As filed with the Securities and Exchange Commission on October 18, 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. 29 [ X ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 28 [ 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:
ELINOR W. GAMMON, ESQ.
JENNIFER R. GONZALEZ, 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)
[ ] On __________ pursuant to Rule 485(a)(1)
[ X ] 75 days after filing pursuant to Rule 485(a)(2)
[ ] On __________________ pursuant to Rule 485(a)(2)
Title of Securities Being Registered: Class H and I Shares of Beneficial
Interest of Strategy Portfolio.
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MITCHELL HUTCHINS SERIES TRUST
STRATEGY PORTFOLIO
The 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
________________, 1999
_______________________________________
AS WITH ALL MUTUAL FUNDS, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THE FUND'S SHARES OR DETERMINED WHETHER THIS PROSPECTUS
IS COMPLETE OR ACCURATE. TO STATE OTHERWISE IS A CRIME.
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Strategy Portfolio
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CONTENTS
STRATEGY PORTFOLIO
- -----------------------------------------------------------------
What every investor 3 Investment Objective, Strategies
should know about and Risks
the fund 5 More About Investment Strategies
and Risks
INVESTING IN THE FUND
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Information for 6 Purchases, Redemptions and
managing your fund Exchanges
account 6 Pricing and Valuation
ADDITIONAL INFORMATION
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Additional important 7 Management
information about 8 Dividends and Taxes
the fund
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Where to learn more Back Cover
about this fund
-------------------------------
The fund is not a complete
or balanced investment program.
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Strategy Portfolio
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STRATEGY PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
------------------------------------------
FUND OBJECTIVE:
Long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES:
The fund will invest substantially all of its assets in stocks of issuers that
are on PaineWebber's HIGHLIGHTED STOCKS list. Historically, the HIGHLIGHTED
STOCKS list has consisted primarily of common stocks of relatively large, well
known U.S. companies.
Under normal circumstances, the fund will purchase only stocks that are included
on the HIGHLIGHTED STOCKS list and will sell stocks that have been removed from
the HIGHLIGHTED STOCKS list. The fund will purchase a stock that has been added
or sell a stock that has been removed after publication of that change.
The fund is designed for investors seeking long-term capital appreciation from a
fully invested, all-equity portfolio. The fund is not a market-timing vehicle
and not a complete investment program.
Generally, the fund seeks to maintain equal weightings of its assets among the
stocks on the HIGHLIGHTED STOCKS list. Any remaining assets may be invested by
the fund's investment adviser, Mitchell Hutchins Asset Management Inc., in
short-term debt obligations, money market instruments and options and futures
contracts.
For more than a century, PaineWebber has been committed to providing superior
equity research, resulting in one of the strongest franchises on Wall Street.
PaineWebber Investment Strategy Group's approach to research seeks to place its
recommendations in the context of broad social, economic and political themes.
PaineWebber believes that the ability to spot emerging trends--and the companies
expected to benefit from them--has proven critical to successful investing. The
Investment Strategy Group aims to identify these themes before they emerge and
become well recognized. While the Investment Strategy Group identifies several
different industries and companies that are expected to benefit from each theme,
the HIGHLIGHTED STOCKS list is a list of "choice" companies from each theme.
The Investment Strategy Group periodically makes subjective decisions to add or
delete companies from the HIGHLIGHTED STOCKS list, but the list is not compiled
with any client or product in mind, including the fund. Historically, the
HIGHLIGHTED STOCKS list has included approximately 25 stocks, which are
typically covered by the PaineWebber Research Department and carry a "1" (Buy)
or "2" (Attractive) rating. As of October 1, 1999, the HIGHLIGHTED STOCKS list
consisted of 29 stocks. Stocks are usually added to or deleted from the
HIGHLIGHTED STOCKS list at the beginning of a month, but revisions may also be
made on other days.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; you may lose money by investing in
the fund.
Stocks generally fluctuate in value more than other investments. Because the
fund invests only in stocks that are on the HIGHLIGHTED STOCKS list, the fund
will hold a relatively small number of stocks, often focused in market sectors
that correspond to the investment themes underlying the list. As a result,
changes in the market value of a single issuer or market sector could affect the
fund's performance and net asset value more severely than if its holdings were
more diversified.
The fund's investment results will not be the same as the price returns reported
for the HIGHLIGHTED STOCKS list. Deviations from the HIGHLIGHTED STOCKS list's
reported price returns will result because the HIGHLIGHTED STOCKS list's price
returns do not reflect the execution of actual purchases or sales. Fund
purchases and sales, however, will be affected by market conditions following
the publication of changes to the HIGHLIGHTED STOCKS list and will be subject to
competing orders by other PaineWebber clients who invest based on the
HIGHLIGHTED STOCKS list recommendations. In addition, because the HIGHLIGHTED
STOCKS list is a paper portfolio that is not managed to a target number of
stocks, no "re-balancing" of actual investments is done when stocks are added to
or deleted from the list. Although the fund will "re-balance" periodically to
establish equal weightings of its assets among the stocks on the HIGHLIGHTED
STOCKS list, the fund may not be able to maintain equal weightings at all times.
The fund will also be subject to daily cash flows, which will result in ongoing
purchases and sales of stocks and transactional expenses, including brokerage
fees, as well as the advisory fees and other expenses that the fund bears. In
addition, to the extent the fund invests part of its assets in short-term debt
obligations, money market instruments and options and futures contracts, its
investment results will differ from those of the HIGHLIGHTED STOCKS list.
3
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Strategy Portfolio
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PaineWebber could at any time suspend or terminate publication of the
HIGHLIGHTED STOCKS list. In that event, or in the event that the HIGHLIGHTED
STOCKS list contains fewer than 20 stocks, the fund will determine how to
proceed consistent with the fund's investment objective and the interests of its
shareholders.
It is possible that the HIGHLIGHTED STOCKS list will include stocks of issuers
for which PaineWebber or one of its affiliates performs banking services for
which it receives fees, as well as stocks of issuers in which PaineWebber or one
of its affiliates makes a market and may have long or short positions. When
PaineWebber or one of its affiliates is engaged in certain activities for an
issuer that is on the HIGHLIGHTED STOCKS list, Mitchell Hutchins may be
prohibited from additional purchases or sales of that issuer's stock for the
re-balancing of the fund.
Price returns reported for the HIGHLIGHTED STOCKS list do not predict the future
results of the HIGHLIGHTED STOCKS list or the fund. Materials showing any price
returns of the HIGHLIGHTED STOCKS list do not reflect the fund's performance.
More information about other risks of an investment in the fund is provided
below in "More About Investment Strategies and Risks."
The fund is newly organized. As a result, the fund has no operating history or
performance information to include in a bar chart or table reflecting average
annual returns.
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Strategy Portfolio
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MORE ABOUT INVESTMENT STRATEGIES AND RISKS
------------------------------------------
ADDITIONAL INVESTMENT STRATEGIES
STRATEGIES USING DERIVATIVES. The fund may use derivatives in strategies
intended to simulate investment in the stocks in the S&P 500 Index or other
stock indices when it is impractical to invest substantially all of its assets
in stocks that are on the HIGHLIGHTED STOCKS list because of diversification
requirements that apply to mutual funds. In addition, the fund may use these
derivatives while keeping a cash balance for fund management purposes, such as
to provide liquidity to meet anticipated sales of its shares by shareholders and
for fund operating expenses, or to facilitate trading and reduce transaction
costs. 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
the fund to lose more than the amount it invested in the derivative. Options and
futures contracts are examples of derivatives.
CASH RESERVES. The fund may invest a portion of its total assets in short-term
debt obligations, money market instruments and options and futures contracts.
The fund may invest in these instruments either for liquidity, in anticipation
of shareholder redemptions of fund shares, or because the diversification
requirements that apply to mutual funds prevent it from investing substantially
all its assets in the stocks that are on the HIGHLIGHTED STOCKS list. This can
occur if the HIGHLIGHTED STOCKS list includes fewer than 20 issuers, because the
fund's investments in stocks generally will be equally weighted.
PORTFOLIO TURNOVER. The fund is expected to have an annual turnover greater than
100% because it will make additions and deletions to its portfolio to reflect
changes in the HIGHLIGHTED STOCKS list. A high portfolio turnover rate may
result in higher fund expenses due to transaction costs. The fund does not
restrict the frequency of trading in order to limit expenses.
USE OF PROCEEDS OF INITIAL OFFERING. The fund may not be fully invested in the
stocks on the HIGHLIGHTED STOCKS list until approximately 30 days after its
total assets exceed $__ million. Until that time, the fund may invest in
short-term debt obligations, money market instruments and options and futures
contracts as well as stocks on the HIGHLIGHTED STOCKS list.
ADDITIONAL RISKS
YEAR 2000 RISK. The fund could be adversely affected by problems relating to the
inability of computer systems used by Mitchell Hutchins and the fund's other
service providers to recognize the year 2000. While year 2000-related computer
problems could have a negative effect on the fund, 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 fund invests and trading systems used by
the fund 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 fund.
5
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Strategy Portfolio
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INVESTING IN THE FUND
PURCHASES, REDEMPTIONS AND EXCHANGES
Shares of the fund 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 fund - not the individual contract
owners. However, the separate accounts may pass through voting rights to the
contract owners.
The fund offers both Class H and Class I shares to insurance company separate
accounts:
o Class H shares are sold and redeemed at net asset value and do not pay any
12b-1 fees.
o Class I shares also are sold and redeemed at net asset value. However,
under a rule 12b-1 plan adopted by the fund, Class I shares pay an annual
distribution fee of 0.25% of average net assets. The fund pays this fee
to insurance companies for the sale of Class I shares and for services
that the insurance company provides to contract owners. Because these
12b-1 fees are paid out of the fund's assets on an ongoing basis, over
time they will increase the cost of a contract owner's investment and may
cost more than paying other types of sales charges.
An insurance company separate account may exchange shares of the fund for shares
of the same class in another Mitchell Hutchins Series Trust 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 Mitchell Hutchins Series Trust funds or classes of fund shares.
The fund 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. The 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 fund does not price its
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 fund's net asset value
per share will be calculated as of the time trading was halted.
The fund calculates its net asset value based on the current market value for
its portfolio securities. The fund normally obtains market values for its
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
fund's board. The fund normally uses the amortized cost method to value money
market instruments that will mature in 60 days or less.
6
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Strategy Portfolio
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MANAGEMENT
----------
INVESTMENT ADVISER
Mitchell Hutchins Asset Management Inc. is the investment adviser and
administrator of the fund. Mitchell Hutchins is located at 51 West 52nd Street,
New York, New York, 10019-6114, 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 August 31,
1999, Mitchell Hutchins was adviser or sub-adviser of 33 investment companies
with 75 separate portfolios and aggregate assets of approximately $47.8 billion.
PORTFOLIO MANAGER
T. Kirkham Barneby, supported by his quantitative investment team, is
responsible for the day-to-day management of the fund's portfolio. Mr. Barneby
is a managing director and chief investment officer of 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.
INVESTMENT CONSULTANT
PaineWebber makes available the Investment Strategy Group, headed by Edward
M. Kerschner, to consult with Mitchell Hutchins regarding the development of
investment themes and stocks covered by the PaineWebber Research Department.
Mr. Kerschner is the Chief Investment Strategist of PaineWebber and Chairman
of the Investment Policy Committee. Mr. Kerschner joined PaineWebber in
1982.
ADVISORY FEES
The fund pays advisory fees to Mitchell Hutchins at the annual contract rate of
0.75% of its average daily net assets.
OTHER INFORMATION
The fund has received an exemptive order from the SEC that permits its board to
appoint and replace sub-advisers and to amend sub-advisory contracts without
obtaining shareholder approval.
ADDITIONAL INFORMATION ABOUT THE HIGHLIGHTED STOCKS LIST
The HIGHLIGHTED STOCKS list was created and is currently maintained by the
Investment Strategy Group in the PaineWebber Research Department. Since January
1988, the HIGHLIGHTED STOCKS list has included between 11 and 31 stocks,
although on average it has consisted of 25 stocks. The names of the companies on
the HIGHLIGHTED STOCKS list as of October 1, 1999 are included in the
Statement of Additional Information ("SAI"). That list changes regularly. While
the companies on the list generally have been relatively large, well known U.S.
companies, the list is not restricted to those types of companies. A list of the
investment themes as of October 1, 1999 is also included in the SAI and
changes from time to time.
Mitchell Hutchins does not have access to information regarding additions or
deletions for the HIGHLIGHTED STOCKS list prior to their publication.
PaineWebber publishes other lists of recommended securities that could be
appropriate for fund investors but that are not used by Mitchell Hutchins for
the fund.
The HIGHLIGHTED STOCKS list is not maintained for the purpose of managing any
account or investment company such as the fund. The average number of stocks on
the HIGHLIGHTED STOCKS list and the frequency of additions to and deletions from
the HIGHLIGHTED STOCKS list change from year to year, and there are no targets
for such numbers in future years. The stocks selected for the HIGHLIGHTED STOCKS
list constitute only a "paper portfolio" that does not reflect actual trading
and does not have an actual performance record. The HIGHLIGHTED STOCKS list's
price return is simply an arithmetic average of the price returns for the stocks
selected for the HIGHLIGHTED STOCKS list. It does not represent the return on
any fund or any other account that involves actual trading. The price returns
would not be indicative of the returns on any fund or account because, among
other things, they do not reflect actual prices when stocks are purchased or
sold, transaction costs and account fees. In addition, because the HIGHLIGHTED
STOCKS list does not include a cash component, price returns are based on a
constant 100% investment in the stocks on the HIGHLIGHTED STOCKS list. Past
price returns are not representative of future price returns. It should not be
assumed that recommendations made in the future will be profitable.
7
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Strategy Portfolio
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DIVIDENDS AND TAXES
DIVIDENDS
Dividends and distributions are paid in additional shares of the fund unless the
shareholder requests otherwise.
The fund normally declares and pays income dividends and distributes any
realized 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
certain variable annuity or variable life contracts. These accounts generally
are not subject to tax on dividends from the fund or when fund shares are
exchanged or redeemed. 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 fund; and
o the holders of contracts funded through those separate accounts.
The fund must satisfy certain diversification requirements imposed by the
Internal Revenue Code on segregated assets accounts used to fund variable
annuity or variable life contracts. Failure of the fund to do so would result in
taxation of the insurance company issuing the variable annuity or variable life
contracts and treatment of the contract holders other than as described in the
contract prospectus.
See the SAI for information or for a more detailed discussion. Prospective
shareholders are urged to consult their tax advisers.
8
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If you want more information about the fund, the following documents are
available free upon request:
STATEMENT OF ADDITIONAL INFORMATION (SAI) AND CONTRACT PROSPECTUS:
The SAI provides more detailed information about the fund 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 fund, obtain free copies of annual and
semi-annual reports and the SAI, or request other information, by contacting the
fund directly at 1-800-986-0088.
You may review and copy information about the fund, including annual and
semi-annual 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 fund and information about the operations of the SEC's
Public Reference Room:
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
Mitchell Hutchins Series Trust
Investment Company Act File No. - 811-4919
9
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MITCHELL HUTCHINS SERIES TRUST
STRATEGY PORTFOLIO
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
STATEMENT OF ADDITIONAL INFORMATION
Strategy Portfolio is a diversified series of Mitchell Hutchins Series
Trust ("Trust"), a professionally managed open-end investment company. The fund
offers its Class H and Class I shares only to insurance company separate
accounts that fund benefits under certain 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 the fund. Mitchell Hutchins
also serves as distributor for the fund's Class I shares.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the fund's current Prospectus, dated _______,
1999. A copy of the Prospectus may be obtained by calling any PaineWebber
Financial Advisor or correspondent firm or by calling toll-free 1-800-986-0088.
The Prospectus contains more complete information about the fund. You should
read it carefully before investing.
This Statement of Additional Information is dated _______, 1999.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
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<S> <C>
The Fund and Its Investment Policies.......................................................2
The Fund's Investments, Related Risks and Limitations......................................4
Strategies Using Derivative Instruments...................................................12
Organization of Trust; Trustees and Officers and Principal Holders of Securities..........19
Investment Advisory, Administration and Distribution Arrangements.........................25
Portfolio Transactions....................................................................28
Additional Purchase and Redemption Information...........................................29
Valuation of Shares.......................................................................29
Taxes.....................................................................................30
Other Information.........................................................................31
</TABLE>
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THE FUND AND ITS INVESTMENT POLICIES
The fund's investment objective may not be changed without shareholder
approval. Except where noted, the other investment policies of the fund may be
changed by the board without shareholder approval. As with other mutual funds,
there is no assurance that the fund will achieve its investment objective.
The fund's investment objective is long-term capital appreciation. The
fund seeks to achieve this objective by investing at least 80% of its assets in
the securities of issuers that are on the PaineWebber's HIGHLIGHTED STOCKS list.
Historically, the HIGHLIGHTED STOCKS list has consisted primarily of common
stocks of relatively large, well known U.S. companies, although it is not
restricted to those types of companies. As of October 1, 1999, the average
capitalization of companies listed on the HIGHLIGHTED STOCKS list was $60
billion. The fund may invest up to 20% of its assets in short-term debt
obligations, money market instruments and options and futures contracts.
The fund will purchase a security that has been added to or sell a
security that has been removed from the HIGHLIGHTED STOCKS list after
publication of that change. The fund may trade in securities added to or deleted
from the HIGHLIGHTED STOCKS list no earlier than the market open after relevant
changes to the HIGHLIGHTED STOCKS list are announced. Under normal
circumstances, the fund will not purchase stocks that are not included on the
HIGHLIGHTED STOCKS list or keep stocks that have been removed from the
HIGHLIGHTED STOCKS list.
There is no assurance that the fund will be able to maintain an equal
weighting of assets among all the stocks on the HIGHLIGHTED STOCKS list. In
certain instances, such as when the HIGHLIGHTED STOCKS list contains fewer than
20 stocks, the fund may choose not to re-balance its portfolio following an
announced change to the HIGHLIGHTED STOCKS list. In addition, the fund may be
unable to purchase or sell sufficient securities due to market restrictions or
diversification and illiquid security limitations imposed by the Investment
Company Act of 1940 ("Investment Company Act"). In such circumstances, the fund
may purchase options and futures contracts on security indices, index-based
securities such as Standard and Poor's Depository Receipts ("SPDRs") and stocks
not on the HIGHLIGHTED STOCKS list.
For more than a century, PaineWebber has been committed to providing
superior equity research, resulting in one of the strongest franchises on Wall
Street. PaineWebber Investment Strategy Group's approach to research places its
recommendations in the context of broad social, economic and political themes.
PaineWebber believes that the ability to spot emerging trends--and the companies
expected to benefit from them--has proven critical to successful investing. The
Investment Strategy Group aims to identify these themes before they emerge and
become well recognized. While the Investment Strategy Group identifies several
industries and companies that are expected to benefit from each theme, the
HIGHLIGHTED STOCKS list is a list of "choice" companies from each theme.
Historically, the HIGHLIGHTED STOCKS list has included 25 stocks, which are
typically covered by the PaineWebber Research Department and carry a "1" (Buy)
or "2" (Attractive) rating. Stocks are usually added or deleted from the
HIGHLIGHTED STOCKS list at the beginning of a month, but revisions can also be
made on other days.
The fund is designed for investors seeking long-term capital appreciation
from a fully invested, all-equity portfolio. The fund is not a market-timing
vehicle and not a complete investment program.
The HIGHLIGHTED STOCKS list as of October 1, 1999, consisted of the
following 29 securities.
<TABLE>
<S> <C> <C> <C>
America Online Delta Airlines Lucent Technologies Schering-Plough
American Express Disney MCI WorldCom Smurfit-Stone Container
Bank of New York Gap Medtronic Sun Microsystems
Bed Bath & Beyond Gateway Microsoft Time Warner
Carnival Corp Home Depot Motorola Wal-Mart
Chase Manhattan Illinois Tool Works Nextel Warner-Lambert
Clear Channel IBM Pfizer Xerox
Costco
</TABLE>
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In addition to the securities listed above, the following securities have
appeared on the HIGHLIGHTED STOCKS list at some point during the twelve months
from September 1, 1998 to August 31, 1999: Abbot Laboratories, Air Products and
Chemicals, American Int'l Group, Avon Products, Coca Cola, Ecolab, Compaq,
Freddie Mac, Gannett, Gateway, Lear, New York Times, NiSource, Pepsico,
Sherwin-Williams, Staples and State Street.
As of October 1, 1999, the HIGHLIGHTED STOCKS list reflects the following
investment themes:
THE NEW MILLENNIUM AMERICAN (September 1998). This theme focuses on the
consumer, taking an approach more typical of Madison Avenue than of Wall Street.
What this report attempts to do is understand consumer behavior and, in
particular, the behavior of baby boomers--the largest, fastest-growing and
wealthiest segment of the population. Driven by "shared life experiences," the
attitudes of baby boomers about everything from consumption to leisure to health
care have changed dramatically as this generation has aged. With most of their
material needs satisfied, boomers today place more value on experiences than on
tangibles.
KEY TRENDS & INVESTMENT IMPLICATIONS
o CRADLE-TO-GRAVE ENTREPRENEURIALISM: Beneficiaries include firms
catering to small businesses, home offices, investors seeking asset
management and parents supervising children's education.
o TIME DROUGHT: Americans feel short of time and find themselves doing
several things at once. Trusted brands and time-savers could flourish.
o STRESSLESS LEISURE: As baby boomers age, they seek leisure activities
with less effort, less physical exertion, less risk and fewer projects.
Cruise lines, airlines, theme parks, casinos and hotels could benefit.
o NO-SERVICE/FULL-SERVICE ECONOMY. A tight labor market creates
opportunities for low-cost, highly efficient services and for premium
quality service providers.
o NEW DRUG CULTURE. Aging baby boomers want more pharmaceuticals and
"better-for-you" products.
MUTED CYCLE CYCLICALS (April 1999). "Benign deflation" and the muting of
the business cycle--infrequent and less severe recessions--have altered the old
sector rotation, which typically followed this pattern: first, defensive stocks;
second, interest-rate sensitive cyclicals; third, commodity cyclicals; and
lastly, capital goods makers. Although the domestic economy has become less
volatile, in addition to the muted business cycle, the "new profit pattern" has
two other elements: industry mini-recessions and global recession rotation. In
this "new profit pattern" there are four types of cyclical companies whose
earnings are affected by different variables: Capacity cyclicals, Demand
cyclicals, Growth cyclicals, Credit cycle cyclicals.
KEY TRENDS & INVESTMENT IMPLICATIONS
o CAPACITY CYCLICALS: Companies that could benefit from swings in
industry capacity. Supply and demand situation appears favorable for
airlines, papers and semiconductors.
o DEMAND CYCLICALS: Solid economic growth could prove favorable for
autos, diversified industrials, railroads and retailers.
o GROWTH CYCLICALS: Global rebound and global growth could be favorable
for computer, household products, specialty chemicals and telecom
equipment firms.
o CREDIT CYCLE CYCLICALS: Rebounds in Japanese and Asian markets could
benefit select U.S. financial services firms.
INFORMATION REVOLUTION WARS (May 1999). The quantity of global GDP that
ultimately will be "digitizable" will likely surpass today's wildest
speculations. Major technological revolutions are always bigger than anyone ever
thinks. The First and Second Industrial Revolutions were violent upheavals
marked by many simultaneous "wars" between competing interests, technologies and
business models. So too will the Information Revolution witness many wars in
which some firms perish while others flourish.
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SOME KEY TRENDS & INVESTMENT IMPLICATIONS
o INFORMATION AGE VS. INDUSTRIAL AGE: The distribution and manipulation
of information is now the central wealth-creating activity
o PRODUCER VS. DISTRIBUTOR: The Internet increases the power of producers
and threatens distributors and middlemen that don't add value.
o E-TAILING VS. BRICK-AND-MORTAR RETAILING: Companies with strong brands and
sophisticated distribution could benefit more than retailers with weak
brands.
o COMMODITIZED INFORMATION VS. PROPRIETARY CONTENT VS. SPECIALIZED INSIGHT:
Commoditization of information could hurt traditional information
providers, such as newspapers. Proprietary content is valuable if
consumers prove willing to pay for it. Consumers will pay for specialized
insight tailored to their specific needs.
Both the stocks on the HIGHLIGHTED STOCKS list and the investment themes
will change from time to time. Changes to the list of stocks are normally made
monthly but may be made more frequently. Themes have changed less frequently in
the past.
OTHER INVESTMENT POLICIES. The fund may invest up to 15% of its net assets
in illiquid securities. The fund may purchase securities on a when-issued basis
and may purchase or sell securities for delayed delivery. 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. The fund may invest in the securities of other investment
companies and may sell securities short "against the box."
THE FUND'S INVESTMENTS, RELATED RISKS AND LIMITATIONS
The following supplements the information contained in the Prospectus and
above concerning the fund's investments, related risks and limitations. Except
as otherwise indicated in the Prospectus or this SAI, the fund has established
no policy limitations on its ability to use the investments or techniques
discussed in these documents.
EQUITY SECURITIES. Equity securities (referred to as "stocks" in the
Prospectus) include common stocks, most preferred stocks and securities that are
convertible into them, including common stock purchase warrants and rights,
equity interests in trusts, partnerships, joint ventures or similar enterprises
and depository receipts. Common stocks, the most familiar type, represent an
equity (ownership) interest in a corporation.
Preferred stock has certain fixed income features, like a bond, but
actually it is equity that is senior to a company's common stock. Convertible
securities may 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, their prices generally fluctuate more than other securities
and reflect changes in a company's financial condition and in overall market and
economic conditions. Common stocks generally represent the riskiest investment
in a company. It is possible that the fund may experience a substantial or
complete loss on an individual equity investment.
HIGHLIGHTED STOCKS LIST RISK. There can be no assurance that the equity
securities of issuers on the HIGHLIGHTED STOCKS list will perform as
anticipated. The past performance of these securities and issuers cannot be used
to predict the future results of either the HIGHLIGHTED STOCKS list or the fund.
The fund's investment results will not be identical to those of the HIGHLIGHTED
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STOCKS list for a number of reasons, including: (1) the timing of the fund's
purchase and sale of stocks in response to changes in the HIGHLIGHTED STOCKS
list--the fund will buy and sell stocks only after publication of the changes to
the HIGHLIGHTED STOCKS list has been made; (2) the fund's cash flow from
purchases and sales of fund shares, which can occur daily and will result in
portfolio purchases and sales; (3) the fees and expenses, including the costs of
buying and selling stocks, that the fund bears; (4) the fund's possible
inability to add to or subtract from its holdings of a stock on the HIGHLIGHTED
STOCKS list at a given time, particularly in connection with the re-balancing of
the fund's portfolio to establish equal weightings of its assets among the
stocks on the HIGHLIGHTED STOCKS list; and (5) the fund's investment of part of
its assets in short-term debt obligations, money market instruments and options
and futures contracts. The fund may invest in these instruments, for example,
for liquidity in anticipation of shareholder sales of fund shares or because the
diversification requirements that apply to mutual funds prevent it from
investing substantially all its assets in the stocks that are on the HIGHLIGHTED
STOCKS list.
Because the HIGHLIGHTED STOCKS list includes a relatively small number of
issuers and the fund invests in stocks only if they are on the HIGHLIGHTED
STOCKS list, the fund will hold a relatively small number of stocks. As a
result, changes in the market value of a single issuer's stock could affect the
fund's performance and net asset value more severely than if its holdings were
more diversified. PaineWebber Investment Strategy Group makes subjective
decisions to add or delete companies from the HIGHLIGHTED STOCKS list, but the
list is not compiled with any particular client or product in mind, including
the fund. When selecting the companies for its HIGHLIGHTED STOCKS list, the
Investment Strategy Group does not take industry sector diversification concerns
into account.
PaineWebber could at any time suspend or terminate publication of the
HIGHLIGHTED STOCKS list. In that event, the fund will determine how to proceed
consistent with its investment objective and the interests of its shareholders.
It is also possible that the HIGHLIGHTED STOCKS list would include fewer
securities than are necessary for the fund to satisfy the diversification
requirements for qualifying as a regulated investment company ("RIC") under the
Internal Revenue Code of 1986, as amended ("Code"). See "Taxes." In that event,
the fund will invest in stocks not on the HIGHLIGHTED STOCKS list, short-term
debt obligations, money market instruments, options and futures contracts, and
index-based securities such as SPDRs. Since January 1988, the HIGHLIGHTED STOCKS
list has included between 11 and 31 stocks, although on average it has consisted
of 25 stocks.
It is possible that the HIGHLIGHTED STOCKS list will include stocks of
issuers for which PaineWebber or one of its affiliates performs banking services
for which it receives fees, as well as stocks of issuers in which PaineWebber or
one of its affiliates makes a market and may have long or short positions in the
stock. Fund purchases and sales will be affected by market conditions following
publication of changes to the HIGHLIGHTED STOCKS list and will be subject to
competing orders by other PaineWebber clients who invest based on the
HIGHLIGHTED STOCKS list recommendations. If a stock is removed from or no longer
appears on the HIGHLIGHTED STOCKS list because PaineWebber or one of its
affiliates is engaged in activities such as those mentioned above, the fund may
continue to regard that stock as being on the HIGHLIGHTED STOCK list.
Mitchell Hutchins does not have access to information regarding additions
to or deletions from the HIGHLIGHTED STOCKS list prior to their publication. The
HIGHLIGHTED STOCKS list is not maintained for the purpose of managing any
account or investment company such as the fund. In addition to being available
to the fund, the HIGHLIGHTED STOCKS list is also available to other clients of
PaineWebber and its affiliates, including Mitchell Hutchins, which may trade on
the basis of the HIGHLIGHTED STOCKS list. PaineWebber publishes other lists of
recommended securities that could be appropriate for fund investors but which
are not used by Mitchell Hutchins for the fund.
INVESTING IN FOREIGN SECURITIES. Historically, the HIGHLIGHTED STOCKS list
has only once included a foreign security. If the HIGHLIGHTED STOCKS list
includes one or more foreign securities, the fund will invest in them. 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
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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 many foreign companies may be less liquid and their prices
more volatile than securities of comparable U.S. companies. 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 the 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. Additionally, the costs of investing outside the
United States frequently are higher than those in the United States. These costs
include relatively higher brokerage commissions and foreign custody expenses.
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 fund 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.
If the HIGHLIGHTED STOCKS list includes 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, the fund will invest in these
receipts. 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 the 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 over-the-counter 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 fund anticipates that its 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.
However, from time to time foreign securities may be difficult to liquidate
rapidly without significantly depressing the price of such securities. Although
the fund will endeavor to achieve the best net results in effecting its
portfolio transactions, transactions on foreign exchanges are usually subject to
fixed commissions that are generally higher than negotiated commissions on U.S.
transactions. There is generally less government supervision and regulation of
exchanges and brokers in foreign countries than in the United States.
FOREIGN CURRENCY TRANSACTIONS. Currency risk is the risk that changes in
foreign exchange rates may reduce the U.S. dollar value of the fund's foreign
investments. The fund's share value may change significantly when its
investments are denominated in foreign currencies. Generally, currency exchange
rates are determined by supply and demand in the foreign exchange markets and
the relative merits of investments in different countries. Currency exchange
rates 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.
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The 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 the 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, the fund could suffer a loss of some or all
of the amounts deposited. The fund may convert foreign currency to U.S. dollars
from time to time.
The value of the assets of the fund as measured in U.S. dollars may be
affected favorably or unfavorably by fluctuations in currency rates and exchange
control regulations. Further, the 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. The 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.
ILLIQUID SECURITIES. The term "illiquid securities" means securities that
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which the fund has valued the securities and
includes, among other things, purchased over-the-counter options, repurchase
agreements maturing in more than seven days and restricted securities other than
those Mitchell Hutchins has determined are liquid pursuant to guidelines
established by the fund's board. The assets used as cover for over-the-counter
options written by the fund will be considered illiquid unless the
over-the-counter options are sold to qualified dealers who agree that the fund
may repurchase any over-the-counter options it writes at a maximum price to be
calculated by a formula set forth in the option agreements. The cover for an
over-the-counter 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. To the extent the 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 the 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 Securities Act of 1933
("Securities Act") and may be sold only in privately negotiated or other
exempted transactions or after a Securities Act registration statement has
become effective. Where registration is required, the 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 the fund may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the 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 tradable 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 Securities
Act. Institutional investors generally will not seek to sell these instruments
to the general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not dispositive of the liquidity of such investments.
Institutional markets for restricted securities also have developed as a
result of Rule 144A under the Securities Act, which establishes a "safe harbor"
from the registration requirements of that 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
the 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.
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The board has delegated the function of making day-to-day determinations
of liquidity to Mitchell Hutchins pursuant to guidelines approved by the board.
Mitchell Hutchins 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 monitors the liquidity of
restricted securities in the fund's portfolio and reports periodically on such
decisions to the board.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
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.
The 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. 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 the fund upon acquisition is accrued as interest and
included in its net investment income. 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. The fund intends to
enter into repurchase agreements only with counterparties in transactions
believed by Mitchell Hutchins to present minimum credit risks.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements involve the
sale of securities held by the fund subject to its agreement to repurchase the
securities at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest. Reverse repurchase agreements are subject to the fund's
limitation on borrowings and may be entered into only with banks or securities
dealers or their affiliates. While a reverse repurchase agreement is
outstanding, the 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 the fund might be unable to deliver them when the 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.
LENDING OF PORTFOLIO SECURITIES. The fund is authorized to lend its
portfolio securities to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified. Lending securities enables the fund to earn additional
income, but could result in a loss or delay in recovering these securities. The
borrower of the fund's portfolio securities must maintain acceptable collateral
with the 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. The 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,
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Mitchell Hutchins will consider, and during the period of the loan will monitor,
all relevant facts and circumstances, including the creditworthiness of the
borrower. The fund will retain authority to terminate any of its loans at any
time. The 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. The fund will receive amounts
equivalent to any dividends, interest or other distributions on the securities
loaned. The 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 the fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for the fund. The board also has authorized the payment of fees (including
fees calculated as a percentage of invested cash collateral) to PaineWebber for
these services. PaineWebber also has been approved as a borrower under the
fund's securities lending program. The board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent and/or
borrower.
SHORT SALES "AGAINST THE BOX." The fund may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales "against the
box"). To make delivery to the purchaser in a short sale, the executing broker
borrows the securities being sold short on behalf of the fund, and the fund is
obligated to replace the securities borrowed at a date in the future. When the
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 with its custodian, in a segregated account, the securities that could
be used to cover the short sale. The fund incurs transaction costs, including
interest expense, in connection with opening, maintaining and closing short
sales "against the box."
The fund might make a short sale "against the box" to hedge against market
risks when Mitchell Hutchins believes that the price of a security may decline,
thereby causing a decline in the value of a security 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 gain in the short position. Conversely, any gain in the long
position should be reduced by a loss in the short position. The extent to which
gains or losses in the long position are reduced will depend upon the amount of
the securities sold short relative to the amount of securities the fund owns,
either directly or indirectly, and in the case where the fund owns convertible
securities, changes in the investment value or conversion premiums of such
securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The fund may purchase
securities on a "when-issued" basis or may purchase or sell securities for
delayed delivery, I.E., for issuance or delivery to or by the fund later than
the normal settlement date for such securities at a stated price and yield. The
fund generally would not pay for such securities or start earning interest on
them until they are received. However, when the 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 the 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, the 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 the fund's net asset value. When the 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 "The Fund's Investments,
Related Risks and Limitations--Segregated Accounts." The fund may sell the right
to acquire the security prior to delivery if Mitchell Hutchins deems it
advantageous to do so, which may result in a gain or loss to the fund.
MONEY MARKET INVESTMENTS. The fund may invest in money market investments
for liquidity, in anticipation of shareholder redemptions of fund shares, or
when the fund is unable to purchase or sell sufficient securities due to market
restrictions or diversification and illiquid security limitations imposed by the
Investment Company Act. Such investments include, among other things, (1)
securities issued or guaranteed by the U.S. government or one of its agencies or
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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 political subdivisions,
agencies or instrumentalities, including obligations of supranational entities,
(6) bonds issued by foreign issuers, (7) repurchase agreements and (8) other
investment companies that invest exclusively in money market instruments.
SEGREGATED ACCOUNTS. When the fund enters into certain transactions that
involve obligations to make future payments to third parties, 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 and swaps.
SPDRS ("STANDARD & POOR'S DEPOSITORY RECEIPTS"). The fund may invest in
SPDRs. SPDRs are exchange-traded securities that represent ownership in
long-term unit investment trusts established to accumulate and hold a portfolio
of common stocks that is intended to track the price performance and dividend
yield of the Standard & Poor's 500 Composite Stock Price Index.
To the extent the fund invests in SPDRs, fund shareholders would
indirectly pay a portion of the operating costs of such companies in addition to
the expenses of its own operation. Indirectly then, fund shareholders may pay
higher operational costs than if they owned the underlying investments directly.
Additionally, the fund's investment in SPDRs is subject to limitations under the
Investment Company Act and market availability.
The price of a SPDR is derived from and based upon the securities it
holds. Accordingly, the level of risk involved in the purchase or sale of a SPDR
is similar to the risk involved in the purchase or sale of traditional common
stocks, with the exception that the pricing mechanism for such instruments is
based on a basket of stocks. The market prices of SPDRs are expected to
fluctuate in accordance with both changes in the net asset values of their
underlying indices and the supply and demand for the instruments on the
exchanges on which they are traded. Substantial market or other disruptions
affecting a SPDR could adversely affect the liquidity and value of the shares of
the fund.
INVESTMENT LIMITATIONS OF THE FUND
FUNDAMENTAL LIMITATIONS. The following fundamental investment limitations
cannot be changed for the 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.
The fund will not:
(1) 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.
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(2) 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, and
provided that the fund will invest 25% or more of its total assets in securities
of issuers in the same industry if necessary to replicate the composition of the
HIGHLIGHTED STOCKS list.
(3) issue senior securities or borrow money, except as permitted
under the Investment Company Act 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.
(4) 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 bonds 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.
The following interpretation applies to, but is not part of, this
fundamental restriction: The Fund's investments in master notes, funding
agreements and similar instruments will not be considered to be the making of a
loan.
(5) 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.
(6) purchase or sell real estate, except that investments in
securities of issuers that invest in real estate and investments in
mortgage-backed securities, mortgage participations or other instruments
supported by interests in real estate are not subject to this limitation, and
except that the 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.
(7) 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.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions
are non-fundamental and may be changed by a vote of the board without
shareholder approval.
The 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 satisfy the diversification requirements imposed by section 817(h) of
the Internal Revenue Code and the Treasury regulations issued thereunder on
segregated assets accounts used to fund variable annuity and/or variable life
insurance contracts (these requirements must be satisfied by the fund as the
investment vehicle underlying those accounts).
(2) 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.
(3) 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.
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(4) purchase securities of other investment companies, except to the
extent permitted by the Investment Company Act and except that this limitation
does not apply to securities received or acquired as dividends, through offers
of exchange, or as a result of reorganization, consolidation, or merger.
(5) purchase portfolio securities while borrowings in excess of 5%
of its total assets are outstanding.
STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. Mitchell Hutchins may
use a variety of financial instruments ("Derivative Instruments"), including
certain options, futures contracts (sometimes referred to as "futures"), options
on futures contracts and swaps to attempt to hedge the fund's portfolio and also
to attempt to enhance income or return. The fund may enter into transactions
involving one or more type of Derivative Instruments under which the full value
of its portfolio is at risk. Under normal circumstances, however, the fund's use
of these instruments will place at risk a much smaller portion of its assets.
The particular Derivative Instruments that may be used by the fund are described
below.
The fund might not use any Derivative Instruments or derivative
strategies, and there can be no assurance that using any strategy will succeed.
If Mitchell Hutchins is incorrect in its judgment on market values, interest
rates or other economic factors in using a Derivative Instrument or strategy,
the 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 bonds or currency, in most cases the contracts
are closed out before the settlement date without the making or taking of
delivery.
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OPTIONS ON FUTURES CONTRACTS. Options on futures contracts are
similar to options on securities, 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, 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.
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 the fund's portfolio. Thus, in a short hedge the 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, the
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, the 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, the 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 the fund intends to acquire.
Thus, in a long hedge, the 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, the 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, the fund could exercise the call and thus
limit its acquisition cost to the exercise price plus the premium paid and
transaction costs. Alternatively, the fund might be able to offset the price
increase by closing out an appreciated call option and realizing a gain.
The 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. The fund
might enter into a long straddle when Mitchell Hutchins 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. The fund might enter into a short straddle
when Mitchell Hutchins 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 the
fund owns or intends to acquire. Derivative Instruments on stock indices, in
contrast, generally are used to hedge against price movements in broad stock
market sectors in which the fund has invested or expects to invest.
Income strategies using Derivative Instruments may include the
writing of covered options to obtain the related option premiums. Return
strategies may include using Derivative Instruments to increase or decrease the
fund's exposure to different asset classes without buying or selling the
underlying instruments. The 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, the fund's ability to use Derivative Instruments may be limited by tax
considerations. See "Taxes."
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In addition to the products, strategies and risks described below
and in the Prospectus, Mitchell Hutchins may discover additional opportunities
in connection with Derivative Instruments and with hedging, income and return
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 may utilize these
opportunities for the fund to the extent that they are consistent with the
fund's investment objective and permitted by its investment limitations and
applicable regulatory authorities. The fund's Prospectus or SAI 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 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 is experienced in the use of Derivative Instruments, there can be no
assurance that any particular strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of a Derivative Instrument and price movements of the
investments 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 the fund entered into a
short hedge because Mitchell Hutchins projected a decline in the price of a
security in the 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, the 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 the
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. The 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 the fund.
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose the fund to an
obligation to another party. The 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. The 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.
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Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Derivative Instrument is open, unless they are
replaced with similar assets. As a result, committing a large portion of the
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.
OPTIONS. The fund may purchase put and call options, and write (sell)
covered put or call options on securities in which it invests and related
indices and 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. The fund
may also use options to attempt to enhance return or 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 the 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 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
over-the-counter options written by the fund would be considered illiquid to the
extent described under "The Fund's Investments, Related Risks and
Limitations--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, European-style options can only be exercised
immediately prior to their 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.
The fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the 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, the 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 the fund to realize profits or
limit losses on an option position prior to its exercise or expiration.
The fund may purchase and write both exchange-traded and over-the-counter
options. Currently, many options on equity securities (stocks) are
exchange-traded. 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, over-the-counter options are contracts between the
fund and its counterparty (usually a securities dealer or a bank) with no
clearing organization guarantee. Thus, when the fund purchases or writes an
over-the-counter 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 fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
over-the-counter options only by negotiating directly with the counterparty, or
by a transaction in the secondary market if any such market exists. Although the
fund will enter into over-the-counter options only with counterparties that are
expected to be capable of entering into closing transactions with the fund,
there is no assurance that the fund will in fact be able to close out an
over-the-counter option position at a favorable price prior to expiration. In
the event of insolvency of the counterparty, the fund might be unable to close
out an over-the-counter option position at any time prior to its expiration.
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If the 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
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.
The 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.
FUTURES. The fund may purchase and sell securities index futures
contracts, interest rate futures contracts and foreign currency futures
contracts. The fund may 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, the 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,
either as a hedge or to enhance return or realize gains.
The 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. The fund will engage in this
strategy only when it is more advantageous to the 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 the 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 the fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the 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.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the fund's obligations to or from a futures
broker. When the fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the 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 the 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 fund intends to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may
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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 the 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. The fund would continue to be subject
to market risk with respect to the position. In addition, except in the case of
purchased options, the 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 fund's use of
futures and related options is governed by the following guideline, which can be
changed by its board without shareholder vote:
To the extent the 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.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. The fund may
use options and futures on foreign currencies, as described above, and forward
currency contracts, as described below, to hedge against movements in the values
of the foreign currencies in which the 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.
The 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 believes will have a positive correlation to
the value of the currency being hedged. In addition, the fund may use forward
currency contracts to shift exposure to foreign currency fluctuations from one
country to another. For example, if the fund owned securities denominated in a
foreign currency and Mitchell Hutchins 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.
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There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Derivative Instruments until they reopen.
Settlement of Derivative Instruments involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the fund 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. The fund 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, the 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, the 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 the 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 the 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.
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, the 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. The fund 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.
18
<PAGE>
SWAP TRANSACTIONS. The fund may enter into swap transactions, which
include swaps, caps, floors and collars relating to interest rates, currencies,
securities or other instruments. 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
rather than interest rates. Equity swaps or other swaps relating to securities
or other instruments are also similar, but they are based on changes in the
value of the underlying securities or instruments. For example, an equity swap
might involve an exchange of the value of a particular security or securities
index in a certain notional amount for the value of another security or index or
for the value of interest on that notional amount at a specified fixed or
variable rate.
The fund may enter into interest rate swap transactions to preserve a
return or spread on a particular investment or portion of its bond portfolio or
to protect against any increase in the price of securities it anticipates
purchasing at a later date. The fund may use interest rate swaps, caps, floors
and collars as a hedge on either an asset-based or liability-based basis,
depending on whether it is hedging its assets or its liabilities. Interest rate
swap transactions are subject to risks comparable to those described above with
respect to other derivatives strategies.
The fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out, with the fund receiving or paying, as the case
may be, only the net amount of the two payments. Since segregated accounts will
be established with respect to such transactions, Mitchell Hutchins believes
such obligations do not constitute senior securities and, accordingly, will not
treat them as being subject to the fund's borrowing restrictions. The net amount
of the excess, if any, of the fund's obligations over its entitlements with
respect to each 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 "The Fund's
Investment, Related Risks and Limitations--Segregated Accounts." The fund also
will establish and maintain such segregated accounts with respect to its total
obligations under any swaps that are not entered into on a net basis.
The fund will enter into interest rate swap transactions only with banks
and recognized securities dealers or their respective affiliates believed by
Mitchell Hutchins 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, the 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 fourteen 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 the
fund's operations.
The trustees and executive officers of the Trust, their ages, business
addresses and principal occupations during the past five years are:
19
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------- ----------------------------------------
<S> <C> <C>
Margo N. Alexander*+; 52 Trustee and Mrs. Alexander is chairman
President (since March 1999), 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
one of their affiliates serves as
investment adviser.
Richard Q. Armstrong; 64 Trustee Mr. Armstrong is chairman and
R.Q.A. Enterprises principal of R.Q.A. Enterprises
One Old Church Road (management consulting firm)
Unit #6 (since April 1991 and principal
Greenwich, CT 06830 occupation since March 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
one of their affiliates serves as
investment adviser.
E. Garrett Bewkes, Trustee and Mr. Bewkes is a director of
Jr.**+; 73 Chairman of the Paine Webber Group Inc. ("PW
Board of Trustees 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 35 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C><C>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------- ----------------------------------------
Richard R. Burt; 52 Trustee Mr. Burt is chairman of IEP
1275 Pennsylvania Ave., Advisors, Inc. (international
N.W. 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. (gold mining), Powerhouse
Technologies Inc. (provides
technology to gaming and
wagering industry) and Weirton
Steel Corp. (makes and finishes
steel products). 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 one of
their affiliates serves 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 30
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Meyer Feldberg; 57 Trustee Mr. Feldberg is Dean and
Columbia University Professor of Management of the
101 Uris Hall Graduate School of Business,
New York, NY 10027 Columbia University. Prior to
1989, he was president of the
Illinois Institute of
Technology. Dean Feldberg is
also a director of Primedia,
Inc. (publishing), Federated
Department Stores, Inc.
(operator of department stores)
and Revlon, Inc. (cosmetics).
Dean Feldberg is a director or
trustee of 34 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
George W. Gowen; 70 Trustee Mr. Gowen is a partner in the
666 Third Avenue law firm of Dunnington,
New York, NY 10017 Bartholow & Miller. Prior to May
1994, he was a partner in the law
firm of Fryer, Ross & Gowen. Mr.
Gowen is a director or trustee of
34 investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
21
<PAGE>
<S> <C> <C><C>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------- ----------------------------------------
Frederic V. Malek; 62 Trustee Mr. Malek is chairman of Thayer
1455 Pennsylvania Ave., Capital Partners (merchant
N.W. bank). From January 1992 to
Suite 350 November 1992, he was campaign
Washington, DC 20004 manager of Bush-Quayle `92. From
1990 to 1992, he was vice
chairman and, from 1989 to 1990,
he was president of Northwest
Airlines Inc. and NWA Inc.
(holding company of Northwest
Airlines 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
Aegis Communications, Inc.
(tele-services), American
Management Systems, Inc.
(management consulting and
computer related services),
Automatic Data Processing, Inc.
(computing services), CB Richard
Ellis, Inc. (real estate
services), FPL Group, Inc.
(electric services), Global
Vacation Group (packaged
vacations), HCR/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 one of their affiliates
serves as investment adviser.
Carl W. Schafer; 63 Trustee Mr. Schafer is president of the
66 Witherspoon Street, Atlantic Foundation (charitable
#1100 foundation supporting mainly
Princeton, NJ 08542 oceanographic exploration and
research). He is a director of
Labor Ready, Inc. (temporary
employment), 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 one of their affiliates
serves as investment adviser.
Brian M. Storms*+; 45 Trustee Mr. Storms is president and
chief operating officer of
Mitchell Hutchins (since March
1999). Prior to March 1999, he
was president of Prudential
Investments (1996-1999). Prior
to joining Prudential, he was a
managing director at Fidelity
Investments. Mr. Storms is a
director or trustee of 31
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
22
<PAGE>
<S> <C> <C><C>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------- ----------------------------------------
T. Kirkham Barneby*; 53 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 one of their affiliates
serves as investment adviser.
John J. Lee**; 31 Vice President and Mr. Lee is a vice president and
and Assistant a manager of the mutual fund
Treasurer 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 one of
their affiliates serves as an
investment adviser.
Kevin J. Vice President Mr. Mahoney is a first vice
Mahoney**; 34 and Assistant president and senior manager of
Treasurer the mutual fund finance
department of Mitchell Hutchins.
From August 1996 through March
1999, he was the manager of the
mutual fund internal control
group of Salomon Smith Barney.
Prior to August 1996, he was an
associate and assistant
treasurer for BlackRock
Financial Management L.P. Mr.
Mahoney is a vice president and
assistant treasurer of 32
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Ann E. Moran**; 42 Vice President and Ms. Moran is a vice president
Assistant Treasurer and a manager of 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 one of
their affiliates serves as
investment adviser.
Dianne E. O'Donnell**; 47 Vice President and Ms. O'Donnell is a senior vice
Secretary president and deputy 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 one of
their affiliates serves 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 one of their affiliates
serves as investment adviser.
23
<PAGE>
<S> <C> <C><C>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------- ----------------------------------------
Victoria E. Schonfeld**; Vice President Ms. Schonfeld is a managing
48 director and general counsel of
Mitchell Hutchins (since May
1994) and a senior vice president
of PaineWebber (since July 1995).
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
one of their affiliates serves as
investment adviser.
Paul H. Schubert**; 36 Vice President and Mr. Schubert is a senior vice
Treasurer president and director of the
mutual fund finance department
of Mitchell Hutchins. Mr.
Schubert is a vice president and
treasurer of 32 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Barney A. Taglialatela**; Vice President and Mr. Taglialatela is a vice
38 Assistant Treasurer president and a 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 one of their affiliates
serves as investment adviser.
Keith A. Weller**; 38 Vice President and Mr. Weller is a first vice
Assistant Secretary president and associate general
counsel of Mitchell Hutchins.
Prior to May 1995, he was an
attorney in private practice.
Mr. Weller is a vice president
and assistant secretary of 31
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
</TABLE>
- ---------
* The business address of each listed person is 51 West 52nd Street, New York,
New York 10019-6114.
** The business address of each listed person is 1285 Avenue of the Americas,
New York, New York 10019.
+ Mrs. Alexander, Mr. Bewkes, Ms. Farrell and Mr. Storms are "interested
persons" of the Trust and the fund as defined in the Investment Company Act
by virtue of their positions with Mitchell Hutchins, PaineWebber, and/or PW
Group.
The Trust pays trustees who are not "interested persons" of the Trust
("disinterested trustees") $500 annually for each series and up to an additional
$150 per series for each board meeting and each separate meeting of a board
committee. The Trust presently has 14 series and thus pays each such trustee
$7,000 annually, plus any additional annual 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 no shares of the fund. Because Mitchell Hutchins and
PaineWebber perform substantially all of the services necessary for the
operation of the Trust and the 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 trustee or officer.
24
<PAGE>
The table below includes certain information relating to the compensation
of the current board members who hold office with the Trust and the compensation
of those board members from all PaineWebber funds during the 1998 calendar year.
COMPENSATION TABLE+
ESTIMATED TOTAL
AGGREGATE COMPENSATION
COMPENSATION FROM THE TRUST
FROM THE AND THE FUND
NAME OF PERSON, POSITION TRUST* COMPLEX**
------------------------ ----- -------
Richard Q. Armstrong,
Trustee $13,370 $101,372
Richard R. Burt,
Trustee 13,370 101,372
Meyer Feldberg,
Trustee 13,370 116,222
George W. Gowen,
Trustee 16,210 108,272
Frederic V. Malek,
Trustee 13,370 101,372
Carl W. Schafer,
Trustee 13,370 101,372
- --------------------
+ Only independent board members are compensated by the Trust and the fund
complex and identified above; board members who are "interested persons," as
defined by the Investment Company Act, do not receive compensation.
* Represents fees estimated to be paid to each board member during the fund's
initial full fiscal year ended December 31, 2000.
** Represents total compensation paid during the calendar year ended December
31, 1998, to each board member by 31 investment companies (34 in the case of
Messrs. Feldberg and Gowen) for which Mitchell Hutchins, PaineWebber or one
of their affiliates served as investment adviser. No fund within the
PaineWebber fund complex has a bonus, pension, profit sharing or retirement
plan.
PRINCIPAL HOLDERS OF SECURITIES
As of December __, 1999, the fund had no outstanding shares.
INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS. Mitchell Hutchins
acts as the investment adviser and administrator of the fund pursuant to an
advisory contract ("Advisory Contract") with the fund. Under the Advisory
Contract, the fund pays Mitchell Hutchins a fee, computed daily and paid
monthly, at the annual rate of 0.75% of its average daily net assets.
Under the terms of the Advisory Contract, the 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 its series are allocated among the series by or under the direction of
the board in such manner as the board determines to be fair and equitable.
Expenses borne by the fund include the following (or the fund's allocable share
of the following): (1) the cost (including brokerage commissions, if any) 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
25
<PAGE>
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 trustees who are not interested
persons of the fund or Mitchell Hutchins; (6) all expenses incurred in
connection with the trustees' services, including travel expenses; (7) taxes
(including any income or franchise taxes) and governmental fees; (8) costs of
any liability, uncollectible items of deposit and other insurance 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 fund for violation of any law;
(10) legal, accounting and auditing expenses, including legal fees of special
counsel for the independent trustees; (11) charges of custodians, transfer
agents and other agents; (12) costs of preparing share certificates; (13)
expenses of setting in type and printing prospectuses and supplements thereto,
statements of additional information and supplements thereto, reports and proxy
materials for existing shareholders and costs of mailing such materials to
existing 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 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 trustees and
officers; and (18) costs of mailing, stationery and communications equipment.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Mitchell Hutchins in the performance of its duties or from reckless disregard of
its duties and obligations thereunder. The Advisory Contract terminates
automatically upon its 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 fund.
PaineWebber makes the Investment Strategy Group, headed by Edward M.
Kerschner, available to consult with Mitchell Hutchins regarding the development
of investment themes and stocks covered by the Research Department. Mr.
Kerschner is PaineWebber's Chief Investment Strategist and Chairman of its
Investment Policy Committee. PaineWebber does not receive a fee for these
consulting services.
NET ASSETS. The following table shows the approximate net assets as of
October 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 .............................
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.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
the Class I shares of the fund under a separate distribution contract with the
Trust ("Distribution Contract"). The Distribution Contract requires Mitchell
26
<PAGE>
Hutchins to use its best efforts, consistent with its other businesses, to sell
Class I shares of the fund. Class H shares have no distributor or distribution
contract. Class H and Class I shares of the fund are offered continuously to
separate accounts of insurance companies.
Under a plan of distribution pertaining to the Class I shares of the fund
adopted by the Trust in the manner prescribed under Rule 12b-1 under the
Investment Company Act ("Class I Plan" or "Plan"), the 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 fund 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 fund will not be obligated to pay
more than those fees. On the other hand, if Mitchell Hutchins' expenses are less
than such fees, it will retain its full fees and realize a profit. Expenses in
excess of distribution fees received or accrued through the termination date of
the Class I Plan will be Mitchell Hutchins' sole responsibility and not that of
the fund. 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.
In approving the Class I Plan for the 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 the fund, which fees would
increase if the Class I Plan were successful and the fund attained and
maintained significant asset levels.
27
<PAGE>
PORTFOLIO TRANSACTIONS
Subject to policies established by the board, Mitchell Hutchins is
responsible for the execution of the fund's portfolio transactions and the
allocation of brokerage transactions. In executing portfolio transactions,
Mitchell Hutchins seeks to obtain the best net results for the 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 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. The fund may invest in securities traded
in the over-the-counter market and will engage primarily in transactions
directly with the dealers who make markets in such securities, unless a better
price or execution could be obtained by using a broker.
The fund has no obligation to deal with any broker or group of brokers in
the execution of portfolio transactions. The fund contemplates that, consistent
with the policy of obtaining the best net results, brokerage transactions may be
conducted through Mitchell Hutchins or its affiliates, including PaineWebber.
The board has adopted procedures in conformity with Rule 17e-1 under the
Investment Company Act to ensure that all brokerage commissions paid to
PaineWebber are reasonable and fair. Specific provisions in the Advisory
Contract authorize Mitchell Hutchins and any of its affiliates that is a member
of a national securities exchange to effect portfolio transactions for the 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.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs"), who receive brokerage commissions for their services. The
fund's procedures in selecting FCMs to execute its transactions in futures
contracts, including procedures permitting the use of Mitchell Hutchins and its
affiliates, are similar to those in effect with respect to brokerage
transactions in securities.
In selecting brokers, Mitchell Hutchins will consider the full range and
quality of a broker's services. Consistent with the interests of the fund and
subject to the review of the board, Mitchell Hutchins may cause the fund to
purchase and sell portfolio securities through brokers who provide Mitchell
Hutchins with brokerage or research services. The fund may pay those brokers a
higher commission than may be charged by other brokers, provided that Mitchell
Hutchins determines in good faith that the commission is reasonable in terms
either of that particular transaction or of the overall responsibility of
Mitchell Hutchins to the fund and its other clients.
Research services obtained from brokers may include written reports,
pricing and appraisal services, analysis of issues raised in proxy statements,
educational seminars, subscriptions, portfolio attribution and monitoring
services, and computer hardware, software and access charges which are directly
related to investment research. Research services may be received in the form of
written reports, online services, telephone contacts and personal meetings with
securities analysts, economists, corporate and industry spokespersons, and
government representatives.
For purchases or sales with broker-dealer firms that act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with these transactions,
Mitchell Hutchins 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. Mitchell Hutchins
may engage in agency transactions in over-the-counter equity and debt securities
in return for research and execution services. These transactions are entered
into only pursuant to procedures that are designed to ensure 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.
Research services and information received from brokers or dealers are
supplemental to Mitchell Hutchins' own research efforts and, when utilized, are
subject to internal analysis before being incorporated into its investment
processes. Information and research services furnished by brokers or dealers
28
<PAGE>
through which or with which the fund effects securities transactions may be used
by Mitchell Hutchins in advising other funds or accounts and, conversely,
research services furnished to Mitchell Hutchins by brokers or dealers in
connection with other funds or accounts that it advises may be used in advising
the fund.
Investment decisions for the fund and for other investment accounts
managed by Mitchell Hutchins 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 the fund and one or more accounts. In
those cases, simultaneous transactions are inevitable. Purchases or sales are
then averaged as to price and allocated between that fund and the other
account(s) as to amount according to a formula deemed equitable to the fund and
the other 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 fund is concerned,
or upon its ability to complete its entire order, in other cases it is believed
that simultaneous transactions and the ability to participate in volume
transactions will benefit the fund.
The fund will not purchase securities that are offered in underwritings in
which PaineWebber is a member of the underwriting or selling group, except
pursuant to procedures adopted by the board pursuant to Rule 10f-3 under the
Investment Company 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 not participate in or benefit from the sale
to the fund.
PORTFOLIO TURNOVER. The fund's 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 the 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 fund is
expected to have an annual turnover rate greater than 100%.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The insurance company separate accounts purchase and redeem shares of the
fund 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
the 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 fund within seven
days thereafter. No fee is charged the separate accounts when they purchase or
redeem fund shares.
The fund 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 the fund to dispose of
securities owned by it or fairly to determine the value of its assets or (3) as
the SEC may otherwise permit. The redemption price may be more or less than the
shareholder's cost, depending on the market value of the fund's portfolio at the
time.
VALUATION OF SHARES
The 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 exchanges normally are
valued at the last sale price on the day the securities are valued or, lacking
any sales on such day, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are generally
29
<PAGE>
valued on the exchange considered by Mitchell Hutchins as the primary market.
Securities traded in the over-the-counter market and listed on the Nasdaq Stock
Market ("Nasdaq") normally are valued at the last available sale price on Nasdaq
prior to valuation; other over-the-counter securities are valued at the last bid
price available prior to valuation. Where market quotations are readily
available, portfolio securities are valued based upon market quotations,
provided those quotations adequately reflect, in the judgment of Mitchell
Hutchins, the fair value of the security. Where those market quotations are not
readily available, 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. All other securities and other
assets are valued at fair value as determined in good faith by or under the
direction of the board. The amortized cost method of valuation generally is used
to value debt obligations with 60 days or less remaining until maturity, unless
the board determines that this does not represent fair value.
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 the 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 fund 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.
TAXES
Fund shares are offered only to insurance company separate accounts the
fund benefits under certain variable annuity contracts and/or variable life
insurance contracts. See the applicable contract prospectus for a discussion of
the special taxation of insurance companies with respect to those accounts and
the contract holders.
QUALIFICATION AS REGULATED INVESTMENT COMPANIES. The fund is treated as a
separate corporation for federal income tax purposes. To qualify for treatment
as a regulated investment company ("RIC") under the Subchapter M of the Internal
Revenue Code ("Code"), the 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 meet several additional requirements. For the 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 the fund failed to qualify for treatment as a RIC for any taxable year,
(a) it would be taxed as an ordinary corporation on the full amount of its
taxable income for that year (even if it distributed that income to its
shareholders), (b) all distributions out of its earnings and profits, including
distributions of net capital gain (the excess of net long-term capital gain over
net short-term capital loss), would be taxable to its shareholders as dividends
(that is, ordinary income) and (c) most importantly, each insurance company
separate account invested in the fund would fail to satisfy the diversification
requirements of section 817(h) described in the next paragraph, with the result
that the variable annuity and/or life insurance contracts supported by that
account would no longer be eligible for tax deferral. In addition, the fund
could be required to recognize unrealized gains, pay substantial taxes and
interest and make substantial distributions before requalifying for RIC
treatment.
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<PAGE>
ADDITIONAL DIVERSIFICATION REQUIREMENTS. The fund intends to satisfy the
diversification requirements indirectly imposed by section 817(h) of the Code
and the regulations thereunder, which are in addition to the diversification
requirements described above. 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 the fund as assets of the related separate account, the fund 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 the 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
RICs. Failure of the fund to satisfy the section 817(h) requirements would
result in (1) taxation of the insurance company issuing the variable contracts,
the benefits under which are funded by the separate account(s) investing in the
fund, and (2) 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 determine for income tax purposes the amount,
character and timing of recognition of the gains and losses the 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 the fund with respect
to its business of investing in securities or foreign currencies, qualify as
permissible income under the Income Requirement.
If the 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 the
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 the 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).
The foregoing is only a general summary of some of the important federal
income tax considerations generally affecting the fund and its shareholders. No
attempt is made to present a complete explanation of the federal tax treatment
of the fund's 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 fund and to
dividends and distributions therefrom.
OTHER INFORMATION
MASSACHUSETTS BUSINESS TRUST. The Trust is an entity of the type commonly
known as a "Massachusetts business trust." Under Massachusetts law, shareholders
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<PAGE>
of the 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
the 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 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 fund. The board members intend to
conduct the 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 the fund benefits
under variable annuity or variable life insurance contracts are the shareholders
of the fund - not the individual owners of those contracts. However, the
separate accounts may pass through voting rights to contract owners.
Shareholders of the 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 the
fund will be voted together, except that only the shareholders of a particular
class of the fund may vote on matters affecting only that class, such as the
terms of the Class I Plan as it relates to the Class I shares. 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 fund 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
the fund. This might force the fund to sell securities at disadvantageous
prices.
CLASSES OF SHARES. A share of each class of the fund represents an
identical interest in the 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 fund will affect the performance of those classes. Each share of
the fund is entitled to participate equally in dividends, other distributions
and the proceeds of any liquidation of the fund. However, due to the differing
expenses of the classes, dividends and liquidation proceeds on Class H and I
shares will differ.
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 the fund.
The custodian employs foreign sub-custodians approved by the board in accordance
with applicable requirements under the Investment Company Act to provide custody
of the foreign assets of the fund outside the United States. PFPC Inc., a
subsidiary of PNC Bank, N.A., serves as the fund's transfer and dividend
disbursing agent. It is located at 400 Bellevue Parkway, Wilmington, DE 19809.
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<PAGE>
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 fund. 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 fund.
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<PAGE>
YOU SHOULD RELY ONLY ON THE
INFORMATION CONTAINED OR REFERRED TO
IN THE PROSPECTUS AND THIS STATEMENT
OF ADDITIONAL INFORMATION. THE FUND
AND ITS 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 FUND IN ANY
JURISDICTION WHERE THE FUND OR ITS
DISTRIBUTOR MAY NOT LAWFULLY SELL
THOSE SHARES.
------------
Mitchell Hutchins Series Trust
Strategy Portfolio
------------------------------------------
Statement of Additional Information
______________, 1999
------------------------------------------
(C)1999 PaineWebber Incorporated
- -------------------------------------
<PAGE>
PART C. OTHER INFORMATION
-------------------------
<TABLE>
Item 23. Exhibits
--------
<S> <C>
(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 (3)/
(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 GrowthPortfolio (3)/
(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 (3)/
(h) Investment Advisory and Administration Fee Agreement with respect
to Strategy Portfolio (filed herewith)
(i) Sub-Investment Advisory Contract with respect to Aggressive Growth
Portfolio (1)/
(j) Sub-Advisory Agreement with respect to Global Growth Portfolio (3)/
(k) Sub-Advisory Agreement with respect to Strategic Fixed Income
Portfolio (4)/
(5) Distribution Contract with respect to Class I shares (3)/
(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) (a) Transfer Agency Services and Shareholder Services Agreement (3)/
(b) Participation Agreement with American Republic Insurance Company (3)/
(c) Participation Agreement with Great American Reserve Insurance Company (3)/
(d) Participation Agreement with Hartford Life Insurance Company (3)/
(9) Opinion and consent of counsel (filed herewith)
(10) Other opinions, appraisals, rulings and consents: Auditors' consent (not applicable)
(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 (3)/
</TABLE>
C-1
<PAGE>
(14) and
(27) Financial Data Schedule (not applicable)
(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.
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. 29 to the
registration statement, SEC File No. 33-10438, filed April 30, 1999.
4/ 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 April 1, 1999, PaineWebber Life Variable Annuity Account, a
segregated investment account of PaineWebber Life Insurance Company owned
more than 50% of the outstanding shares of beneficial interest of each of
Aggressive Growth Portfolio, Balanced Portfolio, Global Growth Portfolio,
Global Income Portfolio, Growth and Income Portfolio, Growth Portfolio, High
Grade Fixed Income Portfolio, Money Market Portfolio and Strategic Fixed
Income Portfolio. As of that date, segregated investment accounts of
Hartford Life Insurance Company owned more than 99% of the outstanding shares
of beneficial interest of each of High Income Portfolio and Small Cap
Portfolio and owned more than 50% of the outstanding shares of beneficial
interest of each of Tactical Allocation Portfolio and Strategic Income
Portfolio. Information about persons controlled by or under common control
of each of these separate accounts is set forth under Item 26 of the most
recent post-effective amendment to the their registration statements 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
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<PAGE>
Article X, trustees shall not be liable for errors of judgment or mistakes of
fact or law, or for any act or omission in accordance with the advice of
counsel or other experts, or failing to follow such advice, with respect to
the meaning and operation of the Declaration of Trust.
Article XI of the By-Laws provides that the Registrant may purchase and
maintain insurance on behalf of any person who is or was a trustee, officer
or employee of the Trust, or is or was serving at the request of the Trust as
a trustee, officer or employee of a corporation, partnership, joint venture,
trust or other enterprise against any liability asserted against him or her
and incurred by him or her in any such capacity or arising out of his or her
status as such, whether or not the Registrant would have the power to
indemnify him or her against such liability, provided that the Registrant may
not acquire insurance protecting any trustee or officer against liability to
the Registrant or the Registrant or its shareholders to which he or she would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of
his or her office.
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
C-3
<PAGE>
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.
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 LIR MONEY SERIES
MITCHELL HUTCHINS PORTFOLIOS
MITCHELL HUTCHINS SERIES TRUST
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
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<PAGE>
PAINEWEBBER INDEX TRUST
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER MASTER SERIES, INC.
PAINEWEBBER MUNICIPAL SERIES
PAINEWEBBER MUTUAL FUND TRUST
PAINEWEBBER OLYMPUS FUND
PAINEWEBBER SECURITIES TRUST
STRATEGIC GLOBAL INCOME FUND, INC.
2002 TARGET TERM TRUST INC.
<TABLE>
<CAPTION>
<S> <C> <C>
(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.
</TABLE>
<TABLE>
<CAPTION>
Positions and Officer Positions and Offices With
Name With Registrant Underwriter
---- --------------------- --------------------------
<S> <C> <C>
Margo N. Alexander* Trustee and President Chairman, Chief Executive Officer
and Director of Mitchell Hutchins
Brian M. Storms* Trustee President and Chief Operating
Officer 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 Senior 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
Assistant Treasurer the Mutual Fund Finance
Department of Mitchell Hutchins
Thomas J. Libassi* Vice President Senior Vice President and a
Portfolio Manager of Mitchell
Hutchins
Kevin J. Mahoney** Vice President and First Vice President and a Senior
Assistant Treasurer Manager of the Mutual Fund
Finance Department 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
Assistant Treasurer the 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
</TABLE>
C-5
<TABLE>
<CAPTION>
<S> <C> <C>
Positions and Officer Positions and Offices With
Name With Registrant Underwriter
---- --------------------- --------------------------
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. Vice President Managing Director and General
Schonfeld** Counsel of Mitchell Hutchins
Paul H. Schubert** Vice President and First Vice President and
Treasurer Director of the Mutual Fund
Finance Department of Mitchell
Hutchins
Nirmal Singh* Vice President Senior Vice President and a
Portfolio Manager of Mitchell
Hutchins
Barney A. Vice President and Vice President and a Manager
Taglialatela** Assistant Treasurer of the Mutual Fund Finance
Department of Mitchell Hutchins
Mark A. Tincher* Vice President Managing Director and Chief
Investment Officer - Equities 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
Assistant Secretary Associate Counsel of Mitchell
Hutchins
</TABLE>
* The business address of this person is 51 West 52nd Street, New York,
New York 10019-6114.
** The business address this person is 1285 Avenue of the Americas, New
York, New York 10019.
(c) None.
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>
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 18th day of October, 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 October 18, 1999
- --------------------------- (Chief Executive
Margo N. Alexander * Officer)
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman October 18, 1999
- --------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr. *
/s/ Richard Q. Armstrong Trustee October 18, 1999
- ---------------------------
Richard Q. Armstrong *
/s/ Richard R. Burt Trustee October 18, 1999
- ---------------------------
Richard R. Burt *
/s/ Mary C. Farrell Trustee October 18, 1999
- ---------------------------
Mary C. Farrell *
/s/ Meyer Feldberg Trustee October 18, 1999
- ---------------------------
Meyer Feldberg *
/s/ George W. Gowen Trustee October 18, 1999
- ---------------------------
George W. Gowen *
/s/ Frederic V. Malek Trustee October 18, 1999
- ---------------------------
Frederic V. Malek *
/s/ Carl W. Schafer Trustee October 18, 1999
- ---------------------------
Carl W. Schafer *
/s/ Brian M. Storms Trustee October 18, 1999
- ---------------------------
Brian M. Storms **
/s/ Paul H. Schubert Vice President and October 18, 1999
- --------------------------- Treasurer (Chief
Paul H. Schubert Financial and
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.
** Signature affixed by Elinor W. Gammon pursuant to power of attorney dated
May 14, 1999 and filed herewith as Exhibit 16.
<PAGE>
MITCHELL HUTCHINS SERIES TRUST
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit
Number
- ------
<S> <C> <C>
(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 (3)/
(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 (3)/
(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 (3)/
(h) Investment Advisory and Administration Fee Agreement with respect
to Strategy Portfolio (filed herewith)
(i) Sub-Investment Advisory Contract with respect to Aggressive Growth
Portfolio (1)/
(j) Sub-Advisory Agreement with respect to Global Growth Portfolio (3)/
(k) Sub-Advisory Agreement with respect to Strategic Fixed Income
Portfolio (4)/
(5) Distribution Contract with respect to Class I shares (3)/
(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) (a) Transfer Agency Services and Shareholder Services Agreement (3)/
(b) Participation Agreement with American Republic Insurance Company (3)/
(c) Participation Agreement with Great American Reserve Insurance Company (3)/
(d) Participation Agreement with Hartford Life Insurance Company (3)/
(9) Opinion and consent of counsel (filed herewith)
(10) Other opinions, appraisals, rulings and consents: Auditors' consent
(not applicable)
(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 (3)/
</TABLE>
<PAGE>
(14) and
(27) Financial Data Schedule (not applicable)
(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.
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. 29 to the
registration statement, SEC File No. 33-10438, filed April 30, 1999.
4/ Incorporated by reference from Post-Effective Amendment No. 23 to the
registration statement, SEC File No. 33-10438, filed May 1, 1996.
Exhibit No. 4(h)
INVESTMENT ADVISORY AND ADMINISTRATION FEE AGREEMENT
Agreement made as of December , 1999, between MITCHELL HUTCHINS SERIES
TRUST, a Massachusetts business trust ("Trust"), and MITCHELL HUTCHINS ASSET
MANAGEMENT INC. ("Mitchell Hutchins"), a Delaware corporation registered as a
broker-dealer under the Securities Exchange Act of 1934, as amended, and as an
investment adviser under the Investment Advisers Act of 1940, as amended.
WHEREAS, the Trust has appointed Mitchell Hutchins as investment adviser
and administrator for Global Equity Portfolio pursuant to an Investment Advisory
and Administration Contract, dated November 2, 1998, between the Trust and
Mitchell Hutchins ("Advisory Contract"); and
WHEREAS, Strategy Portfolio ("Fund") has been established as new series
of the Trust; and
WHEREAS, the Trust wishes to appoint Mitchell Hutchins as investment
adviser and administrator for the Fund pursuant to the terms of the Advisory
Contract:
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. For the services provided and the expenses assumed pursuant to the
Advisory Contract with respect to the Fund, the Fund will pay to
Mitchell Hutchins a fee at the annual rate of 0.75% of its average
daily net asset set forth below, such fee to be computed daily and
paid monthly.
2. This Fee Agreement shall be subject to all of the terms and
conditions of the Advisory Contract.
3. This Fee Agreement shall become effective upon the date written
above, provided that it shall not take effect with respect to a Fund
unless it has first been approved with respect to that Fund (i) by a
vote of a majority of the Trustees of the Trust who are not parties
to this Fee Agreement or the Advisory Contract or interested persons
of any such persons at a meeting called for the purpose of such
approval and (ii) by vote of a majority of the Fund's outstanding
voting securities.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated as of the day and year first above
written.
MITCHELL HUTCHINS SERIES TRUST
By:
-------------------------------------
Name: Dianne E. O'Donnell
Title: Secretary and Vice President
MITCHELL HUTCHINS ASSET MANAGEMENT INC.
By:
-------------------------------------
Name: Victoria Schonfeld
Title: Managing Director and General Counsel
2
Exhibit No. 9
KIRKPATRICK & LOCKHART LLP
1800 MASSACHUSETTS AVENUE, N.W.
2ND FLOOR
WASHINGTON, D.C. 20036-1800
TELEPHONE 202-778-9000
WWW.KL.COM
October 18, 1999
Mitchell Hutchins Series Trust
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
You have requested our opinion, as counsel to Mitchell Hutchins Series
Trust ("Trust"), as to certain matters regarding the issuance of certain Shares
of the Trust. As used in this letter, the term "Shares" means the Class H and
Class I shares of beneficial interest of the series of the Trust listed below
that may be issued during the time that Post-Effective Amendment No. 29 to the
Trust's Registration Statement on Form N-1A ("PEA") is effective and has not
been superseded by another post-effective amendment.
The series of the Trust is Strategy Portfolio.
As such counsel, we have examined certified or other copies, believed by
us to be genuine, of the Trust's Declaration of Trust and by-laws and such
resolutions and minutes of meetings of the Trust's Board of Trustees as we have
deemed relevant to our opinion, as set forth herein. Our opinion is limited to
the laws and facts in existence on the date hereof, and it is further limited to
the laws (other than the conflict of law rules) of the Commonwealth of
Massachusetts that in our experience are normally applicable to the issuance of
shares by investment companies organized as business trusts in that State and to
the Securities Act of 1933 ("1933 Act"), the Investment Company Act of 1940
("1940 Act") and the regulations of the Securities and Exchange Commission
("SEC") thereunder.
Based on the foregoing, we are of the opinion that the issuance of the
Shares has been duly authorized by the Trust and that, when sold in accordance
with the terms contemplated by the PEA, including receipt by the Trust of full
payment for the Shares and compliance with the 1933 Act and the 1940 Act, the
Shares will have been validly issued, fully paid and non-assessable.
We note, however, that the Trust is an entity of the type commonly known
as a "Massachusetts business trust." Under Massachusetts law, shareholders
could, under certain circumstances, be held personally liable for the
obligations of the Trust. The Declaration of Trust states that creditors of,
contractors with and claimants against the Trust or any series shall look only
to the assets of the Trust for the appropriate series for payment. It also
requires that notice of such disclaimer be given in each note, bond, contract,
certificate, undertaking or instrument made or issued by the officers or the
trustees of the Trust on behalf of the Trust. The Declaration of Trust further
<PAGE>
Mitchell Hutchins Series Trust
October 18, 1999
Page 2
provides: (1) for indemnification from the assets of the Trust or the
appropriate series for all loss and expense of any shareholder held personally
liable for the obligations of the Trust or any series by virtue of ownership of
shares of the Trust or such series; and (2) for the Trust or appropriate series
to assume the defense of any claim against the shareholder for any act or
obligation of the Trust or series. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Trust or series would be unable to meet its obligations.
We hereby consent to this opinion accompanying the PEA when it is filed
with the SEC and to the reference to our firm in the statement of additional
information that is being filed as part of the PEA.
Very truly yours,
/s/ Kirkpatrick & Lockhart LLP
KIRKPATRICK & LOCKHART LLP
