As filed with the Securities and Exchange Commission on April 4, 2000
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. 30 [ X ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 29 [ X ]
(Check appropriate box or boxes.)
MITCHELL HUTCHINS SERIES TRUST
((Exact name of registrant as specified in charter)
51 West 52nd Street
New York, New York 10019-6114
(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.
[ ] Immediately upon filing pursuant to Rule 485(b)
[X] On May 1, 2000 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 EQUITY 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, 2000
- -------------------------------
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 Money Market Portfolio
should know about 4 Investment Objective, Strategies and Risks
the funds 5 Performance
High Grade Fixed Income Portfolio
6 Investment Objective, Strategies and Risks
7 Performance
Strategic Fixed Income Portfolio
8 Investment Objective, Strategies and Risks
9 Performance
Strategic Income Portfolio
10 Investment Objective, Strategies and Risks
11 Performance
Global Income Portfolio
12 Investment Objective, Strategies and Risks
13 Performance
High Income Portfolio
14 Investment Objective, Strategies and Risks
15 Performance
Balanced Portfolio
16 Investment Objective, Strategies and Risks
17 Performance
Growth and Income Portfolio
18 Investment Objective, Strategies and Risks
19 Performance
Tactical Allocation Portfolio
20 Investment Objective, Strategies and Risks
21 Performance
Growth Portfolio
22 Investment Objective, Strategies and Risks
23 Performance
Aggressive Growth Portfolio
24 Investment Objective, Strategies and Risks
25 Performance
Small Cap Portfolio
26 Investment Objective, Strategies and Risks
27 Performance
2
<PAGE>
Mitchell Hutchins Series Trust
- -----------------------------------------------
Global Equity Portfolio
28 Investment Objective, Strategies and Risks
29 Performance
30 More About Risks and Investment Strategies
INVESTING IN THE FUNDS
-------------------------------------------------------------
Information for 32 Purchases, Redemptions and Exchanges
managing you fund
account
32 Pricing and Valuation
ADDITIONAL INFORMATION
-------------------------------------------------------------
Additional important 33 Management
information about
the funds 35 Dividends and Taxes
36 Financial Highlights
Where to learn more Back Cover
about the funds
---------------------------------------
The funds are not complete or balanced
investment programs.
---------------------------------------
3
<PAGE>
Mitchell Hutchins Series Trust 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 fund and seeks to maintain a stable price of $1.00
per share. The fund invests in a diversified portfolio of high quality money
market instruments of governmental and private issuers.
Money market instruments are short-term debt obligations and similar securities.
They also include longer term bonds that have variable interest rates or other
special features that give them the financial characteristics of short-term
debt. The fund invests in foreign money market instruments only if they are
denominated in U.S. dollars.
Mitchell Hutchins Asset Management Inc., the fund's investment adviser, selects
money market instruments for the fund based on its assessment of relative values
and changes in market and economic conditions. Mitchell Hutchins considers
safety of principal and liquidity in selecting securities for the fund and thus
may not buy securities that pay the highest yield.
Mitchell Hutchins may use a number of professional money management techniques
to respond to changing economic and money market conditions and to shifts in
fiscal and monetary policies. These techniques include varying the fund's
composition and weighted average maturity based upon its assessment of the
relative values of various money market instruments and future interest rate
patterns. Mitchell Hutchins also may buy or sell money market instruments to
take advantage of yield differences.
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. Money market
instruments generally have a low risk of loss, but they are not risk free. The
principal risks presented by the fund are:
o CREDIT RISK - Issuers of money market instruments may fail to make payments
when due, or they may become less willing or less able to do so.
o INTEREST RATE RISK - The value of the fund's investments generally will fall
when interest rates rise and its yield will tend to lag behind prevailing
rates.
o FOREIGN INVESTING RISK - The value of the fund's investments in foreign
securities may fall due to adverse political, social and economic
developments abroad. However, because the fund's foreign investments must be
denominated in U.S. dollars, it generally is not subject to the risk of
changes in currency valuations.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
4
<PAGE>
Mitchell Hutchins Series Trust 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, the only class outstanding during the periods
shown.
The table that follows the bar chart shows the average annual returns for Class
H shares over several time periods.
The fund's past performance does not necessarily indicate how it will perform in
the future.
TOTAL RETURN ON CLASS H SHARES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CALENDAR YEAR PERCENTAGES
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%
1999 3.55%
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, 1999
CLASS CLASS H
(INCEPTION DATE) (5/04/87)
---------------- ---------
One Year............. 3.55%
Five Years........... 3.81%
Ten Years............ 4.26%
Life of Class........ 2.37%
5
<PAGE>
Mitchell Hutchins Series Trust High Grade Fixed Income Portfolio
- -----------------------------------------------------------------------
HIGH GRADE FIXED INCOME PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE
Primarily, current income consistent with the preservation of capital;
secondarily, capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The fund invests primarily in
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
may (but is not required to) use 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; you may lose money by investing in
the fund. The principal risks presented by the fund are:
o INTEREST RATE RISK - The value of the fund's investments generally will fall
when interest rates rise.
o PREPAYMENT RISK - The fund's mortgage- and asset-backed securities may be
prepaid more rapidly than expected, especially when interest rates are
falling, and the fund may have to reinvest those prepayments at lower
interest rates. When interest rates are rising, slower prepayments may extend
the duration of the securities and may reduce their value.
o CREDIT RISK - Bond issuers may fail to make payments when due, or they may
become less willing or less able to do so.
o FOREIGN INVESTING RISK - The value of the fund's investments in foreign
securities may fall due to adverse political, social and economic
developments abroad. However, because the fund's foreign investments must be
denominated in U.S. dollars, it generally is not subject to the risk of
changes in currency valuations.
o DERIVATIVES RISK - The fund's investments in derivatives may rise or fall
more rapidly than other investments.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
6
<PAGE>
Mitchell Hutchins Series Trust 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, the only class outstanding during the periods
shown.
The table that follows the bar chart shows the average annual returns for Class
H shares over several time periods. The table compares fund returns to returns
on a broad-based market index that is unmanaged and, therefore, does not include
any sales charges or expenses.
The fund's past performance does not necessarily indicate how it will perform in
the future. This is especially true for periods prior to July 21, 1995, when
Mitchell Hutchins assumed day-to-day portfolio management responsibility from a
sub-adviser.
TOTAL RETURN ON CLASS H SHARES (1994 IS THE FUND'S FIRST FULL CALENDAR
YEAR OF OPERATIONS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CALENDAR YEAR PERCENTAGES
1990
1991
1992
1993
1994 -6.56%
1995 15.44%
1996 1.41%
1997 8.13%
1998 6.83%
1999 -3.82%
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, 1999
CLASS CLASS H LEHMAN BROTHERS
(INCEPTION DATE) (11/08/93) GOVERNMENT BOND INDEX
---------------- ---------- ---------------------
One Year............... (3.82)% 2.23%
Five Years............. 5.40% 7.44%
Life of Class.......... 2.59% 5.27%*
--------------
* Return is for the period 10/31/93 to 12/31/99, annualized.
7
<PAGE>
Mitchell Hutchins Series Trust 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 may (but is not required
to) use 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; you may lose money by investing in
the fund. The principal risks presented by the fund are:
o INTEREST RATE RISK - The value of the fund's investments generally will fall
when interest rates rise.
o PREPAYMENT RISK - The fund's mortgage- and asset-backed securities may be
prepaid more rapidly than expected, especially when interest rates are
falling, and the fund may have to reinvest those prepayments at lower
interest rates. When interest rates are rising, slower prepayments may extend
the duration of the securities and may reduce their value.
o CREDIT RISK - Bond issuers may fail to make payments when due, or they may
become less willing or less able to do so.
o LEVERAGE RISK - Leverage magnifies the effect of changes in market values.
While leverage can increase the fund's income and potential for gain, it also
can increase expenses and the risk of loss. The fund attempts to limit the
magnifying effect of its leverage by managing its portfolio duration.
o FOREIGN INVESTING RISK - The value of the fund's investments in foreign
securities may fall due to adverse political, social and economic
developments abroad and due to decreases in foreign currency values relative
to the U.S. dollar.
o DERIVATIVES RISK - The fund's investments in derivatives may rise or fall
more rapidly than other investments.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
8
<PAGE>
Mitchell Hutchins Series Trust 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, the only class outstanding during the periods
shown.
The table that follows the bar chart shows the average annual returns for Class
H shares over several time periods. The table compares fund returns to returns
on a broad-based market index that is unmanaged and, therefore, does not include
any sales charges or expenses.
The fund's past performance does not necessarily indicate how it 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.
TOTAL RETURN ON CLASS H SHARES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CALENDAR YEAR PERCENTAGES
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%
1999 -3.32%
Best quarter during years shown: 2nd quarter, 1995 -- 6.20%
Worst quarter during years shown: 1st quarter, 1994 -- (4.11)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999
CLASS CLASS H LEHMAN BROTHERS
(INCEPTION DATE) (7/05/89) MORTGAGE BOND INDEX
---------------- --------- -------------------
One Year................... (3.32)% 1.86%
Five Years................. 7.47% 7.98%
Ten Years.................. 7.21% 7.77%
Life of Class.............. 7.11% 8.14%*
------------------
* Return is for the period 6/30/89 to 12/31/99, annualized.
9
<PAGE>
Mitchell Hutchins Series Trust Strategic Income Portfolio
- -------------------------------------------------------------
STRATEGIC INCOME PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE
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
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 to buy or sell for
the fund are based on market outlook, investment research, geographic analysis
and forecasts of interest rates and currency exchange rates. The fund may (but
is not required to) use derivatives as part of its investment strategy or to
help manage portfolio risks
PRINCIPAL RISKS
An investment in the fund is not guaranteed; you may lose money by investing in
the fund. The principal risks presented by the fund are:
o CREDIT RISK - Bond issuers may fail to make payments when due, or they may
become less willing or less able to do so. This risk is greater for high
yield, lower quality bonds than for bonds that are investment grade.
o INTEREST RATE RISK - The value of the fund's investments generally will fall
when interest rates rise.
o ASSET ALLOCATION RISK - Mitchell Hutchins may not be successful in choosing
the best allocation of the fund's assets among market sectors.
o FOREIGN INVESTING AND EMERGING MARKETS RISKS - The value of the fund's
investments in foreign securities may fall due to adverse political, social
and economic developments abroad and due to decreases in foreign currency
values relative to the U.S. dollar. These risks are greater for investments
in emerging market issuers than for issuers in more developed countries.
o EQUITY RISK - Stocks and other equity securities generally fluctuate in value
more than bonds. The fund could lose all of its investment in a company's
stock.
o INDIVIDUAL ISSUER CONCENTRATION RISK - 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.
o PREPAYMENT RISK - The fund's mortgage- and asset-backed securities may be
prepaid more rapidly than expected, especially when interest rates are
falling, and the fund may have to reinvest those prepayments at lower
interest rates. When interest rates are rising, prepayments often occur more
slowly than expected, which may extend the duration of the backed securities
and may reduce their value.
10
<PAGE>
o SOVEREIGN RISK - Investments in foreign government bonds involve special
risks because the fund may have limited legal recourse in the event of
default.
o DERIVATIVES RISK - The fund's investments in derivatives may rise or fall
more rapidly than other investments.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
10A
<PAGE>
Mitchell Hutchins Series Trust Strategic 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 the fund's performance for its initial calendar year. The
bar chart shows Class H shares because Class I shares were not outstanding for
the full calendar year.
The table that follows the bar chart shows the average annual returns for Class
H shares for one year and the life of the class. Performance for Class I shares
is not included in the table because Class I shares were not outstanding for the
full calendar year. The table compares fund returns to returns on a broad-based
market index that is unmanaged and, therefore, does not include any sales
charges or expenses.
The fund's past performance does not necessarily indicate how it will perform in
the future.
TOTAL RETURN ON CLASS H SHARES (1999 IS THE FUND'S FIRST FULL CALENDAR
YEAR OF OPERATIONS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CALENDAR YEAR PERCENTAGES
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999 1.89%
Best quarter during year shown: 1st quarter, 1999 -- 2.05%
Worst quarter during year shown 2nd quarter, 1999 -- (0.64)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999
CLASS CLASS H LEHMAN BROTHERS
(INCEPTION DATE) (9/28/98) AGGREGATE BOND INDEX
---------------- --------- --------------------
One Year................. 1.89% (0.82)%
Life of Class............ 3.79% (0.39)%*
--------------
* Return is for the period 9/30/98 to 12/31/99, annualized.
11
<PAGE>
Mitchell Hutchins Series Trust Global Income Portfolio
- ---------------------------------------------------------------
GLOBAL INCOME PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- ------------------------------------------
FUND OBJECTIVE
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 rated 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 decides which bonds to buy or sell by determining 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. The fund may (but is not required to) use derivatives as part of its
investment strategy or to help manage portfolio risks.
PRINCIPAL RISKS
An investment in the fund is not guaranteed; you may lose money by investing in
the fund. The principal risks presented by the fund are:
o INTEREST RATE RISK - The value of the fund's investments generally will fall
when interest rates rise.
o FOREIGN INVESTING AND EMERGING MARKETS RISKS - The value of the fund's
investments in foreign securities may fall due to adverse political, social
and economic developments abroad and due to decreases in foreign currency
values relative to the U.S. dollar. These risks are greater for investments
in emerging market issuers than for issuers in more developed countries.
o CREDIT RISK - Bond issuers may fail to make payments when due, or they may
become less willing or less able to do so.
o SOVEREIGN RISK - Investments in foreign government bonds involve special
risks because the fund may have limited legal recourse in the event of
default.
o ASSET ALLOCATION RISK - Mitchell Hutchins may not be successful in choosing
the best allocation of the fund's assets between U.S. and foreign issuers.
o INDIVIDUAL ISSUER CONCENTRATION RISK - 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.
o DERIVATIVES RISK - The fund's investments in derivatives may rise or fall
more rapidly than other investments.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN THE CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING SUCH REPORTS).
12
<PAGE>
Mitchell Hutchins Series Trust 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, the only class outstanding during the periods
shown.
The table that follows the bar chart shows the average annual returns for Class
H shares over several time periods. The table compares fund returns to returns
on a broad-based market index that is unmanaged and, therefore, does not include
any sales charges or expenses.
The fund's past performance does not necessarily indicate how it will perform in
the future.
TOTAL RETURN ON CLASS H SHARES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CALENDAR YEAR PERCENTAGES
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%
1999 -4.79%
Best quarter during years shown: 2nd quarter, 1990 -- 5.77%
Worst quarter during years shown: 1st quarter, 1994 -- (4.44)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999
SALOMON SMITH BARNEY
CLASS CLASS H WORLD GOVERNMENT
(INCEPTION DATE) (5/01/88) BOND INDEX
---------------- --------- ----------
One Year................... (4.79)% (4.27)%
Five Years................. 5.53% 6.42%
Ten Years.................. 6.36% 8.03%
Life of Class.............. 6.63% 7.48%*
-----------------
* Return is for the period 4/30/88 to 12/31/99, annualized.
13
<PAGE>
Mitchell Hutchins Series Trust 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 may (but is not required to) use
derivatives as part of its investment strategy or to help manage portfolio
risks.
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 performing fundamental
credit analysis based on cash flow, leverage and other balance sheet and income
statement factors. In deciding which securities to buy or sell for the fund,
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; you may lose money by investing in
the fund. The principal risks presented by the fund are:
o CREDIT RISK - Bond issuers may fail to make payments when due, or they may
become less willing or less able to do so. This risk is greater for high
yield, lower quality bonds than for bonds that are investment grade.
o FOREIGN INVESTING AND EMERGING MARKETS RISKS - The value of the fund's
investments in foreign securities may fall due to adverse political, social
and economic developments abroad and due to decreases in foreign currency
values relative to the U.S. dollar. These risks are greater for investments
in emerging market issuers than for issuers in more developed countries.
o INTEREST RATE RISK - The value of the fund's investments generally will fall
when interest rates rise.
o EQUITY RISK - Stocks and other equity securities generally fluctuate in value
more than bonds. The fund could lose all of its investment in a company's
stock.
o DERIVATIVES RISK - The fund's investments in derivatives may rise or fall
more rapidly than other investments.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
14
<PAGE>
Mitchell Hutchins Series Trust High 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 for its initial calendar year.
The bar chart shows Class H shares, the only class outstanding during the
periods shown.
The table that follows the bar chart shows the average annual returns for Class
H shares for one year and the life of the class. The table compares fund returns
to returns on a broad-based market index that is unmanaged and, therefore, does
not include any sales charges or expenses.
The fund's past performance does not necessarily indicate how it will perform in
the future.
TOTAL RETURN ON CLASS H SHARES (1999 IS THE FUND'S FIRST FULL CALENDAR
YEAR OF OPERATIONS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CALENDAR YEAR PERCENTAGES
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999 5.42%
Best quarter during year shown: 4th quarter, 1999 -- 4.29%
Worst quarter during year shown: 3rd quarter, 1999 -- (1.01)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999
CLASS CLASS H CS FIRST BOSTON HIGH
(INCEPTION DATE) (9/28/98) YIELD BOND INDEX
---------------- --------- ----------------
One Year................ 5.42% 3.28%
Life of Class........... 8.54% 4.54%*
----------------
* Return is for the period 9/30/98 to 12/31/99, annualized.
15
<PAGE>
Mitchell Hutchins Series Trust 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. The fund may invest in U.S. dollar-denominated
securities of foreign issuers. The fund may (but is not required to) use
derivatives to adjust its exposure to different asset classes, to manage the
"duration" of its bond investments and to maintain exposure to stocks or bonds
while maintaining a cash balance for fund management purposes. "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
asset class. Mitchell Hutchins also believes that prices of securities in each
asset class tend to move toward a level that reflects that consensus, but that
this takes time. By using fundamental valuation techniques, Mitchell Hutchins
attempts to adjust the allocation of the fund's assets among sectors before
prices fully reflect the consensus view.
In buying and selling individual securities for the fund, Mitchell Hutchins uses
the following process:
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).
PRINCIPAL RISKS
An investment in the fund is not guaranteed; you may lose money by investing in
the fund. The principal risks presented by the fund are:
o ASSET ALLOCATION RISK - Mitchell Hutchins may not be successful in choosing
the best allocation of the fund's assets among the three asset classes.
o EQUITY RISK - Stocks and other equity securities generally fluctuate in value
more than bonds. The fund could lose all of its investment in a company's
stock.
o INTEREST RATE RISK - The value of the fund's bond investments generally will
fall when interest rates rise.
16
<PAGE>
o CREDIT RISK - Bond issuers may fail to make payments when due, or they may
become less willing or less able to do so.
o FOREIGN INVESTING RISK - The value of the fund's investments in foreign
securities may fall due to adverse political, social and economic
developments abroad. However, because the fund's foreign investments must be
denominated in U.S. dollars, it generally is not subject to the risk of
changes in currency valuations.
o DERIVATIVES RISK - The fund's investments in derivatives may rise or fall
more rapidly than other investments.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
16a
<PAGE>
Mitchell Hutchins Series Trust 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, the only class outstanding during all the
periods shown.
The table that follows the bar chart shows the average annual returns for Class
H shares over several time periods. Performance for Class I shares is not
included in the table because Class I shares were not outstanding for the full
1999 calendar year. The table compares fund returns to returns on a broad-based
market index that is unmanaged and that, therefore, does not include any sales
charges or expenses.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
TOTAL RETURN ON CLASS H SHARES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CALENDAR YEAR PERCENTAGES
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%
1999 1.82%
Best quarter during years shown: 4th quarter, 1998 -- 14.29%
Worst quarter during years shown: 2nd quarter, 1994 -- (5.55)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999
CLASS CLASS H S&P 500 COMPOSITE
(INCEPTION DATE) (6/01/88) STOCK INDEX
---------------- --------- -----------
One Year.................... 1.82% 21.03%
Five Years.................. 16.42% 28.54%
Ten Years................... 11.11% 18.19%
Life of Class............... 10.96% 19.11%*
---------------
* Return is for the period 5/31/88 to 12/31/99, annualized.
17
<PAGE>
Mitchell Hutchins Series Trust 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 in a combination of securities to obtain both growth and
income. To obtain growth, the fund invests in stocks that Mitchell Hutchins
Asset Management Inc., its investment adviser, believes have substantial
potential for capital growth. To obtain current income, the fund invests in
dividend paying stocks and, to a lesser extent, convertible bonds and money
market instruments.
The fund generally invests in large capitalization companies. Some of the fund's
investments may be in U.S. dollar denominated securities of foreign investors.
The fund may (but is not required to) use derivatives as part of its investment
strategy or to help manage portfolio risks.
In buying and selling stocks for the fund, Mitchell Hutchins uses its own Factor
Valuation Model to identify stocks with growth potential that appear to be
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; you may lose money by investing in
the fund. The principal risks presented by the fund are:
o EQUITY RISK - Stocks and other equity securities generally fluctuate in value
more than bonds. The fund could lose all of its investment in a company's
stock.
o FOREIGN INVESTING RISK - The value of the fund's investments in foreign
securities may fall due to adverse political, social and economic
developments abroad. However, because the fund's foreign investments must be
denominated in U.S. dollars, it generally is not subject to the risk of
changes in currency valuations.
o DERIVATIVES RISK - The fund's investments in derivatives may rise or fall
more rapidly than other investments.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
18
<PAGE>
Mitchell Hutchins Series Trust 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, the only class outstanding during all the
periods shown.
The table that follows the bar chart shows the average annual returns for Class
H shares over several time periods. Performance for Class I shares is not
included in the table because Class I shares were not outstanding for the full
1999 calendar year. The table compares fund returns to returns on a broad-based
market index that is unmanaged and, therefore, does not include any sales
charges or expenses.
The fund's past performance does not necessarily indicate how it will perform in
the future.
TOTAL RETURN ON CLASS H SHARES (1993 IS THE FUND'S FIRST FULL CALENDAR
YEAR OF OPERATIONS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CALENDAR YEAR PERCENTAGES
1990
1991
1992
1993 -2.26%
1994 -6.18%
1995 30.52%
1996 22.12%
1997 32.45%
1998 16.32%
1999 10.33%
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, 1999
CLASS CLASS H S&P 500 COMPOSITE
(INCEPTION DATE) (1/02/92) STOCK INDEX
---------------- --------- -----------
One Year.................... 10.33% 21.03%
Five Years.................. 22.06% 28.54%
Life of Class............... 12.52% 19.69%*
- ----------------
* Return is for the period 12/31/91 to 12/31/99, annualized.
19
<PAGE>
Mitchell Hutchins Series Trust 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 Index
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 fixed income allocation of more
than 50%, 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.
The fund may (but is not required to) use derivatives to adjust its exposure to
different asset classes or to maintain exposure to stocks or bonds while
maintaining a cash balance for fund management purposes. Mitchell Hutchins also
may use these instruments to reduce the risk of adverse price movements while
investing cash received when investors buy fund shares, to facilitate trading
and to reduce transactions costs.
PRINCIPAL RISKS
An investment in the fund is not guaranteed; you may lose money by investing in
the fund. The principal risks presented by the fund are:
o ASSET ALLOCATION RISK - The Tactical Allocation Model may not correctly
predict the appropriate time to shift the fund's assets from asset class to
another.
o EQUITY RISK - Stocks and other equity securities generally fluctuate in value
more than bonds. The fund could lose all of its investment in a company's
stock.
o INDEX TRACKING RISK - The fund expects a close correlation between the
performance of its stock investments and that of the S&P 500 Index in both
rising and falling markets. The fund's performance, however, generally will
not be identical to that of the Index because of the fees and expenses borne
by the fund and investor purchases and sales of fund shares, which can occur
daily.
20
<PAGE>
o INTEREST RATE RISK - The value of the fund's bond investments generally will
fall when interest rates rise.
o DERIVATIVES RISK -- The fund's investments in derivatives may rise or fall
more rapidly than other investments.
o FOREIGN INVESTING RISK - The S&P 500 Index includes some U.S. dollar
denominated foreign securities. The value of the fund's investments in
foreign securities may fall due to adverse political, social and economic
developments abroad. However, because the fund's foreign investments must be
denominated in U.S. dollars, it generally is not subject to the risk of
changes in currency valuations.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
20a
<PAGE>
Mitchell Hutchins Series Trust Tactical Allocation 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 the fund's performance for its initial calendar year. The
bar chart shows Class H shares because Class I shares were not outstanding for
the full calendar year.
The table that follows the bar chart shows the average annual returns for Class
H shares for one year and the life of the class. Performance for Class I shares
is not included in the table because Class I shares were not outstanding for the
full calendar year. The table compares fund returns to returns on a broad-based
market index that is unmanaged and, therefore, does not include any sales
charges or expenses.
The fund's past performance does not necessarily indicate how it will perform in
the future.
TOTAL RETURN ON CLASS H SHARES (1999 IS THE FUND'S FIRST FULL CALENDAR
YEAR OF OPERATIONS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CALENDAR YEAR PERCENTAGES
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999 18.43%
Best quarter during year shown: 4th quarter, 1999 -- 13.08%
Worst quarter during year shown: 3rd quarter, 1999 -- 6.16%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999
CLASS CLASS H S&P 500 COMPOSITE
(INCEPTION DATE) (9/28/98) STOCK INDEX
---------------- --------- -----------
One Year.................... 18.43% 21.03%
Life of Class............... 36.66% 35.94%*
-----------------
* Return is for the period 9/30/98 to 12/31/99, annualized.
21
<PAGE>
Mitchell Hutchins Series Trust 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 investment adviser, believes have substantial potential for
capital growth.
The fund generally invests in larger capitalization companies but has the
flexibility to invest in companies having any market capitalization. Some of the
fund's investments may be in U.S. dollar denominated securities of foreign
issuers and the fund also may invest in bonds. The fund may (but is not required
to) use derivatives as part of its investment strategy or to help manage
portfolio risks.
In buying and selling stocks for the fund, Mitchell Hutchins uses its own
Multi-Factor Growth 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. When investing in smaller companies, Mitchell
Hutchins also considers the trading volume of the company's stock.
PRINCIPAL RISKS
An investment in the fund is not guaranteed; you may lose money by investing in
the fund. The principal risks presented by the fund are:
o EQUITY RISK - Stocks and other equity securities generally fluctuate in value
more than bonds. The fund could lose all of its investment in a company's
stock.
o FOREIGN INVESTING RISK - The value of the fund's investments in foreign
securities may fall due to adverse political, social and economic
developments abroad. However, because the fund's foreign investments must be
denominated in U.S. dollars, it generally is not subject to the risk of
changes in currency valuations.
o LIMITED CAPITALIZATION RISK - Equity risk is greater for the common stocks of
mid and small cap companies because they generally are more vulnerable than
larger companies to adverse business or economic developments and they may
have more limited resources. In general, these risks are greater for small
cap companies than for mid cap companies.
o DERIVATIVES RISK - The fund's investments in derivatives may rise or fall
more rapidly than other investments.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
22
<PAGE>
Mitchell Hutchins Series Trust 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, the only class outstanding during all the
periods shown.
The table that follows the bar chart shows the average annual returns for Class
H shares over several time periods. Performance for Class I shares is not
included in the table because Class I shares were not outstanding for the full
1999 calendar year. The table compares fund returns to returns on a broad-based
market index that is unmanaged and, therefore, does not include any sales
charges or expenses.
The fund's past performance does not necessarily indicate how it will perform in
the future.
TOTAL RETURN ON CLASS H SHARES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CALENDAR YEAR PERCENTAGES
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%
1999 33.61%
Best quarter during years shown: 4th quarter, 1998 -- 30.29%
Worst quarter during years shown: 3rd quarter, 1990 -- (16.09)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999
CLASS CLASS H S&P 500 COMPOSITE
(INCEPTION DATE) (5/04/87) STOCK INDEX
---------------- --------- -----------
One Year.................... 33.61% 21.03%
Five Years.................. 25.93% 28.54%
Ten Years................... 16.54% 18.19%
Life of Class............... 16.80% 16.79%*
- ------------
* Return is for the period 4/30/87 to 12/31/99, annualized.
23
<PAGE>
Mitchell Hutchins Series Trust 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 expects to grow faster than the average rate of companies in the S&P
500 Composite Stock Index. The fund has the flexibility to invest in companies
of any size, including small capitalization ("small cap") companies. In general,
however, the fund invests the majority of its assets in mid capitalization ("mid
cap") companies.
Some of the fund's investments may be in U.S. dollar-denominated securities of
foreign issuers and the fund also may invest in bonds. The fund may (but is not
required to) use derivatives as part of its investment strategy or to help
manage portfolio risks.
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 its sub-adviser believes to be undergoing a basic
change in operations or markets that would result in a significant improvement
in earnings.
The fund's investment adviser, Mitchell Hutchins Asset Management Inc., has
appointed Nicholas-Applegate Capital Management as the fund's sub-adviser. 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; you may lose money by investing in
the fund. The principal risks presented by the fund are:
o EQUITY RISK - Stocks and other equity securities generally fluctuate in value
more than bonds. The fund could lose all of its investment in a company's
stock.
o LIMITED CAPITALIZATION RISK - Equity risk is greater for the common stocks of
mid and small cap companies because they generally are more vulnerable than
larger companies to adverse business or economic developments and they may
have more limited resources. In general, these risks are greater for small
cap companies than for mid cap companies.
o FOREIGN INVESTING RISK - The value of the fund's investments in foreign
securities may fall due to adverse political, social and economic
developments abroad. However, because the fund's foreign investments must be
denominated in U.S. dollars, it generally is not subject to the risk of
changes in currency valuations.
o DERIVATIVES RISK - The fund's investments in derivatives may rise or fall
more rapidly than other investments.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
24
<PAGE>
Mitchell Hutchins Series Trust 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, the only class outstanding during the periods
shown.
The table that follows the bar chart shows the average annual returns for Class
H shares over several time periods. The table compares fund returns to returns
on a broad-based market index that is unmanaged and, therefore, does not include
any sales charges or expenses.
The fund's past performance does not necessarily indicate how it will perform in
the future.
TOTAL RETURN ON CLASS H SHARES (1994 IS THE FUND'S FIRST FULL YEAR OF
OPERATIONS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CALENDAR YEAR PERCENTAGES
1990
1991
1992
1993
1994 -2.90%
1995 21.04%
1996 25.23%
1997 20.76%
1998 15.30%
1999 25.07%
Best quarter during years shown: 4th quarter, 1998 -- 18.30%
Worst quarter during years shown: 3rd quarter, 1998 -- (15.45)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999
CLASS CLASS H S&P 500 COMPOSITE
(INCEPTION DATE) (11/02/93) STOCK INDEX
---------------- ---------- -----------
One Year.................... 25.07% 21.03%
Five Years.................. 21.43% 28.54%
Life of Class............... 16.42% 22.87%*
------------
* Return is for the period 10/31/93 to 12/31/99, annualized.
25
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Mitchell Hutchins Series Trust 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, that Mitchell Hutchins Asset Management Inc., its investment adviser,
believes have substantial potential for capital growth. The fund considers
companies with market capitalizations of up to $1.5 billion to be small cap.
The fund also invests, to a lesser extent, in stocks of larger companies and in
bonds and money market instruments. Some of the fund's investments may be in
U.S. dollar-denominated securities of foreign issuers. The fund may (but is not
required to) use derivatives as part of its investment strategy or to help
manage portfolio risks.
In buying and selling stocks for the fund, Mitchell Hutchins uses its own Factor
Valuation Model to identify companies that appear to be 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; you may lose money by investing in
the fund. The principal risks presented by the fund are:
o EQUITY RISK - Stocks and other equity securities generally fluctuate in value
more than bonds. The fund could lose all of its investment in a company's
stock.
o LIMITED CAPITALIZATION RISK - Equity risk is greater for the common stocks of
small cap companies because they generally are more vulnerable than large or
mid cap companies to adverse business or economic developments and they may
have more limited resources.
o FOREIGN INVESTING RISK - The value of the fund's investments in foreign
securities may fall due to adverse political, social and economic
developments abroad. However, because the fund's foreign investments must be
denominated in U.S. dollars, it generally is not subject to the risk of
changes in currency valuations.
o DERIVATIVES RISK - The fund's investments in derivatives may rise or fall
more rapidly than other investments.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THESE REPORTS).
26
<PAGE>
Mitchell Hutchins Series Trust Small Cap 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 for its initial calendar year.
The bar chart shows Class H shares because Class I shares were not outstanding
for the full calendar year.
The table that follows the bar chart shows the average annual returns for Class
H shares for one year and the life of the class. Performance for Class I shares
is not included in the table because Class I shares were not outstanding for the
entire 1999 calendar year. The table compares fund returns to returns on two
broad-based market indices of small cap companies that are unmanaged and,
therefore, do not include any sales charges or expenses.
The fund's past performance does not necessarily indicate how it will perform in
the future.
TOTAL RETURN ON CLASS H SHARES (1999 IS THE FUND'S FIRST FULL CALENDAR
YEAR OF OPERATIONS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CALENDAR YEAR PERCENTAGES
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999 6.13%
Best quarter during year shown: -- 4th quarter, 1999 -- 16.48%
Worst quarter during year shown: -- 1st quarter, 1999 -- (15.50)%
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1999
CLASS CLASS H S&P SMALLCAP RUSSELL 2000
(INCEPTION DATE) (9/28/98) 600 INDEX [SMALL CAP] INDEX
---------------- --------- --------- -----------------
One Year............... 6.13% 12.41% 21.26%
Life of Class.......... 29.45% 25.01%* 31.66%
---------------
* Return is for the period 9/30/98 to 12/31/99, annualized.
27
<PAGE>
Mitchell Hutchins Series Trust Global Equity Portfolio
- ----------------------------------------------------------
GLOBAL EQUITY 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. The fund may (but is not required to) use derivatives as part of its
investment strategy or to help manage portfolio risks.
Mitchell Hutchins has appointed Invista Capital Management, LLC as the
sub-adviser for the fund's foreign investments. In buying and selling foreign
stocks for the fund, Invista analyzes the fundamental business prospects of
industries and of individual companies and assesses the relative risks presented
by the countries in which those companies operate.
In buying and selling U.S. 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; you may lose money by investing in
the fund. The principal risks presented by the fund are:
o EQUITY RISK - Stocks and other equity securities generally fluctuate in value
more than bonds. The fund could lose all of its investment in a company's
stock.
o ASSET ALLOCATION RISK - Mitchell Hutchins may not be successful in choosing
the best allocation of the fund's assets between U.S. and foreign issuers.
o FOREIGN INVESTING AND EMERGING MARKETS RISKS - The value of the fund's
investments in foreign securities may fall due to adverse political, social
and economic developments abroad and due to decreases in foreign currency
values relative to the U.S. dollar. These risks are greater for investments
in emerging market issuers than for issuers in more developed countries.
o DERIVATIVES RISK - The fund's investments in derivatives may rise or fall
more rapidly than other investments.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies."
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN THE CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING SUCH REPORTS).
28
<PAGE>
Mitchell Hutchins Series Trust Global Equity 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, the only class outstanding during all the
periods shown.
The table that follows the bar chart shows the average annual returns for Class
H shares over several time periods. Performance for Class I shares is not
included in the table because Class I shares were not outstanding for the full
1999 calendar year. The table compares fund returns to returns on a broad-based
market index that is unmanaged and, therefore, does not include any sales
charges or expenses.
The fund's past performance does not necessarily indicate how it will perform in
the future. This is especially true for the period prior to November 2, 1998,
when Mitchell Hutchins and Invista assumed day-to-day management of the fund's
assets. Prior to that date, another sub-adviser was responsible for managing all
the fund's assets.
TOTAL RETURN ON CLASS H SHARES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CALENDAR YEAR PERCENTAGES
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%
1999 18.47%
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, 1999
CLASS CLASS H MSCI WORLD
(INCEPTION DATE) 05/04/87 INDEX
---------------- -------- -----
One Year.................... 18.47% 25.34%
Five Years.................. 9.86% 20.25%
Ten Years................... 7.50% 11.96%
Life of Class............... 7.92% 11.65%*
------------
* Return is for the period 4/30/87 to 12/31/99, annualized.
29
<PAGE>
Mitchell Hutchins Series Trust
- --------------------------------
MORE ABOUT RISKS AND INVESTMENT STRATEGIES
- ------------------------------------------
PRINCIPAL RISKS
The main risks of investing in 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 details 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.
ASSET ALLOCATION RISK. Mitchell Hutchins may not be successful in choosing the
best allocation of a fund's assets among different asset classes or geographic
or other market sectors. A fund that allocates its assets among different asset
classes or market sectors is more dependent on Mitchell Hutchins' ability to
successfully assess the relative values in each asset class or sector than are
funds that do not do so.
For Tactical Allocation Portfolio, the Mitchell Hutchins Tactical Allocation
Model may not correctly predict the times to shift the fund's assets from one
asset class to another.
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, during periods of market volatility,
may be more difficult to sell 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. A fund's use of derivatives may not succeed for various reasons,
including unexpected changes in the values of the derivatives or the assets
underlying them. Also, if a fund uses derivatives to adjust or "hedge" the
overall risk of its portfolio, the hedge will not succeed if changes in the
values of the derivatives are not matched by opposite changes in the values of
the assets being hedged.
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
social, 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 INVESTING RISK. Foreign investing involve risks relating to
political, social and economic developments abroad to a greater extent than
investing in the securities of U.S. issuers. In addition, there are
differences between U.S. and foreign regulatory requirements and market
practices. Foreign investments denominated in foreign currencies are subject
to the risk that the value of a foreign currency will fall in relation to the
U.S. dollar. Currency exchange rates can be volatile and can be affected by,
30
<PAGE>
among other factors, the general economics of a country, the actions of U.S.
and foreign governments or central banks, the imposition of currency controls
and speculation.
INDIVIDUAL ISSUER CONCENTRATION RISK. Global Income Portfolio and Strategic
Income Portfolio are non-diversified. A non-diversified fund may invest more
than 5% of its total assets in securities of a single issuer to a greater extent
than a diversified fund. 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.
INTEREST RATE RISK. The value of bonds generally 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
30a
<PAGE>
Mitchell Hutchins Series Trust
- --------------------------------
interest rates may actually have a larger 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.
LIMITED CAPITALIZATION RISK. Securities of mid and small cap companies generally
involve greater risk than securities of larger companies because they may be
more vulnerable to adverse business or economic developments. Mid and small cap
companies also may have limited product lines, markets or financial resources,
and they may be dependent on a relatively small management group. Securities of
mid and 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. In general, all these risks are greater for small cap companies than
for mid cap companies.
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.
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 INVESTMENT STRATEGIES
DEFENSIVE POSITIONS; CASH RESERVES. 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 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 to achieve its
investment objective. Frequent trading can result in portfolio turnover of
100% or more (high portfolio turnover).
31
<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 Mitchell Hutchins Series Trust fund at their
relative net asset values per share, provided that the separate account invests
in both funds. A particular insurance company separate account may not invest in
all Mitchell Hutchins Series Trust funds or classes of fund shares.
The 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 most 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. As a result, a fund's net asset value may change on days when you
will not be able to buy and sell fund shares. 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.
32
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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 51 West 52nd Street,
New York, New York 10019-6114, and is a wholly owned asset management subsidiary
of PaineWebber Incorporated, which is wholly owned by Paine Webber Group Inc., a
publicly owned financial services holding company. On February 29, 2000,
Mitchell Hutchins was adviser or sub-adviser to 31 investment companies with 76
separate funds and aggregate assets of approximately $54.4 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, 1999, PIMCO had approximately $86
billion in assets under management and was the adviser or sub-adviser of 18
investment companies with 65 portfolios and aggregate net assets of
approximately $53 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 February 29, 2000, Nicholas-Applegate had approximately $48.5 billion
in assets under management and was the adviser or sub-adviser of 14 investment
companies with 32 portfolios and aggregate net assets of approximately $7.8
billion.
Invista Capital Management, LLC is the sub-adviser for Global Equity Portfolio's
foreign investments. It is located at 1900 Hub Tower, 699 Walnut, Des Moines,
Iowa 50309. As of December 31, 1999, Invista managed approximately $35.3 billion
in client assets.
The funds have received an exemptive order from the SEC that permits their 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. The shareholders of Strategic Fixed Income
Portfolio and Global Equity Portfolio have approved this policy. As of the date
of this prospectus, the shareholders of the other funds have not been asked to
do so.
ADVISORY FEES
The funds paid advisory fees to Mitchell Hutchins for the most recent fiscal
year at the following annual 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 Equity Portfolio 0.75%
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 Julieanna Berry assist Mr. McCauley in managing the fund's
portfolio. Messrs. McCauley and Singh have held their management
responsibilities for the fund since July 1995. Ms. Berry assumed her
management responsibilities for the fund in February 2000.
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
33
<PAGE>
portfolio management group of PIMCO since 1991 and assumed his management
responsibilities for the fund in September 1996.
STRATEGIC INCOME PORTFOLIO. Dennis L. McCauley is the fund's allocation
manager. Nirmal Singh and Julieanna Berry share responsibility as sector
managers for the day-to-day management of the fund's U.S. government and
investment grade securities. James F. Keegan is the sector manager
33a
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Mitchell Hutchins Series Trust
- --------------------------------
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 and Waugh have held their day-to-day management
responsibilities for the fund since its inception. Mr. Keegan has held
day-to-day management responsibilities for the fund since its inception but
assumed his sector manager responsibilities for the fund's U.S. high yield,
high risk securities in February 2000. Ms. Berry has held her day-to-day
management responsibilities for the fund since February 2000.
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 management
responsibilities for the fund in 1997.
HIGH INCOME PORTFOLIO. James F. Keegan is responsible for the day-to-day
management of the fund's portfolio. Mr. Keegan has held his management
responsibilities for the fund since February 2000.
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 fund's
fixed income portion. Nirmal Singh and Susan Ryan assist Mr. McCauley in
managing the fund's fixed income investments.
Messrs. Barneby, McCauley, Singh and Tincher and Ms. Ryan have held their
management responsibilities for the fund 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 management
responsibilities for the fund 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 management responsibilities for the fund
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.
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 team since he joined the firm in 1994. The team has held its
management responsibilities for the fund since its inception.
SMALL CAP PORTFOLIO. Donald R. Jones is primarily responsible for the
day-to-day management of the fund. He has held his management
responsibilities for the fund since its inception.
GLOBAL EQUITY PORTFOLIO. T. Kirkham Barneby is responsible for allocating
the fund's assets between U.S. investments and foreign investments. Mark A.
Tincher is primarily responsible for the day-to-day management of the fund's
U.S. investments.
Scott D. Opsal and Kurtis D. Spieler are primarily responsible for the
day-to-day management of Global Equity Portfolio's foreign investments. Mr.
Opsal is an executive vice president and chief investment officer of Invista,
where he has been employed since 1986. Mr. Spieler is a portfolio manager
specializing in the management of international equity portfolios.
He has been employed by Invista since 1994.
Messrs. Barneby, Tincher, Opsal and Spieler assumed their management
responsibilities for the fund 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
34
<PAGE>
Growth, Strategic Fixed Income and Global Equity Portfolios. She has held her
Money Market Portfolio responsibilities since its inception.
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.
34a
<PAGE>
Mitchell Hutchins Series Trust
- --------------------------------
JULIEANNA BERRY is a first vice president of Mitchell Hutchins, where she has
been employed as a portfolio manager since 1989.
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, he 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.
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.
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.
Mr. McCauley joined Mitchell Hutchins in 1994.
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, where he has been
employed since 1993.
MARK A. TINCHER is a managing director and chief investment officer of equities
(stocks) of Mitchell Hutchins, where he has been employed since March 1995.
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.
35
<PAGE>
Mitchell Hutchins Series Trust
- --------------------------------
DIVIDENDS AND TAXES
DIVIDENDS
Dividends are paid in additional shares of the distributing 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 and 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 asset 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 contracts and treatment of the contract
holders other than as described in the contract prospectus.
See the SAI for a more detailed discussion. Prospective investors are urged to
consult their tax advisers.
36
<PAGE>
Mitchell Hutchins Series Trust
- --------------------------------
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
the funds' financial performance for the past 5 years. Shorter periods are shown
for funds 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 Reports
to Shareholders. The Annual Reports may be obtained without charge by calling
1-800-986-0088.
Please note that not every fund had Class I shares outstanding during the
periods shown.
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.
37
<PAGE>
Mitchell Hutchins Series Trust Money Market Portfolio
- -------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
- -------------------------------------------------------------------------------
CLASS H
------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Net asset value, beginning of $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
year........................... ---- ---- ---- ---- ----
Net investment income.......... 0.03 0.04 0.04 0.04 0.05
---- ---- ---- ---- ----
Dividends from net investment
income....................... (0.03) (0.04) (0.04) (0.04) (0.05)
------ ------ ------ ------ ------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
===== ===== ==== ==== ====
Total investment return(1) 3.55% 4.51% 4.53% 4.32% 5.22%
===== ===== ==== ==== ====
Ratios/Supplemental Data:
Net assets, end of year
(000's)........................ $5,590 $9,582 $8,906 $12,287 $ 21,974
Expenses to average net assets 1.64% 1.15% 1.22% 1.17% 0.79%
Net investment income to
average net assets...... 3.52% 4.42% 4.43% 4.27% 5.23%
- -------------------
(1)Total investment return is calculated assuming a $1,000 investment on the
first day of each year 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 year reported. The figures do not include additional contract level
charges; results would be lower if such charges were included.
38
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Mitchell Hutchins Series Trust Mitchell Hutchins High Grade Fixed Income Portfolio
- -------------------------------------------------------------
</TABLE>
HIGH GRADE FIXED INCOME PORTFOLIO
- ----------------------------------------------------------------
CLASS H
--------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Net asset value,
beginning of year....... $ 9.17 $ 9.29 $ 9.10 $ 9.49 $ 8.71
------ ------ ------ ------ ------
Net investment income... 0.54 0.56 0.55 0.50 0.56
Net realized and
unrealized gains
(losses from
investments........... (0.89) 0.07 0.19 (0.37) 0.79
------ ------ ------ ------ ------
Net increase (decrease)
from investment
operations............ (0.35) 0.63 0.74 0.13 1.35
------ ------ ------ ------ ------
Dividends from net
investment income..... -- (0.56) (0.55) (0.52) (0.57)
Distributions from net
realized gains on -- (0.19) -- -- --
investments........... ------ ------ ------ ----- ------
Total dividends and 0.00 (0.75) (0.55) (0.52) (0.57)
distributions......... ------ ------ ------ ----- ------
Net asset value, end of $ 8.82 $ 9.17 $ 9.29 $ 9.10 $ 9.49
year.................... ====== ====== ====== ===== ======
Total investment (3.82)% 6.83% 8.13% 1.41% 15.44%
return(1)............. ====== ====== ====== ===== ======
Ratios/Supplemental Data:
Net assets, end of year
(000's)............... $4,568 $6,770 $7,345 $7,902 $ 9.147
Expenses to average net 1.91% 1.27% 1.43% 1.62% 1.01%
assets................
Net investment income to
average net assets..... 4.65% 5.39% 5.54% 5.04% 5.56%
Portfolio turnover rate. 166% 101% 95% 282% 136%
- ---------------------------
(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.
39
<PAGE>
Mitchell Hutchins Series Trust Strategic Fixed Income Portfolio
- --------------------------------------------------------------------------------
STRATEGIC FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
CLASS H
------------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Net asset value,
beginning of year........ $ 10.78 $ 10.64 $ 10.21 $ 10.61 $ 10.34
------- ------- ------- ------- -------
Net investment income.... 0.72 0.70 0.69 0.70 0.88
------- ------- ------- ------- -------
Net realized and
unrealized gains
(losses) from
investments, futures,
options and foreign (1.08) 0.21 0.44 (0.31) 1.03
currency transactions.. ------ ----- ---- ------ ----
Net increase (decrease)
from investment (0.36) 0.91 1.13 0.39 1.91
operations............. ------ ----- ---- ---- ----
Dividends from net
investment income...... -- (0.68) (0.70) (0.70) (0.88)
Distributions from net
realized gains on 0.00++ (0.09) -- (0.09) (0.76)
investments............ ---- ------ ----- ------ ------
Total dividends and 0.00 (0.77) (0.70) (0.79) (1.64)
distributions.......... ---- ------- ------ ------ ------
Net asset value, end of
year..................... $ 10.42 $ 10.78 $ 10.64 $ 10.21 $ 10.61
Total investment
return(1).............. (3.32) % 8.62% 11.00% 3.79% 18.51%
Ratios/Supplemental Data:
Net assets, end of year
(000's).................. $ 6,250 $9,469 $9,891 $10,689 $13,741
Expenses to average net 1.82%+ 1.10%+ 1.00% 1.52% 0.99%
assets.................
Net investment income to
average net assets..... 5.34% 5.88% 6.04% 5.88% 6.35%
Portfolio turnover....... 503% 245% 175% 317% 234%
- -------------------
+ Includes 0.10% and 0.14% of interest expense related to the reverse
repurchase agreements during the years ended December 31, 1999 and December
31, 1998, respectively.
++ The Fund paid a distribution of less than $0.005 per share for the year ended
December 31, 1999.
(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.
40
<PAGE>
<TABLE>
<CAPTION>
Mitchell Hutchins Strategic Income
Series Trust Portfolio
- ------------------------------------------
STRATEGIC INCOME PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------
CLASS H CLASS I
---------------------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE SEPTEMBER 28, JANUARY 5,
YEAR ENDED 1998++ THROUGH 1999++ THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period......... $ 12.19 $ 12.00 $ 12.22
------- ------- -------
Net investment income........................ 0.77@ 0.14 0.76@
Net realized and unrealized gains(losses)
from investments, foreign currency and
futures contracts......................... (0.54)@ 0.20 (0.56)@
------- ------- -------
Net increase from investment operations...... 0.23 0.34 0.20
------- ------- -------
Dividends from net investment income......... (0.68) (0.14) (0.68)
Distributions from net realized gains from -- (0.01) --
investments............................... ------- ------- -------
Distributions from paid in capital........... (0.01) -- (0.01)
------- ------- -------
Total dividends and distributions
to shareholders............................ (0.69) (0.15) (0.69)
Net asset value, end of period............... $11.73 $ 12.19 $ 11.73
Total investment return(1)................... 1.89% 2.84% 1.63%
------- ------- -------
Ratios/Supplemental data:
Net assets, end of period (000's)............ $11,423 $ 10,328 $ 1,335
Expenses to average net assets, before
waiver from adviser....................... 1.62% 1.44%* 1.87%*
Expenses to average net assets, after 1.62% 1.44%* 1.62%*
waiver from adviser........................
Net investment income to average net assets,
before waiver from adviser................ 6.20% 5.09%* 5.75%*
Net investment income to average net assets,
after waiver from adviser................. 6.20% 5.09%* 6.00%*
Portfolio turnover rate...................... 403% 81% 403%
</TABLE>
- -------------------
+ Commencement of operations.
++ Commencement of issuance of shares.
* Annualized
@ Calculated using the average daily shares outstanding for the period.
(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 periods of less
than one year has not been annualized.
41
<PAGE>
<TABLE>
<CAPTION>
Mitchell Hutchins Series Trust Global Income Portfolio
- --------------------------------------------------------------------
GLOBAL INCOME PORTFOLIO
- --------------------------------------------------------------------------------------------------------------
CLASS H
-------------------------------------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning $ 11.07 $ 10.81 $ 11.14 $ 11.20 $ 10.88
of year..........................
Net investment income (loss)....... 0.59 0.69 0.75 0.87 (0.05)
Net realized and unrealized gains
(losses) from investments and
foreign currency................. (1.12) 0.36 (0.36) (0.13) 1.52
------- ----- ------ ------ ----
Net increase (decrease) from
investment operations............ (0.53) 1.05 0.39 0.74 1.47
------ ----- ---- ---- ----
Dividends from net investment
income........................... -- (0.61) (0.71) (0.79) (1.15)
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)
--- ------ ------ ------ ------
Net asset value, end of year....... $ 10.54 $ 11.07 $ 10.81 $ 11.14 $ 11.20
Total investment return(1)......... (4.79)% 9.69% 3.50% 6.62% 13.58%
Ratios/Supplemental Data:
Net assets, end of year (000's).... $ 8,828 $ 14,702 $17,730 $ 24,436 $ 35,700
Expenses to average net assets..... 2.09% 1.68% 1.52% 1.56% 1.19%
Net investment income to
average net assets............... 4.62% 5.53% 6.34% 6.56% 7.21%
Portfolio turnover rate............ 43% 104% 142% 134% 160%
</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
distributions 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.
42
<PAGE>
Mitchell Hutchins Series Trust High Income Portfolio
- ---------------------------------------------------------------
HIGH INCOME PORTFOLIO
- --------------------------------------------------------------------------------
CLASS H
-------------------------------------
FOR THE PERIOD
FOR THE SEPTEMBER 28,
YEAR ENDED 1998+ THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
Net asset value, beginning of period...... $ 12.40 $ 12.00
------- -------
Net investment income..................... 1.21 0.20
Net realized and unrealized gains
(losses) from investments............... (0.54) 0.42
------ -----
Net increase from investment operations... 0.67 0.62
---- ----
Dividends from net investment income...... (1.21) (0.20)
Distributions from net realized gains
from investments........................ (0.11) (0.02)
------ -------
Total dividends and distributions......... (1.32) (0.22)
------ -------
Net asset value, end of period............ $ 11.75 $ 12.40
======= =======
Total investment return(1)................ 5.42% 5.16%
==== =======
Ratios/Supplemental data:
Net assets, end of period (000's)......... $12,561 $ 10,933
Expenses to average net assets............ 1.35 1.20%*
Net investment income to average net 9.44% 7.04%*
assets..................................
Portfolio turnover rate................... 69% 21%
- -------------------
+ 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 periods of less
than one year has not been annualized.
43
<PAGE>
<TABLE>
<CAPTION>
Mitchell Hutchins Series Trust Balanced Portfolio
- -------------------------------------------------------------------
BALANCED PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------
CLASS H CLASS I
------------------------------------------------------------------------------------
FOR THE PERIOD
FOR THE YEARS ENDED AUGUST 17, 1999+
DECEMBER 31, THROUGH
----------------------------------------------------------
1999 1998 1997 1996# 1995 DECEMBER 31, 1999
---- ---- ---- ---- ---- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................... $ 11.54 $11.33 $ 10.95 $ 10.70 $ 9.54 $ 11.37
----- ----- ----- ----- ---- -------
Net investment income......... 0.26 0.28 0.28 0.29 0.35 0.04
Net realized and unrealized
gains (losses) from
investments and futures.... (0.05) 1.61 2.44 1.49 1.88 0.34
------ ----- ---- ---- ---- ----
Net increase from
investment operations....... 0.21 1.89 2.72 1.78 2.23 0.38
---- ----- ---- ---- ---- ----
Dividends from net investment
income...................... -- (0.27) (0.28) (0.28) (0.35) --
Distributions from net
realized gains on (0.00)++ (1.41) (2.06) (1.25) (0.72) (0.00)++
investments................. ------ ------- ------ ------ ------ ------
Total dividends and
distributions............... (0.00) (1.68) (2.34) (1.53) (1.07) (0.00)
------ ------- ------ ------ ------ ------
Net asset value, end of
period...................... $ 11.75 $ 11.54 $ 11.33 $ 10.95 $ 10.70 $11.75
Total investment return(1).... 1.82% 16.81% 24.86% 16.82% 23.27% 3.34%
Ratios/Supplemental data:
Net assets, end of period
(000's)..................... $21,418 $ 28,549 $ 28,211 $ 29,224 $23,413 $ 596
Expenses to average net
assets, net of waivers(2)... 1.25% 0.97% 1.19% 1.24% 1.09% 1.57%*
Net investment income to
average net assets, net
of waivers (3).............. 1.81% 2.08% 2.06% 2.29% 2.88% 1.39%*
Portfolio turnover............ 206% 177% 169% 235% 171% 206%
</TABLE>
- -------------------
+ Commencement of issuance of shares.
# Prior to the close of business on January 26, 1996, the Balanced Portfolio
was known as the Asset Allocation Portfolio.
++ The Portfolio made a distribution of less than $0.005 per shareduring the
year ended December 31, 1999.
* Annualized.
44
<PAGE>
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
distributions, if any, at net asset value on the payable dates and a sale
at net asset value on the last day of each period reported. The figures do
not include additional contract level charges; results would be lower if
such charges were included. Total investment return for periods of less
than one year has not been annualized.
(2) During the period ended December 31, 1999, Mitchell Hutchins waived a
portion of its fees. The ratios excluding the waiver would have been 1.25%
and 1.82% for Class H and Class I, respectively.
(3) During the period ended December 31, 1999, Mitchell Hutchins waived a
portion of its fees. The ratios excluding the waiver would have been 1.81%
and 1.14% for Class H and Class I, respectively.
44a
<PAGE>
Mitchell Hutchins Series Trust Growth and Income Portfolio
- ---------------------------------------------------------------------
<TABLE>
GROWTH AND INCOME PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS H CLASS I
-----------------------------------------------------------------------------------
FOR THE YEARS ENDED FOR THE PERIOD
DECEMBER 31, JANUARY 5, 1999+
---------------------------------------------------------- THROUGH
1999 1998 1997 1996 1995 DECEMBER 31, 1999
---- ---- ---- ---- ---- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 14.81 $ 13.69 $ 12.27 $ 11.83 $ 9.16 $ 14.70
------- ------- ------- ------- ------ -------
Net investment income................... 0.05@ 0.07 0.10 0.06 0.10 0.04@
Net realized and unrealized gains from
investments........................... 1.48@ 2.16 3.88 2.53 2.70 1.61@
---- ----- ---- ---- ---- ----
Net increase from
investment operations................. 1.53 2.23 3.98 2.59 2.80 1.65
---- ----- ---- ---- ---- ----
Dividends from net investment
income................................ (0.00)# (0.07) (0.10) (0.06) (0.10) (0.00)++
Distributions from net realized
gains from investments -- (1.04) (2.46) (2.09) (0.03) --
----- ------- ------ ------ ------ ---
Total dividends and
other distributions.... (0.00)# (1.11) (2.56) (2.15) (0.13) (0.00)++
------- ------- ------ ------ ------ ------
Net asset value, end of $ 16.34 $ 14.81 $ 13.69 $ 12.27 $ 11.83 $ 16.35
===== ===== ===== ===== ===== =====
period.................
Total investment 10.33% 16.32% 32.45% 22.12% 30.52% 11.23%
===== ===== ===== ===== ===== =====
return(1)............
Ratios/Supplemental Data:
Net assets, end of $22,457 $ 24,497 $18,493 $14,520 $14,797 $6,201
period (000's).........
Expenses to average net
assets, before waiver 1.23% 1.04% 1.04% 1.58% 1.37% 1.48%*
from adviser.........
Expenses to average net
assets, after waiver 1.23% 1.04% 1.04% 1.58% 1.37% 1.23%*
from adviser.........
Net investment income to
average net assets, 0.36% 0.46% 0.71% 0.49% 0.94% 0.04%*
before waiver from
adviser..............
Net investment income to 0.46% 0.71% 0.49% 0.94% 0.29%* 0.36%
average net assets,
after waiver from
adviser..............
Portfolio turnover rate 65% 69% 92% 99% 134% 65%
- -------------------
</TABLE>
+ Commencement of issuance of shares.
* Annualized
@ Calculated using the average monthly shares outstanding for the period.
(1)Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
distributions, if any, at net asset value on the payable dates and a sale at
net asset value on the last day of each period reported. The figures do not
include additional contract level charges; results would be lower if such
charges were included. Total investment return for periods of less than one
year has not been annualized.
# The Portfolio made a distribution of less than $0.005 per share during the
year ended December 31, 1999.
45
<PAGE>
Mitchell Hutchins Series Trust Tactical Allocation Portfolio
- ---------------------------------------------------------------------
TACTICAL ALLOCATION PORTFOLIO
- ------------------------------------------------------------------------------
CLASS H CLASS I
-----------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE SEPTEMBER 28, JANUARY 5,
YEAR ENDED 1998+ THROUGH 1999++
DECEMBER 31, DECEMBER 31, THROUGH
1999 1998 DECEMBER 31, 1999
---- ---- -----------------
Net asset value, beginning of $ 14.91 $ 12.00 $ 14.89
------- ------- -------
period........................
Net investment income......... 0.11@ 0.02 0.11@
Net realized and unrealized 2.64@ 2.99 2.65@
---- ---- ----
gains from investments..
Net increase from investment 2.75 3.01 2.76
---- ----- -----
operations..................
Dividends from net investment (0.06) (0.02) (0.06)
income......................
Distributions from net (1.11)
-------
realized gains from (1.11) (0.08)
------ -------
investments.................
Total dividends and (1.17) (0.10) (1.17)
------ ------- -------
distributions...............
Net asset value, end of period $ 16.49 $ 14.91 $ 16.48
===== ====== ======
Total investment return(1).... 18.43% 24.98% 18.52%
===== ====== ======
Ratios/Supplemental data:
Net assets, end of period $36,714 $ 22,494 $ 54,413
(000's).......................
Expenses to average net 0.74% 0.95%* 0.99%*
assets, before waiver from
adviser.....................
Expenses to average net 0.74% 0.95%* 0.74%*
assets, after waiver from
adviser.....................
Net investment income to 0.71% 0.77%* 0.56%*
average net assets, before
waiver from adviser.........
Net investment income to 0.71% 0.77%* 0.81%*
average net assets, after
waiver from adviser.........
Portfolio turnover rate....... 110% 6% 110%
- -------------------
+ Commencement of operations.
++ Commencement of issuance of shares.
* Annualized.
@ Calculated using the average monthly shares outstanding for the period.
(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 periods of less than one
year has not been annualized.
46
<PAGE>
Mitchell Hutchins Series Trust Growth Portfolio
- ----------------------------------------------------
<TABLE>
GROWTH PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS H CLASS I
-----------------------------------------------------------------------------------
FOR THE YEARS ENDED FOR THE PERIOD
DECEMBER 31, JULY 18, 1999+
---------------------------------------------------------- THROUGH
1999 1998 1997 1996 1995 DECEMBER 31, 1999
---- ---- ---- ---- ---- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $ 18.03 $ 15.63 $ 17.48 $ 17.57 $ 14.56 $ 20.59
------- ------- ------- ------- ------- -------
beginning of year....
Net investment 0.14 (0.07) 0.03 (0.06) 0.04 (0.03)
income (loss)........
Net realized and
unrealized gains 6.20 4.79 2.69 3.29 4.68 3.53
---- ----- ---- ---- ---- ----
(losses) from
investments........
Net increase
(decrease) from 6.06 4.72 2.72 3.23 4.72 3.50
---- ----- ---- ---- ---- ----
investment
operations.........
Dividends from net
investment -- -- (0.03) -- (0.08) --
income.............
Distributions from
net realized gains (0.00)++ (2.32) (4.54) (3.32) (1.63) (0.00)++
------- ------- ------ ------ ------ ------
from investments...
Total dividends and (0.00) (2.32) (4.57) (3.32) (1.71) (0.00)
------ ------- ------ ------ ------ ------
distributions........
Net asset value, end $ 24.09 $ 18.03 $15.63 $17.48 $17.57 $ 24.09
======= ====== ====== ====== ====== ======
of year.............
Total investment 33.61% 30.59% 15.41% 18.70% 32.50% 17.00%
===== ===== ===== ===== ===== =====
return(1)..........
Ratios/Supplemental
data:
Net assets, end of $36,428 $36,830 $30,586 $36,357 $42,784 $2,375
year (000's).........
Expenses to average 1.11% 1.05% 1.05% 1.14% 1.02% 1.14%*
net assets.........
Net investment
income (loss) to (0.58)% (0.37)% 0.12% (0.29)% 0.23% (0.58)%*
average net assets.
Portfolio turnover 23% 50% 89% 53% 41% 23%
rate...............
- -------------------
</TABLE>
* Annualized.
+ Commencement of issuance of shares.
++ The Fund paid a distribution of less than $0.005 per share for the period
ended December 31, 1999.
(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 year reported. The figures do not
include additional contract level charges; results would be lower if such
charges were included. Total investment return for periods of less than one
year has not been annualized.
(2)During the period ended December 31, 1999 Mitchell Hutchins waived a portion
of its fees. The ratios excluding the waiver would have been 1.11% and 1.39%
for Class H and Class I, respectively.
(3)During the period ended December 31, 1999 Mitchell Hutchins waived a portion
of its fees. The ratios excluding the waiver would have been (0.58)% and
(0.83)% for Class H and Class I, respectively.
47
<PAGE>
<TABLE>
Mitchell Hutchins Series Trust Aggressive Growth Portfolio
- ----------------------------------------------------------------
AGGRESSIVE GROWTH PORTFOLIO
- ----------------------------------------------------------------------------
<CAPTION>
CLASS H
----------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Net asset value, beginning $13.64 $ 13.40 $13.09 $11.34 $9.65
------ ------ ------ ------ -----
of year...................
Net investment income (0.18) (0.12) (0.09) (0.10) 0.03
(loss)....................
Net realized and
unrealized gains from 3.60 2.15 2.78 2.93 2.00
---- ----- ---- ---- ----
investments.............
Net increase from
investment operations... 3.42 2.03 2.69 2.83 2.03
---- ----- ---- ---- ----
Dividends from net -- -- -- -- (0.02)
investment income.......
Distributions from net
realized gains from -- (1.79) (2.38) (1.08) (0.32)
----- ------- ------ ------ ------
investments.............
Total dividends and -- (1.79) (2.38) (1.08) (0.34)
----- ------- ------ ------ ------
distributions.............
Net asset value, end of $17.06 $ 13.64 $13.40 $13.09 $11.34
===== ====== ====== ====== ======
year......................
Total investment return(1) 25.07% 15.30% 20.76% 25.23% 21.04%
===== ===== ===== ===== =====
Ratios/Supplemental data:
Net assets, end of year $15,491 $18,715 $19,076 $19,167 $17,660
(000's)...................
Expenses to average net 1.38% 1.21% 1.18% 1.52% 1.29%
assets..................
Net investment income
(loss) to average net (0.95) % (0.70)% (0.59)% (0.74)% 0.23%
assets..................
Portfolio turnover rate... 135% 73% 89% 115% 119%
- -------------------
</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.
48
<PAGE>
Mitchell Hutchins Small Cap Portfolio
Series Trust
- ------------------------------------------
<TABLE>
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<CAPTION>
CLASS H CLASS I
-------------------------------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE SEPTEMBER 28, JULY 6, 1999++
YEAR ENDED 1998+ THROUGH THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of $ 14.90 $ 12.00 $ 14.70
------- -------
period.............................
Net investment loss................ (0.41) (0.04) (0.12)
Net realized and unrealized gains 1.32 3.67 1.22
---- ---- ----
(losses) from investments........
Net increase (decrease) from 0.91 3.63 1.10
---- ----- -----
investment operations............
Distributions from net realized (0.55) (0.73) (0.55)
------ ------- -------
gains from investments...........
Net asset value, end of period..... $15.26 $ 14.90 $ 15.25
====== ====== ======
Total investment return(1)......... 6.13% 30.36% 7.51%
==== ====== =====
Ratios/Supplemental Data:
Net assets, end of period (000's) $4,769 $ 4,057 $ 301
Expenses to average net assets, 3.86%(2) 1.94%* 3.80%*
net of waivers (2)...............
Net investment loss to average net (3.09)%(3) (1.27)%* (3.13)%*
assets, net of waivers (3).......
Portfolio turnover rate............ 98% 17% 98%
- -------------------
</TABLE>
+ Commencement of operations.
++ Commencement of issuance of shares.
* 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 periods of less than one
year has not been annualized.
(2)During the period ended December 31, 1999, Mitchell Hutchins waived a
portion of its fees. The ratios excluding the waiver would have been 3.86%
and 4.05% for Class H and Class I, respectively.
(3)During the period ended December 31, 1999, Mitchell Hutchins waived a
portion of its fees. The ratios excluding the waiver would have been (3.09)%
and (3.38)% for Class H and Class I, respectively.
49
<PAGE>
Mitchell Hutchins Global Equity
Series Trust Portfolio
- ------------------------------------------
<TABLE>
GLOBAL EQUITY PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS H CLASS I
------------------------------------------------------------------------------------
FOR THE PERIOD
FOR THE YEARS ENDED DECEMBER 31, AUGUST 5, 1999+
------------------------------------------------------------- THROUGH
1999 1998 1997 1996 1995 DECEMBER 31, 1999
---- ---- ---- ---- ---- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period........ $ 13.74 $ 14.62 $13.74 $12.00 $12.44 $14.43
------- ------ ------ ------ ------ ------
Net investment income (loss)................ (0.03) 0.08 0.04 0.07 0.01 0.01
Net realized and unrealized gains (losses)
from investments, futures and foreign 2.56 1.92 0.94 1.75 (0.45) 1.82
---- ----- ---- ---- ------ ----
currency transactions....................
Net increase (decrease) from investment
operations............................... 2.53 2.00 0.98 1.82 (0.44) 1.83
---- ----- ---- ---- ------ ----
Dividends from net investment income........ (0.05) -- (0.04) (0.08) -- (0.05)
Distributions from net realized gains from
investments.............................. (0.01) (2.88) (0.06) -- -- (0.01)
------ ------- ------ ----- ----- -------
Total dividends and other distributions..... (0.06) (2.88) (0.10) (0.08) 0.00 (0.06)
------ ------- ------ ------ ---- ------
Net asset value, end of period.............. $16.21 $ 13.74 $14.62 $13.74 $12.00 $16.20
====== ====== ====== ====== ====== ======
Total investment return (1)................. 18.47% 13.50% 7.16% 15.14% (3.54)% 12.74%
===== ===== ==== ===== ====== =====
Ratios/Supplemental Data:
Net assets, end of period (000's)........... $13,015 $15,799 $21,215 $25,701 $28,507 $ 387
Expenses to average net assets, net of 1.85% 1.33% 1.07% 1.10% 1.96% 2.00%*
waivers(2)...............................
Net investment income (loss) to average
net assets, net of waivers(3)............ 0.13% 0.46% 0.26% 0.46% 0.10% (0.64)%*
Portfolio turnover rate..................... 63% 154% 81% 44% 157% 63%
</TABLE>
- -------------------
+ Commencement of issuance of shares.
* 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 each period. The figures do not include
additional contract level charges; results would be lower if such charges
were included. Total investment return for periods of less than one year has
not been annualized.
(2)During the period ended December 31, 1999 Mitchell Hutchins waived a portion
of its fees. The ratios excluding the waiver would have been 1.85% and 2.25%
for Class H and Class I, respectively.
(3)During the period ended December 31, 1999 Mitchell Hutchins waived a portion
of its fees. The ratios excluding the waiver would have been 0.13% and
(0.89)% for Class H and Class I, respectively.
50
<PAGE>
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 shareholder
reports and the SAI, at the Public Reference Room of the Securities and Exchange
Commission. You may obtain information about the operations of the SEC's Public
Reference Room by calling the SEC at 1-202-942-8090. You can get text-only
copies of reports and other information about the funds:
o For a fee, by electronic request at [email protected] or by writing the
SEC's Public Reference Room, Washington, D.C. 20549-0102; or
o Free, from the EDGAR Database on the SEC's Internet website at:
http://www.sec.gov
Mitchell Hutchins Series Trust
Investment Company Act File No. - 811-4919
<PAGE>
MITCHELL HUTCHINS SERIES TRUST
STRATEGY PORTFOLIO
The fund offers its Class H and Class I shares only to insurance company
separate accounts that fund certain variable annuity and variable life insurance
contracts. This prospectus should be read together with the prospectus for those
contracts.
PROSPECTUS
May 1, 2000
- -------------------------------
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the fund's shares or determined whether this prospectus
is complete or accurate. To state otherwise is a crime.
<PAGE>
Strategy Portfolio
- -------------------------------
CONTENTS
STRATEGY PORTFOLIO
----------------------------------------------------------------
What every investor 3 Investment Objective, Strategies
should know about and Risks
the fund 5 More About Investment Strategies
and Risks
INVESTING IN THE FUND
----------------------------------------------------------------
Information for 6 Purchases, Redemptions and
managing your fund Exchanges
account 6 Pricing and Valuation
ADDITIONAL INFORMATION
----------------------------------------------------------------
Additional important 7 Management
information about 8 Dividends and Taxes
the fund
----------------------------------------------------------------
Where to learn more Back Cover
about this fund
------------------------------
The fund is not a complete or
balanced investment program.
------------------------------
2
<PAGE>
Strategy Portfolio
- -------------------------------
STRATEGY PORTFOLIO
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
------------------------------------------
Fund Objective
Long-term capital appreciation.
Principal Investment Strategies
The fund will invest substantially all of its assets in stocks of issuers that
are on PaineWebber's Highlighted Stocks list. Historically, the Highlighted
Stocks list has consisted primarily of common stocks of relatively large, well
known U.S. companies.
Under normal circumstances, the fund will purchase only stocks that are included
on the Highlighted Stocks list and will sell stocks that have been removed from
the Highlighted Stocks list. The fund will purchase a stock that has been added
or sell a stock that has been removed after publication of that change.
The fund is designed for investors seeking long-term capital appreciation from a
fully invested, all-equity portfolio. The fund is not a market-timing vehicle
and not a complete investment program.
Generally, the fund seeks to maintain equal weightings of its assets among the
stocks on the Highlighted Stocks list. Any remaining assets may be invested by
the fund's investment adviser, Mitchell Hutchins Asset Management Inc., in
short-term debt obligations, money market instruments and options and futures
contracts.
For more than a century, PaineWebber has been committed to providing superior
equity research, resulting in one of the strongest franchises on Wall Street.
PaineWebber Investment Strategy Group's approach to research seeks to place its
recommendations in the context of broad social, economic and political themes.
PaineWebber believes that the ability to spot emerging trends -- and the
companies expected to benefit from them -- has proven critical to successful
investing. The Investment Strategy Group aims to identify these themes before
they emerge and become well recognized. While the Investment Strategy Group
identifies several different industries and companies that are expected to
benefit from each theme, the Highlighted Stocks list is a list of "choice"
companies from each theme.
The Investment Strategy Group periodically makes subjective decisions to add or
delete companies from the Highlighted Stocks list, but the list is not compiled
with any client or product in mind, including the fund. Historically, the
Highlighted Stocks list has included approximately 25 stocks, which are
typically covered by the PaineWebber Research Department and carry a "1" (Buy)
or "2" (Attractive) rating. As of March 29, 2000, the Highlighted Stocks list
consisted of 31 stocks. Stocks are usually added to or deleted from the
Highlighted Stocks list at the beginning of a month, but revisions may also be
made on other days.
Principal Risks
An investment in the fund is not guaranteed; you may lose money by investing in
the fund.
Stocks generally fluctuate in value more than other investments. Because the
fund invests only in stocks that are on the Highlighted Stocks list, the fund
will hold a relatively small number of stocks, often focused in market sectors
that correspond to the investment themes underlying the list. As a result,
changes in the market value of a single issuer or market sector could affect the
fund's performance and net asset value more severely than if its holdings were
more diversified.
The fund's investment results will not be the same as the price returns reported
for the Highlighted Stocks list. Deviations from the Highlighted Stocks list's
reported price returns will result because the Highlighted Stocks list's price
returns are calculated using the prices of the stocks at the close of the stock
market before changes to the Highlighted Stocks list are announced, and they do
not reflect the execution of actual purchases or sales. Fund purchases and
sales, however, will be affected by market conditions following the publication
of changes to the Highlighted Stocks list and will be subject to competing
orders by other PaineWebber clients who invest based on the Highlighted Stocks
list recommendations. In addition, because the Highlighted Stocks list is a
paper portfolio that is not managed to a target number of stocks, no
"re-balancing" of actual investments is done when stocks are added to or deleted
from the list. Although the fund will "re-balance" periodically to establish
equal weightings of its assets among the stocks on the Highlighted Stocks list,
the fund may not be able to maintain equal weightings at all times. The fund
will also be subject to daily cash flows, which will result in ongoing purchases
and sales of stocks and transactional expenses, including brokerage fees, as
well as the advisory fees and other expenses that the fund bears. In addition,
to the extent the fund invests part of its assets in short-term debt
obligations, money market instruments and options and futures contracts, its
investment results will differ from those of the Highlighted Stocks list.
3
<PAGE>
Strategy Portfolio
- -------------------------------
PaineWebber could at any time suspend or terminate publication of the
Highlighted Stocks list. In that event, or in the event that the Highlighted
Stocks list contains fewer than 20 stocks, the fund will determine how to
proceed consistent with the fund's investment objective and the interests of its
shareholders.
It is possible that the Highlighted Stocks list will include stocks of issuers
for which PaineWebber or one of its affiliates performs banking services for
which it receives fees, as well as stocks of issuers in which PaineWebber or one
of its affiliates makes a market and may have long or short positions. When
PaineWebber or one of its affiliates is engaged in certain activities for an
issuer that is on the Highlighted Stocks list, Mitchell Hutchins may be
prohibited from additional purchases or sales of that issuer's stock for the
re-balancing of the fund.
Price returns reported for the Highlighted Stocks list do not predict the future
results of the Highlighted Stocks list or the fund. Materials showing any price
returns of the Highlighted Stocks list do not reflect the fund's performance.
More information about other risks of an investment in the fund is provided
below in "More About Investment Strategies and Risks."
Performance
The fund is newly organized. As a result, the fund has no operating history or
performance information to include in a bar chart or table reflecting average
annual returns.
4
<PAGE>
Strategy Portfolio
- ------------------------
MORE ABOUT INVESTMENT STRATEGIES AND RISKS
------------------------------------------
Additional Investment Strategies
Strategies Using Derivatives. The fund may use derivatives in strategies
intended to simulate investment in the stocks in the S&P 500 Index or other
stock indices when it is impractical to invest substantially all of its assets
in stocks that are on the Highlighted Stocks list because of diversification
requirements that apply to mutual funds. In addition, the fund may use these
derivatives while keeping a cash balance for fund management purposes, such as
to provide liquidity to meet anticipated sales of its shares by shareholders and
for fund operating expenses, or to facilitate trading and reduce transaction
costs. The value of "derivatives" -- so-called because their value "derives"
from the value of an underlying asset, reference rate or index -- may rise or
fall more rapidly than other investments. For some derivatives, it is possible
for the fund to lose more than the amount it invested in the derivative. Options
and futures contracts are examples of derivatives.
Cash Reserves. The fund may invest a portion of its total assets in short-term
debt obligations, money market instruments and options and futures contracts.
The fund may invest in these instruments either for liquidity, in anticipation
of shareholder redemptions of fund shares, or because the diversification
requirements that apply to mutual funds prevent it from investing substantially
all its assets in the stocks that are on the Highlighted Stocks list. This can
occur if the Highlighted Stocks list includes fewer than 20 issuers, because the
fund's investments in stocks generally will be equally weighted.
Portfolio Turnover. The fund is expected to engage in frequent trading and to
have an annual portfolio turnover greater than 100% (high portfolio turnover)
because it will make additions and deletions to its portfolio to reflect changes
in the Highlighted Stocks list.
Frequent trading may increase the portion of the fund's capital gains that are
realized for tax purposes in any given year. This may increase the fund's
taxable dividends in that year. Frequent trading also may increase the portion
of the fund's realized capital gains that are considered "short-term" for tax
purposes. Shareholders will pay higher taxes on dividends that represent
short-term gains than they would pay on dividends that represent long-term
gains. Frequent trading also may result in higher fund expenses due to
transaction costs.
The fund does not restrict the frequency of trading in order to limit expenses
or the tax effect that the fund's dividends may have on shareholders.
Use of Proceeds of Initial Offering. The fund may not be fully invested in the
stocks on the Highlighted Stocks list until approximately 30 days after it
begins investment operations. During that period, the fund will purchase stocks
on the Highlighted Stocks list, as well as invest in short-term debt
obligations, money market instruments and options and futures contracts.
5
<PAGE>
Strategy Portfolio
- -------------------------------
INVESTING IN THE FUND
Purchases, Redemptions and Exchanges
Shares of the fund are sold only to insurance company separate accounts that
fund benefits under variable annuity or variable life insurance contracts. These
separate accounts are the shareholders of the fund -- not the individual
contract owners. However, the separate accounts may pass through voting rights
to the contract owners.
The fund offers both Class H and Class I shares to insurance company separate
accounts:
o Class H shares are sold and redeemed at net asset value and do not pay any
12b-1 fees.
o Class I shares also are sold and redeemed at net asset value. However,
under a rule 12b-1 plan adopted by the fund, Class I shares pay an annual
distribution fee of 0.25% of average net assets. The fund pays this fee to
insurance companies for the sale of Class I shares and for services that
the insurance companies provide to contract owners. Because these 12b-1
fees are paid out of the fund's assets on an ongoing basis, over time they
will increase the cost of a contract owner's investment and may cost more
than paying other types of sales charges.
An insurance company separate account may exchange shares of the fund for shares
of the same class in another Mitchell Hutchins Series Trust fund at their
relative net asset values per share, provided that the separate account invests
in both funds. A particular insurance company separate account may not invest in
all Mitchell Hutchins Series Trust funds or classes of fund shares.
The fund and Mitchell Hutchins (for Class I shares) reserve the right to reject
any purchase order and to suspend the offering of a fund's shares for a period
of time.
Pricing and Valuation
Insurance company separate accounts buy, sell or exchange fund shares at the net
asset value next calculated after the order is placed. The fund calculates net
asset value separately for each class as of the close of trading on the New York
Stock Exchange (generally, 4:00 p.m., Eastern time). The NYSE normally is not
open, and the fund does not price its shares, on most national holidays and on
Good Friday. If trading on the NYSE is halted for the day before 4:00 p.m.,
Eastern time, the fund's net asset value per share will be calculated as of the
time trading was halted.
The fund calculates its net asset value based on the current market value for
its portfolio securities. The fund normally obtains market values for its
securities from independent pricing services that use reported last sales
prices, current market quotations or valuations from computerized "matrix"
systems that derive values based on comparable securities. If a market value is
not available from an independent pricing source for a particular security, that
security is valued at a fair value determined by or under the direction of the
fund's board. The fund normally uses the amortized cost method to value money
market instruments that will mature in 60 days or less.
6
<PAGE>
Strategy Portfolio
- -------------------------------
MANAGEMENT
Investment Adviser
Mitchell Hutchins Asset Management Inc. is the investment adviser and
administrator of the fund. Mitchell Hutchins is located at 51 West 52nd Street,
New York, New York, 10019-6114, and is a wholly owned asset management
subsidiary of PaineWebber Incorporated, which is wholly owned by Paine Webber
Group Inc., a publicly owned financial services holding company. On February 29,
2000, Mitchell Hutchins was adviser or sub-adviser of 31 investment companies
with 76 separate portfolios and aggregate assets of approximately $54.4 billion.
Portfolio Manager
T. Kirkham Barneby, supported by his quantitative investment team, is
responsible for the day-to-day management of the fund's portfolio. Mr. Barneby
is a managing director and chief investment officer of quantitative investments
of Mitchell Hutchins. Mr. Barneby rejoined Mitchell Hutchins in 1994, after
being with Vantage Global Management for one year. During the eight years that
Mr. Barneby was previously with Mitchell Hutchins, he was a senior vice
president responsible for quantitative management and asset allocation.
Investment Consultant
PaineWebber makes available the Investment Strategy Group, headed by Edward M.
Kerschner, to consult with Mitchell Hutchins regarding the development of
investment themes and stocks covered by the PaineWebber Research Department. Mr.
Kerschner is the Chief Investment Strategist of PaineWebber and Chairman of the
Investment Policy Committee. Mr. Kerschner joined PaineWebber in 1982.
Advisory Fees
The fund pays advisory fees to Mitchell Hutchins at the annual contract rate of
0.75% of its average daily net assets.
Other Information
The fund has received an exemptive order from the SEC that permits its board to
appoint and replace sub-advisers and to amend sub-advisory contracts without
obtaining shareholder approval.
Additional Information About the Highlighted Stocks list
The Highlighted Stocks list was created and is currently maintained by the
Investment Strategy Group in the PaineWebber Research Department. Since January
1988, the Highlighted Stocks list has included between 11 and 31 stocks,
although on average it has consisted of 25 stocks. The names of the companies on
the Highlighted Stocks list as of March 29, 2000 are included in the Statement
of Additional Information ("SAI"). That list changes regularly. While the
companies on the list generally have been relatively large, well known U.S.
companies, the list is not restricted to those types of companies. A list of the
investment themes as of March 29, 2000 is also included in the SAI and changes
from time to time.
Mitchell Hutchins does not have access to information regarding additions or
deletions for the Highlighted Stocks list prior to their publication.
PaineWebber publishes other lists of recommended securities that could be
appropriate for fund investors but that are not used by Mitchell Hutchins for
the fund.
The Highlighted Stocks list is not maintained for the purpose of managing any
account or investment company such as the fund. The average number of stocks on
the Highlighted Stocks list and the frequency of additions to and deletions from
the Highlighted Stocks list change from year to year, and there are no targets
for such numbers in future years. The stocks selected for the Highlighted Stocks
list constitute only a "paper portfolio" that does not reflect actual trading
and does not have an actual performance record. The Highlighted Stocks list's
price return is simply an arithmetic average of the price returns for the stocks
selected for the Highlighted Stocks list. It does not represent the return on
any fund or any other account that involves actual trading. The price returns
would not be indicative of the returns on any fund or account because, among
other things, they do not reflect actual prices when stocks are purchased or
sold, transaction costs and account fees. In addition, because the Highlighted
Stocks list does not include a cash component, price returns are based on a
constant 100% investment in the stocks on the Highlighted Stocks list. Past
price returns are not representative of future price returns. It should not be
assumed that recommendations made in the future will be profitable or will equal
past price returns on the Highlighted Stocks list.
7
<PAGE>
Strategy Portfolio
- ----------------------------
DIVIDENDS AND TAXES
Dividends
Dividends and distributions are paid in additional shares of the fund unless the
shareholder requests otherwise.
The fund normally declares and pays income dividends and distributes any
realized gains annually.
Class I shares have higher expenses because of their distribution fees and thus
are expected to have lower dividends than Class H shares.
Taxes
Fund shares are offered only to insurance company separate accounts that fund
certain variable annuity or variable life contracts. These accounts generally
are not subject to tax on dividends from the fund or when fund shares are
exchanged or redeemed. See the applicable contract prospectus for a discussion
of the federal income tax status of
o the insurance company separate accounts that purchase and hold shares of
the fund; and
o the holders of contracts funded through those separate accounts.
The fund must satisfy certain diversification requirements imposed by the
Internal Revenue Code on segregated assets accounts used to fund variable
annuity or variable life contracts. Failure of the fund to do so would result in
taxation of the insurance company issuing the variable annuity or variable life
contracts and treatment of the contract holders other than as described in the
contract prospectus.
See the SAI for information or for a more detailed discussion. Prospective
shareholders are urged to consult their tax advisers.
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If you want more information about the fund, the following documents are
available free upon request:
Statement of Additional Information (SAI) and Contract Prospectus:
The SAI provides more detailed information about the fund and is
incorporated by reference into this prospectus. Investors are advised to
also read the applicable contract prospectus.
You may discuss your questions about the fund, obtain free copies of the SAI, or
request other information, by contacting the fund directly at 1-800-986-0088.
You may review and copy information about the fund, including the SAI, at the
Public Reference Room of the Securities and Exchange Commission. You may obtain
information about the operations of the SEC's Public Reference Room by calling
the SEC at 1-202-942-8090. You can get text-only copies of information about the
fund:
o For a fee, by electronic request at [email protected] or by writing
to or calling the SEC's Public Reference Room, Washington, D.C.
20549-0102; or
o Free, from the EDGAR Database on the SEC's Internet website at:
http://www.sec.gov
Mitchell Hutchins Series Trust
Investment Company Act File No. 811-4919
<PAGE>
MITCHELL HUTCHINS SERIES TRUST
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
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 Equity 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 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 ("SAI"). The Annual
Reports accompany this SAI. You may obtain additional copies of a fund's Annual
Report by calling toll-free 1-800-986-0088.
This SAI is not a prospectus and should be read only in conjunction with
the funds' current Prospectus, dated May 1, 2000. 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 SAI is dated May 1, 2000.
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; Trustees and Officers; Principal Holders and
Management Ownership of Securities......................................41
Investment Advisory, Administration and Distribution Arrangements.......50
Portfolio Transactions..................................................55
Additional Purchase and Redemption Information..........................60
Valuation of Shares.....................................................60
Taxes...................................................................62
Dividends...............................................................65
Other Information.......................................................65
Financial Statements....................................................66
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'S investment objective is 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. Money market instruments are short-term debt
obligations and similar securities. These instruments include (1) U.S. and
foreign government securities, (2) obligations of U.S. and foreign banks, (3)
commercial paper and other short-term corporate obligations of U.S. and foreign
corporations, partnerships, trusts and similar entities, (4) repurchase
agreements and (5) investment company securities. Money market instruments also
include longer term bonds that have variable interest rates or other special
features that give them the financial characteristics of short-term debt. The
fund 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 only if the institution has total assets at the time of
purchase in excess of $1.5 billion. The fund's investments in non-negotiable
time deposits of these institutions will be considered illiquid if they have
maturities greater than seven days.
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 in 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. If a security in the fund's portfolio ceases to be
a First Tier Security (as defined above) or Mitchell Hutchins becomes aware that
a security has received a rating below the second highest rating by any rating
agency, Mitchell Hutchins and, in certain cases, the board, will consider
whether the fund should continue to hold the obligation. 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.
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. Certain of these obligations carry a demand feature that gives
the fund the right to tender them back to a specified party, usually the issuer
or a remarketing agent, prior to maturity. 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. The fund will purchase variable and floating
rate securities of non-U.S. government issuers that have remaining maturities of
more than 13 months only if the securities are subject to a demand feature
exercisable within 13 months or less.
Generally, Money Market Portfolio may exercise demand features (1) upon a
default under the terms of the underlying security, (2) to maintain its
portfolio in accordance with its investment objective and policies or applicable
legal or regulatory requirements or (3) as needed to provide liquidity to the
fund in order to meet redemption requests. The ability of a bank or other
financial institutional to fulfill its obligations under a letter of credit,
guarantee or other liquidity arrangement might be affected by possible financial
difficulties of its borrowers, adverse interest rate or economic conditions,
regulatory limitations or other factors. The interest rate on floating rate or
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variable rate securities ordinarily is readjusted on the basis of the prime rate
of the bank that originated the financing or some other index or published rate,
such as the 90-day U.S. Treasury bill rate, or is otherwise reset to reflect
market rates of interest. Generally, these interest rate adjustments cause the
market value of floating rate and variable rate securities to fluctuate less
than the market value of fixed-rate securities.
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.
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), except that the fund may
invest up to 25% of its total assets in First Tier Securities of a single issuer
for a period of up to three business days. 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 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.
HIGH GRADE FIXED INCOME PORTFOLIO'S primary investment objective is
current income; capital appreciation is a secondary investment objective. 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 High Grade Fixed Income Portfolio's total assets 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.
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'S investment objective is total return
with low volatility. The fund's investments are managed by a sub-adviser,
Pacific Investment Management Company ("PIMCO"). The fund invests in bonds of
varying maturities but normally maintains 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
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currency exchange-related securities, loan participations and assignments and
money market. 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.
Strategic Fixed Income Portfolio invests primarily in investment grade
bonds but may invest up to 20% of its total assets in securities, including
convertible securities, that are not investment grade but are rated at least B
by S&P or Moody's, assigned a comparable rating by another rating agency or, if
unrated, determined by the sub-adviser to be of comparable quality. The fund may
invest up to 20% of its total assets in a combination of Yankee bonds,
Eurodollar bonds and bonds denominated in foreign currencies, except that not
more than 10% of its 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.
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 from banks or through reverse repurchase
agreements 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 Brothers Aggregate Bond Index, the Salomon
Smith Barney High Yield Master Index, the Merrill Lynch High Yield Index and the
Salomon Smith Barney 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.
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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 for investment purposes to enhance the fund's return. These
transactions are considered borrowing. The fund may also borrow from banks or
through reverse repurchase agreements for temporary or emergency purposes, but
the fund's aggregate borrowings for all purposes may not exceed 33 1/3% of its
total assets, plus an additional 5% 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."
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.
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 these
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 bonds 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
rated 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.
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Global Income Fund may invest up to 35% of its total assets in cash or
investment grade money market instruments as part of its ordinary investment
activities. The fund's investment of cash collateral from securities lending in
these money market instruments is not subject to this 35% limitation, and there
is no limitation on its 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 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 10% of its
total assets. The fund may invest in the securities of other investment
companies and may sell short "against the box."
HIGH INCOME PORTFOLIO'S investment objective is to provide high income.
The fund normally invests at least 65% of its total assets in high yield
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. 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'S investment objective is 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, if unrated, determined by Mitchell
Hutchins to be of comparable quality. The fund's bond investments may include
zero coupon bonds and other original issue discount securities.
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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; commercial paper and other short-term corporate obligations;
variable and floating rate securities and repurchase agreements; participation
interests in these money market instruments; and the securities of other
investment companies that invest exclusively in money market instruments. 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.
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 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."
GROWTH AND INCOME PORTFOLIO'S investment objective is current income and
capital growth. The fund seeks to achieve the capital growth portion of its
objective by investing, under normal circumstances, at least 65% of its total
assets in equity securities believed by Mitchell Hutchins to have the potential
for rapid earnings growth. The fund seeks to achieve the income portion of its
investment objective by investing, under normal circumstances, at least 65% of
its total assets in income producing securities, which may include dividend
paying equity securities, bonds and money market instruments. The fund may
invest up to 10% of its total assets in convertible securities rated below
investment grade but no lower than B by S&P or Moody's, 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.
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 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."
TACTICAL ALLOCATION PORTFOLIO'S investment objective is 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 fund seeks to achieve total return during all economic and
financial market cycles, with lower volatility than that of the Standard &Poor's
500 Compoiste Stock Index ("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
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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 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.
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). The S&P 500
Index can include U.S. dollar denominated equity securities of foreign issuers,
and the fund invests in those securities to the extent needed to track the
performance of 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. The fund may (but is
not required to) use options and futures and other derivatives to effect all or
part of an asset reallocation by adjusting the fund's exposure to the different
asset classes.
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 from banks or through reverse repurchase
agreements 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."
GROWTH PORTFOLIO'S investment objective is 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, the fund invests at least 65% of its total assets in equity
securities.
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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.
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 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."
AGGRESSIVE GROWTH PORTFOLIO'S investment objective is maximizing long-term
capital appreciation. The fund's investments are managed by a sub-adviser,
Nicholas-Applegate Capital Management. Under normal market conditions, the fund
invests at least 75% of its total assets in common stocks. The fund invests
primarily in common stocks of U.S. companies the assets and stock prices of
which the sub-adviser expects to grow faster than the average rate of companies
in the S&P 500 Index. The fund is not restricted to investments in companies of
any particular size. The fund may invest up to 25% of its total assets in
preferred and convertible securities issued by similar growth companies, U.S.
government bonds and investment grade corporate bonds. The fund may invest up to
25% of its total assets in U.S. dollar denominated equity 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 from banks or through reverse repurchase
agreements 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'S investment objective is 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 $1.5 billion at the time of
purchase. 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 bonds and
money market instruments. This includes up to 10% in convertible bonds that are
rated below investment grade but 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 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 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."
GLOBAL EQUITY 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).
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Mitchell Hutchins allocates Global Equity Portfolio's assets between U.S.
investments and foreign investments and manages the assets allocated to U.S.
investments. Mitchell Hutchins has selected Invista Capital Management, LLC
("Invista") to serve as the fund's sub-adviser to manage the assets allocated to
the fund's foreign investments. Mitchell Hutchins reevaluates the allocation of
the fund's assets between U.S. and foreign securities monthly and does not
expect to reallocate the fund's assets to reflect relatively minor changes (that
is, less than 5%) in the asset allocation model employed. When Mitchell Hutchins
determines that a reallocation of the fund's assets is appropriate, the fund may
effect the reallocation by using cash available from the purchase of fund shares
or by selectively selling securities in a region to meet share redemption
requests in addition to buying or selling portfolio securities specifically to
implement a reallocation. The fund also may use derivative instruments to adjust
its exposure to U.S. and foreign stock markets. Mitchell Hutchins determines the
extent to which the fund uses derivative instruments for this purpose and is
responsible for implementing these transactions.
Under normal circumstances, Global Equity 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 ("MSCI") Europe,
Australia and Far East Index ("EAFE Index"). The EAFE Index is 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, Canada and emerging markets.) Mitchell Hutchins
may also invest, as part of the fund's U.S. investments, up to 10% of the fund's
total assets in U.S. dollar denominated equity securities and bonds of foreign
issuers that are traded on recognized U.S.
exchanges or in the U.S. over-the-counter market.
Global Equity 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, but these securities may not exceed 10% of its net assets. 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 SAI, 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 depositary receipts. Common stocks, most
familiar type, represent an equity (ownership) interest in a corporation.
Preferred stock has certain fixed income features, like a bond, but
actually it is equity that is senior to a company's common stock. Convertible
bonds 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. Some preferred stock also may be converted into or
exchanged for common stock. Depositary receipts typically are issued by banks or
trust companies and evidence ownership of underlying equity securities.
While past performance does not guarantee future results, equity
securities historically have provided the greatest long-term growth potential in
a company. However, their prices generally fluctuate more than other securities
and reflect changes in a company's financial condition and in overall market and
economic conditions. Common stocks generally represent the riskiest investment
in a company. It is possible that 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 bills, notes,
debentures, money market instruments and similar instruments and securities.
Mortgage- and asset-backed securities are types of bonds, and certain types of
income-producing, non-convertible preferred stocks may be treated as bonds for
investment purposes. Bonds generally are used by corporations, governments and
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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. 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.
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 SAI. 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 rating represents an
assessment of the likelihood that principal prepayments will be made by obligors
on the underlying assets or the degree to which such prepayments may differ from
that originally anticipated, nor do such ratings address the possibility that
investors may suffer a lower than anticipated yield or that investors in such
securities may fail to recoup fully their initial investment due to prepayments.
Credit ratings attempt to evaluate the safety of principal and interest
payments, but they do not evaluate the volatility of a bond's value or its
liquidity and do not guarantee the performance of the issuer. Rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than the rating indicates. There is a risk that rating agencies may downgrade
the rating of a bond. Subsequent to a bond's purchase by a fund, it may cease to
be rated or its rating may be reduced below the minimum rating required for
purchase by the fund. The funds may use these ratings in determining whether to
purchase, sell or hold a security. It should be emphasized, however, that
ratings are general and are not absolute standards of quality. Consequently,
bonds with the same maturity, interest rate and rating may have different market
prices.
In addition to ratings assigned to individual bond issues, Mitchell
Hutchins or the applicable sub-adviser will analyze interest rate trends and
developments that may affect individual issuers, including factors such as
liquidity, profitability and asset quality. The yields on bonds are dependent on
a variety of factors, including general money market conditions, general
conditions in the bond market, the financial condition of the issuer, the size
of the offering, the maturity of the obligation and its rating. There is a wide
variation in the quality of bonds, both within a particular classification and
between classifications. An issuer's obligations under its bonds are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of bond holders or other creditors of an issuer; litigation or other
conditions may also adversely affect the power or ability of issuers to meet
their obligations for the payment of interest and principal on their bonds.
Investment grade bonds are rated in one of the four highest rating
categories by Moody's or S&P, comparably rated by another rating agency or, if
unrated, determined by Mitchell Hutchins or the applicable 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 bonds. Bonds rated D by S&P are in payment default or such rating is
assigned upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized. Bonds rated C by Moody's
are in the lowest rated class and can be regarded as having extremely poor
prospects of attaining any real investment standing.
Non-investment grade bonds (commonly known as "junk bonds" and sometimes
referred to as "high-yield" bonds) are rated Ba or lower by Moody's, BB or lower
by S&P, comparably rated by another rating agency or, if unrated, determined by
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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 greater
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
that 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 years
by volatility in emerging market securities. In the past, many lower rated bonds
experienced substantial price declines reflecting an expectation that many
issuers of such securities might experience financial difficulties. As a result,
the yields on lower rated bonds rose dramatically. However, those higher yields
did not reflect the value of the income stream that holders of such securities
expected. Rather, they reflected the risk that holders of such securities could
lose a substantial portion of their value due to the issuers' financial
restructurings or defaults by the issuers. There can be no assurance that those
declines will not recur.
The market for non-investment grade bonds generally is thinner and less
active than that for higher quality securities, which may limit a fund's ability
to sell such securities at fair value in response to changes in the economy or
financial markets. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may also decrease the values and liquidity of
non-investment grade bonds, especially in a thinly traded market.
U.S. GOVERNMENT SECURITIES include direct obligations of the U.S.
Treasury (such as Treasury bills, notes or bonds) and obligations issued or
guaranteed as to principal and interest (but not as to market value) by the
U.S. government, its agencies or its instrumentalities. U.S. government
securities include mortgage-backed securities issued or guaranteed by
government agencies or government-sponsored enterprises. Other U.S.
government securities may be backed by the full faith and credit of the U.S.
government or supported primarily or solely by the creditworthiness of the
government-related issuer or, in the case of mortgage-backed securities, by
pools of assets.
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") (also known as
"inflation-indexed securities") 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 semi-annually 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. See "Taxes -- Other Information," below.
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
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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 and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and special
purposes entities (collectively, "Private Mortgage Lenders"). Payments of
principal and interest (but not the market value) of such private
mortgage-backed securities may be supported by pools of mortgage loans or other
mortgage-backed securities that are guaranteed, directly or indirectly, by the
U.S. government or one of its agencies or instrumentalities, or they may be
issued without any government guarantee of the underlying mortgage assets but
with some form of non-government credit enhancement. Foreign mortgage-backed
securities may be issued by mortgage banks and other private or governmental
entities outside the United States and are supported by interests in foreign
real estate.
Mortgage-backed securities may be composed of one or more classes and may
be structured either as pass-through securities or collateralized debt
obligations. Multiple-class mortgage-backed securities are referred to herein as
"CMOs." Some CMOs are directly supported by other CMOs, which in turn are
supported by mortgage pools. Investors typically receive payments out of the
interest and principal on the underlying mortgages. The portions of these
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class. CMOs
involve special risk and evaluating them requires special knowledge.
A major difference between mortgage-backed securities and traditional
bonds is that interest and principal payments are made more frequently (usually
monthly) and that principal may be repaid at any time because the underlying
mortgage loans may be prepaid at any time. When interest rates go down and
homeowners refinance their mortgages, mortgage-backed securities may be paid off
more quickly than investors expect. When interest rates rise, mortgage-backed
securities may be paid off more slowly than originally expected. Changes in the
rate or "speed" of these prepayments can cause the value of mortgage-backed
securities to fluctuate rapidly.
Mortgage-backed securities also may decrease in value as a result of
increases in interest rates and, because of prepayments, may benefit less than
other bonds from declining interest rates. Reinvestments of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting a fund's yield. Actual prepayment experience may cause the yield of a
mortgage-backed security to differ from what was assumed when the fund purchased
the security. Prepayments at a slower rate than expected may lengthen the
effective life of a mortgage-backed security. The value of securities with
longer effective lives generally fluctuates more widely in response to changes
in interest rates than the value of securities with shorter effective lives.
CMO classes may be specially structured in a manner that provides any of a
wide variety of investment characteristics, such as yield, effective maturity
and interest rate sensitivity. As market conditions change, however, and
particularly during periods of rapid or unanticipated changes in market interest
rates, the attractiveness of the CMO classes and the ability of the structure to
provide the anticipated investment characteristics may be significantly reduced.
These changes can result in volatility in the market value, and in some
instances reduced liquidity, of the CMO class.
Certain classes of CMOs and other mortgage-backed securities are
structured in a manner that makes them extremely sensitive to changes in
prepayment rates. Interest only ("IO") and principal-only ("PO") classes are
examples of this. IOs are entitled to receive all or a portion of the interest,
but none (or only a nominal amount) of the principal payments, from the
underlying mortgage assets. If the mortgage assets underlying an IO experience
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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.
Foreign mortgage-backed securities markets are substantially smaller than U.S.
markets, but have been established in several countries, including Germany,
Denmark, Sweden, Canada and Australia, and may be developed elsewhere. Foreign
mortgage-backed securities generally are structured differently than domestic
mortgage-backed securities, but they normally present substantially similar
investment risks as well as the other risks normally associated with foreign
securities.
During 1994, the value and liquidity of many mortgage-backed securities
declined sharply due primarily to increases in interest rates. There can be no
assurance that such declines will not recur. The market value of certain
mortgage-backed securities, including IO and PO classes of mortgage-backed
securities, can be extremely volatile, and these securities may become illiquid.
Mitchell Hutchins or the applicable sub-adviser seeks to manage a fund's
investments in mortgage-backed securities so that the volatility of its
portfolio, taken as a whole, is consistent with its investment objective.
Management of portfolio duration is an important part of this. However,
computing the duration of mortgage-backed securities is complex. See, "The
Funds' Investments, Related Risks and Limitations -- Duration." If Mitchell
Hutchins or the applicable 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 applicable 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. The funds that may invest in foreign securities may
invest in foreign mortgage-backed securities, which may be structured
differently than domestic mortgage-backed securities.
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
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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 "The Funds'
Investments, Related Risks and Limitations--Types of Credit Enhancement." These
credit enhancements do not protect investors from changes in market value.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE PASS-THROUGHS
- -- CMOs are debt obligations that are collateralized by mortgage loans or
mortgage pass-through securities (collectively "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
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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
relates to losses resulting after default by an obligor on the underlying assets
and collection of all amounts recoverable directly from the obligor and through
liquidation of the collateral. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets (usually the
bank, savings association or mortgage banker that transferred the underlying
loans to the issuer of the security), to ensure that the receipt of payments on
the underlying pool occurs in a timely fashion. Loss protection ensures ultimate
payment of the obligations on at least a portion of the assets in the pool. Such
protection may be provided through guarantees, insurance policies or letters of
credit obtained by the issuer or sponsor, from third parties, through various
means of structuring the transaction or through a combination of such
approaches. A fund will not pay any additional fees for such credit enhancement,
although the existence of credit enhancement may increase the price of a
security. Credit enhancements do not provide protection against changes in the
market value of the security. Examples of credit enhancement arising out of the
structure of the transaction include "senior-subordinated securities" (multiple
class securities with one or more classes subordinate to other classes as to the
payment of principal thereof and interest thereon, with the result that defaults
on the underlying assets are borne first by the holders of the subordinated
class), creation of "spread accounts" or "reserve funds" (where cash or
investments, sometimes funded from a portion of the payments on the underlying
assets, are held in reserve against future losses) and "over-collateralization"
(where the scheduled payments on, or the principal amount of, the underlying
assets exceed that required to make payment of the securities and pay any
servicing or other fees). The degree of credit enhancement provided for each
issue generally is based on historical information regarding the level of credit
risk associated with the underlying assets. Delinquency or loss in excess of
that anticipated could adversely affect the return on an investment in such a
security.
SPECIAL CHARACTERISTICS OF MORTGAGE- AND ASSET-BACKED SECURITIES -- The
yield characteristics of mortgage- and asset-backed securities differ from those
of traditiona1 debt securities. Among the major differences are that interest
and principal payments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans or
other obligations generally may be prepaid at any time. Prepayments on a pool of
mortgage loans are influenced by a variety of economic, geographic, social and
other factors, including changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and servicing
decisions. Generally, however, prepayments on fixed-rate mortgage loans will
increase during a period of falling interest rates and decrease during a period
of rising interest rates. Similar factors apply to prepayments on asset-backed
securities, but the receivables underlying asset-backed securities generally are
of a shorter maturity and thus are less likely to experience substantial
prepayments. Such securities, however, often provide that for a specified time
period the issuers will replace receivables in the pool that are repaid with
comparable obligations. If the issuer is unable to do so, repayment of principal
on the asset-backed securities may commence at an earlier date. Mortgage- and
asset-backed securities may decrease in value as a result of increases in
interest rates and may benefit less than other fixed-income securities from
declining interest rates because of the risk of prepayment.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
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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 (sometimes referred to as ARMs) are
mortgage-backed securities that represent a right to receive interest payments
at a rate that is adjusted to reflect the interest earned on a pool of mortgage
loans bearing variable or adjustable rates of interest. Floating rate
mortgage-backed securities are classes of mortgage-backed securities that have
been structured to represent the right to receive interest payments at rates
that fluctuate in accordance with an index but that generally are supported by
pools comprised of fixed-rate mortgage loans. Because the interest rates on ARM
and floating rate mortgage-backed securities are reset in response to changes in
a specified market index, the values of such securities tend to be less
sensitive to interest rate fluctuations than the values of fixed-rate
securities. As a result, during periods of rising interest rates, ARMs generally
do not decrease in value as much as fixed-rate securities. Conversely, during
periods of declining rates, ARMs generally do not increase in value as much as
fixed-rate securities. ARMs represent a right to receive interest payments at a
rate that is adjusted to reflect the interest earned on a pool of ARM 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 ARM 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.
ARM 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 ARMs could increase because the availability of
fixed-rate 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 ARM 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
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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 may
involve more risks than investing in U.S. securities. The value of foreign
securities is subject to economic and political developments in the countries
where the issuers operate and to changes in foreign currency values. Investments
in foreign securities involve risks relating to political, social and economic
developments abroad, as well as risks resulting from the differences between the
regulations to which U.S. and foreign issuers and markets are subject. These
risks may include expropriation, confiscatory taxation, withholding taxes on
interest and/or dividends, limitations on the use of or transfer of fund assets
and political or social instability or diplomatic developments. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. In those European countries that have begun using the Euro as a common
currency unit, individual national economies may be adversely affected by the
inability of national governments to use monetary policy to address their own
economic or political concerns.
Securities of 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. 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 some of a fund's assets 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. Foreign securities trading practices, including
those involving securities settlement where fund assets may be released prior to
receipt of payment, may expose the funds 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.
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 a fund than is available concerning U.S. companies. Foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards or to other regulatory requirements comparable to
those applicable to U.S. companies.
The funds may invest in foreign securities by purchasing depositary
receipts, including American Depositary Receipts ("ADRs"), European Depositary
Receipts ("EDRs") and Global Depositary 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
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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, depositary receipts
generally are deemed to have the same classification as the underlying
securities they represent. Thus, a depositary 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 depositary's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depositary's
transaction fees are paid directly by the ADR holders. In addition, less
information is available in the United States about an unsponsored ADR than
about a sponsored ADR.
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.
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. These 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 funds that hold
foreign currencies do not intend to convert them 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 U.S. dollar value of fund assets that are denominated in foreign
currencies 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
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dealer. Funds that conduct currency exchange transactions do so 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.
EMERGING MARKET INVESTMENTS. The special risks of investing in foreign
securities are heightened in emerging markets. For example, many emerging market
currencies recently have experienced significant devaluations relative to the
U.S. dollar in recent years. 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 more
developed markets.
INVESTMENT AND REPATRIATION RESTRICTIONS -- Foreign investment in the
securities markets of several emerging market countries is restricted or
controlled to varying degrees. These restrictions may limit a fund's investment
in these countries and may increase its expenses. For example, certain countries
may require governmental approval prior to investments by foreign persons in a
particular company or industry sector or limit investment by foreign persons to
only a specific class of securities of a company, which may have less
advantageous terms (including price) than securities of the company available
for purchase by nationals. Certain countries may restrict or prohibit investment
opportunities in issuers or industries deemed important to national interests.
In addition, the repatriation of both investment income and capital from some
emerging market countries is subject to restrictions, such as the need for
certain government consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of a fund's operations. These restrictions may in the future make it
undesirable to invest in the countries to which they apply. In addition, if
there is a deterioration in a country's balance of payments or for other
reasons, a country may impose restrictions on foreign capital remittances
abroad. A fund could be adversely affected by delays in, or a refusal to grant,
any required governmental approval for repatriation, as well as by the
application to it of other restrictions on investments.
If, because of restrictions on repatriation or conversion, a fund were
unable to distribute substantially all of its net investment income 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. If it did
cease to qualify for that treatment, it would become subject to federal income
tax on all of its income and net gains. See "Taxes -- Qualification as a
Regulated Investment Company," below.
DIFFERENCES BETWEEN THE U.S. AND EMERGING MARKET SECURITIES MARKETS. Most
of the securities markets of emerging market countries have substantially less
volume than the New York Stock Exchange, and equity securities of most companies
in emerging market countries are less liquid and more volatile than equity
securities of U.S. companies of comparable size. Some of the stock exchanges in
emerging market countries are in the earliest stages of their development. As a
result, securities settlements may in some instances be subject to delays and
related administrative uncertainties. Many companies whose securities are traded
on securities markets in emerging market countries are smaller, newer and less
seasoned than companies whose securities are traded on securities markets in the
United States. Investments in smaller companies involve greater risk than is
customarily associated with investing in larger companies. Smaller companies may
have limited product lines, markets or financial or managerial resources and may
be more susceptible to losses and risks of bankruptcy. Additionally,
market-making and arbitrage activities are generally less extensive in such
markets, which may contribute to increased volatility and reduced liquidity of
such markets. Accordingly, each of these markets may be subject to greater
influence by adverse events generally affecting the market, and by large
investors trading significant blocks of securities, than is usual in the United
States. To the extent that an emerging market country experiences rapid
increases in its money supply and investment in equity securities for
speculative purposes, the equity securities traded in that country may trade at
price-earnings multiples higher than those of comparable companies trading on
securities markets in the United States, which may not be sustainable.
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GOVERNMENT SUPERVISION OF EMERGING MARKET SECURITIES MARKETS; LEGAL
SYSTEMS. There is also less government supervision and regulation of securities
exchanges, listed companies and brokers in emerging market countries than exists
in the United States. Therefore, less information may be available to a fund
than with respect to investments in the United States. Further, in certain
countries, less information may be available to a fund than to local market
participants. Brokers in other countries may not be as well capitalized as those
in the United States, so that they are more susceptible to financial failure in
times of market, political or economic stress. 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.
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: (1) authoritarian governments or military
involvement in political and economic decision making, and changes in government
through extra-constitutional means; (2) popular unrest associated with demands
for improved political, economic and social conditions; (3) internal
insurgencies; (4) hostile relations with neighboring countries; and (5) 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 Union. 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. A country whose exports are concentrated in a few
commodities could be vulnerable to a decline in the international price of such
commodities.
Emerging markets include formerly communist countries of Eastern Europe,
Russia and the other countries that once formed the Soviet Union, and China.
Upon the accession to power of communist regimes approximately 50 to 80 years
ago, the governments of a number of these countries seized a large amount of
property. The claims of many property owners against those governments were
never finally settled. There can be no guarantee that a fund's investments in
these countries, if any, would not also be seized or otherwise taken away, in
which case the fund could lose its entire investment in the country involved.
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
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national laws. In circumstances where adequate laws exist, it may not be
possible to obtain swift and equitable enforcement of the law.
FOREIGN SOVEREIGN DEBT. Sovereign debt includes bonds that are issued by
foreign governments or their agencies, instrumentalities or political
subdivisions or by foreign central banks. Sovereign debt also may be issued by
quasi-governmental entities that are owned by foreign governments but are not
backed by their full faith and credit or general taxing powers. Investment in
sovereign debt involves special risks. The issuer of the debt or the
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal and/or interest when due in accordance with the
terms of such debt, and the funds may have limited legal recourse in the event
of a default.
Sovereign debt differs from debt obligations issued by private entities in
that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore somewhat diminished. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt obligations, are of considerable significance. Also, there can be no
assurance that the holders of commercial bank debt issued by the same sovereign
entity may not contest payments to the holders of sovereign debt in the event of
default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and
interest due in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which a
sovereign debtor may be subject. A country whose exports are concentrated in a
few commodities could be vulnerable to a decline in the international price of
such commodities. Increased protectionism on the part of a country's trading
partners, or political changes in those countries, could also adversely affect
its exports. Such events could diminish a country's trade account surplus, if
any, or the credit standing of a particular local government or agency. Another
factor bearing on the ability of a country to repay sovereign debt is the level
of the country's international reserves. Fluctuations in the level of these
reserves can affect the amount of foreign exchange readily available for
external debt payments and, thus, could have a bearing on the capacity of the
country to make payments on its sovereign debt.
The occurrence of political, social or diplomatic changes in one or more
of the countries issuing sovereign debt could adversely affect the funds'
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their sovereign debt. While Mitchell Hutchins or the sub-adviser manages a
fund's portfolio 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
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proceeding by which sovereign debt on which a sovereign has defaulted may be
collected in whole or in part.
Foreign investment in certain sovereign debt is restricted or controlled
to varying degrees. These restrictions or controls may at times limit or
preclude foreign investment in such sovereign debt and increase the costs and
expenses of a fund. Certain countries in which a fund may invest require
governmental approval prior to investments by foreign persons, limit the amount
of investment by foreign persons in a particular issuer, limit the investment by
foreign persons only to a specific class of securities of an issuer that may
have less advantageous rights than the classes available for purchase by
domiciliaries of the countries or impose additional taxes on foreign investors.
Certain issuers may require governmental approval for the repatriation of
investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in a country's balance of
payments the country could impose temporary restrictions on foreign capital
remittances. A fund could be adversely affected by delays in, or a refusal to
grant, any required governmental approval for repatriation of capital, as well
as by the application to the fund of any restrictions on investments. Investing
in local markets may require a fund to adopt special procedures, seek local
government approvals or take other actions, each of which may involve additional
costs to the fund.
BRADY BONDS -- Brady Bonds are sovereign 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 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
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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 generally 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 usually involves the
deposit with or purchase by a U.S. or foreign entity, such as a corporation or
trust, of specified instruments (such as commercial bank loans or Brady Bonds)
and the issuance by that entity of one or more classes of securities backed by,
or representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued structured
foreign investments to create securities with different investment
characteristics such as varying maturities, payment priorities and interest rate
provisions, and the extent of the payments made with respect to structured
foreign investments is often 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. Each fund may invest in
securities of other investment companies, subject to limitations under the
Investment Company Act. Among other things, these limitations currently restrict
a fund's aggregate investments in other investment companies to no more than 10%
of its total assets. A fund's investments in certain private investment vehicles
are not subject to this restriction. The shares of other investment companies
are subject to the management fees and other expenses of those companies, and
the purchase of shares of some investment companies requires the payment of
sales loads and (in the case of closed-end investment companies) sometimes
substantial premiums above the value of those companies' portfolio securities.
At the same time, a fund would continue to pay its own management fees and
expenses with respect to all its investments, including shares of other
investment companies. Each fund may invest in the shares of other investment
companies when, in the judgment of its investment adviser, the potential
benefits of the investment outweigh the payment of any management fees and
expenses and, where applicable, premium or sales load.
From time to time, investments in other investment companies may be the
most effective available means for a fund to invest a portion of its assets. In
some cases, investment in another investment company may be the most practical
way for a fund to invest in securities of issuers in certain countries. These
investments may include World Equity Benchmark SharesSM (commonly known as
"WEBS"), which are exchange-traded shares of series of an investment company
that are designed to replicate the composition and performance of publicly
traded issuers in particular foreign countries. A fund's investment in another
investment company is subject to the risks of that investment company's
underlying portfolio securities.
Money Market Portfolio may invest in the securities of other money market
funds when Mitchell Hutchins believes that (1) the amounts to be invested are
too small or are available too late in the day to be effectively invested in
money market instruments, (2) shares of other money market funds otherwise would
provide a better return than direct investment in money market instruments or
(3) such investments would enhance the fund's liquidity. The other funds may
invest in the securities of money market funds for similar reasons. In addition,
from time to time, investments in other investment companies also may be the
most effective available means for a fund to invest a portion of its assets. In
some cases, investment in another investment company may be the only practical
way for a fund to invest in securities of issuers in certain countries.
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ZERO COUPON AND OTHER OID SECURITIES; PIK SECURITIES. Zero coupon
securities are securities on which no periodic interest payments are made but
instead are issued at a deep discount from their maturity 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 that are sold with original issue discount ("OID"),
(i.e., the difference between the issue price and the value at maturity) may
provide for some interest to be paid 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.
Because federal tax law requires that accrued OID and "interest" on PIK
securities must be included in a fund's current income (see "Taxes," below), a
fund might be required to distribute a dividend an amount that is greater than
the total amount of cash it actually receives. These distributions would have to
be made 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 these 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.
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.
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
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of Loans from third parties. Participations typically result in the fund's
having a contractual relationship only with the Lender, not with the borrower. A
fund has the right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the borrower. In connection with
purchasing Participations, a fund generally has no direct right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
Loan, nor any rights of set-off against the borrower, and a fund may not
directly benefit from any collateral supporting the Loan in which it has
purchased the Participation. As a result, a fund assumes the credit risk of both
the borrower and the Lender that is selling the Participation. In the event of
the insolvency of the selling Lender, the fund may be treated as a general
creditor of that Lender and may not benefit from any set-off between the Lender
and the borrower. A fund will acquire Participations only if Mitchell Hutchins
or the applicable sub-adviser determines that the selling Lender is
creditworthy.
When a fund purchases Assignments from Lenders, it acquires direct rights
against the borrower on the Loan. In an Assignment, the fund is entitled to
receive payments directly from the borrower and, therefore, does not depend on
the selling bank to pass these payments onto the fund. However, because
Assignments are arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired by the fund as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender.
Assignments and Participations are generally not registered under the
Securities Act of 1933, 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, to
reinvest cash collateral from its securities lending activities 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 and similar private investment vehicles. Only those
funds that may invest outside the United States may invest in money market
instruments that are denominated in foreign currencies.
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 SAI 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 the
board. The assets used as cover for over-the-counter options written by a fund
will be considered illiquid unless the over-the-counter options are sold to
qualified dealers that agree that the fund may repurchase any over-the-counter
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options it writes at a maximum price to be calculated by a formula set forth in
the option agreements. The cover for an over-the-counter option written subject
to this procedure would be considered illiquid only to the extent that the
maximum repurchase price under the formula exceeds the intrinsic value of the
option. Under current SEC guidelines, interest only and interest only classes of
mortgage-backed securities generally are considered illiquid. However, IO and PO
classes of fixed-rate mortgage-backed securities issued by the U.S. government
or one of its agencies or instrumentalities will not be considered illiquid if
Mitchell Hutchins or the applicable sub-adviser has determined that they are
liquid pursuant to guidelines established by the board. A fund may not be able
to readily liquidate its investments in illiquid securities 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.
Not all restricted securities are illiquid. If 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 the portfolio
securities, and the fund might be unable to dispose of them promptly or at
favorable prices.
The board has delegated the function of making day-to-day determinations
of liquidity to Mitchell Hutchins or the applicable sub-adviser pursuant to
guidelines approved by the board. Mitchell Hutchins or the sub-adviser takes
into account a number of factors in reaching liquidity decisions, including (1)
the frequency of trades for the security, (2) the number of dealers that make
quotes for the security, (3) the number of dealers that have undertaken to make
a market in the security, (4) the number of other potential purchasers and (5)
the nature of the security and how trading is effected (e.g., the time needed to
sell the security, how bids are solicited and the mechanics of transfer).
Mitchell Hutchins or the sub-adviser monitors the liquidity of restricted
securities in each fund's portfolio and reports periodically on such decisions
to the board.
Mitchell Hutchins and (where applicable) the sub-adviser monitor each
fund's overall holdings of illiquid securities. If a fund's holdings of illiquid
securities exceeds its limitation on investments in illiquid securities for any
reason (such as a particular security becoming illiquid, changes in relative
market values of liquid and illiquid portfolio securities or shareholder
redemptions), Mitchell Hutchins and the sub-adviser will consider what action
would be in the best interest of the fund and its shareholders.
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
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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 or the applicable sub-adviser to
present minimum credit risks.
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 and may be entered into only with banks or
securities dealers or their affiliates. 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. See "The Funds'
Investments, Related Risks and Limitations -- Segregated Accounts."
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, the 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.
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, i.e., for issuance or delivery to the fund later than the
normal settlement date at a stated price and yield. When issued securities
include TBA ("to be announced") securities. TBA securities are usually
mortgage-backed securities that are purchased on a forward commitment basis with
an approximate principal amount and no defined maturity date. The actual
principal amount and maturity date are determined upon settlement when the
specific mortgage pools are assigned. A fund generally would not pay for such
securities or start earning interest on them until they are received. However,
when a fund undertakes a when-issued or delayed delivery obligation, it
immediately assumes the risks of ownership, including the risks of price
fluctuation. Failure of the issuer to deliver a security purchased by a fund on
a when-issued or delayed delivery basis may result in the fund's incurring or
missing an opportunity to make an alternative investment. Depending on market
conditions, a fund's when-issued and delayed-delivery purchase commitments could
cause its net asset value per share to be more volatile, because such securities
may increase the amount by which the fund's total assets, including the value of
when-issued and delayed-delivery securities held by that fund, exceeds its net
assets.
A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in market
value, generally based upon changes in the level of interest rates. Thus,
fluctuation in the value of the security from the time of the commitment date
will affect a fund's net asset value. When a fund commits to purchase securities
on a when-issued or delayed delivery basis, its custodian segregates assets to
cover the amount of the commitment. See "The Funds' Investments, Related Risks
and Limitations -- Segregated Accounts."
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DOLLAR ROLLS. In a dollar roll, a fund sells TBA 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.
DURATION. Duration is a measure of the expected life of a bond on a
present value basis. Duration incorporates the bond'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 the applicable sub-adviser in
portfolio selection and yield curve positioning a fund's bond investments.
Duration was developed as a more precise alternative to the concept "term to
maturity." Traditionally, a bond's "term to maturity" has been used as a proxy
for the sensitivity of the bond's price to changes in interest rates (which is
the "interest rate risk" or "volatility" of the bond). However, "term to
maturity" measures only the time until the scheduled final payment on the bond,
taking no account of the pattern of 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 bond, expected to be made, and weights them by the present
values of the cash to be received at each future point in time. For any bond
with interest payments occurring prior to the payment of principal, duration is
always less than maturity. 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 the applicable sub-adviser to make
certain predictions as to the effect that changes in the level of interest rates
will have on the value of a fund's portfolio of bonds. For example, when the
level of interest rates increases by 1%, a bond having a positive duration of
three years generally will decrease by approximately 3%. Thus, if Mitchell
Hutchins or a sub-adviser 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 bond. For example, floating
and variable rate bonds often have final maturities of ten or more years;
however, their interest rate exposure corresponds to the frequency of the coupon
reset. Another example where the interest rate exposure is not properly captured
by the standard duration calculation is the case of mortgage-backed securities.
The stated final maturity of such securities is generally 30 years, but current
prepayment rates are critical in determining the securities' interest rate
exposure. In these and other similar situations, Mitchell Hutchins or the
applicable 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 the
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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 including other investment
companies. A fund also may reinvest cash collateral in private investment
vehicles similar to money market funds, including one managed by Mitchell
Hutchins. 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, and reverse
repurchase agreements, it will maintain with an approved custodian in a
segregated account cash or liquid securities, marked to market daily, in an
amount at least equal to the fund's obligation or commitment under such
transactions. As described below under "Strategies Using Derivative
Instruments," segregated accounts may also be required in connection with
certain transactions involving options, futures or forward currency contracts
and swaps.
INVESTMENT LIMITATIONS OF THE FUNDS
FUNDAMENTAL LIMITATIONS. The following fundamental investment limitations
cannot be changed for a fund without the affirmative vote of the lesser of (a)
more than 50% of the outstanding shares of the fund or (b) 67% or more of the
shares of the fund present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy. If a
percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations. With regard to the borrowings
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limitation in fundamental limitation (2), each fund will comply with the
applicable restrictions of Section 18 of the Investment Company Act.
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.
The following interpretation applies to but is not part of this
fundamental restriction: A fund's investments in master notes and similar
instruments will not be considered to be 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
apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment companies.
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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. 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) hold assets of any issuers, at the end of any calendar quarter (or
within 30 days thereafter), to the extent those 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 (which 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. Each fund other than Money
Market Portfolio is authorized to 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 its portfolio and also to attempt to enhance income or return
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. In particular, each fund
except Money Market Portfolio may use the Derivative Instruments described
below.
A fund 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, as applicable, 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. A fund may
use Derivative Instruments to attempt to hedge its portfolio and also to attempt
to enhance income or return or realize gains and to manage the duration of its
bond portfolio. A fund may use Derivative Instruments to maintain exposure to
stocks or bonds 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), to facilitate trading or to adjust its
exposure to different asset classes. For example, Global Equity Fund may use
Derivative Instruments to adjust its exposure to U.S. and foreign equity markets
in connection with a reallocation or rebalancing of the fund's assets. A fund
also may use Derivative Instruments on currencies, including forward currency
contracts, to hedge against price changes of securities that a fund owns or
intends to acquire that are attributable to changes in the value of the
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currencies in which the securities are denominated. A fund may also use
Derivative Instruments on currencies to shift exposure from one currency to
another or to attempt to realize gains from favorable changes in exchange rates.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Derivative Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in a fund's portfolio. Thus, in a short hedge a fund takes a
position in a Derivative Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged. For example, a
fund might purchase a put option on a security to hedge against a potential
decline in the value of that security. If the price of the security declined
below the exercise price of the put, a fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transaction
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, a fund might be
able to close out the put option and realize a gain to offset the decline in the
value of the security.
Conversely, a long hedge is a purchase or sale of a Derivative Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that a fund intends to acquire. Thus, in a long
hedge, a fund takes a position in a Derivative Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, a fund might purchase a call option on a
security it intends to purchase in order to hedge against an increase in the
cost of the security. If the price of the security increased above the exercise
price of the call, a fund could exercise the call and thus limit its acquisition
cost to the exercise price plus the premium paid and transactions costs.
Alternatively, a fund might be able to offset the price increase by closing out
an appreciated call option and realizing a gain.
A fund may purchase and write (sell) straddles on securities or indices of
securities. A long straddle is a combination of a call and a put option
purchased on the same security or on the same futures contract, where the
exercise price of the put is equal to the exercise price of the call. A fund
might enter into a long straddle when Mitchell Hutchins or a sub-adviser
believes it likely that the prices of the securities will be more volatile
during the term of the option than the option pricing implies. A short straddle
is a combination of a call and a put written on the same security where the
exercise price of the put is equal to the exercise price of the call. A fund
might enter into a short straddle when Mitchell Hutchins or a sub-adviser
believes it unlikely that the prices of the securities will be as volatile
during the term of the option as the option pricing implies.
Derivative Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that a fund owns
or intends to acquire. Derivative Instruments on stock indices, in contrast,
generally are used to hedge against price movements in broad equity market
sectors in which a fund has invested or expects to invest. Derivative
Instruments on 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. Return or 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, return 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 use these opportunities for a fund to the extent that
they are consistent with the fund's investment objective and permitted by its
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investment limitations and applicable regulatory authorities. The Prospectus or
SAI will be supplemented to the extent that new products or techniques involve
materially different risks than those described below or in the Prospectus.
SPECIAL RISKS OF STRATEGIES USING DERIVATIVE INSTRUMENTS. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.
(1) Successful use of most Derivative Instruments depends upon the ability
of Mitchell Hutchins or the applicable sub-adviser to predict movements of the
overall securities, interest rate or currency exchange markets, which requires
different skills than predicting changes in the prices of individual securities.
While Mitchell Hutchins and the sub-advisers are experienced in the use of
Derivative Instruments, there can be no assurance that any particular strategy
adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Derivative Instrument and price movements of the
investments that are being hedged. For example, if the value of a Derivative
Instrument used in a short hedge increased by less than the decline in value of
the hedged investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors affecting the markets in which Derivative
Instruments are traded, rather than the value of the investments being hedged.
The effectiveness of hedges using Derivative Instruments on indices will depend
on the degree of correlation between price movements in the index and price
movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly
or partially offsetting the negative effect of unfavorable price movements in
the investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a fund entered into a short
hedge because Mitchell Hutchins or a sub-adviser projected a decline in the
price of a security in that fund's portfolio, and the price of that security
increased instead, the gain from that increase might be wholly or partially
offset by a decline in the price of the Derivative Instrument. Moreover, if the
price of the Derivative Instrument declined by more than the increase in the
price of the security, the fund could suffer a loss. In either such case, the
fund would have been in a better position had it not hedged at all.
(4) As described below, a fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
(i.e., Derivative Instruments other than purchased options). If the fund was
unable to close out its positions in such Derivative Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the positions expired or matured. These requirements might impair a fund's
ability to sell a portfolio security or make an investment at a time when it
would otherwise be favorable to do so, or require that the fund sell a portfolio
security at a disadvantageous time. A fund's ability to close out a position in
a Derivative Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of a counterparty to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to a fund.
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose the funds to an
obligation to another party. A fund will not enter into any such transactions
unless it owns either (1) an offsetting ("covered") position in securities,
currencies or other options or futures contracts or (2) cash or liquid
securities, with a value sufficient at all times to cover its potential
obligations to the extent not covered as provided in (1) above. Each fund will
comply with SEC guidelines regarding cover for such transactions and will, if
the guidelines so require, set aside cash or liquid securities in a segregated
account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Derivative Instrument is open, unless they are
replaced with similar assets. As a result, committing a large portion of a
fund's assets to cover positions or to segregated accounts could impede
portfolio management or the fund's ability to meet redemption requests or other
current obligations.
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OPTIONS. The funds may purchase put and call options, and write (sell)
covered put or call options on securities in which they invest and related
indices. Funds that may invest outside the United States also may purchase put
and call options and write covered options on foreign currencies. The purchase
of call options may serve as a long hedge, and the purchase of put options may
serve as a short hedge. In addition, a fund may also use options to attempt to
enhance return or realize gains by increasing or reducing its exposure to an
asset class without purchasing or selling the underlying securities. Writing
covered put or call options can enable a fund to enhance income by reason of the
premiums paid by the purchasers of such options. Writing covered call options
serves as a limited short hedge, because declines in the value of the hedged
investment would be offset to the extent of the premium received for writing the
option. However, if the security appreciates to a price higher than the exercise
price of the call option, it can be expected that the option will be exercised
and the affected fund will be obligated to sell the security at less than its
market value. Writing covered put options serves as a limited long hedge because
increases in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and the fund will be obligated
to purchase the security at more than its market value. The securities or other
assets used as cover for over-the-counter options written by a fund would be
considered illiquid to the extent described under "The Funds' Investment
Policies, Related Risks and Limitations--Illiquid Securities."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Generally, over-the-counter debt options or foreign
currency options used by the funds are European-style options. This means that
the option is only exercisable immediately prior to its expiration. This is in
contrast to American-style options which are exercisable at any time prior to
the expiration date of the option. 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.
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<PAGE>
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.
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 either
as a hedge or to enhance return or realize gains.
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
37
<PAGE>
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.
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 use of futures
and related options is governed by the following guidelines, which can be
changed by the board without shareholder vote:
(1) The aggregate initial margin and premiums on futures contracts and
options on futures positions that are not for bona fide hedging purposes (as
defined by the CFTC), excluding the amount by which options are "in-the-money",
may not exceed 5% of a fund's 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 a fund that are held at any time will not exceed 20% of
its net assets.
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<PAGE>
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by a 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
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
39
<PAGE>
counterparty to make or take delivery of the underlying currency at the maturity
of the contract. Failure by the counterparty to do so would result in the loss
of any expected benefit of the transaction.
As is the case with futures contracts, parties to forward currency
contracts can enter into offsetting closing transactions, similar to closing
transactions on futures, by entering into an instrument identical to the
instrument purchased or sold, but in the opposite direction. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the counterparty. Thus, there can be no assurance
that a fund will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the counterparty, a fund might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the fund would continue
to be subject to market risk with respect to the position, and would continue to
be required to maintain a position in the securities or currencies that are the
subject of the hedge or to maintain cash or securities in a segregated account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, 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. Swap transactions include swaps, caps, floors and
collars relating to interest rates, currencies, securities or other instruments.
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. Equity swaps or other swaps relating to
securities or other instruments are also similar, but they are based on changes
in the value of the underlying securities or instruments. For example, an equity
swap might involve an exchange of the value of a particular security or
securities index in a certain notional amount for the value of another security
or index or for the value of interest on that notional amount at a specified
fixed or variable rate.
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 use interest rate swaps, caps, floors and collars as a
hedge on either an asset-based or liability-based basis, depending on whether it
is hedging its assets or liabilities. Interest rate swap transactions are
subject to risks comparable to those described above with respect to other
derivatives strategies.
A fund 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. Because segregated
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accounts will be established with respect to these 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 "The Funds'
Investments, Related Risks and Limitations--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 interest rate swap transactions only with banks or
recognized securities dealers or their affiliates believed by Mitchell Hutchins
or the applicable sub-adviser to present minimal credit risk in accordance with
guidelines established by the fund's board. If there is a default by the other
party to such a transaction, a fund will have to rely on its contractual
remedies (which may be limited by bankruptcy, insolvency or similar laws)
pursuant to the agreements related to the transaction.
ORGANIZATION; TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS AND MANAGEMENT
OWNERSHIP OF SECURITIES
The Trust was formed on November 21, 1986 as a business trust under the
laws of the Commonwealth of Massachusetts and has thirteen operating series. The
Trust is governed by a board of trustees, which is authorized to establish
additional series and to issue an unlimited number of shares of beneficial
interest of each existing or future series, par value $0.001 per share. The
board oversees each fund's operations.
The trustees and executive officers of the Trust, their ages, business
addresses and principal occupations during the past five years are:
POSITION WITH BUSINESS EXPERIENCE; OTHER
NAME AND ADDRESS; AGE TRUST DIRECTORSHIPS
--------------------- ----- -------------
Margo N. Alexander*+; 53 Trustee and Mrs. Alexander is Chairman (since
President March 1999), chief executive officer
and a director of Mitchell Hutchins
(since January 1995), and an executive
vice president and director of
PaineWebber (since March 1984). Mrs.
Alexander is president and director or
trustee of 31 investment companies for
which Mitchell Hutchins, PaineWebber
or one of their affiliates serves as
investment adviser.
Richard Q. Armstrong; 64 Trustee Mr. Armstrong is chairman and
R.Q.A. Enterprises principal of R.Q.A. Enterprises
One Old Church Road (management consulting firm) (since
Unit #6 April 1991 and principal occupation
Greenwich, CT 06830 since March 1995). Mr. Armstrong
was chairman of the board, chief
executive officer and co-owner of
Adirondack Beverages (producer and
distributor of soft drinks and
sparkling/still waters) (October
1993-March 1995). He was a partner of
The New England Consulting Group
(management consulting firm) (December
1992-September 1993). He was managing
director of LVMH U.S. Corporation
(U.S. subsidiary of the French luxury
goods conglomerate, Louis Vuitton Moet
Hennessey Corporation) (1987-1991) and
chairman of its wine and spirits
subsidiary, Schieffelin & Somerset
Company (1987-1991). Mr. Armstrong is
a director or trustee of 30 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
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POSITION WITH BUSINESS EXPERIENCE; OTHER
NAME AND ADDRESS; AGE TRUST DIRECTORSHIPS
--------------------- ----- -------------
E. Garrett Bewkes, Trustee and Mr. Bewkes is a director of Paine
Jr.**+; 73 Chairman of Webber Group Inc. ("PW Group")
the Board of (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 34 investment companies
for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Richard R. Burt; 53 Trustee Mr. Burt is chairman of IEP
1275 Pennsylvania Ave, Advisors, LLP (international
N.W. investments and consulting firm)
Washington, DC 20004 (since March 1994), 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) and Homestake Mining
Corp. (gold mining), vice chairman
of Anchor Gaming (provides
technology to gaming and wagering
industry) (since July 1999), nine
investment companies in the Flag
Investors Family of Funds, The
Central European Fund, Inc., The
Germany Fund, Inc. and chairman of
Weirton Steel Corp. (makes and
finishes steel products) (since
April 1996). 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
30 investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Mary C. Farrell**+; 50 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 29 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
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POSITION WITH BUSINESS EXPERIENCE; OTHER
NAME AND ADDRESS; AGE TRUST DIRECTORSHIPS
--------------------- ----- -------------
Meyer Feldberg; 58 Trustee Mr. Feldberg is Dean and Professor
Columbia University of Management of the Graduate School
101 Uris Hall of Business, Columbia University.
New York, NY 10027 Prior to 1989, he was president of
the Illinois Institute of
Technology. Dean Feldberg is also a
director of Primedia Inc.
(publishing), Federated Department
Stores, Inc. (operator of department
stores) and Revlon, Inc.
(cosmetics). Dean Feldberg is a
director or trustee of 33 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
George W. Gowen; 70 Trustee Mr. Gowen is a partner in the law
666 Third Avenue firm of Dunnington, Bartholow &
New York, NY 10017 Miller. Prior to May 1994, he was a
partner in the law firm of Fryer, Ross
& Gowen. Mr. Gowen is a director or
trustee of 33 investment companies for
which Mitchell Hutchins, PaineWebber
or one of their affiliates serves as
investment adviser.
Frederic V. Malek; 63 Trustee Mr. Malek is chairman of Thayer
1455 Pennsylvania Ave, Capital Partners (merchant bank) and
N.W. chairman of Thayer Hotel Investors
Suite 350 II and Lodging Opportunities Fund
Washington, DC 20004 (hotel investment partnerships).
From January 1992 to November 1992,
he was campaign manager of
Bush-Quayle '92. From 1990 to 1992,
he was vice chairman and, from 1989
to 1990, he was president of
Northwest Airlines Inc. and NWA Inc.
(holding company of Northwest
Airlines Inc.). Prior to 1989, he
was employed by the Marriott
Corporation (hotels, restaurants,
airline catering and contract
feeding), where he most recently was
an executive vice president and
president of Marriott Hotels and
Resorts. Mr. Malek is also a
director of Aegis Communications,
Inc. (tele-services), American
Management Systems, Inc. (management
consulting and computer related
services), Automatic Data
Processing, Inc., (computing
services), CB Richard Ellis, Inc.
(real estate services), FPL Group,
Inc. (electric services), Global
Vacation Group (packaged vacations),
HCR/Manor Care, Inc. (health care),
SAGA Systems, Inc. (software
company) and Northwest Airlines
Inc. Mr. Malek is a director or
trustee of 30 investment companies
for which Mitchell Hutchins,
PaineWebber or one of their
affiliates serves as investment
adviser.
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<PAGE>
POSITION WITH BUSINESS EXPERIENCE; OTHER
NAME AND ADDRESS; AGE TRUST DIRECTORSHIPS
--------------------- ----- -------------
Carl W. Schafer; 64 Trustee Mr. Schafer is president of the
66 Witherspoon Street, Atlantic Foundation (charitable
#1100 foundation supporting mainly
Princeton, NJ 08542 oceanographic exploration and
research). He is a director of
Labor Ready, Inc. (temporary
employment), Roadway Express, Inc.
(trucking), The Guardian Group of
Mutual Funds, the Harding, Loevner
Funds, E.I.I. Realty Trust
(investment company), 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
30 investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Brian M. Storms*+; 45 Trustee Mr. Storms is president and chief
operating officer of Mitchell
Hutchins (since March 1999). Mr.
Storms was president of Prudential
Investments (1996-1999). Prior to
joining Prudential he was a managing
director at Fidelity Investments.
Mr. Storms is a director or trustee
of 30 investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
T. Kirkham Barneby*; 53 Vice President Mr. Barneby is a managing director
and chief investment
officer--quantitative investments of
Mitchell Hutchins. Mr. Barneby is a
vice president of seven investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Tom Disbrow**; 34 Vice President Mr. Disbrow is a first vice
and Assistant president and a senior manager of
Treasurer the mutual fund finance department
of Mitchell Hutchins. Prior to
November 1999, he was a vice
president of Zweig/Glaser Advisers.
Mr. Disbrow is a vice president and
assistant treasurer of 31 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Ellen R. Harris*; 53 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.
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<PAGE>
POSITION WITH BUSINESS EXPERIENCE; OTHER
NAME AND ADDRESS; AGE TRUST DIRECTORSHIPS
--------------------- ----- -------------
Donald R. Jones*; 39 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*; 39 Vice President Mr. Keegan is a senior vice
president and a portfolio manager of
Mitchell Hutchins. Prior to March
1996, he was director of fixed
income strategy and research of
Merrion Group, L.P. Mr. Keegan is a
vice president of six investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
John J. Lee**; 31 Vice President Mr. Lee is a vice president and a
and manager of the mutual fund finance
Assistant department of Mitchell Hutchins.
Treasurer 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 31 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Kevin J. Mahoney**; 34 Vice President Mr. Mahoney is a first vice
and president and a senior manager of
Assistant the mutual fund finance department
Treasurer of Mitchell Hutchins. From August
1996 through March 1999, he was the
manager of the mutual fund internal
control group of Salomon Smith
Barney. Prior to August 1996, he
was an associate and assistant
treasurer for BlackRock Financial
Management L.P. Mr. Mahoney is a
vice president and assistant
treasurer of 31 investment companies
for which Mitchell Hutchins,
PaineWebber or one of their
affiliates serves as investment
adviser.
Dennis McCauley*; 53 Vice President Mr. McCauley is a managing director
and chief investment officer--fixed
income of Mitchell Hutchins. 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**; 42 Vice President Ms. Moran is a vice president and a
and manager of the mutual fund finance
Assistant department of Mitchell Hutchins. Ms.
Treasurer Moran is a vice president and
assistant treasurer of 31 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
45
<PAGE>
POSITION WITH BUSINESS EXPERIENCE; OTHER
NAME AND ADDRESS; AGE TRUST DIRECTORSHIPS
--------------------- ----- -------------
Dianne E. O'Donnell**; 47 Vice President Ms. O'Donnell is a senior vice
and Secretary president and deputy general counsel
of Mitchell Hutchins. Ms. O'Donnell
is a vice president and secretary of
30 investment companies and a vice
president and assistant secretary of
one investment company for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Emil Polito*; 39 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 31
investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Susan Ryan; 40* 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**; Vice President Ms. Schonfeld is a managing director
49 and general counsel of Mitchell
Hutchins and (since July 1995) a
senior vice president of
PaineWebber. Ms. Schonfeld is a vice
president of 30 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**; 37 Vice President Mr. Schubert is a senior vice
and Treasurer president and director of the mutual
fund finance department of Mitchell
Hutchins. Mr. Schubert is a vice
president and treasurer of 31
investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Nirmal Singh*; 44 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. Vice President Mr. Taglialatela is a vice president
Taglialatela**; 39 and and a manager of the mutual fund
Assistant finance department of Mitchell
Treasurer Hutchins. Mr. Taglialatela is a vice
president and assistant treasurer of
31 investment companies for which
Mitchell Hutchins, PaineWebber or one
of their affiliates serves as
investment adviser.
Mark A. Tincher*; 44 Vice President Mr. Tincher is a managing director
and chief investment
officer--equities of Mitchell
Hutchins. Mr. Tincher is a vice
president of 12 investment companies
for which Mitchell Hutchins,
PaineWebber or one of their
affiliates serves as investment
adviser.
46
<PAGE>
POSITION WITH BUSINESS EXPERIENCE; OTHER
NAME AND ADDRESS; AGE TRUST DIRECTORSHIPS
--------------------- ----- -------------
Stuart Waugh*; 44 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**; 38 Vice President Mr. Weller is a first vice president
and and associate general counsel of
Assistant Mitchell Hutchins. Prior to May
Secretary 1995, he was an attorney in private
practice. Mr. Weller is a vice
president and assistant secretary of
30 investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
- -------------
* This person's business address is 51 West 52nd Street, New York, New York
10019-6114.
** This person's business address is 1285 Avenue of the Americas, New York, New
York 10019.
+ Mrs. Alexander, Mr. Bewkes, Ms. Farrell and Mr. Storms are "interested
persons" of 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. The Trust
presently has 13 series and thus pays each such trustee $6,500 annually, plus
any additional amounts due for board or committee meetings. Each chairman of the
audit and contract review committees of individual funds within the PaineWebber
fund complex receives additional compensation, aggregating $15,000 annually,
from the relevant funds. All board members are reimbursed for any expenses
incurred in attending meetings. 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.
47
<PAGE>
The table below includes certain information relating to the compensation
of the current board members and the compensation of those board members from
all PaineWebber funds during the year ended December 31, 1999.
COMPENSATION TABLE+
<TABLE>
<CAPTION>
COMPENSATION TABLE+
TOTAL COMPENSATION FROM
AGGREGATE COMPENSATION FROM THE TRUST AND THE FUND
NAME OF PERSON, POSITION THE TRUST* COMPLEX
------------------------ ---------- -------
<S> <C> <C>
Richard Q. Armstrong,
Trustee.......................................... $16,640 $104,650
Richard R. Burt,
Trustee.......................................... 16,250 102,850
Meyer Feldberg,
Trustee.......................................... 16,640 119,650
George W. Gowen,
Trustee.......................................... 21,806 119,650
Frederic V. Malek,
Trustee.......................................... 16,640 104,650
Carl W. Schafer,
Trustee.......................................... 16,640 104,650
</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, 1999.
** Represents total compensation paid during the calendar year ended December
31, 1999 to each board member by 31 investment companies (34 in the case of
Messrs. Feldberg and Gowen) for which Mitchell Hutchins, PaineWebber or one
of their affiliates served as investment adviser. No fund within the
PaineWebber fund complex has a bonus, pension, profit sharing or retirement
plan.
PRINCIPAL HOLDERS AND MANAGEMENT OWNERSHIP OF SECURITIES
As of March 3, 2000, trustees and officers owned in the aggregate less
than 1% of the outstanding shares of any class of each fund.
The following shareholders are shown in the Trust's records as owning more
than 5% of the outstanding Class H and Class I shares of the funds as of March
3, 2000, as indicated below.
<TABLE>
<CAPTION>
FUND PERCENTAGE OWNED SHAREHOLDER
<S> <C> <C>
AGGRESSIVE GROWTH PORTFOLIO
- --Class H shares 100% PaineWebber Life Insurance Co.
BALANCED PORTFOLIO
- --Class H shares 32.58% American Republic Insurance Company
58.02% PaineWebber Life Insurance Co.
6.45% AIG Life Paradigm Variable Annuity
GLOBAL EQUITY PORTFOLIO
- --Class H shares 32.73% American Republic Insurance Company
66.42% PaineWebber Life Insurance Co.
48
<PAGE>
FUND PERCENTAGE OWNED SHAREHOLDER
GLOBAL INCOME PORTFOLIO
- --Class H shares 49.89% American Republic Insurance Company
43.45% PaineWebber Life Insurance Co.
GROWTH AND INCOME PORTFOLIO
- --Class H shares 24.26% American Republic Insurance Company
39.88% PaineWebber Life Insurance Co.
28.93% AIG Life Paradigm Variable Annuity
- --Class I shares 61.30% Hartford Life Insurance Company
13.43% Aetna Life Insurance & Annuity Co.
14.10% Keyport Life Insurance
11.15% The Ohio National Life Insurance
Co.
GROWTH PORTFOLIO
- --Class H shares 48.11% American Republic Insurance Company
44.60% PaineWebber Life Insurance Co.
6.01% AIG Life Paradigm Variable Annuity
HIGH GRADE FIXED INCOME
PORTFOLIO
- --Class H shares 100% PaineWebber Life Insurance Co.
HIGH INCOME PORTFOLIO
- --Class H shares 10.16% AIG Life Paradigm Variable Annuity
88.01% PaineWebber Capital
MONEY MARKET PORTFOLIO
- --Class H shares 25.27% American Republic Insurance Company
73.27% PaineWebber Life Insurance Co.
SMALL CAP PORTFOLIO
- --Class H shares 11.48% AIG Life Paradigm Variable Annuity
86.15% PaineWebber Capital
STRATEGIC FIXED INCOME
- --Class H shares 40.49% American Republic Insurance Company
56.62% PaineWebber Life Insurance Co.
STRATEGIC INCOME PORTFOLIO
- --Class H shares 8.10% AIG Life Paradigm Variable Annuity
90.93% PaineWebber Capital
- --Class I shares 75.43% Hartford Life Insurance Company
12.23% Keyport Life Insurance
12.32% The Ohio National Life Insurance
Co.
TACTICAL ALLOCATION PORTFOLIO
- --Class H shares 85.39% AIG Life Paradigm Variable Annuity
13.27% AIG Life Paradigm ADB
49
<PAGE>
FUND PERCENTAGE OWNED SHAREHOLDER
- --Class I shares 41.18% Hartford Life Insurance Company
12.49% Aetna Life Insurance & Annuity Co.
41.10% Keyport Life Insurance
5.20% The Ohio National Life Insurance
Co.
</TABLE>
INVESTMENT ADVISORY; ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS. Mitchell Hutchins
acts as the investment adviser and administrator of each fund pursuant to
separate contracts (each an "Advisory Contract") with the Trust. Under the
applicable Advisory Contract, the Trust pays Mitchell Hutchins a fee (expressed
as a percentage of the fund's average daily net assets) computed daily and paid
monthly, at the annual rates indicated below. The table also shows the advisory
fees earned (or accrued) by Mitchell Hutchins during the periods shown.
<TABLE>
<CAPTION>
ANNUAL RATE OF ADVISORY FEE
AS A PERCENTAGE OF FUND'S
AVERAGE DAILY NET ASSETS ADVISORY FEES PAID OR ACCRUED
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C>
Money Market Portfolio................. 0.50% $35,628 $ 47,751 $ 56,346
High Grade Fixed Income Portfolio...... 0.50% 30,260 38,332 39,763
Strategic Fixed Income Portfolio....... 0.50% 40,308 52,424 53,270
Strategic Income Portfolio *........... 0.75% 87,217 16,271 n/a
Global Income Portfolio................ 0.75% 88,569 127,634 165,480
High Income Portfolio *................ 0.50% 61,666 12,017 n/a
Balanced Portfolio..................... 0.75% 198,050 249,460 252,729
Growth and Income Portfolio............ 0.70% 180,762 167,394 138,089
Tactical Allocation Portfolio *........ 0.50% 221,102 18,444 n/a
Growth Portfolio....................... 0.75% 278,216 286,582 299,373
Aggressive Growth Portfolio............ 0.80% 137,591 172,407 170,723
Small Cap Portfolio *.................. 1.00% 41,972 8,635 n/a
Global Equity Portfolio................ 0.75% 115,797 151,440 182,141
</TABLE>
- -------------------
* These funds commenced operations on September 28, 1998.
50
<PAGE>
For the fiscal year ended December 31, 1999, Mitchell Hutchins voluntarily
waived the portion of its fee shown below under the applicable Advisory
Contracts in connection with certain funds' investment of cash collateral from
securities lending in a private investment vehicle managed by Mitchell Hutchins.
AMOUNT OF FEE WAIVED UNDER
FUND ADVISORY CONTRACT
- ---- -----------------
Money Market Portfolio................. $ 0
High Grade Fixed Income Portfolio...... 0
Strategic Fixed Income Portfolio....... 0
Strategic Income Portfolio *........... 0
Global Income Portfolio................ 0
High Income Portfolio *................ 0
Balanced Portfolio..................... 80
Growth and Income Portfolio............ 23
Tactical Allocation Portfolio *........ 451
Growth Portfolio....................... 196
Aggressive Growth Portfolio............ 0
Small Cap Portfolio *.................. 14
Global Equity Portfolio................ 72
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 the
foreign investment segment of Global Equity Portfolio, as described further
below.
Mitchell Hutchins has entered into a Sub-Advisory Contract with Pacific
Investment Management Company ("PIMCO") pursuant to which 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, 1999, December 31, 1998 and December 31, 1997, Mitchell
Hutchins paid or accrued sub-advisory fees to PIMCO of $20,153, $26,212 and
$26,635, 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. ("PAH"), 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 the nation. Included among PIMCO's
institutional clients are many "Fortune 500" companies. On October 31 1999,
PIMCO Advisors, PAH and Allianz AG ("Allianz") announced that they had reached a
definitive agreement pursuant to which Allianz will acquire majority ownership
of PIMCO Advisors and its subsidiaries, including PIMCO (the "Allianz
Transaction"). Under the terms of the transaction, Allianz will acquire all of
PAH, the publicly traded general partner of PIMCO Advisors. Pacific Life
Insurance Company will retain an approximate 30% interest in PIMCO Advisors. The
Allianz Transaction is currently expected to be completed in the second quarter
of 2000.
Mitchell Hutchins has entered into a Sub-Advisory Contract with
Nicholas-Applegate Capital Management ("Nicholas-Applegate") pursuant to which
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, 1999, December 31,
1998 and December 31, 1997, Mitchell Hutchins paid or accrued sub-advisory fees
to Nicholas-Applegate of $85,994, $107,754 and $106,702, 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.
51
<PAGE>
Mitchell Hutchins has entered into a Sub-Advisory Contract with Invista
Capital Management LLC ("Invista") pursuant to which Invista serves as
sub-adviser for the foreign investments segment of Global Equity 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 year ended December 31, 1999 and for the period
November 2, 1998 to December 31, 1998, Mitchell Hutchins paid or accrued
sub-advisory fees to Invista of $27,039 and $4,556, respectively. 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 Equity 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
year ended December 31, 1997, Mitchell Hutchins paid or accrued sub-advisory
fees to GEIM of $49,623 and $70,428, 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 terminates
automatically upon assignment and is terminable with respect to a fund 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
52
<PAGE>
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.
SECURITIES LENDING. During the fiscal years ended December 31, 1999,
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:
<TABLE>
<CAPTION>
FUND FISCAL YEAR ENDED DECEMBER 31,
---- ------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Money Market Portfolio................................ $0 $0 $0
High Grade Fixed Income Portfolio..................... 0 0 0
Strategic Fixed Income Portfolio...................... 0 0 0
Strategic Income Portfolio *.......................... 0 0 n/a
Global Income Portfolio .............................. 0 171 213
High Income Portfolio *............................... 0 0 n/a
Balanced Portfolio.................................... 512 1,725 867
Growth and Income Portfolio........................... 100 420 437
Tactical Allocation Portfolio *....................... 1,039 0 n/a
Growth Portfolio...................................... 2,898 2,936 9,945
Aggressive Growth Portfolio........................... 1,428 555 2,060
Small Cap Portfolio *................................. 164 0 n/a
Global Equity Portfolio............................... 708 1,377 809
</TABLE>
------------------
* These funds commenced operations on September 28, 1998.
NET ASSETS. The following table shows the approximate net assets as of
February 29, 2000, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
NET ASSETS
INVESTMENT CATEGORY ($MIL)
------------------- ------
Domestic (excluding Money Market)...................... $9,931.5
Global................................................. 4,757.8
Equity/Balanced........................................ 10,115.9
Fixed Income (excluding Money Market).................. 4,573.4
Taxable Fixed Income............................. 3,146.1
Tax-Free Fixed Income............................ 1,427.3
Money Market Funds..................................... 39,977.1
PERSONAL TRADING POLICIES. The funds, their investment adviser and their
principal underwriter each have adopted a code of ethics under rule 17j-1 of the
Investment Company Act, which permits personnel covered by the Code to invest in
securities that may be purchased or held by a fund, but prohibits fraudulent,
deceptive or manipulative conduct in connection with that personal investing.
Each sub-adviser also has adopted a code of ethics under rule 17j-1.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
the Class I shares of each fund under a 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 each fund. Class H shares have no distributor or distribution
contract. Class H and Class I shares of each fund are offered continuously to
53
<PAGE>
separate accounts of insurance companies. Mitchell Hutchins is located at 51
West 52nd Street, New York, New York 10019-6114.
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.
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.
54
<PAGE>
During the year ended December 31, 1999, the funds paid (or accrued) to
Mitchell Hutchins the following distribution fees for their Class I shares under
the Plan:
<TABLE>
<CAPTION>
FEES WAIVED BY
FUND FEES PAID BY FUND MITCHELL HUTCHINS
- ---- ----------------- -----------------
<S> <C> <C>
Money Market Portfolio................. $ 0 $ 0
High Grade Fixed Income Portfolio...... 0 0
Strategic Fixed Income Portfolio....... 0 0
Strategic Income Portfolio ............ 0 1,524
Global Income Portfolio................ 0 0
High Income Portfolio.................. 0 0
Balanced Portfolio..................... 0 364
Growth and Income Portfolio............ 0 6,549
Tactical Allocation Portfolio.......... 0 43,639
Growth Portfolio....................... 0 1,461
Aggressive Growth Portfolio............ 0 0
Small Cap Portfolio.................... 0 181
Global Equity Portfolio................ 0 107
</TABLE>
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.
During the fiscal years indicated, the funds paid the brokerage
commissions set forth below:
55
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Money Market Portfolio.......................... $ 0 $ 0 $ 0
High Grade Fixed Income Portfolio............... 0 0 0
Strategic Fixed Income Portfolio................ 0 64 1,149
Strategic Income Portfolio *.................... 0 0 n/a
Global Income Portfolio......................... 0 0 0
High Income Portfolio *......................... 0 0 n/a
Balanced Portfolio.............................. 33,068 47,323 51,556
Growth and Income Portfolio..................... 34,313 33,107 39,178
Tactical Allocation Portfolio *................. 40,444 7,579 n/a
Growth Portfolio................................ 26,525 45,109 71,334
Aggressive Growth Portfolio..................... 33,597 46,977 47,838
Small Cap Portfolio *........................... 8,737 6,471 n/a
Global Equity Portfolio......................... 11,456 137,373 113,093
</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 the fiscal years indicated, the funds paid brokerage commissions to
PaineWebber or, as applicable, brokerage affiliates of the sub-adviser as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Money Market Portfolio......................... $ 0 $ 0 $ 0
High Grade Fixed Income Portfolio.............. 0 0 0
Strategic Fixed Income Portfolio............... 0 0 0
Strategic Income Portfolio *................... 0 0 n/a
Global Income Portfolio........................ 0 0 0
High Income Portfolio *........................ 0 0 n/a
Balanced Portfolio............................. 1,674 54 1,992
Growth and Income Portfolio.................... 2,009 714 558
Tactical Allocation Portfolio *................ 12 0 n/a
Growth Portfolio............................... 1,996 4,212 4,020
Aggressive Growth Portfolio.................... 3,306 0 1,621
Small Cap Portfolio *.......................... 0 0 n/a
Global Equity Portfolio........................ 589 12 0
</TABLE>
------------------
* These funds commenced operations on September 28, 1998.
56
<PAGE>
These brokerage commissions paid for the year ended December 31, 1999
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>
PERCENTAGE OF DOLLAR
PERCENTAGE OF TOTAL AMOUNT OF TRANSACTIONS
BROKERAGE COMMISSIONS INVOLVING PAYMENT OF
PAID BROKERAGE COMMISSIONS
<S> <C> <C>
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...................... 5.06% 4.29%
Growth and Income Portfolio............. 5.85% 5.14%
Tactical Allocation Portfolio .......... 0.03% 0.02%
Growth Portfolio........................ 7.52% 7.11%
Aggressive Growth Portfolio............. 9.84% 8.48%
Small Cap Portfolio..................... 0 0
Global Equity Portfolio................. 5.14% 4.45%
</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.
In selecting brokers, Mitchell Hutchins or a sub-adviser will consider the
full range and quality of a broker's services. Consistent with the interests of
the funds and subject to the review of each board, Mitchell Hutchins or a
sub-adviser may cause a fund to purchase and sell portfolio securities through
brokers who provide Mitchell Hutchins or the sub-adviser with brokerage or
research services. The funds may pay 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.
Research services obtained from brokers may include written reports,
pricing and appraisal services, analysis of issues raised in proxy statements,
educational seminars, subscriptions, portfolio attribution and monitoring
services, and computer hardware, software and access charges which are directly
related to investment research. Research services may be received in the form of
written reports, online services, telephone contacts and personal meetings with
securities analysts, economists, corporate and industry spokespersons and
government representatives.
57
<PAGE>
For the year ended December 31, 1999, the funds directed the portfolio
transactions indicated below to brokers chosen because they provide research,
analysis, advice and similar services, for which the funds paid the brokerage
commissions indicated below:
<TABLE>
<CAPTION>
FUND AMOUNT OF PORTFOLIO BROKERAGE COMMISSIONS
TRANSACTIONS PAID
<S> <C> <C>
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............................. 87,238,383 116,186
Growth and Income Portfolio.................... 58,094,080 118,987
Tactical Allocation Portfolio.................. 0 0
Growth Portfolio............................... 12,940,269 11,507
Aggressive Growth Portfolio.................... 25,826,257 40,735
Small Cap Portfolio............................ 3,519,318 7,788
Global Equity Portfolio........................ 536,737 1,661
</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. Mitchell Hutchins or the sub-adviser
may engage in agency transactions in over-the-counter equity and debt securities
in return for research and execution services. These transactions are entered
into only 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.
Research services obtained from brokers may include written reports,
pricing and appraisal services, analysis of issues raised in proxy statements,
educational seminars, subscriptions, portfolio attribution and monitoring
services, and computer hardware, software and access charges which are directly
related to investment research. Research services may be received in the form of
written reports, online services, telephone contacts and personal meetings with
securities analysts, economists, corporate and industry spokespersons and
government representatives.
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 a fund is concerned, or upon its ability to complete its entire order,
in other cases it is believed that coordination and the ability to participate
in volume transactions will be beneficial to the fund.
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
58
<PAGE>
thereof or an affiliate of the sub-adviser not participate in or benefit from
the sale to the funds.
As of December 31, 1999, the funds owned securities issued by the
following companies which are regular broker-dealers for the funds:
Money Market Portfolio: None.
High Grade Fixed Income Portfolio: Bonds of Lehman Brothers Holdings
Inc. ($92,032), Merrill Lynch & Company Inc. ($126,056) and Morgan
Stanley Group Inc. ($136,892); collateralized mortgage obligations of
Morgan Stanley Capital Inc. ($126,282).
Strategic Fixed Income Portfolio: Collateralized mortgage obligations
of Merrill Lynch Mortgage Investors Inc. ($429,344) and Prudential Home
Mortgage Securities Corp. ($345,845); repurchase agreement with State
Street Bank and Trust Co. ($185,000)..
Strategic Income Portfolio: None.
Global Income Portfolio: None.
High Income Portfolio: None.
Balanced Portfolio: Common stock of AXA Financial Inc. (121,950),
Chase Manhattan Corp. ($248,600), Mellon Financial Corp. ($34,062),
Morgan Stanley Dean Witter & Co. ($328,325); bonds of Lehman Brothers
Holdings Inc. ($140,469), Merrill Lynch & Company Inc. ($121,007),
Morgan Stanley Dean Witter & Co. ($193,538); collateralized mortgage
obligations of CS First Boston Mortgage Securities Corp. ($55,105) and
Morgan Stanley Capital Inc. ($90,785).
Growth and Income Portfolio: Common stock of Morgan Stanley Dean
Witter & Co. ($485,350).
Tactical Allocation Portfolio: J.P. Morgan & Co., Inc. ($126,625),
Bear Stearns Company, Inc. ($34,200), Charles Schwab Corp. ($176,525),
Franklin Resources, Inc. ($48,094), Lehman Brothers Holdings, Inc.
($59,281), Merrill Lynch & Co., Inc. ($175,350), Morgan Stanley Dean
Witter & Co. ($456,800), T. Rowe Price & Associates, Inc. ($25,856).
Growth Portfolio: Common stock of Charles Schwab Corp. ($115,125) and
Citigroup Inc. ($105,569).
Aggressive Growth Portfolio: None.
Small Cap Portfolio: None
Global Equity Portfolio: Common stock of AXA UAP ($83,650), Deutsche
Bank AG ($109,805), UBS AG ($136,645), Chase Manhattan Corp.
($118,706), Mellon Financial Corp. ($52,048), AXA Financial Inc.
($39,431), Morgan Stanley Dean Witter & Co. ($80,368).
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.
59
<PAGE>
The funds' respective portfolio turnover rates for the fiscal years shown
were:
<TABLE>
<CAPTION>
FUND PORTFOLIO TURNOVER RATES FOR THE
YEARS ENDED DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Money Market Portfolio.......................... n/a n/a
High Grade Fixed Income Portfolio............... 166% 101%
Strategic Fixed Income Portfolio................ 503% 245%
Strategic Income Portfolio *.................... 403% 81%
Global Income Portfolio......................... 43% 104%
High Income Portfolio *......................... 69% 21%
Balanced Portfolio.............................. 206% 177%
Growth and Income Portfolio..................... 65% 69%
Tactical Allocation Portfolio *................. 110% 6%
Growth Portfolio................................ 23% 50%
Aggressive Growth Portfolio..................... 135% 73%
Small Cap Portfolio *........................... 98% 17%
Global Equity Portfolio......................... 63% 154%
</TABLE>
------------------
* These funds commenced operations on September 28, 1998.
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 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 New York Stock Exchange 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 New York Stock Exchange on each Monday through Friday when
the New York Stock Exchange is open. Prices will be calculated earlier when the
New York Stock Exchange closes early because trading has been halted for the
day.
Securities that are listed on U.S. and foreign stock exchanges normally
are valued at the last sale price on the day the securities are valued or,
lacking any sales on that day, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are generally
valued on the exchange considered by Mitchell Hutchins or the applicable
sub-adviser as the primary market. Securities traded in the 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.
60
<PAGE>
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 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 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. Money Market Portfolio will limit portfolio
investments, including repurchase agreements, to those U.S. dollar denominated
instruments that are of high quality and that the trustees determine present
minimal credit risks as advised by Mitchell Hutchins and will comply with
certain reporting and recordkeeping procedures. There is not assurance that
constant net asset value per share will be maintained. In the event amortized
cost ceases to represent fair value, the board will take appropriate action.
In determining the approximate market value of portfolio instruments, the
Trust may employ outside organizations, which may use a matrix or formula method
that takes into consideration market indices, matrices, yield curves and other
specific adjustments. This may result in the securities being valued at a price
61
<PAGE>
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 continue to qualify for
treatment as a regulated investment company ("RIC") under 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. By qualifying as a RIC, a fund
(but not its shareholders) will be relieved of federal income tax on the part of
its investment company taxable income and net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss) that it distributes
to its shareholders).
If a fund failed to qualify for treatment as a RIC for any taxable year,
(1) 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), (2) all distributions out of its earnings and profits, including
distributions of net capital gain, would be taxable to its shareholders as
dividends (that is, ordinary income) and (3) most importantly, each insurance
company separate account invested in the fund would fail to satisfy the
diversification requirements of section 817(h) of the Code 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 continue to
satisfy the diversification requirements indirectly imposed on it 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 separate account that may be
invested in the securities of a single issuer. Because section 817(h) and the
regulations thereunder treat the assets of each fund as assets of the related
separate account, the funds must also meet these requirements. Specifically, the
regulations under section 817(h) provide that, except as permitted by the "safe
harbor" described below, as of the end of each calendar quarter or within 30
days thereafter no more than 55% of the total assets of a fund may be
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments and no more than 90% by any four
investments. For this purpose, all securities of the same issuer are considered
a single investment, and each U.S. government agency and instrumentality is
considered a separate issuer. Section 817(h) provides, as a safe harbor, that a
separate account will be treated as being adequately diversified if the
diversification requirements under Subchapter M are satisfied and no more than
55% of the value of the separate account's total assets are cash and cash items,
government securities and securities of other 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
62
<PAGE>
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 will determine for income tax purposes the amount,
character and timing of recognition of the gains and losses a fund realizes in
connection therewith. Gains from the disposition of foreign currencies (except
certain gains that may be excluded by future regulations), and gains from
options, futures and forward currency contracts derived by a fund with respect
to its business of investing in securities or foreign currencies, will be
treated as qualifying income under the Income Requirement.
Investment income earned and gains realized by a fund on foreign
securities may be subject to income, withholding or other taxes imposed by
foreign countries and U.S. possessions that would reduce the return on those
securities. Tax treaties between the United States and certain foreign
countries, however, may reduce or eliminate these taxes, and many foreign
countries do not impose taxes on capital gains in respect of investments by
foreign investors.
A fund may invest in the stock of "passive foreign investment companies"
("PFICs") if that stock is a permissible investment. A PFIC is any foreign
corporation (with certain exceptions) 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 that 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.
Certain futures and foreign currency contracts and listed non-equity
options (such as those on a securities index) in which a fund may invest may be
subject to section 1256 of the Internal Revenue Code ("section 1256 contracts").
Any section 1256 contracts a fund holds at the end of each taxable year
generally must be "marked-to-market" (that is, treated as having been sold at
that time for their fair market value) for federal income tax purposes, with the
result that unrealized gains or losses will be treated as though they were
realized. Sixty percent of any net gain or loss recognized on these deemed
sales, and 60% of any net realized gain or loss from any actual sales of section
1256 contracts, will be treated as long-term capital gain or loss, and the
balance will be treated as short-term capital gain or loss. These rules may
operate to increase the amount that a fund must distribute to satisfy the
Distribution Requirement (i.e., with respect to the portion treated as
short-term capital gain), which will be taxable to its shareholders as ordinary
63
<PAGE>
income, and to increase the net capital gain a fund recognizes, without in
either case increasing the cash available to the fund. A fund may elect not to
have the foregoing rules apply to any "mixed straddle" (that is, a straddle,
clearly identified by the fund in accordance with applicable regulations, at
least one (but not all) the positions of which are section 1256 contracts),
although doing so may have the effect of increasing the relative proportion of
net short-term capital gain (taxable as ordinary income) and thus increasing the
amount of dividends that must be distributed.
Offsetting positions in any actively traded security, option, futures or
forward currency contract entered into or held by a fund may constitute a
"straddle" for federal income tax purposes. Straddles are subject to certain
rules that may affect the amount, character and timing of a fund's gains and
losses with respect to positions of the straddle by requiring, among other
things, that (1) loss realized on disposition of one position of a straddle be
deferred to the extent of any unrealized gain in an offsetting position until
the latter position is disposed of, (2) the fund's holding period in certain
straddle positions not begin until the straddle is terminated (possibly
resulting in gain being treated as short-term rather than long-term capital
gain) and (3) losses recognized with respect to certain straddle positions, that
otherwise would constitute short-term capital losses, be treated as long-term
capital losses. Applicable regulations also provide certain "wash sale" rules,
which apply to transactions where a position is sold at a loss and a new
offsetting position is acquired within a prescribed period, and "short sale"
rules applicable to straddles. Different elections are available to the funds,
which may mitigate the effects of the straddle rules, particularly with respect
to mixed straddles.
When a covered call option written (sold) by a fund expires, it will
realize a short-term capital gain equal to the amount of the premium it received
for writing the option. When a fund terminates its obligations under such an
option by entering into a closing transaction, it will realize a short-term
capital gain (or loss), depending on whether the cost of the closing transaction
is less (or more) than the premium it received when it wrote the option. When a
covered call option written by a fund is exercised, the fund will be treated as
having sold the underlying security, producing long-term or short-term capital
gain or loss, depending on the holding period of the underlying security and
whether the sum of the option price received on the exercise plus the premium it
received when it wrote the option is more or less than the basis of the
underlying security.
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 position, 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 identical property. In addition, if the appreciated
financial position is itself a short sale or such a contract, acquisition of the
underlying property or substantially identical 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 identical 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 (1) zero coupon or other securities issued with
original issue discount ("OID") or (2) 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
64
<PAGE>
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. A 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 other 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.
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.
65
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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,
1995, Growth and Income Portfolio was known as "Dividend Growth Portfolio."
Prior to July 28, 1999, Global Equity Portfolio was known as Global 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
Each fund's Annual Report to Shareholders for its last fiscal year is a
separate document supplied with this SAI, and the financial statements,
accompanying notes and report of independent auditors appearing therein are
incorporated herein by reference.
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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
A-1
<PAGE>
the obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation; CCC. An obligation rated CCC is currently vulnerable to
nonpayment and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation; CC. An obligation rated CC is currently highly vulnerable to
nonpayment; 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
A-2
<PAGE>
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
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, 2000
--------------------------------------
(C)2000 PaineWebber Incorporated. All
rights reserved.
- -------------------------------------
<PAGE>
MITCHELL HUTCHINS SERIES TRUST
STRATEGY PORTFOLIO
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
STATEMENT OF ADDITIONAL INFORMATION
Strategy Portfolio is a diversified series of Mitchell Hutchins Series
Trust ("Trust"), a professionally managed open-end investment company. The fund
offers its Class H and Class I shares only to insurance company separate
accounts that fund benefits under certain variable annuity contracts and/or
variable life insurance contracts.
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly
owned asset management subsidiary of PaineWebber Incorporated ("PaineWebber"),
serves as investment adviser and administrator for the fund. Mitchell Hutchins
also serves as distributor for the fund's Class I shares.
This Statement of Additional Information ("SAI") is not a prospectus and
should be read only in conjunction with the fund's current Prospectus, dated May
1, 2000. A copy of the Prospectus may be obtained by calling any PaineWebber
Financial Advisor or correspondent firm or by calling toll-free 1-800-986-0088.
The Prospectus contains more complete information about the fund. You should
read it carefully before investing.
This SAI is dated May 1, 2000.
TABLE OF CONTENTS
PAGE
The Fund and Its Investment Policies................................... 2
The Fund's Investments, Related Risks and Limitations.................. 4
Strategies Using Derivative Instruments................................12
Organization of Trust; Trustees and Officers; Principal
Holders of Securities...............................................20
Investment Advisory, Administration and Distribution
Arrangements........................................................27
Portfolio Transactions.................................................30
Additional Purchase and Redemption Information.........................31
Valuation of Shares....................................................31
Taxes..................................................................32
Other Information......................................................34
<PAGE>
THE FUND AND ITS INVESTMENT POLICIES
The fund's investment objective may not be changed without shareholder
approval. Except where noted, the other investment policies of the fund may be
changed by the board without shareholder approval. As with other mutual funds,
there is no assurance that the fund will achieve its investment objective.
The fund's investment objective is long-term capital appreciation. The
fund seeks to achieve this objective by investing at least 80% of its assets in
the securities of issuers that are on PaineWebber's HIGHLIGHTED STOCKS list.
Historically, the HIGHLIGHTED STOCKS list has consisted primarily of common
stocks of relatively large, well known U.S. companies, although it is not
restricted to those types of companies. As of _______________, the average
capitalization of companies listed on the HIGHLIGHTED STOCKS list was $___
billion. The fund may invest up to 20% of its assets in short-term debt
obligations, money market instruments and options and futures contracts.
The fund will purchase a security that has been added to or sell a
security that has been removed from the HIGHLIGHTED STOCKS list after
publication of that change. The fund may trade in securities added to or deleted
from the HIGHLIGHTED STOCKS list no earlier than the market open after relevant
changes to the HIGHLIGHTED STOCKS list are announced. Under normal
circumstances, the fund will not purchase stocks that are not included on the
HIGHLIGHTED STOCKS list or keep stocks that have been removed from the
HIGHLIGHTED STOCKS list.
There is no assurance that the fund will be able to maintain an equal
weighting of assets among all the stocks on the HIGHLIGHTED STOCKS list. In
certain instances, such as when the HIGHLIGHTED STOCKS list contains fewer than
20 stocks, the fund may choose not to re-balance its portfolio following an
announced change to the HIGHLIGHTED STOCKS list. The fund may be unable to
purchase or sell sufficient securities due to market restrictions or
diversification and illiquid security limitations imposed by the Investment
Company Act of 1940, as amended ("Investment Company Act"). In such
circumstances, the fund may purchase options and futures contracts on security
indices, index-based securities such as Standard and Poor's Depositary Receipts
("SPDRs") and stocks not on the HIGHLIGHTED STOCKS list.
For more than a century, PaineWebber has been committed to providing
superior equity research, resulting in one of the strongest franchises on Wall
Street. PaineWebber Investment Strategy Group's approach to research places its
recommendations in the context of broad social, economic and political themes.
PaineWebber believes that the ability to spot emerging trends -- and the
companies expected to benefit from them -- has proven critical to successful
investing. The Investment Strategy Group aims to identify these themes before
they emerge and become well recognized and, in doing so, aims to provide clients
with specific investment opportunities that offer superior performance. While
the Investment Strategy Group identifies several industries and companies that
are expected to benefit from each theme, the HIGHLIGHTED STOCKS list is a list
of "choice" companies from each theme. Historically, the HIGHLIGHTED STOCKS list
has included approximately 25 stocks, which are typically covered by the
PaineWebber Research Department and carry a "1" (Buy) or "2" (Attractive)
rating. Stocks are usually added or deleted from the HIGHLIGHTED STOCKS list at
the beginning of a month, but revisions can also be made on other days.
The fund is designed for investors seeking long-term capital appreciation
from a fully invested, all-equity portfolio. The fund is not a market-timing
vehicle and not a complete investment program.
2
<PAGE>
The HIGHLIGHTED STOCKS list as of March 29, 2000, consisted of the
following 31 securities.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
America Online Costco IBM Smurfit-Stone Container
Amgen Delta Airlines Lucent Technologies Tandy
AXA Financial Electronic Data Systems MCI WorldCom Tiffany & Co
Bank of New York Gap Microsoft Time Warner
Bed Bath & Beyond Gateway Motorola Wal-Mart
Carnival Corp Hewlett Packard Nextel Warner-Lambert
Cisco Systems Home Depot Oracle Weyerhauser
Clear Channel Hughes Electronics Schering-Plough
</TABLE>
The following additional securities have appeared on prior versions of the
HIGHLIGHTED STOCKS since September 1, 1998: Abbot Laboratories, American
Express, Air Products and Chemicals, American Intl Group, Avon Products, Chase
Manhattan, Coca Cola, Disney, Ecolab, Compaq, Freddie Mac, Gannett, Illinois
Tool Works, Lear, Medtronic, New York Times, NiSource, Pepsico, Pfizer,
Sherwin-Williams, Staples, State Street, Sun
Microsystems.
As of March 29, 2000, the HIGHLIGHTED STOCKS list reflects the following
investment themes:
THE AMERICAN AGE OF AFFLUENCE (November 1999). This theme focuses on the
consumer, taking an approach more typical of Madison Avenue than of Wall Street.
What this report attempts to do is understand consumer behavior and, in
particular, the behavior of baby boomers -- the largest, fastest-growing and
wealthiest segment of the population. Driven by "shared life experiences," the
attitudes of baby boomers about everything from consumption to leisure to health
care have changed dramatically as this generation has aged. With most of their
material needs satisfied, boomers today place more value on experiences than on
tangibles.
KEY TRENDS & INVESTMENT IMPLICATIONS
o CRADLE-TO-GRAVE ENTREPRENEURIALISM: Beneficiaries include firms
catering to small businesses, home offices, investors seeking asset
management and parents supervising children's education.
o TIME DROUGHT: Americans feel short of time and find themselves doing
several things at once. Trusted brands and time-savers could
flourish.
o STRESSLESS LEISURE: As baby boomers age, they seek leisure
activities with less effort, less physical exertion, less risk and
fewer projects. Cruise lines, airlines, theme parks, casinos and
hotels could benefit.
o NO-SERVICE/FULL-SERVICE ECONOMY. A tight labor market creates
opportunities for low-cost, highly efficient services and for
premium quality service providers.
o NEW DRUG CULTURE. Aging baby boomers want more pharmaceuticals and
"better-for-you" products.
MUTED CYCLE CYCLICALS (April 1999). "Benign deflation" and the muting of
the business cycle -- infrequent and less severe recessions -- have altered the
old sector rotation, which typically followed this pattern: first, defensive
stocks; second, interest-rate sensitive cyclicals; third, commodity cyclicals;
and lastly, capital goods makers. Although the domestic economy has become less
volatile, in addition to the muted business cycle, the "new profit pattern" has
two other elements: industry mini-recessions and global recession rotation. In
this "new profit pattern" there are four types of cyclical companies whose
earnings are affected by different variables: Capacity cyclicals, Demand
cyclicals, Growth cyclicals, Credit cycle cyclicals.
3
<PAGE>
KEY TRENDS & INVESTMENT IMPLICATIONS
o CAPACITY CYCLICALS: Companies that could benefit from swings in
industry capacity. Supply and demand situation appears favorable for
airlines, papers and semiconductors.
o DEMAND CYCLICALS: Solid economic growth could prove favorable for
autos, diversified industrials, railroads and retailers.
o GROWTH CYCLICALS: Global rebound and global growth could be
favorable for computer, household products, specialty chemicals and
telecom equipment firms.
o CREDIT CYCLE CYCLICALS: Rebounds in Japanese and Asian markets could
benefit select U.S. financial services firms.
INFORMATION REVOLUTION WARS (May 1999). The quantity of global GDP that
ultimately will be "digitizable" will likely surpass today's wildest
speculations. Major technological revolutions are always bigger than anyone ever
thinks. The First and Second Industrial Revolutions were violent upheavals
marked by many simultaneous "wars" between competing interests, technologies and
business models. So too will the Information Revolution witness many wars in
which some firms perish while others flourish.
SOME KEY TRENDS & INVESTMENT IMPLICATIONS
o INFORMATION AGE VS. INDUSTRIAL AGE: The distribution and
manipulation of information is now the central wealth-creating
activity
o PRODUCER VS. DISTRIBUTOR: The Internet increases the power of
producers and threatens distributors and middlemen that don't add
value.
o E-TAILING VS. BRICK-AND-MORTAR RETAILING: Companies with strong
brands and sophisticated distribution could benefit more than
retailers with weak brands.
o COMMODITIZED INFORMATION VS. PROPRIETARY CONTENT VS. SPECIALIZED
INSIGHT: Commoditization of information could hurt traditional
information providers, such as newspapers. Proprietary content is
valuable if consumers prove willing to pay for it. Consumers will
pay for specialized insight tailored to their specific needs.
Both the stocks on the HIGHLIGHTED STOCKS list and the investment themes
will change from time to time. Changes to the list of stocks are normally made
monthly but may be made more frequently. Themes have changed less frequently in
the past.
OTHER INVESTMENT POLICIES. The fund may invest up to 15% of its net assets
in illiquid securities. The fund may purchase securities on a when-issued basis
and may purchase or sell securities for delayed delivery. The fund may lend its
portfolio securities to qualified broker-dealers or institutional investors in
an amount up to 33 1/3% of its total assets. The fund may borrow up to 33 1/3%
of its total assets. The fund may invest in the securities of other investment
companies and may sell securities short "against the box."
THE FUND'S INVESTMENTS, RELATED RISKS AND LIMITATIONS
The following supplements the information contained in the Prospectus and
above concerning the fund's investments, related risks and limitations. Except
as otherwise indicated in the Prospectus or this SAI, the fund has established
no policy limitations on its ability to use the investments or techniques
discussed in these documents.
EQUITY SECURITIES. Equity securities (referred to as "stocks" in the
Prospectus) include common stocks, most preferred stocks and securities that are
convertible into them, including common stock purchase warrants and rights,
equity interests in trusts, partnerships, joint ventures or similar enterprises
and depositary receipts. Common stocks, the most familiar type, represent an
equity (ownership) interest in a corporation.
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Preferred stock has certain fixed income features, like a bond, but
actually it is equity that is senior to a company's common stock. Convertible
bonds 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. Some preferred stock also may be converted into or
exchanged for common stock. Depositary receipts typically are issued by banks or
trust companies and evidence ownership of underlying equity securities.
While past performance does not guarantee future results, equity
securities historically have provided the greatest long-term growth potential in
a company. However, their prices generally fluctuate more than other securities
and reflect changes in a company's financial condition and in overall market and
economic conditions. Common stocks generally represent the riskiest investment
in a company. It is possible that the fund may experience a substantial or
complete loss on an individual equity investment.
HIGHLIGHTED STOCKS LIST RISK. There can be no assurance that the equity
securities of issuers on the HIGHLIGHTED STOCKS list will perform as
anticipated. The past performance of these securities and issuers cannot be used
to predict the future results of either the HIGHLIGHTED STOCKS list or the fund.
The fund's investment results will not be identical to those of the HIGHLIGHTED
STOCKS list for a number of reasons, including: (1) the timing of the fund's
purchase and sale of stocks in response to changes in the HIGHLIGHTED STOCKS
list -- the fund will buy and sell stocks only after publication of the changes
to the HIGHLIGHTED STOCKS list has been made; (2) the fund's cash flow from
purchases and sales of fund shares, which can occur daily and will result in
portfolio purchases and sales; (3) the fees and expenses, including the costs of
buying and selling stocks, that the fund bears; (4) the fund's possible
inability to add to or subtract from its holdings of a stock on the HIGHLIGHTED
STOCKS list at a given time, particularly in connection with the re-balancing of
the fund's portfolio to establish equal weightings of its assets among the
stocks on the HIGHLIGHTED STOCKS list; and (5) the fund's investment of part of
its assets in short-term debt obligations, money market instruments and options
and futures contracts. The fund may invest in these instruments, for example,
for liquidity in anticipation of shareholder sales of fund shares or because the
diversification requirements that apply to mutual funds prevent it from
investing substantially all its assets in the stocks that are on the HIGHLIGHTED
STOCKS list.
Because the HIGHLIGHTED STOCKS list includes a relatively small number of
issuers and the fund invests in stocks only if they are on the HIGHLIGHTED
STOCKS list, the fund will hold a relatively small number of stocks. As a
result, changes in the market value of a single issuer's stock could affect the
fund's performance and net asset value more severely than if its holdings were
more diversified. PaineWebber Investment Strategy Group makes subjective
decisions to add or delete companies from the HIGHLIGHTED STOCKS list, but the
list is not compiled with any particular client or product in mind, including
the fund. When selecting the companies for its HIGHLIGHTED STOCKS list, the
Investment Strategy Group does not take industry sector diversification concerns
into account.
PaineWebber could at any time suspend or terminate publication of the
HIGHLIGHTED STOCKS list. In that event, the fund will determine how to proceed
consistent with its investment objective and the interests of its shareholders.
It is also possible that the HIGHLIGHTED STOCKS list would include fewer
securities than are necessary for the fund to satisfy the diversification
requirements for qualifying as a regulated investment company under the Internal
Revenue Code of 1986, as amended ("Internal Revenue Code"). See "Taxes." In that
event, the fund will invest in short-term debt obligations, money market
instruments, options and futures contracts, index-based securities such as SPDRs
and stocks not on the HIGHLIGHTED STOCKS list. [Since January 1988, the
HIGHLIGHTED STOCKS list has included between 11 and 31 stocks, although on
average it has consisted of 25 stocks].
It is possible that the HIGHLIGHTED STOCKS list will include stocks of
issuers for which PaineWebber or one of its affiliates performs banking services
for which it receives fees, as well as stocks of issuers in which PaineWebber or
one of its affiliates makes a market and may have long or short positions. Fund
purchases and sales will be affected by market conditions following publication
of changes to the HIGHLIGHTED STOCKS list and will be subject to competing
orders by other PaineWebber clients who invest based on the HIGHLIGHTED STOCKS
list recommendations. If a stock is removed from or no longer appears on the
HIGHLIGHTED STOCKS list because PaineWebber or one of its affiliates is engaged
in activities such as those mentioned above, the fund may continue to regard
that stock as being on the HIGHLIGHTED STOCK list.
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Mitchell Hutchins does not have access to information regarding additions
to or deletions from the HIGHLIGHTED STOCKS list prior to their publication. The
HIGHLIGHTED STOCKS list is not maintained for the purpose of managing any
account or investment company such as the fund. In addition to being available
to the fund, the HIGHLIGHTED STOCKS list is also available to other clients of
PaineWebber and its affiliates, including Mitchell Hutchins, which may trade on
the basis of the HIGHLIGHTED STOCKS list. PaineWebber publishes other lists of
recommended securities that could be appropriate for fund investors but which
are not used by Mitchell Hutchins for the fund.
INVESTING IN FOREIGN SECURITIES. Historically, the HIGHLIGHTED STOCKS list
has only once included a foreign security. If the HIGHLIGHTED STOCKS list
includes one or more foreign securities, the fund will invest in them. Investing
in foreign securities involves more risks than investing in the United States.
The value of foreign securities is subject to economic and political
developments in the countries where the companies operate and to changes in
foreign currency values. Investments in foreign securities involve risks
relating to political, social and economic developments abroad, as well as risks
resulting from the differences between the regulations to which U.S. and foreign
issuers and markets are subject. These risks may include expropriation,
confiscatory taxation, withholding taxes on interest and/or dividends,
limitations on the use of or transfer of fund assets and political or social
instability or diplomatic developments. Moreover, individual foreign economies
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. In those European
countries that have begun using the Euro as a common currency unit, individual
national economies may be adversely affected by the inability of national
governments to use monetary policy to address their own economic or political
concerns.
Securities of many foreign companies may be less liquid and their prices
more volatile than securities of comparable U.S. companies. Transactions in
foreign securities may be subject to less efficient settlement practices.
Foreign securities trading practices, including those involving securities
settlement where fund assets may be released prior to receipt of payment, may
expose the fund to increased risk in the event of a failed trade or the
insolvency of a foreign broker-dealer. Legal remedies for defaults and disputes
may have to be pursued in foreign courts, whose procedures differ substantially
from those of U.S. courts. Additionally, the costs of investing outside the
United States frequently are higher than those in the United States. These costs
include relatively higher brokerage commissions and foreign custody expenses.
Securities of foreign issuers may not be registered with the Securities
and Exchange Commission ("SEC"), and the issuers thereof may not be subject to
its reporting requirements. Accordingly, there may be less publicly available
information concerning foreign issuers of securities held by the fund than is
available concerning U.S. companies. Foreign companies are not generally subject
to uniform accounting, auditing and financial reporting standards or to other
regulatory requirements comparable to those applicable to U.S. companies.
If the HIGHLIGHTED STOCKS list includes depositary receipts, including
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
Global Depositary Receipts ("GDRs"), or other securities convertible into
securities of issuers based in foreign countries, the fund will invest in these
receipts. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are receipts
typically issued by a U.S. bank or trust company evidencing ownership of the
underlying securities. They generally are in registered form, are denominated in
U.S. dollars and are designed for use in the U.S. securities markets. EDRs are
European receipts evidencing a similar arrangement, may be denominated in other
currencies and are designed for use in European securities markets. GDRs are
similar to EDRs and are designed for use in several international financial
markets. For purposes of the fund's investment policies, depositary receipts
generally are deemed to have the same classification as the underlying
securities they represent. Thus, a depositary 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 depositary's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depositary's
transaction fees are paid directly by the ADR holders. In addition, less
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information is available in the United States about an unsponsored ADR than
about a sponsored ADR.
The fund anticipates that its brokerage transactions involving foreign
securities of companies headquartered in countries other than the United States
will be conducted primarily on the principal exchanges of such countries.
However, from time to time foreign securities may be difficult to liquidate
rapidly without significantly depressing the price of such securities. Although
the fund will endeavor to achieve the best net results in effecting its
portfolio transactions, transactions on foreign exchanges are usually subject to
fixed commissions that are generally higher than negotiated commissions on U.S.
transactions. There is generally less government supervision and regulation of
exchanges and brokers in foreign countries than in the United States.
FOREIGN CURRENCY 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 the 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 those fund investments will
decrease. These changes may have a significant impact on the value of fund
shares. In some instances, the 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, the
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.
The fund values its assets daily in U.S. dollars and does not intend to
convert its holdings of foreign currencies to U.S. dollars on a daily basis.
From time to time the fund's foreign currencies may be held as "foreign currency
call accounts" at foreign branches of foreign or domestic banks. These accounts
bear interest at negotiated rates and are payable upon relatively short demand
periods. If a bank became insolvent, the fund could suffer a loss of some or all
of the amounts deposited. The fund may convert foreign currency to U.S. dollars
from time to time.
The value of the assets of the fund as measured in U.S. dollars may be
affected favorably or unfavorably by fluctuations in currency rates and exchange
control regulations. Further, the fund may incur costs in connection with
conversions between various currencies. Currency exchange dealers realize a
profit based on the difference between the prices at which they are buying and
selling various currencies. Thus, a dealer normally will offer to sell a foreign
currency to a fund at one rate, while offering a lesser rate of exchange should
a fund desire immediately to resell that currency to the dealer. The fund
conducts its currency exchange transactions either on a spot (i.e., cash) basis
at the spot rate prevailing in the foreign currency exchange market, or through
entering into forward, futures or options contracts to purchase or sell foreign
currencies.
ILLIQUID SECURITIES. The term "illiquid securities" means securities that
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which the fund has valued the securities and
includes, among other things, purchased over-the-counter options, repurchase
agreements maturing in more than seven days and restricted securities other than
those Mitchell Hutchins has determined are liquid pursuant to guidelines
established by the fund's board. The assets used as cover for over-the-counter
options written by the fund will be considered illiquid unless the
over-the-counter options are sold to qualified dealers that agree that the fund
may repurchase any over-the-counter options it writes at a maximum price to be
calculated by a formula set forth in the option agreements. The cover for an
over-the-counter option written subject to this procedure would be considered
illiquid only to the extent that the maximum repurchase price under the formula
exceeds the intrinsic value of the option. The fund may not be able to readily
liquidate its investments in illiquid securities and may have to sell other
investments if necessary to raise cash to meet its obligations. The lack of a
liquid secondary market for illiquid securities may make it more difficult for
the fund to assign a value to those securities for purposes of valuing its
portfolio and calculating its net asset value.
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Restricted securities are not registered under the Securities Act of 1933,
as amended ("Securities Act"), and may be sold only in privately negotiated or
other exempted transactions or after a Securities Act registration statement has
become effective. Where registration is required, the fund may be obligated to
pay all or part of the registration expenses and a considerable period may
elapse between the time of the decision to sell and the time the fund may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the fund might
obtain a less favorable price than prevailed when it decided to sell.
Not all restricted securities are illiquid. To the extent that foreign
securities are freely tradable in the country in which they are principally
traded, they generally are not considered illiquid, even if they are restricted
in the United States. A large institutional market has developed for many U.S.
and foreign securities that are not registered under the Securities Act.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not dispositive of the liquidity of such investments.
Institutional markets for restricted securities also have developed as a
result of Rule 144A under the Securities Act, which establishes a "safe harbor"
from the registration requirements of that Act for resales of certain securities
to qualified institutional buyers. Such markets include automated systems for
the trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held by
the fund, however, could affect adversely the marketability of such portfolio
securities, and the fund might be unable to dispose of them promptly or at
favorable prices.
The board has delegated the function of making day-to-day determinations
of liquidity to Mitchell Hutchins pursuant to guidelines approved by the board.
Mitchell Hutchins takes into account a number of factors in reaching liquidity
decisions, including (1) the frequency of trades for the security, (2) the
number of dealers that make quotes for the security, (3) the number of dealers
that have undertaken to make a market in the security, (4) the number of other
potential purchasers and (5) the nature of the security and how trading is
effected (e.g., the time needed to sell the security, how bids are solicited and
the mechanics of transfer). Mitchell Hutchins monitors the liquidity of
restricted securities in the fund's portfolio and reports periodically on such
decisions to the board.
Mitchell Hutchins monitors the fund's overall holdings of illiquid
securities. If the fund's holdings of illiquid securities exceed its limitation
on investments in illiquid securities for any reason (such as a particular
security becoming illiquid, changes in relative market values of liquid and
illiquid securities or shareholder redemptions), Mitchell Hutchins will consider
what action would be in the best interests of the fund and its shareholders.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
fund purchases securities or other obligations from a bank or securities dealer
(or its affiliate) and simultaneously commits to resell them to the counterparty
at an agreed-upon date or upon demand and at a price reflecting a market rate of
interest unrelated to the coupon rate or maturity of the purchased obligations.
The fund maintains custody of the underlying obligations prior to their
repurchase, either through its regular custodian or through a special
"tri-party" custodian or sub-custodian that maintains separate accounts for both
the fund and its counterparty. Thus, the obligation of the counterparty to pay
the repurchase price on the date agreed to or upon demand is, in effect, secured
by such obligations.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including a possible decline in the market value of
the underlying obligations. If their value becomes less than the repurchase
price, plus any agreed-upon additional amount, the counterparty must provide
additional collateral so that at all times the collateral is at least equal to
the repurchase price plus any agreed-upon additional amount. The difference
between the total amount to be received upon repurchase of the obligations and
the price that was paid by the fund upon acquisition is accrued as interest and
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included in its net investment income. Repurchase agreements involving
obligations other than U.S. government securities (such as commercial paper and
corporate bonds) may be subject to special risks and may not have the benefit of
certain protections in the event of the counterparty's insolvency. If the seller
or guarantor becomes insolvent, the fund may suffer delays, costs and possible
losses in connection with the disposition of collateral. The fund intends to
enter into repurchase agreements only with counterparties in transactions
believed by Mitchell Hutchins to present minimum credit risks.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements involve the
sale of securities held by the fund subject to the fund's agreement to
repurchase the securities at an agreed-upon date or upon demand and at a price
reflecting a market rate of interest. Reverse repurchase agreements are subject
to the fund's limitation on borrowings and may be entered into only with banks
or securities dealers or their affiliates. While a reverse repurchase agreement
is outstanding, the fund will maintain, in a segregated account with its
custodian, cash or liquid securities, marked to market daily, in an amount at
least equal to its obligations under the reverse repurchase agreement. See "The
Fund's Investments, Related Risks and Limitations -- Segregated Accounts."
Reverse repurchase agreements involve the risk that the buyer of the
securities sold by the fund might be unable to deliver them when the fund seeks
to repurchase. In the event that the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, the buyer or
trustee or receiver may receive an extension of time to determine whether to
enforce the fund's obligation to repurchase the securities, and the fund's use
of the proceeds of the reverse repurchase agreement may effectively be
restricted pending such decision.
LENDING OF PORTFOLIO SECURITIES. The fund is authorized to lend its
portfolio securities to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified. Lending securities enables the fund to earn additional
income, but could result in a loss or delay in recovering these securities. The
borrower of the fund's portfolio securities must maintain acceptable collateral
with the fund's custodian in an amount, marked to market daily, at least equal
to the market value of the securities loaned, plus accrued interest and
dividends. Acceptable collateral is limited to cash, U.S. government securities
and irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. The fund may reinvest any cash collateral in money market
investments or other short-term liquid investments including other investment
companies. The fund also may reinvest cash collateral in private investment
vehicles similar to money market funds, including one managed by Mitchell
Hutchins. In determining whether to lend securities to a particular
broker-dealer or institutional investor, Mitchell Hutchins will consider, and
during the period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. The fund will
retain authority to terminate any of its loans at any time. The fund may pay
reasonable fees in connection with a loan and may pay the borrower or placing
broker a negotiated portion of the interest earned on the reinvestment of cash
held as collateral. The fund will receive amounts equivalent to any dividends,
interest or other distributions on the securities loaned. The fund will regain
record ownership of loaned securities to exercise beneficial rights, such as
voting and subscription rights, when regaining such rights is considered to be
in the fund's interest.
Pursuant to procedures adopted by the board governing the fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for the fund. The board also has authorized the payment of fees (including
fees calculated as a percentage of invested cash collateral) to PaineWebber for
these services. PaineWebber also has been approved as a borrower under the
fund's securities lending program. The board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent and/or
borrower.
SHORT SALES "AGAINST THE BOX." The fund may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales "against the
box"). To make delivery to the purchaser in a short sale, the executing broker
borrows the securities being sold short on behalf of the fund, and the fund is
obligated to replace the securities borrowed at a date in the future. When the
fund sells short, it establishes a margin account with the broker effecting the
short sale and deposits collateral with the broker. In addition, the fund
maintains with its custodian, in a segregated account, the securities that could
be used to cover the short sale. The fund incurs transaction costs, including
interest expense, in connection with opening, maintaining and closing short
sales "against the box."
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The fund might make a short sale "against the box" to hedge against market
risks when Mitchell Hutchins believes that the price of a security may decline,
thereby causing a decline in the value of a security owned by the fund or a
security convertible into or exchangeable for a security owned by the fund. In
such case, any loss in the fund's long position after the short sale should be
reduced by a gain in the short position. Conversely, any gain in the long
position should be reduced by a loss in the short position. The extent to which
gains or losses in the long position are reduced will depend upon the amount of
the securities sold short relative to the amount of securities the fund owns,
either directly or indirectly, and in the case where the fund owns convertible
securities, changes in the investment value or conversion premiums of such
securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The fund may purchase
securities on a "when-issued" basis or may purchase or sell securities for
delayed delivery, i.e., for issuance or delivery to or by the fund later than
the normal settlement date for such securities at a stated price and yield. The
fund generally would not pay for such securities or start earning interest on
them until they are received. However, when the fund undertakes a when-issued or
delayed delivery obligation, it immediately assumes the risks of ownership,
including the risks of price fluctuation. Failure of the issuer to deliver a
security purchased by the fund on a when-issued or delayed delivery basis may
result in the fund's incurring or missing an opportunity to make an alternative
investment. Depending on market conditions, the fund's when-issued and delayed
delivery purchase commitments could cause its net asset value per share to be
more volatile, because such securities may increase the amount by which the
fund's total assets, including the value of when-issued and delayed delivery
securities held by that fund, exceeds its net assets.
A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in market
value, generally based upon changes in the level of interest rates. Thus,
fluctuation in the value of the security from the time of the commitment date
will affect the fund's net asset value. When the fund commits to purchase
securities on a when-issued or delayed delivery basis, its custodian segregates
assets to cover the amount of the commitment. See "The Fund's Investments,
Related Risks and Limitations -- Segregated Accounts." The fund purchases
when-issues securities only with the intention of taking delivery but may sell
the right to acquire the security prior to delivery if Mitchell Hutchins deems
it advantageous to do so, which may result in a gain or loss to the fund.
MONEY MARKET INVESTMENTS. The fund may invest in money market investments
for liquidity, in anticipation of shareholder redemptions of fund shares, when
the fund is unable to purchase or sell sufficient securities due to market
restrictions or diversification and illiquid security limitations imposed by the
Investment Company Act, or to reinvest cash collateral from its securities
lending activities. 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 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 and
similar private investment vehicles.
SEGREGATED ACCOUNTS. When the fund enters into certain transactions that
involve obligations to make future payments to third parties, it will maintain
with an approved custodian in a segregated account cash or liquid securities,
marked to market daily, in an amount at least equal to the fund's obligation or
commitment under such transactions. As described below under "Strategies Using
Derivative Instruments," segregated accounts may also be required in connection
with certain transactions involving options, futures, swaps and forward currency
contracts.
SPDRS ("STANDARD & POOR'S DEPOSITARY RECEIPTS"). The fund may invest in
SPDRs. SPDRs are exchange-traded securities that represent ownership in
long-term unit investment trusts established to accumulate and hold a portfolio
of common stocks that is intended to track the price performance and dividend
yield of the Standard & Poor's 500 Composite Stock Price Index.
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To the extent the fund invests in SPDRs, fund shareholders would
indirectly pay a portion of the operating costs of such companies in addition to
the expenses of its own operation. Indirectly then, fund shareholders may pay
higher operational costs than if they owned the underlying investments directly.
Additionally, the fund's investment in SPDRs is subject to limitations under the
Investment Company Act and market availability.
The price of a SPDR is derived from and based upon the securities it
holds. Accordingly, the level of risk involved in the purchase or sale of a SPDR
is similar to the risk involved in the purchase or sale of traditional common
stocks, with the exception that the pricing mechanism for such instruments is
based on a basket of stocks. The market prices of SPDRs are expected to
fluctuate in accordance with both changes in the net asset values of their
underlying indices and the supply and demand for the instruments on the
exchanges on which they are traded. Substantial market or other disruptions
affecting a SPDR could adversely affect the liquidity and value of the shares of
the fund.
INVESTMENT LIMITATIONS OF THE FUND
FUNDAMENTAL LIMITATIONS. The following fundamental investment limitations
cannot be changed for the fund without the affirmative vote of the lesser of (a)
more than 50% of the outstanding shares of the fund or (b) 67% or more of the
shares of the fund present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy. If a
percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations. With regard to the borrowings
limitation in fundamental limitation (3), the fund will comply with the
applicable restrictions of Section 18 of the Investment Company Act.
The fund will not:
(1) purchase securities of any one issuer if, as a result, more than 5% of
the fund's total assets would be invested in securities of that issuer or the
fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 25% of the fund's total assets may be invested
without regard to this limitation, and except that this limitation does not
apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment companies.
The following interpretation applies to, but is not a part of, this
fundamental restriction: Mortgage- and asset-backed securities will not be
considered to have been issued by the same issuer by reason of the securities
having the same sponsor, and mortgage- and asset-backed securities issued by a
finance or other special purpose subsidiary that are not guaranteed by the
parent company will be considered to be issued by a separate issuer from the
parent company.
(2) purchase any security if, as a result of that purchase, 25% or more of
the fund's total assets would be invested in securities of issuers having their
principal business activities in the same industry, except that this limitation
does not apply to securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities or to municipal securities, and provided that the
fund will invest 25% or more of its total assets in securities of issuers in the
same industry if necessary to replicate the composition of the HIGHLIGHTED
STOCKS list.
(3) issue senior securities or borrow money, except as permitted under the
Investment Company Act and then not in excess of 33 1/3% of the fund's total
assets (including the amount of the senior securities issued but reduced by any
liabilities not constituting senior securities) at the time of the issuance or
borrowing, except that the fund may borrow up to an additional 5% of its total
assets (not including the amount borrowed) for temporary or emergency purposes.
(4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other bonds or instruments, or participations
or other interests therein and investments in government obligations, commercial
paper, certificates of deposit, bankers' acceptances or similar instruments will
not be considered the making of a loan.
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The following interpretation applies to, but is not part of, this
fundamental restriction: The fund's investments in master notes and similar
instruments will not be considered to be the making of a loan.
(5) engage in the business of underwriting securities of other issuers,
except to the extent that the fund might be considered an underwriter under the
federal securities laws in connection with its disposition of portfolio
securities.
(6) purchase or sell real estate, except that investments in securities of
issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the fund may
exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an orderly
manner.
(7) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the fund may purchase, sell or enter
into financial options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative instruments.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are
non-fundamental and may be changed by a vote of the board without shareholder
approval. If a percentage restriction is adhered to at the time of an investment
or transaction, later changes in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations.
The fund will not:
(1) hold assets of any issuers, at the end of any calendar quarter (or
within 30 days thereafter), to the extent such holdings would cause the fund to
fail to satisfy the diversification requirements imposed by section 817(h) of
the Internal Revenue Code and the Treasury regulations issued thereunder on
segregated assets accounts used to fund variable annuity and/or variable life
insurance contracts (these requirements must be satisfied by the fund as the
investment vehicle underlying those accounts);
(2) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the fund may make margin
deposits in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
(3) engage in short sales of securities or maintain a short position,
except that the fund may (a) sell short "against the box" and (b) maintain short
positions in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
(4) purchase securities of other investment companies, except to the
extent permitted by the Investment Company Act and except that this limitation
does not apply to securities received or acquired as dividends, through offers
of exchange, or as a result of reorganization, consolidation, or merger.
(5) purchase portfolio securities while borrowings in excess of 5% of its
total assets are outstanding.
STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. Mitchell Hutchins may use a
variety of financial instruments ("Derivative Instruments"), including certain
options, futures contracts (sometimes referred to as "futures"), options on
futures contracts, swaps and forward currency contracts. The fund may enter into
transactions involving one or more type of Derivative Instruments under which
the full value of its portfolio is at risk. Under normal circumstances, however,
the fund's use of these instruments will place at risk a much smaller portion of
its assets. The particular Derivative Instruments that may be used by the fund
are described below.
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The fund might not use any Derivative Instruments or derivative
strategies, and there can be no assurance that using any strategy will succeed.
If Mitchell Hutchins is incorrect in its judgment on market values, interest
rates or other economic factors in using a Derivative Instrument or strategy,
the fund may have lower net income and a net loss on the investment.
OPTIONS ON SECURITIES AND FOREIGN CURRENCIES. A call option is a
short-term contract pursuant to which the purchaser of the option, in return for
a premium, has the right to buy the security or currency underlying the option
at a specified price at any time during the term of the option or at specified
times or at the expiration of the option, depending on the type of option
involved. The writer of the call option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to deliver the
underlying security or currency against payment of the exercise price. A put
option is a similar contract that gives its purchaser, in return for a premium,
the right to sell the underlying security or currency at a specified price
during the option term or at specified times or at the expiration of the option,
depending on the type of option involved. The writer of the put option, who
receives the premium, has the obligation, upon exercise of the option during the
option term, to buy the underlying security or currency at the exercise price.
OPTIONS ON SECURITIES INDICES. A securities index assigns relative values
to the securities included in the index and fluctuates with changes in the
market values of those securities. A securities index option operates in the
same way as a more traditional securities option, except that exercise of a
securities index option is effected with cash payment and does not involve
delivery of securities. Thus, upon exercise of a securities index option, the
purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the securities
index.
SECURITIES INDEX FUTURES CONTRACTS. A securities index futures contract is
a bilateral agreement pursuant to which one party agrees to accept, and the
other party agrees to make, delivery of an amount of cash equal to a specified
dollar amount times the difference between the securities index value at the
close of trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the securities comprising the index
is made. Generally, contracts are closed out prior to the expiration date of the
contract.
INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS. Interest rate and
foreign currency futures contracts are bilateral agreements pursuant to which
one party agrees to make, and the other party agrees to accept, delivery of a
specified type of debt security or currency at a specified future time and at a
specified price. Although such futures contracts by their terms call for actual
delivery or acceptance of bonds or currency, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts are similar to
options on securities, except that an option on a futures contract gives the
purchaser the right, in return for the premium, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a
specified price at any time during the option term. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be
accompanied by delivery of the accumulated balance that represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future. The writer of an option, upon exercise, will assume a short position in
the case of a call and a long position in the case of a put.
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. The fund
may use Derivative Instruments to attempt to hedge its portfolio and also to
attempt to enhance income or return or realize gains. For example, the fund may
use Derivative Instruments 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 redemptions and for fund operating
expenses), to facilitate trading or to enhance returns.
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Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Derivative Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in the fund's portfolio. Thus, in a short hedge the fund takes
a position in a Derivative Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged. For example, the
fund might purchase a put option on a security to hedge against a potential
decline in the value of that security. If the price of the security declined
below the exercise price of the put, the fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transaction
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, the fund might be
able to close out the put option and realize a gain to offset the decline in the
value of the security.
Conversely, a long hedge is a purchase or sale of a Derivative Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the fund intends to acquire. Thus, in a
long hedge, the fund takes a position in a Derivative Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, the fund might purchase a call option on a
security it intends to purchase in order to hedge against an increase in the
cost of the security. If the price of the security increased above the exercise
price of the call, the fund could exercise the call and thus limit its
acquisition cost to the exercise price plus the premium paid and transaction
costs. Alternatively, the fund might be able to offset the price increase by
closing out an appreciated call option and realizing a gain.
The fund may purchase and write (sell) straddles on securities or indices
of securities. A long straddle is a combination of a call and a put option
purchased on the same security or on the same futures contract, where the
exercise price of the put is equal to the exercise price of the call. The fund
might enter into a long straddle when Mitchell Hutchins believes it likely that
the prices of the securities will be more volatile during the term of the option
than the option pricing implies. A short straddle is a combination of a call and
a put written on the same security where the exercise price of the put is equal
to the exercise price of the call. The fund might enter into a short straddle
when Mitchell Hutchins believes it unlikely that the prices of the securities
will be as volatile during the term of the option as the option pricing implies.
Derivative Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that the fund
owns or intends to acquire. Derivative Instruments on stock indices, in
contrast, generally are used to hedge against price movements in broad stock
market sectors in which the fund has invested or expects to invest.
Income strategies using Derivative Instruments may include the writing of
covered options to obtain the related option premiums. Return strategies may
include using Derivative Instruments to increase or decrease the fund's exposure
to different asset classes without buying or selling the underlying instruments.
The fund also may use derivatives to simulate full investment by the fund while
maintaining a cash balance for fund management purposes (such as to provide
liquidity to meet anticipated shareholder sales of fund shares and for fund
operating expenses).
The use of Derivative Instruments is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they are traded
and the Commodity Futures Trading Commission ("CFTC"). In addition, the fund's
ability to use Derivative Instruments may be limited by tax considerations. See
"Taxes."
In addition to the products, strategies and risks described below and in
the Prospectus, Mitchell Hutchins may discover additional opportunities in
connection with Derivative Instruments and with hedging, income and return
strategies. These new opportunities may become available as regulatory
authorities broaden the range of permitted transactions and as new Derivative
Instruments and techniques are developed. Mitchell Hutchins may use these
opportunities for the fund to the extent that they are consistent with the
fund's investment objective and permitted by its investment limitations and
applicable regulatory authorities. The fund's Prospectus or SAI will be
supplemented to the extent that new products or techniques involve materially
different risks than those described below or in the Prospectus.
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SPECIAL RISKS OF STRATEGIES USING DERIVATIVE INSTRUMENTS. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.
(1) Successful use of most Derivative Instruments depends upon the ability
of Mitchell Hutchins to predict movements of the overall securities, interest
rate or currency exchange markets, which requires different skills than
predicting changes in the prices of individual securities. While Mitchell
Hutchins is experienced in the use of Derivative Instruments, there can be no
assurance that any particular strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Derivative Instrument and price movements of the
investments that are being hedged. For example, if the value of a Derivative
Instrument used in a short hedge increased by less than the decline in value of
the hedged investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors affecting the markets in which Derivative
Instruments are traded, rather than the value of the investments being hedged.
The effectiveness of hedges using Derivative Instruments on indices will depend
on the degree of correlation between price movements in the index and price
movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly
or partially offsetting the negative effect of unfavorable price movements in
the investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if the fund entered into a
short hedge because Mitchell Hutchins projected a decline in the price of a
security in the fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Derivative Instrument. Moreover, if the price of the
Derivative Instrument declined by more than the increase in the price of the
security, the fund could suffer a loss. In either such case, the fund would have
been in a better position had it not hedged at all.
(4) As described below, the fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
(i.e., Derivative Instruments other than purchased options). If the fund was
unable to close out its positions in such Derivative Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the positions expired or matured. These requirements might impair the
fund's ability to sell a portfolio security or make an investment at a time when
it would otherwise be favorable to do so, or require that the fund sell a
portfolio security at a disadvantageous time. The fund's ability to close out a
position in a Derivative Instrument prior to expiration or maturity depends on
the existence of a liquid secondary market or, in the absence of such a market,
the ability and willingness of a counterparty to enter into a transaction
closing out the position. Therefore, there is no assurance that any hedging
position can be closed out at a time and price that is favorable to the fund.
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose the fund to an
obligation to another party. The fund will not enter into any such transactions
unless it owns either (1) an offsetting ("covered") position in securities,
currencies or other options or futures contracts or (2) cash or liquid
securities with a value sufficient at all times to cover its potential
obligations to the extent not covered as provided in (1) above. The fund will
comply with SEC guidelines regarding cover for such transactions and will, if
the guidelines so require, set aside cash or liquid securities in a segregated
account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Derivative Instrument is open, unless they are
replaced with similar assets. As a result, committing a large portion of the
fund's assets to cover positions or to segregated accounts could impede
portfolio management or the fund's ability to meet redemption requests or other
current obligations.
OPTIONS. The fund may purchase put and call options, and write (sell)
covered put or call options on securities in which it invests and related
indices and on foreign currencies. The purchase of call options may serve as a
long hedge, and the purchase of put options may serve as a short hedge. The fund
may also use options to attempt to enhance return or realize gains by increasing
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or reducing its exposure to an asset class without purchasing or selling the
underlying securities. Writing covered put or call options can enable the fund
to enhance income by reason of the premiums paid by the purchasers of such
options. Writing covered call options serves as a limited short hedge, because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the fund will be obligated to
sell the security at less than its market value. Writing covered put options
serves as a limited long hedge, because increases in the value of the hedged
investment would be offset to the extent of the premium received for writing the
option. However, if the security depreciates to a price lower than the exercise
price of the put option, it can be expected that the put option will be
exercised and the fund will be obligated to purchase the security at more than
its market value. The securities or other assets used as cover for
over-the-counter options written by the fund would be considered illiquid to the
extent described under "The Fund's Investments, Related Risks and
Limitations--Illiquid Securities."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Generally, European-style options can only be exercised
immediately prior to their expiration. This is in contrast to American-style
options which are exercisable at any time prior to the expiration date of the
option. There are also other types of options that may be exercised on certain
specified dates before expiration. Options that expire unexercised have no
value.
The fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the fund to realize profits or
limit losses on an option position prior to its exercise or expiration.
The fund may purchase and write both exchange-traded and over-the-counter
options. Currently, many options on equity securities (stocks) are
exchange-traded. Exchange-traded options in the United States are issued by a
clearing organization affiliated with the exchange on which the option is listed
which, in effect, guarantees completion of every exchange-traded option
transaction. In contrast, over-the-counter options are contracts between the
fund and its counterparty (usually a securities dealer or a bank) with no
clearing organization guarantee. Thus, when the fund purchases or writes an
over-the-counter option, it relies on the counterparty to make or take delivery
of the underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by the fund
as well as the loss of any expected benefit of the transaction.
The fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
over-the-counter options only by negotiating directly with the counterparty, or
by a transaction in the secondary market if any such market exists. Although the
fund will enter into over-the-counter options only with counterparties that are
expected to be capable of entering into closing transactions with the fund,
there is no assurance that the fund will in fact be able to close out an
over-the-counter option position at a favorable price prior to expiration. In
the event of insolvency of the counterparty, the fund might be unable to close
out an over-the-counter option position at any time prior to its expiration.
If the fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered put or call
option written by the fund could cause material losses because the fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.
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The fund may purchase and write put and call options on indices in much
the same manner as the more traditional options discussed above, except the
index options may serve as a hedge against overall fluctuations in a securities
market (or market sector) rather than anticipated increases or decreases in the
value of a particular security
FUTURES. The fund may purchase and sell securities index futures
contracts, interest rate futures contracts and foreign currency futures
contracts. The fund may purchase put and call options, and write covered put and
call options, on futures in which it is allowed to invest. The purchase of
futures or call options thereon can serve as a long hedge, and the sale of
futures or the purchase of put options thereon can serve as a short hedge.
Writing covered call options on futures contracts can serve as a limited short
hedge, and writing covered put options on futures contracts can serve as a
limited long hedge, using a strategy similar to that used for writing covered
options on securities or indices. In addition, the fund may purchase or sell
futures contracts or purchase options thereon to increase or reduce its exposure
to an asset class without purchasing or selling the underlying securities,
either as a hedge or to enhance return or realize gains.
The fund may also write put options on futures contracts while at the same
time purchasing call options on the same futures contracts in order
synthetically to create a long futures contract position. Such options would
have the same strike prices and expiration dates. The fund will engage in this
strategy only when it is more advantageous to the fund than is purchasing the
futures contract.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash, obligations of
the United States or obligations fully guaranteed as to principal and interest
by the United States, in an amount generally equal to 10% or less of the
contract value. Margin must also be deposited when writing a call option on a
futures contract, in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not represent
a borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the fund's obligations to or from a futures
broker. When the fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the fund purchases
or sells a futures contract or writes a call option thereon, it is subject to
daily variation margin calls that could be substantial in the event of adverse
price movements. If the fund has insufficient cash to meet daily variation
margin requirements, it might need to sell securities at a time when such sales
are disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The fund intends to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If the fund were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The fund would continue to be subject
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to market risk with respect to the position. In addition, except in the case of
purchased options, the fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to maintain cash or securities in a segregated
account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. The use of futures
and related options is governed by the following guideline, which can be changed
by its board without shareholder vote:
The aggregate initial margin and premiums on futures contracts and options
on futures positions that are not for bona fide hedging purposes (as defined by
the CFTC) (excluding the amount by which options are "in-the-money") may not
exceed 5% of the fund's net assets.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. The fund may
use options and futures on foreign currencies, as described above, and forward
currency contracts, as described below, to hedge against movements in the values
of the foreign currencies in which the fund's securities are denominated. Such
currency hedges can protect against price movements in a security the fund owns
or intends to acquire that are attributable to changes in the value of the
currency in which it is denominated. Such hedges do not, however, protect
against price movements in the securities that are attributable to other causes.
The fund might seek to hedge against changes in the value of a particular
currency when no Derivative Instruments on that currency are available or such
Derivative Instruments are considered expensive. In such cases, the fund may
hedge against price movements in that currency by entering into transactions
using Derivative Instruments on another currency or a basket of currencies, the
value of which Mitchell Hutchins believes will have a positive correlation to
the value of the currency being hedged. In addition, the fund may use forward
currency contracts to shift exposure to foreign currency fluctuations from one
country to another. For example, if the fund owned securities denominated in a
foreign currency and Mitchell Hutchins believed that currency would decline
relative to another currency, it might enter into a forward contract to sell an
appropriate amount of the first foreign currency, with payment to be made in the
second foreign currency. Transactions that use two foreign currencies are
sometimes referred to as "cross hedging." Use of a different foreign currency
magnifies the risk that movements in the price of the Derivative Instrument will
not correlate or will correlate unfavorably with the foreign currency being
hedged.
The value of Derivative Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Derivative
Instruments, a fund could be disadvantaged by having to deal in the odd-lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
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
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price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Derivative Instruments until they reopen.
Settlement of Derivative Instruments involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
FORWARD CURRENCY CONTRACTS. The fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. Such transactions may serve as long hedges
- -- for example, the fund may purchase a forward currency contract to lock in the
U.S. dollar price of a security denominated in a foreign currency that the fund
intends to acquire. Forward currency contract transactions may also serve as
short hedges -- for example, the fund may sell a forward currency contract to
lock in the U.S. dollar equivalent of the proceeds from the anticipated sale of
a security denominated in a foreign currency.
The cost to the fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When the fund enters into a forward currency contract, it relies on the
counterparty to make or take delivery of the underlying currency at the maturity
of the contract. Failure by the counterparty to do so would result in the loss
of any expected benefit of the transaction.
As is the case with futures contracts, parties to forward currency
contracts can enter into offsetting closing transactions, similar to closing
transactions on futures, by entering into an instrument identical to the
instrument purchased or sold, but in the opposite direction. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the counterparty. Thus, there can be no assurance
that the 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, the fund might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the fund would continue
to be subject to market risk with respect to the position, and would continue to
be required to maintain a position in the securities or currencies that are the
subject of the hedge or to maintain cash or securities in a segregated account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, the fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS. The fund may enter
into forward currency contracts or maintain a net exposure to such contracts
only if (1) the consummation of the contracts would not obligate the fund to
deliver an amount of foreign currency in excess of the value of the position
being hedged by such contracts or (2) the fund segregates with its custodian
cash or liquid securities in an amount not less than the value of its total
assets committed to the consummation of the contract and not covered as provided
in (1) above, as marked to market daily.
SWAP TRANSACTIONS. Swap transactions include swaps, caps, floors and
collars relating to interest rates, currencies, securities or other instruments.
Interest rate swaps involve an agreement between two parties to exchange
payments that are based, for example, on variable and fixed rates of interest
and that are calculated on the basis of a specified amount of principal (the
"notional principal amount") for a specified period of time. Interest rate cap
and floor transactions involve an agreement between two parties in which the
first party agrees to make payments to the counterparty when a designated market
interest rate goes above (in the case of a cap) or below (in the case of a
19
<PAGE>
floor) a designated level on predetermined dates or during a specified time
period. Interest rate collar transactions involve an agreement between two
parties in which payments are made when a designated market interest rate either
goes above a designated ceiling level or goes below a designated floor level on
predetermined dates or during a specified time period. Currency swaps, caps,
floors and collars are similar to interest rate swaps, caps, floors and collars,
but they are based on currency exchange rates rather than interest rates. Equity
swaps or other swaps relating to securities or other instruments are also
similar, but they are based on changes in the value of the underlying securities
or instruments. For example, an equity swap might involve an exchange of the
value of a particular security or securities index in a certain notional amount
for the value of another security or index or for the value of interest on that
notional amount at a specified fixed or variable rate.
The fund may enter into interest rate swap transactions to preserve a
return or spread on a particular investment or portion of its bond portfolio or
to protect against any increase in the price of securities it anticipates
purchasing at a later date. The fund may use interest rate swaps, caps, floors
and collars as a hedge on either an asset-based or liability-based basis,
depending on whether it is hedging its assets or its liabilities. Interest rate
swap transactions are subject to risks comparable to those described above with
respect to other derivatives strategies.
The fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out, with the fund receiving or paying, as the case
may be, only the net amount of the two payments. Because segregated accounts
will be established with respect to such transactions, Mitchell Hutchins
believes such obligations do not constitute senior securities and, accordingly,
will not treat them as being subject to the fund's borrowing restrictions. The
net amount of the excess, if any, of the fund's obligations over its
entitlements with respect to each swap will be accrued on a daily basis, and
appropriate fund assets having an aggregate net asset value at least equal to
the accrued excess will be maintained in a segregated account as described above
in "The Fund's Investment, Related Risks and Limitations -- Segregated
Accounts." The fund also will establish and maintain such segregated accounts
with respect to its total obligations under any swaps that are not entered into
on a net basis.
The fund will enter into interest rate swap transactions only with banks
and recognized securities dealers or their respective affiliates believed by
Mitchell Hutchins to present minimal credit risk in accordance with guidelines
established by the fund's board. If there is a default by the other party to
such a transaction, the fund will have to rely on its contractual remedies
(which may be limited by bankruptcy, insolvency or similar laws) pursuant to the
agreements related to the transaction.
ORGANIZATION; TRUSTEES AND OFFICERS;
PRINCIPAL HOLDERS AND MANAGEMENT OWNERSHIP OF SECURITIES
The Trust was formed on November 21, 1986 as a business trust under the
laws of the Commonwealth of Massachusetts and has fourteen series. The Trust is
governed by a board of trustees, which is authorized to establish additional
series and to issue an unlimited number of shares of beneficial interest of each
existing or future series, par value $0.001 per share. The board oversees the
fund's operations.
The trustees and executive officers of the Trust, their ages, business
addresses and principal occupations during the past five years are:
20
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER
DIRECTORSHIPS
Margo N. Alexander*+; 53 Trustee and Mrs. Alexander is Chairman
President (since March 1999), chief
executive officer and a director
of Mitchell Hutchins (since
January 1995), and an executive
vice president and director of
PaineWebber (since March 1984).
Mrs. Alexander is president and
director or trustee of 31
investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Richard Q. Armstrong; 64 Trustee Mr. Armstrong is chairman and
R.Q.A. Enterprises principal of R.Q.A. Enterprises
One Old Church Road (management consulting firm)
Unit #6 (since April 1991 and principal
Greenwich, CT 06830 occupation since March 1995).
Mr. Armstrong was chairman of the
board, chief executive officer
and co-owner of Adirondack
Beverages (producer and
distributor of soft drinks and
sparkling/still waters) (October
1993-March 1995). He was a
partner of The New England
Consulting Group (management
consulting firm) (December
1992-September 1993). He was
managing director of LVMH U.S.
Corporation (U.S. subsidiary of
the French luxury goods
conglomerate, Louis Vuitton Moet
Hennessey Corporation)
(1987-1991) and chairman of its
wine and spirits subsidiary,
Schieffelin & Somerset Company
(1987-1991). Mr. Armstrong is a
director or trustee of 30
investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
E. Garrett Bewkes, Trustee and Mr. Bewkes is a director of
Jr.**+; 73 Chairman of the Paine Webber Group Inc.
Board of Trustees ("PW Group") (holding company of
PaineWebber and Mitchell
Hutchins). Prior to December
1995, he was a consultant to
PW Group. Prior to 1988, he was
chairman of the board, president
and chief executive officer of
American Bakeries Company.
Mr. Bewkes is a director of
Interstate Bakeries Corporation.
Mr. Bewkes is a director or
trustee of 34 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
21
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER
DIRECTORSHIPS
Richard R. Burt; 53 Trustee Mr. Burt is chairman of IEP
1275 Pennsylvania Ave., Advisors, LLP (international
N.W. investments and consulting firm)
Washington, DC 20004 (since March 1994), 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) and Homestake
Mining Corp. (gold mining), vice
chairman of Anchor Gaming
(provides technology to gaming
and wagering industry) (since
July 1999) and chairman of
Weirton Steel Corp. (makes and
finishes steel products) (since
April 1996). 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 30
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Mary C. Farrell**+; 50 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 29
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Meyer Feldberg; 58 Trustee Mr. Feldberg is Dean and
Columbia University Professor of Management of the
101 Uris Hall Graduate School of Business,
New York, NY 10027 Columbia University. Prior to
1989, he was president of the
Illinois Institute of
Technology. Dean Feldberg is
also a director of Primedia Inc.
(publishing), Federated
Department Stores, Inc.
(operator of department stores)
and Revlon, Inc. (cosmetics).
Dean Feldberg is a director or
trustee of 33 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
22
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER
DIRECTORSHIPS
George W. Gowen; 70 Trustee Mr. Gowen is a partner in the
666 Third Avenue law firm of Dunnington,
New York, NY 10017 Bartholow & Miller. Prior to
May 1994, he was a partner in the
law firm of Fryer, Ross & Gowen.
Mr. Gowen is a director or
trustee of 33 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Frederic V. Malek; 63 Trustee Mr. Malek is chairman of Thayer
1455 Pennsylvania Ave., Capital Partners (merchant bank)
N.W. and chairman of Thayer Hotel
Suite 350 Investors II and Lodging
Washington, DC 20004 Opportunities Fund (hotel
investment partnerships). From
January 1992 to November 1992,
he was campaign manager of
Bush-Quayle '92. From 1990 to
1992, he was vice chairman and,
from 1989 to 1990, he was
president of Northwest Airlines
Inc. and NWA Inc. (holding
company of Northwest Airlines
Inc.). Prior to 1989, he was
employed by the Marriott
Corporation (hotels,
restaurants, airline catering
and contract feeding), where he
most recently was an executive
vice president and president of
Marriott Hotels and Resorts.
Mr. Malek is also a director of
Aegis Communications, Inc.
(tele-services), American
Management Systems, Inc.
(management consulting and
computer related services),
Automatic Data Processing, Inc.,
(computing services), CB Richard
Ellis, Inc. (real estate
services), FPL Group, Inc.
(electric services), Global
Vacation Group (packaged
vacations), HCR/Manor Care, Inc.
(health care), SAGA Systems,
Inc. (software company) and
Northwest Airlines Inc.
Mr. Malek is a director or
trustee of 30 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
23
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER
DIRECTORSHIPS
Carl W. Schafer; 63 Trustee Mr. Schafer is president of the
66 Witherspoon Street, Atlantic Foundation (charitable
#1100 foundation supporting mainly
Princeton, NJ 08542 oceanographic exploration and
research). He is a director of
Labor Ready, Inc. (temporary
employment), Roadway Express,
Inc. (trucking), The Guardian
Group of Mutual Funds, the
Harding, Loevner Funds, E.I.I.
Realty Trust (investment
company), 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 30 investment companies for
which Mitchell Hutchins,
PaineWebber or one of their
affiliates serves as investment
adviser.
Brian M. Storms*+; 45 Trustee Mr. Storms is president and
chief operating officer of
Mitchell Hutchins (since March
1999). Mr. Storms was president
of Prudential Investments
(1996-1999). Prior to joining
Prudential he was a managing
director at Fidelity
Investments. Mr. Storms is a
director or trustee of 30
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
T. Kirkham Barneby*; 53 Vice President Mr. Barneby is a managing
director and chief investment
officer--quantitative
investments of Mitchell
Hutchins. Mr. Barneby is a
vice president of seven
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
John J. Lee**; 31 Vice President and Mr. Lee is a vice president and
Assistant Treasurer a manager of the 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 31 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
24
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER
DIRECTORSHIPS
Kevin J. Vice President Mr. Mahoney is a first vice
Mahoney**; 34 and Assistant president and a senior manager
Treasurer of the mutual fund finance
department of Mitchell
Hutchins. From August 1996
through March 1999, he was the
manager of the mutual fund
internal control group of
Salomon Smith Barney. Prior
to August 1996, he was an
associate and assistant
treasurer for BlackRock
Financial Management L.P. Mr.
Mahoney is a vice president
and assistant treasurer of 31
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Ann E. Moran**; 42 Vice President and Ms. Moran is a vice president
Assistant Treasurer and a manager of the mutual fund
finance department of Mitchell
Hutchins. Ms. Moran is a vice
president and assistant
treasurer of 31 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Dianne E. O'Donnell**; 47 Vice President and Ms. O'Donnell is a senior vice
Secretary president and deputy general
counsel of Mitchell Hutchins.
Ms. O'Donnell is a vice
president and secretary of 30
investment companies and a vice
president and assistant
secretary of one investment
company for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Emil Polito*; 39 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 31
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Victoria E. Schonfeld**; Vice President Ms. Schonfeld is a managing
49 director and general counsel of
Mitchell Hutchins and (since July
1995) a senior vice president of
PaineWebber. Ms. Schonfeld is a
vice president of 30 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**; 37 Vice President and Mr. Schubert is a senior vice
Treasurer president and director of the
mutual fund finance department
of Mitchell Hutchins. Mr.
Schubert is a vice president and
treasurer of 31 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
25
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER
DIRECTORSHIPS
Barney A. Taglialatela**; Vice President and Mr. Taglialatela is a vice
39 Assistant Treasurer president and a manager of the
mutual fund finance department
of Mitchell Hutchins. Mr.
Taglialatela is a vice president
and assistant treasurer of 31
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Keith A. Weller**; 38 Vice President and Mr. Weller is a first vice
Assistant Secretary president and associate general
counsel of Mitchell Hutchins.
Prior to May 1995, he was an
attorney in private practice.
Mr. Weller is a vice president
and assistant secretary of 30
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
- ---------
* This person's business address is 51 West 52nd Street, New York, New York
10019-6114.
** This person's business address is 1285 Avenue of the Americas, New York, New
York 10019.
+ Mrs. Alexander, Mr. Bewkes, Ms. Farrell and Mr. Storms are "interested
persons" of the Trust and the fund as defined in the Investment Company Act
by virtue of their positions with Mitchell Hutchins, PaineWebber, and/or PW
Group.
The Trust pays trustees who are not "interested persons" of the Trust
("disinterested trustees") $500 annually for each series and up to an additional
$150 per series for each board meeting and each separate meeting of a board
committee. The Trust presently has 14 series and thus pays each such trustee
$7,000 annually, plus any additional annual amounts due for board or committee
meetings. Each chairman of the audit and contract review committees of
individual funds within the PaineWebber fund complex receives additional
compensation aggregating $15,000 annually from the relevant funds. All board
members are reimbursed for any expenses incurred in attending meetings. Board
members and officers own no shares of the fund. Because Mitchell Hutchins and
PaineWebber perform substantially all of the services necessary for the
operation of the Trust and the fund, the Trust requires no employees. No
officer, director or employee of Mitchell Hutchins or PaineWebber presently
receives any compensation from the Trust for acting as a trustee or officer.
26
<PAGE>
The table below includes certain information relating to the compensation
of the current board members and the compensation of those board members from
all PaineWebber funds during the periods indicated.
<TABLE>
<CAPTION>
COMPENSATION TABLE+
ESTIMATED
AGGREGATE TOTAL COMPENSATION
NAME OF PERSON, POSITION COMPENSATION FROM FROM THE TRUST AND THE
THE TRUST* FUND COMPLEX**
<S> <C> <C>
Richard Q. Armstrong,
Trustee $13,370 $104,650
Richard R. Burt,
Trustee 13,370 102,850
Meyer Feldberg,
Trustee 13,370 119,650
George W. Gowen,
Trustee 16,210 119,650
Frederic V. Malek,
Trustee 13,370 104,650
Carl W. Schafer,
Trustee 13,370 104,650
</TABLE>
- --------------------
+ Only independent board members are compensated by the PaineWebber funds and
identified above; board members who are "interested persons," as defined by
the Investment Company Act, do not receive compensation from the funds.
* Represents fees estimated to be paid to each board member during the fund's
initial full fiscal year ended December 31, 2000.
** Represents total compensation paid during the calendar year ended December
31, 1999, to each board member by 31 investment companies (34 in the case of
Messrs. Feldberg and Gowen) for which Mitchell Hutchins, PaineWebber or one
of their affiliates served as investment adviser. No fund within the
PaineWebber fund complex has a bonus, pension, profit sharing or retirement
plan.
PRINCIPAL HOLDERS AND MANAGEMENT OWNERSHIP OF SECURITIES
As of March ____, 2000, the fund had no outstanding shares.
INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS. Mitchell Hutchins
acts as the investment adviser and administrator of the fund pursuant to an
advisory contract ("Advisory Contract") with the fund. Under the Advisory
Contract, the fund pays Mitchell Hutchins a fee, computed daily and paid
monthly, at the annual rate of 0.75% of its average daily net assets.
Under the terms of the Advisory Contract, the fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Trust not readily identifiable as belonging to
one of its series are allocated among the series by or under the direction of
the board in such manner as the board determines to be fair and equitable.
Expenses borne by the fund include the following (or the fund's allocable share
of the following): (1) the cost (including brokerage commissions, if any) of
securities purchased or sold by the fund and any losses incurred in connection
therewith; (2) fees payable to and expenses incurred on behalf of the fund by
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
27
<PAGE>
qualifications; (5) fees and salaries payable to trustees who are not interested
persons of the fund or Mitchell Hutchins; (6) all expenses incurred in
connection with the trustees' services, including travel expenses; (7) taxes
(including any income or franchise taxes) and governmental fees; (8) costs of
any liability, uncollectible items of deposit and other insurance or fidelity
bonds; (9) any costs, expenses or losses arising out of a liability of or claim
for damages or other relief asserted against the fund for violation of any law;
(10) legal, accounting and auditing expenses, including legal fees of special
counsel for the independent trustees; (11) charges of custodians, transfer
agents and other agents; (12) costs of preparing share certificates; (13)
expenses of setting in type and printing prospectuses and supplements thereto,
statements of additional information and supplements thereto, reports and proxy
materials for existing shareholders and costs of mailing such materials to
existing shareholders; (14) any extraordinary expenses (including fees and
disbursements of counsel) incurred by the fund; (15) fees, voluntary assessments
and other expenses incurred in connection with membership in investment company
organizations; (16) costs of mailing and tabulating proxies and costs of
meetings of shareholders, the board and any committees thereof; (17) the cost of
investment company literature and other publications provided to trustees and
officers; and (18) costs of mailing, stationery and communications equipment.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Mitchell Hutchins in the performance of its duties or from reckless disregard of
its duties and obligations thereunder. The Advisory Contract terminates
automatically upon its assignment and is terminable at any time without penalty
by the board or by vote of the holders of a majority of the fund's outstanding
voting securities, on 60 days' written notice to Mitchell Hutchins or by
Mitchell Hutchins on 60 days' written notice to the fund.
PaineWebber makes the Investment Strategy Group, headed by Edward M.
Kerschner, available to consult with Mitchell Hutchins regarding the development
of investment themes and stocks covered by the Research Department. Mr.
Kerschner is PaineWebber's Chief Investment Strategist and Chairman of its
Investment Policy Committee. PaineWebber does not receive a fee for these
consulting services.
NET ASSETS. The following table shows the approximate net assets as of
February 29, 2000, 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).........................$ 9,931.5
Global......................................................4,757.8
Equity/Balanced............................................10,115.9
Fixed Income (excluding Money Market).......................4,573.4
Taxable Fixed Income..................................3,146.1
Tax-Free Fixed Income.................................1,427.3
Money Market Funds.........................................39,977.1
PERSONAL TRADING POLICIES. The fund, its investment adviser and its
principal underwriter each has adopted a code of ethics under rule 17j-1 of the
Investment Company Act, which permits personnel covered by the rule to invest in
securities that may be purchased or held by the fund but prohibits fraudulent,
deceptive or manipulative conduct in connection with that personal investing.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
the Class I shares of the fund under a separate distribution contract with the
Trust ("Distribution Contract"). The Distribution Contract requires Mitchell
Hutchins to use its best efforts, consistent with its other businesses, to sell
Class I shares of the fund. Class H shares have no distributor or distribution
contract. Class H and Class I shares of the fund are offered continuously to
28
<PAGE>
separate accounts of insurance companies. Mitchell Hutchins is located at 51
West 52nd Street, New York, New York 10019-6114.
Under a plan of distribution pertaining to the Class I shares of the fund
adopted by the Trust in the manner prescribed under Rule 12b-1 under the
Investment Company Act ("Class I Plan" or "Plan"), the fund pays Mitchell
Hutchins a distribution fee, accrued daily and payable monthly, at the annual
rate of 0.25% of the average daily net assets attributable to its Class I
shares. Mitchell Hutchins uses these distribution fees to pay insurance
companies whose separate accounts purchase Class I shares for
distribution-related services that the insurance companies provide with respect
to the Class I shares. These services include (1) the printing and mailing of
fund prospectuses, statements of additional information, related supplements and
shareholder reports to current and prospective contract owners, (2) the
development and preparation of sales material, including sales literature,
relating to Class I shares, (3) materials and activities intended to educate and
train insurance company sales personnel concerning the fund and Class I shares,
(4) obtaining information and providing explanations to contract owners
concerning the funds, (5) compensating insurance company sales personnel with
respect to services that result in the sale or retention of Class I shares, (6)
providing personal services and/or account maintenance services to contract
owners with respect to insurance company separate accounts that hold Class I
shares, and (7) financing other activities that the board determines are
primarily intended to result in the sale of Class I shares.
The Plan and the related Distribution Contract for Class I shares specify
that the distribution fees paid to Mitchell Hutchins are not reimbursements for
specific expenses incurred. Therefore, even if Mitchell Hutchins' expenses
exceed the distribution fees it receives, the fund will not be obligated to pay
more than those fees. On the other hand, if Mitchell Hutchins' expenses are less
than such fees, it will retain its full fees and realize a profit. Expenses in
excess of distribution fees received or accrued through the termination date of
the Class I Plan will be Mitchell Hutchins' sole responsibility and not that of
the fund. The board reviews the Class I Plan and Mitchell Hutchins'
corresponding expenses annually.
Among other things, the Class I Plan provides that (1) Mitchell Hutchins
will submit to the board at least quarterly, and the board members will review,
reports regarding all amounts expended under the Class I Plan and the purposes
for which such expenditures were made, (2) the Class I Plan will continue in
effect only so long as it is approved at least annually, and any material
amendment thereto is approved, by the board, including those board members who
are not "interested persons" of the Trust and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to the
Plan, acting in person at a meeting called for that purpose, (3) payments by a
fund under the Class I Plan shall not be materially increased without the
affirmative vote of the holders of a majority of the outstanding shares of the
relevant class and (4) while the Class I Plan remains in effect, the selection
and nomination of board members who are not "interested persons" of the Trust
shall be committed to the discretion of the board members who are not
"interested persons" of that Trust.
In approving the Class I Plan for the fund, the board considered all the
features of the distribution system for the Class I shares, including (1) the
expectation that Class I shares would be sold primarily to the separate accounts
of insurance companies unaffiliated with Mitchell Hutchins or PaineWebber, (2)
the expenses those unaffiliated insurance companies were likely to incur in
marketing Class I shares to the owners of contracts issued by their separate
accounts, (3) the need to encourage those unaffiliated insurance companies to
educate their agents concerning the fund and to compensate their agents for
selling Class I shares and (4) the need to encourage those unaffiliated
insurance companies to educate their contract owners concerning the fund and to
provide personal and account maintenance services to contract owners with
respect to the fund's Class I shares attributable to their accounts.
The board also considered all compensation that Mitchell Hutchins would
receive under the Class I Plan and the Distribution Contract and the benefits
that would accrue to Mitchell Hutchins under the Class I Plan in that Mitchell
Hutchins would receive distribution and advisory fees that are calculated based
upon a percentage of the average net assets of the fund, which fees would
increase if the Class I Plan were successful and the fund attained and
maintained significant asset levels.
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<PAGE>
PORTFOLIO TRANSACTIONS
Subject to policies established by the board, Mitchell Hutchins is
responsible for the execution of the fund's portfolio transactions and the
allocation of brokerage transactions. In executing portfolio transactions,
Mitchell Hutchins seeks to obtain the best net results for the fund, taking into
account such factors as the price (including the applicable brokerage commission
or dealer spread), size of order, difficulty of execution and operational
facilities of the firm involved. While Mitchell Hutchins generally seeks
reasonably competitive commission rates, payment of the lowest commission is not
necessarily consistent with obtaining the best net results. Prices paid to
dealers in principal transactions generally include a "spread," which is the
difference between the prices at which the dealer is willing to purchase and
sell a specific security at the time. The fund may invest in securities traded
in the over-the-counter market and will engage primarily in transactions
directly with the dealers who make markets in such securities, unless a better
price or execution could be obtained by using a broker.
The fund has no obligation to deal with any broker or group of brokers in
the execution of portfolio transactions. The fund contemplates that, consistent
with the policy of obtaining the best net results, brokerage transactions may be
conducted through Mitchell Hutchins or its affiliates, including PaineWebber.
The board has adopted procedures in conformity with Rule 17e-1 under the
Investment Company Act to ensure that all brokerage commissions paid to
PaineWebber are reasonable and fair. Specific provisions in the Advisory
Contract authorize Mitchell Hutchins and any of its affiliates that is a member
of a national securities exchange to effect portfolio transactions for the fund
on such exchange and to retain compensation in connection with such
transactions. Any such transactions will be effected and related compensation
paid only in accordance with applicable SEC regulations.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs"), who receive brokerage commissions for their services. The
fund's procedures in selecting FCMs to execute its transactions in futures
contracts, including procedures permitting the use of Mitchell Hutchins and its
affiliates, are similar to those in effect with respect to brokerage
transactions in securities.
In selecting brokers, Mitchell Hutchins will consider the full range and
quality of a broker's services. Consistent with the interests of the fund and
subject to the review of the board, Mitchell Hutchins may cause the fund to
purchase and sell portfolio securities through brokers who provide Mitchell
Hutchins with brokerage or research services. The fund may pay those brokers a
higher commission than may be charged by other brokers, provided that Mitchell
Hutchins determines in good faith that the commission is reasonable in terms
either of that particular transaction or of the overall responsibility of
Mitchell Hutchins to the fund and its other clients.
Research services obtained from brokers may include written reports,
pricing and appraisal services, analysis of issues raised in proxy statements,
educational seminars, subscriptions, portfolio attribution and monitoring
services, and computer hardware, software and access charges which are directly
related to investment research. Research services may be received in the form of
written reports, online services, telephone contacts and personal meetings with
securities analysts, economists, corporate and industry spokespersons, and
government representatives.
For purchases or sales with broker-dealer firms that act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with these transactions,
Mitchell Hutchins will not purchase securities at a higher price or sell
securities at a lower price than would otherwise be paid if no weight was
attributed to the services provided by the executing dealer. Mitchell Hutchins
may engage in agency transactions in over-the-counter equity and debt securities
in return for research and execution services. These transactions are entered
into only pursuant to procedures that are designed to ensure that the
transaction (including commissions) is at least as favorable as it would have
been if effected directly with a market-maker that did not provide research or
execution services.
Research services and information received from brokers or dealers are
supplemental to Mitchell Hutchins' own research efforts and, when utilized, are
subject to internal analysis before being incorporated into its investment
processes. Information and research services furnished by brokers or dealers
through which or with which the fund effects securities transactions may be used
30
<PAGE>
by Mitchell Hutchins in advising other funds or accounts and, conversely,
research services furnished to Mitchell Hutchins by brokers or dealers in
connection with other funds or accounts that it advises may be used in advising
the fund.
Investment decisions for the fund and for other investment accounts
managed by Mitchell Hutchins are made independently of each other in light of
differing considerations for the various accounts. However, the same investment
decision may occasionally be made for the fund and one or more accounts. In
those cases, simultaneous transactions are inevitable. Purchases or sales are
then averaged as to price and allocated between that fund and the other
account(s) as to amount according to a formula deemed equitable to the fund and
the other account(s). While in some cases this practice could have a detrimental
effect upon the price or value of the security as far as the fund is concerned,
or upon its ability to complete its entire order, in other cases it is believed
that simultaneous transactions and the ability to participate in volume
transactions will benefit the fund.
The fund will not purchase securities that are offered in underwritings in
which PaineWebber is a member of the underwriting or selling group, except
pursuant to procedures adopted by the board pursuant to Rule 10f-3 under the
Investment Company Act. Among other things, these procedures require that the
spread or commission paid in connection with such a purchase be reasonable and
fair, the purchase be at not more than the public offering price prior to the
end of the first business day after the date of the public offering and that
PaineWebber or any affiliate thereof not participate in or benefit from the sale
to the fund.
PORTFOLIO TURNOVER. The fund's annual portfolio turnover rates may vary
greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate is
calculated by dividing the lesser of the fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of securities in the portfolio during the year. The fund is
expected to have an annual turnover rate greater than 100%.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The insurance company separate accounts purchase and redeem shares of the
fund on each day on which the New York Stock Exchange 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 New York Stock Exchange is
closed on the observance of the following holidays: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. Purchases and redemptions of
the shares of the fund are effected at their respective net asset values per
share determined as of the close of regular trading (usually 4:00 p.m., Eastern
time) on the New York Stock Exchange on that Business Day. Payment for
redemptions are made by the fund within seven days thereafter. No fee is charged
the separate accounts when they purchase or redeem fund shares.
The fund may suspend redemption privileges or postpone the date of payment
during any period (1) when the New York Stock Exchange is closed or trading on
the New York Stock Exchange is restricted as determined by the SEC, (2) when an
emergency exists, as defined by the SEC, that makes it not reasonably
practicable for the fund to dispose of securities owned by it or fairly to
determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of the fund's portfolio at the time.
VALUATION OF SHARES
The fund determines its net asset value per share separately for each
class of shares, normally as of the close of regular trading (usually 4:00 p.m.,
Eastern time) on the New York Stock Exchange on each Monday through Friday when
the New York Stock Exchange is open. Prices will be calculated earlier when the
New York Stock Exchange closes early because trading has been halted for the
day.
31
<PAGE>
Securities that are listed on U.S. and foreign exchanges normally are
valued at the last sale price on the day the securities are valued or, lacking
any sales on such day, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are generally
valued on the exchange considered by Mitchell Hutchins as the primary market.
Securities traded in the over-the-counter market and listed on The Nasdaq Stock
Market ("Nasdaq") normally are valued at the last available sale price on Nasdaq
prior to valuation; other over-the-counter securities are valued at the last bid
price available prior to valuation. Where market quotations are readily
available, portfolio securities are valued based upon market quotations,
provided those quotations adequately reflect, in the judgment of Mitchell
Hutchins, the fair value of the security. Where those market quotations are not
readily available, securities are valued based upon appraisals received from a
pricing service using a computerized matrix system or based upon appraisals
derived from information concerning the security or similar securities received
from recognized dealers in those securities. All other securities and other
assets are valued at fair value as determined in good faith by or under the
direction of the board. The amortized cost method of valuation generally is used
to value debt obligations with 60 days or less remaining until maturity, unless
the board determines that this does not represent fair value.
All investments quoted in foreign currency will be valued daily in U.S.
dollars on the basis of the foreign currency exchange rate prevailing at the
time such valuation is determined by the fund's custodian. Foreign currency
exchange rates are generally determined prior to the close of regular trading on
the New York Stock Exchange. 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 New York Stock Exchange, which events
would not be reflected in the computation of the 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
board. The foreign currency exchange transactions of the fund conducted on a
spot (that is, cash) basis are valued at the spot rate for purchasing or selling
currency prevailing on the foreign exchange market. Under normal market
conditions this rate differs from the prevailing exchange rate by less than
one-tenth of one percent due to the costs of converting from one currency to
another.
TAXES
Fund shares are offered only to insurance company separate accounts 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. The fund intends to
qualify for treatment as a regulated investment company ("RIC") under Subchapter
M of the Internal Revenue Code. To so qualify, the fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-term
capital gains and net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements.
These requirements include the following: (1) the fund must derive at least 90%
of its gross income each taxable year from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from options,
futures or forward contracts) derived with respect to its business of investing
in securities or those currencies ("Income Requirement"); (2) at the close of
each quarter of the fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities,
securities of other RICs and other securities, with these other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the fund's total assets and that does not represent more than 10%
of the issuer's outstanding voting securities; and (3) at the close of each
quarter of the fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. government securities or
the securities of other RICs) of any one issuer.
If the fund failed to qualify for treatment as a RIC for any taxable year,
(a) it would be taxed as an ordinary corporation on the full amount of its
taxable income for that year (even if it distributed that income to its
shareholders), (b) all distributions out of its earnings and profits, including
distributions of net capital gain (the excess of net long-term capital gain over
net short-term capital loss), would be taxable to its shareholders as dividends
32
<PAGE>
(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. The fund intends to satisfy the
diversification requirements indirectly imposed by section 817(h) of the
Internal Revenue Code and the regulations thereunder, which are in addition to
the diversification requirements described above. These requirements place
certain limitations on the assets of each insurance company account that may be
invested in securities of a single issuer. Because section 817(h) and the
regulations thereunder treat the assets of the fund as assets of the related
separate account, the fund must also meet these requirements. Specifically, the
regulations under section 817(h) provide that, except as permitted by the "safe
harbor" described below, as of the end of each calendar quarter or within 30
days thereafter no more than 55% of the total assets of the fund may be
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments and no more than 90% by any four
investments. For this purpose, all securities of the same issuer are considered
a single investment, and each U.S. government agency and instrumentality is
considered a separate issuer. Section 817(h) provides, as a safe harbor, that a
separate account will be treated as being adequately diversified if the
diversification requirements under Subchapter M are satisfied and no more than
55% of the value of the separate account's total assets are cash and cash items,
government securities and securities of other RICs. Failure of the fund to
satisfy the section 817(h) requirements would result in (1) taxation of the
insurance company issuing the variable contracts, the benefits under which are
funded by the separate account(s) investing in the fund, and (2) treatment of
the contract owners other than as described in the applicable contract
prospectus.
OTHER INFORMATION
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward currency contracts,
involves complex rules that determine for income tax purposes the amount,
character and timing of recognition of the gains and losses the fund realizes in
connection therewith. Gains from the disposition of foreign currencies (except
certain gains that may be excluded by future regulations), and gains from
options, futures and forward currency contracts derived by the fund with respect
to its business of investing in securities or foreign currencies, will be
treated as qualifying income under the Income Requirement.
If the fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis -- and enters into a "constructive sale" of the same or
substantially similar property, the fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract or a futures or forward currency contract entered into by the
fund or a related person with respect to the same or substantially similar
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale. The foregoing will not
apply, however, to the fund's transaction during any taxable year that otherwise
would be treated as a constructive sale if the transaction is closed within 30
days after the end of that year and the fund holds the appreciated financial
position unhedged for 60 days after that closing (i.e., at no time during that
60-day period is the fund's risk of loss regarding that position reduced by
reason of certain specified transactions with respect to substantially similar
or related property, such as having an option to sell, being contractually
obligated to sell, making a short sale or granting an option to buy
substantially identical stock or securities).
The foregoing is only a general summary of some of the important federal
income tax considerations generally affecting the fund and its shareholders. No
attempt is made to present a complete explanation of the federal tax treatment
of the fund's activities, and this discussion is not intended as a substitute
for careful tax planning. Accordingly, potential investors are urged to consult
their own tax advisers for more detailed information and for information
33
<PAGE>
regarding any state, local or foreign taxes applicable to the fund and to
dividends and distributions therefrom.
OTHER INFORMATION
MASSACHUSETTS BUSINESS TRUST. The Trust is an entity of the type commonly
known as a "Massachusetts business trust." Under Massachusetts law, shareholders
of the fund could, under certain circumstances, be held personally liable for
the obligations of the fund or the Trust. However, the Trust's Declaration of
Trust disclaims shareholder liability for acts or obligations of the Trust or
the fund and requires that notice of such disclaimer be given in each note,
bond, contract, instrument, certificate or undertaking made or issued by the
board members or by any officers or officer by or on behalf of the Trust or the
fund, the board members or any of them in connection with the Trust. The
Declaration of Trust provides for indemnification from the fund's property for
all losses and expenses of any shareholder held personally liable for the
obligations of the fund. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the fund itself would be unable to meet its obligations, a possibility that
Mitchell Hutchins believes is remote and not material. Upon payment of any
liability incurred by a shareholder solely by reason of being or having been a
shareholder, the shareholder paying such liability would be entitled to
reimbursement from the general assets of the fund. The board members intend to
conduct the fund's operations in such a way as to avoid, as far as possible,
ultimate liability of the shareholders for liabilities of the fund.
VOTING RIGHTS. The insurance company separate accounts that fund benefits
under variable annuity or variable life insurance contracts are the shareholders
of the fund -- not the individual owners of those contracts. However, the
separate accounts may pass through voting rights to contract owners.
Shareholders of the fund are entitled to one vote for each full share held
and fractional votes for fractional shares held. Voting rights are not
cumulative and, as a result, the holders of more than 50% of all the shares of
the Trust may elect all of the board members of the Trust. The shares of the
fund will be voted together, except that only the shareholders of a particular
class of the fund may vote on matters affecting only that class, such as the
terms of the Class I Plan as it relates to the Class I shares. The shares of
each series of the Trust will be voted separately, except when an aggregate vote
of all the series is required by law.
The fund does not hold annual meetings. Shareholders of record of no less
than two-thirds of the outstanding shares of the Trust may remove a board member
through a declaration in writing or by vote cast in person or by proxy at a
meeting called for that purpose. A meeting will be called to vote on the removal
of a board member at the written request of holders of 10% of the outstanding
shares of the Trust.
POSSIBLE CONFLICTS. Shares of the fund may serve as the underlying
investments for separate accounts of unaffiliated insurance companies ("shared
funding") as well as for both annuity and life insurance contracts ("mixed
funding"). Due to differences in tax treatment or other considerations, the
interests of various contract owners might at some time be in conflict. The
Trust does not currently foresee any conflict. However, the Trust's board
intends to monitor events to identify any material irreconcilable conflict that
may arise and to determine what action, if any, should be taken in response to
such conflict. If such a conflict were to occur, one or more insurance
companies' separate accounts might be required to withdraw its investments in
the fund. This might force the fund to sell securities at disadvantageous
prices.
CLASSES OF SHARES. A share of each class of the fund represents an
identical interest in the fund's investment portfolio and has the same rights,
privileges and preferences. However, each class may differ with respect to
distribution fees, if any, other expenses allocable exclusively to each class,
voting rights on matters exclusively affecting that class, and its exchange
privilege, if any. The different expenses applicable to the different classes of
shares of the fund will affect the performance of those classes. Each share of
the fund is entitled to participate equally in dividends, other distributions
and the proceeds of any liquidation of the fund. However, due to the differing
expenses of the classes, dividends and liquidation proceeds on Class H and I
shares will differ.
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<PAGE>
CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT. State
Street Bank and Trust Company, located at One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian and recordkeeping agent for the fund.
The custodian employs foreign sub-custodians approved by the board in accordance
with applicable requirements under the Investment Company Act to provide custody
of the foreign assets of the fund outside the United States. PFPC Inc., a
subsidiary of PNC Bank, N.A., serves as the fund's transfer and dividend
disbursing agent. It is located at 400 Bellevue Parkway, Wilmington, DE 19809.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the Trust and
the fund. Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and
Mitchell Hutchins in connection with other matters.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for the fund.
35
<PAGE>
YOU SHOULD RELY ONLY ON THE
INFORMATION CONTAINED OR REFERRED TO
IN THE PROSPECTUS AND THIS STATEMENT
OF ADDITIONAL INFORMATION. THE FUND
AND ITS DISTRIBUTOR HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THE
PROSPECTUS AND THIS STATEMENT OF
ADDITIONAL INFORMATION ARE NOT AN
OFFER TO SELL SHARES OF THE FUND IN
ANY JURISDICTION WHERE THE FUND OR ITS
DISTRIBUTOR MAY NOT LAWFULLY SELL
THOSE SHARES.
------------
Mitchell Hutchins Series Trust
Strategy Portfolio
--------------------------------------
Statement of Additional Information
May 1, 2000
--------------------------------------
(C)2000 PaineWebber Incorporated All
rights reserved.
<PAGE>
PART C. OTHER INFORMATION
-------------------------
Item 23. EXHIBITS
--------
(1) (a) Amended and Restated Declaration of Trust 1/
(b) Amendment to Declaration of Trust effective July 28, 1999 (filed
herewith)
(c) Amendment to Declaration of Trust effective October 6, 1999 (filed
herewith)
(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
Equity Portfolio (formerly Global Growth Portfolio) 3/
(c) Investment Advisory and Administration Fee Agreement with respect to
Strategic Fixed Income Portfolio (formerly Government Portfolio) 1/
(d) Investment Advisory and Administration Fee Agreement with respect to
Growth and Income Portfolio (formerly Dividend Growth Portfolio) 1/
(e) Investment Advisory and Administration Fee Agreement with respect to
Aggressive Growth Portfolio 3/
(f) Investment Advisory and Administration Fee Agreement with respect to
High Grade Fixed Income Portfolio (formerly Fixed Income Portfolio) 1/
(g) Investment Advisory and Administration Fee Agreement with respect to
High Income Portfolio, Small Cap Portfolio, Strategic Income Portfolio
and Tactical Allocation Portfolio 3/
(h) Investment Advisory and Administration Fee Agreement with respect to
Strategy Portfolio 4/
(i) Sub-Investment Advisory Contract with respect to Aggressive Growth
Portfolio 1/
(j) Sub-Advisory Agreement with respect to Global Equity Portfolio 3/
(k) Sub-Advisory Agreement with respect to Strategic Fixed Income
Portfolio 5/
(5) Distribution Contract with respect to Class I shares 3/
(6) Bonus, profit sharing or pension plans - none
(7) (a) Custodian Agreement with State Street Bank and Trust Company 1/
(b) Custodian Agreement with Brown Brothers Harriman & Co. 1/
(8) (a) Transfer Agency Services and Shareholder Services Agreement 3/
(b) Participation Agreement with American Republic Insurance Company 3/
(c) Participation Agreement with Great American Reserve Insurance Company
3/
(d) Participation Agreement with Hartford Life Insurance Company 3/
(e) Participation Agreement with Aetna Life Insurance and Annuity Company
(filed herewith)
(f) Amendment to Participation Agreement with Conseco Variable Insurance
Company (formerly Great American Reserve Insurance Company) and
Conseco Equity Sales, Inc. (filed herewith)
(g) Participation Agreement with The Ohio National Life Insurance Company
(filed herewith)
(h) Participation Agreement with Ohio National Life Assurance Corporation
(filed herewith)
(i) Participation Agreement with Keyport Benefit Life Insurance Company
(filed herewith)
(j) Participation Agreement with Keyport Life Insurance Company
(filed herewith)
(k) Form of Participation Agreement with AIG (filed herewith)
(9) Opinion and consent of counsel (filed herewith)
(10) Other opinions, appraisals, rulings and consents: Auditors' consents
(filed herewith)
C-1
<PAGE>
(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
3/
(14) and
(27) Financial Data Schedule (not applicable)
(15) Plan pursuant to Rule 18f-3 1/
(16)(a) Code of Ethics for Registrant, its investment adviser and its
principal distributor 6/
(b) Code of Ethics for Pacific Investment Management Company 6/
(c) Code of Ethics for Invista Capital Management LLC (filed herewith)
(d) Code of Ethics for Nicholas-Applegate Capital Management (filed
herewith)
- ----------------------
1/ Incorporated by reference from Post-Effective Amendment No. 26 to this
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. 28 to this
registration statement, SEC File No. 33-10438, filed April 30, 1999.
4/ Incorporated by reference from Post-Effective Amendment No. 29 to this
registration statement, SEC File No. 33-10438, filed October 18, 1999.
5/ Incorporated by reference from Post-Effective Amendment No. 23 to this
registration statement, SEC File No. 33-10438, filed May 1, 1996.
6/ Incorporated by reference from Post-Effective Amendment No. 67 to the
registration statement of PaineWebber Managed Investments Trust, SEC File
No. 2-91362, filed March 30, 2000.
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
-------------------------------------------------------------
As of March 3, 2000 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 Equity 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 50% of the outstanding Class I shares of beneficial
interest of each of Growth and Income Portfolio and Strategic Income Portfolio.
As of that date, the segregated investment accounts of AIG Life Paradigm
Variable Annuity owned more than 50% of the Class H shares of beneficial
interest of Tactical Allocation Portfolio. As of that date, the segregated
investment accounts of American Republic Life Insurance Company and PaineWebber
Life Insurance Company each owned more than 40% of the outstanding shares of
beneficial interest of each of Global Income Portfolio and Growth Portfolio. As
of that date, Hartford Life Insurance Company and Keyport Life Insurance Company
each owned more than 40% of the outstanding Class I shares of beneficial
interest of Tactical Allocation Portfolio. As of that date, the segregated
investment accounts of PaineWebber Life Insurance Company and AIG Life Paradigm
Variable Annuity each owned more than 25% of the outstanding Class H shares of
beneficial interest of Growth and Income Portfolio. As of that date, PaineWebber
Capital Inc. owned more than 50% of the outstanding Class H shares of beneficial
interest of each of Small Cap Portfolio, High Income 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
C-2
<PAGE>
X, that such person is liable to the Registrant or its shareholders by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office or did not act in good faith
in the reasonable belief that his action was in the best interest of the
Registrant. Section 2 of "Indemnification" in Article X also provides that the
Registrant may maintain insurance policies covering such rights of
indemnification.
Additionally, "Limitation of Liability" in Article X of the Declaration of
Trust provides that the trustees or officers of the Registrant shall not be
personally liable to any person extending credit to, contracting with or having
a claim against the Trust or a particular series thereof; and that, provided
they have exercised reasonable care and have acted under the reasonable belief
that their actions are in the best interest of the Registrant, the trustees and
officers shall not be liable for neglect or wrongdoing by them or any officer,
agent, employee or investment adviser of the Registrant.
Section 2 of Article XI of the Declaration of Trust additionally provides
that, subject to the provisions of Section 1 of Article XI and to Article X,
trustees shall not be liable for errors of judgment or mistakes of fact or law,
or for any act or omission in accordance with the advice of counsel or other
experts, or failing to follow such advice, with respect to the meaning and
operation of the Declaration of Trust.
Article XI of the By-Laws provides that the Registrant may purchase and
maintain insurance on behalf of any person who is or was a trustee, officer or
employee of the Trust, or is or was serving at the request of the Trust as a
trustee, officer or employee of a corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against him or her and
incurred by him or her in any such capacity or arising out of his or her status
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,
C-3
<PAGE>
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding or payment pursuant to any insurance policy) is
asserted against the Registrant by such trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
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") serves as
sub-adviser for Aggressive Growth Portfolio. 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") serves as sub-adviser for
Strategic Fixed Income Portfolio. 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.
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. On October 31, 1999, PIMCO Advisors, PAH and Allianz
AG ("Allianz") announced that they had reached a definitive agreement pursuant
to which Allianz will acquire majority ownership of PIMCO Advisors and its
subsidiaries, including PIMCO (the "Allianz Transaction"). Under the terms of
the transaction, Allianz will acquire all of PAH, the publicly traded general
partner of PIMCO Advisors. Pacific Life Insurance Company will retain an
approximate 30% interest in PIMCO Advisors. The Allianz Transaction is currently
expected to be completed by the end of the second quarter of 2000.
Invista Capital Management, LLC ("Invista") serves as investment
sub-adviser for the foreign assets of PaineWebber Global Equity 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.
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
MANAGED HIGH YIELD FUND INC.
MANAGED HIGH YIELD PLUS FUND INC.
MITCHELL HUTCHINS LIR MONEY SERIES
C-4
<PAGE>
MITCHELL HUTCHINS PORTFOLIOS
MITCHELL HUTCHINS SECURITIES TRUST
MITCHELL HUTCHINS SERIES TRUST
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INDEX TRUST
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
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.
C-5
<PAGE>
(b) Mitchell Hutchins is the Registrant's principal underwriter. The
directors and officers of Mitchell Hutchins, their principal business
addresses, and their positions and offices with Mitchell Hutchins are
identified in its Form ADV, as filed with the Securities and Exchange
Commission (registration number 801-13219). The foregoing information
is hereby incorporated herein by reference. The information set forth
below is furnished for those directors and officers of Mitchell
Hutchins who also serve as trustees or officers of the Registrant.
<TABLE>
<CAPTION>
Positions and Office POSITIONS AND OFFICES WITH
NAME WITH REGISTRANT UNDERWRITER
---- --------------- -----------
<S> <C> <C>
Margo N. Alexander* Trustee and President Chairman, Chief Executive Officer
and Director of Mitchell Hutchins
Brian M. Storms* Trustee President and Chief Operating
Officer of Mitchell Hutchins
T. Kirkham Barneby* Vice President Managing Director and Chief
Investment Officer - Quantitative
Investments of Mitchell Hutchins
Tom Disbrow** Vice President and First Vice President and a Senior
Assistant Treasurer Manager of the Mutual Fund
Finance Department of Mitchell
Hutchins
Ellen R. Harris* Vice President Managing Director and a Portfolio
Manager of Mitchell Hutchins
Donald R. Jones* Vice President Senior Vice President and a
Portfolio Manager of Mitchell
Hutchins
James F. Keegan* Vice President Senior Vice President and a
Portfolio Manager of Mitchell
Hutchins
Johm J. Lee** Vice President and Vice President and a Manager of
Assistant Treasurer the Mutual Fund Finance
Department of Mitchell Hutchins
KevinJ. Mahoney** Vice President and First Vice President and a Senior
Assistant Treasurer Manager of the Mutual Fund
Finance Department of Mitchell
Hutchins
Dennis McCauley* Vice President Managing Director and Chief
Investment Officer - Fixed Income
of Mitchell Hutchins
Ann E. Moran** Vice President and Vice President and a Manager of
Assistant Treasurer the Mutual Fund Finance
Department of Mitchell Hutchins
Dianne E. O'Donnell** Vice President and Senior Vice President and Deputy
Secretary General Counsel of Mitchell
Hutchins
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
C-5A
<PAGE>
Paul H. Schubert** Vice President and First Vice President and Director
Treasurer of the Mutual Fund Finance
Department of Mitchell Hutchins
Nirmal Singh* Vice President Senior Vice President and a
Portfolio Manager of Mitchell
Hutchins
Barney A. Taglialatela** Vice President and Vice President and a Manager of
Assistant Treasurer the Mutual Fund Finance
Department of Mitchell Hutchins
C-6
<PAGE>
Positions and Office POSITIONS AND OFFICES WITH
NAME WITH REGISTRANT UNDERWRITER
---- --------------- -----------
<S> <C> <C> <C>
Mark A. Tincher* Vice President Managing Director and Chief
Investment Officer - Equities of
Mitchell Hutchins
Stuart Waugh* Vice President Managing Director and a Portfolio
Manager of Mitchell Hutchins
Keith A. Weller** Vice President and First Vice President and
Assistant Secretary Associate Counsel of Mitchell
Hutchins
</TABLE>
- -------------------------
* The business address of this person is 51 West 52nd Street, New York, New York
10019-6114.
** The business address this person is 1285 Avenue of the Americas, New York,
New York 10019.
(c) None.
Item 28. LOCATION OF ACCOUNTS AND RECORDS
--------------------------------
The books and other documents required by paragraphs (b)(4), (c) and
(d) of Rule 31a-1 under the Investment Company Act of 1940 are maintained in the
physical possession of Registrant's investment adviser and administrator,
Mitchell Hutchins, 1285 Avenue of the Americas, New York, New York 10019 and
Mitchell Hutchins, 51 West 52nd Street, New York, New York 10019-6114. 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-7
<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
30th day of March, 2000.
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 March 30, 2000
- --------------------------- (Chief Executive Officer)
Margo N. Alexander *
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman March 30, 2000
- --------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr. *
/s/ Richard Q. Armstrong Trustee March 30, 2000
- ---------------------------
Richard Q. Armstrong *
/s/ Richard R. Burt Trustee March 30, 2000
- ---------------------------
Richard R. Burt *
/s/ Mary C. Farrell Trustee March 30, 2000
- ---------------------------
Mary C. Farrell *
/s/ Meyer Feldberg Trustee March 30, 2000
- ---------------------------
Meyer Feldberg *
/s/ George W. Gowen Trustee March 30, 2000
- ---------------------------
George W. Gowen *
/s/ Frederic V. Malek Trustee March 30, 2000
- ---------------------------
Frederic V. Malek *
/s/ Carl W. Schafer Trustee March 30, 2000
- ---------------------------
Carl W. Schafer *
/s/ Brian M. Storms Trustee March 30, 2000
- ---------------------------
Brian M. Storms **
/s/ Paul H. Schubert Vice President and Treasurer March 30, 2000
- --------------------------- (Chief Financial and Accounting
Paul H. Schubert Officer)
<PAGE>
SIGNATURES (CONTINUED)
* Signature affixed by Elinor W. Gammon pursuant to powers of attorney
dated May 21, 1996 and incorporated by reference from Post-Effective
Amendment No. 30 to the registration statement of PaineWebber Managed
Municipal Trust, SEC File 2-89016, filed June 27, 1996.
** Signature affixed by Elinor W. Gammon pursuant to power of attorney
dated May 14, 1999 and incorporated by reference from Post-Effective
Amendment No. 61 to the registration statement of PaineWebber Managed
Investments Trust, SEC File 2-91362, filed June 1, 1999.
<PAGE>
MITCHELL HUTCHINS SERIES TRUST
EXHIBIT INDEX
Exhibit
Number
(1) (a) Amended and Restated Declaration of Trust 1/
(b) Amendment to Declaration of Trust effective July 28, 1999 (filed
herewith)
(c) Amendment to Declaration of Trust effective October 6, 1999 (filed
herewith)
(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 Equity Portfolio (formerly Global Growth Portfolio) 3/
(c) Investment Advisory and Administration Fee Agreement with respect to
Strategic Fixed Income Portfolio (formerly Government Portfolio) 1/
(d) Investment Advisory and Administration Fee Agreement with respect to
Growth and Income Portfolio (formerly Dividend Growth Portfolio) 1/
(e) Investment Advisory and Administration Fee Agreement with respect to
Aggressive Growth Portfolio 3/
(f) Investment Advisory and Administration Fee Agreement with respect to
High Grade Fixed Income Portfolio (formerly Fixed Income Portfolio) 1/
(g) Investment Advisory and Administration Fee Agreement with respect to
High Income Portfolio, Small Cap Portfolio, Strategic Income Portfolio
and Tactical Allocation Portfolio 3/
(h) Investment Advisory and Administration Fee Agreement with respect to
Strategy Portfolio 4/
(i) Sub-Investment Advisory Contract with respect to Aggressive Growth
Portfolio 1/
(j) Sub-Advisory Agreement with respect to Global Equity Portfolio 3/
(k) Sub-Advisory Agreement with respect to Strategic Fixed Income
Portfolio 5/
(5) Distribution Contract with respect to Class I shares 3/
(6) Bonus, profit sharing or pension plans - none
(7) (a) Custodian Agreement with State Street Bank and Trust Company 1/
(b) Custodian Agreement with Brown Brothers Harriman & Co. 1/
(8) (a) Transfer Agency Services and Shareholder Services Agreement 3/
(b) Participation Agreement with American Republic Insurance Company 3/
(c) Participation Agreement with Great American Reserve Insurance Company
3/
(d) Participation Agreement with Hartford Life Insurance Company 3/
(e) Participation Agreement with Aetna Life Insurance and Annuity
Company (filed herewith)
(f) Amendment to Participation Agreement with Conseco Variable Insurance
Company (formerly Great American Reserve Insurance Company) and
Conseco Equity Sales, Inc. (filed herewith)
(g) Participation Agreement with The Ohio National Life Insurance Company
(filed herewith)
(h) Participation Agreement with Ohio National Life Assurance Corporation
(filed herewith)
(i) Participation Agreement with Keyport Benefit Life Insurance Company
(filed herewith)
(j) Participation Agreement with Keyport Life Insurance Company
(filed herewith)
(k) Form of Participation Agreement with AIG (filed herewith)
<PAGE>
(9) Opinion and consent of counsel (filed herewith)
(10) Other opinions, appraisals, rulings and consents: Auditors' consents (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 3/
(14) and
(27) Financial Data Schedule (not applicable)
(15) Plan pursuant to Rule 18f-3 1/
(16) (a) Code of Ethics for Registrant, its investment adviser and its
principal distributor 6/
(b) Code of Ethics for Pacific Investment Management Company 6/
(c) Code of Ethics for Invista Capital Management LLC (filed herewith)
(d) Code of Ethics for Nicholas-Applegate Capital Management (filed
herewith)
- ----------------------
1/ Incorporated by reference from Post-Effective Amendment No. 26 to this
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. 28 to this
registration statement, SEC File No. 33-10438, filed April 30, 1999.
4/ Incorporated by reference from Post-Effective Amendment No. 29 to this
registration statement, SEC File No. 33-10438, filed October 18, 1999.
5/ Incorporated by reference from Post-Effective Amendment No. 23 to this
registration statement, SEC File No. 33-10438, filed May 1, 1996.
6/ Incorporated by reference from Post-Effective Amendment No. 67 to the
registration statement of PaineWebber Managed Investments Trust, SEC File
No. 2-91362, filed March 30, 2000.
Exhibit No. 1(b)
MITCHELL HUTCHINS SERIES TRUST
CERTIFICATE OF VICE PRESIDENT AND SECRETARY
I, Dianne E. O'Donnell, Vice President and Secretary of Mitchell Hutchins
Series Trust ("Trust"), hereby certify that the board of trustees of the Trust
adopted the following resolutions at a meeting held July 28, 1999, that the
resolutions became effective on that date, and that the Amended and Restated
Schedule A attached to this certificate is a true copy of the Amended and
Restated Schedule A to the Trust's Declaration of Trust that was approved by the
board of trustees at its July 28, 1999 meeting:
RESOLVED, that pursuant to Section 7 of Article XI of the Trust's
Declaration of Trust, the name of the Series of the Trust designated as
"Global Growth Portfolio" be, and hereby is, changed to "Global Equity
Portfolio"; and be it further
RESOLVED, that Schedule A of the Trust's Declaration of Trust be,
and hereby is, amended and restated to reflect the name change of the
Series.
Dated: August 6, 1999 By: /s/ Dianne E. O'Donnell
-----------------------
Dianne E. O'Donnell
Vice President and Secretary
Mitchell Hutchins Series Trust
Subscribed and sworn before me this 6th day of August, 1999:
/s/ Cristina Paradiso
- ---------------------
Cristina Paradiso
Notary Public State of New York
Qual. N.Y. Cty
No. 01PA6017191
Comm. Exp 12/07/2000
<PAGE>
Schedule A to Declaration of Trust of
Mitchell Hutchins Series Trust
(As Amended and Restated July 28, 1999)
Series of the Trust
- -------------------
Aggressive Growth Portfolio
Balanced Portfolio
Global Equity Portfolio
Global Income Portfolio
Growth and Income Portfolio
Growth Portfolio
High Grade Fixed Income Portfolio
High Income Portfolio
Money Market Portfolio
Small Cap Portfolio
Strategic Fixed Income Portfolio
Strategic Income Portfolio
Tactical Allocation Portfolio
Classes of Shares of Each Series
- --------------------------------
An unlimited number of shares of beneficial interest have been established by
the Board as Class H shares and Class I shares of each of the above Series. Each
of the Class H shares and Class I shares of a Series represents interests in the
assets of only that Series and has the same preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption of shares, except as provided in the
Trust's Declaration of Trust.
Exhibit No. 1(c)
MITCHELL HUTCHINS SERIES TRUST
CERTIFICATE OF VICE PRESIDENT AND SECRETARY
I, Dianne E. O'Donnell, Vice President and Secretary of Mitchell Hutchins
Series Trust ("Trust"), hereby certify that the board of trustees of the Trust
adopted the following resolutions by unanimous consent, effective October 6,
1999, and that the Amended and Restated Schedule A attached to this certificate
is a true copy of the Amended and Restated Schedule A to the Trust's Declaration
of Trust that was approved by the board, also by unanimous consent effective
October 6, 1999:
RESOLVED, that pursuant to Section 2 of Article III of the
Trust's Declaration of Trust, there is hereby established and
designated a new series of shares of beneficial interest of the
Trust, having the rights and privileges specified in the Trust's
Declaration of Trust, to be known as Strategy Portfolio ("Fund"); and
be it further
RESOLVED, that an unlimited number of shares of beneficial
interest of the Fund be, and they hereby are, established as Class H
shares; and be it further
RESOLVED, that an unlimited number of shares of beneficial
interest of the Fund be, and they hereby are, established as Class I
shares; and be it further
RESOLVED, that Class H shares and Class I shares of the Fund
represent interests in the assets of only that series and shall have
the same preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms
and conditions of redemption of shares, except as provided in the
Trust's Declaration of Trust; and be it further
RESOLVED, that Schedule A of the Trust's Declaration of Trust
be, and it hereby is, amended and restated to reflect the addition of
the Fund as a new series of the Trust and the two classes of shares
established for the Fund.
Dated: November 1, 1999 By: /s/ Dianne E. O'Donnell
-----------------------
Dianne E. O'Donnell
Vice President and Secretary
Mitchell Hutchins Series Trust
Subscribed and sworn before me this 1st day of November, 1999:
/s/ Cristina Paradiso
- ---------------------
Cristina Paradiso
Notary Public State of New York
Qual. N.Y. Cty
No. 01PA6017191
Comm. Exp 12/07/2000
<PAGE>
Schedule A to Declaration of Trust of
Mitchell Hutchins Series Trust
(As Amended and Restated October 6, 1999)
Series of the Trust
- -------------------
Aggressive Growth Portfolio
Balanced Portfolio
Global Equity 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
Strategy Portfolio
Tactical Allocation Portfolio
Classes of Shares of Each Series
- --------------------------------
An unlimited number of shares of beneficial interest have been established by
the Board as Class H shares and Class I shares of each of the above Series. Each
of the Class H shares and Class I shares of a Series represents interests in the
assets of only that Series and has the same preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption of shares, except as provided in the
Trust's Declaration of Trust.
EXHIBIT NO. 8(e)
FUND PARTICIPATION AGREEMENT
between
FUND and ALIAC
Aetna Life Insurance and Annuity Company (the "Company"), Mitchell
Hutchins Series Trust (the "Fund") and Mitchell Hutchins Asset Management, Inc.
(the "Adviser") hereby agree to an arrangement whereby the Fund shall be made
available to serve as underlying investment media for Variable Annuity or
Variable Life Contracts ("Contracts") to be issued by the Company.
1. Establishment of Accounts; Availability of Fund.
-----------------------------------------------
(a) The Company represents that it has established Variable Annuity
Accounts B, C, D and Variable Life Account B and may establish such
other accounts as may be set forth in Schedule A attached hereto and
as may be amended from time to time with the mutual consent of the
parties hereto (the "Accounts"), each of which is a separate account
under Connecticut Insurance law, and has registered or will register
each of the Accounts (except for such Accounts for which no such
registration is required) as a unit investment trust under the
Investment Company Act of 1940 (the "1940 Act"), to serve as an
investment vehicle for the Contracts. Each Contract provides for the
allocation of net amounts received by the Company to an Account for
investment in the shares of one of more specified open-end management
investment companies available through that Account as underlying
investment media. Selection of a particular investment management
company and changes therein from time to time are made by the
participant or Contract owner, as applicable under a particular
Contract.
(b) The Fund represents and warrants that the investments of the series
of the Fund (each designated a "Portfolio") specified in Schedule B
attached hereto (as may be amended from time to time with the mutual
consent of the parties hereto) will at all times be adequately
diversified within the meaning of Section 817(h) of the Internal
Revenue Service Code of 1986, as amended (the "Code"), and the
Regulations thereunder, and that at all times while this agreement is
in effect, all beneficial interests will be owned by one or more
insurance companies or by any other party permitted under Section
1.817-5(f)(3) of the Regulations promulgated under the Code or by the
successor thereto, or by any other party permitted under a Revenue
Ruling or private letter ruling granted by the Internal Revenue
Service.
2. Pricing Information; Orders; Settlement.
---------------------------------------
(a) The Fund will make Fund shares available to be purchased by the
Company, and will accept redemption orders from the Company, on
behalf of each Account at the net asset value applicable to each
order on those days on which the Fund calculates its net asset value
(a "Business Day"). Fund shares shall be purchased and redeemed in
such quantity and at such time determined by the Company to be
<PAGE>
necessary to meet the requirements of those Contracts for which the
Fund serve as underlying investment media, provided, however, that
the Board of Trustees of the Fund (hereinafter the "Trustees") may
upon reasonable notice to the Company, refuse 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 Trustees, acting in good faith and in the best
interests of the shareholders of any Portfolio and is acting in
compliance with their fiduciary obligations under federal and/or any
applicable state laws.
(b) The Fund will provide to the Company closing net asset value,
dividend and capital gain information at the close of trading each
day that the New York Stock Exchange (the "Exchange" is open (each
such day a "Business Day"), and in no event later than 7:00 p.m.
Eastern Standard time on such Business Day. The Company will send via
facsimile or electronic transmission to the Fund or its specified
agent orders to purchase and/or redeem Fund shares by 10:00 a.m.
Eastern Standard Time the following business day. Payment for net
purchases will be wired by the Company to an account designated by
the Fund to coincide with the order for shares of the Fund.
(c) The Fund hereby appoints the Company as its agent for the limited
purpose of accepting purchase and redemption orders for Fund shares
relating to the Contracts from Contract owners or participants.
Orders from Contract owners or participants received from any
distributor of the Contracts (including affiliates of the Company) by
the Company, acting as agent for the Fund, prior to the close of the
Exchange on any given business day will be executed by the Fund at
the net asset value determined as of the close of the Exchange on
such Business Day, provided that the Fund receives written (or
facsimile) notice of such order by 10 a.m. Eastern Standard Time on
the next following Business Day. Any orders received by the Company
acting as agent on such day but after the close of the Exchange will
be executed by the Fund at the net asset value determined as of the
close of the Exchange on the next business day following the day of
receipt of such order, provided that the Fund receives written (or
facsimile) notice of such order by 10 a.m. Eastern Standard Time
within two days following the day of receipt of such order.
(d) Payments for net redemptions of shares of the Fund will be wired by
the Fund to an account designated by the Company. Payments for net
purchases of the Fund will be wired by the Company to an account
designated by the Fund on the same Business Day the Company places
an order to purchase Fund shares. Payments shall be in federal funds
transmitted by wire.
(e) Each party has the right to rely on information or confirmations
provided by the other party (or by any affiliate of the other
party), and shall not be liable in the event that an error is a
result of any misinformation supplied by the other party.
2
<PAGE>
(f) The Company agrees to purchase and redeem the shares of the
Portfolios named in Schedule B offered by the then current prospectus
and statement of additional information of the Fund in accordance
with the provisions of such prospectus and statement of additional
information. The Company shall not permit any person other than a
Contract owner or Participant to give instructions to the Company
which would require the Company to redeem or exchange shares of the
Fund. This provision shall not be construed to prohibit the Company
from substituting shares of another fund, as permitted by law.
3. Expenses.
--------
(a) Except as otherwise provided in this Agreement, all expenses incident
to the performance by the Fund under this Agreement shall be paid by
the Fund, including the cost of registration of Fund shares with the
Securities and Exchange Commission (the "SEC") and in states where
required. The Fund and Adviser shall pay no fee or other compensation
to the Company under this Agreement, and the Company shall pay no fee
or other compensation to the Fund or Adviser, except as provided
herein and in Schedule C attached hereto and made a part of this
Agreement as may be amended from time to time with the mutual consent
of the parties hereto. All expenses incident to performance by each
party of its respective duties under this Agreement shall be paid by
that party, unless otherwise specified in this Agreement.
(b) The Fund or the Adviser shall provide to the Company PostScript files
of periodic fund reports to shareholders and other materials that are
required by law to be sent to Contract owners. In addition, the Fund
or the Adviser shall provide the Company with a sufficient quantity
of its prospectuses, statements of additional information and any
supplements to any of these materials, to be used in connection with
the offerings and transactions contemplated by this Agreement. In
addition, the Fund shall provide the Company with a sufficient
quantity of its proxy material that is required to be sent to
Contract owners. The Adviser shall be permitted to review and approve
the typeset form of such material prior to such printing provided
such material has been provided by the Adviser to the Company within
a reasonable period of time prior to typesetting.
(c) In lieu of the Fund's or Adviser's providing printed copies of
prospectuses, statements of additional information and any
supplements to any of these materials, and periodic fund reports to
shareholders, the Company shall have the right to request that the
Fund transmit a copy of such materials in an electronic format (Post
Script files), which the Company may use to have such materials
printed together with similar materials of other Account funding
media that the Company or any distributor will distribute to existing
or prospective Contract owners or participants.
3
<PAGE>
4. Representations.
---------------
The Company agrees that it and its agents shall not, without the written
consent of the Fund or the Adviser, make representations concerning the
Fund, its shares, or the Adviser except those contained in the then
current prospectuses and in current printed sales literature approved by
or deemed approved by the Fund or the Adviser if the Fund or Adviser does
not respond within 5 days of receiving written copy of such materials.
(a) The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of the state of
its incorporation and that it has legally and validly established
each Contract and Account.
(b) The Company represents and warrants that it has registered or, prior
to any issuance or sale of the Contracts, will register each Account
as a unit investment trust ("UII") in accordance with the provisions
of the 1940 Act and cause each Account to remain so registered to
serve as a segregated asset account for the Contracts unless an
exemption from registration is available.
(c) The Company represents and warrants that the Contracts will be
registered under the 1933 Act unless an exemption from registration
is available prior to any issuance or sale of the Contracts and that
the Company will use its best efforts to ensure that the Contracts
will be issued and sold in compliance in all material respects with
applicable federal and state laws and further that the sale of the
Contracts shall comply in all material respects with state insurance
law suitability requirements.
(d) The Company represents and warrants that the 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, and that it will notify the Fund immediately upon having a
reasonable basis for believing that the Contracts have ceased to be
so treated or that they might not be so treated in the future.
5. Termination.
-----------
This agreement shall terminate as to the sale and issuance of new
Contracts:
(a) at the option of either the Company, the Adviser or the Fund, upon
sixty days advance written notice to the other parties;
(b) at the option of the Company, upon one week advance written notice to
the Adviser and the Fund, if Fund shares are not available for any
reason to meet the requirement of Contracts as determined by the
Company. Reasonable advance notice of election to terminate shall be
furnished by Company;
(c) at the option of either the Company, the Adviser or the Fund,
immediately upon institution of formal proceedings against the
broker-dealer or broker-dealers marketing the Contracts, the Account,
the Company, the Fund or the Adviser by the National Association of
4
<PAGE>
Securities Dealers, Inc. (the "NASD"), the SEC or any other
regulatory body;
(d) upon the determination of the Accounts to substitute for the Fund's
shares the shares of another investment company in accordance with
the terms of the applicable Contracts. The Company will give 60 days
written notice to the Fund and the Adviser of any decision to replace
the Fund's' shares;
(e) upon assignment of this Agreement, unless made with the written
consent of all other parties hereto; (f) if Fund shares are not
registered, issued or sold in conformance with Federal law or such
law precludes the use of Fund shares as an underlying investment
medium for Contracts issued or to be issued by the Company. Prompt
notice shall be given by the appropriate party should such situation
occur.
(g) in the event the Contracts cease to qualify as annuity contracts or
life insurance contracts, as applicable under the Code or 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.
(h) at the option of any Party, upon a Party's breach of any material
provision of this Agreement, which breach has not been cured to the
satisfaction of the other Party within 20 days after written notice
of such breach is delivered to the other Party.
(i) At the option of the Fund, if the Contracts are not registered,
issued or sold in all material respects in accordance with applicable
federal and/or state law. Termination shall be effective immediately
upon written notice.
6. Continuation of Agreement.
-------------------------
Termination as the result of any cause listed in Section 5 shall not
affect the Fund's obligation to furnish its shares to Contracts then in force
for which its shares serve or may serve as the underlying medium unless such
further sale of Fund shares is prohibited by law or the SEC or other regulatory
body, or is determined by the Fund's Board to be necessary to remedy or
eliminate an irreconcilable conflict pursuant to Section 10 hereof.
7. Advertising Materials; Filed Documents.
--------------------------------------
(a) Advertising and sales literature with respect to the Fund prepared by
the Company or its agents for use in marketing its Contracts will be
submitted to the Fund or its designee for review before such material
is used and submitted to any regulatory body for review. No such
material shall be used if the Fund or its designee reasonably object
to such use in writing, transmitted by facsimile within five business
days after receipt of such material.
5
<PAGE>
(b) The Fund will provide additional copies of its financials as soon as
available to the Company and at least one complete copy of all
registration statements, prospectuses, statements of additional
information, annual and semi-annual reports, proxy statements and all
amendments or supplements to any of the above that relate to the Fund
promptly after the filing of such document with the SEC or other
regulatory authorities. At the Adviser's request, the Company will
provide to the Adviser at least one complete copy of all registration
statements, prospectuses, statements of additional information.
annual and semi-annual reports, proxy statements, and all amendments
or supplements to any of the above that relate to the Account
promptly after the filing of such document with the SEC or other
regulatory authority.
(c) The Fund or the Adviser will provide via Excel spreadsheet diskette
format or in electronic transmission to the Company at least
quarterly portfolio information necessary to update Fund profiles
with seven business days following the end of each quarter.
(d) The Fund will reimburse the Company for any incorrect information
provided to the Company under this Section as provided for in
Schedule C.
8. Proxy Voting.
------------
(a) The Company shall provide pass-through voting privileges on Fund
shares held by registered separate accounts to all Contract owners
and participants to the extent the SEC continues to interpret the
1940 Act as requiring such privileges. The Company shall provide
pass-through voting privileges on Fund shares held by unregistered
separate accounts to all Contract owners.
(b) The Company will distribute to Contract owners and participants, as
appropriate, all proxy material furnished by the Fund and will vote
Fund shares in accordance with instructions received from such
Contract owners and participants. If and to the extent required by
law, the Company, with respect to each group Contract and in each
Account, shall vote Fund shares for which no instructions have been
received in the same proportion as shares for which such instructions
have been received. The Company and its agents shall not oppose or
interfere with the solicitation of proxies for Fund shares held for
such Contract owners and participants.
9. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless the Fund and the
Adviser, and each of their directors, officers, employees, agents,
trustees and each person, if any, who controls the Fund or its
Adviser within the meaning of the Securities Act of 1933 (the "1933
Act") against any losses, claims, damages or liabilities to which the
Fund, the Adviser or any such director, officer, employee, agent, or
controlling person may become subject, under the 1933 Act or
otherwise, insofar as such losses, claims, damages, or liabilities
6
<PAGE>
(or actions in respect thereof) that (i) arise out of a breach or
violation of the terms of this Agreement by the Company or (ii) arise
out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Contracts or the
Registration Statement, prospectus or sales literature prepared by
the Company 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, or arise out of or as a result of conduct, statements or
representations (other than statements or representations contained
in the prospectuses or sales literature of the Fund) of the Company
or its agents, with respect to the sale and distribution of Contracts
for which Fund shares are the underlying investment. The Company will
reimburse any legal or other expenses reasonably incurred by the
Fund, the Adviser or any such director, officer, employee, agent,
investment adviser, trustee or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon (i) an untrue statement or
omission or alleged omission made in such Registration Statement or
prospectus in conformity with written materials furnished to the
Company by the Fund specifically for use therein or (ii) the willful
misfeasance, bad faith, or gross negligence by the Fund or Adviser in
the performance of its duties hereunder or the Fund's or Adviser's
reckless disregard of obligations or duties under this Agreement or
to the Company, whichever is applicable. This indemnity agreement
will be in addition to any liability which Company may otherwise
have.
(b) The Fund and the Adviser agree to indemnify and hold harmless the
Company and its directors, officers, employees, agents and each
person, if any, who controls the Company within the meaning of the
1933 Act against any losses, claims, damages or liabilities to which
the Company or any such director, officer, employee, agent or
controlling person may become subject, under the 1933 Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) that (i) arise out of a breach or
violation of the terms of this Agreement by the Fund or Adviser or
(ii) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement, prospectuses or sales literature of the Fund 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 material
fact required to be stated therein or necessary to make the
statements therein not misleading. The Fund and/or the Adviser will
reimburse any legal or other expenses reasonably incurred by the
Company or any such director, officer, employee, agent, or
controlling person in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however,
that the Fund or Adviser will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of
or is based upon (i) an untrue statement or omission or alleged
omission made in such Registration Statement or prospectuses which
are in conformity with written materials furnished to the Fund by the
7
<PAGE>
Company specifically for use therein, or (ii) the willful
misfeasance, bad faith, or gross negligence by the Company in the
performance of its duties hereunder or the Company's reckless
disregard of obligations or duties under this Agreement or to the
Fund and/or Adviser, whichever is applicable. This indemnity
agreement will be in addition to any liability which the Fund and/or
Adviser may otherwise have;
(c) Promptly after receipt by an indemnified party hereunder of notice of
the commencement of action, such indemnified party will, if a claim
in respect thereof is to be made against the indemnifying party
hereunder, notify the indemnifying party of the commencement thereof,
but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party
otherwise under this Section 9. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party
of the commencement thereof, the indemnifying party will be entitled
to participate therein and, to the extent that it may wish to, assume
the defense thereof, with counsel satisfactory to such indemnified
party, and after notice from the indemnifying party to such
indemnified party of its election to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under
this Section 9 for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof
other than reasonable costs of investigation.
10. Potential Conflicts.
-------------------
(a) The Company has received a copy of an application for exemptive
relief, as amended, filed by the Fund on and with the SEC (File No.
811-4919) (the "Shared Funding Exemptive Application"). The Company
has reviewed the conditions to the requested relief set forth in such
application for exemptive relief. As set forth in such application
once the Shared Funding Exemptive Order is issued, the Board of
Trustees of Fund (the "Board") will monitor the Fund for the
existence of any material irreconcilable conflict between the
interests of the contractholders of all separate accounts
("Participating Companies") investing in the Fund. An irreconcilable
material conflict may arise for a variety of reasons, including: (i)
an action by any state insurance regulatory authority; (ii) 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 actions by insurance, tax or
securities regulatory authorities; (iii) an administrative or
judicial decision in any relevant proceeding; (iv) the manner in
which the investments of any portfolio are being managed; (v) a
difference in voting instructions given by variable annuity
contractholders and variable life insurance contractholders; or (vi)
a decision by an insurer to disregard the voting instructions of
contractholders. The Board shall promptly inform the Company if it
determines that an irreconcilable material conflict exists and the
implications thereof.
8
<PAGE>
(b) The Company will report any potential or existing conflicts of which
it is aware to the Board. The Company will assist the Board in
carrying out its responsibilities under the Shared Funding Exemptive
Order 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 contractholder voting instructions are disregarded.
(c) If a majority of the Board, or a majority of its disinterested Board
members, determines that a material irreconcilable conflict exists
with regard to contractholder investments in a Fund, the Board shall
give prompt notice to all Participating Companies. If the Board
determines that the Company is responsible for causing or creating
said conflict, the Company shall at its sole cost and expense, and to
the extent reasonably practicable (as determined by a majority of the
disinterested Board members), take such action as is necessary to
remedy or eliminate the irreconcilable material conflict. Such
necessary action may include but shall not be limited to:
(i) withdrawing the assets allocable to the Account from the Fund
and reinvesting such assets in a different investment medium or
submitting the question of whether such segregation should be
implemented to a vote of all affected contractholders 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
Companies) that votes in favor of such segregation, or offering
to the affected contractholders the option of making such a
change; and/or
(ii) establishing a new registered management investment company or
managed separate account.
(d) If a material irreconcilable conflict arises as a result of a
decision by the Company to disregard its contractholder voting
instructions and said decision represents a minority position or
would preclude a majority vote by all of its contractholders having
an interest in the Fund, the Company at its sole cost, may be
required, at the Board's election, to withdraw an Account's
investment in the Fund and terminate this Agreement; 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.
(e) For the purpose of this Section 10, a majority of the disinterested
Board members shall determine whether or not 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
any Contract. The Company shall not be required by this Section 10 to
establish a new funding medium for any Contract if an offer to do so
has been declined by vote of a majority of the Contract owners or
participants materially adversely affected by the irreconcilable
material conflict.
9
<PAGE>
12. Miscellaneous.
-------------
(a) AMENDMENT AND WAIVER. Neither this Agreement, nor any provision
hereof, may be amended, waived, discharged or terminated orally, but
only by an instrument in writing signed by all parties hereto.
(b) NOTICES. All notices and other communications hereunder shall be
given or made in writing and shall be delivered personally, or sent
by telex, telecopier or registered or certified mail, postage
prepaid, return receipt requested, or recognized overnight courier
service to the party or parties to whom they are directed at the
following addresses, or at such other addresses as may be designated
by notice from such party to all other parties.
To the Company:
Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156
Attention: Maria F. McKeon, Counsel
To the Fund:
Mitchell Hutchins Series Trust
C/O Mitchell Hutchins Asset Management, Inc.
1285 Avenue of the Americas
New York, NY 10010
Attn: Dianne E. O'Donnell
Secretary and Vice President
Any notice, demand or other communication given in a manner prescribed in
this subsection (b) shall be deemed to have been delivered on receipt.
(c) SUCCESSORS AND ASSIGNS. This agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective
permitted successors and assigns.
(d) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one
agreement, and any party hereto may execute this Agreement by signing
any such counterpart.
(e) SEVERABILITY. In case any one or more of the provisions contained in
this Agreement should be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or
impaired thereby.
(f) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and
understanding between the parties hereto and supersedes all prior
agreement and understandings relating to the subject matter hereof.
10
<PAGE>
(g) GOVERNING LAW. This Agreement shall be governed and interpreted in
accordance with the laws of the State of Connecticut.
(h) It is understood by the parties that this Agreement is not an
exclusive arrangement in any respect.
(i) The terms of this Agreement and the Schedules thereto will be held
confidential by each party except to the extent that either party or
its counsel may deem it necessary to disclose such terms.
13. Limitation on Liability of Trustees, etc.
----------------------------------------
This agreement has been executed on behalf of the Fund by the undersigned
officer of the Fund in his or her capacity as an officer of the Fund. The
obligations of this agreement shall be binding upon the assets and property of
the Fund only and shall not be binding on any Trustee, officer or shareholder of
the Fund individually.
IN WITNESS WHEREOF, the undersigned have executed this Agreement by their
duly authorized officers effective as of the 1st day of May , 1999.
AETNA LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Laurie M. LeBlanc
------------------------------
Name: Laurie M. LeBlanc
------------------------------
Title: V.P.
------------------------------
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/ Dianne E. O'Donnell
------------------------------
Name: Dianne E. O'Donnell
------------------------------
Title: Senior Vice President
------------------------------
11
<PAGE>
Schedule A
(For any future separate accounts - See Section 1 (a))
12
<PAGE>
Schedule B
/ / MITCHELL HUTCHINS SERIES TRUST -
/ / GROWTH & INCOME PORTFOLIO
/ / TACTICAL ALLOCATION PORTFOLIO
/ / SMALL CAP PORTFOLIO
13
<PAGE>
Schedule C
The following costs, expenses and reimbursements will be paid by the party
indicated:
1. For purposes of Sections 2 and 7, the Fund shall be liable to the
Company for systems and out of pocket costs incurred by the Company
in making a Contract owner's or a participant's account whole, if
such costs or expenses are a result of the Fund's failure to provide
timely or correct net asset values, dividend and capital gains or
financial information and if such information is not corrected by 4pm
EST of the next business day after releasing such incorrect
information provided the incorrect NAV as well as the correct NAV for
each day that the error occurred is provided. If a mistake is caused
in supplying such information or confirmations, which results in a
reconciliation with incorrect information, the amount required to
make a Contract owner's or a Participant's account whole shall be
borne by the party providing the incorrect information, regardless of
when the error is corrected.
2. For purposes of Section 3, the Fund shall pay for the cost of
typesetting and printing periodic fund reports to shareholders,
prospectuses, prospectus supplements, statements of additional
information and other materials that are required by law to be sent
to Contract owners or participants, as well as the cost of
distributing such materials. The Company shall pay for the cost of
prospectuses and statements of additional information and the
distribution thereof for prospective Contract owners or participants.
Each party shall be provided with such supporting data as may
reasonably be requested for determining expenses under Section 3.
3. The Fund shall pay all expenses in connection with the provision to
the Company of a sufficient quantity of its proxy material under
Section 3. The cost associated with proxy preparation, group
authorization letters, programming for tabulation and necessary
materials (including postage) will be paid by the Fund.
Dated this 1ST day of May, 1999.
AETNA LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Laurie M. LeBlanc
------------------------------
Name: Laurie M. LeBlanc
------------------------------
Title: V.P.
------------------------------
14
<PAGE>
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/ Dianne E. O'Donnell
------------------------------
Name: Dianne E. O'Donnell
------------------------------
Title: Senior Vice President
------------------------------
15
Exhibit No. 8(f)
Amendment To Fund Participation Agreement
This Amendment made as of the 19th day of January, 2000, by and between
Mitchell Hutchins Series Trust ("Fund"), a Massachusetts business trust,
Mitchell Hutchins Asset Management Inc. ("Adviser") a Delaware corporation, and
Conseco Variable Insurance Company (formerly 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, the aforementioned parties entered into a Fund Participation
Agreement dated March 2nd, 1998 ("Agreement"); and
Whereas the parties desire to amend such Agreement;
Now, Therefore, the parties agree to amend the Agreement as follows:
1. The name of the Company shall be changed to Conseco Variable
Insurance Company.
2. Appendix B shall be amended and restated to as set forth in the
Amended and Restated Appendix B attached hereto.
In Witness Whereof, the parties have caused their duly authorized officers
to execute this Amendment as of the date and year first above written.
Conseco Variable Insurance Company Mitchell Hutchins Series Trust
By: /s/ Jon Davis By: /s/ Dianne E. O'Donnell
------------------------------ ------------------------------------
Name: Jon Davis Name: Dianne E. O'Donnell
Title: Senior Vice President 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 Senior Vice President Title: Chief Administrative Officer
<PAGE>
Amended and Restated Appendix B
Separate Accounts Selected Portfolios
- ----------------- -------------------
Conseco Variable Accounts Growth and Income Portfolio
C,E,F,G,H
Conseco Variable Life Account A
EXHIBIT NO. 8(g)
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made as of the 1st day of July 1999, between MITCHELL
HUTCHINS SERIES TRUST ("Fund"), an open-end management investment company
organized as a Massachusetts business trust, and THE OHIO NATIONAL LIFE
INSURANCE COMPANY ("Company"), a life insurance company organized under the laws
of the state of Ohio, on its own behalf and on behalf of each segregated asset
account of the Company set forth in Schedule A as attached hereto, as such
Schedule A may be amended from time to time ("Accounts").
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended ("1940 Act"), as an open-end management investment company; and
WHEREAS, the Fund is organized as a series fund and has established a
number of distinct series of shares of beneficial interest ("Series"), which
correspond to distinct portfolios of investments; and
WHEREAS, the Fund acts as an investment vehicle for separate accounts
established for variable life insurance policies and variable annuity contracts
to be offered by insurance companies that have entered into participation
agreements with the Fund ("Participating Insurance Companies"); and
WHEREAS, Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") is
registered as an investment adviser under the Advisors Act of 1940, as amended,
a broker-dealer under the Securities Exchange Act of 1934, as amended ("1934
Act"), and is a member in good standing of the National Association of
Securities Dealers, Inc. ("NASD") and serves as investment advisor and
administrator to all Series of the Fund; and
WHEREAS, the Series of the Fund offered by the Fund to the Company and the
Accounts are set forth on Schedule B attached hereto, as such Schedule B may be
amended from time to time; and
WHEREAS, the Fund intends to apply for an order ("Exemptive Order") from
the Securities and Exchange Commission ("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 1940 Act and rules 6e-2(b)(15) and
6e-3(T)(b)(15) thereunder to the extent necessary to permit shares of the Fund
<PAGE>
to be sold to and held by variable annuity and variable life insurance separate
accounts of both affiliated and unaffiliated life insurance companies and
certain qualified pension and retirement plans ("Qualified Plans"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase Class I shares ("Shares") of one or
more of the Series on behalf of the Accounts to fund the Contracts, and the Fund
intends to sell such Shares to the relevant Accounts at such Shares' net asset
value;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, it is agreed between the parties as follows:
1. SALE OF SHARES. The Fund agrees to make Shares available for purchase
by the Accounts or the Company or its affiliates on behalf of the Accounts at
the Shares' net asset value as computed in accordance with the Fund's
registration statement under the Securities Act of 1933, as amended ("1933 Act")
and the 1940 Act, including the Fund's current prospectus and statement of
additional information, as amended or supplemented from time to time ("Fund
Registration Statement"). Purchases of Shares will be made in accordance with
the provisions of the Fund Registration Statement and the operational procedures
mutually agreed to by Mitchell Hutchins and the Company from time to time. The
Fund may refuse to sell Shares of any Series to any person or may suspend or
terminate the offering of Shares of any Series if such action is required by law
or by regulatory authorities having jurisdiction or is, in the sole discretion
of the trustees of the Fund, necessary in the best interests of the shareholders
of any Series.
2. REDEMPTION OF SHARES. The Fund will redeem Shares when requested by an
Account or the Company or its affiliates on behalf of the Account at the Shares'
net asset value (as computed in accordance with the Fund Registration Statement)
in accordance with the provisions of the Fund Registration Statement and the
operational procedures mutually agreed to by Mitchell Hutchins and the Company
from time to time.
3. ACCEPTANCE OF ORDERS. The Fund shall accept purchase and redemption
orders resulting from investments in and payments under the Contracts on each
Business Day, provided that such orders are received by Mitchell Hutchins or the
Fund prior to 9:00 a.m., Eastern time, on such Business Day and reflect
instructions received by the Company from Contract holders in good order prior
to the time the net asset value of the Series is calculated in accordance with
the Fund Registration Statement on the prior Business Day. Notwithstanding the
foregoing, the Company shall use its best efforts to provide Mitchell Hutchins
or the Fund with such orders by 7:30 a.m. on the Business Day following the
Business Day on which instructions are so received by the Company. Orders
reflecting instructions received by the Company in good order after the time the
net asset value of the Series is calculated will not be deemed received until
the next succeeding Business Day. The Company acts as the agent of the Fund and
Mitchell Hutchins for the limited purpose of accepting purchase and redemption
instructions from Contract holders. Mitchell Hutchins and the Fund may reject
purchase and redemption orders that are not in proper form as mutually agreed to
by Mitchell Hutchins and the Company from time to time.
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4. PAYMENT FOR PURCHASES AND REDEMPTIONS. Purchase orders shall be paid
for in federal funds transmitted by wire no later than the Business Day that the
Fund receives notice of the order. The Fund shall use its best efforts to send
redemption proceeds in federal funds transmitted by wire no later than the next
Business Day after the Fund received notice of the order, unless doing so would
cause the Fund to dispose of portfolio securities or otherwise incur additional
costs. In any event, the Fund will wire proceeds of redemption orders to the
Company within the period required under the 1940 Act or the rules, orders or
regulations thereunder.
5. LIMITATION ON SALES OF SHARES. The Fund agrees that its Shares will be
sold only to Participating Insurance Companies and their separate accounts
and/or to Qualified Plans, all in accordance with Section 817(h) of the Internal
Revenue Code and applicable Treasury Regulations. No shares of any Series will
be sold directly to the general public. The Company agrees that Shares will be
used only for the purposes of funding the Contracts and Accounts listed in
Schedule A, as amended from time to time.
6. BOOK ENTRY. Issuance and transfer of 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 the appropriate title for each
Account.
7. NOTICE OF DIVIDENDS AND DISTRIBUTIONS. The Fund will furnish prompt
notice to the Company of any income, dividends or capital gain distribution
payable on Shares. The Company hereby elects to receive all such income
dividends and capital gain distributions payable on Shares in additional Shares
of the same Series. The Fund shall notify the Company of the number of Shares so
issued as payment of such dividends and distributions.
8. COMPANY REPORTS, The Company agrees to provide the Fund or its
designee on a daily basis with the amount of shares of each Portfolio purchased
and sold by each owner of the Contracts (and information identifying each
Contract owner's PaineWebber Investment Executive) and such other information
concerning transactions in shares of the Fund by the Contract owners as the
Fund shall reasonably request.
9. UNIFORM APPLICATION OF PASS-THROUGH VOTING AND CONFLICTS OF INTEREST.
The Fund agrees that all Participating Insurance Companies shall have the same
obligations and responsibilities regarding pass-through voting and conflicts of
interest as the Company has under this Agreement.
10. PASS-THROUGH VOTING. With respect to Contracts and Accounts that are
subject to the 1940 Act, so long as and to the extent that the SEC interprets
the 1940 Act to require pass-through voting privileges to Contract owners
(including, for purposes of this section, policy owners whose cash values are
invested in Shares through the Accounts), the Company will provide pass-through
voting privileges to Contract owners. The Fund shall require all Participating
Insurance Companies to calculate voting privileges in the same manner and the
Company will be responsible for assuring that the Accounts calculate voting
privileges in the manner established by the Fund. With respect to each Account,
the Company will vote Shares held by the Account and for which no timely voting
instructions are received from the Contract owners, as well as Shares held by
the Account that are owned by the Company for its general account, in the same
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<PAGE>
proportion as the Company votes Shares held by the Account for which timely
voting instructions are received from Contract owners. The Company and its
agents will in no way recommend or oppose or interfere with the solicitation of
proxies for Shares held by Contract owners without the prior written consent of
the Fund, which may be withheld in the Fund's sole discretion.
11. REPRESENTATIONS. (a) The Company represents and warrants that it is an
insurance company duly organized and in good standing under the laws of its
state of incorporation and that it has legally and validly established each
Contract and Account.
(b) The Company represents and warrants that it has registered or, prior
to any issuance or sale of the Contracts, will register each Account as a unit
investment trust ("UIT") in accordance with the provisions of the 1940 Act and
cause each Account to remain so registered to serve as a segregated asset
account for the Contracts unless an exemption from registration is available.
(c) The Company represents and warrants that the Contracts will be
registered under the 1933 Act unless and exemption from registration is
available prior to any issuance or sale of the Contracts and that the Contracts
will be issued and sold in compliance in all material respects with applicable
federal and state laws and further that the sale of the Contracts shall comply
in all material respects with state insurance law suitability requirements.
(d) The Company represents and warrants that the Contracts are currently
and at the time of issuance will be treated as life insurance, endowment or
annuity contracts under applicable provisions of the Internal Revenue Code, that
it will maintain such treatment and that it will notify the Fund immediately
upon having a reasonable basis for believing that the Contracts have ceased to
be so treated or that they might not be so treated in the future.
(e) The Fund represents and warrants that the Shares offered and sold
pursuant to this Agreement will be registered under the 1933 Act to the extent
required by that Act and sold in accordance with all applicable federal and
state laws, and that the Fund shall be registered under the 1940 Act to the
extent required by that Act, prior to and at the time of any issuance or sale of
such Shares. The Fund shall qualify its Shares for sale in accordance with the
laws of the various states only if and to the extent deemed advisable by the
Fund.
(f) The Fund represents and warrants that each Series will comply with the
diversification requirements set forth in Section 817(h) of the Internal Revenue
Service and applicable regulations thereunder and will notify the Company
immediately upon having a reasonable basis for believing any Series has ceased
to comply or might not so comply and will immediately take all reasonable steps
to adequately diversify the Series to achieve compliance.
(g) The Fund represents and warrants that each Series in which the
Accounts invest is currently qualified as a "regulated investment company" under
Subchapter M of the Internal Revenue Code and will maintain such qualification.
The Fund will notify the Company immediately upon having a reasonable basis for
believing any Series has ceased to comply or might not so comply in the future.
4
<PAGE>
12. INDEMNIFICATION. (a) The Fund agrees to indemnify, defend and hold the
Company, its officers, directors, employees and agents and any person who
controls the Company within the meaning of Section 15 of the 1933 Act (referred
to in this Section 11(a) collectively as "Indemnified Parties"), 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, amounts paid in settlement with the consent of the Fund and any
counsel fees incurred in connection therewith) which the Indemnified Parties may
incur under the 1933 Act, or under common law or otherwise, (i) arising out of
or based upon any alleged untrue statement of a material fact contained in the
Fund Registration Statement or arising out of or based upon any alleged omission
to state a material fact required to be stated in the Fund 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 or on behalf of the Company to the Fund for use in the Fund
Registration Statement or otherwise for use in connection with the sale of
Contracts or Shares; (ii) arising out of or based upon statements or
representations (other than statements or representations made in reliance upon
and in conformity with information furnished in writing by or on behalf of the
Company) or wrongful conduct of the Fund or persons under its control concerning
the sale or distribution of the Contracts or Shares; (iii) arising out of or
based upon any alleged omission to state a material fact required to be stated
in the registration statement for the Contracts (including any amendment or
supplement to the prospectus or statement of additional information) ("Contract
Registration Statement") or necessary to make the statements therein not
misleading, if 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 or on behalf of the Fund to the Company for use in the Contract
Registration Statement; or (iv) arise out of or result from any material breach
of the representations and/or warranties made by the Fund in this Agreement or
any other material breach of this Agreement by the Fund. In no event shall
anything contained herein be so construed as to protect the Company against any
liability to the Fund or to the shareholders of any Series to which the Company
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 Agreement.
(b) The Fund shall not be liable to the Company under this indemnity
agreement with respect to any claim made against the Company or any other
Indemnified Party unless the Company or other such person shall have notified
the Fund in writing of the claim within a reasonable time after the summons or
other first written notification giving information of the nature of the claim
shall have been served upon the Indemnified Party (or after the Indemnified
Party 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 an Indemnified Party 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 the Indemnified Parties in the
suit whose approval shall not be unreasonably withheld. In the event that the
5
<PAGE>
Fund elects to assume the defense of any suit and retain counsel, the
Indemnified Parties 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 Parties for the reasonable fees and expenses of
any counsel retained by them.
(c) The Company agrees to indemnify, defend, and hold the Fund, its
officers, trustees, employees and agents and any person who controls the Fund
within the meaning of Section 15 of the 1933 Act (in this Section 11(b),
referred to collectively as "Indemnified Parties") , 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,
amounts paid in settlement with the consent of the Company and any counsel fees
incurred in connection therewith) which the Indemnified Parties may incur under
the 1933 Act or under common law or otherwise (i) arising out of or based upon
any alleged untrue statement of a material fact contained in the Contract
Registration Statement or in the Contracts themselves or in any sales literature
generated or approved by the Company on behalf of the Contracts or Accounts or
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 Contract
Registration Statement, Contracts or such sales literature 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 or on behalf of the Fund to
the Company for use in the Contract Registration Statement, the Contracts or
such sales literature or otherwise for use in connection with the sale of
Contracts or Shares; (ii) arising out of or based upon statements or
representations (other than statements made in reliance upon and in conformity
with information furnished in writing by or on behalf of the Fund) or wrongful
conduct of the Company or persons under its control concerning the sale or
distribution of the Contracts or Shares; (iii) arising out of or based upon any
alleged omission to state a material fact required to be stated in the Fund
Registration Statement or necessary to make the statements therein not
misleading, if 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 or on behalf of the Company to the Fund for use in the Fund
Registration Statement; or (iv) arise out of or result from any material breach
of the representations and/or warranties made by the Company in this Agreement
or any other material breach of this Agreement by the Company.
(d) The Company shall not be liable to the Fund under this indemnity
agreement with respect to any claim made against the Fund or any other
Indemnified Party unless the Fund or other such person shall have notified the
Company 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 the Indemnified Party (or after the Indemnified
Party shall have received notice of service on any designated agent). However,
failure to notify the Company of any claim shall not relieve the Company from
any liability which it may have to an Indemnified Party otherwise than on
account of this indemnity agreement. The Company 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 Company elects to assume the defense of any such claim, the
defense shall be conducted by counsel chosen by the Company and satisfactory to
6
<PAGE>
the Indemnified Parties in the suit whose approval shall not be unreasonably
withheld. In the event that the Company elects to assume the defense of a suit
and retain counsel, the Indemnified Parties shall bear the fees and expenses of
any additional counsel retained by them. If the Company does not elect to assume
the defense of any suit, it will reimburse the Indemnified Parties for the
reasonable fees and expenses of any counsel retained by them.
(e) These indemnification provisions shall survive termination of this
Agreement.
13. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS OF THE FUND.
The trustees of the Fund and the shareholders of its Series shall not be liable
for any obligations of the Fund or any Series under this Contract, and the
Company agrees that, in asserting any rights or claims under this Contract, it
shall look only to the assets and property of the Fund or the particular Series
in settlement of such right or claims, and not to such trustees or shareholders.
14. POTENTIAL CONFLICTS. (a) The trustees of the Fund will monitor the
operations of the Fund for the existence of any material irreconcilable conflict
among the interests of all Contract owners of all separate accounts investing in
each Series of the Fund. An irreconcilable conflict may arise, among other
things, from (a) an action by any sate insurance regulatory authority; (b) a
change in applicable insurance laws or regulations; (c) a tax ruling or
provision of the Internal Revenue Code or the regulations thereunder; (d) any
other development relating to the tax treatment of insurers, contract holders or
policy owners or beneficiaries of variable annuity or variable life insurance
products; (e) the manner in which the investments of any Series are managed; (f)
a difference in voting instructions given by variable annuity contract owners,
on the one hand, and variable life insurance policy owners on the other hand, or
by the contract holders or policy owners of different Participating Insurance
Companies; or ; (g) a decision by an insurer to override the voting instructions
of participating contract owners.
(b) The Company is responsible for reporting any potential or existing
conflicts to the trustees of the Fund. The Company will be responsible for
assisting the trustees in carrying out their responsibilities under this Section
14(b) and Section 14(a), by providing the trustees with all information
reasonably necessary for them to consider the issues raised. The Fund will also
request its investment adviser to report to the trustees any such conflict which
comes to the attention of the adviser.
(c) If a majority of the trustees of the Fund or a majority of its
disinterested trustees determine that a material irreconcilable conflict exists
involving the Company, the Company shall, at its expense and to the extent
reasonably practicable (as determined by a majority of the disinterested
trustees), take whatever steps are necessary to eliminate the irreconcilable
material conflict, including withdrawing the assets allocable to some or all of
the separate accounts from the Fund or any Series and reinvesting such assets in
a different investment medium, including another Series of the Fund, offering to
the affected Contract owners the option of making such a change or establishing
a new funding medium, including a registered investment company.
For purposes of this Section 14(c), the trustees or the disinterested
trustees shall determine whether any proposed action adequately remedies any
irreconcilable material conflict. In the event of a determination of the
7
<PAGE>
existence of an irreconcilable material conflict, the trustees shall cause the
Fund to take such action, such as the establishment of one or more additional
Series, as they in their sole discretion determine to be in the interest of all
shareholders and Contract owners in view of all applicable factors, such as the
cost, feasibility, tax, regulatory and other considerations. In no event will
the Fund be required by this Section 14(c) to establish a new funding medium for
any Contract.
The Company shall not be required by this Section 14(c) to establish a new
funding medium for any Contract if an offer to do so has been declined by a vote
of a majority of the Contract owners materially adversely affected by the
material irreconcilable conflict. The Company will recommend to its Contract
owners that they decline an offer to establish a new funding medium only if the
Company believes it is in the best interests of the Contract owners.
15. DURATION AND TERMINATION. This Agreement shall become effective as of
the date hereof and shall continue in force until terminated as set forth below:
(a) At the option of either party, upon 180 days' notice, unless a shorter
time is agreed to by the parties;
(b) At the option of either party, upon the institution of formal
proceedings against the other party by the SEC, the NASD or any other regulatory
body, the expected or anticipated outcome of which would, in the judgment of the
terminating party, materially impair the other party's ability to meet and
perform its obligations under this Agreement. Prompt notice of an election to
terminate under this provision shall be furnished by the terminating party and
shall be effective upon receipt.
(c) In the event the Fund's Shares are not registered, issued or sold in
accordance with applicable federal or state law or such law precludes the use of
Shares as the underlying investment medium of the Contracts, the Company may
terminate this Agreement effective upon giving notice to the Fund.
(d) In the event the Contracts cease to qualify as annuity contracts or
life insurance contracts, as applicable under the Code 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.
(e) At the option of the Fund, upon the Company's breach of any material
provision of this Agreement, which breach has not been cured to the satisfaction
of the Fund within 10 days after written notice of such breach is delivered to
the Company.
(f) At the option of the Company, upon the Fund's breach of any material
provision of this Agreement, which breach has not been cured to the satisfaction
of the Company within 10 days after written notice of such breach is delivered
to the Fund.
(g) At the option of the Fund, if the Contracts are not registered, issued
or sold in accordance with applicable federal and/or state law. Termination
shall be effective immediately without notice.
8
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(h) If this Agreement is assigned without the prior written consent of the
other party, termination shall be effective immediately without notice.
16. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement 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.
17. GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of Delaware and the 1940 Act, except that Section 13 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 of Massachusetts conflict with the applicable provisions of the
l940 Act, the latter shall control.
18. 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.
19. MISCELLANEOUS. 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. 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. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors. As used in this
Agreement, the terms "assignment" shall have the same meaning as such terms have
in the l940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated as of the day and year first above
written.
ATTEST: MITCHELL HUTCHINS SERIES TRUST
/s/ Mark Goldstein By: /s/ Dianne E. O'Donnell
------------------------------ ------------------------
Name: Dianne E. O'Donnell
Title: Secretary and Vice President
ATTEST: THE OHIO NATIONAL LIFE INSURANCE COMPANY
/s/ Ronald L. Benedict By: /s/ John J. Palmer
------------------------------ ------------------------
Name: John J. Palmer
Title: Senior Vice President,
Strategic Initiatives
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SCHEDULE A
Accounts of Company Participating in Series of Mitchell Hutchins Series
Trust:
Name of Separate Account Date Established
Ohio National Variable Account A August 1, 1969
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SCHEDULE B
Series of Mitchell Hutchins Series Trust offered to Accounts of Company:
Growth and Income Portfolio
Small Cap Portfolio
Strategic Income Portfolio
Tactical Allocation Portfolio
11
EXHIBIT NO. 8(h)
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made as of the 1st day of July 1999, between MITCHELL
HUTCHINS SERIES TRUST ("Fund"), an open-end management investment company
organized as a Massachusetts business trust, and OHIO NATIONAL LIFE ASSURANCE
CORPORATION ("Company"), a life insurance company organized under the laws of
the state of Ohio, on its own behalf and on behalf of each segregated asset
account of the Company set forth in Schedule A as attached hereto, as such
Schedule A may be amended from time to time ("Accounts").
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended ("1940 Act"), as an open-end management investment company; and
WHEREAS, the Fund is organized as a series fund and has established a
number of distinct series of shares of beneficial interest ("Series"), which
correspond to distinct portfolios of investments; and
WHEREAS, the Fund acts as an investment vehicle for separate accounts
established for variable life insurance policies and variable annuity contracts
to be offered by insurance companies that have entered into participation
agreements with the Fund ("Participating Insurance Companies"); and
WHEREAS, Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") is
registered as an investment adviser under the Advisors Act of 1940, as amended,
a broker-dealer under the Securities Exchange Act of 1934, as amended ("1934
Act"), and is a member in good standing of the National Association of
Securities Dealers, Inc. ("NASD") and serves as investment advisor and
administrator to all Series of the Fund; and
WHEREAS, the Series of the Fund offered by the Fund to the Company and the
Accounts are set forth on Schedule B attached hereto, as such Schedule B may be
amended from time to time; and
WHEREAS, the Fund intends to apply for an order ("Exemptive Order") from
the Securities and Exchange Commission ("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 1940 Act and rules 6e-2(b)(15) and
6e-3(T)(b)(15) thereunder to the extent necessary to permit shares of the Fund
<PAGE>
to be sold to and held by variable annuity and variable life insurance separate
accounts of both affiliated and unaffiliated life insurance companies and
certain qualified pension and retirement plans ("Qualified Plans"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase Class I shares ("Shares") of one or
more of the Series on behalf of the Accounts to fund the Contracts, and the Fund
intends to sell such Shares to the relevant Accounts at such Shares' net asset
value;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, it is agreed between the parties as follows:
1. SALE OF SHARES. The Fund agrees to make Shares available for purchase
by the Accounts or the Company or its affiliates on behalf of the Accounts at
the Shares' net asset value as computed in accordance with the Fund's
registration statement under the Securities Act of 1933, as amended ("1933 Act")
and the 1940 Act, including the Fund's current prospectus and statement of
additional information, as amended or supplemented from time to time ("Fund
Registration Statement"). Purchases of Shares will be made in accordance with
the provisions of the Fund Registration Statement and the operational procedures
mutually agreed to by Mitchell Hutchins and the Company from time to time. The
Fund may refuse to sell Shares of any Series to any person or may suspend or
terminate the offering of Shares of any Series if such action is required by law
or by regulatory authorities having jurisdiction or is, in the sole discretion
of the trustees of the Fund, necessary in the best interests of the shareholders
of any Series.
2. REDEMPTION OF SHARES. The Fund will redeem Shares when requested by an
Account or the Company or its affiliates on behalf of the Account at the Shares'
net asset value (as computed in accordance with the Fund Registration Statement)
in accordance with the provisions of the Fund Registration Statement and the
operational procedures mutually agreed to by Mitchell Hutchins and the Company
from time to time.
3. ACCEPTANCE OF ORDERS. The Fund shall accept purchase and redemption
orders resulting from investments in and payments under the Contracts on each
Business Day, provided that such orders are received by Mitchell Hutchins or the
Fund prior to 9:00 a.m., Eastern time, on such Business Day and reflect
instructions received by the Company from Contract holders in good order prior
to the time the net asset value of the Series is calculated in accordance with
the Fund Registration Statement on the prior Business Day. Notwithstanding the
foregoing, the Company shall use its best efforts to provide Mitchell Hutchins
or the Fund with such orders by 7:30 a.m. on the Business Day following the
Business Day on which instructions are so received by the Company. Orders
reflecting instructions received by the Company in good order after the time the
net asset value of the Series is calculated will not be deemed received until
the next succeeding Business Day. The Company acts as the agent of the Fund and
Mitchell Hutchins for the limited purpose of accepting purchase and redemption
instructions from Contract holders. Mitchell Hutchins and the Fund may reject
purchase and redemption orders that are not in proper form as mutually agreed to
by Mitchell Hutchins and the Company from time to time.
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4. PAYMENT FOR PURCHASES AND REDEMPTIONS. Purchase orders shall be paid
for in federal funds transmitted by wire no later than the Business Day that the
Fund receives notice of the order. The Fund shall use its best efforts to send
redemption proceeds in federal funds transmitted by wire no later than the next
Business Day after the Fund received notice of the order, unless doing so would
cause the Fund to dispose of portfolio securities or otherwise incur additional
costs. In any event, the Fund will wire proceeds of redemption orders to the
Company within the period required under the 1940 Act or the rules, orders or
regulations thereunder.
5. LIMITATION ON SALES OF SHARES. The Fund agrees that its Shares will be
sold only to Participating Insurance Companies and their separate accounts
and/or to Qualified Plans, all in accordance with Section 817(h) of the Internal
Revenue Code and applicable Treasury Regulations. No shares of any Series will
be sold directly to the general public. The Company agrees that Shares will be
used only for the purposes of funding the Contracts and Accounts listed in
Schedule A, as amended from time to time.
6. BOOK ENTRY. Issuance and transfer of 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 the appropriate title for each
Account.
7. NOTICE OF DIVIDENDS AND DISTRIBUTIONS. The Fund will furnish prompt
notice to the Company of any income, dividends or capital gain distribution
payable on Shares. The Company hereby elects to receive all such income
dividends and capital gain distributions payable on Shares in additional Shares
of the same Series. The Fund shall notify the Company of the number of Shares so
issued as payment of such dividends and distributions.
8. COMPANY REPORTS, The Company agrees to provide the Fund or its
designee on a daily basis with the amount of shares of each Portfolio purchased
and sold by each owner of the Contracts (and information identifying each
Contract owner's PaineWebber Investment Executive) and such other information
concerning transactions in shares of the Fund by the Contract owners as the Fund
shall reasonably request.
9. UNIFORM APPLICATION OF PASS-THROUGH VOTING AND CONFLICTS OF INTEREST.
The Fund agrees that all Participating Insurance Companies shall have the same
obligations and responsibilities regarding pass-through voting and conflicts of
interest as the Company has under this Agreement.
10. PASS-THROUGH VOTING. With respect to Contracts and Accounts that are
subject to the 1940 Act, so long as and to the extent that the SEC interprets
the 1940 Act to require pass-through voting privileges to Contract owners
(including, for purposes of this section, policy owners whose cash values are
invested in Shares through the Accounts), the Company will provide pass-through
voting privileges to Contract owners. The Fund shall require all Participating
Insurance Companies to calculate voting privileges in the same manner and the
Company will be responsible for assuring that the Accounts calculate voting
privileges in the manner established by the Fund. With respect to each Account,
the Company will vote Shares held by the Account and for which no timely voting
instructions are received from the Contract owners, as well as Shares held by
the Account that are owned by the Company for its general account, in the same
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proportion as the Company votes Shares held by the Account for which timely
voting instructions are received from Contract owners. The Company and its
agents will in no way recommend or oppose or interfere with the solicitation of
proxies for Shares held by Contract owners without the prior written consent of
the Fund, which may be withheld in the Fund's sole discretion.
11. REPRESENTATIONS. (a) The Company represents and warrants that it is an
insurance company duly organized and in good standing under the laws of its
state of incorporation and that it has legally and validly established each
Contract and Account.
(b) The Company represents and warrants that it has registered or, prior
to any issuance or sale of the Contracts, will register each Account as a unit
investment trust ("UIT") in accordance with the provisions of the 1940 Act and
cause each Account to remain so registered to serve as a segregated asset
account for the Contracts unless an exemption from registration is available.
(c) The Company represents and warrants that the Contracts will be
registered under the 1933 Act unless and exemption from registration is
available prior to any issuance or sale of the Contracts and that the Contracts
will be issued and sold in compliance in all material respects with applicable
federal and state laws and further that the sale of the Contracts shall comply
in all material respects with state insurance law suitability requirements.
(d) The Company represents and warrants that the Contracts are currently
and at the time of issuance will be treated as life insurance, endowment or
annuity contracts under applicable provisions of the Internal Revenue Code, that
it will maintain such treatment and that it will notify the Fund immediately
upon having a reasonable basis for believing that the Contracts have ceased to
be so treated or that they might not be so treated in the future.
(e) The Fund represents and warrants that the Shares offered and sold
pursuant to this Agreement will be registered under the 1933 Act to the extent
required by that Act and sold in accordance with all applicable federal and
state laws, and that the Fund shall be registered under the 1940 Act to the
extent required by that Act, prior to and at the time of any issuance or sale of
such Shares. The Fund shall qualify its Shares for sale in accordance with the
laws of the various states only if and to the extent deemed advisable by the
Fund.
(f) The Fund represents and warrants that each Series will comply with the
diversification requirements set forth in Section 817(h) of the Internal Revenue
Service and applicable regulations thereunder and will notify the Company
immediately upon having a reasonable basis for believing any Series has ceased
to comply or might not so comply and will immediately take all reasonable steps
to adequately diversify the Series to achieve compliance.
(g) The Fund represents and warrants that each Series in which the
Accounts invest is currently qualified as a "regulated investment company" under
Subchapter M of the Internal Revenue Code and will maintain such qualification.
The Fund will notify the Company immediately upon having a reasonable basis for
believing any Series has ceased to comply or might not so comply in the future.
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12. INDEMNIFICATION. (a) The Fund agrees to indemnify, defend and hold the
Company, its officers, directors, employees and agents and any person who
controls the Company within the meaning of Section 15 of the 1933 Act (referred
to in this Section 11(a) collectively as "Indemnified Parties"), 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, amounts paid in settlement with the consent of the Fund and any
counsel fees incurred in connection therewith) which the Indemnified Parties may
incur under the 1933 Act, or under common law or otherwise, (i) arising out of
or based upon any alleged untrue statement of a material fact contained in the
Fund Registration Statement or arising out of or based upon any alleged omission
to state a material fact required to be stated in the Fund 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 or on behalf of the Company to the Fund for use in the Fund
Registration Statement or otherwise for use in connection with the sale of
Contracts or Shares; (ii) arising out of or based upon statements or
representations (other than statements or representations made in reliance upon
and in conformity with information furnished in writing by or on behalf of the
Company) or wrongful conduct of the Fund or persons under its control concerning
the sale or distribution of the Contracts or Shares; (iii) arising out of or
based upon any alleged omission to state a material fact required to be stated
in the registration statement for the Contracts (including any amendment or
supplement to the prospectus or statement of additional information) ("Contract
Registration Statement") or necessary to make the statements therein not
misleading, if 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 or on behalf of the Fund to the Company for use in the Contract
Registration Statement; or (iv) arise out of or result from any material breach
of the representations and/or warranties made by the Fund in this Agreement or
any other material breach of this Agreement by the Fund. In no event shall
anything contained herein be so construed as to protect the Company against any
liability to the Fund or to the shareholders of any Series to which the Company
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 Agreement.
(b) The Fund shall not be liable to the Company under this indemnity
agreement with respect to any claim made against the Company or any other
Indemnified Party unless the Company or other such person shall have notified
the Fund in writing of the claim within a reasonable time after the summons or
other first written notification giving information of the nature of the claim
shall have been served upon the Indemnified Party (or after the Indemnified
Party 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 an Indemnified Party 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 the Indemnified Parties in the
suit whose approval shall not be unreasonably withheld. In the event that the
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Fund elects to assume the defense of any suit and retain counsel, the
Indemnified Parties 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 Parties for the reasonable fees and expenses of
any counsel retained by them.
(c) The Company agrees to indemnify, defend, and hold the Fund, its
officers, trustees, employees and agents and any person who controls the Fund
within the meaning of Section 15 of the 1933 Act (in this Section 11(b),
referred to collectively as "Indemnified Parties") , 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,
amounts paid in settlement with the consent of the Company and any counsel fees
incurred in connection therewith) which the Indemnified Parties may incur under
the 1933 Act or under common law or otherwise (i) arising out of or based upon
any alleged untrue statement of a material fact contained in the Contract
Registration Statement or in the Contracts themselves or in any sales literature
generated or approved by the Company on behalf of the Contracts or Accounts or
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 Contract
Registration Statement, Contracts or such sales literature 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 or on behalf of the Fund to
the Company for use in the Contract Registration Statement, the Contracts or
such sales literature or otherwise for use in connection with the sale of
Contracts or Shares; (ii) arising out of or based upon statements or
representations (other than statements made in reliance upon and in conformity
with information furnished in writing by or on behalf of the Fund) or wrongful
conduct of the Company or persons under its control concerning the sale or
distribution of the Contracts or Shares; (iii) arising out of or based upon any
alleged omission to state a material fact required to be stated in the Fund
Registration Statement or necessary to make the statements therein not
misleading, if 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 or on behalf of the Company to the Fund for use in the Fund
Registration Statement; or (iv) arise out of or result from any material breach
of the representations and/or warranties made by the Company in this Agreement
or any other material breach of this Agreement by the Company.
(d) The Company shall not be liable to the Fund under this indemnity
agreement with respect to any claim made against the Fund or any other
Indemnified Party unless the Fund or other such person shall have notified the
Company 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 the Indemnified Party (or after the Indemnified
Party shall have received notice of service on any designated agent). However,
failure to notify the Company of any claim shall not relieve the Company from
any liability which it may have to an Indemnified Party otherwise than on
account of this indemnity agreement. The Company 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 Company elects to assume the defense of any such claim, the
defense shall be conducted by counsel chosen by the Company and satisfactory to
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the Indemnified Parties in the suit whose approval shall not be unreasonably
withheld. In the event that the Company elects to assume the defense of a suit
and retain counsel, the Indemnified Parties shall bear the fees and expenses of
any additional counsel retained by them. If the Company does not elect to assume
the defense of any suit, it will reimburse the Indemnified Parties for the
reasonable fees and expenses of any counsel retained by them.
(e) These indemnification provisions shall survive termination of this
Agreement.
13. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS OF THE FUND.
The trustees of the Fund and the shareholders of its Series shall not be liable
for any obligations of the Fund or any Series under this Contract, and the
Company agrees that, in asserting any rights or claims under this Contract, it
shall look only to the assets and property of the Fund or the particular Series
in settlement of such right or claims, and not to such trustees or shareholders.
14. POTENTIAL CONFLICTS. (a) The trustees of the Fund will monitor the
operations of the Fund for the existence of any material irreconcilable conflict
among the interests of all Contract owners of all separate accounts investing in
each Series of the Fund. An irreconcilable conflict may arise, among other
things, from (a) an action by any sate insurance regulatory authority; (b) a
change in applicable insurance laws or regulations; (c) a tax ruling or
provision of the Internal Revenue Code or the regulations thereunder; (d) any
other development relating to the tax treatment of insurers, contract holders or
policy owners or beneficiaries of variable annuity or variable life insurance
products; (e) the manner in which the investments of any Series are managed; (f)
a difference in voting instructions given by variable annuity contract owners,
on the one hand, and variable life insurance policy owners on the other hand, or
by the contract holders or policy owners of different Participating Insurance
Companies; or ; (g) a decision by an insurer to override the voting instructions
of participating contract owners.
(b) The Company is responsible for reporting any potential or existing
conflicts to the trustees of the Fund. The Company will be responsible for
assisting the trustees in carrying out their responsibilities under this Section
14(b) and Section 14(a), by providing the trustees with all information
reasonably necessary for them to consider the issues raised. The Fund will also
request its investment adviser to report to the trustees any such conflict which
comes to the attention of the adviser.
(c) If a majority of the trustees of the Fund or a majority of its
disinterested trustees determine that a material irreconcilable conflict exists
involving the Company, the Company shall, at its expense and to the extent
reasonably practicable (as determined by a majority of the disinterested
trustees), take whatever steps are necessary to eliminate the irreconcilable
material conflict, including withdrawing the assets allocable to some or all of
the separate accounts from the Fund or any Series and reinvesting such assets in
a different investment medium, including another Series of the Fund, offering to
the affected Contract owners the option of making such a change or establishing
a new funding medium, including a registered investment company.
For purposes of this Section 14(c), the trustees or the disinterested
trustees shall determine whether any proposed action adequately remedies any
irreconcilable material conflict. In the event of a determination of the
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existence of an irreconcilable material conflict, the trustees shall cause the
Fund to take such action, such as the establishment of one or more additional
Series, as they in their sole discretion determine to be in the interest of all
shareholders and Contract owners in view of all applicable factors, such as the
cost, feasibility, tax, regulatory and other considerations. In no event will
the Fund be required by this Section 14(c) to establish a new funding medium for
any Contract.
The Company shall not be required by this Section 14(c) to establish a new
funding medium for any Contract if an offer to do so has been declined by a vote
of a majority of the Contract owners materially adversely affected by the
material irreconcilable conflict. The Company will recommend to its Contract
owners that they decline an offer to establish a new funding medium only if the
Company believes it is in the best interests of the Contract owners.
15. DURATION AND TERMINATION. This Agreement shall become effective as of
the date hereof and shall continue in force until terminated as set forth below:
(a) At the option of either party, upon 180 days' notice, unless a shorter
time is agreed to by the parties;
(b) At the option of either party, upon the institution of formal
proceedings against the other party by the SEC, the NASD or any other regulatory
body, the expected or anticipated outcome of which would, in the judgment of the
terminating party, materially impair the other party's ability to meet and
perform its obligations under this Agreement. Prompt notice of an election to
terminate under this provision shall be furnished by the terminating party and
shall be effective upon receipt.
(c) In the event the Fund's Shares are not registered, issued or sold in
accordance with applicable federal or state law or such law precludes the use of
Shares as the underlying investment medium of the Contracts, the Company may
terminate this Agreement effective upon giving notice to the Fund.
(d) In the event the Contracts cease to qualify as annuity contracts or
life insurance contracts, as applicable under the Code 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.
(e) At the option of the Fund, upon the Company's breach of any material
provision of this Agreement, which breach has not been cured to the satisfaction
of the Fund within 10 days after written notice of such breach is delivered to
the Company.
(f) At the option of the Company, upon the Fund's breach of any material
provision of this Agreement, which breach has not been cured to the satisfaction
of the Company within 10 days after written notice of such breach is delivered
to the Fund.
(g) At the option of the Fund, if the Contracts are not registered, issued
or sold in accordance with applicable federal and/or state law. Termination
shall be effective immediately without notice.
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(h) If this Agreement is assigned without the prior written consent of the
other party, termination shall be effective immediately without notice.
16. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement 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.
17. GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of Delaware and the 1940 Act, except that Section 13 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 of Massachusetts conflict with the applicable provisions of the
l940 Act, the latter shall control.
18. 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.
19. MISCELLANEOUS. 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. 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. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors. As used in this
Agreement, the terms "assignment" shall have the same meaning as such terms have
in the l940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated as of the day and year first above
written.
ATTEST: MITCHELL HUTCHINS SERIES TRUST
/s/ Mark Goldstein By: /s/ Dianne E. O'Donnell
------------------------------ ------------------------
Name: Dianne E. O'Donnell
Title: Secretary and Vice President
ATTEST: THE OHIO NATIONAL LIFE INSURANCE COMPANY
/s/ Ronald L. Benedict By: /s/ John J. Palmer
------------------------------ ------------------------
Name: John J. Palmer
Title: Senior Vice President,
Strategic Initiatives
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SCHEDULE A
Accounts of Company Participating in Series of Mitchell Hutchins Series
Trust:
Name of Separate Account Date Established
Ohio National Variable Account R May 6, 1985
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SCHEDULE B
Series of Mitchell Hutchins Series Trust offered to Accounts of Company:
Growth and Income Portfolio
Small Cap Portfolio
Strategic Income Portfolio
Tactical Allocation Portfolio
11
EXHIBIT NO. 8(i)
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made as of the 31st day of May 1999, between MITCHELL
HUTCHINS SERIES TRUST ("Fund"), an open-end management investment company
organized as a Massachusetts business trust, and KEYPORT BENEFIT LIFE INSURANCE
COMPANY ("Company"), a life insurance company organized under the laws of the
state of New York, on its own behalf and on behalf of each segregated asset
account of the Company set forth in Schedule A as attached hereto, as such
Schedule A may be amended from time to time ("Accounts").
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended ("1940 Act"), as an open-end management investment company; and
WHEREAS, the Fund is organized as a series fund and has established a
number of distinct series of shares of beneficial interest ("Series"), which
correspond to distinct portfolios of investments; and
WHEREAS, the Fund acts as an investment vehicle for separate accounts
established for variable life insurance policies and variable annuity contracts
to be offered by insurance companies that have entered into participation
agreements with the Fund ("Participating Insurance Companies"); and
WHEREAS, Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") is
registered as an investment adviser under the Advisors Act of 1940, as amended,
a broker-dealer under the Securities Exchange Act of 1934, as amended ("1934
Act"), and is a member in good standing of the National Association of
Securities Dealers, Inc. ("NASD") and serves as investment advisor and
administrator to all Series of the Fund; and
WHEREAS, the Series of the Fund offered by the Fund to the Company and the
Accounts are set forth on Schedule B attached hereto, as such Schedule B may be
amended from time to time; and
WHEREAS, the Fund intends to apply for an order ("Exemptive Order") from
the Securities and Exchange Commission ("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 1940 Act and rules 6e-2(b)(15) and
6e-3(T)(b)(15) thereunder to the extent necessary to permit shares of the Fund
<PAGE>
to be sold to and held by variable annuity and variable life insurance
separate accounts of both affiliated and unaffiliated life insurance companies
and certain qualified pension and retirement plans ("Qualified Plans"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase Class I shares ("Shares") of one or
more of the Series on behalf of the Accounts to fund the Contracts, and the Fund
intends to sell such Shares to the relevant Accounts at such Shares' net asset
value;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, it is agreed between the parties as follows:
1. Sale of Shares. The Fund agrees to make Shares available for purchase
by the Accounts or the Company or its affiliates on behalf of the Accounts at
the Shares' net asset value as computed in accordance with the Fund's
registration statement under the Securities Act of 1933, as amended ("1933 Act")
and the 1940 Act, including the Fund's current prospectus and statement of
additional information, as amended or supplemented from time to time ("Fund
Registration Statement"). Purchases of Shares will be made in accordance with
the provisions of the Fund Registration Statement and the operational procedures
mutually agreed to by Mitchell Hutchins and the Company from time to time. The
Fund may refuse to sell Shares of any Series to any person or may suspend or
terminate the offering of Shares of any Series if such action is required by law
or by regulatory authorities having jurisdiction or is, in the sole discretion
of the trustees of the Fund, necessary in the best interests of the shareholders
of any Series.
2. Redemption of Shares. The Fund will redeem Shares when requested by an
Account or the Company or its affiliates on behalf of the Account at the Shares'
net asset value (as computed in accordance with the Fund Registration Statement)
in accordance with the provisions of the Fund Registration Statement and the
operational procedures mutually agreed to by Mitchell Hutchins and the Company
from time to time.
3. Acceptance of Orders. The Fund shall accept purchase and redemption
orders resulting from investments in and payments under the Contracts on each
Business Day, provided that such orders are received by Mitchell Hutchins or the
Fund prior to 9:00 a.m., Eastern time, on such Business Day and reflect
instructions received by the Company from Contract holders in good order prior
to the time the net asset value of the Series is calculated in accordance with
the Fund Registration Statement on the prior Business Day. Notwithstanding the
foregoing, the Company shall use its best efforts to provide Mitchell Hutchins
or the Fund with such orders by 7:30 a.m. on the Business Day following the
Business Day on which instructions are so received by the Company. Orders
reflecting instructions received by the Company in good order after the time the
net asset value of the Series is calculated will not be deemed received until
the next succeeding Business Day. The Company acts as the agent of the Fund and
Mitchell Hutchins for the limited purpose of accepting purchase and redemption
instructions from Contract holders. Mitchell Hutchins and the Fund may reject
purchase and redemption orders that are not in proper form as mutually agreed to
by Mitchell Hutchins and the Company from time to time.
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4. Payment for Purchases and Redemptions. Purchase orders shall be paid
for in federal funds transmitted by wire no later than the Business Day that the
Fund receives notice of the order. The Fund shall use its best efforts to send
redemption proceeds in federal funds transmitted by wire no later than the next
Business Day after the Fund received notice of the order, unless doing so would
cause the Fund to dispose of portfolio securities or otherwise incur additional
costs. In any event, the Fund will wire proceeds of redemption orders to the
Company within the period required under the 1940 Act or the rules, orders or
regulations thereunder.
5. Limitation on Sales of Shares. The Fund agrees that its Shares will be
sold only to Participating Insurance Companies and their separate accounts
and/or to Qualified Plans, all in accordance with Section 817(h) of the Internal
Revenue Code and applicable Treasury Regulations. No shares of any Series will
be sold directly to the general public. The Company agrees that Shares will be
used only for the purposes of funding the Contracts and Accounts listed in
Schedule A, as amended from time to time.
6. Book Entry. Issuance and transfer of 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 the appropriate title
for each Account.
7. Notice of Dividends and Distributions. The Fund will furnish prompt
notice to the Company of any income, dividends or capital gain distribution
payable on Shares. The Company hereby elects to receive all such income
dividends and capital gain distributions payable on Shares in additional Shares
of the same Series. The Fund shall notify the Company of the number of Shares so
issued as payment of such dividends and distributions.
8. Company Reports, The Company agrees to provide the Fund or its
designee on a daily basis with the amount of shares of each Portfolio purchased
and sold by each owner of the Contracts (and information identifying each
Contract owner's PaineWebber Investment Executive) and such other information
concerning transactions in shares of the Fund by the Contract owners as the Fund
shall reasonably request.
9. Uniform Application of Pass-Through Voting and Conflicts of Interest.
The Fund agrees that all Participating Insurance Companies shall have the same
obligations and responsibilities regarding pass-through voting and conflicts of
interest as the Company has under this Agreement.
10. Pass-Through Voting. With respect to Contracts and Accounts that are
subject to the 1940 Act, so long as and to the extent that the SEC interprets
the 1940 Act to require pass-through voting privileges to Contract owners
(including, for purposes of this section, policy owners whose cash values are
invested in Shares through the Accounts), the Company will provide pass-through
voting privileges to Contract owners. The Fund shall require all Participating
Insurance Companies to calculate voting privileges in the same manner and the
Company will be responsible for assuring that the Accounts calculate voting
privileges in the manner established by the Fund. With respect to each Account,
the Company will vote Shares held by the Account and for which no timely voting
instructions are received from the Contract owners, as well as Shares held by
the Account that are owned by the Company for its general account, in the same
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proportion as the Company votes Shares held by the Account for which timely
voting instructions are received from Contract owners. The Company and its
agents will in no way recommend or oppose or interfere with the solicitation of
proxies for Shares held by Contract owners without the prior written consent of
the Fund, which may be withheld in the Fund's sole discretion.
11. Representations. (a) The Company represents and warrants that it is an
insurance company duly organized and in good standing under the laws of its
state of incorporation and that it has legally and validly established each
Contract and Account.
(b) The Company represents and warrants that it has registered or, prior
to any issuance or sale of the Contracts, will register each Account as a unit
investment trust ("UIT") in accordance with the provisions of the 1940 Act and
cause each Account to remain so registered to serve as a segregated asset
account for the Contracts unless an exemption from registration is available.
(c) The Company represents and warrants that the Contracts will be
registered under the 1933 Act unless and exemption from registration is
available prior to any issuance or sale of the Contracts and that the Contracts
will be issued and sold in compliance in all material respects with applicable
federal and state laws and further that the sale of the Contracts shall comply
in all material respects with state insurance law suitability requirements.
(d) The Company represents and warrants that the Contracts are currently
and at the time of issuance will be treated as life insurance, endowment or
annuity contracts under applicable provisions of the Internal Revenue Code, that
it will maintain such treatment and that it will notify the Fund immediately
upon having a reasonable basis for believing that the Contracts have ceased to
be so treated or that they might not be so treated in the future.
(e) The Fund represents and warrants that the Shares offered and sold
pursuant to this Agreement will be registered under the 1933 Act to the extent
required by that Act and sold in accordance with all applicable federal and
state laws, and that the Fund shall be registered under the 1940 Act to the
extent required by that Act, prior to and at the time of any issuance or sale of
such Shares. The Fund shall qualify its Shares for sale in accordance with the
laws of the various states only if and to the extent deemed advisable by the
Fund.
(f) The Fund represents and warrants that each Series will comply with the
diversification requirements set forth in Section 817(h) of the Internal Revenue
Service and applicable regulations thereunder and will notify the Company
immediately upon having a reasonable basis for believing any Series has ceased
to comply or might not so comply and will immediately take all reasonable steps
to adequately diversify the Series to achieve compliance.
(g) The Fund represents and warrants that each Series in which the
Accounts invest is currently qualified as a "regulated investment company" under
Subchapter M of the Internal Revenue Code and will maintain such qualification.
The Fund will notify the Company immediately upon having a reasonable basis for
believing any Series has ceased to comply or might not so comply in the future.
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12. Indemnification. (a) The Fund agrees to indemnify, defend and hold the
Company, its officers, directors, employees and agents and any person who
controls the Company within the meaning of Section 15 of the 1933 Act (referred
to in this Section 11(a) collectively as "Indemnified Parties"), 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, amounts paid in settlement with the consent of the Fund and any
counsel fees incurred in connection therewith) which the Indemnified Parties may
incur under the 1933 Act, or under common law or otherwise, (i) arising out of
or based upon any alleged untrue statement of a material fact contained in the
Fund Registration Statement or arising out of or based upon any alleged omission
to state a material fact required to be stated in the Fund 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 or on behalf of the Company to the Fund for use in the Fund
Registration Statement or otherwise for use in connection with the sale of
Contracts or Shares; (ii) arising out of or based upon statements or
representations (other than statements or representations made in reliance upon
and in conformity with information furnished in writing by or on behalf of the
Company) or wrongful conduct of the Fund or persons under its control concerning
the sale or distribution of the Contracts or Shares; (iii) arising out of or
based upon any alleged omission to state a material fact required to be stated
in the registration statement for the Contracts (including any amendment or
supplement to the prospectus or statement of additional information) ("Contract
Registration Statement") or necessary to make the statements therein not
misleading, if 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 or on behalf of the Fund to the Company for use in the Contract
Registration Statement; or (iv) arise out of or result from any material breach
of the representations and/or warranties made by the Fund in this Agreement or
any other material breach of this Agreement by the Fund. In no event shall
anything contained herein be so construed as to protect the Company against any
liability to the Fund or to the shareholders of any Series to which the Company
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 Agreement.
(b) The Fund shall not be liable to the Company under this indemnity
agreement with respect to any claim made against the Company or any other
Indemnified Party unless the Company or other such person shall have notified
the Fund in writing of the claim within a reasonable time after the summons or
other first written notification giving information of the nature of the claim
shall have been served upon the Indemnified Party (or after the Indemnified
Party 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 an Indemnified Party 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 the Indemnified Parties in the
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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 Parties 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 Parties for the reasonable fees and expenses of
any counsel retained by them.
(c) The Company agrees to indemnify, defend, and hold the Fund, its
officers, trustees, employees and agents and any person who controls the Fund
within the meaning of Section 15 of the 1933 Act (in this Section 11(b),
referred to collectively as "Indemnified Parties") , 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,
amounts paid in settlement with the consent of the Company and any counsel fees
incurred in connection therewith) which the Indemnified Parties may incur under
the 1933 Act or under common law or otherwise (i) arising out of or based upon
any alleged untrue statement of a material fact contained in the Contract
Registration Statement or in the Contracts themselves or in any sales literature
generated or approved by the Company on behalf of the Contracts or Accounts or
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 Contract
Registration Statement, Contracts or such sales literature 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 or on behalf of the Fund to
the Company for use in the Contract Registration Statement, the Contracts or
such sales literature or otherwise for use in connection with the sale of
Contracts or Shares; (ii) arising out of or based upon statements or
representations (other than statements made in reliance upon and in conformity
with information furnished in writing by or on behalf of the Fund) or wrongful
conduct of the Company or persons under its control concerning the sale or
distribution of the Contracts or Shares; (iii) arising out of or based upon any
alleged omission to state a material fact required to be stated in the Fund
Registration Statement or necessary to make the statements therein not
misleading, if 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 or on behalf of the Company to the Fund for use in the Fund
Registration Statement; or (iv) arise out of or result from any material breach
of the representations and/or warranties made by the Company in this Agreement
or any other material breach of this Agreement by the Company.
(d) The Company shall not be liable to the Fund under this indemnity
agreement with respect to any claim made against the Fund or any other
Indemnified Party unless the Fund or other such person shall have notified the
Company 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 the Indemnified Party (or after the Indemnified
Party shall have received notice of service on any designated agent). However,
failure to notify the Company of any claim shall not relieve the Company from
any liability which it may have to an Indemnified Party otherwise than on
account of this indemnity agreement. The Company 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 Company elects to assume the defense of any such claim, the
defense shall be conducted by counsel chosen by the Company and satisfactory to
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the Indemnified Parties in the suit whose approval shall not be unreasonably
withheld. In the event that the Company elects to assume the defense of a suit
and retain counsel, the Indemnified Parties shall bear the fees and expenses of
any additional counsel retained by them. If the Company does not elect to assume
the defense of any suit, it will reimburse the Indemnified Parties for the
reasonable fees and expenses of any counsel retained by them.
(e) These indemnification provisions shall survive termination of this
Agreement.
13. Limitation of Liability of the Trustees and Shareholders of the Fund.
The trustees of the Fund and the shareholders of its Series shall not be liable
for any obligations of the Fund or any Series under this Contract, and the
Company agrees that, in asserting any rights or claims under this Contract, it
shall look only to the assets and property of the Fund or the particular Series
in settlement of such right or claims, and not to such trustees or shareholders.
14. Potential Conflicts. (a) The trustees of the Fund will monitor the
operations of the Fund for the existence of any material irreconcilable conflict
among the interests of all Contract owners of all separate accounts investing in
each Series of the Fund. An irreconcilable conflict may arise, among other
things, from (a) an action by any sate insurance regulatory authority; (b) a
change in applicable insurance laws or regulations; (c) a tax ruling or
provision of the Internal Revenue Code or the regulations thereunder; (d) any
other development relating to the tax treatment of insurers, contract holders or
policy owners or beneficiaries of variable annuity or variable life insurance
products; (e) the manner in which the investments of any Series are managed; (f)
a difference in voting instructions given by variable annuity contract owners,
on the one hand, and variable life insurance policy owners on the other hand, or
by the contract holders or policy owners of different Participating Insurance
Companies; or ; (g) a decision by an insurer to override the voting instructions
of participating contract owners.
(b) The Company is responsible for reporting any potential or existing
conflicts to the trustees of the Fund. The Company will be responsible for
assisting the trustees in carrying out their responsibilities under this Section
14(b) and Section 14(a), by providing the trustees with all information
reasonably necessary for them to consider the issues raised. The Fund will also
request its investment adviser to report to the trustees any such conflict which
comes to the attention of the adviser.
(c) If a majority of the trustees of the Fund or a majority of its
disinterested trustees determine that a material irreconcilable conflict exists
involving the Company, the Company shall, at its expense and to the extent
reasonably practicable (as determined by a majority of the disinterested
trustees), take whatever steps are necessary to eliminate the irreconcilable
material conflict, including withdrawing the assets allocable to some or all of
the separate accounts from the Fund or any Series and reinvesting such assets in
a different investment medium, including another Series of the Fund, offering to
the affected Contract owners the option of making such a change or establishing
a new funding medium, including a registered investment company.
For purposes of this Section 14(c), the trustees or the disinterested
trustees shall determine whether any proposed action adequately remedies any
irreconcilable material conflict. In the event of a determination of the
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existence of an irreconcilable material conflict, the trustees shall cause the
Fund to take such action, such as the establishment of one or more additional
Series, as they in their sole discretion determine to be in the interest of all
shareholders and Contract owners in view of all applicable factors, such as the
cost, feasibility, tax, regulatory and other considerations. In no event will
the Fund be required by this Section 14(c) to establish a new funding medium for
any Contract.
The Company shall not be required by this Section 14(c) to establish a new
funding medium for any Contract if an offer to do so has been declined by a vote
of a majority of the Contract owners materially adversely affected by the
material irreconcilable conflict. The Company will recommend to its Contract
owners that they decline an offer to establish a new funding medium only if the
Company believes it is in the best interests of the Contract owners.
15. Duration and Termination. This Agreement shall become effective as of
the date hereof and shall continue in force until terminated as set forth below:
(a) At the option of either party, upon 180 days' notice, unless a shorter
time is agreed to by the parties;
(b) At the option of either party, upon the institution of formal
proceedings against the other party by the SEC, the NASD or any other regulatory
body, the expected or anticipated outcome of which would, in the judgment of the
terminating party, materially impair the other party's ability to meet and
perform its obligations under this Agreement. Prompt notice of an election to
terminate under this provision shall be furnished by the terminating party and
shall be effective upon receipt.
(c) In the event the Fund's Shares are not registered, issued or sold in
accordance with applicable federal or state law or such law precludes the use of
Shares as the underlying investment medium of the Contracts, the Company may
terminate this Agreement effective upon giving notice to the Fund.
(d) In the event the Contracts cease to qualify as annuity contracts or
life insurance contracts, as applicable under the Code 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.
(e) At the option of the Fund, upon the Company's breach of any material
provision of this Agreement, which breach has not been cured to the satisfaction
of the Fund within 10 days after written notice of such breach is delivered to
the Company.
(f) At the option of the Company, upon the Fund's breach of any material
provision of this Agreement, which breach has not been cured to the satisfaction
of the Company within 10 days after written notice of such breach is delivered
to the Fund.
(g) At the option of the Fund, if the Contracts are not registered, issued
or sold in accordance with applicable federal and/or state law. Termination
shall be effective immediately without notice.
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(h) If this Agreement is assigned without the prior written consent of the
other party, termination shall be effective immediately without notice.
16. Amendment of this Agreement. No provision of this Agreement 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.
17. Governing Law. This Agreement shall be construed in accordance with
the laws of the State of Delaware and the 1940 Act, except that Section 13 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 of Massachusetts conflict with the applicable provisions of the
l940 Act, the latter shall control.
18. 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.
19. Miscellaneous. 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. 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. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors. As used in this
Agreement, the terms "assignment" shall have the same meaning as such terms have
in the l940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated as of the day and year first above
written.
ATTEST: MITCHELL HUTCHINS SERIES TRUST
/s/ Stephanie H. Johnson By: /s/ Dianne E. O'Donnell
------------------------------ ------------------------
Stephanie H. Johnson Name: Dianne E. O'Donnell
Assistant Secretary Title: Secretary and Vice President
ATTEST: KEYPORT BENEFIT INSURANCE COMPANY
/s/ James J. Klopper By: /s/ Mark R. Tully
------------------------------ ------------------------
James J. Klopper Name: Mark R. Tully
Vice President Title: Senior Vice President,
& Secretary Chief Sales Officer
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SCHEDULE A
Accounts of Company Participating in Series of Mitchell Hutchins Series Trust:
Name of Separate Account Date Established
Variable Account A February 6, 1998
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SCHEDULE B
Series of Mitchell Hutchins Series Trust offered to Accounts of Company:
Balanced Portfolio
Global Growth Portfolio
Growth Portfolio
Growth and Income Portfolio
Strategic Income Portfolio
Tactical Allocation Portfolio
11
EXHIBIT NO. 8(j)
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made as of the 31st day of May 1999, between MITCHELL
HUTCHINS SERIES TRUST ("Fund"), an open-end management investment company
organized as a Massachusetts business trust, and KEYPORT LIFE INSURANCE COMPANY
("Company"), a life insurance company organized under the laws of the state of
Rhode Island, on its own behalf and on behalf of each segregated asset account
of the Company set forth in Schedule A as attached hereto, as such Schedule A
may be amended from time to time ("Accounts").
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended ("1940 Act"), as an open-end management investment company; and
WHEREAS, the Fund is organized as a series fund and has established a
number of distinct series of shares of beneficial interest ("Series"), which
correspond to distinct portfolios of investments; and
WHEREAS, the Fund acts as an investment vehicle for separate accounts
established for variable life insurance policies and variable annuity contracts
to be offered by insurance companies that have entered into participation
agreements with the Fund ("Participating Insurance Companies"); and
WHEREAS, Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") is
registered as an investment adviser under the Advisors Act of 1940, as amended,
a broker-dealer under the Securities Exchange Act of 1934, as amended ("1934
Act"), and is a member in good standing of the National Association of
Securities Dealers, Inc. ("NASD") and serves as investment advisor and
administrator to all Series of the Fund; and
WHEREAS, the Series of the Fund offered by the Fund to the Company and the
Accounts are set forth on Schedule B attached hereto, as such Schedule B may be
amended from time to time; and
WHEREAS, the Fund intends to apply for an order ("Exemptive Order") from
the Securities and Exchange Commission ("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 1940 Act and rules 6e-2(b)(15) and
6e-3(T)(b)(15) thereunder to the extent necessary to permit shares of the Fund
<PAGE>
to be sold to and held by variable annuity and variable life insurance separate
accounts of both affiliated and unaffiliated life insurance companies and
certain qualified pension and retirement plans ("Qualified Plans"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase Class I shares ("Shares") of one or
more of the Series on behalf of the Accounts to fund the Contracts, and the Fund
intends to sell such Shares to the relevant Accounts at such Shares' net asset
value;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, it is agreed between the parties as follows:
1. SALE OF SHARES. The Fund agrees to make Shares available for purchase
by the Accounts or the Company or its affiliates on behalf of the Accounts at
the Shares' net asset value as computed in accordance with the Fund's
registration statement under the Securities Act of 1933, as amended ("1933 Act")
and the 1940 Act, including the Fund's current prospectus and statement of
additional information, as amended or supplemented from time to time ("Fund
Registration Statement"). Purchases of Shares will be made in accordance with
the provisions of the Fund Registration Statement and the operational procedures
mutually agreed to by Mitchell Hutchins and the Company from time to time. The
Fund may refuse to sell Shares of any Series to any person or may suspend or
terminate the offering of Shares of any Series if such action is required by law
or by regulatory authorities having jurisdiction or is, in the sole discretion
of the trustees of the Fund, necessary in the best interests of the shareholders
of any Series.
2. REDEMPTION OF SHARES. The Fund will redeem Shares when requested by an
Account or the Company or its affiliates on behalf of the Account at the Shares'
net asset value (as computed in accordance with the Fund Registration Statement)
in accordance with the provisions of the Fund Registration Statement and the
operational procedures mutually agreed to by Mitchell Hutchins and the Company
from time to time.
3. ACCEPTANCE OF ORDERS. The Fund shall accept purchase and redemption
orders resulting from investments in and payments under the Contracts on each
Business Day, provided that such orders are received by Mitchell Hutchins or the
Fund prior to 9:00 a.m., Eastern time, on such Business Day and reflect
instructions received by the Company from Contract holders in good order prior
to the time the net asset value of the Series is calculated in accordance with
the Fund Registration Statement on the prior Business Day. Notwithstanding the
foregoing, the Company shall use its best efforts to provide Mitchell Hutchins
or the Fund with such orders by 7:30 a.m. on the Business Day following the
Business Day on which instructions are so received by the Company. Orders
reflecting instructions received by the Company in good order after the time the
net asset value of the Series is calculated will not be deemed received until
the next succeeding Business Day. The Company acts as the agent of the Fund and
Mitchell Hutchins for the limited purpose of accepting purchase and redemption
instructions from Contract holders. Mitchell Hutchins and the Fund may reject
purchase and redemption orders that are not in proper form as mutually agreed to
by Mitchell Hutchins and the Company from time to time.
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4. PAYMENT FOR PURCHASES AND REDEMPTIONS. Purchase orders shall be paid
for in federal funds transmitted by wire no later than the Business Day that the
Fund receives notice of the order. The Fund shall use its best efforts to send
redemption proceeds in federal funds transmitted by wire no later than the next
Business Day after the Fund received notice of the order, unless doing so would
cause the Fund to dispose of portfolio securities or otherwise incur additional
costs. In any event, the Fund will wire proceeds of redemption orders to the
Company within the period required under the 1940 Act or the rules, orders or
regulations thereunder.
5. LIMITATION ON SALES OF SHARES. The Fund agrees that its Shares will be
sold only to Participating Insurance Companies and their separate accounts
and/or to Qualified Plans, all in accordance with Section 817(h) of the Internal
Revenue Code and applicable Treasury Regulations. No shares of any Series will
be sold directly to the general public. The Company agrees that Shares will be
used only for the purposes of funding the Contracts and Accounts listed in
Schedule A, as amended from time to time.
6. BOOK ENTRY. Issuance and transfer of 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 the appropriate title for each
Account.
7. NOTICE OF DIVIDENDS AND DISTRIBUTIONS. The Fund will furnish prompt
notice to the Company of any income, dividends or capital gain distribution
payable on Shares. The Company hereby elects to receive all such income
dividends and capital gain distributions payable on Shares in additional Shares
of the same Series. The Fund shall notify the Company of the number of Shares so
issued as payment of such dividends and distributions.
8. COMPANY REPORTS, The Company agrees to provide the Fund or its
designee on a daily basis with the amount of shares of each Portfolio purchased
and sold by each owner of the Contracts (and information identifying each
Contract owner's PaineWebber Investment Executive) and such other information
concerning transactions in shares of the Fund by the Contract owners as the Fund
shall reasonably request.
9. UNIFORM APPLICATION OF PASS-THROUGH VOTING AND CONFLICTS OF INTEREST.
The Fund agrees that all Participating Insurance Companies shall have the same
obligations and responsibilities regarding pass-through voting and conflicts of
interest as the Company has under this Agreement.
10. PASS-THROUGH VOTING. With respect to Contracts and Accounts that are
subject to the 1940 Act, so long as and to the extent that the SEC interprets
the 1940 Act to require pass-through voting privileges to Contract owners
(including, for purposes of this section, policy owners whose cash values are
invested in Shares through the Accounts), the Company will provide pass-through
voting privileges to Contract owners. The Fund shall require all Participating
Insurance Companies to calculate voting privileges in the same manner and the
Company will be responsible for assuring that the Accounts calculate voting
privileges in the manner established by the Fund. With respect to each Account,
the Company will vote Shares held by the Account and for which no timely voting
instructions are received from the Contract owners, as well as Shares held by
the Account that are owned by the Company for its general account, in the same
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proportion as the Company votes Shares held by the Account for which timely
voting instructions are received from Contract owners. The Company and its
agents will in no way recommend or oppose or interfere with the solicitation of
proxies for Shares held by Contract owners without the prior written consent of
the Fund, which may be withheld in the Fund's sole discretion.
11. REPRESENTATIONS. (a) The Company represents and warrants that it is an
insurance company duly organized and in good standing under the laws of its
state of incorporation and that it has legally and validly established each
Contract and Account.
(b) The Company represents and warrants that it has registered or, prior
to any issuance or sale of the Contracts, will register each Account as a unit
investment trust ("UIT") in accordance with the provisions of the 1940 Act and
cause each Account to remain so registered to serve as a segregated asset
account for the Contracts unless an exemption from registration is available.
(c) The Company represents and warrants that the Contracts will be
registered under the 1933 Act unless and exemption from registration is
available prior to any issuance or sale of the Contracts and that the Contracts
will be issued and sold in compliance in all material respects with applicable
federal and state laws and further that the sale of the Contracts shall comply
in all material respects with state insurance law suitability requirements.
(d) The Company represents and warrants that the Contracts are currently
and at the time of issuance will be treated as life insurance, endowment or
annuity contracts under applicable provisions of the Internal Revenue Code, that
it will maintain such treatment and that it will notify the Fund immediately
upon having a reasonable basis for believing that the Contracts have ceased to
be so treated or that they might not be so treated in the future.
(e) The Fund represents and warrants that the Shares offered and sold
pursuant to this Agreement will be registered under the 1933 Act to the extent
required by that Act and sold in accordance with all applicable federal and
state laws, and that the Fund shall be registered under the 1940 Act to the
extent required by that Act, prior to and at the time of any issuance or sale of
such Shares. The Fund shall qualify its Shares for sale in accordance with the
laws of the various states only if and to the extent deemed advisable by the
Fund.
(f) The Fund represents and warrants that each Series will comply with the
diversification requirements set forth in Section 817(h) of the Internal Revenue
Service and applicable regulations thereunder and will notify the Company
immediately upon having a reasonable basis for believing any Series has ceased
to comply or might not so comply and will immediately take all reasonable steps
to adequately diversify the Series to achieve compliance.
(g) The Fund represents and warrants that each Series in which the
Accounts invest is currently qualified as a "regulated investment company" under
Subchapter M of the Internal Revenue Code and will maintain such qualification.
The Fund will notify the Company immediately upon having a reasonable basis for
believing any Series has ceased to comply or might not so comply in the future.
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<PAGE>
12. INDEMNIFICATION. (a) The Fund agrees to indemnify, defend and hold the
Company, its officers, directors, employees and agents and any person who
controls the Company within the meaning of Section 15 of the 1933 Act (referred
to in this Section 11(a) collectively as "Indemnified Parties"), 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, amounts paid in settlement with the consent of the Fund and any
counsel fees incurred in connection therewith) which the Indemnified Parties may
incur under the 1933 Act, or under common law or otherwise, (i) arising out of
or based upon any alleged untrue statement of a material fact contained in the
Fund Registration Statement or arising out of or based upon any alleged omission
to state a material fact required to be stated in the Fund 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 or on behalf of the Company to the Fund for use in the Fund
Registration Statement or otherwise for use in connection with the sale of
Contracts or Shares; (ii) arising out of or based upon statements or
representations (other than statements or representations made in reliance upon
and in conformity with information furnished in writing by or on behalf of the
Company) or wrongful conduct of the Fund or persons under its control concerning
the sale or distribution of the Contracts or Shares; (iii) arising out of or
based upon any alleged omission to state a material fact required to be stated
in the registration statement for the Contracts (including any amendment or
supplement to the prospectus or statement of additional information) ("Contract
Registration Statement") or necessary to make the statements therein not
misleading, if 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 or on behalf of the Fund to the Company for use in the Contract
Registration Statement; or (iv) arise out of or result from any material breach
of the representations and/or warranties made by the Fund in this Agreement or
any other material breach of this Agreement by the Fund. In no event shall
anything contained herein be so construed as to protect the Company against any
liability to the Fund or to the shareholders of any Series to which the Company
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 Agreement.
(b) The Fund shall not be liable to the Company under this indemnity
agreement with respect to any claim made against the Company or any other
Indemnified Party unless the Company or other such person shall have notified
the Fund in writing of the claim within a reasonable time after the summons or
other first written notification giving information of the nature of the claim
shall have been served upon the Indemnified Party (or after the Indemnified
Party 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 an Indemnified Party 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 the Indemnified Parties in the
suit whose approval shall not be unreasonably withheld. In the event that the
5
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Fund elects to assume the defense of any suit and retain counsel, the
Indemnified Parties 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 Parties for the reasonable fees and expenses of
any counsel retained by them.
(c) The Company agrees to indemnify, defend, and hold the Fund, its
officers, trustees, employees and agents and any person who controls the Fund
within the meaning of Section 15 of the 1933 Act (in this Section 11(b),
referred to collectively as "Indemnified Parties") , 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,
amounts paid in settlement with the consent of the Company and any counsel fees
incurred in connection therewith) which the Indemnified Parties may incur under
the 1933 Act or under common law or otherwise (i) arising out of or based upon
any alleged untrue statement of a material fact contained in the Contract
Registration Statement or in the Contracts themselves or in any sales literature
generated or approved by the Company on behalf of the Contracts or Accounts or
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 Contract
Registration Statement, Contracts or such sales literature 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 or on behalf of the Fund to
the Company for use in the Contract Registration Statement, the Contracts or
such sales literature or otherwise for use in connection with the sale of
Contracts or Shares; (ii) arising out of or based upon statements or
representations (other than statements made in reliance upon and in conformity
with information furnished in writing by or on behalf of the Fund) or wrongful
conduct of the Company or persons under its control concerning the sale or
distribution of the Contracts or Shares; (iii) arising out of or based upon any
alleged omission to state a material fact required to be stated in the Fund
Registration Statement or necessary to make the statements therein not
misleading, if 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 or on behalf of the Company to the Fund for use in the Fund
Registration Statement; or (iv) arise out of or result from any material breach
of the representations and/or warranties made by the Company in this Agreement
or any other material breach of this Agreement by the Company.
(d) The Company shall not be liable to the Fund under this indemnity
agreement with respect to any claim made against the Fund or any other
Indemnified Party unless the Fund or other such person shall have notified the
Company 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 the Indemnified Party (or after the Indemnified
Party shall have received notice of service on any designated agent). However,
failure to notify the Company of any claim shall not relieve the Company from
any liability which it may have to an Indemnified Party otherwise than on
account of this indemnity agreement. The Company 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 Company elects to assume the defense of any such claim, the
defense shall be conducted by counsel chosen by the Company and satisfactory to
6
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the Indemnified Parties in the suit whose approval shall not be unreasonably
withheld. In the event that the Company elects to assume the defense of a suit
and retain counsel, the Indemnified Parties shall bear the fees and expenses of
any additional counsel retained by them. If the Company does not elect to assume
the defense of any suit, it will reimburse the Indemnified Parties for the
reasonable fees and expenses of any counsel retained by them.
(e) These indemnification provisions shall survive termination of this
Agreement.
13. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS OF THE FUND.
The trustees of the Fund and the shareholders of its Series shall not be liable
for any obligations of the Fund or any Series under this Contract, and the
Company agrees that, in asserting any rights or claims under this Contract, it
shall look only to the assets and property of the Fund or the particular Series
in settlement of such right or claims, and not to such trustees or shareholders.
14. POTENTIAL CONFLICTS. (a) The trustees of the Fund will monitor the
operations of the Fund for the existence of any material irreconcilable conflict
among the interests of all Contract owners of all separate accounts investing in
each Series of the Fund. An irreconcilable conflict may arise, among other
things, from (a) an action by any sate insurance regulatory authority; (b) a
change in applicable insurance laws or regulations; (c) a tax ruling or
provision of the Internal Revenue Code or the regulations thereunder; (d) any
other development relating to the tax treatment of insurers, contract holders or
policy owners or beneficiaries of variable annuity or variable life insurance
products; (e) the manner in which the investments of any Series are managed; (f)
a difference in voting instructions given by variable annuity contract owners,
on the one hand, and variable life insurance policy owners on the other hand, or
by the contract holders or policy owners of different Participating Insurance
Companies; or ; (g) a decision by an insurer to override the voting instructions
of participating contract owners.
(b) The Company is responsible for reporting any potential or existing
conflicts to the trustees of the Fund. The Company will be responsible for
assisting the trustees in carrying out their responsibilities under this Section
14(b) and Section 14(a), by providing the trustees with all information
reasonably necessary for them to consider the issues raised. The Fund will also
request its investment adviser to report to the trustees any such conflict which
comes to the attention of the adviser.
(c) If a majority of the trustees of the Fund or a majority of its
disinterested trustees determine that a material irreconcilable conflict exists
involving the Company, the Company shall, at its expense and to the extent
reasonably practicable (as determined by a majority of the disinterested
trustees), take whatever steps are necessary to eliminate the irreconcilable
material conflict, including withdrawing the assets allocable to some or all of
the separate accounts from the Fund or any Series and reinvesting such assets in
a different investment medium, including another Series of the Fund, offering to
the affected Contract owners the option of making such a change or establishing
a new funding medium, including a registered investment company.
For purposes of this Section 14(c), the trustees or the disinterested
trustees shall determine whether any proposed action adequately remedies any
irreconcilable material conflict. In the event of a determination of the
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<PAGE>
existence of an irreconcilable material conflict, the trustees shall cause the
Fund to take such action, such as the establishment of one or more additional
Series, as they in their sole discretion determine to be in the interest of all
shareholders and Contract owners in view of all applicable factors, such as the
cost, feasibility, tax, regulatory and other considerations. In no event will
the Fund be required by this Section 14(c) to establish a new funding medium for
any Contract.
The Company shall not be required by this Section 14(c) to establish a new
funding medium for any Contract if an offer to do so has been declined by a vote
of a majority of the Contract owners materially adversely affected by the
material irreconcilable conflict. The Company will recommend to its Contract
owners that they decline an offer to establish a new funding medium only if the
Company believes it is in the best interests of the Contract owners.
15. DURATION AND TERMINATION. This Agreement shall become effective as of
the date hereof and shall continue in force until terminated as set forth below:
(a) At the option of either party, upon 180 days' notice, unless a shorter
time is agreed to by the parties;
(b) At the option of either party, upon the institution of formal
proceedings against the other party by the SEC, the NASD or any other regulatory
body, the expected or anticipated outcome of which would, in the judgment of the
terminating party, materially impair the other party's ability to meet and
perform its obligations under this Agreement. Prompt notice of an election to
terminate under this provision shall be furnished by the terminating party and
shall be effective upon receipt.
(c) In the event the Fund's Shares are not registered, issued or sold in
accordance with applicable federal or state law or such law precludes the use of
Shares as the underlying investment medium of the Contracts, the Company may
terminate this Agreement effective upon giving notice to the Fund.
(d) In the event the Contracts cease to qualify as annuity contracts or
life insurance contracts, as applicable under the Code 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.
(e) At the option of the Fund, upon the Company's breach of any material
provision of this Agreement, which breach has not been cured to the satisfaction
of the Fund within 10 days after written notice of such breach is delivered to
the Company.
(f) At the option of the Company, upon the Fund's breach of any material
provision of this Agreement, which breach has not been cured to the satisfaction
of the Company within 10 days after written notice of such breach is delivered
to the Fund.
(g) At the option of the Fund, if the Contracts are not registered, issued
or sold in accordance with applicable federal and/or state law. Termination
shall be effective immediately without notice.
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<PAGE>
(h) If this Agreement is assigned without the prior written consent of the
other party, termination shall be effective immediately without notice.
16. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement 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.
17. GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of Delaware and the 1940 Act, except that Section 13 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 of Massachusetts conflict with the applicable provisions of the
l940 Act, the latter shall control.
18. 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.
19. MISCELLANEOUS. 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. 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. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors. As used in this
Agreement, the terms "assignment" shall have the same meaning as such terms have
in the l940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated as of the day and year first above
written.
ATTEST: MITCHELL HUTCHINS SERIES TRUST
/s/ Stephanie H. Johnson By: /s/ Dianne E. O'Donnell
------------------------------ ------------------------
Stephanie H. Johnson Name: Dianne E. O'Donnell
Assistant Secretary Title: Secretary and Vice President
ATTEST: KEYPORT BENEFIT INSURANCE COMPANY
/s/ James J. Klopper By: /s/ Mark R. Tully
------------------------------ ------------------------
James J. Klopper Name: Mark R. Tully
Vice President Title: Senior Vice President
& Secretary Chief Sales Officer
9
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SCHEDULE A
Accounts of Company Participating in Series of Mitchell Hutchins Series
Trust:
Name of Separate Account Date Established
Variable Account A January 30, 1996
10
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SCHEDULE B
Series of Mitchell Hutchins Series Trust offered to Accounts of Company:
Balanced Portfolio
Global Growth Portfolio
Growth Portfolio
Growth and Income Portfolio
Strategic Income Portfolio
Tactical Allocation Portfolio
11
Exhibit 8(k)
FORM OF FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made as of the ____ day of ________ , 1998, between
MITCHELL HUTCHINS SERIES TRUST ("Fund"), an open-end management investment
company organized as a Massachusetts business trust, and
____________________________________________("Company"), a life insurance
company organized under the laws of the state of _____________________________,
on its own behalf and on behalf of each segregated asset account of the Company
set forth in Schedule A as attached hereto, as such Schedule A may be amended
from time to time ("Accounts").
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended ("1940 Act"), as an open-end management investment company; and
WHEREAS, the Fund is organized as a series fund and has established a
number of distinct series of shares of beneficial interest ("Series"), which
correspond to distinct portfolios of investments; and
WHEREAS, the Fund acts as an investment vehicle for separate accounts
established for variable life insurance policies and variable annuity contracts
to be offered by insurance companies that have entered into participation
agreements with the Fund ("Participating Insurance Companies"); and
WHEREAS, Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") is
registered as an investment adviser under the Advisors Act of 1940, as amended,
a broker-dealer under the Securities Exchange Act of 1934, as amended ("1934
Act"), and is a member in good standing of the National Association of
Securities Dealers, Inc. ("NASD") and serves as investment advisor and
administrator to all Series of the Fund; and
WHEREAS, the Series of the Fund offered by the Fund to the Company and the
Accounts are set forth on Schedule B attached hereto, as such Schedule B may be
amended from time to time; and
WHEREAS, the Fund intends to apply for an order ("Exemptive Order")
from the Securities and Exchange Commission ("SEC") granting Participating
Insurance Companies and their separate accounts exemptions from the provisions
<PAGE>
of sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act and rules 6e-2(b)(15)
and 6e-3(T)(b)(15) thereunder to the extent necessary to permit shares of the
Fund to be sold to and held by variable annuity and variable life insurance
separate accounts of both affiliated and unaffiliated life insurance companies
and certain qualified pension and retirement plans ("Qualified Plans"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase Class H shares ("Shares") of one or
more of the Series on behalf of the Accounts to fund the Contracts, and the Fund
intends to sell such Shares to the relevant Accounts at such Shares' net asset
value;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, it is agreed between the parties as follows:
1. SALE OF SHARES. The Fund agrees to make Shares available for purchase
by the Accounts or the Company or its affiliates on behalf of the Accounts at
the Shares' net asset value as computed in accordance with the Fund's
registration statement under the Securities Act of 1933, as amended ("1933 Act")
and the 1940 Act, including the Fund's current prospectus and statement of
additional information, as amended or supplemented from time to time ("Fund
Registration Statement"). Purchases of Shares will be made in accordance with
the provisions of the Fund Registration Statement and the operational procedures
mutually agreed to by Mitchell Hutchins and the Company from time to time. The
Fund may refuse to sell Shares of any Series to any person or may suspend or
terminate the offering of Shares of any Series if such action is required by law
or by regulatory authorities having jurisdiction or is, in the sole discretion
of the trustees of the Fund, necessary in the best interests of the shareholders
of any Series.
2. REDEMPTION OF SHARES. The Fund will redeem Shares when requested by an
Account or the Company or its affiliates on behalf of the Account at the Shares'
net asset value (as computed in accordance with the Fund Registration Statement)
in accordance with the provisions of the Fund Registration Statement and the
operational procedures mutually agreed to by Mitchell Hutchins and the Company
from time to time.
3. ACCEPTANCE OF ORDERS. The Fund shall accept purchase and redemption
orders resulting from investments in and payments under the Contracts on each
Business Day, provided that such orders are received by Mitchell Hutchins or the
Fund prior to 9:00 a.m., Eastern time, on such Business Day and reflect
instructions received by the Company from Contract holders in good order prior
to the time the net asset value of the Series is calculated in accordance with
the Fund Registration Statement on the prior Business Day. Notwithstanding the
foregoing, the Company shall use its best efforts to provide Mitchell Hutchins
or the Fund with such orders by 7:30 a.m. on the Business Day following the
Business Day on which instructions are so received by the Company. Orders
reflecting instructions received by the Company in good order after the time the
net asset value of the Series is calculated will not be deemed received until
the next succeeding Business Day. The Company acts as the agent of the Fund and
Mitchell Hutchins for the limited purpose of accepting purchase and redemption
instructions from Contract holders. Mitchell Hutchins and the Fund may reject
purchase and redemption orders that are not in proper form as mutually agreed to
by Mitchell Hutchins and the Company from time to time.
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<PAGE>
4. PAYMENT FOR PURCHASES AND REDEMPTIONS. Purchase orders shall be paid
for in federal funds transmitted by wire no later than the Business Day that the
Fund receives notice of the order. The Fund shall use its best efforts to send
redemption proceeds in federal funds transmitted by wire no later than the next
Business Day after the Fund received notice of the order, unless doing so would
cause the Fund to dispose of portfolio securities or otherwise incur additional
costs. In any event, the Fund will wire proceeds of redemption orders to the
Company within the period required under the 1940 Act or the rules, orders or
regulations thereunder.
5. LIMITATION ON SALES OF SHARES. The Fund agrees that its Shares will be
sold only to Participating Insurance Companies and their separate accounts
and/or to Qualified Plans, all in accordance with Section 817(h) of the Internal
Revenue Code and applicable Treasury Regulations. No shares of any Series will
be sold directly to the general public. The Company agrees that Shares will be
used only for the purposes of funding the Contracts and Accounts listed in
Schedule A, as amended from time to time.
6. BOOK ENTRY. Issuance and transfer of 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 the appropriate title for each
Account.
7. NOTICE OF DIVIDENDS AND DISTRIBUTIONS; NET ASSET VALUE. The Fund will
furnish prompt notice to the Company of any income, dividends or capital gain
distribution payable on Shares. The Company hereby elects to receive all such
income dividends and capital gain distributions payable on Shares in additional
Shares of the same Series. The Fund shall notify the Company of the number of
Shares so issued as payment of such dividends and distributions. 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.
8. COMPANY REPORTS, The Company agrees to provide the Fund or its designee
on a daily basis with the amount of shares of each Portfolio purchased and sold
by each owner of the Contracts (and information identifying each Contract
owner's PaineWebber Investment Executive) and such other information concerning
transactions in shares of the Fund by the Contract owners as the Fund shall
reasonably request.
9. UNIFORM APPLICATION OF PASS-THROUGH VOTING AND CONFLICTS OF INTEREST.
The Fund agrees that all Participating Insurance Companies shall have the same
obligations and responsibilities regarding pass-through voting and conflicts of
interest as the Company has under this Agreement.
10. PASS-THROUGH VOTING. With respect to Contracts and Accounts that are
subject to the 1940 Act, so long as and to the extent that the SEC interprets
the 1940 Act to require pass-through voting privileges to Contract owners
(including, for purposes of this section, policy owners whose cash values are
invested in Shares through the Accounts), the Company will provide pass-through
voting privileges to Contract owners. The Fund shall require all Participating
Insurance Companies to calculate voting privileges in the same manner and the
Company will be responsible for assuring that the Accounts calculate voting
3
<PAGE>
privileges in the manner established by the Fund. With respect to each Account,
the Company will vote Shares held by the Account and for which no timely voting
instructions are received from the Contract owners, as well as Shares held by
the Account that are owned by the Company for its general account, in the same
proportion as the Company votes Shares held by the Account for which timely
voting instructions are received from Contract owners. The Company and its
agents will in no way recommend or oppose or interfere with the solicitation of
proxies for Shares held by Contract owners without the prior written consent of
the Fund, which may be withheld in the Fund's sole discretion.
11. REPRESENTATIONS. (a) The Company represents and warrants that it is an
insurance company duly organized and in good standing under the laws of its
state of incorporation and that it has legally and validly established each
Contract and Account.
(b) The Company represents and warrants that it has registered or, prior
to any issuance or sale of the Contracts, will register each Account as a unit
investment trust ("UIT") in accordance with the provisions of the 1940 Act and
cause each Account to remain so registered to serve as a segregated asset
account for the Contracts unless an exemption from registration is available.
(c) The Company represents and warrants that the Contracts will be
registered under the 1933 Act unless and exemption from registration is
available prior to any issuance or sale of the Contracts and that the Contracts
will be issued and sold in compliance in all material respects with applicable
federal and state laws and further that the sale of the Contracts shall comply
in all material respects with state insurance law suitability requirements.
(d) The Company represents and warrants that the Contracts are currently
and at the time of issuance will be treated as life insurance, endowment or
annuity contracts under applicable provisions of the Internal Revenue Code, that
it will maintain such treatment and that it will notify the Fund immediately
upon having a reasonable basis for believing that the Contracts have ceased to
be so treated or that they might not be so treated in the future.
(e) The Fund represents and warrants that the Shares offered and sold
pursuant to this Agreement will be registered under the 1933 Act to the extent
required by that Act and sold in accordance with all applicable federal and
state laws, and that the Fund shall be registered under the 1940 Act to the
extent required by that Act, prior to and at the time of any issuance or sale of
such Shares. The Fund shall qualify its Shares for sale in accordance with the
laws of the various states only if and to the extent deemed advisable by the
Fund.
(f) The Fund represents and warrants that each Series will comply with the
diversification requirements set forth in Section 817(h) of the Internal Revenue
Service and applicable regulations thereunder and will notify the Company
immediately upon having a reasonable basis for believing any Series has ceased
to comply or might not so comply and will immediately take all reasonable steps
to adequately diversify the Series to achieve compliance.
(g) The Fund represents and warrants that each Series in which the
Accounts invest is currently qualified as a "regulated investment company" under
Subchapter M of the Internal Revenue Code and will maintain such qualification.
4
<PAGE>
The Fund will notify the Company immediately upon having a reasonable basis for
believing any Series has ceased to comply or might not so comply in the future.
12. INDEMNIFICATION. (a) The Fund agrees to indemnify, defend and hold the
Company, its officers, directors, employees and agents and any person who
controls the Company within the meaning of Section 15 of the 1933 Act (referred
to in this Section 11(a) collectively as "Indemnified Parties"), 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, amounts paid in settlement with the consent of the Fund and any
counsel fees incurred in connection therewith) which the Indemnified Parties may
incur under the 1933 Act, or under common law or otherwise, (i) arising out of
or based upon any alleged untrue statement of a material fact contained in the
Fund Registration Statement or arising out of or based upon any alleged omission
to state a material fact required to be stated in the Fund 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 or on behalf of the Company to the Fund for use in the Fund
Registration Statement or otherwise for use in connection with the sale of
Contracts or Shares; (ii) arising out of or based upon statements or
representations (other than statements or representations made in reliance upon
and in conformity with information furnished in writing by or on behalf of the
Company) or wrongful conduct of the Fund or persons under its control concerning
the sale or distribution of the Contracts or Shares; (iii) arising out of or
based upon any alleged omission to state a material fact required to be stated
in the registration statement for the Contracts (including any amendment or
supplement to the prospectus or statement of additional information) ("Contract
Registration Statement") or necessary to make the statements therein not
misleading, if 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 or on behalf of the Fund to the Company for use in the Contract
Registration Statement; or (iv) arise out of or result from any material breach
of the representations and/or warranties made by the Fund in this Agreement or
any other material breach of this Agreement by the Fund. In no event shall
anything contained herein be so construed as to protect the Company against any
liability to the Fund or to the shareholders of any Series to which the Company
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 Agreement.
(b) The Fund shall not be liable to the Company under this indemnity
agreement with respect to any claim made against the Company or any other
Indemnified Party unless the Company or other such person shall have notified
the Fund in writing of the claim within a reasonable time after the summons or
other first written notification giving information of the nature of the claim
shall have been served upon the Indemnified Party (or after the Indemnified
Party 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
5
<PAGE>
liability which it may have to an Indemnified Party 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 the Indemnified Parties 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 Parties 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 Parties for the reasonable fees and expenses of
any counsel retained by them.
(c) The Company agrees to indemnify, defend, and hold the Fund, its
officers, trustees, employees and agents and any person who controls the Fund
within the meaning of Section 15 of the 1933 Act (in this Section 11(b),
referred to collectively as "Indemnified Parties") , 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,
amounts paid in settlement with the consent of the Company and any counsel fees
incurred in connection therewith) which the Indemnified Parties may incur under
the 1933 Act or under common law or otherwise (i) arising out of or based upon
any alleged untrue statement of a material fact contained in the Contract
Registration Statement or in the Contracts themselves or in any sales literature
generated or approved by the Company on behalf of the Contracts or Accounts or
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 Contract
Registration Statement, Contracts or such sales literature 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 or on behalf of the Fund to
the Company for use in the Contract Registration Statement, the Contracts or
such sales literature or otherwise for use in connection with the sale of
Contracts or Shares; (ii) arising out of or based upon statements or
representations (other than statements made in reliance upon and in conformity
with information furnished in writing by or on behalf of the Fund) or wrongful
conduct of the Company or persons under its control concerning the sale or
distribution of the Contracts or Shares; (iii) arising out of or based upon any
alleged omission to state a material fact required to be stated in the Fund
Registration Statement or necessary to make the statements therein not
misleading, if 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 or on behalf of the Company to the Fund for use in the Fund
Registration Statement; or (iv) arise out of or result from any material breach
of the representations and/or warranties made by the Company in this Agreement
or any other material breach of this Agreement by the Company.
(d) The Company shall not be liable to the Fund under this indemnity
agreement with respect to any claim made against the Fund or any other
Indemnified Party unless the Fund or other such person shall have notified the
Company 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 the Indemnified Party (or after the Indemnified
6
<PAGE>
Party shall have received notice of service on any designated agent). However,
failure to notify the Company of any claim shall not relieve the Company from
any liability which it may have to an Indemnified Party otherwise than on
account of this indemnity agreement. The Company 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 Company elects to assume the defense of any such claim, the
defense shall be conducted by counsel chosen by the Company and satisfactory to
the Indemnified Parties in the suit whose approval shall not be unreasonably
withheld. In the event that the Company elects to assume the defense of a suit
and retain counsel, the Indemnified Parties shall bear the fees and expenses of
any additional counsel retained by them. If the Company does not elect to assume
the defense of any suit, it will reimburse the Indemnified Parties for the
reasonable fees and expenses of any counsel retained by them.
(e) These indemnification provisions shall survive termination of this
Agreement.
13. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS OF THE FUND.
The trustees of the Fund and the shareholders of its Series shall not be liable
for any obligations of the Fund or any Series under this Contract, and the
Company agrees that, in asserting any rights or claims under this Contract, it
shall look only to the assets and property of the Fund or the particular Series
in settlement of such right or claims, and not to such trustees or shareholders.
14. POTENTIAL CONFLICTS. (a) The trustees of the Fund will monitor the
operations of the Fund for the existence of any material irreconcilable conflict
among the interests of all Contract owners of all separate accounts investing in
each Series of the Fund. An irreconcilable conflict may arise, among other
things, from (a) an action by any sate insurance regulatory authority; (b) a
change in applicable insurance laws or regulations; (c) a tax ruling or
provision of the Internal Revenue Code or the regulations thereunder; (d) any
other development relating to the tax treatment of insurers, contract holders or
policy owners or beneficiaries of variable annuity or variable life insurance
products; (e) the manner in which the investments of any Series are managed; (f)
a difference in voting instructions given by variable annuity contract owners,
on the one hand, and variable life insurance policy owners on the other hand, or
by the contract holders or policy owners of different Participating Insurance
Companies; or (g) a decision by an insurer to override the voting instructions
of participating contract owners.
(b) The Company is responsible for reporting any potential or existing
conflicts to the trustees of the Fund. The Company will be responsible for
assisting the trustees in carrying out their responsibilities under this Section
14(b) and Section 14(a), by providing the trustees with all information
reasonably necessary for them to consider the issues raised. The Fund will also
request its investment adviser to report to the trustees any such conflict which
comes to the attention of the adviser.
(c) If a majority of the trustees of the Fund or a majority of its
disinterested trustees determine that a material irreconcilable conflict exists
involving the Company, the Company shall, at its expense and to the extent
reasonably practicable (as determined by a majority of the disinterested
trustees), take whatever steps are necessary to eliminate the irreconcilable
7
<PAGE>
material conflict, including withdrawing the assets allocable to some or all of
the separate accounts from the Fund or any Series and reinvesting such assets in
a different investment medium, including another Series of the Fund, offering to
the affected Contract owners the option of making such a change or establishing
a new funding medium, including a registered investment company.
For purposes of this Section 14(c), the trustees or the disinterested
trustees shall determine whether any proposed action adequately remedies any
irreconcilable material conflict. In the event of a determination of the
existence of an irreconcilable material conflict, the trustees shall cause the
Fund to take such action, such as the establishment of one or more additional
Series, as they in their sole discretion determine to be in the interest of all
shareholders and Contract owners in view of all applicable factors, such as the
cost, feasibility, tax, regulatory and other considerations. In no event will
the Fund be required by this Section 14(c) to establish a new funding medium for
any Contract.
The Company shall not be required by this Section 14(c) to establish a new
funding medium for any Contract if an offer to do so has been declined by a vote
of a majority of the Contract owners materially adversely affected by the
material irreconcilable conflict. The Company will recommend to its Contract
owners that they decline an offer to establish a new funding medium only if the
Company believes it is in the best interests of the Contract owners.
15. DURATION AND TERMINATION. This Agreement shall become effective as of
the date hereof and shall continue in force until terminated as set forth below:
(a) At the option of either party, upon 90 days' notice, unless a shorter
time is agreed to by the parties;
(b) At the option of either party, upon the institution of formal
proceedings against the other party by the SEC, the NASD or any other regulatory
body, the expected or anticipated outcome of which would, in the judgment of the
terminating party, materially impair the other party's ability to meet and
perform its obligations under this Agreement. Prompt notice of an election to
terminate under this provision shall be furnished by the terminating party and
shall be effective upon receipt.
(c) In the event the Fund's Shares are not registered, issued or sold in
accordance with applicable federal or state law or such law precludes the use of
Shares as the underlying investment medium of the Contracts, the Company may
terminate this Agreement effective upon giving notice to the Fund.
(d) In the event the Contracts cease to qualify as annuity contracts or
life insurance contracts, as applicable under the Code 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.
(e) At the option of the Fund, upon the Company's breach of any material
provision of this Agreement, which breach has not been cured to the satisfaction
of the Fund within 10 days after written notice of such breach is delivered to
the Company.
8
<PAGE>
(f) At the option of the Company, upon the Fund's breach of any material
provision of this Agreement, which breach has not been cured to the satisfaction
of the Company within 10 days after written notice of such breach is delivered
to the Fund.
(g) At the option of the Fund, if the Contracts are not registered, issued
or sold in accordance with applicable federal and/or state law. Termination
shall be effective immediately without notice.
(h) If this Agreement is assigned without the prior written consent of the
other party, termination shall be effective immediately without notice.
16. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement 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.
17. GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of Delaware and the 1940 Act, except that Section 13 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 of Massachusetts conflict with the applicable provisions of the
l940 Act, the latter shall control.
18. 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.
9
<PAGE>
19. MISCELLANEOUS. 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. 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. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors. As used in this
Agreement, the terms "assignment" shall have the same meaning as such terms have
in the l940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated as of the day and year first above
written.
ATTEST: MITCHELL HUTCHINS SERIES TRUST
_____________________________ By: _____________________________
ATTEST:
_____________________________ By: _____________________________
10
<PAGE>
SCHEDULE A
Accounts of Company Participating in Series of Mitchell Hutchins Series
Trust:
Name of Separate Account Date Established
11
<PAGE>
SCHEDULE B
Series of Mitchell Hutchins Series Trust offered to Accounts of Company:
Strategic Income Portfolio
Global Income Portfolio
High Income Portfolio
Balanced Portfolio
Growth and Income Portfolio
Tactical Allocation Portfolio
Growth Portfolio
Small Cap Portfolio
12
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 4, 2000
Mitchell Hutchins Series Trust
51 West 52nd Street
New York, New York 10019-6114
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 fourteen series of the Trust listed
below that may be issued during the time that Post-Effective Amendment No. 30 to
the Trust's Registration Statement on Form N-1A ("PEA") is effective and has not
been superseded by another post-effective amendment. The fourteen current series
of the Trust are Aggressive Growth Portfolio, Balanced Portfolio, Global Equity
Portfolio, Global Income Portfolio, Growth and Income Portfolio, Growth
Portfolio, High Grade Fixed Income Portfolio, High Income Portfolio, Money
Market Portfolio, Small Cap Portfolio, Strategic Fixed Income Portfolio,
Strategic Income Portfolio, Tactical Allocation Portfolio and Strategy
Portfolio.
As such counsel, we have examined certified or other copies, believed by
us to be genuine, of the Trust's Declaration of Trust and by-laws and such
resolutions and minutes of meetings of the Trust's Board of Trustees as we have
deemed relevant to our opinion, as set forth herein. Our opinion is limited to
the laws and facts in existence on the date hereof, and it is further limited to
the laws (other than the conflict of law rules) of the Commonwealth of
Massachusetts that in our experience are normally applicable to the issuance of
shares by investment companies organized as business trusts in that State and to
the Securities Act of 1933 ("1933 Act"), the Investment Company Act of 1940
("1940 Act") and the regulations of the Securities and Exchange Commission
("SEC") thereunder.
Based on the foregoing, we are of the opinion that the issuance of the
Shares has been duly authorized by the Trust and that, when sold in accordance
with the terms contemplated by the PEA, including receipt by the Trust of full
payment for the Shares and compliance with the 1933 Act and the 1940 Act, the
Shares will have been validly issued, fully paid and non-assessable.
We note, however, that the Trust is an entity of the type commonly known
as a "Massachusetts business trust." Under Massachusetts law, shareholders
could, under certain circumstances, be held personally liable for the
<PAGE>
Mitchell Hutchins Series Trust
April 4, 2000
Page 2
obligations of the Trust. The Declaration of Trust states that creditors of,
contractors with and claimants against the Trust or any series shall look only
to the assets of the Trust for the appropriate series for payment. It also
requires that notice of such disclaimer be given in each note, bond, contract,
certificate, undertaking or instrument made or issued by the officers or the
trustees of the Trust on behalf of the Trust. The Declaration of Trust further
provides: (1) for indemnification from the assets of the Trust or the
appropriate series for all loss and expense of any shareholder held personally
liable for the obligations of the Trust or any series by virtue of ownership of
shares of the Trust or such series; and (2) for the Trust or appropriate series
to assume the defense of any claim against the shareholder for any act or
obligation of the Trust or series. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Trust or series would be unable to meet its obligations.
We hereby consent to this opinion accompanying the PEA when it is filed
with the SEC and to the reference to our firm in the statement of additional
information that is being filed as part of the PEA.
Very truly yours,
/s/ Kirkpatrick & Lockhart LLP
KIRKPATRICK & LOCKHART LLP
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
Equity 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 16, 2000, 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
March 31, 2000
<PAGE>
Exhibit No. 10
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Auditors" in the
Statement of Additional Information of the Strategy Portfolio, 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
March 31, 2000
EXHIBIT NO. 16(c)
1.1.1 CODE OF ETHICS INVISTA CAPITAL MANAGEMENT, LLC
I. Statement of Purpose and General Principles
The purpose of this Code of Ethics ("Code") is to prevent conflicts of
interest which may exist, or appear to exist, when persons associated with
Invista Capital Management ("Invista") own or engage in transactions
involving securities that are owned or are being purchased or sold or are
being considered for purchase or sale for the accounts of clients of
Invista. Central to this Code are the following fiduciary principles:
A. The duty at all times to place the interests of clients first.
B. The requirement that all personal securities transactions be
conducted consistent with this Code, and in such a manner as to avoid
any actual or potential conflict of interest or abuse of an
individual's position of trust and responsibility.
C. The fundamental standard that persons associated with Invista should
not take inappropriate advantage of their positions.
II. Definitions:
A. SECURITY: Shall have the meaning set forth in Section 202(a)(18) of
the Investment Advisers Act, except it shall not include securities
issued by the Government of the United States, bankers' acceptances,
certificates of deposit, commercial paper, or shares of open-end
management investment companies (i.e. mutual funds).
B. ACCESS PERSON: "Access person" means any (1) director or officer of
Invista or (2) employee of Invista who in the regular course of his
or her duties makes, participates in or obtains information regarding
the purchase or sale of securities for the accounts of clients of
Invista or whose functions relate to the making of any
recommendations with respect to such purchases and sales.
Access Persons consist of these sub-categories: (1) Portfolio Managers
(individuals entrusted with the direct responsibility and authority to
make investment decisions affecting the accounts of clients of
Invista), (2) Investment Personnel (which include Portfolio Managers
as well as portfolio strategists, analysts and traders), and (3) Other
Access Persons (all persons who are not included in sub-categories 1
or 2).
C. PURCHASE OR SALE: A security is being considered for purchase or sale
when a Portfolio Manager views the purchase or sale of the security
for a client account as probable. The phrase "purchase or sale of a
security" includes the writing of an option to purchase or sell a
security or the purchase of an option to purchase or sell a security.
D. BENEFICIAL OWNERSHIP: "Beneficial ownership" shall be interpreted
in the same manner as in determining whether a person is subject to
the provisions of Section 16 of the Securities Exchange Act of 1934
and the rules and regulations thereunder, except that the
determination of direct and indirect beneficial ownership shall
apply to all securities which a person owns. For example, the term
"Beneficial Ownership" encompasses (i) in addition to securities in
<PAGE>
a person's own account(s), securities owned by members of the
person's immediate family sharing the same household, and (ii)
securities a person might acquire or dispose of through the
exercise or conversion of any derivative security, whether
presently exercisable or not.
E. RESTRICTED LISTS: A record known as the "Restricted Equity
Securities List" shall be maintained by the securities trading
area. The List shall include the names of all securities that are
(1) currently being bought, or which Invista expects to buy, for
client accounts, and (2) currently held in client accounts;
provided however that any security an index account is currently
buying or which such account currently holds shall not be included
on the Restricted Equity Securities List.
The reference date for determining when Invista "expects to buy" is
the date on which a Portfolio Manager views the purchase of the
security for a client account as probable. Names of securities shall
be removed from the Restricted List 15 days after Invista has (1)
ceased considering the security for purchase or (2) entirely
liquidated its position in such security.
A record known as the "Restricted Debt Securities List" shall be
maintained by Invista's affiliate, Principal Capital Management, LLC.
III. Exempted Transactions. This Code shall not apply to:
A. Sales made pursuant to a general public tender offer.
B. The acceptance of stock dividends of securities already owned; the
reinvestment of cash dividends of securities already owned under a
dividend reinvestment program or the participation in a monthly
investment plan for the purchase of a security already owned (Note:
The initial purchase or establishment of a dividend reinvestment
program or automatic investment plan must be precleared).
C. Purchases effected upon the exercise of rights issued by an issuer
PRO RATA to all holders of a class of securities, to the extent such
rights are acquired directly from the issuers thereof, and sales of
such rights.
D. Exercising or selling options or rights to exchange or convert
securities, but only when those instruments have been acquired or
disposed of in accordance with the Code.
E. Purchases or sales effected in any account over which the Access
Person has no direct or indirect influence or control.
F. Purchases or sales which are non-volitional on the part of either the
Access Person or one of the client accounts.
<PAGE>
IV. Restricted and Prohibited Transactions
A. No Investment Personnel may acquire, directly or indirectly,
beneficial ownership in any security that is part of an initial
public offering.
B. No Investment Personnel may acquire, directly or indirectly,
beneficial ownership in any security in a private placement
transaction without prior approval.
Investment Personnel who have acquired securities in a private
placement transaction must disclose that investment when they play a
part in any consideration of an investment in the issuer of the
privately placed security for a client account. In such circumstances
a decision to purchase securities of the issuer for a client account
must be subject to an independent review by Investment Personnel with
no personal interest in the issuer.
C. No Access Person may purchase or sell a security in which he or she
has, or by reason of such transaction acquires, any direct or
indirect beneficial ownership while that security is listed on a
Restricted List, except as provided elsewhere in this Code. See V.
Preclearance.
No Portfolio Manager may purchase or sell a security in which he or
she has, or by reason of such transaction acquires, any direct or
indirect beneficial interest within 7 days before and after a client
account that he or she manages trades in that security.
D. Investment Personnel may not profit directly or indirectly from the
acquisition and disposition (or disposition and acquisition of
beneficial ownership) of the same (or equivalent) securities within
60 calendar days. Any profits realized on such short-term trades must
be disgorged to a charitable organization determined by management of
Invista.
Investment Personnel may request exceptions to this prohibition prior
to realizing the profit. Such exceptions will be considered on a
case-by-case basis, taking into consideration the facts and
circumstances of each situation.
V. Preclearance
A. Portfolio Managers (Refer also to Section IV. C.)
Portfolio Managers may request permission to trade any security on
the Restricted Debt Securities List. Portfolio Managers may also
request permission to trade securities on the Restricted Equity
Securities List in an amount each calendar quarter that is the
greater of 500 shares or 1% of the daily average trading volume
during the 90 days prior to the date the Portfolio Manager makes the
request; provided however Portfolio Managers may not purchase or sell
any security within seven (7) days before and after a client account
the Portfolio Manager manages purchased or sold the security.
Requests for approval may be made by contacting the person
<PAGE>
responsible for maintaining the Restricted Debt Securities List or
the Restricted Equity Securities List.
Approvals to trade are valid for 24 hours after given. Portfolio
Managers who desire an approval that is valid for a longer period may
make such a request when seeking approval to trade.
B. Access Persons Other Than Portfolio Managers
Access Persons other than Portfolio Managers may request permission
to trade any security on the Restricted Debt Securities List. Access
Persons may also request permission to trade securities on the
Restricted Equity Securities List in an amount each calendar quarter
that is the greater of 500 shares or 1% of the daily average trading
volume during the 90 days prior to the date the Access Person makes
the request.
Requests for approval may be made by contacting the person responsible
for maintaining the Restricted Debt Securities List or the Restricted
Equity Securities List.
Approvals to trade are valid for 24 hours after given. Access Persons
who desire an approval that is valid for a longer period may make such
a request when seeking approval to trade.
VI. Disclosure of Securities Ownership and Securities Transactions
A. When recommending the purchase or sale of securities for a client
account in accordance with portfolio management procedures,
Investment Personnel must disclose any direct or indirect beneficial
ownership in any security of the issuer whose securities are under
consideration.
B. All Access Persons shall file a report listing all their personal
securities transactions during the previous calendar quarter in any
security (as defined in Section II, A.) in which such person has
acquired or sold any direct or indirect beneficial ownership
including transactions exempt from this Code under Section III.
The report shall be made on a form provided by Invista within 10
days following the end of such calendar quarter. The report shall
contain the following information:
1. The date of the transaction, the title and the number of shares
or the principal amount of each security involved;
2. The nature of the transactions (e.g., purchase or sale);
3. The price at which the transaction was effected;
4. The name of the broker, dealer or bank with or through which the
transaction was effected; and
<PAGE>
5. If a sale transaction, the date on which the security was
acquired and the cost basis of the security.
C. Access Persons must direct brokerage and other firms with which they
have securities accounts to furnish Invista on a timely basis
duplicate copies of confirmations of all personal securities
transactions.
D. Access Persons must direct brokerage and other firms with which they
have securities accounts to furnish Invista on a timely basis a
duplicate copy of the Access Person's December 31 account statement.
E. Access Persons who are Portfolio Managers must give Invista a listing
of all securities in which they have a direct or indirect beneficial
ownership at the time of their appointment as a Portfolio Manager,
and thereafter on an annual basis as of December 31 of each year.
VII. Certification of Compliance
All Access Persons will be required to certify annually that they have
read and understand the Code and its applicability to them, and that they
have complied with the requirements of the Code and that they have
disclosed or reported all personal securities transactions as required by
the Code.
VIII. Gifts
Investment Personnel are prohibited from receiving any gift or other thing
having a value of more than $100 in the aggregate in any calendar year
from any person or entity that does business with or on behalf of Invista.
Gifts do not include occasional dinners, sporting events or other
entertainment that Investment Personnel attend with their host.
IX. Service as a Corporate Director
Investment Personnel are prohibited from serving on the board of directors
of a publicly traded company, absent prior authorization based on a
determination that board service would be consistent with the interest of
Invista clients.
X. Administration and Sanctions
A. Responsibility for this Code is vested in the Chairman of the Board
of Directors of Invista. (Administrative responsibility has been
delegated to Dennis Cameron. Requests for interpretation of this Code
or for preclearance of purchase or sales that are not clearly
addressed by this
Code should be directed (in order to be contacted) to: J. B.
Schustek, E. H. Gillum, A. S. Filean, M. D. Roughton, R. C.
Eucher).
<PAGE>
B. Upon discovering a violation of this Code, the Chairman of Invista
shall impose such sanctions as the Chairman deems appropriate.
C. Annually, those individuals charged with the responsibility for
carrying out this Code shall prepare a report to the Board of
Directors of Invista that, as a minimum, will include:
1. A summary of existing procedures concerning personal investing,
and any procedural changes made during the past year.
2. Identification of violations requiring significant remedial
action during the past year.
3. Recommendations, if any, as to changes in existing restrictions
or procedures based on experience with this Code, evolving
industry practices or developments in applicable laws or
regulations.
EXHIBIT NO. 16(d)
NICHOLAS-APPLEGATE
================================================================================
- --------------------------------------------------------------------------------
CODE OF ETHICS AND CONDUCT
- --------------------------------------------------------------------------------
<PAGE>
NICHOLAS-APPLEGATE
CAPITAL MANAGEMENT
================================================================================
NICHOLAS-APPLEGATE SECURITIES
================================================================================
NICHOLAS-APPLEGATE INSTITUTIONAL FUNDS
<PAGE>
MESSAGE FROM THE MANAGING PARTNER
Nicholas-Applegate, quite simply, does not exist without our clients. While it's
true we are an investment management firm, known for providing excellent
investment returns and client service, a large part of our success is built on
our reputation for integrity and professionalism. Our clients place not only
their money, but also their trust with us when they hire us. It is up to us as a
firm, and each one of us individually, to ensure that trust is upheld. Without
it, we would not have a single client, regardless of our investment returns.
With this in mind, the firm has long had a formal Code of Ethics in place. Every
employee commits to follow this Code when he/she joins the firm, and we, as a
firm, are committed to the principles embodied by the Code. The driving
principle is actually pretty easy to express: "Our clients come first."
Everything, really, flows from that simple statement. When you review and sign
the attached Code of Ethics, I'd like you to keep these principles in mind and
know that they are supported at our firm from the top down. I'd also like you to
recognize that ultimately the Code of Ethics is really just an expression about
the way we, as a firm, want to do business, and that it is our responsibility
individually, and as a firm, to ensure the Code is followed in spirit, as well
as word. The Code can't cover every individual situation that may come up, so we
must all use our best efforts to apply the principles of the Code in our
everyday business. We, and our clients, should expect nothing less.
Art Nicholas
i
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
A. DEFINITIONS .....................................................A-1
I. INTRODUCTION & OVERVIEW............................................1
II. PERSONS COVERED BY THIS CODE
A. EMPLOYEES & COVERED PERSONS.....................................3
B. OUTSIDE FUND DIRECTORS /TRUSTEES................................3
C. THE ADMINISTRATOR...............................................4
III. PERSONAL SECURITIES TRANSACTIONS
A. COVERED SECURITIES & TRANSACTIONS...............................5
B. EXEMPT SECURITIES & TRANSACTIONS................................5
IV. PROCEDURES FOR TRADING SECURITIES
A. PRE-CLEARANCE................................................7
B. VIOLATIONS...................................................8
C. HOLDING PERIOD RESTRICTION..................................10
D. BLACKOUT PERIOD.............................................10
E. DE MINIMIS TRANSACTIONS.....................................10
F. INITIAL PUBLIC OFFERINGS ("IPOS") & PRIVATE PLACEMENTS......11
G. FRONT-RUNNING...............................................11
H. INSIDE INFORMATION..........................................11
V. REPORTS & CERTIFICATIONS REGARDING PERSONAL SECURITIES TRANSACTIONS
-------------------------------------------------------------------------
A. PERSONAL HOLDINGS REPORTS...................................13
B. MONTHLY TRANSACTION & GIFT REPORTS..........................13
C. DUPLICATE BROKERAGE STATEMENTS & CONFIRMATIONS..............14
D. CERTIFICATION OF COMPLIANCE.................................14
VI. POTENTIAL CONFLICT OF INTEREST ISSUES
A. SERVICE ON BOARDS OF OTHER COMPANIES........................15
B. GIFTS.......................................................15
C. GIFT PRE-CLEARANCE..........................................15
D. GIFT VIOLATIONS.............................................16
ii
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS (CONT'D)
- --------------------------------------------------------------------------------
VII. VIOLATIONS OF THE CODE ...........................................17
VIII. ANNUAL BOARD REVIEW ..............................................18
IX. ADMINISTRATION & CONSTRUCTION ....................................19
X. AMENDMENTS & MODIFICATIONS........................................20
- --------------------------------------------------------------------------------
POLICIES & PROCEDURES - INSIDER TRADING POLICY .............. APPENDIX I
EXAMPLES OF BENEFICIAL OWNERSHIP ............................ APPENDIX II
PERSONAL TRADING RESTRICTION SUMMARY ........................ APPENDIX III
EXCEPTIONS TO BAN ON SHORT-TERM TRADING ..................... APPENDIX IV
CODE OF ETHICS SIGNATURE PAGES............................... APPENDIX V
iii
<PAGE>
- --------------------------------------------------------------------------------
DEFINITIONS
- --------------------------------------------------------------------------------
THE FOLLOWING DEFINITIONS APPLY TO THIS CODE OF ETHICS:
NACM Nicholas-Applegate Capital Management, Inc., a
CA LP
NAS Nicholas-Applegate Securities
NAIF OR FUNDS Nicholas-Applegate Institutional Funds
NA Nicholas-Applegate (I.E., NACM, NAS and NAIF)
CODE NA Code of Ethics
EMPLOYEES All officers, partners and employees of NACM and
NAS, well as part-time employees, consultants,
temps and interns after one month
COVERED PERSONS Any Employee and any relative by blood or marriage
living in the Employee's household or any person
who holds an account that names Employee as a
beneficiary or otherwise
INVESTMENT PERSONNEL Trading Desk personnel, portfolio managers and
financial analysts
ADMINISTRATOR Brown Brothers Harriman - Administrator of the
Funds
ADVISORY CLIENTS Shareholders of funds, institutional clients and
any other person or entity whom NA provides
investment advisory services
EXEMPT TRANSACTIONS Any transaction that does not require pre-
clearance by NA's Compliance Department prior to
execution (E.G., open-end mutual funds, U.S,
government securities and named indices as listed
in the Code at APPENDIX IV)
TRUSTEES Trustees of the Funds
BENEFICIAL OWNERSHIP For purposes of this Code, "beneficial
ownership" means any interest in a security for
which a Covered Person can directly or
indirectly receive a monetary benefit, including
the right to buy or sell a security, to direct
the purchase or sale of a security, or to vote
or direct the voting of a security. Please
refer to APPENDIX II for additional examples of
beneficial ownership
A-1
<PAGE>
NON-EMPLOYEE TRUSTEES Trustees of the Funds who are not Employees of
NACM or NAS (including employees of the
Administrator)
PERSONAL SECURITIES Any trade in debt or equity securities executed
TRANSACTION on a stock market, or other securities not
defined as "exempt securities" under the NA Code
of Ethics, by a Covered Person. This includes all
futures, options, warrants, short-sells, margin
calls, or other instrument of investment relating
to an equity security
EXEMPT SECURITIES Securities, which, under the Code, do not require
pre-clearance authorization by the Compliance
Department (see page 11 and APPENDIX IV)
BLUEFORM Monthly Personal Securities Transaction and Gift
Report
INSIDER Persons who are officers, directors, employees
and spouse and anyone else who is privy to
inside information
INSIDER TRADING Buying or selling of a security while in
possession of material, non-public information or
anyone who has communicated such information in
connection with a transaction that results in a
public trade or information service or medium
NON-PUBLIC INFORMATION Any information that is not made known via a
public magazine, newspaper or other public
document
ACCESS PERSON Any Employee of NA, including temporary
employees (if here more than one month), interns
and consultants (working on NA premises)
OPEN-END INVESTMENT Funds that continuously offer new shares and
COMPANIES (OPEN-END redeem outstanding shares at NAV on any business
MUTUAL FUNDS) day. Shares are purchased directly from the
distributor of the funds
CLOSED-END INVESTMENT Funds whose shares traded on the secondary
COMPANIES market with most being listed on stock
exchanges. New shares are not continuously
offered, nor are outstanding shares redeemable.
A-2
<PAGE>
CODE OF ETHICS AND CONDUCT
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
NICHOLAS-APPLEGATE SECURITIES
NICHOLAS-APPLEGATE INSTITUTIONAL FUNDS
REVISED AS OF MARCH 20, 2000
- --------------------------------------------------------------------------------
I. INTRODUCTION & OVERVIEW
- --------------------------------------------------------------------------------
Nicholas-Applegate Capital Management ("NACM"), Nicholas-Applegate
Securities ("NAS") and Nicholas-Applegate Institutional Funds ("NAIF")
(collectively, "NA") have developed and maintain a reputation for
integrity and high ethical standards. Therefore, it is essential not only
that NA and its employees comply with relevant federal and state
securities laws, but that we also maintain high standards of personal and
professional conduct. NA's Code of Ethics and Conduct (the "Code") is
designed to help ensure that we conduct our business in a manner
consistent with these high standards.
As a registered investment adviser, NA and its employees owe a fiduciary
duty to our clients that requires each of us to place the interests of our
clients ahead of our own. A critical component of meeting our fiduciary
duty is to avoid potential conflicts of interest. Accordingly, you must
avoid all activities, interests and relationships that interfere or appear
to interfere with making decisions in the best interests of the
shareholders of NAIF (or "Funds") and any other person or entity to which
NA provides investment advisory services (together, "Advisory Clients").
Please bear in mind a conflict of interest can arise even if there is no
financial loss to Advisory Clients and regardless of the employee's
motivation. Many potential conflicts of interest can arise in connection
with employee personal trading and related activities. The Code is
designed to address and prevent potential conflicts of interest pertaining
to personal trading and related activities and is based on the following
principles:
1) WE MUST AT ALL TIMES PLACE THE INTERESTS OF OUR ADVISORY CLIENTS
FIRST. In other words, as a fiduciary, you must scrupulously avoid
serving your own personal interests ahead of the interests of NA
Advisory Clients.
2) We must make sure that all PERSONAL SECURITIES TRANSACTIONS ARE
CONDUCTED CONSISTENT WITH THE CODE and in such a manner as to avoid
any actual or potential conflicts of interest or any abuse of an
individual's position of trust and responsibility.
3) WE MUST NOT TAKE INAPPROPRIATE ADVANTAGE OF OUR POSITIONS. The
receipt of investment opportunities, perquisites, or gifts from
persons seeking business with NA could call into question the
exercise of your independent judgment.
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The Code contains policies and procedures relating to personal trading by
Covered Persons, as well as Trustees of the Funds.
- --------------------------------------------------------------------------------
YOU MUST BECOME FAMILIAR
WITH AND ABIDE BY THE CODE
- --------------------------------------------------------------------------------
Compliance with the Code is a condition of your employment with NA.
Violations of the Code will be taken seriously and will result in
sanctions against the violator, up to and including termination of
employment.
As with all policies and procedures, the Code was designed to apply to a
myriad of circumstances and conduct. However, this Code is not intended to
be all-inclusive as no policy can anticipate every potential conflict of
interest that can arise in connection with personal trading.
- --------------------------------------------------------------------------------
YOU ARE EXPECTED TO ABIDE NOT ONLY BY THE LETTER OF THE CODE,
BUT ALSO BY THE SPIRIT OF THE CODE
- --------------------------------------------------------------------------------
Whether or not a specific provision of the Code addresses a particular
situation, you must conduct your activities in accordance with the general
principles contained in the Code and in a manner that is designed to avoid
any ACTUAL OR POTENTIAL conflicts of interest. NA reserves the right, when
it deems necessary in light of particular circumstances, to impose more
stringent requirements on those persons subject to the Code, or to grant
exceptions to the Code.
Because governmental regulations and industry standards relating to
personal trading and potential conflicts of interest can evolve over time,
NA reserves the right to modify any or all of the policies and procedures
set forth in the Code. If NA revises the Code, the Director of Compliance
will provide you with written notification of the changes. You must
familiarize yourself with any modifications to the Code.
IF YOU HAVE ANY QUESTIONS ABOUT ANY ASPECT OF THE CODE, OR IF YOU HAVE
QUESTIONS REGARDING APPLICATION OF THE CODE IN A PARTICULAR SITUATION,
CONTACT THE COMPLIANCE DEPARTMENT.
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- --------------------------------------------------------------------------------
II. PERSONS COVERED BY THIS CODE
- --------------------------------------------------------------------------------
A. EMPLOYEES & COVERED PERSONS
The policies and procedures set forth in the Code apply to all officers,
principals and employees of NACM and NAS (collectively, "Employees"). The
Code also applies to all temporary employees, consultants and interns (if
here more than one month) who work for NA on premises.
The policies and procedures set forth in the Code also apply to all
members of an Employee's immediate family which, for purposes of the Code,
refers to ANY RELATIVE BY BLOOD OR MARRIAGE LIVING IN THE EMPLOYEE'S
HOUSEHOLD (together with Employees, "Covered Persons").
- --------------------------------------------------------------------------------
THE CODE ALSO APPLIES TO ACCOUNTS IN WHICH THE
EMPLOYEE IS NAMED AS A BENEFICIARY, TRUSTEE OR
IS OTHERWISE ABLE TO EXERCISE INVESTMENT CONTROL
- --------------------------------------------------------------------------------
B. OUTSIDE FUND DIRECTORS/TRUSTEES
Special rules apply to Fund Trustees who are not employees of NACM or NAS
("Non-Employee Trustees"). Specifically, Non-Employee Trustees are NOT
subject to the:
o 3-day blackout period;
o prohibition on initial public offerings;
o restrictions on private placements;
o ban on short-term trading profits;
o gift restrictions; or
o restriction on service as a director.
Further, a Non-Employee Trustee is not required to pre-clear personal
securities transactions PROVIDED he or she did not have knowledge of any
current or pending transactions in the Security that have been completed
within the last fifteen (15) calendar days immediately preceding the date
of the transaction.
A Non-Employee Trustee is not required to submit quarterly personal
securities transaction reports, unless he or she knew, or should have
known, in the ordinary course of the fulfillment of his or her official
duties as a trustee of one of the Funds, that during the 15-day period
immediately preceding or following the date of a transaction in a security
by the Non-Employee Trustee that such security was purchased or sold, or
was considered for a purchase or sale, by a Fund or by NA for an Advisory
Client. Non-Employee Trustees also are not required to submit annual
portfolio holdings reports to NA.
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C. THE ADMINISTRATOR
Officers of the Fund who are officers or employees of the Fund's
Administrator are exempt from all provisions of this Code to the extent
that the Administrator has adopted reasonable written policies and
procedures regarding personal securities transactions by its employees.
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- --------------------------------------------------------------------------------
III. PERSONAL SECURITIES TRANSACTIONS
- --------------------------------------------------------------------------------
The firm's policies and procedures set forth in the Code regarding
personal investing apply to ALL personal securities transactions by
Covered Persons, UNLESS a transaction is in an Exempt Security or the
transaction is an Exempt Transaction as defined below.
A. COVERED SECURITIES & TRANSACTIONS
Personal securities transactions subject to the Code include, but are not
limited to:
o equity securities including common and preferred stock, except
as otherwise exempted below;
o investment and non-investment grade debt securities;
o investments convertible into, or exchangeable for, stock or
debt securities;
o any derivative instrument relating to any of the above
securities, including options, warrants and futures;
o any interest in a partnership investment in any of the
foregoing; and
o shares of closed-end investment companies.
B. EXEMPT SECURITIES & TRANSACTIONS
The Code pre-clearance procedures and reporting requirements do not apply
to the following types of securities and transactions, UNLESS SPECIFIED
OTHERWISE, which are referred to as "Exempt Securities" and "Exempt
Transactions":
EXEMPT SECURITIES
1. Shares of registered open-end mutual funds and money market funds;
2. Treasury bonds, treasury notes, treasury bills, U.S. Savings Bonds,
and other instruments issued by the U.S. government or its agencies
or instrumentalities;
3. Debt instruments issued by a banking institution, such as bankers'
acceptances and bank certificates of deposit; (this does not exempt
corporate bonds or high yield bonds)
4. Commercial paper;
5. Municipal bonds; or
6. Stock indices; (SEE APPENDIX IV)
EXEMPT TRANSACTIONS
1. Transactions in an account over which a Covered Person has no direct
or indirect influence or control; or in any account held by a
Covered Person which is managed on a discretionary basis by a person
other than the Covered Person and, with respect to which the Covered
Person does not influence or control the transactions;
2. Transactions that are non-voluntary on the part of the Covered
Person (THESE TRANSACTIONS MUST BE REPORTED ON THE MONTHLY REPORT OR
"BLUE FORM") (E.G., bond calls, stock splits, spin-offs, etc.);
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3. Purchases that are part of an automatic dividend reinvestment plan.
However, your initial purchase into a DRIP program must be
pre-cleared with Compliance and reported on your first monthly
report after starting the program. If you ever contribute more than
the automatic deduction to this plan, you must pre-clear this
transaction as if it were a non-exempt transaction;
4. Purchases as a result of the exercise by a Covered Person of rights
issued pro rata to all holders of a class of securities, to the
extent that such rights were acquired from the issuer, and the sale
of such rights;
5. Other similar circumstances as determined by the Director of
Compliance or General Counsel; or
6. Transactions in options or futures contracts on commodities,
currencies or interest rates.
Additionally, transactions in accounts over which the Covered Person has
no beneficial ownership, nor exercises direct or indirect influence or
control, may be excluded from the Code (and treated as Exempt
Transactions).
IF YOU HAVE ANY QUESTIONS ABOUT WHETHER A PARTICULAR TRANSACTION QUALIFIES
AS AN EXEMPT TRANSACTION, CONTACT THE COMPLIANCE DEPARTMENT OR THE GENERAL
COUNSEL.
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- --------------------------------------------------------------------------------
IV. PROCEDURES FOR TRADING SECURITIES
- --------------------------------------------------------------------------------
Covered Persons wishing to purchase or sell securities for their own
accounts must follow certain procedures designed to avoid actual or
potential conflicts of interest. These procedures include pre-clearing the
transaction, holding the security for at least the required minimum length
of time, and adhering to a blackout period around Advisory Client trades.
Please note that these procedures DO NOT APPLY TO EXEMPT SECURITIES AND
EXEMPT TRANSACTIONS, as described above.
A. PRE-CLEARANCE
As a Covered Person, you must submit an Employee Personal Request (an
electronic pre-clearance form), which can be found on the NA intranet site
at HOME.NACM.COM UNDER TRADING/MONTHLY REPORTS AND FORMS - CTI ITRADE,
prior to the purchase or sale of securities for your own account or any
accounts over which you have control or have a beneficial interest. In
addition, Investment Personnel must have all transactions approved by the
Chief Investment Officer ("CIO") (or investment partner in the CIO's
absence). Requests received without the required signature will not be
cleared.
You must submit pre-clearance for ALL PERSONAL SECURITIES transactions,
unless the transaction qualifies as an Exempt or De Minimis Transaction
(described below). All other purchase or sale transactions, including
transactions in equity securities of up to 1,000 shares or $10,000 that
are NOT listed on a domestic exchange or have market capitalization of
LESS THAN $2 BILLION, must be pre-cleared prior to execution.
- --------------------------------------------------------------------------------
TRANSACTIONS IN EQUITY SECURITIES UNDER 1000 SHARES
OR $10,000, WITH A MARKET CAPITALIZATION OF
OVER $2 BILLION DO NOT NEED PRE-CLEARANCE
- --------------------------------------------------------------------------------
However, if you are buying 500 shares or less, the security is on NYSE or
the issuer's market capitalization is over $500 million the trade will be
approved even if NA is active in the security.
NA will treat the pre-clearance process as confidential and will not
disclose the information given during the pre-clearance process, except as
required by law or for applicable business purposes.
As a Covered Person, you cannot execute the requested transaction until
you receive authorization from the Compliance Department to do so.
Pre-clearance requests will be processed by the Compliance Department as
quickly as possible. PLEASE REMEMBER THAT PRE-CLEARANCE APPROVAL IS NOT
AUTOMATICALLY GRANTED FOR EVERY TRADE.
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<PAGE>
PRIORITY PRE-CLEARANCE WINDOW
Compliance Department personnel will give priority attention to any
pre-clearance request submitted prior to 9:00 a.m. In these cases, you
will normally receive notification of your pre-clearance approval or
denial within 10-15 minutes. Pre-clearance requests submitted after 9:00
a.m. will be processed in as timely a manner as possible, but other
Compliance Department duties may delay the response for two (2) hours or
more (depending on department priorities) after submission.
PRE-CLEARANCE PERIOD
Pre-clearance must be obtained on the date of the proposed transaction.
Pre-clearance approval for domestic Personal Securities Transactions
effected through a broker-dealer is the day it is pre-cleared up until the
"market open" the next business day (6:30 a.m. PT, except holidays) after
the day that pre-clearance was obtained.
- --------------------------------------------------------------------------------
IF YOU DECIDE NOT TO EXECUTE THE TRANSACTION ON THE DAY YOUR
PRE-CLEARANCE APPROVAL IS GIVEN, OR YOUR ENTIRE TRADE IS NOT EXECUTED, YOU
MUST REQUEST PRE-CLEARANCE AGAIN AT
SUCH TIME AS YOU DECIDE TO EXECUTE THE TRADE
- --------------------------------------------------------------------------------
Pre-clearance approval is valid only for the particular security and
quantity indicated on the Form. For example, if you wish to increase the
size of the transaction, you must submit a new pre-clearance request and
receive a new pre-clearance approval. However, you may decrease the size
of the transaction without obtaining new authorization, but should inform
Compliance if this is done.
Failure to obtain pre-clearance for a personal securities transaction is a
serious breach of NA's Code. If you fail to obtain pre-clearance approval
for your personal securities transaction, you will be subject to
disciplinary action, up to and including termination of employment. You
may also be required to cancel the trade and bear any losses that occur.
You may also be required to disgorge any profits realized on the
unauthorized trade and donate them to a charity designated by NA (see
below).
B. VIOLATIONS
1. MONTHLY REPORTING VIOLATIONS
You must complete your Personal Security Transaction and Gift Report
("Blueform") via the intranet site by the end of the 10th day of each
month, regardless of whether you had any trading or gift activity for that
month.
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- --------------------------------------------------------------------------------
YOU MUST SUBMIT YOUR BLUEFORM
BY THE 10TH OF EVERY MONTH
- --------------------------------------------------------------------------------
The Executive Committee member with oversight of your department may grant
exceptions to this requirement for legitimate business or personal
reasons. However, you should make every reasonable effort to submit your
report in a timely manner.
- --------------------------------------------------------------------------------
IF YOU FAIL TO REMIT YOUR BLUEFORM ON TIME,
YOU WILL BE FINED $50 FOR THE FIRST DAY LATE &
$10 FOR EACH ADDITIONAL DAY THE REPORT IS LATE.
- --------------------------------------------------------------------------------
2. TRADING VIOLATIONS
Any trading-related violation of this Code, including failure to properly
pre-clear a non-exempt personal trade, etc., will incur the following
sanctions, IN ADDITION TO disgorging any profits on personal trades that
conflict with NA client transactions:
- --------------------------------------------------------------------------------
FIRST VIOLATION
- --------------------------------------------------------------------------------
o A fine of 0.5% of base salary up to $500;
o Meet with Department Head and the Director of Compliance to
discuss and re-sign the Code of Ethics.
- --------------------------------------------------------------------------------
SECOND VIOLATION (WITHIN 12 MONTHS)
- --------------------------------------------------------------------------------
o A fine of 1% of base salary up to $1,000;
o Meet with Department Head and the Director of Compliance to
discuss and re-sign the Code of Ethics;
o Written warning to personnel file;
- --------------------------------------------------------------------------------
THIRD VIOLATION (WITHIN 12 MONTHS)
- --------------------------------------------------------------------------------
o A fine of 2% of base salary up to $2,000;
o Meet with Department Head and the Director of Compliance to
discuss and re-sign the Code of Ethics;
o Written warning to personnel file;
o Prohibition from trading personally for a specific period of
time (E.G., 6 months to 1 year) except to close out current
positions;
o May result in termination of employment with NA.
All fines will be paid to a charity of NA's choice: currently the United
Way. Checks will be submitted to Compliance and forwarded to the selected
charity.
9
<PAGE>
C. HOLDING PERIOD RESTRICTION
As a general principle, personal securities transactions must be for
investment purposes and not for the purposes of generating short-term
profits. Any profits realized on a sale of a security held less than 60
days will be disgorged, with a check written to a charity of NA's choice,
currently the United Way. Checks will be submitted to Compliance and
forwarded to the selected charity. You may, however, sell a security held
less than 60 days if the security is being sold for no profit.
This holding period restriction does not apply to Exempt Securities or
Exempt Transactions. NA's Director of Compliance or General Counsel may
also grant exceptions to this prohibition in limited circumstances (E.G.,
bankruptcy, eviction, personal health emergency, etc.) upon prior written
request.
- --------------------------------------------------------------------------------
YOU MAY NOT SELL A SECURITY ACQUIRED WITHIN THE
PREVIOUS 60 DAYS, UNLESS SELLING AT A LOSS
- --------------------------------------------------------------------------------
D. BLACKOUT PERIOD
As a Covered Person, you may not buy or sell equity securities for your
personal accounts if:
o NA has engaged in a transaction in the same or an equivalent
security for an Advisory Client account within the last three
(3) days, OR
o the security is on the NA trading blotter or proposed blotter.
In the event you effect a prohibited personal securities transaction
within 3 business days before or after an Advisory Client account
transaction in the same or equivalent security, you will be required to
close out your position in the security and disgorge any profit realized
from the transaction to a charity designated by NA. However, if you
properly obtained pre-clearance for a transaction and an Advisory Client
account subsequently transacted in the same security within 3 days of your
transaction, this will not normally result in required disgorgement,
unless otherwise determined by NA's Director of Compliance or General
Counsel.
The blackout period does not apply to transactions that qualify as Exempt
Securities or Exempt Transactions.
E. DE MINIMIS TRANSACTIONS
You are NOT required to pre-clear certain de minimis transactions that
meet the following criteria. However, you must report these transactions
on your monthly Blue Form:
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<PAGE>
EQUITY SECURITIES
Any purchase or sale transaction of up to 1,000 shares or $10,000
DAILY in a NYSE-listed security or any security listed on another
domestic exchange (including NASDAQ) with a market capitalization of
at least $2 billion.
DEBT SECURITIES
Any purchase or sale transaction of up to 100 units ($100,000
principal amount) in an issuer with a market capitalization of at
least $2 billion.
- --------------------------------------------------------------------------------
ALL DE MINIMIS TRANSACTIONS ARE SUBJECT TO
THE HOLDING PERIOD RESTRICTION
- --------------------------------------------------------------------------------
F. INITIAL PUBLIC OFFERINGS ("IPOS") & PRIVATE PLACEMENTS
As a Covered Person, you may not engage in a personal securities
transaction in any security in a private placement or IPO without prior
written approval of NA's Director of Compliance or its General Counsel. In
considering such approval, the Director of Compliance or General Counsel
will take into account, among other factors, whether the investment
opportunity is available to and/or should be reserved for an Advisory
Client account, and whether the opportunity is being offered to the
Covered Person by virtue of his or her position.
If you are approved to engage in a personal securities transaction in a
private placement or IPO, you must disclose that investment if you play a
part directly or indirectly in subsequent investment considerations of the
security for an Advisory Client account. In such circumstances, NA's
decision to purchase or sell securities of the issuer shall be subject to
an independent review by an NA Employee with no personal interest in the
issuer. In addition, you may also be required to refrain from trading the
security.
G. FRONT-RUNNING
As a Covered Person, you may not front-run an order or recommendation,
even if you are not handling the order or the recommendation (and even if
the order or recommendation is for someone other than the Covered Person).
Front-running consists of executing a transaction based on the knowledge
of the forthcoming transaction or recommendation in the same or an
underlying security, or other related securities, within three (3)
business days preceding a transaction on behalf of an Advisory Client.
H. INSIDE INFORMATION
As a Covered Person, you may not use material, non-public information
about any issuer of securities, whether or not such securities are held in
the portfolios of Advisory Clients or suitable for inclusion in such
portfolios, for personal gain or on behalf of an Advisory Client. If you
believe you are in possession of such information, you must contact NA's
11
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Director of Compliance immediately to discuss the information and the
circumstances surrounding its receipt. This prohibition does not prevent a
Covered Person from contacting officers and employees of issuers or other
investment professionals in seeking information about issuers that is
publicly available. (REFER TO NA'S INSIDER TRADING POLICY ATTACHED
APPENDIX I FOR MORE INFORMATION.)
- --------------------------------------------------------------------------------
AS A COVERED PERSON, YOU MAY NOT USE MATERIAL,
NON-PUBLIC INFORMATION ABOUT ANY ISSUER OF SECURITIES
- --------------------------------------------------------------------------------
IF YOU HAVE ANY REGARDING PERSONAL TRADING, CONTACT THE COMPLIANCE
DEPARTMENT OR THE GENERAL COUNSEL.
12
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- --------------------------------------------------------------------------------
V. REPORTS & CERTIFICATIONS REGARDING PERSONAL SECURITIES TRANSACTIONS
- --------------------------------------------------------------------------------
A. PERSONAL HOLDINGS REPORTS
In order to address potential conflicts of interest that can arise when a
Covered Person acquires or disposes of a security, and to help ensure
compliance with the Code, as a Covered Person, you must submit a Personal
Holdings Report at the time of commencement of employment with NACM or NAS
and annually thereafter with a list of all securities holdings in which
you have a beneficial interest (other than interests in Exempt
Securities).
- --------------------------------------------------------------------------------
YOU MUST SUBMIT A COMPLETE PERSONAL HOLDINGS
REPORT UPON COMMENCEMENT OF
EMPLOYMENT & ANNUALLY THEREAFTER
- --------------------------------------------------------------------------------
B. MONTHLY TRANSACTION & GIFT REPORTS
As a Covered Person, you must file a Monthly Securities Transaction and
Gift Report ("Blueform") with Compliance by the 10th day of each month for
the previous month (E.G., a September Blue Form would be due by the 10th
of October). If you did not execute any securities transactions during the
applicable month, you must still submit a Blue Form indicating that fact.
You file these Reports electronically on the NA Intranet site at
HTTP://HOME.NACM.COM/COMPLIANCE. The Compliance Department receives all
Report confirmations via email and stores them in a master database that
is archived annually to CD ROM.
Your Report must contain the following information with respect to each
reportable personal securities transaction. All fields must be completed
in order for your report to be successfully filed:
o Date of transaction;
o Nature of the transaction (purchase, sale or any other type of
acquisition or disposition);
o Security name;
o Security symbol or CUSIP;
o Number of shares/par;
o Principal amount of each security and/or the price at which the
transaction was effected; and
o Name of the broker, dealer or bank with or through whom the
transaction was effected.
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Monthly Reports may contain a statement that the report is not to be
construed as an admission that the person filing the report has or had any
direct or indirect beneficial interest in any security described in the
report.
C. DUPLICATE BROKERAGE STATEMENTS & CONFIRMATIONS
To assist NA in monitoring compliance with the Code, as a Covered Person,
you must instruct each broker-dealer with whom you maintain an account to
send duplicate copies of all transaction confirmations and statements
directly to NA's Compliance Department. This requirement does not apply to
accounts that are exclusively hold Exempt Securities or are held at a
mutual fund company.
D. CERTIFICATION OF COMPLIANCE
As a newly hired Employee, you must certify that you have read, understand
and will comply with the Code.
As a continuing Employee, you must annually certify that you have read,
understand, have complied, and will continue to comply, with the Code.
14
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- --------------------------------------------------------------------------------
VI. POTENTIAL CONFLICT OF INTEREST ISSUES
- --------------------------------------------------------------------------------
Certain activities, while not directly involving personal trading issues,
nonetheless raise similar potential conflict of interest issues and are
appropriate for inclusion in the Code. These monitored activities are as
follows:
A. SERVICE ON BOARDS OF OTHER COMPANIES
As a Covered Person, you are prohibited from serving on the board of
directors of any PUBLICLY TRADED company or organization. In addition, if
you wish to serve on the board of directors of a PRIVATELY HELD "for
profit" company, you must first obtain prior written approval from NA's
Director of Compliance or General Counsel. It is not necessary to obtain
approval to serve on the board of directors of entities such as schools,
churches, industry organizations or associations, or similar non-profit
boards.
B. GIFTS
As a Covered Person, you may not seek any gift, favor, gratuity, or
preferential treatment from any person or entity that:
o does business with or on behalf of NA;
o is or may appear to be connected with any present or future
business dealings between NA and that person or organization;
or
o may create or appear to create a conflict of interest.
You may only accept gifts offered as a courtesy. You must report on your
monthly Blueform all gifts, favors or gratuities valued at $25 MORE
(EXCEPT MEALS VALUED AT LESS THAN $50). Non-Employee Trustees only need to
report gifts if values in excess of $100 AND the gift is given in
connection with the Trustee's affiliation with the NA.
C. GIFT PRE-CLEARANCE
You must submit a gift pre-clearance form and obtain prior written
approval for all gifts with a fair market value in excess of $100. Fair
market value applies to the value of the total gift (E.G., if you receive
4 tickets valued at $55 a piece, this is considered a gift in valued over
$100 and must be pre-cleared). You must make every reasonable effort to
obtain approval from your direct supervisor and the Compliance Department
PRIOR to accepting anything of value over $100. In the event that
pre-approval is not possible, you must make disclosure as soon as possible
after the gift/event, in any event, no later than on your next Blue Form.
A gift may be denied or required to be returned or reimbursed if you
receive an excessive number of gifts, especially if received from a single
source or if the total dollar value of gifts received during a single year
is deemed excessive.
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<PAGE>
D. GIFT VIOLATIONS
In the event you fail to properly disclose and/or pre-clear these items,
the Management Committee will require the employee personally to either
donate the fair market value of the item (or the item itself) to charity
or directly reimburse the person or entity responsible for giving the
item.
As a Covered Person, you may not offer any gifts, favors or gratuities
that could be viewed as influencing decision-making or otherwise could be
considered as creating a conflict of interest on the part of the
recipient.
You must never give or receive gifts or entertainment that would be
controversial to either you or NA, if the information was made public. You
should be aware that certain NA clients might also place restrictions on
gifts YOU may give to their employees.
16
<PAGE>
- --------------------------------------------------------------------------------
VII. VIOLATIONS OF THE CODE
- --------------------------------------------------------------------------------
A violation of this Code is subject to the imposition of such sanctions as
may be deemed appropriate under the circumstances to achieve the purposes
of this Code. NA's Director of Compliance and the Executive Committee will
determine sanctions for violations of the Code. Such sanctions may include
those previously described, as well as others deemed appropriate.
Sanctions for a material violation (I.E., one that involves an actual
conflict or appearance of impropriety) of this Code by a Trustee of the
Funds will be determined by a majority vote of that Fund's Disinterested
Trustees.
IF YOU HAVE ANY QUESTIONS ABOUT ANY ASPECT OF THE CODE, CONTACT THE
DIRECTOR OF COMPLIANCE.
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- --------------------------------------------------------------------------------
VIII. ANNUAL BOARD REVIEW
- --------------------------------------------------------------------------------
The NA management annually prepares a report to the Funds' boards
summarizing existing procedures concerning personal trading (including any
changes in the Code), highlights material violations of the Code requiring
significant corrective action and identifies any recommended changes to
the Code.
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- --------------------------------------------------------------------------------
IX. ADMINISTRATION & CONSTRUCTION
- --------------------------------------------------------------------------------
NA's Director of Compliance serves as the "Administrator" of this Code.
The Administrator's duties include:
o Maintenance of a current list of Covered Persons;
o Providing all Employees with a copy of the Code and
periodically informing them of their duties and obligations
under the Code;
o Supervising the implementation and enforcement of the terms of
the Code;
o Maintaining or supervising the maintenance of all records and
reports required by the Code;
o Preparing a list of all transactions effected by any Covered
Person during the three (3) day blackout period;
o Determining whether any particular securities transactions
should be exempted pursuant to the provisions of Section III of
the Code;
o Issuing, either personally or with the assistance of counsel,
any interpretation of the Code which would be consistent with
the objectives of the Code;
o Conducting inspections or investigations reasonably required to
detect and report material violations of the Code and provide
recommendations relative to these violations to NA's Management
Committee, or the Board of Trustees of a Fund or any Committee
appointed by them to deal with such information;
o Submitting a quarterly report to the Trustees of each Fund
containing a description of any material violation and action
taken and any other significant information concerning
administration of the Code; and
o Regular reporting on Code compliance to the Executive Committee
and General Counsel.
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- --------------------------------------------------------------------------------
X. AMENDMENTS & MODIFICATIONS
- --------------------------------------------------------------------------------
This Code may be amended or modified as deemed necessary by the officers
of the Funds, with the advice of Fund counsel, provided such amendments or
modifications shall be submitted to the Board of Trustees of the Funds for
ratification and approval at the next available meeting. This version of
the Code has been amended taking into account the recent amendments to
Rule 17j-1 under the Investment Company Act of 1940. This Code is
effective as of March 20, 2000 to be ratified by the Board of Trustees of
the Funds at its next regularly scheduled meeting.
20
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================================================================================
APPENDIX I
================================================================================
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
NICHOLAS-APPLEGATE SECURITIES
POLICIES AND PROCEDURES CONCERNING THE MISUSE
OF MATERIAL NON-PUBLIC INFORMATION
("INSIDER TRADING")
Every employee of Nicholas-Applegate Capital Management, a California Limited
Partnership ("NA") must read and retain a copy of these Policies and Procedures.
Any questions regarding the Policies and Procedures described herein should be
referred to NA's Compliance Department ("Compliance").
- --------------------------------------------------------------------------------
SECTION I. POLICY STATEMENT ON INSIDER TRADING ("POLICY STATEMENT")
- --------------------------------------------------------------------------------
NA's Policy Statement applies to every Employee and extends to activities
both within and outside the scope of their duties at NA. NA forbids any
Employee from engaging in any activities that would be considered "insider
trading."
The term "insider trading" is not defined in the federal securities laws,
but generally is understood to prohibit the following activities:
o Trading by an insider, while in possession of material
non-public information;
o Trading by a non-insider, while in possession of material
non-public information, where the information either was
disclosed to the non-insider in violation of an insider's duty
to keep it confidential or was misappropriated;
o Recommending the purchase or sale of securities while in
possession of material non-public information; or
o Communicating material non-public information to others (I.E.,
"tipping").
The elements of insider trading and the penalties for such unlawful
conduct are discussed below. If you have any questions regarding this
Policy Statement you should consult the Compliance Department.
WHO IS AN INSIDER?
The concept of "insider" is broad and it includes officers, partners and
employees of a company. In addition, a person can be a "temporary insider"
if he or she enters into a special confidential relationship in the
conduct of a company's affairs and, as a result, is given access to
information solely for the company's purposes. A temporary insider can
include, among others, company attorneys, accountants, consultants, bank
lending officers, and the employees of these organizations. In addition,
NA and its Employees may become temporary insiders of a company that NA
advises or for which NA performs other services. According to the U.S.
Supreme Court, before an outsider will be considered a temporary insider
for these purposes, the company must expect the outsider to keep the
I-1
<PAGE>
disclosed non-public information confidential and the relationship must,
at least, imply such a duty.
WHAT IS MATERIAL INFORMATION?
Trading, tipping, or recommending securities transactions while in
possession of inside information is not an actionable activity UNLESS the
information is "material." Generally, information is considered material
if: (i) there is a substantial likelihood that a reasonable investor would
consider it important in making his or her investment decisions or (ii) it
is reasonably certain to have a substantial effect on the price of a
company's securities. Information that should be considered material
includes, but is not limited to:
o dividend changes;
o earnings estimates;
o changes in previously released earnings estimates;
o a joint venture;
o the borrowing of significant funds;
o a major labor dispute, merger or acquisition proposals or
agreements;
o major litigation;
o liquidation problems; and
o extraordinary management developments.
For information to be considered material, it need not be so important
that it would have changed an investor's decision to purchase or sell
particular securities; rather it is enough that it is the type of
information on which reasonable investors rely in making purchase or sale
decisions. The materiality of information relating to the possible
occurrence of any future event would depend on the likelihood that the
event will occur and its significance if it did occur.
Material information does not have to relate to a company's business. For
example, in U.S. V. CARPENTER, 791 F.2d 1024 (2d Cir. 1986), AFF'D, 484
U.S. 19 (1987) (affirmed without opinion by an evenly divided court with
respect to the charge of insider trading, based on the "misappropriation"
theory), the court considered as material certain information about the
contents of a forthcoming newspaper column that was expected to affect the
market price of a security. In that case, a WALL STREET JOURNAL reporter
was found criminally liable for disclosing to others the dates that
reports on various companies would appear in the JOURNAL and whether those
reports would be favorable or not.
WHAT IS NON-PUBLIC INFORMATION?
All information is considered non-public until it has been effectively
communicated to the marketplace. One must be able to point to some fact to
show that the information is generally public. For example, information
found in a report filed with the SEC, or appearing in DOW Jones, REUTERS
ECONOMIC SERVICES, THE WALL STREET JOURNAL or other publications of
general circulation would be considered public. Information in bulletins
and research reports disseminated by brokerage firms are also generally
considered to be public information.
I-2
<PAGE>
BASIS FOR LIABILITY
In order to be found liable for insider trading, one must either (i) have
a fiduciary relationship with the other party to the transaction and have
breached the fiduciary duty owed to that other party, or (ii) have
misappropriated material non-public information from another person.
FIDUCIARY DUTY THEORY
Insider trading liability may be imposed on the theory that the
insider breached a fiduciary duty to a company. In 1980, the U.S.
Supreme Court held that there is no general duty to disclose before
trading on material non-public information, and that such a duty
arises only where there is a fiduciary relationship. That is, there
must be an existing relationship between the parties to the
transaction such that one party has a right to expect that the other
party would either (a) disclose any material non-public information,
if appropriate or permitted to do so, or (b) refrain from trading on
such material non-public information. CHIARELLA V. U.S., 445 U.S.
222 (1980).
In DIRKS V. SEC, 463 U.S. 646 (1983), the U.S. Supreme Court stated
alternative theories under which non-insiders can acquire the
fiduciary duties of insiders: (a) they can enter into a confidential
relationship with the company through which they gain the
information (E.G., attorneys, accountants, etc.), or (b) they can
acquire a fiduciary duty to the company's shareholders as "tippees"
if they were aware, or should have been aware, that they had been
given confidential information by an insider that violated his or
her fiduciary duty to the company's shareholders by providing such
information to an outsider.
However, in the "tippee" situation, a breach of duty occurs ONLY
where the insider personally benefits, directly or indirectly, from
the disclosure. Such benefit does not have to be pecuniary, and can
be a gift, a reputational benefit that will translate into future
earnings, or even evidence of a relationship that suggests a QUID
PRO QUO.
MISAPPROPRIATION THEORY
Another basis for insider trading liability is the
"misappropriation" theory. Under the misappropriation theory,
liability is established when trading occurs as a result of, or
based upon, material non-public information that was stolen or
misappropriated from any other person. In U.S. V. CARPENTER, SUPRA,
the court held that a columnist for THE WALL STREET JOURNAL had
defrauded the JOURNAL when he obtained information that was to
appear in the JOURNAL and used such information for trading in the
securities markets. The court held that the columnist's
misappropriation of information from his employer was sufficient to
give rise to a duty to disclose such information or abstain from
trading thereon, even though the columnist owed no direct fiduciary
duty to the issuers of the securities described in the column or to
purchasers or sellers of such securities in the marketplace.
Similarly, if information is given to an analyst on a confidential
basis and the analyst uses that information for trading purposes,
liability could arise under the misappropriation theory.
I-3
<PAGE>
PENALTIES FOR INSIDER TRADING
Penalties for trading on, or communicating material non-public information
are severe, both for individuals involved in such unlawful conduct and
their employers. A person can be subject to some or all of the penalties
below even if he or she did not personally benefit from the violation.
Penalties include:
o Civil injunctions;
o Criminal penalties for individuals of up to $1 million and for
"non-natural persons" of up to $2.5 million plus, for
individuals, a maximum jail term from five to ten years;
o Private rights of actions for disgorgement of profits;
o Civil penalties for the person who committed the violation of
up to three times the profit gained or loss avoided, whether or
not the person actually benefited;
o Civil penalties for the employer or other controlling person of
up to the greater of $1 million per violation or three times
the amount of the profit gained or loss avoided, as a result of
each violation; and
o A permanent bar, pursuant to the SEC's administrative
jurisdiction, from association with any broker, dealer,
investment company, investment adviser, or municipal securities
dealer.
In addition, any violation of this Policy Statement can be expected to
result in serious sanctions by NA, including dismissal of the persons
involved.
- --------------------------------------------------------------------------------
SECTION II. PROCEDURES TO IMPLEMENT NA'S POLICY STATEMENT
- --------------------------------------------------------------------------------
The following procedures have been established to aid NA's Employees in
avoiding insider trading, and to aid NA in preventing, detecting and
imposing sanctions against insider trading. Every Employee of NA must
follow these procedures or risk serious sanctions, as described above. If
you have any questions about these procedures you should consult with the
Director of Compliance.
IDENTIFYING INSIDER INFORMATION
Before trading for yourself or others, including for any client accounts
managed by NA, in the securities of a company about which you may have
potential insider information, or revealing such information to others or
making a recommendation based on such information, you should ask yourself
the following questions.
o Is the information material?
o Is this information that an investor would consider important
in making an investment decision?
o Is this information that would substantially affect the market
price of the securities if generally disclosed?
o Is the information non-public?
o To whom has this information been provided?
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<PAGE>
o Has the information been effectively communicated to the
marketplace by being published in THE WALL STREET JOURNAL or
other publications of general circulation, or has it otherwise
been made available to the public?
If, after consideration of the above, you believe that the information is
material and non-public, or if you have questions as to whether the
information may be material and non-public, you should take the following
steps.
o Report the matter immediately to Compliance and disclose all
information that you believe may bear on the issue of whether
the information you have is material and non-public;
o Refrain from purchasing or selling securities with respect to
such information on behalf of yourself or others, including for
client accounts managed by NA; and
o Refrain from communicating the information inside or outside
NA, other than to Compliance.
After Compliance has reviewed the issue, you will be instructed to
continue the prohibitions against trading, tipping, or communication, or
you will be allowed to trade and communicate the information. In
appropriate circumstances, our Director of Compliance will consult with
our General Counsel as to the appropriate course of action.
PERSONAL SECURITIES TRADING
All Employees of NA must adhere to NA's Code of Ethics and Conduct
("Code") with respect to:
o securities transactions effected for their own account,
o accounts over which they have a direct or indirect beneficial
interest, and
o accounts over which they exercise any direct or indirect
influence.
Please refer to NA's Code as necessary. In accordance with the Code,
Employees are required to obtain prior written approval from Compliance
for all personal securities transactions (unless otherwise exempt under
the Code) and to submit to Compliance a Monthly Securities Transaction and
Gift Report ("Blueform") concerning all equity securities transactions as
required by NA's Code.
RESTRICTING ACCESS TO MATERIAL NON-PUBLIC INFORMATION
Information in your possession that you identify, or that has been
identified to you as material and non-public, must not be communicated to
anyone, except as provided above. In addition, you should make certain
that such information is secure. For example, files containing material
non-public information should be sealed and inaccessible and access to
computer files containing material non-public information should be
restricted by means of a password or other similar restriction.
I-5
<PAGE>
RESOLVING ISSUES CONCERNING INSIDER TRADING
If, after consideration of the items set forth above, doubt remains as to
whether information is material or non-public, or if there is any
unresolved question as to the applicability or interpretation of the
foregoing procedures, or as to the propriety of any action, please discuss
such matters with our Director of Compliance before trading or
communicating the information in question to anyone.
SUPERVISORY PROCEDURES
NA's Compliance Department is critical to the implementation and
maintenance of these Policies and Procedures against insider trading. The
supervisory procedures set forth below are designed to detect and prevent
insider trading.
PREVENTION OF INSIDER TRADING
In addition to the pre-approval and monthly reporting procedures
specified in the Code concerning personal securities transactions,
the following measures have been implemented to prevent insider
trading by NA's Employees.
1. All Employees of NA will be provided with a copy of these
Policies and Procedures regarding insider trading.
2. Compliance will, as deemed necessary, conduct educational
seminars to familiarize Employees with NA's Policies and
Procedures. Such educational seminars will target, in
particular, persons in sensitive areas of NA who may receive
inside information more often than others;
3. Compliance will answer questions regarding NA's Policies and
Procedures;
4. Compliance will resolve issues of whether information received
by an Employee of NA is material and non-public;
5. Compliance will review these Policies and Procedures on a
regular basis and update as necessary;
6. Whenever it has been determined that an Employee of NA has
possession of material non-public information, Compliance will
(i) implement measures to prevent dissemination of such
information, and (ii) restrict Employees from trading in the
securities by placing such securities on NA's Restricted List;
and
7. Upon the request of any Employee, Compliance will review and
any requests for clearance to trade in specified securities and
either approve or disapprove.
DETECTION OF INSIDER TRADING
To detect insider trading, Compliance will:
1. Review the personal securities transaction reports filed by
each Employee, including subsequent monthly review of all
personal securities transactions;
2. Review the trading activity of client accounts managed by NA;
3. Review the trading activity of NA's own accounts, if any; and
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<PAGE>
4. Coordinate the review of such reports with other appropriate
Employees of NA when Compliance has reason to believe inside
information has been provided to certain Employees.
REPORTS TO MANAGEMENT
Promptly upon learning of a potential violation of NA's Policies and
Procedures, Compliance will prepare a confidential written report to
management, providing full details and recommendations for further
action. In addition, Compliance will prepare reports to management,
when appropriate, setting forth:
1. A summary of existing procedures to prevent and detect insider
trading;
2. Full details of any investigation, either internal or by a
regulatory agency, of any suspected insider trading and the
results of such investigation;
3. An evaluation of the current procedures and any recommendations
for improvement; and
4. A description of NA's continuing education program regarding
insider trading, including the dates of any seminars since the
last report to management.
In response to such report, management will determine whether any
changes to the Policies and Procedures might be appropriate.
I-7
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX II
- --------------------------------------------------------------------------------
EXAMPLES OF BENEFICIAL OWNERSHIP
>> Securities held by an Access Person for their own benefit, regardless of the
form in which held;
>> Securities held by others for an Access Person's benefit, such as securities
held by custodians, brokers, relatives, executors or administrators;
>> Securities held by a pledgee for an Access Person's account;
>> Securities held by a trust in which an Access Person has an income or
remainder interest, unless the Access Person's only interest is to receive
principal (a) if some other remainderman dies before distribution or (b) if
some other person can direct by will a distribution of trust property or
income to the Access Person;
>> Securities held by an Access Person as trustee or co-trustee, where the
Access Person or any member of their immediate family (I.E., spouse, children
or their descendants, stepchildren, parents and their ancestors, and
stepparents, in each case treating a legal adoption as a blood relationship)
has an income or remainder interest in the trust;
>> Securities held by a trust of which the Access Person is the settlor, if the
Access Person has the power to revoke the trust without obtaining the consent
of all the beneficiaries;
>> Securities held by a general or limited partnership in which an Access Person
is either the general partner of such partnership or a controlling partner of
such entity (E.G., Access Person owns more than 25% of the partnership's
general or limited partnership interests);
>> Securities held by a personal holding company controlled by an Access Person
alone or jointly with others;
>> Securities held in the name of an Access Person's spouse - unless legally
separated or divorced;
>> Securities held in the name of minor children of an Access Person or in the
name of any relative of an Access Person or of their spouse (including an
adult child) who is presently sharing the Access Person's home;
>> Securities held in the name of any person other than an Access Person and
those listed in above, if by reason of any contract, understanding,
relationship, agreement, or other arrangement the Access Person obtains
benefits equivalent to those of ownership; and
>> Securities held in the name of any person other than an Access Person , even
though the Access Person does not obtain benefits equivalent to those of
ownership (as described above), if the Access Person can vest or re-vest
title in himself.
II-1
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
APPENDIX III
- ----------------------------------------------------------------------------------------------------------------
QUICK REFERENCE GUIDE
- ----------------------------------------------------------------------------------------------------------------
DESCRIPTION PRE- REPORT BLACK-OUT HOLDING TRADING FINE DISGORGEMENT
CLEAR ("Blue PERIOD PERIOD APPLIES REQUIRED
Form")
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EXEMPT SECURITIES: NO NO NO NO N/A N/A
Open-end mutual funds, US
Gov't securities, BAs, CDs,
CP, Muni bonds and stock
indices
- ----------------------------------------------------------------------------------------------------------------
EXEMPT TRANSACTIONS: NO NO NO NO N/A N/A
No control or influence,
non-voluntary, automatic
dividend reinvestment plan,
exercise of pro-rata rights
issue, options or futures on
commodities, currencies or
interest rates
- ----------------------------------------------------------------------------------------------------------------
DE MINIMIS TRANSACTIONS: NO YES NO YES YES YES
1,000 shares or $10,000 and
NYSE or other listed domestic
exchange, including NASDAQ,
and market cap = $2 billion
(daily limit)
- ----------------------------------------------------------------------------------------------------------------
= 500 shares, NYSE, or market YES YES NO YES YES YES
cap = $500 million
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: THIS INFORMATION IS PROVIDED AS A SUMMARY ONLY. YOU ARE RESPONSIBLE TO
ENSURE YOUR PERSONAL SECURITIES TRADING COMPLIES WITH THE CODE. PLEASE REFER TO
THE CODE FOR FURTHER DETAILS. IF YOU HAVE ANY QUESTIONS, PLEASE CONTACT
COMPLIANCE.
III-1
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX IV
- --------------------------------------------------------------------------------
EXEMPT INDICES
- --------------------------------------------------------------------------------
The following are exempt from the 60-DAY MINIMUM hold rule and are exempt from
pre-clearance:
o S&P 500 Index
o S&P 100 Index
o S&P Mid Cap Index (400 Issues) o S&P Small Cap Index (600 Issues) o NASDAQ
100 Index o Russell 2000 Index o Wilshire Small Cap Index (250 Issues) o
EUROTOP 100 Index
o Financial Times Stock Exchange (FT-SE) 100 Index
o Japan Index (210 Issues)
o NYSE Composite Index (2400 Issues)
o PHLX National OTC Index (100 Issues)
o Standard & Poor's Depository Receipts (SPDRs)
o Standard & Poor's Mid Cap 400 Depository Receipts (Mid Cap SPDRs)
o Gold/Silver Index Options
o World Equity Benchmark Shares (WEBS)
o JP Morgan Commodity Indexed Preferred Securities, Series A (Symbol JPO)
o Dow Jones Industrials Diamonds (DIA) o NASDAQ 100 Shares (QQQ)
The Director of Compliance may approve any other Index on a case-by-case basis.
If you have any questions regarding the above, please contact the Compliance
Department.
IV-1
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX V
- --------------------------------------------------------------------------------
================================================================================
NEW HIRES:
PLEASE COMPLETE, SIGN & RETURN THE FOLLOWING 4 PAGES TO THE COMPLIANCE
DEPARTMENT WITHIN 5 DAYS OF YOUR DATE OF HIRE
YOU ARE NOT PERMITTED TO EXECUTE ANY PERSONAL
TRADES UNTIL THESE CERTIFICATES ARE FILED.
ANNUAL RECERTIFICATION (PRESENT EMPLOYEES):
YOU ARE REQUIRED TO COMPLETE, SIGN & RETURN THE FOLLOWING 4 PAGES TO THE
COMPLIANCE DEPARTMENT BY THE ANNUAL DUE DATE (STATED IN RENEWAL PACKET). IF IT
IS RECEIVED AFTER THAT DATE YOU WILL INCUR A FINE AS FOLLOWS - $50 FOR THE FIRST
DAY LATE & $10 EVERY DAY AFTER THAT.
ALL FINES ARE WRITTEN & SENT TO THE UNITED WAY.
YOU WILL ALSO BE RESTRICTED FROM TRADING UNTIL THESE
CERTIFICATES ARE RECEIVED IN COMPLIANCE (ONLY IF LATE).
THANK YOU
================================================================================
V-1
<PAGE>
- --------------------------------------------------------------------------------
NICHOLAS-APPLEGATE INSTITUTIONAL FUNDS
NICHOLAS-APPLEGATE SECURITIES
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
CERTIFICATE OF COMPLIANCE
- -----------------------------------
NAME (PLEASE PRINT)
This is to certify that the Code of Ethics and Conduct ("Code"), updated as of
March 2000, is available for my review on the intranet site (home.nacm.com) for
the year 2000. I have read and understand the Code. I certify that I will comply
with these policies and procedures during the course of my employment by NACM or
NAS. Moreover, I agree to promptly report to the Director of Compliance any
violation, or possible violation of this Code, of which I become aware.
I understand that a violation of this Code will be grounds for disciplinary
action or dismissal and may also be a violation of federal and/or state
securities laws.
- ------------------------------------
SIGNATURE
- ------------------------------------
DATE
- --------------------------------------------------------------------------------
V-2
<PAGE>
- --------------------------------------------------------------------------------
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
NICHOLAS-APPLEGATE SECURITIES
INSIDER TRADING POLICY
{APPENDIX I}
CERTIFICATE OF COMPLIANCE
- ------------------------------------
NAME (PLEASE PRINT)
This is to certify that I have read and understand the policies and procedures
of NA's Insider Trading Policy (the "Policy"), updated as of March 2000, and
available for my review on the intranet site (home.nacm.com) for the year 2000.
I certify that I will comply with these policies and procedures during the
course of my employment with NA. Moreover, I agree to promptly report to the
Director of Compliance any violation, or possible violation, of the Policy of
which I became aware.
I understand that violation of the Policy will be grounds for disciplinary
action or dismissal and may also be a violation of federal and/or state
securities laws.
- ------------------------------------
SIGNATURE
- ------------------------------------
DATE
- --------------------------------------------------------------------------------
V-3
<PAGE>
PERSONAL HOLDINGS REPORT
AS REQUIRED IN Section V of the NA's Code of Ethics ("Code"), please provide a
list of all Securities (except Exempt Securities) in which you have a beneficial
interest, including those in accounts of your immediate family and all
Securities in non-client accounts for which you make investment decisions.
1. List all Securities that are:
a) personally owned; or
b) in which a beneficial interest is held by you, your spouse,
minor child, or any other member of your immediate household;
c) any trust or estate of which you or your spouse is a trustee,
other fiduciary or beneficiary, or of which your minor child is
a beneficiary; or
d) any person for whom you direct or effect transactions under a
power of attorney or otherwise.
<TABLE>
<CAPTION>
TABLE A
=========================================================================================================================
NAME OF SECURITY TYPE SECURITY(1) HOLDINGS HOLDINGS RELATIONSHIP(3) DISCLAIMER OF
# OF SHARES PRINCIPAL BENEFICIAL INTEREST(4)
AMOUNT ($)(2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
=========================================================================================================================
</TABLE>
* IF NONE, WRITE NONE.
* NOTE: CONTINUE LISTING AS NECESSARY ON ADDITIONAL SHEETS. (YOU MAY ATTACH
A COPY OF A BROKER STATEMENT LISTING THE INFORMATION - IF SO, INDICATE BY
WRITING "SEE ATTACHED.")
IF YOU ARE A PRESENT EMPLOYEE (NEW EMPLOYEES CONTINUE TO TABLE B)
2. Have you, during the past 12 months, requested prior clearance of and
filed monthly reports for all applicable securities transactions as
required by the Code?
Yes No
----- ----
If "No", has the transaction been discussed with the Compliance
Department?
Yes No
----------------------------
- --------------------
(1) Insert the following symbol as pertinent to indicate the type of security
held: C-common stock, P-preferred stock, O-option, W-warrant and D-debt
security.
(2) To be completed only for debt securities.
(3) Insert a, b, c, or d as explained above, to describe your interest in these
securities.
(4) Mark x to indicate that the reporting or recording of this securities
holding shall not be construed as an admission that you have any direct or
indirect beneficial interest in these securities. Please see Appendix II for a
list of examples of beneficial interest.
V-4
<PAGE>
If not, please advise the Compliance Department in writing separately of
any securities transactions not pre-cleared or reported.
3. Have you filed monthly reports for all reportable securities transactions
as required by the Code?
Yes No
----------------------------
In addition, Nicholas-Applegate requires all employees to disclose ALL
BROKERAGE ACCOUNTS in their name, any spouse's account, any children's
account or any other account over which the employee has control or is a
beneficiary.
TABLE B
================================================================================
NAME OF BROKER ACCOUNT NUMBER NAME(S) ON ACCOUNT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
* IF NONE, WRITE NONE.
I certify that the statements made by me on this form are true, complete and
correct to the best of my knowledge and belief and are made in good faith.
- ------------------------ ---------------------------------------------
DATE SIGNATURE
V-5