assignment," "broker," "dealer,"
"investment adviser," "national securities exchange," "net assets,"
"prospectus," "sale," "sell" and "security" shall have the same meaning as such
terms have in the 1940 Act, subject to such exemption as may be granted by the
Securities and Exchange Commission by any rule, regulation or order. Where the
effect of a requirement of the 1940 Act reflected in any provision of this
Contract is relaxed by a rule, regulation or order of the Securities and
Exchange Commission, whether of special or general application, such provision
shall be deemed to incorporate the effect of such rule, regulation or order.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated as of the day and year first above
written.
Attest: PAINEWEBBER SERIES TRUST
/s/ Abbe P. Stein By: /s/ Dianne E. O'Donnell
- - ----------------- ------------------------
Attest: MITCHELL HUTCHINS ASSET MANAGEMENT INC.
/s/ Abbe P. Stein By: /s/ Ellen R. Harris
- - ----------------- --------------------
-9-
<PAGE>
Exhibit No. 5(b)
INVESTMENT ADVISORY AND ADMINISTRATION FEE AGREEMENT
Agreement made as of May 1, 1989, between PAINEWEBBER SERIES TRUST, a
Massachusetts business trust ("Trust"), on behalf of the Government Portfolio, a
series of shares of beneficial interest of the Trust ("Portfolio"), and MITCHELL
HUTCHINS ASSET MANAGEMENT INC. ("Mitchell Hutchins"), a Delaware corporation
registered as broker-dealer under the Securities Exchange Act of 1934, as
amended, and as an investment adviser under the Investment Advisers Act of 1940,
as amended.
WHEREAS the Trust has appointed Mitchell Hutchins as investment adviser and
administrator for each series of shares of beneficial interest of the Trust as
now exists and as hereafter may be established, pursuant to an Investment
Advisory and Administration Contract dated April 21, 1988 between the Trust and
Mitchell Hutchins ("Advisory Contract"); and
WHEREAS the Portfolio has been established as a new series of shares of the
Trust;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. For the services provided and the expenses assumed pursuant to the
Advisory Contract with respect to the Portfolio, the Portfolio will pay to
Mitchell Hutchins a fee, computed daily and paid monthly, at the annual rate of
0.50% of the Portfolio's average daily net assets.
<PAGE>
2. This Fee Agreement shall be subject to all terms and conditions of the
Advisory Contract.
3. This Fee Agreement shall become effective upon the date hereabove
written, provided that it shall take effect unless it has first been approved
(i) by a vote of a majority of those Trustees of the Trust who are not parties
to this Fee Agreement or the Advisory Contract or interested persons of any such
party at a meeting called for the purpose of such approval and (ii) by vote of a
majority of the Portfolio's outstanding voting securities.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated as of the day and year first above
written.
PAINEWEBBER SERIES TRUST
on behalf of the Government Portfolio
By: /s/ Dianne E. O'Donnell
----------------------------------
MITCHELL HUTCHINS ASSET MANAGEMENT INC.
By: /s/
----------------------------------
2
<PAGE>
Exhibit No. 5(c)
INVESTMENT ADVISORY AND ADMINISTRATION FEE AGREEMENT
Agreement made as of December 30, 1991 between PAINEWEBBER SERIES TRUST, a
Massachusetts business trust ("Trust"), on behalf of the Dividend Growth
Portfolio, a series of shares of beneficial interest of the Trust ("Portfolio"),
and MITCHELL HUTCHINS ASSET MANAGEMENT INC. ("Mitchell Hutchins"), a Delaware
corporation registered as a broker-dealer under the Securities Exchange Act of
1934, as amended, and as an investment adviser under the Investment Advisers Act
of 1940, as amended.
WHEREAS the Trust has appointed Mitchell Hutchins as investment adviser and
administrator for each series of shares of beneficial interest of the Trust as
now exists and as hereafter may be established, pursuant to an Investment
Advisory and Administration Contract dated April 21, 1988 between the Trust and
Mitchell Hutchins ("Advisory Contract"); and
WHEREAS the Portfolio has been established as a new series of shares of the
Trust;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. For the services provided and the expenses assumed pursuant to the
Advisory Contract with respect to the Portfolio, the Portfolio will pay to
Mitchell Hutchins a fee, computed daily and paid monthly, at the annual rate of
0.70% of the Portfolio's average daily net assets.
<PAGE>
2. This Fee Agreement shall be subject to all terms and conditions of the
Advisory Contract.
3. This Fee Agreement shall become effective upon the date hereabove
written, provided that it shall not take effect unless it has first been
approved (i) by a vote of a majority of those Trustees of the Trust who are not
parties to this Fee Agreement or the Advisory Contract or interested persons of
any such party at a meeting called for the purpose of such approval and (ii) by
vote of a majority of the Portfolio's outstanding voting securities.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated as of the day and year first above
written.
PAINEWEBBER SERIES TRUST
on behalf of the Dividend Growth Portfolio
By:
---------------------------------------------
MITCHELL HUTCHINS ASSET MANAGEMENT INC.
By:
---------------------------------------------
2
<PAGE>
Exhibit No. 5(d)
INVESTMENT ADVISORY AND ADMINISTRATION FEE AGREEMENT
Agreement made as of September 1, 1993, between PAINEWEBBER SERIES TRUST, a
Massachusetts business trust ("Trust"), on behalf of the Aggressive Growth
Portfolio, a series of shares of beneficial interest of the Trust ("Portfolio"),
and MITCHELL HUTCHINS ASSET MANAGEMENT INC. ("Mitchell Hutchins"), a Delaware
corporation registered as a broker-dealer under the Securities Exchange Act of
1934, as amended, and as an investment adviser under the Investment Advisers Act
of 1940, as amended.
WHEREAS, the Trust has appointed Mitchell Hutchins as investment adviser
and administrator for each series of shares of beneficial interest of the Trust
as now exists and as hereafter may be established, pursuant to an Investment
Advisory and Administration Contract dated April 28, 1988 between the Trust and
Mitchell Hutchins ("Advisory Contract"); and
WHEREAS, the Portfolio has been established as a new series of the Trust
NOW THEREFORE, in consideration of the premises and mutual covenants herein
contained, it is agreed between the parties hereto as follows:
1. For the services provided and the expenses assumed pursuant to the
Advisory Contract with respect to the Portfolio, the Portfolio will pay to
Mitchell Hutchins a fee, computed daily and paid monthly, at the annual rate of
0.80% of the Portfolio's average daily net assets.
2. This Fee Agreement shall be subject to all terms and conditions of the
Advisory Contract.
3. This Fee Agreement shall become effective upon the date written above,
provided that it shall not take effect unless it has first been approved (i) by
a vote of a majority of the Trustees of the Trust who are not parties to this
Fee Agreement or the Advisory Contract or interested persons of any such persons
at a meeting called for the purpose of such approval and (ii) by vote of a
majority of the Portfolio's outstanding voting securities.
<PAGE>
IN WITNESS HEREOF, the parties hereto have caused this instrument to be
executed by their officers designated as of the day and year first above
written.
PAINEWEBBER SERIES TRUST
on behalf of the Aggressive Growth Portfolio
By: /s/ Dianne E. O'Donnell
----------------------------
Name: Dianne E. O'Donnell
----------------------------
Title: Secretary and Vice President
----------------------------
MITCHELL HUTCHINS ASSET MANAGEMENT INC.
By: /s/ Jack W. Murphy
----------------------------
Name: Jack W. Murphy
----------------------------
Title: First Vice President
----------------------------
2
<PAGE>
Exhibit No. 5(e)
INVESTMENT ADVISORY AND ADMINISTRATION FEE AGREEMENT
Agreement made as of September 1, 1993, between PAINEWEBBER SERIES TRUST, a
Massachusetts business trust ("Trust"), on behalf of the Fixed Income Portfolio,
a series of shares of beneficial interest of the Trust ("Portfolio"), and
MITCHELL HUTCHINS ASSET MANAGEMENT INC. ("Mitchell Hutchins"), a Delaware
corporation registered as broker-dealer under the Securities Exchange Act of
1934, as amended, and as an investment adviser under the Investment Advisers Act
of 1940, as amended.
WHEREAS the Trust has appointed Mitchell Hutchins as investment adviser and
administrator for each series of shares of beneficial interest of the Trust as
now exists and as hereafter may be established, pursuant to an Investment
Advisory and Administration Contract dated April 28, 1988 between the Trust and
Mitchell Hutchins ("Advisory Contract"); and
WHEREAS the Portfolio has been established as a new series of the Trust;
NOW THEREFORE, in consideration of the premises and mutual covenants herein
contained, it is agreed between the parties hereto as follows:
1. For the services provided and the expenses assumed pursuant to the
Advisory Contract with respect to the Portfolio, the Portfolio will pay to
Mitchell Hutchins a fee, computed daily and paid monthly, at the annual rate of
0.50% of the Portfolio's average daily net assets.
2. This Fee Agreement shall be subject to all terms and conditions of the
Advisory Contract.
3. This Fee Agreement shall become effective upon the date hereabove
written, provided that it shall take effect unless it has first been approved
(i) by a vote of a majority of the Trustees of the Trust who are not parties to
this Fee Agreement or the Advisory Contract or interested persons of any such
persons at a meeting called for the purpose of such approval and (ii) by vote of
a majority of the Portfolio's outstanding voting securities.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated as of the day and year first above
written.
PAINEWEBBER SERIES TRUST
on behalf of the Fixed Income Portfolio
By: /s/ Dianne E. O'Donnell
----------------------------
Name: Dianne E. O'Donnell
----------------------------
Title: Secretary and Vice President
----------------------------
MITCHELL HUTCHINS ASSET MANAGEMENT INC.
By: /s/ Jack W. Murphy
----------------------------
Name: Jack W. Murphy
----------------------------
Title: First Vice President
----------------------------
2
<PAGE>
Exhibit No. 5(f)
INVESTMENT ADVISORY AND ADMINISTRATION FEE AGREEMENT
----------------------------------------------------
Agreement made as of ____________________________, 199_, between MITCHELL
HUTCHINS SERIES TRUST, a Massachusetts business trust ("Trust"), and MITCHELL
HUTCHINS ASSET MANAGEMENT INC. ("Mitchell Hutchins"), a Delaware corporation
registered as a broker-dealer under the Securities Exchange Act of 1934, as
amended, and as an investment adviser under the Investment Advisers Act of 1940,
as amended.
WHEREAS, the Trust has appointed Mitchell Hutchins as investment adviser and
administrator for each series of shares of beneficial interest of the Trust as
now exists and as hereafter may be established, pursuant to an Investment
Advisory and Administration Contract, dated April 21, 1988, between the Trust
and Mitchell Hutchins ("Advisory Contract"); and
WHEREAS, the following four new series of shares of beneficial interest (each
a "Fund") have been established as new series of the Trust: High Income
Portfolio, Tactical Allocation Portfolio, Small Cap Portfolio and Strategic
Income Portfolio;
NOW THEREFORE, in consideration of the premises and mutual covenants herein
contained, it is agreed between the parties hereto as follows:
1. For the services provided and the expenses assumed pursuant to the
Advisory Contract with respect to the Funds, each Fund will pay to
Mitchell Hutchins a fee at the annual rate of its average daily net
asset set forth below, such fee to be computed daily and paid
monthly:
High Income Portfolio: 0.50%
Tactical Allocation Portfolio: 0.50%
Small Cap Portfolio 1.00%
Strategic Income Portfolio 0.75%
2. This Fee Agreement shall be subject to all of the terms and
conditions of the Advisory Contract.
3. This Fee Agreement shall become effective upon the date written
above, provided that it shall not take effect with respect to a
Fund unless it has first been approved with respect to that Fund
(i) by a vote of a majority of the Trustees of the Trust who are
not parties to this Fee Agreement or the Advisory Contract or
interested persons of any such persons at a meeting called for the
purpose of such approval and (ii) by vote of a majority of the
Fund's outstanding voting securities.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated as of the day and year first above
written.
MITCHELL HUTCHINS SERIES TRUST
By:
------------------------------------
Name: Dianne E. O'Donnell
Title: Secretary and Vice President
MITCHELL HUTCHINS ASSET MANAGEMENT INC.
By:
------------------------------------
Name:
Title:
2
<PAGE>
Exhibit No. 5(g)
SUB-INVESTMENT ADVISORY CONTRACT
Contract made as of September 1, 1993, between MITCHELL HUTCHINS ASSET
MANAGEMENT INC. ("Mitchell Hutchins"), a Delaware corporation, and NICHOLAS-
APPLEGATE CAPITAL MANAGEMENT, L.P. ("Sub-Adviser"), a California limited
partnership.
WHEREAS, Mitchell Hutchins has entered into an Investment Advisory and
Administration Contract dated April 21, 1988 ("Advisory Contract") with
PaineWebber Series Trust (the "Trust"), an open-end investment company
registered under the Investment Company Act of 1940, as amended ("1940 Act");
and
WHEREAS, Mitchell Hutchins wishes to retain the Sub-Adviser as sub-adviser
to furnish certain investment advisory services to Mitchell Hutchins and the
Aggressive Growth Portfolio series ("Series") of the Trust, and the Sub-Adviser
is willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. Mitchell Hutchins hereby appoints the Sub-Adviser as its
-----------
investment sub-adviser with respect to the Series for the period and on the
terms set forth in this Contract. The Sub-Adviser accepts such appointment and
agrees to render the services herein set forth, for the compensation herein
provided.
2. Duties as Sub-Adviser.
---------------------
(a) Subject to the supervision of the Trust's Board of Trustees ("Board")
and Mitchell Hutchins, the Sub-Adviser will provide a continuous investment
program for the Series, including investment research and management. The Sub-
Adviser will determine from time to time what investments will be purchased,
retained or sold by the Series. The Sub-Adviser will be responsible for placing
purchase and sell orders for investments and for other related transactions. The
Sub-Adviser will be responsible for voting proxies of issuers of securities held
by the Series. The Sub-Adviser will manage the Series' assets so as to permit
the Series (i) to qualify or to continue to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code, as amended ("Code") and
(ii) to comply or continue to comply with the diversification requirements
imposed by Section 817(h) of the Code and the regulations thereunder. The Sub-
Adviser will provide services under this Contract in accordance with the Series'
investment objective, policies and restrictions as stated in the Trust's
Prospectus.
(b) The Sub-Adviser agrees that, in placing orders with brokers, it will
attempt to obtain the best net result in terms of price and execution; provided
that, on behalf of the Series, the Sub-Adviser may, in its discretion, use
brokers who provide the Series with research,
<PAGE>
analysis, advice and similar services to execute portfolio transactions on
behalf of the Series, and the Sub-Adviser may pay to those brokers in return for
brokerage and research services a higher commission than may be charged by other
brokers, subject to the Sub-Adviser's determining in good faith that such
commission is reasonable in terms either of the particular transaction or of the
overall responsibility of the Sub-Adviser to the Series and its other clients
and that the total commissions paid by the Series will be reasonable in relation
to the benefits to the Series over the long term. In no instance will portfolio
securities be purchased from or sold to the Sub-Adviser, or any affiliated
person thereof, except in accordance with the federal securities laws and the
rules and regulations thereunder. Whenever the Sub-Adviser simultaneously places
orders to purchase or sell the same security on behalf of the Series and one or
more other accounts advised by the Sub-Adviser, such orders will be allocated as
to price and amount among all such accounts in a manner believed to be equitable
to each account. Mitchell Hutchins recognizes that in some cases this procedure
may adversely affect the results obtained for the Series.
(c) The Sub-Adviser will maintain all books and records required to be
maintained by the Sub-Adviser pursuant to the 1940 Act and the rules and
regulations promulgated thereunder with respect to transactions on behalf of the
Series, and will furnish the Board and Mitchell Hutchins with such periodic and
special reports as the Board or Mitchell Hutchins reasonably may request. In
compliance with the requirements of Rule 31 a-3 under the 1940 Act, the Sub-
Adviser hereby agrees that all records which it maintains for the Series are the
property of the Trust, agrees to preserve for the periods prescribed by Rule 31
a-2 under the 1940 Act any records which it maintains for the Trust and which
are required to be maintained by Rule 31a-1 under the 1940 Act, and further
agrees to surrender promptly to the Trust any records which it maintains for the
Trust upon request by the Trust.
(d) At such times as shall be reasonably requested by the Board or Mitchell
Hutchins, the Sub-Adviser will provide the Board and Mitchell Hutchins with
economic and investment analyses and reports and make available to the Board and
Mitchell Hutchins any economic, statistical and investment services normally
available to institutional or other customers of the Sub-Adviser.
3. Further Duties. In all matters relating to the performance of this
--------------
Contract, the Sub-Adviser will act in conformity with the Trust's Declaration of
Trust, By-Laws and currently effective registration statement under the 1940 Act
and any amendments or supplements thereto ("Registration Statement") and with
the instructions and directions of the Board and Mitchell Hutchins and will
comply with the requirements of the 1940 Act, the Investment Advisers Act of
1940 ("Advisers Act"), the rules thereunder, and all other applicable federal
and state laws and regulations. Mitchell Hutchins agrees to provide to the Sub-
Adviser copies of the Trust's Declaration of Trust, By-Laws, Registration
Statement, written instructions and directions of the Board and Mitchell
Hutchins, and any amendments or supplements to any of them as soon as
practicable after such materials become available.
4. Services Not Exclusive. The services furnished by the Sub-Adviser
----------------------
hereunder are not to be deemed exclusive, and except as the Sub-Adviser may
otherwise agree in writing, the
2
<PAGE>
Sub-Adviser shall be free to furnish similar services to others so long as its
services under this Contract are not impaired thereby. Nothing in this Contract
shall limit or restrict the right of any director, officer or employee of the
Sub-Adviser, who may also be a trustee, officer or employee of the Trust, to
engage in any other business or to devote his or her time and attention in part
to the management or other aspects of any other business, whether of a similar
nature or a dissimilar nature.
5. Expenses. During the term of this Contract, the Sub-Adviser will bear
--------
all expenses incurred by it in connection with its services under this Contract.
6. Compensation.
------------
(a) For the services provided and the expenses assumed by the Sub-Adviser
pursuant to this Contract, Mitchell Hutchins will pay to the Sub-Adviser a fee,
computed daily and payable monthly, at an annual rate of 0.50% of the Series'
average daily net assets (computed in the manner specified in the Advisory
Contract).
(b) The fee shall be accrued daily and payable monthly to the Sub-Adviser
on or before the last business day of the next succeeding calendar month.
(c) If this Contract becomes effective or terminates before the end of any
month, the fee for the period from the effective date to the end of the month or
from the beginning of such month to the date of termination, as the case may be,
shall be prorated according to the proportion which such period bears to the
full month in which such effectiveness or termination occurs.
7. Limitation of Liability. The Sub-Adviser shall not be liable for any
-----------------------
error of judgment or mistake of law or for any loss suffered by the Series, the
Trust or its shareholders or by Mitchell Hutchins in connection with the matters
to which Contract relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations and duties under this Contract.
8. Representations of Sub-Adviser. The Sub-Adviser represents, warrants
------------------------------
and agrees as follows:
(a) The Sub-Adviser: (i) is registered as an investment adviser under the
Advisers Act and will continue to be so registered for so long as this Contract
remains in effect; (ii) is not prohibited by the 1940 Act or the Advisers Act
from performing the services contemplated by this Contract; (iii) has met, and
will continue to meet for so long as this Contract remains in effect, any other
applicable federal or state requirements, or the applicable requirements of any
regulatory or industry self-regulatory agency, necessary to be met in order to
perform the services contemplated by this Contract; (iv) has the authority to
enter into and perform the services contemplated by this Contract; and (v) will
immediately notify Mitchell Hutchins of the occurrence of any event that would
disqualify the Sub-Adviser from serving as an investment adviser of an
investment company pursuant to Section 9(a) of the 1940 Act or otherwise.
3
<PAGE>
(b) The Sub-Adviser shall notify Mitchell Hutchins of any change in the
membership of the Sub-Adviser within a reasonable time after such change.
(c) The Sub-Adviser has adopted a written code of ethics complying with the
requirements of Rule 1 7j-1 under the 1940 Act and will provide Mitchell
Hutchins with a copy of such code of ethics, together with evidence of its
adoption. Within 45 days after the end of the last calendar quarter of each year
that this Contract is in effect, the president or a vice-president of the Sub-
Adviser shall certify to Mitchell Hutchins that the Sub-Adviser has complied
with the requirements of Rule 17j-1 during the previous year and that there has
been no material violation of the Sub-Adviser's code of ethics or, if such a
violation has occurred, that appropriate action was taken in response to such
violation. Upon the written request of Mitchell Hutchins, the Sub-Adviser shall
permit Mitchell Hutchins, its employees or its agents to examine the reports
required to be made to the Sub-Adviser by Rule 1 7j-1 (c)(1) and all other
records relevant to the Sub-Adviser's code of ethics.
(c) The Sub-Adviser has provided Mitchell Hutchins with a copy of its Form
ADV as most recently filed with the Securities and Exchange Commission ("SEC")
and will, promptly after filing any amendment to its Form ADV with the SEC,
furnish a copy of such amendment to Mitchell Hutchins.
9. Duration and Termination.
------------------------
(a) This Contract shall become effective upon the date first above written,
provided that this Contract shall not take effect unless it has first been
approved (i) by a vote of a majority of those trustees of the Trust who are not
parties to this Contract or interested persons of any such party, cast in person
at a meeting called for the purpose of voting on such approval, and (ii) by vote
of a majority of the Series' outstanding voting securities.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for two years from its effective date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of those trustees of the Trust who
are not parties to this Contract or interested persons of any such party, cast
in person at a meeting called for the purpose of voting on such approval, and
(ii) by the Board or by vote of a majority of the outstanding voting securities
of the Series
(c) Notwithstanding the foregoing, this Contract may be terminated at any
time, without the payment of any penalty, by vote of the Board or by a vote of a
majority of the outstanding voting securities of the Series on 60 days' written
notice to the Sub-Adviser. This Contract may also be terminated by Mitchell
Hutchins: (i) on 120 days' written notice to the Sub-Adviser, without the
payment of any penalty; (ii) upon material breach by the Sub-Adviser of any of
the representations and warranties set forth in Paragraph 8 of this Contract, if
such breach shall not have been cured within a 20 day period after notice of
such breach; or (iii) if the Sub-Adviser becomes unable to discharge its duties
and obligations under this Contract. The Sub-
4
<PAGE>
Adviser may terminate this Contract at any time, without the payment of any
penalty, on 120 days' written notice to Mitchell Hutchins. This Contract will
terminate automatically in the event of its assignment or upon termination of
the Advisory Contract.
10. Amendment of this Contract. No provision of this Contract may be
--------------------------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Contract shall be
effective until approved by vote of a majority of the Series' outstanding voting
securities.
11. Governing Law. This Contract shall be construed in accordance with the
-------------
laws of the State of Delaware without giving effect to the conflicts of laws
principles thereof and the 1940 Act. To the extent that the applicable laws of
the State of Delaware conflict with the applicable provisions of the 1940 Act,
the latter shall control.
12. Miscellaneous. The captions in this Contract are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors. As used in this Contract,
the terms "majority of the outstanding voting securities," "affiliated person,"
"interested person," "assignment," "broker," "investment adviser," "net assets,"
"sale," "sell" and "security" shall have the same meaning as such terms have in
the 1940 Act, subject to such exemption as may be granted by the SEC by any
rule, regulation or order. Where the effect of a requirement of the federal
securities laws reflected in any provision of this Contract is made less
restrictive by a rule, regulation or order of the SEC, whether of special or
general application, such provision shall be deemed to incorporate the effect of
such rule, regulation or order.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized signatories as of the date and year first
above written.
Attest: MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
/s/ Ilene Shore By: /s/ Dianne E. O'Donnell
- - -------------------------- -------------------------
Name: Dianne E. O'Donnell
-------------------------
Title: First Vice President
-------------------------
NICHOLAS-APPLEGATE
CAPITAL MANAGEMENT, L.P.
Attest:
/s/ Cathy By: /s/ E. Blake Moore, Jr.
- - -------------------------- -------------------------
Name: E. Blake Moore, Jr.
-------------------------
Title: General Counsel
-------------------------
6
<PAGE>
Exhibit No. 6
MITCHELL HUTCHINS SERIES TRUST
DISTRIBUTION CONTRACT
CLASS I SHARES
CONTRACT made as of ____________________, 1998, between MITCHELL HUTCHINS
SERIES TRUST, a Massachusetts business trust ("Fund"), and MITCHELL HUTCHINS
ASSET MANAGEMENT INC., a Delaware corporation ("Mitchell Hutchins").
WHEREAS the Fund is registered under the Investment Company Act of l940, as
amended ("l940 Act"), as an open-end management investment company and currently
has thirteen distinct series of shares of beneficial interest ("Series"), which
correspond to distinct portfolios of investments and have been designated as the
Aggressive Growth Portfolio, Balanced Portfolio, Global Growth Portfolio, Global
Income Portfolio, Growth and Income Portfolio, Growth Portfolio, High Grade
Fixed Income Portfolio, High Income Portfolio, Money Market Portfolio, Small Cap
Portfolio, Strategic Fixed Income Portfolio, Strategic Income Portfolio and
Tactical Allocation Portfolio; and
WHEREAS the Fund's board of trustees ("Board") has established an unlimited
number of shares of beneficial interest of the above-referenced Series as Class
I shares ("Shares") and determined that it is in the interests of the Fund to
offer the Shares of the above-referenced Series for sale continuously to the
separate accounts ("Separate Accounts") of insurance companies ("Insurance
Companies") that issue variable annuity or variable life contracts ("Variable
Contracts"); and
WHEREAS the Fund has adopted a Plan of Distribution pursuant to Rule 12b-1
under the 1940 Act for its Shares ("Plan") and desires to retain Mitchell
Hutchins as principal distributor in connection with the offering and sale of
the Shares of the above-referenced Series and of such other Series as may
hereafter be designated by the Board and have Shares established; and
WHEREAS Mitchell Hutchins is willing to act as principal distributor of the
Shares of each such Series with respect to the continuous offering of the Shares
to the Insurance Companies for their Separate Accounts on the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants herein
contained, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints Mitchell Hutchins as its exclusive
-----------
agent to be the principal distributor to sell and to arrange for the sale of the
Shares to the Insurance Companies for their Separate Accounts on the terms and
for the period set forth in this Contract. Mitchell Hutchins hereby accepts
such appointment and agrees to act hereunder. As used in this Contract, the
term "Registration Statement" shall mean the currently effective registration
statement of the Fund, and any supplements thereto, under the Securities Act of
1933, as amended ("1933 Act"), and the 1940 Act.
<PAGE>
2. Services and Duties of Mitchell Hutchins.
----------------------------------------
(a) Mitchell Hutchins agrees to sell the Shares to the Insurance
Companies for their Separate Accounts on a best efforts basis from time to time
during the term of this Contract as agent for the Fund and upon the terms
described in the Registration Statement.
(b) Upon the later of the date of this Contract or the initial offering
of the Shares by a Series, Mitchell Hutchins will hold itself available to
receive purchase orders, satisfactory to Mitchell Hutchins, for the Shares of
that Series from Insurance Companies for their Separate Accounts and will accept
such orders on behalf of the Fund as of the time of receipt of such orders and
promptly transmit such orders as are accepted to the Fund's transfer agent.
Purchase orders shall be deemed effective at the time and in the manner set
forth in the Registration Statement.
(c) Mitchell Hutchins in its discretion may enter into agreements to
sell the Shares to such registered and qualified retail dealers, including but
not limited to PaineWebber Incorporated ("PaineWebber"), as it may select. In
making agreements with such dealers, Mitchell Hutchins shall act only as
principal and not as agent for the Fund.
(d) The offering price of the Shares of each Series shall be the net
asset value per Share as next determined by the Fund following receipt of an
order by Mitchell Hutchins. The Fund shall promptly furnish Mitchell Hutchins
with a statement of each computation of net asset value.
(e) Mitchell Hutchins shall not be obligated to sell any certain number
of the Shares.
(f) To facilitate redemption of the Shares by shareholders directly or
through dealers, Mitchell Hutchins is authorized but not required on behalf of
the Fund to repurchase the Shares presented to it by shareholders and dealers at
the price determined in accordance with, and in the manner set forth in, the
Registration Statement.
(g) Mitchell Hutchins shall arrange for each Insurance Company to which
it sells Shares for that Insurance Company's Separate Accounts to enter into an
agreement with the Fund to provide certain distribution related services with
respect to the Shares and the owners of the Variable Contracts issued by the
Separate Accounts. These distribution related services may include, but are not
limited to, the following: (a) printing and mailing of Fund prospectuses,
statements of additional information, any supplements thereto and shareholder
reports for existing and prospective Variable Contract owners; (b) services
relating to the development, preparation, printing and mailing of Trust
advertisements, sales literature and other promotional materials describing
and/or relating to the Trust and including materials intended for use within the
Participating Insurance Company or for broker-dealer use only or retail use; (c)
holding seminars and sales meetings designed to promote the distribution of the
Shares; (d) obtaining information and providing explanations to Variable
Contract owners regarding the investment objectives and policies and other
information about the Fund and its Series, including the performance of the
Series; (e) training sales personnel regarding the Fund and its Series;
-2-
<PAGE>
(f) compensating sales personnel with respect to the Fund and its Series; (g)
providing personal services and/or maintenance of the Variable Contract owner
accounts with respect to the Shares attributable to such accounts; and (h)
financing any other activity that the Board determines is primarily intended to
result in the sale of the Shares.
(h) Mitchell Hutchins shall have the right to use any list of
shareholders of the Fund or any other list of investors which it obtains in
connection with its services under this Contract; provided, however, that
Mitchell Hutchins shall not sell or knowingly provide such list or lists to any
unaffiliated person.
3. Authorization to Enter into Exclusive Dealer Agreements and to Delegate
-----------------------------------------------------------------------
Duties as Distributor. With respect to the Shares of any or all Series,
- - ---------------------
Mitchell Hutchins may enter into an exclusive dealer agreement with PaineWebber
or any other registered and qualified dealer with respect to sales of the Shares
to the Insurance Companies for their Separate Accounts. In a separate contract
or as part of any such exclusive dealer agreement, Mitchell Hutchins also may
delegate to PaineWebber or another registered and qualified dealer ("sub-
distributor") any or all of its duties specified in this Contract, provided that
such separate contract or exclusive dealer agreement imposes on the sub-
distributor bound thereby all applicable duties and conditions to which Mitchell
Hutchins is subject under this Contract, and further provided that such separate
contract or exclusive dealer agreement meets all requirements of the 1940 Act
and rules thereunder.
4. Services Not Exclusive. The services furnished by Mitchell Hutchins
----------------------
hereunder are not to be deemed exclusive and Mitchell Hutchins shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired thereby. Nothing in this Contract shall limit or restrict the
right of any director, officer or employee of Mitchell Hutchins, who may also be
a trustee, officer or employee of the Fund, to engage in any other business or
to devote his or her time and attention in part to the management or other
aspects of any other business, whether of a similar or a dissimilar nature.
5. Compensation. (a) As compensation for its activities under this contract
-------------
with respect to the distribution of the Shares, Mitchell Hutchins shall receive
from the Fund for remittance to the Insurance Companies or may direct the Fund
to pay directly to such Insurance Companies a distribution fee at the rate and
under the terms and conditions of the Plan adopted by the Fund with respect to
the Shares of the Series, as such Plan is amended from time to time, and subject
to any further limitations on such fee as the Board may impose.
6. Duties of the Fund.
-------------------
(a) The Fund reserves the right at any time to withdraw offering the
Shares of any or all Series by written notice to Mitchell Hutchins at its
principal office.
-3-
<PAGE>
(b) The Fund shall determine in its sole discretion whether
certificates shall be issued with respect to the Shares. If the Fund has
determined that certificates shall be issued, the Fund will not cause
certificates representing the Shares to be issued unless so requested by
shareholders. If such request is transmitted by Mitchell Hutchins, the Fund will
cause certificates evidencing the Shares to be issued in such names and
denominations as Mitchell Hutchins shall from time to time direct.
(c) The Fund shall keep Mitchell Hutchins fully informed of its affairs
and shall make available to Mitchell Hutchins copies of all information,
financial statements, and other papers which Mitchell Hutchins may reasonably
request for use in connection with the distribution of the Shares, including,
without limitation, certified copies of any financial statements prepared for
the Fund by its independent public accountant and such reasonable number of
copies of the most current prospectus, statement of additional information, and
annual and interim reports of any Series as Mitchell Hutchins may request, and
the Fund shall cooperate fully in the efforts of Mitchell Hutchins to sell and
arrange for the sale of the Shares of the Series and in the performance of
Mitchell Hutchins under this Contract.
(d) The Fund shall take, from time to time, all necessary action,
including payment of the related filing fee, as may be necessary to register the
Shares under the 1933 Act to the end that there will be available for sale such
number of the Shares as Mitchell Hutchins may be expected to sell. The Fund
agrees to file, from time to time, such amendments, reports, and other documents
as may be necessary in order that there will be no untrue statement of a
material fact in the Registration Statement, nor any omission of a material fact
which omission would make the statements therein misleading.
(e) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of the Shares of each Series for sale
under the securities laws of such states or other jurisdictions as Mitchell
Hutchins and the Fund may approve, and, if necessary or appropriate in
connection therewith, to qualify and maintain the qualification of the Fund as a
broker or dealer in such jurisdictions; provided that the Fund shall not be
required to amend its Declaration of Trust or By-Laws to comply with the laws of
any jurisdiction, to maintain an office in any jurisdiction, to change the terms
of the offering of the Shares in any jurisdiction from the terms set forth in
its Registration Statement, to qualify as a foreign corporation in any
jurisdiction, or to consent to service of process in any jurisdiction other than
with respect to claims arising out of the offering of the Shares. Mitchell
Hutchins shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualifications.
7. Expenses of the Fund. The Fund shall bear all costs and expenses of
--------------------
registering the Shares with the Securities and Exchange Commission and
qualifying the shares with state and other regulatory bodies, and shall assume
expenses related to communications with shareholders of each Series, including
(i) fees and disbursements of its counsel and independent public accountant;
(ii) the preparation, filing and printing of registration statements and/or
prospectuses or statements of additional information required under the federal
securities laws; (iii) the preparation and mailing of annual and interim
reports, prospectuses, statements of
-4-
<PAGE>
additional information and proxy materials to shareholders; and (iv) the
qualifications of the Shares for sale and of the Fund as a broker or dealer
under the securities laws of such jurisdictions as shall be selected by the Fund
and Mitchell Hutchins pursuant to Paragraph 6(e) hereof, and the costs and
expenses payable to each such jurisdiction for continuing qualification therein.
8. Expenses of Mitchell Hutchins. Mitchell Hutchins shall bear all costs and
-----------------------------
expenses of (i) preparing, printing and distributing any materials not prepared
by the Fund and other materials used by Mitchell Hutchins in connection with the
sale of the Shares under this Contract, including the additional cost of
printing copies of prospectuses, statements of additional information, and
annual and interim shareholder reports other than copies thereof required for
distribution to existing shareholders or for filing with any federal or state
securities authorities; (ii) any expenses of advertising incurred by Mitchell
Hutchins in connection with such offering; (iii) the expenses of registration or
qualification of Mitchell Hutchins as a broker or dealer under federal or state
laws and the expenses of continuing such registration or qualification; and (iv)
all compensation paid to Mitchell Hutchins' employees and others for selling the
Shares, and all expenses of Mitchell Hutchins, its employees and others who
engage in or support the sale of the Shares as may be incurred in connection
with their sales efforts.
9. Indemnification.
---------------
(a) The Fund agrees to indemnify, defend and hold Mitchell Hutchins,
its officers and directors, and any person who controls Mitchell Hutchins within
the meaning of Section 15 of the 1933 Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which Mitchell Hutchins, its officers,
directors or any such controlling person may incur under the 1933 Act, or under
common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement or arising
out of or based upon any alleged omission to state a material fact required to
be stated in the Registration Statement or necessary to make the statements
therein not misleading, except insofar as such claims, demands, liabilities or
expenses arise out of or are based upon any such untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in conformity
with information furnished in writing by Mitchell Hutchins to the Fund for use
in the Registration Statement; provided, however, that this indemnity agreement
shall not inure to the benefit of any person who is also an officer or trustee
of the Fund or who controls the Fund within the meaning of Section 15 of the
1933 Act, unless a court of competent jurisdiction shall determine, or it shall
have been determined by controlling precedent, that such result would not be
against public policy as expressed in the 1933 Act; and further provided, that
in no event shall anything contained herein be so construed as to protect
Mitchell Hutchins against any liability to the Fund or to the shareholders of
any Series to which Mitchell Hutchins would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligations under this
Contract. The Fund shall not be liable to Mitchell Hutchins under this indemnity
agreement with respect to any claim made against Mitchell Hutchins or any person
indemnified unless Mitchell Hutchins or other such
-5-
<PAGE>
person shall have notified the Fund in writing of the claim within a reasonable
time after the summons or other first written notification giving information of
the nature of the claim shall have been served upon Mitchell Hutchins or such
other person (or after Mitchell Hutchins or the person shall have received
notice of service on any designated agent). However, failure to notify the Fund
of any claim shall not relieve the Fund from any liability which it may have to
Mitchell Hutchins or any person against whom such action is brought otherwise
than on account of this indemnity agreement. The Fund shall be entitled to
participate at its own expense in the defense or, if it so elects, to assume the
defense of any suit brought to enforce any claims subject to this indemnity
agreement. If the Fund elects to assume the defense of any such claim, the
defense shall be conducted by counsel chosen by the Fund and satisfactory to
indemnified defendants in the suit whose approval shall not be unreasonably
withheld. In the event that the Fund elects to assume the defense of any suit
and retain counsel, the indemnified defendants shall bear the fees and expenses
of any additional counsel retained by them. If the Fund does not elect to assume
the defense of a suit, it will reimburse the indemnified defendants for the
reasonable fees and expenses of any counsel retained by the indemnified
defendants. The Fund agrees to notify Mitchell Hutchins promptly of the
commencement of any litigation or proceedings against it or any of its officers
or trustees in connection with the issuance or sale of any of its Shares.
(b) Mitchell Hutchins agrees to indemnify, defend, and hold the Fund,
its officers and trustees and any person who controls the Fund within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending against such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Fund, its trustees or
officers, or any such controlling person may incur under the 1933 Act or under
common law or otherwise arising out of or based upon any alleged untrue
statement of a material fact contained in information furnished in writing by
Mitchell Hutchins to the Fund for use in the Registration Statement, arising out
of or based upon any alleged omission to state a material fact in connection
with such information required to be stated in the Registration Statement
necessary to make such information not misleading, or arising out of any
agreement between Mitchell Hutchins and any retail dealer, or arising out of any
supplemental sales literature or advertising used by Mitchell Hutchins in
connection with its duties under this Contract. Mitchell Hutchins shall be
entitled to participate, at its own expense, in the defense or, if it so elects,
to assume the defense of any suit brought to enforce the claim, but if Mitchell
Hutchins elects to assume the defense, the defense shall be conducted by counsel
chosen by Mitchell Hutchins and satisfactory to the indemnified defendants whose
approval shall not be unreasonably withheld. In the event that Mitchell Hutchins
elects to assume the defense of any suit and retain counsel, the defendants in
the suit shall bear the fees and expenses of any additional counsel retained by
them. If Mitchell Hutchins does not elect to assume the defense of any suit, it
will reimburse the indemnified defendants in the suit for the reasonable fees
and expenses of any counsel retained by them.
10. Limitation of Liability of the Trustees and Shareholders of the Fund.
--------------------------------------------------------------------
The trustees of the Fund and the shareholders of any Series shall not be liable
for any obligations of the Fund or any Series under this Contract, and Mitchell
Hutchins agrees that, in asserting any rights or
-6-
<PAGE>
claims under this Contract, it shall look only to the assets and property of the
Fund or the particular Series in settlement of such right or claims, and not to
such trustees or shareholders.
11. Services Provided to the Fund by Employees of Mitchell Hutchins. Any
---------------------------------------------------------------
person, even though also an officer, director, employee or agent of Mitchell
Hutchins, who may be or become an officer, trustee, employee or agent of the
Fund, shall be deemed, when rendering services to the Fund or acting in any
business of the Fund, to be rendering such services to or acting solely for the
Fund and not as an officer, director, employee or agent or one under the control
or direction of Mitchell Hutchins even though paid by Mitchell Hutchins.
12. Duration and Termination.
------------------------
(a) This Contract shall become effective upon the date written above,
provided that, with respect to any Series, this Contract shall not take effect
unless such action has first been approved by vote of a majority of the Board
and by vote of a majority of those trustees of the Fund who are not interested
persons of the Fund, and have no direct or indirect financial interest in the
operation of the Plan relating to the Series or in any agreements related
thereto (all such trustees collectively being referred to herein as the
"Independent Trustees"), cast in person at a meeting called for the purpose of
voting on such action.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for one year from the above written date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of the Independent Trustees, cast in
person at a meeting called for the purpose of voting on such approval, and (ii)
by the Board or with respect to any given Series by vote of a majority of the
outstanding voting Shares of such Series.
(c) Notwithstanding the foregoing, with respect to any Series, this
Contract may be terminated at any time, without the payment of any penalty, by
vote of the Board, by vote of a majority of the Independent Trustees or by vote
of a majority of the outstanding voting Shares of such Series on sixty days'
written notice to Mitchell Hutchins or by Mitchell Hutchins at any time, without
the payment of any penalty, on sixty days' written notice to the Fund or such
Series. This Contract will automatically terminate in the event of its
assignment.
(d) Termination of this Contract with respect to any given Series shall
in no way affect the continued validity of this Contract or the performance
thereunder with respect to any other Series.
13. Amendment of this Contract. No provision of this Contract may be
--------------------------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
14. Governing Law. This Contract shall be construed in accordance with the
-------------
laws of the State of Delaware and the 1940 Act, except that Section 10 shall be
construed in accordance with the laws of the Commonwealth of Massachusetts. To
the extent that the applicable laws of
-7-
<PAGE>
the State of Delaware or the Commonwealth of Massachusetts conflict with the
applicable provisions of the l940 Act, the latter shall control.
15. Notice. Any notice required or permitted to be given by either party to
------
the other shall be deemed sufficient upon receipt in writing at the other
party's principal offices.
16. Miscellaneous. The captions in this Contract are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors. As used in this Contract,
the terms "majority of the outstanding voting securities," "interested person"
and "assignment" shall have the same meaning as such terms have in the l940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be
executed by their officers designated as of the day and year first above
written.
ATTEST: MITCHELL HUTCHINS SERIES TRUST
By:
----------------------------- -----------------------------
ATTEST: MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
By:
----------------------------- -----------------------------
-8-
<PAGE>
Exhibit No. 8(a)
CUSTODIAN CONTRACT
Between
PAINEWEBBER SERIES TRUST
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Employment of Custodian and Property to be Held by It.................... 1
2. Duties of the Custodian with Respect to Property of the Fund Held By the
Custodian............................................................... 2
2.1 Holding Securities..................................................... 2
2.2 Delivery of Securities................................................. 2
2.3 Registration of Securities............................................. 5
2.4 Bank Accounts.......................................................... 6
2.5 Payments for Shares.................................................... 7
2.6 Investment and Availability of Federal Funds........................... 7
2.7 Collection of Income................................................... 7
2.8 Payment of Fund Moneys................................................. 8
2.9 Liability for Payment in Advance of Receipt of Securities Purchased.... 9
2.10 Payments for Repurchases or Redemptions of Shares of the Portfolio.... 10
2.11 Appointment of Agents................................................. 10
2.12 Deposit of Fund Assets in Securities Systems.......................... 10
2.13 Segregated Account................................................... 13
2.14 Ownership Certificates for Tax Purposes............................... 14
2.15 Proxies............................................................... 14
2.16 Communications Relating to Portfolio Securities....................... 14
2.17 Proper Instructions................................................... 15
2.18 Actions Permitted without Express Authority........................... 15
2.19 Evidence of Authority................................................. 16
3. Duties of Custodian With Respect to the Books of Account and Calculation
of Net Asset Value and Net Income....................................... 16
4. Records.................................................................. 17
5. Opinion of Fund's by Independent Certified Public Accountant............. 18
6. Reports to Fund by Independent Certified Public Accountants.............. 18
7. Compensation of Custodian................................................ 18
8. Responsibility of Custodian.............................................. 19
9. Effective Period, Termination and Amendment.............................. 20
10. Successor Custodian..................................................... 21
11. Interpretive and Additional Provisions.................................. 22
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
12. Additional Funds........................................................ 22
13. Massachusetts Law to Apply.............................................. 23
14. Assignment.............................................................. 23
16. Notices................................................................. 23
17. Limitation of Liability of the Trustees and Shareholders................ 23
</TABLE>
<PAGE>
CUSTODIAN CONTRACT
------------------
This Contract between PaineWebber Series Trust, a Massachusetts
business trust organized and existing under the laws of Massachusetts, having
its principal place of business at 1285 Avenue of the Americas, New York, New
York 10019 hereinafter called the "Fund", and State Street bank and Trust
Company, a Massachusetts corporation, having its principal place of business at
225 Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian",
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer shares in five (5)
series, the Money Market Portfolio, Growth and Income Portfolio, Growth
Portfolio, Corporate Bond Portfolio, and High Yield Bond Portfolio (each such
series and any other series subsequently established by the Fund and made
subject to this Contract in accordance with paragraph 12, being herein referred
to as the "Portfolio");
NOW THEREFOR, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
-----------------------------------------------------
The Fund hereby employs the Custodian as the custodian of the assets
of the Portfolios of the Fund pursuant to the provisions of the Declaration of
Trust. The Fund agrees to deliver to the Custodian all securities and cash owned
by it, and all payments of income, payments of principal or capital
distributions received by it with respect to all securities owned by the
Portfolios from time to time, and the cash consideration received by it for such
new or treasury shares of
<PAGE>
beneficial interest ("Shares") of the Portfolios as may be issued or sold from
time to time. The Custodian shall not be responsible for any property of a
Portfolio held or received by the Portfolio and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Section
2.17), the Custodian shall from time to time employ one or more sub-custodians,
but only in accordance with an applicable vote by the Trustees of the Fund, and
provided that the Custodian shall have no more or less responsibility or
liability to the Fund on account of any actions or omissions of any sub-
custodian so employed than any such sub-custodian has to the Custodian.
2. Duties of the Custodian with Respect to Property of the Fund Held By the
------------------------------------------------------------------------
Custodian
---------
2.1 Holding Securities . The Custodian shall hold and physically segregate for
------------------
the account of each Portfolio all non-cash property, including all
securities owned by such Portfolio, other than securities which are
maintained pursuant to Section 2.12 in a clearing agency which acts as a
securities depository or in a book-entry system authorized by the IJ.S.
Department of the Treasury, collectively referred to herein as "Securities
System".
2.2 Delivery of Securities . The Custodian shall release and deliver
----------------------
securities owned by a Portfolio held by the Custodian or in a Securities
System account of the Custodian only upon receipt of Proper Instructions,
which may be continuing instructions when deemed appropriate by the
parties, and only in the following cases:
l) Upon sale of such securities for the account of the Portfolio and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase agreement
related to such securities entered into by the Portfolio;
2
<PAGE>
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.12 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities owned by the Portfolio;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of the
Portfolio or into the name of any nominee or nominees of the Custodian
or into the name or nominee name of any agent appointed pursuant to
Section 2.11 or into the name or nominee name of any sub-custodian
appointed pursuant to Article l; or for exchange for a different
number of bonds, certificates or other evidence representing the same
aggregate face amount or number of units; provided that, in any such
--------
case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Portfolio, to
the broker or its clearing agent, against a receipt, for examination in
accordance with "street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or liability for any
loss arising from the delivery of such securities prior to receiving
payment for such securities except as may arise from the Custodian's
own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, capitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions
for conversion contained in such securities, or
3
<PAGE>
pursuant to any deposit agreement; provided that, in any such case, the
new securities and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities
or the surrender of interim receipts or temporary securities for
definitive securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the
Portfolio, but only against receipt of adequate collateral as agreed
--------
upon from time to time by the Custodian and the Fund on behalf of the
Portfolio, which may be in the form of cash or obligations issued by
the United States government its Agencies or instrumentalities, except
that in connection with any loans for which collateral is to be
credited to the Custodian's account in the book-entry system authorized
by the U.S. Department of the Treasury, the Custodian will not be held
liable or responsible for the delivery of securities owned by the
Portfolio prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by the
Portfolio requiring a pledge of assets by the Portfolio, but only
--------
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the "Exchange
Act") and a member of The National Association of Securities Dealers,
Inc. ("NASD"), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national
4
<PAGE>
securities exchange, or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions
by the Portfolio of the Fund;
13) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange Act,
relating to compliance with the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any similar organization or
organizations, regarding account deposits in connection with
transactions by the Portfolio of the Fund;
14) For any other proper corporate purpose, but only upon receipt of, in
--------
addition to Proper Instructions, a certified copy of a resolution of
the Trustees or of the Executive Committee signed by an officer of the
Fund and certified by the Secretary or an Assistant Secretary,
specifying the securities to be delivered, setting forth the purpose
for which such delivery is to be made, declaring such purpose to be a
proper corporate purpose, and naming the person or persons to whom
delivery of such securities shall be made;
2.3 Registration of Securities. Securities held by the Custodian (other than
--------------------------
bearer securities) shall be registered in the name of the Portfolio or in
the name of any nominee of the Portfolio or of any nominee of the Custodian
which nominee shall be assigned exclusively to the Portfolio, unless the
------
Fund has authorized in writing the appointment of a nominee to be used in
common with other registered investment companies having the same
investment adviser as the Portfolio, or in the name or nominee name of any
agent appointed pursuant to Section 2.11 or in the name or nominee name of
any sub-custodian
5
<PAGE>
appointed pursuant to Article 1. All securities accepted by the Custodian
on behalf of the Portfolio under the terms of this Contract shall be in
"street name" or other good delivery form.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
-------------
account or accounts in the name of each Portfolio of the Fund, subject only
to draft or order by the Custodian acting pursuant to the terms of this
Contract, and shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for the accounts of the
Portfolio, other than cash maintained by the Portfolio in bank account(s)
established and used in accordance with Rule 17f-3 under the Investment
Company Act of 1940. Funds held by the Custodian for a Portfolio may be
deposited by it to its credit as Custodian in the Banking Department of the
Custodian or in such other banks or trust companies as it may in its
discretion deem necessary or desirable; provided, however, that every such
--------
bank or trust company shall be qualified to act as a custodian under the
Investment Company Act of 1940 and that each such bank or trust company and
the funds to be deposited with each such bank or trust company shall be
approved by vote of a majority of the Trustees of the Fund. Such funds
shall be deposited by the Custodian in its capacity as Custodian and shall
be withdrawable by the Custodian only in that capacity.
2.5 Payments for Shares. The Custodian shall receive from the Transfer Agent
-------------------
of the Fund and deposit into the account of the appropriate Portfolio such
payments as are received for Shares of that Portfolio. The Custodian will
provide timely notification to the Portfolio and the Transfer Agent of any
receipt by it of payments for Shares of such Portfolio.
6
<PAGE>
2.6 Investment and Availability of Federal Funds. Upon mutual agreement
--------------------------------------------
between the Fund and the Custodian, the Custodian shall, upon the receipt
of Proper Instructions, make federal funds available to a Portfolio as of
specified times agreed upon from time to time by the Fund and the Custodian
in the amount of checks received in payment for Shares of such Portfolio
which are deposited into the Portfolio's account.
2.7 Collection of Income. The Custodian shall collect on a timely basis all
--------------------
income, and other payments with respect to registered securities held
hereunder to which each Portfolio shall be entitled either by law or
pursuant to custom in the securities business, and shall collect on a
timely basis all income and other payments with respect to bearer
securities if, on the date of payment by the issuer, such securities are
held by the Custodian or its agent thereof and shall credit such income, as
collected, to such Portfolio's account. Without limiting the generality of
the foregoing, the Custodian shall detach and present for payment all
coupons and other income items requiring presentation as and when they
become due and shall collect interest when due on securities held
hereunder. Income due each Portfolio on securities loaned pursuant to the
provisions of Section 2.2 (10) shall be the responsibility of the Fund. The
Custodian will have no duty or responsibility in connection therewith,
other than to provide the Fund with such information or data as may be
necessary to assist the Fund in arranging for the timely delivery to the
Custodian of the income to which the Portfolio is properly entitled.
2.8 Payment of Fund Moneys. Upon receipt of Proper Instructions, which may be
----------------------
continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out moneys of a Portfolio in the following cases only:
7
<PAGE>
1) Upon the purchase of securities, futures contracts or options on
futures contracts for the account of the Portfolio but only (a)
against the delivery of such securities, or evidence of title to
futures contracts or options on futures contracts, to the Custodian
(or any bank, banking firm or trust company doing business in the
United States or abroad which is qualified under the Investment
Company Act of 1940, as amended, to act as a custodian and has been
designated by the Custodian as its agent for this purpose) registered
in the name of the Portfolio or in the name of a nominee of the
Custodian referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a Securities
System, in accordance with the conditions set forth in Section 2.12
hereof; or (c) in the case of repurchase agreements entered into
between the Fund on behalf of the Portfolio and the Custodian, or
another bank, or a broker-dealer which is a member of NASD, (i)
against delivery of the securities either in certificate form or
through an entry crediting the Custodian's account at the Federal
Reserve Bank with such securities or (ii) against delivery of the
receipt evidencing purchase by the Portfolio of securities owned by
the Custodian along with written evidence of the agreement by the
Custodian to repurchase such securities from the Portfolio;
2) In connection with conversion, exchange or surrender of securities
owned by the Portfolio as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by the Portfolio as
set forth in Section 2.10 hereof;
4) For the payment of any expense or liability incurred by the Portfolio,
including but not limited to the following payments for the account of
the Portfolio: interest,
8
<PAGE>
taxes, management, accounting, transfer agent and legal fees, and
operating expenses of the Fund whether or not such expenses are to be
in whole or part capitalized or treated as deferred expenses;
5) For payment of the account of dividends received in respect of
securities sold short;
6) For any other proper purpose, but only upon receipt of, in addition to
Proper instructions, a certified copy of a resolution of the trustees
or of the Executive Committee of the Fund signed by an officer of the
Fund and certified by its Secretary or an Assistant Secretary,
specifying the amount of such payment, setting forth the purpose for
which such payment is to be made, declaring such purpose to be a
proper purpose, and naming the person or persons to whom such payment
is to be made.
2.9 Liability for Payment in Advance of Receipt of Securities Purchased. In
-------------------------------------------------------------------
any and every case where payment for purchase of security for the account
of a Portfolio is made by the Custodian in advance of receipt of the
securities purchased in the absence of specific written instructions from
such Portfolio to so pay in advance, the Custodian shall be absolutely
liable to the Portfolio for such securities to the same extent as if the
securities had been received by the Custodian.
2.10 Payments for Repurchases or Redemptions of Shares of the Portfolio. From
------------------------------------------------------------------
such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of the
Trustees of the Fund pursuant thereto, the Custodian shall, upon receipt of
instructions from the Transfer agent, make funds available for payment to
holders of Shares who have delivered to the Transfer Agent a request for
9
<PAGE>
redemption or repurchase of their Shares. In connection with the redemption
or repurchase of Shares of a Portfolio, the Custodian is authorized upon
receipt of instructions from the Transfer Agent to wire funds to or through
a commercial bank designated by the redeeming shareholders.
2.11 Appointment of Agents. The Custodian may at any time or times in its
---------------------
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of 1940,
as amended, to act as a custodian, as its agent to carry out such of the
provisions of this Article 2 as the Custodian may from time to time direct;
provided, however, that the appointment of any agent shall not relieve the
--------
Custodian of its responsibilities or liabilities hereunder.
2.12 Deposit of Fund Assets in Securities Systems . The Custodian may deposit
--------------------------------------------
and/or maintain securities owned by a Portfolio in a clearing agency
registered with the Securities and Exchange Commission under Section 17A of
the Securities Exchange Act of 1934, which acts as a securities depository,
or in the book-entry system authorized by the U.S. Department of the
Treasury and certain federal agencies, collectively referred to herein as
"Securities System" in accordance with applicable Federal reserve Board and
Securities and exchange Commission rules and regulations, if any, and
subject to the following provisions:
1) The Custodian may keep securities of the Portfolio in a Securities
System provided that such securities are represented in an account
("Account") of the Custodian in the Securities System which shall not
include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
10
<PAGE>
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a Securities System shall identify
by book-entry those securities belonging to the Portfolio;
3) The Custodian shall pay for securities purchased for the account of
the Portfolio upon (i) receipt of advice from the Securities System
that such securities have been transferred to the Account, and (ii)
the making of an entry on the records of the Custodian to reflect such
payment and transfer for the account of the Portfolio. The Custodian
shall transfer securities sold for the account of the Portfolio upon
(i) receipt of advice from the Securities System that payment for such
securities has been transferred to the Account, and (ii) the making of
an entry on the records of the Custodian to reflect such transfer and
payment for the account of the Portfolio. Copies of all advices from
the Securities system of transfers of securities for the account of
the Portfolio shall identify the Portfolio, be maintained for the
Portfolio by the Custodian and be provided to the Fund at its request.
Upon request, the Custodian shall furnish the Fund on behalf of the
Portfolio confirmation of each transfer to or from the account of the
Portfolio in the form of a written advice or notice and shall furnish
to the Fund on behalf of the Portfolio copies of daily transaction
sheets reflecting each day's transactions in the Securities System for
the account of the Portfolio.
4) The Custodian shall provide the Fund for the Portfolio with any report
obtained by the Custodian on the Securities System's accounting
system, internal accounting control and procedures for safeguarding
securities deposited in the Securities System;
11
<PAGE>
5) The Custodian shall have received the initial or annual certificate,
as the case may be, required by Article 9 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the Portfolio
for any loss or damage to the Portfolio resulting from use of the
Securities System by reason of any negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any of its or
their employees or from failure of the Custodian or any such agent to
enforce effectively such rights as it may have against the Securities
System; at the election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claim
against the Securities System or any other person which the Custodian
may have as a consequence of any such loss or damage if and to the
extent that the Portfolio has not been made whole for any such loss or
damage.
2.13 Segregated Account. The Custodian shall upon receipt of Proper
------------------
Instructions establish and maintain a segregated account or accounts for
and on behalf of each Portfolio, into which account or accounts may be
transferred cash and/or securities, including securities maintained in an
account by the Custodian pursuant to Section 2.12 hereof, (i) in accordance
with the provisions of any agreement among the Fund on behalf of the
Portfolio, the Custodian and a broker-dealer registered under the Exchange
Act and a member of the NASD (or any futures commission merchant registered
under the Commodity Exchange Act), relating to compliance with the rules of
The Options Clearing Corporation and of any registered national securities
exchange (or the Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in
12
<PAGE>
connection with transactions by the Portfolio, (ii) for purposes of
segregating cash or government securities in connection with options
purchased, sold or written by the Portfolio or commodity futures contracts
or options thereon purchased or sold by the Portfolio, (iii) for the
purposes of compliance by the Portfolio with the procedures required by
Investment Company Act Release No. 10666, or any subsequent release or
releases of the Securities and Exchange Commission relating to the
maintenance of segregated accounts by registered investment companies and
(iv) for other proper corporate purposes, but only, in the case of clause
--- ----
(iv), upon receipt of, in addition to Proper Instructions, a certified copy
of a resolution of the Trustees or of the Executive Committee signed by an
officer of the Fund and certified by the Secretary or an Assistant
Secretary, setting forth the purpose or purposes of such segregated account
and declaring such purposes to be proper corporate purposes.
2.14 Ownership Certificates for Tax Purposes. The Custodian shall execute
---------------------------------------
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to securities of each Portfolio held by it and in connection with
transfers of securities.
2.15 Proxies. The Custodian shall, with respect to the securities held
-------
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Portfolio or a nominee of the Portfolio, all proxies, without
indication of the manner in which such proxies are to be voted, and shall
promptly deliver to the Portfolio such proxies, all proxy soliciting
materials and all notices relating to such securities.
13
<PAGE>
2.16 Communications Relating to Portfolio Securities. The Custodian shall
-----------------------------------------------
transmit promptly to the Fund for each Portfolio all written information
(including, without limitation, pendency of calls and maturities of
securities and expirations of rights in connection therewith and notices of
exercise of call and put options written by the Fund on behalf of the
Portfolio and the maturity of futures contracts purchased or sold by the
Portfolio) received by the Custodian from issuers of the securities being
held for the Portfolio. With respect to tender or exchange offers, the
Custodian shall transmit promptly to the Portfolio all written information
received by, the Custodian from issuers of the securities whose tender or
exchange is sought and from the party (or his agents) making the tender or
exchange offer. If the Portfolio desires to take action with respect to any
tender offer, exchange offer or any other similar transaction, the
Portfolio shall notify the Custodian at least three business days prior to
the date on which the Custodian is to take such action.
2.17 Proper Instructions. Proper Instructions as used throughout this Article
-------------------
2 means a writing signed or initiated by one or more person or persons as
the Trustees shall have from time to time authorized. Each such writing
shall set forth the specific transaction or type of transaction involved,
including a specific statement of the purpose for which such action is
requested. Oral instructions will be considered Proper Instructions if the
Custodian reasonably believes them to have been given by a person
authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in
writing. Upon receipt of a certificate of the Secretary or an Assistant
Secretary as to the authorization by the Trustees of the Fund accompanied
by a detailed description of procedures approved by the Trustees, Proper
Instructions may include communications effected directly between electro-
mechanical or electronic
14
<PAGE>
devices provided that the Trustees and the Custodian are satisfied that
such procedures afford adequate safeguards for the Portfolio's assets.
2.18 Actions Permitted without Express Authority. The Custodian may in its
-------------------------------------------
discretion, without express authority from the Fund on behalf of the
Portfolio:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Contract, provided that all such payments shall be accounted for to
--------
the Fund on behalf of the Portfolio;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Portfolio, checks, drafts
and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Portfolio except as
otherwise directed by the Trustees of the Fund.
2.19 Evidence of Authority. The Custodian shall be protected in acting upon
---------------------
any instructions, notice, request, consent, certificate or other instrument
or paper believed by it to be genuine and to have been properly executed by
or on behalf of the Fund. The Custodian may receive and accept a certified
copy of a vote of the Trustees of the Fund as conclusive evidence (a) of
the authority of any person to act in accordance with such vote or (b) of
any determination or of any action by the Trustees pursuant to the
Declaration of Trust as described in such Vote, and such vote nay be
considered as in full force and effect until receipt by the custodian of
Written notice to the contrary.
15
<PAGE>
3. Duties of Custodian With Respect to the Books of Account and Calculation of
---------------------------------------------------------------------------
Net Asset Value and Net Income.
------------------------------
The Custodian shall cooperate with and Supply necessary information to the
entity or entitles appointed by the Trustees of the Fund to keep the books of
account of each Portfolio and/or compute the net asset value per Share of the
outstanding Shares of each Portfolio or, if directed in writing to do so by the
Portfolio, shall itself keep such books of account and/or compute such net asset
value per Share. If so directed, the Custodian shall also calculate daily the
net income of each Portfolio as described in the Fund's currently effective
prospectus and shall advise the Portfolio Manager and the Transfer Agent daily
of the total amounts of such net income and, if instructed in writing by an
officer of the Fund to do so, shall advise the Transfer Agent periodically of
the division of such net income among its various components. The calculations
of the net asset value per Share and the daily income of each Portfolio shall be
made at the time or times described from time to time in the Fund's currently
effective prospectus.
4. Records
-------
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder,
applicable federal and state tax laws and any other law or administrative rules
or procedures which may be applicable to the Fund. All such records shall be the
property of the Fund and shall at all times during the regular business hours of
the Custodian be open for inspection by duly authorized officers, employees or
agents of the Fund and employees and agents of the Securities and Exchange
Commission. The Custodian shall, at the Fund's request, supply the Fund with a
tabulation of securities owned by each Portfolio and held by the
16
<PAGE>
Custodian and shall, when requested to do so by the Fund and for such
compensation as shall be agreed upon between the Fund and the Custodian, include
certificate numbers in such tabulations.
5. Opinion of Fund's by Independent Certified Public Accountant
------------------------------------------------------------
The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent certified public accountants with respect to its activities
hereunder in connection with the preparation of the Fund's Form N-1A, and Form
N-SAR or other annual reports to the Securities and Exchange Commission and with
respect to any other requirements of such Commission.
6. Reports to Fund by Independent Certified Public Accountants
-----------------------------------------------------------
The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent certified public accountants on
the accounting system, internal accounting control and procedures for
safeguarding securities, futures contracts and options on futures contracts,
including securities deposited and/or maintained in a Securities System,
relating to the services provided by the Custodian under this Contract; such
reports, shall be of sufficient scope and in sufficient detail, as may
reasonably be required by the Fund to provide reasonable assurance that any
material inadequacies would be disclosed by such examination, and, if there are
no such inadequacies, the reports shall so state.
7. Compensation of Custodian
-------------------------
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund and
the Custodian.
17
<PAGE>
8. Responsibility of Custodian
---------------------------
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonable believed by it to
be genuine and to be signed by the proper party or parties. The Custodian shall
be held to the exercise of reasonable care in carrying out the provisions of
this Contract, but shall be kept identified by and shall be without liability to
the Fund for any action taken or omitted by it in good faith without negligence.
It shall be entitled to rely on and may act upon advice of counsel (who may be
counsel for the Fund) on all matters, and shall be without liability for any
action reasonably taken or omitted pursuant to such advice.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund or the Portfolio being liable for the payment of money or incurring
liability of some other form, the Fund, as a prerequisite to requiring the
Custodian to take such action, shall provide indemnity to the Custodian in an
amount and form satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for any
purpose for the benefit of a Portfolio or in the event that the Custodian or its
nominee shall incur or be assessed any taxes, charges, expenses, assessments,
claims or liabilities in connection with the performance of this Contract,
except such as may arise from its or its nominee's own negligent action,
negligent failure to act or willful misconduct, any property at any time held
for the account of the Portfolio shall be security therefor and should the Fund
fail to repay the Custodian
18
<PAGE>
promptly, the Custodian shall be entitled to utilize available cash and to
dispose of the Portfolio's assets to the extent necessary to obtain
reimbursement.
9. Effective Period, Termination and Amendment
-------------------------------------------
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and nay be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than sixty (60) days
after the date of such delivery or mailing; provided, however, that the
--------
Custodian shall not act under Section 2.12 hereof in the absence of receipt of
an initial certificate of the Secretary or an Assistant Secretary that the
Trustees of the Fund have approved the initial use of a particular Securities
System and the receipt of an annual certificate of the Secretary or an Assistant
Secretary that the Trustees have reviewed the use by the Fund of such Securities
System, as required in each case by Rule 17f-4 under the Investment Company Act
of 1940, as amended; provided further, however, that the Fund shall not amend or
----------------
terminate this Contract in contravention of any applicable federal or state
regulations, or any provision of the Declaration of Trust, and further provided,
that the Fund may at any time by action of its Trustees (i) substitute another
bank or trust company for the Custodian by giving notice as described above to
the Custodian, or (ii) immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian by the Comptroller of
the Currency or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
19
<PAGE>
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements.
10. Successor Custodian
-------------------
If a successor custodian shall be appointed by the Trustees of the Fund,
the Custodian shall, upon termination, deliver to such successor custodian at
the office of the Custodian, duly endorsed and in the form for transfer, all
securities then held by it hereunder and shall transfer to an account of the
successor custodian all of the Portfolio's securities held in a Securities
System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Trustees of the
Fund, deliver at the office of the Custodian and transfer such securities, funds
and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Trustees shall have been delivered to the
Custodian on or before the date when such termination shall become effective,
then the Custodian shall have the right to deliver to a bank or trust company,
which is a "bank" as defined in the Investment Company Act of 1940, doing
business in Boston, Massachusetts, of its own selection, having an aggregate
capital, surplus, and undivided profits, as shown by its last published report,
of not less than $25,000,000, all securities, funds and other properties held by
the Custodian and all instruments held by the Custodian relative thereto and all
other property held by it under this Contract and to transfer to an account of
such successor custodian all of the Portfolio's securities held in any
Securities System. Thereafter, such bank or trust company shall be the successor
of the Custodian under this Contract.
20
<PAGE>
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Trustees to appoint a successor custodian, the Custodian shall be entitled
to fair compensation for its service during such period as the Custodian retains
possession of such securities, funds and other properties and the provisions of
this Contract relating to the duties and obligations of the Custodian shall
remain In full force and effect.
11. Interpretive and Additional Provisions
--------------------------------------
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such Interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
--------
shall contravene any applicable federal or state regulations or any provision of
the Declaration of Trust of the fund. No Interpretive or additional provisions
made as provided in the preceding sentence shall be deemed to be an amendment of
this Contract.
12. Additional Funds
----------------
In the event that the Fund establishes one or more series of Shares in
addition to the Money Market Portfolio, Growth and Income Portfolio, Growth
Portfolio, Corporate Bond Portfolio, and High Yield Bond Portfolio with respect
to which it desires to have the Custodian render services as custodian under the
terms hereof, it shall so notify the Custodian in writing, and if the Custodian
agrees in writing to provide such services, such series of Shares shall become a
Portfolio hereunder.
21
<PAGE>
13. Massachusetts Law to Apply
--------------------------
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
14. Assignment
----------
This Contract may not be assigned by the Custodian except as expressly
provided for in Section 10, without the prior written consent of the Fund.
15. Headings
--------
The headings of the Sections of this Contract are inserted for reference
and convenience only, and shall not affect the construction of this Contract.
16. Notices
-------
All notices and communications including Proper Instructions (collectively
referred to as "Notice or "Notices" in this paragraph), hereunder shall be in
writing or by confirming telegram, cable or telex. Notices shall be addressed
(a) if to the Custodian at its address, 225 Franklin Street, Boston,
Massachusetts 02110, marked for the attention of the Insurance/Broker-Dealer
Services Division, (b) if to the Fund, at the address of the Fund, or (c) if to
neither of the foregoing, at such other address as shall have been notified to
the sender of any such Notice.
17. Limitation of Liability of the Trustees and Shareholders
--------------------------------------------------------
A copy of the Declaration of Trust of the Fund is on file with the
Secretary of The Commonwealth of Massachusetts, and notice is hereby given that
this instrument is executed on behalf of the Trustees of the Fund as Trustees
and not individually and that the obligations of this instrument are not binding
upon any of the Trustees, officers or shareholders individually but are binding
only upon the assets and property of the Fund.
22
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 1st day of April, 1987.
ATTEST PAINEWEBBER SERIES TRUST
/s/ Abbe P. Stein By: /s/ Dianne E. O'Donnell
- - ------------------- -----------------------
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ By: /s/
- - ------------------- -----------------------
Assistant Secretary Vice President
23
<PAGE>
Exhibit No. 8(b)
CUSTODIAN AGREEMENT
AGREEMENT made this 1st day of April, 1987, between PAINEWEBBER SERIES
TRUST ("Fund") and Brown Brothers Harriman & Co. ("Custodian").
WITNESSETH: That in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. The Fund is a Massachusetts business trust registered as an open-end
management investment company under the Investment Company Act of 1940, as
amended, and intends to offer for sale series of shares of beneficial interest,
including PaineWebber Global Growth Portfolio, each corresponding to a separate
portfolio. The Fund hereby employs and appoints the Custodian as a custodian for
Global Growth Portfolio ("Portfolio") for the term and subject to the provisions
of this Agreement. The Custodian shall not be under any duty or obligation to
require the Portfolio to deliver to it any securities or funds owned by the
Portfolio and shall have no responsibility or liability for or on account of
securities or funds not so delivered. The Fund will deposit with the Custodian
copies of the Declaration of Trust and By-Laws (or comparable documents) of the
Fund and all amendments thereto, and copies of such votes and other proceedings
of the Fund or the Portfolio as may be necessary for or convenient to the
Custodian in the performance of its duties.
2. Except for securities and funds held by any Subcustodian appointed
pursuant to the provisions of Section 3 hereof ("Subcustodian"), the Custodian
shall have and perform the following powers and duties:
<PAGE>
A. Safekeeping - To keep safely the securities and other assets of the
-----------
Portfolio that have been delivered to the Custodian and, on behalf of the
Portfolio, from time to time to receive delivery of securities and other assets
for safekeeping.
B. Manner of Holding Securities - To hold securities of the Portfolio (1)
----------------------------
by physical possession of the share certificates or other instruments
representing such securities in registered or bearer form, or (2) in book-entry
form by a Securities System (as said term is defined in Section 2S and in
accordance with the provisions thereof).
C. Registered Name; Nominee - To hold registered securities of the
------------------------
Portfolio (1) in the name of the Custodian or the Portfolio or any nominee
thereof, or in the name of any agent appointed pursuant to Section 6E ("Agent")
or any nominee thereof, or (2) in street certificate form, so-called, and in any
case with or without any indication of fiduciary capacity, provided, securities
are held in an account of the Custodian containing only assets of the Portfolio
or only assets held as fiduciary or custodian for customers.
D. Purchases - Upon receipt of Proper Instructions, as defined in Section
---------
2V, and insofar as funds are available for the purpose, to pay for and receive
securities purchased for the account of the Portfolio, payment being made only
upon receipt of the securities (1) by the Custodian, (2) by a clearing
corporation of a national securities exchange of which the custodian is a
member, or (3) by a Securities System. However, (i) in the case of repurchase
agreements entered into by the Portfolio, the Custodian (as well as a
Subcustodian or an Agent) may release funds to a Securities System prior to the
receipt of advice from the Securities System that the securities underlying such
repurchase agreement have been transferred by book entry into the Account (as
defined in Section 2S) of the Custodian (or such Subcustodian or Agent)
maintained with such Securities System, provided that the Custodian's
instructions to the Securities System
2
<PAGE>
require that the Securities System may make payment of such funds to the other
party to the repurchase agreement only upon transfer by book entry into the
Account of the securities underlying the repurchase agreement, and (ii) in the
case of time deposits, call account deposits, currency deposits, and other
deposits, contracts or options or foreign exchange transactions pursuant to
Sections 2K, 2L and 2M, the Custodian may make payment therefor before receipt
of an advice or confirmation evidencing said deposit or entry into such
transaction.
E. Exchanges - Upon receipt of Proper Instructions, to exchange securities
---------
held by it for the account of the Portfolio for other securities in connection
with any reorganization, recapitalization, split-up of shares, change of par
value, conversion or other event relating to the securities or the issuer of
such securities, and to deposit any such securities in accordance with the terms
of any reorganization or protective plan. Without Proper Instructions, the
Custodian may surrender securities in temporary form for definitive securities,
may surrender securities for transfer into a name or nominee name as permitted
in Section 2C, and may surrender securities for a different number of
certificates or instruments representing the same number of shares or same
principal amount of indebtedness, provided the securities to be issued are to be
delivered to the Custodian.
F. Sales of Securities - Upon receipt of Proper Instructions, to make
-------------------
delivery of securities which have been sold for the account of the Portfolio,
but only against payment therefor (1) in cash, by a certified check, bank
cashier's check, bank credit, or bank wire transfer, (2) by credit to the
account of the Custodian with a clearing corporation of a national securities
exchange of which the Custodian is a member, or (3) by credit to the account of
the Custodian or an Agent of the Custodian with a Securities System in
accordance with the provisions of Section 2S.
3
<PAGE>
G. Depositary Receipts - Upon receipt of Proper Instructions, to instruct
-------------------
a Subcustodian or an Agent to surrender securities to the depositary used by an
issuer of American Depositary Receipts or International Depositary Receipts
(hereinafter collectively referred to as "ADRs") for such securities against a
written receipt therefor adequately describing such securities and written
evidence satisfactory to the Subcustodian or Agent that the depositary has
acknowledged receipt of instructions to issue with respect to such securities
ADRs in the name of the Custodian, or a nominee of the Custodian, for delivery
to the Custodian in Boston, Massachusetts, or at such other place as the
Custodian may from time to time designate.
Upon receipt of Proper Instructions, to surrender ADRs to the issuer
thereof against a written receipt therefor adequately describing the ADRs
surrendered and written evidence satisfactory to the Custodian that the issuer
of the ADRs has acknowledged receipt of instructions to cause its depositary to
deliver the securities underlying such ADRs to a Subcustodian or an Agent.
H. Exercise of Rights; Tender Offers - Upon timely receipt of Proper
---------------------------------
Instructions, to deliver to the issuer or trustee thereof, or to the agent of
either, warrants, puts, calls, rights or similar securities for the purpose of
being exercised or sold, provided that the new securities and cash, if any,
acquired by such action are to be delivered to the Custodian, and, upon receipt
of Proper Instructions, to deposit securities upon invitations for tenders of
securities, provided that the consideration is to be paid or delivered or the
tendered securities are to be returned to the Custodian.
I. Stock Dividends, Rights, Etc. - To receive and collect all stock
----------------------------
dividends, rights and other items of like nature; and to deal with the same
pursuant to Proper Instructions relative thereto.
4
<PAGE>
J. Borrowings - Upon receipt of Proper Instructions, to deliver securities
----------
of the Portfolio to lenders or their agents as collateral for borrowings
effected by the Portfolio, provided that such borrowed money is payable to or
upon the Custodian's order as Custodian for the Portfolio.
K. Demand Deposit Bank Accounts - To open and maintain an account or
----------------------------
accounts in the name of the Portfolio on the Custodian's books subject only to
draft or order by the Custodian. All funds received by the Custodian from or for
the account of the Portfolio shall be deposited in said account(s). The
responsibilities of the Custodian to the Portfolio for deposits accepted on the
Custodian's books shall be that of a U.S. bank for a similar deposit.
If and when authorized by Proper Instructions, the Custodian may open and
operate an additional account(s) in such other banks or trust companies as may
be designated by the Fund in such instructions (any such bank or trust company
so designated by the Fund being referred to hereafter as a "Banking
Institution"), provided that such account(s) (hereinafter collectively referred
to as "demand deposit bank accounts") shall be in the name of the Custodian for
account of the Portfolio and subject only to the Custodian's draft or order.
Such demand deposit bank accounts may be opened with Banking Institutions in the
United States and in other countries and may be denominated in either U.S.
Dollars or other currencies as the Fund may determine. All such deposits shall
be deemed to be portfolio securities of the Portfolio and accordingly the
responsibility of the Custodian therefor shall be the same as and no greater
than the Custodian's responsibility in respect of other portfolio securities of
the Portfolio.
L. Interest Bearing Call or Time Deposits - To place interest bearing
--------------------------------------
fixed term and call deposits with such banks and in such amounts for the account
of the Portfolio as the Fund may authorize pursuant to Proper Instructions. Such
deposits may be placed with the Custodian
5
<PAGE>
or with Subcustodians or other Banking Institutions as the Fund may determine.
Deposits may be denominated in U.S. Dollars or other currencies. The Custodian
shall include in its records with respect to the assets of the Portfolio
appropriate notation as to the amount and currency of each such deposit, the
accepting Banking Institution and other appropriate details, and shall retain
such forms of advice or receipt evidencing the deposit, if any, as may be
forwarded to the Custodian by the Banking Institution. Such deposits, other than
those placed with the Custodian, shall be deemed portfolio securities of the
Portfolio and the responsibilities of the Custodian therefor shall be the same
as those for demand deposit bank accounts placed with other banks, as described
in Section K of this Agreement. The responsibility of the Custodian for such
deposits accepted on the Custodian's books shall be that of a U.S. bank for a
similar deposit.
M. Foreign Exchange Transactions - Pursuant to Proper Instructions, to
-----------------------------
enter into foreign exchange contracts or options to purchase and sell foreign
currencies for spot and future delivery on behalf and for the account of the
Portfolio. Such transactions may be undertaken by the Custodian with such
Banking Institutions, including the Custodian and Subcustodian(s) as principals,
as approved and authorized by the Fund. Foreign exchange contracts and options
other than those executed with the Custodian, shall be deemed to be portfolio
securities of the Portfolio and the responsibilities of the Custodian therefor
shall be the same as those for demand deposit bank accounts placed with other
banks as described in Section K of this Agreement.
N. Stock Loans - Upon receipt of Proper Instructions, to deliver
-----------
securities of the Portfolio, in connection with loans of securities by the
Portfolio, to the borrower thereof prior to receipt of the collateral, if any,
for such borrowing, provided that for stock loans secured by cash collateral the
Custodian's instructions to the Securities System require that the Securities
System
6
<PAGE>
may deliver the securities to the borrower thereof only upon receipt of the
collateral for such borrowing.
O. Collections - To collect, receive and deposit in said account or
-----------
accounts all income and other payments with respect to the securities held
hereunder, and to execute ownership and other certificates and affidavits for
all federal and state tax purposes in connection with receipt of income or other
payments with respect to securities of the Portfolio or in connection with
transfer of securities, and pursuant to Proper Instructions, with respect to
collection or receipt of funds or transfer of securities which involve an
investment decision, to take all other necessary or proper actions.
P. Dividends, Distributions and Redemptions - Upon receipt of Proper
----------------------------------------
Instructions from the Fund, or upon receipt of instructions from the Fund's
transfer agent, dividend disbursing agent, shareholder servicing agent or agent
with comparable duties (the "Shareholder Servicing Agent") (given by such person
or persons and in such manner on behalf of the Shareholder Servicing Agent as
the Fund shall have authorized), the Custodian shall release funds or securities
to the Shareholder Servicing Agent or otherwise apply funds or securities,
insofar as available, for the payment of dividends or other distributions to
Portfolio shareholders. Upon receipt of Proper Instructions from the Fund, or
upon receipt of instructions from the Shareholder Servicing Agent (given by such
person or persons and in such manner on behalf of the Shareholder Servicing
Agent as the Fund shall have authorized), the Custodian shall release funds or
securities, insofar as available, to the Shareholder Servicing Agent or as such
Agent shall otherwise instruct for payment to Portfolio shareholders who have
delivered to such Agent a request for repurchase or redemption of their shares
of the Portfolio.
7
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Q. Proxies, Notices, Etc. - Promptly to deliver or mail to the Fund all
----------------------
forms of proxies and all notices of meetings and any other notices or
announcements affecting or relating to securities owned by the Portfolio that
are received by the Custodian, and upon receipt of Proper Instructions, to
execute and deliver or cause its nominee to execute and deliver such proxies or
other authorizations as may be required. Neither the Custodian nor its nominee
shall vote upon any of such securities or execute any proxy to vote thereon or
give any consent or take any other action with respect thereto (except as
otherwise herein provided) unless ordered to do so by Proper Instructions.
R. Nondiscretionary Details - Without the necessity of express
------------------------
authorization from the Fund, (1) to attend to all nondiscretionary details in
connection with the sale, exchange, substitution, purchase, transfer or other
dealings with securities, funds or other property of the Portfolio held by the
Custodian except as otherwise directed from time to time by the Trustees of the
Fund, and (2) to make payments to itself or others for minor expenses of
handling securities or other similar items relating to the Custodian's duties
under this Agreement, provided that all such payments shall be accounted for to
the Fund.
S. Deposit of Portfolio Assets in Securities Systems - The Custodian may
-------------------------------------------------
deposit and/or maintain securities owned by the Portfolio in (i) The Depository
Trust Company, (ii) any book-entry system as provided in Subpart O of Treasury
Circular No. 300, 31 CFR 306, Subpart B of 31 CFR Part 350, or the book-entry
regulations of federal agencies substantially in the form of Subpart O, or (iii)
any other domestic clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities Exchange Act of 1934 which acts
as a securities depository and whose use the Fund has previously approved in
writing (each of the foregoing being referred to in this Agreement as a
"Securities System''). Utilization of a
8
<PAGE>
Securities System shall be in accordance with applicable Federal Reserve Board
and Securities and Exchange Commission rules and regulations, if any, and
subject to the following provisions:
1) The Custodian may deposit and/or maintain Portfolio securities, either
directly or through one or more Agents appointed by the Custodian (provided that
any such agent shall be qualified to act as a custodian of the Fund pursuant to
the Investment Company Act of 1940 and the rules and regulations thereunder), in
a Securities System provided that such securities are represented in an account
("Account") of the Custodian or such Agent in the Securities System which shall
not include any assets of the Custodian or Agent other than assets held as a
fiduciary, custodian, or otherwise for customers;
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a Securities System shall identify by book-
entry those securities belonging to the Portfolio;
3) The Custodian shall pay for securities purchased for the account of the
Portfolio upon (i) receipt of advice from the Securities System that such
securities have been transferred to the Account, and (ii) the making of an entry
on the records of the Custodian to reflect such payment and transfer for the
account of the Portfolio. The Custodian shall transfer securities sold for the
account of the Portfolio upon (i) receipt of advice from the Securities System
that payment for such securities has been transferred to the Account, and (ii)
the making of an entry on the records of the Custodian to reflect such transfer
and payment for the account of the Portfolio. Copies of all advices from the
Securities System of transfers of securities for the account of the Portfolio
shall identify the Portfolio, be maintained for the Portfolio by the Custodian
or an Agent as referred to above, and be provided to the Fund at its request.
The Custodian shall furnish the Fund confirmation of each transfer to or from
the account of the
9
<PAGE>
Portfolio in the form of a written advice or notice and shall furnish to the
Fund copies of daily transaction sheets reflecting each day's transactions in
the Securities System for the account of the Portfolio on the next business day;
4) The Custodian shall provide the Fund with any report obtained by the
Custodian or any Agent as referred to above on the Securities System's
accounting system, internal accounting control and procedures for safeguarding
securities deposited in the Securities System; and the Custodian and such Agents
shall send to the Fund such reports on their own systems of internal accounting
control as the Fund may reasonably request from time to time.
5) At the written request of the Fund, the Custodian will terminate the
use of any such Securities System on behalf of the Portfolio as promptly as
practicable.
T. Other Transfers - To deliver securities, funds and other property of
---------------
the Portfolio to a Subcustodian or another custodian of the Portfolio; and, upon
receipt of Proper Instructions, to make such other disposition of securities,
funds or other property of the Portfolio in a manner other than or for purposes
other than as enumerated elsewhere in this Agreement, provided that the
instructions relating to such disposition shall include a statement of the
purpose for which the delivery is to be made, the amount of securities to be
delivered and the name of the person or persons to whom delivery is to be made.
U. Investment Limitations - In performing its duties generally, and more
----------------------
particularly in connection with the purchase, sale and exchange of securities
made by or for the Portfolio, the Custodian may assume unless and until notified
in writing to the contrary that Proper Instructions received by it are not in
conflict with or in any way contrary to any provisions of the Fund's Declaration
of Trust or By-Laws (or comparable documents) or votes or proceedings of the
shareholders or Trustees of the Fund, or the Fund's Registration Statement on
Form N-lA. The
10
<PAGE>
Custodian shall in no event be liable to the Portfolio for any violation of any
investment limitations to which the Portfolio is subject or other limitations
with respect to the Fund's powers to make expenditures, encumber securities,
borrow or take similar actions affecting the Portfolio.
V. Proper Instructions - "Proper Instructions" shall mean a tested telex
-------------------
from the Fund or a written request, direction, instruction or certification
signed or initialed on behalf of the Fund by one or more person or persons as
the Board of Trustees of the Fund shall have from time to time authorized,
provided, however, that no such instructions directing the delivery of
securities or the payment of funds to an authorized signatory of the Fund shall
be signed by such person. Those persons authorized to give Proper Instructions
may be identified by the Board of Trustees by name, title or position and will
include at least one officer empowered by the Board to name other individuals
who are authorized to give Proper Instructions on behalf of the Portfolio.
Telephonic or other oral instructions given by any one of the above persons will
be considered Proper Instructions if the Custodian reasonably believes them to
have been given by a person authorized to give such instructions with respect to
the transaction involved. Oral instructions will be confirmed by tested telex or
in writing in the manner set forth above but the lack of such confirmation shall
in no way affect any action taken by the Custodian in reliance upon such oral
instructions. The Fund authorizes the Custodian to tape record any and all
telephonic or other oral instructions given to the Custodian by or on behalf of
the Fund (including any of its officers, Trustees, employees or agents) and will
deliver to the Custodian a similar authorization from any investment manager or
adviser or person or entity with similar responsibilities which is authorized to
give Proper Instructions on behalf of the Portfolio to the Custodian. Proper
Instructions may relate to specific transactions or to types or classes of
transactions, and may be in the form of standing instructions.
11
<PAGE>
Proper Instructions may include communications effected directly between
electro-mechanical or electronic devices or systems, in addition to tested
telex, provided that the Fund and the Custodian agree to the use of such device
or system.
W. Segregated Account - The Custodian shall upon receipt of Proper
------------------
Instructions establish and maintain on its books a segregated account or
accounts for and on behalf of the Portfolio, into which account or accounts may
be transferred cash and/or securities of the Portfolio, including securities
maintained by the Custodian pursuant to Section 2S hereof, (i) in accordance
with the provisions of any agreement among the Fund, the Custodian and a broker-
dealer registered under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. (or any futures commission
merchant registered under the Commodity Exchange Act) relating to compliance
with the rules of the Options Clearing Corporation and of any registered
national securities exchange (or the Commodity Futures Trading Commission or any
registered contract market), or any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by the
Portfolio, (ii) for purposes of segregating cash or securities in connection
with options purchased, sold or written by the Portfolio or commodity futures
contracts or options thereon purchased or sold by the Portfolio, (iii) for the
purposes of compliance by the Portfolio with the procedures required by
Investment Company Act Release No. 10666, or any subsequent release or releases
of the Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies, and (iv) as mutually
agreed from time to time between the Fund and the Custodian.
3. Securities, funds and other property of the Portfolio may be held by
any Subcustodian appointed pursuant to the provisions of this Section 3. The
Custodian may, at any
12
<PAGE>
time and from time to time, appoint any bank or trust company (meeting the
requirements of a custodian or an "eligible foreign custodian" under the
Investment Company Act of 1940 and the rules and regulations thereunder) to act
as a Subcustodian for the Portfolio, provided that the Fund shall have approved
in writing (1) any such bank or trust company and the subcustodian agreement to
be entered into between such bank or trust company and the Custodian, and (2)
the country or countries in which and the securities depositories, if any,
through which the Subcustodian is authorized to hold securities, cash and other
property of the Portfolio. Upon such approval by the Fund, the Custodian is
authorized on behalf of the Portfolio to notify each Subcustodian of its
appointment as such.
Those Subcustodians and the countries where and the securities depositories
through which they may hold securities, cash and other property of the Portfolio
which the Fund has approved to date are set forth on Appendix A hereto. Such
Appendix shall be amended from time to time as Subcustodians and/or countries
and/or securities depositories are changed, added or deleted. The Fund shall be
responsible for informing the Custodian sufficiently in advance of a proposed
investment which is to be held in a country not listed on Appendix A, in order
that there shall be sufficient time for the Fund's Board of Trustees to consider
approval of a subcustodian in the country as required by the preceding paragraph
and for the Custodian to effect the appropriate arrangements with such
Subcustodian, including entry into a proposed subcustodian agreement and
submission of such subcustodian agreement to the Fund's Board of Trustees for
approval.
If the Portfolio shall have invested in a security to be held in a country
before the foregoing procedures have been completed, such security shall be held
by such agent as the Custodian may appoint. In any event, the Custodian shall be
liable to the Portfolio for the actions
13
<PAGE>
of such agent if and only to the extent the Custodian shall have recovered from
such agent for any damages caused the Portfolio by such agent. At the request of
the Fund, Custodian agrees to remove any securities held on behalf of the
Portfolio by such agent, if practical, to an approved Subcustodian. Under such
circumstances Custodian will collect income and respond to corporate actions on
a best efforts basis.
With respect to the securities and funds held by a Subcustodian, either
directly or indirectly, including demand and interest bearing deposits,
currencies or other deposits and foreign exchange contracts as referred to in
Sections 2K, 2L or 2M, the Custodian shall be liable to the Portfolio if and
only to the extent that such Subcustodian is liable to the Custodian and the
Custodian recovers under the applicable subcustodian agreement. The Custodian
shall nevertheless be liable to the Portfolio for its own negligence in
transmitting any instructions received by it from the Fund for the account of
the Portfolio and for its own negligence in connection with the delivery of any
securities or funds held by it to any such Subcustodian.
In the event that any Subcustodian appointed pursuant to the provisions of
this Section 3 fails to perform any of its obligations under the terms and
conditions of the applicable subcustodian agreement, the Custodian shall use its
best efforts to cause such Subcustodian to perform such obligations. In the
event that the Custodian is unable to cause such Subcustodian to perform fully
its obligations thereunder, the Custodian shall forthwith upon the Fund's
request terminate such Subcustodian in accordance with the termination
provisions under the applicable subcustodian agreement. At the election of the
Fund, it shall have the right to enforce, to the extent permitted by the
subcustodian agreement and applicable law, the Custodian's rights against any
such Subcustodian for loss or damage caused the Portfolio by such Subcustodian.
14
<PAGE>
The Custodian may, at any time in its discretion upon notification to the
Fund, terminate any Subcustodian of the Portfolio in accordance with the
termination provisions under the applicable Subcustodian Agreement, and at the
written request of the Fund, the Custodian will terminate any Subcustodian in
accordance with the termination provisions under the applicable Subcustodian
Agreement.
If necessary or desirable, the Custodian may appoint another subcustodian
to replace a Subcustodian terminated pursuant to the foregoing provisions of
this Section 3, such appointment to be made upon approval of the successor
subcustodian by the Fund's Board of Trustees in accordance with the provisions
of this Section 3.
The Custodian will not amend any subcustodian agreement or agree to change
or permit any changes thereunder except upon the prior written approval of the
Fund.
In the event the Custodian makes any payment to a Subcustodian under the
indemnification provisions of any subcustodian agreement, no more than thirty
days after written notice to the Fund of the Custodian's intention to make such
payment, the Portfolio will reimburse the Custodian the amount of such payment
except in respect of any negligence or misconduct of the Custodian.
4. The Custodian may assist generally in the preparation of reports to
Portfolio shareholders and others, audits of accounts, and other ministerial
matters of like nature.
5. The Fund hereby also appoints the Custodian as the Portfolio's
financial agent. With respect to the appointment as financial agent, the
Custodian shall have and perform the following powers and duties:
A. Records - To create, maintain and retain such records relating to its
-------
activities and obligations under this Agreement as are required under the
Investment Company Act of 1940 and
15
<PAGE>
the rules and regulations thereunder (including Section 31 thereof and
Rules 31a-1 and 31a-2 thereunder) and under applicable Federal and State tax
laws. All such records will be the property of the Fund and in the event of
termination of this Agreement shall be delivered to the successor custodian.
B. Accounts - To keep books of account and render statements, including
--------
interim monthly and complete quarterly financial statements, or copies thereof,
from time to time as reasonably requested by Proper Instructions.
C. Access to Records - The books and records maintained by the Custodian
-----------------
pursuant to Sections 5A and 5B shall at all times during the Custodian's regular
business hours be open to inspection and audit by officers of, attorneys for and
auditors employed by the Fund and by employees and agents of the Securities and
Exchange Commission, provided that all such individuals shall observe all
security requirements of the Custodian applicable to its own employees having
access to similar records within the Custodian and such regulations as may be
reasonably imposed by the Custodian.
D. Calculation of Net Asset Value - To compute and determine the net asset
------------------------------
value per share of shares of the Portfolio as of the close of business on the
New York Stock Exchange on each day on which such Exchange is open, unless
otherwise directed by Proper Instructions. Such computation and determination
shall be made in accordance with (1) the provisions of the current effective
prospectus, Declaration of Trust and By-Laws of the Fund, as they may from time
to time be amended and delivered to the Custodian, (2) the votes of the Board of
Trustees of the Fund at the time in force and applicable, as they may from time
to time be delivered to the Custodian, and (3) Proper Instructions from such
officers of the Fund or other persons as are from time to time authorized by the
Board of Trustees of the Fund to give instructions with
16
<PAGE>
respect to computation and determination of the net asset value. On each day
that the Custodian shall compute the net asset value per share of the Portfolio
the Custodian shall provide the Fund with written reports which permit the Fund
to verify that portfolio transactions have been recorded in accordance with the
Fund's instructions.
In computing the net asset value, the Custodian may rely upon any
information furnished by Proper Instructions, including without limitation any
information (1) as to accrual of liabilities of the Portfolio and as to
liabilities of the Portfolio not appearing on the books of account kept by the
Custodian, (2) as to the existence, status and proper treatment of Portfolio
reserves, if any, authorized by the Fund, (3) as to the sources of quotations to
be used in computing the net asset value, including those listed in Appendix B,
(4) as to the fair value to be assigned to any securities or other property for
which price quotations are not readily available, and (5) as to the sources of
information with respect to "corporate actions" affecting portfolio securities
of the Portfolio, including those listed in Appendix B. (Information as to
"corporate actions" shall include information as to dividends, distributions,
stock splits, stock dividends, rights offerings, conversions, exchanges,
recapitalizations, mergers, redemptions, calls, maturity dates and similar
transactions, including the ex-dividend and record dates and the amounts or
other terms thereof.)
In like manner, the Custodian shall compute and determine the net asset
value of the Portfolio as of such other times as the Board of Trustees of the
Fund from time to time may reasonably request.
Notwithstanding any other provisions of this Agreement, including Section
6C, the following provisions shall apply with respect to the Custodian's
foregoing responsibilities in this Section 5D: The Custodian shall be held to
the exercise of reasonable care in computing and determining net asset value as
provided in this Section 5D, but shall not be held accountable or
17
<PAGE>
liable for any losses, damages or expenses the Portfolio or any shareholder or
former shareholder of the Portfolio or any other party may suffer or incur
arising from or based upon errors or delays in the determination of such net
asset value unless such error or delay was due to the Custodian's negligence,
gross negligence or reckless or willful misconduct in determination of such net
asset value. (The parties hereto acknowledge, however, that the Custodian's
causing an error or delay in the determination of net asset value does not in
and of itself constitute negligence, gross negligence or reckless or willful
misconduct.) In no event shall the Custodian be liable or responsible to the
Portfolio, any present or former shareholder of the Portfolio or any other party
for any error or delay which continued or was undetected after the date of an
audit of the Portfolio performed by the certified public accountants employed by
the Fund if, in the exercise of reasonable care, such accountants should have
become aware of such error or delay in the course of performing such audit. The
Custodian's liability for any such negligence, gross negligence or reckless or
willful misconduct which results in an error in determination of such net asset
value, regardless of the nature or characterization of such damages, shall be
limited solely to the direct, out-of-pocket loss the Portfolio, shareholder or
former shareholder shall actually incur, measured by the difference between the
actual and the erroneously computed net asset value.
Without limiting the foregoing, the Custodian shall not be held accountable
or liable to the Portfolio, any shareholder or former shareholder thereof or any
other person for any delays or losses, damages or expenses any of them may
suffer or incur resulting from (1) errors or delays in the computation of net
asset value resulting from equipment failure or interruption of power sources,
(2) the Custodian's failure to receive timely and suitable notification
concerning quotations or corporate actions relating to or affecting portfolio
securities of the Portfolio or (3)
18
<PAGE>
any errors in the computation of the net asset value based upon or arising out
of quotations or information as to corporate actions if received by the
Custodian either (i) from a source which the Custodian was authorized pursuant
to the second paragraph of this Section 5D to rely upon or (ii) from a source
which in the Custodian's reasonable judgment was as reliable a source for such
quotations or information as the sources authorized pursuant to that paragraph.
Nevertheless, the Custodian will use its best judgment in determining whether to
verify through other sources any information it has received as to quotations or
corporate actions if the Custodian believes that any such information is
incorrect.
In the event of any error or delay in the determination of such net asset
value for which the Custodian may be liable, the Fund will make reasonable
efforts to mitigate any loss suffered by the Portfolio or its present or former
shareholders or any other party, in order to reduce the Custodian's exposure to
liability, such as by taking reasonable steps to collect from any Portfolio
shareholder or former shareholder who has received any overpayment upon
redemption of shares such overpaid amount or to collect from any Portfolio
shareholder who has underpaid upon a purchase of shares the amount of such
underpayment or to reduce the number of shares issued to such shareholder.
E. Disbursements - Upon receipt of Proper Instructions, to pay or cause to
-------------
be paid, insofar as funds are available for the purpose, bills, statements and
other obligations of the Portfolio (including but not limited to interest
charges, taxes, management fees, compensation to Fund officers and employees,
and other operating expenses of the Portfolio).
6. A. The Custodian shall not be liable for any action taken or omitted
in reliance upon Proper Instructions reasonably believed by it to be genuine or
upon any other written notice,
19
<PAGE>
request, direction, instruction, certificate or other instrument reasonably
believed by it to be genuine and signed by the proper party or parties.
The Secretary or Assistant Secretary of the Fund shall certify to the
Custodian the names, signatures and scope of authority of all persons authorized
to give Proper Instructions or any other such notice, request, direction,
instruction, certificate or instrument on behalf of the Portfolio, the names and
signatures of the officers of the Fund, the name and address of the Shareholder
Servicing Agent, and any resolutions, votes, instructions or directions of the
Fund's Board of Trustees or shareholders. Such certificate may be accepted and
relied upon by the Custodian as conclusive evidence of the facts set forth
therein and may be considered in full force and effect until receipt of a
similar certificate to the contrary.
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Agreement.
The Custodian shall be entitled, at the expense of the Portfolio, to
receive and act upon advice of (i) counsel regularly retained by the Custodian
in respect of custodian matters, (ii) counsel for the Fund, or (iii) such other
counsel as the Fund and the Custodian may agree upon, with respect to all
matters, and the Custodian shall be without liability for any action reasonably
taken or omitted pursuant to such advice.
B. With respect to the portfolio securities, cash and other property of
the Portfolio held by a Securities System, the Custodian shall be liable to the
Portfolio only for any loss or damage to the Portfolio resulting from use of the
Securities System if caused by any negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their employees or from any
failure of the Custodian or any such agent to enforce effectively such
20
<PAGE>
rights as it may have against the Securities System. At the election of the
Fund, it shall be entitled to be subrogated to the rights of the Custodian with
respect to any claim against the Securities System or any other person which the
Custodian may have as a consequence of any such loss or damage to the Portfolio
of and to the extent that the Portfolio has not been made whole for any such
loss or damage.
C. Except as may otherwise be set forth in this Agreement with respect to
particular matters, the Custodian shall be held only to the exercise of
reasonable care and diligence in carrying out the provisions of this Agreement,
provided that the Custodian shall not thereby be required to take any action
which is in contravention of any applicable law. The Portfolio agrees to
indemnify and hold harmless the Custodian and its nominees from all claims and
liabilities (including counsel fees) incurred or assessed against it or its
nominees in connection with the performance of this Agreement, except such as
may arise from its or its nominee's breach of the relevant standard of conduct
set forth in this Agreement. Without limiting the foregoing indemnification
obligation of the Portfolio, the Portfolio agrees to indemnify the Custodian and
any nominee in whose name portfolio securities or other property of the Fund is
registered against any liability the Custodian or such nominee may incur by
reason of taxes assessed to the Custodian or such nominee or other costs,
liability or expense incurred by the Custodian or such nominee resulting
directly or indirectly from the fact that portfolio securities or other property
of the Portfolio is registered in the name of the Custodian or such nominee.
It is also understood that the Custodian shall not be liable for any loss
involving any securities, currencies, deposits or other property of the
Portfolio, whether maintained by it, a Subcustodian, a securities depository, an
agent of the Custodian or a Subcustodian, a Securities System, or a Banking
Institution, or a loss arising from a foreign currency transaction or contract,
21
<PAGE>
resulting from a Sovereign Risk. A "Sovereign Risk" shall mean nationalization,
expropriation, devaluation, revaluation, confiscation, seizure, cancellation,
destruction or similar action by any governmental authority, de facto or de
jure; or enactment, promulgation, imposition or enforcement by any such
governmental authority of currency restrictions, exchange controls, taxes,
levies or other charges affecting the Portfolio's property; or acts of war,
terrorism, insurrection or revolution; or any other similar act or event beyond
the Custodian's control.
D. The Custodian shall be entitled to receive reimbursement from the
Portfolio on demand, in the manner provided in Section 7, for its cash
disbursements, expenses and charges (including the fees and expenses of any
Subcustodian or any Agent) in connection with this Agreement, but excluding
salaries and usual overhead expenses.
E. The Custodian may at any time or times in its discretion appoint (and
may at any time remove) any other bank or trust company which is qualified to
act as a custodian under the Investment Company Act of 1940, as amended, as the
Custodian's agent ("Agent") to carry out such of the provisions of this
Agreement as the Custodian may from time to time direct, provided, however, that
the appointment of such Agent (other than an Agent appointed pursuant to the
third paragraph of Section 3) shall not relieve the Custodian of any of its
responsibilities under this agreement.
F. Upon request, the Fund shall deliver to the Custodian such proxies,
powers of attorney or other instruments as may be reasonable and necessary or
desirable in connection with the performance by the Custodian or any
Subcustodian of their respective obligations under this Agreement or any
applicable subcustodian agreement.
7. The Portfolio shall pay the Custodian a custody fee based on such fee
schedule as may from time to time be agreed upon in writing by the Custodian and
the Fund. Such fee,
22
<PAGE>
together with all amounts for which the Custodian is to be reimbursed in
accordance with Section 6D, shall be billed to the Fund for the account of the
Portfolio in such a manner as to permit payment either by a direct cash payment
to the Custodian or by placing Portfolio transactions with the Custodian
resulting in an agreed-upon amount of commissions being paid to the Custodian
within an agreed-upon period of time.
8. This Agreement shall continue in full force and effect until terminated
by either party by an instrument in writing delivered or mailed, postage
prepaid, to the other party, such termination to take effect not sooner than
seventy five (75) days after the date of such delivery or mailing. In the event
of termination the Custodian shall be entitled to receive prior to delivery of
the securities, funds and other property held by it all accrued fees and
unreimbursed expenses the payment of which is contemplated by Sections 6D and 7,
upon receipt by the Fund of a statement setting forth such fees and expenses.
In the event of the appointment of a successor custodian, it is agreed that
the funds and securities owned by the Portfolio and held by the Custodian or any
Subcustodian shall be delivered to the successor custodian, and the Custodian
agrees to cooperate with the Fund in execution of documents and performance of
other actions necessary or desirable in order to substitute the successor
custodian for the Custodian under this Agreement.
9. The Custodian agrees that any claims by it against the Fund under this
Agreement may be satisfied only from the assets of the Fund; that the person
executing this Agreement has executed it on behalf of the Fund and not
individually, and that the obligations of the Fund arising out of this Agreement
are not binding upon such person or the Fund's shareholders individually but are
binding only upon the assets and property of the Fund; and that no
23
<PAGE>
shareholders, trustees or officers of the Fund may be held personally liable or
responsible for any obligations of the Fund arising out of this Agreement.
This Agreement constitutes the entire understanding and agreement of the
parties hereto with respect to the subject matter hereof. No provision of this
Agreement may be amended or terminated except by a statement in writing signed
by the party against which enforcement of the amendment or termination is
sought.
In connection with the operation of this Agreement, the Custodian and the
Fund may agree in writing from time to time on such provisions interpretative of
or in addition to the provisions of this Agreement as may in their joint opinion
be consistent with the general tenor of this Agreement. No interpretative or
additional provisions made as provided in the preceding sentence shall be deemed
to be an amendment of this Agreement.
10. This instrument is executed and delivered in The Commonwealth of
Massachusetts and shall be governed by and construed according to the laws of
said Commonwealth.
11. Notices and other writings delivered or mailed postage prepaid to the
Fund addressed to the Fund at PaineWebber Incorporated, 1285 Avenue of the
Americas, New York, New York 10019, Attention: Mutual Fund Administrator, or to
such other address as the Fund may have designated to the Custodian in writing,
or to the Custodian at 40 Water Street, Boston, Massachusetts 02109, Attention:
Manager, Securities Department, or to such other address as the Custodian may
have designated to the Fund in writing, shall be deemed to have been properly
delivered or given hereunder to the respective addressee.
12. This Agreement shall be binding on and shall inure to the benefit of
the Fund and the Custodian and their respective successors and assigns, provided
that neither party hereto may
24
<PAGE>
assign this Agreement or any of its rights or obligations hereunder without the
prior written consent of the other party.
13. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original. This Agreement shall become effective when
one or more counterparts have been signed and delivered by each of the parties.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in its name and behalf on the day and year first above written.
PAINEWEBBER SERIES TRUST BROWN BROTHERS HARRIMAN & CO.
By /s/ Dianne E. O'Donnell per pro /s/
------------------------------ --------------------------------
25
<PAGE>
Exhibit No. 9
TRANSFER AGENCY AND RELATED SERVICES AGREEMENT
----------------------------------------------
THIS AGREEMENT is made as of____________, 199__ by and between PFPC INC., a
Maryland corporation ("PFPC"), and MITCHELL HUTCHINS SERIES TRUST, a
Massachusetts business trust(the "Fund").
W I T N E S S E T H:
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Fund wishes to retain PFPC to serve as transfer agent,
registrar, dividend disbursing agent and related services agent to the Fund's
Portfolios (as hereinafter defined) and PFPC wishes to furnish such services.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. DEFINITIONS. AS USED IN THIS AGREEMENT:
---------------------------------------
(a) "1933 Act" means the Securities Act of 1933, as amended.
----------
(b) "1934 Act" means the Securities Exchange Act of 1934, as amended.
----------
(c) "Authorized Person" means any officer of the Fund and any other person
-------------------
duly authorized by the Fund's Board of Directors or Trustees ("Board") to give
Oral Instructions and Written Instructions on behalf of the Fund and listed on
the Authorized Persons Appendix attached hereto and made a part hereof or any
amendment thereto as may be received by PFPC. An Authorized Person's scope of
authority may be limited by the Fund by setting forth such limitation in the
Authorized Persons Appendix.
<PAGE>
(d) "CEA" means the Commodities Exchange Act, as amended.
-----
(e) "Oral Instructions" mean oral instructions received by PFPC from
-------------------
an Authorized Person.
(f) "Portfolio" means a series or investment portfolio of the Fund
-----------
identified on Annex A hereto, as the same may from time to time be amended, if
the Fund consists of more than one series or investment portfolio; however, if
the Fund does not have separate series or investment portfolios, then this term
shall be deemed to refer to the Fund itself.
(g) "SEC" means the Securities and Exchange Commission.
-----
(h) "Securities Laws" mean the 1933 Act, the 1934 Act,
-----------------
the 1940 Act and the CEA.
(i) "Shares" mean the shares of common stock or beneficial interest
--------
of any series or class of the Fund.
(j) "Written Instructions" mean written instructions signed by an
----------------------
Authorized Person and received by PFPC. The instructions may be delivered by
hand, mail, tested telegram, cable, telex or facsimile sending device.
2. APPOINTMENT. The Fund hereby appoints PFPC to serve as transfer
-----------
agent, registrar, dividend disbursing agent and related services agent to the
Fund, and should the Fund have separate Portfolios, those Portfolios which are
listed on Annex A hereto, in accordance with the terms set forth in this
Agreement. PFPC accepts such appointment and agrees to furnish such services.
2
<PAGE>
3. DELIVERY OF DOCUMENTS. The Fund (or a particular Portfolio, as
---------------------
appropriate) has provided or, where applicable, will provide PFPC with the
following:
(a) Certified or authenticated copies of the resolutions of the
Fund's Board approving the appointment of PFPC to provide
services to the Fund and approving this Agreement;
(b) A copy of each executed broker-dealer agreement with respect to
each Fund; and
(c) Copies (certified or authenticated if requested by PFPC) of any
post-effective amendment to the Fund's registration statement,
advisory agreement, distribution agreement, shareholder servicing
agreement and all amendments or supplements to the foregoing upon
request.
4. COMPLIANCE WITH RULES AND REGULATIONS. PFPC undertakes to comply with
-------------------------------------
all applicable requirements of the Securities Laws and any laws, rules and
regulations of governmental authorities having jurisdiction with respect to the
duties to be performed by PFPC hereunder. Except as specifically set forth
herein, PFPC assumes no responsibility for such compliance by the Fund or any of
its Portfolios.
5. INSTRUCTIONS.
------------
(a) Unless otherwise provided in this Agreement, PFPC shall act only
upon Oral Instructions and Written Instructions.
(b) PFPC shall be entitled to rely upon any Oral Instructions and
Written Instructions it receives from an Authorized Person pursuant to this
Agreement. PFPC may assume that any Oral Instruction or Written Instruction
received hereunder is not in any way inconsistent with the provisions of
organizational documents or of any vote, resolution or proceeding of the Fund's
Board or of the Fund's shareholders, unless and until PFPC receives
3
<PAGE>
Written Instructions to the contrary.
(c) The Fund agrees to forward to PFPC Written Instructions
confirming Oral Instructions so that PFPC receives the Written Instructions by
the close of business on the next day after such Oral Instructions are received.
The fact that such confirming Written Instructions are not received by PFPC
shall in no way invalidate the transactions or enforceability of the
transactions authorized by the Oral Instructions. Where Oral Instructions or
Written Instructions reasonably appear to have been received from an Authorized
Person, PFPC shall incur no liability to the Fund in acting upon such Oral
Instructions or Written Instructions provided that PFPC's actions comply with
the other provisions of this Agreement.
6. RIGHT TO RECEIVE ADVICE.
-----------------------
(a) Advice of the Fund. If PFPC is in doubt as to any action it
------------------
should or should not take, PFPC may request directions or advice, including Oral
Instructions or Written Instructions, from the Fund.
(b) Advice of Counsel. If PFPC shall be in doubt as to any question of
-----------------
law pertaining to any action it should or should not take, PFPC may request
advice at its own cost from such counsel of its own choosing (who may be counsel
for the Fund, the Fund's investment adviser or PFPC, at the option of PFPC).
(c) Conflicting Advice. In the event of a conflict between
------------------
directions, advice or Oral Instructions or Written Instructions PFPC receives
from the Fund, and the advice it receives from counsel, PFPC may rely upon and
follow the advice of counsel. In the event PFPC so relies on the advice of
counsel, PFPC remains liable for any action or omission on the part of
4
<PAGE>
PFPC which constitutes willful misfeasance, bad faith, negligence or reckless
disregard by PFPC of any duties, obligations or responsibilities set forth in
this Agreement.
(d) Protection of PFPC. PFPC shall be protected in any action it
------------------
takes or does not take in reliance upon directions, advice or Oral Instructions
or Written Instructions it receives from the Fund or from counsel and which PFPC
believes, in good faith, to be consistent with those directions, advice or Oral
Instructions or Written Instructions. Nothing in this section shall be
construed so as to impose an obligation upon PFPC (i) to seek such directions,
advice or Oral Instructions or Written Instructions, or (ii) to act in
accordance with such directions, advice or Oral Instructions or Written
Instructions unless, under the terms of other provisions of this Agreement, the
same is a condition of PFPC's properly taking or not taking such action.
Nothing in this subsection shall excuse PFPC when an action or omission on the
part of PFPC constitutes willful misfeasance, bad faith, negligence or reckless
disregard by PFPC of any duties, obligations or responsibilities set forth in
this Agreement.
7. RECORDS; VISITS. PFPC shall prepare and maintain in complete and accurate
---------------
form all books and records necessary for it to serve as transfer agent,
registrar, dividend disbursing agent and related services agent to each
Portfolio, including (a) all those records required to be prepared and
maintained by the Fund under the 1940 Act, by other applicable Securities Laws,
rules and regulations and by state laws and (b) such books and records as are
necessary for PFPC to perform all of the services it agrees to provide in this
Agreement and the appendices attached hereto, including but not limited to the
books and records necessary to effect the conversion of Class B shares, the
calculation of any contingent deferred sales charges and the calculation of
5
<PAGE>
front-end sales charges. The books and records pertaining to the Fund, which
are in the possession or under the control of PFPC, shall be the property of the
Fund. The Fund and Authorized Persons shall have access to such books and
records in the possession or under the control of PFPC at all times during
PFPC's normal business hours. Upon the reasonable request of the Fund, copies
of any such books and records in the possession or under the control of PFPC
shall be provided by PFPC to the Fund or to an Authorized Person. Upon
reasonable notice by the Fund, PFPC shall make available during regular business
hours its facilities and premises employed in connection with its performance of
this Agreement for reasonable visits by the Fund, any agent or person designated
by the Fund or any regulatory agency having authority over the Fund.
8. CONFIDENTIALITY. PFPC agrees to keep confidential all records of the
---------------
Fund and information relating to the Fund and its shareholders (past, present
and future), its investment adviser and its principal underwriter, unless the
release of such records or information is otherwise consented to, in writing, by
the Fund prior to its release. The Fund agrees that such consent shall not be
unreasonably withheld and may not be withheld where PFPC may be exposed to civil
or criminal contempt proceedings or when required to divulge such information or
records to duly constituted authorities.
9. COOPERATION WITH ACCOUNTANTS. PFPC shall cooperate with the Fund's
----------------------------
independent public accountants and shall take all reasonable actions in the
performance of its obligations under this Agreement to ensure that the necessary
information is made available to such accountants for the expression of their
opinion, as required by the Fund.
6
<PAGE>
10. DISASTER RECOVERY. PFPC shall enter into and shall maintain in effect
-----------------
with appropriate parties one or more agreements making reasonable provisions for
periodic backup of computer files and data with respect to the Fund and
emergency use of electronic data processing equipment. In the event of
equipment failures, PFPC shall, at no additional expense to the Fund, take
reasonable steps to minimize service interruptions. PFPC shall have no
liability with respect to the loss of data or service interruptions caused by
equipment failure, provided such loss or interruption is not caused by PFPC's
own willful misfeasance, bad faith, negligence or reckless disregard of its
duties or obligations under this Agreement and provided further that PFPC has
complied with the provisions of this paragraph 10.
11. COMPENSATION. As compensation for services rendered by PFPC during
------------
the term of this Agreement, the Fund will pay to PFPC a fee or fees as may be
agreed to from time to time in writing by the Fund and PFPC.
12. INDEMNIFICATION.
---------------
(a) The Fund agrees to indemnify and hold harmless PFPC and its affiliates
from all taxes, charges, expenses, assessments, penalties, claims and
liabilities (including, without limitation, liabilities arising under the
Securities Laws and any state and foreign securities and blue sky laws, and
amendments thereto), and expenses, including (without limitation) reasonable
attorneys' fees and disbursements, arising directly or indirectly from (i) any
action or omission to act which PFPC takes (a) at the request or on the
direction of or in reliance on the advice of the Fund or (b) upon Oral
Instructions or Written Instructions or (ii) the acceptance, processing and/or
negotiation of checks or other methods utilized for the purchase of Shares.
Neither PFPC,
7
<PAGE>
nor any of its affiliates, shall be indemnified against any liability (or any
expenses incident to such liability) arising out of PFPC's or its affiliates'
own willful misfeasance, bad faith, negligence or reckless disregard of its
duties and obligations under this Agreement. The Fund's liability to PFPC for
PFPC's acceptance, processing and/or negotiation of checks or other methods
utilized for the purchase of Shares shall be limited to the extent of the Fund's
policy(ies) of insurance that provide for coverage of such liability, and the
Fund's insurance coverage shall take precedence.
(b) PFPC agrees to indemnify and hold harmless the Fund from all taxes,
charges, expenses, assessments, penalties, claims and liabilities arising from
PFPC's obligations pursuant to this Agreement (including, without limitation,
liabilities arising under the Securities Laws, and any state and foreign
securities and blue sky laws, and amendments thereto) and expenses, including
(without limitation) reasonable attorneys' fees and disbursements arising
directly or indirectly out of PFPC's or its nominee's own willful misfeasance,
bad faith, negligence or reckless disregard of its duties and obligations under
this Agreement.
(c) In order that the indemnification provisions contained in this
Paragraph 12 shall apply, upon the assertion of a claim for which either party
may be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be
8
<PAGE>
required to indemnify it except with the other party's prior written consent.
(d) The members of the Board of the Fund, its officers and Shareholders, or
of any Portfolio thereof, shall not be liable for any obligations of the Fund,
or any such Portfolio, under this Agreement, and PFPC agrees that in asserting
any rights or claims under this Agreement, it shall look only to the assets and
property of the Fund or the particular Portfolio in settlement of such rights or
claims and not to such members of the Board, its officers or Shareholders.
PFPC further agrees that it will look only to the assets and property of a
particular Portfolio of the Fund, should the Fund have established separate
series, in asserting any rights or claims under this Agreement with respect to
services rendered with respect to that Portfolio and will not seek to obtain
settlement of such rights or claims from the assets of any other Portfolio of
the Fund.
13. INSURANCE. PFPC shall maintain insurance of the types and in the
---------
amounts deemed by it to be appropriate. To the extent that policies of
insurance may provide for coverage of claims for liability or indemnity by the
parties set forth in this Agreement, the contracts of insurance shall take
precedence, and no provision of this Agreement shall be construed to relieve an
insurer of any obligation to pay claims to the Fund, PFPC or other insured party
which would otherwise be a covered claim in the absence of any provision of this
Agreement.
14. SECURITY.
--------
(a) PFPC represents and warrants that, to the best of its knowledge, the
various procedures and systems which PFPC has implemented with regard to the
safeguarding from loss or damage attributable to fire, theft or any other cause
(including provision for twenty-four hours a day restricted access) of the
Fund's blank checks, certificates, records and other data and
9
<PAGE>
PFPC's equipment, facilities and other property used in the performance of its
obligations hereunder are adequate, and that it will make such changes therein
from time to time as in its judgment are required for the secure performance of
its obligations hereunder. PFPC shall review such systems and procedures on a
periodic basis, and the Fund shall have reasonable access to review these
systems and procedures.
(b) Y2K Compliance. PFPC further represents and warrants that any and all
electronic data processing systems and programs that it uses or retains in
connection with the provision of services hereunder on or before January 1, 1999
will be year 2000 compliant.
15. RESPONSIBILITY OF PFPC.
----------------------
(a) PFPC shall be under no duty to take any action on behalf of the
Fund except as specifically set forth herein or as may be specifically agreed to
by PFPC in writing. PFPC shall be obligated to exercise care and diligence in
the performance of its duties hereunder, to act in good faith and to use its
best efforts in performing services provided for under this Agreement. PFPC
shall be liable for any damages arising out of PFPC's failure to perform its
duties under this Agreement to the extent such damages arise out of PFPC's
willful misfeasance, bad faith, negligence or reckless disregard of such duties.
(b) Without limiting the generality of the foregoing or of any other
provision of this Agreement, PFPC shall not be under any duty or obligation to
inquire into and shall not be liable for (A) the validity or invalidity or
authority or lack thereof of any Oral Instruction or Written Instruction, notice
or other instrument which conforms to the applicable requirements of this
Agreement, and which PFPC reasonably believes to be genuine; or (B) subject to
Section 10,
10
<PAGE>
delays or errors or loss of data occurring by reason of circumstances beyond
PFPC's control, including acts of civil or military authority, national
emergencies, labor difficulties, fire, flood, catastrophe, acts of God,
insurrection, war, riots or failure of the mails, transportation, communication
or power supply.
(c) Notwithstanding anything in this Agreement to the contrary,
neither PFPC nor its affiliates shall be liable to the Fund for any
consequential, special or indirect losses or damages which the Fund may incur or
suffer by or as a consequence of PFPC's or its affiliates' performance of the
services provided hereunder, whether or not the likelihood of such losses or
damages was known by PFPC or its affiliates.
(d) Notwithstanding anything in this Agreement to the contrary, the
Fund shall not be liable to PFPC nor its affiliates for any consequential,
special or indirect losses or damages which PFPC or its affiliates may incur or
suffer by or as a consequence of PFPC's performance of the services provided
hereunder, whether or not the likelihood of such losses or damages was known by
the Fund.
16. DESCRIPTION OF SERVICES.
-----------------------
(a) Services Provided on an Ongoing Basis, If Applicable.
-----------------------------------------------------
(i) Calculate 12b-1 payments to financial intermediaries,
including brokers, and financial intermediary trail
commissions;
(ii) Develop, monitor and maintain, in consultation with the
Fund, all systems necessary to implement and operate the
four-tier distribution system, including Class B
conversion feature, as described in the registration
statement and related documents of the Fund, as they may
be amended from time to time;
11
<PAGE>
(iii) Calculate contingent deferred sales charge amounts upon
redemption of Fund shares and deduct such amounts from
redemption proceeds;
(iv) Calculate front-end sales load amounts at time of
purchase of shares;
(v) Determine dates of Class B conversion and effect the
same;
(vi) Establish and maintain proper shareholder registrations;
(vii) Review new applications and correspond with shareholders
to complete or correct information;
(viii) Direct payment processing of checks or wires;
(ix) Prepare and certify stockholder lists in conjunction with
proxy solicitations;
(x) Prepare and mail to shareholders confirmation of
activity;
(xi) Provide toll-free lines for direct shareholder use, plus
customer liaison staff for on-line inquiry response;
(xii) Send duplicate confirmations to broker-dealers of their
clients' activity, whether executed through the broker-
dealer or directly with PFPC;
(xiii) Provide periodic shareholder lists, outstanding share
calculations and related statistics to the Fund;
(xiv) Provide detailed data for underwriter/broker
confirmations;
(xv) Prepare and mail required calendar and taxable year-end
tax and statement information (including forms 1099-DIV
and 1099-B and accompanying statements);
(xvi) Notify on a daily basis the investment adviser,
accounting agent, and custodian of fund activity;
12
<PAGE>
(xvii) Perform, itself or through a delegate, such of the
services, whether or not included within the scope of
another paragraph of this Paragraph 16(a), specified on
Annex B hereto as may be agreed upon from time to time;
and
(xviii) Perform other participating broker-dealer shareholder
services as may be agreed upon from time to time.
13
<PAGE>
(b) Services Provided by PFPC Under Oral Instructions or Written
------------------------------------------------------------
Instructions.
------------
(i) Accept and post daily Fund and class purchases and
redemptions;
(ii) Accept, post and perform shareholder transfers and
exchanges;
(iii) Pay dividends and other distributions;
(iv) Solicit and tabulate proxies; and
(v) Cancel certificates.
(c) Purchase of Shares. PFPC shall issue and credit an account of an
------------------
investor, in the manner described in the Fund's prospectus, once it receives:
(i) A purchase order;
(ii) Proper information to establish a shareholder account;
and
(iii) Confirmation of receipt or crediting of funds for such
order to the Fund's custodian.
(d) Redemption of Shares. PFPC shall redeem Shares only if that
--------------------
function is properly authorized by the Fund's organizational documents or
resolutions of the Fund's Board. Shares shall be redeemed and payment therefor
shall be made in accordance with the Fund's or Portfolio's prospectus.
14
<PAGE>
(i) Broker-Dealer Accounts.
----------------------
When a broker-dealer notifies PFPC of a redemption desired
by a customer, and the Fund's or Portfolio's custodian (the
"Custodian") has provided PFPC with funds, PFPC shall (a)
transfer by Fedwire or other agreed upon electronic means
such redemption payment to the broker-dealer for the credit
to, and for the benefit of, the customer's account or (b)
shall prepare and send a redemption check to the broker-
dealer, made payable to the broker-dealer on behalf of its
customer.
(ii) Fund-Only Accounts.
------------------
If Shares (or appropriate instructions) are received in
proper form, at the Fund's request Shares may be redeemed
before the funds are provided to PFPC from the Custodian.
If the recordholder has not directed that redemption
proceeds be wired, when the Custodian provides PFPC with
funds, the redemption check shall be sent to and made
payable to the recordholder, unless:
(a) the surrendered certificate is drawn to the order of
an assignee or holder and transfer authorization is
signed by the recordholder; or
(b) transfer authorizations are signed by the
recordholder when Shares are held in book-entry
form.
15
<PAGE>
(e) Dividends and Distributions. Upon receipt of a resolution of the
---------------------------
Fund's Board authorizing the declaration and payment of dividends and
distributions, PFPC shall issue dividends and distributions declared by the Fund
in Shares, or, upon shareholder election, pay such dividends and distributions
in cash, if provided for in the appropriate Fund's or Portfolio's prospectus.
PFPC shall mail to the Fund's shareholders and the IRS and other appropriate
taxing authorities such tax forms, or permissible substitute forms, and other
information relating to dividends and distributions paid by the Fund (including
designations of the portions of distributions of net capital gain that are 20%
rate gain distributions and 28% rate gain distributions pursuant to IRS Notice
97-64) as are required to be filed and mailed by applicable law, rule or
regulation within the time required thereby. PFPC shall mail to the Fund's
shareholders such tax forms and other information, or permissible substitute
notice, relating to dividends and distributions paid by the Fund as are required
to be filed and mailed by applicable law, rule or regulation. PFPC shall
prepare, maintain and file with the IRS and other appropriate taxing authorities
reports relating to all dividends above a stipulated amount paid by the Fund to
its shareholders as required by tax or other law, rule or regulation.
(f) Shareholder Account Services.
----------------------------
(i) PFPC will arrange, in accordance with the appropriate
Fund's or Portfolio's prospectus, for issuance of Shares
obtained through:
- The transfer of funds from shareholders' accounts at
financial institutions, provided PFPC receives advance
Oral or Written Instruction of such transfer;
16
<PAGE>
- Any pre-authorized check plan; and
- Direct purchases through broker wire orders, checks and
applications.
(ii) PFPC will arrange, in accordance with the appropriate
Fund's or Portfolio's prospectus, for a shareholder's:
- Exchange of Shares for shares of another fund with which
the Fund has exchange privileges;
- Automatic redemption from an account where that
shareholder participates in a systematic withdrawal plan;
and/or
- Redemption of Shares from an account with a checkwriting
privilege.
(g) Communications to Shareholders. Upon timely Written Instructions,
------------------------------
PFPC shall mail all communications by the Fund to its shareholders, including:
(i) Reports to shareholders;
(ii) Confirmations of purchases and sales of Fund shares;
(iii) Monthly or quarterly statements;
(iv) Dividend and distribution notices;
(v) Proxy material; and
(vi) Tax forms (including substitute forms) and accompanying
information containing the information required by
paragraph 16(e).
If requested by the Fund, PFPC will receive and tabulate the proxy
cards for the meetings of the Fund's shareholders and supply personnel to serve
as inspectors of election.
17
<PAGE>
(h) Records. PFPC shall maintain those records required by the
-------
Securities Laws and any laws, rules and regulations of governmental authorities
having jurisdiction with respect to the duties to be performed by PFPC hereunder
with respect to shareholder accounts or by transfer agents generally, including
records of the accounts for each shareholder showing the following information:
(i) Name, address and United States Taxpayer Identification
or Social Security number;
(ii) Number and class of Shares held and number and class of
Shares for which certificates, if any, have been issued,
including certificate numbers and denominations;
(iii) Historical information regarding the account of each
shareholder, including dividends and distributions paid,
their character (e.g. ordinary income, net capital gain
(including 20% rate gain and 28% rate gain), exempt-
interest, foreign tax-credit and dividends received
deduction eligible) for federal income tax purposes and
the date and price for all transactions on a
shareholder's account;
(iv) Any stop or restraining order placed against a
shareholder's account;
(v) Any correspondence relating to the current maintenance of
a shareholder's account;
(vi) Information with respect to withholdings; and
(vii) Any information required in order for the transfer agent
to perform any calculations contemplated or required by
this Agreement.
(i) Lost or Stolen Certificates. PFPC shall place a stop notice
---------------------------
against any certificate reported to be lost or stolen and comply with all
applicable federal regulatory requirements for reporting such loss or alleged
misappropriation. The lost or stolen certificate
18
<PAGE>
will be canceled and uncertificated Shares will be issued to a shareholder's
account only upon:
(i) The shareholder's pledge of a lost instrument bond or such other
appropriate indemnity bond issued by a surety company approved by
PFPC; and
(ii) Completion of a release and indemnification agreement signed by
the shareholder to protect PFPC and its affiliates.
(j) Shareholder Inspection of Stock Records. Upon a request from
---------------------------------------
any Fund shareholder to inspect stock records, PFPC will notify the Fund, and
the Fund will issue instructions granting or denying each such request. Unless
PFPC has acted contrary to the Fund's instructions, the Fund agrees and does
hereby release PFPC from any liability for refusal of permission for a
particular shareholder to inspect the Fund's shareholder records.
(k) Withdrawal of Shares and Cancellation of Certificates.
-----------------------------------------------------
Upon receipt of Written Instructions, PFPC shall cancel outstanding
certificates surrendered by the Fund to reduce the total amount of outstanding
shares by the number of shares surrendered by the Fund.
17. DURATION AND TERMINATION.
------------------------
(a) This Agreement shall be effective on the date first written above and
shall continue for a period of three (3) years (the "Initial Term"). Upon the
expiration of the Initial Term, this Agreement shall automatically renew for
successive terms of one (1) year ("Renewal Terms") each provided that it may be
terminated by either party during a Renewal Term upon written notice given at
least ninety (90) days prior to termination. During either the Initial Term or
the Renewal Terms, this Agreement may also be terminated on an earlier date by
either party for cause.
19
<PAGE>
(b) With respect to the Fund, cause includes, but is not limited to, (i)
PFPC's material breach of this Agreement causing it to fail to substantially
perform its duties under this Agreement. In order for such material breach to
constitute "cause" under this Paragraph, PFPC must receive written notice from
the Fund specifying the material breach and PFPC shall not have corrected such
breach within a 15-day period; (ii) financial difficulties of PFPC evidenced by
the authorization or commencement of a voluntary or involuntary bankruptcy under
the U.S. Bankruptcy Code or any applicable bankruptcy or similar law, or under
any applicable law of any jurisdiction relating to the liquidation or
reorganization of debt, the appointment of a receiver or to the modification or
alleviation of the rights of creditors; and (iii) issuance of an administrative
or court order against PFPC with regard to the material violation or alleged
material violation of the Securities Laws or other applicable laws related to
its business of performing transfer agency services;
(c) With respect to PFPC, cause includes, but is not limited to, the
failure of the Fund to pay the compensation set forth in writing pursuant to
Paragraph 11 of this Agreement.
(d) Any notice of termination for cause in conformity with subparagraphs
(a), (b) and (c) of this Paragraph by the Fund shall be effective thirty (30)
days from the date of any such notice. Any notice of termination for cause by
PFPC shall be effective 90 days from the date of such notice.
(e) Upon the termination hereof, the Fund shall pay to PFPC such
compensation as may be due for the period prior to the date of such termination.
In the event that the Fund
20
<PAGE>
designates a successor to any of PFPC's obligations under this Agreement, PFPC
shall, at the direction and expense of the Fund, transfer to such successor all
relevant books, records and other data established or maintained by PFPC
hereunder including, a certified list of the shareholders of the Fund or any
Portfolio thereof with name, address, and if provided, taxpayer identification
or Social Security number, and a complete record of the account of each
shareholder. To the extent that PFPC incurs expenses related to a transfer of
responsibilities to a successor, other than expenses involved in PFPC's
providing the Fund's books and records described in the preceding sentence to
the successors, PFPC shall be entitled to be reimbursed for such extraordinary
expenses, including any out-of-pocket expenses reasonably incurred by PFPC in
connection with the transfer.
(f) Any termination effected pursuant to this Paragraph shall not affect
the rights and obligations of the parties under Paragraph 12 hereof.
(g) Notwithstanding the foregoing, this Agreement shall terminate with
respect to the Fund or any Portfolio thereof upon the liquidation, merger, or
other dissolution of the Fund or Portfolio or upon the Fund's ceasing to be a
registered investment company.
18. REGISTRATION AS A TRANSFER AGENT. PFPC represents that it is
--------------------------------
currently registered with the appropriate federal agency for the registration of
transfer agents, or is otherwise permitted to lawfully conduct its activities
without such registration and that it will remain so registered or able to so
conduct such activities for the duration of this Agreement. PFPC agrees that it
will promptly notify the Fund in the event of any material change in its status
as a registered transfer agent. Should PFPC fail to be registered with the SEC
as a transfer agent at
21
<PAGE>
any time during this Agreement, and such failure to register does not permit
PFPC to lawfully conduct its activities, the Fund may, on written notice to
PFPC, terminate this Agreement upon five days written notice to PFPC.
19. NOTICES. All notices and other communications, including Written
-------
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. Notices shall be addressed (a) if to PFPC, at 400
Bellevue Parkway, Wilmington, Delaware 19809; (b) if to the Fund, at the address
of the Fund or (c) if to neither of the foregoing, at such other address as
shall have been given by like notice to the sender of any such notice or other
communication by the other party. If notice is sent by confirming telegram,
cable, telex or facsimile sending device during regular business hours, it shall
be deemed to have been given immediately; if sent at a time other than regular
business hours, such notice shall be deemed to have been given at the opening of
the next business day. If notice is sent by first-class mail, it shall be
deemed to have been given three days after it has been mailed. If notice is
sent by messenger, it shall be deemed to have been given on the day it is
delivered. All postage, cable, telegram, telex and facsimile sending device
charges arising from the sending of a notice hereunder shall be paid by the
sender.
20. AMENDMENTS. This Agreement, or any term thereof, may be changed
----------
or waived only by a written amendment, signed by the party against whom
enforcement of such change or waiver is sought.
21. ADDITIONAL PORTFOLIOS. In the event that the Fund establishes one or
---------------------
more investment series in addition to and with respect to which it desires to
have PFPC render services
22
<PAGE>
as transfer agent, registrar, dividend disbursing agent and related services
agent under the terms set forth in this Agreement, it shall so notify PFPC in
writing, and PFPC shall agree in writing to provide such services, and such
investment series shall become a Portfolio hereunder, subject to such additional
terms, fees and conditions as are agreed to by the parties.
22. DELEGATION; ASSIGNMENT.
----------------------
(a) PFPC may, at its own expense, assign its rights and delegate its
duties hereunder to any wholly-owned direct or indirect subsidiary of PNC Bank,
National Association or PNC Bank Corp., provided that (i) PFPC gives the Fund
thirty (30) days' prior written notice; (ii) the delegate (or assignee) agrees
with PFPC and the Fund to comply with all relevant provisions of the Securities
Laws; and (iii) PFPC and such delegate (or assignee) promptly provide such
information as the Fund may request, and respond to such questions as the Fund
may ask, relative to the delegation (or assignment), including (without
limitation) the capabilities of the delegate (or assignee). The assignment and
delegation of any of PFPC's duties under this subparagraph (a) shall not relieve
PFPC of any of its responsibilities or liabilities under this Agreement.
(b) PFPC may delegate to PaineWebber Incorporated its obligation to perform
the services described on Annex B hereto. In addition, PFPC may assign its
rights and delegate its other duties hereunder to PaineWebber Incorporated or
Mitchell Hutchins Asset Management Inc. or an affiliated person of either,
provided that
(i) PFPC gives the Fund thirty (30) days' prior written notice; (ii) the
delegate (or assignee) agrees with PFPC and the Fund to comply with all relevant
provisions of the Securities Laws;
23
<PAGE>
and (iii) PFPC and such delegate (or assignee) promptly provide such information
as the Fund may request, and respond to such questions as the Fund may ask,
relative to the delegation (or assignment), including (without limitation) the
capabilities of the delegate (or assignee). In assigning its rights and
delegating its duties under this paragraph, PFPC may impose such conditions or
limitations as it determines appropriate including the condition that PFPC be
retained as a sub-transfer agent.
(c) In the event that PFPC assigns its rights and delegates its duties
under this section, no amendment of the terms of this Agreement shall become
effective without the written consent of PFPC.
23. COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
24
<PAGE>
24. FURTHER ACTIONS. Each party agrees to perform such further acts and
---------------
execute such further documents as are necessary to effectuate the purposes
hereof.
25. MISCELLANEOUS.
-------------
(a) Entire Agreement. This Agreement embodies the entire agreement
----------------
and understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the parties
may embody in one or more separate documents their agreement, if any, with
respect to services to be performed and fees payable under this Agreement.
(b) Captions. The captions in this Agreement are included for
--------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
(c) Governing Law. This Agreement shall be deemed to be a contract
-------------
made in Delaware and governed by Delaware law, without regard to principles of
conflicts of law.
(d) Partial Invalidity. If any provision of this Agreement shall be
------------------
held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
(e) Successors and Assigns. This Agreement shall be binding upon and
----------------------
shall inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
(f) Facsimile Signatures. The facsimile signature of any party to
--------------------
this Agreement shall constitute the valid and binding execution hereof by such
party.
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
PFPC INC.
By:
---------------------------------
Title:
------------------------------
MITCHELL HUTCHINS SERIES TRUST
By:
---------------------------------
Title:
------------------------------
26
<PAGE>
ANNEX A
Portfolios
Money Market Portfolio
Growth Portfolio
Global Growth Portfolio
Global Income Portfolio
Strategic Fixed Income Portfolio
Growth and Income Portfolio
Aggressive Growth Portfolio
High Grade Fixed Income Portfolio
Balanced Portfolio
27
<PAGE>
AUTHORIZED PERSONS APPENDIX
NAME (TYPE) SIGNATURE
- - ------------------------ ----------------------
- - ------------------------ ----------------------
- - ------------------------ ----------------------
- - ------------------------ ----------------------
- - ------------------------ ----------------------
- - ------------------------ ----------------------
28
<PAGE>
ANNEX B
a. Establish and maintain a dedicated service center with sufficient
facilities, equipment and skilled personnel to address all shareholder
inquiries received by telephone, mail or in-person regarding the Funds and
their accounts
b. Provide timely execution of redemptions, exchanges and non-financial
transactions directed to investment executives and specifically requested
by Fund shareholders
c. Issue checks from proceeds of Fund share redemptions to shareholders as
directed by the shareholders or their agents
d. Process and maintain shareholder account registration information
e. With respect to customer accounts maintained through PaineWebber
Incorporated ("PaineWebber"), review new applications and correspond with
shareholders to complete or correct information
f. Prepare and mail monthly or quarterly consolidated account statements that
reflect PaineWebber Mutual Fund balances and transactions (such
information to be combined with other activity and holdings in investors'
brokerage accounts if this responsibility is delegated to PaineWebber)
g. Establish and maintain a dedicated service center with sufficient
facilities, equipment and skilled personnel to address all branch inquiries
regarding operational issues and performance
h. Capture, process and mail required tax information to shareholders and
report this information to the Internal Revenue Service
i. Provide the capability to margin PaineWebber Mutual Funds held within the
client's brokerage account (if this responsibility is delegated to
PaineWebber)
j. Prepare and provide shareholder registrations for mailing of proxies,
reports and other communications to shareholders
k. Develop, maintain and issue checks from the PaineWebber systematic
withdrawal plan offered within the client's brokerage account (if this
responsibility is delegated to PaineWebber)
29
<PAGE>
l. Maintain duplicate shareholder records and reconcile those records with
those at the transfer agent (if this responsibility is delegated to
PaineWebber)
m. Process and mail duplicate PaineWebber monthly or quarterly statements to
PaineWebber Investment Executives
n. Establish and maintain shareholder distribution options (i.e., election to
have dividends paid in cash, rather than reinvested in Fund shares)
o. Process and mail purchase, redemption and exchange confirmations to Fund
shareholders and PaineWebber Investment Executives
p. Issue dividend checks to shareholders that select cash distributions to
their brokerage account (if this responsibility is delegated to
PaineWebber)
q. Develop and maintain the automatic investment plan offered within the
client's brokerage account (if this responsibility is delegated to
PaineWebber)
r. Provide bank-to-bank wire transfer capabilities related to transactions in
Fund shares
s. Maintain computerized compliance programs for blue sky and non-resident
alien requirements (only with respect to PaineWebber Cashfund, Inc.)
30
<PAGE>
Exhibit No. 10
KIRKPATRICK & LOCKHART LLP
1800 MASSACHUSETTS AVENUE, N.W.
2ND FLOOR
WASHINGTON, D. C. 20036-1800
TELEPHONE 202-778-9000
February 27, 1998
Mitchell Hutchins Series Trust
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
You have requested our opinion, as counsel to Mitchell Hutchins Series Trust
("Trust"), as to certain matters regarding the issuance of certain Shares of the
Trust. As used in this letter, the term "Shares" means the Class H and Class I
shares of beneficial interest of the thirteen current series of the Trust during
the time that Post-Effective Amendment No. 26 to the Trust's Registration
Statement on Form N-1A ("PEA") is effective and has not been superseded by
another post-effective amendment. The thirteen current series of the Trust are
Aggressive Growth Portfolio, Balanced Portfolio, Global Growth Portfolio, Global
Income Portfolio, Growth and Income Portfolio, Growth Portfolio, High Grade
Fixed Income Portfolio, High Income Portfolio, Money Market Portfolio, Small Cap
Portfolio, Strategic Fixed Income Portfolio, Strategic Income Portfolio and
Tactical Allocation Portfolio.
As such counsel, we have examined certified or other copies, believed by us to
be genuine, of the Trust's Declaration of Trust and by-laws and such resolutions
and minutes of meetings of the Trust's Board of Trustees as we have deemed
relevant to our opinion, as set forth herein. Our opinion is limited to the laws
and facts in existence on the date hereof, and it is further limited to the laws
(other than the conflict of law rules) in the Commonwealth of Massachusetts that
in our experience are normally applicable to the issuance of shares by
unincorporated voluntary associations and to the Securities Act of 1933 ("1933
Act"), the Investment Company Act of 1940 ("1940 Act") and the regulations of
the Securities and Exchange Commission ("SEC") thereunder.
Based on the foregoing, we are of the opinion that the issuance of the Shares
has been duly authorized by the Trust and that, when sold in accordance with the
terms contemplated by the PEA, including receipt by the Trust of full payment
for the Shares and compliance with the 1933 Act and the 1940 Act, the Shares
will have been validly issued, fully paid and non-assessable.
<PAGE>
Mitchell Hutchins Series Trust
February 27, 1998
Page 2
We note, however, that the Trust is an entity of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, shareholders could,
under certain circumstances, be held personally liable for the obligations of
the Trust. The Declaration of Trust states that creditors of, contractors with
and claimants against the Trust or any series shall look only to the assets of
the Trust for the appropriate series for payment. It also requires that notice
of such disclaimer be given in each note, bond, contract, certificate
undertaking or instrument made or issued by the officers or the trustees of the
Trust on behalf of the Trust. The Declaration of Trust further provides: (1) for
indemnification from the assets of the Trust or the appropriate series for all
loss and expense of any shareholder held personally liable for the obligations
of the Trust or any series by virtue of ownership of shares of the Trust or such
series; and (2) for the Trust or appropriate series to assume the defense of any
claim against the shareholder for any act or obligation of the Trust or series.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Trust or series
would be unable to meet its obligations.
We hereby consent to this opinion accompanying the PEA when it is filed with
the SEC and to the reference to our firm in the statement of additional
information that is being filed as part of the PEA.
Very truly yours,
/s/ Kirkpatrick & Lockhart LLP
KIRKPATRICK & LOCKHART LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Auditors" in the Statement of Additional
Information and to the incorporation by reference therein of our report dated
February 13, 1998, in this Registration Statement (Form N-1A No. 33-10438) of
Mitchell Hutchins Series Trust.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
New York, New York
February 25, 1998
<PAGE>
Exhibit No. 13
April 1, 1987
PaineWebber Series Trust
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
Please be advised that the shares of beneficial interest of the PaineWebber
Series Trust, which we have today purchased from you in the aggregate amount of
$100,000 were purchased as an investment with no present intention of redeeming
or selling such shares and we do not have any intention of redeeming or selling
such shares.
Very truly yours,
PAINEWEBBER INCORPORATED
By: /s/ Dianne E. O'Donnell
-----------------------
Dianne E. O'Donnell, Esq.
Vice President and Associate
General Counsel
<PAGE>
Exhibit No. 15
MITCHELL HUTCHINS SERIES TRUST -- CLASS I SHARES
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
WHEREAS, Mitchell Hutchins Series Trust ("Trust") is registered under the
Investment Company Act of 1940, as amended ("1940 Act"), as an open-end
management investment company;
WHEREAS, the Trust currently has thirteen series of shares of beneficial
interest ("Series"), each of which corresponds to a distinct portfolio of
investments, which have been designated Aggressive Growth Portfolio, Balanced
Portfolio, Global Growth Portfolio, Global Income Portfolio, Growth and Income
Portfolio, Growth Portfolio, High Grade Fixed Income Portfolio, High Income
Portfolio, Money Market Portfolio, Small Cap Portfolio, Strategic Fixed Income
Portfolio, Strategic Income Portfolio and Tactical Allocation Portfolio; and
WHEREAS, the Trust intends to offer Class I shares of beneficial interest
("Shares") of each Series for sale to the separate accounts ("Separate
Accounts") of insurance companies ("Insurance Companies") that issue variable
annuity or variable life contracts ("Contracts"); and
WHEREAS the Trust desires to adopt a Plan of Distribution ("Plan") pursuant
to Rule 12b-1 under the 1940 Act with respect to the Shares of each current
Series and of such other Series as may hereafter be designated by the Trust's
board of trustees ("Board") and have Shares established; and
WHEREAS the Trust has entered into a Distribution Contract with Mitchell
Hutchins Asset Management Inc. ("Mitchell Hutchins") pursuant to which Mitchell
Hutchins has agreed to serve as Distributor of the Shares of each such Series;
NOW, THEREFORE, the Trust hereby adopts this Plan with respect to the
Shares of each Series in accordance with Rule 12b-1 under the 1940 Act.
1. The Trust authorizes Mitchell Hutchins to arrange for the Trust to
enter into agreements with Insurance Companies ("Participating Insurance
Companies") concerning the sale of Shares of one or more Series to the Separate
Accounts of such Participating Insurance Companies.
2. A. Each Series is authorized to pay to Mitchell Hutchins for
remittance to each Participating Insurance Company or, at Mitchell Hutchins'
direction, to pay directly to a Participating Insurance Company, a distribution
fee at the annual rate of 0.25% of the average daily net assets of the Shares
held by the Separate Accounts of that Participating Insurance Company. Such fee
shall be calculated and accrued daily and paid quarterly or at such other
intervals as the Board shall determine.
<PAGE>
B. Any Series may pay the distribution fee at a lesser rate than
that specified in paragraph 2A of this Plan, as agreed upon by the Board and
Mitchell Hutchins and as approved in the manner specified in paragraph 4 of this
Plan.
3. Mitchell Hutchins or the Trust, at the direction of Mitchell
Hutchins, shall pay the distribution fee to Participating Insurance Companies as
compensation for providing distribution related services to the Trust's
shareholders. These distribution related services may include, but are not
limited to, the following: (a) printing and mailing of Trust prospectuses,
statements of additional information, any supplements thereto and shareholder
reports for existing and prospective Contract owners; (b) services relating to
the development, preparation, printing and mailing of Trust advertisements,
sales literature and other promotional materials describing and/or relating to
the Trust and including materials intended for use within the Participating
Insurance Company or for broker-dealer use only or retail use; (c) holding
seminars and sales meetings designed to promote the distribution of the Shares;
(d) obtaining information and providing explanations to Contract owners
regarding the investment objectives and policies and other information about the
Trust and its Series, including the performance of the Series; (e) training
sales personnel regarding the Trust and its Series; (f) compensating sales
personnel with respect to the Trust and its Series; (g) providing personal
services and/or maintenance of the Contract owner accounts with respect to Trust
Shares attributable to such accounts; and (h) financing any other activity that
the Board determines is primarily intended to result in the sale of the Shares.
4. This Plan shall not take effect with respect to the Shares of any
Series unless it first has been approved, together with any related agreements,
by votes of a majority of both (a) the Board and (b) those Trustees of the Trust
who are not "interested persons" of the Trust and have no direct or indirect
financial interest in the operation of this Plan or any agreements related
thereto ("Independent Trustees"), cast in person at a meeting (or meetings)
called for the purpose of voting on such approval; and until the Trustees who
approve the Plan's taking effect with respect to such Series' Shares have
reached the conclusion required by Rule 12b-1(e) under the 1940 Act.
5. After approval as set forth in paragraph 4, this Plan shall continue in
full force and effect with respect to such Series for so long as such
continuance is specifically approved at least annually in the manner provided
for approval of this Plan in paragraph 4.
6. Mitchell Hutchins shall provide to the Board and the Board shall
review, at least quarterly, a written report that complies with the requirements
of Rule 12b-1 regarding the disbursement of the distribution fee during such
period. Only distribution expenditures properly attributable to the sale of
Shares of a particular Series will be used to justify any fee paid by the Trust
with respect to that Series pursuant to this Plan. To the extent that such
expenditures relate to more than one Series, the expenditures will be allocated
between or among the affected Series in a manner deemed appropriate by the
Board.
-2-
<PAGE>
7. This Plan may be terminated with respect to any Series at any time by
vote of the Board, by vote of a majority of the Independent Trustees, or by vote
of a majority of the outstanding Shares of that Series.
8. This Plan may not be amended to increase materially the amount of
distribution fees provided for in paragraph 2A hereof unless such amendment is
approved by a vote of a majority of the outstanding Shares of each Series, and
no material amendment to the Plan shall be made unless approved in the manner
provided for approval and annual renewal in paragraph 5 hereof.
9. The amount of the distribution fees payable by any Series under
paragraph 2A hereof and the Distribution Contract is not related directly to
expenses incurred by Mitchell Hutchins or a Participating Insurance Company in
providing distribution related services on behalf of such Series, and paragraph
3 hereof and the Distribution Contract do not obligate the Series to reimburse
Mitchell Hutchins or the Participating Insurance Company for such expenses. The
distribution fees set forth in paragraph 2A hereof will be paid by the Series to
Mitchell Hutchins or at the direction of Mitchell Hutchins until either the Plan
or the Distribution Contract is terminated or not renewed. If either the Plan
or the Distribution Contract is terminated or not renewed with respect to the
Shares of any Series, any expenses relating to distribution activities incurred
by Mitchell Hutchins or a Participating Insurance Company on behalf of the
Series in excess of payments of the distribution fees specified in paragraph 2A
hereof and the Distribution Contract which Mitchell Hutchins or a Participating
Insurance Company has received or accrued through the termination date are the
sole responsibility and liability of Mitchell Hutchins or the Participating
Insurance Company, and are not obligations of the Series.
10. While this Plan is in effect, the selection and nomination of the
Trustees who are not interested persons of the Trust shall be committed to the
discretion of the Trustees who are not interested persons of the Trust.
11. As used in this Plan, the terms "majority of the outstanding voting
securities" and "interested person" shall have the same meaning as those terms
have in the 1940 Act.
12. The Trust shall preserve copies of this Plan (including any amendments
thereto) and any related agreements and all reports made pursuant to paragraph 6
hereof for a period of not less than six years from the date of this Plan, the
first two years in an easily accessible place.
13. The Trustees of the Trust and the shareholders of each Series shall
not be liable for any obligations of the Trust or any Series under this Plan,
and Mitchell Hutchins or any other person, in asserting any rights or claims
under this Plan, shall look only to the assets and property of the Trust or such
Series in settlement of such right or claim, and not to such Trustees or
shareholders.
-3-
<PAGE>
IN WITNESS WHEREOF, the Trust has executed this Plan of Distribution on
the day and year set forth below in New York, New York.
Date: February 11, 1998
MITCHELL HUTCHINS SERIES TRUST
Attest: By:
--------------------------- -------------------------------
-4-
<PAGE>
Exhibit No. 18
MITCHELL HUTCHINS SERIES TRUST
MULTIPLE CLASS PLAN PURSUANT TO RULE 18f-3
Mitchell Hutchins Series Trust hereby adopts this Multiple Class Plan pursuant
to Rule 18f-3 under the Investment Company Act of 1940, as amended ("1940 Act"),
on behalf of each of its thirteen current series and any series that may be
established in the future (referred to hereinafter collectively as the
"Portfolios" and individually as a "Portfolio").
A. GENERAL DESCRIPTION OF CLASSES THAT ARE OFFERED:
-----------------------------------------------
1. CLASS H SHARES. Class H shares of each Portfolio may be sold
without imposition of an initial sales charge or contingent
deferred sales charge ("CDSC") and are not subject to any
distribution or service fees.
2. CLASS I SHARES. Class I shares are sold without imposition of an
initial sales charge or CDSC and are subject to an annual
distribution fee of 0.25% of the average daily net assets of the
Class I shares of the Portfolio, paid in accordance with a plan
adopted pursuant to Rule 12b-1 under the 1940 Act.
Class H and Class I shares of each Portfolio are available for purchase
only by: (i) insurance company separate accounts that fund benefits under
variable annuity contracts and/or variable life contracts ("Accounts") and
(ii) such other investors as may be permitted to own shares of an
investment company in which Accounts invest under the applicable provisions
of the Internal Revenue Code and regulations thereunder.
B. EXPENSE ALLOCATIONS OF EACH CLASS:
---------------------------------
Certain expenses may be attributable to a particular Class of shares of
each Portfolio ("Class Expenses"). Class Expenses are charged directly to
the net assets of the particular Class and thus are borne on a pro rata
basis by the outstanding shares of that Class.
In addition to the distribution fees described above, each Class may also
pay a different amount of the following other expenses:
1. printing and postage expenses related to preparing and distributing
materials such as shareholder reports, prospectuses, and proxies to
current shareholders of a specific Class;
2. Blue Sky fees incurred by a specific Class of shares;
3. SEC registration fees incurred by a specific Class of shares;
<PAGE>
4. expenses of administrative personnel and services required to
support the shareholders of a specific Class of shares;
5. Trustees' fees incurred as a result of issues relating to a
specific Class of shares;
6. litigation expenses or other legal expenses relating to a specific
Class of shares; and
7. transfer agent fees identified as being attributable to a specific
Class.
C. EXCHANGE PRIVILEGES:
-------------------
Class H and Class I shares of each Portfolio may be exchanged for shares of
the corresponding Class of other Portfolios or may be acquired through an
exchange of shares of the corresponding Class of those Portfolios.
D. CLASS DESIGNATION:
-----------------
Subject to approval by the Board of Trustees of Mitchell Hutchins Series
Trust, a Portfolio may alter the nomenclature for the designations of one
or more of its Classes of shares.
E. ADDITIONAL INFORMATION:
----------------------
This Multiple Class Plan is qualified by and subject to the terms of the
then current prospectus for the applicable Classes; provided, however, that
none of the terms set forth in any such prospectus shall be inconsistent
with the terms of the Classes contained in this Plan. The prospectus for
each Portfolio contains additional information about the Classes and each
Portfolio's multiple class structure.
F. DATE OF EFFECTIVENESS:
---------------------
This Multiple Class Plan is effective as of the date hereof, provided that
this Plan shall not become effective with respect to any Fund unless such
action has first been approved by the vote of a majority of the Board of
Trustees and by vote of a majority of those Trustees who are not interested
persons of Mitchell Hutchins Series Trust.
February 11, 1998
