As filed with the Securities and Exchange Commission on February 26, 1999
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. 27 [ X ]
---
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 26 [ X ]
---
(Check appropriate box or boxes.)
MITCHELL HUTCHINS 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:
ROBERT A. WITTIE, ESQ.
ELINOR W. GAMMON, ESQ.
Kirkpatrick & Lockhart LLP
Second Floor
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036-1800
Telephone: (202) 778-9000
Approximate Date of Proposed Public Offering: Effective Date of this
Post-Effective Amendment.
[ ] Immediately upon filing pursuant to Rule 485(b)
[ ] On pursuant to Rule 485(b)
-----------------
[ ] 60 days after filing pursuant to Rule 485(a)(1)
[X ] On May 1, 1999 pursuant to Rule 485(a)(1)
-----------------
[ ] 75 days after filing pursuant to Rule 485(a)(2)
[ ] On pursuant to Rule 485(a)(2)
-----------------
Title of Securities Being Registered: Shares of Beneficial Interest.
<PAGE>
MITCHELL HUTCHINS SERIES TRUST
MONEY MARKET PORTFOLIO
HIGH GRADE FIXED INCOME PORTFOLIO
STRATEGIC FIXED INCOME PORTFOLIO
STRATEGIC INCOME PORTFOLIO
GLOBAL INCOME PORTFOLIO
HIGH INCOME PORTFOLIO
BALANCED PORTFOLIO
GROWTH AND INCOME PORTFOLIO
TACTICAL ALLOCATION PORTFOLIO
GROWTH PORTFOLIO
AGGRESSIVE GROWTH PORTFOLIO
SMALL CAP PORTFOLIO
GLOBAL GROWTH PORTFOLIO
Each fund offers its Class H and Class I shares only to insurance company
separate accounts that fund certain variable annuity and variable life insurance
contracts. This prospectus should be read together with the prospectus for those
contracts.
PROSPECTUS May 1, 1999
- -------------------------------
AS WITH ALL MUTUAL FUNDS, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED ANY FUND'S SHARES AS INVESTMENTS OR DETERMINED WHETHER THIS PROSPECTUS
IS COMPLETE OR ACCURATE. TO STATE OTHERWISE IS A CRIME.
<PAGE>
CONTENTS
THE FUNDS (PAGE NUMBERS WILL CHANGE)
-------------------------------------------------------------------
What every investor 4 Money Market Portfolio
should know about
the funds 7 High Grade Fixed Income Portfolio
10 Strategic Fixed Income Portfolio
13 Strategic Income Portfolio
15 Global Income Portfolio
18 High Income Portfolio
19 Balanced Portfolio
23 Growth and Income Portfolio
26 Tactical Allocation Portfolio
27 Growth Portfolio
30 Aggressive Growth Portfolio
34 Small Cap Portfolio
35 Global Growth Portfolio
38 More on Risks and Investment Strategies
INVESTING IN THE FUNDS
-------------------------------------------------------------------
Information for 41 Purchases, Redemptions and Exchanges
managing your Fund 41 Pricing and Valuation
account
2
<PAGE>
Mitchell Hutchins Series Trust
- -----------------------------------------------------------------------------
ADDITIONAL INFORMATION
-------------------------------------------------------------------
Additional important 43 Management
information about 47 Dividends, Distributions and Taxes
the Funds 48 Financial Highlights
------------------------------------------------------
Where to learn more
about these Funds
The funds are not complete or
balanced investment programs.
--------------------------------
3
<PAGE>
Mitchell Hutchins Money Market Portfolio
- -------------------------------------------------
MONEY MARKET PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE:
Maximum current income consistent with liquidity and conservation of capital
PRINCIPAL INVESTMENT STRATEGIES:
The fund is a money market mutual fund and is subject to maturity, quality and
diversification requirements designed to help it maintain a stable price of
$1.00 per share.
The fund invests in a diversified portfolio of high quality, short-term U.S.
dollar-denominated money market instruments and related repurchase agreements.
These instruments include
o commercial paper and other short-term corporate obligations of U.S. and
foreign issuers
o U.S. government securities
o obligations of U.S. and foreign banks
Mitchell Hutchins Asset Management Inc., the fund's investment adviser,
evaluates its investments based on credit analysis and interest rate outlook.
Because the fund buys and sells its portfolio securities based on considerations
of safety of principal and liquidity, the fund may not buy securities that pay
the highest yield. The fund may attempt to increase its yield by trading to take
advantage of short-term market variations.
PRINCIPAL RISKS:
An investment in the fund is not a bank deposit and is neither insured nor
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. While the fund seeks to maintain the value of your investment at $1.00
per share, it is possible to lose money by investing in the fund.
The principal risks presented by the fund are:
o Interest Rate Risk
o Credit Risk
For an explanation of each of these risks, see "More on Risks and Investment
Strategies," below.
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMIANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS)
4
<PAGE>
Mitchell Hutchins Money Market Portfolio
- -------------------------------------------------
PERFORMANCE
- -----------
RISK/RETURN BAR CHART AND TABLE:
The following bar chart and table provide information about the fund's
performance. The fund's shares are sold only to insurance company separate
accounts that fund certain variable annuity and variable life contracts. The bar
chart and table do not reflect sales charges or other expenses of these
contracts.
The bar chart shows how the fund's performance has varied from year to year. The
chart shows Class H shares, which were the only class outstanding during the
periods shown.
The table that follows the bar chart shows the average annual returns over
several time periods.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
TOTAL RETURN ON CLASS H SHARES
[BAR CHART]
Best quarter during years shown: ___ quarter, 19__ -- _____%
Worst quarter during years shown: ___ quarter, 19__ -- _____%
5
<PAGE>
Mitchell Hutchins Money Market Portfolio
- -------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
CLASS CLASS H
INCEPTION DATE 5/04/87
ONE YEAR
FIVE YEARS
TEN YEARS
LIFE OF CLASS
6
<PAGE>
Mitchell Hutchins High Grade Fixed Income Portfolio
- -----------------------------------------------------------
HIGH GRADE FIXED INCOME PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE:
Primarily, current income consistent with the preservation of capital;
secondarily, capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in a portfolio of U.S. government bonds, mortgage-
and asset-backed securities of both government and private issuers and high
quality corporate bonds. These high quality bonds are rated in one of the two
highest rating categories or are of comparable quality. The fund uses interest
rate futures contracts and other derivatives to help manage its portfolio
"duration." "Duration" is a measure of the fund's exposure to interest rate
risk.
The fund also invests, to a lesser extent, in corporate bonds that are
investment grade but not high quality and in securities of foreign issuers that
are denominated in U.S. dollars and traded in U.S. markets.
Mitchell Hutchins Asset Management Inc., the fund's investment adviser,
allocates its assets among bond market sectors and industries by deciding which
sectors and industries provide the best relative values under prevailing
conditions.
Mitchell Hutchins selects industries and companies within the corporate bond
sector using a proprietary financial forecasting model and by performing
fundamental credit analysis based on cash flows and the ability of the issuer to
make required payments on its debt. Mitchell Hutchins chooses specific
securities that it believes provide the best combination of income, liquidity
and potential for gain relative to risk of loss.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund. The principal risks presented by the fund are:
o Interest Rate Risk
o Credit Risk
o Prepayment Risk
o Derivatives Risk
For an explanation of each of these risks, see "More on Risks and Investment
Strategies," below.
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMIANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
7
<PAGE>
Mitchell Hutchins High Grade Fixed Income Portfolio
- -----------------------------------------------------------
PERFORMANCE
- -----------
RISK/RETURN BAR CHART AND TABLE:
The following bar chart and table provide information about the fund's
performance. The fund's shares are sold only to insurance company separate
accounts that fund certain variable annuity and variable life contracts. The bar
chart and table do not reflect sales charges or other expenses of these
contracts.
The bar chart shows how the fund's performance has varied from year to year. The
bar chart shows Class H shares, which were the only class outstanding during the
periods shown.
The table that follows the bar chart shows the average annual returns over
several time periods compared to the return of a broad-based market index.
The fund's past performance does not necessarily indicate how the fund will
perform in the future. This is especially true for periods prior to July 21,
1995, which is when Mitchell Hutchins assumed day-to-day portfolio management
responsibility from a sub-adviser.
TOTAL RETURN ON CLASS H SHARES
[BAR CHART]
Best quarter during years shown: ___ quarter, 19__ -- _____%
Worst quarter during years shown: ___ quarter, 19__ -- _____%
8
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
CLASS CLASS H LEHMAN BROTHERS
GOVERNMENT BOND
INDEX
INCEPTION DATE 11/08/93
ONE YEAR
FIVE YEARS
LIFE OF CLASS
9
<PAGE>
Mitchell Hutchins Strategic Fixed Income Portfolio
- ---------------------------------------------------------
STRATEGIC FIXED INCOME PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE:
Total return with low volatility.
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests in bonds with varying maturities, although it normally limits
its overall portfolio "duration" to between three and eight years. "Duration" is
a measure of the fund's exposure to interest rate risk. The fund invests
primarily in
o mortgage- and asset-backed securities of both government and private
issuers
o investment grade corporate bonds
o U.S. and foreign government bonds
o money market instruments
The fund also invests, to a lesser extent, in bonds that are below investment
grade. Securities rated below investment grade are commonly known as "junk
bonds." The fund invests in when-issued or delayed delivery bonds as a
leveraging technique to increase its return.
The fund uses interest rate futures and other derivatives to help manage its
portfolio duration.
Mitchell Hutchins Asset Management Inc. has appointed Pacific Investment
Management Company ("PIMCO") as the fund's sub-adviser. PIMCO analyzes U.S.
economic and market conditions, as well as other factors, to decide on a
portfolio duration and to allocate fund assets to bonds of different credit
qualities, maturities, types and coupon interest rates. PIMCO seeks bonds that
it believes to be relatively undervalued and selects bonds based on various
factors, including economic forecasts, anticipated interest rate levels and
expected prepayment rates on the mortgages supporting mortgage-backed bonds.
PIMCO selects specific bonds by analyzing their relative value and risk
characteristics.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund. The principal risks presented by the fund are:
o Interest Rate Risk
o Credit Risk
o Prepayment Risk
o Foreign Securities Risk
o Leverage Risk
o Derivatives Risk
For an explanation of each of these risks, see "More on Risks and Investment
Strategies," below.
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMIANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
10
<PAGE>
Mitchell Hutchins Strategic Fixed Income Portfolio
- ---------------------------------------------------------
PERFORMANCE
- -----------
RISK/RETURN BAR CHART AND TABLE:
The following bar chart and table provide information about the fund's
performance. The fund's shares are sold only to insurance company separate
accounts that fund certain variable annuity and variable life contracts. The bar
chart and table do not reflect sales charges or other expenses of these
contracts.
The bar chart shows how the fund's performance has varied from year to year. The
bar chart shows Class H shares, which were the only class outstanding during the
periods shown.
The table that follows the bar chart shows the average annual returns over
several time periods compared to the return of a broad-based market index.
The fund's past performance does not necessarily indicate how the fund will
perform in the future. This is especially true for periods prior to September
21, 1995, which is when PIMCO assumed portfolio management responsibility from
Mitchell Hutchins.
TOTAL RETURN ON CLASS H SHARES
[BAR CHART]
Best quarter during years shown: ___ quarter, 19__ -- _____%
Worst quarter during years shown: ___ quarter, 19__ -- _____%
11
<PAGE>
Mitchell Hutchins Strategic Fixed Income Portfolio
- ---------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
CLASS CLASS H LEHMAN BROTHERS
MORTGAGE BOND
INDEX
INCEPTION DATE 7/05/89
ONE YEAR
FIVE YEARS
LIFE OF CLASS
12
<PAGE>
Mitchell Hutchins Strategic Income Portfolio
- --------------------------------------------------
STRATEGIC INCOME PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
Mitchell Hutchins Strategic Income Portfolio
- --------------------------------------------------
FUND OBJECTIVE:
High level of current income and, secondarily, capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES:
The fund strategically allocates investments among three bond market sectors:
o U.S. government and investment grade bonds;
o U.S. high yield bonds (sometimes called "junk bonds"), including preferred
stock and bonds that are convertible into common stock; and
o Foreign and emerging market bonds.
Each of these sectors generally reacts in different ways or at different times
to changes in interest rates or to particular economic events. This means that
when one sector underperforms the market as a whole, another sector may
outperform the market.
The fund normally invests in each of the three sectors. However, the fund's
investment adviser, Mitchell Hutchins Asset Management Inc., tries to take
advantage of changes in the relative performance of different sectors by
allocating a larger percentage of the fund's assets to those sectors that it
believes are undervalued. Selections of specific securities are based on market
outlook, investment research, geographic analysis and forecasts of interest
rates and currency exchange rates. The fund sometimes uses forward currency
contracts to hedge against foreign currency risk.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund. The principal risks presented by the fund are:
o Interest Rate Risk
o Credit Risk
o Sector Allocation Risk
o Foreign Securities Risk
o Emerging Markets Risk
o Equity Risk
o Non-Diversified Status Risk
o Prepayment Risk
o Derivatives Risk
For an explanation of each of these risks, see "More on Risks and Investment
Strategies," below.
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMIANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
Strategic Income Portfolio commenced operations on , 1998. As a result, the fund
does not have performance information of at least one calendar year to include
in a bar chart or table reflecting average annual returns.
13
<PAGE>
Mitchell Hutchins Global Income Portfolio
- -------------------------------------------------
GLOBAL INCOME PORTFOLIO
INVESTMENT OBJECTIVES AND STRATEGIES
- ------------------------------------
FUND OBJECTIVE:
Primarily, high current income consistent with prudent investment risk;
secondarily, capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in high quality bonds of governmental and private
issuers in the U.S. and developed foreign countries. These high quality bonds
are rated in one of the two highest rating categories or are of comparable
quality. The fund also invests, to a lesser extent, in lower quality bonds,
including bonds of issuers in emerging markets. These may include bonds that
have very low credit ratings, but that Mitchell Hutchins Asset Management Inc.,
the fund's investment adviser, believes provide a return that is high enough to
justify the additional risk. Some of the fund's bonds may be backed by
mortgages.
Mitchell Hutchins normally invests a portion of the fund's assets in bonds of
U.S. government and private issuers, and allocates the balance of the fund's
portfolio among bonds of issuers in different foreign countries. Mitchell
Hutchins determines the allocation to different geographic areas, countries and
industries based upon its assessment of fundamental economic strengths, credit
quality and currency and interest rate trends. Mitchell Hutchins uses forward
currency contracts to increase or decrease the fund's exposure to various
foreign currencies.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund. The principal risks presented by the fund are:
o Interest Rate Risk
o Foreign Securities Risk
o Sovereign Risk
o Sector Allocation Risk
o Currency Risk
o Emerging Markets Risk
o Credit Risk
o Non-Diversified Status Risk
o Prepayment Risk
o Derivatives Risk
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN THE CURRENT ANNUAL/SEMIANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING SUCH REPORTS).
14
<PAGE>
Mitchell Hutchins Global Income Portfolio
- -------------------------------------------------
PERFORMANCE
- -----------
RISK/RETURN BAR CHART AND TABLE:
The following bar chart and table provide information about the fund's
performance. The fund's shares are sold only to insurance company separate
accounts that fund certain variable annuity and variable life contracts. The bar
chart and table do not reflect sales charges or other expenses of these
contracts.
The bar chart shows how the fund's performance has varied from year to year. The
bar chart shows Class H shares, which were the only class outstanding during the
periods shown.
The table that follows the bar chart shows the average annual returns over
several time periods compared to the return of a broad-based market index.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
TOTAL RETURN ON CLASS H SHARES
[BAR CHART]
Best quarter during years shown: ___ quarter, 19__ -- _____%
Worst quarter during years shown: ___ quarter, 19__ -- _____%
15
<PAGE>
Mitchell Hutchins Global Income Portfolio
- -------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
CLASS CLASS H SALOMON BROTHERS
(INCEPTION DATE) 5/01/88 WORLD GOVERNMENT
BOND INDEX
ONE YEAR
FIVE YEARS
TEN YEARS
LIFE OF CLASS
16
<PAGE>
Mitchell Hutchins High Income Portfolio
- -------------------------------------------------
HIGH INCOME PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE:
High income.
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in a diversified range of high yield U.S. and foreign
corporate bonds (sometimes called "junk bonds"). The fund also invests, to a
lesser extent, in preferred stocks and bonds that are convertible into common
stock and other types of bonds.
The fund's investment adviser, Mitchell Hutchins, uses a three step investment
process to find the best relative values in the bond markets in which the fund
invests: industry selection; company selection and security selection.
Mitchell Hutchins allocates the fund's assets among industry groups by analyzing
economic factors, industry dynamics and yield spreads to determine which
industries provide the most attractive investment opportunities. Mitchell
Hutchins selects companies within these industries using a proprietary financial
forecasting model and by performing fundamental credit analysis based on cash
flows and other factors. Finally, Mitchell Hutchins chooses from among the types
of securities offered by these companies to select those that appear to offer
the best relative values. All aspects of this process rely on Mitchell Hutchins'
economic, credit, quantitative and market research.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund. The principal risks presented by the fund are:
o Interest Rate Risk
o Credit Risk
o Foreign Securities Risk
o Emerging Markets Risk
o Equity Risk
For an explanation of each of these risks, see "More on Risks and Investment
Strategies," below.
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMIANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
High Income Portfolio commenced operations on [month/day , 1998. As a result,
the fund does not have performance information of at least one calendar year to
include in a bar chart or table reflecting average annual returns.
17
<PAGE>
Mitchell Hutchins Balanced Portfolio
- -------------------------------------------------
BALANCED PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE:
High total return with low volatility.
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in a combination of three asset classes:
o stocks
o bonds (investment grade bonds and U.S. government securities)
o cash (money market instruments)
The fund may invest in securities of foreign issuers that are traded in U.S.
dollars and in U.S. markets. The fund may invest, to a lesser extent, in bonds
that are not investment grade. The fund's investment adviser, Mitchell Hutchins
Asset Management Inc., may use futures contracts and other derivatives to adjust
the fund's exposure to different asset classes and to manage the "duration" of
its bond investments. "Duration" is a measure of the fund's exposure to interest
rate risk.
The fund keeps at least 25% of its total assets invested in fixed income
securities (bonds and cash) at all times. The fund's investment adviser,
Mitchell Hutchins, believes that this fixed income allocation should make the
fund's volatility lower than that of funds that invest solely in stocks.
Mitchell Hutchins believes that returns on stocks, bonds and money market
instruments reflect the consensus expectations for key economic variables, such
as interest rates, profit growth and inflation. Mitchell Hutchins seeks to
reallocate the fund's assets from time to time before changes in the consensus
outlook have been fully discounted by the market. Mitchell Hutchins applies
fundamental valuation techniques to the consensus data to determine whether the
expected return from stocks is sufficient to offset the additional risk when
compared to bonds and relatively risk-free money market instruments. Mitchell
Hutchins changes the fund's asset allocations from time to time in response to
significant changes in expected returns.
Mitchell Hutchins uses the following process to select individual securities for
each asset class:
o STOCKS. Mitchell Hutchins uses its own Factor Valuation Model to identify
companies that appear undervalued. The model ranks companies based on
"value" factors, such as dividends, cash flows, earnings and book values,
as well as on "growth" factors, such as earnings momentum and industry
performance forecasts. Mitchell Hutchins then applies fundamental analysis
to select specific stocks from among those in the top 20% identified by
the model.
o 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).
o MONEY MARKET INSTRUMENTS. Mitchell Hutchins selects money market
instruments based on its judgment of how they can further the fund's
investment objective.
As of December 31, 1998, the fund's net assets were allocated % to stocks, % to
bonds and % to cash. As of June 30, 1998, the fund's net assets were allocated %
to stocks, % to bonds and % to cash.
18
<PAGE>
Mitchell Hutchins Balanced Portfolio
- -------------------------------------------------
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund. The principal risks presented by the fund are:
o Equity Risk
o Sector Allocation Risk
o Interest Rate Risk
o Credit Risk
o Derivatives Risk
o Foreign Securities Risk
For an explanation of each of these risks, see "More on Risks and Investment
Strategies," below.
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMIANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
19
<PAGE>
Mitchell Hutchins Balanced Portfolio
- -------------------------------------------------
PERFORMANCE
- -----------
RISK/RETURN BAR CHART AND TABLE:
The following bar chart and table provide information about the fund's
performance. The fund's shares are sold only to insurance company separate
accounts that fund certain variable annuity and variable life contracts. The bar
chart and table do not reflect sales charges or other expenses of these
contracts.
The bar chart shows how the fund's performance has varied from year to year. The
bar chart shows Class H shares, which were the only class outstanding during the
periods shown.
The table that follows the bar chart shows the average annual returns over
several time periods compared to two broad-based market indices - one for stocks
and one for bonds.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
TOTAL RETURN ON CLASS H SHARES
[BAR CHART]
Best quarter during years shown: ___ quarter, 19__ -- _____%
Worst quarter during years shown: ___ quarter, 19__ -- _____%
20
<PAGE>
Mitchell Hutchins Balanced Portfolio
- -------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
S&P 500 COMPOSITE [LEHMAN BROTHERS
CLASS CLASS H STOCK PRICE INDEX] INTERMEDIATE
TREASURY BOND
INDEX]
INCEPTION DATE 6/01/88
ONE YEAR
FIVE YEARS
TEN YEARS
LIFE OF CLASS
21
<PAGE>
Mitchell Hutchins Growth and Income Portfolio
- ------------------------------------------------------
GROWTH AND INCOME PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE:
Current income and capital growth.
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in dividend-paying stocks of companies that its
investment adviser, Mitchell Hutchins Asset Management Inc., believes have
potential for rapid earnings growth.
The fund also invests, to a lesser extent, in bonds when Mitchell Hutchins
believes those investments offer opportunities for capital appreciation because
interest rates may fall or credit factors or ratings affecting particular
issuers may improve. The fund may invest in securities of foreign issuers that
are denominated in U.S. dollars and traded in U.S.
markets.
In selecting stocks for the fund, Mitchell Hutchins uses its own Factor
Valuation Model to identify companies that appear undervalued. The model ranks
companies based on "value" factors such as dividends, cash flows, earnings and
book values, as well as on "growth" factors, such as earnings momentum and
industry performance forecasts. Mitchell Hutchins then applies fundamental
analysis to select specific stocks from among those in the top 20% identified by
the model.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund. The principal risks presented by the fund are:
o Equity Risk
o Interest Rate Risk
o Credit Risk
o Foreign Securities Risk
For an explanation of each of these risks, see "More on Risks and Investment
Strategies," below.
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMIANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
22
<PAGE>
Mitchell Hutchins Growth and Income Portfolio
- ------------------------------------------------------
PERFORMANCE
- -----------
RISK/RETURN BAR CHART AND TABLE:
The following bar chart and table provide information about the fund's
performance. The fund's shares are sold only to insurance company separate
accounts that fund certain variable annuity and variable life contracts. The bar
chart and table do not reflect sales charges or other expenses of these
contracts.
The bar chart shows how the fund's performance has varied from year to year. The
bar chart shows Class H shares because they have the longer performance history.
The table that follows the bar chart shows the average annual returns over
several time compared to a broad-based market index.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
TOTAL RETURN ON CLASS H SHARES
[BAR CHART]
Best quarter during years shown: ___ quarter, 19__ -- _____%
Worst quarter during years shown: ___ quarter, 19__ -- _____%
23
<PAGE>
Mitchell Hutchins Growth and Income Portfolio
- ------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
CLASS CLASS H S&P 500
COMPOSITE STOCK
PRICE INDEX
INCEPTION DATE 1/02/92
ONE YEAR
FIVE YEARS
LIFE OF CLASS
24
<PAGE>
Mitchell Hutchins Tactical Allocation Portfolio
- -----------------------------------------------------
TACTICAL ALLOCATION PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE:
Total return, consisting of long-term capital appreciation and current income.
PRINCIPAL INVESTMENT STRATEGIES:
The fund allocates its assets between
o a stock portion that is designed to track the performance of the S&P 500
Composite Stock Price Index and
o a fixed income portion that consists of either five-year U.S. Treasury
notes or U.S. Treasury bills with remaining maturities of 30 days.
Mitchell Hutchins Asset Management Inc., the fund's investment adviser,
reallocates the fund's assets in accordance with the recommendations of its own
Tactical Allocation Model on the first business day of each month.
The Tactical Allocation Model attempts to track the performance of the S&P 500
Index in periods of strong market performance. The Model 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 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 fund's assets. The Model uses a bond risk premium determination to decide
whether to recommend five-year U.S. Treasury notes or 30-day U.S. Treasury
bills.
When the Tactical Allocation Model recommends a more than 50% fixed income
allocation, the fund must invest in other high quality bonds or money market
instruments to the extent needed to limit the fund's investments in U.S.
Treasury obligations to no more than 55% of its assets. This limit is imposed by
Internal Revenue Code diversification requirements for segregated asset accounts
used to fund variable annuity or variable life contracts.
As of December 31, 1998, the fund's net assets were allocated % to stocks and %
to bonds.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund. The principal risks presented by the fund are:
o Equity Risk
o Sector Allocation Risk
o Interest Rate Risk
For an explanation of each of these risks, see "More on Risks and Investment
Strategies," below.
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMIANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
Tactical Allocation Portfolio commenced operations on [month/day ], 1998. As a
result, the fund does not have performance information of at least one calendar
year to include in a bar chart or table reflecting average annual returns.
25
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Mitchell Hutchins Growth Portfolio
- -------------------------------------------------
GROWTH PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE:
Long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in stocks of companies that Mitchell Hutchins Asset
Management Inc., its adviser, believes have substantial potential for capital
growth.
The fund also invests, to a lesser extent, in other securities, including bonds.
The fund invests in bonds when Mitchell Hutchins believes those investments
offer opportunities for capital appreciation because interest rates may fall or
credit factors or ratings affecting particular issuers may improve. The fund may
invest in securities of foreign issuers that are denominated in U.S. dollars and
traded in U.S. markets.
The fund may invest in companies of any size, including small capitalization
companies.
In selecting stocks for the fund, Mitchell Hutchins combines a "bottom up"
stock-by-stock approach with a modified, growth-oriented version of its own
Factor Valuation Model to identify companies that appear to have potential for
above-average growth in earnings, cash flow and/or book value. The model ranks
companies based on "growth" factors such as earnings momentum, stock price
movement, economic sensitivity and industry performance forecasts. Mitchell
Hutchins then applies fundamental analysis to select specific stocks from among
those in the top 20% identified by the model.
This flexibility allows the fund to invest more of its assets in companies that
have greater earnings growth potential regardless of their market
capitalizations. When investing in smaller companies, the Team places more
emphasis on the trading volume of the company's stock..
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund. The principal risks presented by the fund are:
o Equity Risk
o Small Cap Companies Risk
o Foreign Securities Risk
o Interest Rate Risk
o Credit Risk
For an explanation of each of these risks, see "More on Risks and Investment
Strategies," below.
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMIANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
26
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Mitchell Hutchins Growth Portfolio
- -------------------------------------------------
PERFORMANCE
- -----------
RISK/RETURN BAR CHART AND TABLE:
The following bar chart and table provide information about the fund's
performance. The fund's shares are sold only to insurance company separate
accounts that fund certain variable annuity and variable life contracts. The bar
chart and table do not reflect sales charges or other expenses of these
contracts.
The bar chart shows how the fund's performance has varied from year to year. The
bar chart shows Class H shares, which were the only class outstanding during the
periods shown.
The table that follows the bar chart shows the average annual returns over
several time periods compared to a broad-based market index.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
TOTAL RETURN ON CLASS H SHARES
[BAR CHART]
Best quarter during years shown: ___ quarter, 19__ -- _____%
Worst quarter during years shown: ___ quarter, 19__ -- _____%
27
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Mitchell Hutchins Growth Portfolio
- -------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
S&P 500 COMPOSITE
CLASS CLASS H STOCK PRICE INDEX
INCEPTION DATE 5/04/87
ONE YEAR
FIVE YEARS
TEN YEARS
LIFE OF CLASS
28
<PAGE>
Mitchell Hutchins Aggressive Growth Portfolio
- ------------------------------------------------------
AGGRESSIVE GROWTH PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE:
Maximizing long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in common stocks of U.S. companies that its
sub-adviser, Nicholas-Applegate Capital Management, expects to grow faster than
the average rate of companies in the S&P 500 Composite Stock Price Index.
The fund invests, to a lesser extent, in preferred stocks, convertible
securities and investment grade bonds. The fund may invest in securities of
foreign issuers that are denominated in U.S. dollars and traded in U.S. markets.
The fund invests in companies that are diversified over a cross-section of
industries. The fund's investments may include growth companies, cyclical
companies or companies that Nicholas-Applegate believes to be undergoing a basic
change in operations or markets that would result in a significant improvement
in earnings. The fund may invest in companies of any size, including small
capitalization companies.
In selecting investments for the fund, Nicholas-Applegate uses a proprietary
investment methodology to identify companies with attractive earnings and growth
potential and to evaluate their investment prospects.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund. The principal risks presented by the fund are:
o Equity Risk
o Foreign Securities Risk
o Small Cap Companies Risk
o Interest Rate Risk
o Credit Risk
For an explanation of each of these risks, see "More on Risks and Investment
Strategies," below.
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMIANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
29
<PAGE>
Mitchell Hutchins Aggressive Growth Portfolio
- ------------------------------------------------------
PERFORMANCE
- -----------
RISK/RETURN BAR CHART AND TABLE:
The following bar chart and table provide information about the fund's
performance. The fund's shares are sold only to insurance company separate
accounts that fund certain variable annuity and variable life contracts. The bar
chart and table do not reflect sales charges or other expenses of these
contracts.
The bar chart shows how the fund's performance has varied from year to year. The
bar chart shows Class H shares, which were the only class outstanding during the
periods shown.
The table that follows the bar chart shows the average annual returns over
several time periods compared to a broad-based market index.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
TOTAL RETURN ON CLASS H SHARES
[BAR CHART]
Best quarter during years shown: ___ quarter, 19__ -- _____%
Worst quarter during years shown: ___ quarter, 19__ -- _____%
30
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Mitchell Hutchins Growth Portfolio
- -------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
CLASS CLASS H S&P 500
COMPOSITE STOCK
PRICE INDEX
INCEPTION DATE 11/02/93
ONE YEAR
FIVE YEARS
LIFE OF CLASS
31
<PAGE>
Mitchell Hutchins Small Cap Portfolio
- -------------------------------------------------
SMALL CAP PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE:
Long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in stocks of small capitalization ("small cap")
companies, which are defined as companies that have market capitalizations of up
to $1 billion.
The fund may invest, to a lesser extent, in stocks of larger companies,
preferred stocks, and bonds, including convertible securities. The fund would
invest in bonds when its investment adviser, Mitchell Hutchins Asset Management
Inc., believes those investments offer opportunities for capital appreciation
because interest rates may fall or credit factors or ratings affecting
particular issuers may improve. The fund may invest in securities of foreign
issuers that are denominated in U.S. dollars and traded in U.S.
markets.
In selecting stocks for the fund, Mitchell Hutchins uses its own Factor
Valuation Model to identify companies that appear undervalued. The model ranks
companies based on "value" factors such as dividends, cash flows, earnings and
book values, as well as on "growth" factors, such as earnings momentum and
industry performance forecasts. Mitchell Hutchins then applies fundamental
analysis to select specific stocks from among those of small cap companies in
the top 20% identified by the model.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund. The principal risks presented by the fund are:
o Small Cap Companies Risk
o Equity Risk
o Foreign Securities Risk
o Interest Rate Risk
o Credit Risk
For an explanation of each of these risks, see "More on Risks and Investment
Strategies," below.
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMIANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
Small Cap Portfolio commenced operations on [month/day ], 1998. As a result, the
fund does not have performance information of at least one calendar year to
include in a bar chart or table reflecting average annual returns
32
<PAGE>
Mitchell Hutchins Global Growth Portfolio
- -------------------------------------------------
GLOBAL GROWTH PORTFOLIO
INVESTMENT OBJECTIVES AND STRATEGIES
- ------------------------------------
FUND OBJECTIVE:
Long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in stocks of companies in the United States and in
foreign countries that are represented in the MSCI Europe, Australia and Far
East Index. The EAFE Index reflects stocks in most developed countries outside
North America. The fund also invests, to a lesser extent, in stocks of issuers
in other countries, including emerging markets, and in U.S. and foreign bonds.
The fund's investment adviser, Mitchell Hutchins Asset Management Inc.,
allocates the fund's assets between U.S. and foreign markets based on how it
expects U.S. stock markets to perform in comparison to stock markets in certain
of the EAFE countries. Mitchell Hutchins may increase the allocation of the
fund's assets to either the U.S. or foreign markets if it believes that one of
those markets has a greater potential for high returns, relative to the risk of
loss. Mitchell Hutchins may use futures and forward currency contracts to adjust
the fund's exposure to either the U.S. or foreign markets.
Mitchell Hutchins manages the fund's U.S. investments using its own Factor
Valuation Model to identify companies that appear undervalued. The model ranks
companies based on "value" factors, such as dividends, cash flows, earnings and
book values, as well as on "growth" factors, such as earnings momentum and
industry performance forecasts. Mitchell Hutchins then applies fundamental
analysis to select specific stocks from among those identified by the model.
Mitchell Hutchins has appointed Invista Capital Management LLC as the
sub-adviser for the fund's foreign investments. Invista selects foreign stocks
for the fund through a qualitative analysis of the fundamental business
prospects of industries and of individual companies and by making a quantitative
assessment of the relative risks presented by the countries in which those
companies operate.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund. The principal risks presented by the fund are:
o Equity Risk
o Sector Allocation Risk
o Foreign Securities Risk
o Emerging Markets Risk
o Currency Risk
o Interest Rate Risk
o Credit Risk
o Derivatives Risk
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN THE CURRENT ANNUAL/SEMIANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING SUCH REPORTS).
33
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Mitchell Hutchins Global Growth Portfolio
- -------------------------------------------------
PERFORMANCE
- -----------
RISK/RETURN BAR CHART AND TABLE:
The following bar chart and table provide information about the fund's
performance. The fund's shares are sold only to insurance company separate
accounts that fund certain variable annuity and variable life contracts. The bar
chart and table do not reflect sales charges or other expenses of these
contracts.
The bar chart shows how the fund's performance has varied from year to year. The
bar chart shows Class H shares, which were the only class outstanding during the
periods shown.
The table that follows the bar chart shows the average annual returns over
several time periods compared to a broad-based market index.
The fund's past performance does not indicate how the fund will perform in the
future. This may be particularly true for the period prior to November 2, 1998,
which is the date on which Mitchell Hutchins and Invista assumed day-to-day
management of the fund's assets. Prior to that date, another sub-adviser was
responsible for managing all the fund's assets.
TOTAL RETURN ON CLASS H SHARES
[BAR CHART]
Best quarter during years shown: ___ quarter, 19__ -- _____%
Worst quarter during years shown: ___ quarter, 19__ -- _____%
34
<PAGE>
Mitchell Hutchins Global Growth Portfolio
- -------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
CLASS MSCI
(INCEPTION DATE) CLASS H INTERNATIONAL
05/04/87 WORLD INDEX
ONE YEAR
FIVE YEARS
TEN YEARS
LIFE OF CLASS
35
<PAGE>
Mitchell Hutchins Series Trust
- -------------------------------------
MORE ON RISKS AND INVESTMENT STRATEGIES
- ---------------------------------------
PRINCIPAL RISKS
The main risks of investing in one or more of the funds are described below. Not
all of these risks apply to each fund. You can find a list of the main risks
that apply to a particular fund by looking under the "Investment Objective,
Strategies and Risks" heading for that fund.
Other risks of investing in a fund, along with further detail about some of the
risks described below, are discussed in the funds' Statement of Additional
Information ("SAI"). Information on how you can obtain the SAI is on the back
cover of this prospectus.
CREDIT RISK. Credit risk is the risk that the issuer of a bond will not make
principal or interest payments when they are due. Even if an issuer does not
default on a payment, a bond's value may decline if the market believes that the
issuer has become less able, or less willing, to make payments on time. Even
high quality bonds are subject to some credit risk. However, credit risk is
greater for lower quality bonds. Bonds that are not investment grade involve
high credit risk and are considered speculative. Some of these low quality bonds
may be in default when purchased by a fund.
CURRENCY RISK. Currency risk is the risk that the value of a foreign currency in
which one or more of a fund's investments are denominated will fall in relation
to the U.S. dollar. Currency exchange rates can be volatile and can be affected
by, among other factors, the general economics of a country, the actions of the
U.S. and foreign governments or central banks, the imposition of currency
controls, and speculation.
DERIVATIVES RISK. The value of "derivatives" - so-called because their value
"derives" from the value of an underlying asset, reference rate or index - may
rise or fall more rapidly than other investments. For some derivatives, it is
possible for a fund to lose more than the amount it invested in the derivative.
Options, futures contracts and forward currency contracts are examples of
derivatives. If a fund uses derivatives to adjust or "hedge" the overall risk of
its portfolio, it is possible that the hedge will not succeed. This may happen
for various reasons, including unexpected changes in the value of the
derivatives that are not matched by opposite changes in the value of the rest of
the fund's portfolio.
EMERGING MARKETS RISK. Securities of issuers located in emerging market
countries are subject to all of the risks of other foreign securities (see
below). However, the level of those risks often is higher due to the fact that
political, legal and economic systems in emerging market countries may be less
fully developed and less stable than those in developed countries. Emerging
market securities also may be subject to additional risks, such as lower
liquidity and larger changes in value.
EQUITY RISK. The prices of common stocks and other equity securities generally
fluctuate more than those of other investments. They reflect changes in the
issuing company's financial condition and changes in the overall market. A fund
may lose a substantial part, or even all, of its investment in a company's
stock.
FOREIGN SECURITIES RISK. Foreign securities involve risks that normally are not
associated with securities of U.S. issuers. These include risks relating to
political, social and economic developments abroad and differences between U.S.
and foreign regulatory requirements and market practices. When securities are
denominated in foreign currencies, they also are subject to currency risk (see
above).
INTEREST RATE RISK. The value of bonds can be expected to fall when interest
rates rise and to rise when interest rates fall. Interest rate risk is the risk
36
<PAGE>
Mitchell Hutchins Series Trust
- -------------------------------------
that interest rates will rise, so that the value of a fund's investments in
bonds will fall. Because interest rate risk is the primary risk presented by
U.S. government and other very high quality bonds, changes in interest rates may
actually have a greater effect on the value of those bonds than on lower quality
bonds.
LEVERAGE RISK Leverage involves increasing the total assets in which a fund can
invest beyond the level of the fund's net assets. Because leverage increases the
amount of a fund's assets, it can magnify the effect on the fund of changes in
market values. As a result, while leverage can increase a fund's income and
potential for gain, it also can increase expenses and the risk of loss.
Strategic Fixed Income Portfolio, which uses leverage by investing in
when-issued and delayed delivery bonds, attempts to limit the potential
magnifying effect of the leverage by managing its portfolio duration.
NON-DIVERSIFIED STATUS RISK. This means that a fund may invest more than 5%, but
no more than 25%, of its total assets in securities of a single issuer (other
than the U.S. government). When a fund holds a large position in the securities
of one issuer, changes in the financial condition or in the market's assessment
of that issuer may cause larger changes in the fund's total return and in the
price of its shares than if the fund held only a smaller position.
PREPAYMENT RISK. Payments on bonds that are backed by mortgage loans or similar
assets may be received earlier or later than expected due to changes in the rate
at which the underlying loans are prepaid. Faster prepayments often happen when
market interest rates are falling. As a result, a fund may need to reinvest
these early payments at those lower interest rates, thus reducing its income.
Conversely, when interest rates rise, prepayments may happen more slowly,
causing the underlying loans to be outstanding for a longer time. This can cause
the market value of the security to fall because the market may view its
interest rate to be too low for a longer term investment.
SECTOR ALLOCATION RISK. Mitchell Hutchins may not be successful in choosing the
best allocation among market sectors. A fund that allocates its assets among
market sectors is more dependent on Mitchell Hutchins' ability to successfully
assess the relative values in each sector than are funds that do not do so.
The Mitchell Hutchins Tactical Allocation Model may not correctly predict the
times to shift Tactical Allocation Portfolio's assets from one type of
investment to another.
SMALL CAP COMPANIES RISK. Securities of small cap companies generally involve
greater risk than securities of larger companies because small cap companies may
be more vulnerable to adverse business or economic developments. Small cap
companies also may have limited product lines, markets or financial resources,
and may be dependent on a relatively small management group. Securities of small
cap companies may be less liquid and more volatile than securities of larger
companies or the market averages in general. 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.
SOVEREIGN RISK. Investments in foreign government bonds involve special risks
because the investors may have limited legal recourse in the event of default.
Political conditions, especially a country's willingness to meet the terms of
its debt obligations, can be of considerable significance.
ADDITIONAL RISKS
YEAR 2000 RISK. The funds could be adversely affected by problems relating to
the inability of computer systems used by Mitchell Hutchins and the funds' other
service providers to recognize the year 2000. While year 2000-related computer
37
<PAGE>
Mitchell Hutchins Series Trust
- -------------------------------------
problems could have a negative effect on the funds, Mitchell Hutchins is working
to avoid these problems with respect to its own computer systems and to obtain
assurances from service providers that they are taking similar steps.
Similarly, the companies in which the funds invest and trading systems used by
the funds could be adversely affected by this issue. The ability of a company or
trading system to respond successfully to the issue requires both technological
sophistication and diligence, and there can be no assurance that any steps taken
will be sufficient to avoid an adverse impact on the funds.
ADDITIONAL INVESTMENT STRATEGIES
DEFENSIVE POSITIONS; CASH RESERVES In order to protect itself from adverse
market conditions, a fund may take a defensive position that is different from
its normal investment strategy. This means that the fund may temporarily invest
a larger-than-normal part, or even all, of its assets in cash or money market
instruments. Since these investments provide relatively low income, a defensive
position may not be consistent with achieving a fund's investment objective.
Strategic Income Portfolio, Global Income Portfolio and Balanced Portfolio each
may invest in money market instruments on an unlimited basis as part of its
ordinary investment strategy. Money Market Portfolio invests exclusively in
money market instruments. Each of the other funds may invest up to 35% of its
total assets in cash or money market instruments as a cash reserve for liquidity
or other purposes.
PORTFOLIO TURNOVER. Each fund may engage in frequent trading in order to achieve
its investment objective. Frequent trading may result in a high portfolio
turnover rate and higher fund expenses due to transaction costs.
38
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Mitchell Hutchins Series Trust
- -------------------------------------
INVESTING IN THE FUNDS
PURCHASES, REDEMPTIONS AND EXCHANGES
Shares of the funds are sold only to insurance company separate accounts that
fund benefits under variable annuity or variable life insurance contracts. These
separate accounts are the shareholders of the funds - not the individual
contract owners. However, the separate accounts may pass through voting rights
to the contract owners.
The funds offer both Class H and Class I shares, and both classes of shares are
sold and redeemed at net asset value.
o Class H shares are offered only to separate accounts where the related
insurance company receives no payments from the fund with respect to its
services in connection with the sale of the fund's shares.
o Class I shares are offered to separate accounts where the related insurance
company receives such payments and are subject to a distribution fee at the
annual rate of 0.25% of net assets attributable to the fund's Class I shares.
As a result, Class I shares have higher ongoing expenses than Class H shares
of the same fund.
An insurance company separate account may exchange shares of one fund for shares
of the same class in another fund at their relative net asset values per share,
provided that the separate account invests in both funds. A particular insurance
company separate account may not invest in all funds or classes of fund shares.
The funds and Mitchell Hutchins (for Class I shares) reserve the right to reject
any purchase order and to suspend the offering of a fund's shares for a period
of time.
PRICING AND VALUATION
Insurance company separate accounts buy, sell or exchange fund shares at their
net asset values. Each fund calculates net asset value separately for each class
as of the close of trading on the New York Stock Exchange (generally, 4:00 p.m.,
Eastern time). The NYSE normally is not open, and the funds do not price their
shares, on national holidays and on Good Friday. If trading on the NYSE is
halted for the day before 4:00 p.m., Eastern time, the funds' net asset value
per share will be calculated as of the time trading was halted.
MONEY MARKET PORTFOLIO'S net asset value per share is expected to be $1.00 per
share, although this value is not guaranteed. Money Market Portfolio values its
securities at their amortized cost. This method uses a constant amortization to
maturity of the difference between the cost of the instrument to the fund and
the amount due at maturity.
OTHER FUNDS. Each other fund calculates its net asset value based on the current
market value for its portfolio securities. The funds normally obtain market
values for their securities from independent pricing services that use reported
last sales prices, current market quotations or valuations from computerized
"matrix" systems that derive values based on comparable securities. If a market
value is not available from an independent pricing source for a particular
security, that security is valued at a fair value determined by or under the
direction of the funds' board of trustees. The funds normally use the amortized
cost method to value bonds that will mature in 60 days or less.
Judgment plays a greater role in valuing thinly traded securities, including
many lower-rated bonds, because there is less reliable, objective data
available.
39
<PAGE>
The funds calculate the U.S. dollar value of investments that are denominated in
foreign currencies daily, based on current exchange rates. A fund may own
securities, including some securities that trade primarily in foreign markets,
that trade on weekends or other days on which a fund does not calculate net
asset value. A fund may use fair value methods to reflect material changes in
the value of foreign securities that occur after the close of trading in the
principal foreign market but before the close of the NYSE. This policy is
intended to assure that the fund's net asset value fairly reflects security
values as of 4:00 p.m., Eastern time.
40
<PAGE>
Mitchell Hutchins Series Trust
- -------------------------------------
MANAGEMENT
- ----------
INVESTMENT ADVISERS
Mitchell Hutchins Asset Management Inc. is the investment adviser and
administrator of each fund. Mitchell Hutchins is located at 1285 Avenue of the
Americas, New York, New York 10019, and is a wholly owned asset management
subsidiary of PaineWebber Incorporated, which is wholly owned by Paine Webber
Group Inc., a publicly owned financial services holding company. On March 31,
1999, Mitchell Hutchins was adviser or sub-adviser to ______ investment
companies with _______ separate funds and aggregate assets of approximately
$______ billion.
Pacific Investment Management Company is the sub-adviser for Strategic Fixed
Income Portfolio. It is located at 840 Newport Center Drive, Suite 360, Newport
Beach, California 92660. On February 28, 1999, PIMCO had approximately $___
billion in assets under management and was the adviser or sub-adviser of ___
investment companies with _____ portfolios and aggregate net assets of
approximately $___ billion.
Nicholas-Applegate Capital Management is the sub-adviser for Aggressive Growth
Portfolio. It is located at 600 West Broadway, 29th Floor, San Diego, California
92101. On March 31, 1999, Nicholas-Applegate had approximately $___ billion in
assets under management and was the adviser or sub-adviser of ____ investment
companies with portfolios and aggregate net assets of approximately $____
billion.
Invista Capital Management, LLC is the sub-adviser for Global Growth Portfolio's
foreign investments. It is located at 1800 Hub Tower, 699 Walnut, Des Moines,
Iowa 50309. As of January 31, 1999, Invista managed approximately $___ in client
assets.
The funds have received an exemptive order from the SEC to permit the board to
appoint and replace sub-advisers and to amend sub-advisory contracts without
obtaining shareholder approval. A fund's shareholders must approve this policy
before the board may implement it. As of April 30, 1999, only the shareholders
of Global Growth Portfolio have done so.
ADVISORY FEES
The funds paid advisory fees to Mitchell Hutchins for the most recent fiscal
year at the following rates based on average daily net assets:
Money Market Portfolio 0.50%
High Grade Fixed Income Portfolio 0.50%
Strategic Fixed Income Portfolio 0.50%
Strategic Income Portfolio 0.75%
Global Income Portfolio 0.75%
High Income Portfolio 0.50%
Balanced Portfolio 0.75%
Growth and Income Portfolio 0.70%
Tactical Allocation Portfolio 0.50%
Growth Portfolio 0.75%
Aggressive Growth Portfolio 0.80%
Small Cap Portfolio 1.00%
Global Growth Portfolio 0.75%
41
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Mitchell Hutchins Series Trust
- -------------------------------------
PORTFOLIO MANAGERS.
Unless otherwise noted, all portfolio managers are employees of Mitchell
Hutchins. Most of these individuals serve as portfolio managers for more than
one fund. Information about their positions with Mitchell Hutchins and their
business experience follows this section. All relevant information about
portfolio managers who are employees of a sub-adviser is provided in this
section.
HIGH GRADE FIXED INCOME PORTFOLIO. Dennis L. McCauley is primarily responsible
for the day-to-day management of the fund's portfolio. Nirmal Singh, Craig
Varrelman and James Keegan assist Mr. McCauley in managing the fund's portfolio.
Messrs. McCauley, Singh and Varrelman have held their fund responsibilities
since July 1995. Mr. Keegan assumed his fund responsibilities in April 1996.
STRATEGIC FIXED INCOME PORTFOLIO. William C. Powers, a PIMCO Managing Director,
is primarily responsible for the day-to-day management of the fund's portfolio.
Mr. Powers has been a senior member of the fixed income portfolio management
group of PIMCO since 1991 and assumed his fund responsibilities in September
1996.
STRATEGIC INCOME PORTFOLIO. Dennis L. McCauley is the fund's allocation manager.
Nirmal Singh, Craig Varrelman and James Keegan assist Mr. McCauley in managing
Strategic Income Portfolio and share responsibility for the fund's U.S.
government and investment grade securities sector.
Thomas J. Libassi is the sector manager responsible for the day-to-day
management of Strategic Income Portfolio's U.S. high yield, high risk
securities.
Stuart Waugh is the sector manager responsible for the day-to-day management of
Strategic Income Portfolio's foreign and emerging market bonds.
Messrs. McCauley, Singh, Varrelman, Keegan, Libassi and Waugh have held their
day-to-day fund management responsibilities for the fund since its inception.
GLOBAL INCOME PORTFOLIO. Stuart Waugh and William King are primarily responsible
for the day-to-day management of the fund's portfolio. Mr. Waugh has been
involved with the fund since its inception, first as an analyst and as portfolio
manager since 1993. Mr. King assumed his present responsibilities for the fund
in 1997.
HIGH INCOME PORTFOLIO. Thomas J. Libassi is responsible for the day-to-day
management of the fund's portfolio. Mr. Libassi has held his fund
responsibilities since its inception.
BALANCED PORTFOLIO. T. Kirkham Barneby is responsible for the asset allocation
decisions for the fund. Mr. Barneby has held his fund responsibilities since
August 1995.
Mark A. Tincher is primarily responsible for the day-to-day management of the
equity portion of Balanced Portfolio. Mr. Tincher has held his fund
responsibilities since August 1995.
Dennis L. McCauley is primarily responsible for the day-to-day management of the
fixed income portion of Balanced Portfolio. Messrs. Singh and Varrelman and
Susan Ryan assist Mr. McCauley in managing Balanced Portfolio's fixed income
investments. Messrs. McCauley, Singh and Varrelman and Ms. Ryan have held their
fund responsibilities since August 1995.
GROWTH AND INCOME PORTFOLIO. Mark A. Tincher is primarily responsible for the
day-to-day management of the fund. Mr. Tincher has held his fund
responsibilities since April 1995.
TACTICAL ALLOCATION PORTFOLIO. T. Kirkham Barneby is responsible for the fund's
asset allocation decisions and the day-to-day management of its portfolio. Mr.
Barneby has held his fund responsibilities since its inception.
42
<PAGE>
Mitchell Hutchins Series Trust
- -------------------------------------
GROWTH PORTFOLIO. Ellen R. Harris has been primarily responsible for the
day-to-day management of the fund's portfolio since its inception in May 1987
and was joined by Karen L. Finkel in November 1998.
AGGRESSIVE GROWTH PORTFOLIO. The Systems Driven Internal Research team at
Nicholas-Applegate, which is primarily responsible for the day-to-day management
of Aggressive Growth Portfolio, has been under the supervision of Arthur E.
Nicholas since February 1994. Mr. Nicholas has been the chief investment officer
and managing partner of Nicholas-Applegate since its organization in 1984. The
Research team at Nicholas-Applegate has held its fund responsibilities since the
fund's inception.
SMALL CAP PORTFOLIO. Donald R. Jones is primarily responsible for the day-to-day
management of the fund. He has held his fund responsibilities since its
inception.
GLOBAL GROWTH PORTFOLIO. T. Kirkham Barneby is responsible for allocating the
fund's assets between U.S. investments and foreign investments.
Mark A. Tincher is primarily responsible for the day-to-day management of the
fund's U.S. investments.
Scott D. Opsal is primarily responsible for the day-to-day management of Global
Growth Portfolio's foreign investments. Mr. Opsal has served as executive vice
president and chief investment officer of Invista since 1997. Previously, he
served as a vice president of Invista from 1986 to 1997.
Messrs. Barneby, Tincher and Opsal assumed their fund responsibilities on
November 2, 1998.
* * *
Ms. Ryan is responsible for the day-to-day management of Money Market Portfolio
and management of the cash portion of all the other funds except Aggressive
Growth, Strategic Fixed Income and Global Growth Portfolios. She has held her
Money Market Portfolio responsibilities since its inception in May 1987.
Other members of Mitchell Hutchins' fixed income and equity investments groups
provide input on market outlook, invest rate forecasts, investment research and
other considerations pertaining to each fund's investments.
POSITIONS WITH MITCHELL HUTCHINS AND BUSINESS EXPERIENCE OF MITCHELL HUTCHINS
EMPLOYEES.
T. KIRKHAM 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.
KAREN L. FINKEL is a senior vice president of Mitchell Hutchins and has been
employed by Mitchell Hutchins as a portfolio manager for over ten years.
ELLEN R. HARRIS is a managing director of Mitchell Hutchins.
DONALD R. 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.
JAMES KEEGAN is a senior vice president of Mitchell Hutchins. Prior to joining
Mitchell Hutchins in March 1996, Mr. Keegan was a director with Merrion Group,
43
<PAGE>
Mitchell Hutchins Series Trust
- -------------------------------------
L.P. From 1987 to 1994, he was a vice president of global investment management
of Bankers Trust Company.
WILLIAM KING joined Mitchell Hutchins in November 1995. Prior to 1995, he was at
IBM Corporation where he was responsible for the management of IBM Pension
Fund's global bond portfolio. Mr. King is a Chartered Financial Analyst.
THOMAS J. LIBASSI is a senior vice president of Mitchell Hutchins. Prior to May
1994, Mr. Libassi was a vice president of Keystone Custodian Funds Inc. with
fund management responsibility for approximately $900 million in assets
primarily invested in high yield, high risk bonds.
DENNIS L. 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.
SUSAN RYAN is a senior vice president of Mitchell Hutchins and has been with
Mitchell Hutchins since 1982.
NIRMAL SINGH is a senior vice president of Mitchell Hutchins. Prior to joining
Mitchell Hutchins in 1993, Mr. Singh was with Merrill Lynch Asset Management,
Inc., where he was a member of the fund management team.
MARK A. TINCHER is a managing director and chief investment officer of equities
(stocks) of Mitchell Hutchins. Prior to joining Mitchell Hutchins in March 1995,
Mr. Tincher worked for Chase Manhattan Private Bank, where he was vice president
and directed the U.S. funds management and equity research area and oversaw the
management of all Chase equity funds.
CRAIG VARRELMAN is a senior vice president of Mitchell Hutchins. Mr. Varrelman
has been with Mitchell Hutchins as a fund manager since 1988 and manages fixed
income funds with an emphasis on U.S. government securities.
STUART WAUGH is a managing director of Mitchell Hutchins responsible for global
fixed income investments and currency trading. He has been with Mitchell
Hutchins since 1983.
Mr. Waugh is a Chartered Financial Analyst.
44
<PAGE>
Mitchell Hutchins Series Trust
- -------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
- ----------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions are paid in additional shares of the relevant fund
unless the shareholder requests otherwise.
Money Market Portfolio declares dividends daily and pays them monthly. Money
Market Portfolio does not expect to realize gains. The other funds normally
declare and pay dividends and distribute any gains annually.
Class I shares have higher expenses because of their distribution fees and thus
are expected to have lower dividends than Class H shares.
TAXES
Fund shares are offered only to insurance company separate accounts that fund
the variable annuity or variable life contracts. See the applicable contract
prospectus for a discussion of the federal income tax status of
o the insurance company separate accounts that purchase and hold shares of
the funds and
o the holders of contracts funded through those separate accounts.
See the Statement of Additional Information for information a more detailed
discussion. Prospective shareholders are urged to consult their tax advisers.
45
<PAGE>
Mitchell Hutchins Series Trust
- -------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------
The following financial highlights tables are intended to help you understand
the funds' financial performance for the past 5 years. Shorter periods are shown
for funds or classes of fund shares that have existed for less than 5 years.
Certain information reflects financial results for a single fund share. In the
tables, "total investment return" represents the rate that an investor would
have earned (or lost) on an investment in a fund, assuming reinvestment of all
dividends and distributions. This information has been audited by Ernst & Young
LLP, independent auditors, whose report, along with the funds' financial
statements, are included in the funds' Annual Report to Shareholders. The Annual
Report may be obtained without charge by calling 1-800-986-0088.
Please note that Class I shares were outstanding during the periods shown only
for ______________________ Portfolios. The information shown below for these
funds' 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 because Class I shares have higher expenses.
The information in these tables pertains only to the funds and does not reflect
charges related to the insurance company separate accounts that fund variable
annuity or variable life contracts. See the appropriate contract prospectus for
information concerning these charges.
46
<PAGE>
Mitchell Hutchins Money Market Portfolio
- -------------------------------------------------
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
- ---------------------------------------------------------------------------------------------------
CLASS H
-------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.. $ 1.00 $ 1.00 $ 1.00 $ 1.00
---- ---- ---- ----
Net investment income................. 0.04 0.04 0.05 0.03
---- ---- ---- ----
Dividends from net investment
income.............................. (0.04) (0.04) (0.05) (0.03)
------ ------ ------ ------
Net asset value, end of period........ $ 1.00 $ 1.00 $ 1.00 $ 1.00
==== ==== ==== ====
Total investment return(1)............ 4.53% 4.32% 5.22% 3.43%
==== ==== ==== ====
Ratios/Supplemental Data:
Net assets, end of period (000's)... $8,906 $12,287 $21,974 $25,042
Expenses to average net assets........ 1.22% 1.17% 0.79% 0.88%
Net investment income to
average net assets.................. 4.43% 4.27% 5.23% 3.56%
</TABLE>
- -------------------
(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.
47
<PAGE>
Mitchell Hutchins High Grade Fixed Income Portfolio
- ---------------------------------------------------------
<TABLE>
<CAPTION>
HIGH GRADE FIXED INCOME PORTFOLIO
- -----------------------------------------------------------------------------------------
CLASS H
----------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of $ 9.10 $ 9.49 $ 8.71 $ 9.61
period............................. ---- ---- ---- ----
Net investment income.............. 0.55 0.50 0.56 0.26
Net realized and unrealized gains
(losses) from investments........ 0.19 (0.63) 0.79 (0.89)
---- ------ ---- ------
Net increase (decrease) from
investment operations............ 0.74 0.13 1.35 (0.63)
---- ---- ---- ------
Dividends from net investment
income........................... (0.55) (0.52) (0.57) (0.27)
------ ------ ------ ------
Net asset value, end of period..... $ 9.29 $ 9.10 $ 9.49 $ 8.71
==== ==== ==== ====
Total investment return(1)......... 8.13% 1.41% 15.44% (6.56)%
==== ==== ===== ======
Ratios/Supplemental Data:
Net assets, end of period (000's) $7,345 $7,902 $9,147 $7.638
Expenses to average net assets..... 1.43% 1.62% 1.01% 1.56%
Net investment income to
average net assets............... 5.54% 5.04% 5.56% 4.61%
Fund turnover rate................. 95% 282% 136% 36%
</TABLE>
- ---------------------------
(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.
48
<PAGE>
Mitchell Hutchins Strategic Fixed Income Portfolio
- --------------------------------------------------------
<TABLE>
<CAPTION>
STRATEGIC FIXED INCOME PORTFOLIO
- ---------------------------------------------------------------------------------------------
CLASS H
--------------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of $ 10.21 $ 10.61 $ 10.34 $ 11.93
period............................. ----- ----- ----- -----
Net investment income.............. 0.69 0.70 0.88 0.85
Net realized and unrealized gains
(losses) from investments........ 0.44 (1.09) 1.03 (1.49)
---- ------ ---- ------
Net increase (decrease) from
investment operations............ 1.13 0.39 1.91 (0.64)
---- ---- ---- ------
Dividends from net investment
income........................... (0.70) (0.70) (0.88) (0.85)
Distributions from net realized __
gains from investments........... (0.09) (0.76) (0.10)
------ ------ ------ ------
Total dividends and other (0.70) (0.79) (1.64) (0.95)
distributions.................... ------ ------ ------ ------
Net asset value, end of period..... $ 10.64 $ 10.21 $ 10.61 $ 10.34
===== ===== ===== =====
Total investment return(1)......... 11.00% 3.79% 18.51% (5.34)%
===== ===== ====== =======
Ratios/Supplemental Data:
Net assets, end of period (000's) $9,891 $10,689 $13,741 $17,020
Expenses to average net assets..... 1.00% 1.52% 0.99% 0.89%
Net investment income to
average net assets............... 6.04% 5.88% 6.35% 6.64%
Fund turnover rate................. 175% 317% 234% 54%
</TABLE>
- -------------------
(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.
49
<PAGE>
Mitchell Hutchins Global Income Portfolio
- -------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL INCOME PORTFOLIO
- -----------------------------------------------------------------------------------------
CLASS H
-----------------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................. $ 11.14 $ 11.20 $ 10.88 $ 11.72
----- ----- ----- -----
Net investment income (loss) 0.75 0.87 (0.05) 0.97
Net realized and unrealized
gains (losses) from (0.36) (0.13) 1.52 (1.60)
investments............... ------ ------ ---- ------
Net increase (decrease) from
investment operations..... 0.39 0.74 1.47 (0.63)
---- ---- ---- ------
Dividends from net
investment income........ (0.71) (0.79) (1.15) (0.21)
Distributions in excess of
net investment income..... ___ ___ ___ ___
Distributions from net
realized gains (0.01) (0.01) ___ ___
from investments.... ------ ------ ------ ------
Total dividends and other
distributions............. (0.72) (0.80) (1.15) (0.21)
------ ------ ------ ------
Net asset value, end of $ 10.81 $ 11.14 $ 11.20 $ 10.88
period.................... ===== ===== ===== =====
Total investment return(1).. 3.50% 6.62% 13.58% (5.56)%
==== ==== ===== =======
Ratios/Supplemental Data:
Net assets, end of period $17,773 $24,436 $35,700 $52,688
(000's).....................
Expenses to average net 1.52% 1.56% 1.19% 1.17%
assets....................
Net investment income to
average net assets........ 6.34% 6.56% 7.21% 7.23%
Fund turnover rate.......... 142% 134% 160% 97%
</TABLE>
- -------------------
(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.
50
<PAGE>
Mitchell Hutchins Balanced Portfolio
- -------------------------------------------------
<TABLE>
<CAPTION>
BALANCED PORTFOLIO*
- ------------------------------------------------------------------------------------
CLASS H
------------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................. $ 10.95 $ 10.70 $ 9.54 $ 11.95
----- ----- ---- -----
Net investment income....... 0.28 0.29 0.35 0.30
Net realized and unrealized
gains (losses) from 2.44 1.49 1.88 (1.44)
investments............... ---- ---- ---- ------
Net increase (decrease) from
investment operations..... 2.72 1.78 2.23 (1.14)
---- ---- ---- ------
Dividends from net
investment (0.28) (0.28) (0.35) (0.30)
income....................
Distributions from net
realized gains on (2.06) (1.25) (0.72) (0.97)
investments...... ------ ------ ------ ------
Total dividends and other
distributions............. (2.34) (1.53) (1.07) (1.27)
------ ------ ------ ------
Net asset value, end of $ 11.33 $ 10.95 $ 10.70 $ 9.54
period...................... ===== ===== ===== ====
Total investment return(1).. 24.86% 16.82% 23.27% (9.59)%
===== ===== ===== =======
Ratios/Supplemental Data:
Net assets, end of period $28,211 $29,224 $23,413 $23,263
(000's).....................
Expenses to average net 1.19% 1.24% 1.09% 1.03%
assets....................
Net investment income to
average net assets........ 2.06% 2.29% 2.88% 2.30%
Fund turnover rate.......... 169% 235% 171% 112%
</TABLE>
- -------------------
* Prior to January 26, 1996, Balanced Fund was known as Asset Allocation
Fund.
(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.
51
<PAGE>
Mitchell Hutchins Growth and Income Portfolio
- ---------------------------------------------------
GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS H
-----------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of $ 12.27 $ 11.83 $ 9.16 $ 9.87
period............................. ----- ----- ---- ----
Net investment income ............. 0.10 0.06 0.10 0.10
Net realized and unrealized gains
(losses) from investments........ 3.88 2.53 2.70 (0.71)
---- ---- ---- ------
Net increase (decrease) from
investment operations............ 3.98 2.59 2.80 (0.61)
---- ---- ---- ------
Dividends from net investment
income........................... (0.10) (0.06) (0.10) (0.10)
Distributions from net realized ___
gains from investments........... (2.46) (2.09) (0.03)
------ ------ ------
Total dividends and other (2.56) (2.15) (0.13) (0.10)
distributions .... ------ ------ ------ ------
Net asset value, end of period..... $13.69 $12.27 $11.83 $9.16
===== ===== ===== ====
Total investment return(1)......... 32.45% 22.12% 30.52% (6.18)%
===== ===== ===== =====
Ratios/Supplemental Data:
Net assets, end of period (000's) $18,493 $14,520 $14,797 $12,872
Expenses to average net assets..... 1.04% 1.58% 1.37% 1.35%
Net investment income to
average net assets............... 0.71% 0.49% 0.94% 1.06%
Fund turnover rate................. 92% 99% 134% 150%
</TABLE>
- -------------------
(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.
52
<PAGE>
Mitchell Hutchins Growth Portfolio
- -------------------------------------------------
<TABLE>
<CAPTION>
GROWTH PORTFOLIO
- ------------------------------------------------------------------------------------
CLASS H
-----------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning $17.48 $17.57 $14.56 $18.06
of period.................... ------ ------ ------ ------
Net investment income (loss). 0.03 (0.06) 0.04 0.01
Net realized and unrealized
gains (losses) 2.69 3.29 4.68 (2.13)
from investments........... ---- ---- ---- ------
Net increase (decrease) from
investment operations...... 2.72 3.23 4.72 (2.12)
---- ---- ---- ------
Dividends from net investment
income..................... (0.03) --- (0.08) (0.01)
Distributions from net
realized gains (4.54) (3.32) (1.63) (1.37)
from investments........... ------ ------ ------ ------
Total dividends and other (4.57) (3.32) (1.71) (1.38)
distributions................ ------ ------ ------ ------
Net asset value, end of $15.63 $17.48 $17.57 $14.56
period....................... ====== ====== ====== ======
Total investment return(1)... 15.41% 18.70% 32.50% (11.65)%
===== ===== ===== =======
Ratios/Supplemental Data:
Net assets, end of period $30,586 $36,357 $42,784 39,135
(000's)......................
Expenses to average net 1.05% 1.14% 1.02% 1.00%
assets.....................
Net investment income (loss)
to average net assets...... 0.12% (0.29)% 0.23% 0.04%
Fund turnover rate........... 89% 53% 41% 27%
</TABLE>
- -------------------
(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.
53
<PAGE>
Mitchell Hutchins Aggressive Growth Portfolio
- ---------------------------------------------------
AGGRESSIVE GROWTH PORTFOLIO
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS H
---------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of $13.09 $11.34 $9.65 $9.95
period............................. ------ ------ ----- -----
Net investment income (loss)....... (0.09) (0.10) 0.03 0.01
------ ------ ---- ----
Net realized and unrealized gains 2.78 2.93 2.00 (0.30)
(losses) from investments........ ---- ---- ---- ------
Net increase (decrease) from 2.69 2.83 2.03 (0.29)
investment operations............ ---- ---- ---- ------
Dividends from net investment --- --- (0.02) (0.01)
income...........................
Distributions from net investment (2.38) (1.08) (0.32) ---
income........................... ------ ------ ------ --------
Total dividends and other (2.38) (1.08) (0.34) (0.01)
distributions...................... ------ ------ ------ ------
Net asset value, end of period..... $13.40 $13.09 $11.34 $9.65
====== ====== ====== =====
Total investment return(1)......... 20.76% 25.23% 21.04% (2.90)%
====== ====== ====== =======
Ratios/Supplemental Data: $19,076 $19,167 $17,660 $13,600
Net assets, end of period (000's)
Expenses to average net assets..... 1.18% 1.52% 1.29% 1.59%
Net investment income to (0.59)% (0.74)% 0.23% 0.07%
average net assets...............
Fund turnover rate................. 89% 115% 119% 90%
</TABLE>
- -------------------
(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.
54
<PAGE>
Mitchell Hutchins Global Growth Portfolio
- -------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL GROWTH PORTFOLIO
- ------------------------------------------------------------------------------------------------
CLASS H
---------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $13.74 $12.00 $12.44 $14.97
------ ------ ------ ------
Net investment income (loss)........ 0.04 0.07 0.01 (0.03)
Net realized and unrealized gains
(losses) from investments......... 0.94 1.75 (0.45) (1.76)
---- ---- ------ ------
Net increase (decrease) from 0.98 1.82 (0.44) (1.79)
investment operations............. ---- ---- ------ ------
Dividends from net investment income. (0.04) (0.08) --- (0.01)
Distributions in excess of net --- --- --- ---
investment income.................
Distributions from net realized gains (0.06) --- --- (0.73)
from investments.................. ------ ---- --- ------
Total dividends and distributions... (0.10) (0.08) 0.00 (0.74)
------ ------ ---- ------
Net asset value, end of period...... $14.62 $13.74 $12.00 $12.44
====== =--=== ====== ======
Total investment return(1).......... 7.16% 15.14% (3.54)% (11.94)%
==== ===== ====== =======
Ratios/Supplemental Data:
Net assets, end of period (000's). $21,215 $25,701 $28,507 $40,493
Expenses to average net assets...... 1.07% 1.10% 1.96% 1.48%
Net investment income (loss) to 0.26% 0.46% 0.10% (0.13)%
average net assets................
Fund turnover rate.................. 81% 44% 157% 175%
</TABLE>
- -------------------
(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.
55
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[BACK COVER]
If you want more information about the funds, the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS:
Additional information about the funds' investments is available in the
funds' annual and semiannual reports to shareholders. In the funds' annual
reports, you will find a discussion of the market conditions and
investment strategies that significantly affected the funds' performance
during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI) AND CONTRACT PROSPECTUS:
The SAI provides more detailed information about the funds and is
incorporated by reference into this prospectus. Investors are advised to
also read the applicable Contract prospectus.
You may discuss your questions about the funds, obtain free copies of annual and
semiannual reports and the SAI, or request other information, by contacting the
funds directly at 1-800-986-0088.
You may review and copy information about the funds, including annual and
semiannual reports and the SAI, at the Public Reference Room of the Securities
and Exchange Commission. You can get text-only copies of reports and other
information about the funds:
o For a fee, by writing to or calling the SEC's Public Reference Room,
Washington, D.C. 20549-6009
Telephone: 1-800-SEC-0330
o Free, from the SEC's Internet website at: http://www.sec.gov
Investment Company Act File No.
Mitchell Hutchins Series Trust - 811-4919
56
<PAGE>
MITCHELL HUTCHINS SERIES TRUST
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
The following funds are series of Mitchell Hutchins Series Trust
("Trust"), a professionally managed open-end management investment company.
Money Market Portfolio High Grade Fixed Income Portfolio
Strategic Fixed Income Portfolio Strategic Income Portfolio
Global Income Portfolio High Income Portfolio
Balanced Portfolio Growth and Income Portfolio
Tactical Allocation Portfolio Growth Portfolio
Aggressive Growth Portfolio Small Cap Portfolio
Global Growth Portfolio
Global Income Portfolio and Strategic Income Portfolio are non-diversified
series of the Trust. The other funds are diversified series. Each fund offers
its Class H and Class I shares only to insurance company separate accounts that
fund benefits under variable annuity contracts and/or variable life insurance
contracts.
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly
owned asset management subsidiary of PaineWebber Incorporated ("PaineWebber"),
serves as investment adviser and administrator for each fund. Certain funds have
sub-advisers. Mitchell Hutchins also serves as distributor for the funds' Class
I shares.
Portions of the funds' Annual Report to Shareholders are incorporated by
reference into this Statement of Additional Information. The Annual Report
accompanies this Statement of Additional Information. You may obtain an
additional copy of the funds' Annual Report by calling toll-free 1-800-986-0088.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the funds' current Prospectus, dated May 1, 1999.
A copy of the Prospectus may be obtained by calling any PaineWebber investment
executive or correspondent firm or by calling toll-free 1-800-986-0088. The
Prospectus contains more complete information about the funds. You should read
it carefully before investing.
This Statement of Additional Information is dated May 1, 1999.
<PAGE>
THE FUNDS AND THEIR INVESTMENT POLICIES
No fund's investment objective may be changed without shareholder
approval. Except where noted, the other investment policies of each fund may be
changed by the board without shareholder approval. As with other mutual funds,
there is no assurance that a fund will achieve its investment objective.
MONEY MARKET PORTFOLIO has an investment objective of maximum current
income consistent with liquidity and conservation of capital. The fund invests
in high quality 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 fund'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 fund may purchase only U.S. dollar-denominated
obligations of foreign issuers.
Money Market Portfolio may invest in commercial paper and other short-term
corporate obligations only if Mitchell Hutchins determines, pursuant to
procedures adopted by the board, that the obligations 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 ("rating
agencies"), (2) rated in the highest short-term rating category by a single
rating agency if only that rating agency has assigned the obligations a
short-term rating or (3) unrated, but determined by Mitchell Hutchins to be of
comparable quality. The fund 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).
Money Market Portfolio may invest up to 10% of its net assets in illiquid
securities. The fund may purchase securities on a when-issued or delayed
delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow up to 10% of its total assets for temporary or
emergency purposes. The fund may invest in the securities of other investment
companies.
HIGH GRADE FIXED INCOME PORTFOLIO has a primary investment objective of
current income and a secondary investment objective of capital appreciation. The
fund invests in U.S. government bonds, including those backed by mortgages. The
fund 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 fund 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 fund 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 fund may invest in bonds that are assigned comparable ratings by
another rating agency and unrated bonds that Mitchell Hutchins determines are of
comparable quality to rated securities in which the fund may invest. High Grade
Fixed Income 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 High Grade Fixed Income Portfolio
may be represented by U.S. Treasury obligations to assure the fund'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 fund'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.
2
<PAGE>
High Grade Fixed Income Portfolio may invest up to 10% of its net assets
in illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow up to 33-1/3% of its total assets for
temporary or emergency purposes. The fund may invest in the securities of other
investment companies and may sell short "against the box."
STRATEGIC FIXED INCOME PORTFOLIO has an investment objective of total
return with low volatility. The fund's investments are managed by a sub-adviser,
Pacific Investment Management Company. The fund invests in bonds and other fixed
income securities of varying maturities with a dollar-weighted average portfolio
duration between three and eight years. Under normal circumstances, the fund
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),
corporate bonds of U.S. and foreign issuers (including mortgage- and
asset-backed securities of private issuers), convertible securities, foreign
currency exchange-related securities, loan participations and assignments and
money market instruments. The fund's investments in mortgage-backed securities
of private issuers are limited to 35% of its total assets and its investments in
loan participations and assignments are limited to 5% of its net assets.
All securities purchased for the fund are investment grade, except that
the fund 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 rating agency or, if unrated, determined by the sub-adviser to
be of comparable quality. The fund 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 fund'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.
Strategic Fixed Income Portfolio may invest up to 15% of its net assets in
illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow up to 33-1/3% of its total assets for
temporary or emergency purposes. The fund may invest in the securities of other
investment companies and may sell short "against the box."
STRATEGIC INCOME PORTFOLIO has a primary investment objective of high
current income and a secondary investment objective of capital appreciation. The
fund 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 corporate bonds,
including convertible bonds, and preferred stock; and (3) foreign and emerging
market bonds. A portion of the fund's assets normally is invested in each of
these investment sectors. However, the fund has the flexibility at any time to
invest all or substantially all of its investments in any one sector. As a
result, the fund may invest without limit in below investment grade bonds and in
the securities of foreign issuers that are denominated in foreign currencies
(including bonds of issuers in emerging market countries).
Strategic Income Portfolio may invest in high yield bonds that are rated
as low as D by S&P or C by Moody's.
The foreign and emerging market bonds in which Strategic Income Portfolio
may invest include (1) government bonds, including Brady bonds and other
sovereign debt, and bonds issued by multi-national 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; (3) interests in foreign loan participations and assignments; and
(4) foreign mortgage-backed securities and other structured foreign investments.
The fund may invest without limit in securities of issuers located in any
country in the world, including both industrialized and emerging market
countries. The fund generally is not restricted in the portion of its assets
that may be invested in a single country or region, but the fund's assets
normally are invested in issuers located in at least three countries. No more
than 25% of the fund's total assets are invested in securities issued or
guaranteed by any single foreign government. The fund may invest in foreign and
emerging market bonds that do not meet any minimum credit rating standard or
that are unrated.
3
<PAGE>
[Mitchell Hutchins believes that Strategic Income Portfolio's strategy of
sector allocation should be less risky than investing in only one sector of the
bond market. Data from the Lehman Aggregate Bond Index, the Salomon Brothers
High Yield Index, the Merrill Lynch High Yield Index and the Salomon Brothers
World Government Bond Index indicate that these sectors are not closely
correlated. If successful, the fund's strategy should enable the fund to achieve
a higher level of investment return than if the fund invested exclusively in any
one investment sector or allocated a fixed proportion of its assets to each
investment sector.]
Strategic Income 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 fund also may invest
without limit in certificates of deposit issued by banks and savings
associations and in bankers' acceptances.
Strategic Income Portfolio may invest in zero coupon bonds, other original
discount securities, payment-in-kind securities and principal-only mortgage
backed securities. The fund also may invest in fixed and floating rate loans
through either participations in or assignments of all or a portion of loans
made by banks.
Strategic Income Portfolio may invest up to 15% of its net assets in
illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may engage in dollar rolls and reverse repurchase
agreements, which are considered borrowings and may not exceed 33-1/3% of its
total assets. The fund may also borrow for temporary or emergency purposes, but
not in excess of an additional 5% of its total assets. The fund may invest in
the securities of other investment companies and may sell short "against the
box."
GLOBAL INCOME PORTFOLIO'S primary investment objective is high current
income consistent with prudent investment risk; capital appreciation is a
secondary objective. The fund seeks to achieve these objectives by investing
principally in high-quality debt securities issued or guaranteed by foreign
governments, the U.S. government, their respective agencies or instrumentalities
or supranational organizations or issued by U.S. or foreign companies. Debt
securities are considered high quality if they are rated within one of the two
highest grades assigned by S&P or Moody's or another rating agency or, if
unrated, determined by Mitchell Hutchins to be of comparable quality.
Normally, at least 65% of Global Income Portfolio's total assets consist
of high-quality debt securities (and receivables from the sale of such debt
securities) 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, Spain, Sweden,
Switzerland, the United Kingdom and the United States. No more than 40% of the
fund's total assets are normally invested in securities of issuers located in
any one country other than the United States. The fund's investments may include
zero coupon securities and other debt securities sold with a discount. Up to 5%
of the fund's total assets may be invested in bonds convertible into equity
securities.
Global Income Portfolio may invest up to 35% of its total assets in debt
securities rated below the two highest grades assigned by a rating agency.
Except as noted below, these securities must be investment grade (that is, rated
at least BBB by S&P, Baa by Moody's or comparably rated by another rating agency
or, if unrated, determined by Mitchell Hutchins to be of comparable quality).
Within this 35% limitation, the fund may invest up to 20% of its total assets in
debt securities that are below investment grade. These debt securities may be
rated as low as D by S&P, C by Moody's or comparably rated by another rating
agency or, in the case of debt securities assigned a short-term debt rating as
low as D by S&P or comparably rated by another rating agency or, if not so
rated, determined by Mitchell Hutchins to be of comparable quality. Debt
securities rated D by S&P are in payment default or the rating is assigned upon
the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized. Debt securities 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. Mitchell Hutchins will
purchase these securities for the fund only when it concludes that the
anticipated return to the fund on the investment warrants exposure to the
additional level of risk. Lower-rated debt securities are often issued by
4
<PAGE>
businesses and governments in emerging markets. Because the fund may also invest
in emerging market debt securities that are investment grade, the fund's total
investment in emerging market debt securities may exceed 20% of its total
assets.
Global Income 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 rating agency or,
if unrated, determined by Mitchell Hutchins to be of comparable quality. Up to
20% of the fund's total assets may be invested in debt securities that are not
paying current income (a category that does not include zero coupon debt
securities and other debt securities sold with a discount). The fund may
purchase these debt securities if Mitchell Hutchins believes that they have a
potential for capital appreciation. The fund also may invest in secured and
unsecured fixed or floating rate loans in the form of participations and
assignments.
Global Income Portfolio may invest up to 35% of its total assets in cash
or investment grade money market instruments as part of its ordinary investment
program. The fund's investment of cash collateral from securities lending in
these money market instruments is not subject to this 35% limitation activities
and there is no limitation on the fund's investments in short-term debt
securities denominated in foreign currencies.
Global Income Portfolio may invest in loan participations and assignments
and may invest up to 10% of its net assets in illiquid securities. The fund may
lend its portfolio securities to qualified broker-dealers or institutional
investors in an amount up to 33-1/3% of its total assets. The fund may borrow
money from banks or through reverse repurchase agreements for temporary or
emergency purposes but not in excess of 10% of its total assets. The fund may
invest in the securities of other investment companies and may sell short
"against the box."
HIGH INCOME PORTFOLIO'S investment objective is to provide high income.
The fund normally invests at least 65% of its total assets in non-investment
grade corporate bonds that, at the time of purchase, are rated B or better by
S&P or Moody's, are comparably rated by another nationally recognized rating
agency or, if unrated, are considered to be of comparable quality by Mitchell
Hutchins. The fund 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 fund also may invest up to 35% of its total assets in (1) bonds that are
rated below B (and rated as low as D by S&P or C by Moody's) or comparable
unrated bonds; (2) U.S. government bonds; (3) equity securities; and (4) money
market instruments, including repurchase agreements.
Up to 35% of High Income Portfolio's net assets may be invested in
securities of foreign issuers, including securities that are U.S.
dollar-denominated but whose value is linked to the value of foreign currencies.
However, no more than 10% of the fund's net assets may be invested in securities
of foreign issuers that are denominated and traded in currencies other than the
U.S. dollar.
Up to 25% of High Income Portfolio's total assets may be invested in bonds
and equity securities that are not paying current income. The fund may purchase
these securities if Mitchell Hutchins believes they have a potential for capital
appreciation. High Income Portfolio may invest in zero coupon bonds, other
original discount securities, payment-in-kind securities and principal-only
mortgage backed securities, all of which are considered income producing
securities. The fund also may invest up to 5% of its net assets in fixed and
floating rate loans through either participations in or assignments of all or a
portion of loans made by banks.
High Income Portfolio may invest up to 15% of its net assets in illiquid
securities. The fund may purchase securities on a when-issued or delayed
delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow money from banks or through reverse repurchase
agreements for temporary or emergency purposes but not in excess of 33-1/3% of
its total assets. The fund may invest in the securities of other investment
companies and may sell short "against the box."
BALANCED PORTFOLIO has an investment objective of high total return with
low volatility. The fund 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%.
5
<PAGE>
Balanced 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 fund 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 fund may also invest up to 10% of
its assets in bonds and other securities (including convertible securities)
rated below investment grade but rated at least B by S&P or Moody's, comparably
rated by another rating agency or determined by Mitchell Hutchins to be of
comparable quality.
Balanced Portfolio may invest up to 10% of its net assets in illiquid
securities. The fund may purchase securities on a when-issued or delayed
delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow for temporary or emergency purposes, but not
in excess of 10% of its total assets. The fund may invest in the securities of
other investment companies and may sell short "against the box."
GROWTH AND INCOME PORTFOLIO has an investment objective of current income
and capital growth. The fund, 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. The fund 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. The fund's investments may include 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 rating agency or determined by Mitchell
Hutchins to be of comparable quality. The fund 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
fund 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. ]
Growth and Income Portfolio may invest up to 10% of its net assets in
illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow for temporary or emergency purposes, but not
in excess of 10% of its total assets. The fund may invest in the securities of
other investment companies and may sell short "against the box."
TACTICAL ALLOCATION PORTFOLIO has an investment objective of total return,
consisting of long-term capital appreciation and current income. The fund 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.
Tactical Allocation 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 fund's assets based on the Tactical
Allocation Model's quantitative assessment of the projected rates of return for
each asset class. The funds 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 fund'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 downtown 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 fund
to invest 100% in stocks. Conversely, when the ERP decreases below certain
threshold levels, the Model signals the fund to reduce its exposure to stocks.
The Model can recommend stock allocations of 100%, 75%, 50% 25% or 0%.
6
<PAGE>
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 fund's assets. The Model will recommend either bonds (five-year U.S.
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.
Tactical Allocation Portfolio deviates from the recommendations of the
Tactical Allocation Model only to the extent necessary to
o Maintain an amount in cash, not expected to exceed 2% of its total
assets under normal market conditions, to pay fund operating expenses,
dividends and other distributions on its shares and to meet anticipated
redemptions of shares;
o Qualify as a regulated investment company for federal income tax
purposes; and
O 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
fund 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
fund may still hold a small portion of its assets in 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 fund'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 fund shares that may occur daily, as well as from expenses borne
by the fund. Instead, the fund attempts to achieve a correlation of at least
0.95 between the performance of the fund's stock portion, before the deduction
of operating expenses, and that of the S&P 500 Index (a correlation of 1.00
would mean that the net asset value of the stock portion increased or decreased
in exactly the same proportion as changes in the S&P 500 Index).
Asset reallocations are made on the first business day of each month. In
addition to any reallocation of assets directed by the Tactical Allocation
Model, any material amounts resulting from appreciation or receipt of dividends,
other distributions, interest payments and proceeds from securities maturing in
each of the asset classes are reallocated (or "rebalanced") to the extent
practicable to establish the Model's recommended asset mix.
Tactical Allocation Portfolio may invest up to 15% of its net assets in
illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow for temporary or emergency purposes, but not
in excess of 33-1/3 % of its total assets. The fund may invest in the securities
of other investment companies and may sell short "against the box."
GROWTH PORTFOLIO has an investment objective of long-term capital
appreciation. The fund 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 fund's total
assets is invested in equity securities.
Growth Portfolio may invest up to 35% of its total assets in U.S.
government bonds and in corporate bonds, including up to 10% in convertible debt
securities that are rated below investment grade. These convertible debt
securities may be rated no lower than B by S&P or Moody's, comparably rated by
another rating agency or, if unrated, determined by Mitchell Hutchins to be of
comparable quality. The fund may invest up to 25% of its total assets in U.S.
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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 fund 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.
Growth Portfolio may invest up to 10% of its net assets in illiquid
securities. The fund may purchase securities on a when-issued or delayed
delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow for temporary or emergency purposes, but not
in excess of 10% of its total assets. The fund may invest in the securities of
other investment companies and may sell short "against the box."
AGGRESSIVE GROWTH PORTFOLIO has an investment objective of maximizing
long-term capital appreciation. The fund's investments are managed by a
sub-adviser, Nicholas-Applegate Capital Management. Under normal market
conditions, the fund invests at least 75% of its total assets in common stocks.
The fund invests primarily in common stocks of U.S. companies the assets and
stock prices of which the sub-adviser expects to grow faster than the average
rate of companies in the S&P 500 Index. The fund is not restricted to
investments in companies of any particular size. The fund 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 fund may invest up to 25% of its total assets in U.S. dollar-denominated
equity secuities and bonds of foreign issuers that are traded on recognized U.S.
exchanges or in the U.S. OTC market.
Aggressive Growth Portfolio may invest up to 15% of its net assets in
illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow for temporary or emergency purposes, but not
in excess of 20% of its total assets. The fund may invest in the securities of
other investment companies and may sell short "against the box."
SMALL CAP PORTFOLIO has an investment objective of long-term capital
appreciation. The fund invests 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. The fund may invest
up to 35% of its total assets in equity securities of companies that are larger
than small cap companies, as well as in U.S. government securities, corporate
bonds and money market instruments and including up to 10% in convertible debt
securities that are rated below investment grade. These convertible debt
securities may be rated no lower than B by S&P or Moody's, comparably rated by
another rating agency or, if unrated, determined by Mitchell Hutchins to be of
comparable quality. The fund 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 may invest up to 15% of its net assets in illiquid
securities. The fund may purchase securities on a when-issued or delayed
delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow for temporary or emergency purposes, but not
in excess of 33-1/3% of its total assets. The fund may invest in the securities
of other investment companies and may sell short "against the box."
GLOBAL GROWTH PORTFOLIO'S investment objective is long-term capital
appreciation. The fund invests primarily in common stocks issued by companies in
United States, Europe, Japan and the Pacific Basin. Under normal circumstances,
the fund invests at least 65% of its total assets in common stocks and
securities convertible into common stocks. The fund 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).
Mitchell Hutchins allocates Global Growth Portfolio's assets between U.S.
investments and foreign investments and manages the assets allocated to U.S.
investments. Mitchell Hutchins has appointed Invista Capital Management, Inc.
("Invista") as the fund's sub-adviser to manage the assets allocated to the
fund's foreign investments. Mitchell Hutchins currently expects to reevaluate
the allocation of the fund's assets monthly. It does not expect to reallocate
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assets to reflect relatively minor changes (that is, less than 5%) in the asset
allocation model. The fund may effect a reallocation of assets by using cash
flows from the purchase or redemption of its shares in addition to selling
portfolio securities from one segment and reinvesting the proceeds in the other
segment. The fund may also use futures contracts to adjust its exposure to U.S.
and foreign equity markets in connection with a reallocation. Mitchell Hutchins
determines the extent to which the fund uses futures contracts for this purpose
and is responsible for implementing its decisions using futures contracts.
Under normal circumstances, Global Growth Portfolio invests at least 80%
of its total assets in securities of issuers in the United States and countries
represented in the Morgan Stanley Capital International Europe, Australia and
Far East Index ("EAFE Index"), a well known index that reflects most major
equity markets outside the United States. The fund may invest up to 20% of its
assets in securities of issuers located in other countries, for example, in
Canada and in emerging markets. Mitchell Hutchins may also invest, as part of
the fund's U.S. investments, up to 10% of the fund's 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. over-the-counter market.
Global Growth Portfolio may invest up to 10% of its net assets in illiquid
securities. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow money from banks or through reverse repurchase
agreements for temporary or emergency purposes but not in excess of 10% of its
total assets. The fund may invest in the securities of other investment
companies and may sell short "against the box."
THE FUNDS' INVESTMENTS, RELATED RISKS AND LIMITATIONS
The following supplements the information contained in the Prospectus and
above concerning the funds' investments, related risks and limitations. Except
as otherwise indicated in the Prospectus or the Statement of Additional
Information, the funds have established no policy limitations on their ability
to use the investments or techniques discussed in these documents.
EQUITY 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 are the
most familiar type of equity security. They 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. Convertible securities include
debentures, notes and preferred equity 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.
Depository receipts typically are issued by banks or trust companies and
evidence ownership of underlying 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, the prices of equity securities generally fluctuate more
than bonds 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 fund may experience a substantial
or complete loss on an individual equity investment.
While this is possible with bonds, it is less likely.
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 certain types of income-producing,
non-convertible preferred stocks may be treated as bonds for investment
purposes. Bonds generally are used by corporations, governments and other
issuers to borrow money from investors. The issuer pays the investor a fixed or
variable rate of interest and normally must repay the amount borrowed on or
before maturity. Many preferred stocks and some bonds are "perpetual" in that
they have no maturity date.
Bonds are subject to interest rate risk and credit risk, but to varying
degrees. Interest rate risk is the risk that interest rates will rise and that,
as a result, bond prices will fall, lowering the value of a fund's investments
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in bonds. In general, bonds having longer durations are more sensitive to
interest rate changes than are bonds with shorter durations. Credit risk is the
risk that an issuer may be unable or unwilling to pay interest and/or principal
on the bond, or that a market may become less confident as to the issuer's
ability or willingness to do so. Credit risk can be affected by many factors,
including adverse changes in the issuer's own financial condition or in economic
conditions.
CREDIT RATINGS; NON-INVESTMENT GRADE BONDS. Moody's, S&P and other rating
agencies are private services that provide ratings of the credit quality of
bonds and certain other securities. A description of the ratings assigned to
corporate bonds by Moody's and S&P is included in the Appendix to this Statement
of Additional Information. The process by which Moody's and S&P determine
ratings for mortgage-backed securities includes consideration of the likelihood
of the receipt by security holders of all distributions, the nature of the
underlying assets, the credit quality of the guarantor, if any, and the
structural, legal and tax aspects associated with these securities. Not even the
highest such ratings represents an assessment of the likelihood that principal
prepayments will be made by obligors on the underlying assets 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.
Credit ratings attempt to evaluate the safety of principal and interest
payments, but they do not evaluate the volatility of a bond'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
the rating of a bond. Subsequent to a bond's purchase by a fund, it may cease to
be rated or its rating may be reduced below the minimum rating required for
purchase by the fund. The funds 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,
bonds with the same maturity, interest rate and rating may have different market
prices.
In addition to ratings assigned to individual bond issues, Mitchell
Hutchins or the applicable sub-adviser will analyze interest rate trends and
developments that may affect individual issuers, including factors such as
liquidity, profitability and asset quality. The yields on bonds 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.
Investment grade bonds are rated in one of the four highest rating
categories by Moody's or S&P, comparably rated by another rating agency or, if
unrated, determined by Mitchell Hutchins or the sub-adviser to be of comparable
quality. 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 debt
securities. 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 the Prospectus or Statement of Additional Information include bonds that are
not rated by a rating agency but that Mitchell Hutchins or the applicable
sub-adviser determines to be of comparable quality.
High yield bonds (commonly known as "junk bonds") are non-investment grade
bonds. This means they are rated Ba or lower by Moody's, BB or lower by S&P,
comparably rated by another rating agency or determined by Mitchell Hutchins or
the sub-adviser to be of comparable quality. A fund's investments in
non-investment grade bonds entail greater risk than its investments in higher
rated bonds. Non-investment grade bonds are considered predominantly speculative
with respect to the issuer's ability to pay interest and repay principal and may
involve significant risk exposure to adverse conditions. Non-investment grade
bonds generally offer a higher current yield than that available for investment
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grade issues; however, they involve higher risks, in that they are especially
sensitive 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 by
collateral and will not receive payment until more senior claims are paid in
full.
The market for non-investment grade bonds, 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 recent
volatility in emerging market securities. In the past, many lower rated bonds
experienced substantial price declines reflecting an expectation that many
issuers of such securities might experience financial difficulties. As a result,
the yields on lower rated bonds rose dramatically. However, those higher yields
did not reflect the value of the income stream that holders of such securities
expected. Rather, they reflected the risk that holders of such securities could
lose a substantial portion of their value due to the issuers' financial
restructurings or defaults by the issuers. There can be no assurance that those
declines will not recur.
The market for non-investment grade bonds generally is thinner and less
active than that for higher quality securities, which may limit a fund'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
non-investment grade bonds, especially in a thinly traded market.
U.S. GOVERNMENT SECURITIES include direct obligations of the U.S. Treasury
(such as Treasury bills, notes or bonds) and obligations issued or guaranteed as
to principal and interest (but not as to market value) by the U.S. government,
its agencies or its instrumentalities. U.S. government securities include
mortgage-backed securities issued or guaranteed by government agencies or
government-sponsored enterprises. Other U.S. government securities 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 or, in the case
of mortgage-backed securities, by pools of assets.
Treasury Inflation-Protection Securities ("TIPS") 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 fund holds
TIPS, the fund may earn less on the TIPS than it would on conventional Treasury
bonds. Any increase in the principal value of TIPS is taxable in the year the
increase occurs, even though holders do not receive cash representing the
increase at that time.
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 sales
contracts, other installment sales 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 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 the payment of principal and interest (but not as to market
value) by Ginnie Mae (also known as the Government National Mortgage
Association), Fannie Mae (also known as the Federal National Mortgage
Association), Freddie Mac (also known as the Federal Home Loan Mortgage
Corporation) or other government sponsored enterprises. Other domestic
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mortgage-backed securities are sponsored or issued by private entities,
generally originators of an investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and special
purposes 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. 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 herein 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 risk and evaluating them requires special knowledge.
A major difference between mortgage-backed securities and traditional
bonds is that interest and principal payments are made more frequently (usually
monthly) and that principal may be repaid at any time because the underlying
mortgage loans 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.
Mortgage-backed securities also may decrease in value as a result of
increases in interest rates and, because of prepayments, may benefit less than
other bonds from declining interest rates. Reinvestments of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting a fund's yield. Actual prepayment experience may cause the yield of a
mortgage-backed security to differ from what was assumed when the fund purchased
the security. Prepayments at a slower rate than expected may lengthen the
effective life of a mortgage-backed security. The value of securities with
longer effective lives generally fluctuates more widely in response to changes
in interest rates than the value of securities with shorter effective lives.
CMO classes may be specially structured in a manner that provides any of a
wide variety of investment characteristics, such as yield, effective maturity
and interest rate sensitivity. As market conditions change, however, and
particularly during periods of rapid or unanticipated changes in market interest
rates, the attractiveness of the CMO classes and the ability of the structure to
provide the anticipated investment characteristics may be significantly reduced.
These changes can result in volatility in the market value, and in some
instances reduced liquidity, of the CMO class.
Certain classes of CMOs and other mortgage-backed securities are
structured in a manner that makes them extremely sensitive to changes in
prepayment rates. Interest-only ("IO") and principal-only ("PO") classes are
examples of this. IOs are entitled to receive all or a portion of the interest,
but none (or only a nominal amount) of the principal payments, from the
underlying mortgage assets. If the mortgage assets underlying an IO experience
greater than anticipated principal prepayments, then the total amount of
interest payments allocable to the IO class, and therefore the yield to
investors, generally will be reduced. In some instances, an investor in an IO
may fail to recoup all of his or her initial investment, even if the security is
government issued or guaranteed or is rated AAA or the equivalent. Conversely,
PO classes are entitled to receive all or a portion of the principal payments,
but none of the interest, from the underlying mortgage assets. PO classes are
purchased 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.
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The market for privately issued mortgage-backed securities is smaller and
less liquid than the market for U.S. government mortgage-backed securities. CMO
classes may be specially structured in a manner that provides any of a wide
variety of investment characteristics, such as yield, effective maturity and
interest rate sensitivity. As market conditions change, however, and especially
during periods of rapid or unanticipated changes in market interest rates, the
attractiveness of some 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. Foreign mortgage-backed securities markets
are 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 investment risks as well as the other
risks normally associated with foreign securities.
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, can be extremely volatile, and these securities may become illiquid.
Mitchell Hutchins or the applicable sub-adviser seeks to manage a fund's
investments in mortgage-backed securities so that the volatility of its
portfolio, taken as a whole, is consistent with its investment objective.
Management of portfolio duration is an important part of this. However,
computing the duration of mortgage-backed securities is complex. See, "--
Duration." If Mitchell Hutchins or the sub-adviser does not compute the duration
of mortgage-backed securities correctly, the value of the fund's portfolio may
be either more or less sensitive to changes in market interest rates than
intended. In addition, if market interest rates or other factors that affect the
volatility of securities held by a fund change in ways that Mitchell Hutchins or
the sub-adviser does not anticipate, the fund's ability to meet its investment
objective may be reduced.
More information concerning these mortgage-backed securities and the
related risks of investments therein is set forth below. New types of
mortgage-backed securities are developed and marketed from time to time and,
consistent with their investment limitations, the funds expect to invest in
those new types of mortgage-backed securities that Mitchell Hutchins or the
applicable sub-adviser believe may assist the funds in achieving their
investment objectives. Similarly, the funds 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 the funds. 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-insured
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
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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 the full faith and credit of the U.S. government.
PRIVATE MORTGAGE-BACKED SECURITIES--Mortgage-backed securities issued by
Private Mortgage Lenders are structured similarly to CMOs issued or guaranteed
by Ginnie Mae, Fannie Mae and Freddie Mac. Such mortgage-backed securities may
be supported by pools of U.S. government or agency insured or guaranteed
mortgage loans or by other mortgage-backed securities issued by a government
agency or instrumentality, but they generally are supported by pools of
conventional (i.e., non-government guaranteed or insured) mortgage loans. Since
such mortgage-backed securities normally are not guaranteed by an entity having
the credit standing of Ginnie Mae, Fannie Mae and Freddie Mac, they normally are
structured with one or more types of credit enhancement. See "--Types of Credit
Enhancement." These credit enhancements do not protect investors from changes in
market value.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE
PASS-THROUGHS--CMOs are debt obligations that are collateralized by mortgage
loans or mortgage pass-through securities (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 in 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 the debt service on the CMOs or to make scheduled
distributions on the multi-class mortgage pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, also referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrued on all classes of a CMO (other than any
principal-only or "PO" class) on a monthly, quarterly or semiannual basis. The
principal and interest on the Mortgage Assets may be allocated among the several
classes of a CMO in many ways. In one structure, payments of principal,
including any principal prepayments, on the Mortgage Assets are applied to the
classes of a CMO in the order of their respective stated maturities or final
distribution dates so that no payment of principal will be made on any class of
the CMO until all other classes having an earlier stated maturity or final
distribution date have been paid in full. In some CMO structures, all or a
portion of the interest attributable to one or more of the CMO classes may be
added to the principal amounts attributable to such classes, rather than passed
through to certificateholders on a current basis, until other classes of the CMO
are paid in full.
Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier.
Some CMO classes are structured to pay interest at rates that are adjusted
in accordance with a formula, such as a multiple or fraction of the change in a
specified interest rate index, so as to pay at a rate that will be attractive in
certain interest rate environments but not in others. For example, an inverse
floating rate CMO class pays interest at a rate that increases as a specified
interest rate index decreases but decreases as that index increases. For other
CMO classes, the yield may move in the same direction as market interest rates--
i.e., the yield may increase as rates increase and decrease as rates
decrease--but may do so more rapidly or to a greater degree. The market value of
such securities generally is more volatile than that of a fixed rate obligation.
Such interest rate formulas may be combined with other CMO characteristics. For
example, a CMO class may be an inverse interest-only ("IO") class, 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
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categories: (1) liquidity protection and (2) loss protection. Loss protection
related to 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. Loss protection 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 fund 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 the 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 traditiona1 debt securities. Among the major differences are that interest
and principal payments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans or
other obligations generally may be prepaid at any time. Prepayments on a pool of
mortgage loans are influenced by a variety of economic, geographic, social and
other factors, including changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and servicing
decisions. Generally, however, prepayments on fixed-rate mortgage loans will
increase during a period of falling interest rates and decrease during a period
of rising interest rates. Similar factors apply to prepayments on asset-backed
securities, but the receivables underlying asset-backed securities generally are
of a shorter maturity and thus are less likely to experience substantial
prepayments. Such securities, however, often provide that for a specified time
period the issuers will replace receivables in the pool that are repaid with
comparable obligations. If the issuer is unable to do so, repayment of principal
on the asset-backed securities may commence at an earlier date. Mortgage- and
asset-backed securities may decrease in value as a result of increases in
interest rates and may benefit less than other fixed-income securities from
declining interest rates because of the risk of prepayment.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice was 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
of prepayment tends to increase, thereby shortening the actual average life of a
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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 a fund's yield.
ADJUSTABLE RATE MORTGAGE AND FLOATING RATE MORTGAGE-BACKED
SECURITIES--Adjustable Rate Mortgage ("ARM") mortgage-backed securities are
mortgage-backed securities that represent a right to receive interest payments
at a rate that is adjusted to reflect the interest earned on a pool of mortgage
loans bearing variable or adjustable rates of interest (such mortgage loans are
referred to as "ARMs"). Floating rate mortgage-backed securities are classes of
mortgage-backed securities that have been structured to represent the right to
receive interest payments at rates that fluctuate in accordance with an index
but that generally are supported by pools comprised of fixed-rate mortgage
loans. Because the interest rates on ARM and floating rate mortgage-backed
securities are reset in response to changes in a specified market index, the
values of such securities tend to be less sensitive to interest rate
fluctuations than the values of fixed-rate securities. As a result, during
periods of rising interest rates, ARMs generally do not decrease in value as
much as fixed rate securities. Conversely, during periods of declining rates,
ARMs generally do not increase in value as much as fixed rate securities. ARM
mortgage-backed securities represent a right to receive interest payments at a
rate that is adjusted to reflect the interest earned on a pool of ARMs. ARMs
generally specify that the borrower's mortgage interest rate may not be adjusted
above a specified lifetime maximum rate or, in some cases, below a minimum
lifetime rate. In addition, certain ARMs specify limitations on the maximum
amount by which the mortgage interest rate may adjust for any single adjustment
period. ARMs also may limit changes in the maximum amount by which the
borrower's monthly payment may adjust for any single adjustment period. In the
event that a monthly payment is not sufficient to pay the interest accruing on
the ARM, any such excess interest is added to the mortgage loan ("negative
amortization"), which is repaid through future payments. If the monthly payment
exceeds the sum of the interest accrued at the applicable mortgage interest rate
and the principal payment that would have been necessary to amortize the
outstanding principal balance over the remaining term of the loan, the excess
reduces the principal balance of the ARM. Borrowers under ARMs experiencing
negative amortization may take longer to build up their equity in the underlying
property and may be more likely to default.
ARMs also may be subject to a greater rate of prepayments in a declining
interest rate environment. For example, during a period of declining interest
rates, prepayments on ARMs could increase because the availability of fixed
mortgage loans at competitive interest rates may encourage mortgagors to
"lock-in" at a lower interest rate. Conversely, during a period of rising
interest rates, prepayments on ARMs might decrease. The rate of prepayments with
respect to ARMs has fluctuated in recent years.
The rates of interest payable on certain ARMs, and therefore on certain
ARM mortgage-backed securities, are based on indices, such as the one-year
constant maturity Treasury rate, that reflect changes in market interest rates.
Others are based on indices, such as the 11th District Federal Home Loan Bank
Cost of Funds Index ("COFI"), that tend to lag behind changes in market interest
rates. The values of ARM mortgage-backed securities supported by ARMs that
adjust based on lagging indices tend to be somewhat more sensitive to interest
rate fluctuations than those reflecting current interest rate levels, although
the values of such ARM mortgage-backed securities still tend to be less
sensitive to interest rate fluctuations than fixed-rate securities.
Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. As with ARM
mortgage-backed securities, interest rate adjustments on floating rate
mortgage-backed securities may be based on indices that lag behind market
interest rates. Interest rates on floating rate mortgage-backed securities
generally are adjusted monthly. Floating rate mortgage-backed securities are
subject to lifetime interest rate caps, but they generally are not subject to
limitations on monthly or other periodic changes in interest rates or monthly
payments.
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INVESTING IN FOREIGN SECURITIES. Investing in foreign securities involves
more risks than investing in the United States. The value of foreign securities
is subject to economic and political developments in the countries where the
companies operate and to changes in foreign currency values. Investments in
foreign securities 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 on
interest and/or dividends, limitations on the use of or transfer of fund assets
and political or social instability or diplomatic developments. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. In those European countries that have begun using the Euro as a common
currency unit, individual national economies may be adversely affected by the
inability of national governments to use monetary policy to address their own
economic or political concerns.
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 funds than is
available concerning U.S. companies. Foreign companies are not generally subject
to uniform accounting, auditing and financial reporting standards or to other
regulatory requirements comparable to those applicable to U.S. companies.
Securities of many foreign companies may be less liquid and their prices
more volatile than 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 fund assets may
be released prior to receipt of payment, may expose a fund 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.
The costs of investing outside the United States frequently are higher
than those attributable to investing in the United States. 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 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.
The funds may invest in foreign securities by purchasing depository
receipts, including American Depository Receipts ("ADRs"), European Depository
Receipts ("EDRs") and Global Depository Receipts ("GDRs"), or other securities
convertible into securities of issuers 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 generally are in registered form, are denominated in U.S.
dollars and are designed for use in the U.S. securities markets. 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 fund's investment policies, depository receipts
generally are deemed to have the same classification as the underlying
securities they represent. Thus, a depository receipt representing ownership of
common stock will be treated as common stock.
ADRs are publicly traded on exchanges or 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
depository's transaction fees, whereas under an unsponsored arrangement, the
foreign issuer assumes no obligations and the depository'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.
The funds that invest outside the United States anticipate that their
brokerage transactions involving foreign securities of companies headquartered
in countries other than the United States will be conducted primarily on the
principal exchanges of such countries. Although each fund will endeavor to
achieve the best net results in effecting its portfolio transactions,
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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.
Foreign markets 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 temporary periods when assets
of a fund are uninvested and no return is earned thereon. The inability of a
fund to make intended security purchases due to settlement problems could cause
the fund to miss attractive investment opportunities. Inability to dispose of a
portfolio security due to settlement problems could result either in losses to
the fund due to subsequent declines in the value of such portfolio security or,
if the fund has entered into a contract to sell the security, could result in
possible liability to the purchaser.
Investment income on certain foreign securities in which the funds may
invest may be subject to foreign withholding or other taxes that could reduce
the return on these securities. Tax treaties between the United States and
foreign countries, however, may reduce or eliminate the amount of foreign taxes
to which the funds would be subject. In addition, substantial limitations may
exist in certain countries with respect to the funds' ability to repatriate
investment capital or the proceeds of sales of securities.
FOREIGN CURRENCY RISKS. Currency risk is the risk that changes in foreign
exchange rates may reduce the U.S. dollar value of a fund's foreign investments.
If the value of a foreign currency rises against the value of the U.S. dollar,
the value of a fund's investments that are denominated in, or linked to, that
currency will increase. Conversely, if the value of a foreign currency declines
against the value of the U.S. dollar, the value of such fund investments will
decrease. Such changes may have a significant impact on the value of fund
shares. In some instances, a fund may use derivative strategies to hedge against
changes in foreign currency value. (See "Strategies Using Derivative
Instruments" below.) However, opportunities to hedge against currency risk may
not exist in certain markets, particularly with respect to emerging market
currencies, and even when appropriate hedging opportunities are available, a
fund may choose not to hedge against currency risk.
Generally, currency exchange rates are determined by supply and demand in
the foreign exchange markets and the relative merits of investments in different
countries. In the case of those European countries that use the Euro as a common
currency unit, the relative merits of investments in the common market in which
they participate, rather than the merits of investments in the individual
country, will be a determinant of currency exchange rates. Currency exchange
rates also can be affected by the intervention of the U.S. and foreign
governments or central banks, the imposition of currency controls, speculation,
devaluation or other political or economic developments inside and outside the
United States.
Each fund values its assets daily in U.S. dollars and does not intend to
convert its holdings of foreign currencies to U.S. dollars on a daily basis.
From time to time a fund's 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 fund could suffer a loss of some or all
of the amounts deposited. Each fund may convert foreign currency to U.S. dollars
from time to time.
The value of the assets of a fund as measured in U.S. dollars may be
affected favorably or unfavorably by fluctuations in currency rates and exchange
control regulations. Further, a fund 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 fund at one rate, while offering a lesser rate of exchange should
a fund desire immediately to resell that currency to the dealer. Each fund
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.
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SPECIAL CHARACTERISTICS OF EMERGING MARKET SECURITIES AND SOVEREIGN DEBT
EMERGING MARKET INVESTMENTS. The special risks of investing in foreign
securities are heightened when emerging markets are involved. For example, many
emerging market currencies recently have experienced significant devaluations
relative to the U.S. dollar. Emerging market countries typically have economic
and political systems that are less fully developed and can be expected to be
less stable than those of developed countries. Emerging market countries may
have policies that restrict investment by foreigners, and there is a higher risk
of government expropriation or nationalization of private property. The
possibility of low or nonexistent trading volume in the securities of companies
in emerging markets also may 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.
INVESTMENT AND REPATRIATION RESTRICTIONS. Foreign investment in the
securities markets of several emerging market countries is restricted or
controlled to varying degrees. These restrictions may limit a fund's investment
in these countries and may increase its expenses. For example, certain countries
may require governmental approval prior to investments by foreign persons in a
particular company or industry sector or limit investment by foreign persons to
only a specific class of securities of a company, which may have less
advantageous terms (including price) than securities of the company available
for purchase by nationals. Certain countries may restrict or prohibit investment
opportunities in issuers or industries deemed important to national interests.
In addition, the repatriation of both investment income and capital from some
emerging market countries is subject to restrictions, such as the need for
certain government consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of a fund's operations. These restrictions may in the future make it
undesirable to invest in the countries to which they apply. In addition, if
there is a deterioration in a country's balance of payments or for other
reasons, a country may impose restrictions on foreign capital remittances
abroad. A fund could be adversely affected by delays in, or a refusal to grant,
any required governmental approval for repatriation, as well as by the
application to it of other restrictions on investments.
If, because of restrictions on repatriation or conversion, a fund were
unable to distribute substantially all of its net investment income, including
net short-term capital gains and net long-term capital gains within applicable
time periods, the fund could be subject to federal income and excise taxes that
would not otherwise be incurred and could cease to qualify for the favorable tax
treatment afforded to regulated investment companies under the Internal Revenue
Code. In such case, it would become subject to federal income tax on all of its
income and net gains.
SOCIAL, POLITICAL AND ECONOMIC FACTORS. Many emerging market countries may
be subject to a greater degree of social, political and economic instability
than is the case in the United States. Any change in the leadership or policies
of these countries may halt the expansion of or reverse any liberalization of
foreign investment policies now occurring. Such instability may result from,
among other things, the following: (i) authoritarian governments or military
involvement in political and economic decision making, and changes in government
through extra-constitutional means; (ii) popular unrest associated with demands
for improved political, economic and social conditions; (iii) internal
insurgencies; (iv) hostile relations with neighboring countries; and (v) ethnic,
religious and racial disaffection. Such social, political and economic
instability could significantly disrupt the financial markets in those countries
and elsewhere and could adversely affect the value of a fund's assets. In
addition, there may be the possibility of asset expropriations or future
confiscatory levels of taxation affecting a fund.
The economies of many emerging markets are heavily dependent upon
international trade and are accordingly affected by protective trade barriers
and the economic conditions of their trading partners, principally the United
States, Japan, China and the European Community. The enactment by the United
States or other principal trading partners of protectionist trade legislation,
reduction of foreign investment in the local economies and general declines in
the international securities markets could have a significant adverse effect
upon the securities markets of these countries. In addition, the economies of
some countries are vulnerable to weakness in world prices for their commodity
exports, including crude oil.
FINANCIAL INFORMATION AND LEGAL STANDARDS. Issuers in emerging market
countries generally are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
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to U.S. issuers. In particular, the assets and profits appearing on the
financial statements of an emerging market issuer may not reflect its financial
position or results of operations in the way they would be reflected had the
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. In addition, for an issuer that keeps accounting records
in local currency, inflation accounting rules may require, for both tax and
accounting purposes, that certain assets and liabilities be restated on the
issuer's balance sheet in order to express items in terms of currency of
constant purchasing power. Inflation accounting may indirectly generate losses
or profits. Consequently, financial data may be materially affected by
restatements for inflation and may not accurately reflect the real condition of
those issuers and securities markets.
In addition, existing laws and regulations are often inconsistently
applied. As legal systems in some of the emerging market countries develop,
foreign investors may be adversely affected by new laws and regulations, changes
to existing laws and regulations and preemption of local laws and regulations by
national laws. In circumstances where adequate laws exist, it may not be
possible to obtain swift and equitable enforcement of the law.
FOREIGN SOVEREIGN DEBT. Sovereign debt includes bonds that are issued 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. Investment in
sovereign debt involves special risks. The issuer of the debt or the
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal and/or interest when due in accordance with the
terms of such debt, and the funds may have limited legal recourse in the event
of a default.
Sovereign debt differs from debt obligations issued by private entities in
that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore somewhat diminished. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt 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. A country whose exports are concentrated in a
few commodities could be vulnerable to a decline in the international price of
such commodities. 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. 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.
The occurrence of political, social or diplomatic changes in one or more
of the countries issuing sovereign debt could adversely affect the funds'
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 manages a fund's portfolios 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 the funds to suffer a
loss of interest or principal on any of its sovereign debt holdings.
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. Some emerging market
countries have from time to time declared moratoria on the payment of principal
and interest on external debt.
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Some 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 funds, may be requested to participate
in the rescheduling of such debt and to extend further loans to sovereign
debtors. The interests of holders of sovereign debt could be adversely affected
in the course of restructuring arrangements or by certain other factors referred
to below. Furthermore, some of the participants in the secondary market for
sovereign debt may also be directly involved in negotiating the terms of these
arrangements and may, therefore, have access to information not available to
other market participants. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of certain issuers of sovereign debt. There is no bankruptcy
proceeding by which sovereign debt on which a sovereign has defaulted may be
collected in whole or in part.
Foreign investment in certain sovereign debt is restricted or controlled
to varying degrees. These restrictions or controls may at times limit or
preclude foreign investment in such sovereign debt and increase the costs and
expenses of a fund. Certain countries in which a fund may invest require
governmental approval prior to investments by foreign persons, limit the amount
of investment by foreign persons in a particular issuer, limit the investment by
foreign persons only to a specific class of securities of an issuer that may
have less advantageous rights than the classes available for purchase by
domiciliaries of the countries or impose additional taxes on foreign investors.
Certain issuers may require governmental approval for the repatriation of
investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in a country's balance of
payments the country could impose temporary restrictions on foreign capital
remittances. A fund 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 fund of any restrictions on investments. Investing
in local markets may require a fund to adopt special procedures, seek local
government approvals or take other actions, each of which may involve additional
costs to the fund.
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 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.
Brady Bonds have been issued only in recent years, 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 fund will purchase Brady
Bonds 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 until 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. Interest payments on Brady Bonds may be wholly uncollateralized
or may be collateralized by cash or high grade securities in amounts that
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typically represent between 12 and 18 months of interest accruals on these
instruments, with the balance of the interest accruals being uncollateralized.
Brady Bonds are often viewed as having several valuation components: (1)
the collateralized repayment of principal, if any, at final maturity, (2) the
collateralized interest payments, if any, (3) the uncollateralized interest
payments and (4) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative. A fund 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.
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 that 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.
CURRENCY-LINKED INVESTMENTS. The principal amount of securities that are
indexed to specific foreign currency exchange rates may be adjusted up or down
(but not below zero) at maturity to reflect changes in the exchange rate between
two currencies. A fund may experience loss of principal due to these
adjustments.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. From time to time, investments
in other investment companies may be the most effective available means by which
a fund may invest in securities of issuers in certain countries. Investment in
such investment companies may involve the payment of management expenses and, in
connection with some purchases, sales loads and payments of substantial premiums
above the value of such companies' portfolio securities. At the same time, a
fund would continue to pay its own management fees and other expenses. Each fund
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 fund's
investments in such investment companies are subject to limitations under the
Investment Company Act of 1940 and market availability and may result in special
federal income tax law tax consequences.
ZERO COUPON, OID AND PIK SECURITIES. Zero coupon securities are securities
that make no periodic interest payments but instead are sold at a deep discount
from their face value. The buyer of these securities receives a rate of return
by the gradual appreciation of the security, which results from the fact that it
will be paid at face value on a specified maturity date. There are many types of
zero coupon securities. Some are issued in zero coupon form, including Treasury
bills, notes and bonds that have been stripped of their unmatured interest
coupons and receipts or certificates representing interests in such stripped
debt obligations and coupons. Others are created by brokerage firms that strip
(separate) the coupons (unmatured interest payments) from interest-paying debt
securities and sell the principal and the coupons separately.
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Other securities are sold with original issue discount ("OID"), a term
that means the securities are issued at a price that is lower than their value
at maturity, even though the securities also may make cash payments of interest
prior to maturity. In addition, payment-in-kind ("PIK") securities pay interest
in additional securities, not in cash. OID and PIK securities usually trade at a
discount from their face value.
Zero coupon securities pay no cash interest to holders prior to maturity.
Accordingly, they are generally more sensitive to changes in interest rates than
debt obligations of comparable maturities that make current interest payments.
This means that when interest rates fall, the value of zero coupon securities
rises more rapidly than securities paying interest on a current basis. However,
when interest rates rise, their value falls more dramatically. Other OID
securities also are subject to greater fluctuations in market value in response
to changing interest rates than debt securities of comparable maturities that
make current distributions of interest in cash.
Federal tax law requires that the holder of a zero coupon security or
other OID security include in gross income each year the original issue discount
that accrues on the security for the year, even though the holder receives no
interest payment on the security during the year. Accordingly, to continue to
qualify as a regulated investment company and to avoid a federal excise tax, a
fund may be required to distribute as dividends amounts that are greater than
the total amount of cash it actually receives. Similarly, while PIK securities
may pay interest in the form of additional securities rather than cash, that
interest must be included in a fund's annual income. These distributions must be
made from the fund's cash assets or, if necessary, from the proceeds of sales of
portfolio securities. A fund will not be able to purchase additional securities
with cash used to make such distributions and its current income and the value
of its shares may ultimately be reduced as a result.
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.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common 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 or dividends 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. However, 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.
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 of 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. 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
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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 fund is called for redemption,
the fund 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. Investment
Grade Income Fund has no current intention of converting any convertible
securities it may own into equity or holding them as equity upon conversion,
although it may do so for temporary purposes. The other funds that may invest in
convertible securities may hold any equity securities they acquire upon
conversion subject only to their limitations on holding equity securities.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Investments in secured or unsecured
fixed or floating rate loans ("Loans") arranged through private negotiations
between a borrowing corporation, government or other entity and one or more
financial institutions ("Lenders") may be in the form of participations
("Participations") in Loans or assignments ("Assignments") of all or a portion
of Loans from third parties. Participations typically result in the fund's
having a contractual relationship only with the Lender, not with the borrower. A
fund 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 fund 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 fund may not
directly benefit from any collateral supporting the Loan in which it has
purchased the Participation. As a result, a fund assumes the credit risk of both
the borrower and the Lender that is selling the Participation. In the event of
the insolvency of the selling Lender, the fund may be treated as a general
creditor of that Lender and may not benefit from any set-off between the Lender
and the borrower. A fund will acquire Participations only if Mitchell Hutchins
or the applicable sub-adviser determines that the selling Lender is
creditworthy.
When a fund purchases Assignments from Lenders, it acquires direct rights
against the borrower on the Loan. In an Assignment, the fund is entitled to
receive payments directly from the borrower and, therefore, does not depend on
the selling bank to pass these payments onto the fund. However, because
Assignments are arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired by the fund 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
Securities Act of 1933 and thus may be subject to a fund's limitation on
investment in illiquid securities. Because there may be no liquid market for
such securities, such securities may be sold only to a limited number of
institutional investors. The lack of a liquid secondary market could have an
adverse impact on the value of such securities and on a fund's ability to
dispose of particular Assignments or Participations when necessary to meet the
fund's liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the borrower.
TEMPORARY AND DEFENSIVE INVESTMENTS; MONEY MARKET INVESTMENTS. Each fund
may invest in money market investments for temporary or defensive purposes or as
part of its normal investment program. Except for Money Market Portfolio and
Balanced Fund (whose money market investments are described elsewhere), such
investments 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 funds that may
invest outside the United States may invest in money market instruments that are
denominated in foreign currencies.
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SELECTION OF INVESTMENTS BY BALANCED PORTFOLIO. The money market
instruments in which Balanced Portfolio may invest include U.S. Treasury bills
and other obligations issued or guaranteed as to interest and principal by the
U.S. government, its agencies and instrumentalities; obligations of U.S. banks
(including certificates of deposit and bankers' acceptances) having total assets
at the time of purchase in excess of $1.5 billion [and interest bearing savings
deposits in U.S. commercial and savings banks in principal amounts at each such
bank not greater than are fully insured by the Federal Deposit Insurance
Corporation, provided that the aggregate amount of such deposits does not exceed
5% of the value of the fund's assets]; commercial paper and other short-term
corporate obligations; and variable and floating rate securities and repurchase
agreements. The fund 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 or A-2 by S&P, (2) comparably rated by
another RATING AGENCY 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.
WARRANTS. Warrants are securities permitting, but not obligating, holders
to subscribe for other securities. 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. The term "illiquid securities" for purposes of the
Prospectus and Statement of Additional Information means securities that cannot
be disposed of within seven days in the ordinary course of business at
approximately the amount at which a fund has valued the securities and includes,
among other things, purchased OTC options, repurchase agreements maturing in
more than seven days and restricted securities other than those Mitchell
Hutchins or the applicable sub-adviser has determined are liquid pursuant to
guidelines established by each fund's board. The assets used as cover for OTC
options written by the funds will be considered illiquid unless the OTC options
are sold to qualified dealers who agree that the funds may repurchase any OTC
options they write 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 would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
Under current SEC guidelines, IO and PO classes of mortgage-backed securities
generally are considered illiquid. However, IO and PO classes of fixed-rate
mortgage-backed securities issued by the U.S. government or one of its agencies
or instrumentalities will not be considered illiquid if Mitchell Hutchins or the
Sub-Adviser has determined that they are liquid pursuant to guidelines
established by each fund's board. To the extent a fund 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. The lack of a liquid secondary market for illiquid securities may
make it more difficult for a fund to assign a value to those securities for
purposes of valuing its portfolio and calculating its net asset value.
Restricted securities are not registered under the 1933 Act and may be
sold only in privately negotiated or other exempted transactions or after a 1933
Act registration statement has become effective. Where registration is required,
a fund 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 a fund may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
a fund might obtain a less favorable price than prevailed when it decided to
sell.
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 generally 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 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
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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 also 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 institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held by
a fund, however, could affect adversely the marketability of such portfolio
securities, and the fund might be unable to dispose of such securities promptly
or at favorable prices.
The board has delegated the function of making day-to-day determinations
of liquidity to Mitchell Hutchins or the applicable sub-adviser pursuant to
guidelines approved by the board. Mitchell Hutchins or the sub-adviser takes
into account a number of factors in reaching liquidity decisions, including (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 sub-adviser monitors the liquidity of restricted
securities in each fund's portfolio and reports periodically on such decisions
to the board.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
fund purchases securities or other obligations from a bank or securities dealer
(or its affiliate) and simultaneously commits to resell them to the counterparty
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 obligations.
A fund maintains custody of the underlying obligations prior to their
repurchase, either through its regular custodian or through a special
"tri-party" custodian or sub-custodian that maintains separate accounts for both
the fund and its counterparty. Thus, the obligation of the counterparty to pay
the repurchase price on the date agreed to or upon demand is, in effect, secured
by such obligations. Repurchase agreements carry certain risks not associated
with direct investments in securities, including a possible decline in the
market value of the underlying obligations. Repurchase agreements involving
obligations other than U.S. government securities (such as commercial paper and
corporate bonds) may be subject to special risks and may not have the benefit of
certain protections in the event of the counterparty's insolvency. If the seller
or guarantor becomes insolvent, the fund may suffer delays, costs and possible
losses in connection with the disposition of collateral. If their value becomes
less than the repurchase price, plus any agreed-upon additional amount, the
counterparty 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 obligations and the price that was paid by a fund upon
acquisition is accrued as interest and included in its net investment income.
Each fund intends to enter into repurchase agreements only with counterparties
in transactions believed by Mitchell Hutchins to present minimum credit risks in
accordance with guidelines established by the board.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements involve the
sale of securities held by a fund subject to its agreement to repurchase the
securities at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest. Reverse repurchase agreements are subject to each
fund's limitation on borrowings. While a reverse repurchase agreement is
outstanding, a fund will maintain, in a segregated account with its custodian,
cash or liquid securities, marked to market daily, in an amount at least equal
to its obligations under the reverse repurchase agreement.
Reverse repurchase agreements involve the risk that the buyer of the
securities sold by a fund might be unable to deliver them when that fund seeks
to repurchase. In the event that the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
trustee or receiver may receive an extension of time to determine whether to
enforce that fund's obligation to repurchase the securities, and the fund's use
of the proceeds of the reverse repurchase agreement may effectively be
restricted pending such decision.
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DOLLAR ROLLS. In a dollar roll, a fund sells mortgage-backed or other
securities for delivery on the next regular settlement date for those securities
and, simultaneously, contracts to purchase substantially similar securities for
delivery on a later settlement date. Dollar rolls also are subject to a fund's
limitation on borrowings.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each fund may purchase
securities on a "when-issued" basis or may purchase or sell securities for
delayed delivery, that is, for issuance or delivery to the fund later than the
normal settlement date for such securities at a stated price and yield. When
issued securities include TBA ("to be assigned") securities. TBA securities,
which are usually mortgage-backed securities, are purchased on a forward
commitment basis with an approximate principal amount and no defined maturity
date. The actual principal amount and maturity date are determined upon
settlement when the specific mortgage pools are assigned. A fund generally would
not pay for such securities or start earning interest on them until they are
received. However, when a fund undertakes a when-issued or delayed-delivery
obligation, it immediately assumes the risks of ownership, including the risks
of price fluctuation. Failure of the issuer to deliver a security purchased by a
fund on a when-issued or delayed-delivery basis may result in the fund's
incurring or missing an opportunity to make an alternative investment. Depending
on market conditions, a fund's when-issued and delayed-delivery purchase
commitments could cause its net asset value per share to be more volatile,
because such securities may increase the amount by which the fund's total
assets, including the value of when-issued and delayed-delivery securities held
by that fund, exceeds its net assets.
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 fund's net asset value. When a fund 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
Restrictions--Segregated Accounts." A fund purchases 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 a Sub-Adviser, as applicable,
deems it advantageous to do so, which may result in a gain or loss to the fund.
DURATION. Duration is a measure of the expected life of a debt security on
a present value basis. Duration incorporates the debt security's yield, coupon
interest payments, final maturity and call features into one measures and is one
of the fundamental tools used by Mitchell Hutchins or, where applicable, a
sub-adviser in portfolio selection and yield curve positioning a fund's
investments in debt securities. Duration 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.
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 debt security, 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
debt security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. For example, depending on its
coupon and the level of market yields, a 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.
Duration allows Mitchell Hutchins or a sub-adviser to make certain
predictions as to the effect that changes in the level of interest rates will
have on the value of a fund's portfolio of debt securities. For example, when
the level of interest rates increases by 1%, a debt security having a positive
duration of three years generally will decrease by approximately 3%. Thus, if
Mitchell Hutchins calculates the duration of a fund's portfolio of debt
securities as three years, it normally would expect the portfolio to change in
value by approximately 3% for every 1% change in the level of interest rates.
However, various factors, such as changes in anticipated prepayment rates,
qualitative considerations and market supply and demand, can cause particular
securities to respond somewhat differently to changes in interest rates than
indicated in the above example. Moreover, in the case of mortgage-backed and
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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 fund's portfolio of debt securities may
vary in relation to interest rates by a greater or lesser percentage than
indicated by the above example.
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 will lengthen portfolio 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-Adviser 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.
LENDING OF PORTFOLIO SECURITIES. Each fund is authorized to lend its
portfolio securities in an amount up to 33-1/3% of its total assets to
broker-dealers or institutional investors that Mitchell Hutchins deems
qualified. Lending securities enables a fund to earn additional income, but
could result in a loss or delay in recovering these securities. The borrower of
a fund's portfolio securities must maintain acceptable collateral with that
fund's custodian in an amount, marked to market daily, 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 fund 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. Each fund will retain authority to terminate any of its loans at any
time. Each fund may pay reasonable fees in connection with a loan and may pay
the borrower or placing broker a negotiated portion of the interest earned on
the reinvestment of cash held as collateral. A fund will receive amounts
equivalent to any dividends, interest or other distributions on the securities
loaned. Each fund will regain record ownership of loaned securities to exercise
beneficial rights, such as voting and subscription rights, when regaining such
rights is considered to be in the fund's interest.
Pursuant to procedures adopted by the board governing each fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for each fund. The boards also have authorized the payment of fees
(including fees calculated as a percentage of invested cash collateral) to
PaineWebber for these services. Each board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent.
PaineWebber also has been approved as a borrower under each fund's securities
lending program.
SHORT SALES "AGAINST THE BOX." Each fund (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 a fund, and that fund is obligated to replace the securities borrowed
at a date in the future. When a fund sells short, it establishes a margin
account with the broker effecting the short sale and deposits collateral with
the broker. In addition, the fund maintains, in a segregated account with its
custodian, the securities that could be used to cover the short sale. Each fund
incurs transaction costs, including interest expense, in connection with
opening, maintaining and closing short sales "against the box."
A fund 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
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owned by the fund or a security convertible into or exchangeable for a security
owned by the fund. In such case, any loss in the fund'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 a fund owns,
either directly or indirectly, and in the case where the fund owns convertible
securities, changes in the investment values or conversion premiums of such
securities.
SEGREGATED ACCOUNTS. When a fund enters into certain transactions that
involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis, or reverse
repurchase agreements, it 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 fund's obligation or commitment under such
transactions. As described below under "Strategies Using Derivative
Instruments," segregated accounts may also be required in connection with
certain transactions involving options, futures or forward currency contracts
and swaps.
INVESTMENT LIMITATIONS OF THE FUNDS
FUNDAMENTAL LIMITATIONS. The following fundamental investment limitations
cannot be changed for a fund without the affirmative vote of the lesser of (a)
more than 50% of the outstanding shares of the fund or (b) 67% or more of the
shares of the fund present at a shareholders' meeting if more than 50% of the
outstanding shares 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, later changes 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 following limitations.
Each fund will not:
(1) purchase any security if, as a result of that purchase, 25% or more of
the fund'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
Investment Company Act of 1940 and then not in excess of 33 1/3% of the fund'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 fund 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 fund might be considered an underwriter under the
federal securities laws in connection with its disposition of portfolio
securities.
(5) purchase or sell real estate, except that investments in securities of
issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
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in real estate are not subject to this limitation, and except that the fund 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 fund 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 funds except Global
Income Portfolio and Strategic Income Portfolio:
(7) purchase securities of any one issuer if, as a result, more than 5% of
the fund's total assets would be invested in securities of that issuer or the
fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 25% of the fund'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 restriction: 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 are
non-fundamental and may be changed by the vote of the board without shareholder
approval.
Each fund 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 fund 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 portfolio securities while borrowings in excess of 5% of its
total assets are outstanding;
(3) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the fund may make margin
deposits in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments;
(4) engage in short sales of securities or maintain a short position,
except that the fund 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; or
(5) 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.
STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. Mitchell Hutchins or the
applicable sub-adviser may use a variety of financial instruments ("Derivative
Instruments"), including certain options, futures contracts (sometimes referred
to as "futures"), and options on futures contracts, to attempt to hedge each
fund's portfolio and also to attempt to enhance income or realize gains and (for
funds that invest in bonds) to manage the duration of its portfolio. For funds
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that are permitted to invest outside the United States, Mitchell Hutchins or the
sub-adviser also may use forward currency contracts, foreign currency options
and futures and options on foreign currency futures. Funds that invest primarily
in bonds also may enter into interest rate swap transactions. A fund may enter
into transactions involving one or more types of Derivative Instruments under
which the full value of its portfolio is at risk. Under normal circumstances,
however, each fund'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
funds are described below.
The funds might not use any derivative instruments or strategies, and
there can be no assurance that using any strategy will succeed. If Mitchell
Hutchins or a sub-adviser is incorrect in its judgment on market values,
interest rates or other economic factors in using a derivative instrument or
strategy, a fund may have lower net income and a net loss on the investment.
OPTIONS ON 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 or at specified
times or at the expiration of the option, depending on the type of option
involved. 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 or at specified times or at the expiration of the option,
depending on the type of option involved. 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 SECURITIES INDICES--A securities index assigns relative values
to the securities included in the index and fluctuates with changes in the
market values of those securities. A securities index option operates in the
same way as a more traditional securities option, except that exercise of a
securities index option is effected with cash payment and does not involve
delivery of securities. Thus, upon exercise of a securities 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 securities
index.
SECURITIES INDEX FUTURES CONTRACTS--A securities 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 securities 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 securities comprising the index
is made. Generally, contracts are closed out prior to the expiration date of the
contract.
INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS--Interest rate and
foreign currency futures contracts are bilateral agreements pursuant to which
one party agrees to make, and the other party agrees to accept, delivery of a
specified type of debt security or currency at a specified future time and at a
specified price. Although such futures contracts by their terms call for actual
delivery or acceptance of debt securities or currency, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to
options on securities or currency, except that an option on a futures contract
gives the purchaser the right, in return for the premium, to assume a position
in a futures contract (a long position if the option is a call and a short
position if the option is a put), rather than to purchase or sell a security or
currency, at a specified price at any time during the option term. Upon exercise
of the option, the delivery of the futures position to the holder of the option
will be accompanied by delivery of the accumulated balance that represents the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the future. The writer of an option, upon exercise, will assume a short
position in the case of a call and a long position in the case of a put.
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FORWARD CURRENCY CONTRACTS--A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into.
GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS. Hedging
strategies can be broadly categorized as "short hedges" and "long hedges." A
short hedge is a purchase or sale of a Derivative Instrument intended partially
or fully to offset potential declines in the value of one or more investments
held in a fund's portfolio. Thus, in a short hedge a fund 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 fund 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, a fund 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, a fund 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 fund intends to acquire. Thus, in a long
hedge, a fund 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 fund 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, a fund could exercise the call and thus limit its acquisition
cost to the exercise price plus the premium paid and transactions costs.
Alternatively, a fund might be able to offset the price increase by closing out
an appreciated call option and realizing a gain.
A fund may purchase and write (sell) straddles on securities or indices of
securities. 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 fund
might enter into a long straddle when Mitchell Hutchins or a sub-adviser
believes it likely that the prices of the securities 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 fund
might enter into a short straddle when Mitchell Hutchins or a sub-adviser
believes it unlikely that the prices of the securities 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 fund 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 a fund 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 using Derivative Instruments may include the writing of
covered options to obtain the related option premiums. Gain strategies may
include using Derivative Instruments to increase or decrease a fund's exposure
to different asset classes without buying or selling the underlying instruments.
A fund also may use derivatives to simulate full investment by the fund while
maintaining a cash balance for fund management purposes (such as to provide
liquidity to meet anticipated shareholder sales of fund shares and for fund
operating expenses).
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 fund's
ability to use Derivative Instruments may be limited by tax considerations. See
"Taxes."
In addition to the products, strategies and risks described below and in
the Prospectus, Mitchell Hutchins and the sub-advisers 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 for a fund to the extent that they
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are consistent with the fund's investment objective and permitted by its
investment limitations and applicable regulatory authorities. The funds'
Prospectus or Statement of Additional Information will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.
SPECIAL RISKS OF STRATEGIES USING DERIVATIVE 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 the ability
of Mitchell Hutchins or the applicable sub-adviser 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 and the sub-advisers are 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 that are 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 in 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 fund entered into a short
hedge because Mitchell Hutchins or a sub-adviser projected a decline in the
price of a security in that fund's 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 fund could suffer a loss. In either such case, the
fund would have been in a better position had it not hedged at all.
(4) As described below, a fund 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 the fund was
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 positions expired or matured. These requirements might impair a fund'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 the fund sell a portfolio
security at a disadvantageous time. A fund'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 counterparty to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to a fund.
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose the funds to an
obligation to another party. A fund will not enter into any such transactions
unless it owns either (1) an offsetting ("covered") position in securities,
currencies or other options or futures contracts or (2) cash or 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 fund will
comply with SEC guidelines regarding cover for such transactions and will, if
the guidelines so require, set aside cash or liquid securities in a segregated
account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Derivative Instrument is open, unless they are
replaced with similar assets. As a result, committing a large portion of a
fund's assets to cover positions or to segregated accounts could impede
portfolio management or the fund's ability to meet redemption requests or other
current obligations.
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OPTIONS. The funds may purchase put and call options, and write (sell)
covered put or call options on securities in which they invest and related
indices. Funds that may invest outside the United States also may purchase put
and call options and write covered options on foreign currencies. 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, a fund may also use options to attempt to
realize gains 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 fund to enhance income by reason of the premiums paid by
the purchasers of such options. 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 affected
fund will be obligated to sell the security at less than its market value.
Writing covered put options serves as a limited long hedge because increases 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 depreciates to a price
lower than the exercise price of the put option, it can be expected that the put
option will be exercised and the fund will be obligated to purchase the security
at more than its market value. The securities or other assets used as cover for
OTC options written by a fund 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. Generally, OTC options on bonds are European-style
options. This means that the option can only be exercised immediately prior to
its expiration. This is in contrast to American-style options that may be
exercised at any time. There are also other types of options that may be
exercised on certain specified dates before expiration. Options that expire
unexercised have no value.
A fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, a fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a fund 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 fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
The funds may purchase and 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 a fund and its counterparty (usually
a securities dealer or a bank) with no clearing organization guarantee. Thus,
when a fund purchases or writes an OTC option, it relies on the counterparty to
make or take delivery of the underlying investment upon exercise of the option.
Failure by the counterparty to do so would result in the loss of any premium
paid by the fund as well as the loss of any expected benefit of the transaction.
The funds' ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The funds intend 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 counterparty, or by a
transaction in the secondary market if any such market exists. Although the
funds will enter into OTC options only with counterparties that are expected to
be capable of entering into closing transactions with the funds, there is no
assurance that a fund 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
counterparty, a fund might be unable to close out an OTC option position at any
time prior to its expiration.
If a fund 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 put or call
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option written by the fund could cause material losses because the fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.
A fund 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 funds' use of options is governed
by the following guidelines, which can be changed by the board without
shareholder vote:
(1) A fund 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 fund, does not exceed 5% of its total assets.
(2) The aggregate value of securities underlying put options written by a
fund, 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 securities indices and options on futures
contracts) purchased by a fund that are held at any time will not exceed 20% of
its net assets.
FUTURES. The funds may purchase and sell securities index futures
contracts, interest rate futures contracts, debt security index futures
contracts and (for those funds that invest outside the United States) foreign
currency futures contracts. A fund may also purchase put and call options, and
write covered put and call options, on futures in which it is allowed to invest.
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, and writing covered put options on futures contracts can serve as a
limited long hedge, using a strategy similar to that used for writing covered
options on securities or indices. In addition, a fund may purchase or sell
futures contracts or purchase options thereon to increase or reduce its exposure
to an asset class without purchasing or selling the underlying securities.
Futures strategies also can be used to manage the average duration of a
fund's portfolio. If Mitchell Hutchins or the applicable sub-adviser wishes to
shorten the average duration of a fund's portfolio, the fund may sell a futures
contract or a call option thereon, or purchase a put option on that futures
contract. If Mitchell Hutchins or the sub-adviser wishes to lengthen the average
duration of the fund's portfolio, the fund may buy a futures contract or a call
option thereon, or sell a put option thereon.
A fund may also write put options on 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 fund will engage in this
strategy only when it is more advantageous to a fund than is purchasing the
futures contract.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a fund 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 a call 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 a fund at the termination of the transaction if all
contractual obligations have been satisfied. Under certain circumstances, such
as periods of high volatility, a fund 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.
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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 each fund's obligations to or from a futures
broker. When a fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a fund 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 a fund 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.
The funds intend 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 fund 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. A fund would continue to be subject
to market risk with respect to the position. In addition, except in the case of
purchased options, a fund would continue to be required to make daily variation
margin payments and might be required to maintain the position being hedged by
the future or option or to maintain cash or securities in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. The funds' use of
futures and related options is governed by the following guidelines, which can
be changed by the board without shareholder vote:
(1) To the extent a fund enters into futures contracts and options on
futures positions 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 paid on all options (including options on
securities, foreign currencies and securities indices and options on futures
contracts) purchased by each fund 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 each fund will not exceed 5% of its total assets.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. Each fund
that may invest outside the United States may use options and futures on foreign
currencies, as described above, and forward currency contracts, as described
36
<PAGE>
below, to hedge against movements in the values of the foreign currencies in
which the fund's securities are denominated. Such currency hedges can protect
against price movements in a security a fund 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 fund 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 considered expensive. In such cases, the fund may
hedge against price movements in that currency by entering into transactions
using Derivative Instruments on another currency or a basket of currencies, the
value of which Mitchell Hutchins or the applicable sub-adviser believes will
have a positive correlation to the value of the currency being hedged. In
addition, a fund may use forward currency contracts to shift exposure to foreign
currency fluctuations from one country to another. For example, if a fund owned
securities denominated in a foreign currency and Mitchell Hutchins or the
sub-adviser believed that currency would decline relative to another currency,
it might enter into a forward contract to sell an appropriate amount of the
first foreign currency, with payment to be made in the second foreign currency.
Transactions that use two foreign currencies are sometimes referred to as "cross
hedging." Use of a different foreign currency magnifies the risk that movements
in the price of the Derivative Instrument will not correlate or will correlate
unfavorably with the foreign currency being hedged.
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, a fund 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.
Settlement of Derivative Instruments involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the funds 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. Funds 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 fund may purchase a
forward currency contract to lock in the U.S. dollar price of a security
denominated in a foreign currency that the fund intends to acquire. Forward
currency contract transactions may also serve as short hedges--for example, a
fund 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 cost to a fund 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 fund enters into a forward currency contract, it relies on the
counterparty to make or take delivery of the underlying currency at the maturity
of the contract. Failure by the counterparty to do so would result in the loss
of any expected benefit of the transaction.
37
<PAGE>
As is the case with futures 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 purchased or sold, 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 counterparty. Thus, there can be no assurance
that a fund 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 counterparty, a fund might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the fund would continue
to be subject to market risk with respect to the position, and would continue to
be required to maintain a position 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 fund 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. A fund 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 fund to deliver an amount of foreign currency
in excess of the value of the position being hedged by such contracts or (2) the
fund segregates with its custodian cash or liquid securities 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 marked to market daily.
SWAP TRANSACTIONS. A fund 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 period of time. Interest rate cap and floor
transactions involve an agreement between two parties in which the first party
agrees to make payments to the counterparty when a designated market interest
rate goes above (in the case of a cap) or below (in the case of a floor) a
designated level on predetermined dates or during a specified time period.
Interest rate collar transactions involve an agreement between two parties in
which payments are made when a designated market interest rate either goes above
a designated ceiling level or goes below a designated floor level on
predetermined dates or during a specified time period. Currency swaps, caps,
floors and collars are similar to interest rate swaps, caps, floors and collars,
but they are based on currency exchange rates than interest rates.
A fund may 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. A fund may only 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.
A fund 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 fund
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
sub-advisers (if applicable) believe such obligations do not constitute senior
securities and, accordingly, will not treat them as being subject to a fund's
borrowing restrictions. The net amount of the excess, if any, of a fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis, and appropriate fund 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." A fund also will establish and maintain such
38
<PAGE>
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 written by the fund.
A fund will enter into swap transactions only with banks and recognized
securities dealers believed by Mitchell Hutchins or A sub-adviser to present
minimal credit risk in accordance with guidelines established by the fund's
board. If there is a default by the other party to such a transaction, a fund
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.
ORGANIZATION OF TRUST; TRUSTEES AND OFFICERS AND PRINCIPAL HOLDERS OF SECURITIES
The Trust was formed on November 21, 1986 as a business trust under the
laws of the Commonwealth of Massachusetts and has thirteen operating series. The
Trust is governed by a board of trustees, which is authorized to establish
additional series and to issue an unlimited number of shares of beneficial
interest of each existing or future series, par value $0.001 per share. The
board oversees each fund's operations.
The trustees and executive officers of each Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
NAME AND ADDRESS*; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------- ----------------------------------------
<S> <C> <C>
Margo N. Alexander**; 52 Trustee and President Mrs. Alexander is president, chief executive
officer and a director of Mitchell Hutchins (since
January 1995), and an executive vice president and
a director of PaineWebber (since March 1984). Mrs.
Alexander is president and a director or trustee of
32 investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve as
investment adviser.
Richard Q. Armstrong; 63 Trustee Mr. Armstrong is chairman and principal of R.Q.A.
One Old Church Road Enterprises (management consulting firm) (since
Unit #6 April 1991 and principal occupation since March
Greenwich, CT 06830 1995). Mr. Armstrong was chairman of the board,
chief executive officer and co-owner of Adirondack
Beverages (producer and distributor of soft drinks
and sparkling/still waters) (October 1993-March
1995). He was a partner of The New England
Consulting Group (management consulting firm)
(December 1992-September 1993). He was managing
director of LVMH U.S. Corporation (U.S. subsidiary
of the French luxury goods conglomerate, Louis
Vuitton Moet Hennessey Corporation) (1987-1991) and
chairman of its wine and spirits subsidiary,
Schieffelin & Somerset Company (1987-1991). Mr.
Armstrong is a director or trustee of 31 investment
companies for which Mitchell Hutchins, PaineWebber
or their affiliates serve as investment adviser.
E. Garrett Bewkes, Jr.**; 72 Trustee and Chairman of Mr. Bewkes is a director of Paine Webber Group Inc.
the Board of Trustees ("PW Group") (holding company of PaineWebber and
Mitchell Hutchins). Prior to December 1995, he was
a consultant to PW Group. Prior to 1988, he was
chairman of the board, president and chief
executive officer of American Bakeries Company. Mr.
Bewkes is a director of Interstate Bakeries
Corporation. Mr. Bewkes is a director or trustee of
34 investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve as
investment adviser.
39
<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------- ----------------------------------------
Richard R. Burt; 52 Trustee Mr. Burt is chairman of IEP Advisors, Inc.
1275 Pennsylvania Ave, N.W. (international investments and consulting firm)
Washington, DC 20004 (since March 1994) and a partner of McKinsey &
Company (management consulting firm) (since 1991).
He is also a director of Archer-Daniels-Midland Co.
(agricultural commodities), Hollinger International
Co. (publishing), Homestake Mining Corp.,
Powerhouse Technologies Inc. and Wierton Steel
Corp. He was the chief negotiator in the Strategic
Arms Reduction Talks with the former Soviet Union
(1989-1991) and the U.S. Ambassador to the Federal
Republic of Germany (1985-1989). Mr. Burt is a
director or trustee of 31 investment companies for
which Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.
Mary C. Farrell**; 49 Trustee Ms. Farrell is a managing director, senior
investment strategist and member of the Investment
Policy Committee of PaineWebber. Ms. Farrell joined
PaineWebber in 1982. She is a member of the
Financial Women's Association 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 31 investment companies
for which Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.
Meyer Feldberg; 57 Trustee Mr. Feldberg is Dean and Professor of Management of
Columbia University the Graduate School of Business, Columbia
101 Uris Hall University. Prior to 1989, he was president of the
New York, NY 10027 Illinois Institute of Technology. Dean Feldberg is
also a director of Primedia, Inc., Federated
Department Stores, Inc. and Revlon, Inc. Dean
Feldberg is a director or trustee of 33 investment
companies for which Mitchell Hutchins, PaineWebber
or their affiliates serve as investment adviser.
George W. Gowen; 69 Trustee Mr. Gowen is a partner in the law firm of
666 Third Avenue Dunnington, Bartholow & Miller. Prior to May 1994,
New York, NY 10017 he was a partner in the law firm of Fryer, Ross &
Gowen. Mr. Gowen is a director or trustee of 31
investment companies for which Mitchell Hutchins,
Paine Webber or their affiliates serve as
investment adviser.
40
<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------- ----------------------------------------
Frederic V. Malek; 62 Trustee Mr. Malek is chairman of Thayer Capital Partners
1455 Pennsylvania Ave, N.W. (merchant bank). From January 1992 to November
Suite 350 1992, he was campaign manager of Bush-Quayle `92.
Washington, DC 20004 From 1990 to 1992, he was vice chairman and, from
1989 to 1990, he was president of Northwest
Airlines Inc., NWA Inc. (holding 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 catering and contract
feeding), where he most recently was an executive
vice president and president of Marriott Hotels and
Resorts. Mr. Malek is also a director of American
Management Systems, Inc. (management consulting and
computer related services), Automatic Data
Processing, Inc., CB Commercial Group, Inc. (real
estate services), Choice Hotels International
(hotel and hotel franchising), FPL Group, Inc.
(electric services), Manor Care, Inc. (health care)
and Northwest Airlines Inc. Mr. Malek is a director
or trustee of 31 investment companies for which
Mitchell Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Carl W. Schafer; 63 Trustee Mr. Schafer is president of the Atlantic Foundation
66 Witherspoon Street, #1100 (charitable foundation supporting mainly
Princeton, NJ 08542 oceanographic exploration and research). He is a
director of Base Ten Systems, Inc. (software),
Roadway Express, Inc. (trucking), The Guardian
Group of Mutual Funds, the Harding, Loevner Funds,
Evans Systems, Inc. (motor fuels, convenience store
and diversified company), Electronic Clearing
House, Inc., (financial transactions processing),
Frontier Oil Corporation and Nutraceutix, Inc.
(biotechnology company). Prior to January 1993, he
was chairman of the Investment Advisory Committee
of the Howard Hughes Medical Institute. Mr. Schafer
is a director or trustee of 31 investment companies
for which Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.
T. Kirkham Barneby; 52 Vice President Mr. Barneby is a managing director and chief
investment officer - quantitative investments of
Mitchell Hutchins. Prior to September 1994, he
was a senior vice president at Vantage Global
Management. Mr. Barneby is a vice president of
seven investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve
as investment adviser.
Ellen R. Harris; 52 Vice President Ms. Harris is a managing director and a portfolio
manager of Mitchell Hutchins. Ms. Harris is a
vice president of two investment companies for
which Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.
Donald R. Jones; 38 Vice President Mr. Jones is a senior vice president and a
portfolio manager of Mitchell Hutchins. Prior to
February 1996, he was a vice president in the
asset management group of First Fidelity
Bancorporation. Mr. Jones is a vice president of
two investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve
as investment adviser.
41
<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------- ----------------------------------------
James F. Keegan; 38 Vice President Mr. Keegan is a senior vice president and a
portfolio manager of Mitchell Hutchins. Prior to
March 1996, he was director 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
companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
John J. Lee; 30 Vice President and Mr. Lee is a vice president and a manager of the
Assistant Treasurer mutual fund finance department of Mitchell
Hutchins. Prior to September 1997, he was an
audit manager in the financial services practice
of Ernst & Young LLP. Mr. Lee is a vice president
and assistant treasurer of 32 investment
companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as an
investment adviser.
Thomas J. Libassi; 40 Vice President Mr. Libassi is a senior vice president and
portfolio manager of Mitchell Hutchins. Prior to
May 1994, he was a vice president of Keystone
Custodian Funds Inc. with portfolio management
responsibility. Mr. Libassi is a vice president
of six investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve
as investment adviser.
Dennis McCauley; 52 Vice President Mr. McCauley is a managing director and chief
investment officer--fixed income of Mitchell
Hutchins. Prior to December 1994, he was director
of fixed income investments of IBM Corporation.
Mr. McCauley is a vice president of 22 investment
companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
Ann E. Moran; 41 Vice President and Ms. Moran is a vice president and a manager of
Assistant Treasurer the mutual fund finance department of Mitchell
Hutchins. Ms. Moran is a vice president and
assistant treasurer of 32 investment companies
for which Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.
Dianne E. O'Donnell; 46 Vice President and Ms. O'Donnell is a senior vice president and deputy
Secretary general counsel of Mitchell Hutchins. Ms. O'Donnell
is a vice president and secretary of 31 investment
companies and a vice president and assistant
secretary of one investment company for which
Mitchell Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Emil Polito; 38 Vice President Mr. Polito is a senior vice president and
director of operations and control for Mitchell
Hutchins. Mr. Polito is a vice president of 32
investment companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
Susan Ryan; 39 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, PaineWebber or their
affiliates serve as investment adviser.
42
<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------- ----------------------------------------
Victoria E. Schonfeld; 48 Vice President Ms. Schonfeld is a managing director and general
counsel of Mitchell Hutchins since May 1994 and a
senior vice president of PaineWebber since July
1995. Prior to May 1994, she was a partner in
the law firm of Arnold & Porter. Ms. Schonfeld is
a vice president of 31 investment companies and a
vice president and secretary of one investment
company for which Mitchell Hutchins, PaineWebber
or their affiliates serve as investment adviser.
Paul H. Schubert; 36 Vice President and Mr. Schubert is a senior vice president and
Treasurer director of the mutual fund finance department of
Mitchell Hutchins. From August 1992 to August
1994, he was a vice president at BlackRock
Financial Management L.P. Mr. Schubert is a vice
president and treasurer of 32 investment
companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
Nirmal Singh; 42 Vice President Mr. Singh is a senior vice president and a
portfolio manager of Mitchell Hutchins. Mr. Singh
is a vice president of four investment companies
for which Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.
Barney A. Taglialatela; 38 Vice President and Mr. Taglialatela is a vice president and a
Assistant Treasurer manager of the mutual fund finance department of
Mitchell Hutchins. Prior to February 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 32 investment companies for which
Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.
Mark A. Tincher; 43 Vice President Mr. Tincher is a managing director and chief
investment officer--equities of Mitchell Hutchins.
Prior to March 1995, he was a vice president and
directed the U.S. funds management and equity
research areas of Chase Manhattan Private Bank.
Mr. Tincher is a vice president of 13 investment
companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
Craig M. Varrelman; 40 Vice President Mr. Varrelman is a senior vice president and a
portfolio manager of Mitchell Hutchins. Mr.
Varrelman is a vice president of four investment
companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
Stuart Waugh; 43 Vice President Mr. Waugh is a managing director and a portfolio
manager of Mitchell Hutchins responsible for
global fixed income investments and currency
trading. Mr. Waugh is a vice president of five
investment companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
Keith A. Weller; 37 Vice President and Mr. Weller is a first vice president and associate
Assistant Secretary general counsel of Mitchell Hutchins. Prior to May
1995, he was an attorney in private practice. Mr.
Weller is a vice president and assistant secretary
of 31 investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve as
investment adviser.
</TABLE>
43
<PAGE>
- -------------
* 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
Trust and each fund as defined in the 1940 Act by virtue of their positions
with Mitchell Hutchins, PaineWebber, and/or PW Group.
The Trust pays each board member who is not an "interested person" of the
Trust $500 annually for each fund and an additional up to $150 per fund for each
board meeting and each separate meeting of a board committee. Therefore, the
Trust 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 board members are reimbursed for any expenses incurred in attending
meetings. Board members and officers own in the aggregate less than 1% of the
outstanding shares of any class of each fund. Because PaineWebber, Mitchell
Hutchins and, as applicable, a sub-adviser perform substantially all the
services necessary for the operation of the Trust and each fund, the Trust
requires no employees. No officer, director or employee of Mitchell Hutchins or
PaineWebber presently receives any compensation from the Trust for acting as a
board member or officer.
44
<PAGE>
The table below includes certain information relating to the compensation
of the current board members who held office with the Trust or with other
PaineWebber funds during the year ended December 31, 1998.
COMPENSATION TABLE+
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FROM THE TRUST AND
NAME OF PERSON, POSITION THE TRUST* THE FUND COMPLEX
------------------------ ---------- ----------------
Richard Q. Armstrong,
Trustee
Richard R. Burt,
Trustee
Meyer Feldberg,
Trustee
George W. Gowen,
Trustee
Frederic V. Malek,
Trustee
Carl W. Schafer,
Trustee
- --------------------
+ Only independent board members are compensated by the Trust and identified
above; board members who are "interested persons," as defined by the 1940
Act, do not receive compensation.
* Represents fees paid to each Trustee from the Trust for the year ended
December 31, 1998.
** Represents total compensation paid to each board member during the calendar
year ended December 31, 1998; no fund within the fund complex has a bonus,
pension, profit sharing or retirement plan.
PRINCIPAL HOLDERS OF SECURITIES
The following shareholders are shown in the Trust's records as owning more
than 5% of the Class H and Class I shares of the funds as of April , 1999, as
indicated below:
PAINEWEBBER AMERICAN
LIFE REPUBLIC
VARIABLE VARIABLE
ANNUITY ANNUITY
ACCOUNT (1) ACCOUNT (2)
Money Market
Portfolio
Class H shares
Class I shares
High Grade Fixed
income Portfolio
Class H shares
Class I shares
Strategic Fixed
Income Portfolio
Class H shares
Class I shares
Strategic Income
Portfolio
Class H shares
Class I shares
45
<PAGE>
PAINEWEBBER AMERICAN
LIFE REPUBLIC
VARIABLE VARIABLE
ANNUITY ANNUITY
ACCOUNT (1) ACCOUNT (2)
Global Income
Portfolio
Class H shares
Class I shares
High Income Portfolio
Class H shares
Class I shares
Balanced Portfolio
Class H shares
Class I shares
Growth and Income
Portfolio
Class H shares
Class I shares
Tactical Allocation
Portfolio
Class H shares
Class I shares
Growth Portfolio
Class H shares
Class I shares
Aggressive Growth
Portfolio
Class H shares
Class I shares
Small Cap Portfolio
Class H shares
Class I shares
Global Growth
Portfolio
Class H shares
Class I shares
- ---------------
(1) PaineWebber Life Variable Annuity Account is a segregated investment account
of PaineWebber Life Insurance Company, 1200 Harbor Blvd., Weekhawken, New
Jersey 07087.
(2) American Republic Variable Annuity Account is a segregated investment
account of American Republic Insurance Company, 601 6th Avenue, Des Moines,
Iowa 50309.
46
<PAGE>
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of each fund pursuant to contracts (each an "Advisory
Contract") with the Trust dated November 2, 1998 with respect to Global Growth
Portfolio and April 21, 1988 (as supplemented by Fee Agreements dated May 1,
1989, December 30, 1991, September 1, 1993 and May 1, 1998) with respect to the
other funds. Under the Advisory Contracts, the Trust pays Mitchell Hutchins a
fee for each fund, computed daily and payable monthly, at the annual rate of the
fund's average daily net assets as indicated in the table below. The table also
shows the advisory fees earned (or accrued) by Mitchell Hutchins during the
periods shown.
<TABLE>
<CAPTION>
ANNUAL RATE OF ADVISORY FEES PAID OR ACCRUED
ADVISORY FEE AS A FOR THE YEARS ENDED DECEMBER 31,
PERCENTAGE OF FUND'S
AVERAGE DAILY NET 1998 1997 1996
ASSETS ---- ---- ----
------
<S> <C> <C> <C>
Money Market Portfolio 0.50 $ 56,346 $ 79,283
High Grade Fixed Income Portfolio 0.50 39,763 44,461
Strategic Fixed Income Fund 0.50 53,270 62,785
Strategic Income Portfolio * 0.75 n/a n/a
Global Income Portfolio 0.75 165,480 230,262
High Income Portfolio * 0.50 n/a n/a
Balanced Portfolio 0.75 252,729 249,995
Growth and Income Portfolio 0.70 138,089 111,599
Tactical Allocation Portfolio * 0.50 n/a n/a
Growth Portfolio 0.75 299,373 325,065
Aggressive Growth Portfolio 0.80 170,723 155,896
Small Cap Portfolio * 1.00 n/a n/a
Global Growth Portfolio 0.75 182,141 198,128
</TABLE>
* These funds commenced operations in 1998 on the following dates:
Strategic Income Portfolio 00/00/98
High Income Portfolio 00/00/98
Tactical Allocation Portfolio 00/00/98
Small Cap Portfolio 00/00/98
The Advisory Contracts authorize Mitchell Hutchins to retain one or more
sub-advisers but do not require Mitchell Hutchins to do so. Mitchell Hutchins
has entered into sub-advisory contracts ("Sub-Advisory Contracts") with respect
to Strategic Fixed Income Portfolio, Aggressive Growth Portfolio and (for its
foreign investments segment) Global Growth Portfolio, as described further
below.
Under a Sub-Advisory Contract with Mitchell Hutchins dated September 21,
1995, Pacific Investment Management Company ("PIMCO") serves as sub-adviser for
Strategic Fixed Income Portfolio. Mitchell Hutchins (not the fund) pays PIMCO
for its services under the Sub-Advisory Contract a fee in the annual amount of
0.25% of the fund's average daily net assets. For the years ended December 31,
1998, December 31, 1997 and December 31, 1996, Mitchell Hutchins paid or accrued
sub-advisory fees to PIMCO of $______, $26,635 and $31,393, respectively. PIMCO,
47
<PAGE>
a Delaware general partnership, is a registered investment adviser and a
subsidiary partnership of PIMCO Advisors L.P. ("PIMCO Advisors"). The general
partners of PIMCO Advisors are PIMCO Advisors Holding L.P., a publicly traded
company listed on the New York Stock Exchange under the symbol "PA" and PIMCO
Partners, G.P., a general partnership between Pacific Life Insurance Company and
PIMCO Partners, LLC, a limited liability company controlled by the PIMCO
managing directors. As of January 31, 1999, PIMCO has approximately $ billion in
assets under management and was adviser or sub-adviser of [46] pooled fund
accounts with aggregate assets of approximately $ billion. PIMCO is one of the
largest fixed income management firms in the nation. Included among PIMCO's
institutional clients are many "Fortune 500" companies.
Under a Sub-Advisory Contract with Mitchell Hutchins dated September 1,
1993, Nicholas-Applegate Capital Management ("Nicholas-Applegate") serves as
sub-adviser for Aggressive Growth Portfolio. Mitchell Hutchins (not the fund)
pays Nicholas-Applegate for its services under the Sub-Advisory Contract a fee
in the annual amount of 0.50% of the fund's average daily net assets. For the
years ended December 31, 1998, December 31, 1997 and December 31, 1996, Mitchell
Hutchins paid or accrued sub-advisory fees to Nicholas-Applegate of $______,
$106,701 and $97,434, respectively. Nicholas-Applegate is a California limited
partnership. Its general partner is Nicholas-Applegate Capital Management
Holdings, L.P., a California limited partnership controlled by Arthur E.
Nicholas. As of January 31, 1999, Nicholas-Applegate managed a total of
approximately $ billion in assets for its client accounts, which include
employee benefit plans of corporations, public retirement systems and unions,
university endowments and other institutional investors.
Under a Sub-Advisory Contract with Mitchell Hutchins dated November 2,
1998, Invista Capital Management Inc. ("Invista") serves as sub-adviser for the
foreign investments segment of Global Growth Portfolio. Mitchell Hutchins (not
the fund) pays Invista for its services under the Sub-Advisory Contract a fee in
the annual amount of 0.29% of the fund's average daily net assets. For the
period November 2, 1998 to December 31, 1998, Mitchell Hutchins paid or accrued
sub-advisory fees to Invista of $______. Invista, which was founded in 1984, is
an indirect wholly owned subsidiary of Principal Life Insurance Company and
manages substantially all of Principal Life Insurance Company's equity accounts,
in addition to providing investment advice to other affiliated and
non-affiliated customers. As of January 31, 1999, Invista managed approximately
$ billion in client assets.
Prior to November 2, 1998, GE Investment Management Incorporated ("GEIM")
served as investment sub-adviser for all investments of Global Growth Portfolio
and Mitchell Hutchins (not the fund) paid GEIM for its services under this prior
Sub-Advisory Contract a fee in the annual amount of 0.29% of the fund's average
daily net assets. For the period January 1, 1998 to November 1, 1998 and the
years ended December 31, 1997 and December 31, 1996, Mitchell Hutchins paid or
accrued sub-advisory fees to GEIM of $______, $70,428 and $76,609, respectively.
Under the terms of the Advisory Contracts, each fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Trust not readily identifiable as belonging to
one of the funds are allocated among the funds by or under the direction of the
Trust's board in such manner as the board determines to be fair and equitable.
Expenses borne by each fund include the following (or the fund's allocable share
of the following): (1) the cost (including brokerage commissions) of securities
purchased or sold by the fund and any losses incurred in connection therewith;
(2) fees payable to and expenses incurred on behalf of the fund by Mitchell
Hutchins; (3) organizational expenses; (4) filing fees and expenses relating to
the registration and qualification of the fund's shares under federal and state
securities laws and maintenance of such registrations and qualifications; (5)
fees and salaries payable to board members and officers who are not interested
persons (as defined in the 1940 Act) of the Trust or Mitchell Hutchins; (6) all
expenses incurred in connection with the board members' 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 or fidelity bonds; (9) any costs, expenses or losses arising
out of a liability of or claim for damages or other relief asserted against the
Trust or fund for violation of any law; (10) legal, accounting and auditing
expenses, including legal fees of special counsel for the independent board
members; (11) charges of custodians, transfer agents and other agents; (12)
costs of preparing share certificates; (13) expenses of setting in type and
printing prospectuses, 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; (15) fees,
voluntary assessments and other expenses incurred in connection with membership
48
<PAGE>
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 board members and officers; and (18) costs of mailing, stationery
and communications equipment.
Under each Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Trust or a
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. Each 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 fund's outstanding
voting securities on 60 days' written notice to Mitchell Hutchins, or by
Mitchell Hutchins on 60 days' written notice to the Trust.
Under each Sub-Advisory Contract, the sub-adviser will not be liable for
any error of judgment or mistake of law or for any loss suffered by the Trust,
the fund, its shareholders or Mitchell Hutchins in connection with the
Sub-Advisory Contract, except any liability to any of them to which the
sub-adviser would otherwise be subject by reason of 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 the Sub-Advisory
Contract. 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
applicable fund'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. Each Sub-Advisory Contract also may be terminated by Mitchell Hutchins
(1) upon material breach by the sub-adviser of its representations and
warranties, which breach shall not have been cured within a 20 day period after
notice of such breach; (2) if the sub-adviser becomes unable to discharge its
duties and obligations under the Sub-Advisory Contract; or (3) upon 120 days'
notice to the sub-adviser.
During the years ended December 31, 1998 and December 31, 1997, the
indicated fund paid (or accrued) the following fees to PaineWebber for its
services as securities lending agent:
FUND YEAR ENDED DECEMBER 31,
1998 1997
---- ----
Money Market Portfolio
High Grade Fixed Income Portfolio
Strategic Fixed Income Portfolio
Strategic Income Portfolio
Global Income Portfolio
High Income Portfolio
Balanced Portfolio
Growth and Income Portfolio
Tactical Allocation Portfolio
Growth Portfolio
Aggressive Growth Portfolio
Small Cap Portfolio
Global Growth Portfolio
49
<PAGE>
NET ASSETS. The following table shows the approximate net assets as of
March 31, 1999, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
NET ASSETS
INVESTMENT CATEGORY ($MIL)
------------------- ------
Domestic (excluding Money Market)........................ $
Global...................................................
Equity/Balanced..........................................
Fixed Income (excluding Money Market)...................
Taxable Fixed Income..............................
Tax-Free Fixed Income..............................
Money Market Funds.......................................
PERSONAL TRADING POLICIES. 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 PaineWebber mutual 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 may also invest in securities for their own accounts pursuant
to comparable codes of ethics.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
the Class I shares of each fund under separate distribution contract with the
Trust ("Distribution Contract"). The Distribution Contract requires Mitchell
Hutchins to use its best efforts, consistent with its other businesses, to sell
Class I shares of the each fund. Class H shares have no distributor or
distribution contract. Class H and Class I shares of each fund are offered
continuously to separate accounts of insurance companies.
Under a plan of distribution pertaining to the Class I shares of each fund
adopted by the Trust in the manner prescribed under Rule 12b-1 under the 1940
Act ("Class I Plan" or "Plan"), each fund 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. Mitchell Hutchins
uses these 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 the Class I shares. These 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 funds and Class I shares, (4) obtaining information and providing
explanations to Contract Owners concerning the funds, (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 services 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 Plan and the related Distribution Contract for Class I shares specify
that the distribution fees paid to Mitchell Hutchins are not reimbursements for
specific expenses incurred. Therefore, even if Mitchell Hutchins' expenses
exceed the distribution fees it receives, the funds 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
50
<PAGE>
excess of distribution fees received or accrued through the termination date of
the Class I Plan will be Mitchell Hutchins' sole responsibility and not that of
the funds. The board reviews the Class I Plan and Mitchell Hutchins'
corresponding expenses annually.
Among other things, the Class I Plan provides that (1) Mitchell Hutchins
will submit to the board at least quarterly, and the board members 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 board members who
are not "interested persons" of the Trust and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to the
Plan, acting in person at a meeting called for that purpose, (3) payments by a
fund under the Class I Plan shall not be materially increased without the
affirmative vote of the holders of a majority of the outstanding shares of the
relevant class and (4) while the Class I Plan remains in effect, the selection
and nomination of board members who are not "interested persons" of the Trust
shall be committed to the discretion of the board members who are not
"interested persons" of that Trust.
The following funds paid (or accrued) the following fees to Mitchell
Hutchins under the Class I Plan during the year ended December 31, 1998:
FUND
----
Money Market Portfolio
High Grade Fixed Income Portfolio
Strategic Fixed Income Portfolio
Strategic Income Portfolio
Global Income Portfolio
High Income Portfolio
Balanced Portfolio
Growth and Income Portfolio
Tactical Allocation Portfolio
Growth Portfolio
Aggressive Growth Portfolio
Small Cap Portfolio
Global Growth Portfolio
Mitchell Hutchins estimates that it and its parent corporation,
PaineWebber, incurred the following distribution-related expenses with respect
to the Class I shares of each fund during the year ended December 31, 1998:
51
<PAGE>
<TABLE>
<CAPTION>
PRINTING OF BRANCH
PROSPECTUSES AND NETWORK COSTS
STATEMENTS OF FEES PAID TO ALLOCATED AND
MARKETING AND ADDITIONAL INSURANCE INTEREST
ADVERTISING INFORMATION COMPANIES EXPENSE
----------- ----------- --------- -------
<S> <C> <C> <C> <C>
Money Market Portfolio
High Grade Fixed Income Portfolio
Strategic Fixed Income Portfolio
Strategic Income Portfolio
Global Income Portfolio
High Income Portfolio
Balanced Portfolio
Growth and Income Portfolio
Tactical Allocation Portfolio
Growth Portfolio
Aggressive Growth Portfolio
Small Cap Portfolio
Global Growth Portfolio
</TABLE>
"Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing the funds' shares. These
internal costs encompass office rent, salaries and other overhead expenses of
various departments and areas of operations of Mitchell Hutchins. "Branch
network costs allocated and interest expense" consist of an allocated portion of
the expenses of various PaineWebber departments involved in the distribution of
the funds' shares, including the PaineWebber retail branch system.
In approving the Class I Plan for each fund, 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
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 fund and to compensate their agents for
selling Class I shares and (4) the need to encourage those unaffiliated
insurance companies to educate their Contract Owners concerning the fund and to
provide personal and account maintenance services to Contract owners with
respect to the fund's Class I shares 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
upon a percentage of the average net assets of a fund, which fees would increase
if the Class I Plan were successful and the fund 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 each fund's portfolio
transactions and the allocation of brokerage transactions. In executing
portfolio transactions, Mitchell Hutchins or the sub-adviser seeks to obtain the
best net results for a fund, taking into account such factors as the price
(including the applicable brokerage commission or dealer spread), size of order,
difficulty of execution and operational facilities of the firm involved. While
Mitchell Hutchins or the 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 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 the time. Generally, bonds are traded on the OTC market on a "net" basis
without a stated commission through dealers acting for their own accounts and
not through brokers. Each fund may invest in securities traded in the OTC
52
<PAGE>
markets and will engage primarily with the dealers who make markets in such
securities, unless a better price or execution could be obtained by using a
broker.
During the years indicated, the funds paid the brokerage commissions set
forth below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Money Market Portfolio $ $ 0 $ 0
High Grade Fixed Income Portfolio 0 0
Strategic Fixed Income Fund 1,149 2,279
Strategic Income Portfolio * n/a n/a
Global Income Portfolio 0 0
High Income Portfolio * n/a n/a
Balanced Portfolio 51,556 65,857
Growth and Income Portfolio 39,178 31,792
Tactical Allocation Portfolio * n/a n/a
Growth Portfolio 71,334 33,885
Aggressive Growth Portfolio 47,838 53,904
Small Cap Portfolio * n/a n/a
Global Growth Portfolio 113,093 78,261
</TABLE>
* These funds commenced operations in 1998 on the following dates:
Strategic Income Portfolio 00/00/98
High Income Portfolio 00/00/98
Tactical Allocation Portfolio 00/00/98
Small Cap Portfolio 00/00/98
The funds have no obligation to deal with any broker or group of brokers
in the execution of portfolio transactions. The funds contemplate that,
consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through Mitchell Hutchins or its affiliates,
including PaineWebber, or brokerage affiliates of a fund's sub-adviser. The
board has adopted procedures in conformity with Rule 17e-1 under the 1940 Act to
ensure that all brokerage commissions paid to PaineWebber or brokerage
affiliates of a fund's sub-adviser are reasonable and fair. Specific provisions
in the Advisory Contracts and the Sub-Advisory Contracts authorize Mitchell
Hutchins and each sub-adviser, respectively, and any of their affiliates that is
a member of a national securities exchange to effect portfolio transactions for
the applicable fund on such exchange and to retain compensation in connection
with such transactions. Any such transactions will be effected and related
compensation paid only in accordance with applicable SEC regulations. During the
each of the three years ended December 31, 1998, the funds paid brokerage
commissions to PaineWebber or, as applicable, brokerage affiliates of the
sub-adviser as follows:
53
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Money Market Portfolio $ 0 $ 0 $ 0
High Grade Fixed Income Portfolio 0 0
Strategic Fixed Income Fund 0 0
Strategic Income Portfolio n/a n/a
Global Income Portfolio 0 0
High Income Portfolio n/a n/a
Balanced Portfolio 1,992 1,320
Growth and Income Portfolio 558 852
Tactical Allocation Portfolio n/a n/a
Growth Portfolio 4,020 300
Aggressive Growth Portfolio 1,621 186
Small Cap Portfolio n/a n/a
Global Growth Portfolio 0 0
</TABLE>
These brokerage commissions paid for the year ended December 31, 1998
represented for each fund the percentages of total brokerage commissions paid
and of the dollar amount representing the fund's transactions involving the
payment of brokerage commissions set forth below.
[Table]
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL PERCENTAGE OF DOLLAR AMOUNT OF
BROKERAGE TRANSACTIONS INVOLVING PAYMENT
COMMISSIONS PAID OF BROKERAGE COMMISSIONS
<S> <C> <C>
Money Market Portfolio $ 0
High Grade Fixed Income Portfolio
Strategic Fixed Income Fund
Strategic Income Portfolio
Global Income Portfolio
High Income Portfolio
Balanced Portfolio
Growth and Income Portfolio
Tactical Allocation Portfolio
Growth Portfolio
Aggressive Growth Portfolio
Small Cap Portfolio
Global Growth Portfolio
</TABLE>
54
<PAGE>
Transactions in futures contracts are executed through futures commission
merchants ("FCMs"), who receive brokerage commissions for their services. The
funds' procedures in selecting FCMs to execute their transactions in futures
contracts, including procedures permitting the use of Mitchell Hutchins and its
affiliates or brokerage affiliates of the Sub-Adviser, are similar to those in
effect with respect to brokerage transactions in securities.
Consistent with the interests of the funds and subject to the review of
the board, Mitchell Hutchins or the applicable sub-adviser may cause a fund to
purchase and sell portfolio securities through brokers who provide Mitchell
Hutchins or the sub-adviser with research, analysis, advice and similar
services. The funds may pay to those brokers a higher commission than may be
charged by other brokers, provided that Mitchell Hutchins or the 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 sub-adviser, as applicable, to that fund and its other clients,
and that the total commissions paid by the fund will be reasonable in relation
to the benefits to the fund over the long term. For the year ended December 31,
1998, the funds directed the portfolio transactions indicated below to brokers
chosen because they provide research, analysis, advice and similar services, for
which the funds paid the brokerage commissions indicated below:
<TABLE>
<CAPTION>
FUND AMOUNT OF PORTFOLIO TRANSACTIONS BROKERAGE COMMISSIONS PAID
- ---- -------------------------------- --------------------------
<S> <C> <C>
Money Market Portfolio
High Grade Fixed Income Portfolio
Strategic Fixed Income Portfolio
Strategic Income Portfolio
Global Income Portfolio
High Income Portfolio
Balanced Portfolio
Growth and Income Portfolio
Tactical Allocation Portfolio
Growth Portfolio
Aggressive Growth Portfolio
Small Cap Portfolio
Global Growth Portfolio
</TABLE>
For purchases or sales with broker-dealer firms that act as principal,
Mitchell Hutchins or the applicable sub-adviser seeks best execution. Although
Mitchell Hutchins or a sub-adviser may receive certain research or execution
services in connection with these transactions, Mitchell Hutchins and the
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
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 that could be purchased for hard dollars. Mitchell Hutchins or
the sub-adviser may engage in agency transactions in OTC 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 sub-adviser receiving multiple
quotes from dealers before executing the transactions on an agency basis.
55
<PAGE>
Information and research services furnished by brokers or dealers through
which or with which the funds 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 sub-adviser by brokers or dealers in connection with other funds or accounts
that either of them advises may be used in advising the funds. Information and
research received from brokers or dealers will be in addition to, and not in
lieu of, the services required to be performed by Mitchell Hutchins under the
Advisory Contracts or the sub-advisers under the Sub-Advisory Contract.
Investment decisions for a fund and for other investment accounts managed
by Mitchell Hutchins or by 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 fund 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 that fund and such other account(s) as to amount according to a formula
deemed equitable to the fund 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 the funds are concerned, or upon their ability to complete their
entire order, in other cases it is believed that coordination and the ability to
participate in volume transactions will be beneficial to the funds.
The funds will not purchase securities that are offered in underwritings
in which PaineWebber, an applicable sub-adviser or any of their affiliates is a
member of the underwriting or selling group, except pursuant to procedures
adopted by the board pursuant to Rule 10f-3 under the 1940 Act. Among other
things, these procedures require that the spread or commission paid in
connection with such a purchase be reasonable and fair, 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 PaineWebber or any affiliate
thereof or an affiliate of the sub-adviser not participate in or benefit from
the sale to the fund.
As of December 31, 1998, the funds owned securities issued by the
following companies which are regular broker-dealers for the funds: [ ].
PORTFOLIO TURNOVER. The funds' annual portfolio turnover rates may vary
greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate is
calculated by dividing the lesser of a fund'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 securities in the portfolio during the year.
The funds' respective portfolio turnover rates for the fiscal periods
shown were:
FUND PORTFOLIO TURNOVER RATES FOR
---- THE YEARS ENDED DECEMBER 31,
----------------------------
1998 1997
---- ----
Money Market Portfolio n/a n/a
High Grade Fixed Income Portfolio 95%
Strategic Fixed Income Portfolio 175%
Strategic Income Portfolio n/a
Global Income Portfolio 142%
High Income Portfolio n/a
Balanced Portfolio 169%
Growth and Income Portfolio 92%
Tactical Allocation Portfolio n/a
Growth Portfolio 89%
Aggressive Growth Portfolio 89%
Small Cap Portfolio n/a
Global Growth Portfolio 81%
56
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The insurance company separate accounts purchase and redeem shares of the
funds 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 the following holidays: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Purchases and redemptions of the shares of
each fund are effected at their respective net asset values per share determined
as of the close of regular trading (usually 4:00 p.m., Eastern time) on the NYSE
on that Business Day. Payment for redemptions are made by the funds within seven
days thereafter. No fee is charged the separate accounts when they purchase or
redeem fund shares.
The funds may suspend redemption privileges 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 a 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 a fund's portfolio at the
time.
VALUATION OF SHARES
Each fund determines its net asset value per share separately for each
class of shares, normally as of the close of regular trading (usually 4:00 p.m.,
Eastern time) on the NYSE on each Monday through Friday when the NYSE is open.
Prices will be calculated earlier when the NYSE closes early because trading has
been halted for the day.
Securities that are listed on U.S. and foreign stock exchanges normally
are valued at the last sale price on the day the securities are valued or,
lacking any sales on that day, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are generally
valued on the exchange considered by Mitchell Hutchins or the applicable
Sub-Adviser as the primary market. Securities traded in the OTC market and
listed on the Nasdaq Stock Market ("Nasdaq") normally are valued at the last
available sale price on Nasdaq prior to valuation; other OTC securities are
valued at the last bid price available prior to valuation, other than short-term
investments that mature in 60 days or less.
Where market quotations are readily available, debt securities of the
funds (other than Money Market Portfolio) are valued based upon market
quotations, provided those quotations adequately reflect, in the judgment of
Mitchell Hutchins or the applicable Sub-Adviser, the fair value of the
securities. Where those market quotations are not readily available, debt
securities are valued based upon appraisals received from a pricing service
using a computerized matrix system or based upon appraisals derived from
information concerning the security or similar securities received from
recognized dealers in those securities. The amortized cost method of valuation
generally is used to value debt obligations with 60 days or less remaining until
maturity, unless the applicable board determines that this does not represent
fair value. All other securities and other assets are valued at fair value as
determined in good faith by or under the direction of the board.
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It should be recognized that judgment often plays a greater role in
valuing thinly traded securities and lower rated bonds 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 currency will be valued daily in U.S.
dollars on the basis of the foreign currency exchange rate prevailing at the
time such valuation is determined by a fund's custodian. Foreign currency
exchange rates are generally determined prior to the close of regular trading on
the NYSE. Occasionally events affecting the value of foreign investments and
such exchange rates occur between the time at which they are determined and the
close of trading on the NYSE, which events would not be reflected in the
computation of a fund's net asset value on that day. If events materially
affecting the value of such investments or currency exchange rates occur during
such time period, the investments will be valued at their fair value as
determined in good faith by or under the direction of the applicable board. The
foreign currency exchange transactions of the funds conducted on a spot (that
is, cash) basis are valued at the spot rate for purchasing or selling currency
prevailing on the foreign exchange market. Under normal market conditions this
rate differs from the prevailing exchange rate by less than one-tenth of one
percent due to the costs of converting from one currency to another.
MONEY MARKET PORTFOLIO. 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 fund must adhere to certain conditions under that Rule relating
to its investments. 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 fund might have to sell portfolio
securities prior to maturity and at a price that might not be as desirable as
the value at maturity.
The board has established procedures for the purpose of maintaining a
constant net asset value of $1.00 per share for Money Market Portfolio, which
include a review of the extent of any deviation of net asset value per share,
based on available market quotations, from the $1.00 amortized cost per share.
Should that deviation exceed 1/2 of 1%, the trustees will promptly consider
whether any action should be initiated to eliminate or reduce material dilution
or other unfair results to shareholders. Such action may include redeeming
shares in kind, selling portfolio securities prior to maturity, reducing or
withholding dividends and utilizing a net asset value per share as determined by
using available market quotations. Money Market Portfolio will maintain a dollar
weighted average portfolio maturity of 90 days or less and will not purchase any
instrument with a remaining maturity greater than 13 months (as calculated under
Rule 2a-7) and except that securities subject to repurchase agreements may have
maturities in excess of 13 months, will limit portfolio investments, including
repurchase agreements, to those U.S. dollar-denominated instruments that are of
high quality and that the trustees determine present minimal credit risks as
advised by Mitchell Hutchins and will comply with certain reporting and
recordkeeping procedures. There is not assurance that constant net asset value
per share 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 instruments, the
Trust may employ outside organizations, which may use a matrix or formula method
that takes into consideration market indices, martices, 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
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. To qualify or continue to
qualify for treatment as a RIC under the Subchapter M of the Internal Revenue
Code ("Code"), each fund 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 gains and net gains from
certain foreign currency transactions) ("Distribution Requirement") and must
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meet several additional requirements. For each fund, these requirements include
the following: (1) the fund 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
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
fund'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
fund'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
fund'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. If a fund failed to qualify for treatment as a
RIC for any taxable year, it would be taxed as an ordinary corporation on its
taxable income for that year (even if that income was distributed to its
shareholders) and all distributions out of its earnings and profits would be
taxable to its shareholders, as dividends (that is, ordinary income).
ADDITIONAL DIVERSIFICATION REQUIREMENTS. Each fund intends to comply or
continue to comply with the diversification requirements imposed on it by
section 817(h) of the Code and the regulations thereunder, which are in addition
to the diversification requirements imposed on each fund to qualify for
treatment as a RIC under Subchapter M of the Code. These requirements place
certain limitations on the assets of each insurance company account that may be
invested in securities of a single issuer. Because section 817(h) and the
regulations thereunder treat the assets of each fund as assets of the related
separate account, the funds must also meet these requirements. Specifically, the
regulations under section 817(h) 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 fund may be
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments and no more than 90% by any four
investments. For this purpose, all securities of the same issuer are considered
a single investment, and each U.S. government agency and instrumentality is
considered a separate issuer. Section 817(h) provides, as a safe harbor, that a
separate account will be treated as being adequately diversified if the
diversification requirements under Subchapter M are satisfied and no more than
55% of the value of the separate account's total assets are cash and cash items,
government securities and securities of other regulated investment companies.
Failure of a fund to satisfy the section 817(h) requirements would result in
taxation of the insurance company issuing the Contracts and treatment of the
Contract Owners other than as described in the applicable Contract prospectus.
OTHER INFORMATION.
The use of hedging strategies, such as writing (selling) 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 fund realizes in
connection therewith. Gains from the disposition of foreign currencies (except
certain gains that may be excluded by future regulations), and gains from
options, futures and forward currency contracts derived by a fund with respect
to its business of investing in securities or foreign currencies, will qualify
as permissible income under the Income Requirement.
Each fund may invest in the stock of "passive foreign investment
companies" ("PFICs") if such stock is a permissible investment. A PFIC is a
foreign corporation--other than a "controlled foreign corporation" (i.e., a
foreign corporation of which, on any day during its taxable year, more than 50%
of the total voting power of its voting stock or the total value of all of its
stock 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 fund is U.S.
shareholder (effective for their taxable years beginning November 1,
1998)--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 fund 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 fund distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the fund'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 fund invests in
a PFIC and elects to treat the PFIC as a "qualified electing fund" ("QEF"), then
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in lieu of the foregoing tax and interest obligation, the fund will 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 may have to be distributed by the fund to
satisfy the Distribution Requirement and avoid imposition of the Excise
Tax--even if those earnings and gain are not distributed to the fund by the QEF.
In most instances it will be very difficult, if not impossible, to make this
election because of certain of its requirements.
Effective for their taxable years beginning [January 1, 1999], each fund
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 fund's adjusted basis
therein as of the end of that year. Pursuant to the election, a fund 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 fund for prior taxable years. A fund's
adjusted basis in each PFIC's stock with respect to which it has made this
election will be adjusted to reflect the amounts of income included and
deductions taken under the election. Regulations proposed in 1992 would have
provided a similar election with respect to the stock of certain PFIC's.
If a fund has an "appreciated financial position"--generally, an interest
(including an interest through an option, futures or forward currency 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 fund 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 a futures or forward currency contract entered into by a
fund 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. The foregoing will not
apply, however, to a fund's transaction during any taxable year that otherwise
would be treated as a constructive sale if the transaction is closed within 30
days after the end of that year and the fund holds the appreciated financial
position unhedged for 60 days after that closing (i.e., at no time during that
60-day period is the fund's risk of loss regarding that position reduced by
reason of certain specified transactions with respect to substantially similar
or related property, such as having an option to sell, being contractually
obligated to sell, making a short sale, or granting an option to buy
substantially identical stock or securities).
A fund may acquire zero coupon or other securities issued with original
issue discount or Treasury Inflation-Protection Securities ("TIPS"), on which
principal is adjusted based on changes in the Consumer Price Index. A fund must
include in its gross income the portion of the original issue discount
(including the amount of any principal increases on TIPS) that accrues on such
securities during the taxable year, even if the fund receives no corresponding
payment on them during the year. Because a fund annually must distribute
substantially all of its investment company taxable income, including any
accrued original issue discount, 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 the fund's cash assets or from the proceeds of sales of
portfolio securities, if necessary. The fund may realize capital gains or losses
from those sales, which would increase or decrease its investment company
taxable income and/or net capital gain.
The foregoing is only a general summary of some of the important federal
income tax considerations generally affecting the funds and their shareholders.
No attempt is made to present a complete explanation of the federal tax
treatment of the funds' 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 funds
and to dividends and distributions therefrom.
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DIVIDENDS
MONEY MARKET PORTFOLIO. Shares of Money Market Portfolio begin earning
dividends on the day of purchase; dividends are accrued to shareholder accounts
daily and are automatically invested in additional fund shares monthly. The fund
does not expect to realize net capital gain. In the event of a redemption of all
of the fund'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 fund 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
MASSACHUSETTS BUSINESS TRUST. The Trust is an entity of the type commonly
known as a "Massachusetts business trust." Under Massachusetts law, shareholders
of a fund could, under certain circumstances, be held personally liable for the
obligations of the fund or the Trust. However, the Trust's Declaration of Trust
disclaims shareholder liability for acts or obligations of the Trust or a fund
and requires that notice of such disclaimer be given in each note, bond,
contract, instrument, certificate or undertaking made or issued by the board
members or by any officers or officer by or on behalf of the Trust or the fund,
the board members or any of them in connection with the Trust. The Declaration
of Trust provides for indemnification from the relevant fund's property for all
losses and expenses of any shareholder held personally liable for the
obligations of the fund. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the fund 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 solely by reason of being or having been a
shareholder, the shareholder paying such liability would be entitled to
reimbursement from the general assets of the relevant fund. The board members
intend to conduct each fund's operations in such a way as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the fund.
VOTING RIGHTS. The insurance company separate accounts that fund benefits
under variable annuity or variable life insurance contracts are the shareholders
of the funds not the individual owners of those contracts. However, the separate
accounts may pass through voting rights to contract owners.
Shareholders of each fund are entitled to one vote for each full share
held and fractional votes for fractional shares held. Voting rights are not
cumulative and, as a result, the holders of more than 50% of all the shares of
the Trust may elect all of the board members of the Trust. The shares of a fund
will be voted together, except that only the shareholders of a particular class
of a fund may vote on matters affecting only that class, such as the terms of a
Plan as it relates to the class. The shares of each series will be voted
separately, except when an aggregate vote of all the series is required by law.
The fund does not hold annual meetings. Shareholders of record of no less
than two-thirds of the outstanding shares of the Trust may remove a board member
through a declaration in writing or by vote cast in person or by proxy at a
meeting called for that purpose. A meeting will be called to vote on the removal
of a board member at the written request of holders of 10% of the outstanding
shares of the Trust.
POSSIBLE CONFLICTS. Shares of the funds may serve as the underlying
investments for separate accounts of unaffiliated insurance companies ("shared
funding") as well as for both annuity and life insurance contracts ("mixed
funding"). Due to differences in tax treatment or other considerations, the
interests of various contract owners might at some time be in conflict. The
Trust does not currently foresee any conflict. However, the Trust's 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 funds. This might force a fund to sell securities at disadvantageous
prices.
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CLASSES OF SHARES. A share of each class of a fund represents an identical
interest in that fund'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
funds will affect the performance of those classes. Each share of a fund is
entitled to participate equally in dividends, other distributions and the
proceeds of any liquidation of that fund. However, due to the differing expenses
of the classes, dividends and liquidation proceeds on Class H and I shares will
differ.
PRIOR NAMES. Prior to November 19, 1997, the Trust was known as
"PaineWebber Series Trust." Prior to January 26, 1996, Balanced Portfolio was
known as "Asset Allocation Portfolio." Prior to September 21, 1995, Strategic
Fixed Income Portfolio was known as "Government Portfolio" and High Grade Fixed
Income Portfolio was known as "Fixed Income Portfolio." Prior to August 14,
1995, Growth and Income Portfolio was known as "Dividend Growth Portfolio."
CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT. State
Street Bank and Trust Company, located at One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian and recordkeeping agent for each fund
and employs foreign sub-custodians approved by the respective boards in
accordance with applicable requirements under the 1940 Act to provide custody of
the foreign assets of those funds that invest outside the United States. PFPC
Inc., a subsidiary of PNC Bank, N.A., serves as each fund's transfer and
dividend disbursing agent. It is located at 400 Bellevue Parkway, Wilmington, DE
19809.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the Trust and
the funds. Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and
Mitchell Hutchins in connection with other matters.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for the Trust.
FINANCIAL STATEMENTS
The funds' Annual Report to Shareholders for their last fiscal year 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 this reference into the Statement of
Additional Information.
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APPENDIX
RATINGS INFORMATION
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues; Aa. Bonds which are rated Aa
are judged to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risk appear
somewhat larger than in Aaa securities; A. Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future; Baa. Bonds which are rated Baa are considered
as medium-grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payment and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well; Ba. Bonds
which are rated Ba are judged to have speculative elements; their future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class; B. Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small; Caa. Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest; Ca. Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings; C. Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from AA through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category, the modifier
2 indicates a mid-range ranking, and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the highest rated
obligations 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 obligations in higher rated categories. However, the
obligor's capacity to meet its financial commitment on the obligation is still
strong; BBB. An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation; BB, B, CCC, CC, C. Obligations rated BB, B, CCC, CC and C are
regarded as having significant speculative characteristics. BB indicates the
least degree of speculation and C the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions; BB. An
obligation rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation; B. An
obligation rated B is more vulnerable to nonpayment 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
A-1
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nonpayment and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation; CC. An obligation rated CC is currently highly vulnerable to
nonpayment; C. The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued; D. An obligation rated D is in payment default.
The D rating category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
CI. The rating CI is reserved for income bonds on which no interest is
being paid.
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.
r. This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERRED TO IN THE
PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION. THE FUNDS AND THEIR
DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS
DIFFERENT. THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN
OFFER TO SELL SHARES OF THE FUNDS IN ANY JURISDICTION WHERE THE FUNDS OR THEIR
DISTRIBUTOR MAY NOT LAWFULLY SELL THOSE SHARES.
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TABLE OF CONTENTS
PAGE
----
The Funds and Their Investment Policies...... 1
The Funds' Investments, Related Risks and
Limitations................................ 4
Strategies Using Derivative Instruments...... 21
Organization of the Trust; Trustees and Officers
and Principal Holders of Securities........ 28
Investment Advisory and Distribution
Arrangements.............................. 34
Portfolio Transactions....................... 40
Reduced Sales Charges, Additional Exchange and
Redemption Information and Other Services. 43
Conversion of Class B Shares................. 47
Valuation of Shares.......................... 48
Performance Information...................... 48
Taxes........................................ 52
Other Information............................ 54
Financial Statements......................... 55
Appendix..................................... A-1
(c)1999 PaineWebber Incorporated
Mitchell Hutchins
Series Trust
--------------------------------------------------
Statement of Additional Information
May 1, 1999
--------------------------------------------------
PAINEWEBBER
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
--------
(1) Amended and Restated Declaration of Trust 1/
(2) Restated By-Laws 1/
(3) Instruments defining the rights of holders of the Registrant's shares
of beneficial interest 2/
(4) (a) Investment Advisory and Administration
Contract 1/
(b) Investment Advisory and Administration Contract relating to Global
Growth Portfolio (to be filed)
(c) Investment Advisory and Administration Fee Agreement with respect
to Strategic Fixed Income Portfolio(formerly Government Portfolio)1/
(d) Investment Advisory and Administration Fee Agreement with respect to
Growth and Income Portfolio(formerly Dividend Growth Portfolio) 1/
(e) Investment Advisory and Administration Fee Agreement with respect
to Aggressive Growth Portfolio (to be filed)
(f) Investment Advisory and Administration Fee Agreement with respect to
High Grade Fixed Income Portfolio(formerly Fixed Income Portfolio)1/
(g) Investment Advisory and Administration Fee Agreement with respect to
High Income Portfolio, Small Cap Portfolio, Strategic Income
Portfolio and Tactical Allocation Portfolio (to be filed)
(h) Sub-Investment Advisory Contract with respect to Aggressive Growth
Portfolio 1/
(i) Sub-Advisory Agreement with respect to the Global Growth Portfolio
(to be filed)
(j) Sub-Advisory Agreement with respect to the Strategic Fixed
Income Portfolio 3/
(5) Distribution Contract with respect to Class I shares (to be filed)
(6) Bonus, profit sharing or pension plans - none
(7) (a) Custodian Agreement with State Street Bank and Trust Company 1/
(b) Custodian Agreement with Brown Brothers Harriman & Co.1/
(8) Transfer Agency Services and Shareholder Services Agreement (to be filed)
(9) Opinion and consent of counsel (to be filed)
(10) Other opinions, appraisals, rulings and consents: Auditors' consent
(to be filed)
(11) Financial statements omitted from prospectus-none
(12) Letter of investment intent 1/
(13) Plan of Distribution pursuant to Rule 12b-1with respect to Class I
shares (to be filed)
(14) and
(27) Financial Data Schedule (to be filed)
(15) Plan pursuant to Rule 18f-3 1/
- ----------------------
1/ Incorporated by reference from Post-Effective Amendment No. 26 to the
registration statement, SEC file No. 33-10438, filed February 27, 1998.
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2/ 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.
3/ Incorporated by reference from Post-Effective Amendment No. 23 to the
registration statement, SEC File No. 33-10438, filed May 1, 1996.
Item 24. 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 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 25. 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, 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
C-2
<PAGE>
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.
Each 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. Each Advisory Contract also 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.
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
that of the Investment Advisory and Administration Contract with respect to the
Investment Advisory and Administration Contracts limiting the liability of the
Trust's trustees.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be provided to trustees, officers and controlling
persons of the Registrant, pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding or payment pursuant to any insurance policy) is
asserted against the Registrant by such trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
C-3
<PAGE>
Item 26. 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
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.
Invista Capital Management, LLC ("Invista") serves as investment
sub-adviser for PaineWebber Global Growth Portfolio. Invista, an Iowa
Corporation, is a registered investment adviser and is an indirect, wholly owned
subsidiary of Principal Life Insurance Company. Invista is primarily engaged in
the investment advisory business. Information as to the officers and directors
of Invista is included on its Form ADV, as filed with the Securities and
Exchange Commission (registration number 801-23020), and is incorporated herein
by reference.
Item 27. 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.
MANAGED HIGH YIELD PLUS FUND INC.
MITCHELL HUTCHINS INSTITUTIONAL SERIES
MITCHELL HUTCHINS PORTFOLIOS
MITCHELL HUTCHINS SERIES TRUST
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INDEX TRUST
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
C-4
<PAGE>
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
John J. Lee Vice President and Vice President and a Manager of the
Assistant Treasurer Mutual Fund Finance Department 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 Vice President and a Manager of the
Assistant Treasurer Mutual Fund Finance Department of
Mitchell Hutchins
Dianne E. O'Donnell Vice President and Senior Vice President and Deputy
Secretary 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 First Vice President and Director of
Treasurer the Mutual Fund Finance Department of
Mitchell Hutchins
C-5
<PAGE>
Nirmal Singh Vice President Senior Vice President and a Portfolio
Manager of Mitchell Hutchins
Barney A. Taglialatela Vice President and Vice President and a Manager of the
Assistant Treasurer Mutual Fund Finance Department of
Mitchell Hutchins
Mark A. Tincher Vice President Managing Director and Chief Investment
Officer - Equities 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 First Vice President and Associate
Assistant Secretary Counsel of Mitchell Hutchins
Ian W. Williams Vice President and Vice President and a Manager of the
Assistant Treasurer Mutual Fund Finance Department of
Mitchell Hutchins
(c) None.
</TABLE>
Item 28. 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 29. Management Services
-------------------
Not applicable.
Item 30. Undertakings
------------
None.
C-6
<PAGE>
MITCHELL HUTCHINS SERIES TRUST
EXHIBIT INDEX
Exhibit
Number
- ------
(1) Amended and Restated Declaration of Trust 1/
(2) Restated By-Laws 1/
(3) Instruments defining the rights of holders of the Registrant's shares
of beneficial interest 2/
(4) (a) Investment Advisory and Administration
Contract 1/
(b) Investment Advisory and Administration Contract relating to Global
Growth Portfolio (to be filed)
(c) Investment Advisory and Administration Fee Agreement with respect
to Strategic Fixed Income Portfolio(formerly Government Portfolio)1/
(d) Investment Advisory and Administration Fee Agreement with respect to
Growth and Income Portfolio(formerly Dividend Growth Portfolio) 1/
(e) Investment Advisory and Administration Fee Agreement with respect
to Aggressive Growth Portfolio (to be filed)
(f) Investment Advisory and Administration Fee Agreement with respect to
High Grade Fixed Income Portfolio(formerly Fixed Income Portfolio)1/
(g) Investment Advisory and Administration Fee Agreement with respect to
High Income Portfolio, Small Cap Portfolio, Strategic Income
Portfolio and Tactical Allocation Portfolio (to be filed)
(h) Sub-Investment Advisory Contract with respect to Aggressive Growth
Portfolio 1/
(i) Sub-Advisory Agreement with respect to the Global Growth Portfolio
(to be filed)
(j) Sub-Advisory Agreement with respect to the Strategic Fixed
Income Portfolio 3/
(5) Distribution Contract with respect to Class I shares (to be filed)
(6) Bonus, profit sharing or pension plans - none
(7) (a) Custodian Agreement with State Street Bank and Trust Company 1/
(b) Custodian Agreement with Brown Brothers Harriman & Co.1/
(8) Transfer Agency Services and Shareholder Services Agreement (to be filed)
(9) Opinion and consent of counsel (to be filed)
(10) Other opinions, appraisals, rulings and consents: Auditors' consent
(to be filed)
(11) Financial statements omitted from prospectus-none
(12) Letter of investment intent 1/
(13) Plan of Distribution pursuant to Rule 12b-1with respect to Class I
shares (to be filed)
(14) and
(27) Financial Data Schedule (to be filed)
(15) Plan pursuant to Rule 18f-3 1/
- ----------------------
1/ Incorporated by reference from Post-Effective Amendment No. 26 to the
registration statement, SEC file No. 33-10438, filed February 27, 1998.
<PAGE>
2/ 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.
3/ Incorporated by reference from Post-Effective Amendment No. 23 to the
registration statement, SEC File No. 33-10438, filed May 1, 1996.
<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 24th day of February, 1999.
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:
Signature Title Date
- --------- ----- ----
/s/ Margo N. Alexander President and Trustee February 24, 1999
- -------------------------- (Chief Executive Officer)
Margo N. Alexander *
/s/ E. Garrett Bewles. Jr. Trustee and Chairman February 24, 1999
- -------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr. *
/s/ Richard Q. Armstrong Trustee February 24, 1999
- --------------------------
Richard Q. Armstrong *
/s/ Richard R. Burt Trustee February 24, 1999
- --------------------------
Richard R. Burt *
/s/ Mary C. Farrell Trustee February 24, 1999
- --------------------------
Mary C. Farrell *
/s/ Meyer Feldberg Trustee February 24, 1999
- --------------------------
Meyer Feldberg *
/s/ George W. Gowen Trustee February 24, 1999
- --------------------------
George W. Gowen *
/s/ Frederic V. Malek Trustee February 24, 1999
- --------------------------
Frederic V. Malek *
/s/ Carl W. Schafer Trustee February 24, 1999
- --------------------------
Carl W. Schafer *
/s/ Paul H. Schubert Vice President and Treasurer February 24, 1999
- -------------------------- (Chief Financial and
Paul H. Schubert Accounting Officer)
<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
Exhibit
Number
- ------
(1) Amended and Restated Declaration of Trust 1/
(2) Restated By-Laws 1/
(3) Instruments defining the rights of holders of the Registrant's shares
of beneficial interest 2/
(4) (a) Investment Advisory and Administration
Contract 1/
(b) Investment Advisory and Administration Contract relating to Global
Growth Portfolio (to be filed)
(c) Investment Advisory and Administration Fee Agreement with respect
to Strategic Fixed Income Portfolio(formerly Government Portfolio)1/
(d) Investment Advisory and Administration Fee Agreement with respect to
Growth and Income Portfolio(formerly Dividend Growth Portfolio) 1/
(e) Investment Advisory and Administration Fee Agreement with respect
to Aggressive Growth Portfolio (to be filed)
(f) Investment Advisory and Administration Fee Agreement with respect to
High Grade Fixed Income Portfolio(formerly Fixed Income Portfolio)1/
(g) Investment Advisory and Administration Fee Agreement with respect to
High Income Portfolio, Small Cap Portfolio, Strategic Income
Portfolio and Tactical Allocation Portfolio (to be filed)
(h) Sub-Investment Advisory Contract with respect to Aggressive Growth
Portfolio 1/
(i) Sub-Advisory Agreement with respect to the Global Growth Portfolio
(to be filed)
(j) Sub-Advisory Agreement with respect to the Strategic Fixed
Income Portfolio 3/
(5) Distribution Contract with respect to Class I shares (to be filed)
(6) Bonus, profit sharing or pension plans - none
(7) (a) Custodian Agreement with State Street Bank and Trust Company 1/
(b) Custodian Agreement with Brown Brothers Harriman & Co.1/
(8) Transfer Agency Services and Shareholder Services Agreement (to be filed)
(9) Opinion and consent of counsel (to be filed)
(10) Other opinions, appraisals, rulings and consents: Auditors' consent
(to be filed)
(11) Financial statements omitted from prospectus-none
(12) Letter of investment intent 1/
(13) Plan of Distribution pursuant to Rule 12b-1with respect to Class I
shares (to be filed)
(14) and
(27) Financial Data Schedule (to be filed)
(15) Plan pursuant to Rule 18f-3 1/
- ----------------------
<PAGE>
1/ Incorporated by reference from Post-Effective Amendment No. 26 to the
registration statement, SEC file No. 33-10438, filed February 27, 1998.
2/ 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.
3/ Incorporated by reference from Post-Effective Amendment No. 23 to the
registration statement, SEC File No. 33-10438, filed May 1, 1996.