As filed with the Securities and Exchange Commission on April 30, 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. 28 [ X ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 27 [ 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.
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.
[ X ] 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)
[___] 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.
<PAGE>
MITCHELL HUTCHINS SERIES TRUST
MONEY MARKET PORTFOLIO
HIGH GRADE FIXED INCOME PORTFOLIO
STRATEGIC FIXED INCOME PORTFOLIO
STRATEGIC INCOME PORTFOLIO
GLOBAL INCOME PORTFOLIO
HIGH INCOME PORTFOLIO
BALANCED PORTFOLIO
GROWTH AND INCOME PORTFOLIO
TACTICAL ALLOCATION PORTFOLIO
GROWTH PORTFOLIO
AGGRESSIVE GROWTH PORTFOLIO
SMALL CAP PORTFOLIO
GLOBAL GROWTH PORTFOLIO
Each fund offers its Class H and Class I shares only to insurance company
separate accounts that fund certain variable annuity and variable life insurance
contracts. This prospectus should be read together with the prospectus for those
contracts.
PROSPECTUS
May 1, 1999
- -------------------------------
AS WITH ALL MUTUAL FUNDS, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED ANY FUND'S SHARES OR DETERMINED WHETHER THIS PROSPECTUS
IS COMPLETE OR ACCURATE. TO STATE OTHERWISE IS A CRIME.
<PAGE>
Mitchell Hutchins Series Trust
- --------------------------------------------------------------------------------
CONTENTS
THE FUNDS
- --------------------------------------------------------------------------------
What every investor 4 Money Market Portfolio
should know about
the funds 6 High Grade Fixed Income Portfolio
8 Strategic Fixed Income Portfolio
10 Strategic Income Portfolio
11 Global Income Portfolio
13 High Income Portfolio
14 Balanced Portfolio
16 Growth and Income Portfolio
18 Tactical Allocation Portfolio
19 Growth Portfolio
21 Aggressive Growth Portfolio
23 Small Cap Portfolio
24 Global Growth Portfolio
26 More About Risks and Investment Strategies
INVESTING IN THE FUNDS
- --------------------------------------------------------------------------------
Information for 28 Purchases, Redemptions and Exchanges
managing your fund
account 28 Pricing and Valuation
2
<PAGE>
Mitchell Hutchins Series Trust
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional important 29 Management
information about
the funds 32 Dividends and Taxes
33 Financial Highlights
Where to learn more
about these funds
--------------------------------
The funds are not complete or
balanced investment programs.
--------------------------------
3
<PAGE>
Mitchell Hutchins Money Market Portfolio
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE:
Maximum current income consistent with liquidity and conservation of capital
PRINCIPAL INVESTMENT STRATEGIES:
The fund is a money market mutual fund and is subject to maturity, quality and
diversification requirements designed to help it maintain a stable price of
$1.00 per share.
The fund invests in a diversified portfolio of high quality, short-term money
market instruments of U.S. and foreign issuers, including money market
instruments with variable and floating rate of interest. All the fund's
investments are denominated in U.S. dollars. Its investments include
o commercial paper and other short-term obligations of corporations,
partnerships, trusts and other entities
o government securities
o bank obligations
o repurchase agreements
Mitchell Hutchins Asset Management Inc., the fund's investment adviser,
evaluates its investments based on credit analysis and interest rate outlook.
Because the fund buys and sells its portfolio securities based on considerations
of safety of principal and liquidity, the fund may not buy securities that pay
the highest yield. The fund may attempt to increase its yield by trading to take
advantage of short-term market variations.
PRINCIPAL RISKS:
An investment in the fund is not a bank deposit and is neither insured nor
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. While the fund seeks to maintain the value of your investment at $1.00
per share, it is possible to lose money by investing in the fund.
Although the fund's investments are considered by Mitchell Hutchins to have
minimal credit risk, they are not risk free and an issuer may not make principal
or interest payments when due. The fund is subject to interest rate risk, which
means that the value of its investments generally will fall when interest rates
rise and its yield will tend to lag behind prevailing short-term interest rates.
The fund's investments in money market instruments of foreign issuers may
present greater risk than investments in the money market instruments of U.S.
issuers.
More information about these and other risks of an investment in the fund is
provided in "More About Risks and Investment Strategies" below., under the
following headings:
o Credit Risk
o Interest Rate Risk
o Foreign Securities Risk
INFORMATION ON THE FUND'S RECENT INVESTMENT HOLDINGS CAN BE FOUND IN ITS CURRENT
ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON ORDERING THESE
REPORTS)
4
<PAGE>
Mitchell Hutchins Money Market Portfolio
- --------------------------------------------------------------------------------
PERFORMANCE
- -----------
RISK/RETURN BAR CHART AND TABLE:
The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.
The fund's shares are sold only to insurance company separate accounts that fund
certain variable annuity and variable life contracts. The bar chart and table do
not reflect sales charges or other expenses of these contracts. If those sales
charges and expenses were included, the total returns shown would be lower.
The bar chart shows how the fund's performance has varied from year to year. The
bar chart shows Class H shares, which were the only class outstanding during the
periods shown.
The table that follows the bar chart shows the average annual returns over
several time periods.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
MONEY MARKET PORTFOLIO -- TOTAL RETURN ON CLASS H SHARES
1989 8.00%
1990 5.00%
1991 5.00%
1992 3.00%
1993 2.45%
1994 3.43%
1995 5.22%
1996 4.32%
1997 4.53%
1998 4.51%
Best quarter during years shown: 2nd quarter, 1995 -- 1.36%
Worst quarter during years shown: 3rd quarter, 1993 -- 0.57%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
CLASS CLASS H
(INCEPTION DATE) 5/04/87
---------------- -------
One Year 4.51%
Five Years 4.40%
Ten Years 4.55%
Life of Class
5
<PAGE>
Mitchell Hutchins High Grade Fixed Income Portfolio
- --------------------------------------------------------------------------------
HIGH GRADE FIXED INCOME PORTFOLIO
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
- -------------------------------------------
FUND OBJECTIVES:
Primarily, current income consistent with the preservation of capital;
secondarily, capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in
o U.S. government bonds
o mortgage and asset-backed bonds of both government and private issuers
o investment grade corporate bonds, principally high quality bonds (rated in
one of the two highest rating categories or of comparable quality)
To a lesser extent, the fund invests in securities of foreign issuers that are
denominated in U.S. dollars and traded in U.S. markets (Yankee bonds). The fund
can use interest rate futures contracts and other derivatives to help manage its
portfolio "duration." "Duration" is a measure of the fund's exposure to interest
rate risk.
Mitchell Hutchins Asset Management Inc., the fund's investment adviser,
allocates its assets among bond market sectors and industries by deciding which
sectors and industries provide the best relative values under prevailing
conditions. Mitchell Hutchins selects industries and companies within the
corporate bond sector by performing fundamental credit analysis based on cash
flows and the ability of the issuer to make required payments on its debt.
Mitchell Hutchins chooses specific securities that it believes provide the best
combination of income, liquidity and potential for gain relative to risk of
loss.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund.
The fund is subject to interest rate risk, which means that the value of its
investments generally will fall when interest rates rise. Because the fund
invests significantly in mortgage-backed securities, it also is subject to
prepayment risk, which means that the underlying mortgages may be paid earlier
or later than expected. The fund may have to reinvest prepayments that occur
faster than expected at lower interest rates. The market value of
mortgage-backed securities with prepayments that occur more slowly than expected
may fall, adversely affecting the fund's performance. The fund also is subject
to credit risk in that the issuers of its securities may not make principal or
interest payments when due.
More information about these and other risks of an investment in the fund is
provided in "More About Risks and Investment Strategies" below., under the
following headings:
o Interest Rate Risk
o Prepayment Risk
o Credit Risk
o Foreign Securities Risk
o Derivatives Risk
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
6
<PAGE>
Mitchell Hutchins High Grade Fixed Income Portfolio
- --------------------------------------------------------------------------------
PERFORMANCE
- -----------
RISK/RETURN BAR CHART AND TABLE:
The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.
The fund's shares are sold only to insurance company separate accounts that fund
certain variable annuity and variable life contracts. The bar chart and table do
not reflect sales charges or other expenses of these contracts. If those sales
charges and expenses were included, the total returns shown would be lower.
The bar chart shows how the fund's performance has varied from year to year. The
bar chart shows Class H shares, which were the only class outstanding during the
periods shown.
The table that follows the bar chart shows the average annual returns over
several time periods compared to the return of a broad-based market index.
The fund's past performance does not necessarily indicate how the fund will
perform in the future. This is especially true for periods prior to July 21,
1995, which is when Mitchell Hutchins assumed day-to-day portfolio management
responsibility from a sub-adviser.
HIGH GRADE FIXED INCOME PORTFOLIO -- TOTAL RETURN ON CLASS H SHARES
1994 (6.56)%
1995 15.44%
1996 1.41%
1997 8.13%
1998 6.83%
Best quarter during years shown: 2nd quarter, 1995 -- 4.42%
Worst quarter during years shown: 1st quarter, 1994 -- (4.79)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
CLASS CLASS H LEHMAN BROTHERS
(INCEPTION DATE) 11/08/93 GOVERNMENT BOND INDEX
---------------- -------- ---------------------
One Year 6.83% 9.85%
Five Years 4.79% 7.18%
Life of Class 3.88% 7.14%*
- -----------------
* Return is for the period 11/30/93 to 12/31/98, annualized.
7
<PAGE>
Mitchell Hutchins Strategic Fixed Income Portfolio
- --------------------------------------------------------------------------------
STRATEGIC FIXED INCOME PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE:
Total return with low volatility.
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests in bonds with varying maturities, although it normally limits
its overall portfolio "duration" to between three and eight years. "Duration" is
a measure of the fund's exposure to interest rate risk. The fund invests
primarily in
o mortgage- and asset-backed securities of both government and private
issuers
o investment grade corporate bonds
o U.S. and foreign government bonds
o money market instruments
The fund also invests, to a lesser extent, in bonds that are below investment
grade. Securities rated below investment grade are commonly known as "junk
bonds." The fund invests in when-issued or delayed delivery bonds as a
leveraging technique to increase its return. The fund uses interest rate futures
and other derivatives to help manage its portfolio duration.
The fund's investment adviser, Mitchell Hutchins Asset Management Inc., has
appointed Pacific Investment Management Company ("PIMCO") as the fund's
sub-adviser. PIMCO analyzes U.S. economic and market conditions, as well as
other factors, to decide on a portfolio duration and to allocate fund assets to
bonds of different credit qualities, maturities, types and coupon interest
rates. PIMCO seeks bonds that it believes to be relatively undervalued and
selects bonds based on various factors, including economic forecasts,
anticipated interest rate levels and expected prepayment rates on the mortgages
supporting mortgage-backed bonds. PIMCO selects specific bonds by analyzing
their relative value and risk characteristics.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund.
The fund is subject to interest rate risk, which means that the value of its
investments generally will fall when interest rates rise. Because the fund
invests significantly in mortgage-backed securities, it also is subject to
prepayment risk, which means that the underlying mortgages may be paid earlier
or later than expected. The fund may have to reinvest prepayments that occur
faster than expected at lower interest rates. The market value of
mortgage-backed securities with prepayments that occur more slowly than expected
may fall, adversely affecting the fund's performance. The fund also is subject
to credit risk in that the issuers of its securities may not make principal or
interest payments when due.
More information about these and other risks of an investment in the fund is
provided in "More About Risks and Investment Strategies" below., under the
following headings:
o Interest Rate Risk
o Prepayment Risk
o Credit Risk
o Foreign Securities Risk
o Leverage Risk
o Derivatives Risk
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
8
<PAGE>
Mitchell Hutchins Strategic Fixed Income Portfolio
- --------------------------------------------------------------------------------
PERFORMANCE
- -----------
RISK/RETURN BAR CHART AND TABLE:
The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.
The fund's shares are sold only to insurance company separate accounts that fund
certain variable annuity and variable life contracts. The bar chart and table do
not reflect sales charges or other expenses of these contracts. If those sales
charges and expenses were included, the total returns shown would be lower.
The bar chart shows how the fund's performance has varied from year to year. The
bar chart shows Class H shares, which were the only class outstanding during the
periods shown.
The table that follows the bar chart shows the average annual returns over
several time periods compared to the return of a broad-based market index.
The fund's past performance does not necessarily indicate how the fund will
perform in the future. This is especially true for periods prior to September
21, 1995, when PIMCO assumed portfolio management responsibility from Mitchell
Hutchins.
STRATEGIC FIXED INCOME PORTFOLIO -- TOTAL RETURN ON CLASS H SHARES
1990 7.58%
1991 15.17%
1992 6.76%
1993 11.66%
1994 (5.34)%
1995 18.51%
1996 3.79%
1997 11.00%
1998 8.62%
Best quarter during years shown: 2ndquarter, 1995 - 6.20%
Worst quarter during years shown: 1st quarter, 1994 - (4.11)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
CLASS CLASS H LEHMAN BROTHERS
(INCEPTION DATE) 7/05/89 MORTGAGE BOND INDEX
---------------- ------- -------------------
One Year 8.62% 6.96%
Five Years 7.02% 7.58%
Life of Class 8.28% 8.45%*
- -------------------
* Return is for the period 7/31/89 to 12/31/98, annualized.
9
<PAGE>
Mitchell Hutchins Strategic Fixed Income Portfolio
- --------------------------------------------------------------------------------
STRATEGIC INCOME PORTFOLIO
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
- -------------------------------------------
FUND OBJECTIVES:
Primarily, high level of current income; secondarily, capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES:
The fund strategically allocates investments among three bond market sectors:
o U.S. government and investment grade bonds;
o U.S. high yield bonds (sometimes called "junk bonds"), including
preferred stock and bonds that are convertible into common stock; and
o Foreign and emerging market bonds.
Each of these sectors generally reacts in different ways or at different times
to changes in interest rates or to particular economic events. This means that,
when one sector underperforms the market as a whole, another sector may
outperform the market.
The fund normally invests in each of these three sectors. However, the fund's
investment adviser, Mitchell Hutchins Asset Management Inc., tries to take
advantage of changes in the relative performance of different sectors by
allocating a larger percentage of the fund's assets to those sectors that it
believes are undervalued. Selections of specific securities are based on market
outlook, investment research, geographic analysis and forecasts of interest
rates and currency exchange rates. The fund sometimes uses forward currency
contracts to hedge against foreign currency risk.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund.
The fund is subject to sector allocation risk in that Mitchell Hutchins may not
be successful in choosing the best allocation among market sectors. The fund is
subject to credit risk in that the issuers of its securities may not make
principal or interest payments when due. This risk is greater for the fund's
non-investment grade bonds, which also may have greater price volatility than
higher quality bonds and be more difficult to sell during market downturns. The
fund also is subject to interest rate risk, which means that the value of its
investments generally will fall when interest rates rise. The value of the
fund's foreign investments may fall due to adverse political, social and
economic developments abroad. This risk is greater for the fund's investments in
emerging market issuers. Because the fund is non-diversified, it can invest more
of its assets in a single issuer than a diversified fund can. As a result,
changes in the market value of a single issuer can have a greater effect on the
fund's performance and share price than if the fund held a smaller position.
More information about these and other risks of an investment in the fund is
provided in "More About Risks and Investment Strategies" below., under the
following headings:
o Sector Allocation Risk
o Credit Risk
o Interest Rate Risk
o Foreign Securities Risk
o Emerging Markets Risk
o Non-Diversified Status Risk
o Equity Risk
o Prepayment Risk
o Derivatives Risk
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
Strategic Income Portfolio commenced operations on September 28, 1998. As a
result, the fund does not have performance information of at least one calendar
year to include in a bar chart or table reflecting average annual returns.
10
<PAGE>
Mitchell Hutchins Global Income Portfolio
- --------------------------------------------------------------------------------
GLOBAL INCOME PORTFOLIO
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
- -------------------------------------------
FUND OBJECTIVES:
Primarily, high current income; secondarily, capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in high quality bonds of governmental and private
issuers in the U.S. and developed foreign countries. These high quality bonds
are rated in one of the two highest rating categories or are of comparable
quality. The fund also invests, to a lesser extent, in lower quality bonds,
including bonds of issuers in emerging markets. These may include bonds that
have very low credit ratings, but that Mitchell Hutchins Asset Management Inc.,
the fund's investment adviser, believes provide a return that is high enough to
justify the additional risk. Some of the fund's bonds may be backed by
mortgages.
Mitchell Hutchins normally invests a portion of the fund's assets in bonds of
U.S. government and private issuers, and allocates the balance of the fund's
portfolio among bonds of issuers in different foreign countries. Mitchell
Hutchins determines the allocation to different geographic areas, countries and
industries based upon its assessment of fundamental economic strengths, credit
quality and currency and interest rate trends. Mitchell Hutchins uses forward
currency contracts to increase or decrease the fund's exposure to various
foreign currencies.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund.
The fund is subject to sector allocation risk in that Mitchell Hutchins may not
be successful in choosing the best allocation between U.S. and foreign issuers.
The fund is subject to interest rate risk, which means that the value of its
investments generally will fall when interest rates rise. The value of the
fund's foreign investments also may fall due to adverse political, social and
economic developments abroad. These risks are greater for the fund's investments
in emerging market issuers. The fund also is subject to credit risk in that the
issuers of its securities may not make principal or interest payments when due.
This risk is greater for the fund's non-investment grade bonds, which also may
have greater price volatility than higher quality bonds and be more difficult to
sell during market downturns. Because the fund is non-diversified, it can invest
more of its assets in a single issuer than a diversified fund can. As a result,
changes in the market value of a single issuer can have a greater effect on the
fund's performance and share price than if the fund held a smaller position.
More information about these and other risks of an investment in the fund is
provided in "More About Risks and Investment Strategies" below., under the
following headings:
o Sector Allocation Risk
o Interest Rate Risk
o Foreign Securities Risk
o Emerging Markets Risk
o Credit Risk
o Non-Diversified Status Risk
o Sovereign Risk
o Prepayment Risk
o Derivatives Risk
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN THE CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING SUCH REPORTS).
11
<PAGE>
Mitchell Hutchins Global Income Portfolio
- --------------------------------------------------------------------------------
PERFORMANCE
- -----------
RISK/RETURN BAR CHART AND TABLE:
The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.
The fund's shares are sold only to insurance company separate accounts that fund
certain variable annuity and variable life contracts. The bar chart and table do
not reflect sales charges or other expenses of these contracts. If those sales
charges and expenses were included, the total returns shown would be lower.
The bar chart shows how the fund's performance has varied from year to year. The
bar chart shows Class H shares, which were the only class outstanding during the
periods shown.
The table that follows the bar chart shows the average annual returns over
several time periods compared to the return of a broad-based market index.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
GLOBAL INCOME PORTFOLIO -- TOTAL RETURN ON CLASS H SHARES
1989 6.80%
1990 14.92%
1991 10.30%
1992 1.29%
1993 16.65%
1994 (5.56)%
1995 13.58%
1996 6.62%
1997 3.50%
1998 9.69%
Best quarter during years shown: 2nd quarter, 1990 - 5.77%
Worst quarter during years shown: 1st quarter, 1989 - (4.59)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
SALOMON BROTHERS
CLASS CLASS H WORLD GOVERNMENT
(INCEPTION DATE) 5/01/88 BOND INDEX
---------------- ------- ----------
One Year 9.69% 15.31%
Five Years 5.40% 7.85%
Ten Years 7.22% 8.96%
Life of Class 7.77% 8.82%*
- -------------------
* Return is for the period 5/31/88 to 12/31/98, annualized.
12
<PAGE>
Mitchell Hutchins High Income Portfolio
- --------------------------------------------------------------------------------
HIGH INCOME PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE:
High income.
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in a diversified range of high yield U.S. and foreign
corporate bonds (sometimes called "junk bonds"). The fund also invests, to a
lesser extent, in other types of bonds, preferred stocks and bonds that are
convertible into common stock.
The fund's investment adviser, Mitchell Hutchins Asset Management Inc., uses a
three-step investment process to find the best relative values in the bond
markets in which the fund invests: industry selection; company selection and
security selection.
Mitchell Hutchins allocates the fund's assets among industry groups by analyzing
economic factors, industry dynamics and yield spreads to determine which
industries provide the most attractive investment opportunities. Mitchell
Hutchins selects companies within these industries by using a proprietary
financial forecasting model and by performing fundamental credit analysis based
on cash flows and other factors. Finally, Mitchell Hutchins chooses from among
the types of securities offered by these companies to select those that appear
to offer the best relative values. All aspects of this process rely on Mitchell
Hutchins' economic, credit, quantitative and market research.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund.
The fund invests a large portion of its assets in high yield or "junk" bonds and
so is subject to high credit risk -- the risk that the issuers of these bonds
will not make principal or interest payments when due. These bonds also may have
greater price volatility than higher quality bonds and be more difficult to sell
during market downturns. The fund also is subject to interest rate risk, which
means that the value of its investments generally will fall when interest rates
rise.
More information about these and other risks of an investment in the fund is
provided in "More About Risks and Investment Strategies" below., under the
following headings:
o Credit Risk
o Interest Rate Risk
o Foreign Securities Risk
o Emerging Markets Risk
o Equity Risk
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
High Income Portfolio commenced operations on September 28, 1998. As a result,
the fund does not have performance information of at least one calendar year to
include in a bar chart or table reflecting average annual returns.
13
<PAGE>
Mitchell Hutchins Balanced Portfolio
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE:
High total return with low volatility.
PRINCIPAL INVESTMENT STRATEGIES:
The fund allocates its investments among three investment sectors:
o stocks
o bonds
o cash (money market instruments)
The fund normally has investments in each sector but it always keeps at least
25% of its total assets in a combination of bonds and cash. This is intended to
limit changes in the value of fund shares compared to funds that invest solely
in stocks.
The fund's bonds are primarily investment grade, but it may invest, to a
lesser extent, in lower quality bonds. Any of the fund's investments may by
issued by U.S. or foreign issuers, but they must be denominated in U.S.
dollars and traded in U.S. markets. The fund may use futures contracts and
other derivatives to adjust its exposure to different asset classes and to
manage the "duration" of its bond investments. "Duration" is a measure of
the fund's exposure to interest rate risk.
Mitchell Hutchins Asset Management Inc., the fund's investment adviser, believes
investors tend to reach a consensus as to the likely effect of changes in key
economic variables (for example, interest rates, profits and inflation) on each
investment sector. Mitchell Hutchins also believes that prices of securities in
each sector tend to move toward a level that reflects that consensus, but that
this takes time. By using fundamental valuation techniques, Mitchell Hutchins
attempts adjust the allocation of the fund's assets among sectors before prices
fully reflect the consensus view.
Mitchell Hutchins uses the following process to select individual securities for
each sector:
o STOCKS. Mitchell Hutchins uses its own Factor Valuation Model to identify
companies that appear undervalued. The model ranks companies based on "value"
factors, such as dividends, cash flows, earnings and book values, as well as
on "growth" factors, such as earnings momentum and industry performance
forecasts. Mitchell Hutchins then applies fundamental analysis to select
specific stocks from among those identified by the model.
o BONDS. Mitchell Hutchins selects bonds based on its analysis of their
maturity and risk structures (comparing yields on U.S. Treasury bonds to
yields on riskier types of bonds).
As of December 31, 1998, the fund's portfolio assets were allocated 69% to
stocks, 19% to bonds and 12% to cash.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund.
Mitchell Hutchins may not be successful in choosing the best allocation among
the three investment sectors. Because it invests in both stocks and bonds, the
fund is subject to both equity risk and interest rate risk. Equities, such as
common stocks, generally fluctuate in price more than do other investments. The
fund could lose all of its investment in a company's stock. Interest rate risk
means that the value of the fund's bonds generally will fall when interest rates
rise.
More information about these and other risks of an investment in the fund is
provided in "More About Risks and Investment Strategies" below., under the
following headings:
14
<PAGE>
o Sector Allocation Risk
o Equity Risk
o Interest Rate Risk
o Credit Risk
o Foreign Securities Risk
o Derivatives Risk
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
14A
<PAGE>
Mitchell Hutchins Balanced Portfolio
- --------------------------------------------------------------------------------
PERFORMANCE
- -----------
RISK/RETURN BAR CHART AND TABLE:
The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.
The fund's shares are sold only to insurance company separate accounts that fund
certain variable annuity and variable life contracts. The bar chart and table do
not reflect sales charges or other expenses of these contracts. If those sales
charges and expenses were included, the total returns shown would be lower.
The bar chart shows how the fund's performance has varied from year to year. The
bar chart shows Class H shares, which were the only class outstanding during the
periods shown.
The table that follows the bar chart shows the average annual returns over
several time periods compared to a broad-based market index.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
BALANCED PORTFOLIO -- TOTAL RETURN ON CLASS H SHARES
1989 11.10%
1990 2.63%
1991 18.73%
1992 5.18%
1993 15.76%
1994 (9.59)%
1995 23.27%
1996 16.82%
1997 24.86%
1998 16.81%
Best quarter during years shown: 4th quarter, 1998 -- 14.29%
Worst quarter during years shown: 3rd quarter, 1998 -- (8.46)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
CLASS CLASS H S&P 500 COMPOSITE
(INCEPTION DATE) 6/01/88 STOCK PRICE INDEX
---------------- ------- -----------------
One Year 16.81%
Five Years 13.69%
Ten Years 11.62%
Life of Class 11.86%
15
<PAGE>
Mitchell Hutchins Growth and Income Portfolio
- --------------------------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE:
Current income and capital growth.
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in dividend-paying stocks of companies that its
investment adviser, Mitchell Hutchins Asset Management Inc., believes have
potential for rapid earnings growth.
The fund also invests, to a lesser extent, in bonds when Mitchell Hutchins
believes those investments offer opportunities for capital appreciation because
interest rates may fall or credit factors or ratings affecting particular
issuers may improve. The fund may invest in securities of foreign issuers that
are denominated in U.S. dollars and traded in U.S. markets.
In selecting stocks for the fund, Mitchell Hutchins uses its own Factor
Valuation Model to identify companies that appear undervalued. The model ranks
companies based on "value" factors such as dividends, cash flows, earnings and
book values, as well as on "growth" factors, such as earnings momentum and
industry performance forecasts. Mitchell Hutchins then applies fundamental
analysis to select specific stocks from among those identified by the model.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund.
Equities, such as common stocks, generally fluctuate in price more than do other
investments. The fund could lose all of its investment in a company's stock. The
fund is subject, to a lesser extent, to interest rate risk, which means that the
value of the fund's bond investments generally will fall when interest rates
rise.
More information about these and other risks of an investment in the fund is
provided in "More About Risks and Investment Strategies" below., under the
following headings:
o Equity Risk
o Interest Rate Risk
o Credit Risk
o Foreign Securities Risk
For an explanation of each of these risks, see "More About Risks and Investment
Strategies," below.
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
16
<PAGE>
Mitchell Hutchins Growth and Income Portfolio
- --------------------------------------------------------------------------------
PERFORMANCE
- -----------
RISK/RETURN BAR CHART AND TABLE:
The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.
The fund's shares are sold only to insurance company separate accounts that fund
certain variable annuity and variable life contracts. The bar chart and table do
not reflect sales charges or other expenses of these contracts. If those sales
charges and expenses were included, the total returns shown would be lower.
The bar chart shows how the fund's performance has varied from year to year. The
bar chart shows Class H shares because they have the longer performance history.
The table that follows the bar chart shows the average annual returns over
several time compared to a broad-based market index.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
GROWTH AND INCOME PORTFOLIO -- TOTAL RETURN ON CLASS H SHARES
1993 (2.26)%
1994 (6.18)%
1995 30.52%
1996 22.12%
1997 32.45%
1998 16.32%
Best quarter during years shown: 4th quarter, 1998 -- 19.73%
Worst quarter during years shown: 3rd quarter, 1998 -- (14.91)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
CLASS CLASS H S&P 500 COMPOSITE
(INCEPTION DATE) 1/02/92 STOCK PRICE INDEX
---------------- ------- -----------------
One Year 16.32%
Five Years 18.17%
Life of Class 12.84%
17
<PAGE>
Mitchell Hutchins Tactical Allocation Portfolio
- --------------------------------------------------------------------------------
TACTICAL ALLOCATION PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE:
Total return, consisting of long-term capital appreciation and current income.
PRINCIPAL INVESTMENT STRATEGIES:
The fund allocates its assets between
o a stock portion that is designed to track the performance of the S&P
500 Composite Stock Price Index and
o a fixed income portion that consists of either five-year U.S. Treasury
notes or U.S. Treasury bills with remaining maturities of 30 days.
Mitchell Hutchins Asset Management Inc., the fund's investment adviser,
reallocates the fund's assets in accordance with the recommendations of its own
Tactical Allocation Model on the first business day of each month.
The Tactical Allocation Model attempts to track the performance of the S&P 500
Index in periods of strong market performance. The Model attempts to take a more
defensive posture by reallocating assets to bonds or cash when the Model signals
a potential bear market, prolonged downturn in stock prices or significant loss
in value. The Model can recommend stock allocations of 100%, 75%, 50% 25% or 0%.
If the Tactical Allocation Model recommends a stock allocation of less than
100%, the Model also recommends a fixed income allocation for the remainder of
the fund's assets. The Model uses a bond risk premium determination to decide
whether to recommend five-year U.S. Treasury notes or 30-day U.S.
Treasury bills.
When the Tactical Allocation Model recommends a more than 50% fixed income
allocation, the fund must invest in other high quality bonds or money market
instruments to the extent needed to limit the fund's investments in U.S.
Treasury obligations to no more than 55% of its assets. This limit is imposed by
Internal Revenue Code diversification requirements for segregated asset accounts
used to fund variable annuity or variable life contracts.
As of December 31, 1998, the fund's portfolio assets were allocated 100% to
stocks and 0% to bonds.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund.
The fund is subject to sector allocation risk in that the Tactical Allocation
Model may not correctly predict the appropriate times to shift the fund's assets
from one type of investment to another. Equities, such as common stocks,
generally fluctuate in price more than do other investments. The fund could lose
all of its investment in a company's stock. To the extent the fund invests in
bonds, it is subject, to interest rate risk, which means that the value of these
investments generally will fall when interest rates rise.
More information about these and other risks of an investment in the fund is
provided in "More About Risks and Investment Strategies" below., under the
following headings:
o Sector Allocation Risk
o Equity Risk
o Interest Rate Risk
For an explanation of each of these risks, see "More About Risks and Investment
Strategies," below.
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
Tactical Allocation Portfolio commenced operations on September 28, 1998. As a
result, the fund does not have performance information of at least one calendar
year to include in a bar chart or table reflecting average annual returns.
18
<PAGE>
Mitchell Hutchins Growth Portfolio
- --------------------------------------------------------------------------------
GROWTH PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE:
Long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in stocks of companies that Mitchell Hutchins Asset
Management Inc., its adviser, believes have substantial potential for capital
growth. The fund may invest in companies of any size.
The fund also invests, to a lesser extent, in other securities, including
bonds. The fund may invest in securities of foreign issuers that are
denominated in U.S. dollars and traded in U.S. markets.
In selecting stocks for the fund, Mitchell Hutchins combines a "bottom up"
stock-by-stock approach with a modified, growth-oriented version of its own
Factor Valuation Model to identify companies that appear to have potential for
above-average growth in earnings, cash flow and/or book value. The model ranks
companies based on "growth" factors such as earnings momentum, stock price
movement, economic sensitivity and industry performance forecasts. Mitchell
Hutchins then applies fundamental analysis to select specific stocks from among
those identified by the model.
This flexibility allows the fund to invest more of its assets in companies that
Mitchell Hutchins believes have greater earnings growth potential regardless of
their market capitalizations. When investing in smaller companies, Mitchell
Hutchins places more emphasis on the trading volume of the company's stock.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund.
Equities, such as common stocks, generally fluctuate in price more than do other
investments. The fund could lose all of its investment in a company's stock.
More information about these and other risks of an investment in the fund is
provided in "More About Risks and Investment Strategies" below., under the
following headings:
o Equity Risk
o Foreign Securities Risk
For an explanation of each of these risks, see "More About Risks and Investment
Strategies," below.
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
19
<PAGE>
Mitchell Hutchins Growth Portfolio
- --------------------------------------------------------------------------------
PERFORMANCE
- -----------
RISK/RETURN BAR CHART AND TABLE:
The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.
The fund's shares are sold only to insurance company separate accounts that fund
certain variable annuity and variable life contracts. The bar chart and table do
not reflect sales charges or other expenses of these contracts. If those sales
charges and expenses were included, the total returns shown would be lower.
The bar chart shows how the fund's performance has varied from year to year. The
bar chart shows Class H shares, which were the only class outstanding during the
periods shown.
The table that follows the bar chart shows the average annual returns over
several time periods compared to a broad-based market index.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
GROWTH PORTFOLIO -- TOTAL RETURN ON CLASS H SHARES
1989 38.44%
1990 (8.15)%
1991 42.10%
1992 5.83%
1993 19.61%%
1994 (11.65)%
1995 32.50%
1996 18.70%
1997 15.41%
1998 30.59%
Best quarter during years shown: 3rd quarter, 1989 -- 22.67%
Worst quarter during years shown: 3rd quarter, 1990 -- (16.09)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
CLASS CLASS H S&P 500 COMPOSITE
(INCEPTION DATE) 5/04/87 STOCK PRICE INDEX
---------------- ------- -----------------
One Year 30.59%
Five Years 15.93%
Ten Years 14.93%
Life of Class 15.46%
20
<PAGE>
Mitchell Hutchins Aggressive Growth Portfolio
- --------------------------------------------------------------------------------
AGGRESSIVE GROWTH PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
FUND OBJECTIVE:
Maximizing long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in common stocks of U.S. companies that its
sub-adviser, Nicholas-Applegate Capital Management, expects to grow faster than
the average rate of companies in the S&P 500 Composite Stock Price Index.
The fund invests, to a lesser extent, in preferred stocks, convertible
securities and investment grade bonds. The fund may invest in securities of
foreign issuers that are denominated in U.S. dollars and traded in U.S.
markets.
The fund invests in companies that are diversified over a cross-section of
industries. The fund's investments may include growth companies, cyclical
companies or companies that Nicholas-Applegate believes to be undergoing a basic
change in operations or markets that would result in a significant improvement
in earnings. The fund may invest in companies of any size, including small
capitalization companies.
In selecting investments for the fund, Nicholas-Applegate uses a proprietary
investment methodology to identify companies with attractive earnings and growth
potential and to evaluate their investment prospects.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund.
Equities, such as common stocks, generally fluctuate in price more than do other
investments. The fund could lose all of its investment in a company's stock.
This risk is greater for the common stocks of smaller companies because they are
more vulnerable to adverse business or economic developments and may have more
limited resources. The fund could lose a substantial part of its investment in a
company's stock. The fund is subject, to a lesser extent, to interest rate risk,
which means that the value of the fund's bond investments generally will fall
when interest rates rise.
More information about these and other risks of an investment in the fund is
provided in "More About Risks and Investment Strategies" below., under the
following headings:
o Equity Risk
o Small Cap Companies Risk
o Interest Rate Risk
o Foreign Securities Risk
o Credit Risk
For an explanation of each of these risks, see "More About Risks and Investment
Strategies," below.
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
21
<PAGE>
Mitchell Hutchins Aggressive Growth Portfolio
- --------------------------------------------------------------------------------
PERFORMANCE
- -----------
RISK/RETURN BAR CHART AND TABLE:
The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.
The fund's shares are sold only to insurance company separate accounts that fund
certain variable annuity and variable life contracts. The bar chart and table do
not reflect sales charges or other expenses of these contracts. If those sales
charges and expenses were included, the total returns shown would be lower.
The bar chart shows how the fund's performance has varied from year to year. The
bar chart shows Class H shares, which were the only class outstanding during the
periods shown.
The table that follows the bar chart shows the average annual returns over
several time periods compared to a broad-based market index.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
AGGRESSIVE GROWTH PORTFOLIO -- TOTAL RETURN ON CLASS H SHARES
1994 (2.90)%
1995 21.04%
1996 25.23%
1997 20.76%
1998 15.30%
Best quarter during years shown: 4th quarter, 1998 - 23.31%
Worst quarter during years shown: 3rd quarter, 1998 - (20.75)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
CLASS CLASS H S&P 500 COMPOSITE
(INCEPTION DATE) 11/02/93 STOCK PRICE INDEX
---------------- -------- -----------------
One Year 15.30%
Five Years 15.43%
Life of Class 14.82%
22
<PAGE>
Mitchell Hutchins Small Cap Portfolio
- --------------------------------------------------------------------------------
SMALL CAP PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE:
Long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in stocks of small capitalization ("small cap")
companies, which are defined as companies that have market capitalizations of up
to $1 billion.
The fund may invest, to a lesser extent, in stocks of larger companies,
preferred stocks, and bonds, including convertible securities. The fund would
invest in bonds when its investment adviser, Mitchell Hutchins Asset Management
Inc., believes those investments offer opportunities for capital appreciation
because interest rates may fall or credit factors or ratings affecting
particular issuers may improve. The fund may invest in securities of foreign
issuers that are denominated in U.S. dollars and traded in U.S.
markets.
In selecting stocks for the fund, Mitchell Hutchins uses its own Factor
Valuation Model to identify companies that appear undervalued. The model ranks
companies based on "value" factors such as dividends, cash flows, earnings and
book values, as well as on "growth" factors, such as earnings momentum and
industry performance forecasts. Mitchell Hutchins then applies fundamental
analysis to select specific stocks from among those small cap companies
identified by the model.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund. The principal risks presented by the fund are:
Equities, such as common stocks, generally fluctuate in price more than do other
investments. The fund could lose all of its investment in a company's stock.
This risk is greater for the common stocks of smaller companies because they are
more vulnerable to adverse business or economic developments and may have more
limited resources. The fund could lose a substantial part of its investment in a
company's stock. The fund is subject, to a lesser extent, to interest rate risk,
which means that the value of the fund's bond investments generally will fall
when interest rates rise.
More information about these and other risks of an investment in the fund is
provided in "More About Risks and Investment Strategies" below., under the
following headings:
o Small Cap Companies Risk
o Equity Risk
o Foreign Securities Risk
o Interest Rate Risk
o Credit Risk
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
Small Cap Portfolio commenced operations on September 28, 1998. As a result, the
fund does not have performance information of at least one calendar year to
include in a bar chart or table reflecting average annual returns
23
<PAGE>
Mitchell Hutchins Global Growth Portfolio
- --------------------------------------------------------------------------------
GLOBAL GROWTH PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE:
Long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES:
The fund invests primarily in stocks of companies in the United States and in
foreign countries that are represented in the MSCI Europe, Australia and Far
East Index. The EAFE Index reflects stocks in most developed countries outside
North America. The fund also invests, to a lesser extent, in stocks of issuers
in other countries, including emerging markets, and in U.S. and foreign bonds.
The fund's investment adviser, Mitchell Hutchins Asset Management Inc.,
allocates the fund's assets between U.S. and foreign markets based on how it
expects U.S. stock markets to perform in comparison to stock markets in certain
of the EAFE countries. Mitchell Hutchins may increase the allocation of the
fund's assets to either the U.S. or foreign markets if it believes that one of
those markets has a greater potential for high returns, relative to the risk of
loss. Mitchell Hutchins may use futures and forward currency contracts to adjust
the fund's exposure to either the U.S. or foreign markets.
Mitchell Hutchins manages the fund's U.S. investments using its own Factor
Valuation Model to identify companies that appear undervalued. The model ranks
companies based on "value" factors, such as dividends, cash flows, earnings and
book values, as well as on "growth" factors, such as earnings momentum and
industry performance forecasts. Mitchell Hutchins then applies fundamental
analysis to select specific stocks from among those identified by the model.
Mitchell Hutchins has appointed Invista Capital Management LLC as the
sub-adviser for the fund's foreign investments. Invista selects foreign stocks
for the fund through a qualitative analysis of the fundamental business
prospects of industries and of individual companies and by making a quantitative
assessment of the relative risks presented by the countries in which those
companies operate.
PRINCIPAL RISKS:
An investment in the fund is not guaranteed; investors may lose money by
investing in the fund.
Mitchell Hutchins may not be successful in choosing the best allocation between
U.S. and foreign investments. Equities, such as common stocks, generally
fluctuate in price more than do other investments. The fund could lose all of
its investment in a company's stock. The value of the fund's foreign investments
may fall due to adverse political, social and economic developments abroad.
These risks are greater for the fund's investments in emerging market issuers.
The fund is subject, to a lesser extent, to interest rate risk, which means that
the value of the fund's bond investments generally will fall when interest rates
rise.
More information about these and other risks of an investment in the fund is
provided in "More About Risks and Investment Strategies" below., under the
following headings:
o Sector Allocation Risk
o Equity Risk
o Foreign Securities Risk
o Emerging Markets Risk
o Interest Rate Risk
o Credit Risk
o Derivatives Risk
INFORMATION ON THE FUND'S RECENT INVESTMENT STRATEGIES AND HOLDINGS CAN BE FOUND
IN THE CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING SUCH REPORTS).
24
<PAGE>
Mitchell Hutchins Global Growth Portfolio
- --------------------------------------------------------------------------------
PERFORMANCE
- -----------
RISK/RETURN BAR CHART AND TABLE:
The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.
The fund's shares are sold only to insurance company separate accounts that fund
certain variable annuity and variable life contracts. The bar chart and table do
not reflect sales charges or other expenses of these contracts. If those sales
charges and expenses were included, the total returns shown would be lower.
The bar chart shows how the fund's performance has varied from year to year. The
bar chart shows Class H shares, which were the only class outstanding during the
periods shown.
The table that follows the bar chart shows the average annual returns over
several time periods compared to a broad-based market index.
The fund's past performance does not indicate how the fund will perform in the
future. This may be particularly true for the period prior to November 2, 1998,
which is the date on which Mitchell Hutchins and Invista assumed day-to-day
management of the fund's assets. Prior to that date, another sub-adviser was
responsible for managing all the fund's assets.
GLOBAL GROWTH PORTFOLIO -- TOTAL RETURN ON CLASS H SHARES
1989 19.18%
1990 7.53%
1991 4.93%
1992 (7.55%)
1993 40.02%
1994 (11.94)%
1995 (3.54)%
1996 15.14%
1997 7.16%
1998 13.50%
Best quarter during years shown: 4th quarter, 1998 -- 19.55%
Worst quarter during years shown: 3rd quarter, 1998 -- (18.97)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
CLASS CLASS H MSCI WORLD
(INCEPTION DATE) 05/04/87 INDEX
---------------- -------- -----
One Year 13.50% 24.80%
Five Years 3.54% 16.19%
Ten Years 7.26% 11.21%
Life of Class 7.06% 10.62%*
- ------------------
* Return is for the period 5/31/87 to 12/31/98, annualized.
25
<PAGE>
Mitchell Hutchins Series Trust
- --------------------------------------------------------------------------------
MORE ABOUT RISKS AND INVESTMENT STRATEGIES
- ------------------------------------------
PRINCIPAL RISKS
The main risks of investing in one or more of the funds are described below. Not
all of these risks apply to each fund. You can find a list of the main risks
that apply to a particular fund by looking under the "Investment Objective,
Strategies and Risks" heading for that fund.
Other risks of investing in a fund, along with further detail about some of the
risks described below, are discussed in the funds' Statement of Additional
Information ("SAI"). Information on how you can obtain the SAI is on the back
cover of this prospectus.
CREDIT RISK. Credit risk is the risk that the issuer of a bond will not make
principal or interest payments when they are due. Even if an issuer does not
default on a payment, a bond's value may decline if the market believes that the
issuer has become less able, or less willing, to make payments on time. Even
high quality bonds are subject to some credit risk. However, credit risk is
greater for lower quality bonds. Bonds that are not investment grade involve
high credit risk and are considered speculative. Some of these low quality bonds
may be in default when purchased by a fund. Low quality bonds may fluctuate in
value more than higher quality bonds and may be more difficult to sell during
market downturns at the time and price a fund desires.
DERIVATIVES RISK. The value of "derivatives" - so-called because their value
"derives" from the value of an underlying asset, reference rate or index may
rise or fall more rapidly than other investments. For some derivatives, it is
possible for a fund to lose more than the amount it invested in the derivative.
Options, futures contracts and forward currency contracts are examples of
derivatives. If a fund uses derivatives to adjust or "hedge" the overall risk of
its portfolio, it is possible that the hedge will not succeed. This may happen
for various reasons, including unexpected changes in the value of the
derivatives that are not matched by opposite changes in the value of the rest of
the fund's portfolio.
EMERGING MARKETS RISK. Securities of issuers located in emerging market
countries are subject to all of the risks of other foreign securities (see
below). However, the level of those risks often is higher due to the fact that
political, legal and economic systems in emerging market countries may be less
fully developed and less stable than those in developed countries. Emerging
market securities also may be subject to additional risks, such as lower
liquidity and larger changes in value.
EQUITY RISK. The prices of common stocks and other equity securities generally
fluctuate more than those of other investments. They reflect changes in the
issuing company's financial condition and changes in the overall market. A fund
may lose a substantial part, or even all, of its investment in a company's
stock.
FOREIGN SECURITIES RISK. Foreign securities involve risks that normally are not
associated with securities of U.S. issuers. These include risks relating to
political, social and economic developments abroad and differences between U.S.
and foreign regulatory requirements and market practices. When securities are
denominated in foreign currencies, they also are subject to currency risk (see
above). When securities are denominated in foreign currencies, they also are
subject to the risk that the value of the foreign currency will fall in relation
to the U.S. dollar. Currency exchange rates can be volatile and can be affected
by, among other factors, the general economics of a country, the actions of the
U.S. and foreign governments or central banks, the imposition of currency
controls, and speculation.
INTEREST RATE RISK. The value of bonds can be expected to fall when interest
rates rise and to rise when interest rates fall. Interest rate risk is the risk
that interest rates will rise, so that the value of a fund's investments in
bonds will fall. Because interest rate risk is the primary risk presented by
U.S. government and other very high quality bonds, changes in interest rates may
actually have a greater effect on the value of those bonds than on lower quality
bonds.
LEVERAGE RISK. Leverage involves increasing the total assets in which a fund can
invest beyond the level of its net assets. Because leverage increases the amount
of a fund's assets, it can magnify the effect on the fund of changes in market
values. As a result, while leverage can increase a fund's income and potential
for gain, it also can increase expenses and the risk of loss. Strategic Fixed
Income Portfolio, which uses leverage by investing in when-issued and delayed
delivery bonds, attempts to limit the potential magnifying effect of the
leverage by managing its portfolio duration.
26
<PAGE>
NON-DIVERSIFIED STATUS RISK. A non-diversified fund is not subject to certain
limitations on its ability to invest more than 5% of its total assets in
securities of a single issuer. When a fund holds a large position in the
securities of one issuer, changes in the financial condition or in the market's
assessment of that issuer may cause larger changes in the fund's total return
and in the price of its shares than if the fund held only a smaller position.
26A
<PAGE>
Mitchell Hutchins Series Trust
- --------------------------------------------------------------------------------
PREPAYMENT RISK. Payments on bonds that are backed by mortgage loans or similar
assets may be received earlier or later than expected due to changes in the rate
at which the underlying loans are prepaid. Faster prepayments often happen when
market interest rates are falling. As a result, a fund may need to reinvest
these early payments at those lower interest rates, thus reducing its income.
Conversely, when interest rates rise, prepayments may happen more slowly,
causing the underlying loans to be outstanding for a longer time. This can cause
the market value of the security to fall because the market may view its
interest rate to be too low for a longer term investment.
SECTOR ALLOCATION RISK. Mitchell Hutchins may not be successful in choosing the
best allocation among market sectors. A fund that allocates its assets among
market sectors is more dependent on Mitchell Hutchins' ability to successfully
assess the relative values in each sector than are funds that do not do so.
The Mitchell Hutchins Tactical Allocation Model may not correctly predict the
times to shift Tactical Allocation Portfolio's assets from one type of
investment to another.
SMALL CAP COMPANIES RISK. Securities of small cap companies generally involve
greater risk than securities of larger companies because small cap companies may
be more vulnerable to adverse business or economic developments. Small cap
companies also may have limited product lines, markets or financial resources,
and may be dependent on a relatively small management group. Securities of small
cap companies may be less liquid and more volatile than securities of larger
companies or the market averages in general. In addition, small cap companies
may not be well-known to the investing public, may not have institutional
ownership and may have only cyclical, static or moderate growth prospects.
SOVEREIGN RISK. Investments in foreign government bonds involve special risks
because the investors may have limited legal recourse in the event of default.
Political conditions, especially a country's willingness to meet the terms of
its debt obligations, can be of considerable significance.
ADDITIONAL RISKS
YEAR 2000 RISK. The funds could be adversely affected by problems relating to
the inability of computer systems used by Mitchell Hutchins and the funds' other
service providers to recognize the year 2000. While year 2000-related computer
problems could have a negative effect on the funds, Mitchell Hutchins is working
to avoid these problems with respect to its own computer systems and to obtain
assurances from service providers that they are taking similar steps.
Similarly, the companies in which the funds invest and trading systems used by
the funds could be adversely affected by this issue. The ability of a company or
trading system to respond successfully to the issue requires both technological
sophistication and diligence, and there can be no assurance that any steps taken
will be sufficient to avoid an adverse impact on the funds. This risk may be
greater with respect to trading systems in foreign countries and, in particular,
in emerging market countries.
ADDITIONAL INVESTMENT STRATEGIES
DEFENSIVE POSITIONS; CASH RESERVES. In order to protect itself from adverse
market conditions, a fund may take a defensive position that is different from
its normal investment strategy. This means that the fund may temporarily invest
a larger-than-normal part, or even all, of its assets in cash or money market
instruments. Since these investments provide relatively low income, a defensive
position may not be consistent with achieving a fund's investment objective.
Strategic Income Portfolio, Global Income Portfolio and Balanced Portfolio each
may invest in money market instruments on an unlimited basis as part of its
ordinary investment strategy. Money Market Portfolio invests exclusively in
money market instruments. Each of the other funds may invest up to 35% of its
total assets in cash or money market instruments as a cash reserve for liquidity
or other purposes.
PORTFOLIO TURNOVER. Each fund may engage in frequent trading (high portfolio
turnover) to achieve its investment objective. Frequent trading may result in a
high portfolio turnover rate and higher fund expenses due to transaction costs.
27
<PAGE>
Mitchell Hutchins Series Trust
- --------------------------------------------------------------------------------
INVESTING IN THE FUNDS
PURCHASES, REDEMPTIONS AND EXCHANGES
Shares of the funds are sold only to insurance company separate accounts that
fund benefits under variable annuity or variable life insurance contracts. These
separate accounts are the shareholders of the funds - not the individual
contract owners. However, the separate accounts may pass through voting rights
to the contract owners.
The funds offer both Class H and Class I shares 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 each fund, Class I shares pay an annual
distribution fee of 0.25% of average net assets. The funds pay 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 a 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 one fund for shares
of the same class in another fund at their relative net asset values per share,
provided that the separate account invests in both funds. A particular insurance
company separate account may not invest in all funds or classes of fund shares.
The funds and Mitchell Hutchins (for Class I shares) reserve the right to reject
any purchase order and to suspend the offering of a fund's shares for a period
of time.
PRICING AND VALUATION
Insurance company separate accounts buy, sell or exchange fund shares at their
net asset values. Each fund calculates net asset value separately for each class
as of the close of trading on the New York Stock Exchange (generally, 4:00 p.m.,
Eastern time). The NYSE normally is not open, and the funds do not price their
shares, on national holidays and on Good Friday. If trading on the NYSE is
halted for the day before 4:00 p.m., Eastern time, the funds' net asset value
per share will be calculated as of the time trading was halted.
MONEY MARKET PORTFOLIO'S net asset value per share is expected to be $1.00 per
share, although this value is not guaranteed. Money Market Portfolio values its
securities at their amortized cost. This method uses a constant amortization to
maturity of the difference between the cost of the instrument to the fund and
the amount due at maturity.
OTHER FUNDS. Each other fund calculates its net asset value based on the current
market value for its portfolio securities. The funds normally obtain market
values for their securities from independent pricing services that use reported
last sales prices, current market quotations or valuations from computerized
"matrix" systems that derive values based on comparable securities. If a market
value is not available from an independent pricing source for a particular
security, that security is valued at a fair value determined by or under the
direction of the funds' board of trustees. The funds normally use the amortized
cost method to value bonds that will mature in 60 days or less.
Judgment plays a greater role in valuing thinly traded securities, including
many lower-rated bonds, because there is less reliable, objective data
available.
The funds calculate the U.S. dollar value of investments that are denominated in
foreign currencies daily, based on current exchange rates. A fund may own
securities, including some securities that trade primarily in foreign markets,
that trade on weekends or other days on which a fund does not calculate net
asset value. If a fund concludes that a material change in the value of a
foreign security has occurred after the close of trading in the principal
foreign market but before the close of the NYSE, the fund may use fair value
methods to reflect those changes. This policy is intended to assure that the
fund's net asset value fairly reflects security values as of the time of
pricing.
28
<PAGE>
Mitchell Hutchins Series Trust
- --------------------------------------------------------------------------------
MANAGEMENT
INVESTMENT ADVISERS
Mitchell Hutchins Asset Management Inc. is the investment adviser and
administrator of each fund. Mitchell Hutchins is located at 1285 Avenue of the
Americas, New York, New York 10019, and is a wholly owned asset management
subsidiary of PaineWebber Incorporated, which is wholly owned by Paine Webber
Group Inc., a publicly owned financial services holding company. On March 31,
1999, Mitchell Hutchins was adviser or sub-adviser to 33 investment companies
with 75 separate funds and aggregate assets of approximately $48.3 billion.
Pacific Investment Management Company is the sub-adviser for Strategic Fixed
Income Portfolio. It is located at 840 Newport Center Drive, Suite 360, Newport
Beach, California 92660. On December 31, 1998, PIMCO had approximately $158
billion in assets under management and was the adviser or sub-adviser of 19
investment companies with 55 portfolios and aggregate net assets of
approximately $39.5 billion.
Nicholas-Applegate Capital Management is the sub-adviser for Aggressive Growth
Portfolio. It is located at 600 West Broadway, 29th Floor, San Diego, California
92101. On March 31, 1999, Nicholas-Applegate had approximately $32.3 billion in
assets under management and was the adviser or sub-adviser of 60investment
companies with 111 portfolios and aggregate net assets of approximately $5.1
billion.
Invista Capital Management, LLC is the sub-adviser for Global Growth Portfolio's
foreign investments. It is located at 1800 Hub Tower, 699 Walnut, Des Moines,
Iowa 50309. As of December 31, 1998, Invista managed approximately $31.0 billion
in client assets.
The funds have received an exemptive order from the SEC to permit the board to
appoint and replace sub-advisers and to amend sub-advisory contracts without
obtaining shareholder approval. A fund's shareholders must approve this policy
before the board may implement it. As of April 30, 1999, only the shareholders
of Global Growth Portfolio have done so.
ADVISORY FEES
The funds paid advisory fees to Mitchell Hutchins for the most recent fiscal
year at the following contract rates based on average daily net assets.
Money Market Portfolio 0.50%
High Grade Fixed Income Portfolio 0.50%
Strategic Fixed Income Portfolio 0.50%
Strategic Income Portfolio 0.75%
Global Income Portfolio 0.75%
High Income Portfolio 0.50%
Balanced Portfolio 0.75%
Growth and Income Portfolio 0.70%
Tactical Allocation Portfolio 0.50%
Growth Portfolio 0.75%
Aggressive Growth Portfolio 0.80%
Small Cap Portfolio 1.00%
Global Growth Portfolio 0.75%
29
<PAGE>
Mitchell Hutchins Series Trust
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS.
Unless otherwise noted, all portfolio managers are employees of Mitchell
Hutchins. Most of these individuals serve as portfolio managers for more than
one fund. Information about their positions with Mitchell Hutchins and their
business experience follows this section. All relevant information about
portfolio managers who are employees of a sub-adviser is provided in this
section.
HIGH GRADE FIXED INCOME PORTFOLIO. Dennis L. McCauley is primarily
responsible for the day-to-day management of the fund's portfolio. Nirmal
Singh and James Keegan assist Mr. McCauley in managing the fund's portfolio.
Messrs. McCauley and Singh have held their fund responsibilities since July
1995. Mr. Keegan assumed his fund responsibilities in April 1996.
STRATEGIC FIXED INCOME PORTFOLIO. William C. Powers, a PIMCO Managing
Director, is primarily responsible for the day-to-day management of the
fund's portfolio. Mr. Powers has been a senior member of the fixed income
portfolio management group of PIMCO since 1991 and assumed his fund
responsibilities in September 1996.
STRATEGIC INCOME PORTFOLIO. Dennis L. McCauley is the fund's allocation
manager. Nirmal Singh and James Keegan share responsibility as sector
managers for the day-to-day management of the fund's U.S. government and
investment grade securities. Thomas J. Libassi is the sector manager
responsible for the day-to-day management of the fund's U.S. high yield, high
risk securities. Stuart Waugh is the sector manager responsible for the
day-to-day management of the fund's foreign and emerging market bonds.
Messrs. McCauley, Singh, Keegan, Libassi and Waugh have held their day-to-day
fund management responsibilities for the fund since its inception.
GLOBAL INCOME PORTFOLIO. Stuart Waugh and William King are primarily
responsible for the day-to-day management of the fund's portfolio. Mr. Waugh
has been involved with the fund since its inception, first as an analyst and
as portfolio manager since 1993. Mr. King assumed his present
responsibilities for the fund in 1997.
HIGH INCOME PORTFOLIO. Thomas J. Libassi is responsible for the day-to-day
management of the fund's portfolio. Mr. Libassi has held his fund
responsibilities since its inception.
BALANCED PORTFOLIO. T. Kirkham Barneby is responsible for the asset
allocation decisions for the fund. Mark A. Tincher is primarily responsible
for the day-to-day management of the fund's equity portion. Dennis L.
McCauley is primarily responsible for the day-to-day management of the fixed
income portion of Balanced Portfolio. Mr. Singh and Susan Ryan assist Mr.
McCauley in managing Balanced Portfolio's fixed income investments.
Messrs. Barneby, McCauley, Singh and Tincher and Ms. Ryan have held their
fund responsibilities since August 1995.
GROWTH AND INCOME PORTFOLIO. Mark A. Tincher is primarily responsible for
the day-to-day management of the fund. Mr. Tincher has held his fund
responsibilities since April 1995.
TACTICAL ALLOCATION PORTFOLIO. T. Kirkham Barneby is responsible for the
fund's asset allocation decisions and the day-to-day management of its
portfolio. Mr. Barneby has held his fund responsibilities since its
inception.
GROWTH PORTFOLIO. Ellen R. Harris has been primarily responsible for the
day-to-day management of the fund's portfolio since its inception in May
1987.
AGGRESSIVE GROWTH PORTFOLIO. The Systems Driven Internal Research team at
Nicholas-Applegate, which is primarily responsible for the day-to-day management
of Aggressive Growth Portfolio, has been under the supervision of portfolio
manager John Kane for the past five years. Mr. Kane has been the lead portfolio
manager for the [systematic] [Research] team since he jointed the firm in 1994.
The Research team at Nicholas-Applegate has held its fund responsibilities since
the fund's inception.
SMALL CAP PORTFOLIO. Donald R. Jones is primarily responsible for the
day-to-day management of the fund. He has held his fund responsibilities
since its inception.
GLOBAL GROWTH PORTFOLIO. T. Kirkham Barneby is responsible for allocating
the fund's assets between U.S. investments and foreign investments. Mark A.
Tincher is primarily responsible for the day-to-day management of the fund's
U.S. investments.
30
<PAGE>
Scott D. Opsal is primarily responsible for the day-to-day management of Global
Growth Portfolio's foreign investments. Mr. Opsal is an executive vice president
and chief investment officer of Invista, where he has been employed since 1986.
Messrs. Barneby, Tincher and Opsal assumed their fund responsibilities on
November 2, 1998.
* * *
Ms. Ryan is responsible for the day-to-day management of Money Market Portfolio
and management of the cash portion of all the other funds except Aggressive
30A
<PAGE>
Mitchell Hutchins Series Trust
- --------------------------------------------------------------------------------
Growth, Strategic Fixed Income and Global Growth Portfolios. She has held her
Money Market Portfolio responsibilities since its inception in May 1987.
Other members of Mitchell Hutchins' fixed income and equity investments groups
provide input on market outlook, interest rate forecasts, investment research
and other considerations pertaining to each fund's investments.
POSITIONS WITH MITCHELL HUTCHINS AND BUSINESS EXPERIENCE OF MITCHELL HUTCHINS
EMPLOYEES.
T. KIRKHAM BARNEBY is a managing director and chief investment
officer--quantitative investments of Mitchell Hutchins. Mr. Barneby rejoined
Mitchell Hutchins in 1994, after being with Vantage Global Management for one
year. During the eight years that Mr. Barneby was previously with Mitchell
Hutchins, he was a senior vice president responsible for quantitative management
and asset allocation models.
ELLEN R. HARRIS is a managing director of Mitchell Hutchins and has been with
Mitchell Hutchins since 1983.
DONALD R. JONES has been a first vice president of Mitchell Hutchins since
February 1996. Prior to joining Mitchell Hutchins, Mr. Jones was a vice
president in the Asset Management Group of First Fidelity Bancorporation, which
he joined in 1983.
JAMES F. KEEGAN is a senior vice president of Mitchell Hutchins. Prior to
joining Mitchell Hutchins in March 1996, Mr. Keegan was a director with Merrion
Group, L.P. From 1987 to 1994, he was a vice president of global investment
management of Bankers Trust Company.
WILLIAM KING joined Mitchell Hutchins in November 1995. Prior to 1995, he
was at IBM Corporation where he was responsible for the management of IBM
Pension Fund's global bond portfolio. Mr. King is a Chartered Financial
Analyst.
THOMAS J. LIBASSI is a senior vice president of Mitchell Hutchins. Prior to May
1994, Mr. Libassi was a vice president of Keystone Custodian Funds Inc. with
fund management responsibility for approximately $900 million in assets
primarily invested in high yield, high risk bonds.
DENNIS L. MCCAULEY is a managing director and chief investment officer-fixed
income of Mitchell Hutchins responsible for overseeing all active fixed income
investments, including domestic and global taxable and tax-exempt mutual funds.
Prior to joining Mitchell Hutchins in 1994, Mr. McCauley worked for IBM
Corporation, where he was director of fixed income investments responsible for
developing and managing investment strategy for all fixed income and cash
management investments of IBM's pension fund and self-insured medical funds. Mr.
McCauley has also served as vice president of IBM Credit Corporation's mutual
funds and as a member of the Retirement Fund Investment Committee.
SUSAN RYAN is a senior vice president of Mitchell Hutchins and has been with
Mitchell Hutchins since 1982.
NIRMAL SINGH is a senior vice president of Mitchell Hutchins. Prior to joining
Mitchell Hutchins in 1993, Mr. Singh was with Merrill Lynch Asset Management,
Inc., where he was a member of the fund management team.
MARK A. TINCHER is a managing director and chief investment officer of equities
(stocks) of Mitchell Hutchins. Prior to joining Mitchell Hutchins in March 1995,
Mr. Tincher worked for Chase Manhattan Private Bank, where he was vice president
and directed the U.S. funds management and equity research area and oversaw the
management of all Chase equity funds.
STUART WAUGH is a managing director of Mitchell Hutchins responsible for
global fixed income investments and currency trading. He has been with
Mitchell Hutchins since 1983. Mr. Waugh is a Chartered Financial Analyst.
31
<PAGE>
Mitchell Hutchins Series Trust
- --------------------------------------------------------------------------------
DIVIDENDS AND TAXES
- -------------------
DIVIDENDS
Dividends are paid in additional shares of the relevant fund unless the
shareholder requests otherwise.
Money Market Portfolio declares dividends daily and pays them monthly; it does
not expect to realize gains. The other funds normally declare and pay dividends
and distribute any gains annually.
Class I shares have higher expenses because of their distribution fees and thus
are expected to have lower dividends than Class H shares.
TAXES
Fund shares are offered only to insurance company separate accounts that fund
certain variable annuity or variable life contracts. These accounts generally
are not subject to tax on dividends from the funds 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 funds and
o the holders of contracts funded through those separate accounts.
Each 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 a 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 Statement of Additional Information for information a more detailed
discussion. Prospective shareholders are urged to consult their tax advisers.
32
<PAGE>
Mitchell Hutchins Series Trust
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FINANCIAL HIGHLIGHTS
- --------------------
The following financial highlights tables are intended to help you understand
the funds' financial performance for the past 5 years. Shorter periods are shown
for funds that have existed for less than 5 years. Certain information reflects
financial results for a single fund share. In the tables, "total investment
return" represents the rate that an investor would have earned (or lost) on an
investment in a fund, assuming reinvestment of all dividends. This information
has been audited by Ernst & Young LLP, independent auditors, whose report, along
with the funds' financial statements, are included in the funds' Annual Report
to Shareholders. The Annual Report may be obtained without charge by calling
1-800-986-0088.
Please note that no Class I shares were outstanding during the periods shown.
The information shown below for Class H shares should not be considered
indicative of the results the Class I shares would have achieved had they been
outstanding during these periods because Class I shares have higher expenses.
The information in these tables pertains only to the funds and does not reflect
charges related to the insurance company separate accounts that invest in the
funds. See the appropriate variable annuity contract or variable life contract
prospectus for information concerning these charges.
33
<PAGE>
Mitchell Hutchins Money Market Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
CLASS H
--------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---- ---- ---- ---- ----
Net investment income....................... 0.04 0.04 0.04 0.05 0.03
---- ---- ---- ---- ----
Dividends from net investment
income................................... (0.04) (0.04) (0.04) (0.05) (0.03)
------ ------ ------ ------ ------
Net asset value, end of year................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
===== ==== ==== ==== ====
Total investment return(1).................. 4.51% 4.53% 4.32% 5.22% 3.43%
===== ==== ==== ==== ====
Ratios/Supplemental data:
Net assets, end of year (000's)............. $ 9,582 $ 8,906 $ 12,287 $ 21,974 $ 25,042
Expenses to average net assets.............. 1.15% 1.22% 1.17% 0.79% 0.88%
Net investment income to
average net assets....................... 4.42% 4.43% 4.27% 5.23% 3.56%
</TABLE>
- -------------------
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends at net
asset value on the payable dates, and a sale at net asset value on the last
day of each period reported. The figures do not include additional contract
level charges; results would be lower if such charges were included.
34
<PAGE>
Mitchell Hutchins High Grade Fixed Income Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH GRADE FIXED INCOME PORTFOLIO
- ------------------------------------------------------------------------------------------------------------
CLASS H
----------------------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year...... $ 9.29 $ 9.10 $ 9.49 $ 8.71 $ 9.61
---- ---- ---- ---- ----
Net investment income................... 0.56 0.55 0.50 0.56 0.26
Net realized and unrealized gains
(losses) from investments............ 0.07 0.19 (0.63) 0.79 (0.89)
----- ---- ------ ---- ------
Net increase (decrease) from
investment operations................ 0.63 0.74 0.13 1.35 (0.63)
----- ---- ---- ---- ------
Dividends from net investment
income............................... (0.56) (0.55) (0.52) (0.57) (0.27)
Distributions from net realized gains on
investments.......................... (0.19) -- -- -- --
------
Total dividends and distributions....... (0.75) (0.55) (0.52) (0.57) (0.27)
------ ------ ------ ------ ------
Net asset value, end of year............ $ 9.17 $ 9.29 $ 9.10 $ 9.49 $ 8.71
==== ==== ==== ==== ====
Total investment return(1).............. 6.83% 8.13% 1.41% 15.44% (6.56)%
==== ==== ==== ===== ======
Ratios/Supplemental data:
Net assets, end of year (000's)......... $6,770 $7,345 $7,902 $9,147 $7,638
Expenses to average net assets.......... 1.27% 1.43% 1.62% 1.01% 1.56%
Net investment income to
average net assets................... 5.39% 5.54% 5.04% 5.56% 4.61%
Portfolio turnover rate................. 101% 95% 282% 136% 36%
</TABLE>
- ---------------------------
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
distributions, if any, at net asset value on the payable dates and a sale
at net asset value on the last day of each period reported. The figures do
not include additional contract level charges; results would be lower if
such charges were included.
35
<PAGE>
Mitchell Hutchins Strategic Fixed Income Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STRATEGIC FIXED INCOME PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
CLASS H
-----------------------------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year........ $ 10.64 $ 10.21 $ 10.61 $ 10.34 $ 11.93
------ ----- ----- ----- -----
Net investment income..................... 0.70 0.69 0.70 0.88 0.85
Net realized and unrealized gains
(losses) from investments, futures and 0.21 0.44 (0.31) 1.03 (1.49)
options................................ ----- ---- ------ ---- ------
Net increase (decrease) from
investment operations.................. 0.91 1.13 0.39 1.91 (0.64)
----- ---- ---- ---- ------
Dividends from net investment
income................................. (0.68) (0.70) (0.70) (0.88) (0.85)
Distributions from net realized
gains from investments................. (0.09) -- (0.09) (0.76) (0.10)
------ ----- ------ ------ ------
Total dividends and distributions......... (0.77) (0.70) (0.79) (1.64) (0.95)
------- ------ ------ ------ ------
Net asset value, end of year.............. $ 10.78 $ 10.64 $ 10.21 $ 10.61 $ 10.34
====== ===== ===== ===== =====
Total investment return(1)................ 8.62% 11.00% 3.79% 18.51% (5.34)%
==== ===== ==== ===== =====
Ratios/Supplemental data:
Net assets, end of year (000's)........... $ 9,469 $ 9,891 $ 10,689 $ 13,741 $ 17,020
Expenses to average net assets............ 1.10%+ 1.00% 1.52% 0.99% 0.89%
Net investment income to
average net assets..................... 5.88% 6.04% 5.88% 6.35% 6.64%
Portfolio turnover rate................... 245% 175% 317% 234% 54%
</TABLE>
- -------------------
+ Includes 0.14% of interest expense related to the reverse repurchase
agreements entered into during the year ended December 31, 1998.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
distributions, if any, at net asset value on the payable dates and a sale
at net asset value on the last day of each period reported. The figures do
not include additional contract level charges; results would be lower if
such charges were included.
36
<PAGE>
Mitchell Hutchins Strategic Income Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STRATEGIC INCOME PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
CLASS H
-----------------------
FOR THE PERIOD
SEPTEMBER 28,
1998+ THROUGH
DECEMBER 31, 1998
-------------------
<S> <C>
Net asset value, beginning of period....................................................... $ 12.00
-------
Net investment income...................................................................... 0.14
Net realized and unrealized gains (losses) from investments and foreign currency........... 0.20
-----
Net increase from investment operations.................................................... 0.34
-----
Dividends from net investment income....................................................... (0.14)
Distributions from net realized gains from investments..................................... (0.01)
-------
Total dividends and distributions.......................................................... (0.15)
-------
Net asset value, end of period............................................................. $ 12.19
======
Total investment return(1)................................................................. 2.84%
=====
Ratios/Supplemental data:
Net assets, end of period (000's)........................................................ $ 10,328
Expenses to average net assets............................................................. 1.44%*
Net investment income to average net assets................................................ 5.09%*
Portfolio turnover rate.................................................................... 81%
</TABLE>
- -------------------
+ Commencement of operations
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the period reported, reinvestment of all dividends and other
distributions, if any, at net asset value on the payable dates and a sale
at net asset value on the last day of the period reported. The figures do
not include additional contract level charges; results would be lower if
such charges were included. Total investment return for the period has not
been annualized.
37
<PAGE>
Mitchell Hutchins Global Income Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL INCOME PORTFOLIO
- ------------------------------------------------------------------------------------------------------------
CLASS H
------------------------------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year........................ $ 10.81 $ 11.14 $ 11.20 $ 10.88 $ 11.72
----- ----- ----- ----- -----
Net investment income (loss)...... 0.69 0.75 0.87 (0.05) 0.97
Net realized and unrealized gains
(losses) from investments and
foreign currency............... 0.36 (0.36) (0.13) 1.52 (1.60)
----- ------ ------ ---- ------
Net increase (decrease) from
investment operations.......... 1.05 0.39 0.74 1.47 (0.63)
----- ---- ---- ---- ------
Dividends from net investment
income......................... (0.61) (0.71) (0.79) (1.15) (0.21)
Distributions from net realized
gains from investments......... (0.18) (0.01) (0.01) -- --
------ ------ ------ ----- ---
Total dividends and distributions.
(0.79) (0.72) (0.80) (1.15) (0.21)
------- ------ ------ ------ ------
Net asset value, end of year...... $ 11.07 $ 10.81 $ 11.14 $ 11.20 $ 10.88
===== ===== ===== ===== =====
Total investment return(1)........ 9.69% 3.50% 6.62% 13.58% (5.56)%
==== ==== ==== ===== =====
Ratios/Supplemental data:
Net assets, end of year (000's)... $ 14,702 $ 17,730 $ 24,436 $ 35,700 $ 52,688
Expenses to average net assets.... 1.68% 1.52% 1.56% 1.19% 1.17%
Net investment income to
average net assets............. 5.53% 6.34% 6.56% 7.21% 7.23%
Portfolio turnover rate........... 104% 142% 134% 160% 97%
</TABLE>
- -------------------
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each year reported, reinvestment of all dividends and other
distributions, if any, at net asset value on the payable dates and a sale
at net asset value on the last day of each year reported. The figures do
not include additional contract level charges; results would be lower if
such charges were included.
38
<PAGE>
Mitchell Hutchins High Income Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH INCOME PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
CLASS H
-----------------------
FOR THE PERIOD
SEPTEMBER 28,
1998+ THROUGH
DECEMBER 31, 1998
-----------------
<S> <C>
Net asset value, beginning of period....................................................... $ 12.00
-------
Net investment income...................................................................... 0.20
Net realized and unrealized gain from investments.......................................... 0.42
-----
Net increase from investment operations.................................................... 0.62
----
Dividends from net investment income....................................................... (0.20)
Distributions from net realized gains from investments..................................... (0.02)
-------
Total dividends and distributions.......................................................... (0.22)
-------
Net asset value, end of period............................................................. $ 12.40
======
Total investment return(1)................................................................. 5.16%
======
Ratios/Supplemental data:
Net assets, end of period (000's).......................................................... $10,933
Expenses to average net assets............................................................. 1.20%*
Net investment income to average net assets................................................ 7.04%*
Portfolio turnover rate.................................................................... 21%
</TABLE>
- -------------------
+ Commencement of operations
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the period reported, reinvestment of all dividends and other
distributions, if any, at net asset value on the payable dates and a sale
at net asset value on the last day of the period reported. The figures do
not include additional contract level charges; results would be lower if
such charges were included. Total investment return for the period has not
been annualized.
39
<PAGE>
Mitchell Hutchins Balanced Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCED PORTFOLIO*
- ------------------------------------------------------------------------------------------------------------
CLASS H
------------------------------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------------------------------------------
1998 1997 1996* 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year........................ $11.33 $ 10.95 $ 10.70 $ 9.54 $ 11.95
----- ----- ----- ---- -----
Net investment income............. 0.28 0.28 0.29 0.35 0.30
Net realized and unrealized gains
(losses) from investments...... 1.61 2.44 1.49 1.88 (1.44)
----- ---- ---- ---- ------
Net increase (decrease) from
investment operations.......... 1.89 2.72 1.78 2.23 (1.14)
----- ---- ---- ---- ------
Dividends from net investment
income......................... (0.27) (0.28) (0.28) (0.35) (0.30)
Distributions from net realized
gains on investments........... (1.41) (2.06) (1.25) (0.72) (0.97)
------- ------ ------ ------ ------
Total dividends and distributions. (1.68) (2.34) (1.53) (1.07) (1.27)
------- ------ ------ ------ ------
Net asset value, end of year...... $11.54 $ 11.33 $ 10.95 $ 10.70 $ 9.54
===== ===== ===== ===== ====
Total investment return(1)........ 16.81% 24.86% 16.82% 23.27% (9.59)%
===== ===== ===== ===== =====
Ratios/Supplemental data:
Net assets, end of year (000's)... $28,549 $28,211 $29,224 $23,413 $23,263
Expenses to average net assets.... 0.97% 1.19% 1.24% 1.09% 1.03%
Net investment income to
average net assets............. 2.08% 2.06% 2.29% 2.88% 2.30%
Portfolio turnover rate........... 177% 169% 235% 171% 112%
</TABLE>
- -------------------
* Prior to the close of business on January 26, 1996, Balanced Portfolio was
known as Asset Allocation Portfolio.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include additional contract level charges; results would be lower if such
charges were included.
40
<PAGE>
Mitchell Hutchins Growth and Income Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH AND INCOME PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------
CLASS H
---------------------------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year........ $ 13.69 $ 12.27 $ 11.83 $ 9.16 $ 9.87
------- ------- ------- ------ ------
Net investment income .................... 0.07 0.10 0.06 0.10 0.10
Net realized and unrealized gains
(losses) from investments.............. 2.16 3.88 2.53 2.70 (0.71)
----- ---- ---- ---- ------
Net increase (decrease) from
investment operations.................. 2.23 3.98 2.59 2.80 (0.61)
----- ---- ---- ---- ------
Dividends from net investment
income................................. (0.07) (0.10) (0.06) (0.10) (0.10)
Distributions from net realized
gains from investments................. (1.04) (2.46) (2.09) (0.03) --
------- ------ ------ ------ ---
Total dividends and distributions .... (1.11) (2.56) (2.15) (0.13) (0.10)
------- ------ ------ ------ ------
Net asset value, end of year.............. $ 14.81 $ 13.69 $ 12.27 $ 11.83 $ 9.16
===== ===== ===== ===== ====
Total investment return(1)................ 16.32% 32.45% 22.12% 30.52% (6.18)%
===== ===== ===== ===== =====
Ratios/Supplemental data:
Net assets, end of year (000's)........... $ 24,497 $ 18,493 $14,520 $14,797 $12,872
Expenses to average net assets............ 1.04% 1.04% 1.58% 1.37% 1.35%
Net investment income to
average net assets..................... 0.46% 0.71% 0.49% 0.94% 1.06%
Portfolio turnover rate................... 69% 92% 99% 134% 150%
</TABLE>
- -------------------
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each year reported, reinvestment of all dividends and other
distributions, if any, at net asset value on the payable dates and a sale
at net asset value on the last day of each year reported. The figures do
not include additional contract level charges; results would be lower if
such charges were included.
41
<PAGE>
Mitchell Hutchins Tactical Allocation Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TACTICAL ALLOCATION PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
CLASS H
-----------------------
FOR THE PERIOD
SEPTEMBER 28,
1998+ THROUGH
DECEMBER 31, 1998
-----------------
<S> <C>
Net asset value, beginning of period....................................................... $ 12.00
-------
Net investment income...................................................................... 0.02
Net realized and unrealized gains from investments......................................... 2.99
----
Net increase from investment operations.................................................... 3.01
-----
Dividends from net investment income....................................................... (0.02)
Distributions from net realized gains from investments..................................... (0.08)
-------
Total dividends and distributions.......................................................... (0.10)
-------
Net asset value, end of period............................................................. $ 14.91
======
Total investment return(1)................................................................. 24.98%
======
Ratios/Supplemental data:
Net assets, end of period (000's).......................................................... $22,494
Expenses to average net assets............................................................. 0.95%*
Net investment income to average net assets................................................ 0.77%*
Portfolio turnover rate.................................................................... 6%
</TABLE>
- -------------------
+ Commencement of operations
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates and a sale
at net asset value on the last day of the period reported. The figures do
not include additional contract level charges; results would be lower if
such charges were included. Total investment return for the period has not
been annualized.
42
<PAGE>
Mitchell Hutchins Growth Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH PORTFOLIO
- --------------------------------------------------------------------------------------------------------------
CLASS H
------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.. $ 15.63 $ 17.48 $ 17.57 $ 14.56 $ 18.06
------- ------- ------- ------- -------
Net investment income (loss)........ (0.07) 0.03 (0.06) 0.04 0.01
Net realized and unrealized gains
(losses) from investments........ 4.79 2.69 3.29 4.68 (2.13)
----- ---- ---- ---- ------
Net increase (decrease) from
investment operations............ 4.72 2.72 3.23 4.72 (2.12)
----- ---- ---- ---- ------
Dividends from net investment
income........................... -- (0.03) --- (0.08) (0.01)
Distributions from net realized
gains from investments........... (2.32) (4.54) (3.32) (1.63) (1.37)
------- ------ ------ ------ ------
Total dividends and distributions... (2.32) (4.57) (3.32) (1.71) (1.38)
------- ------ ------ ------ ------
Net asset value, end of year........ $ 18.03 $15.63 $17.48 $17.57 $14.56
====== ====== ====== ====== ======
Total investment return(1).......... 30.59% 15.41% 18.70% 32.50% (11.65)%
===== ===== ===== ===== =======
Ratios/Supplemental data:
Net assets, end of year (000's)..... $36,830 $30,586 $36,357 42,784 39,135
Expenses to average net assets...... 1.05% 1.05% 1.14% 1.02% 1.00%
Net investment income (loss) to (0.37)%
average net assets............... 0.12% (0.29)% 0.23% 0.04%
Portfolio turnover rate............. 50% 89% 53% 41% 27%
</TABLE>
- -------------------
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
distributions, if any, at net asset value on the payable dates and a sale
at net asset value on the last day of each period reported. The figures do
not include additional contract level charges; results would be lower if
such charges were included.
43
<PAGE>
Mitchell Hutchins Aggressive Growth Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
CLASS H
--------------------------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.......... $ 13.40 $13.09 $11.34 $9.65 $9.95
------ ------ ------ ----- -----
Net investment income (loss)................ (0.12) (0.09) (0.10) 0.03 0.01
Net realized and unrealized gains (losses)
from investments......................... 2.15 2.78 2.93 2.00 (0.30)
----- ---- ---- ---- ------
Net increase (decrease) from
investment operations.................... 2.03 2.69 2.83 2.03 (0.29)
----- ---- ---- ---- ------
Dividends from net investment income........ -- -- -- (0.02) (0.01)
Distributions from net realized gains from
investments.............................. (1.79) (2.38) (1.08) (0.32) --
------- ------ ------ ------ ---
Total dividends and distributions........... (1.79) (2.38) (1.08) (0.34) (0.01)
------- ------ ------ ------ ------
Net asset value, end of year................ $ 13.64 $13.40 $13.09 $11.34 $9.65
====== ====== ====== ====== =====
Total investment return(1).................. 15.30% 20.76% 25.23% 21.04% (2.90)%
===== ===== ===== ===== =====
Ratios/Supplemental data:
Net assets, end of year (000's)............. $18,715 $19,076 $19,167 $17,660 $13,600
Expenses to average net assets.............. 1.21% 1.18% 1.52% 1.29% 1.59%
Net investment income (loss) to average net
assets................................... (0.70)% (0.59)% (0.74)% 0.23% 0.07%
Portfolio turnover rate..................... 73% 89% 115% 119% 90%
</TABLE>
- -------------------
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each year reported, reinvestment of all dividends and other
distributions, if any, at net asset value on the payable dates and a sale
at net asset value on the last day of each year reported. The figures do
not include additional contract level charges; results would be lower if
such charges were included.
44
<PAGE>
Mitchell Hutchins Small Cap Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
CLASS H
-----------------------
FOR THE PERIOD
SEPTEMBER 28,
1998+ THROUGH
DECEMBER 31, 1998
-----------------
<S> <C>
Net asset value, beginning of period....................................................... $ 12.00
-------
Net investment loss........................................................................ (0.04)
Net realized and unrealized gains from investments......................................... 3.67
----
Net increase from investment operations.................................................... 3.63
-----
Distributions from net realized gains from investments..................................... (0.73)
-------
Net asset value, end of period............................................................. $ 14.90
======
Total investment return(1)................................................................. 30.36%
======
Ratios/Supplemental data:
Net assets, end of period (000's).......................................................... $ 4,057
Expenses to average net assets............................................................. 1.94%*
Net investment income to average net assets................................................ (1.27)%*
Portfolio turnover rate.................................................................... 17%
</TABLE>
- -------------------
+ Commencement of operations
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the period reported, reinvestment of all dividends and other
distributions, if any, at net asset value on the payable dates and a sale
at net asset value on the last day of the period reported. The figures do
not include additional contract level charges; results would be lower if
such charges were included. Total investment return for the period has not
been annualized.
45
<PAGE>
Mitchell Hutchins Global Growth Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------------
CLASS H
-----------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.......... $ 14.62 $13.74 $12.00 $12.44 $14.97
------ ------ ------ ------ ------
Net investment income (loss)................ 0.08 0.04 0.07 0.01 (0.03)
Net realized and unrealized gains (losses) from
investments and foreign currency......... 1.92 0.94 1.75 (0.45) (1.76)
----- ---- ---- ------ ------
Net increase (decrease) from investment
operations............................... 2.00 0.98 1.82 (0.44) (1.79)
----- ---- ---- ------ ------
Dividends from net investment income........ -- (0.04) (0.08) -- (0.01)
Distributions from net realized gains from
investments.............................. (2.88) (0.06) -- -- (0.73)
------- ------ ----- ----- ------
Total dividends and distributions........... (2.88) (0.10) (0.08) 0.00 (0.74)
------- ------ ------ ---- ------
Net asset value, end of year................ $ 13.74 $14.62 $13.74 $12.00 $12.44
====== ====== ====== ====== ======
Total investment return (1)................. 13.50% 7.16% 15.14% (3.54)% (11.94)%
===== ==== ===== ====== =======
Ratios/Supplemental data:
Net assets, end of year (000's)............. $15,799 $21,215 $25,701 $28,507 $40,493
Expenses to average net assets.............. 1.33% 1.07% 1.10% 1.96% 1.48%
Net investment income (loss) to average
net assets............................... 0.46% 0.26% 0.46% 0.10% (0.13)%
Portfolio turnover rate..................... 154% 81% 44% 157% 175%
</TABLE>
- -------------------
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
distributions, if any, at net asset value on the payable dates and a sale
at net asset value on the last day of each period reported. The figures do
not include additional contract level charges; results would be lower if
such charges were included.
46
<PAGE>
[BACK COVER]
If you want more information about the funds, the following documents are
available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS:
Additional information about the funds' investments is available in the
funds' annual and semi-annual reports to shareholders. In the funds'
annual reports, you will find a discussion of the market conditions and
investment strategies that significantly affected the funds' performance
during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI) AND CONTRACT PROSPECTUS:
The SAI provides more detailed information about the funds and is
incorporated by reference into this prospectus. Investors are advised to
also read the applicable contract prospectus.
You may discuss your questions about the funds, obtain free copies of annual and
semi-annual reports and the SAI, or request other information, by contacting the
funds directly at 1-800-986-0088.
You may review and copy information about the funds, including annual and
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 funds:
o For a fee, by writing to or calling the SEC's Public Reference Room,
Washington, D.C. 20549-6009 Telephone: 1-800-SEC-0330
o Free, from the SEC's Internet website at: http://www.sec.gov
Investment Company Act File No.
Mitchell Hutchins Series Trust - 811-4919
47
<PAGE>
MITCHELL HUTCHINS SERIES TRUST
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
The following funds are series of Mitchell Hutchins Series Trust
("Trust"), a professionally managed open-end investment company.
Money Market Portfolio High Grade Fixed Income Portfolio
Strategic Fixed Income Portfolio Strategic Income Portfolio
Global Income Portfolio High Income Portfolio
Balanced Portfolio Growth and Income Portfolio
Tactical Allocation Portfolio Growth Portfolio
Aggressive Growth Portfolio Small Cap Portfolio
Global Growth Portfolio
Global Income Portfolio and Strategic Income Portfolio are
non-diversified series of the Trust. The other funds are diversified series.
Each fund offers its Class H and Class I shares only to insurance company
separate accounts that fund benefits under 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 each fund. Certain funds have
sub-advisers. Mitchell Hutchins also serves as distributor for the funds' Class
I shares.
Portions of the funds' annual reports to shareholders are incorporated
by reference into this Statement of Additional Information. The annual reports
accompany this Statement of Additional Information. You may obtain additional
copies of a fund's Annual Report by calling toll-free 1-800-986-0088.
This Statement of Additional Information is not a prospectus and should
be read only in conjunction with the funds' current Prospectus, dated May 1,
1999. A copy of the Prospectus may be obtained by calling any PaineWebber
Financial Advisor or correspondent firm or by calling toll-free 1-800-986-0088.
The Prospectus contains more complete information about the funds. You should
read it carefully before investing.
This Statement of Additional Information is dated May 1, 1999.
TABLE OF CONTENTS
PAGE
----
The Funds and Their Investment Policies........................ 2
The Funds' Investments, Related Risks and Limitations.......... 10
Strategies Using Derivative Instruments........................ 32
Organization of Trust; Trustees and Officers and
Principal Holders of Securities ............................... 40
Investment Advisory and Distribution Arrangements.............. 49
Portfolio Transactions......................................... 53
Additional Purchase and Redemption Information................. 57
Valuation of Shares............................................ 58
Taxes.......................................................... 59
Dividends...................................................... 61
Other Information.............................................. 62
Financial Statements........................................... 63
Appendix....................................................... A-1
<PAGE>
THE FUNDS AND THEIR INVESTMENT POLICIES
No fund's investment objective may be changed without shareholder
approval. Except where noted, the other investment policies of each fund may be
changed by the board without shareholder approval. As with other mutual funds,
there is no assurance that a fund will achieve its investment objective.
MONEY MARKET PORTFOLIO has an investment objective of maximum current
income consistent with liquidity and conservation of capital. The fund invests
in high quality money market instruments that have, or are deemed to have,
remaining maturities of 13 months or less. These instruments include (1) U.S.
government securities, (2) obligations of U.S. and foreign banks, (3) commercial
paper and other short-term corporate obligations of U.S. and foreign companies,
governments and similar entities, including variable and floating rate
securities and participation interests and (4) repurchase agreements regarding
any of the foregoing. The fund also may purchase participation interests in any
of the securities in which it is permitted to invest. Participation interests
are pro rata interests in securities held by others. The fund maintains a
dollar-weighted average portfolio maturity of 90 days or less
Money Market Portfolio may invest in obligations (including certificates
of deposit, bankers' acceptances, time deposits and similar obligations) of U.S.
and foreign banks having total assets at the time of purchase in excess of $1.5
billion. The fund may invest in non-negotiable time deposits of U.S. banks,
savings associations and similar depository institutions only if the institution
has total assets at the time of purchase in excess of $1.5 billion and the time
deposit has a maturity of seven days or less.
Money Market Portfolio may purchase only those obligations that Mitchell
Hutchins determines, pursuant to procedures adopted by the board, present
minimal credit risks and are "First Tier Securities" as defined in Rule 2a-7
under the Investment Company Act of 1940, as amended ("Investment Company Act").
A First Tier Security is either (1) rated in the highest short-term rating
category by at least two nationally recognized statistical rating organizations
("rating agencies"), (2) rated in the highest short-term rating category by a
single rating agency if only that rating agency has assigned the obligation a
short-term rating, (3) issued by an issuer that has received such a short-term
rating with respect to a security that is comparable is priority and security,
(4) subject to a guarantee rated in the highest short-term rating category or
issued by a guarantor that has received the highest short-term rating for a
comparable debt obligation or (5) unrated, but determined by Mitchell Hutchins
to be of comparable quality. A First Tier Security rated in the highest
short-term category at the time of purchase that subsequently receives a rating
below the highest rating category from a different rating agency may continue to
be considered a First Tier Security.
Money Market Portfolio may purchase variable and floating rate
securities with remaining maturities in excess of 13 months issued by U.S.
government agencies or instrumentalities or guaranteed by the U.S. government.
In addition, the fund may purchase variable and floating rate securities of
other issuers with remaining maturities in excess of 13 month if the securities
are subject to a demand feature exercisable within 13 months or less. The yields
on these securities are adjusted in relation to changes in specific rates, such
as the prime rate, and different securities may have different adjustment rates.
The fund's investment in these securities must comply with conditions
established by the Securities and Exchange Commission ("SEC") under which they
may be considered to have remaining maturities of 13 months or less. Certain of
these obligations carry a demand feature that gives the fund the right to tender
them back to the issuer or a remarketing agent and receive the principal amount
of the security prior to maturity. The demand feature may be backed by letters
of credit or other liquidity support arrangements provided by banks or other
financial institutions whose credit standing affects the credit quality of the
obligations. Changes in the credit quality of these institutions could cause
losses to the fund and affect its share price.
Variable rate securities include variable amount master demand notes,
which are unsecured redeemable obligations that permit investment of varying
amounts at fluctuating interest rates under a direct agreement between Money
Market Portfolio and an issuer. The principal amount of these notes may be
increased from time to time by the parties (subject to specified maximums) or
decreased by the fund or the issuer. These notes are payable on demand and may
or may not be rated.
2
<PAGE>
Money Market Portfolio generally may invest no more than 5% of its total
assets in the securities of a single issuer (other than securities issued by the
U.S. government, its agencies or instrumentalities). The fund may purchase only
U.S. dollar-denominated obligations of foreign issuers.
Money Market Portfolio may invest up to 10% of its net assets in
illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow up to 10% of its total assets for temporary or
emergency purposes. The fund may invest in the securities of other investment
companies.
HIGH GRADE FIXED INCOME PORTFOLIO has a primary investment objective of
current income and a secondary investment objective of capital appreciation. The
fund invests in U.S. government bonds, including those backed by mortgages. The
fund may also invest in corporate bonds and may invest up to 25% of its total
assets in mortgage- and asset-backed securities of private issuers. The
corporate bonds in which the fund may invest consist primarily of bonds that
are, at the time of purchase, rated within one of the two highest grades
assigned by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P"), or Moody's Investors Service Inc. ("Moody's"), except that the fund may
invest up to 35% of its total assets in investment grade bonds that are rated at
the time of purchase lower than the two highest grades assigned by S&P or
Moody's. The fund may invest in bonds that are assigned comparable ratings by
another rating agency and unrated bonds that Mitchell Hutchins determines are of
comparable quality to rated securities in which the fund may invest. The fund
may invest up to 15% of its total assets in U.S. dollar-denominated bonds sold
in the United States by foreign issuers (Yankee bonds) if the securities are
traded on recognized U.S. exchanges or in the U.S. over-the-counter market.
No more than 55% of the total assets of High Grade Fixed Income
Portfolio may be represented by U.S. Treasury obligations to assure the fund's
satisfaction of the diversification requirements imposed by the Internal Revenue
Code on segregated asset accounts used to fund variable annuity and/or life
insurance contracts. These diversification requirements must be satisfied by the
fund as an investment vehicle underlying the segregated asset accounts.
Mitchell Hutchins will seek to vary the average maturity of High Grade
Fixed Income Portfolio's securities depending on its perception of future
interest rate movements, so that the average maturity will be shortened when
Mitchell Hutchins believes that interest rates may rise and will be lengthened
when Mitchell Hutchins anticipates a decline in interest rates.
High Grade Fixed Income Portfolio may invest up to 10% of its net assets
in illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow up to 33-1/3% of its total assets for
temporary or emergency purposes. The fund may invest in the securities of other
investment companies and may sell short "against the box."
STRATEGIC FIXED INCOME PORTFOLIO has an investment objective of total
return with low volatility. The fund's investments are managed by a sub-adviser,
Pacific Investment Management Company. The fund invests in bonds and other fixed
income securities of varying maturities with a dollar-weighted average portfolio
duration between three and eight years. Under normal circumstances, the fund
invests at least 65% of its total assets in fixed income securities, which
include U.S. government and foreign government bonds (including bonds issued by
supranational and quasi-governmental entities and mortgage-backed securities),
corporate bonds of U.S. and foreign issuers (including mortgage- and
asset-backed securities of private issuers), convertible securities, foreign
currency exchange-related securities, loan participations and assignments and
money market instruments. The fund's investments in mortgage-backed securities
of private issuers are limited to 35% of its total assets and its investments in
loan participations and assignments are limited to 5% of its net assets.
All securities purchased for the fund are investment grade, except that
the fund may invest up to 20% of its total assets in securities that are not
investment grade but rated at least B by S&P or Moody's, assigned a comparable
rating by another rating agency or, if unrated, determined by the sub-adviser to
be of comparable quality. The fund may invest up to 20% of its total assets in a
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combination of Yankee bonds, Eurodollar bonds and bonds denominated in foreign
currencies, except that not more than 10% of the fund's total assets may be
invested in bonds denominated in foreign currencies. Yankee bonds are U.S.
dollar-denominated obligations of foreign issuers, and Eurodollar bonds are U.S.
dollar-denominated obligations of issuers that are held outside the United
States, primarily in Europe.
Strategic Fixed Income Portfolio may invest up to 15% of its net assets
in illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow up to 33-1/3% of its total assets for
temporary or emergency purposes. The fund may invest in the securities of other
investment companies and may sell short "against the box."
STRATEGIC INCOME PORTFOLIO'S primary investment objective is to achieve
a high level of current income. As a secondary investment objective, the fund
seeks capital appreciation. The fund strategically allocates its investments
among three distinct bond market categories: (1) U.S. government and investment
grade corporate bonds, including mortgage- and asset-backed securities; (2) U.S.
high yield corporate bonds, including convertible bonds, and preferred stock;
and (3) foreign and emerging market bonds. A portion of the fund's assets
normally is invested in each of these investment sectors. However, the fund has
the flexibility at any time to invest all or substantially all of its
investments in any one sector.
Strategic Income Portfolio may invest in high yield bonds that are rated
as low as D by S&P or C by Moody's.
The foreign and emerging market bonds in which Strategic Income
Portfolio may invest include (1) government bonds, including Brady bonds and
other sovereign debt, and bonds issued by multi-national institutions such as
the International Bank for Reconstruction and Development and the International
Monetary Fund; (2) corporate bonds and preferred stock issued by entities
located in foreign countries, or denominated in or indexed to foreign
currencies; (3) interests in foreign loan participations and assignments; and
(4) foreign mortgage-backed securities and other structured foreign investments.
The fund may invest without limit in securities of issuers located in any
country in the world, including both industrialized and emerging market
countries. The fund generally is not restricted in the portion of its assets
that may be invested in a single country or region, but the fund's assets
normally are invested in issuers located in at least three countries. No more
than 25% of the fund's total assets are invested in securities issued or
guaranteed by any single foreign government. The fund may invest in foreign and
emerging market bonds that do not meet any minimum credit rating standard or
that are unrated.
Mitchell Hutchins believes that Strategic Income Portfolio's strategy of
sector allocation should be less risky than investing in only one sector of the
bond market. Data from the Lehman Aggregate Bond Index, the Salomon Brothers
High Yield Index, the Merrill Lynch High Yield Index and the Salomon Brothers
World Government Bond Index indicate that these sectors are not closely
correlated. If successful, the fund's strategy should enable the fund to achieve
a higher level of investment return than if the fund invested exclusively in any
one investment sector or allocated a fixed proportion of its assets to each
investment sector.
Strategic Income Portfolio may invest up to 10% of its total assets in
preferred stock of U.S. and foreign issuers. It also may acquire equity
securities when attached to bonds or as part of a unit including bonds or in
connection with a conversion or exchange of bonds. The fund also may invest
without limit in certificates of deposit issued by banks and savings
associations and in bankers' acceptances.
Strategic Income Portfolio may invest in zero coupon bonds, other
original discount securities, payment-in-kind securities and principal-only
mortgage backed securities. The fund also may invest in fixed and floating rate
loans through either participations in or assignments of all or a portion of
loans made by banks.
Strategic Income Portfolio may invest up to 15% of its net assets in
illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may engage in dollar rolls and reverse repurchase
agreements, which are considered borrowings and may not exceed 33-1/3% of its
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total assets. The fund may also borrow for temporary or emergency purposes, but
not in excess of an additional 5% of its total assets. The fund may invest in
the securities of other investment companies and may sell short "against the
box."
GLOBAL INCOME PORTFOLIO'S primary investment objective is high current
income consistent with prudent investment risk; capital appreciation is a
secondary objective. The fund invests principally in high-quality bonds issued
or guaranteed by foreign governments, the U.S. government, their respective
agencies or instrumentalities or supranational organizations or issued by U.S.
or foreign companies. Debt securities are considered high quality if they are
rated within one of the two highest grades assigned by S&P or Moody's or another
rating agency or, if unrated, determined by Mitchell Hutchins to be of
comparable quality.
Global Income Portfolio's portfolio consists primarily of bonds rated
within one of the two highest grades assigned by S&P, Moody's or another rating
agency or, if unrated, determined by Mitchell Hutchins to be of comparable
quality. Normally, at least 65% of the fund's total assets consist of
high-quality bonds (and receivables from the sale of such bonds) denominated in
foreign currencies or U.S. dollars of issuers located in at least three of the
following countries: Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand,
Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and
the United States. No more than 40% of the fund's total assets are normally
invested in securities of issuers located in any one country other than the
United States. The fund's investments may include zero coupon securities and
other debt securities sold with a discount. Up to 5% of the fund's total assets
may be invested in bonds convertible into equity securities.
Global Income Portfolio may invest up to 35% of its total assets in
bonds rated below the two highest grades assigned by a rating agency. Except as
noted below, these securities must be investment grade (that is, rated at least
BBB by S&P, Baa by Moody's or comparably rated by another rating agency or, if
unrated, determined by Mitchell Hutchins to be of comparable quality). Within
this 35% limitation, the fund may invest up to 20% of its total assets in bonds
that are below investment grade. These bonds may be rated as low as D by S&P, C
by Moody's or comparably rated by another rating agency or, in the case of bonds
assigned a short-term debt rating as low as D by S&P or comparably rated by
another rating agency or, if not so rated, determined by Mitchell Hutchins to be
of comparable quality. Bonds rated D by S&P are in payment default or the rating
is assigned upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized. Bonds rated C by Moody's
are in the lowest rated class and can be regarded as having extremely poor
prospects of attaining any real investment standing. Mitchell Hutchins will
purchase these securities for the fund only when it concludes that the
anticipated return to the fund on the investment warrants exposure to the
additional level of risk. Lower-rated bonds are often issued by businesses and
governments in emerging markets. Because the fund may also invest in emerging
market bonds that are investment grade, the fund's total investment in emerging
market bonds may exceed 20% of its total assets.
Global Income Portfolio may invest up to 35% of its total assets in
mortgage-backed securities of U.S. or foreign issuers that are rated in one of
the two highest rating categories by S&P, Moody's or another rating agency or,
if unrated, determined by Mitchell Hutchins to be of comparable quality. Up to
20% of the fund's total assets may be invested in bonds that are not paying
current income (a category that does not include zero coupon bonds and other
bonds sold with a discount). The fund may purchase these bonds if Mitchell
Hutchins believes that they have a potential for capital appreciation. The fund
also may invest in secured and unsecured fixed or floating rate loans in the
form of participations and assignments.
[Global Income Portfolio may invest up to 35% of its total assets in
cash or investment grade money market instruments as part of its ordinary
investment program. The fund's investment of cash collateral from securities
lending in these money market instruments is not subject to this 35% limitation
activities and there is no limitation on the fund's investments in short-term
bonds denominated in foreign currencies. ]
Global Income Portfolio may invest up to 10% of its net assets in
illiquid securities. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow money from banks or through reverse repurchase
agreements for temporary or emergency purposes but not in excess of 10% of its
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total assets. The fund may invest in the securities of other investment
companies and may sell short "against the box."
HIGH INCOME PORTFOLIO'S investment objective is to provide high income.
The fund normally invests at least 65% of its total assets in non-investment
grade corporate bonds that, at the time of purchase, are rated B or better by
S&P or Moody's, are comparably rated by another rating agency or, if unrated,
are considered to be of comparable quality by Mitchell Hutchins. The fund may
include in this 65% of its total assets any equity securities (including common
stocks and rights and warrants for equity securities) that are attached to
corporate bonds or are part of a unit including corporate bonds, so long as the
corporate bonds meet these quality requirements. The fund also may invest up to
35% of its total assets in (1) bonds that are rated below B (and rated as low as
D by S&P or C by Moody's) or comparable unrated bonds; (2) U.S. government
bonds; (3) equity securities; and (4) money market instruments, including
repurchase agreements.
Up to 35% of High Income Portfolio's net assets may be invested in
securities of foreign issuers, including securities that are U.S.
dollar-denominated but whose value is linked to the value of foreign currencies.
However, no more than 10% of the fund's net assets may be invested in securities
of foreign issuers that are denominated and traded in currencies other than the
U.S. dollar.
Up to 25% of High Income Portfolio's total assets may be invested in
bonds and equity securities that are not paying current income. The fund may
purchase these securities if Mitchell Hutchins believes they have a potential
for capital appreciation. High Income Portfolio may invest in zero coupon bonds,
other original discount securities, payment-in-kind securities and
principal-only mortgage backed securities, all of which are considered income
producing securities. The fund also may invest up to 5% of its net assets in
fixed and floating rate loans through either participations in or assignments of
all or a portion of loans made by banks.
High Income Portfolio may invest up to 15% of its net assets in illiquid
securities. The fund may purchase securities on a when-issued or delayed
delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow money from banks or through reverse repurchase
agreements for temporary or emergency purposes but not in excess of 33-1/3% of
its total assets. The fund may invest in the securities of other investment
companies and may sell short "against the box."
BALANCED PORTFOLIO has an investment objective of high total return with
low volatility. The fund invests primarily in a combination of three asset
classes: stocks (equity securities), bonds (investment grade bonds) and cash
(money market instruments) and maintains a fixed income allocation (including
bonds and cash) of at least 25%.
Balanced Portfolio may invest in a broad range of equity securities
issued by companies believed by Mitchell Hutchins to have the potential for
rapid earnings growth, investment grade bonds, U.S. government securities,
convertible securities and money market instruments. The fund may invest in U.S.
dollar-denominated securities of foreign issuers that are traded on recognized
U.S. exchanges or in the U.S. over-the-counter market. The fund may also invest
up to 10% of its assets in bonds and other securities (including convertible
securities) rated below investment grade but rated at least B by S&P or Moody's,
comparably rated by another rating agency or determined by Mitchell Hutchins to
be of comparable quality.
Balanced Portfolio may invest up to 10% of its net assets in illiquid
securities. The fund may purchase securities on a when-issued or delayed
delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow for temporary or emergency purposes, but not
in excess of 10% of its total assets. The fund may invest in the securities of
other investment companies and may sell short "against the box."
GROWTH AND INCOME PORTFOLIO has an investment objective of current
income and capital growth. The fund, under normal circumstances, invests at
least 65% of its total assets in dividend-paying equity securities believed by
Mitchell Hutchins to have the potential for rapid earnings growth. The fund may
invest up to 35% of its total assets in equity securities not meeting these
selection criteria, as well as in U.S. government bonds, corporate bonds and
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money market instruments. The fund's investments may include up to 10% of its
total assets in convertible securities rated below investment grade but no lower
than B by S&P or Moody's, comparably rated by another rating agency or
determined by Mitchell Hutchins to be of comparable quality. The fund may invest
up to 25% of its total assets in U.S. dollar-denominated equity securities and
bonds of foreign issuers that are traded on recognized U.S. exchanges or in the
U.S. over-the-counter market. [The fund may invest in bonds for purposes of
seeking capital appreciation when, for example, Mitchell Hutchins anticipates
that market interest rates may decline or credit factors or ratings affecting
particular issuers may improve. ]
Growth and Income Portfolio may invest up to 10% of its net assets in
illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow for temporary or emergency purposes, but not
in excess of 10% of its total assets. The fund may invest in the securities of
other investment companies and may sell short "against the box."
TACTICAL ALLOCATION PORTFOLIO has an investment objective of total
return, consisting of long-term capital appreciation and current income. The
fund seeks to achieve its objective by using the Tactical Allocation Model, a
systematic investment strategy that allocates its investments between an equity
portion designed to track the performance of the S&P 500 Composite Stock Price
Index ("S&P 500 Index") and a fixed income portion that generally will be
comprised of either five-year U.S. Treasury notes or 30-day U.S. Treasury bills.
Tactical Allocation Portfolio seeks to achieve total return during all
economic and financial market cycles, with lower volatility than that of the S&P
500 Index. Mitchell Hutchins allocates the fund's assets based on the Tactical
Allocation Model's quantitative assessment of the projected rates of return for
each asset class. The funds seeks to achieve total return during all economic
and financial market cycles, with lower volatility than that of the S&P 500
Index. Mitchell Hutchins allocates the fund's assets based on the Model's
quantitative assessment of the projected rates of return for each asset class.
The Model attempts to track the S&P 500 Index in periods of strongly positive
market performance but attempts to take a more defensive posture by reallocating
assets to bonds or cash when the Model signals a potential bear market,
prolonged downtown in stock prices or significant loss in value.
The basic premise of the Tactical Allocation Model is that investors
accept the risk of owning stocks, measured as volatility of return, because they
expect a return advantage. This expected return advantage of owning stocks is
called the equity risk premium ("ERP"). The Model projects the stock market's
expected ERP based on several factors, including the current price of stocks and
their expected future dividends and the yield-to-maturity of the one-year U.S.
Treasury bill. When the stock market's ERP is high, the Model signals the fund
to invest 100% in stocks. Conversely, when the ERP decreases below certain
threshold levels, the Model signals the fund to reduce its exposure to stocks.
The Model can recommend stock allocations of 100%, 75%, 50% 25% or 0%.
If the Tactical Allocation Model recommends a stock allocation of less
than 100%, the Model also recommends a fixed income allocation for the remainder
of the fund's assets. The Model will recommend either bonds (five-year U.S.
Treasury notes) or cash (30-day U.S. Treasury bills), but not both. To make this
determination, the Model calculates the risk premium available for the notes.
This bond risk premium ("BRP") is calculated based on the yield-to-maturity of
the five-year U.S. Treasury note and the one-year U.S. Treasury bill.
Tactical Allocation Portfolio deviates from the recommendations of the
Tactical Allocation Model only to the extent necessary to
o Maintain an amount in cash, not expected to exceed 2% of its total
assets under normal market conditions, to pay fund operating
expenses, dividends and other distributions on its shares and to
meet anticipated redemptions of shares;
o Continue to qualify as a regulated investment company for federal
income tax purposes; and
Meet the diversification requirements imposed by the Internal Revenue
Code on segregated asset accounts used to fund variable annuity and/or life
insurance contracts, which means, among other things, that the fund may not
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invest more than 55% of its total assets in U.S. Treasury obligations. These
diversification requirements must be satisfied by the fund as an investment
vehicle underlying the segregated asset accounts.
As a result, if the Tactical Allocation Model recommends more than a 50%
allocation to bonds or cash, Tactical Allocation Portfolio must invest a portion
of its assets in bonds or money market instruments that are not U.S. Treasury
obligations and, even if the Model does not recommend an allocation to cash, the
fund may still hold a small portion of its assets in cash.
In its stock portion, Tactical Allocation Portfolio attempts to
duplicate, before the deduction of operating expenses, the investment results of
the S&P 500 Index. Securities in the S&P 500 Index are selected, and may change
from time to time, based on a statistical analysis of such factors as the
issuer's market capitalization (the S&P 500 Index emphasizes large
capitalization stocks), the security's trading activity and its adequacy as a
representative of stocks in a particular industry section. The fund's investment
results for its stock portion will not be identical to those of the S&P 500
Index. Deviations from the performance of the S&P 500 Index may result from
purchases and redemptions of fund shares that may occur daily, as well as from
expenses borne by the fund. Instead, the fund attempts to achieve a correlation
of at least 0.95 between the performance of the fund's stock portion, before the
deduction of operating expenses, and that of the S&P 500 Index (a correlation of
1.00 would mean that the net asset value of the stock portion increased or
decreased in exactly the same proportion as changes in the S&P 500 Index).
Asset reallocations are made, if required, on the first business day of
each month. In addition to any reallocation of assets directed by the Tactical
Allocation Model, any material amounts resulting from appreciation or receipt of
dividends, other distributions, interest payments and proceeds from securities
maturing in each of the asset classes are reallocated (or "rebalanced") to the
extent practicable to establish the Model's recommended asset mix. Any cash
maintained to pay fund operating expenses, pay dividends and other distributions
and to meet share redemptions is invested on a daily basis.
Tactical Allocation Portfolio may invest up to 15% of its net assets in
illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow for temporary or emergency purposes, but not
in excess of 33-1/3 % of its total assets.
GROWTH PORTFOLIO has an investment objective of long-term capital
appreciation. The fund invests primarily in equity securities issued by
companies believed by Mitchell Hutchins to have substantial potential for
capital growth. Under normal circumstances, at least 65% of the fund's total
assets is invested in equity securities.
Growth Portfolio may invest up to 35% of its total assets in U.S.
government bonds and in corporate bonds, including up to 10% in convertible
bonds that are rated below investment grade. These convertible bonds may be
rated no lower than B by S&P or Moody's, comparably rated by another rating
agency or, if unrated, determined by Mitchell Hutchins to be of comparable
quality. The fund may invest up to 25% of its total assets in U.S.
dollar-denominated equity securities and bonds of foreign issuers that are
traded on recognized U.S. exchanges or in the U.S. over-the-counter market. The
fund may invest in bonds for purposes of seeking capital appreciation when, for
example, Mitchell Hutchins anticipates that market interest rates may decline or
credit factors or ratings affecting particular issuers may improve.
Growth Portfolio may invest up to 10% of its net assets in illiquid
securities. The fund may purchase securities on a when-issued or delayed
delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow for temporary or emergency purposes, but not
in excess of 10% of its total assets. The fund may invest in the securities of
other investment companies and may sell short "against the box."
AGGRESSIVE GROWTH PORTFOLIO has an investment objective of maximizing
long-term capital appreciation. The fund's investments are managed by a
sub-adviser, Nicholas-Applegate Capital Management. Under normal market
conditions, the fund invests at least 75% of its total assets in common stocks.
The fund invests primarily in common stocks of U.S. companies the assets and
stock prices of which the sub-adviser expects to grow faster than the average
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rate of companies in the S&P 500 Index. The fund is not restricted to
investments in companies of any particular size. The fund may invest up to 25%
of its total assets in preferred and convertible securities issued by similar
growth companies, U.S. government bonds and investment grade corporate bonds.
The fund may invest up to 25% of its total assets in U.S. dollar-denominated
equity securities and bonds of foreign issuers that are traded on recognized
U.S. exchanges or in the U.S. over-the-counter market.
Aggressive Growth Portfolio may invest up to 15% of its net assets in
illiquid securities. The fund may purchase securities on a when-issued or
delayed delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow for temporary or emergency purposes, but not
in excess of 20% of its total assets. The fund may invest in the securities of
other investment companies and may sell short "against the box."
SMALL CAP PORTFOLIO has an investment objective of long-term capital
appreciation. The fund invests at least 65% of its total assets in equity
securities of small capitalization ("small cap") companies, which are defined as
companies having market capitalizations of up to $1 billion. The fund may invest
up to 35% of its total assets in equity securities of companies that are larger
than small cap companies, as well as in U.S. government securities, corporate
bonds and money market instruments and including up to 10% in convertible
bondsthat are rated below investment grade. These convertible bondsmay be rated
no lower than B by S&P or Moody's, comparably rated by another rating agency or,
if unrated, determined by Mitchell Hutchins to be of comparable quality. The
fund may invest up to 25% of its total assets in U.S. dollar-denominated equity
securities and bonds of foreign issuers that are traded on recognized U.S.
exchanges or in the U.S. over-the-counter market.
Small Cap Portfolio may invest up to 15% of its net assets in illiquid
securities. The fund may purchase securities on a when-issued or delayed
delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow for temporary or emergency purposes, but not
in excess of 33-1/3% of its total assets. The fund may invest in the securities
of other investment companies and may sell short "against the box."
GLOBAL GROWTH PORTFOLIO'S investment objective is long-term capital
appreciation. The fund invests primarily in common stocks issued by companies in
United States, Europe, Japan and the Pacific Basin. Under normal circumstances,
the fund invests at least 65% of its total assets in common stocks and
securities convertible into common stocks. The fund may also hold other types of
securities, including non-convertible investment grade bonds, government bonds
and money market securities of U.S. and foreign issuers and cash (foreign
currencies or U.S. dollars).
Mitchell Hutchins allocates Global Growth Portfolio's assets between
U.S. investments and foreign investments and manages the assets allocated to
U.S. investments. Mitchell Hutchins has appointed Invista Capital Management,
Inc. ("Invista") as the fund's sub-adviser to manage the assets allocated to the
fund's foreign investments. Mitchell Hutchins currently expects to reevaluate
the allocation of the fund's assets monthly. It does not expect to reallocate
assets to reflect relatively minor changes (that is, less than 5%) in the asset
allocation model. The fund may effect a reallocation of assets by using cash
flows from the purchase or redemption of its shares in addition to selling
portfolio securities from one segment and reinvesting the proceeds in the other
segment. The fund may also use futures contracts to adjust its exposure to U.S.
and foreign equity markets in connection with a reallocation. Mitchell Hutchins
determines the extent to which the fund uses futures contracts for this purpose
and is responsible for implementing its decisions using futures contracts.
Under normal circumstances, Global Growth Portfolio invests at least 80%
of its total assets in securities of issuers in the United States and countries
represented in the Morgan Stanley Capital International Europe, Australia and
Far East Index ("EAFE Index"), a well known index that reflects most major
equity markets outside the United States. The fund may invest up to 20% of its
assets in securities of issuers located in other countries, for example, in
Canada and in emerging markets. Mitchell Hutchins may also invest, as part of
the fund's U.S. investments, up to 10% of the fund's total assets in U.S.
dollar-denominated equity securities and bonds of foreign issuers that are
traded on recognized U.S. exchanges or in the U.S. over-the-counter market.
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Global Growth Portfolio may invest up to 10% of its net assets in
illiquid securities. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow money from banks or through reverse repurchase
agreements for temporary or emergency purposes but not in excess of 10% of its
total assets. The fund may invest in the securities of other investment
companies and may sell short "against the box."
THE FUNDS' INVESTMENTS, RELATED RISKS AND LIMITATIONS
The following supplements the information contained in the Prospectus
and above concerning the funds' investments, related risks and limitations.
Except as otherwise indicated in the Prospectus or the Statement of Additional
Information, the funds have established no policy limitations on their ability
to use the investments or techniques discussed in these documents.
EQUITY SECURITIES. Equity securities include common stocks, most
preferred stocks and securities that are convertible into them, including common
stock purchase warrants and rights, equity interests in trusts, partnerships,
joint ventures or similar enterprises and depository receipts. Common stocks are
the most familiar type of equity security. They represent an equity (ownership)
interest in a corporation.
Preferred stock has certain fixed income features, like a bond, but is
actually equity in a company, like common stock. Convertible securities include
debentures, notes and preferred equity securities, that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula.
Depository receipts typically are issued by banks or trust companies and
evidence ownership of underlying equity securities.
While past performance does not guarantee future results, equity
securities historically have provided the greatest long-term growth potential in
a company. However, the prices of equity securities generally fluctuate more
than bonds and reflect changes in a company's financial condition and in overall
market and economic conditions. Common stocks generally represent the riskiest
investment in a company. It is possible that a fund may experience a substantial
or complete loss on an individual equity investment. While this is possible with
bonds, it is less likely.
BONDS are fixed or variable rate debt obligations, including notes,
debentures, and similar instruments and securities, including money market
instruments. Mortgage- and asset-backed securities are types of bonds, and
certain types of income-producing, non-convertible preferred stocks may be
treated as bonds for investment purposes. Bonds generally are used by
corporations, governments and other issuers to borrow money from investors. The
issuer pays the investor a fixed or variable rate of interest and normally must
repay the amount borrowed on or before maturity. Many preferred stocks and some
bonds are "perpetual" in that they have no maturity date.
Bonds are subject to interest rate risk and credit risk, but to varying
degrees. Interest rate risk is the risk that interest rates will rise and that,
as a result, bond prices will fall, lowering the value of a fund's investments
in bonds. In general, bonds having longer durations are more sensitive to
interest rate changes than are bonds with shorter durations. Credit risk is the
risk that an issuer may be unable or unwilling to pay interest and/or principal
on the bond, or that a market may become less confident as to the issuer's
ability or willingness to do so. Credit risk can be affected by many factors,
including adverse changes in the issuer's own financial condition or in economic
conditions.
CREDIT RATINGS; NON-INVESTMENT GRADE BONDS. Moody's, S&P and other
rating agencies are private services that provide ratings of the credit quality
of bonds and certain other securities. A description of the ratings assigned to
corporate bonds by Moody's and S&P is included in the Appendix to this Statement
of Additional Information. The process by which Moody's and S&P determine
ratings for mortgage-backed securities includes consideration of the likelihood
of the receipt by security holders of all distributions, the nature of the
underlying assets, the credit quality of the guarantor, if any, and the
structural, legal and tax aspects associated with these securities. Not even the
highest such ratings represents an assessment of the likelihood that principal
prepayments will be made by obligors on the underlying assets or the degree to
which such prepayments may differ from that originally anticipated, nor do such
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ratings address the possibility that investors may suffer a lower than
anticipated yield or that investors in such securities may fail to recoup fully
their initial investment due to prepayments.
Credit ratings attempt to evaluate the safety of principal and interest
payments, but they do not evaluate the volatility of a bond's value or its
liquidity and do not guarantee the performance of the issuer. Rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than the rating indicates. There is a risk that rating agencies may downgrade
the rating of a bond. Subsequent to a bond's purchase by a fund, it may cease to
be rated or its rating may be reduced below the minimum rating required for
purchase by the fund. The funds may use these ratings in determining whether to
purchase, sell or hold a security. It should be emphasized, however, that
ratings are general and are not absolute standards of quality. Consequently,
bonds with the same maturity, interest rate and rating may have different market
prices.
In addition to ratings assigned to individual bond issues, Mitchell
Hutchins or the applicable sub-adviser will analyze interest rate trends and
developments that may affect individual issuers, including factors such as
liquidity, profitability and asset quality. The yields on bonds are dependent on
a variety of factors, including general money market conditions, general
conditions in the bond market, the financial condition of the issuer, the size
of the offering, the maturity of the obligation and its rating. There is a wide
variation in the quality of bonds, both within a particular classification and
between classifications. An issuer's obligations under its bonds are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of bond holders or other creditors of an issuer; litigation or other
conditions may also adversely affect the power or ability of issuers to meet
their obligations for the payment of interest and principal on their bonds.
Investment grade bonds are rated in one of the four highest rating
categories by Moody's or S&P, comparably rated by another rating agency or, if
unrated, determined by Mitchell Hutchins or the sub-adviser to be of comparable
quality. Moody's considers bonds rated Baa (its lowest investment grade rating)
to have speculative characteristics. This means that changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case for higher rated debt
securities. Bonds rated D by S&P are in payment default or such rating is
assigned upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized. Bonds rated C by Moody's
are in the lowest rated class and can be regarded as having extremely poor
prospects of attaining any real investment standing. References to rated bonds
in the Prospectus or Statement of Additional Information include bonds that are
not rated by a rating agency but that Mitchell Hutchins or the applicable
sub-adviser determines to be of comparable quality.
High yield bonds (commonly known as "junk bonds") are non-investment
grade bonds. This means they are rated Ba or lower by Moody's, BB or lower by
S&P, comparably rated by another rating agency or determined by Mitchell
Hutchins or the sub-adviser to be of comparable quality. A fund's investments in
non-investment grade bonds entail greater risk than its investments in higher
rated bonds. Non-investment grade bonds are considered predominantly speculative
with respect to the issuer's ability to pay interest and repay principal and may
involve significant risk exposure to adverse conditions. Non-investment grade
bonds generally offer a higher current yield than that available for investment
grade issues; however, they involve higher risks, in that they are especially
sensitive to adverse changes in general economic conditions and in the
industries in which the issuers are engaged, to changes in the financial
condition of the issuers and to price fluctuations in response to changes in
interest rates. During periods of economic downturn or rising interest rates,
highly leveraged issuers may experience financial stress which could adversely
affect their ability to make payments of interest and principal and increase the
possibility of default. In addition, such issuers may not have more traditional
methods of financing available to them and may be unable to repay debt at
maturity by refinancing. The risk of loss due to default by such issuers is
significantly greater because such securities frequently are unsecured by
collateral and will not receive payment until more senior claims are paid in
full.
The market for non-investment grade bonds, especially those of foreign
issuers, has expanded rapidly in recent years, which has been a period of
generally expanding growth and lower inflation. These securities will be
susceptible to greater risk when economic growth slows or reverses and when
inflation increases or deflation occurs. This has been reflected in recent
volatility in emerging market securities. In the past, many lower rated bonds
experienced substantial price declines reflecting an expectation that many
issuers of such securities might experience financial difficulties. As a result,
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the yields on lower rated bonds rose dramatically. However, those higher yields
did not reflect the value of the income stream that holders of such securities
expected. Rather, they reflected the risk that holders of such securities could
lose a substantial portion of their value due to the issuers' financial
restructurings or defaults by the issuers. There can be no assurance that those
declines will not recur.
The market for non-investment grade bonds generally is thinner and less
active than that for higher quality securities, which may limit a fund's ability
to sell such securities at fair value in response to changes in the economy or
financial markets. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may also decrease the values and liquidity of
non-investment grade bonds, especially in a thinly traded market.
U.S. GOVERNMENT SECURITIES include direct obligations of the U.S.
Treasury (such as Treasury bills, notes or bonds) and obligations issued or
guaranteed as to principal and interest (but not as to market value) by the U.S.
government, its agencies or its instrumentalities. U.S. government securities
include mortgage-backed securities issued or guaranteed by government agencies
or government-sponsored enterprises. Other U.S. government securities may be
backed by the full faith and credit of the U.S. government or supported
primarily or solely by the creditworthiness of the government-related issuer or,
in the case of mortgage-backed securities, by pools of assets.
U.S. government securities also include separately traded principal and
interest components of securities issued or guaranteed by the U.S. Treasury,
which are traded independently under the Separate Trading of Registered Interest
and Principal of Securities ("STRIPS") program. Under the STRIPS programs, the
principal and interest components are individually numbered and separately
issued by the U.S. Treasury.
Treasury inflation protected securities ("TIPS") are Treasury bonds on
which the principal value is adjusted daily in accordance with changes in the
Consumer Price Index. Interest on TIPS is payable semiannually on the adjusted
principal value. The principal value of TIPS would decline during periods of
deflation, but the principal amount payable at maturity would not be less than
the original par amount. If inflation is lower than expected while a fund holds
TIPS, the fund may earn less on the TIPS than it would on conventional Treasury
bonds. Any increase in the principal value of TIPS is taxable in the year the
increase occurs, even though holders do not receive cash representing the
increase at that time.
ASSET-BACKED SECURITIES. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed in more
detail below. However, the underlying assets are not first lien mortgage loans
or interests therein, but include assets such as motor vehicle installment sales
contracts, other installment sales contracts, home equity loans, leases of
various types of real and personal property and receivables from revolving
credit (credit card) agreements. Such assets are securitized through the use of
trusts or special purpose corporations. Payments or distributions of principal
and interest may be guaranteed up to a certain amount and for a certain time
period by a letter of credit or pool insurance policy issued by a financial
institution unaffiliated with the issuer, or other credit enhancements may be
present.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent direct
or indirect interests in pools of underlying mortgage loans that are secured by
real property. U.S. government mortgage-backed securities are issued or
guaranteed as to the payment of principal and interest (but not as to market
value) by Ginnie Mae (also known as the Government National Mortgage
Association), Fannie Mae (also known as the Federal National Mortgage
Association), Freddie Mac (also known as the Federal Home Loan Mortgage
Corporation) or other government sponsored enterprises. Other domestic
mortgage-backed securities are sponsored or issued by private entities,
generally originators of an investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and special
purposes entities (collectively, "Private Mortgage Lenders"). Payments of
principal and interest (but not the market value) of such private
mortgage-backed securities may be supported by pools of mortgage loans or other
mortgage-backed securities that are guaranteed, directly or indirectly, by the
U.S. government or one of its agencies or instrumentalities, or they may be
issued without any government guarantee of the underlying mortgage assets but
with some form of non-government credit enhancement. Foreign mortgage-backed
securities may be issued by mortgage banks and other private or governmental
entities outside the United States and are supported by interests in foreign
real estate.
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Mortgage-backed securities may be composed of one or more classes and
may be structured either as pass-through securities or collateralized debt
obligations. Multiple-class mortgage-backed securities are referred to herein as
"CMOs." Some CMOs are directly supported by other CMOs, which in turn are
supported by mortgage pools. Investors typically receive payments out of the
interest and principal on the underlying mortgages. The portions of these
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class. CMOs
involve special risk and evaluating them requires special knowledge.
A major difference between mortgage-backed securities and traditional
bonds is that interest and principal payments are made more frequently (usually
monthly) and that principal may be repaid at any time because the underlying
mortgage loans may be prepaid at any time. When interest rates go down and
homeowners refinance their mortgages, mortgage-backed securities may be paid off
more quickly than investors expect. When interest rates rise, mortgage-backed
securities may be paid off more slowly than originally expected. Changes in the
rate or "speed" of these prepayments can cause the value of mortgage-backed
securities to fluctuate rapidly.
Mortgage-backed securities also may decrease in value as a result of
increases in interest rates and, because of prepayments, may benefit less than
other bonds from declining interest rates. Reinvestments of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting a fund's yield. Actual prepayment experience may cause the yield of a
mortgage-backed security to differ from what was assumed when the fund purchased
the security. Prepayments at a slower rate than expected may lengthen the
effective life of a mortgage-backed security. The value of securities with
longer effective lives generally fluctuates more widely in response to changes
in interest rates than the value of securities with shorter effective lives.
CMO classes may be specially structured in a manner that provides any of
a wide variety of investment characteristics, such as yield, effective maturity
and interest rate sensitivity. As market conditions change, however, and
particularly during periods of rapid or unanticipated changes in market interest
rates, the attractiveness of the CMO classes and the ability of the structure to
provide the anticipated investment characteristics may be significantly reduced.
These changes can result in volatility in the market value, and in some
instances reduced liquidity, of the CMO class.
Certain classes of CMOs and other mortgage-backed securities are
structured in a manner that makes them extremely sensitive to changes in
prepayment rates. Interest-only ("IO") and principal-only ("PO") classes are
examples of this. IOs are entitled to receive all or a portion of the interest,
but none (or only a nominal amount) of the principal payments, from the
underlying mortgage assets. If the mortgage assets underlying an IO experience
greater than anticipated principal prepayments, then the total amount of
interest payments allocable to the IO class, and therefore the yield to
investors, generally will be reduced. In some instances, an investor in an IO
may fail to recoup all of his or her initial investment, even if the security is
government issued or guaranteed or is rated AAA or the equivalent. Conversely,
PO classes are entitled to receive all or a portion of the principal payments,
but none of the interest, from the underlying mortgage assets. PO classes are
purchased at substantial discounts from par, and the yield to investors will be
reduced if principal payments are slower than expected. Some IOs and POs, as
well as other CMO classes, are structured to have special protections against
the effects of prepayments. These structural protections, however, normally are
effective only within certain ranges of prepayment rates and thus will not
protect investors in all circumstances. Inverse floating rate CMO classes also
may be extremely volatile. These classes pay interest at a rate that decreases
when a specified index of market rates increases.
The market for privately issued mortgage-backed securities is smaller
and less liquid than the market for U.S. government mortgage-backed securities.
CMO classes may be specially structured in a manner that provides any of a wide
variety of investment characteristics, such as yield, effective maturity and
interest rate sensitivity. As market conditions change, however, and especially
during periods of rapid or unanticipated changes in market interest rates, the
attractiveness of some CMO classes and the ability of the structure to provide
the anticipated investment characteristics may be significantly reduced. These
changes can result in volatility in the market value and, in some instances,
reduced liquidity of the CMO class. Foreign mortgage-backed securities markets
are substantially smaller than U.S. markets, but have been established in
several countries, including Germany, Denmark, Sweden, Canada and Australia, and
may be developed elsewhere. Foreign mortgage-backed securities generally are
structured differently than domestic mortgage-backed securities, but they
normally present substantially similar investment risks as well as the other
risks normally associated with foreign securities.
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During 1994, the value and liquidity of many mortgage-backed securities
declined sharply due primarily to increases in interest rates. There can be no
assurance that such declines will not recur. The market value of certain
mortgage-backed securities, including IO and PO classes of mortgage-backed
securities, can be extremely volatile, and these securities may become illiquid.
Mitchell Hutchins or the applicable sub-adviser seeks to manage a fund's
investments in mortgage-backed securities so that the volatility of its
portfolio, taken as a whole, is consistent with its investment objective.
Management of portfolio duration is an important part of this. However,
computing the duration of mortgage-backed securities is complex. See, "--
Duration." If Mitchell Hutchins or the sub-adviser does not compute the duration
of mortgage-backed securities correctly, the value of the fund's portfolio may
be either more or less sensitive to changes in market interest rates than
intended. In addition, if market interest rates or other factors that affect the
volatility of securities held by a fund change in ways that Mitchell Hutchins or
the sub-adviser does not anticipate, the fund's ability to meet its investment
objective may be reduced.
More information concerning these mortgage-backed securities and the
related risks of investments therein is set forth below. New types of
mortgage-backed securities are developed and marketed from time to time and,
consistent with their investment limitations, the funds expect to invest in
those new types of mortgage-backed securities that Mitchell Hutchins or the
applicable sub-adviser believe may assist the funds in achieving their
investment objectives. Similarly, the funds may invest in mortgage-backed
securities issued by new or existing governmental or private issuers other than
those identified herein.
GINNIE MAE CERTIFICATES--Ginnie Mae guarantees certain mortgage
pass-through certificates ("Ginnie Mae certificates") that are issued by Private
Mortgage Lenders and that represent ownership interests in individual pools of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. Timely payment of interest
and principal is backed by the full faith and credit of the U.S. government.
Each mortgagor's monthly payments to his lending institution on his residential
mortgage are "passed through" to certificateholders such as the funds. Mortgage
pools consist of whole mortgage loans or participations in loans. The terms and
characteristics of the mortgage instruments are generally uniform within a pool
but may vary among pools. Lending institutions that originate mortgages for the
pools are subject to certain standards, including credit and other underwriting
criteria for individual mortgages included in the pools.
FANNIE MAE CERTIFICATES--Fannie Mae facilitates a national secondary
market in residential mortgage loans insured or guaranteed by U.S. government
agencies and in privately insured or uninsured residential mortgage loans
(sometimes referred to as "conventional mortgage loans" or "conventional loans")
through its mortgage purchase and mortgage-backed securities sales activities.
Fannie Mae issues guaranteed mortgage pass-through certificates ("Fannie Mae
certificates"), which represent pro rata shares of all interest and principal
payments made and owed on the underlying pools. Fannie Mae guarantees timely
payment of interest and principal on Fannie Mae certificates. The Fannie Mae
guarantee is not backed by the full faith and credit of the U.S. government.
FREDDIE MAC CERTIFICATES--Freddie Mac also facilitates a national
secondary market for conventional residential and U.S. government-insured
mortgage loans through its mortgage purchase and mortgage-backed securities
sales activities. Freddie Mac issues two types of mortgage pass-through
securities: mortgage participation certificates ("PCs") and guaranteed mortgage
certificates ("GMCs"). Each PC represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. Freddie Mac generally
guarantees timely monthly payment of interest on PCs and the ultimate payment of
principal, but it also has a PC program under which it guarantees timely payment
of both principal and interest. GMCs also represent a pro rata interest in a
pool of mortgages. These instruments, however, pay interest semi-annually and
return principal once a year in guaranteed minimum payments. The Freddie Mac
guarantee is not backed by the full faith and credit of the U.S. government.
PRIVATE MORTGAGE-BACKED SECURITIES--Mortgage-backed securities issued by
Private Mortgage Lenders are structured similarly to CMOs issued or guaranteed
by Ginnie Mae, Fannie Mae and Freddie Mac. Such mortgage-backed securities may
be supported by pools of U.S. government or agency insured or guaranteed
mortgage loans or by other mortgage-backed securities issued by a government
agency or instrumentality, but they generally are supported by pools of
conventional (i.e., non-government guaranteed or insured) mortgage loans. Since
such mortgage-backed securities normally are not guaranteed by an entity having
the credit standing of Ginnie Mae, Fannie Mae and Freddie Mac, they normally are
structured with one or more types of credit enhancement. See "--Types of Credit
Enhancement." These credit enhancements do not protect investors from changes in
market value.
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COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE
PASS-THROUGHS--CMOs are debt obligations that are collateralized by mortgage
loans or mortgage pass-through securities (such collateral collectively being
called "Mortgage Assets"). CMOs may be issued by Private Mortgage Lenders or by
government entities such as Fannie Mae or Freddie Mac. Multi-class mortgage
pass-through securities are interests in trusts that are comprised of Mortgage
Assets and that have multiple classes similar to those in CMOs. Unless the
context indicates otherwise, references herein to CMOs include multi-class
mortgage pass-through securities. Payments of principal of, and interest on, the
Mortgage Assets (and in the case of CMOs, any reinvestment income thereon)
provide the funds to pay the debt service on the CMOs or to make scheduled
distributions on the multi-class mortgage pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMO, also referred to as a "tranche," is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause CMOs
to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrued on all classes of a CMO (other
than any principal-only or "PO" class) on a monthly, quarterly or semiannual
basis. The principal and interest on the Mortgage Assets may be allocated among
the several classes of a CMO in many ways. In one structure, payments of
principal, including any principal prepayments, on the Mortgage Assets are
applied to the classes of a CMO in the order of their respective stated
maturities or final distribution dates so that no payment of principal will be
made on any class of the CMO until all other classes having an earlier stated
maturity or final distribution date have been paid in full. In some CMO
structures, all or a portion of the interest attributable to one or more of the
CMO classes may be added to the principal amounts attributable to such classes,
rather than passed through to certificateholders on a current basis, until other
classes of the CMO are paid in full.
Parallel pay CMOs are structured to provide payments of principal on
each payment date to more than one class. These simultaneous payments are taken
into account in calculating the stated maturity date or final distribution date
of each class, which, as with other CMO structures, must be retired by its
stated maturity date or final distribution date but may be retired earlier.
Some CMO classes are structured to pay interest at rates that are
adjusted in accordance with a formula, such as a multiple or fraction of the
change in a specified interest rate index, so as to pay at a rate that will be
attractive in certain interest rate environments but not in others. For example,
an inverse floating rate CMO class pays interest at a rate that increases as a
specified interest rate index decreases but decreases as that index increases.
For other CMO classes, the yield may move in the same direction as market
interest rates-- i.e., the yield may increase as rates increase and decrease as
rates decrease--but may do so more rapidly or to a greater degree. The market
value of such securities generally is more volatile than that of a fixed rate
obligation. Such interest rate formulas may be combined with other CMO
characteristics. For example, a CMO class may be an inverse interest-only ("IO")
class, on which the holders are entitled to receive no payments of principal and
are entitled to receive interest at a rate that will vary inversely with a
specified index or a multiple thereof.
TYPES OF CREDIT ENHANCEMENT--To lessen the effect of failures by
obligors on Mortgage Assets to make payments, mortgage-backed securities may
contain elements of credit enhancement. Such credit enhancement falls into two
categories: (1) liquidity protection and (2) loss protection. Loss protection
related to losses resulting after default by an obligor on the underlying assets
and collection of all amounts recoverable directly from the obligor and through
liquidation of the collateral. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets (usually the
bank, savings association or mortgage banker that transferred the underlying
loans to the issuer of the security), to ensure that the receipt of payments on
the underlying pool occurs in a timely fashion. Loss protection ensures ultimate
payment of the obligations on at least a portion of the assets in the pool. Such
protection may be provided through guarantees, insurance policies or letters of
credit obtained by the issuer or sponsor, from third parties, through various
means of structuring the transaction or through a combination of such
approaches. A fund will not pay any additional fees for such credit enhancement,
although the existence of credit enhancement may increase the price of a
security. Credit enhancements do not provide protection against changes in the
market value of the security. Examples of credit enhancement arising out of the
structure of the transaction include "senior-subordinated securities" (multiple
class securities with one or more classes subordinate to other classes as to the
payment of principal thereof and interest thereon, with the result that defaults
on the underlying assets are borne first by the holders of the subordinated
class), creation of "spread accounts" or "reserve funds" (where cash or
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investments, sometimes funded from a portion of the payments on the underlying
assets, are held in reserve against future losses) and "over-collateralization"
(where the scheduled payments on, or the principal amount of, the underlying
assets exceed that required to make payment of the securities and pay any
servicing or other fees). The degree of credit enhancement provided for each
issue generally is based on historical information regarding the level of credit
risk associated with the underlying assets. Delinquency or loss in excess of
that anticipated could adversely affect the return on an investment in such a
security.
SPECIAL CHARACTERISTICS OF MORTGAGE- AND ASSET-BACKED SECURITIES--The
yield characteristics of mortgage- and asset-backed securities differ from those
of traditiona1 debt securities. Among the major differences are that interest
and principal payments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans or
other obligations generally may be prepaid at any time. Prepayments on a pool of
mortgage loans are influenced by a variety of economic, geographic, social and
other factors, including changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and servicing
decisions. Generally, however, prepayments on fixed-rate mortgage loans will
increase during a period of falling interest rates and decrease during a period
of rising interest rates. Similar factors apply to prepayments on asset-backed
securities, but the receivables underlying asset-backed securities generally are
of a shorter maturity and thus are less likely to experience substantial
prepayments. Such securities, however, often provide that for a specified time
period the issuers will replace receivables in the pool that are repaid with
comparable obligations. If the issuer is unable to do so, repayment of principal
on the asset-backed securities may commence at an earlier date. Mortgage- and
asset-backed securities may decrease in value as a result of increases in
interest rates and may benefit less than other fixed-income securities from
declining interest rates because of the risk of prepayment.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice was to assume that prepayments on pools of
fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. However, these effects may not be present, or may
differ in degree, if the mortgage loans in the pools have adjustable interest
rates or other special payment terms, such as a prepayment charge. Actual
prepayment experience may cause the yield of mortgage-backed securities to
differ from the assumed average life yield. Reinvestment of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting a fund's yield.
ADJUSTABLE RATE MORTGAGE AND FLOATING RATE MORTGAGE-BACKED
SECURITIES--Adjustable rate mortgage ("ARM") securities are mortgage-backed
securities (sometimes referred to as ARMs) that represent a right to receive
interest payments at a rate that is adjusted to reflect the interest earned on a
pool of mortgage loans bearing variable or adjustable rates of interest.
Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. Because the
interest rates on ARM and floating rate mortgage-backed securities are reset in
response to changes in a specified market index, the values of such securities
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tend to be less sensitive to interest rate fluctuations than the values of
fixed-rate securities. As a result, during periods of rising interest rates,
ARMs generally do not decrease in value as much as fixed rate securities.
Conversely, during periods of declining rates, ARMs generally do not increase in
value as much as fixed rate securities. ARMs represent a right to receive
interest payments at a rate that is adjusted to reflect the interest earned on a
pool of adjustable rate mortgage loans. These mortgage loans generally specify
that the borrower's mortgage interest rate may not be adjusted above a specified
lifetime maximum rate or, in some cases, below a minimum lifetime rate. In
addition, certain adjustable rate mortgage loans specify limitations on the
maximum amount by which the mortgage interest rate may adjust for any single
adjustment period. These mortgage loans also may limit changes in the maximum
amount by which the borrower's monthly payment may adjust for any single
adjustment period. In the event that a monthly payment is not sufficient to pay
the interest accruing on the ARM, any such excess interest is added to the
mortgage loan ("negative amortization"), which is repaid through future
payments. If the monthly payment exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment that would have been
necessary to amortize the outstanding principal balance over the remaining term
of the loan, the excess reduces the principal balance of the adjustable rate
mortgage loan. Borrowers under these mortgage loans experiencing negative
amortization may take longer to build up their equity in the underlying property
and may be more likely to default.
Adjustable rate mortgage loans also may be subject to a greater rate of
prepayments in a declining interest rate environment. For example, during a
period of declining interest rates, prepayments on these mortgage loans could
increase because the availability of fixed mortgage loans at competitive
interest rates may encourage mortgagors to "lock-in" at a lower interest rate.
Conversely, during a period of rising interest rates, prepayments on adjustable
rate mortgage loans might decrease. The rate of prepayments with respect to
adjustable rate mortgage loans has fluctuated in recent years.
The rates of interest payable on certain adjustable rate mortgage loans,
and therefore on certain ARM securities, are based on indices, such as the
one-year constant maturity Treasury rate, that reflect changes in market
interest rates. Others are based on indices, such as the 11th District Federal
Home Loan Bank Cost of Funds Index ("COFI"), that tend to lag behind changes in
market interest rates. The values of ARM securities supported by adjustable rate
mortgage loans that adjust based on lagging indices tend to be somewhat more
sensitive to interest rate fluctuations than those reflecting current interest
rate levels, although the values of such ARM securities still tend to be less
sensitive to interest rate fluctuations than fixed-rate securities.
Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. As with ARM
securities, interest rate adjustments on floating rate mortgage-backed
securities may be based on indices that lag behind market interest rates.
Interest rates on floating rate mortgage-backed securities generally are
adjusted monthly. Floating rate mortgage-backed securities are subject to
lifetime interest rate caps, but they generally are not subject to limitations
on monthly or other periodic changes in interest rates or monthly payments.
INVESTING IN FOREIGN SECURITIES. Investing in foreign securities
involves more risks than investing in the United States. The value of foreign
securities is subject to economic and political developments in the countries
where the companies operate and to changes in foreign currency values.
Investments in foreign securities involve risks relating to political, social
and economic developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign issuers and
markets are subject. These risks may include expropriation, confiscatory
taxation, withholding taxes on interest and/or dividends, limitations on the use
of or transfer of fund assets and political or social instability or diplomatic
developments. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. In those European countries that have begun using
the Euro as a common currency unit, individual national economies may be
adversely affected by the inability of national governments to use monetary
policy to address their own economic or political concerns.
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Securities of foreign issuers may not be registered with the SEC, and
the issuers thereof may not be subject to its reporting requirements.
Accordingly, there may be less publicly available information concerning foreign
issuers of securities held by the funds than is available concerning U.S.
companies. Foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory requirements
comparable to those applicable to U.S. companies.
Securities of many foreign companies may be less liquid and their prices
more volatile than securities of comparable U.S. companies. From time to time
foreign securities may be difficult to liquidate rapidly without significantly
depressing the price of such securities. Transactions in foreign securities may
be subject to less efficient settlement practices. Foreign securities trading
practices, including those involving securities settlement where fund assets may
be released prior to receipt of payment, may expose a fund to increased risk in
the event of a failed trade or the insolvency of a foreign broker-dealer. Legal
remedies for defaults and disputes may have to be pursued in foreign courts,
whose procedures differ substantially from those of U.S. courts.
The costs of investing outside the United States frequently are higher
than those attributable to investing in the United States. This is particularly
true with respect to emerging capital markets. For example, the cost of
maintaining custody of foreign securities exceeds custodian costs for domestic
securities, and transaction and settlement costs of foreign investing frequently
are higher than those attributable to domestic investing. Costs associated with
the exchange of currencies also make foreign investing more expensive than
domestic investing.
The funds may invest in foreign securities by purchasing depository
receipts, including American Depository Receipts ("ADRs"), European Depository
Receipts ("EDRs") and Global Depository Receipts ("GDRs"), or other securities
convertible into securities of issuers based in foreign countries. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by a U.S. bank or trust company evidencing ownership of the underlying
securities. They generally are in registered form, are denominated in U.S.
dollars and are designed for use in the U.S. securities markets. EDRs are
European receipts evidencing a similar arrangement, may be denominated in other
currencies and are designed for use in European securities markets. GDRs are
similar to EDRs and are designed for use in several international financial
markets. For purposes of each fund's investment policies, depository receipts
generally are deemed to have the same classification as the underlying
securities they represent. Thus, a depository receipt representing ownership of
common stock will be treated as common stock.
ADRs are publicly traded on exchanges or 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 funds that invest outside the United States anticipate that their
brokerage transactions involving foreign securities of companies headquartered
in countries other than the United States will be conducted primarily on the
principal exchanges of such countries. Although each fund will endeavor to
achieve the best net results in effecting its portfolio transactions,
transactions on foreign exchanges are usually subject to fixed commissions that
are generally higher than negotiated commissions on U.S. transactions. There is
generally less government supervision and regulation of exchanges and brokers in
foreign countries than in the United States.
Foreign markets have different clearance and settlement procedures, and
in certain markets there have been times when settlements have failed to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Delays in settlement could result in temporary periods when
assets of a fund are uninvested and no return is earned thereon. The inability
of a fund to make intended security purchases due to settlement problems could
cause the fund to miss attractive investment opportunities. Inability to dispose
of a portfolio security due to settlement problems could result either in losses
to the fund due to subsequent declines in the value of such portfolio security
or, if the fund has entered into a contract to sell the security, could result
in possible liability to the purchaser.
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Investment income and gains on certain foreign securities in which the
funds may invest may be subject to foreign withholding or other taxes that could
reduce the return on these securities. Tax treaties between the United States
and certain foreign countries, however, may reduce or eliminate the amount of
foreign taxes to which the funds would be subject. In addition, substantial
limitations may exist in certain countries with respect to the funds' ability to
repatriate investment capital or the proceeds of sales of securities.
FOREIGN CURRENCY RISKS. Currency risk is the risk that changes in
foreign exchange rates may reduce the U.S. dollar value of a fund's foreign
investments. If the value of a foreign currency rises against the value of the
U.S. dollar, the value of a fund's investments that are denominated in, or
linked to, that currency will increase. Conversely, if the value of a foreign
currency declines against the value of the U.S. dollar, the value of such fund
investments will decrease. Such changes may have a significant impact on the
value of fund shares. In some instances, a fund may use derivative strategies to
hedge against changes in foreign currency value. (See "Strategies Using
Derivative Instruments" below.) However, opportunities to hedge against currency
risk may not exist in certain markets, particularly with respect to emerging
market currencies, and even when appropriate hedging opportunities are
available, a fund may choose not to hedge against currency risk.
Generally, currency exchange rates are determined by supply and demand
in the foreign exchange markets and the relative merits of investments in
different countries. In the case of those European countries that use the Euro
as a common currency unit, the relative merits of investments in the common
market in which they participate, rather than the merits of investments in the
individual country, will be a determinant of currency exchange rates. Currency
exchange rates also can be affected by the intervention of the U.S. and foreign
governments or central banks, the imposition of currency controls, speculation,
devaluation or other political or economic developments inside and outside the
United States.
Each fund values its assets daily in U.S. dollars and does not intend to
convert its holdings of foreign currencies to U.S. dollars on a daily basis.
From time to time a fund's foreign currencies may be held as "foreign currency
call accounts" at foreign branches of foreign or domestic banks. These accounts
bear interest at negotiated rates and are payable upon relatively short demand
periods. If a bank became insolvent, a fund could suffer a loss of some or all
of the amounts deposited. Each fund may convert foreign currency to U.S. dollars
from time to time.
The value of the assets of a fund as measured in U.S. dollars may be
affected favorably or unfavorably by fluctuations in currency rates and exchange
control regulations. Further, a fund may incur costs in connection with
conversions between various currencies. Currency exchange dealers realize a
profit based on the difference between the prices at which they are buying and
selling various currencies. Thus, a dealer normally will offer to sell a foreign
currency to a fund at one rate, while offering a lesser rate of exchange should
a fund desire immediately to resell that currency to the dealer. Each fund
conducts its currency exchange transactions either on a spot (i.e., cash) basis
at the spot rate prevailing in the foreign currency exchange market, or through
entering into forward, futures or options contracts to purchase or sell foreign
currencies.
SPECIAL CHARACTERISTICS OF EMERGING MARKET SECURITIES AND SOVEREIGN DEBT
EMERGING MARKET INVESTMENTS. The special risks of investing in foreign
securities are heightened when emerging markets are involved. For example, many
emerging market currencies recently have experienced significant devaluations
relative to the U.S. dollar. Emerging market countries typically have economic
and political systems that are less fully developed and can be expected to be
less stable than those of developed countries. Emerging market countries may
have policies that restrict investment by foreigners, and there is a higher risk
of government expropriation or nationalization of private property. The
possibility of low or nonexistent trading volume in the securities of companies
in emerging markets also may result in a lack of liquidity and in price
volatility. Issuers in emerging markets typically are subject to a greater
degree of change in earnings and business prospects than are companies in
developed markets.
INVESTMENT AND REPATRIATION RESTRICTIONS. Foreign investment in the
securities markets of several emerging market countries is restricted or
controlled to varying degrees. These restrictions may limit a fund's investment
in these countries and may increase its expenses. For example, certain countries
may require governmental approval prior to investments by foreign persons in a
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particular company or industry sector or limit investment by foreign persons to
only a specific class of securities of a company, which may have less
advantageous terms (including price) than securities of the company available
for purchase by nationals. Certain countries may restrict or prohibit investment
opportunities in issuers or industries deemed important to national interests.
In addition, the repatriation of both investment income and capital from some
emerging market countries is subject to restrictions, such as the need for
certain government consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of a fund's operations. These restrictions may in the future make it
undesirable to invest in the countries to which they apply. In addition, if
there is a deterioration in a country's balance of payments or for other
reasons, a country may impose restrictions on foreign capital remittances
abroad. A fund could be adversely affected by delays in, or a refusal to grant,
any required governmental approval for repatriation, as well as by the
application to it of other restrictions on investments.
If, because of restrictions on repatriation or conversion, a fund were
unable to distribute substantially all of its net investment income and net
short-term and long-term capital gains within applicable time periods, the fund
would be subject to federal income and/or excise taxes that would not otherwise
be incurred and could cease to qualify for the favorable tax treatment afforded
to regulated investment companies under the Internal Revenue Code. In that case,
it would become subject to federal income tax on all of its income and net
gains.
SOCIAL, POLITICAL AND ECONOMIC FACTORS. Many emerging market countries
may be subject to a greater degree of social, political and economic instability
than is the case in the United States. Any change in the leadership or policies
of these countries may halt the expansion of or reverse any liberalization of
foreign investment policies now occurring. Such instability may result from,
among other things, the following: (i) authoritarian governments or military
involvement in political and economic decision making, and changes in government
through extra-constitutional means; (ii) popular unrest associated with demands
for improved political, economic and social conditions; (iii) internal
insurgencies; (iv) hostile relations with neighboring countries; and (v) ethnic,
religious and racial disaffection. Such social, political and economic
instability could significantly disrupt the financial markets in those countries
and elsewhere and could adversely affect the value of a fund's assets. In
addition, there may be the possibility of asset expropriations or future
confiscatory levels of taxation affecting a fund.
The economies of many emerging markets are heavily dependent upon
international trade and are accordingly affected by protective trade barriers
and the economic conditions of their trading partners, principally the United
States, Japan, China and the European Community. The enactment by the United
States or other principal trading partners of protectionist trade legislation,
reduction of foreign investment in the local economies and general declines in
the international securities markets could have a significant adverse effect
upon the securities markets of these countries. In addition, the economies of
some countries are vulnerable to weakness in world prices for their commodity
exports, including crude oil.
FINANCIAL INFORMATION AND LEGAL STANDARDS. Issuers in emerging market
countries generally are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
to U.S. issuers. In particular, the assets and profits appearing on the
financial statements of an emerging market issuer may not reflect its financial
position or results of operations in the way they would be reflected had the
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. In addition, for an issuer that keeps accounting records
in local currency, inflation accounting rules may require, for both tax and
accounting purposes, that certain assets and liabilities be restated on the
issuer's balance sheet in order to express items in terms of currency of
constant purchasing power. Inflation accounting may indirectly generate losses
or profits. Consequently, financial data may be materially affected by
restatements for inflation and may not accurately reflect the real condition of
those issuers and securities markets.
In addition, existing laws and regulations are often inconsistently
applied. As legal systems in some of the emerging market countries develop,
foreign investors may be adversely affected by new laws and regulations, changes
to existing laws and regulations and preemption of local laws and regulations by
national laws. In circumstances where adequate laws exist, it may not be
possible to obtain swift and equitable enforcement of the law.
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FOREIGN SOVEREIGN DEBT. Sovereign debt includes bonds that are issued by
foreign governments or their agencies, instrumentalities or political
subdivisions or by foreign central banks. Sovereign debt also may be issued by
quasi-governmental entities that are owned by foreign governments but are not
backed by their full faith and credit or general taxing powers. Investment in
sovereign debt involves special risks. The issuer of the debt or the
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal and/or interest when due in accordance with the
terms of such debt, and the funds may have limited legal recourse in the event
of a default.
Sovereign debt differs from debt obligations issued by private entities
in that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore somewhat diminished. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt obligations, are of considerable significance. Also, there can be no
assurance that the holders of commercial bank debt issued by the same sovereign
entity may not contest payments to the holders of sovereign debt in the event of
default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and
interest due in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which a
sovereign debtor may be subject. A country whose exports are concentrated in a
few commodities could be vulnerable to a decline in the international price of
such commodities. Increased protectionism on the part of a country's trading
partners, or political changes in those countries, could also adversely affect
its exports. Such events could diminish a country's trade account surplus, if
any, or the credit standing of a particular local government or agency. Another
factor bearing on the ability of a country to repay sovereign debt is the level
of the country's international reserves. Fluctuations in the level of these
reserves can affect the amount of foreign exchange readily available for
external debt payments and, thus, could have a bearing on the capacity of the
country to make payments on its sovereign debt.
The occurrence of political, social or diplomatic changes in one or more
of the countries issuing sovereign debt could adversely affect the funds'
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their sovereign debt. While Mitchell Hutchins manages a fund's portfolios in a
manner that is intended to minimize the exposure to such risks, there can be no
assurance that adverse political changes will not cause the funds to suffer a
loss of interest or principal on any of its sovereign debt holdings.
With respect to sovereign debt of emerging market issuers, investors
should be aware that certain emerging market countries are among the largest
debtors to commercial banks and foreign governments. Some emerging market
countries have from time to time declared moratoria on the payment of principal
and interest on external debt.
Some emerging market countries have experienced difficulty in servicing
their sovereign debt on a timely basis which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit agreements
or converting outstanding principal and unpaid interest to Brady Bonds
(discussed below), and obtaining new credit to finance interest payments.
Holders of sovereign debt, including the funds, may be requested to participate
in the rescheduling of such debt and to extend further loans to sovereign
debtors. The interests of holders of sovereign debt could be adversely affected
in the course of restructuring arrangements or by certain other factors referred
to below. Furthermore, some of the participants in the secondary market for
sovereign debt may also be directly involved in negotiating the terms of these
arrangements and may, therefore, have access to information not available to
other market participants. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of certain issuers of sovereign debt. There is no bankruptcy
proceeding by which sovereign debt on which a sovereign has defaulted may be
collected in whole or in part.
Foreign investment in certain sovereign debt is restricted or controlled
to varying degrees. These restrictions or controls may at times limit or
preclude foreign investment in such sovereign debt and increase the costs and
expenses of a fund. Certain countries in which a fund may invest require
governmental approval prior to investments by foreign persons, limit the amount
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of investment by foreign persons in a particular issuer, limit the investment by
foreign persons only to a specific class of securities of an issuer that may
have less advantageous rights than the classes available for purchase by
domiciliaries of the countries or impose additional taxes on foreign investors.
Certain issuers may require governmental approval for the repatriation of
investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in a country's balance of
payments the country could impose temporary restrictions on foreign capital
remittances. A fund could be adversely affected by delays in, or a refusal to
grant, any required governmental approval for repatriation of capital, as well
as by the application to the fund of any restrictions on investments. Investing
in local markets may require a fund to adopt special procedures, seek local
government approvals or take other actions, each of which may involve additional
costs to the fund.
BRADY BONDS. Brady Bonds are sovereign bonds issued under the framework
of the Brady Plan, an initiative announced by former U.S. Treasury Secretary
Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their
outstanding external commercial bank indebtedness. In restructuring its external
debt under the Brady Plan framework, a debtor nation negotiates with its
existing bank lenders as well as multilateral institutions such as the
International Monetary Fund ("IMF"). The Brady Plan framework, as it has
developed, contemplates the exchange of commercial bank debt for newly issued
Brady Bonds. Brady Bonds may also be issued in respect of new money being
advanced by existing lenders in connection with the debt restructuring. The
World Bank and the IMF support the restructuring by providing funds pursuant to
loan agreements or other arrangements which enable the debtor nation to
collateralize the new Brady Bonds or to repurchase outstanding bank debt at a
discount.
Brady Bonds have been issued only in recent years, and accordingly do
not have a long payment history. Agreements implemented under the Brady Plan to
date are designed to achieve debt and debt-service reduction through specific
options negotiated by a debtor nation with its creditors. As a result, the
financial packages offered by each country differ. The types of options have
included the exchange of outstanding commercial bank debt for bonds issued at
100% of face value of such debt, which carry a below-market stated rate of
interest (generally known as par bonds), bonds issued at a discount from the
face value of such debt (generally known as discount bonds), bonds bearing an
interest rate which increases over time and bonds issued in exchange for the
advancement of new money by existing lenders. Regardless of the stated face
amount and stated interest rate of the various types of Brady Bonds, a fund will
purchase Brady Bonds in which the price and yield to the investor reflect market
conditions at the time of purchase.
Certain Brady Bonds have been collateralized as to principal due at
maturity by U.S. Treasury zero coupon bonds with maturities equal to the final
maturity of such Brady Bonds. Collateral purchases are financed by the IMF, the
World Bank and the debtor nations' reserves. In the event of a default with
respect to collateralized Brady Bonds as a result of which the payment
obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent until the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments that would have then been due on the Brady Bonds in the
normal course. Interest payments on Brady Bonds may be wholly uncollateralized
or may be collateralized by cash or high grade securities in amounts that
typically represent between 12 and 18 months of interest accruals on these
instruments, with the balance of the interest accruals being uncollateralized.
Brady Bonds are often viewed as having several valuation components: (1)
the collateralized repayment of principal, if any, at final maturity, (2) the
collateralized interest payments, if any, (3) the uncollateralized interest
payments and (4) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative. A fund may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) repayment of principal
primarily on the willingness and ability of the foreign government to make
payment in accordance with the terms of the Brady Bonds.
STRUCTURED FOREIGN INVESTMENTS. This term refers to interests in U.S.
and foreign entities organized and operated solely for the purpose of
securitizing or restructuring the investment characteristics of foreign
securities. This type of securitization or restructuring involves the deposit
with or purchase by a U.S. or foreign entity, such as a corporation or trust, of
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specified instruments (such as commercial bank loans or Brady Bonds) and the
issuance by that entity of one or more classes of securities backed by, or
representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued structured
foreign investments to create securities with different investment
characteristics such as varying maturities, payment priorities and interest rate
provisions, and the extent of the payments made with respect to structured
foreign investments is dependent on the extent of the cash flow on the
underlying instruments.
Structured foreign investments frequently involve no credit enhancement.
Accordingly, their credit risk generally will be equivalent to that of the
underlying instruments. In addition, classes of structured foreign investments
may be subordinated to the right of payment of another class. Subordinated
structured foreign investments typically have higher yields and present greater
risks that unsubordinated structured foreign investments. Structured foreign
investments are typically sold in private placement transactions, and there
currently is no active trading market for structured foreign investments.
CURRENCY-LINKED INVESTMENTS. The principal amount of securities that are
indexed to specific foreign currency exchange rates may be adjusted up or down
(but not below zero) at maturity to reflect changes in the exchange rate between
two currencies. A fund may experience loss of principal due to these
adjustments.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. From time to time,
investments in other investment companies may be the most effective available
means by which a fund may invest in securities of issuers in certain countries.
Investment in such investment companies may involve the payment of management
expenses and, in connection with some purchases, sales loads and payments of
substantial premiums above the value of such companies' portfolio securities. At
the same time, a fund would continue to pay its own management fees and other
expenses. Each fund that may invest outside the United States may invest in such
investment companies when, in the judgment of Mitchell Hutchins or the
applicable sub-adviser, the potential benefits of such investment outweigh the
payment of any applicable premium, sales load and expenses. In addition, a
fund's investments in such investment companies are subject to limitations under
the Investment Company Act and market availability and may result in special
federal income tax consequences.
ZERO COUPON, OID AND PIK SECURITIES. Zero coupon securities are
securities on which no periodic interest payments are made but instead are sold
at a deep discount from their face value. The buyer of these securities receives
a rate of return by the gradual appreciation of the security, which results from
the fact that it will be paid at face value on a specified maturity date. There
are many types of zero coupon securities. Some are issued in zero coupon form,
including Treasury bills, notes and bonds that have been stripped of (separated
from) their unmatured interest coupons (unmatured interest payments) and
receipts or certificates representing interests in such stripped debt
obligations and coupons. Others are created by brokerage firms that strip the
coupons from interest-paying bonds and sell the principal and the coupons
separately.
Other securities are sold with original issue discount ("OID"), a term
that means the securities are issued at a price that is lower than their value
at maturity, even though interest on the securities may be paid make prior to
maturity. In addition, payment-in-kind ("PIK") securities pay interest in
additional securities, not in cash. OID and PIK securities usually trade at a
discount from their face value.
Zero coupon securities are generally more sensitive to changes in
interest rates than debt obligations of comparable maturities that make current
interest payments. This means that when interest rates fall, the value of zero
coupon securities rises more rapidly than securities paying interest on a
current basis. However, when interest rates rise, their value falls more
dramatically. Other OID securities and PIK securities also are subject to
greater fluctuations in market value in response to changing interest rates than
bonds of comparable maturities that make current distributions of interest in
cash.
Federal tax law requires that the holder of a zero coupon security or
other OID security include in gross income each year the OID that accrues on the
security for the year, even though the holder receives no interest payment on
the security during the year. Similarly, while PIK securities may pay interest
in the form of additional securities rather than cash, that interest must be
included in a fund's current income. These distributions would have to be made
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from the fund's cash assets or, if necessary, from the proceeds of sales of
portfolio securities. A fund would not be able to purchase additional securities
with cash used to make such distributions and its current income and the value
of its shares would ultimately be reduced as a result.
Certain zero coupon securities are U.S. Treasury notes and bonds that
have been stripped of their unmatured interest coupon receipts or interests in
such U.S. Treasury securities or coupons. The staff of the SEC currently takes
the position that "stripped" U.S. government securities that are not issued
through the U.S. Treasury are not U.S. government securities. This technique is
frequently used with U.S. Treasury bonds to create CATS (Certificate of Accrual
Treasury Securities), TIGRs (Treasury Income Growth Receipts) and similar
securities.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture,
note, preferred stock or other security that may be converted into or exchanged
for a prescribed amount of common stock of the same or a different issuer within
a particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest or dividends until the
convertible security matures or is redeemed, converted or exchanged. Convertible
securities have unique investment characteristics in that they generally (1)
have higher yields than common stocks, but lower yields than comparable
non-convertible securities, (2) are less subject to fluctuation in value than
the underlying stock because they have fixed income characteristics and (3)
provide the potential for capital appreciation if the market price of the
underlying common stock increases. While no securities investment is without
some risk, investments in convertible securities generally entail less risk than
the issuer's common stock. However, the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security sells
above its value as a fixed income security.
Before conversion, convertible securities have characteristics similar
to non-convertible bonds in that they ordinarily provide a stable stream of
income with generally higher yields than those of common stocks of the same or
similar issuers. Convertible securities rank senior to common stock in a
corporation's capital structure but are usually subordinated to comparable
non-convertible securities. The value of a convertible security is a function of
its "investment value" (determined by its yield comparison with the yields of
other securities of comparable maturity and quality that do not have a
conversion privilege) and its "conversion value" (the security's worth, at
market value, if converted into the underlying common stock). The investment
value of a convertible security is influenced by changes in interest rates, with
investment value declining as interest rates increase and increasing as interest
rates decline. The credit standing of the issuer and other factors also may have
an effect on the convertible security's investment value. The conversion value
of a convertible security is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment value,
the price of the convertible security is governed principally by its investment
value. Generally, the conversion value decreases as the convertible security
approaches maturity. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition, a
convertible security generally will sell at a premium over its conversion value
determined by the extent to which investors place value on the right to acquire
the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a fund is called for redemption,
the fund will be required to permit the issuer to redeem the security, convert
it into the underlying common stock or sell it to a third party. Investment
Grade Income Fund has no current intention of converting any convertible
securities it may own into equity or holding them as equity upon conversion,
although it may do so for temporary purposes. The other funds that may invest in
convertible securities may hold any equity securities they acquire upon
conversion subject only to their limitations on holding equity securities.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Investments in secured or unsecured
fixed or floating rate loans ("Loans") arranged through private negotiations
between a borrowing corporation, government or other entity and one or more
financial institutions ("Lenders") may be in the form of participations
("Participations") in Loans or assignments ("Assignments") of all or a portion
of Loans from third parties. Participations typically result in the fund's
having a contractual relationship only with the Lender, not with the borrower. A
fund has the right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the Participation and only
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upon receipt by the Lender of the payments from the borrower. In connection with
purchasing Participations, a fund generally has no direct right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
Loan, nor any rights of set-off against the borrower, and a fund may not
directly benefit from any collateral supporting the Loan in which it has
purchased the Participation. As a result, a fund assumes the credit risk of both
the borrower and the Lender that is selling the Participation. In the event of
the insolvency of the selling Lender, the fund may be treated as a general
creditor of that Lender and may not benefit from any set-off between the Lender
and the borrower. A fund will acquire Participations only if Mitchell Hutchins
or the applicable sub-adviser determines that the selling Lender is
creditworthy.
When a fund purchases Assignments from Lenders, it acquires direct
rights against the borrower on the Loan. In an Assignment, the fund is entitled
to receive payments directly from the borrower and, therefore, does not depend
on the selling bank to pass these payments onto the fund. However, because
Assignments are arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired by the fund as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender.
Assignments and Participations are generally not registered under the
Securities Act of 1933, as amended ("Securities Act") and thus may be subject to
a fund's limitation on investment in illiquid securities. Because there may be
no liquid market for such securities, such securities may be sold only to a
limited number of institutional investors. The lack of a liquid secondary market
could have an adverse impact on the value of such securities and on a fund's
ability to dispose of particular Assignments or Participations when necessary to
meet the fund's liquidity needs or in response to a specific economic event,
such as a deterioration in the creditworthiness of the borrower.
TEMPORARY AND DEFENSIVE INVESTMENTS; MONEY MARKET INVESTMENTS. Each fund
may invest in money market investments for temporary or defensive purposes or as
part of its normal investment program. Except for Money Market Portfolio and
Balanced Fund (whose money market investments are described elsewhere), such
investments include, among other things, (1) securities issued or guaranteed by
the U.S. government or one of its agencies or instrumentalities, (2) debt
obligations of banks, savings and loan institutions, insurance companies and
mortgage bankers, (3) commercial paper and notes, including those with variable
and floating rates of interest, (4) debt obligations of foreign branches of U.S.
banks, U.S. branches of foreign banks, and foreign branches of foreign banks,
(5) debt obligations issued or guaranteed by one or more foreign governments or
any of their foreign political subdivisions, agencies or instrumentalities,
including obligations of supranational entities, (6) bonds issued by foreign
issuers, (7) repurchase agreements and (8) other investment companies that
invest exclusively in money market instruments. Only those funds that may invest
outside the United States may invest in money market instruments that are
denominated in foreign currencies.
SELECTION OF INVESTMENTS BY BALANCED PORTFOLIO. The money market
instruments in which Balanced Portfolio may invest include U.S. Treasury bills
and other obligations issued or guaranteed as to interest and principal by the
U.S. government, its agencies and instrumentalities; obligations of U.S. banks
(including certificates of deposit and bankers' acceptances) having total assets
at the time of purchase in excess of $1.5 billion [and interest bearing savings
deposits in U.S. commercial and savings banks in principal amounts at each such
bank not greater than are fully insured by the Federal Deposit Insurance
Corporation, provided that the aggregate amount of such deposits does not exceed
5% of the value of the fund's assets]; commercial paper and other short-term
corporate obligations; and variable and floating rate securities and repurchase
agreements. The fund may also hold cash.
The commercial paper and other short-term corporate obligations
purchased by Balanced Portfolio will consist only of obligations of U.S.
corporations that are (1) rated at least Prime-2 by Moody's or A-2 by S&P, (2)
comparably rated by another rating agency or (3) unrated and determined by
Mitchell Hutchins to be of comparable quality. These obligations may include
variable amount master demand notes, which are unsecured obligations redeemable
upon notice that permit investment of fluctuating amounts at varying rates of
interest pursuant to direct arrangements with the issuer of the instrument. Such
obligations are usually unrated by a rating agency.
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WARRANTS. Warrants are securities permitting, but not obligating,
holders to subscribe for other securities. Warrants do not carry with them the
right to dividends or voting rights with respect to the securities that they
entitle their holder to purchase, and they do not represent any rights in the
assets of the issuer. As a result, warrants may be considered more speculative
than certain other types of investments. In addition, the value of a warrant
does not necessarily change with the value of the underlying securities, and a
warrant ceases to have value if it is not exercised prior to its expiration
date.
ILLIQUID SECURITIES. The term "illiquid securities" for purposes of the
Prospectus and Statement of Additional Information means securities that cannot
be disposed of within seven days in the ordinary course of business at
approximately the amount at which a fund has valued the securities and includes,
among other things, purchased over-the-counter options, repurchase agreements
maturing in more than seven days and restricted securities other than those
Mitchell Hutchins or the applicable sub-adviser has determined are liquid
pursuant to guidelines established by each fund's board. The assets used as
cover for over-the-counter options written by the funds will be considered
illiquid unless the over-the-counter options are sold to qualified dealers who
agree that the funds may repurchase any over-the-counter options they write 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. Under current SEC
guidelines, interest only and principal only classes of mortgage-backed
securities generally are considered illiquid. However, interest only and
principal only classes of fixed-rate mortgage-backed securities issued by the
U.S. government or one of its agencies or instrumentalities will not be
considered illiquid if Mitchell Hutchins or the sub-adviser has determined that
they are liquid pursuant to guidelines established by each fund's board. To the
extent a fund invests in illiquid securities, it may not be able to readily
liquidate such investments and may have to sell other investments if necessary
to raise cash to meet its obligations. The lack of a liquid secondary market for
illiquid securities may make it more difficult for a fund to assign a value to
those securities for purposes of valuing its portfolio and calculating its net
asset value.
Restricted securities are not registered under the 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, a fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time a fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, a fund might obtain a less favorable price than
prevailed when it decided to sell.
However, not all restricted securities are illiquid. To the extent that
foreign securities are freely tradeable in the country in which they are
principally traded, they generally are not considered illiquid, even if they are
restricted in the United States. A large institutional market has developed for
many U.S. and foreign securities that are not registered under the 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, which establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. Such markets include automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held by
a fund, however, could affect adversely the marketability of such portfolio
securities, and the fund might be unable to dispose of such securities promptly
or at favorable prices.
The board has delegated the function of making day-to-day determinations
of liquidity to Mitchell Hutchins or the applicable sub-adviser pursuant to
guidelines approved by the board. Mitchell Hutchins or the sub-adviser takes
into account a number of factors in reaching liquidity decisions, including (1)
the frequency of trades for the security, (2) the number of dealers that make
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quotes for the security, (3) the number of dealers that have undertaken to make
a market in the security, (4) the number of other potential purchasers and (5)
the nature of the security and how trading is effected (e.g., the time needed to
sell the security, how bids are solicited and the mechanics of transfer).
Mitchell Hutchins or the sub-adviser monitors the liquidity of restricted
securities in each fund's portfolio and reports periodically on such decisions
to the board.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
fund purchases securities or other obligations from a bank or securities dealer
(or its affiliate) and simultaneously commits to resell them to the counterparty
at an agreed-upon date or upon demand and at a price reflecting a market rate of
interest unrelated to the coupon rate or maturity of the purchased obligations.
A fund maintains custody of the underlying obligations prior to their
repurchase, either through its regular custodian or through a special
"tri-party" custodian or sub-custodian that maintains separate accounts for both
the fund and its counterparty. Thus, the obligation of the counterparty to pay
the repurchase price on the date agreed to or upon demand is, in effect, secured
by such obligations. Repurchase agreements carry certain risks not associated
with direct investments in securities, including a possible decline in the
market value of the underlying obligations. Repurchase agreements involving
obligations other than U.S. government securities (such as commercial paper and
corporate bonds) may be subject to special risks and may not have the benefit of
certain protections in the event of the counterparty's insolvency. If the seller
or guarantor becomes insolvent, the fund may suffer delays, costs and possible
losses in connection with the disposition of collateral. If their value becomes
less than the repurchase price, plus any agreed-upon additional amount, the
counterparty must provide additional collateral so that at all times the
collateral is at least equal to the repurchase price plus any agreed-upon
additional amount. The difference between the total amount to be received upon
repurchase of the obligations and the price that was paid by a fund upon
acquisition is accrued as interest and included in its net investment income.
Each fund intends to enter into repurchase agreements only with counterparties
in transactions believed by Mitchell Hutchins to present minimum credit risks in
accordance with guidelines established by the board.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements involve the
sale of securities held by a fund subject to its agreement to repurchase the
securities at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest. Reverse repurchase agreements are subject to each
fund's limitation on borrowings. While a reverse repurchase agreement is
outstanding, a fund will maintain, in a segregated account with its custodian,
cash or liquid securities, marked to market daily, in an amount at least equal
to its obligations under the reverse repurchase agreement.
Reverse repurchase agreements involve the risk that the buyer of the
securities sold by a fund might be unable to deliver them when that fund seeks
to repurchase. If 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.
DOLLAR ROLLS. In a dollar roll, a fund sells mortgage-backed or other
securities for delivery on the next regular settlement date for those securities
and, simultaneously, contracts to purchase substantially similar securities for
delivery on a later settlement date. Dollar rolls also are subject to a fund's
limitation on borrowings.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each fund may purchase
securities on a "when-issued" basis or may purchase or sell securities for
delayed delivery, that is, for issuance or delivery to the fund later than the
normal settlement date for such securities at a stated price and yield. When
issued securities include TBA ("to be assigned") securities. TBA securities,
which are usually mortgage-backed securities, are purchased on a forward
commitment basis with an approximate principal amount and no defined maturity
date. The actual principal amount and maturity date are determined upon
settlement when the specific mortgage pools are assigned. A fund generally would
not pay for such securities or start earning interest on them until they are
received. However, when a fund undertakes a when-issued or delayed-delivery
obligation, it immediately assumes the risks of ownership, including the risks
of price fluctuation. Failure of the issuer to deliver a security purchased by a
fund on a when-issued or delayed-delivery basis may result in the fund's
incurring or missing an opportunity to make an alternative investment. Depending
on market conditions, a fund's when-issued and delayed-delivery purchase
commitments could cause its net asset value per share to be more volatile,
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because such securities may increase the amount by which the fund's total
assets, including the value of when-issued and delayed-delivery securities held
by that fund, exceeds its net assets.
A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in market
value, generally based upon changes in the level of interest rates. Thus,
fluctuation in the value of the security from the time of the commitment date
will affect a fund's net asset value. When a fund commits to purchase securities
on a when-issued or delayed delivery basis, its custodian segregates assets to
cover the amount of the commitment. See "Investment Policies and
Restrictions--Segregated Accounts." A fund may sell the right to acquire the
security prior to delivery if Mitchell Hutchins or a sub-adviser, as applicable,
deems it advantageous to do so, which may result in a gain or loss to the fund.
DURATION. Duration is a measure of the expected life of a debt security
on a present value basis. Duration incorporates the debt security's yield,
coupon interest payments, final maturity and call features into one measures and
is one of the fundamental tools used by Mitchell Hutchins or, where applicable,
a sub-adviser in portfolio selection and yield curve positioning a fund's
investments in debt securities. Duration was developed as a more precise
alternative to the concept "term to maturity." Traditionally, a debt security's
"term to maturity" has been used as a proxy for the sensitivity of the
security's price to changes in interest rates (which is the "interest rate risk"
or "volatility" of the security). However, "term to maturity" measures only the
time until a debt security provides for a final payment, taking no account of
the pattern of the security's payments prior to maturity.
Duration takes the length of the time intervals between the present time
and the time that the interest and principal payments are scheduled or, in the
case of a callable debt security, expected to be made, and weights them by the
present values of the cash to be received at each future point in time. For any
debt security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. For example, depending on its
coupon and the level of market yields, a Treasury note with a remaining maturity
of five years might have a duration of 4.5 years. For mortgage-backed and other
securities that are subject to prepayments, put or call features or adjustable
coupons, the difference between the remaining stated maturity and the duration
is likely to be much greater.
Duration allows Mitchell Hutchins or a sub-adviser to make certain
predictions as to the effect that changes in the level of interest rates will
have on the value of a fund's portfolio of debt securities. For example, when
the level of interest rates increases by 1%, a debt security having a positive
duration of three years generally will decrease by approximately 3%. Thus, if
Mitchell Hutchins calculates the duration of a fund's portfolio of bonds as
three years, it normally would expect the portfolio to change in value by
approximately 3% for every 1% change in the level of interest rates. However,
various factors, such as changes in anticipated prepayment rates, qualitative
considerations and market supply and demand, can cause particular securities to
respond somewhat differently to changes in interest rates than indicated in the
above example. Moreover, in the case of mortgage-backed and other complex
securities, duration calculations are estimates and are not precise. This is
particularly true during periods of market volatility. Accordingly, the net
asset value of a fund's portfolio of bonds may vary in relation to interest
rates by a greater or lesser percentage than indicated by the above example.
Futures, options and options on futures have durations that, in general,
are closely related to the duration of the securities that underlie them.
Holding long futures or call option positions will lengthen portfolio duration
by approximately the same amount as would holding an equivalent amount of the
underlying securities. Short futures or put options have durations roughly equal
to the negative duration of the securities that underlie these positions, and
have the effect of reducing portfolio duration by approximately the same amount
as would selling an equivalent amount of the underlying securities.
There are some situations in which the standard duration calculation
does not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by the standard duration calculation is the case of mortgage-backed
securities. The stated final maturity of such securities is generally 30 years,
but current prepayment rates are critical in determining the securities'
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interest rate exposure. In these and other similar situations, Mitchell Hutchins
and the sub-adviser will use more sophisticated analytical techniques that
incorporate the economic life of a security into the determination of its
duration and, therefore, its interest rate exposure.
LENDING OF PORTFOLIO SECURITIES. Each fund is authorized to lend its
portfolio securities in an amount up to 33-1/3% of its total assets to
broker-dealers or institutional investors that Mitchell Hutchins deems
qualified. Lending securities enables a fund to earn additional income, but
could result in a loss or delay in recovering these securities. The borrower of
a fund's portfolio securities must maintain acceptable collateral with that
fund's custodian in an amount, marked to market daily, at least equal to the
market value of the securities loaned, plus accrued interest and dividends.
Acceptable collateral is limited to cash, U.S. government securities and
irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. Each fund may reinvest any cash collateral in money market
investments or other short-term liquid investments. In determining whether to
lend securities to a particular broker-dealer or institutional investor,
Mitchell Hutchins will consider, and during the period of the loan will monitor,
all relevant facts and circumstances, including the creditworthiness of the
borrower. Each fund will retain authority to terminate any of its loans at any
time. Each fund may pay reasonable fees in connection with a loan and may pay
the borrower or placing broker a negotiated portion of the interest earned on
the reinvestment of cash held as collateral. A fund will receive amounts
equivalent to any dividends, interest or other distributions on the securities
loaned. Each fund will regain record ownership of loaned securities to exercise
beneficial rights, such as voting and subscription rights, when regaining such
rights is considered to be in the fund's interest.
Pursuant to procedures adopted by the board governing each fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for each fund. The boards also have authorized the payment of fees
(including fees calculated as a percentage of invested cash collateral) to
PaineWebber for these services. Each board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent.
PaineWebber also has been approved as a borrower under each fund's securities
lending program.
SHORT SALES "AGAINST THE BOX." Each fund (other than Money Market
Portfolio) may engage in short sales of securities it owns or has the right to
acquire at no added cost through conversion or exchange of other securities it
owns (short sales "against the box"). To make delivery to the purchaser in a
short sale, the executing broker borrows the securities being sold short on
behalf of a fund, and that fund is obligated to replace the securities borrowed
at a date in the future. When a fund sells short, it establishes a margin
account with the broker effecting the short sale and deposits collateral with
the broker. In addition, the fund maintains, in a segregated account with its
custodian, the securities that could be used to cover the short sale. Each fund
incurs transaction costs, including interest expense, in connection with
opening, maintaining and closing short sales "against the box."
A fund might make a short sale "against the box" to hedge against market
risks when Mitchell Hutchins or a sub-adviser believes that the price of a
security may decline, thereby causing a decline in the value of a security owned
by the fund or a security convertible into or exchangeable for a security owned
by the fund. In such case, any loss in the fund's long position after the short
sale should be reduced by a corresponding gain in the short position.
Conversely, any gain in the long position after the short sale should be reduced
by a corresponding loss in the short position. The extent to which gains or
losses in the long position are reduced will depend upon the amount of the
securities sold short relative to the amount of the securities a fund owns,
either directly or indirectly, and in the case where the fund owns convertible
securities, changes in the investment values or conversion premiums of such
securities.
SEGREGATED ACCOUNTS. When a fund enters into certain transactions that
involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis, or reverse
repurchase agreements, it will maintain with an approved custodian in a
segregated account cash or liquid securities, marked to market daily, in an
amount at least equal to the fund's obligation or commitment under such
transactions. As described below under "Strategies Using Derivative
Instruments," segregated accounts may also be required in connection with
certain transactions involving options, futures or forward currency contracts
and swaps.
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INVESTMENT LIMITATIONS OF THE FUNDS
FUNDAMENTAL LIMITATIONS. The following fundamental investment
limitations cannot be changed for a fund without the affirmative vote of the
lesser of (a) more than 50% of the outstanding shares of the fund or (b) 67% or
more of the shares of the fund present at a shareholders' meeting if more than
50% of the outstanding shares are represented at the meeting in person or by
proxy. If a percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations.
Each fund will not:
(1) purchase any security if, as a result of that purchase, 25% or more
of the fund's total assets would be invested in securities of issuers having
their principal business activities in the same industry, except that this
limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or to municipal securities (or, in
the case of Money Market Portfolio, to certificates of deposit and bankers'
acceptances of domestic branches of U.S. banks).
For Money Market Portfolio only - the following interpretations apply
to, but are not a part of, this fundamental restriction: (a) with respect to
this limitation, domestic and foreign banking will be considered to be different
industries and (b) asset-backed securities will be grouped in industries based
upon their underlying assets and not treated as constituting a single, separate
industry.
(2) 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.
(3) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other 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.
(4) engage in the business of underwriting securities of other issuers,
except to the extent that the fund might be considered an underwriter under the
federal securities laws in connection with its disposition of portfolio
securities.
(5) purchase or sell real estate, except that investments in securities
of issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the fund may
exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an orderly
manner.
(6) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the fund may purchase, sell or enter
into financial options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative instruments.
The following investment restriction applies to all funds except Global
Income Portfolio and Strategic Income Portfolio:
(7) purchase securities of any one issuer if, as a result, more than 5%
of the fund's total assets would be invested in securities of that issuer or the
fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 25% of the fund's total assets may be invested
without regard to this limitation, and except that this limitation does not
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apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment companies.
The following interpretation applies to, but is not a part of, this
fundamental restriction: Mortgage- and asset-backed securities will not be
considered to have been issued by the same issuer by reason of the securities
having the same sponsor, and mortgage- and asset-backed securities issued by a
finance or other special purpose subsidiary that are not guaranteed by the
parent company will be considered to be issued by a separate issuer from the
parent company.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are
non-fundamental and may be changed by the vote of the board without shareholder
approval.
Each fund will not:
(1) hold assets of any issuers, at the end of any calendar quarter (or
within 30 days thereafter), to the extent such holdings would cause the fund to
fail to satisfy the diversification requirements imposed by section 817(h) of
the Internal Revenue Code and the Treasury regulations issued thereunder on
segregated asset accounts used to fund variable annuity and/or variable life
insurance contracts (these requirements must be satisfied by the fund as the
investment vehicle underlying those accounts).
(2) purchase portfolio securities while borrowings in excess of 5% of
its total assets are outstanding;
(3) purchase securities on margin, except for short-term credit
necessary for clearance of portfolio transactions and except that the fund may
make margin deposits in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments;
(4) engage in short sales of securities or maintain a short position,
except that the fund may (a) sell short "against the box" and (b) maintain short
positions in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments; or
(5) purchase securities of other investment companies, except to the
extent permitted by the 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.
STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. Mitchell Hutchins or the
applicable sub-adviser may use a variety of financial instruments ("Derivative
Instruments"), including certain options, futures contracts (sometimes referred
to as "futures"), and options on futures contracts, to attempt to hedge each
fund's portfolio and also to attempt to enhance income or realize gains and (for
funds that invest in bonds) to manage the duration of its portfolio. For funds
that are permitted to invest outside the United States, Mitchell Hutchins or the
sub-adviser also may use forward currency contracts, foreign currency options
and futures and options on foreign currency futures. Funds that invest primarily
in bonds also may enter into interest rate swap transactions. A fund may enter
into transactions involving one or more types of Derivative Instruments under
which the full value of its portfolio is at risk. Under normal circumstances,
however, each fund's use of these instruments will place at risk a much smaller
portion of its assets. Money Market Portfolio is not authorized to use these
Derivative Instruments. The particular Derivative Instruments used by the other
funds are described below.
The funds might not use any derivative instruments or strategies, and
there can be no assurance that using any strategy will succeed. If Mitchell
Hutchins or a sub-adviser is incorrect in its judgment on market values,
interest rates or other economic factors in using a derivative instrument or
strategy, a fund may have lower net income and a net loss on the investment.
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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.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar
to options on securities or currency, except that an option on a futures
contract gives the purchaser the right, in return for the premium, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell a
security or currency, at a specified price at any time during the option term.
Upon exercise of the option, the delivery of the futures position to the holder
of the option will be accompanied by delivery of the accumulated balance that
represents the amount by which the market price of the futures contract exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the future. The writer of an option, upon exercise, will assume
a short position in the case of a call and a long position in the case of a put.
FORWARD CURRENCY CONTRACTS--A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into.
GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS. Hedging
strategies can be broadly categorized as "short hedges" and "long hedges." A
short hedge is a purchase or sale of a Derivative Instrument intended partially
or fully to offset potential declines in the value of one or more investments
held in a fund's portfolio. Thus, in a short hedge a fund takes a position in a
Derivative Instrument whose price is expected to move in the opposite direction
of the price of the investment being hedged. For example, a fund might purchase
a put option on a security to hedge against a potential decline in the value of
that security. If the price of the security declined below the exercise price of
the put, a fund could exercise the put and thus limit its loss below the
exercise price to the premium paid plus transaction costs. In the alternative,
because the value of the put option can be expected to increase as the value of
the underlying security declines, a fund might be able to close out the put
option and realize a gain to offset the decline in the value of the security.
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Conversely, a long hedge is a purchase or sale of a Derivative
Instrument intended partially or fully to offset potential increases in the
acquisition cost of one or more investments that a fund intends to acquire.
Thus, in a long hedge, a fund takes a position in a Derivative Instrument whose
price is expected to move in the same direction as the price of the prospective
investment being hedged. For example, a fund might purchase a call option on a
security it intends to purchase in order to hedge against an increase in the
cost of the security. If the price of the security increased above the exercise
price of the call, a fund could exercise the call and thus limit its acquisition
cost to the exercise price plus the premium paid and transactions costs.
Alternatively, a fund might be able to offset the price increase by closing out
an appreciated call option and realizing a gain.
A fund may purchase and write (sell) straddles on securities or indices
of securities. A long straddle is a combination of a call and a put option
purchased on the same security or on the same futures contract, where the
exercise price of the put is equal to the exercise price of the call. A fund
might enter into a long straddle when Mitchell Hutchins or a sub-adviser
believes it likely that the prices of the securities will be more volatile
during the term of the option than the option pricing implies. A short straddle
is a combination of a call and a put written on the same security where the
exercise price of the put is equal to the exercise price of the call. A fund
might enter into a short straddle when Mitchell Hutchins or a sub-adviser
believes it unlikely that the prices of the securities will be as volatile
during the term of the option as the option pricing implies.
Derivative Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that a fund owns
or intends to acquire. Derivative Instruments on stock indices, in contrast,
generally are used to hedge against price movements in broad equity market
sectors in which a fund has invested or expects to invest. Derivative
Instruments on bonds may be used to hedge either individual securities or broad
fixed income market sectors.
Income strategies using Derivative Instruments may include the writing
of covered options to obtain the related option premiums. Gain strategies may
include using Derivative Instruments to increase or decrease a fund's exposure
to different asset classes without buying or selling the underlying instruments.
A fund also may use derivatives to simulate full investment by the fund while
maintaining a cash balance for fund management purposes (such as to provide
liquidity to meet anticipated shareholder sales of fund shares and for fund
operating expenses).
The use of Derivative Instruments is subject to applicable regulations
of the SEC, the several options and futures exchanges upon which they are traded
and the Commodity Futures Trading Commission ("CFTC"). In addition, a fund's
ability to use Derivative Instruments may be limited by tax considerations. See
"Taxes."
In addition to the products, strategies and risks described below and in
the Prospectus, Mitchell Hutchins and the sub-advisers may discover additional
opportunities in connection with Derivative Instruments and with hedging, income
and gain strategies. These new opportunities may become available as regulatory
authorities broaden the range of permitted transactions and as new Derivative
Instruments and techniques are developed. Mitchell Hutchins or the applicable
sub-adviser may utilize these opportunities for a fund to the extent that they
are consistent with the fund's investment objective and permitted by its
investment limitations and applicable regulatory authorities. The funds'
Prospectus or Statement of Additional Information will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.
SPECIAL RISKS OF STRATEGIES USING DERIVATIVE INSTRUMENTS. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.
(1) Successful use of most Derivative Instruments depends upon the
ability of Mitchell Hutchins or the applicable sub-adviser to predict movements
of the overall securities, interest rate or currency exchange markets, which
requires different skills than predicting changes in the prices of individual
securities. While Mitchell Hutchins and the sub-advisers are experienced in the
use of Derivative Instruments, there can be no assurance that any particular
strategy adopted will succeed.
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(2) There might be imperfect correlation, or even no correlation,
between price movements of a Derivative Instrument and price movements of the
investments that are being hedged. For example, if the value of a Derivative
Instrument used in a short hedge increased by less than the decline in value of
the hedged investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors affecting the markets in which Derivative
Instruments are traded, rather than the value of the investments being hedged.
The effectiveness of hedges using Derivative Instruments on indices will depend
on the degree of correlation between price movements in the index and price
movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly
or partially offsetting the negative effect of unfavorable price movements in
the investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a fund entered into a short
hedge because Mitchell Hutchins or a sub-adviser projected a decline in the
price of a security in that fund's portfolio, and the price of that security
increased instead, the gain from that increase might be wholly or partially
offset by a decline in the price of the Derivative Instrument. Moreover, if the
price of the Derivative Instrument declined by more than the increase in the
price of the security, the fund could suffer a loss. In either such case, the
fund would have been in a better position had it not hedged at all.
(4) As described below, a fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
(i.e., Derivative Instruments other than purchased options). If the fund was
unable to close out its positions in such Derivative Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the positions expired or matured. These requirements might impair a fund's
ability to sell a portfolio security or make an investment at a time when it
would otherwise be favorable to do so, or require that the fund sell a portfolio
security at a disadvantageous time. A fund's ability to close out a position in
a Derivative Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of a counterparty to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to a fund.
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose the funds to an
obligation to another party. A fund will not enter into any such transactions
unless it owns either (1) an offsetting ("covered") position in securities,
currencies or other options or futures contracts or (2) cash or liquid
securities, with a value sufficient at all times to cover its potential
obligations to the extent not covered as provided in (1) above. Each fund will
comply with SEC guidelines regarding cover for such transactions and will, if
the guidelines so require, set aside cash or liquid securities in a segregated
account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding Derivative Instrument is open, unless
they are replaced with similar assets. As a result, committing a large portion
of a fund's assets to cover positions or to segregated accounts could impede
portfolio management or the fund's ability to meet redemption requests or other
current obligations.
OPTIONS. The funds may purchase put and call options, and write (sell)
covered put or call options on securities in which they invest and related
indices. Funds that may invest outside the United States also may purchase put
and call options and write covered options on foreign currencies. The purchase
of call options may serve as a long hedge, and the purchase of put options may
serve as a short hedge. In addition, a fund may also use options to attempt to
realize gains by increasing or reducing its exposure to an asset class without
purchasing or selling the underlying securities. Writing covered put or call
options can enable a fund to enhance income by reason of the premiums paid by
the purchasers of such options. Writing covered call options serves as a limited
short hedge, because declines in the value of the hedged investment would be
offset to the extent of the premium received for writing the option. However, if
the security appreciates to a price higher than the exercise price of the call
option, it can be expected that the option will be exercised and the affected
fund will be obligated to sell the security at less than its market value.
Writing covered put options serves as a limited long hedge because increases in
the value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security depreciates to a price
lower than the exercise price of the put option, it can be expected that the put
option will be exercised and the fund will be obligated to purchase the security
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at more than its market value. The securities or other assets used as cover for
over-the-counter options written by a fund would be considered illiquid to the
extent described under "Investment Policies and Restrictions--Illiquid
Securities."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Generally, over-the-counter options on bonds are
European-style options. This means that the option can only be exercised
immediately prior to its expiration. This is in contrast to American-style
options that may be exercised at any time. There are also other types of options
that may be exercised on certain specified dates before expiration. Options that
expire unexercised have no value.
A fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, a fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit a fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
The funds may purchase and write both exchange-traded and
over-the-counter options. Currently, many options on equity securities are
exchange-traded. Exchange markets for options on bonds and foreign currencies
exist but are relatively new, and these instruments are primarily traded on the
over-the-counter market. Exchange-traded options in the United States are issued
by a clearing organization affiliated with the exchange on which the option is
listed which, in effect, guarantees completion of every exchange-traded option
transaction. In contrast, over-the-counter options are contracts between a fund
and its counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when a fund purchases or writes an
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 funds' ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The funds
intend to purchase or write only those exchange-traded options for which there
appears to be a liquid secondary market. However, there can be no assurance that
such a market will exist at any particular time. Closing transactions can be
made for 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 funds will enter into over-the-counter options only with
counterparties that are expected to be capable of entering into closing
transactions with the funds, there is no assurance that a fund will in fact be
able to close out an over-the-counter option position at a favorable price prior
to expiration. In the event of insolvency of the counterparty, a fund might be
unable to close out an over-the-counter option position at any time prior to its
expiration.
If a fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered put or call
option written by the fund could cause material losses because the fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.
A fund may purchase and write put and call options on indices in much
the same manner as the more traditional options discussed above, except the
index options may serve as a hedge against overall fluctuations in a securities
market (or market sector) rather than anticipated increases or decreases in the
value of a particular security.
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LIMITATIONS ON THE USE OF OPTIONS. The funds' use of options is governed
by the following guidelines, which can be changed by the board without
shareholder vote:
(1) A fund may purchase a put or call option, including any straddle or
spread, only if the value of its premium, when aggregated with the premiums on
all other options held by the fund, does not exceed 5% of its total assets.
(2) The aggregate value of securities underlying put options written by
a fund, determined as of the date the put options are written, will not exceed
50% of its net assets.
(3) The aggregate premiums paid on all options (including options on
securities, foreign currencies and securities indices and options on futures
contracts) purchased by a fund that are held at any time will not exceed 20% of
its net assets.
FUTURES. The funds may purchase and sell securities index futures
contracts, interest rate futures contracts, debt security index futures
contracts and (for those funds that invest outside the United States) foreign
currency futures contracts. A fund may also purchase put and call options, and
write covered put and call options, on futures in which it is allowed to invest.
The purchase of futures or call options thereon can serve as a long hedge, and
the sale of futures or the purchase of put options thereon can serve as a short
hedge. Writing covered call options on futures contracts can serve as a limited
short hedge, and writing covered put options on futures contracts can serve as a
limited long hedge, using a strategy similar to that used for writing covered
options on securities or indices. In addition, a fund may purchase or sell
futures contracts or purchase options thereon to increase or reduce its exposure
to an asset class without purchasing or selling the underlying securities.
Futures strategies also can be used to manage the average duration of a
fund's portfolio. If Mitchell Hutchins or the applicable sub-adviser wishes to
shorten the average duration of a fund's portfolio, the fund may sell a futures
contract or a call option thereon, or purchase a put option on that futures
contract. If Mitchell Hutchins or the sub-adviser wishes to lengthen the average
duration of the fund's portfolio, the fund may buy a futures contract or a call
option thereon, or sell a put option thereon.
A fund may also write put options on futures contracts while at the same
time purchasing call options on the same futures contracts in order
synthetically to create a long futures contract position. Such options would
have the same strike prices and expiration dates. A fund will engage in this
strategy only when it is more advantageous to a fund than is purchasing the
futures contract.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash, obligations of
the United States or obligations fully guaranteed as to principal and interest
by the United States, in an amount generally equal to 10% or less of the
contract value. Margin must also be deposited when writing a call option on a
futures contract, in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not represent
a borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to a fund at the termination of the transaction if all
contractual obligations have been satisfied. Under certain circumstances, such
as periods of high volatility, a fund may be required by an exchange to increase
the level of its initial margin payment, and initial margin requirements might
be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of each fund's obligations to or from a futures
broker. When a fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a fund purchases or
sells a futures contract or writes a call option thereon, it is subject to daily
variation margin calls that could be substantial in the event of adverse price
movements. If a fund has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales are
disadvantageous.
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Holders and writers of futures positions and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The funds intend to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or related option can vary from
the previous day's settlement price; once that limit is reached, no trades may
be made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a fund were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. A fund would continue to be subject
to market risk with respect to the position. In addition, except in the case of
purchased options, a fund would continue to be required to make daily variation
margin payments and might be required to maintain the position being hedged by
the future or option or to maintain cash or securities in a segregated account.
Certain characteristics of the futures market might increase the risk
that movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. The funds' use of
futures and related options is governed by the following guidelines, which can
be changed by the board without shareholder vote:
(1) To the extent a fund enters into futures contracts and options on
futures positions that are not for bona fide hedging purposes (as defined by the
CFTC), the aggregate initial margin and premiums on those positions (excluding
the amount by which options are "in-the-money") may not exceed 5% of its net
assets.
(2) The aggregate premiums paid on all options (including options on
securities, foreign currencies and securities indices and options on futures
contracts) purchased by each fund that are held at any time will not exceed 20%
of its net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by each fund will not exceed 5% of its total assets.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. Each fund
that may invest outside the United States may use options and futures on foreign
currencies, as described above, and forward currency contracts, as described
below, to hedge against movements in the values of the foreign currencies in
which the fund's securities are denominated. Such currency hedges can protect
against price movements in a security a fund owns or intends to acquire that are
attributable to changes in the value of the currency in which it is denominated.
Such hedges do not, however, protect against price movements in the securities
that are attributable to other causes.
A fund might seek to hedge against changes in the value of a particular
currency when no Derivative Instruments on that currency are available or such
Derivative Instruments are considered expensive. In such cases, the fund may
hedge against price movements in that currency by entering into transactions
using Derivative Instruments on another currency or a basket of currencies, the
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value of which Mitchell Hutchins or the applicable sub-adviser believes will
have a positive correlation to the value of the currency being hedged. In
addition, a fund may use forward currency contracts to shift exposure to foreign
currency fluctuations from one country to another. For example, if a fund owned
securities denominated in a foreign currency and Mitchell Hutchins or the
sub-adviser believed that currency would decline relative to another currency,
it might enter into a forward contract to sell an appropriate amount of the
first foreign currency, with payment to be made in the second foreign currency.
Transactions that use two foreign currencies are sometimes referred to as "cross
hedging." Use of a different foreign currency magnifies the risk that movements
in the price of the Derivative Instrument will not correlate or will correlate
unfavorably with the foreign currency being hedged.
The value of Derivative Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Derivative
Instruments, a fund could be disadvantaged by having to deal in the odd-lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Derivative Instruments until they reopen.
Settlement of Derivative Instruments involving foreign currencies might
be required to take place within the country issuing the underlying currency.
Thus, the funds might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
FORWARD CURRENCY CONTRACTS. Funds that may invest outside the United
States may enter into forward currency contracts to purchase or sell foreign
currencies for a fixed amount of U.S. dollars or another foreign currency. Such
transactions may serve as long hedges--for example, a fund may purchase a
forward currency contract to lock in the U.S. dollar price of a security
denominated in a foreign currency that the fund intends to acquire. Forward
currency contract transactions may also serve as short hedges--for example, a
fund may sell a forward currency contract to lock in the U.S. dollar equivalent
of the proceeds from the anticipated sale of a security denominated in a foreign
currency.
The cost to a fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When a fund enters into a forward currency contract, it relies on the
counterparty to make or take delivery of the underlying currency at the maturity
of the contract. Failure by the counterparty to do so would result in the loss
of any expected benefit of the transaction.
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
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subject of the hedge or to maintain cash or securities in a segregated account.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, a fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS. A fund that may
invest outside the United States may enter into forward currency contracts or
maintain a net exposure to such contracts only if (1) the consummation of the
contracts would not obligate the fund to deliver an amount of foreign currency
in excess of the value of the position being hedged by such contracts or (2) the
fund segregates with its custodian cash or liquid securities in an amount not
less than the value of its total assets committed to the consummation of the
contract and not covered as provided in (1) above, as marked to market daily.
SWAP TRANSACTIONS. A fund that invests primarily in bonds may enter into
interest swap transactions, including swaps, caps, floors and collars. Interest
rate swaps involve an agreement between two parties to exchange payments that
are based, for example, on variable and fixed rates of interest and that are
calculated on the basis of a specified amount of principal (the "notional
principal amount") for a specified period of time. Interest rate cap and floor
transactions involve an agreement between two parties in which the first party
agrees to make payments to the counterparty when a designated market interest
rate goes above (in the case of a cap) or below (in the case of a floor) a
designated level on predetermined dates or during a specified time period.
Interest rate collar transactions involve an agreement between two parties in
which payments are made when a designated market interest rate either goes above
a designated ceiling level or goes below a designated floor level on
predetermined dates or during a specified time period. Currency swaps, caps,
floors and collars are similar to interest rate swaps, caps, floors and collars,
but they are based on currency exchange rates than interest rates.
A fund may enter into interest rate swap transactions to preserve a
return or spread on a particular investment or portion of its portfolio or to
protect against any increase in the price of securities it anticipates
purchasing at a later date. A fund may only use these transactions as a hedge
and not as a speculative investment. Interest rate swap transactions are subject
to risks comparable to those described above with respect to other hedging
strategies.
A fund may enter into interest rate swaps, caps, floors and collars on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with a fund
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these interest rate swap transactions are entered into for
good faith hedging purposes, and inasmuch as segregated accounts will be
established with respect to such transactions, Mitchell Hutchins and the
sub-advisers (if applicable) believe such obligations do not constitute senior
securities and, accordingly, will not treat them as being subject to a fund's
borrowing restrictions. The net amount of the excess, if any, of a fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis, and appropriate fund assets having an aggregate net
asset value at least equal to the accrued excess will be maintained in a
segregated account as described above in "Investment Policies and
Restrictions--Segregated Accounts." A fund also will establish and maintain such
segregated accounts with respect to its total obligations under any swaps that
are not entered into on a net basis and with respect to any caps, floors and
collars that are written by the fund.
A fund will enter into swap transactions only with banks and recognized
securities dealers believed by Mitchell Hutchins or A sub-adviser to present
minimal credit risk in accordance with guidelines established by the fund's
board. If there is a default by the other party to such a transaction, a fund
will have to rely on its contractual remedies (which may be limited by
bankruptcy, insolvency or similar laws) pursuant to the agreements related to
the transaction.
39
<PAGE>
ORGANIZATION OF TRUST; TRUSTEES AND OFFICERS AND PRINCIPAL HOLDERS OF SECURITIES
The Trust was formed on November 21, 1986 as a business trust under the
laws of the Commonwealth of Massachusetts and has thirteen operating series. The
Trust is governed by a board of trustees, which is authorized to establish
additional series and to issue an unlimited number of shares of beneficial
interest of each existing or future series, par value $0.001 per share. The
board oversees each fund's operations.
<TABLE>
<CAPTION>
<S> <C> <C>
NAME AND ADDRESS*; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------- ----------------------------------------
Margo N. Alexander**; 52 Trustee and President Mrs. Alexander is chairman (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; 63 Trustee Mr. Armstrong is chairman and principal of R.Q.A.
R.Q.A. Enterprises Enterprises (management consulting firm) (since April
One Old Church Road 1991 and principal occupation since March 1995). Mr.
Unit #6 Armstrong was chairman of the board, chief executive
Greenwich, CT 06830 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, Jr.**; 72 Trustee and Chairman Mr. Bewkes is a director of Paine Webber Group Inc.
of the Board of ("PW Group") (holding company of PaineWebber and
Trustees 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.
40
<PAGE>
<S> <C> <C>
NAME AND ADDRESS*; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------- ----------------------------------------
Richard R. Burt; 52 Trustee Mr. Burt is chairman of IEP Advisors, Inc.
1275 Pennsylvania Ave, N.W. (international investments and consulting firm)
Washington, DC 20004 (since March 1994) and a partner of McKinsey &
Company (management consulting firm) (since 1991). He
is also a director of Archer-Daniels-Midland Co.
(agricultural commodities), Hollinger International Co.
(publishing), Homestake Mining Corp., Powerhouse
Technologies Inc. and Wierton Steel Corp. He was the
chief negotiator in the Strategic Arms Reduction Talks
with the former Soviet Union (1989-1991) and the U.S.
Ambassador to the Federal Republic of Germany
(1985-1989). Mr. Burt is a director or trustee of 31
investment companies for which Mitchell Hutchins,
PaineWebber or 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 31
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 Professor of Management of
Columbia University the Graduate School of Business, Columbia University.
101 Uris Hall Prior to 1989, he was president of the Illinois
New York, NY 10027 Institute of Technology. Dean Feldberg is also a
director of Primedia, Inc., Federated Department
Stores, Inc. and Revlon, Inc. Dean Feldberg is a
director or trustee of 34 investment companies for
which Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
George W. Gowen; 69 Trustee Mr. Gowen is a partner in the law firm of Dunnington,
666 Third Avenue Bartholow & Miller. Prior to May 1994, he was a
New York, NY 10017 partner in the law firm of Fryer, Ross & Gowen. Mr.
Gowen is a director or trustee of 34 investment
companies for which Mitchell Hutchins, Paine Webber or
one of their affiliates serves as investment adviser.
41
<PAGE>
<S> <C> <C>
NAME AND ADDRESS*; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------- ----------------------------------------
Frederic V. Malek; 62 Trustee Mr. Malek is chairman of Thayer Capital Partners
1455 Pennsylvania Ave, N.W. (merchant bank). From January 1992 to November 1992,
Suite 350 he was campaign manager of Bush-Quayle `92. From 1990
Washington, DC 20004 to 1992, he was vice chairman and, from 1989 to 1990,
he was president of Northwest Airlines Inc., NWA Inc.
(holding company of Northwest Airlines Inc.) and Wings
Holdings Inc. (holding company of NWA Inc.). Prior to
1989, he was employed by the Marriott Corporation
(hotels, restaurants, airline catering and contract
feeding), where he most recently was an executive vice
president and president of Marriott Hotels and Resorts.
Mr. Malek is also a director of American Management
Systems, Inc. (management consulting and computer
related services), Automatic Data Processing, Inc., CB
Commercial Group, Inc. (real estate services), Choice
Hotels International (hotel and hotel franchising), FPL
Group, Inc. (electric services), Manor Care, Inc.
(health care) and Northwest Airlines Inc. Mr. Malek is
a director or trustee of 31 investment companies for
which Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Carl W. Schafer; 63 Trustee Mr. Schafer is president of the Atlantic Foundation
66 Witherspoon Street, #1100 (charitable foundation supporting mainly
Princeton, NJ 08542 oceanographic exploration and research). He is a
director of Base Ten Systems, Inc. (software), Roadway
Express, Inc. (trucking), The Guardian Group of Mutual
Funds, the Harding, Loevner Funds, Evans Systems, Inc.
(motor fuels, convenience store and diversified
company), Electronic Clearing House, Inc., (financial
transactions processing), Frontier Oil Corporation and
Nutraceutix, Inc. (biotechnology company). Prior to
January 1993, he was chairman of the Investment
Advisory Committee of the Howard Hughes Medical
Institute. Mr. Schafer is a director or trustee of 31
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
T. Kirkham Barneby; 52 Vice President Mr. Barneby is a managing director and chief
investment officer - quantitative investments of
Mitchell Hutchins. Prior to September 1994, he was a
senior vice president at Vantage Global Management. Mr.
Barneby is a vice president of seven investment
companies for which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as investment adviser.
Ellen R. Harris; 52 Vice President Ms. Harris is a managing director and a portfolio
manager of Mitchell Hutchins. Ms. Harris is a vice
president of two investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
42
<PAGE>
<S> <C> <C>
NAME AND ADDRESS*; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------- ----------------------------------------
Donald R. Jones; 38 Vice President Mr. Jones is a senior vice president and a portfolio
manager of Mitchell Hutchins. Prior to February 1996,
he was a vice president in the asset management group
of First Fidelity Bancorporation. Mr. Jones is a vice
president of two investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
James F. Keegan; 38 Vice President Mr. Keegan is a senior vice presiden and a portfolio
manager of Mitchell Hutchins. Prior to March 1996, he
was director of fixed income strategy and research of
Merrion Group, L.P. From 1987 to 1994, he was a vice
president of global investment management of Bankers
Trust. Mr. Keegan is a vice president of three
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
John J. Lee; 30 Vice President and Mr. Lee is a vice president and a manager of the
Assistant Treasurer mutual fund finance department of Mitchell Hutchins.
Prior to September 1997, he was an audit manager in the
financial services practice of Ernst & Young LLP. Mr.
Lee is a vice president and assistant treasurer of 32
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as an
investment adviser.
Thomas J. Libassi; 40 Vice President Mr. Libassi is a senior vice president and portfolio
manager of Mitchell Hutchins. Prior to May 1994, he was
a vice president of Keystone Custodian Funds Inc. with
portfolio management responsibility. Mr. Libassi is a
vice president of six investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Dennis McCauley; 52 Vice President Mr. McCauley is a managing director and chief
investment officer--fixed income of Mitchell Hutchins.
Prior to December 1994, he was director of fixed income
investments of IBM Corporation. Mr. McCauley is a vice
president of 22 investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates serves
as investment adviser.
Ann E. Moran; 41 Vice President and Ms. Moran is a vice president and a manager of the
Assistant Treasurer 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; 46 Vice President and Ms. O'Donnell is a senior vice president and deputy
Secretary general counsel of Mitchell Hutchins. Ms. O'Donnell
is a vice president and secretary of 31 investment
companies and a vice president and assistant secretary
of one investment company for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
43
<PAGE>
<S> <C> <C>
NAME AND ADDRESS*; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------- ----------------------------------------
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.
Susan Ryan; 39 Vice President Ms. Ryan is a senior vice president and portfolio
manager of Mitchell Hutchins and has been with Mitchell
Hutchins since 1982. Ms. Ryan is a vice president of
five investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
Victoria E. Schonfeld; 48 Vice President Ms. Schonfeld is a managing director and general
counsel of Mitchell Hutchins since May 1994 and a
senior vice president of PaineWebber since July 1995.
Prior to May 1994, she was a partner in the law firm of
Arnold & Porter. Ms. Schonfeld is a vice president of
31 investment companies and a vice president and
secretary of one investment company for which Mitchell
Hutchins, PaineWebber or one of their affiliates serves
as investment adviser.
Paul H. Schubert; 36 Vice President and Mr. Schubert is a senior vice president and director
Treasurer of the mutual fund finance department of Mitchell
Hutchins. From August 1992 to August 1994, he was a
vice president at BlackRock Financial Management L.P.
Mr. Schubert is a vice president and treasurer of 32
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
Nirmal Singh; 42 Vice President Mr. Singh is a senior vice president and a portfolio
manager of Mitchell Hutchins. Mr. Singh is a vice
president of four investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Barney A. Taglialatela; 38 Vice President and Mr. Taglialatela is a vice president and a manager of
Assistant Treasurer 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.
Mark A. Tincher; 43 Vice President Mr. Tincher is a managing director and chief
investment officer--equities of Mitchell Hutchins.
Prior to March 1995, he was a vice president and
directed the U.S. funds management and equity research
areas of Chase Manhattan Private Bank. Mr. Tincher is a
vice president of 13 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
44
<PAGE>
<S> <C> <C>
NAME AND ADDRESS*; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------- ----------------------------------------
Stuart Waugh; 43 Vice President Mr. Waugh is a managing director and a portfolio
manager of Mitchell Hutchins responsible for global
fixed income investments and currency trading. Mr.
Waugh is a vice president of five investment companies
for which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.
Keith A. Weller; 37 Vice President and Mr. Weller is a first vice president and associate
Assistant Secretary general counsel of Mitchell Hutchins. Prior to May
1995, he was an attorney in private practice. Mr.
Weller is a vice president and assistant secretary of
31 investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
- -------------
* Unless otherwise indicated, the business address of each listed person is 1285 Avenue of the Americas, New York,
New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of the Trust and each fund as defined in the
Investment Company Act by virtue of their positions with Mitchell Hutchins, PaineWebber, and/or PW Group.
The Trust pays each board member who is not an "interested person" of the Trust $500 annually for each fund
and an additional up to $150 per fund for each board meeting and each separate meeting of a board committee.
Therefore, the Trust pays each such trustee$6,500 annually, plus any additional amounts due for board or committee
meetings. Each chairman of the audit and contract review committees of individual funds within the PaineWebber fund
complex receives additional compensation, aggregating $15,000 annually, from the relevant funds. All board members
are reimbursed for any expenses incurred in attending meetings. Board members and officers own in the aggregate less
than 1% of the outstanding shares of any class of each fund. Because PaineWebber, Mitchell Hutchins and, as
applicable, a sub-adviser perform substantially all the services necessary for the operation of the Trust and each
fund, the Trust requires no employees. No officer, director or employee of Mitchell Hutchins or PaineWebber
presently receives any compensation from the Trust for acting as a board member or officer.
</TABLE>
45
<PAGE>
The table below includes certain information relating to the
compensation of the current board members who held office with the Trust or with
other PaineWebber funds during the year ended December 31, 1998.
COMPENSATION TABLE+
<TABLE>
<CAPTION>
<S> <C> <C>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM THE FROM THE TRUST AND THE
NAME OF PERSON, POSITION TRUST* FUND COMPLEX
------------------------ --------------------- ----------------------
Richard Q. Armstrong,
Trustee......................... $ 12,870 $ 101,372
Richard R. Burt,
Trustee......................... $ 12,870 101,372
Meyer Feldberg,
Trustee......................... $ 12,870 116,222
George W. Gowen,
Trustee......................... $ 15,710 108,272
Frederic V. Malek,
Trustee......................... $ 12,870 101,372
Carl W. Schafer,
Trustee......................... $ 12,870 101,372
</TABLE>
- --------------------
+ Only independent board members are compensated by the Trust and identified
above; board members who are "interested persons," as defined by the
Investment Company Act, do not receive compensation.
* Represents fees paid to each Trustee from the Trust for the year ended
December 31, 1998.
** Represents total compensation paid during the calendar year ended December
31, 1998 to each board member by 31 investment companies (33 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
The following shareholders are shown in the Trust's records as owning
more than 5% of the Class H and Class I shares of the funds as of April 1, 1999,
as indicated below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
AMERICAN CONSECO (3) HARTFORD(4)
PAINEWEBBER REPUBLIC VARIABLE
LIFE VARIABLE ANNUITY ACCOUNT
ANNUITY ACCOUNT (2)
(1)
Money Market
Portfolio
--Class H shares 6,245,688 shares 2,114,173 shares
73% 25%
--Class I shares 0 0
High Grade Fixed
income Portfolio
--Class H shares 754,731 0
100%
--Class I shares
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
AMERICAN CONSECO (3) HARTFORD(4)
PAINEWEBBER REPUBLIC VARIABLE
LIFE VARIABLE ANNUITY ACCOUNT
ANNUITY ACCOUNT (2)
(1)
Strategic Fixed Income
Portfolio
--Class H share 530,090 shares 279,195 0
62% 34%
--Class I shares 0 0 0
Strategic Income Portfolio
--Class H shares 0 0 0
--Class I shares 0 0 0
Global Income Portfolio
--Class H shares 707,490 shares 541,068 shares 0
56% 43%
--Class I shares 0 0 0
High Income Portfolio
--Class H shares 0 0 0
--Class I shares 0 0 0
Balanced Portfolio
--Class H shares 1,733,416 shares 731,501 0
69% 29%0
--Class I shares 0 0 0
Growth and Income Portfolio
--Class H shares 968,127 shares 419,195 shares 420,577 shares
54% 23% 23%
--Class I shares 0 0 0
Tactical Allocation Portfolio
--Class H shares 0 0 0
--Class I shares 0 0 0
Growth Portfolio
--Class H shares 1,153,733 shares 864,515 shares 0
57% 42%
--Class I shares 0 0 0
Aggressive Growth Portfolio
--Class H shares 1,380,791 shares 0 0
100%
--Class I shares 0 0 0
Small Cap Portfolio
--Class H shares 0 0 0
--Class I shares 0 0 0
Global Growth Portfolio
--Class H shares 872,605 shares 338,066 shares 0
72% 28%
Class I shares 0 0 0
</TABLE>
47
<PAGE>
- ---------------
(1) PaineWebber Life Variable Annuity Account is a segregated investment account
of PaineWebber Life Insurance Company, 1200 Harbor Blvd., Weekhawken, New
Jersey 07087.
(2) American Republic Variable Annuity Account is a segregated investment
account of American Republic Insurance Company, 601 6th Avenue, Des Moines,
Iowa 50309.
(3) Conseco_____________________________________________________________________
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the
investment adviser and administrator of each fund pursuant to contracts (each an
"Advisory Contract") with the Trust dated November 2, 1998 with respect to
Global Growth Portfolio and April 21, 1988 (as supplemented by Fee Agreements
dated May 1, 1989, December 30, 1991, September 1, 1993 and May 1, 1998) with
respect to the other funds. Under the Advisory Contracts, the Trust pays
Mitchell Hutchins a fee for each fund, computed daily and payable monthly, at
the annual rate of the fund's average daily net assets as indicated in the table
below. The table also shows the advisory fees earned (or accrued) by Mitchell
Hutchins during the periods shown.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
ANNUAL RATE OF
ADVISORY FEE AS A
PERCENTAGE OF FUND'S ADVISORY FEES PAID OR ACCRUED
AVERAGE DAILY NET FOR THE YEARS ENDED DECEMBER 31,
ASSETS
1998 1997 1996
---- ---- ----
Money Market Portfolio............ 0.50 $ 47,751 $ 56,346 $79,283
High Grade Fixed Income
Portfolio......................... 0.50 38,332 39,763 44,461
Strategic Fixed Income
Fund.............................. 0.50 52,424 53,270 62,785
Strategic Income Portfolio*....... 0.75 16,271 n/a n/a
Global Income Portfolio........... 0.75 127,634 165,480 230,262
High Income Portfolio*............ 0.50 12,017 n/a n/a
Balanced Portfolio................ 0.75 249,460 252,729 249,995
Growth and Income Portfolio....... 0.70 167,394 138,089 111,599
Tactical Allocation Portfolio*.... 0.50 18,444 n/a n/a
Growth Portfolio.................. 0.75 286,582 299,373 325,065
Aggressive Growth Portfolio....... 0.80 172,407 170,723 155,896
Small Cap Portfolio *............. 1.00 8,635 n/a n/a
Global Growth Portfolio........... 0.75 151,440 182,141 198,128
</TABLE>
- -------------------
* These funds commenced operations on September 28, 1998.
The Advisory Contracts authorize Mitchell Hutchins to retain one or more
sub-advisers but do not require Mitchell Hutchins to do so. Mitchell Hutchins
has entered into sub-advisory contracts ("Sub-Advisory Contracts") with respect
to Strategic Fixed Income Portfolio, Aggressive Growth Portfolio and (for its
foreign investments segment) Global Growth Portfolio, as described further
below.
Under a Sub-Advisory Contract with Mitchell Hutchins dated September 21,
1995, Pacific Investment Management Company ("PIMCO") serves as sub-adviser for
Strategic Fixed Income Portfolio. Mitchell Hutchins (not the fund) pays PIMCO
for its services under the Sub-Advisory Contract a fee in the annual amount of
0.25% of the fund's average daily net assets. For the years ended December 31,
1998, December 31, 1997 and December 31, 1996, Mitchell Hutchins paid or accrued
sub-advisory fees to PIMCO of $26,212, $26,635 and $31,393, respectively. PIMCO,
a Delaware general partnership, is a registered investment adviser and a
subsidiary partnership of PIMCO Advisors L.P. ("PIMCO Advisors"). The general
partners of PIMCO Advisors are PIMCO Advisors Holding L.P., a publicly traded
company listed on the New York Stock Exchange under the symbol "PA" and PIMCO
Partners, G.P., a general partnership between Pacific Life Insurance Company and
PIMCO Partners, LLC, a limited liability company controlled by the PIMCO
managing directors. PIMCO is one of the largest fixed income management firms in
48
<PAGE>
the nation. Included among PIMCO's institutional clients are many "Fortune 500"
companies.
Under a Sub-Advisory Contract with Mitchell Hutchins dated September 1,
1993, Nicholas-Applegate Capital Management ("Nicholas-Applegate") serves as
sub-adviser for Aggressive Growth Portfolio. Mitchell Hutchins (not the fund)
pays Nicholas-Applegate for its services under the Sub-Advisory Contract a fee
in the annual amount of 0.50% of the fund's average daily net assets. For the
years ended December 31, 1998, December 31, 1997 and December 31, 1996, Mitchell
Hutchins paid or accrued sub-advisory fees to Nicholas-Applegate of $107,754,
$106,702 and $97,435, respectively. Nicholas-Applegate is a California limited
partnership. Its general partner is Nicholas-Applegate Capital Management
Holdings, L.P., a California limited partnership controlled by Arthur E.
Nicholas.
Under a Sub-Advisory Contract with Mitchell Hutchins dated November 2,
1998, Invista Capital Management Inc. ("Invista") serves as sub-adviser for the
foreign investments segment of Global Growth Portfolio. Mitchell Hutchins (not
the fund) pays Invista for its services under the Sub-Advisory Contract a fee in
the annual amount of 0.29% of the fund's average daily net assets. For the
period November 2, 1998 to December 31, 1998, Mitchell Hutchins paid or accrued
sub-advisory fees to Invista of $4,556. Invista, which was founded in 1984, is
an indirect wholly owned subsidiary of Principal Life Insurance Company and
manages substantially all of Principal Life Insurance Company's equity accounts,
in addition to providing investment advice to other affiliated and
non-affiliated customers
Prior to November 2, 1998, GE Investment Management Incorporated
("GEIM") served as investment sub-adviser for all investments of Global Growth
Portfolio and Mitchell Hutchins (not the fund) paid GEIM for its services under
this prior Sub-Advisory Contract a fee in the annual amount of 0.29% of the
fund's average daily net assets. For the period January 1, 1998 to November 1,
1998 and the years ended December 31, 1997 and December 31, 1996, Mitchell
Hutchins paid or accrued sub-advisory fees to GEIM of $49,623, $70,428 and
$76,609, respectively.
Under the terms of the Advisory Contracts, each fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Trust not readily identifiable as belonging to
one of the funds are allocated among the funds by or under the direction of the
Trust's board in such manner as the board determines to be fair and equitable.
Expenses borne by each fund include the following (or the fund's allocable share
of the following): (1) the cost (including brokerage commissions) of securities
purchased or sold by the fund and any losses incurred in connection therewith;
(2) fees payable to and expenses incurred on behalf of the fund by Mitchell
Hutchins; (3) organizational expenses; (4) filing fees and expenses relating to
the registration and qualification of the fund's shares under federal and state
securities laws and maintenance of such registrations and qualifications; (5)
fees and salaries payable to board members and officers who are not interested
persons (as defined in the Investment Company Act) of the Trust or Mitchell
Hutchins; (6) all expenses incurred in connection with the board members'
services, including travel expenses; (7) taxes (including any income or
franchise taxes) and governmental fees; (8) costs of any liability,
uncollectible items of deposit and other insurance or fidelity bonds; (9) any
costs, expenses or losses arising out of a liability of or claim for damages or
other relief asserted against the Trust or fund for violation of any law; (10)
legal, accounting and auditing expenses, including legal fees of special counsel
for the independent board members; (11) charges of custodians, transfer agents
and other agents; (12) costs of preparing share certificates; (13) expenses of
setting in type and printing prospectuses, statements of additional information
and supplements thereto, reports and proxy materials for existing shareholders,
and costs of mailing such materials to shareholders; (14) any extraordinary
expenses (including fees and disbursements of counsel) incurred by the fund;
(15) fees, voluntary assessments and other expenses incurred in connection with
membership in investment company organizations; (16) costs of mailing and
tabulating proxies and costs of meetings of shareholders, the board and any
committees thereof; (17) the cost of investment company literature and other
publications provided to board members and officers; and (18) costs of mailing,
stationery and communications equipment.
Under each Advisory Contract, Mitchell Hutchins will not be liable for
any error of judgment or mistake of law or for any loss suffered by the Trust or
a fund in connection with the performance of the Advisory Contract, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. Each Advisory Contract
49
<PAGE>
terminates automatically upon assignment and is terminable at any time without
penalty by the board or by vote of the holders of a majority of the fund's
outstanding voting securities on 60 days' written notice to Mitchell Hutchins,
or by Mitchell Hutchins on 60 days' written notice to the Trust.
Under each Sub-Advisory Contract, the sub-adviser will not be liable for
any error of judgment or mistake of law or for any loss suffered by the Trust,
the fund, its shareholders or Mitchell Hutchins in connection with the
Sub-Advisory Contract, except any liability to any of them to which the
sub-adviser would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations and duties under the Sub-Advisory
Contract. Each Sub-Advisory Contract terminates automatically upon its
assignment or the termination of the Advisory Contract and is terminable at any
time without penalty by the board or by vote of the holders of a majority of the
applicable fund's outstanding voting securities on 60 days' notice to the
sub-adviser, or by the sub-adviser on 120 days' written notice to Mitchell
Hutchins. Each Sub-Advisory Contract also may be terminated by Mitchell Hutchins
(1) upon material breach by the sub-adviser of its representations and
warranties, which breach shall not have been cured within a 20 day period after
notice of such breach; (2) if the sub-adviser becomes unable to discharge its
duties and obligations under the Sub-Advisory Contract; or (3) upon 120 days'
notice to the sub-adviser.
During the years ended December 31, 1998 and December 31, 1997, the
indicated fund paid (or accrued) the following fees to PaineWebber for its
services as securities lending agent:
FUND YEAR ENDED DECEMBER 31,
1998 1997
---- ----
Money Market Portfolio................. $ 0 $ 0
High Grade Fixed Income Portfolio...... 0 0
Strategic Fixed Income Portfolio....... 0 0
Strategic Income Portfolio*............ 0 n/a
Global Income Portfolio................ 171 213
High Income Portfolio*................. 0 n/a
Balanced Portfolio..................... 1,725 867
Growth and Income Portfolio............ 420 437
Tactical Allocation Portfolio*......... 0 n/a
Growth Portfolio....................... 2,936 9,925
Aggressive Growth Portfolio............ 555 2,060
Small Cap Portfolio*................... 0 n/a
Global Growth Portfolio................ 1,377 809
------------------
* These funds commenced operations on September 28, 1998.
50
<PAGE>
NET ASSETS. The following table shows the approximate net assets as of
March 31, 1999, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
NET ASSETS
INVESTMENT CATEGORY ($MIL)
Domestic (excluding Money Market)......................... $
Global....................................................
Equity/Balanced...........................................
Fixed Income (excluding Money Market)....................
Taxable Fixed Income.................................
Tax-Free Fixed Income................................
Money Market Funds........................................
PERSONAL TRADING POLICIES. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to a code of ethics that describes
the fiduciary duty owed to shareholders of PaineWebber mutual funds and other
Mitchell Hutchins advisory accounts by all Mitchell Hutchins' directors,
officers and employees, establishes procedures for personal investing and
restricts certain transactions. For example, employee accounts generally must be
maintained at PaineWebber, personal trades in most securities require
pre-clearance and short-term trading and participation in initial public
offerings generally are prohibited. In addition, the code of ethics puts
restrictions on the timing of personal investing in relation to trades by
PaineWebber Funds and other Mitchell Hutchins advisory clients. Personnel of
each sub-adviser may also invest in securities for their own accounts pursuant
to comparable codes of ethics.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
the Class I shares of each fund under separate distribution contract with the
Trust ("Distribution Contract"). The Distribution Contract requires Mitchell
Hutchins to use its best efforts, consistent with its other businesses, to sell
Class I shares of the each fund. Class H shares have no distributor or
distribution contract. Class H and Class I shares of each fund are offered
continuously to separate accounts of insurance companies.
Under a plan of distribution pertaining to the Class I shares of each
fund adopted by the Trust in the manner prescribed under Rule 12b-1 under the
Investment Company Act ("Class I Plan" or "Plan"), each fund pays Mitchell
Hutchins a distribution fee, accrued daily and payable monthly, at the annual
rate of 0.25% of the average daily net assets attributable to its Class I
shares. Mitchell Hutchins uses these distribution fees to pay insurance
companies whose separate accounts purchase Class I shares for
distribution-related services that the insurance companies provide with respect
to the Class I shares. These services include (1) the printing and mailing of
fund prospectuses, statements of additional information, related supplements and
shareholder reports to current and prospective contract owners, (2) the
development and preparation of sales material, including sales literature,
relating to Class I shares, (3) materials and activities intended to educate and
train insurance company sales personnel concerning the funds and Class I shares,
(4) obtaining information and providing explanations to contract owners
concerning the funds, (5) compensating insurance company sales personnel with
respect to services that result in the sale or retention of Class I shares, (6)
providing personal services and/or account maintenance services to contract
owners with respect to insurance company separate accounts that hold Class I
shares, and (7) financing other activities that the board determines are
primarily intended to result in the sale of Class I shares.
The Plan and the related Distribution Contract for Class I shares
specify that the distribution fees paid to Mitchell Hutchins are not
reimbursements for specific expenses incurred. Therefore, even if Mitchell
Hutchins' expenses exceed the distribution fees it receives, the funds will not
be obligated to pay more than those fees. On the other hand, if Mitchell
Hutchins' expenses are less than such fees, it will retain its full fees and
realize a profit. Expenses in excess of distribution fees received or accrued
through the termination date of the Class I Plan will be Mitchell Hutchins' sole
responsibility and not that of the funds. The board reviews the Class I Plan and
Mitchell Hutchins' corresponding expenses annually.
51
<PAGE>
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.
No Class I shares were outstanding during the year ended December 31,
1998 and no fund paid any fees to Mitchell Hutchins under the Plan.
In approving the Class I Plan for each fund, the board considered all
the features of the distribution system for the Class I shares, including (1)
the expectation that Class I shares would be sold primarily to the separate
accounts of insurance companies unaffiliated with Mitchell Hutchins or
PaineWebber, (2) the expenses those unaffiliated insurance companies were likely
to incur in marketing Class I shares to the owners of contracts issued by their
separate accounts, (3) the need to encourage those unaffiliated insurance
companies to educate their agents concerning the fund and to compensate their
agents for selling Class I shares and (4) the need to encourage those
unaffiliated insurance companies to educate their contract owners concerning the
fund and to provide personal and account maintenance services to contract owners
with respect to the fund's Class I shares attributable to their accounts.
The board also considered all compensation that Mitchell Hutchins would
receive under the Class I Plan and the Distribution Contract and the benefits
that would accrue to Mitchell Hutchins under the Class I Plan in that Mitchell
Hutchins would receive distribution and advisory fees that are calculated based
upon a percentage of the average net assets of a fund, which fees would increase
if the Class I Plan were successful and the fund attained and maintained
significant asset levels.
PORTFOLIO TRANSACTIONS
Subject to policies established by the board, Mitchell Hutchins or the
applicable sub-adviser is responsible for the execution of each fund's portfolio
transactions and the allocation of brokerage transactions. In executing
portfolio transactions, Mitchell Hutchins or the sub-adviser seeks to obtain the
best net results for a fund, taking into account such factors as the price
(including the applicable brokerage commission or dealer spread), size of order,
difficulty of execution and operational facilities of the firm involved. While
Mitchell Hutchins or the sub-adviser generally seeks reasonably competitive
commission rates, payment of the lowest commission is not necessarily consistent
with obtaining the best net results. Prices paid to dealers in principal
transactions generally include a "spread," which is the difference between the
prices at which the dealer is willing to purchase and sell a specific security
at the time. Generally, bonds are traded on the over-the-counter market on a
"net" basis without a stated commission through dealers acting for their own
accounts and not through brokers. Each fund may invest in securities traded in
the over-the-counter markets and will engage primarily with the dealers who make
markets in such securities, unless a better price or execution could be obtained
by using a broker.
52
<PAGE>
During the years indicated, the funds paid the brokerage commissions set
forth below:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
Money Market Portfolio.............. $ 0 $ 0 $ 0
High Grade Fixed Income Portfolio... 0 0 0
Strategic Fixed Income Fund......... 64 1,149 2,279
Strategic Income Portfolio*......... 0 n/a n/a
Global Income Portfolio............. 0 0 0
High Income Portfolio*.............. 0 n/a n/a
Balanced Portfolio.................. 47,323 51,556 65,857
Growth and Income Portfolio......... 33,107 39,178 31,792
Tactical Allocation Portfolio*...... 7,579 n/a n/a
Growth Portfolio.................... 45,109 71,334 33,885
Aggressive Growth Portfolio......... 46,977 47,838 53,904
Small Cap Portfolio*................ 6,471 n/a n/a
Global Growth Portfolio............. 137,373 113,093 78,261
</TABLE>
------------------
* These funds commenced operations on September 28, 1998.
The funds have no obligation to deal with any broker or group of brokers
in the execution of portfolio transactions. The funds contemplate that,
consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through Mitchell Hutchins or its affiliates,
including PaineWebber, or brokerage affiliates of a fund's sub-adviser. The
board has adopted procedures in conformity with Rule 17e-1 under the Investment
Company Act to ensure that all brokerage commissions paid to PaineWebber or
brokerage affiliates of a fund's sub-adviser are reasonable and fair. Specific
provisions in the Advisory Contracts and the Sub-Advisory Contracts authorize
Mitchell Hutchins and each sub-adviser, respectively, and any of their
affiliates that is a member of a national securities exchange to effect
portfolio transactions for the applicable fund on such exchange and to retain
compensation in connection with such transactions. Any such transactions will be
effected and related compensation paid only in accordance with applicable SEC
regulations. During each of the three years ended December 31, 1998, the funds
paid brokerage commissions to PaineWebber or, as applicable, brokerage
affiliates of the sub-adviser as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
Money MarketPortfolio............... $ 0 $ 0 $ 0
High Grade Fixed Income Portfolio... 0 0 0
Strategic Fixed Income Fund......... 0 0 0
Strategic Income Portfolio*......... 0 n/a n/a
Global Income Portfolio............. 0 0 0
High Income Portfolio*.............. 0 n/a n/a
Balanced Portfolio.................. 54 1,992 1,320
Growth and Income Portfolio......... 714 558 852
Tactical Allocation Portfolio*...... 0 n/a n/a
Growth Portfolio.................... 4,212 4,020 300
Aggressive Growth Portfolio......... 0 1,621 186
Small Cap Portfolio*................ 0 n/a n/a
Global Growth Portfolio............. 12 0 0
</TABLE>
------------------
* These funds commenced operations on September 28, 1998.
53
<PAGE>
These brokerage commissions paid for the year ended December 31, 1998
represented for each fund the percentages of total brokerage commissions paid
and of the dollar amount representing the fund's transactions involving the
payment of brokerage commissions set forth below.
<TABLE>
<CAPTION>
<S> <C> <C>
PERCENTAGE OF DOLLAR
PERCENTAGE OF TOTAL AMOUNT OF
BROKERAGE TRANSACTIONS
COMMISSIONS PAID INVOLVING PAYMENT OF
BROKERAGE COMMISSIONS
Money Market Portfolio n/a n/a
High Grade Fixed Income n/a n/a
Portfolio
Strategic Fixed Income Fund n/a n/a
Strategic Income Portfolio n/a n/a
Global Income Portfolio n/a n/a
High Income Portfolio n/a n/a
Balanced Portfolio 0.1% 0.0%
Growth and Income Portfolio 2.2% 2.4%
Tactical Allocation Portfolio n/a n/a
Growth Portfolio 9.3% 9.9%
Aggressive Growth Portfolio n/a n/a
Small Cap Portfolio n/a n/a
Global Growth Portfolio 0.0% 0.0%
</TABLE>
Transactions in futures contracts are executed through futures
commission merchants ("FCMs"), who receive brokerage commissions for their
services. The funds' procedures in selecting FCMs to execute their transactions
in futures contracts, including procedures permitting the use of Mitchell
Hutchins and its affiliates or brokerage affiliates of the sub-adviser, are
similar to those in effect with respect to brokerage transactions in securities.
Consistent with the interests of the funds and subject to the review of
the board, Mitchell Hutchins or the applicable sub-adviser may cause a fund to
purchase and sell portfolio securities through brokers who provide Mitchell
Hutchins or the sub-adviser with research, analysis, advice and similar
services. The funds may pay to those brokers a higher commission than may be
charged by other brokers, provided that Mitchell Hutchins or the sub-adviser
determines in good faith that such commission is reasonable in terms either of
that particular transaction or of the overall responsibility of Mitchell
Hutchins or the sub-adviser, as applicable, to that fund and its other clients,
and that the total commissions paid by the fund will be reasonable in relation
to the benefits to the fund over the long term. For the year ended December 31,
1998, the funds directed the portfolio transactions indicated below to brokers
chosen because they provide research, analysis, advice and similar services, for
which the funds paid the brokerage commissions indicated below:
<TABLE>
<CAPTION>
<S> <C> <C>
FUND AMOUNT OF PORTFOLIO BROKERAGE
TRANSACTIONS COMMISSIONS PAID
Money Market Portfolio............ 0 $ 0
High Grade Fixed Income Portfolio. 0 0
Strategic Fixed Income Portfolio.. 0 0
Strategic Income Portfolio........ 0 0
Global Income Portfolio........... 0 0
High Income Portfolio............. 0 0
Balanced Portfolio................ 11,057,199 13,493
Growth and Income Portfolio....... 3,816,836 4,229
Tactical Allocation Portfolio..... 57,775 84
Growth Portfolio.................. 7,898,391 9,378
Aggressive Growth Portfolio....... 26,200,279 46,977
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Small Cap Portfolio............... 901,350 19,337
Global Growth Portfolio........... 0 0
</TABLE>
For purchases or sales with broker-dealer firms that act as principal,
Mitchell Hutchins or the applicable sub-adviser seeks best execution. Although
Mitchell Hutchins or a sub-adviser may receive certain research or execution
services in connection with these transactions, Mitchell Hutchins and the
sub-adviser will not purchase securities at a higher price or sell securities at
a lower price than would otherwise be paid if no weight was attributed to the
services provided by the executing dealer. Moreover, Mitchell Hutchins or the
sub-adviser will not enter into any explicit soft dollar arrangements relating
to principal transactions and will not receive in principal transactions the
types of services that could be purchased for hard dollars. Mitchell Hutchins or
the sub-adviser may engage in agency transactions in over-the-counter securities
in return for research and execution services. These transactions are entered
into only in compliance with procedures ensuring that the transaction (including
commissions) is at least as favorable as it would have been if effected directly
with a market-maker that did not provide research or execution services. These
procedures include Mitchell Hutchins or the sub-adviser receiving multiple
quotes from dealers before executing the transactions on an agency basis.
Information and research services furnished by brokers or dealers
through which or with which the funds effect securities transactions may be used
by Mitchell Hutchins or the applicable sub-adviser in advising other funds or
accounts and, conversely, research services furnished to Mitchell Hutchins or
the sub-adviser by brokers or dealers in connection with other funds or accounts
that either of them advises may be used in advising the funds. Information and
research received from brokers or dealers will be in addition to, and not in
lieu of, the services required to be performed by Mitchell Hutchins under the
Advisory Contracts or the sub-advisers under the Sub-Advisory Contract.
Investment decisions for a fund and for other investment accounts
managed by Mitchell Hutchins or by the applicable sub-adviser are made
independently of each other in light of differing considerations for the various
accounts. However, the same investment decision may occasionally be made for a
fund and one or more of such accounts. In such cases, simultaneous transactions
are inevitable. Purchases or sales are then averaged as to price and allocated
between that fund and such other account(s) as to amount according to a formula
deemed equitable to the fund and such account(s). While in some cases this
practice could have a detrimental effect upon the price or value of the security
as far as the funds are concerned, or upon their ability to complete their
entire order, in other cases it is believed that coordination and the ability to
participate in volume transactions will be beneficial to the funds.
The funds will not purchase securities that are offered in underwritings
in which PaineWebber, an applicable sub-adviser or any of their affiliates is a
member of the underwriting or selling group, except pursuant to procedures
adopted by the board pursuant to Rule 10f-3 under the 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 or an affiliate of the sub-adviser not participate in or benefit from
the sale to the fund.
As of December 31, 1998, the funds owned securities issued by the
following companies which are regular broker-dealers for the funds:
Money Market Portfolio: Commercial paper of Bear Stearns Co. Inc.
($200,000), J. P Morgan & Co., Inc. ($296,533) and Credit Suisse First
Boston Inc. ($300,000); certificate of deposit of Societe Generale
($249,978).
High Grade Fixed Income Portfolio: Repurchase agreement with State
Street Bank and Trust Company ($75,000).
Strategic Fixed Income Portfolio: Bonds of Goldman Sachs Group LP
($252,878) and Lehman Brothers Holdings Inc. ($99,964); repurchase
agreement with State Street Bank and Trust Company ($108,000).
Strategic Income Portfolio: Repurchase agreement with State Street Bank
and Trust Company ($335,000).
Global Income Portfolio: Repurchase agreement with Brown Brothers
Harriman & Company ($55,000).
High Income Portfolio had entered into a repurchase agreement
transaction with State Street Bank and Trust Company ($145,000).
Balanced Portfolio: Common stock of Chase Manhattan Corp. ($299,475),
Mellon Bank Corp. ($89,375), Morgan Stanley Dean Witter & Co.
($213,000); repurchase agreement with State Street Bank and Trust
Company ($325,000).
Growth and Income Portfolio: Common stock of Bank of New York Co. Inc.
($273,200), Chase Manhattan Corp. ($56,920), Mellon Bank Corp.
($137,500), Wells Fargo and Co. ($71,888), Morgan Stanley Dean Witter &
Co. ($205,900); repurchase agreement with State Street Bank and Trust
Company ($735,000).
Tactical Allocation Portfolio: Repurchase agreement with State Street
Bank and Trust Company ($860,000).
Growth Portfolio: Repurchase agreement with State Street Bank and Trust
Company ($535,000).
Aggressive Growth Portfolio: None.
Small Cap Portfolio: Repurchase agreement with State Street Bank and
Trust Company ($190,000).
Global Growth Portfolio: Common stock of Bank of New York Co. Inc.
($76,475), Chase Manhattan Corp. ($122,512), Mellon Bank Corp.
($123,750), Wells Fargo and Co. ($47,925), Morgan Stanley Dean Witter &
Co. ($49,700).
PORTFOLIO TURNOVER. The funds' annual portfolio turnover rates may vary
greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate is
calculated by dividing the lesser of a fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of securities in the portfolio during the year.
55
<PAGE>
The funds' respective portfolio turnover rates for the fiscal periods
shown were:
FUND PORTFOLIO TURNOVER RATES FOR
---- THE YEARS ENDED DECEMBER 31,
----------------------------
1998 1997
---- ----
Money Market Portfolio n/a n/a
High Grade Fixed Income Portfolio 101% 95%
Strategic Fixed Income Portfolio 245% 175%
Strategic Income Portfolio 81% n/a
Global Income Portfolio 104% 142%
High Income Portfolio 21% n/a
Balanced Portfolio 177% 169%
Growth and Income Portfolio 69% 92%
Tactical Allocation Portfolio 6% n/a
Growth Portfolio 50% 89%
Aggressive Growth Portfolio 73% 89%
Small Cap Portfolio 17% n/a
Global Growth Portfolio 154% 81%
Strategic Fixed Income Portfolio experienced a significant increase in
portfolio turnover in 1998 due to an increased number of transactions in
mortgage-backed securities on a forward commitment basis and in mortgage dollar
rolls. Global Growth Portfolio experienced a significant increase in portfolio
turnover in 1998 due to realignment of its portfolio holdings following a change
in its advisory and sub-advisory arrangements.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The insurance company separate accounts purchase and redeem shares of
the funds on each day on which the New York Stock Exchange ("NYSE") is open for
trading ("Business Day") based on, among other things, the amount of premium
payments to be invested and surrendered and transfer requests to be effected on
that day pursuant to the variable contracts. Currently the NYSE is closed on the
observance of the following holidays: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Purchases and redemptions of the shares of
each fund are effected at their respective net asset values per share determined
as of the close of regular trading (usually 4:00 p.m., Eastern time) on the NYSE
on that Business Day. Payment for redemptions are made by the funds within seven
days thereafter. No fee is charged the separate accounts when they purchase or
redeem fund shares.
The funds may suspend redemption privileges or postpone the date of
payment during any period (1) when the NYSE is closed or trading on the NYSE is
restricted as determined by the SEC, (2) when an emergency exists, as defined by
the SEC, that makes it not reasonably practicable for a fund to dispose of
securities owned by it or fairly to determine the value of its assets or (3) as
the SEC may otherwise permit. The redemption price may be more or less than the
shareholder's cost, depending on the market value of a fund's portfolio at the
time.
VALUATION OF SHARES
Each fund determines its net asset value per share separately for each
class of shares, normally as of the close of regular trading (usually 4:00 p.m.,
Eastern time) on the NYSE on each Monday through Friday when the NYSE is open.
Prices will be calculated earlier when the NYSE closes early because trading has
been halted for the day.
Securities that are listed on U.S. and foreign stock exchanges normally
are valued at the last sale price on the day the securities are valued or,
lacking any sales on that day, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are generally
valued on the exchange considered by Mitchell Hutchins or the applicable
57
<PAGE>
sub-adviser 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, other than short-term investments that mature in 60 days or less.
Where market quotations are readily available, bonds of the funds (other
than Money Market Portfolio) are valued based upon market quotations, provided
those quotations adequately reflect, in the judgment of Mitchell Hutchins or the
applicable sub-adviser, the fair value of the securities. Where those market
quotations are not readily available, bonds are valued based upon appraisals
received from a pricing service using a computerized matrix system or based upon
appraisals derived from information concerning the security or similar
securities received from recognized dealers in those securities. The amortized
cost method of valuation generally is used to value debt obligations with 60
days or less remaining until maturity, unless the applicable board determines
that this does not represent fair value. All other securities and other assets
are valued at fair value as determined in good faith by or under the direction
of the board.
It should be recognized that judgment often plays a greater role in
valuing thinly traded securities and lower rated bonds than is the case with
respect to securities for which a broader range of dealer quotations and
last-sale information is available.
All investments quoted in foreign currency will be valued daily in U.S.
dollars on the basis of the foreign currency exchange rate prevailing at the
time such valuation is determined by a fund's custodian. Foreign currency
exchange rates are generally determined prior to the close of regular trading on
the NYSE. Occasionally events affecting the value of foreign investments and
such exchange rates occur between the time at which they are determined and the
close of trading on the NYSE, which events would not be reflected in the
computation of a fund's net asset value on that day. If events materially
affecting the value of such investments or currency exchange rates occur during
such time period, the investments will be valued at their fair value as
determined in good faith by or under the direction of the applicable board. The
foreign currency exchange transactions of the funds conducted on a spot (that
is, cash) basis are valued at the spot rate for purchasing or selling currency
prevailing on the foreign exchange market. Under normal market conditions this
rate differs from the prevailing exchange rate by less than one-tenth of one
percent due to the costs of converting from one currency to another.
MONEY MARKET PORTFOLIO. Money Market Portfolio values its portfolio
securities in accordance with the amortized cost method of valuation under Rule
2a-7 under the Investment Company Act. To use amortized cost to value its
portfolio securities, the fund must adhere to certain conditions under that Rule
relating to its investments. Amortized cost is an approximation of market value,
whereby the difference between acquisition cost and value at maturity is
amortized on a straight-line basis over the remaining life of the instrument.
The effect of changes in the market value of a security as a result of
fluctuating interest rates is not taken into account and thus the amortized cost
method of valuation may result in the value of a security being higher or lower
than its actual market value. In the event that a large number of redemptions
takes place at a time when interest rates have increased, the fund might have to
sell portfolio securities prior to maturity and at a price that might not be as
desirable as the value at maturity.
The board has established procedures for the purpose of maintaining a
constant net asset value of $1.00 per share for Money Market Portfolio, which
include a review of the extent of any deviation of net asset value per share,
based on available market quotations, from the $1.00 amortized cost per share.
Should that deviation exceed 1/2 of 1%, the trustees will promptly consider
whether any action should be initiated to eliminate or reduce material dilution
or other unfair results to shareholders. Such action may include redeeming
shares in kind, selling portfolio securities prior to maturity, reducing or
withholding dividends and utilizing a net asset value per share as determined by
using available market quotations. Money Market Portfolio will maintain a dollar
weighted average portfolio maturity of 90 days or less and will not purchase any
instrument with a remaining maturity greater than 13 months (as calculated under
Rule 2a-7) and except that securities subject to repurchase agreements may have
maturities in excess of 13 months, will limit portfolio investments, including
repurchase agreements, to those U.S. dollar-denominated instruments that are of
high quality and that the trustees determine present minimal credit risks as
advised by Mitchell Hutchins and will comply with certain reporting and
recordkeeping procedures. There is not assurance that constant net asset value
58
<PAGE>
per share will be maintained. In the event amortized cost ceases to represent
fair value, the board will take appropriate action.
In determining the approximate market value of portfolio instruments,
the Trust may employ outside organizations, which may use a matrix or formula
method that takes into consideration market indices, martices, yield curves and
other specific adjustments. This may result in the securities being valued at a
price different from the price that would have been determined had the matrix or
formula method not been used. All cash, receivables and current payables are
carried at their face value. Other assets, if any, are valued at fair value as
determined in good faith by or under the direction of the board.
TAXES
Fund shares are offered only to insurance company separate accounts that
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. Each fund is treated as
a separate corporation for federal income tax purposes. To qualify or continue
to qualify for treatment as a regulated investment company ("RIC") under the
Subchapter M of the Internal Revenue Code ("Code"), each fund must distribute to
its shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-term
capital gains and net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements. For
each fund, these requirements include the following: (1) the fund must derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in securities or those currencies ("Income Requirement");
(2) at the close of each quarter of the fund's taxable year, at least 50% of the
value of its total assets must be represented by cash and cash items, U.S.
government securities, securities of other RICs and other securities, with these
other securities limited, in respect of any one issuer, to an amount that does
not exceed 5% of the value of the fund's total assets and that does not
represent more than 10% of the issuer's outstanding voting securities; and (3)
at the close of each quarter of the fund's taxable year, not more than 25% of
the value of its total assets may be invested in securities (other than U.S.
government securities or the securities of other RICs) of any one issuer.
If a fund failed to qualify for treatment as a RIC for any taxable year,
(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.
ADDITIONAL DIVERSIFICATION REQUIREMENTS. Each fund intends to satisfy or
continue 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 each fund as assets of the related
separate account, the funds must also meet these requirements. Specifically, the
regulations under section 817(h) provide that, except as permitted by the "safe
harbor" described below, as of the end of each calendar quarter or within 30
days thereafter no more than 55% of the total assets of a fund may be
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments and no more than 90% by any four
investments. For this purpose, all securities of the same issuer are considered
a single investment, and each U.S. government agency and instrumentality is
considered a separate issuer. Section 817(h) provides, as a safe harbor, that a
separate account will be treated as being adequately diversified if the
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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 a 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 a fund realizes in
connection therewith. Gains from the disposition of foreign currencies (except
certain gains that may be excluded by future regulations), and gains from
options, futures and forward currency contracts derived by a fund with respect
to its business of investing in securities or foreign currencies, qualify as
permissible income under the Income Requirement.
Each fund may invest in the stock of "passive foreign investment
companies" ("PFICs") if that stock is a permissible investment. A PFIC is a
foreign corporation--other than a "controlled foreign corporation" (i.e., a
foreign corporation in which, on any day during its taxable year, more than 50%
of the total voting power of its voting stock or the total value of all of its
stock is owned, directly, indirectly, or constructively, by "U.S. shareholders,"
defined as U.S. persons that individually own, directly, indirectly, or
constructively, at least 10% of that voting power) as to which a fund is U.S.
shareholder--that, in general, meets either of the following tests: (1) at least
75% of its gross income is passive or (2) an average of at least 50% of its
assets produce, or are held for the production of, passive income. Under certain
circumstances, a fund will be subject to federal income tax on a portion of any
"excess distribution" received on the stock of a PFIC or of any gain from
disposition of such stock (collectively "PFIC income"), plus interest thereon,
even if the fund distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the fund's
investment company taxable income and, accordingly, will not be taxable to it to
the extent it distributes that income to its shareholders.
If a fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the fund will be required to include in income each year its pro
rata share of the QEF's annual ordinary earnings and net capital gain --which it
may have to distribute to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax--even if the QEF did not distribute those earnings
and gain to the fund. In most instances it will be very difficult, if not
impossible, to make this election because of certain of its requirements.
Each fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
a fund's adjusted basis therein as of the end of that year. Pursuant to the
election, a fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included by the fund for
prior taxable years under the election (and under regulations proposed in 1992
that provided a similar election with respect to the stock of certain PFICs). A
fund's adjusted basis in each PFIC's stock with respect to which it has made
this election will be adjusted to reflect the amounts of income included and
deductions taken thereunder.
If a fund has an "appreciated financial position"-- generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis--and enters into a "constructive sale" of the same or
substantially similar property, the fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract or a futures or forward currency contract entered into by a
fund or a related person with respect to the same or substantially similar
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property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale. The foregoing will not
apply, however, to a fund's transaction during any taxable year that otherwise
would be treated as a constructive sale if the transaction is closed within 30
days after the end of that year and the fund holds the appreciated financial
position unhedged for 60 days after that closing (i.e., at no time during that
60-day period is the fund's risk of loss regarding that position reduced by
reason of certain specified transactions with respect to substantially similar
or related property, such as having an option to sell, being contractually
obligated to sell, making a short sale or granting an option to buy
substantially identical stock or securities).
A fund may acquire zero coupon or other securities issued with original
issue discount ("OID") and/or Treasury inflation-protected securities ("TIPS"),
on which principal is adjusted based on changes in the Consumer Price Index. A
fund must include in its gross income the OID that accrues on those securities,
and the amount of any principal increases on TIPS, during the taxable year, even
if the fund receives no corresponding payment on them during the year.
Similarly, a fund that invests in payment-in-kind ("PIK") securities must
include in its gross income securities it receives as "interest" on those
securities. Each fund has elected similar treatment with respect to securities
purchased at a discount from their face value ("market discount"). Because a
fund annually must distribute substantially all of its investment company
taxable income, including any accrued OID, market discount and other non-cash
income, to satisfy the Distribution Requirement, it may be required in a
particular year to distribute as a dividend an amount that is greater than the
total amount of cash it actually receives. Those distributions would have to be
made from the fund's cash assets or from the proceeds of sales of portfolio
securities, if necessary. The fund might realize capital gains or losses from
those sales, which would increase or decrease its investment company taxable
income and/or net capital gain.
The foregoing is only a general summary of some of the important federal
income tax considerations generally affecting the funds and their shareholders.
No attempt is made to present a complete explanation of the federal tax
treatment of the funds' activities, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors are urged
to consult their own tax advisers for more detailed information and for
information regarding any state, local or foreign taxes applicable to the funds
and to dividends and distributions therefrom.
DIVIDENDS
MONEY MARKET PORTFOLIO. Shares of Money Market Portfolio begin earning
dividends on the day of purchase; dividends are accrued to shareholder accounts
daily and are automatically invested in additional fund shares monthly. The fund
does not expect to realize net capital gain. If a shareholder redeems all of its
Money Market Portfolio shares, all accrued dividends declared on the shares up
to the date of redemption are credited to the shareholder's account.
The board may revise the above dividend policy or postpone the payment
of dividends if the fund has or anticipates any large unexpected expense, loss
or fluctuation in net assets that, in the opinion of the board, might have a
significant adverse effect on shareholders. To date, no situation has arisen to
cause the board to take any such action.
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OTHER INFORMATION
MASSACHUSETTS BUSINESS TRUST. The Trust is an entity of the type
commonly known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of a fund could, under certain circumstances, be held personally
liable for the obligations of the fund or the Trust. However, the Trust's
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Trust or a fund and requires that notice of such disclaimer be given in each
note, bond, contract, instrument, certificate or undertaking made or issued by
the board members or by any officers or officer by or on behalf of the Trust or
the fund, the board members or any of them in connection with the Trust. The
Declaration of Trust provides for indemnification from the relevant fund's
property for all losses and expenses of any shareholder held personally liable
for the obligations of the fund. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the fund itself would be unable to meet its obligations, a possibility
that Mitchell Hutchins believes is remote and not material. Upon payment of any
liability incurred by a shareholder solely by reason of being or having been a
shareholder, the shareholder paying such liability would be entitled to
reimbursement from the general assets of the relevant fund. The board members
intend to conduct each fund's operations in such a way as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the fund.
VOTING RIGHTS. The insurance company separate accounts that fund
benefits under variable annuity or variable life insurance contracts are the
shareholders of the funds - not the individual owners of those contracts.
However, the separate accounts may pass through voting rights to contract
owners.
Shareholders of each fund are entitled to one vote for each full share
held and fractional votes for fractional shares held. Voting rights are not
cumulative and, as a result, the holders of more than 50% of all the shares of
the Trust may elect all of the board members of the Trust. The shares of a fund
will be voted together, except that only the shareholders of a particular class
of a fund may vote on matters affecting only that class, such as the terms of
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 funds may serve as the underlying
investments for separate accounts of unaffiliated insurance companies ("shared
funding") as well as for both annuity and life insurance contracts ("mixed
funding"). Due to differences in tax treatment or other considerations, the
interests of various contract owners might at some time be in conflict. The
Trust does not currently foresee any conflict. However, the Trust's board
intends to monitor events to identify any material irreconcilable conflict that
may arise and to determine what action, if any, should be taken in response to
such conflict. If such a conflict were to occur, one or more insurance
companies' separate accounts might be required to withdraw its investments in
one or more funds. This might force a fund to sell securities at disadvantageous
prices.
CLASSES OF SHARES. A share of each class of a fund represents an
identical interest in that fund's investment portfolio and has the same rights,
privileges and preferences. However, each class may differ with respect to
distribution fees, if any, other expenses allocable exclusively to each class,
voting rights on matters exclusively affecting that class, and its exchange
privilege, if any. The different expenses applicable to the different classes of
shares of the funds will affect the performance of those classes. Each share of
a fund is entitled to participate equally in dividends, other distributions and
the proceeds of any liquidation of that fund. However, due to the differing
expenses of the classes, dividends and liquidation proceeds on Class H and I
shares will differ.
PRIOR NAMES. Prior to November 19, 1997, the Trust was known as
"PaineWebber Series Trust." Prior to January 26, 1996, Balanced Portfolio was
known as "Asset Allocation Portfolio." Prior to September 21, 1995, Strategic
Fixed Income Portfolio was known as "Government Portfolio" and High Grade Fixed
Income Portfolio was known as "Fixed Income Portfolio." Prior to August 14,
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1995, Growth and Income Portfolio was known as "Dividend Growth Portfolio."
CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT. Brown
Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109 is
custodian of the assets of Global Income Portfolio. State Street Bank and Trust
Company, located at One Heritage Drive, North Quincy, Massachusetts 02171,
serves as custodian and recordkeeping agent for the other funds. Both custodians
employ 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 those funds that invest outside the United States. PFPC
Inc., a subsidiary of PNC Bank, N.A., serves as each fund's transfer and
dividend disbursing agent. It is located at 400 Bellevue Parkway, Wilmington, DE
19809.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the Trust and
the funds. Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and
Mitchell Hutchins in connection with other matters.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York
10019, serves as independent auditors for the Trust.
FINANCIAL STATEMENTS
The funds' Annual Reports to Shareholders for their last fiscal year are
a separate document supplied with this Statement of Additional Information, and
the financial statements, accompanying notes and report of independent auditors
appearing therein are incorporated by this reference into the Statement of
Additional Information.
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APPENDIX
RATINGS INFORMATION
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues; Aa. Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risk appear
somewhat larger than in Aaa securities; A. Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future; Baa. Bonds which are rated Baa are considered
as medium-grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payment and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well; Ba. Bonds
which are rated Ba are judged to have speculative elements; their future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class; B. Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small; Caa. Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest; Ca. Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings; C. Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category, the modifier 2 indicates
a mid-range ranking, and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong; A. An obligation rated A is
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than obligations in higher rated categories. However, the
obligor's capacity to meet its financial commitment on the obligation is still
strong; BBB. An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation; BB, B, CCC, CC, C. Obligations rated BB, B, CCC, CC and C are
regarded as having significant speculative characteristics. BB indicates the
least degree of speculation and C the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions; BB. An
obligation rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation; B. An
obligation rated B is more vulnerable to nonpayment than obligations rated BB,
but the obligor currently has the capacity to meet its financial commitment on
the obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation; CCC. An obligation rated CCC is currently vulnerable to
A-1
<PAGE>
nonpayment and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation; CC. An obligation rated CC is currently highly vulnerable to
nonpayment; C. The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued; D. An obligation rated D is in payment default.
The D rating category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
CI. The rating CI is reserved for income bonds on which no interest is
being paid.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
r. This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
PRIME-1. Issuers assigned this highest rating have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by the following characteristics: Leading market
positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well established access to
a range of financial markets and assured sources of alternate liquidity.
PRIME-2. Issuers assigned this rating have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
PRIME-3. Issuers assigned this rating have an acceptable capacity for
repayment of senior short-term obligations. The effect of industry
characteristics and market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME. Issuers assigned this rating do not fall within any of the
Prime rating categories.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS
A-1. A short-term obligation rated A-1 is rated in the highest category
by S&P. The obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong. A-2. A short-term
obligation rated A-2 is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory. A-3. A short-term obligation rated
A-3 exhibits adequate protection parameters. However, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on the obligation. B. A
short-term obligation rated B is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
A-2
<PAGE>
which could lead to the obligor's inadequate capacity to meet its financial
commitments on the obligation. C. A short-term obligation rated C is currently
vulnerable to nonpayment and is dependent upon favorable business, financial and
economic conditions for the obligor to meet its financial commitment on the
obligation. D. A short-term obligation rated D is in payment default. The D
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The D rating also will
be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
A-3
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION
CONTAINED OR REFERRED TO IN THE
PROSPECTUS AND THIS STATEMENT OF
ADDITIONAL INFORMATION. THE FUNDS AND
THEIR DISTRIBUTOR HAVE NOT AUTHORIZED
ANYONE TO PROVIDE YOU WITH INFORMATION
THAT IS DIFFERENT. THE PROSPECTUS AND
THIS STATEMENT OF ADDITIONAL INFORMATION
IS NOT AN OFFER TO SELL SHARES OF THE
FUNDS IN ANY JURISDICTION WHERE THE
FUNDS OR THEIR DISTRIBUTOR MAY NOT
LAWFULLY SELL THOSE SHARES.
------------
MITCHELL HUTCHINS
SERIES TRUST
------------------------------------------
Statement of Additional Information
May 1, 1999
------------------------------------------
(COPYRIGHT)1999 PaineWebber Incorporated
- -------------------------------------
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
--------
(1) Amended and Restated Declaration of Trust 1/
(2) Restated By-Laws 1/
(3) Instruments defining the rights of holders of the Registrant's shares of
beneficial interest 2/
(4) (a) Investment Advisory and Administration Contract 1/ -
(b) Investment Advisory and Administration Contract relating to Global
Growth Portfolio (filed herewith)
(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 (filed herewith)
(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 (filed herewith)
(h) Sub-Investment Advisory Contract with respect to Aggressive Growth
Portfolio 1/
(i) Sub-Advisory Agreement with respect to Global Growth Portfolio
(filed herewith)
(j) Sub-Advisory Agreement with respect to Strategic Fixed Income
Portfolio 3/
(5) Distribution Contract with respect to Class I shares (filed herewith)
(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
(filed herewith)
(b) Participation Agreement with American Republic Insurance Company
(filed herewith)
(c) Participation Agreement with Great American Reserve Insurance
Company (filed herewith)
(d) Participation Agreement with Hartford Life Insurance Company
(filedherewith)
(9) Opinion and consent of counsel (filed herewith)
(10) Other opinions, appraisals, rulings and consents: Auditors' consent (filed
herewith)
(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
(filed herewith)
C-1
<PAGE>
(14) and
(27) Financial Data Schedule (filed herewith)
(15) Plan pursuant to Rule 18f-31/
- ----------------------
1/ Incorporated by reference from Post-Effective Amendment No. 26 to the
registration statement, SEC file No. 33-10438, filed February 27, 1998.
2/ Incorporated by reference from Articles III, VIII, IX, X, and XI of
Registrant's Amended and Restated Declaration of Trust and from Articles
II, VII and X of Registrant's Restated By-Laws.
3/ Incorporated by reference from Post-Effective Amendment No. 23 to the
registration statement, SEC File No. 33-10438, filed May 1, 1996.
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 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.
C-2
<PAGE>
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 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
C-3
<PAGE>
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 INSTITUTIONAL SERIES
MITCHELL HUTCHINS PORTFOLIOS
MITCHELL HUTCHINS SERIES TRUST
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INDEX TRUST
PAINEWEBBER INVESTMENT SERIES
C-4
<PAGE>
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER MASTER SERIES, INC.
PAINEWEBBER MUNICIPAL SERIES
PAINEWEBBER MUTUAL FUND TRUST
PAINEWEBBER OLYMPUS FUND
PAINEWEBBER SECURITIES TRUST
STRATEGIC GLOBAL INCOME FUND, INC.
2002 TARGET TERM TRUST INC.
(b) Mitchell Hutchins is the Registrant's principal underwriter. The
directors and officers of Mitchell Hutchins, their principal
business addresses, and their positions and offices with Mitchell
Hutchins are identified in its Form ADV, as filed with the
Securities and Exchange Commission (registration number 801-13219).
The foregoing information is hereby incorporated herein by
reference. The information set forth below is furnished for those
directors and officers of Mitchell Hutchins who also serve as
trustees or officers of the Registrant. Unless otherwise indicated,
the principal business address of each person named is 1285 Avenue
of the Americas, New York, NY 10019.
<TABLE>
<CAPTION>
Positions and Office With
Name Registrant Positions and Offices With Underwriter
---- ---------- --------------------------------------
<S> <C> <C>
Margo N. Alexander Trustee and President President, Chief Executive Officer and
Director of Mitchell Hutchins
T. Kirkham Barneby Vice President Managing Director and Chief Investment
Officer - Quantitative Investments of
Mitchell Hutchins
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 the
Assistant Treasurer Mutual Fund Finance Department of
Mitchell Hutchins
Thomas J. Libassi Vice President Senior Vice President and a Portfolio
Manager of Mitchell Hutchins
Dennis McCauley Vice President Managing Director and Chief Investment
Officer - Fixed Income of Mitchell
Hutchins
Ann E. Moran Vice President and Vice President and a Manager of the
Assistant Treasurer Mutual Fund Finance Department of
Mitchell Hutchins
Dianne E. O'Donnell Vice President and Senior Vice President and Deputy
Secretary General Counsel of Mitchell Hutchins
Emil Polito Vice President Senior Vice President and Director of
Operations and Control of Mitchell
Hutchins
Susan Ryan Vice President Senior Vice President and a Portfolio
Manager of Mitchell Hutchins
Victoria E. Schonfeld Vice President Managing Director and General Counsel
of Mitchell Hutchins
Paul H. Schubert Vice President and First Vice President and Director of
Treasurer the Mutual Fund Finance Department of
Mitchell Hutchins
C-5
<PAGE>
Positions and Office With
Name Registrant Positions and Offices With Underwriter
---- ---------- --------------------------------------
<S> <C> <C>
Nirmal Singh Vice President Senior Vice President and a Portfolio
Manager of Mitchell Hutchins
Barney A. Taglialatela Vice President and Vice President and a Manager of the
Assistant Treasurer Mutual Fund Finance Department of
Mitchell Hutchins
Mark A. Tincher Vice President Managing Director and Chief Investment
Officer - Equities of Mitchell Hutchins
Stuart Waugh Vice President Managing Director and a Portfolio
Manager of Mitchell Hutchins
Keith A. Weller Vice President and First Vice President and Associate
Assistant Secretary Counsel of Mitchell Hutchins
</TABLE>
(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 certifies that it meets all the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment 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 28th day of April, 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 April 28, 1999
- ---------------------------- (Chief Executive Officer)
Margo N. Alexander *
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman April 28, 1999
- ---------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr. *
/s/ Richard Q. Armstrong Trustee April 28, 1999
- ----------------------------
Richard Q. Armstrong *
/s/ Richard R. Burt Trustee April 28, 1999
- ----------------------------
Richard R. Burt *
/s/ Mary C. Farrell Trustee April 28, 1999
- ----------------------------
Mary C. Farrell *
/s/ Meyer Feldberg Trustee April 28, 1999
- ----------------------------
Meyer Feldberg *
/s/ George W. Gowen Trustee April 28, 1999
- ----------------------------
George W. Gowen *
/s/ Frederic V. Malek Trustee April 28, 1999
- ----------------------------
Frederic V. Malek *
/s/ Carl W. Schafer Trustee April 28, 1999
- ----------------------------
Carl W. Schafer *
/s/ Paul H. Schubert Vice President and April 28, 1999
- ---------------------------- Treasurer (Chief Financial
Paul H. Schubert 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.
<PAGE>
MITCHELL HUTCHINS SERIES TRUST
EXHIBIT INDEX
Exhibit
Number
- ------
(1) Amended and Restated Declaration of Trust 1/
(2) Restated By-Laws 1/
(3) Instruments defining the rights of holders of the Registrant's shares of
beneficial interest 2/
(4) (a) Investment Advisory and Administration Contract 1/-
(b) Investment Advisory and Administration Contract relating to Global
Growth Portfolio (filed herewith)
(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 (filed herewith)
(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 (filed herewith)
(h) Sub-Investment Advisory Contract with respect to Aggressive Growth
Portfolio 1/
(i) Sub-Advisory Agreement with respect to Global Growth Portfolio
(filed herewith)
(j) Sub-Advisory Agreement with respect to Strategic Fixed Income
Portfolio 3/
(5) Distribution Contract with respect to Class I shares (filed herewith)
(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 (filed
herewith)
(b) Participation Agreement with American Republic Insurance Company
(filed herewith)
(c) Participation Agreement with Great American Reserve Insurance
Company (filed herewith)
(d) Participation Agreement with Hartford Life Insurance Company
(filed herewith)
(9) Opinion and consent of counsel (filed herewith)
(10) Other opinions, appraisals, rulings and consents: Auditors' consent (filed
herewith)
(11) Financial statements omitted from prospectus-none
(12) Letter of investment intent 1/
(13) Plan of Distribution pursuant to Rule 12b-1 with respect to Class I shares
(filed herewith)
<PAGE>
(14) and
(27) Financial Data Schedule (filed herewith)
(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. 23 to the
registration statement, SEC File No. 33-10438, filed May 1, 1996.
Exhibit No. 4(b)
INVESTMENT ADVISORY AND ADMINISTRATION CONTRACT
Contract made as of November 2, 1998 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 ("1934
Act"), and as an investment adviser under the Investment Advisers Act of 1940,
as amended,
WHEREAS the Trust is registered under the Investment Company Act of 1940,
as amended ("1940 Act"), as an open-end management investment company, and
offers for public sale 13 distinct series of shares of beneficial interest,
which correspond to distinct portfolios, one of which has been designated as
Global Growth Portfolio; and
WHEREAS the Trust desires to retain Mitchell Hutchins as investment
adviser and administrator to furnish certain administrative, investment advisory
and portfolio management services to the Trust with respect to Global Growth
Portfolio and any other Series as to which this Contract may hereafter be made
applicable (each a "Series"), and Mitchell Hutchins is willing to furnish such
services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Trust hereby appoints Mitchell Hutchins as investment
adviser and administrator of the Trust and each Series for the period and on the
terms set forth in this Contract. Mitchell Hutchins accepts such appointment and
agrees to render the services herein set forth, for the compensation herein
provided.
2. DUTIES AS INVESTMENT ADVISER.
(a) Subject to the supervision of the Trust's Board of Trustees ("Board"),
Mitchell Hutchins will provide a continuous investment program for a Series,
including investment research and management with respect to all securities and
investments and cash equivalents in the Series, and may allocate the Series'
portfolio investments between countries, regions or types of investments.
Mitchell Hutchins will determine from time to time what securities and other
investments will be purchased, retained or sold by the Series. Mitchell Hutchins
may delegate to a sub-adviser, in whole or in part, Mitchell Hutchins' duty to
provide a continuous investment management program with respect to any Series,
including the provision of investment management services with respect to a
portion of the Series' assets, in accordance with paragraph 5 of this Agreement.
(b) Mitchell Hutchins agrees that in placing orders with brokers, it will
attempt to obtain the best net result in terms of price and execution; provided
that, on behalf of any Series, Mitchell Hutchins may, in its discretion, use
brokers who provide the Series with research, analysis, advice and similar
services to execute portfolio transactions on behalf of the Series, and Mitchell
<PAGE>
Hutchins may pay to those brokers in return for brokerage and research services
a higher commission than may be charged by other brokers, subject to Mitchell
Hutchins' determining in good faith that such commission is reasonable in terms
either of the particular transaction or of the overall responsibility of
Mitchell Hutchins to such Series and its other clients and that the total
commissions paid by such Series will be reasonable in relation to the benefits
to the Series over the long term. In no instance will portfolio securities be
purchased from or sold to Mitchell Hutchins, or any affiliated person thereof,
except in accordance with the federal securities laws and the rules and
regulations thereunder, or any applicable exemptive orders . Whenever Mitchell
Hutchins simultaneously places orders to purchase or sell the same security on
behalf of a Series and one or more other accounts advised by Mitchell Hutchins,
such orders will be allocated as to price and amount among all such accounts in
a manner believed to be equitable to each account. The Trust recognizes that in
some cases this procedure may adversely affect the results obtained for the
Series.
(c) Mitchell Hutchins will oversee the maintenance of all books and
records with respect to the securities transactions of each Series, and will
furnish the Board with such periodic and special reports as the Board reasonably
may request. In compliance with the requirements of Rule 31a-3 under the 1940
Act, Mitchell Hutchins hereby agrees that all records which it maintains for the
Trust are the property of the Trust, agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any records which it maintains for
the Trust and which are required to be maintained by Rule 31a-l under the 1940
Act and further agrees to surrender promptly to the Trust any records which it
maintains for the Trust upon request by the Trust.
(d) Mitchell Hutchins will oversee the computation of the net asset value
and the net income of each Series as described in the currently effective
registration statement of the Trust under the Securities Act of 1933, as
amended, and the 1940 Act and any supplements thereto ("Registration Statement)
or as more frequently requested by the Board.
(e) The Trust hereby authorizes Mitchell Hutchins and any entity or person
associated with Mitchell Hutchins which is a member of a national securities
exchange to effect any transaction on such exchange for the account of any
Series, which transaction is permitted by Section 11(a) of the 1934 Act and the
rules thereunder, and the Trust hereby consents to the retention of compensation
by Mitchell Hutchins or any person or entity associated with Mitchell Hutchins
for such transaction.
3. DUTIES AS ADMINISTRATOR. Mitchell Hutchins will administer the affairs
of the Trust and each Series subject to the supervision of the Board and the
following understandings:
(a) Mitchell Hutchins will supervise all aspects of the operations of the
Trust and each Series, including oversight of transfer agency, custodial and
accounting services, except as hereinafter set forth; provided, however, that
nothing herein contained shall be deemed to relieve or deprive the Board of its
responsibility for and control of the conduct of the affairs of the Trust and
each Series.
(b) Mitchell Hutchins will provide the Trust and each Series with such
corporate, administrative and clerical personnel (including officers of the
2
<PAGE>
Trust) and services as are reasonably deemed necessary or advisable by the
Board, including the maintenance of certain books and records of the Trust and
each Series.
(c) Mitchell Hutchins will arrange, but not pay, for the periodic
preparation, updating, filing and dissemination (as applicable) of the Trust's
Registration Statement, proxy material, tax returns and required reports to each
Series' shareholders and the Securities and Exchange Commission and other
appropriate federal or state regulatory authorities.
(d) Mitchell Hutchins will provide the Trust and each Series with, or
obtain for it, adequate office space and all necessary office equipment and
services, including telephone service, heat, utilities, stationery supplies and
similar items.
(e) Mitchell Hutchins will provide the Board on a regular basis with
economic and investment analyses and reports and make available to the Board
upon request any economic, statistical and investment services normally
available to institutional or other customers of Mitchell Hutchins.
4. FURTHER DUTIES. In all matters relating to the performance of this
Contract, Mitchell Hutchins will act in conformity with the Declaration of
Trust, By-Laws, and Registration Statement of the Trust and with the
instructions and directions of the Board and will comply with the requirements
of the 1940 Act, the rules thereunder, and all other applicable federal and
state laws and regulations.
5. DELEGATION OF MITCHELL HUTCHINS' DUTIES AS INVESTMENT ADVISER AND
ADMINISTRATOR. With respect to any or all Series, Mitchell Hutchins may enter
into one or more contracts ("Sub-Advisory or Sub-Administration Contract") with
one or more sub-advisers or sub-administrators in which Mitchell Hutchins
delegates to such sub-advisers or sub-administrators any or all of its duties
specified in Paragraphs 2 and 3 of this Contract, provided that each
Sub-Advisory or Sub-Administration Contract imposes on the sub-adviser or
sub-administrator bound thereby all the corresponding duties and conditions to
which Mitchell Hutchins is subject by Paragraphs 2 and 3 of this Contract and
all the duties and conditions of paragraph 4 of this Contract, and further
provided that each Sub-Advisory or Sub-Administration Contract meets all
requirements of the 1940 Act and rules thereunder. Furthermore, to the extent
consistent with the regulations and orders of the Securities and Exchange
Commission, the appointment and engagement of any sub-advisor and delegation to
it of duties hereunder by Mitchell Hutchins shall be subject only to the
approval of the Board of Trustees of the Trust.
6. SERVICES NOT EXCLUSIVE. The services furnished by Mitchell Hutchins
hereunder are not to be deemed exclusive and Mitchell Hutchins shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired thereby or unless otherwise agreed to by the parties hereunder
in writing. Nothing in this Contract shall limit or restrict the right of any
director, officer or employee of Mitchell Hutchins, who may also be a Trustee,
officer or employee of the Trust, to engage in any other business or to devote
his or her time and attention in part to the management or other aspects of any
other business, whether of a similar nature or a dissimilar nature.
3
<PAGE>
7. EXPENSES.
(a) During the term of this Contract, each Series will bear all expenses,
not specifically assumed by Mitchell Hutchins, incurred in its operations and
the offering of its shares.
(b) Expenses borne by each series will include but not be limited to the
following (or each Series' proportionate share of the following): (i) the cost
(including brokerage commissions) of securities purchased or sold by the Series
and any losses incurred in connection therewith; (ii) fees payable to and
expenses incurred on behalf of the Series by Mitchell Hutchins under this
Contract; (iii) expenses of organizing the Trust and the Series; (iv) filing
fees and expenses relating to the registrations and qualification of the Series'
shares and the Trust under federal and/or securities laws and maintaining such
registration and qualifications; (v) fees and salaries payable to the Trust's
Trustees and officers who are not interested persons of the Trust or Mitchell
Hutchins; (vi) all expenses incurred in connection with the Trustees' services,
including travel expenses; (vii) taxes (including any income or franchise taxes)
and governmental fees; (viii) costs of any liability, uncollectible items of
deposit and other insurance and fidelity bonds; (ix) any costs, expenses or
losses arising out of a liability of or claim for damages or other relief
asserted against the Trust or Series for violation of any law; (x) legal,
accounting and auditing expenses, including legal fees of special counsel for
those Trustees of the Trust who are not interested persons of the Trust; (xi)
charges of custodians, transfer agents and other agents; (xii) costs of
preparing share certificates; (xiii) expenses of setting in type and printing
prospectuses and supplements thereto, statements of additional information and
supplements thereto, reports and proxy materials for existing shareholders;
(xiv) costs of mailing prospectuses and supplements thereto, statements of
additional information and supplements thereto, reports and proxy materials to
existing shareholders; (xv) any extraordinary expenses (including fees and
disbursements of counsel, costs of actions, suits or proceedings to which the
Trust is a party and the expenses the Trust may incur as a result of its legal
obligation to provide indemnification to its officers, Trustees, agents and
shareholders) incurred by the Trust or Series; (xvi) fees, voluntary assessments
and other expenses incurred in connection with membership in investment company
organizations; (xvii) cost of mailing and tabulating proxies and costs of
meetings of shareholders, the Board and any committees thereof; (xviii) the cost
of investment company literature and other publications provided by the Trust to
its Trustees and officers; (xix) costs of mailing, stationery and communications
equipment; (xx) expenses incident to any dividend, withdrawal or redemption
options; (xxi) charges and expenses of any outside pricing service used to value
portfolio securities; and (xxii) interest on borrowings.
(c) The Trust or a Series may pay directly any expenses incurred by it in
its normal operations and, if any such payment is consented to by Mitchell
Hutchins and acknowledged as otherwise payable by Mitchell Hutchins pursuant to
this Contract, the Series may reduce the fee payable to Mitchell Hutchins
pursuant to Paragraph 8 thereof by such amount. To the extent that such
deductions exceed the fee payable to Mitchell Hutchins on any monthly payment
date, such excess shall be carried forward and deducted in the same manner from
the fee payable on succeeding monthly payment dates.
4
<PAGE>
(d) Mitchell Hutchins will assume the cost of any compensation for
services provided to the Trust received by the officers of the Trust and by
those Trustees who are interested persons of the Trust.
(e) The payment or assumption by Mitchell Hutchins of any expenses of the
Trust or a Series that Mitchell Hutchins is not required by this Contract to pay
or assume shall not obligate Mitchell Hutchins to pay or assume the same or any
similar expense of the Trust or a Series on any subsequent occasion.
8. COMPENSATION.
(a) For the services provided and the expenses assumed pursuant to this
Contract, with respect to Global Growth Portfolio, the Trust will pay to
Mitchell Hutchins a fee, computed daily and paid monthly, at an annual rate of
0.75% of the average daily net assets of such Series.
(b) For the services provided and the expenses assumed pursuant to this
Contract with respect to any other Series, the Trust will pay to Mitchell
Hutchins from the assets of such Series a fee in an amount to be agreed upon in
a written fee agreement ("Fee Agreement") executed by the Trust on behalf of
such Series and by Mitchell Hutchins. All such Fee Agreements shall provide that
they are subject to all terms and conditions of this Contract.
(c) The fee shall be computed daily and paid monthly to Mitchell Hutchins
on or before the first business day of the next succeeding calendar month.
(d) If this Contract becomes effective or terminates before the end of any
month, the fee for the period from the effective day to the end of the month or
from the beginning of such month to the date of termination, as the case may be,
shall be prorated according to the proportion which such period bears to the
full month in which such effectiveness or termination occurs.
9. LIMITATION OF LIABILITY OF MITCHELL HUTCHINS. Mitchell Hutchins and its
delegates, including any Sub-Adviser or Sub-Administrator to any Series or the
Trust, shall not be liable for any error of judgment or mistake of law or for
any loss suffered by any Series, the Trust or any of its shareholders, in
connection with the matters to which this Contract relates, except to the extent
that such a loss results from willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or from reckless disregard by it of
its obligations and duties under this Contract. Any person, even though also an
officer, director, employee, or agent of Mitchell Hutchins, who may be or become
an officer, Trustee, employee or agent of the Trust shall be deemed, when
rendering services to any Series or the Trust or acting with respect to any
business of such Series or the Trust, to be rendering such service to or acting
solely for the Series or the Trust and not as an officer, director, employee, or
agent or one under the control or direction of Mitchell Hutchins even though
paid by it.
10. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS OF THE TRUST.
No Trustee, shareholder, officer, employee or agent of any Series shall not be
liable for any obligations of any Series or the Trust under this Contract, and
5
<PAGE>
Mitchell Hutchins agrees that, in asserting any rights or claims under this
Contract, it shall look only to the assets and property of the Trust in
settlement of such right or claim, and not to any Trustee, shareholder, officer,
employee or agent.
11. DURATION AND TERMINATION.
(a) This Contract shall become effective upon the date hereabove written
provided that, with respect to any Series, this Contract shall not take effect
unless it has first been approved (i) by a vote of a majority of those Trustees
of the Trust who are not parties to this Contract or interested persons of any
such party cast in person at a meeting called for the purpose of voting on such
approval, and (ii) by vote of a majority of that Series' outstanding voting
securities.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for two years from the above written date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of those Trustees of the Trust who
are not parties to this Contract or interested persons of any such party, cast
in person at a meeting called for the purpose of voting on such approval, and
(ii) by the Board or with respect to any given Series by vote of a majority of
the outstanding voting securities of such Series.
(c) Notwithstanding the foregoing, with respect to any Series this
Contract may be terminated at any time, without the payment of any penalty, by
vote of the board or by a vote of a majority of the outstanding voting
securities of such Series on sixty days' written notice to Mitchell Hutchins or
by Mitchell Hutchins at any time, without the payment of any penalty, on sixty
days' written notice to the Trust. Termination of this Contract with respect to
any given Series shall in no way affect the continued validity of this Contract
or the performance thereunder with respect to any other Series. This Contract
will automatically terminate in the event of its assignment.
12. AMENDMENT OF THIS CONTRACT. No provision of this Contract may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this contract as to any
given Series shall be effective until approved by vote of a majority of such
Series' outstanding voting securities.
13. GOVERNING LAW. This Contract shall be construed in accordance with the
laws of the State of Delaware, without giving effect to the conflicts of laws
principles thereof, and in accordance with the 1940 Act, provided, however, that
Section 10 above will be construed in accordance with the laws of the
Commonwealth of Massachusetts. To the extent that the applicable laws of the
State of Delaware or the Commonwealth of Massachusetts conflict with the
applicable provisions of the 1940 Act, the latter shall control.
14. MISCELLANEOUS. The captions in this Contract are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
6
<PAGE>
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors. As used in this Contract,
the terms "majority of the outstanding voting securities," "affiliated person,"
"interested person," "assignment," "broker," "investment adviser," "national
securities exchange," "net assets," "prospectus," "sale," "sell" and "security"
shall have the same meaning as such terms have in the 1940 Act, subject to such
exemption as may be granted by the Securities and Exchange Commission by any
rule, regulation or order. Where the effect of a requirement of the 1940 Act
reflected in any provision of this contract is relaxed by a rule, regulation or
order of the Securities and Exchange Commission, whether of special or general
application, such provision shall be deemed to incorporate the effect of such
rule, regulation or order.
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 ASSET
MANAGEMENT INC.
Attest: /s/ Cristina Paradiso By: /s/ Victoria Schonfeld
--------------------- ----------------------
MITCHELL HUTCHINS SERIES TRUST
Attest: /s/ Cristina Paradiso By: /s/ Dianne E. O'Donnell
--------------------- -----------------------
7
Exhibit No. 4(e)
INVESTMENT ADVISORY AND ADMINISTRATION FEE AGREEMENT
Agreement made as of September 1, 1993, between PAINEWEBBER SERIES TRUST,
a Massachusetts business trust ("Trust"), on behalf of the Aggressive Growth
Portfolio, a series of shares of beneficial interest of the Trust ("Portfolio"),
and MITCHELL HUTCHINS ASSET MANAGEMENT INC. ("Mitchell Hutchins"), a Delaware
corporation registered as a broker-dealer under the Securities Exchange Act of
1934, as amended, and as an investment adviser under the Investment Advisers Act
of 1940, as amended.
WHEREAS, the Trust has appointed Mitchell Hutchins as investment adviser
and administrator for each series of shares of beneficial interest of the Trust
as now exists and as hereafter may be established, pursuant to an Investment
Advisory and Administration Contract dated April 28, 1988 between the Trust and
Mitchell Hutchins ("Advisory Contract"); and
WHEREAS, the Portfolio has been established as a new series of the Trust;
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. For the services provided and the expenses assumed pursuant to the Advisory
Contract with respect to the Portfolio, the Portfolio will pay to Mitchell
Hutchins a fee, computed daily and paid monthly, at the annual rate of 0.80% of
the Portfolio's average daily net assets.
2. This Fee Agreement shall be subject to all terms and conditions of the
Advisory Contract.
3. This Fee Agreement shall become effective upon the date written above,
provided that it shall not take effect unless it has first been approved (i) by
a vote of a majority of the Trustees of the Trust who are not parties to this
Fee Agreement or the Advisory Contract or interested persons of any such persons
at a meeting called for the purpose of such approval and (ii) by vote of a
majority of the Portfolio's outstanding voting securities.
<PAGE>
IN WITNESS HEREOF, the parties hereto have caused this instrument to be
executed by their officers designated as of the day and year first above
written.
PAINEWEBBER SERIES TRUST
on behalf of the Aggressive Growth Portfolio
By: /s/ Dianne E. O'Donnell
------------------------------------
Name: Dianne E. O'Donnell
Title: Secretary and Vice President
MITCHELL HUTCHINS ASSET MANAGEMENT, INC.
By: /s/ Jack W. Murphy
------------------------------------
Name: Jack W. Murphy
Title: First Vice President
Exhibit No. 4(g)
INVESTMENT ADVISORY AND ADMINISTRATION FEE AGREEMENT
Agreement made as of May 1, 1998, between MITCHELL HUTCHINS SERIES TRUST,
a Massachusetts business trust ("Trust"), and MITCHELL HUTCHINS ASSET MANAGEMENT
INC. ("Mitchell Hutchins"), a Delaware corporation registered as a broker-dealer
under the Securities Exchange Act of 1934, as amended, and as an investment
adviser under the Investment Advisers Act of 1940, as amended.
WHEREAS, the Trust has appointed Mitchell Hutchins as investment adviser
and administrator for each series of shares of beneficial interest of the Trust
as now exists and as hereafter may be established, pursuant to an Investment
Advisory and Administration Contract, dated April 21, 1988, between the Trust
and Mitchell Hutchins ("Advisory Contract"); and
WHEREAS, the following four new series of shares of beneficial interest
(each a "Fund") have been established as new series of the Trust: High Income
Portfolio, Tactical Allocation Portfolio, Small Cap Portfolio and Strategic
Income Portfolio;
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. For the services provided and the expenses assumed pursuant to the
Advisory Contract with respect to the Funds, each Fund will pay to
Mitchell Hutchins a fee at the annual rate of its average daily net
asset set forth below, such fee to be computed daily and paid monthly:
High Income Portfolio: 0.50%
Tactical Allocation Portfolio: 0.50%
Small Cap Portfolio 1.00%
Strategic Income Portfolio 0.75%
2. This Fee Agreement shall be subject to all of the terms and conditions
of the Advisory Contract.
3. This Fee Agreement shall become effective upon the date written above,
provided that it shall not take effect with respect to a Fund unless it
has first been approved with respect to that Fund (i) by a vote of a
majority of the Trustees of the Trust who are not parties to this Fee
Agreement or the Advisory Contract or interested persons of any such
persons at a meeting called for the purpose of such approval and (ii)
by vote of a majority of the Fund's outstanding voting securities.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated as of the day and year first above
written.
MITCHELL HUTCHINS SERIES TRUST
By: /s/ Dianne E. O'Donnell
-----------------------------
Name: Dianne E. O'Donnell
Title: Secretary and Vice President
MITCHELL HUTCHINS ASSET MANAGEMENT INC.
By: /s/ Victoria Schonfeld
-----------------------------
Name: Victoria Schonfeld
Title: Managing Director and General Counsel
2
Exhibit No. 4(i)
SUB-ADVISORY CONTRACT
Agreement made as of November 2, 1998 ("Contract") between MITCHELL
HUTCHINS ASSET MANAGEMENT INC., a Delaware corporation ("Mitchell Hutchins"),
and INVISTA CAPITAL MANAGEMENT, INC., an Iowa corporation ("Sub-Adviser").
RECITALS
--------
(1) Mitchell Hutchins has entered into an Investment Advisory and
Administration Agreement, dated November 2, 1998 ("Management Agreement"), with
Mitchell Hutchins Series Trust ("Trust"), an open-end management investment
company registered under the Investment Company Act of 1940, as amended ("1940
Act");
(2) The Trust offers for public sale distinct series of shares of
beneficial interest, including a series of shares of the Trust known as Global
Growth Portfolio ("Portfolio");
(3) Under the Management Agreement, Mitchell Hutchins has agreed to
provide certain investment advisory and administrative services to the
Portfolio;
(4) The Management Agreement permits Mitchell Hutchins to delegate certain
of its duties as investment adviser thereunder to a sub-adviser;
(5) Mitchell Hutchins desires to allocate the portfolio investments of the
Portfolio between an international segment and a domestic segment, and to retain
the Sub-Adviser to furnish certain investment advisory services with respect to
the international segment of the investments of the Portfolio, and
(6) The Sub-Adviser is willing to furnish such services.
NOW, THEREFORE, in consideration of the premises and mutual covenants herein
contained, Mitchell Hutchins and the Sub-Adviser agree as follows:
1. APPOINTMENT. Mitchell Hutchins hereby appoints the Sub-Adviser as an
investment sub-adviser with respect to the international segment of the
Portfolio's investments for the period and on the terms set forth in this
Contract. The Sub-Adviser accepts that appointment and agrees to render the
services herein set forth, for the compensation herein provided.
2. DUTIES AS SUB-ADVISER.
(a) Subject to the supervision and direction of the Trust's Board of
Trustees ("Board") and review by Mitchell Hutchins, and any written guidelines
adopted by the Board or Mitchell Hutchins, the Sub-Adviser will provide a
continuous investment program with respect to the international segment of the
Portfolio's investments, including investment research and management to all
securities and investments and cash equivalents in the Portfolio allocated by
Mitchell Hutchins to the international segment of the Portfolio's investments.
The Sub-Adviser will manage the Series' assets in cooperation with Mitchell
Hutchins so as to permit the Series (i) to continue to qualify as a regulated
<PAGE>
investment company under Subchapter M of the Internal Revenue Code, as amended
("Code") and (ii) to continue to comply with the diversification requirements
imposed by Section 817(h) of the Code and the regulations thereunder and will
provide Mitchell Hutchins with such information as Mitchell Hutchins may from
time to time request to assure that the Series so qualifies or complies. The
Sub-Adviser will determine from time to time what investments will be purchased,
retained or sold by the Portfolio in the international segment of the
Portfolio's investments. The Sub-Adviser will be responsible for placing
purchase and sell orders for investments and for other related transactions with
respect to the international segment of the Portfolio's investments. The
Sub-Adviser will provide services under this Contract in accordance with the
Portfolio's investment objective, policies and restrictions as stated in the
Trust's currently effective registration statement under the 1940 Act, and any
amendments or supplements thereto ("Registration Statement").
(b) The Sub-Adviser agrees that, in placing orders with brokers, it will
obtain the best net result in terms of price and execution; provided that, on
behalf of the Portfolio, the Sub-Adviser may, in its discretion, use brokers who
provide the Sub-Adviser with research, analysis, advice and similar services to
execute portfolio transactions, and the Sub-Adviser may pay to those brokers in
return for brokerage and research services a higher commission than may be
charged by other brokers, subject to the Sub-Adviser's determining in good faith
that such commission is reasonable in terms either of the particular transaction
or of the overall responsibility of the Sub-Adviser to the Portfolio and its
other clients and that the total commissions paid by the Portfolio will be
reasonable in relation to the benefits to the Portfolio over the long term. In
no instance will portfolio securities be purchased from or sold to the
Sub-Adviser, or any affiliated person thereof, except in accordance with the
federal securities laws and the rules and regulations thereunder. Whenever the
Sub-Adviser simultaneously places orders to purchase or sell the same security
on behalf of the Portfolio and one or more other accounts advised by the
Sub-Adviser, the orders will be allocated as to price and amount among all such
accounts in a manner believed to be equitable over time to each account.
Mitchell Hutchins recognizes that in some cases this procedure may adversely
affect the results obtained for the Portfolio.
(c) The Sub-Adviser will maintain all books and records required to be
maintained pursuant to the 1940 Act and the rules and regulations promulgated
thereunder with respect to actions by the Sub-Adviser on behalf of the
Portfolio, and will furnish the Board and Mitchell Hutchins with such periodic
and special reports as the Board or Mitchell Hutchins reasonably may request. In
compliance with the requirements of Rule 31a-3 under the 1940 Act, the
Sub-Adviser hereby agrees that all records that it maintains for the Portfolio
are the property of the Trust, agrees to preserve for the periods prescribed by
Rule 31a-2 under the 1940 Act any records that it maintains for the Trust and
that are required to be maintained by Rule 31a-1 under the 1940 Act, and further
agrees to surrender promptly to the Trust any records that it maintains for the
Portfolio upon request by the Trust.
(d) At such times as shall be reasonably requested by the Board or
Mitchell Hutchins, the Sub-Adviser will provide the Board and Mitchell Hutchins
with economic and investment analyses and reports as well as quarterly reports
2
<PAGE>
setting forth the performance of the international segment of the Portfolio's
investments and make available to the Board and Mitchell Hutchins any economic,
statistical and investment services that the Sub-Adviser normally makes
available to its institutional or other customers.
(e) In accordance with procedures adopted by the Board, as amended from
time to time, the Sub-Adviser is responsible for assisting in the fair valuation
of all portfolio securities and will use its reasonable efforts to arrange for
the provision of a price(s) from a party(ies) independent of the Sub-Adviser for
each portfolio security for which the custodian does not obtain prices in the
ordinary course of business from an automated pricing service.
3. FURTHER DUTIES. In all matters relating to the performance of this
Contract, the Sub-Adviser will act in conformity with the Trust's Declaration of
Trust, By-Laws and Registration Statement and with the written instructions and
written directions of the Board and Mitchell Hutchins; and will comply with the
requirements of the 1940 Act and the Investment Advisers Act of 1940, as amended
("Advisers Act") and the rules under each, and all other federal and state laws
and regulations applicable to the Trust and the Portfolio. Mitchell Hutchins
agrees to provide to the Sub-Adviser copies of the Trust's Declaration of Trust,
By-Laws, Registration Statement, written instructions and directions of the
Board and Mitchell Hutchins, and any amendments or supplements to any of these
materials as soon as practicable after such materials become available; and
further agrees to identify to the Sub-Adviser in writing any broker-dealers that
are affiliated with Mitchell Hutchins (other than PaineWebber Incorporated and
Mitchell Hutchins itself).
4. EXPENSES. During the term of this Contract, the Sub-Adviser will bear
all expenses incurred by it in connection with its services under this Contract.
5. COMPENSATION.
(a) For the services provided and the expenses assumed by the Sub-Adviser
pursuant to this Contract, Mitchell Hutchins, not the Portfolio, will pay
Invista a sub-advisory fee, computed daily and paid monthly, at an annual rate
of 0.29% of the Portfolio's average daily net assets allocated to its
management. Under this fee arrangement, Invista will receive fees based on the
value of portfolio assets under its management as these assets have been
allocated to it by Mitchell Hutchins.
(b) The fee shall be accrued daily and payable monthly to the Sub-Adviser
on or before the last business day of the next succeeding calendar month.
(c) If this Contract becomes effective or terminates before the end of any
month, the fee for the period from the effective date to the end of the month or
from the beginning of such month to the date of termination, as the case may be,
shall be pro-rated according to the proportion that such period bears to the
full month in which such effectiveness or termination occurs.
3
<PAGE>
6. LIMITATION OF LIABILITY. The Sub-Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Portfolio,
the Trust, its shareholders or by Mitchell Hutchins in connection with the
matters to which this Contract relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations and duties under this
Contract. Nothing in this paragraph shall be deemed a limitation or waiver of
any obligation or duty that may not by law be limited or waived.
7. REPRESENTATIONS OF SUB-ADVISER. The Sub-Adviser represents, warrants
and agrees as follows:
(a) The Sub-Adviser (i) is registered as an investment adviser under the
Advisers Act and will continue to be so registered for so long as this Contract
remains in effect; (ii) is not prohibited by the 1940 Act or the Advisers Act
from performing the services contemplated by this Contract; (iii) has met and
will seek to continue to meet for so long as this Contract remains in effect,
any other applicable federal or state requirements, or the applicable
requirements of any regulatory or industry self-regulatory agency necessary to
be met in order to perform the services contemplated by this Contract; (iv) has
the authority to enter into and perform the services contemplated by this
Contract; and (v) will promptly notify Mitchell Hutchins of the occurrence of
any event that would disqualify the Sub-Adviser from serving as an investment
adviser of an investment company pursuant to Section 9(a) of the 1940 Act or
otherwise.
(b) The Sub-Adviser has adopted a written code of ethics complying with
the requirements of Rule 17j-1 under the 1940 Act and will provide Mitchell
Hutchins and the Board with a copy of such code of ethics, together with
evidence of its adoption. Within forty-five days of the end of the last calendar
quarter of each year that this Contract is in effect, the president or a
vice-president of the Sub-Adviser shall certify to Mitchell Hutchins that the
Sub-Adviser has complied with the requirements of Rule 17j-1 during the previous
year and that there has been no violation of the Sub-Adviser's code of ethics
or, if such a violation has occurred, that appropriate action was taken in
response to such violation. Upon the written request of Mitchell Hutchins, the
Sub-Adviser shall permit Mitchell Hutchins, its employees or its agents to
examine the reports required to be made to the Sub-Adviser by Rule 17j-1(c)(1)
and all other records relevant to the Sub-Adviser's code of ethics.
(c) The Sub-Adviser has provided Mitchell Hutchins with a copy of its Form
ADV, which as of the date of this Agreement is its Form ADV as most recently
filed with the Securities and Exchange Commission ("SEC") and promptly will
furnish a copy of all amendments to Mitchell Hutchins at least annually.
(d) The Sub-Adviser will notify Mitchell Hutchins of any change of control
of the Sub-Adviser, including any change of its general partners or 25%
shareholders, as applicable, and any changes in the key personnel who are either
the portfolio manager(s) of the Portfolio or senior management of the
Sub-Adviser, in each case prior to, or promptly after, such change.
(e) The Sub-Adviser agrees that neither it, nor any of its affiliates,
will in any way refer directly or indirectly to its relationship with the Trust,
the Portfolio, Mitchell Hutchins or any of their respective affiliates in
4
<PAGE>
offering, marketing or other promotional materials without the express written
consent of Mitchell Hutchins.
8. SERVICES NOT EXCLUSIVE. The services furnished by Invista hereunder are
not to be deemed exclusive and Invista shall be free to furnish similar services
to others so long as its services under this Contract are not impaired thereby
or unless otherwise agreed to by the parties hereunder in writing. Nothing in
this Contract shall limit or restrict the right of any director, officer or
employee of Invista, who may also be a Trustee, officer or employee of the
Trust, to engage in any other business or to devote his or her time and
attention in part to the management or other aspects of any other business,
whether of a similar nature or a dissimilar nature.
9. DURATION AND TERMINATION.
(a) This Contract shall become effective upon the date first above
written, provided that this Contract shall not take effect unless it has first
been approved: (i) by a vote of a majority of those trustees of the Trust who
are not parties to this Contract or interested persons of any such party, cast
in person at a meeting called for the purpose of voting on such approval, and
(ii) by vote of a majority of the Portfolio's outstanding securities.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for two years from its effective date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually: (i) by a vote of a majority of those trustees of the Trust who
are not parties to this Contract or interested persons of any such party, cast
in person at a meeting called for the purpose of voting on such approval, and
(ii) by the Board or by vote of a majority of the outstanding voting securities
of the Portfolio.
(c) Notwithstanding the foregoing, this Contract may be terminated at any
time, without the payment of any penalty, by vote of the Board or by a vote of a
majority of the outstanding voting securities of the Portfolio on 60 days'
written notice to the Sub-Adviser. This Contract may also be terminated, without
the payment of any penalty, by Mitchell Hutchins: (i) upon 120 days' written
notice to the Sub-Adviser; (ii) upon material breach by the Sub-Adviser of any
representations and warranties set forth in Paragraph 7 of this Contract, if
such breach has not been cured within a 20 day period after notice of such
breach; or (iii) immediately if, in the reasonable judgment of Mitchell
Hutchins, the Sub-Adviser becomes unable to discharge its duties and obligations
under this Contract, including circumstances such as financial insolvency of the
Sub-Adviser or other circumstances that could adversely affect the Portfolio.
The Sub-Adviser may terminate this Contract at any time, without the payment of
any penalty, on 120 days written notice to Mitchell Hutchins. This Contract will
terminate automatically in the event of its assignment or upon termination of
the Advisory Contract as it relates to the Portfolio.
10. AMENDMENT OF THIS CONTRACT. No provision of this Contract may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought. No amendment of this Contract shall be
effective until approved (i) by a vote of a majority of those trustees of the
5
<PAGE>
Trust who are not parties to this Contract or interested persons of any such
party, and (ii) by a vote of a majority of the Portfolio's outstanding voting
securities (unless in the case of (ii), the Trust receives an SEC order or
no-action letter permitting it to modify the Contract without such vote).
11. GOVERNING LAW. This Contract shall be construed in accordance with the
1940 Act and the laws of the State of Delaware, without giving effect to the
conflicts of laws principles thereof. To the extent that the applicable laws of
the State of Delaware conflict with the applicable provisions of the 1940 Act,
the latter shall control.
12. MISCELLANEOUS. The captions in this Contract are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors. As used in this Contract,
the terms "majority of the outstanding voting securities," "affiliated person,"
"interested person," "assignment," "broker," "investment adviser," "net assets,"
"sale," "sell" and "security" shall have the same meaning as such terms have in
the 1940 Act, subject to such exemption as may be granted by the SEC by any
rule, regulation or order. Where the effect of a requirement of the federal
securities laws reflected in any provision of this Contract is made less
restrictive by a rule, regulation or order of the SEC, whether of special or
general application, such provision shall be deemed to incorporate the effect of
such rule, regulation or order. This Contract may be signed in counterpart.
13. NOTICES. Any notice herein required is to be in writing and is deemed
to have been given to the Sub-Adviser or Mitchell Hutchins upon receipt of the
same at their respective addresses set forth below. All written notices required
or permitted to be given under this Contract will be delivered by personal
service, by postage mail - return receipt requested or by facsimile machine or a
similar means of same day delivery which provides evidence of receipt (with a
confirming copy by mail as set forth herein). All notices provided to Mitchell
Hutchins will be sent to the attention of Victoria E. Schonfeld, General
Counsel. All notices provided to the Sub-Adviser will be sent to the attention
of Dennis W. Cameron, Compliance Officer.
[rest of page left intentionally blank]
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized signatories as of the date and year first
above written.
MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
1285 Avenue of the Americas
New York, New York 10019
Attest:
By: /s/ By: /s/ Dianne E. O'Donnell
-------------------------- -----------------------------
Name: Name: Dianne E. O'Donnell
Title: Title: Senior Vice President
INVISTA CAPITAL MANAGEMENT,
INC.
1900 Hub Tower
699 Walnut Street
Des Moines, Iowa 50309
Attest:
By: /s/ Dirk Laschanzky By: /s/ Craig R. Barnes
-------------------------- -----------------------------
Name: Dirk Laschanzky Name: Craig R. Barnes
Title: Relationship Manager Title: President
Exhibit No. 5
MITCHELL HUTCHINS SERIES TRUST
DISTRIBUTION CONTRACT
CLASS I SHARES
CONTRACT made as of May 1, 1998, between MITCHELL HUTCHINS SERIES TRUST, a
Massachusetts business trust ("Fund"), and MITCHELL HUTCHINS ASSET MANAGEMENT
INC., a Delaware corporation ("Mitchell Hutchins").
WHEREAS the Fund is registered under the Investment Company Act of l940,
as amended ("l940 Act"), as an open-end management investment company and
currently has thirteen distinct series of shares of beneficial interest
("Series"), which correspond to distinct portfolios of investments and have been
designated as the Aggressive Growth Portfolio, Balanced Portfolio, Global Growth
Portfolio, Global Income Portfolio, Growth and Income Portfolio, Growth
Portfolio, High Grade Fixed Income Portfolio, High Income Portfolio, Money
Market Portfolio, Small Cap Portfolio, Strategic Fixed Income Portfolio,
Strategic Income Portfolio and Tactical Allocation Portfolio; and
WHEREAS the Fund's board of trustees ("Board") has established an
unlimited number of shares of beneficial interest of the above-referenced Series
as Class I shares ("Shares") and determined that it is in the best interests of
the Fund to offer the Shares of the above-referenced Series for sale
continuously to the separate accounts ("Separate Accounts") of insurance
companies ("Insurance Companies") that issue variable annuity or variable life
contracts ("Variable Contracts"); and
WHEREAS the Fund has adopted a Plan of Distribution pursuant to Rule 12b-1
under the 1940 Act for its Shares ("Plan") and desires to retain Mitchell
Hutchins as principal distributor in connection with the offering and sale of
the Shares of the above-referenced Series and of such other Series as may
hereafter be designated by the Board and have Shares established; and
WHEREAS Mitchell Hutchins is willing to act as principal distributor of
the Shares of each such Series with respect to the continuous offering of the
Shares to the Insurance Companies for their Separate Accounts on the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Fund hereby appoints Mitchell Hutchins as its
exclusive agent to be the principal distributor to sell and to arrange for the
sale of the Shares to the Insurance Companies for their Separate Accounts on the
terms and for the period set forth in this Contract. Mitchell Hutchins hereby
accepts such appointment and agrees to act hereunder. As used in this Contract,
the term "Registration Statement" shall mean the currently effective
registration statement of the Fund, and any supplements thereto, under the
Securities Act of 1933, as amended ("1933 Act"), and the 1940 Act.
<PAGE>
2. SERVICES AND DUTIES OF MITCHELL HUTCHINS.
(a) Mitchell Hutchins agrees to sell the Shares to the Insurance
Companies for their Separate Accounts on a best efforts basis from time to time
during the term of this Contract as agent for the Fund and upon the terms
described in the Registration Statement.
(b) Upon the later of the date of this Contract or the initial
offering of the Shares by a Series, Mitchell Hutchins will hold itself available
to receive purchase orders, satisfactory to Mitchell Hutchins, for the Shares of
that Series from Insurance Companies for their Separate Accounts and will accept
such orders on behalf of the Fund as of the time of receipt of such orders and
promptly transmit such orders as are accepted to the Fund's transfer agent.
Purchase orders shall be deemed effective at the time and in the manner set
forth in the Registration Statement.
(c) Mitchell Hutchins in its discretion may enter into agreements to
sell the Shares to such registered and qualified retail dealers, including but
not limited to PaineWebber Incorporated ("PaineWebber"), as it may select. In
making agreements with such dealers, Mitchell Hutchins shall act only as
principal and not as agent for the Fund.
(d) The offering price of the Shares of each Series shall be the net
asset value per Share as next determined by the Fund following receipt of an
order by Mitchell Hutchins. The Fund shall promptly furnish Mitchell Hutchins
with a statement of each computation of net asset value.
(e) Mitchell Hutchins shall not be obligated to sell any certain
number of the Shares.
(f) To facilitate redemption of the Shares by shareholders directly
or through dealers, Mitchell Hutchins is authorized but not required on behalf
of the Fund to repurchase the Shares presented to it by shareholders and dealers
at the price determined in accordance with, and in the manner set forth in, the
Registration Statement.
(g) Mitchell Hutchins shall arrange for each Insurance Company to
which it sells Shares for that Insurance Company's Separate Accounts to enter
into an agreement with the Fund or Mitchell Hutchins to provide certain
distribution related services with respect to the Shares and the owners of the
Variable Contracts issued by the Separate Accounts. These distribution related
services may include, but are not limited to, the following: (a) printing and
mailing of Fund prospectuses, statements of additional information, any
supplements thereto and shareholder reports for existing and prospective
Variable Contract owners; (b) services relating to the development, preparation,
printing and mailing of Trust advertisements, sales literature and other
promotional materials describing and/or relating to the Trust and including
materials intended for use within the Participating Insurance Company or for
broker-dealer use only or retail use; (c) holding seminars and sales meetings
designed to promote the distribution of the Shares; (d) obtaining information
and providing explanations to Variable Contract owners regarding the investment
objectives and policies and other information about the Fund and its Series,
including the performance of the Series; (e) training sales personnel regarding
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the Fund and its Series; (f) compensating sales personnel with respect to the
Fund and its Series; (g) providing personal services and/or maintenance of the
Variable Contract owner accounts with respect to the Shares attributable to such
accounts; and (h) financing any other activity that the Board determines is
primarily intended to result in the sale of the Shares.
(h) Mitchell Hutchins shall have the right to use any list of
shareholders of the Fund or any other list of investors which it obtains in
connection with its services under this Contract; provided, however, that
Mitchell Hutchins shall not sell or knowingly provide such list or lists to any
unaffiliated person.
3. AUTHORIZATION TO ENTER INTO EXCLUSIVE DEALER AGREEMENTS AND TO DELEGATE
DUTIES AS DISTRIBUTOR. With respect to the Shares of any or all Series, Mitchell
Hutchins may enter into an exclusive dealer agreement with PaineWebber or any
other registered and qualified dealer with respect to sales of the Shares to the
Insurance Companies for their Separate Accounts. In a separate contract or as
part of any such exclusive dealer agreement, Mitchell Hutchins also may delegate
to PaineWebber or another registered and qualified dealer ("sub-distributor")
any or all of its duties specified in this Contract, provided that such separate
contract or exclusive dealer agreement imposes on the sub-distributor bound
thereby all applicable duties and conditions to which Mitchell Hutchins is
subject under this Contract, and further provided that such separate contract or
exclusive dealer agreement meets all requirements of the 1940 Act and rules
thereunder.
4. SERVICES NOT EXCLUSIVE. The services furnished by Mitchell Hutchins
hereunder are not to be deemed exclusive and Mitchell Hutchins shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired thereby. Nothing in this Contract shall limit or restrict the
right of any director, officer or employee of Mitchell Hutchins, who may also be
a trustee, officer or employee of the Fund, to engage in any other business or
to devote his or her time and attention in part to the management or other
aspects of any other business, whether of a similar or a dissimilar nature.
5. COMPENSATION. (a) As compensation for its activities under this
contract with respect to the distribution of the Shares, Mitchell Hutchins shall
receive from the Fund for remittance to the Insurance Companies or may direct
the Fund to pay directly to such Insurance Companies a distribution fee at the
rate and under the terms and conditions of the Plan adopted by the Fund with
respect to the Shares of the Series, as such Plan is amended from time to time,
and subject to any further limitations on such fee as the Board may impose.
6. DUTIES OF THE FUND.
-------------------
(a) The Fund reserves the right at any time to withdraw offering the
Shares of any or all Series by written notice to Mitchell Hutchins at its
principal office.
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<PAGE>
(b) The Fund shall determine in its sole discretion whether
certificates shall be issued with respect to the Shares. If the Fund has
determined that certificates shall be issued, the Fund will not cause
certificates representing the Shares to be issued unless so requested by
shareholders. If such request is transmitted by Mitchell Hutchins, the Fund will
cause certificates evidencing the Shares to be issued in such names and
denominations as Mitchell Hutchins shall from time to time direct.
(c) The Fund shall keep Mitchell Hutchins fully informed of its
affairs and shall make available to Mitchell Hutchins copies of all information,
financial statements, and other papers which Mitchell Hutchins may reasonably
request for use in connection with the distribution of the Shares, including,
without limitation, certified copies of any financial statements prepared for
the Fund by its independent public accountant and such reasonable number of
copies of the most current prospectus, statement of additional information, and
annual and interim reports of any Series as Mitchell Hutchins may request, and
the Fund shall cooperate fully in the efforts of Mitchell Hutchins to sell and
arrange for the sale of the Shares of the Series and in the performance of
Mitchell Hutchins under this Contract.
(d) The Fund shall take, from time to time, all necessary action,
including payment of the related filing fee, as may be necessary to register the
Shares under the 1933 Act to the end that there will be available for sale such
number of the Shares as Mitchell Hutchins may be expected to sell. The Fund
agrees to file, from time to time, such amendments, reports, and other documents
as may be necessary in order that there will be no untrue statement of a
material fact in the Registration Statement, nor any omission of a material fact
which omission would make the statements therein misleading.
(e) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of the Shares of each Series for sale
under the securities laws of such states or other jurisdictions as Mitchell
Hutchins and the Fund may approve, and, if necessary or appropriate in
connection therewith, to qualify and maintain the qualification of the Fund as a
broker or dealer in such jurisdictions; provided that the Fund shall not be
required to amend its Declaration of Trust or By-Laws to comply with the laws of
any jurisdiction, to maintain an office in any jurisdiction, to change the terms
of the offering of the Shares in any jurisdiction from the terms set forth in
its Registration Statement, to qualify as a foreign corporation in any
jurisdiction, or to consent to service of process in any jurisdiction other than
with respect to claims arising out of the offering of the Shares. Mitchell
Hutchins shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualifications.
7. EXPENSES OF THE FUND. The Fund shall bear all costs and expenses of
registering the Shares with the Securities and Exchange Commission and
qualifying the shares with state and other regulatory bodies, and shall assume
expenses related to communications with shareholders of each Series, including
(i) fees and disbursements of its counsel and independent public accountant;
(ii) the preparation, filing and printing of registration statements and/or
prospectuses or statements of additional information required under the federal
securities laws; (iii) the preparation and mailing of annual and interim
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<PAGE>
reports, prospectuses, statements of additional information and proxy materials
to shareholders; and (iv) the qualifications of the Shares for sale and of the
Fund as a broker or dealer under the securities laws of such jurisdictions as
shall be selected by the Fund and Mitchell Hutchins pursuant to Paragraph 6(e)
hereof, and the costs and expenses payable to each such jurisdiction for
continuing qualification therein.
8. EXPENSES OF MITCHELL HUTCHINS. Mitchell Hutchins shall bear all costs
and expenses of (i) preparing, printing and distributing any materials not
prepared by the Fund and other materials used by Mitchell Hutchins in connection
with the sale of the Shares under this Contract, including the additional cost
of printing copies of prospectuses, statements of additional information, and
annual and interim shareholder reports other than copies thereof required for
distribution to existing shareholders or for filing with any federal or state
securities authorities; (ii) any expenses of advertising incurred by Mitchell
Hutchins in connection with such offering; (iii) the expenses of registration or
qualification of Mitchell Hutchins as a broker or dealer under federal or state
laws and the expenses of continuing such registration or qualification; and (iv)
all compensation paid to Mitchell Hutchins' employees and others for selling the
Shares, and all expenses of Mitchell Hutchins, its employees and others who
engage in or support the sale of the Shares as may be incurred in connection
with their sales efforts.
9. INDEMNIFICATION.
(a) The Fund agrees to indemnify, defend and hold Mitchell Hutchins,
its officers and directors, and any person who controls Mitchell Hutchins within
the meaning of Section 15 of the 1933 Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which Mitchell Hutchins, its officers,
directors or any such controlling person may incur under the 1933 Act, or under
common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement or arising
out of or based upon any alleged omission to state a material fact required to
be stated in the Registration Statement or necessary to make the statements
therein not misleading, except insofar as such claims, demands, liabilities or
expenses arise out of or are based upon any such untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in conformity
with information furnished in writing by Mitchell Hutchins to the Fund for use
in the Registration Statement; provided, however, that this indemnity agreement
shall not inure to the benefit of any person who is also an officer or trustee
of the Fund or who controls the Fund within the meaning of Section 15 of the
1933 Act, unless a court of competent jurisdiction shall determine, or it shall
have been determined by controlling precedent, that such result would not be
against public policy as expressed in the 1933 Act; and further provided, that
in no event shall anything contained herein be so construed as to protect
Mitchell Hutchins against any liability to the Fund or to the shareholders of
any Series to which Mitchell Hutchins would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligations under this
Contract. The Fund shall not be liable to Mitchell Hutchins under this indemnity
agreement with respect to any claim made against Mitchell Hutchins or any person
indemnified unless Mitchell Hutchins or other such person shall have notified
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<PAGE>
the Fund in writing of the claim within a reasonable time after the summons or
other first written notification giving information of the nature of the claim
shall have been served upon Mitchell Hutchins or such other person (or after
Mitchell Hutchins or the person shall have received notice of service on any
designated agent). However, failure to notify the Fund of any claim shall not
relieve the Fund from any liability which it may have to Mitchell Hutchins or
any person against whom such action is brought otherwise than on account of this
indemnity agreement. The Fund shall be entitled to participate at its own
expense in the defense or, if it so elects, to assume the defense of any suit
brought to enforce any claims subject to this indemnity agreement. If the Fund
elects to assume the defense of any such claim, the defense shall be conducted
by counsel chosen by the Fund and satisfactory to indemnified defendants in the
suit whose approval shall not be unreasonably withheld. In the event that the
Fund elects to assume the defense of any suit and retain counsel, the
indemnified defendants shall bear the fees and expenses of any additional
counsel retained by them. If the Fund does not elect to assume the defense of a
suit, it will reimburse the indemnified defendants for the reasonable fees and
expenses of any counsel retained by the indemnified defendants. The Fund agrees
to notify Mitchell Hutchins promptly of the commencement of any litigation or
proceedings against it or any of its officers or trustees in connection with the
issuance or sale of any of its Shares.
(b) Mitchell Hutchins agrees to indemnify, defend, and hold the
Fund, its officers and trustees and any person who controls the Fund within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending against such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Fund, its trustees or
officers, or any such controlling person may incur under the 1933 Act or under
common law or otherwise arising out of or based upon any alleged untrue
statement of a material fact contained in information furnished in writing by
Mitchell Hutchins to the Fund for use in the Registration Statement, arising out
of or based upon any alleged omission to state a material fact in connection
with such information required to be stated in the Registration Statement
necessary to make such information not misleading, or arising out of any
agreement between Mitchell Hutchins and any retail dealer, or arising out of any
supplemental sales literature or advertising used by Mitchell Hutchins in
connection with its duties under this Contract. Mitchell Hutchins shall be
entitled to participate, at its own expense, in the defense or, if it so elects,
to assume the defense of any suit brought to enforce the claim, but if Mitchell
Hutchins elects to assume the defense, the defense shall be conducted by counsel
chosen by Mitchell Hutchins and satisfactory to the indemnified defendants whose
approval shall not be unreasonably withheld. In the event that Mitchell Hutchins
elects to assume the defense of any suit and retain counsel, the defendants in
the suit shall bear the fees and expenses of any additional counsel retained by
them. If Mitchell Hutchins does not elect to assume the defense of any suit, it
will reimburse the indemnified defendants in the suit for the reasonable fees
and expenses of any counsel retained by them.
10. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS OF THE FUND.
The trustees of the Fund and the shareholders of any Series shall not be liable
for any obligations of the Fund or any Series under this Contract, and Mitchell
Hutchins agrees that, in asserting any rights or claims under this Contract, it
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<PAGE>
shall look only to the assets and property of the Fund or the particular Series
in settlement of such right or claims, and not to such trustees or shareholders.
11. SERVICES PROVIDED TO THE FUND BY EMPLOYEES OF MITCHELL HUTCHINS. Any
person, even though also an officer, director, employee or agent of Mitchell
Hutchins, who may be or become an officer, trustee, employee or agent of the
Fund, shall be deemed, when rendering services to the Fund or acting in any
business of the Fund, to be rendering such services to or acting solely for the
Fund and not as an officer, director, employee or agent or one under the control
or direction of Mitchell Hutchins even though paid by Mitchell Hutchins.
12. DURATION AND TERMINATION.
-------------------------
(a) This Contract shall become effective upon the date written
above, provided that, with respect to any Series, this Contract shall not take
effect unless such action has first been approved by vote of a majority of the
Board and by vote of a majority of those trustees of the Fund who are not
interested persons of the Fund, and have no direct or indirect financial
interest in the operation of the Plan relating to the Series or in any
agreements related thereto (all such trustees collectively being referred to
herein as the "Independent Trustees"), cast in person at a meeting called for
the purpose of voting on such action.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for one year from the above written date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of the Independent Trustees, cast in
person at a meeting called for the purpose of voting on such approval, and (ii)
by the Board or with respect to any given Series by vote of a majority of the
outstanding voting Shares of such Series.
(c) Notwithstanding the foregoing, with respect to any Series, this
Contract may be terminated at any time, without the payment of any penalty, by
vote of the Board, by vote of a majority of the Independent Trustees or by vote
of a majority of the outstanding voting Shares of such Series on sixty days'
written notice to Mitchell Hutchins or by Mitchell Hutchins at any time, without
the payment of any penalty, on sixty days' written notice to the Fund or such
Series. This Contract will automatically terminate in the event of its
assignment.
(d) Termination of this Contract with respect to any given Series
shall in no way affect the continued validity of this Contract or the
performance thereunder with respect to any other Series.
13. AMENDMENT OF THIS CONTRACT. No provision of this Contract may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
14. GOVERNING LAW. This Contract shall be construed in accordance with the
laws of the State of Delaware and the 1940 Act, except that Section 10 shall be
construed in accordance with the laws of the Commonwealth of Massachusetts. To
the extent that the applicable laws of the State of Delaware or the Commonwealth
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<PAGE>
of Massachusetts conflict with the applicable provisions of the l940 Act, the
latter shall control.
15. NOTICE. Any notice required or permitted to be given by either party
to the other shall be deemed sufficient upon receipt in writing at the other
party's principal offices.
16. MISCELLANEOUS. The captions in this Contract are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors. As used in this Contract,
the terms "majority of the outstanding voting securities," "interested person"
and "assignment" shall have the same meaning as such terms have in the l940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be
executed by their officers designated as of the day and year first above
written.
ATTEST: MITCHELL HUTCHINS SERIES TRUST
/s/ Evelyn Chieffo By: /s/ Dianne E. O'Donnell
------------------ -----------------------
ATTEST: MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
/s/ Evelyn Chieffo By: /s/ Victoria Schonfeld
------------------ ----------------------
Exhibit No. 8(a)
TRANSFER AGENCY AND RELATED SERVICES AGREEMENT
THIS AGREEMENT is made as of August 1, 1997 by and between PFPC INC., a
Delaware corporation ("PFPC"), and MITCHELL HUTCHINS SERIES TRUST, a
Massachusetts business trust (the "Fund").
W I T N E S S E T H:
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Fund wishes to retain PFPC to serve as transfer agent,
registrar, dividend disbursing agent and related services agent to the Fund's
Portfolios (as hereinafter defined) and PFPC wishes to furnish such services.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. DEFINITIONS. AS USED IN THIS AGREEMENT:
(a) "1933 ACT" means the Securities Act of 1933, as amended.
(b) "1934 ACT" means the Securities Exchange Act of 1934, as
amended.
(c ) "AUTHORIZED PERSON" means any officer of the Fund and any other
person duly authorized by the Fund's Board of Directors or Trustees ("Board") to
give Oral Instructions and Written Instructions on behalf of the Fund and listed
on the Authorized Persons Appendix attached hereto and made a part hereof or any
amendment thereto as may be received by PFPC. An Authorized Person's scope of
authority may be limited by the Fund by setting forth such limitation in the
Authorized Persons Appendix.
<PAGE>
(d) "CEA" means the Commodities Exchange Act, as amended.
(e) "ORAL INSTRUCTIONS" mean oral instructions received by PFPC from
an Authorized Person.
(f) "PORTFOLIO" means a series or investment portfolio of the Fund
identified on Annex A hereto, as the same may from time to time be amended, if
the Fund consists of more than one series or investment portfolio; however, if
the Fund does not have separate series or investment portfolios, then this term
shall be deemed to refer to the Fund itself.
(g) "SEC" means the Securities and Exchange Commission.
(h) "SECURITIES LAWS" mean the 1933 Act, the 1934 Act, the 1940 Act
and the CEA.
(i) "SHARES" mean the shares of common stock or beneficial interest
of any series or class of the Fund.
(j) "WRITTEN INSTRUCTIONS" mean written instructions signed by an
Authorized Person and received by PFPC. The instructions may be delivered by
hand, mail, tested telegram, cable, telex or facsimile sending device.
2. APPOINTMENT. The Fund hereby appoints PFPC to serve as transfer agent,
registrar, dividend disbursing agent and related services agent to the Fund, and
should the Fund have separate Portfolios, those Portfolios which are listed on
Annex A hereto, in accordance with the terms set forth in this Agreement. PFPC
accepts such appointment and agrees to furnish such services.
3. DELIVERY OF DOCUMENTS. The Fund (or a particular Portfolio, as
appropriate) has provided or, where applicable, will provide PFPC with the
following:
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<PAGE>
(a) Certified or authenticated copies of the resolutions of the Fund's
Board approving the appointment of PFPC to provide services to the
Fund and approving this Agreement;
(b) A copy of each executed broker-dealer agreement with respect to each
Fund; and
(c) Copies (certified or authenticated if requested by PFPC) of any
post-effective amendment to the Fund's registration statement,
advisory agreement, distribution agreement, shareholder servicing
agreement and all amendments or supplements to the foregoing upon
request.
4. COMPLIANCE WITH RULES AND REGULATIONS. PFPC undertakes to comply with
all applicable requirements of the Securities Laws and any laws, rules and
regulations of governmental authorities having jurisdiction with respect to the
duties to be performed by PFPC hereunder. Except as specifically set forth
herein, PFPC assumes no responsibility for such compliance by the Fund or any of
its Portfolios.
5. INSTRUCTIONS.
-------------
(a) Unless otherwise provided in this Agreement, PFPC shall act only upon
Oral Instructions and Written Instructions.
(b) PFPC shall be entitled to rely upon any Oral Instructions and Written
Instructions it receives from an Authorized Person pursuant to this Agreement.
PFPC may assume that any Oral Instruction or Written Instruction received
hereunder is not in any way inconsistent with the provisions of organizational
documents or of any vote, resolution or proceeding of the Fund's Board or of the
Fund's shareholders, unless and until PFPC receives Written Instructions to the
contrary.
(c ) The Fund agrees to forward to PFPC Written Instructions confirming
Oral Instructions so that PFPC receives the Written Instructions by the close of
business on the next day after such Oral Instructions are received. The fact
that such confirming Written Instructions are not received by PFPC shall in no
3
<PAGE>
way invalidate the transactions or enforceability of the transactions authorized
by the Oral Instructions. Where Oral Instructions or Written Instructions
reasonably appear to have been received from an Authorized Person, PFPC shall
incur no liability to the Fund in acting upon such Oral Instructions or Written
Instructions provided that PFPC's actions comply with the other provisions of
this Agreement.
6. RIGHT TO RECEIVE ADVICE.
------------------------
(a) ADVICE OF THE FUND. If PFPC is in doubt as to any action it should or
should not take, PFPC may request directions or advice, including Oral
Instructions or Written Instructions, from the Fund.
(b) ADVICE OF COUNSEL. If PFPC shall be in doubt as to any question of law
pertaining to any action it should or should not take, PFPC may request advice
at its own cost from such counsel of its own choosing (who may be counsel for
the Fund, the Fund's investment adviser or PFPC, at the option of PFPC).
(c ) CONFLICTING ADVICE. In the event of a conflict between directions,
advice or Oral Instructions or Written Instructions PFPC receives from the Fund,
and the advice it receives from counsel, PFPC may rely upon and follow the
advice of counsel. In the event PFPC so relies on the advice of counsel, PFPC
remains liable for any action or omission on the part of PFPC which constitutes
willful misfeasance, bad faith, negligence or reckless disregard by PFPC of any
duties, obligations or responsibilities set forth in this Agreement.
(d) PROTECTION OF PFPC. PFPC shall be protected in any action it takes or
does not take in reliance upon directions, advice or Oral Instructions or
Written Instructions it receives from the Fund or from counsel and which PFPC
believes, in good faith, to be consistent with those directions, advice or Oral
Instructions or Written Instructions. Nothing in this section shall be construed
4
<PAGE>
so as to impose an obligation upon PFPC (i) to seek such directions, advice or
Oral Instructions or Written Instructions, or (ii) to act in accordance with
such directions, advice or Oral Instructions or Written Instructions unless,
under the terms of other provisions of this Agreement, the same is a condition
of PFPC's properly taking or not taking such action. Nothing in this subsection
shall excuse PFPC when an action or omission on the part of PFPC constitutes
willful misfeasance, bad faith, negligence or reckless disregard by PFPC of any
duties, obligations or responsibilities set forth in this Agreement.
7. RECORDS; VISITS. PFPC shall prepare and maintain in complete and
accurate form all books and records necessary for it to serve as transfer agent,
registrar, dividend disbursing agent and related services agent to each
Portfolio, including (a) all those records required to be prepared and
maintained by the Fund under the 1940 Act, by other applicable Securities Laws,
rules and regulations and by state laws and (b) such books and records as are
necessary for PFPC to perform all of the services it agrees to provide in this
Agreement and the appendices attached hereto, including but not limited to the
books and records necessary to effect the conversion of Class B shares, the
calculation of any contingent deferred sales charges and the calculation of
front-end sales charges. The books and records pertaining to the Fund, which are
in the possession or under the control of PFPC, shall be the property of the
Fund. The Fund and Authorized Persons shall have access to such books and
records in the possession or under the control of PFPC at all times during
PFPC's normal business hours. Upon the reasonable request of the Fund, copies of
any such books and records in the possession or under the control of PFPC shall
be provided by PFPC to the Fund or to an Authorized Person. Upon reasonable
notice by the Fund, PFPC shall make available during regular business hours its
facilities and premises employed in connection with its performance of this
5
<PAGE>
Agreement for reasonable visits by the Fund, any agent or person designated by
the Fund or any regulatory agency having authority over the Fund.
8. CONFIDENTIALITY. PFPC agrees to keep confidential all records of the
Fund and information relating to the Fund and its shareholders (past, present
and future), its investment adviser and its principal underwriter, unless the
release of such records or information is otherwise consented to, in writing, by
the Fund prior to its release. The Fund agrees that such consent shall not be
unreasonably withheld and may not be withheld where PFPC may be exposed to civil
or criminal contempt proceedings or when required to divulge such information or
records to duly constituted authorities.
9. COOPERATION WITH ACCOUNTANTS. PFPC shall cooperate with the Fund's
independent public accountants and shall take all reasonable actions in the
performance of its obligations under this Agreement to ensure that the necessary
information is made available to such accountants for the expression of their
opinion, as required by the Fund.
10. DISASTER RECOVERY. PFPC shall enter into and shall maintain in effect
with appropriate parties one or more agreements making reasonable provisions for
periodic backup of computer files and data with respect to the Fund and
emergency use of electronic data processing equipment. In the event of equipment
failures, PFPC shall, at no additional expense to the Fund, take reasonable
steps to minimize service interruptions. PFPC shall have no liability with
respect to the loss of data or service interruptions caused by equipment
failure, provided such loss or interruption is not caused by PFPC's own willful
misfeasance, bad faith, negligence or reckless disregard of its duties or
obligations under this Agreement and provided further that PFPC has complied
with the provisions of this paragraph 10.
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<PAGE>
11. COMPENSATION. As compensation for services rendered by PFPC during the
term of this Agreement, the Fund will pay to PFPC a fee or fees as may be agreed
to from time to time in writing by the Fund and PFPC.
12. INDEMNIFICATION.
(a) The Fund agrees to indemnify and hold harmless PFPC and its affiliates
from all taxes, charges, expenses, assessments, penalties, claims and
liabilities (including, without limitation, liabilities arising under the
Securities Laws and any state and foreign securities and blue sky laws, and
amendments thereto), and expenses, including (without limitation) reasonable
attorneys' fees and disbursements, arising directly or indirectly from (i) any
action or omission to act which PFPC takes (a) at the request or on the
direction of or in reliance on the advice of the Fund or (b) upon Oral
Instructions or Written Instructions or (ii) the acceptance, processing and/or
negotiation of checks or other methods utilized for the purchase of Shares.
Neither PFPC, nor any of its affiliates, shall be indemnified against any
liability (or any expenses incident to such liability) arising out of PFPC's or
its affiliates' own willful misfeasance, bad faith, negligence or reckless
disregard of its duties and obligations under this Agreement. The Fund's
liability to PFPC for PFPC's acceptance, processing and/or negotiation of checks
or other methods utilized for the purchase of Shares shall be limited to the
extent of the Fund's policy(ies) of insurance that provide for coverage of such
liability, and the Fund's insurance coverage shall take precedence.
(b) PFPC agrees to indemnify and hold harmless the Fund from all taxes,
charges, expenses, assessments, penalties, claims and liabilities arising from
PFPC's obligations pursuant to this Agreement (including, without limitation,
liabilities arising under the Securities Laws, and any state and foreign
securities and blue sky laws, and amendments thereto) and expenses, including
7
<PAGE>
(without limitation) reasonable attorneys' fees and disbursements arising
directly or indirectly out of PFPC's or its nominee's own willful misfeasance,
bad faith, negligence or reckless disregard of its duties and obligations under
this Agreement.
(c) In order that the indemnification provisions contained in this
Paragraph 12 shall apply, upon the assertion of a claim for which either party
may be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
(d) The members of the Board of the Fund, its officers and Shareholders,
or of any Portfolio thereof, shall not be liable for any obligations of the
Fund, or any such Portfolio, under this Agreement, and PFPC agrees that in
asserting any rights or claims under this Agreement, it shall look only to the
assets and property of the Fund or the particular Portfolio in settlement of
such rights or claims and not to such members of the Board, its officers or
Shareholders. PFPC further agrees that it will look only to the assets and
property of a particular Portfolio of the Fund, should the Fund have established
separate series, in asserting any rights or claims under this Agreement with
respect to services rendered with respect to that Portfolio and will not seek to
obtain settlement of such rights or claims from the assets of any other
Portfolio of the Fund.
13. INSURANCE. PFPC shall maintain insurance of the types and in the
amounts deemed by it to be appropriate. To the extent that policies of insurance
may provide for coverage of claims for liability or indemnity by the parties set
forth in this Agreement, the contracts of insurance shall take precedence, and
8
<PAGE>
no provision of this Agreement shall be construed to relieve an insurer of any
obligation to pay claims to the Fund, PFPC or other insured party which would
otherwise be a covered claim in the absence of any provision of this Agreement.
14. SECURITY.
(a) PFPC represents and warrants that, to the best of its knowledge, the
various procedures and systems which PFPC has implemented with regard to the
safeguarding from loss or damage attributable to fire, theft or any other cause
(including provision for twenty-four hours a day restricted access) of the
Fund's blank checks, certificates, records and other data and PFPC's equipment,
facilities and other property used in the performance of its obligations
hereunder are adequate, and that it will make such changes therein from time to
time as in its judgment are required for the secure performance of its
obligations hereunder. PFPC shall review such systems and procedures on a
periodic basis, and the Fund shall have reasonable access to review these
systems and procedures.
(b) Y2K Compliance. PFPC further represents and warrants that any and all
electronic data processing systems and programs that it uses or retains in
connection with the provision of services hereunder on or before January 1, 1999
will be year 2000 compliant.
15. RESPONSIBILITY OF PFPC.
(a) PFPC shall be under no duty to take any action on behalf of the Fund
except as specifically set forth herein or as may be specifically agreed to by
PFPC in writing. PFPC shall be obligated to exercise care and diligence in the
performance of its duties hereunder, to act in good faith and to use its best
efforts in performing services provided for under this Agreement. PFPC shall be
liable for any damages arising out of PFPC's failure to perform its duties under
9
<PAGE>
this Agreement to the extent such damages arise out of PFPC's willful
misfeasance, bad faith, negligence or reckless disregard of such duties.
(b) Without limiting the generality of the foregoing or of any other
provision of this Agreement, PFPC shall not be under any duty or obligation to
inquire into and shall not be liable for (A) the validity or invalidity or
authority or lack thereof of any Oral Instruction or Written Instruction, notice
or other instrument which conforms to the applicable requirements of this
Agreement, and which PFPC reasonably believes to be genuine; or (B) subject to
Section 10, delays or errors or loss of data occurring by reason of
circumstances beyond PFPC's control, including acts of civil or military
authority, national emergencies, labor difficulties, fire, flood, catastrophe,
acts of God, insurrection, war, riots or failure of the mails, transportation,
communication or power supply.
(c) Notwithstanding anything in this Agreement to the contrary, neither
PFPC nor its affiliates shall be liable to the Fund for any consequential,
special or indirect losses or damages which the Fund may incur or suffer by or
as a consequence of PFPC's or its affiliates' performance of the services
provided hereunder, whether or not the likelihood of such losses or damages was
known by PFPC or its affiliates.
(d) Notwithstanding anything in this Agreement to the contrary, the Fund
shall not be liable to PFPC nor its affiliates for any consequential, special or
indirect losses or damages which PFPC or its affiliates may incur or suffer by
or as a consequence of PFPC's performance of the services provided hereunder,
whether or not the likelihood of such losses or damages was known by the Fund.
10
<PAGE>
16. DESCRIPTION OF SERVICES.
------------------------
(a) SERVICES PROVIDED ON AN ONGOING BASIS, IF APPLICABLE.
-----------------------------------------------------
(i) Calculate 12b-1 payments to financial intermediaries,
including brokers, and financial intermediary trail
commissions;
(ii) Develop, monitor and maintain, in consultation with the Fund,
all systems necessary to implement and operate the four-tier
distribution system, including Class B conversion feature, as
described in the registration statement and related documents
of the Fund, as they may be amended from time to time;
(iii) Calculate contingent deferred sales charge amounts upon
redemption of Fund shares and deduct such amounts from
redemption proceeds;
(iv) Calculate front-end sales load amounts at time of purchase of
shares;
(v) Determine dates of Class B conversion and effect the same;
(vi) Establish and maintain proper shareholder registrations;
(vii) Review new applications and correspond with shareholders to
complete or correct information;
(viii) Direct payment processing of checks or wires;
(ix) Prepare and certify stockholder lists in conjunction with
proxy solicitations;
(x) Prepare and mail to shareholders confirmation of activity;
(xi) Provide toll-free lines for direct shareholder use, plus
customer liaison staff for on-line inquiry response;
(xii) Send duplicate confirmations to broker-dealers of their
clients' activity, whether executed through the broker-dealer
or directly with PFPC;
(xiii) Provide periodic shareholder lists, outstanding share
calculations and related statistics to the Fund;
(xiv) Provide detailed data for underwriter/broker confirmations;
11
<PAGE>
(xv) Prepare and mail required calendar and taxable year-end tax
and statement information (including forms 1099-DIV and 1099-B
and accompanying statements);
(xvi) Notify on a daily basis the investment adviser, accounting
agent, and custodian of fund activity;
(xvii)Perform, itself or through a delegate, all of the services,
whether or not included within the scope of another paragraph
of this Paragraph 16(a), specified on Annex B hereto; and
(xviii)Perform other participating broker-dealer shareholder
services as may be agreed upon from time to time.
(b) SERVICES PROVIDED BY PFPC UNDER ORAL INSTRUCTIONS OR WRITTEN
INSTRUCTIONS.
--------------------------------------------------------------------
(i) Accept and post daily Fund and class purchases and redemptions;
(ii) Accept, post and perform shareholder transfers and exchanges;
(iii) Pay dividends and other distributions;
(iv) Solicit and tabulate proxies; and
(v) Cancel certificates.
(c) PURCHASE OF SHARES. PFPC shall issue and credit an account of an
investor, in the manner described in the Fund's prospectus, once it receives:
(i) A purchase order;
(ii) Proper information to establish a shareholder account; and
(iii) Confirmation of receipt or crediting of funds for such order
to the Fund's custodian.
(d) REDEMPTION OF SHARES. PFPC shall redeem Shares only if that function
is properly authorized by the Fund's organizational documents or resolutions of
the Fund's Board. Shares shall be redeemed and payment therefor shall be made in
accordance with the Fund's or Portfolio's prospectus.
12
<PAGE>
(i) BROKER-DEALER ACCOUNTS.
-----------------------
When a broker-dealer notifies PFPC of a redemption desired by
a customer, and the Fund's or Portfolio's custodian (the
"Custodian") has provided PFPC with funds, PFPC shall (a)
transfer by Fedwire or other agreed upon electronic means such
redemption payment to the broker-dealer for the credit to, and
for the benefit of, the customer's account or (b) shall
prepare and send a redemption check to the broker-dealer, made
payable to the broker-dealer on behalf of its customer.
(ii) FUND-ONLY ACCOUNTS.
-------------------
If Shares (or appropriate instructions) are received in proper
form, at the Fund's request Shares may be redeemed before the
funds are provided to PFPC from the Custodian. If the
recordholder has not directed that redemption proceeds be
wired, when the Custodian provides PFPC with funds, the
redemption check shall be sent to and made payable to the
recordholder, unless:
(a) the surrendered certificate is drawn to the order of an
assignee or holder and transfer authorization is signed
by the recordholder; or
(b) transfer authorizations are signed by the recordholder
when Shares are held in book-entry form.
(e) DIVIDENDS AND DISTRIBUTIONS. Upon receipt of a resolution of the
Fund's Board authorizing the declaration and payment of dividends and
distributions, PFPC shall issue dividends and distributions declared by the Fund
in Shares, or, upon shareholder election, pay such dividends and distributions
in cash, if provided for in the appropriate Fund's or Portfolio's prospectus.
Such issuance or payment, as well as payments upon redemption as described
13
<PAGE>
above, shall be made after deduction and payment of the required amount of funds
to be withheld in accordance with any applicable tax law or other laws, rules or
regulations. PFPC shall mail to the Fund's shareholders and the IRS and other
appropriate taxing authorities such tax forms, or permissible substitute forms,
and other information relating to dividends and distributions paid by the Fund
(including designations of the portions of distributions of net capital gain
that are 20% rate gain distributions and 28% rate gain distributions pursuant to
IRS Notice 97-64) as are required to be filed and mailed by applicable law, rule
or regulation within the time required thereby. PFPC shall prepare, maintain and
file with the IRS and other appropriate taxing authorities reports relating to
all dividends above a stipulated amount paid by the Fund to its shareholders as
required by tax or other law, rule or regulation.
(f) SHAREHOLDER ACCOUNT SERVICES.
(i) PFPC will arrange, in accordance with the appropriate Fund's
or Portfolio's prospectus, for issuance of Shares obtained
through:
- The transfer of funds from shareholders' accounts at
financial institutions, provided PFPC receives advance
Oral or Written Instruction of such transfer;
- Any pre-authorized check plan; and
- Direct purchases through broker wire orders,
checks and applications.
(ii) PFPC will arrange, in accordance with the appropriate Fund's
or Portfolio's prospectus, for a shareholder's:
- Exchange of Shares for shares of another fund with
which the Fund has exchange privileges;
Automatic redemption from an account where that
shareholder participates in a systematic withdrawal
plan; and/or
- Redemption of Shares from an account with a
checkwriting privilege.
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<PAGE>
(g) COMMUNICATIONS TO SHAREHOLDERS. Upon timely Written Instructions, PFPC
shall mail all communications by the Fund to its shareholders, including:
(i) Reports to shareholders;
(ii) Confirmations of purchases and sales of Fund shares;
(iii) Monthly or quarterly statements;
(iv) Dividend and distribution notices;
(v) Proxy material; and
(vi) Tax forms (including substitute forms) and accompanying
information containing the information required by paragraph
16(e).
If requested by the Fund, PFPC will receive and tabulate the proxy cards
for the meetings of the Fund's shareholders and supply personnel to serve as
inspectors of election.
(h) RECORDS. PFPC shall maintain those records required by the Securities
Laws and any laws, rules and regulations of governmental authorities having
jurisdiction with respect to the duties to be performed by PFPC hereunder with
respect to shareholder accounts or by transfer agents generally, including
records of the accounts for each shareholder showing the following information:
(i) Name, address and United States Taxpayer Identification
or Social Security number;
(ii) Number and class of Shares held and number and class of Shares
for which certificates, if any, have been issued, including
certificate numbers and denominations;
(iii) Historical information regarding the account of each
shareholder, including dividends and distributions paid, their
character (e.g. ordinary income, net capital gain (including
20% rate gain and 28% rate gain), exempt-interest, foreign
tax-credit and dividends received deduction eligible) for
federal income tax purposes and the date and price for all
transactions on a shareholder's account;
15
<PAGE>
(iv) Any stop or restraining order placed against a shareholder's
account;
(v) Any correspondence relating to the current maintenance of a
shareholder's account;
(vi) Information with respect to withholdings; and
(vii) Any information required in order for the transfer agent to
perform any calculations contemplated or required by this
Agreement.
(i) LOST OR STOLEN CERTIFICATES. PFPC shall place a stop notice against
any certificate reported to be lost or stolen and comply with all applicable
federal regulatory requirements for reporting such loss or alleged
misappropriation. The lost or stolen certificate will be canceled and
uncertificated Shares will be issued to a shareholder's account only upon:
(i) The shareholder's pledge of a lost instrument bond or such
other appropriate indemnity bond issued by a surety company
approved by PFPC; and
(ii) Completion of a release and indemnification agreement signed
by the shareholder to protect PFPC and its affiliates.
(j) SHAREHOLDER INSPECTION OF STOCK RECORDS. Upon a request from any Fund
shareholder to inspect stock records, PFPC will notify the Fund, and the Fund
will issue instructions granting or denying each such request. Unless PFPC has
acted contrary to the Fund's instructions, the Fund agrees and does hereby
release PFPC from any liability for refusal of permission for a particular
shareholder to inspect the Fund's shareholder records.
(k) WITHDRAWAL OF SHARES AND CANCELLATION OF CERTIFICATES. Upon receipt of
Written Instructions, PFPC shall cancel outstanding certificates surrendered by
the Fund to reduce the total amount of outstanding shares by the number of
shares surrendered by the Fund.
16
<PAGE>
17. DURATION AND TERMINATION.
(a) This Agreement shall be effective on the date first written above and
shall continue for a period of three (3) years (the "Initial Term"). Upon the
expiration of the Initial Term, this Agreement shall automatically renew for
successive terms of one (1) year ("Renewal Terms") each provided that it may be
terminated by either party during a Renewal Term upon written notice given at
least ninety (90) days prior to termination. During either the Initial Term or
the Renewal Terms, this Agreement may also be terminated on an earlier date by
either party for cause.
(b) With respect to the Fund, cause includes, but is not limited to, (i)
PFPC's material breach of this Agreement causing it to fail to substantially
perform its duties under this Agreement. In order for such material breach to
constitute "cause" under this Paragraph, PFPC must receive written notice from
the Fund specifying the material breach and PFPC shall not have corrected such
breach within a 15-day period; (ii) financial difficulties of PFPC evidenced by
the authorization or commencement of a voluntary or involuntary bankruptcy under
the U.S. Bankruptcy Code or any applicable bankruptcy or similar law, or under
any applicable law of any jurisdiction relating to the liquidation or
reorganization of debt, the appointment of a receiver or to the modification or
alleviation of the rights of creditors; and (iii) issuance of an administrative
or court order against PFPC with regard to the material violation or alleged
material violation of the Securities Laws or other applicable laws related to
its business of performing transfer agency services;
(c ) With respect to PFPC, cause includes, but is not limited to, the
failure of the Fund to pay the compensation set forth in writing pursuant to
Paragraph 11 of this Agreement.
17
<PAGE>
(d) Any notice of termination for cause in conformity with subparagraphs
(a), (b) and (c ) of this Paragraph by the Fund shall be effective thirty (30)
days from the date of any such notice. Any notice of termination for cause by
PFPC shall be effective 90 days from the date of such notice.
(e) Upon the termination hereof, the Fund shall pay to PFPC such
compensation as may be due for the period prior to the date of such termination.
In the event that the Fund designates a successor to any of PFPC's obligations
under this Agreement, PFPC shall, at the direction and expense of the Fund,
transfer to such successor all relevant books, records and other data
established or maintained by PFPC hereunder including, a certified list of the
shareholders of the Fund or any Portfolio thereof with name, address, and if
provided, taxpayer identification or Social Security number, and a complete
record of the account of each shareholder. To the extent that PFPC incurs
expenses related to a transfer of responsibilities to a successor, other than
expenses involved in PFPC's providing the Fund's books and records described in
the preceding sentence to the successors, PFPC shall be entitled to be
reimbursed for such extraordinary expenses, including any out-of-pocket expenses
reasonably incurred by PFPC in connection with the transfer.
(f) Any termination effected pursuant to this Paragraph shall not affect
the rights and obligations of the parties under Paragraph 12 hereof.
(g) Notwithstanding the foregoing, this Agreement shall terminate with
respect to the Fund or any Portfolio thereof upon the liquidation, merger, or
other dissolution of the Fund or Portfolio or upon the Fund's ceasing to be a
registered investment company.
18. REGISTRATION AS A TRANSFER AGENT. PFPC represents that it is currently
registered with the appropriate federal agency for the registration of transfer
agents, or is otherwise permitted to lawfully conduct its activities without
18
<PAGE>
such registration and that it will remain so registered or able to so conduct
such activities for the duration of this Agreement. PFPC agrees that it will
promptly notify the Fund in the event of any material change in its status as a
registered transfer agent. Should PFPC fail to be registered with the SEC as a
transfer agent at any time during this Agreement, and such failure to register
does not permit PFPC to lawfully conduct its activities, the Fund may, on
written notice to PFPC, terminate this Agreement upon five days written notice
to PFPC.
19. NOTICES. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. Notices shall be addressed (a) if to PFPC, at 400
Bellevue Parkway, Wilmington, Delaware 19809; (b) if to the Fund, at the address
of the Fund or (c) if to neither of the foregoing, at such other address as
shall have been given by like notice to the sender of any such notice or other
communication by the other party. If notice is sent by confirming telegram,
cable, telex or facsimile sending device during regular business hours, it shall
be deemed to have been given immediately; if sent at a time other than regular
business hours, such notice shall be deemed to have been given at the opening of
the next business day. If notice is sent by first-class mail, it shall be deemed
to have been given three days after it has been mailed. If notice is sent by
messenger, it shall be deemed to have been given on the day it is delivered. All
postage, cable, telegram, telex and facsimile sending device charges arising
from the sending of a notice hereunder shall be paid by the sender.
20. AMENDMENTS. This Agreement, or any term thereof, may be changed or
waived only by a written amendment, signed by the party against whom enforcement
of such change or waiver is sought.
19
<PAGE>
21. ADDITIONAL PORTFOLIOS. In the event that the Fund establishes one or
more investment series in addition to and with respect to which it desires to
have PFPC render services as transfer agent, registrar, dividend disbursing
agent and related services agent under the terms set forth in this Agreement, it
shall so notify PFPC in writing, and PFPC shall agree in writing to provide such
services, and such investment series shall become a Portfolio hereunder, subject
to such additional terms, fees and conditions as are agreed to by the parties.
22. DELEGATION; ASSIGNMENT.
(a) PFPC may, at its own expense, assign its rights and delegate its
duties hereunder to any wholly-owned direct or indirect subsidiary of PNC Bank,
National Association or PNC Bank Corp., provided that (i) PFPC gives the Fund
thirty (30) days' prior written notice; (ii) the delegate (or assignee) agrees
with PFPC and the Fund to comply with all relevant provisions of the Securities
Laws; and (iii) PFPC and such delegate (or assignee) promptly provide such
information as the Fund may request, and respond to such questions as the Fund
may ask, relative to the delegation (or assignment), including (without
limitation) the capabilities of the delegate (or assignee). The assignment and
delegation of any of PFPC's duties under this subparagraph (a) shall not relieve
PFPC of any of its responsibilities or liabilities under this Agreement.
(b) PFPC may delegate to PaineWebber Incorporated its obligation to
perform the services described on Annex B hereto. In addition, PFPC may assign
its rights and delegate its other duties hereunder to PaineWebber Incorporated
or Mitchell Hutchins Asset Management Inc. or an affiliated person of either,
provided that (I) PFPC gives the Fund thirty (30) days' prior written notice;
(ii) the delegate (or assignee) agrees with PFPC and the Fund to comply with all
relevant provisions of the Securities Laws; and (iii) PFPC and such delegate (or
assignee) promptly provide such information as the Fund may request, and respond
20
<PAGE>
to such questions as the Fund may ask, relative to the delegation (or
assignment), including (without limitation) the capabilities of the delegate (or
assignee). In assigning its rights and delegating its duties under this
paragraph, PFPC may impose such conditions or limitations as it determines
appropriate including the condition that PFPC be retained as a sub-transfer
agent.
(c ) In the event that PFPC assigns its rights and delegates its duties
under this section, no amendment of the terms of this Agreement shall become
effective without the written consent of PFPC.
23. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
24. FURTHER ACTIONS. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
25. MISCELLANEOUS.
--------------
(a) ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the parties
may embody in one or more separate documents their agreement, if any, with
respect to services to be performed and fees payable under this Agreement.
(b) CAPTIONS. The captions in this Agreement are included for convenience
of reference only and in no way define or delimit any of the provisions hereof
or otherwise affect their construction or effect.
21
<PAGE>
(c ) GOVERNING LAW. This Agreement shall be deemed to be a contract made
in Delaware and governed by Delaware law, without regard to principles of
conflicts of law.
(d) PARTIAL INVALIDITY. If any provision of this Agreement shall be held
or made invalid by a court decision, statute, rule or otherwise, the remainder
of this Agreement shall not be affected thereby.
(e) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
(f) FACSIMILE SIGNATURES. The facsimile signature of any party to this
Agreement shall constitute the valid and binding execution hereof by such party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
PFPC INC.
By: /s/ Robert F. Crouse
----------------------------------
Title: Vice President
MITCHELL HUTCHINS SERIES TRUST
By: /s/ Dianne E. O'Donnell
----------------------------------
Title: Secretary and Vice President
22
<PAGE>
ANNEX A
Portfolios
Money Market Portfolio
Growth Portfolio
Global Growth Portfolio
Global Income Portfolio
Strategic Fixed Income Portfolio
Growth and Income Portfolio
Aggressive Growth Portfolio
High Grade Fixed Income Portfolio
Balanced Portfolio
Tactical Allocation Portfolio
Strategic Income Portfolio
High Income Portfolio
Small Cap Portfolio
23
<PAGE>
AUTHORIZED PERSONS APPENDIX
NAME (TYPE) SIGNATURE
- --------------- ---------------
- --------------- ---------------
- --------------- ---------------
- --------------- ---------------
- --------------- ---------------
- --------------- ---------------
24
<PAGE>
ANNEX B
a. Establish and maintain a dedicated service center with sufficient
facilities, equipment and skilled personnel to address all shareholder
inquiries received by telephone, mail or in-person regarding the Funds and
their accounts
b. Provide timely execution of redemptions, exchanges and non-financial
transactions directed to investment executives and specifically requested
by Fund shareholders
c. Issue checks from proceeds of Fund share redemptions to shareholders as
directed by the shareholders or their agents
d. Process and maintain shareholder account registration information
e. With respect to customer accounts maintained through PaineWebber
Incorporated ("PaineWebber"), review new applications and correspond with
shareholders to complete or correct information
f. Prepare and mail monthly or quarterly consolidated account statements that
reflect PaineWebber Mutual Fund balances and transactions (such
information to be combined with other activity and holdings in investors'
brokerage accounts if this responsibility is delegated to PaineWebber)
g. Establish and maintain a dedicated service center with sufficient
facilities, equipment and skilled personnel to address all branch
inquiries regarding operational issues and performance
h. Capture, process and mail required tax information to shareholders and
report this information to the Internal Revenue Service
i. Provide the capability to margin PaineWebber Mutual Funds held within the
client's brokerage account (if this responsibility is delegated to
PaineWebber)
j. Prepare and provide shareholder registrations for mailing of proxies,
reports and other communications to shareholders
k. Develop, maintain and issue checks from the PaineWebber systematic
withdrawal plan offered within the client's brokerage account (if this
responsibility is delegated to PaineWebber)
l. Maintain duplicate shareholder records and reconcile those records with
those at the transfer agent (if this responsibility is delegated to
PaineWebber)
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<PAGE>
m. Process and mail duplicate PaineWebber monthly or quarterly statements to
PaineWebber Investment Executives
n. Establish and maintain shareholder distribution options (i.e., election to
have dividends paid in cash, rather than reinvested in Fund shares)
o. Process and mail purchase, redemption and exchange confirmations to Fund
shareholders and PaineWebber Investment Executives
p. Issue dividend checks to shareholders that select cash distributions to
their brokerage account (if this responsibility is delegated to
PaineWebber)
q. Develop and maintain the automatic investment plan offered within the
client's brokerage account (if this responsibility is delegated to
PaineWebber)
r. Provide bank-to-bank wire transfer capabilities related to transactions in
Fund shares
s. Maintain computerized compliance programs for blue sky and non-resident
alien requirements (only with respect to PaineWebber Cashfund, Inc.)
26
Exhibit No. 8(b)
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made as of April 1, 1987, by and between American
Republic Insurance Company ("American Republic"), American Republic Variable
Annuity Account ("Separate Account"), a Separate Account established by American
Republic pursuant to the Iowa Insurance Code, and PaineWebber Series Trust
("Fund"), an open-end diversified management investment company organized by
PaineWebber under the laws of the Commonwealth of Massachusetts.
WHEREAS, the Account is registered as a unit investment trust under the
Investment Company Act of 1940 for the purpose of issuing variable annuity
contracts ("Contracts") and desires to use the Fund as the underlying investment
vehicle for such Contracts;
WHEREAS, the income, gains and losses, whether or not realized, from
assets allocated to the Separate Account are, in accordance with the applicable
Contracts, to be credited to or charged against the Separate Account without
regard to other income, gains or losses of American Republic or of any other
separate account established or to be established by American Republic;
WHEREAS, the Separate Account is currently subdivided into six
Divisions under which income, gains and losses, whether or not realized, from
assets allocated to each such Division are, in accordance with the applicable
Contracts, to be credited to or charged against such Division without regard to
income, gains or losses of other Divisions or of American Republic;
WHEREAS, the Fund has been established as a Massachusetts business
trust, by Declaration of Trust dated November 21, 1986;
<PAGE>
WHEREAS, the Fund is a diversified open-end management investment
company registered under the Investment Company Act of 1940 and established for
the purpose of serving as the underlying investment vehicle for the Separate
Account;
WHEREAS, the Fund is currently subdivided into six Portfolios under
which income, gains and losses, whether or not realized, from assets allocated
to each such Portfolio are, in accordance with the Declaration of Trust, to be
credited to or charged against such Portfolio without regard to income, gains or
losses of other Portfolios of the Fund;
WHEREAS, the investment objectives of the Fund's Portfolios correspond
to the Divisions of the Separate Account; and
WHEREAS, the Fund desires to make the shares of its Portfolios
available to serve as the underlying investment vehicles for the Divisions of
the Separate Account;
IN CONSIDERATION OF - the foregoing, the parties agree as follows:
1. The Contracts will provide for the allocation of net amounts
among the Divisions of the Separate Account for investment in
the shares of the Fund's Portfolios corresponding to such
Divisions. The selection of one or more of the Separate
Account Divisions is to be made by the parties purchasing the
Contracts (the "Contract Owners") and such selection may be
changed in accordance with the terms of the Contracts.
2. If and to the extent required by law, the Separate Account
will:
(i) solicit voting instructions from Contract Owners;
(ii) vote the Fund shares in accordance with instructions
received from Contract Owners; and
2
<PAGE>
(iii) vote Fund shares for which no instructions, have been
received in the same proportion as Fund shares of such
Portfolio for which instructions have been received; so
long as and to the extent that the Securities and
Exchange Commission continues to interpret the
Investment Company Act of 1940 to require pass-through
voting privileges for variable contract owners.
3. The Fund's shares will be made available to serve as the
underlying investment vehicle for the Separate Account;
provided, however, that the Board of Trustees of the Fund (the
"Trustees") may refuse to sell shares of any Portfolio of the
Fund to any person, or suspend or terminate the offering of
shares of any Portfolio, if such action is required by law or
by regulatory authorities having jurisdiction or is, in the
discretion of the Trustees acting in good faith-and in light
of their fiduciary duties under applicable federal and state
laws, necessary in the best interests of the shareholders of
such Portfolio. The Fund will comply with all applicable
federal and state laws and regulations.
4. Shares of the Fund will be purchased by the Separate Account
in accordance with the provisions of the then-current
registration statement of the Fund. Shares of the Fund's
Portfolios will be ordered in such quantities and at such
times as determined by the Separate Account to be necessary to
meet its requirements. Payments for shares purchased by the
Separate Account will be made in federal funds transmitted to
the Fund by wire on the next business day after the order is
placed.
3
<PAGE>
5. Transfer of the Fund's shares will be by book entry only. No
share certificates will be issued to the Separate Account or
its Divisions. The Separate Account will maintain adequate
records with respect to the number of shares held by each
Division on behalf of each Contract Owner.
6. The Fund's Portfolios will declare all dividends or
distributions in accordance with the then-current registration
statement of the Fund. All of such dividends and distributions
will be automatically reinvested in additional shares of the
Portfolios, and the Fund will promptly notify the Separate
Account of the number of additional shares so acquired.
7. The Trustees of the Fund will monitor the Fund for the
existence of any material irreconcilable conflict between the
interests of the Contract Owners of all separate accounts
investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by
any state insurance regulatory authority; (b) a change in
applicable federal or state insurance, tax, or securities laws
or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an
administrative or judicial decision in any relevant
proceeding; (d) the manner in which the investments of any
Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity and variable life
insurance Contract Owners; or (f) a decision by an insurer to
disregard the voting instructions of Contract Owners. The
Trustees will promptly inform American Republic if it
determines that an irreconcilable material conflict arises and
the implications thereof.
4
<PAGE>
8. American Republic will report any potential or existing
conflicts of which it is aware to the Trustees. American
Republic will assist the Trustees in carrying out their
responsibilities under any exemptive order by providing the
Trustees with all information reasonably necessary for them to
consider any issues raised, including whether Contract Owner
voting instructions are being disregarded.
9. If it is determined by a majority of the Trustees, or a
majority of the disinterested Trustees, that a material
irreconcilable conflict exists, American Republic will, to the
extent reasonably practicable (as determined by a majority of
the disinterested Trustees), take whatever steps are necessary
to remedy or eliminate the irreconcilable material conflict,
up to and including: (1) withdrawing the assets allocable to
the Separate Account from the Fund or any Portfolio and
reinvesting such assets in a different investment medium,
including (but not limited to) another Portfolio of the Fund,
or submitting the question of whether such segregation should
be implemented to a vote of all affected Contract Owners and,
as appropriate, segregating the assets of any appropriate
group (i.e., annuity Contract owners, life insurance Contract
Owners or variable contract owners of one or more
participating insurance companies) that votes in favor of such
segregation, or offering to the affected Contract Owners the
option of making such a change; and (2) establishing a new
registered management investment company or separate account.
American Republic will bear the expense of resolving any
irreconcilable conflict arising out of participation in the
Fund by its Variable Products but will not be required to bear
5
<PAGE>
the expense of resolving any irreconcilable conflicts arising
out of participation in the Fund by its Variable Products and
similar products offered by other unaffiliated insurance
companies.
10. If a material irreconcilable conflict arises because of a
decision by American Republic to disregard Contract Owner
voting instructions and that decision represents a minority
position or would preclude a majority vote, American Republic
may be required, at the Fund's election, to withdraw the
Separate Account's investment in the Fund and terminate this
Agreement; provided, however, that such withdrawal and
termination shall be limited to the extent required to cure
such conflict as determined by a majority of the disinterested
Trustees. Any such withdrawal and termination must take place
within six (6) months after the Fund gives written notice that
this provision is being implemented, and until the end of that
six month period Equities and the Fund will continue to accept
and implement orders by American Republic for the purchase
(and redemption) of shares of the Fund.
11. If a material irreconcilable conflict arises because a
particular state insurance regulator's decision applicable to
American Republic conflicts with the majority of other state
regulators, then American Republic will withdraw the Separate
Account's investment in the Fund and terminate this Agreement
within six months after the Trustees inform American Republic
in writing that they have determined that such decision has
created an irreconcilable material conflict; provided,
however, that such withdrawal and termination shall be limited
to the extent required to cure such conflict as determined by
a majority of the disinterested Trustees. Until the end of the
foregoing six month period, the Fund shall continue to accept
6
<PAGE>
and execute orders by American Republic for the purchase (and
redemption) of shares of the Fund unless prohibited by law or
regulatory authority.
12. For purposes of Sections 9-11 above, a majority of the
disinterested Trustees will determine whether any proposed
action adequately remedies any irreconcilable material
conflict, but in no event will the Fund be required to
establish a new funding medium for the Separate Account. In
the event that the Trustees determine that any proposed action
does not adequately remedy any irreconcilable material
conflict, then American Republic will withdraw the Separate
Account's investment in the Fund and terminate this Agreement
within six (6) months after the Trustees inform American
Republic in writing of the foregoing determination; provided,
however that such withdrawal and termination shall be limited
to the extent required to cure such conflict as determined by
a majority of the disinterested Trustees.
13. This Agreement shall be construed in accordance with the laws
of the State of New York; provided, however, that Section 14
below will be construed in accordance with the laws of the
Commonwealth of Massachusetts.
14. The parties hereby acknowledge their understanding that a copy
of the Declaration of Trust of the Fund is on file with the
Secretary of the Commonwealth of Massachusetts and that this
Agreement is executed on behalf of the Fund, and not on behalf
of the Trustees, officers or shareholders of the Fund
individually, and that the obligations under this Agreement
7
<PAGE>
are not binding upon the Trustees, officers, or shareholders
of the Fund individually, but are binding only upon the assets
and property of the Fund.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
this 1st day of April, 1987.
AMERICAN REPUBLIC INSURANCE COMPANY
By: /s/ Jeanne Foster
------------------
Associate Vice President and Associate Counsel
(Name of Officer, Title)
Attest: /s/ Carmen Fritcher
-------------------
AMERICAN REPUBLIC INSURANCE COMPANY
By: /s/ Michael E. Abbott
---------------------
(Name of Officer, Title)
Attest: /s/ Carmen Fritcher
-------------------
PAINEWEBBER SERIES TRUST
By: /s/ Dianne E. O'Donnell
-----------------------
Vice President and Secretary
(Name of Officer; Title)
Attest: /s/ Abbe P. Stein
-----------------
9
Exhibit No. 8(c)
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT made as of the 2nd day of March, 1998, by and between
MITCHELL HUTCHINS SERIES TRUST ('FUND"), a Massachusetts business trust,
MITCHELL HUTCHINS ASSET MANAGEMENT INC. ("ADVISER") a Delaware corporation, and
GREAT AMERICAN RESERVE INSURANCE COMPANY ("COMPANY"), a life insurance company
organized under the laws of the State of Texas and CONSECO EQUITY SALES, INC.
("UNDERWRITER"), a Texas corporation.
WHEREAS, FUND is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended (the "40 Act"), as
an open-end management investment company; and
WHEREAS, FUND is organized as a series fund comprised of several
Portfolios ("Portfolios"), those currently available are listed on Appendix A
hereto; and
WHEREAS, FUND was organized to act as the funding vehicle for certain
variable life insurance and/or variable annuity contracts ("Variable Contracts")
offered by life insurance companies through separate accounts of such life
insurance companies ("Participating Insurance Companies"); and
WHEREAS, FUND intends to apply for an order from the SEC, granting
Participating Insurance Companies and their separate accounts exemptions from
the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the '40 Act, and
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to
permit shares of the Portfolios of the FUND to be sold to and held by variable
annuity and variable life insurance separate accounts of both affiliated and
unaffiliated Participating Insurance Companies ("Exemptive Order"); and
WHEREAS, the COMPANY has established or will establish one or more
separate accounts ("Separate Accounts") to offer Variable Contracts and is
desirous of having FUND as one of the underlying funding vehicles for such
Variable Contracts; and
WHEREAS, the UNDERWRITER is registered with the SEC as a broker-dealer
under the Securities Exchange Act of 1934, as amended;
WHEREAS, ADVISER is registered with the SEC as an investment adviser
under the Investment Advisers Act of 1940; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the COMPANY intends to purchase shares of FUND to fund the
aforementioned Variable Contracts and FUND is authorized to sell such shares to
the COMPANY at net asset value;
<PAGE>
NOW, THEREFORE, in consideration of their mutual promises, the COMPANY,
UNDERWRITER, FUND and ADVISER agree as follows:
Article I. SALE OF FUND SHARES
-------------------
1.1 FUND agrees to make available to the Separate Accounts of the
COMPANY shares of the selected Portfolios as listed on Appendix B for investment
of purchase payments of Variable Contracts allocated to the designated Separate
Accounts as provided in FUND's registration statement under the Securities Act
of 1933 (the "'33 Act") and the "40 Act, including the FUND's current prospectus
and statement of additional information as amended or supplemented from time to
time ("Registration Statement").
1.2 FUND agrees to sell to the COMPANY those shares of the selected
Portfolios of FUND which the COMPANY orders, executing such orders on a daily
basis at the net asset value next computed after receipt by FUND or its designee
of the order for the shares of FUND. For purposes of this Section 1.2, the
COMPANY shall be the designee of FUND for receipt of such orders from the
designated Separate Account and receipt by such designee shall constitute
receipt by FUND; provided that the COMPANY receives the order by the time the
FUND prices its shares (normally at 4:00 p.m., Eastern time) and FUND receives
notice from the COMPANY by telephone or facsimile (or by such other means as
FUND and the COMPANY may agree in writing) of such order by 9:00 a.m., Eastern
time on the next following Business Day. "Business Day" shall mean any day on
which the New York Stock Exchange is open for trading and on which FUND
calculates its net asset value pursuant to the rules of the SEC.
1.3 FUND agrees to redeem on the COMPANY's request, any full or
fractional shares of FUND held by the COMPANY, executing such requests on a
daily basis at the net asset value next computed after receipt by FUND or its
designee of the request for redemption, in accordance with the provisions of
this agreement and FUND"s Registration Statement. For purposes of this Section
1.3, the COMPANY shall be the designee of FUND for receipt of requests for
redemption from the designated Separate Account and receipt by such designee
shall constitute receipt by FUND; provided that the COMPANY receives the request
for redemption by the time the FUND prices its shares (normally at 4:00 p.m.,
Eastern time) and FUND receives notice from the COMPANY by telephone or
facsimile (or by such other means as FUND and the COMPANY may agree in writing)
of such request for redemption by 9:00 a.m., Eastern time on the next following
Business Day.
1.4 FUND shall furnish, on or before the ex-dividend date, notice to the
COMPANY of any income dividends or capital gain distributions payable on the
shares of any Portfolio of FUND. The COMPANY hereby elects to receive all such
income dividends and capital gain distributions as are payable on a Portfolio's
shares in additional shares of the Portfolio. FUND shall notify the COMPANY or
its designee of the number of shares so issued as payment of such dividends and
distributions.
2
<PAGE>
1.5 FUND shall make the net asset value per share for the selected
Portfolio(s) available to the COMPANY on a daily basis as soon as reasonably
practicable after the net asset value per share is calculated but shall use its
best efforts to make such net asset value available by 6:30 p.m., Eastern time.
In the event that FUND is unable to meet the 6:30 p.m. time stated herein, it
shall provide additional time for the COMPANY to place orders for the purchase
and redemption of shares. Such additional time shall be equal to the additional
time which FUND takes to make the net asset value available to the COMPANY. If
FUND provides the COMPANY with materially incorrect share net assets value
information through no fault of the COMPANY, the COMPANY on behalf of the
Separate Accounts, shall be entitled to an adjustment to the number of shares
purchased or redeemed to reflect the correct share net asset value. Any material
error in the calculation of net asset value per share, dividend or capital gain
information shall be reported promptly upon discovery to the COMPANY.
1.6 At the end of each Business Day, the COMPANY shall use the
information described in Section 1.5 to calculate Separate Account unit values
for tile day. Using these unit values, the COMPANY shall process each such
Business Day's Separate Account transactions based on requests and premiums
received by it by the close of trading on the floor of the New York Stock
Exchange (currently 4:00 p.m., Eastern time) to determine the net dollar amount
of FUND shares which shall be purchased or redeemed at that day's closing net
asset value per share. The net purchase or redemption orders so determined shall
be transmitted to FUND by the COMPANY by 9:00 a.m., Eastern time on the Business
Day next following the COMPANY's receipt of such requests and premiums in
accordance with the terms of Sections 1.2 and 1.3 hereof.
1.7 If the COMPANY's order requests the purchase of FUND shares, the
COMPANY shall pay for such purchase by wiring federal funds to FUND or its
designated custodial account on the day the order is transmitted by the COMPANY.
If the COMPANY's order requests a net redemption resulting in a payment of
redemption proceeds to the COMPANY, FUND shall use its best efforts to wire the
redemption proceeds to the COMPANY by the next Business Day, unless doing so
would require FUND to dispose of Portfolio securities or otherwise incur
additional costs. In any event, proceeds shall be wired to the COMPANY within
three Business Days or such longer period permitted by the '40 Act or the rules,
orders or regulations thereunder and FUND shall notify the person designated in
writing by the COMPANY as the recipient for such notice of such delay by 3:00
p.m., Eastern time the same Business Day that the COMPANY transmits the
redemption order to FUND." If the COMPANY's order requests the application of
redemption proceeds from the redemption of shares to tile purchase of shares of
another Portfolio as shown on Appendix B, FUND shall so apply such proceeds on
the same Business Day that the COMPANY transmits such order to FUND.
1.8 FUND agrees that all shares of the Portfolios of FUND will be sold
only to Participating Insurance Companies which have agreed to participate in
FUND to fund their Separate Accounts and/or to Qualified Plans, all in
accordance with the requirements of Section 817(h) of the Internal Revenue Code
of 1986, as amended ("Code") and Treasury Regulation 1.817-5. Shares of the
Portfolios of FUND will not be sold directly to the general public.
3
<PAGE>
1.9 Issuance and transfer of Portfolio shares will be by book entry
only. Stock certificates will not be issued to the COMPANY or the Separate
Accounts. Shares ordered from Portfolio will be recorded in appropriate book
entry titles for the Separate Accounts.
Article II. REPRESENTATIONS AND WARRANTIES
------------------------------
2.1 The COMPANY represents and warrants that it is an insurance company
duly organized and in good standing under the laws of Texas and that it has
legally and validly established each Separate Account as a segregated asset
account under such laws.
2.2 The COMPANY represents and warrants that it has registered or, prior
to any issuance or sale of the Variable Contracts, will register each Separate
Account as a unit investment trust ("UIT") in accordance with the provisions of
the'40 Act and cause each Separate Account to remain so registered to serve as a
segregated asset account for the Variable Contracts, unless an exemption from
registration is available.
2.3 The COMPANY represents and warrants that the Variable Contracts will
be registered under the '33 Act unless an exemption from registration is
available prior to any issuance or sale of the Variable Contracts and that the
Variable Contracts will be issued and sold in compliance in all material
respects with all applicable federal and state laws and further that the sale of
the Variable Contracts shall comply in all material respects with state
insurance law suitability requirements.
2.4 The COMPANY represents and warrants that the Variable Contracts are
currently and at the time of issuance will be treated as life insurance,
endowment or annuity contracts under applicable provisions of the Code, that it
will maintain such treatment and that it will notify FUND immediately upon
having a reasonable basis for believing that the Variable Contracts have ceased
to be so treated or that they might not be so treated in the future.
2.5 FUND represents and warrants that the Portfolio shares offered and
sold pursuant to this Agreement will be registered under the '33 Act to the
extent required by that Act and sold in accordance with all applicable federal
and state laws, and FUND shall be registered under the '40 Act to the extent
required by that Act, prior to and at the time of any issuance or sale of such
shares. FUND, subject to Section 1.9 above, shall amend its Registration
Statement from time to time as required in order to effect the continuous
offering of its shares. FUND shall register and qualify its shares for sale in
accordance with the laws of the various states only if and to the extent deemed
advisable by FUND.
2.6 FUND represents and warrants that each Portfolio will comply with
the diversification requirements set forth in Section 817(h) of the Code, and
the rules and regulations thereunder, including without limitation Treasury
Regulation 1.817-5, and will notify the COMPANY immediately upon having a
reasonable basis for believing any Portfolio has ceased to comply or might not
so comply and will immediately take all reasonable steps to adequately diversify
the Portfolio to achieve compliance.
4
<PAGE>
2.7 FUND represents and warrants that each Portfolio invested in by the
Separate Account is currently qualified as a "regulated investment company under
Subchapter M of the Code, and will maintain such qualification. FUND will notify
the COMPANY immediately upon having a reasonable basis for believing it has
ceased to so qualify or might not so qualify in the future.
2.8 ADVISER represents and warrants that it is and will remain duly
registered and licensed in all material respects under all applicable federal
and state laws and shall perform its obligations hereunder in compliance in all
material respects with any applicable state and federal laws.
2.9 UNDERWRITER represents and warrants that it is and will be a member
in good standing of the NASD and is and will be registered as a broker-dealer
with the SEC, UNDERWRITER further represents that it will sell and distribute
the Variable Contracts in accordance with all applicable state and federal laws
and regulations, including without limitation the '33 Act, the '34 Act and the
'40 Act. UNDERWRITER represents that its operations are and shall at all times
remain in material compliance with the laws of the State of Texas to the extent
required to perform this Agreement.
2.10 UNDERWRITER represents and warrants that it is and will remain duly
registered and licensed in all material respects under all applicable federal
and state securities laws and shall perform its obligations hereunder in
compliance in all material respects with any applicable state and federal laws.
Article III. PROSPECTUS AND PROXY STATEMENTS
-------------------------------
3.1 FUND shall prepare and be responsible for filing with the SEC and
any state regulators requiring such filing all shareholder reports, notices,
proxy materials (or similar materials such as voting instruction solicitation
materials), prospectuses and statements of additional information of FUND. FUND
shall bear the costs of registration and qualification of shares of the
Portfolios, preparation and filing of the documents listed in this Section 3.1
and all taxes and filing fees to which an issuer is subject on the issuance and
transfer of its shares.
3.2 At least annually, FUND, ADVISER or their designee shall provide the
COMPANY, free of charge, with as many copies of the current prospectus for the
shares of the Portfolios as the COMPANY may reasonably request for distribution
to existing Variable Contract owners whose Variable Contracts are funded by such
shares. FUND or its designee shall provide the COMPANY, at the COMPANY's
expense, with as many copies of the current prospectus for the shares as the
COMPANY may reasonably request for distribution to prospective purchasers of
Variable Contracts. If requested by the COMPANY in lieu thereof, FUND or its
designee shall provide such documentation (including a "camera ready" copy of
the new prospectus as set in type or, at the request of the COMPANY, as a
diskette in the form sent to the financial printer) and other assistance as is
reasonably necessary in order for the parties hereto once a year (or more
frequently if the prospectus for the shares is supplemented or amended) to have
the prospectus for the Variable Contracts and the prospectus for the FUND shares
5
<PAGE>
and other funds available under the Variable Contract printed together in one
document. The expenses of such printing will be apportioned between (a) the
COMPANY and (b) FUND in proportion to the number of pages of the Variable
Contract and FUND shares' prospectus, taking account of other relevant factors
affecting the expense of printing, such as covers, columns, graphs and charts;
FUND to bear the cost of printing the FUND shares' prospectus portion of such
document for distribution only to owners of existing Variable Contracts funded
by the FUND shares and the COMPANY to bear the expense of printing the portion
of such documents relating to the Separate Account; provided, however, the
COMPANY shall bear all printing expenses of such combined documents where used
for distribution to prospective purchasers or to owners of existing Variable
Contracts not funded by the shares.
3.3 FUND, at its expense, shall provide the Company with copies of its
Statement of Additional Information, reports to shareholders, proxy material and
other communications to shareholders in such quantity as the Company shall
reasonably require for distribution to the Contract owners.
3.4 FUND will provide the COMPANY with at least one complete copy of all
prospectuses, statements of additional information, annual and semi-annual
reports, proxy statements, exemptive applications and all amendments or
supplements to any of the above that relate to the Portfolios promptly after the
filing of each such document with the SEC or other regulatory authority. The
COMPANY will provide FUND with at least one complete copy of all prospectuses,
statements of additional information, annual and semi-annual reports, proxy
statements, exemptive applications and all amendments or supplements to any of
the above that relate to a Separate Account promptly after the filing of each
such document with the SEC or other regulatory authority.
Article IV. SALES MATERIALS
---------------
4.1 The COMPANY will furnish, or will cause to be furnished, to FUND
each piece of sales literature or other promotional material in which FUND is
named, at least fifteen (15) Business Days prior to its intended use. No such
material will be used if FUND objects to its use in writing within ten (10)
Business Days after receipt of such material.
4.2 FUND will furnish, or will cause to be furnished, to the COMPANY,
each piece of sales literature or other promotional material in which the
COMPANY or its Separate Accounts are named, at least fifteen (15) Business Days
prior to its intended use. No such material will be used if the COMPANY objects
to its use in writing within ten (10) Business Days after receipt of such
material.
4.3 FUND and its affiliates and agents shall not give any information or
make any representations on behalf of the COMPANY or concerning the COMPANY, the
Separate Accounts, or the Variable Contracts issued by the COMPANY, other than
the information or representations contained in a registration statement or
prospectus for such Variable Contracts, as such registration statement and
prospectus may be amended or supplemented from time to time, or in reports of
the Separate Accounts or reports prepared for distribution to owners of such
6
<PAGE>
Variable Contracts, or in sales literature or other promotional material
approved by the COMPANY or its designee, except with the written permission of
the COMPANY.
4.4 The COMPANY and its affiliates and agents shall not give any
information or make any representations on behalf of FUND or concerning FUND
other than the information or representations contained in FUND's Registration
Statement, as such Registration Statement may be amended or supplemented from
time to time, or in sales literature or other promotional material approved by
FUND or its designee, except with the written permission of FUND.
4.5 For purposes of this Agreement, the phrase "sales literature or
other promotional material" or words of similar import include, without
limitation, advertisements (such as material published, or designed for use, in
a newspaper, magazine or other periodical, radio, television, telephone or tape
recording, videotape display, signs or billboards, motion pictures or other
public media), sales literature (such as any written communication distributed
or made generally available to customers or the public including brochures,
circulars, research reports, market letters, form letters, seminar text , or
reprints or excerpts of any other advertisement, sales literature, or published
article), educational or training materials or other communications distributed
or made generally available to some or all agents or employees (including
so-called "broker only" materials), registration statements, prospectuses,
statements of additional information, shareholder reports and proxy materials,
and any other material constituting sales literature or advertising under
National Association of Securities Dealers, Inc. rules, the '40 Act or the '33
Act.
Article V. POTENTIAL CONFLICTS
-------------------
5.1 The parties acknowledge that FUND intends to file an application
with the SEC to request an order granting relief from various provisions of the
'40 Act and the rules thereunder to the extent necessary to permit FUND shares
to be sold to and held by variable annuity and variable life insurance separate
accounts of both affiliated and unaffiliated Participating Insurance Companies
and Qualified Plans. It is anticipated that the Exemptive Order, when and if
issued, shall require FUND and each Participating Insurance Company to comply
with conditions and undertakings substantially as provided in this Section 5. If
the Exemptive Order imposes conditions materially different from those provided
for in this Section 5, the conditions and undertakings imposed by the Exemptive
Order shall govern this Agreement and the parties hereto agree to amend this
Agreement consistent with the Exemptive Order. The FUND will not enter into a
participation agreement with any other Participating Insurance Company unless it
imposes the same conditions and undertakings as are imposed on the COMPANY
hereby.
5.2 The FUND's Board of Trustees ("Board") will monitor FUND for the
existence of any material irreconcilable conflict between the interests of
Variable Contract owners of all separate accounts investing in FUND. An
irreconcilable material conflict may arise for a variety of reasons, which may
include: (a) an action by any state insurance regulatory authority; (b) a change
in applicable federal or state insurance, tax, or securities laws or
regulations, or a public ruling, private letter ruling or any similar action by
insurance, tax or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding, (d) the manner in which the
7
<PAGE>
investments of FUND are being managed; (e) a difference in voting instructions
given by variable annuity and variable life insurance Contract owners; and (f) a
decision by a Participating Insurance Company to disregard the voting
instructions of Variable Contract owners.
5.3 The COMPANY will report any potential or existing conflicts to the
Board. The COMPANY will be responsible for assisting the Board in carrying out
its duties in this regard by providing the Board with all information reasonably
necessary for the Board to consider any issues raised. The responsibility
includes, but is not limited to, an obligation by the COMPANY to inform the
Board whenever it has determined to disregard Variable Contract owner voting
instructions. These responsibilities of the COMPANY will be carried out with a
view only to the interests of the Variable Contract owners.
5.4 If a majority of the Board or majority of its disinterested Members,
determines that a material irreconcilable conflict exists affecting the COMPANY,
the COMPANY, at its expense and to the extent reasonably practicable (as
determined by a majority of the Board's disinterested Members), will take any
steps necessary to remedy or eliminate the irreconcilable material conflict,
including; (a) withdrawing the assets allocable to some or all of the Separate
Accounts from FUND or any Portfolio thereof and reinvesting those assets in a
different investment medium, which may include another Portfolio of FUND, or
another investment company; (b) submitting the question as to whether such
segregation should be implemented to a vote of all affected Variable Contract
owners and as appropriate, segregating the assets of any appropriate group (i.e.
variable annuity or variable life insurance Contract owners of one or more
Participating Insurance Companies) that votes in favor of such segregation, or
offering to the affected Variable Contract owners' the option of making such a
change; and (c) establishing a new registered management investment company (or
series thereof) or managed separate account. If a material irreconcilable
conflict arises because of the COMPANY's decision to disregard Variable Contract
owner voting instructions, and that decision represents a minority position or
would preclude a majority vote, or because a particular state insurance
regulator's decision applicable to the Company conflicts with that of the
majority of other state regulators, the COMPANY may be required, at the election
of FUND, to withdraw the Separate Account's investment in FUND, and no charge or
penalty will be imposed as a result of such withdrawal. The responsibility to
take such remedial action shall be carried out with a view only to the interests
of the Variable Contract owners.
For the purposes of this Section 5.4, a majority of the disinterested
Members of the Board shall determine whether or not any proposed action
adequately remedies any irreconcilable material conflict but in no event will
FUND or its affiliates (including any investment adviser of FUND) be required to
establish a new funding medium for any Variable Contract. Further, the COMPANY
shall not be required by this Section 5.4 to establish a new funding medium for
any Variable Contracts if any offer to do so has been declined by a vote of a
majority of Variable Contract owners materially and adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company shall withdraw the Separate Account's investment in
the FUND and terminate this Agreement with respect to such Account within six
8
<PAGE>
(6) months after the Board informs the Company in writing of the foregoing
determination; provided, however, that such withdrawal and termination shall be
limited to the extent required by any such material irreconcilable conflict as
determined by a majority of the disinterested Members of the Board.
5.5 The Board's determination of the existence of an irreconcilable
material conflict and its implications shall be made known promptly and in
writing to the COMPANY.
5.6 No less than annually, the COMPANY shall submit to the Board such
reports, materials or data as the Board may reasonably request so that the Board
may fully carry out its obligations. Such reports, materials, and data. shall be
submitted more frequently if deemed appropriate by the Board.
Article VI. VOTING
6.1 The COMPANY will provide pass-through voting privileges to all
Variable Contract owners so long as the SEC continues to interpret the '40 Act
as requiring pass- through voting privileges for Variable Contract owners.
Accordingly, the COMPANY, where applicable, will vote shares of the Portfolio
held in its Separate Accounts in a manner consistent with voting instructions
timely received from its Variable Contract owners. The COMPANY will be
responsible for assuring that each of its Separate Accounts that participates in
FUND calculates voting privileges in a manner consistent with other
Participating Insurance Companies. The COMPANY will vote shares for which it has
not received timely voting instructions, as well as shares it owns, in the same
proportion as it votes those shares for which it has received voting
instructions.
6.2 The FUND will comply with all provisions of the '40 Act requiring
voting by shareholders, and in particular the FUND will either provide for
annual meetings or comply with Section 16(c) of the `40 Act (although the FUND
is not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, Section 16(b). Further, the FUND
will act in accordance with the SEC's interpretation of the requirements of
Section 16(a) with respect to periodic elections of Board Members and with
whatever rules the Commission may promulgate with respect thereto.
6.3 If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or if
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the '40
Act or the rules thereunder with respect to mixed and shared funding on terms
and conditions materially different from any exemptions granted in the Exemptive
Order, then FUND, and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rule 6e-2 and Rule
6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such Rules are
applicable and Articles V and VI hereof shall continue in effect only to the
extent that terms and conditions substantially similar thereto are contained in
such Rule(s) as so amended or adopted.
9
<PAGE>
Article VII. INDEMNIFICATION
---------------
7.1 INDEMNIFICATION BY THE COMPANY. The COMPANY agrees to indemnify and
hold harmless FUND and ADVISER and each of their respective Board Members,
principals, officers, employees and agents and each person, if any, who controls
FUND or ADVISER within the meaning of Section 15 of the '33 Act (collectively,
the "Indemnified Parties" for purposes of this Article VII) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the COMPANY, which consent shall not be unreasonably
withheld) or litigation (including reasonable legal and other expenses), to
which the Indemnified Parties may become subject under any statute, regulation,
at common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements are related to the
sale or acquisition of FUND's shares or the Variable Contracts and:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the
registration statement or prospectus for the Variable Contracts
or contained in the Variable Contracts (or any amendment or
supplement to any of the foregoing), or arise out of or are
based upon the omission or the alleged omission to state therein
a material fact required to be stated therein or necessary to
make the statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged statement or
omission was made in reliance upon and in conformity with
information furnished to the COMPANY by or on behalf of FUND for
use in the registration statement or prospectus for the Variable
Contracts or in the Variable Contracts or sales literature (or
any amendment or supplement) or otherwise for use in connection
with the sale of the Variable Contracts or FUND shares; or
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement of sales literature of FUND not supplied
by the COMPANY, or persons under its control) or wrongful
conduct of the COMPANY or the UNDERWRITER or persons under their
respective control, with respect to the sale or distribution of
the Variable Contracts or FUND shares; or
(c) arise out of any untrue statement or alleged untrue statement of
a material fact contained in the Registration Statement or sales
literature of FUND or any amendment thereof or supplement
thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statements therein not misleading if such statement or
omission or such alleged statement or omission was made in
reliance upon and in conformity with information furnished to
FUND by or on behalf of the COMPANY; or
(d) arise as a result of any failure by the COMPANY or the
UNDERWRITER to provide substantially the services and furnish
the materials under the terms of this Agreement; or
10
<PAGE>
(e) arise out of or result from any material breach of any
representation and/or warranty made by the COMPANY or the
UNDERWRITER in this Agreement or arise out of or result from any
other material breach of this Agreement by the COMPANY.
7.2 The COMPANY shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party as such may arise from such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations or duties under this Agreement.
7.3 The COMPANY shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Part shall have notified the COMPANY in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the COMPANY of any such claim shall not
relieve the COMPANY from any liability which it may have to the Indemnified
Party against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against an
Indemnified Part the COMPANY shall be entitled to participate at its own expense
in the defense of action. The COMPANY also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the COMPANY to such party of the COMPANY's election to assume
the defense thereof, the Indemnified Party shall bear the fees and expenses of
any additional counsel retained by it, and the COMPANY will not be liable to
such party under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
7.4 Indemnification by ADVISER. ADVISER agrees to indemnify and hold
harmless the COMPANY and the UNDERWRITER and each of their respective directors,
officers employees, and agents and each person, if any, who controls the COMPANY
or the UNDERWRITER within the meaning of Section 15 of the '33 Act
(collectively, the "Indemnified Parties" for the purposes of this Article VII)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of ADVISER which consent shall not be
unreasonably withheld) or litigation (including reasonable legal and other
expenses) to which the Indemnified Parties may become subject under any statute,
or regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
are related to the sale or acquisition of FUND's shares or the Variable
Contracts and:
(a) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
Registration Statement or sales literature of FUND (or any
amendment or supplement to any of the foregoing), or arise out
of or are based upon the omission or the alleged omission to
11
<PAGE>
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply as to
any Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and in
conformity with information furnished to ADVISER or FUND by or
on behalf of the COMPANY for use in the Registration Statement
for FUND or in sales literature (or any amendment or supplement)
or otherwise for use in connection with the sale of the Variable
Contracts or FUND shares; or
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature for the
Variable Contracts not supplied by ADVISER or FUND or persons
under their control) or wrongful conduct of FUND or ADVISER or
persons under their control, with respect to the sale or
distribution of the Variable Contracts or FUND shares; or
(c) arise out of any untrue statement or alleged untrue statement of
a material fact contained in a registration statement,
prospectus, or sales literature covering the Variable Contracts,
or any amendment thereof or supplement thereto or the omission
or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein
not misleading, if such statement or omission or such alleged
statement or omission was made in reliance upon and in
conformity with information furnished to the COMPANY for
inclusion therein by or on behalf of FUND or ADVISER; or
(d) arise out of or result from any material breach of any
representation and/or warranty made by FUND or ADVISER in this
Agreement or arise out of or result from any other material
breach of this Agreement by FUND or ADVISER.
7.5 ADVISER shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation to which
an Indemnified Party would otherwise be subject by reason of such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement.
7.6 ADVISER shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified ADVISER in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify ADVISER of any such claim shall not
relieve ADVISER from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision In case any such action is brought against the
12
<PAGE>
Indemnified Parties, ADVISER shall be entitled to participate at its own expense
in the defense thereof. ADVISER also shall be entitled to assume the defense
thereof, with counsel satisfactory to the party named in the action. After
notice from ADVISER to such party of ADVISER's election to assume the defense
thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and ADVISER will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
7.7 INDEMNIFICATION BY FUND. FUND agrees to indemnify and hold harmless
the COMPANY and each of its directors, officers, employees, and agents and each
person if any, who controls the COMPANY within the meaning of Section 15 of the
'33 Act (collectively, the "Indemnified Parties" for the purposes of this
Article VII) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of FUND which consent shall
not be unreasonably withheld) or litigation (including legal and other expenses)
to which the Indemnified Parties may become subject under any statute, or
regulation, at common law or otherwise, insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) or settlements are
related to the sale or acquisition of FUND's shares or the Variable Contracts
and:
(a) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
Registration Statement of FUND (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this agreement
to indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was
made in reliance upon and in conformity with information
furnished to FUND by or on behalf of the COMPANY for use in the
Registration Statement for FUND (or any amendment or supplement)
or otherwise for use in connection with the sale of the Variable
Contracts or FUND shares; or
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature for the
Variable Contracts not supplied by FUND or persons under its
control) or wrongful conduct of FUND or persons under its
control, with respect to the sale or distribution of the
Variable Contracts or FUND shares; or
(c) arise out of any untrue statement or alleged untrue statement of
a material fact contained in a registration statement or
prospectus covering the Variable Contracts, or any amendment
thereof or supplement thereto or the omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading, if such statement or omission or such alleged
13
<PAGE>
statement of omission was made in reliance upon and in
conformity with the information furnished to the COMPANY for
inclusion therein by or on behalf of FUND; or
(d) arise as a result of (i) a failure by FUND to provide the
services and furnish the materials under the terms of this
Agreement; or (ii) a failure by a Portfolio(s) invested in by
the Separate Account to comply with the diversification
requirements of Section 817(h) of the Code; or (iii) a failure
by a Portfolio(s) invested in by the Separate Account to qualify
as a "regulated investment company" under Subchapter M of the
Code; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by FUND in this Agreement or
arise out of or result from any other material breach of this
Agreement by FUND.
7.8 FUND shall not be liable under this indemnification provision with
respect to any losses, claims, damages, liabilities or litigation to which an
Indemnified Party would otherwise be subject by reason of such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement.
7.9 FUND shall not be liable under this indemnification provision with
respect to any claim made against an Indemnified Party under Section 7.7, unless
such Indemnified Party shall have notified FUND in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify FUND of any such claim shall not
relieve FUND from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, FUND shall be entitled to participate at its own expense in
the defense thereof. FUND also shall be entitled to assume the defense thereof,
with counsel satisfactory to the party named in the action. After notice from
FUND to such party of FUND's election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any additional counsel
retained by it, and FUND will not be liable to such party under this Agreement
for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable costs
of investigation.
Article VIII. TERM; TERMINATION
-----------------
8.1 This Agreement shall be effective as of the date hereof and shall
continue in force until terminated in accordance with the provisions herein.
8.2 This Agreement shall terminate in accordance with the following
provisions:
14
<PAGE>
(a) At the option of the COMPANY, FUND, ADVISER or UNDERWRITER, at
any time from the date hereof upon 180 days' notice, unless a
shorter time is agreed to by the parties;
(b) At the option of the COMPANY, if FUND shares are not reasonably
available to meet the requirements of the Variable Contracts as
determined by the COMPANY. Prompt notice of election to
terminate shall be furnished by the COMPANY, said termination to
be effective ten days after receipt of notice unless FUND makes
available a sufficient number of shares to reasonably meet the
requirements of the Variable Contracts within said ten-day
period;
(c) At the option of the COMPANY, upon the institution of formal
proceedings against FUND by the SEC, the NASD, or any other
regulatory body, the expected or anticipated ruling, judgment or
outcome of which would, in the COMPANY's reasonable judgment,
materially impair FUND's ability to meet and perform FUND's
obligations and duties hereunder. Prompt notice of election to
terminate shall be furnished by the COMPANY with said
termination to be effective upon receipt of notice;
(d) At the option of FUND or ADVISER, upon the institution of formal
proceedings against the COMPANY or UNDERWRITER by the SEC, the
National Association of Securities Dealers, Inc., or any other
regulatory body, the expected or anticipated ruling, judgment or
outcome of which would, in FUND's or ADVISER's reasonable
judgment, materially impair the COMPANY's or UNDERWRITER's
ability to meet and perform its obligations and duties
hereunder. Prompt notice of election to terminate shall be
furnished by FUND or ADVISER with said termination to be
effective upon receipt of notice;
(e) In the event FUND's shares are not registered, issued or sold in
accordance with applicable state or federal law, or such law
precludes the use of such shares as the underlying investment
medium of Variable Contracts issued or to be issued by the
COMPANY. Termination shall be effective upon such occurrence
without notice;
(f) At the option of FUND, if the Variable Contracts cease to
qualify as annuity contracts or life insurance contracts, as
applicable, under the Code, or if FUND reasonably believes that
the Variable Contracts may fail to so qualify. Termination shall
be effective without notice when the Variable Contracts cease so
to qualify or upon receipt of notice by the COMPANY when the
FUND reasonably believes the Variable Contracts may fail so to
qualify;
15
<PAGE>
(g) At the option of the COMPANY, upon FUND's breach of any material
provision of this Agreement, which breach has not been cured to
the satisfaction of the COMPANY within ten days after written
notice of such breach is delivered to FUND;
(h) At the option of FUND, upon the COMPANY's breach of any material
provision of this Agreement, which breach has not been cured to
the satisfaction of FUND within ten days after written notice of
such breach is delivered to the COMPANY;
(i) At the option of FUND, if the Variable Contracts are not
registered, issued or sold in accordance with applicable federal
and/or state law. Termination shall be effective immediately
upon such occurrence without notice;
(j) In the event this Agreement is assigned without the prior,
written consent of the COMPANY, FUND, ADVISER and UNDERWRITER
termination shall be effective immediately upon such occurrence
without notice.
8.3 Notwithstanding any termination of this Agreement pursuant to
Section 8.2 hereof, FUND at the option of the COMPANY will continue to make
available additional FUND shares, as provided below, pursuant to the terms and
conditions of this Agreement, for all Variable Contracts in effect on the
effective date of termination of this Agreement (hereinafter referred to as
"Existing Contracts"). Specifically, without limitation, the owners of the
Existing Contracts or the COMPANY, whichever shall have legal authority to do
so, shall be permitted to reallocate investments in FUND, redeem investments in
FUND and/or invest in FUND upon the payment of additional premiums under the
"Existing Contracts". This section 8.3 shall not apply to any termination under
Article V and the, effect of such termination shall be governed by Article V of
this Agreement.
16
<PAGE>
Article IX NOTICES
-------
Any notice hereunder shall be given by registered or certified mail
return receipt requested to the other party at the address of such party set
forth below or at such other address as such party may from time to time specify
in writing to the other party.
If to FUND OR ADVISER:
Mitchell Hutchins Series Trust
1285 Avenue of the Americas
New York, New York 10019
Att: Dianne E. O'Donnell
Vice President and Secretary
If to the COMPANY or UNDERWRITER:
Great American Reserve Insurance Company
11815 N. Pennsylvania Street
Carmel, Indiana 46032-4572
Attention: Gregory Gloeckner
Senior Vice President
Notice shall be deemed given on the date of receipt by the addressee as
evidenced by the return receipt. Notice may also be given by facsimile
transmission with a confirming copy sent by overnight delivery. Such notice will
be deemed given on the date of receipt of the facsimile transmission.
Article X. MISCELLANEOUS
-------------
10.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
10.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
10.3 If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
10.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York. It
shall also be subject to the provisions of the federal securities laws and the
rules and regulations thereunder and to any orders of the SEC granting exemptive
relief therefrom and the conditions of such orders.
17
<PAGE>
10.5 It is understood and expressly stipulated that neither the
shareholders of shares of any Portfolio nor the Trustees or officers of FUND or
any Portfolio shall be personally liable hereunder. No Portfolio shall be liable
for the liabilities of any other Portfolio. All persons dealing with FUND or a
Portfolio must look solely to the property of FUND or that Portfolio,
respectively, for enforcement of any claims against FUND or that Portfolio. It
is also understood that each of the Portfolios shall be deemed to be entering
into a separate Agreement with the COMPANY so that it is as if each of the
Portfolios had signed a separate Agreement with the COMPANY and that a single
document is being signed simply to facilitate the execution and administration
of the Agreement.
10.6 Each party shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
National Association of Securities Dealers, Inc. and state insurance regulators)
and shall permit such authorities reasonable access to its books and records in
connection with any investigation or inquiry relating to this Agreement or the
transactions contemplated hereby.
10.7 The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
10.8 No provision of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by
COMPANY, FUND, ADVISER and UNDERWRITER.
10.9 Administrative services to Variable Contract owners shall be the
responsibility of the COMPANY. The COMPANY, on behalf of the Separate Accounts
will be the sole shareholder of record of FUND shares. FUND and ADVISER
recognize that they will derive a substantial savings in administrative expense
by virtue of having a sole shareholder rather than multiple shareholders. In
consideration of the administrative savings resulting from having a sole
shareholder rather than multiple shareholders, ADVISER agrees to pay monthly to
the COMPANY, for as long as the Separate Account(s) are invested in FUND, an
amount computed at the annual rate of 0. 15% of the average daily net asset
value of FUND shares held in sub- accounts for which the COMPANY provides
administrative services. ADVISER's payments to the COMPANY are for
administrative services only and do not constitute payment in any manner for
investment advisory services.
10.10 If this Agreement terminates, the parties agree that Article 7 and
Sections 10.6, 10.7 and 10.9 shall remain in effect after termination.
18
<PAGE>
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Fund Participation Agreement as of the date and year
first above written.
Great American Reserve Insurance Mitchell Hutchins Series Trust
Company
By: /s/L. Gregory Gloeckner By: /s/Dianne E. O'Donnell
------------------------------ ------------------------------------
Name: L. Gregory Gloeckner Name: Dianne E. O'Donnell
Title: Senior Vice Presidnet Title: Secretary and Vice President
Conseco Equity Sales, Inc. Mitchell Hutchins Asset Management Inc.
By: /s/L. Gregory Gloeckner By: /s/Julian Sluyters
----------------------------- -----------------------------------
Name: L. Gregory Gloeckner Name: Julian Sluyters
Title: President Title: Chief Administrative
Officer
19
<PAGE>
APPENDIX A
Fund and its Portfolios
- -----------------------
Money Market Portfolio
Strategic Fixed Income Portfolio
High Grade Fixed Income Portfolio
Global Income Portfolio
Balanced Portfolio
Growth and Income Portfolio
Growth Portfolio
Aggressive Growth Portfolio
Global Growth Portfolio
Small Cap Portfolio
Strategic Income Portfolio
Tactical Allocation Portfolio
20
<PAGE>
APPENDIX B
Separate Accounts Selected Portfolios
- ----------------- ---------------------
Great American Reserve Growth and Income Portfolio
Annuity Account F
21
Exhibit No. 8(d)
PARTICIPATION AGREEMENT
Among
MITCHELL HUTCHINS SERIES TRUST,
MITCHELL HUTCHINS ASSET MANAGEMENT INC.,
and
HARTFORD LIFE INSURANCE COMPANY
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE I Fund Shares 5
ARTICLE II Representations and Warranties 7
ARTICLE III Prospectuses; Reports to Shareholders and Proxy
Statements; Voting 9
ARTICLE IV Sales Material and Information 10
ARTICLE V [RESERVED] 12
ARTICLE VI Diversification 12
ARTICLE VII Potential Conflicts 12
ARTICLE VIII Indemnification 14
ARTICLE IX Applicable Law 17
ARTICLE X Termination 18
ARTICLE XI Notices 20
ARTICLE XII Foreign Tax Credits 21
ARTICLE XIII Miscellaneous 21
<PAGE>
PARTICIPATION AGREEMENT
-----------------------
Among
MITCHELL HUTCHINS SERIES TRUST,
-------------------------------
MITCHELL HUTCHINS ASSET MANAGEMENT INC.,
----------------------------------------
and
HARTFORD LIFE INSURANCE COMPANY
-------------------------------
THIS AGREEMENT, made and entered into as of the 5th day of December,
1998 by and among HARTFORD LIFE INSURANCE COMPANY (hereinafter the "Company"); a
Connecticut corporation, on its behalf and on behalf of each separate account of
the Company set forth on Schedule A hereto as may be amended from time to time
(each such account hereinafter referred to as the "Account") and Mitchell
Hutchins Series Trust, a Massachusetts business trust (hereinafter the "Fund"),
and Mitchell Hutchins Asset Management Inc. (hereinafter the "Adviser").
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as the investment vehicle for
separate accounts established by insurance companies for annuity contracts with
variable accumulation and/or pay-out provision, (hereinafter referred to
individually and/or collectively as "Variable Insurance Products"); and
WHEREAS, insurance companies desiring to utilize the Fund as an
investment vehicle under their Variable Insurance Products are required to enter
into participation agreements with the Fund (the "Participating Insurance
Companies"); and
WHEREAS, shares of the Fund are divided into several series of shares,
each representing the interest in a particular managed portfolio of securities
and other assets, any one or more of which may be made available for Variable
Insurance Products of Participating Insurance Companies; and
WHEREAS, the Fund intends to offer shares of the series set forth on
Schedule B (each such series hereinafter referred to as a "Portfolio") as may be
amended from time to time by mutual agreement of the parties hereto, under this
Agreement to the Accounts of the Company; and
WHEREAS, the Fund intends to obtain, if necessary, an order from the
Securities and Exchange Commission, granting Participating Insurance Companies
and Variable Insurance Product separate accounts exemptions from the provisions
of Sections 9(a), 13(a), 15(a) and 15 (b) of the Investment Company Act of 1940,
as amended (hereinafter the "1940 Act") and Rules 6e-2(b)(15) and 6e-3(T)b(15)
3
<PAGE>
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by Variable Annuity Product separate accounts of both affiliated
unaffiliated life insurance companies hereinafter the "Shared Funding Exemptive
Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Adviser is duly registered as an investment adviser under
the Investment Advisers Act of 1940, as amended, and any applicable state
securities laws; and
WHEREAS, the Adviser is the investment adviser of the Portfolios of the
Fund; and
WHEREAS, the Company has registered or will register certain Variable
Insurance Products under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution or under authority of the Board of
Directors of the Company, on the date shown for such Account on Schedule A
hereto, to set aside and invest assets attributable to the aforesaid Variable
Insurance Products; and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act unless exempt from such registration;
and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid Variable Insurance Products and
the Fund is authorized to sell such shares to each such Account at net asset
value.
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Adviser agree as follows:
4
<PAGE>
ARTICLE I FUND SHARES
-----------
1.1 The Fund agrees to make available for purchase by the Company
shares of the Portfolios and shall execute orders placed for each Account on a
daily basis at the net asset value next computed after receipt by the Fund or
its designee of such order. For purposes of this Section 1.1, the Company shall
be the designee of the Fund for receipt of such orders from each Account and
receipt by such designee shall constitute receipt by the Fund; provided that the
Fund receives notice of such order by 9:30 a.m. (local time where the Fund
processes orders) on the next following Business Day and reflect instructions
received by the Company from Contract Owners in good order prior to the time the
net asset value of the respective Portfolio is calculated on the prior Business
Day. Notwithstanding the foregoing, the Company shall use its best efforts to
provide the Fund with notice of such orders by 8:30 a.m. on the next following
Business Day. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Fund calculates its net asset
value pursuant to the rules of the Securities and Exchange Commission, as set
forth in the Fund's prospectus and statement of additional information.
Notwithstanding the foregoing, the Board of Trustees of the Fund (hereinafter
the "Board" may refuse to permit the Fund to sell shares of any Portfolio to any
person, or suspend or terminate the offering of shares of any Portfolio if such
action is required by law or by regulatory authorities having jurisdiction or
is, in the sole discretion of the Board acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, necessary in
the best interests of the shareholders of such Portfolio.
1.2 The Fund agrees that shares of the Fund will be sold only to
Participating Insurance Companies for their Variable Insurance Products. No
shares of any Portfolio will be sold to the general public.
1.3 The Fund intends to apply for exemptive order that will, when
and if issued, require the Fund and Participating Insurance Companies to afford
the Company substantially the same protections currently provided by Sections
2.1, 2.4, 2.9 and 3.4 and Article VII of this Agreement.
1.4 The Fund agrees to redeem for cash, on the Company's request,
any full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.4, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Fund; provided that the Company receives notice of
such request for redemption in accordance with the timing rules described in
Section 1. 1.
1.5 The Company agrees that purchases and redemptions of Portfolio
shares offered by the then current prospectus of the Fund shall be made in
accordance with the provisions of such prospectus. The Accounts of the Company,
under which amounts may be invested in the Fund are listed on Schedule A
attached hereto and incorporated herein by reference, as such Schedule A may be
amended from time to time by mutual written agreement of all of the parties
5
<PAGE>
hereto. The Company will give the Fund written notice of its intention to make
available in the future, as a funding vehicle under the Contracts, any other
investment company.
1.6 The Company will place separate orders to purchase or redeem
shares of each Portfolio by telephone or facsimile (or by such other means as
the Fund may reasonably determine). Each order shall describe the net amount of
shares and dollar amount of each Portfolio to be purchased or redeemed. In the
event of net purchases, the Company shall pay for Portfolio shares on the next
Business Day after an order to purchase Portfolio shares is made in accordance
with the provisions of Section 1. 1 hereof. Payment shall be in federal funds
transmitted by wire not later than 4:00 p.m. Eastern standard time. In the event
of net redemptions, the Portfolio shall pay the redemption proceeds in federal
funds transmitted by wire not later than 4:00 p.m. Eastern standard time on the
next Business Day after an order to redeem Portfolio shares is made in
accordance with the provisions of Section 1.4 hereof. Notwithstanding the
foregoing, if the payment of redemption proceeds on the next Business Day would
require the Portfolio to dispose of Portfolio securities or otherwise incur
substantial additional costs, and if the Portfolio has determined to settle
redemption transactions for all shareholders on a delayed basis, proceeds shall
be wired to the Company within the period required under the 1940 Act and the
Portfolio shall notify in writing the person designated by the Company as the
recipient for such notice of such delay by 3:00 p.m. Eastern Time on the same
Business Day that the Company transmits the redemption order to the Portfolio.
1.7 Issuance and transfer of the Fund's shares will be by book
entry only. Share certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.8 The Fund or its designee shall use its reasonable best efforts
to furnish same day notice by 6:00 p.m. in its local time zone (by wire or
telephone, followed by written confirmation) to the Company of any dividends or
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such dividends and capital gain distributions as are
payable on the Portfolio shares in additional shares of that Portfolio. (The
Company may, upon 30 days prior written notice to the Fund, revoke this election
and receive all such dividends and capital gain distributions in cash.) The Fund
shall notify the Company of the number of shares so issued as payment of such
dividends and distributions.
1.9 The Fund shall make the net asset value per share of each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated (and shall use its
best efforts to make such net asset value per share available by 6:00 p.m.
Eastern Time.) In the event that the Fund is unable to meet the 6:00 p.m. time
stated immediately above, then the Fund shall provide the Company with
additional time to notify the Fund of purchase or redemption orders pursuant to
Sections 1. 1 and 1.4, respectively, above. Such additional time shall be equal
to the additional time that the Fund takes to make the net asset values
available to the Company; provided, however, that notification must be made by
11:00 a.m. Eastern Time on the Business Day such order is to be executed,
regardless of when net asset value is made available.
6
<PAGE>
1.10 If the Fund provides materially incorrect share net asset value
information through no fault of the Company on behalf of the Accounts, the
Company shall be entitled to an adjustment with respect to the Fund shares
purchased or redeemed to reflect the correct net asset value per share. The
determination of the materiality of any net asset value pricing error shall be
based on the SEC's recommended guidelines regarding such errors. The correction
of any such errors shall be made at the Company level pursuant to the SEC's
recommended guidelines. Any material error in the calculation or reporting of
net asset value per share, dividend or capital gain information shall be
reported promptly upon discovery to the Company.
ARTICLE II REPRESENTATIONS AND WARRANTIES
------------------------------
2.1 The Company represents and warrants that the interests of the
Accounts which offer the Funds (the "Contracts") are or will be registered
unless exempt and that it will maintain such registration under the 1933 Act and
the regulations thereunder to the extent required by the 1933 Act; that the
Contracts will be issued and sold in compliance with all applicable federal and
state laws and regulations and further that the sale of the Contracts will
comply with all state insurance law suitability requirements. The Company
further represents and warrants that it is an insurance company duly organized
and in good standing under applicable law and that it has legally and validly
established each Account prior to any issuance or sale thereof as a segregate
asset account under the Connecticut Insurance Code and the regulations
thereunder and has registered or, prior to any issuance or sale of the
Contracts, will register and will maintain the registration of each Account as a
unit investment trust in accordance with and to the extent required by the
provisions of the 1940 Act and the regulations thereunder, unless exempt
therefrom, to serve as a segregated investment account for the Contracts. The
Company shall amend its registration statement for its contracts under the 1933
Act and the 1940 Act from time to time as required in order to effect the
continuous offering of its Contracts.
2.2 The Fund represents and warrants that Fund shares sold pursuant
to this Agreement shall be registered under the 1933 Act and the regulations
thereunder to the extent required by the 1933 Act, duly authorized for issuance
in accordance with the laws of the Commonwealth of Massachusetts and sold in
compliance with all applicable federal and state securities laws and regulations
and that the Fund is and shall remain registered under the 1940 Act and the
regulations thereunder to the extent required by the 1940 Act. The Fund shall
amend the registration statement for its shares under the 1933 Act and the 1940
Act from time to time as required in order to effect the continuous offering of
its shares. The Fund shall register and qualify the shares for sale in
accordance with the laws of the various states only if and to the extent deemed
advisable by the Fund.
2.3 The Fund represents that it is currently qualified as a
Regulated Investment Company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code") and that it will maintain such qualification
(under Subchapter M or any successor or similar provision) and that it will
notify the Company promptly upon having a reasonable basis for believing that
the Fund has ceased to so qualify or that the Fund might not so qualify in the
future.
7
<PAGE>
2.4 The Company represents that each Account is and will continue
to be a "segregated account" under applicable provisions of the Code and that
each Contract is and will be treated as a "variable contract" under applicable
provisions of the Code and that it will make every effort to maintain such
treatment and that it will notify the Fund immediately upon having a reasonable
basis for believing that the Account or Contract has ceased to be so treated or
that they might not be so treated in the future.
2.5 The Fund represents that to the extent that it decides to
finance distribution expenses pursuant to Rule 12b- 1 under the 1940 Act, the
Fund undertakes to have a board of trustees, a majority of whom are not
interested persons of the Fund, formulate and approve any plan under Rule 12b-1
to finance distribution expenses.
2.6 The Fund makes no representation as to whether any aspect of
its operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states.
2.7 The Fund and the Adviser represent that the Fund is duly
organized and validly existing under applicable law and that the Fund does and
will comply in all material respects with the 1940 Act.
2.8 The Company represents and warrants that all of its trustees,
officers, employees investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage, in an amount equal to the greater of $5 million or any
amount required by applicable federal or state law or regulation. The aforesaid
includes coverage for larceny and embezzlement is issued by a reputable bonding
company.
2.9 The Company represents that and warrants that it shall use its
best efforts to ensure that the principal underwriter for the Contracts,
Hartford Securities Distribution Company, Inc. ("HSD"), is and will be a member
in good standing of the NASD and is and will be registered as a broker/dealer
with the Securities and Exchange Commission. The Company furthers represents
that it will sell and distribute the variable contracts in accordance with all
applicable state and federal laws and regulations, including, without
limitation, the 1933 Act, 1940 Act and the Securities Exchange Act of 1934 ("
1934 Act"). The Company represents that it shall use its best efforts to ensure
that the operations of HSD are and shall at- all times remain in material
compliance with the laws of the State of Connecticut to the extent required to
perform this Agreement.
2.10 The Company represents and warrants that it will use its best
efforts to ensure that HSD is and will remain duly registered and licensed in
all material respects with all applicable federal and state securities laws and
shall perform its obligations hereunder in compliance in all material respects
with any applicable federal and state laws.
8
<PAGE>
ARTICLE III PROSPECTUSES; REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS; VOTING
------------------------------------------------------------------
3.1 The Fund shall provide the Company with as many printed copies
of the Fund's current prospectus and statement of additional information as the
Company may reasonably request. If requested by the Company in lieu of providing
printed copies the Fund shall provide camera-ready film or computer diskettes
containing the Fund's prospectus and statement of additional information, and
such other assistance as is reasonably necessary in order for the Company once
each year (or more frequently if the prospectus and/or statement of additional
information for the Fund is amended during the year) to have the prospectus for
the Contracts and the Fund's prospectus printed together in one document or
separately. The Company may elect to print the Fund's prospectus and/or its
statement of additional information in combination with other fund companies'
prospectuses and statements of additional information.
3.2(a) Except as otherwise provided in this Section 3.2, all expenses
of preparing, setting in type and printing and distributing Fund prospectuses
and statements of additional information shall be the expense of the Company.
For prospectuses and statements of additional information provided by the
Company to its existing owners of Contracts in order to update disclosure as
required by the 1933 Act and/or the 1940, Act, the cost of setting in type,
printing and distributing shall be borne by the Fund. If the Company chooses to
receive camera-ready film or computer diskettes in lieu of receiving printed
copies of the Fund's prospectus and/or statement of additional information, the
Fund shall bear the cost of typesetting to provide the Fund's prospectus and/or
statement of additional information to the Company in the format in which the
Fund is accustomed to formatting prospectuses and statements of additional
information, respectively, and the Company shall bear the expense of adjusting
or changing the format to conform with any of its prospectuses and/or statements
of additional information. The Fund shall not pay any costs of typesetting,
printing and distributing the Fund's prospectus and/or statement of additional
information to prospective Contract owners.
3.2(b) The Fund, at its expense, shall provide the Company with copies
of its proxy statements, reports to shareholders, and other communications
(except for prospectuses and statements of additional information, which are
covered in Section 3.2(a) above) to shareholders in such quantity as the Company
shall reasonably require for distributing to Contract owners.
3.2(c) The Company agrees to provide the Fund or its designee with
such information as may be reasonably requested by the Fund to assure that the
Fund's expenses do not include the cost of typesetting, printing or distributing
any of the foregoing documents other than those actually distributed to existing
Contract owners.
3.2(d) The Fund shall pay no fee or other compensation to the Company
under this Agreement, except to the extent that the Fund or any Portfolio adopts
and implements a plan pursuant to Rule 12b-1 to finance distribution expenses,
then the Fund's principal underwriter may make payments to the Company or to the
underwriter of the Contracts if and in amounts agreed to by the Fund's principal
underwriter in writing.
3.2(e) All expenses, including expenses to be borne by the Fund
pursuant to Section 3.2 hereof, incident to performance by the Fund under this
Agreement shall be paid by the Fund. The Fund shall see to it that all its
9
<PAGE>
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares.
3.3 The Fund's statement of additional information shall be
obtainable from the Fund and the Company or such other person as the Fund may
designate.
3.4 If and to the extent required by law the Company shall
distribute all proxy material furnished by the Fund to Contract Owners to whom
voting privileges are required to be extended and shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with instructions
received from Contract owners; and
(iii) vote Fund shares for which no instructions have been
received in the same proportion as Fund shares of such
Portfolio for which instructions have been received, so
long as and to the extent that the Securities and
Exchange Commission continues to interpret the 1940 Act
to require pass-through voting privileges for variable
contract owners. The Company reserves the right to vote
Fund shares held in any segregated asset account in its
own right, to the extent permitted by law. The Fund and
the Company shall follow the procedures, and shall have
the corresponding responsibilities, for the handling of
proxy and voting instruction solicitations, as set forth
in Schedule C attached hereto and incorporated herein by
reference. Participating Insurance Companies shall be
responsible for ensuring that each of their separate
accounts participating in the Fund calculates voting
privileges in a manner consistent with the standards set
forth on Schedule C, which standards will also be
provided to the other Participating Insurance Companies.
(iv) For unregistered separate accounts subject to the
Employee Retirement Income Security Act of 1974
("ERISA") refrain from voting shares for which no
instructions are received if such shares are held in an
unregistered segregated asset account subject to ERISA.
3.5 The Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders.
ARTICLE IV SALES MATERIAL AND INFORMATION
-----------------------------------------
4.1 The Company shall furnish, or shall cause to be furnished, to
the Fund or its designee, each piece of sales literature or other promotional
material prepared by the Company or any person contracting with the Company in
which the Fund or Adviser is described, at least ten Business Days prior to its
10
<PAGE>
use. No such material shall be used if the Fund or Adviser or their designee
reasonably objects to such use within ten Business Days after receipt of such
material.
4.2 Neither the Company nor any person contracting with the Company
shall give any information or make any representations or statements on behalf
of the Fund or concerning the Fund in connection with the sale of the Contracts
other than the information or representations contained in the registration
statement or Fund prospectus, as such registration statement or Fund prospectus
may be amended or supplemented from time to time, or in reports to shareholders
or proxy statements for the Fund, or in sales literature or other promotional
material approved by the Fund or its designee, except with the permission of the
Fund or its designee.
4.3 The Fund shall furnish, or shall cause to be furnished, to the
Company or its designee, each piece of sales literature or other promotional
material prepared by the Fund in which the Company or its Accounts, are
mentioned at least ten Business Days prior to its use. No such material shall be
used if the Company or its designee reasonably objects to such use within ten
Business Days after receipt of such material.
4.4 The Fund shall not give any information or make any
representations on behalf of the Company or concerning the Company, each
Account, or the Contracts, other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement or prospectus may be amended or supplemented from time to
time, or in published reports or solicitations for voting instruction for each
Account which are in the public domain or approved by the Company for
distribution to Contract owners, or in sales literature or other promotional
material approved by the Company or its designee, except with the permission of
the Company.
4.5 The Fund will provide to the Company at least one complete copy
of all registration statements, prospectuses, statements of additional
information, annual and semi-annual reports, proxy statements, sales literature
and other promotional materials that mention the Company, applications for
exemptions, requests for no-action letters, and all amendments to any of the
above, that relate to the Fund or its shares, contemporaneously with the filing
of such document with the Securities and Exchange Commission or other regulatory
authorities.
4.6 The Company will provide to the Fund, upon the Fund's request,
at least one complete copy of all registration statements, prospectuses,
statements of additional information reports, solicitations for voting
instructions, sales literature and other promotional materials, applications for
exemptions, requests for no action letters, and all amendments to any of the
above, that relate to the investment in an Account or Contract,
contemporaneously with the filing of such document with the Securities and
Exchange Commission or other regulatory authorities.
4.7 For purposes of this Article IV, the phrase "sales literature
or other promotional material" includes, but is not limited to, any of the
following: advertisements (such as material published, or designed for use in, a
newspaper, magazine, or other periodical, radio, television, telephone or tape
recording, videotape display, signs or billboards, motion pictures, or other
public media), sales literature (i.e., any written communication distributed or
made generally available to customers or the public, including brochures,
circulars, research reports, market letters, form letters, seminar texts,
11
<PAGE>
reprints or excerpts of any other advertisement, sales literature, or published
article), educational or training materials or other communications distributed
or made generally available to some or all agents or employees, and registration
statements, prospectuses, statements of additional information, shareholder
reports, and proxy materials.
ARTICLE V [RESERVED]
----------
ARTICLE VI DIVERSIFICATION
---------------
6.1 The Fund represents and warrants that, at all times, the Fund
will comply with Section 817(h) of the Code and Treasury Regulation 1.817-5,
relating to the diversification requirements for variable annuity, endowment, or
life insurance contracts and any amendments or other modifications to such
Section or Regulations. In the event the Fund ceases to so qualify, it will take
all reasonable steps (a) to notify Company of such event and (b) to adequately
diversify the Fund so as to achieve compliance within the grace period afforded
by Regulation 817-5.
ARTICLE VII POTENTIAL CONFLICTS
-------------------
7.1 The Board will monitor the Fund for the existence of any
material irreconcilable conflict between the interests of the contract owners of
all separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract owners and variable life
insurance contract owners; or (f) a decision by a Participating Insurance
Company to disregard the voting instructions of contract owners. The Board shall
promptly inform the Company if it determines that an irreconcilable material
conflict exists and the implications thereof.
7.2 The Company will report any potential or existing material
irreconcilable conflict of which it is aware to the Board. The Company will
assist the Board in carrying out its responsibilities under Section 7 of this
Agreement, by providing the Board with all information reasonably necessary for
the Board to consider any issues raised. This includes, but is not limited to,
an obligation by the Company to inform the Board whenever contract owner voting
instructions are disregarded.
7.3 If it is determined by a majority of the Board, or a majority
of its disinterested trustees, that a material irreconcilable conflict exists,
the Company and other Participating Insurance Companies shall, at their expense
and to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1)
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
12
<PAGE>
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life insurance policy
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2) establishing a new
registered management investment company or managed separate account. No charge
or penalty will be imposed as a result of such withdrawal. The Company agrees
that it bears the responsibility to take remedial action in the event of a Board
determination of an irreconcilable material conflict and the cost of such
remedial action, and these responsibilities will be carried out with a view only
to the interests of Contract owners.
7.4 If a material irreconcilable conflict arises because of a
decision by the Company to disregard contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote, or
because a particular state insurance regulator's decision applicable to the
Company conflicts with that of the majority of other state regulators, the
Company may be required, at the Fund's election, to withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account (at the Company's expense); provided, however that such withdrawal
and termination shall be limited to the extent required by the foregoing
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board. No charge or penalty will be imposed as a
result of such withdrawal. The Company agrees that it bears the responsibility
to take remedial action in the event of a Board determination of an
irreconcilable material conflict and the cost of such remedial action, and these
responsibilities will be carried out with a view only to the interests of
Contract owners.
7.5 For purposes of Sections 7.3 through 7.4 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 through 7.4 to
establish a new funding medium for the Contracts if an offer to do so has been
declined by vote of a majority of Contract owners materially adversely affected
by the irreconcilable material conflict.
7.6 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision
of the 1940 Act or the rules promulgated thereunder with respect to mixed or
shared funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemptive Order, then the Fund and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rules 6e-2
and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are
applicable.
7.7 Each of the Company and the Adviser shall at least annually
submit to the Board such reports, materials or data as the Board may reasonably
request so that the Board may fully carry out the obligations imposed upon them
13
<PAGE>
by the provisions hereof and in the Shared Funding Exemptive Order, and said
reports, materials and data shall be submitted more frequently if deemed
appropriate by the Board. All reports received by the Board of potential or
existing conflicts, and all Board action with regard to determining the
existence of a conflict, notifying Participating Insurance Companies of a
conflict, and determining whether any proposed action adequately remedies a
conflict, shall be properly recorded in the minutes of the Board or other
appropriate records, and such minutes or other records shall be made available
to the Securities and Exchange Commission upon request.
ARTICLE VIII INDEMNIFICATION
---------------
8.1 INDEMNIFICATION BY THE COMPANY
------------------------------
8.1(a) The Company agrees to indemnify and hold harmless the Fund, the
Adviser, and each member of its Board and its officers, employees and agents and
each person, if any, who controls the Fund within the meaning of Section 15 of
the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Section 8. 1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Company)
or litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements
or alleged untrue statements of any material fact
contained in the registration statement or prospectus
for the Contracts or contained in the Contracts or
sales literature for the Contracts (or any amendment
or supplement to any of the foregoing), or arise out
of or are based upon the omission or the alleged
omission to state therein a material fact
required to be stated therein or necessary to make
the statements therein not misleading, provided that
this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or
such alleged statement or omission was made in
reliance upon and in conformity with information
furnished in writing to the Company by or on behalf
of the Fund for use in the registration statement or
prospectus for the Contracts or in the Contracts or
sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the
Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or
representations contained in the registration
statement, prospectus or sales literature of the Fund
not supplied by the Company, or persons under its
control and other than statements or representations
authorized by the Fund or
the Adviser or wrongful conduct -of the Company or
persons under its control, with respect to the sale
or distribution of the Contracts or Fund shares; or
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<PAGE>
(iii) arise out of or as a result of any untrue statement
or alleged untrue statement of a material fact
contained in a registration statement, prospectus, or
sales literature of the Fund or any amendment thereof
or supplement thereto or the omission or alleged
omission to state therein a material fact required to
be stated therein or necessary to make the statements
therein not misleading if such a statement or
omission was made in reliance upon and in conformity
with information furnished to the Fund by or on
behalf of the Company; or
(iv) arise as a result of any failure by the Company to
provide the services and furnish the materials under
the terms of this Agreement; or
(v) arise out of or result from any material breach of
any representation and/or warranty made by the
Company in this Agreement or arise out of or result
from any other material breach of this Agreement by
the Company.
8.1(b) The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
8.1(c) The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses under this Agreement for any legal or other expenses
of any additional counsel retained by the Indemnified Party other than
reasonable costs of investigation.
8.1(d) The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund shares or the Contracts or the operation of the
Fund.
8.2 [RESERVED]
15
<PAGE>
8.3 INDEMNIFICATION BY THE ADVISER
------------------------------
8.3(a) The Adviser agrees to indemnify and hold harmless the Company
and its directors, employees, agents and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(hereinafter collectively, the "Indemnified Parties" and individually,
"Indemnified Party," for purposes of this Section 8.3) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of tile Adviser) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any statute,
at common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements are related to the
sale or acquisition of Fund shares or the Contracts and:
(i) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact
contained in the registration statement or prospectus
or sales literature of the Fund (or any amendment or
supplement to any of the foregoing), or arise out of
or are based upon the omission or the alleged
omission to state therein a material fact required to
be stated therein or necessary to make the statements
therein not misleading, provided that this agreement
to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged
statement or omission was made in. reliance upon and
in conformity with information furnished to the
Adviser, the Fund by or on behalf of the Company for
use in the registration statement or prospectus for
the Fund or in sales literature (or any amendment or
supplement) or otherwise for use in connection with
the sale of the Contracts or Portfolio shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or
representations contained in the registration
statement, prospectus or sales literature for the
Contracts not supplied by the Fund, the Adviser or
persons under its control and other than statements
or representations authorized by the Company) or
unlawful conduct of the Fund, the Adviser or persons
under their control, with respect to the sale or
distribution of the Contracts or Portfolio shares; or
(iii) arise out of or as a result of any untrue statement
or alleged untrue statement of a material fact
contained in a registration statement, prospectus, or
sales literature covering the Contracts, or any
amendment thereof or supplement thereto, or the
omission or alleged omission to state therein a
material fact required to be stated therein or
necessary to make the statement or statements therein
not misleading, if such statement or omission was
made in reliance upon and in conformity with
information furnished to the Company by or on behalf
of the Fund or the Adviser; or
(iv) arise as a result of any failure by the Adviser to
provide the services and furnish the materials under
the terms of this Agreement; or
16
<PAGE>
(v) arise out of or result from any material breach of
any representation and/or warranty made by the Fund
or the Adviser in this Agreement or arise out of or
result from any other material breach of this
Agreement by the Fund or the Adviser, including
without limitation any failure by the Fund to comply
with the conditions of Article VI hereof.
8.3(b) The Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an indemnified Party as may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement.
8.3(c) The Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Adviser in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Adviser of any
such claim shall not relieve the Adviser from an) liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Adviser will be entitled to participate, at
its own expense, in the defense thereof. The Adviser also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Adviser to such party of the Adviser's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Adviser will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other then reasonable costs of investigation.
8.3(d) The Company agrees to promptly notify the Adviser of the
commencement of any litigation or proceedings against it or any of as respective
officers or directors in connection with this Agreement, the issuance or sale of
the Contracts, with respect to the operation of each Account, or the sale or
acquisition of shares of the Fund.
ARTICLE IX APPLICABLE LAW
--------------
9.1 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York.
9.2 This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant (including, but not limited to, the
Shared Funding Exemptive Order) and the terms hereof shall be interpreted and
construed in accordance therewith.
17
<PAGE>
ARTICLE X TERMINATION
-----------
10.1 This Agreement shall continue in full force and effect until
the first to occur of:
(a) termination by any party for any reason upon six months
advance written notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund
or Adviser with respect to any Portfolio based upon the
Company's determination that shares of such Portfolio are
not reasonably available to meet the requirements of the
Contracts. Reasonable advance notice of election to
terminate shall be furnished by the Company, said
termination to be effective ten (10) days after receipt
of notice unless the Fund makes available a sufficient
number of shares to reasonably meet the requirements of
the Account within said ten (10) day period; or
(c) termination by the Company upon written notice to the
Fund or Adviser with respect to any Portfolio in the
event any of the Portfolio's shares are not registered,
issued or sold inaccordance with applicable state and/or
federal law or such law precludes the use of such shares
as the underlying, investment medium of the Contracts
issued or to be issued by the Company. The terminating
party shall give prompt notice to the other parties of
its decision to terminate; or
(d) termination by the Company upon written notice to the
Fund or Adviser with respect to any Portfolio in the
event that such portfolio ceases to qualify as a
Regulated Investment Company under Subchapter M of the
Code or under any successor or similar provision; or
(e) termination by the Company upon written notice to the
Fund or Advisor with respect to any Portfolio in the
event that such Portfolio fails to meet the
diversification requirements specified in Article VI
hereof, or
(f) termination by either the Fund or Adviser by written
notice to the Company, if either one or more of the
Fund or Adviser, shall determine, in its or their sole
judgment exercised in good faith, that the Company and/or
their affiliated companies has suffered a material
adverse change in its business, operations, financial
condition or prospects since the date of this Agreement
or is the subject of material adverse publicity, provided
that the Fund or Adviser will give the Company sixty (60)
days' advance written notice of such determination of its
intent to terminate this Agreement, and provide further
that after consideration of the actions taken by the
Company and any other changes in circumstances since the
giving of such notice, the determination of the Fund or
Adviser shall continue to apply on the 60th day since
giving of such notice, then such 60th day shall be the
effective date of termination; or
18
<PAGE>
(g) termination by the Company by written notice to the Fund
or Adviser, if the Company shall determine, in
its sole judgment exercised in good faith, that either
the Fund or Adviser has suffered a material adverse
change in its business,operations, financial condition or
prospects since the date of this Agreement or is the
subject of material adverse publicity, provided that the
Company will give the Fund or Adviser sixty (60) days'
advance written notice of such determination of its
intent to terminate this Agreement, and provided further
that after consideration of the actions taken by the Fund
or Adviser and any other changes in circumstances since
the giving of such notice, the determination of the
Company shall continue to apply on the 60th day since
giving of such notice, then such 60th day shall be the
effective date of termination; or
(h) termination by the Fund or Adviser by written notice
to the Company, if the Company gives the Fund or
Adviser the written notice specified in Section 1.5
hereof and at the time such notice was given there
was no notice of termination outstanding under any
other provision of this Agreement; provided, however
any termination under this Section 10. 1(h) shall be
effective sixty (60) days after the notice specified
in Section 1.5 was given; or
(i) termination by any party upon the other party's
breach of any representation in Section 2 or any
material provision of this Agreement, which breach
has not been cured to the satisfaction of the
terminating party within ten (10) days after written
notice of such breach is delivered to the Fund or the
Company, as the case may be; or
(j) termination by the Fund or Adviser in the event an
Account or Contract is not registered (unless exempt
from registration) or sold in accordance with
applicable federal or state law or regulation, or the
Company fails to provide pass-through voting
privileges as specified in Section 3.4. Termination
shall be effective immediately upon such occurrence
without notice.
(k) At the option of the Fund or the Adviser, upon a
finding against the Company by the Securities and
Exchange Commission, the National Association of
Securities Dealers, Inc. or any other regulatory body
after the completion of formal proceedings, the
ruling, judgment or outcome of which has, in the
Fund's or the Adviser's reasonable judgment,
materially impaired the Company's ability to meet and
perform its obligations and duties hereunder. Prompt
notice of election to terminate shall be furnished by
the Fund or Adviser with said termination to be
effective upon receipt of notice.
19
<PAGE>
(l) In the event the Contracts cease to qualify as
annuity contracts or life insurance contracts, as
applicable, under the Internal Revenue Code of 1986,
as amended, or if the Fund reasonably believes that
the Contracts may fail to so qualify, the Fund may
terminate this Agreement effective upon giving notice
to the Company.
10.2 EFFECT OF TERMINATION. Notwithstanding any termination of this
Agreement, the Fund shall at the option of the Company, continue to make
available additional shares of the Fund pursuant to the terms and conditions of
this Agreement, for all Contracts in effect on the effective date of termination
of this Agreement (hereinafter referred to as "Existing Contracts") unless such
further sale of Fund shares is proscribed by law, regulation or applicable
regulatory body, or unless the Fund determines that liquidation of the Fund
following termination of this Agreement is in the best interests of the Fund and
its shareholders. Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to direct reallocation of investments in the Fund,
redemption of investments in the Fund and/or investment in the Fund upon the
making of additional purchase payments under the Existing Contracts. The parties
agree that this Section 10.2 shall not apply to any terminations under Article
VII and the effect of such Article VII terminations shall be governed by Article
VII of this Agreement.
10.3 The Company shall not redeem Fund shares attributable to the
Contracts (as distinct from Fund shares attributable to the Company's assets
held in the Account) except (i) as necessary to implement Contract Owner
initiated or approved transactions, or (ii) as required by state and/or federal
laws or regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act. Upon
request, the Company will promptly furnish to the Fund the opinion of counsel
for the Company (which counsel shall be reasonably satisfactory to the Fund) to
the effect that any redemption pursuant to clause (ii) above is a Legally
Required Redemption. Furthermore, except in cases where permitted under the
terms of the Contracts, the Company shall not prevent Contract Owners from
allocating payments to a Portfolio that was otherwise available under the
Contracts without first giving the Fund or the Adviser 30 days notice of its
intention to do so.
ARTICLE XI NOTICES
-------
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
c/o Mitchell Hutchins Asset Management Inc.
Attention: Victoria E. Schonfeld, Esq.
If to the Adviser:
c/o Mitchell Hutchins Asset Management Inc.
20
<PAGE>
Attention: Victoria E. Schonfeld, Esq.
If to the Company: With a copy to:
Hartford Life Insurance Co. Hartford Life Insurance Co.
200 Hopmeadow Street 200 Hopmeadow Street
Simsbury, CT 06089 Simsbury, CT 06089
Attn: Tom Marra, Executive Attn: Lynda Godkin, Sr. Vice President,
Vice President General Counsel & Secretary
ARTICLE XII FOREIGN TAX CREDITS
-------------------
12.1 The Fund and Advisor agree to consult in advance with the
Company concerning whether any series of the Fund qualifies to provide a foreign
tax credit pursuant to Section 853 of the Code.
ARTICLE XIII MISCELLANEOUS
-------------
13.1 The Board of Trustees of the fund and the shareholders of its
Portfolios shall not be liable for any obligations of the Fund of any Portfolio
under this Agreement, and the Company agrees that, in asserting any rights or
claims under this Agreement, it shall look only to the assets and property of
the Fund or the particular Portfolio in settlement of such right or claims, and
not to such trustees or shareholders.
13.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts except, with respect to the Fund and the Adviser,
to the extent that a Contract Owner is a client of PaineWebber Incorporated or
its affiliates and all information reasonably identified as confidential in
writing by any other party hereto and, except as permitted by this Agreement,
shall not disclose, disseminate or utilize such names and addresses and other
confidential information until such time as it may come into public domain
without the express written consent of the affected party.
13.3 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
13.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
13.5 If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
13.6 Each party shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the National Association of Securities
Dealers and state insurance regulators) and shall permit such authorities (and
21
<PAGE>
other parties hereto) reasonable access to its books and records in connection
with any investigation or inquiry relating to this Agreement or the transactions
contemplated hereby.
13.7 The rights, remedies and obligations in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
13.8 This Agreement or any of the rights and obligations hereunder
may not be assigned by any party without the prior written consent of all
parties hereto; provided, however, that the Adviser may, with advance written
notice to the other parties hereto, assign this Agreement or any rights or
obligations hereunder to any affiliate of or company under common control with
the Adviser if such assignee is duly licensed and registered to perform the
obligations of the Adviser under this Agreement.
13.9 The Company shall furnish, or shall cause to be furnished, to
the Fund or its designee upon request, copies of the following reports:
(a) the Company's annual statement (prepared under statutory
accounting principles) and annual report (prepared under
generally accepted accounting principles ("GAAP"), if
any), as soon as practical and in any event within 90
days after the end of each fiscal year;
(b) the Company's June 30th quarterly statements (statutory),
as soon as practical and in any event within 45 days
following such period;
(c) any financial statement, proxy statement, notice or
report of the Company sent to stockholders and/or
policyholders, as soon as practical after the delivery
thereof to stockholders;
(d) any registration statement (without exhibits) and
financial reports of the Company filed with the
Securities and Exchange Commission or any state insurance
regulator, as soon as practical after the filing thereof;
(e) any other public report submitted to the Company by
independent accountants in connection with any annual,
interim or special audit made by them of the books of the
Company, as soon as practical after the receipt thereof.
13.10 If this Agreement terminates, the parties agree that Article VM
and Sections 13.6 and 13.7 shall remain in effect after termination.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in as name and on its behalf by its duly authorized
representative as of the date specified above.
22
<PAGE>
HARTFORD LIFE INSURANCE COMPANY
on behalf of Itself and each of its Accounts named in
Schedule A hereto, as amended from time to time
By: /s/ Peter Cummins
-----------------
Peter Cummins
Its Senior Vice President
23
<PAGE>
FUND
By: /s/ Dianne E. O'Donnell
-----------------------
Dianne E. O'Donnell
Its Vice President and Secretary
ADVISER
By: /s/ Julian Sluyters
-------------------
Julian Sluyters
Its Chief Administrative Officer
24
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
April 30, 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 thirteen series of the Trust listed
below during the time that Post-Effective Amendment No. 28 to the Trust's
Registration Statement on Form N-1A ("PEA") is effective and has not been
superseded by another post-effective amendment. The thirteen current series of
the Trust are Aggressive Growth Portfolio, Balanced Portfolio, Global Growth
Portfolio, Global Income Portfolio, Growth and Income Portfolio, Growth
Portfolio, High Grade Fixed Income Portfolio, High Income Portfolio, Money
Market Portfolio, Small Cap Portfolio, Strategic Fixed Income Portfolio,
Strategic Income Portfolio and Tactical Allocation Portfolio.
As such counsel, we have examined certified or other copies, believed by
us to be genuine, of the Trust's Declaration of Trust and by-laws and such
resolutions and minutes of meetings of the Trust's Board of Trustees as we have
deemed relevant to our opinion, as set forth herein. Our opinion is limited to
the laws and facts in existence on the date hereof, and it is further limited to
the laws (other than the conflict of law rules) in the Commonwealth of
Massachusetts that in our experience are normally applicable to the issuance of
shares by 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
provides: (1) for indemnification from the assets of the Trust or the
<PAGE>
Mitchell Hutchins Series Trust
April 30, 1999
Page 2
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
Exhibit No. 10
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Auditors" in the Statement of Additional
Information and to the use of our reports on the Money Market Portfolio, Global
Growth Portfolio, Growth & Income Portfolio, High Grade Fixed Income Portfolio,
Aggressive Growth Portfolio, Balanced Portfolio, Growth Portfolio, Strategic
Fixed Income Portfolio, Tactical Allocation Portfolio, Small Cap Portfolio,
Strategic Income Portfolio, High Income Portfolio and Global Income Portfolio
dated February 11, 1999, in this Registration Statement (Form N-1A No. 33-10438)
of Mitchell Hutchins Series Trust.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
New York, New York
April 28, 1999
Exhibit No. 13
MITCHELL HUTCHINS SERIES TRUST -- CLASS I SHARES
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
WHEREAS, Mitchell Hutchins Series Trust ("Trust") is registered under the
Investment Company Act of 1940, as amended ("1940 Act"), as an open-end
management investment company;
WHEREAS, the Trust currently has thirteen series of shares of beneficial
interest ("Series"), each of which corresponds to a distinct portfolio of
investments, which have been designated Aggressive Growth Portfolio, Balanced
Portfolio, Global Growth Portfolio, Global Income Portfolio, Growth and Income
Portfolio, Growth Portfolio, High Grade Fixed Income Portfolio, High Income
Portfolio, Money Market Portfolio, Small Cap Portfolio, Strategic Fixed Income
Portfolio, Strategic Income Portfolio and Tactical Allocation Portfolio; and
WHEREAS, the Trust intends to offer Class I shares of beneficial interest
("Shares") of each Series for sale to the separate accounts ("Separate
Accounts") of insurance companies ("Insurance Companies") that issue variable
annuity or variable life contracts ("Contracts"); and
WHEREAS the Trust desires to adopt a Plan of Distribution ("Plan")
pursuant to Rule 12b-1 under the 1940 Act with respect to the Shares of each
current Series and of such other Series as may hereafter be designated by the
Trust's board of trustees ("Board") and have Shares established; and
WHEREAS the Trust has entered into a Distribution Contract with Mitchell
Hutchins Asset Management Inc. ("Mitchell Hutchins") pursuant to which Mitchell
Hutchins has agreed to serve as Distributor of the Shares of each such Series;
NOW, THEREFORE, the Trust hereby adopts this Plan with respect to the
Shares of each Series in accordance with Rule 12b-1 under the 1940 Act.
1. The Trust authorizes Mitchell Hutchins to arrange for the Trust to
enter into agreements with Insurance Companies ("Participating Insurance
Companies") concerning the sale of Shares of one or more Series to the Separate
Accounts of such Participating Insurance Companies.
2. A. Each Series is authorized to pay to Mitchell Hutchins for remittance
to each Participating Insurance Company or, at Mitchell Hutchins' direction, to
pay directly to a Participating Insurance Company, a distribution fee at the
annual rate of 0.25% of the average daily net assets of the Shares held by the
Separate Accounts of that Participating Insurance Company. Such fee shall be
calculated and accrued daily and paid quarterly or at such other intervals as
the Board shall determine.
<PAGE>
B. Any Series may pay the distribution fee at a lesser rate than that
specified in paragraph 2A of this Plan, as agreed upon by the Board and Mitchell
Hutchins and as approved in the manner specified in paragraph 4 of this Plan.
3. Mitchell Hutchins or the Trust, at the direction of Mitchell Hutchins,
shall pay the distribution fee to Participating Insurance Companies as
compensation for providing distribution related services to the Trust's
shareholders. These distribution related services may include, but are not
limited to, the following: (a) printing and mailing of Trust prospectuses,
statements of additional information, any supplements thereto and shareholder
reports for existing and prospective Contract owners; (b) services relating to
the development, preparation, printing and mailing of Trust advertisements,
sales literature and other promotional materials describing and/or relating to
the Trust and including materials intended for use within the Participating
Insurance Company or for broker-dealer use only or retail use; (c) holding
seminars and sales meetings designed to promote the distribution of the Shares;
(d) obtaining information and providing explanations to Contract owners
regarding the investment objectives and policies and other information about the
Trust and its Series, including the performance of the Series; (e) training
sales personnel regarding the Trust and its Series; (f) compensating sales
personnel with respect to the Trust and its Series; (g) providing personal
services and/or maintenance of the Contract owner accounts with respect to Trust
Shares attributable to such accounts; and (h) financing any other activity that
the Board determines is primarily intended to result in the sale of the Shares.
4. If adopted with respect to the Shares of a Series after any public
offering of those Shares, this Plan shall not take effect with respect to those
Shares unless it has first been approved by a vote of a majority of the voting
securities of the Shares of that Series.
5. This Plan shall not take effect with respect to the Shares of any
Series unless it first has been approved, together with any related agreements,
by votes of a majority of both (a) the Board and (b) those Trustees of the Trust
who are not "interested persons" of the Trust and have no direct or indirect
financial interest in the operation of this Plan or any agreements related
thereto ("Independent Trustees"), cast in person at a meeting (or meetings)
called for the purpose of voting on such approval; and until the Trustees who
approve the Plan's taking effect with respect to such Series' Shares have
reached the conclusion required by Rule 12b-1(e) under the 1940 Act.
6. After approval as set forth in paragraph 4 (if applicable) and
paragraph 5, this Plan shall continue in full force and effect with respect to
such Series for so long as such continuance is specifically approved at least
annually in the manner provided for approval of this Plan in paragraph 5.
7. Mitchell Hutchins shall provide to the Board and the Board shall
review, at least quarterly, a written report that complies with the requirements
of Rule 12b-1 regarding the disbursement of the distribution fee during such
period. Only distribution expenditures properly attributable to the sale of
Shares of a particular Series will be used to justify any fee paid by the Trust
with respect to that Series pursuant to this Plan. To the extent that such
- 2 -
<PAGE>
expenditures relate to more than one Series, the expenditures will be allocated
between or among the affected Series in a manner deemed appropriate by the
Board.
8. This Plan may be terminated with respect to any Series at any time by
vote of the Board, by vote of a majority of the Independent Trustees, or by vote
of a majority of the outstanding Shares of that Series.
9. This Plan may not be amended to increase materially the amount of
distribution fees provided for in paragraph 2A hereof unless such amendment is
approved by a vote of a majority of the outstanding Shares of each Series, and
no material amendment to the Plan shall be made unless approved in the manner
provided for initial approval in paragraph 5 hereof.
10. The amount of the distribution fees payable by any Series under
paragraph 2A hereof and the Distribution Contract is not related directly to
expenses incurred by Mitchell Hutchins or a Participating Insurance Company in
providing distribution related services on behalf of such Series, and paragraph
3 hereof and the Distribution Contract do not obligate the Series to reimburse
Mitchell Hutchins or the Participating Insurance Company for such expenses. The
distribution fees set forth in paragraph 2A hereof will be paid by the Series to
Mitchell Hutchins or at the direction of Mitchell Hutchins until either the Plan
or the Distribution Contract is terminated or not renewed. If either the Plan or
the Distribution Contract is terminated or not renewed with respect to the
Shares of any Series, any expenses relating to distribution activities incurred
by Mitchell Hutchins or a Participating Insurance Company on behalf of the
Series in excess of payments of the distribution fees specified in paragraph 2A
hereof and the Distribution Contract which Mitchell Hutchins or a Participating
Insurance Company has received or accrued through the termination date are the
sole responsibility and liability of Mitchell Hutchins or the Participating
Insurance Company, and are not obligations of the Series.
11. While this Plan is in effect, the selection and nomination of the
Trustees who are not interested persons of the Trust shall be committed to the
discretion of the Trustees who are not interested persons of the Trust.
12. As used in this Plan, the terms "majority of the outstanding voting
securities" and "interested person" shall have the same meaning as those terms
have in the 1940 Act.
13. The Trust shall preserve copies of this Plan (including any amendments
thereto) and any related agreements and all reports made pursuant to paragraph 7
hereof for a period of not less than six years from the date of this Plan, the
first two years in an easily accessible place.
14. The Trustees of the Trust and the shareholders of each Series shall
not be liable for any obligations of the Trust or any Series under this Plan,
and Mitchell Hutchins or any other person, in asserting any rights or claims
under this Plan, shall look only to the assets and property of the Trust or such
Series in settlement of such right or claim, and not to such Trustees or
shareholders.
- 3 -
<PAGE>
IN WITNESS WHEREOF, the Trust has executed this Plan of Distribution on
the day and year set forth below in New York, New York.
Date: May 1, 1998
MITCHELL HUTCHINS SERIES TRUST
Attest: /s/ Evelyn Chieffo By: /s/ Dianne E. O'Donnell
------------------ ---------------------------
- 4 -
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