As filed with the Securities and Exchange Commission on August 25, 1997
1933 Act Registration No. 333-26087
1940 Act Registration No. 811-7757
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. 1 [X]
Post-Effective Amendment No. [ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 1
MITCHELL HUTCHINS PORTFOLIOS
(formerly PaineWebber Select Fund)
(Exact name of registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000
DIANNE E. O'DONNELL, Esq.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
Copies to:
ELINOR W. GAMMON, Esq.
JENNIFER R. GONZALEZ, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W., Second Floor
Washington, D.C. 20036-1800
Telephone: (202) 778-9000
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
Pursuant to the provisions of Rule 24f-2 under the Investment Company Act of
1940, an indefinite number of shares of beneficial interest is being registered
by this Registration Statement.
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Mitchell Hutchins Portfolios
Contents of Registration Statement
This Registration Statement consists of the following papers and documents:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheet
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
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MITCHELL HUTCHINS PORTFOLIOS:
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Part A Item No. and Caption Prospectus Caption
--------------------------- ------------------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis The Portfolios at a Glance; Expense Table
3. Condensed Financial Information Performance
4. General Description of Registrant The Portfolios at a Glance; Investment Objectives &
Policies; Investment Philosophy & Process; Investments of
the Portfolios and the Underlying Funds; General Information
5. Management of the Fund Management; General Information
5A. Management's Discussion of Fund Performance Not Applicable
6. Capital Stock and Other Securities Cover Page; Flexible Pricing[SERVICEMARK]; Dividends & Taxes;
General Information
7. Purchase of Securities Being Offered Flexible Pricing[SERVICEMARK]; How to Buy Shares; Other Services;
Determining the Shares' Net Asset Value
8. Redemption or Repurchase How to Sell Shares; Other Services
9. Pending Legal Proceedings Not Applicable
Statement of Additional
Part B Item No. and Caption Information Caption
--------------------------- -----------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Other Information
13. Investment Objective and Policies Portfolios - Investment Policies and Restrictions;
Underlying Funds - Investment Policies; Underlying Funds -
Hedging and Other Strategies Using Derivative Contracts;
Portfolio Transactions
14. Management of the Fund Trustees and Officers; Principal Holders of Securities
15. Control Persons and Principal Holders of Trustees and Officers; Principal Holders of Securities
Securities
16. Investment Advisory and Other Services Investment Advisory and Distribution Arrangements
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Other Securities Conversion of Class B Shares; Other Information
<PAGE>
19. Purchase, Redemption and Pricing of Reduced Sales Charges, Additional Exchange and Redemption
Securities Being Offered Information and Other Services; Valuation of Shares
20. Tax Status Taxes
21. Underwriters Investment Advisory and Distribution Arrangements
22. Calculation of Performance Data Performance Information
23. Financial Statements To Be Supplied
</TABLE>
Part C
- ------
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
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MITCHELL HUTCHINS PORTFOLIOS
1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
PROSPECTUS - SEPTEMBER _______, 1997
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The Mitchell Hutchins Portfolios ("Portfolios") seek to achieve their investment
objectives by investing in a number of other PaineWebber mutual funds. The
Portfolios are newly organized and have no operating history.
MITCHELL HUTCHINS GROWTH PORTFOLIO seeks long-term growth of capital by
investing the majority of its assets in equity mutual funds.
MITCHELL HUTCHINS MODERATE PORTFOLIO seeks total return by investing its
assets in a combination of equity and bond mutual funds.
MITCHELL HUTCHINS CONSERVATIVE PORTFOLIO seeks income and, secondarily,
growth of capital by investing the majority of its assets in bond mutual
funds.
This Prospectus concisely sets forth information that a prospective investor
should know about the Portfolios before investing. Please read it carefully and
retain a copy of this Prospectus for future reference.
A Statement of Additional Information dated September ______, 1997 has been
filed with the Securities and Exchange Commission and is legally part of this
Prospectus. The Statement of Additional Information can be obtained without
charge, and further inquiries can be made, by contacting an individual
Portfolio, your investment executive at PaineWebber or one of its correspondent
firms or by calling toll-free 1-800-647-1568.
INVESTORS SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERRED TO IN THIS
PROSPECTUS. THE PORTFOLIOS AND THEIR DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE TO
PROVIDE INVESTORS WITH INFORMATION THAT IS DIFFERENT. THE PROSPECTUS IS NOT AN
OFFER TO SELL SHARES OF THE PORTFOLIOS IN ANY JURISDICTION WHERE THE PORTFOLIOS
OR THEIR DISTRIBUTOR MAY NOT LAWFULLY SELL THOSE SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
TABLE OF CONTENTS
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PAGE
The Portfolios at a Glance.............................................3
Expense Table..........................................................6
Investment Objectives & Policies......................................10
Investment Philosophy & Process.......................................14
Performance...........................................................15
Investments of the Portfolios and the Underlying Funds................17
Flexible Pricing[SERVICEMARK].........................................25
How To Buy Shares.....................................................29
How To Sell Shares....................................................31
Other Services........................................................32
Management............................................................33
Determining the Shares' Net Asset Value...............................35
Dividends & Taxes.....................................................35
General Information...................................................37
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Prospectus Page 2
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
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THE PORTFOLIOS AT A GLANCE
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The Mitchell Hutchins Portfolios are managed so that each Portfolio can serve as
a core part of a larger investment program. The Portfolios are intended as a
simple and efficient approach to help investors meet retirement and other
long-term goals; the Portfolios are not market timing vehicles.
Each Portfolio invests in a number of PaineWebber mutual funds ("Underlying
Funds") suited to that Portfolio's particular investment objective. Mitchell
Hutchins Asset Management Inc. ("Mitchell Hutchins"), the Portfolios' investment
advisor, allocates each Portfolio's assets among Underlying Funds using
fundamental and quantitative analysis. Mitchell Hutchins expects to adjust that
allocation no more frequently than quarterly, under normal conditions, and only
within predetermined ranges that attempt to maintain broad diversification. As a
result, under normal conditions, there should be no sudden large-scale changes
in the allocation of a Portfolio's investments among Underlying Funds.
When selling shares, investors should be aware that they may get more or less
for their shares than they originally paid for them. As with any mutual fund,
there is no assurance that the Portfolios will achieve their goals.
MITCHELL HUTCHINS GROWTH PORTFOLIO
GOAL: To increase the value of an investment by investing the majority of its
assets in equity mutual funds.
INVESTMENT OBJECTIVE: Long-term growth of capital.
WHO SHOULD INVEST: Investors in their accumulation years, who can accept greater
volatility in the equity market in return for potentially higher returns.
MITCHELL HUTCHINS MODERATE PORTFOLIO
GOAL: To increase the value of an investment by investing its assets in a
combination of equity and bond mutual funds.
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Prospectus Page 3
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
INVESTMENT OBJECTIVE: Total return.
WHO SHOULD INVEST: Investors who seek growth of capital in conjunction with
income.
MITCHELL HUTCHINS CONSERVATIVE PORTFOLIO
GOAL: To provide current income by investing the majority of its assets in bond
mutual funds and, secondarily, to provide growth of capital.
INVESTMENT OBJECTIVE: Income and, secondarily, growth of capital.
WHO SHOULD INVEST: Investors who need current income from their investments but
want to offset some of the effects of inflation by seeking long term growth of
capital as a secondary goal.
RISKS
The performance of a Portfolio will directly reflect the investment performance
of the Underlying Funds it holds. As a result, the Portfolios' ability to meet
their investment objectives depends both on the allocation of their assets among
the various Underlying Funds and the ability of those Underlying Funds to meet
their investment objectives. An investment in a Portfolio is subject to all the
risks of an investment directly in the Underlying Funds it holds. These risks
are discussed under "Investments of the Portfolios and the Underlying Funds,"
and some of the more significant risks are summarized below.
All the Portfolios hold Underlying Funds that invest primarily in equity
securities, although the specific Underlying Funds and the percentage of a
Portfolio's assets invested in each Underlying Fund varies. Equity securities
historically have shown greater growth potential than other types of securities,
but they have also shown greater volatility.
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Prospectus Page 4
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
All the Portfolios hold Underlying Funds that invest primarily in bonds,
although the specific Underlying Funds and the percentage of a Portfolio's
assets invested in each Underlying Funds varies. Bonds are subject to interest
rate and credit risk. Interest rate risk is the risk that interest rates will
rise and bond prices will fall, lowering the value of the Underlying Fund's
investments. Credit risk is the risk that the issuer or guarantor may be unable
to pay interest or repay principal on the bond. Some Underlying Funds may invest
in bonds rated below investment grade, which are subject to greater risks of
default or price fluctuation than investment grade bonds and are considered
predominantly speculative.
Some Underlying Funds are subject to the special risks of investing in foreign
equity securities or foreign bonds, which include possible adverse political,
social and economic developments abroad and differing characteristics of foreign
economies and markets. These risks are greater with respect to securities of
issuers located in emerging markets.
Each Underlying Fund (other than PaineWebber Cashfund) may use derivatives, such
as options, futures contracts, foreign currency contracts, swaps and similar
instruments, in investment activities. Each type of derivative instrument
presents its own special risks.
Investors may lose money by investing in a Portfolio; an investment is not
guaranteed.
MANAGEMENT
Mitchell Hutchins, an asset management subsidiary of PaineWebber Incorporated
("PaineWebber"), is the investment adviser and administrator of the Portfolios.
Mitchell Hutchins also is the investment adviser and administrator of the
Underlying Funds other than PaineWebber Cashfund. PaineWebber serves as
investment adviser and administrator for PaineWebber Cashfund and has appointed
Mitchell Hutchins to serve as its sub-adviser and sub-administrator. Mitchell
Hutchins has appointed sub-advisers for certain other Underlying Funds.
MINIMUM INVESTMENT
To open an account, investors must invest $1,000; to add to an account,
investors need only invest $100.
HOW TO PURCHASE SHARES OF THE PORTFOLIOS
Investors may choose among these classes of shares:
CLASS A SHARES
The price is the net asset value plus the initial sales charge; the maximum
sales charge is 4.5% (4% for Conservative Portfolio) of the public offering
price. Although investors pay an initial sales charge when they buy Class A
shares, the ongoing expenses for this class are lower than the ongoing expenses
of Class B and Class C shares.
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Prospectus Page 5
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
CLASS B SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class B shares. As a result, 100% of their purchase is immediately
invested. However, Class B shares have higher ongoing expenses than Class A
shares. Depending upon how long they own the shares, investors may have to pay a
sales charge when they sell Class B shares. This sales charge is called a
"contingent deferred sales charge" and applies when investors sell their Class B
shares within six years after purchase. After six years, Class B shares convert
to Class A shares, which have lower ongoing expenses and no contingent deferred
sales charge.
CLASS C SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class C shares. As a result, 100% of their purchase is immediately
invested. However, Class C shares have higher ongoing expenses than Class A
shares. A contingent deferred sales charge of 1% (0.75% for Conservative
Portfolio) is charged on shares sold within one year of purchase. Class C shares
never convert to another class of shares.
CLASS Y SHARES
Class Y shares are offered for sale only to limited groups of investors. The
price is the net asset value. Investors do not pay an initial sales charge when
they buy Class Y shares. As a result, 100% of their purchase is immediately
invested. Investors also do not pay a contingent deferred sales charge when they
sell Class Y shares. Class Y shares have lower ongoing expenses than any other
class of shares.
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EXPENSE TABLE
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The following tables are intended to assist investors in understanding the
expenses associated with investing in each class of shares of the Portfolios.
Each Portfolio pays a management fee and, for all classes of shares other than
Class Y shares, also pays 12b-1 service and distribution fees to Mitchell
Hutchins. Mitchell Hutchins is responsible for the payment of all other expenses
of the Portfolios with the exception of extraordinary expenses. Investors should
note that they may invest directly in the Underlying Funds and thereby avoid
incurring the management fee paid by each Portfolio.
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Prospectus Page 6
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge on Purchases of Shares
(as a % of offering price)..................... 4.50%(1) None None None
Sales Charge on Reinvested Dividends (as
a % of offering price)......................... None None None None
Maximum Contingent Deferred Sales Charge as a %
(of offering price or net asset value at None 5% 1%(2) None
the time of sale, whichever is less)..........
Exchange Fees..................................... None None None None
(1) 4.00% for Conservative Portfolio
(2) 0.75% for Conservative Portfolio
ANNUAL FUND OPERATING EXPENSES (as a % of average net assets)
GROWTH PORTFOLIO
Management Fees........................... 0.35% 0.35% 0.35% 0.35%
---- ---- ---- ----
12b-1 Fees................................ 0.25 1.00 1.00 None
Other Expenses............................ None None None None
----- ----- ----- -----
Total Operating Expenses.......................... 0.60% 1.35% 1.35% 0.35%
==== ==== ==== ====
MODERATE PORTFOLIO
Management Fees................................... 0.35% 0.35% 0.35% 0.35%
12b-1 Fees........................................ 0.25 1.00 1.00 None
---- ---- ---- ----
Other Expenses.................................... None None None None
---- ---- ---- ----
Total Operating Expenses.......................... 0.60% 1.35% 1.35% 0.35%
==== ==== ==== ====
CONSERVATIVE PORTFOLIO
Management Fees................................... 0.35% 0.35% 0.35% 0.35%
---- ---- ---- ----
12b-1 Fees........................................ 0.25 1.00 0.75 None
Other Expenses.................................... None None None None
---- ---- ---- ----
Total Operating Expenses.......................... 0.60% 1.35% 1.10% 0.35%
==== ==== ==== ====
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</TABLE>
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Prospectus Page 7
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
CLASS A SHARES: Sales charge waivers and reduced sales charges are available.
Purchases of $1 million or more are not subject to an initial sales charge.
However, if these shares are sold by the shareholder within one year after
purchase, a contingent deferred sales charge of 1% is imposed on the offering
price or the net asset value of the shares at the time of sale, whichever is
less.
CLASS B SHARES: Sales charge waivers are available. The maximum 5% contingent
deferred sales charge applies to sales of shares during the first year after
purchase. The charge generally declines by 1% annually, reaching zero after six
years.
CLASS C SHARES: If shares are sold by the shareholder within one year after
purchase, a contingent deferred sales charge of 1% (0.75% for Conservative
Portfolio) is imposed on the offering price or the net asset value of the shares
at the time of sale, whichever is less.
CLASS Y SHARES: No initial or contingent deferred sales charge is imposed, nor
are Class Y shares subject to 12b-1 distribution or service fees. Class Y shares
may be purchased by participants in the INSIGHT Investment Advisory Program
("INSIGHT") sponsored by PaineWebber, when purchased through that program.
Participation in INSIGHT is subject to payment of an advisory fee at the maximum
annual rate of 1.50% of assets held through INSIGHT (generally charged quarterly
in advance), which may be charged to the INSIGHT participant's PaineWebber
account. This account charge is not included in the table because non-INSIGHT
participants are permitted to purchase Class Y shares of the Portfolios.
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12b-1 distribution fees are asset-based sales charges. Long-term Class B
and Class C shareholders may pay more in direct and indirect sales charges
(including 12b-1 distribution fees) than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. 12b-1 fees have two components, as follows:
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
12b-1 services fees...................... 0.25% 0.25% 0.25% None
12b-1 distribution fees.................. 0.00% 0.75% 0.75%(1) None
_______________________________
(1) 0.50% for Conservative Portfolio
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Prospectus Page 8
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
For more information, see "Management" and "Flexible Pricing[SERVICEMARK]."
The following table shows the expense ratios applicable to Class Y shareholders
of each Underlying Fund, based on operating expenses for its last fiscal year
ended before July 31, 1997 (except for High Income Fund and Investment Grade
Income Fund, for which the expense ratios are based on estimated operating
expenses for the current fiscal year because no Class Y shares were outstanding
during their last fiscal years). The Portfolios invest only in Class Y shares of
the Underlying Funds and, accordingly, pay no sales load or 12b-1 service or
distribution fees in connection with these investments. The Portfolios, however,
indirectly bear their pro rata share of the operating expenses applicable to
Class Y shareholders of the Underlying Funds. As a result, the investment
returns of each Portfolio will reflect the operating expenses of the Underlying
Funds that it holds.
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UNDERLYING PAINEWEBBER FUND EXPENSE RATIO OF
CLASS Y SHARES (AS
A PERCENTAGE OF
NET ASSETS)
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PAINEWEBBER GLOBAL FUNDS
PaineWebber Global Equity Fund 1.17%
PaineWebber Global Income Fund 0.96%
PAINEWEBBER STOCK FUNDS
PaineWebber Growth Fund 1.02%
PaineWebber Growth and Income Fund 0.88%
PaineWebber Small Cap Fund 1.72%
PAINEWEBBER BOND FUNDS
PaineWebber High Income Fund 0.71%
PaineWebber Investment Grade Income Fund 0.69%
PaineWebber Low Duration U.S. Government Income Fund 0.99%
PaineWebber U.S. Government Income Fund 0.64%
PAINEWEBBER MONEY MARKET FUND
PaineWebber Cashfund (1) 0.63%
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(1) PaineWebber Cashfund offers only one class of shares but does not charge
any sales load or 12b-1 service or distribution fees.
The following table shows the estimated approximate aggregate expense ratios of
each Portfolio (that is, the expense ratios of the Portfolio and those of the
Class Y shares of the Underlying Funds), based on a weighted average of the
Class Y expense ratios of the Underlying Funds in which each Portfolio currently
expects to invest for its initial allocation period. These expense ratios may be
higher or lower depending on the actual allocation of a Portfolio's assets among
the Underlying Funds and the expenses actually incurred by those Underlying
Funds.
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Prospectus Page 9
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
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MITCHELL HUTCHINS PORTFOLIO AGGREGATE ESTIMATED EXPENSE RATIO
(AS A PERCENTAGE OF NET ASSETS)
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Growth Portfolio
Class A 1.76%
Class B 2.51%
Class C 2.51%
Class Y 1.51%
Moderate Portfolio
Class A 1.57%
Class B 2.32%
Class C 2.32%
Class Y 1.32%
Conservative Portfolio
Class A 1.43%
Class B 2.18%
Class C 1.93%
Class Y 1.18%
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EXAMPLES OF EFFECT OF FUND EXPENSES
The following examples should assist investors in understanding various
costs and expenses incurred as shareholders of a Portfolio. These expenses
reflect the aggregate estimated expense ratio of each Portfolio, which includes
the estimated expenses of the Underlying Funds. The assumed 5% annual return
shown in the examples is required by regulations of the Securities and Exchange
Commission ("SEC") applicable to all mutual funds. THESE EXAMPLES SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES OF A
PORTFOLIO MAY BE MORE OR LESS THAN THOSE SHOWN.
An investor would pay the following expenses, directly or indirectly, on a
$1,000 investment in a Portfolio, assuming a 5% annual return:
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Prospectus Page 10
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
GROWTH PORTFOLIO
EXAMPLE 1 YEAR 3 YEARS
------ -------
Class A................................................. $62 $ 98
Class B (Assuming sale of all shares at end of period).. $75 $108
Class B (Assuming no sale of shares).................... $25 $ 78
Class C (Assuming sale of all shares at end of period).. $35 $ 78
Class C (Assuming no sale of shares).................... $25 $ 78
Class Y................................................. $15 $ 48
MODERATE PORTFOLIO
EXAMPLE 1 YEAR 3 YEARS
------ -------
Class A................................................. $60 $ 92
Class B (Assuming sale of all shares at end of period).. $74 $102
Class B (Assuming no sale of shares).................... $24 $ 72
Class C (Assuming sale of all shares at end of period).. $34 $ 72
Class C (Assuming no sale of shares).................... $24 $ 72
Class Y................................................. $13 $ 42
CONSERVATIVE PORTFOLIO
EXAMPLE 1 YEAR 3 YEARS
------ -------
Class A................................................. $54 $ 83
Class B (Assuming sale of all shares at end of period).. $72 $ 98
Class B (Assuming no sale of shares).................... $22 $ 68
Class C (Assuming sale of all shares at end of period).. $27 $ 61
Class C (Assuming no sale of shares).................... $20 $ 61
Class Y................................................. $12 $ 37
ASSUMPTIONS MADE IN THE EXAMPLES
o ALL CLASSES: Allocation of each Portfolio's assets among the Underlying Funds
remains the same. Reinvestment of all dividends and other distributions;
percentage amounts listed under "Annual Fund Operating Expenses" remain the
same for the years shown.
o CLASS A SHARES: Deduction of the maximum 4.5% (4.0% for Conservative
Portfolio) initial sales charge at the time of purchase.
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Prospectus Page 11
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
o CLASS B SHARES: Deduction of the maximum applicable contingent deferred sales
charge at the time of sale, which declines over a period of six years.
o CLASS C SHARES: Deduction of a 1% (0.75% for Conservative Portfolio)
contingent deferred sales charge for sales of shares within one year of
purchase.
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INVESTMENT OBJECTIVES & POLICIES
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The investment objectives of the Portfolios may not be changed without
shareholder approval. Each Portfolio seeks to achieve its investment objective
by investing within specified ranges among certain Underlying Funds. Each
Portfolio seeks to maintain different allocations between Underlying Funds that
are equity funds and Underlying Funds that are bond funds (including a money
market fund) depending on its investment objective.
Mitchell Hutchins allocates investments for each Portfolio among Underlying
Funds based on Mitchell Hutchins' outlook for the economy, financial markets and
the relative performance of the Underlying Funds. Based on Mitchell Hutchins'
recommendations, the board of trustees ("board") of the Portfolios has
established investment ranges that designate minimum and maximum percentages for
the allocation of each Portfolio's assets between equity funds and bond funds
and for the percentage of the Portfolio's assets that may be invested in a
particular Underlying Fund.
The two tables that follow set forth for each Portfolio the initial equity/bond
fund allocation targets and the permissible investment ranges for the Underlying
Funds.
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Prospectus Page 12
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
EQUITY/BOND FUND RANGE (% OF EACH PORTFOLIO'S NET ASSETS)
MITCHELL HUTCHINS PORTFOLIO INVESTMENT OBJECTIVE TARGET RANGE
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Growth Portfolio Long-Term Growth of Capital
Equity 80% 70-90%
Bond 20% 10-30%
Moderate Portfolio Total Return
Equity 60% 50%-70%
Bond 40% 30%-50%
Conservative Portfolio Income and, Secondarily,
Long-Term Growth of Capital
Equity 20% 10%-30%
Bond 80% 70%-90%
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INVESTMENT RANGE (% OF EACH PORTFOLIO'S NET ASSETS)
UNDERLYING FUND GROWTH MODERATE CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
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PAINEWEBBER GLOBAL FUNDS
PaineWebber Global Equity Fund 0%-30% 0%-20% 0%
PaineWebber Global Income Fund 0%-10% 0%-20% 5%-15%
PAINEWEBBER STOCK FUNDS
PaineWebber Growth Fund 0%-10% 0%-20% 0%
PaineWebber Growth and Income Fund 20%-40% 20%-40% 10%-30%
PaineWebber Small Cap Fund 20%-40% 0%-20% 0%
PAINEWEBBER BOND FUNDS
PaineWebber High Income Fund 0%-20% 0%-10% 0%
PaineWebber Investment Grade Income 0%-10% 0%-20% 0%-20%
Fund
PaineWebber Low Duration U.S. 0% 0%-10% 20%-40%
Government Income Fund
PaineWebber U.S. Government Income Fund 0% 0%-20% 20%-40%
PAINEWEBBER MONEY MARKET FUNDS
PaineWebber Cashfund 0%-20% 0%-20% 0%-20%
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Prospectus Page 13
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
The Underlying Funds represent a broad spectrum of investments. The equity/bond
ranges and the investment ranges are based on the degree to which Mitchell
Hutchins expects the selected Underlying Funds, in combination, to be
appropriate for a Portfolio's particular investment objective. If appreciation
or depreciation in the value of an Underlying Fund's shares causes the
percentage of a Portfolio's assets invested in that Underlying Fund to exceed or
be less than the applicable investment range, Mitchell Hutchins will consider
whether to reallocate the assets of the Portfolio, but is not required to do so.
The Underlying Funds in which each Portfolio may invest, the equity/bond fund
targets and ranges and the investment ranges applicable to each Underlying Fund
may be changed by the Portfolios' board without shareholder approval.
Each Portfolio maintains cash reserves for meeting redemptions, expenses and in
connection with making new investments. The Portfolios may invest these cash
reserves in Cashfund or may invest directly in short-term U.S. government
securities, high grade short-term commercial paper and repurchase agreements.
When Mitchell Hutchins believes that unusual market or economic conditions
warrant a temporary defensive posture, each Portfolio may invest up to 100% of
its total assets in these securities or in Cashfund.
INVESTMENT OBJECTIVES AND POLICIES OF UNDERLYING FUNDS
The following is a concise description of the investment objectives and policies
of the Underlying Funds in which the Portfolios may invest. As with any mutual
fund, there is no assurance that any Underlying Fund will achieve its investment
objective. The Statement of Additional Information includes more information
about the investment policies of the Underlying Funds. Those policies also are
described more fully in the prospectus of each Underlying Fund. No offer is made
in this Prospectus of shares of any Underlying Fund.
EQUITY FUNDS THE FOLLOWING UNDERLYING FUNDS INVEST PRIMARILY IN EQUITY
SECURITIES.
PAINEWEBBER GLOBAL EQUITY FUND
PAINEWEBBER GROWTH FUND
PAINEWEBBER GROWTH AND INCOME FUND
PAINEWEBBER SMALL CAP FUND
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
BOND FUNDS THE FOLLOWING UNDERLYING FUNDS INVEST PRIMARILY IN FIXED INCOME
SECURITIES.
PAINEWEBBER GLOBAL INCOME FUND
PAINEWEBBER HIGH INCOME FUND
PAINEWEBBER INVESTMENT GRADE INCOME FUND
PAINEWEBBER LOW DURATION U.S. GOVERNMENT INCOME FUND
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
PAINEWEBBER CASHFUND (A MONEY MARKET FUND)
GLOBAL EQUITY FUND
Global Equity Fund's investment objective is long-term growth of capital. The
Fund seeks to achieve this goal by investing primarily in equity securities
issued by companies in foreign countries, as well as in the United States. The
Fund normally invests in at least three countries, one of which is typically the
United States. The Fund normally invests at least 65% of its total assets in
equity securities of foreign and U.S. companies. The Fund may invest up to 35%
of its total assets in investment grade bonds issued by corporate or
governmental entities. The bonds in which the Fund invests have maturities no
longer than seven years. The Fund may assume a temporary defensive position by
investing all or a significant portion of its assets in securities of U.S. and
Canadian issuers or by holding cash or short-term money market investments.
Under normal circumstances, at least 80% of the Fund's total assets are invested
in equity securities or bonds of issuers in countries represented in the Morgan
Stanley Capital International World Index. This is a well-known index that
reflects developed and developing markets throughout the world.
GE Investment Management Incorporated serves as sub-adviser to Global Equity
Fund.
GLOBAL INCOME FUND
Global Income Fund's primary investment objective is high current income
consistent with prudent investment risk; capital appreciation is a secondary
objective. The Fund seeks to achieve these objectives by investing principally
in high-quality debt securities issued or guaranteed by foreign governments, by
the U.S. government, by their respective agencies or instrumentalities or by
supranational organizations, or issued by U.S. or foreign companies. The Fund's
portfolio consists primarily of debt securities rated within one of the two
highest grades assigned by a nationally recognized statistical rating
organization ("NRSRO") or, if unrated, determined by Mitchell Hutchins to be of
comparable quality. Normally, the Fund invests at least 65% of its total assets
in high-quality debt securities, denominated in foreign currencies or U.S.
dollars, of issuers located in at least three of the following countries:
Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong
Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal,
Singapore, Spain, Sweden, Switzerland, Thailand, the United Kingdom and the
United States. No more than 40% of the Fund's assets normally are invested in
securities of issuers located in any one country other than the United States.
Global Income Fund may invest up to 35% of its total assets in debt securities
rated below the two highest grades assigned by an NRSRO. Except as noted below,
these securities must be at least investment grade. Within this 35% limitation,
the Fund may invest up to 20% of its total assets in sovereign debt securities
rated below investment grade.
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
Global Income Fund is a non-diversified fund as defined in the 1940 Act and is
subject to greater risk than funds that have a broader range of investments.
GROWTH FUND
Growth Fund's investment objective is long-term capital appreciation. The Fund
seeks to achieve this objective by investing 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. The Fund may invest up to 35% of its
total assets in U.S. government bonds and in corporate bonds (including up to
10% in bonds and convertible securities rated below investment grade). Up to 25%
of the Fund's total assets may be invested 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 ("OTC") market.
GROWTH AND INCOME FUND
Growth and Income Fund's investment objective is current income and capital
growth. The Fund seeks to achieve this objective by investing primarily in
dividend-paying equity securities believed by Mitchell Hutchins to have the
potential for rapid earnings growth. Normally, the Fund invests at least 65% of
its total assets in these equity securities. The Fund may invest up to 35% of
its total assets in equity securities not meeting these selection criteria, as
well as in U.S. government bonds, corporate bonds and money market instruments,
including up to 10% in convertible bonds rated below investment grade. Up to 25%
of the Fund's total assets may be invested in U.S. dollar-denominated equity
securities and bonds of foreign issuers that are traded on recognized U.S.
exchanges or in the U.S.
OTC market.
SMALL CAP FUND
Small Cap Fund's investment objective is long-term capital appreciation. Under
normal circumstances, the Fund invests at least 65% of its total assets in
equity securities of small cap companies, which are defined as companies having
market capitalizations of up to $1 billion. The Fund may invest up to 35% of its
total assets in equity securities of companies that are larger than small cap
companies, as well as in U.S. government bonds, corporate bonds and money market
instruments, including up to 10% of total assets in convertible bonds rated
below investment grade. Up to 25% of the Fund's total assets may be invested in
U.S. dollar-denominated equity securities of foreign issuers traded on
recognized U.S. exchanges or in the U.S. OTC market.
HIGH INCOME FUND
High Income Fund's investment objective is to provide high income. The Fund
normally invests at least 65% of its total assets in high yield, high risk,
income producing, corporate bonds that, at the time of purchase, are rated B or
better by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P"), or Moody's Investors Service, Inc. ("Moody's"), are comparably rated by
another NRSRO or, if unrated, are considered to be of comparable quality by
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
Mitchell Hutchins. The Fund also may invest up to 35% of its total assets in (1)
bonds that are rated below B or comparable unrated bonds; (2) U.S. government
bonds; (3) preferred stocks; (4) equity securities (including common stocks,
warrants and rights); and (5) money market instruments, including repurchase
agreements. Up to 25% of the Fund's total assets may be invested in bonds and
equity securities that are not paying current income. Up to 35% of the Fund's
net assets may be invested in securities of foreign issuers. 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.
INVESTMENT GRADE INCOME FUND
Investment Grade Income Fund's objective is to provide high current income
consistent with the preservation of capital and liquidity. The Fund normally
invests at least 65% of its total assets in U.S. government and investment grade
corporate bonds (including mortgage-backed securities). The Fund also may invest
up to 35% of its total assets in the following: (1) corporate bonds that are
rated below investment grade; (2) preferred stocks; (3) convertible securities;
(4) asset-backed securities; (5) commercial paper or variable amount master
notes whose issuers, at the time the security is purchased by the Fund, have
outstanding either long-term bonds that are rated investment grade by S&P or
Moody's or commercial paper rated in the highest rating category by S&P or
Moody's; and (6) other money market instruments, including repurchase
agreements.
Investment Grade Income Fund may invest in mortgage-backed securities only if
they are U.S. government issued or guaranteed or if, at the time of purchase,
they are investment grade. The Fund may invest in other asset-backed securities
only if, at the time of purchase, they are rated in one of the two highest
rating categories by S&P or Moody's. Also, the Fund may not invest more than 10%
of its total assets in interest-only and principal-only classes of
mortgage-backed securities.
Up to 20% of the Investment Grade Income Fund's net assets may be invested in
certain foreign securities. These are: (1) U.S. dollar-denominated securities of
foreign issuers or of foreign branches of U.S. banks that are traded in the U.S.
securities markets; and (2) securities that are U.S. dollar-denominated but
whose value is linked to the value of foreign currencies.
U.S. GOVERNMENT INCOME FUND AND
LOW DURATION U.S. GOVERNMENT INCOME FUND ("LOW DURATION INCOME FUND")
U.S. Government Income Fund's investment objective is to provide high income
consistent with the preservation of capital and liquidity. Low Duration Income
Fund's investment objective is to achieve the highest level of income consistent
with the preservation of capital and low volatility of net asset value.
Low Duration Income Fund seeks to limit (but not eliminate) the volatility of
net asset value by normally maintaining an overall portfolio duration of from 1
to 3 years. U.S. Government Income Fund has no fixed portfolio duration policy.
"Duration" is a measure of the expected life of a fixed income security on a
present value basis.
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
Each Fund normally invests at least 65% of its total assets in U.S. government
bonds (including mortgage-backed securities) and repurchase agreements with
respect to them. Each Fund also may invest up to 35% of its total assets in
privately issued mortgage-backed and asset-backed securities that, at the time
of purchase, are rated in the highest rating category by a nationally recognized
rating agency, such as S&P or Moody's, or if unrated, are considered to be of
comparable quality by Mitchell Hutchins or, for Low Duration Income Fund, its
sub-adviser.
Each Fund has a fundamental policy of normally concentrating at least 25% of its
total assets in U.S. government and privately issued mortgage- and asset-backed
securities. This policy has the effect of increasing each Fund's exposure to the
risks of these securities and might cause the Fund's net asset value to
fluctuate more than otherwise would be the case. Some types of mortgage-backed
securities, including "interest only," "principal-only" and inverse floating
rate classes of these securities can be extremely volatile and may become
illiquid. Low Duration Income Fund does not invest in these classes of
mortgage-backed securities.
Pacific Investment Management Company ("PIMCO") serves as sub-adviser for Low
Duration Income Fund.
CASHFUND
Cashfund's investment objective is to provide current income, stability of
principal and high liquidity. The Fund invests exclusively in high quality money
market instruments having or deemed to have remaining maturities of 13 months or
less. These instruments include U.S. government securities, obligations of U.S.
and foreign banks, commercial paper and other short-term obligations of U.S. and
foreign companies, governments and similar entities, variable and floating rate
securities and participation interests and repurchase agreements involving any
of the foregoing. The Fund maintains a dollar-weighted average portfolio
maturity of 90 days or less.
Shares of Cashfund are not insured or guaranteed by the U.S. government.
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INVESTMENT PHILOSOPHY & PROCESS
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A team of three Mitchell Hutchins' Chief Investment Officers ("Team") will
employ a two-step approach to allocate each Portfolio's investments among the
Underlying Funds. First, the Team will allocate each Portfolio's assets among
five basic categories of Underlying Funds: U.S. equity, global equity, U.S.
bond, global bond and money market. (The Portfolios may invest in a money market
fund or directly in money market instruments.)
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
A Portfolio may deviate from its target allocations within the established
investment ranges for equity and fixed income securities when the Team's
analysis indicates that a different allocation is more likely to achieve the
Portfolio's goals. The Team will base its category allocation decisions in part
on quantitative models, which include analysis of various factors, such as
price-to-earnings ratios, inflation rates, real interest rates and the yield
curve in the United States and overseas. Analysis of these variables generates
estimated returns of equities in the four major stock markets (the United
States, the United Kingdom, Germany and Japan) that represent in excess of 70%
of global market capitalization, the estimated changes of bond yields in the U.
S. bond market and global bond markets, and the estimated spreads between these
yields.
After deciding the appropriate category allocation for each Portfolio, the Team
then allocates a Portfolio's investments among the Underlying Funds within each
of the five categories. For example, in making a decision to allocate among the
Underlying Funds that invest in U.S. bonds, the Team will evaluate relevant
factors including the outlook for the direction of interest rates, the duration
of the relevant Underlying Funds' portfolio and yield differentials between
sectors of the bond markets. Similarly, the Team may consider factors such as
the relative valuations of different sectors of the equity market (that is,
large capitalization or small capitalization) and the risks of the different
sectors when deciding the appropriate allocation among U.S. equity funds.
In addition to using quantitative analysis, Team members may rely on their own
judgment, as well as the judgment of the Underlying Funds' portfolio managers,
when making investment decisions. The Team will consider reallocating Portfolio
investments at least quarterly, but may make allocation decisions more
frequently if market conditions warrant.
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PERFORMANCE
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PERFORMANCE OF UNDERLYING FUNDS
The following table shows the average annual total returns of each Underlying
Fund (other than Cashfund) for the most recent one-, five- and ten-year periods
(or since inception if shorter). The performance information reflects both
standardized and non-standardized returns. These terms are defined below in
"Performance Information" in this section. Standardized returns are net of the
maximum applicable initial and contingent deferred sales charges and other
distribution-related expenses and service fees. Non-standardized returns do not
reflect maximum applicable sales charges and thus are higher than standardized
returns.
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
The Portfolios invest in Class Y shares of the Underlying Funds (other than
Cashfund), which are not subject to sales charges and distribution-related
expenses and service fees. However, Class A, B or C shares of the Portfolios are
subject to these sales charges and expenses, all of which will reduce the
returns to an investor. For the Underlying Funds that invest predominantly in
bonds, 30-day yield is also given. For Cashfund, yield and effective yield are
shown in a footnote.
<TABLE>
<CAPTION>
PERFORMANCE OF UNDERLYING FUNDS
30-Day
Underlying Fund Assets of Yield for
all Classes as Inception period ended
of 6/30/97 Date Class(1) One Year Five Years Ten Years 6/30/97
($000's)
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<S> <C> <C> <C> <C> <C> <C> <C>
PAINEWEBBER GLOBAL FUNDS
PaineWebber Global Equity Fund 561,299 11/14/91 A
Standardized Return 12.70% 11.80% N/A N/A
Non-Standardized Return 18.00 12.84 N/A N/A
PaineWebber Global Income Fund 710,126 03/20/87 B
Standardized Return 0.36% 4.62% 9.08% 4.60%
Non-Standardized Return 5.36 4.96 9.08 4.60
PAINEWEBBER STOCK FUNDS
PaineWebber Growth Fund 369,636 03/18/85 A
Standardized Return 0.24 12.55 11.36 N/A
Non-Standardized Return 4.97 13.59 11.88 N/A
PaineWebber Growth and Income Fund 863,952 12/20/83 A
Standardized Return 25.95 13.52 11.26 N/A
Non-Standardized Return 31.89 14.56 11.77 N/A
PaineWebber Small Cap Fund 89,904 02/01/93 B
Standardized Return 13.62 N/A N/A N/A
Non-Standardized Return 18.62 N/A N/A N/A
PAINEWEBBER BOND FUNDS
PaineWebber High Income Fund 588,023 08/31/84 A
Standardized Return 11.46 9.36 9.26 8.65
Non-Standardized Return 16.16 10.26 9.71 8.65
PaineWebber Investment Grade
Income Fund 286,471 08/31/84 A
Standardized Return 5.69 6.89 8.35 6.44
Non-Standardized Return 10.13 7.76 8.80 6.44
PaineWebber Low Duration
U.S. Government Income Fund 164,361 05/03/93 C
Standardized Return 6.09 N/A N/A 4.80
Non-Standardized Return 6.84 N/A N/A 4.80
PaineWebber U.S. Government
Income Fund 383,903 08/31/84 A
Standardized Return 2.59 2.82 6.23 5.90
Non-Standardized Return 6.86 3.66 6.67 5.90
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
(1) The class outstanding for the longest period. If more than one class is outstanding for the
longest period, the table shows performance for the class that represents the largest portion
of the Underlying Fund's net assets.
(2) For the seven-day period ended June 30, 1997, PaineWebber Cashfund's yield was 5.07% and its
effective yield was 5.20%.
</TABLE>
The past performance of the Underlying Funds is not a guarantee of future
results for either the Underlying Funds or the Portfolios. Further information
about each Underlying Fund's performance is contained in its Annual Report to
Shareholders, which may be obtained without charge by contacting the Underlying
Fund, your PaineWebber investment executive or PaineWebber's correspondent firms
or by calling toll-free 1-800-647-1568.
PERFORMANCE INFORMATION
The Portfolios perform a standardized computation of annualized total return and
may show this return in advertisements or promotional materials. Standardized
return shows the change in value of an investment in a Portfolio as a steady
compound annual rate of return. Actual year-by-year returns fluctuate and may be
higher or lower than standardized return. Standardized returns for Class A
shares of the Portfolios reflect deduction of the Portfolios' maximum initial
sales charge of 4.5% (4.0% for Conservative Portfolio) at the time of purchase,
and standardized returns for the Class B and Class C shares of the Portfolios
reflect deduction of the applicable contingent deferred sales charge imposed on
the sale of shares held for the period. One-, five- and ten-year periods will be
shown, unless the Portfolio or class has been in existence for a shorter period.
If so, returns will be shown for the period since inception.
The Portfolios may use other total return presentations (sometimes referred to
as non-standardized return) in conjunction with standardized return. These may
cover the same or different periods as those used for standardized return and
may include cumulative returns, average annual rates, actual year-by-year rates
or any combination thereof. Non-standardized return does not reflect initial or
contingent deferred sales charges and would be lower if such charges were
deducted.
Moderate Portfolio and Conservative Portfolio also may advertise their yields.
Yield reflects investment income net of expenses over a 30-day (or one-month)
period on the Portfolio share, expressed as an annualized percentage of the
maximum offering price per share for Class A shares and net asset value per
share for Class B, Class C and Class Y shares at the end of the period. Yield
computations differ from other accounting methods and thus may differ from
dividends actually paid or reported net income.
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
The Underlying Funds perform the same standardized computation of annualized
total return as the Portfolios, and the Bond Funds perform the same yield
computations.
As a money market fund, Cashfund may advertise its yield and effective yield
based on the income earned on an investment in Cashfund over a specified seven
day period. That income is then "annualized" (that is, assumed to be earned each
week over a 52-week period) and shown as a percentage of the investment. The
effective yield is calculated similarly but, when annualized, the income earned
is assumed to be reinvested. The effective yield will be higher than the yield
because of the compounding effect of this assumed reinvestment.
All total return and yield information reflects past performance and does not
indicate future results. The investment return and principal value of shares of
the Portfolios and the Underlying Funds will fluctuate. The amount investors
receive when selling shares may be more or less than what they paid.
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INVESTMENTS OF THE PORTFOLIOS AND THE UNDERLYING FUNDS
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INVESTMENTS AND RISKS OF THE PORTFOLIOS
The performance of a Portfolio will directly reflect the investment performance
of the Underlying Funds it holds. As a result, the Portfolios' ability to meet
their investment objectives depends both on the allocation of their assets among
the various Underlying Funds and the ability of those Underlying Funds to meet
their investment objectives. An investment in a Portfolio is subject to all the
risks of an investment directly in the Underlying Funds it holds.
The value of the Underlying Funds' investments, and thus the net asset value of
both the Underlying Funds and the Portfolios, will fluctuate in response to
changes in market and economic conditions, as well as the financial condition
and prospects of issuers in which the Underlying Funds invest.
Each Portfolio invests in a limited number of Underlying Funds and may invest
more than 25% of its assets in a single Underlying Fund. As a result, the
performance of a single Underlying Fund can have a significant affect on the
performance of a Portfolio and the price of that Portfolio's shares.
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
The shareholders of a Portfolio will be subject to the risks of the securities
held by and the investment techniques used for an Underlying Fund in direct
proportion to the amount of assets allocated by that Portfolio to the Underlying
Fund. The risks of each Underlying Fund are determined by the nature of the
securities it holds and the investment techniques and strategies used by
Mitchell Hutchins or a sub-adviser. Certain of these securities, investment
techniques and related risks are described here. More information is available
in the Statement of Additional Information and in the prospectuses of the
Underlying Funds.
TYPES OF SECURITIES OF THE UNDERLYING FUNDS
EQUITY SECURITIES include common stocks, preferred stocks and securities that
are convertible into them, including convertible debentures and notes and common
stock purchase warrants and rights. Common stocks, the most familiar type,
represent an equity (ownership) interest in a corporation.
Preferred stock has certain fixed-income features, like a bond, but is actually
equity in a company, like common stock. Convertible securities may include
debentures, notes and preferred equity securities, which are convertible into
common stock.
BONDS are fixed or variable rate obligations, including notes, debentures and
similar debt instruments and securities. Mortgage- and asset-backed securities
are types of bonds. Corporations, governments and other issuers use bonds to
borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest and must repay the amount borrowed at or before maturity. Bonds
have varying degrees of investment risk and varying levels of sensitivity to
changes in interest rates.
U.S. GOVERNMENT BONDS include direct obligations of the U.S. government (such as
U.S. Treasury bills, notes and bonds) and obligations issued or guaranteed by
the U.S. government, its agencies or its instrumentalities. U.S. government
bonds include mortgage-backed securities issued or guaranteed by government
agencies or government-sponsored enterprises. Other U.S. government bonds may be
backed by the full faith and credit of the U.S. government or supported
primarily or solely by the creditworthiness of the government-related issuer,
such as the Resolution Funding Corporation, the Student Loan Marketing
Association ("Sallie Mae"), the Federal Home Loan Banks and the Tennessee Valley
Authority.
CORPORATE BONDS are bonds issued by corporations, banks, partnerships, trusts or
other non-governmental entities.
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
MORTGAGE- AND ASSET-BACKED SECURITIES are bonds backed by specific types of
assets. Mortgage-backed securities represent direct or indirect interests in
pools of underlying mortgage loans that are secured by real property. U.S.
government mortgage-backed securities are issued or guaranteed as to principal
and interest (but not as to market value) by the Government National Mortgage
Association ("Ginnie Mae"), Fannie Mae (also known as the Federal National
Mortgage Association), Freddie Mac (also know as the Federal Home Loan Mortgage
Corporation) or other government-sponsored enterprises. Other mortgage-backed
securities are sponsored or issued by private entities, including investment
banking firms and mortgage originators. The growth of mortgage-backed securities
and the secondary mortgage market in which they are traded has helped to keep
mortgage money available for home financing. Mortgage-backed securities may be
composed of one or more classes and may be structured as either pass-through
securities or collateralized debt obligations.
Other asset-backed securities are similar to mortgage-backed securities, except
that the underlying assets are different. These underlying assets may be nearly
any type of financial asset or receivable, such as motor vehicle installment
sales contracts, home equity loans, leases of various types of real and personal
property and receivables from credit cards.
MONEY MARKET SECURITIES are high quality, short term instruments and include
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, bank certificates of deposit, bankers' acceptances, high
grade commercial paper and repurchase agreements secured by these instruments.
RISKS OF THE UNDERLYING FUNDS
Following is a discussion of the risks that are common to a number of the
Underlying Funds:
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 an Underlying Fund may
experience a substantial or complete loss on an individual equity investment.
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
BONDS - INTEREST RATE 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 the Underlying Fund's investments. In general, bonds having longer
durations are more sensitive to interest rate changes than are bonds with
shorter durations. "Duration" is a measure of the expected life of a fixed
income security on a present value basis. See "Duration."
Credit risk is the risk the issuer or guarantor may be unable to pay interest or
repay principal on the bond. This can be affected by many factors, including
adverse changes in the issuer's own financial condition or in economic
conditions.
DURATION. Duration incorporates a bond's yield, coupon interest rate payments,
final maturity and call features into one measure and is one of the fundamental
tools used by Mitchell Hutchins or a sub-adviser in portfolio selection and
yield curve positioning for the Underlying Funds.
Duration takes the length of the time intervals between the present time and the
time that the interest and principal payments are scheduled or, in the case of a
callable bond, expected to be made, and weights them by the present values of
the cash to be received at each future point in time. For any bond with interest
payments occurring prior to the payment of principal, duration is always less
than maturity.
Duration allows Mitchell Hutchins or a sub-adviser to make certain predictions
as to the effect that changes in the level of interest rates will have on the
value of an Underlying Fund's portfolio. 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 expected. 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.
CREDIT RATINGS; BONDS RATED BELOW INVESTMENT GRADE. Credit ratings attempt to
evaluate the safety of principal and interest payments, but they do not evaluate
the volatility of the security's value or its liquidity and do not guarantee the
performance of the issuer. Rating agencies may fail to make timely changes in
credit ratings in response to subsequent events, so that an issuer's current
financial condition may be better or worse than the rating indicates. There is a
risk that rating agencies may downgrade bonds.
Investment grade bonds are rated in one of the four highest rating categories by
a nationally recognized rating agency, such as S&P or Moody's, or, if unrated,
are considered to be of comparable quality by Mitchell Hutchins or the
applicable sub-adviser. 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.
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
High yield, high risk bonds are rated below investment grade and are commonly
referred to as "junk bonds." High Income Fund may invest without limit in these
bonds and other Underlying Funds may invest significant portions of their assets
in them. High yield, high risk bonds are considered predominantly speculative
with respect to the issuer's ability to pay interest and repay principal. An
Underlying Fund's investments in these lower rated bonds entail greater risk
than its investments in investment grade bonds. Lower rated bonds may be more
sensitive to adverse market conditions. During an economic downturn or period of
rising interest rates, their issuers may experience financial stress that
adversely affects their ability to pay interest and repay principal and may
increase the possibility of default. Lower rated bonds are frequently unsecured
by collateral and will not receive payment until more senior claims are paid in
full. The market for these bonds is thinner and less active, which may limit the
Underlying Funds' ability to sell them at fair value in response to changes in
the economy or financial markets.
FOREIGN SECURITIES. Investing in foreign securities involves more risks than
investing in securities of U.S. companies. Their value is subject to economic
and political developments in the countries where the companies operate and to
changes in foreign currency values. Values may also be affected by foreign tax
laws, changes in foreign economic or monetary policies, exchange control
regulations and regulations involving prohibitions on the repatriation of
foreign currencies. Investments in foreign countries could be affected by other
factors not present in the United States, including expropriation, confiscatory
taxation, lack of uniform accounting and auditing standards and potential
difficulties in enforcing contractual obligations and could be subject to
extended clearance and settlement periods.
In general, less information may be available about foreign companies than about
U.S. companies, and foreign companies are generally not subject to the same
accounting, auditing and financial reporting standards as are U.S. companies.
Foreign securities markets may be less liquid and subject to less regulation
than the U.S. securities markets. The costs of investing outside the United
States frequently are higher than those in the United States. These costs
include relatively higher brokerage commissions and foreign custody expenses.
EMERGING MARKET SECURITIES. Investing in securities issued by companies located
in emerging market countries involves additional risks. These countries
typically have economic and political systems that are relatively less mature,
and can be expected to be less stable, than those of developed countries.
Emerging market countries may have policies that restrict investment by
foreigners in those countries, and there is a risk of government expropriation
or nationalization of private property. The possibility of low or nonexistent
trading volume in the securities of companies in emerging market countries may
also result in a lack of liquidity and in price volatility. Issuers in emerging
market countries typically are subject to a greater degree of change in earnings
and business prospects than are companies in developed markets.
CURRENCY. Currency risk is the risk that changes in foreign exchange rates may
reduce the U.S. dollar value of an Underlying Fund's foreign investments. An
Underlying Fund's share value may change significantly when investments are
denominated in foreign currencies. Generally, currency exchange rates are
determined by supply and demand in the foreign exchange markets and the relative
merits of investments in different countries. Currency exchange rates can also
be affected by the intervention of the U.S. and foreign governments or central
banks, the imposition of currency controls, speculation or other political or
economic developments inside and outside the United States.
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DERIVATIVES. Some of the instruments in which the Underlying Funds may invest
may be referred to as "derivatives," because their value depends on (or
"derives" from) the value of an underlying asset, reference rate or index. These
instruments include options, futures contracts, forward currency contracts,
interest rate protection contracts and similar instruments that may be used in
hedging and related strategies. There is limited consensus as to what
constitutes a "derivative" security. The market value of derivative instruments
and securities sometimes is more volatile than that of other investments, and
each type of derivative instrument may pose its own special risks. Mitchell
Hutchins and the applicable sub-advisers take these risks into account in their
management of the Underlying Funds.
ZERO COUPON, OID AND PIK BONDS. Zero coupon bonds are Treasury bills, notes and
bonds that have been stripped of their unmatured interest coupons, and receipts
or certificates representing interest in such stripped debt obligations and
coupons. A zero coupon security pays no cash interest to its holder prior to
maturity. The buyer of a zero coupon bond receives a rate of return from the
gradual appreciation of the securities that occurs because it will be redeemed
at face value on a specified maturity date. Federal tax law requires that the
holder of a zero coupon security and other securities issued with original issue
discount ("OID") include in gross income each year the OID that accrues on the
security for the year.
Because zero coupon bonds bear no interest, they usually trade at a discount
from their face or par value and they are generally more sensitive to changes in
interest rates than other bonds. This means that when interest rates fall, the
value of zero coupon bonds rises more rapidly than bonds paying interest on a
current basis. However, when interest rates rise, their value falls more
dramatically.
Interest or dividends on payment in kind ("PIK") bonds are paid in additional
securities. PIK bonds also often trade at a discount from their face or par
value and also are subject to greater fluctuations in market value in response
to changing interest rates than comparable securities that pay interest or
dividends in cash.
SOVEREIGN DEBT AND BRADY BONDS. Sovereign debt includes bonds that are issued or
guaranteed by foreign governments or their agencies, instrumentalities or
political subdivisions or by foreign central banks. Sovereign debt also may be
issued by quasi-governmental entities that are owned by foreign governments but
are not backed by their full faith and credit or general taxing powers. The
issuer of the debt or the governmental authorities that control the repayment of
the debt may be unable or unwilling to pay interest or repay principal when due
in accordance with the terms of such debt, and the Underlying Fund may have
limited legal recourse in the event of default. Political conditions, especially
a sovereign entity's willingness to meet the terms of its debt obligations, are
of considerable significance.
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Brady bonds are sovereign debt securities issued under a 1989 plan (named for
former Secretary of the Treasury Nicolas F. Brady) that allows emerging market
countries to restructure their outstanding debt to U.S. and other banks.
Although Brady Bonds are collateralized by U.S. government securities, payment
of interest and repayment of principal is not guaranteed by the U.S. government.
MORTGAGE-BACKED SECURITIES. 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. When interest rates go down and homeowners refinance their mortgages,
mortgage-backed securities may be paid off more quickly than investors expect.
When interest rates rise, mortgage-backed securities may be paid off more slowly
than originally expected. Changes in the rate or "speed" of these prepayments
can cause the value of mortgage-backed securities to fluctuate rapidly. Because
of prepayments, mortgage-backed securities may not benefit as much as other
bonds from declining interest rates, and an Underlying Fund may have to reinvest
prepayments in bonds with lower interest rates than the original investment,
thus adversely affecting its yield. Actual prepayment experience may cause the
yield of a mortgage-backed security to differ from what was assumed when the
Underlying Fund purchased the security.
The market for privately issued mortgage- and asset-backed securities is smaller
and less liquid than the market for U.S. government mortgage-backed securities.
Both U.S. government and privately issued mortgage-backed securities may be
composed of one or more classes and may be structured either as pass-through
securities or collateralized debt obligations. Multiple-class mortgage-backed
securities are referred to in this prospectus as "CMOs." CMO classes may be
specially structured in a manner that provides any of a wide variety of
investment characteristics, such as yield, effective maturity and interest rate
sensitivity. As market conditions change, however, and especially during periods
of rapid or unanticipated changes in market interest rates, the attractiveness
of some CMO classes and the ability of the structure to provide the anticipated
investment characteristics may be significantly reduced. These changes can
result in volatility in the market value and, in some instances, reduced
liquidity of the CMO class.
Certain classes of CMOs are structured in a manner that makes them extremely
sensitive to changes in prepayment rates. Interest only ("IO") and principal
only ("PO") classes are examples of this. IOs are entitled to receive all or a
portion of the interest, but none (or only a nominal amount) of the principal
payments, from the underlying mortgage assets. If the mortgage assets underlying
an IO experience greater than anticipated principal prepayments then the total
amount of interest payments allocable to the IO class, and, therefore, the yield
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
to investors, generally will be reduced. In some instances, an investor may fail
to recoup all of his original investment in the IO, even if the security is
government guaranteed or is considered to be of the highest credit quality.
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.
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.
COUNTERPARTIES. The Underlying Funds may be exposed to the risk of financial
failure or insolvency of another party with which the Underlying Fund enters
into a transaction, such as a repurchase agreement or a derivative contract. To
help lessen those risks, Mitchell Hutchins and the applicable sub-advisers,
subject to the supervision of the respective boards, monitor and evaluate the
creditworthiness of the parties with which each Underlying Fund does business.
CONCENTRATION IN MORTGAGE-BACKED SECURITIES. U.S. Government Income Fund and Low
Duration Income Fund each concentrates at least 25% of its total assets in U.S.
government and privately issued mortgage- and asset-backed securities. This
policy has the effect of increasing each of these Underlying Fund's exposure to
the risks of these securities and might cause its net asset value to fluctuate
more than would otherwise be the case. Some types of mortgage-backed securities,
including IOs, POs and inverse floating rate classes of these securities, can be
extremely volatile and may become illiquid. Low Duration Income Fund does not
invest in these classes of mortgage-backed securities.
NON-DIVERSIFIED STATUS. Global Income Fund is "non-diversified," as that term is
defined in the 1940 Act. This means that it is permitted to invest a greater
proportion of its assets in the securities of a smaller number of issuers. As a
result, this Underlying Fund may be subject to greater risk because its return
and the price of its shares may be significantly affected by the market
condition or market assessment of a single issuer.
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INVESTMENT TECHNIQUES AND STRATEGIES
HEDGING AND OTHER STRATEGIES USING DERIVATIVE CONTRACTS. Each Underlying Fund
except Cashfund may use derivative contracts, which may include options (both
exchange traded and over-the-counter), futures contracts and forward currency
contracts, in strategies intended to reduce the overall risk of its investments
("hedge") or, in the case of some Underlying Funds, to enhance income or return
(including reallocating exposure to different asset classes) or realize gains.
Use of these derivative contracts solely to enhance income or realize gains may
be considered a form of speculation. The Underlying Funds that invest
substantially in bonds also may use interest rate swaps and similar contracts to
preserve a return or spread on a particular investment or portion of their
portfolios or to protect against an increase in the price of securities that the
Underlying Fund anticipates purchasing at a later date. New financial products
and risk management techniques continue to be developed, and may be used by an
Underlying Fund if consistent with its investment objective and policies. The
Statement of Additional Information contains further information on these
derivative contracts and related strategies.
The Underlying Funds might not use any derivative contracts or strategies, and
there can be no assurance that using them will succeed. If Mitchell Hutchins or
the applicable sub-adviser is incorrect in its judgment on market values,
interest rates or other economic factors in using a hedging strategy, an
Underlying Fund may have lower net income and a net loss on the investment. Each
of these strategies involves certain risks, which include:
. the fact that the skills needed to implement a strategy using derivative
contracts are different from those needed to select securities for the
Underlying Funds;
. the possibility of imperfect correlation, or even no correlation, between
price movements of derivative contracts used in hedging strategies and
price movements of the securities or currencies being hedged;
. possible constraints placed on an Underlying Fund's ability to purchase or
sell portfolio investments at advantageous times due to the need for the
Underlying Fund to maintain "cover" or to segregate securities; and
. the possibility that an Underlying Fund is unable to close out or liquidate
its hedged position.
REPURCHASE AGREEMENTS. All the Underlying Funds may use repurchase agreements
and the Portfolios also may use them in investing cash reserves. Repurchase
agreements are transactions in which a Portfolio or Underlying Fund purchases
securities from a bank or recognized securities dealer and simultaneously
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commits to resell the securities to the bank or dealer, usually no more than
seven days after purchase, at an agreed upon date or upon demand and at a price
reflecting a market rate of interest unrelated to the coupon rate or maturity of
the purchased securities. Repurchase agreements carry certain risks not
associated with direct investments in securities, including a possible decline
in the market value of the underlying securities and delays and costs to the
Portfolio or Underlying Fund if the other party to the repurchase agreement
becomes insolvent.
BORROWINGS, DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS. U.S. Government
Income Fund and Low Duration Income Fund each may invest in "arbitraged" dollar
roll and reverse repurchase transactions. In a dollar roll, the Underlying Fund
sells mortgage-backed or other securities for delivery on the next regular
settlement date and, simultaneously, contracts to purchase substantially
identical securities for delivery on a later settlement date. In a reverse
repurchase agreement, the Underlying Fund sells securities to a bank or dealer
and agrees to repurchase them on demand or on a specified future date and at a
specified price. In "arbitraged" transactions, the Underlying Fund maintains an
offsetting position in cash or in U.S. government or investment grade bonds that
mature on or before the settlement date of the related dollar roll or reverse
repurchase agreement. Mitchell Hutchins believes that these "arbitraged"
transactions do not present the risks that are normally associated with
leverage. These Underlying Funds may invest up to 5% of their total assets in
dollar rolls that are not arbitraged. These dollar rolls and reverse repurchase
transactions are subject to each Underlying Fund's limitation on borrowings and
may not exceed 33 1/3% of its total assets. Each of these Underlying Funds also
may borrow for temporary or emergency purposes, but not in excess of an
additional 5% of its total assets.
Each other Underlying Fund may borrow money and use reverse repurchase
agreements subject to its limitation on borrowings, which varies from 10% to 33
1/3% of total assets.
Each Portfolio also may borrow money for temporary or emergency purposes in an
amount not exceeding 33 1/3% of its total assets.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Each Underlying Fund may purchase
securities on a "when-issued" or delayed-delivery basis. In when-issued or
delayed-delivery transactions, delivery of the securities occurs beyond normal
settlement periods, but the Underlying Fund would not pay for such securities or
start earning interest on them until they are delivered. However, when the
Underlying Fund purchases securities on a when-issued or delayed-delivery basis,
it immediately assumes the risks of ownership, including the risk of price
fluctuation
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LENDING PORTFOLIO SECURITIES. Each Underlying Fund may lend its securities to
qualified broker-dealers or institutional investors in an amount up to 33 1/3%
of its total assets. Lending securities enables an Underlying Fund to earn
additional income but could result in a loss or delay in recovering these
securities.
PORTFOLIO TURNOVER. Each Portfolio's and Underlying Fund's portfolio turnover
rate may vary greatly from year to year and will not be a limiting factor when
Mitchell Hutchins or a sub-adviser deems portfolio changes appropriate. A higher
turnover rate (100% or more) for a Portfolio or Underlying Fund will involve
correspondingly greater transaction costs, which will be borne directly by the
Portfolio or Underlying Fund, and may increase the potential for short-term
capital gains.
DEFENSIVE POSITIONS; CASH RESERVES. When Mitchell Hutchins or the applicable
sub-adviser believes that unusual market or economic circumstances warrant a
defensive posture, an Underlying Fund may temporarily commit all or any portion
of its assets to cash or investment grade money market instruments of U.S.
issuers (and foreign issuers for some Underlying Funds), including repurchase
agreements. Each Underlying Fund may invest up to 35% of its total assets in
cash or investment grade money market instruments of U.S. issuers (and foreign
issuers for some Underlying Funds) for liquidity purposes or pending investment
in other securities
ILLIQUID SECURITIES. Each Underlying Fund may invest up to 10% or 15% of its net
assets in illiquid securities, including repurchase agreements maturing in more
than seven days, certain cover for OTC options and securities whose disposition
is restricted under the federal securities laws. The Underlying Funds do not
consider securities that are eligible for resale pursuant to SEC Rule 144A to be
illiquid securities if Mitchell Hutchins or the sub-adviser, as applicable, has
determined such securities to be liquid, based upon the trading markets for the
securities under procedures approved by the Underlying Funds' boards. Investing
in 144A securities could have the effect of increasing the level of illiquidity
to the extent that qualified institutional buyers become, for a time,
uninterested in purchasing these securities.
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Each Portfolio may invest up to 15% of its net assets in illiquid securities,
including Rule 144A securities, but intends to use this authorization only in
connection with its investment of cash reserves in short-term securities.
OTHER INFORMATION. Each Underlying Fund may invest up to 10% of its total assets
in the securities of other investment companies. To the extent an Underlying
Fund invests in other investment companies, its shareholders, including the
Portfolios, incur duplicative fees and expenses, including investment advisory
fees.
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FLEXIBLE PRICING[SERVICEMARK]
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Each Portfolio offers through this Prospectus four classes of shares that differ
in terms of sales charges and expenses. An investor can select from among Class
A, B and C the class that is best suited to his or her investment needs, based
upon the holding period and the amount of investment. Certain eligible investors
may select Class Y. The Portfolios and Mitchell Hutchins reserve the right to
reject any purchase order and to suspend the offering of any class of shares for
a period of time.
CLASS A SHARES
HOW PRICE IS CALCULATED: The price is the net asset value plus the initial sales
charge (the maximum is 4.5% of the public offering price; 4% for Conservative
Portfolio) next calculated after PaineWebber's New York City headquarters or
PFPC Inc., the Portfolios' transfer agent ("Transfer Agent"), receives the
purchase order. Although investors pay an initial sales charge when they buy
Class A shares, the ongoing expenses for this class are lower than the ongoing
expenses of Class B and Class C shares. Class A shares sales charges are
calculated as follows:
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GROWTH PORTFOLIO AND MODERATE PORTFOLIO
SALES CHARGE AS DISCOUNT TO
A PERCENTAGE OF SELECTED
---------------------- DEALERS
OFFERING NET AMOUNT AS PERCENTAGE OF
PRICE INVESTED OFFERING PRICE
-------- ----------- -----------------
AMOUNT OF INVESTMENT
- --------------------
Less than $50,000.................. 4.50% 4.71% 4.25%
$50,000 to $99,999................. 4.00 4.17 3.75
$100,000 to $249,999............... 3.50 3.63 3.25
$250,000 to $499,999............... 2.50 2.56 2.25
$500,000 to $999,999............... 1.75 1.78 1.50
$1,000,000 and over (1)............ None None 1.00(2)
CONSERVATIVE PORTFOLIO
SALES CHARGE AS DISCOUNT TO
A PERCENTAGE OF SELECTED
---------------------- DEALERS
OFFERING NET AMOUNT AS PERCENTAGE OF
PRICE INVESTED OFFERING PRICE
-------- ----------- -----------------
AMOUNT OF INVESTMENT
- ---------------------
Less than $100,000................. 4.00% 4.17% 3.75%
$100,000 to $249,999............... 3.00 3.09 2.75
$250,000 to $499,999............... 2.25 2.30 2.00
$500,000 to $999,999............... 1.75 1.78 1.50
$1,000,000 and over (1)............ None None 1.00(2)
(1) A contingent deferred sales charge of 1% of the shares' offering price or
the net asset value at the time of sale by the shareholder, whichever is
less, is charged on sales of shares made within one year of the purchase
date. Class A shares representing reinvestment of any dividends or other
distributions are not subject to the 1% charge. Withdrawals under the
Systematic Withdrawal Plan are not subject to this charge. However,
investors may not withdraw more than 12% of the value of the Portfolio
account under the Plan in the first year after purchase.
(2) Mitchell Hutchins pays 1% to PaineWebber.
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SALES CHARGE REDUCTIONS & WAIVERS
Investors who are purchasing Class A shares in more than one PaineWebber mutual
fund may combine those purchases to get a reduced sales charge. Investors who
already own Class A shares in one or more PaineWebber mutual funds may combine
the amount they are currently purchasing with the value of such previously owned
shares to qualify for a reduced sales charge. To determine the sales charge
reduction in either case, please refer to the charts above.
Investors may also qualify for a lower sales charge when they combine their
purchases with those of:
. their spouses, parents or children under age 21;
. their Individual Retirement Accounts (IRAs);
. certain employee benefit plans, including 401(k) plans;
. any company controlled by the investor;
. trusts created by the investor;
. Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts
created by the investor or group of individuals for the benefit of the
investors' children; or
. accounts with the same adviser.
Employers who own Class A shares for one or more of their qualified retirement
plans may also qualify for the reduced sales charge.
The sales charge will not apply when the investor:
. is an employee, director, trustee or officer of PaineWebber, its affiliates
or any PaineWebber mutual fund;
. is the spouse, parent or child of any of the above;
. buys these shares through a PaineWebber investment executive who was
formerly employed as a broker with a competing brokerage firm that was
registered as a broker-dealer with the SEC; and
. the investor was the investment executive's client at the
competing brokerage firm;
. within 90 days of buying Class A shares in a Portfolio, the
investor sells shares of one or more mutual funds that (a) were
principally underwritten by the competing brokerage firm or its
affiliates and (b) the investor either paid a sales charge to buy
those shares, paid a contingent deferred sales charge when
selling them or held those shares until the contingent deferred
sales charge was waived; and
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. the amount that the investor purchases does not exceed the total
amount of money the investor received from the sale of the other
mutual fund;
. is a certificate holder of unit investment trusts sponsored by PaineWebber
and has elected to have dividends and other distributions from that
investment automatically invested in Class A shares;
. is an employer establishing an employee benefit plan qualified under
section 401, including a salary reduction plan qualified under section
401(k) or section 403(b) of the Internal Revenue Code ("Code") (each a
"qualified plan"). (This waiver is subject to minimum requirements, with
respect to the number of employees and the amount of plan assets,
established by Mitchell Hutchins. Currently, a plan must have 50 or more
eligible employees and at least $1 million in assets.) For investments made
pursuant to this waiver, Mitchell Hutchins may make a payment to
PaineWebber out of its own resources in an amount not to exceed 1% of the
amount invested;
. is a participant in the PaineWebber Members Only Program(TM). For
investments made pursuant to this waiver, Mitchell Hutchins may make
payments out of its own resources to PaineWebber and to participating
membership organizations in a total amount not to exceed 1% of the amount
invested;
. is a variable annuity offered only to qualified plans. For investments made
pursuant to this waiver, Mitchell Hutchins may make payments out of its own
resources to PaineWebber and to the variable annuity's sponsor, adviser or
distributor in a total amount not to exceed 1% of the amount invested; or
. acquires Class A shares through an investment program that is not sponsored
by PaineWebber or its affiliates and that charges participants a fee for
program services, provided that the program sponsor has entered into a
written agreement with PaineWebber permitting the sale of Class A shares at
net asset value to that program. For investments made pursuant to this
waiver, Mitchell Hutchins may make a payment to PaineWebber out of its own
resources in an amount not to exceed 1% of the amount invested. For
subsequent investments or exchanges made to implement a rebalancing feature
of such an investment program, the minimum subsequent investment
requirement is also waived.
For more information on how to get any reduced sales charge, investors should
contact their investment executive at PaineWebber or one of its correspondent
firms or call 1-800-647-1568. Investors must provide satisfactory information to
PaineWebber or the Portfolio if they seek any of these sales charge reductions
or waivers.
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CLASS B SHARES
HOW PRICE IS CALCULATED: The price is the net asset value next calculated after
PaineWebber's New York City headquarters or the Transfer Agent receives the
purchase order. The ongoing expenses investors pay for Class B shares are higher
than those of Class A shares. Because investors do not pay an initial sales
charge when they buy Class B shares, 100% of their purchase is immediately
invested.
Depending on how long they own their Portfolio investment, investors may have to
pay a sales charge when they sell their Portfolio shares. This sales charge is
called a "contingent deferred sales charge." The amount of the charge depends on
how long the investor owned the shares. The sales charge is calculated by
multiplying the offering price (net asset value at the time of purchase) or the
net asset value of the shares at the time of sale by the shareholder, whichever
is less, by the percentage shown on the following table. Investors who own
shares for more than six years do not have to pay a sales charge when selling
those shares.
PERCENTAGE BY WHICH THE
IF THE INVESTOR SELLS SHARES' NET ASSET
SHARES WITHIN: VALUE IS MULTIPLIED
- --------------------- ------------------------
1st year since purchase 5%
2nd year since purchase 4
3rd year since purchase 3
4th year since purchase 2
5th year since purchase 2
6th year since purchase 1
7th year since purchase None
CONVERSION OF CLASS B SHARES
Class B shares automatically convert to the appropriate number of Class A shares
of equal dollar value after the investor has owned them for six years. Dividends
and other distributions paid to the investor by the Portfolio in the form of
additional Class B shares will also convert to Class A shares on a pro-rata
basis. This benefits shareholders because Class A shares have lower ongoing
expenses than Class B shares. If the investor has exchanged Class B shares
between PaineWebber funds, the Portfolio uses the purchase date at which the
initial investment was made to determine the conversion date.
MINIMIZING THE CONTINGENT DEFERRED SALES CHARGE
When investors sell Class B shares they have owned for less than six years, the
Portfolio automatically will minimize the sales charge by assuming the investors
are selling:
. First, Class B shares owned through reinvested dividends and capital gain
distributions; and
. Second, Class B shares held in the Portfolio the longest.
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WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will not apply to:
. sales of shares under the Portfolio's "Systematic Withdrawal Plan"
(investors may not withdraw annually more than 12% of the value of the
Portfolio account under the Plan);
. a distribution from an IRA, a self-employed individual retirement plan
("Keogh Plan") or a custodial account under Section 403(b) of the Code
(after the investor reaches age 59 1/2);
. a tax-free return of an excess IRA contribution;
. a tax-qualified retirement plan distribution following retirement; or
. Class B shares sold within one year of an investor's death if the investor
owned the shares at the time of death either as the sole shareholder or
with his or her spouse as a joint tenant with the right of survivorship.
An investor must provide satisfactory information to PaineWebber or the
Portfolio if the investor seeks any of these waivers.
CLASS C SHARES
HOW PRICE IS CALCULATED: The price of Class C shares is the net asset value next
calculated after PaineWebber's New York City headquarters or the Transfer Agent
receives the purchase order. Investors do not pay an initial sales charge when
they buy Class C shares, but the ongoing expenses of Class C shares are higher
than those of Class A shares. Class C shares never convert to any other class of
shares.
A contingent deferred sales charge of 1% (0.75% for Conservative Portfolio) of
the offering price (net asset value at the time of purchase) or the net asset
value of the shares at the time of sale by the shareholder, whichever is less,
is charged on sales of shares made within one year of the purchase date. Other
PaineWebber mutual funds may impose a different contingent deferred sales charge
on Class C shares sold within one year of the purchase date. A sale of Class C
shares acquired through an exchange and held less than one year will be subject
to the same contingent deferred sales charge that would have been imposed on the
Class C shares of the PaineWebber mutual fund originally purchased. Class C
shares representing reinvestment of any dividends or capital gain distributions
will not be subject to the 1% (0.75% for Conservative Portfolio) charge.
Withdrawals under the Systematic Withdrawal Plan also will not be subject to
this charge. However, investors may not withdraw more than 12% of the value of
the Portfolio account under the Plan in the first year after purchase.
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CLASS Y SHARES
HOW PRICE IS CALCULATED. Class Y shares are sold to eligible investors at the
net asset value next calculated after PaineWebber's New York City headquarters
or the Transfer Agent receives the purchase order. Because investors do not pay
an initial sales charge when they buy Class Y shares, 100% of their purchase is
immediately invested. No contingent deferred sales charge is imposed on Class Y
shares, and the ongoing expenses for Class Y shares are lower than for the other
classes because Class Y shares are not subject to rule 12b-1 distribution or
service fees.
LIMITED GROUPS OF INVESTORS. Only the following investors are eligible to buy
Class Y shares:
. a participant in INSIGHT when Class Y shares are purchased through that
program;
. an investor who buys $10 million or more at any one time in any combination
of PaineWebber mutual funds in the Flexible Pricing[SERVICEMARK] System;
and
. a qualified plan that has either
5,000 or more eligible employees or
$50 million or more in assets.
INSIGHT. An investor who purchases $50,000 or more of shares of the mutual funds
that are available to INSIGHT participants (which include the PaineWebber mutual
funds in the Flexible Pricing[SERVICEMARK] System and certain other specified
mutual funds) may take part in INSIGHT, a total portfolio asset allocation
program sponsored by PaineWebber, and thus become eligible to purchase Class Y
shares. INSIGHT offers comprehensive investment services, including a
personalized asset allocation investment strategy using an appropriate
combination of funds, monitoring of investment performance and comprehensive
quarterly reports that cover market trends, portfolio summaries and personalized
account information.
Participation in INSIGHT is subject to payment of an advisory fee to PaineWebber
at the maximum annual rate of 1.50% of assets held through the program
(generally charged quarterly in advance), which covers all INSIGHT investment
advisory services and program administration fees. Employees of PaineWebber and
its affiliates are entitled to a 50% reduction in the fee otherwise payable for
participation in INSIGHT. INSIGHT clients may elect to have their INSIGHT fees
charged to their PaineWebber accounts (by the automatic redemption of money
market fund shares) or, if a qualified plan, invoiced.
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
Please contact your PaineWebber investment executive or PaineWebber's
correspondent firms for more information concerning mutual funds that are
available to INSIGHT participants or for other INSIGHT information.
ACQUISITION OF CLASS Y SHARES BY OTHERS. Each Portfolio is authorized to offer
Class Y shares to employee benefit and retirement plans of Paine Webber Group,
Inc. and its affiliates and certain other investment programs that are sponsored
by PaineWebber and that may invest in PaineWebber mutual funds. At present,
however, INSIGHT participants are the only purchasers in these categories.
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HOW TO BUY SHARES
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Prices are calculated for each class of a Portfolio's shares once each Business
Day, at the close of regular trading on the New York Stock Exchange (currently
4:00 p.m., Eastern time). A "Business Day" is any day, Monday through Friday, on
which the New York Stock Exchange is open for business. Shares are purchased at
the next share price calculated after the purchase order is received by
PaineWebber's New York City headquarters or the Transfer Agent.
When placing an order to buy shares, investors should specify which class of
shares they want to buy. If investors fail to specify the class, they will
automatically receive Class A shares, which include an initial sales charge.
Investors in Class Y shares must provide satisfactory information to PaineWebber
or the Portfolio that they are eligible to purchase Class Y shares.
PAINEWEBBER CLIENTS
Investors who are PaineWebber clients may buy shares through PaineWebber
investment executives or its correspondent firms. Investors may buy shares in
person, by mail, by telephone or by wire (the minimum wire purchase is $1
million). PaineWebber investment executives and correspondent firms are
responsible for promptly sending investors' purchase orders to PaineWebber's New
York City headquarters. Investors may pay for their purchases with checks drawn
on U.S. banks or with funds they have in their brokerage accounts at PaineWebber
or its correspondent firms.
OTHER INVESTORS
Investors who are not PaineWebber clients may purchase Portfolio shares and set
up an account through the Transfer Agent (PFPC Inc.) by completing an account
application which may be obtained by calling 1-800-647-1568. The application and
check must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box
8950, Wilmington, DE 19899.
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
Investors who already have money invested in a PaineWebber mutual fund, and want
to invest in another PaineWebber mutual fund, can:
. mail an application with a check; or
. open an account by exchanging from another PaineWebber mutual fund.
Investors do not have to send an application when making additional investments
in the Portfolio.
MINIMUM INVESTMENTS FOR CLASS A, CLASS B AND CLASS C SHARES
To open an account ....................$ 1,000
To add to an account ..................$ 100
A Portfolio may waive or reduce these minimums for:
. employees of PaineWebber or its affiliates;
. participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the Portfolio's automatic investment plan; or
. transactions in Class A and Class Y shares made in certain investment
programs.
HOW TO EXCHANGE SHARES
As shareholders, investors have the privilege of exchanging Class A, Class B and
Class C shares of the Portfolios for the same class of shares of other
PaineWebber mutual funds. For classes of shares where no initial sales charge is
imposed, a contingent deferred sales charge may apply if the investor sells the
shares acquired through the exchange. Class Y shares are not exchangeable.
Exchanges may be subject to minimum investment requirements of the fund into
which exchanges are made.
. Investors who purchased their shares through an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
contacting their investment executive in person or by telephone, mail or
wire.
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
. Investors who do not have an account with an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
writing a "letter of instruction" to the Transfer Agent. The letter of
instruction must include:
. the investor's name and address;
. the Portfolio's name;
. the Portfolio account number;
. the dollar amount or number of shares to be sold; and
. a guarantee of each registered owner's signature by an eligible
institution, such as a commercial bank, trust company or stock exchange
member.
The letter must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box
8950, Wilmington, DE 19899.
No contingent deferred sales charge is imposed when shares are exchanged for the
corresponding class of shares of other PaineWebber mutual funds. A Portfolio
will use the purchase date of the initial investment to determine any contingent
deferred sales charge due when the acquired shares are sold. Portfolio shares
may be exchanged only after the settlement date has passed and payment for the
shares has been made. The exchange privilege is available only in those
jurisdictions where the sale of the fund shares to be acquired is authorized.
This exchange privilege may be modified or terminated at any time and, when
required by SEC rules, upon 60 days' notice. See the back cover of this
prospectus for a listing of other PaineWebber mutual funds.
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HOW TO SELL SHARES
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Investors can sell (redeem) shares at any time. Shares will be sold at the share
price for that class as next calculated (less any applicable contingent deferred
sales charge) after the order is received by PaineWebber's New York City
headquarters or the Transfer Agent. Share prices are normally calculated at the
close of regular trading on the New York Stock Exchange (currently 4:00 p.m.,
Eastern time).
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
Investors who own more than one class of shares should specify which class they
are selling. If they do not, the Portfolio will assume they are first selling
their Class A shares, then Class C, then Class B and last, Class Y.
If a shareholder wants to sell shares which were purchased recently, the
Portfolio may delay payment until it verifies that good payment was received. In
the case of purchases by check, this can take up to 15 days.
Investors who have an account with PaineWebber or one of PaineWebber's
correspondent firms can sell their shares by contacting their investment
executive. PaineWebber investment executives and correspondent firms are
responsible for promptly sending investors' sell orders to PaineWebber's New
York City headquarters. Investors who do not have an account and have bought
their shares through the Transfer Agent, may sell shares by writing a "letter of
instruction," as detailed in "How to Exchange Shares."
Because the Portfolios incur certain fixed costs in maintaining shareholder
accounts, each Portfolio reserves the right to purchase back all of its shares
in any shareholder account with a net asset value of less than $500. If the
Portfolio elects to do so, it will notify the shareholder of the opportunity to
increase the amount invested to $500 or more within 60 days of the notice. A
Portfolio will not purchase back accounts that fall below $500 solely due to a
reduction in net asset value per share.
REINSTATEMENT PRIVILEGE
Shareholders who sell their Class A shares may reinstate their Portfolio account
without a sales charge up to the dollar amount sold by purchasing the
Portfolio's Class A shares within 365 days after the sale. To take advantage of
this reinstatement privilege, shareholders must notify their investment
executive at PaineWebber or one of its correspondent firms at the time of
purchase.
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OTHER SERVICES
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Investors should consult their investment executives at PaineWebber or one of
its correspondent firms to learn more about the following services available
with respect to the Portfolios' Class A, Class B and Class C shares:
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
AUTOMATIC INVESTMENT PLAN
Investing on a regular basis helps investors meet their financial goals.
PaineWebber offers an Automatic Investment Plan with a minimum initial
investment of $1,000 through which a Portfolio will deduct $50 or more monthly,
quarterly, semiannually or annually from the investor's bank account to invest
directly in the Portfolio. In addition to providing a convenient and disciplined
manner of investing, participation in the Automatic Investment Plan enables the
investor to use the technique of "dollar cost averaging."
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan allows investors to set up monthly, quarterly
(March, June, September and December), semiannual (June and December) or annual
(December) withdrawals from their Portfolio accounts. Minimum balances and
withdrawals vary according to the class of shares:
. Class A and Class C shares. Minimum value of Portfolio shares is $5,000;
minimum withdrawals of $100.
. Class B shares. Minimum value of Portfolio shares is $20,000; minimum
monthly, quarterly, semiannual and annual withdrawals of $200, $400, $600
and $800, respectively.
Withdrawals under the Systematic Withdrawal Plan will not be subject to a
contingent deferred sales charge. An investor may not withdraw more than 12% of
the value of the Portfolio account when the investor signed up for the Plan
(annually for Class B shares; during the first year under the Plan for Class A
and Class C shares). Shareholders who elect to receive dividends or other
distributions in cash may not participate in the Plan.
INDIVIDUAL RETIREMENT ACCOUNTS
Self-directed IRAs are available through PaineWebber in which purchases of
PaineWebber mutual funds and other investments may be made. Investors
considering establishing an IRA should review applicable tax laws and should
consult their tax advisers.
TRANSFER OF ACCOUNTS
If investors holding shares of a Portfolio in a PaineWebber brokerage account
transfer their brokerage accounts to another firm, the Portfolio shares will be
moved to an account with the Transfer Agent. However, if the other firm has
entered into a selected dealer agreement with Mitchell Hutchins relating to the
Portfolio, the shareholder may be able to hold Portfolio shares in an account
with the other firm.
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
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MANAGEMENT
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The Portfolios are governed by a board of trustees, which oversees their
operations. Each Portfolio has appointed Mitchell Hutchins as investment adviser
and administrator responsible for that Portfolio's operations (subject to the
authority of the board). As investment adviser and administrator, Mitchell
Hutchins supervises all aspects of each Portfolio's operations and makes and
implements all investment decisions for that Portfolio.
Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York
10019, is an asset management subsidiary of PaineWebber Incorporated, which is
wholly owned by Paine Webber Group Inc., a publicly owned financial services
holding company. On June 30, 1997, Mitchell Hutchins was adviser or sub-adviser
of 30 investment companies with 65 separate portfolios and aggregate assets of
approximately $33.3 billion.
Personnel of Mitchell Hutchins may engage in securities transactions for their
own accounts pursuant to Mitchell Hutchins' code of ethics that establishes
procedures for personal investing and restricts certain transactions.
T. Kirkham Barneby, Dennis McCauley and Mark A. Tincher are responsible for the
day-to-day management of each Portfolio's investments.
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 models.
Dennis McCauley is a managing director and chief investment officer of fixed
income investments of Mitchell Hutchins. Prior to joining Mitchell Hutchins in
December 1994, Mr. McCauley was director of fixed income investments of IBM
Corporation.
Mark A. Tincher is a managing director and chief investment officer of equities
of Mitchell Hutchins. Prior to joining Mitchell Hutchins in March 1995, Mr.
Tincher was a vice president of Chase Manhattan Private Bank where he directed
the U.S. funds management and equity research areas.
MANAGEMENT FEES & OTHER EXPENSES
Each Portfolio incurs various expenses in its operations, such as the management
fee paid to Mitchell Hutchins, 12b-1 distribution and services fees paid with
respect to the various classes, custody and transfer agency fees, professional
fees, expenses of board and shareholder meetings, fees and expenses relating to
registration of its shares, taxes and governmental fees, fees and expenses of
trustees, costs of obtaining insurance, expenses of printing and distributing
shareholder materials, organizational expenses and extraordinary expenses,
including costs or losses in any litigation.
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
Mitchell Hutchins has agreed to bear all expenses of the Portfolios other than
the management fee, the 12b-1 fees and extraordinary expenses. For its services
and its bearing these expenses, each Portfolio pays Mitchell Hutchins a monthly
management fee at the annual rate of 0.35% of its average daily net assets.
Each Underlying Fund pays a management fee to Mitchell Hutchins (PaineWebber for
Cashfund) and also pays other operating expenses. An investor in a Portfolio
will indirectly pay both the Portfolio's management fee and the management fees
and other expenses of the Underlying Funds held by that Portfolio. Investors who
do not wish to take advantage of the Portfolios' allocation of their assets
among several Underlying Funds may invest directly in the Underlying Funds and
thereby avoid incurring the management fee paid by each Portfolio.
DISTRIBUTION ARRANGEMENTS
Mitchell Hutchins is the distributor of each Portfolio's shares and has
appointed PaineWebber as the exclusive dealer for the sale of those shares.
There is no distribution plan with respect to the Portfolios' Class Y shares.
Under distribution plans for Class A, Class B and Class C shares ("Class A
Plan," "Class B Plan" and "Class C Plan," collectively, "Plans"), each Portfolio
pays Mitchell Hutchins:
. Monthly service fees at the annual rate of 0.25% of the average daily net
assets of each class of shares.
. Monthly distribution fees at the annual rate of 0.75% of the average daily
net assets of Class B shares.
. Monthly distribution fees at the annual rate of 0.75% (0.50% for the
Conservative Portfolio) of the average daily net assets of Class C shares.
Mitchell Hutchins primarily uses the service fees under the Plans for the Class
A, Class B and Class C shares to pay PaineWebber for shareholder servicing,
currently at the annual rate of 0.25% of the aggregate investment amounts
maintained in each Portfolio by PaineWebber clients. PaineWebber then
compensates its investment executives for shareholder servicing that they
perform and offsets its own expenses in servicing and maintaining shareholder
accounts.
Mitchell Hutchins uses the distribution fees under the Class B and Class C Plans
to:
. Offset the commissions it pays to PaineWebber for selling each Portfolio's
Class B and Class C shares, respectively.
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
. Offset each Portfolio's marketing costs attributable to such classes, such
as preparation, printing and distribution of sales literature, advertising
and prospectuses to prospective investors and related overhead expenses,
such as employee salaries and bonuses.
PaineWebber compensates investment executives when Class B and Class C shares
are bought by investors, as well as on an ongoing basis. Mitchell Hutchins
receives no special compensation from any of the Portfolios or investors at the
time Class B or Class C shares are bought.
Mitchell Hutchins receives the proceeds of the initial sales charge paid when
Class A shares are bought and of the contingent deferred sales charge paid upon
sales of shares. These proceeds may be used to cover distribution expenses.
The Plans and the related distribution contracts for each class of shares
("Distribution Contracts") specify that each Portfolio must pay service and
distribution fees to Mitchell Hutchins for its activities, not as reimbursement
for specific expenses incurred. Therefore, even if Mitchell Hutchins' expenses
exceed the service or distribution fees it receives, the Portfolios will not be
obligated to pay more than those fees. On the other hand, if Mitchell Hutchins'
expenses are less than such fees, it will retain its full fees and realize a
profit. Expenses in excess of service and distribution fees received or accrued
through the termination date of any Plan will be Mitchell Hutchins' sole
responsibility and not that of the Portfolios. Annually, the board of each
Portfolio reviews the Plan and Mitchell Hutchins' corresponding expenses for
each class separately from the Plans and expenses of the other classes.
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DETERMINING THE SHARES'
NET ASSET VALUE
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The net asset value of a Portfolio's shares fluctuates and is determined
separately for each class as of the close of regular trading on the New York
Stock Exchange (currently 4:00 p.m., Eastern time) each Business Day. Each
Portfolio's net asset value per share is determined by dividing the value of the
securities it holds (that is, the shares of Underlying Funds), plus any cash or
other assets, minus all liabilities, by the total number of Portfolio shares
outstanding. The value of each Underlying Fund will be its net asset value at
the time of computation.
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
Short-term investments that have a maturity of more than 60 days are valued at
prices based on market quotations for securities of similar type, yield and
maturity. The amortized cost method of valuation generally is used to value debt
obligations with 60 days or less remaining to maturity, unless the board
determines that this does not represent fair value.
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DIVIDENDS & TAXES
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DIVIDENDS
Each of Conservative Portfolio and Moderate Portfolio declares and pays
dividends from their net investment income quarterly; Growth Portfolio declares
and pays dividends from its net investment income annually. A Portfolio's net
investment income consists of dividends paid to it from the net investment
income of the Underlying Funds in which it holds shares -- plus accrued interest
and earned discount (including both original issue and market discounts) on
direct investments in money market or other short-term debt investments, if any
- -- less applicable expenses. Each Portfolio also annually distributes
substantially all of its net capital gains, if any, which consist of (1)
distributions to it from the net capital gains, if any, of Underlying Funds in
which it holds shares and (2) net gains realized from the Portfolio's
disposition of Underlying Fund shares (which dispositions generally are
occasioned by reallocating the Portfolio's assets among Underlying Funds or by
the need to make distributions and/or payments of redemption proceeds in excess
of available cash). A Portfolio may make additional distributions, if necessary,
to avoid a 4% excise tax on certain undistributed income and capital gains.
Dividends and other distributions paid on each class of shares of a Portfolio
are calculated at the same time and in the same manner. Dividends on Class A,
Class B and Class C shares of a Portfolio are expected to be lower than those on
its Class Y shares because the other shares have higher expenses resulting from
their distribution and service fees. Dividends on Class B and Class C shares of
a Portfolio are expected to be lower than those on its Class A shares because
Class B and Class C shares have higher expenses resulting from their
distribution fees. For the same reason, dividends on Conservative Portfolio's
Class B shares are expected to be lower than those on its Class C shares.
The Portfolios' dividends and other distributions are paid in additional
Portfolio shares of the same class at net asset value, unless the shareholder
has requested cash payments. Shareholders who wish to receive dividends and
other distributions in cash, either mailed to them by check or credited to their
PaineWebber accounts, should contact their investment executives at PaineWebber
or one of its correspondent firms or complete the appropriate section of the
account application.
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
TAXES
Each Portfolio intends to qualify for treatment as a regulated investment
company under the Code so that it will not have to pay federal income tax on the
part of its investment company taxable income (generally consisting of net
investment income and net short-term capital gain) ("taxable income") and net
capital gain (that is, the excess of net long-term capital gain over net
short-term capital loss) that it distributes to its shareholders.
Dividends paid to a Portfolio from an Underlying Fund's taxable income (which
may include net gains from certain foreign currency transactions) are included
in the Portfolio's taxable income, and dividends from the latter (whether paid
in cash or additional shares) generally are taxable to the Portfolio's
shareholders as ordinary income. Distributions of a Portfolio's net capital
gain, consisting of distributions to it of net capital gain from Underlying
Funds in which it holds shares and gains realized from the Portfolio's
disposition of an Underlying Fund's shares held for more than twelve months
(whether paid in cash or additional shares), are taxable to its shareholders as
long-term capital gains, regardless of how long they have held their Portfolio
shares. The Taxpayer Relief Act of 1997 ("Act"), enacted in August 1997,
dramatically changes the taxation of net capital gain, by applying different
rates thereto depending on the taxpayer's holding period and marginal rate of
federal income tax. The Act, however, does not address the application of these
rules to distributions by regulated investment companies and instead authorizes
the issuance of regulations to do so. Accordingly, shareholders should consult
their tax advisers as to the effect of the Act on distributions by a Portfolio
to them of net capital gain. Shareholders who are not subject to tax on their
income generally will not be required to pay tax on distributions.
YEAR-END TAX REPORTING
Following the end of each calendar year, each Portfolio notifies its
shareholders of the amounts of dividends and capital gain distributions paid (or
deemed paid) for that year and any portion of those dividends that qualifies for
special treatment.
WITHHOLDING REQUIREMENTS
Each Portfolio is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to individuals and certain other
non-corporate shareholders who do not provide the Portfolio with a correct
taxpayer identification number. Withholding at that rate also is required from
dividends and capital gain distributions payable to such shareholders who
otherwise are subject to backup withholding.
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
TAXES ON THE SALE OR EXCHANGE OF PORTFOLIO SHARES
A shareholder's sale (redemption) of shares may result in a taxable gain or
loss. This depends upon whether the shareholders receive more or less than their
adjusted basis for the shares (which normally takes into account any initial
sales charge paid on Class A shares). An exchange of any Portfolio's shares for
shares of another PaineWebber mutual fund generally will have similar tax
consequences. In addition, if a Portfolio's shares are bought within 30 days
before or after selling other shares of that Portfolio (regardless of class) at
a loss, all or a portion of that loss will not be deductible and will increase
the basis of the newly purchased shares.
SPECIAL TAX RULES FOR CLASS A SHAREHOLDERS
Special tax rules apply when a shareholder sells or exchanges Class A shares
within 90 days of purchase and subsequently acquires Class A shares of a
PaineWebber mutual fund without paying a sales charge due to the 365-day
reinstatement privilege or the exchange privilege. In these cases, any gain on
the sale or exchange of the original Class A shares would be increased, or any
loss would be decreased, by the amount of the sales charge paid when those
shares were bought, and that amount will increase the basis of the PaineWebber
mutual fund shares subsequently acquired.
CLASS B SHAREHOLDERS
No gain or loss will be recognized by a shareholder as a result of a conversion
from Class B shares into Class A shares.
****
The foregoing only summarizes some of the important tax considerations affecting
the Portfolios and their shareholders. Please see the further discussion in the
Statement of Additional Information. Prospective shareholders are urged to
consult their tax advisers.
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GENERAL INFORMATION
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ORGANIZATION
The Portfolios are diversified series of Mitchell Hutchins Portfolios ("Trust"),
an open-end management investment company formed on August 9, 1996 as a business
trust under the laws of Delaware. The trustees of the Trust have authority to
issue an unlimited number of shares of beneficial interest of separate series,
with a par value of $0.001 per share. The board has established one series other
than the Portfolios.
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
SHARES
The shares of each Portfolio are divided into four classes, designated Class A,
Class B, Class C and Class Y shares. Each class of shares of a Portfolio
represents an identical interest in that Portfolio's investment portfolio and
has the same rights, privileges and preferences. However, each class may differ
with respect to sales charges, distribution and/or service fees, voting rights
on matters exclusively affecting that class and its exchange privilege. The
different charges applicable to the different classes of shares of the
Portfolios will affect the performance of those classes.
Each share of each Portfolio is entitled to participate equally in dividends,
other distributions and the proceeds of any liquidation of that Portfolio.
However, due to the differing expenses of the classes, dividends on a
Portfolio's Class A, B, C and Y shares will differ.
VOTING RIGHTS
Shareholders of each Portfolio are entitled to one vote for each full share held
and fractional votes for fractional shares held. Voting rights are not
cumulative and the holders of more than 50% of all the shares of the Portfolios
as a group may elect all the board members of the Trust. The shares of a
Portfolio will be voted together, except that only the shareholders of a
particular class may vote on matters affecting only that class, such as the
terms of a Plan as it relates to the class. The shares of each series of the
Trust will be voted separately, except when an aggregate vote of all the
securities is required by law.
SHAREHOLDER MEETINGS
The Trust does not intend to 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.
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Mitchell Hutchins Growth Portfolio Moderate Portfolio Conservative Portfolio
REPORTS TO SHAREHOLDERS; OTHER INFORMATION
Each Portfolio sends its shareholders audited annual and unaudited semiannual
reports, each of which includes a list of the investment securities held by the
Portfolio as of the end of the period covered by the report. The Statement of
Additional Information, which is incorporated by this reference into this
Prospectus, is available to shareholders upon request.
CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, located at One Heritage Drive, North
Quincy, Massachusetts 02171, serves as custodian and recordkeeping agent for the
Portfolios. PFPC Inc., a subsidiary of PNC Bank, N.A., serves as the Portfolios'
transfer and dividend disbursing agent. It is located at 400 Bellevue Parkway,
Wilmington, DE 19809.
<PAGE>
MITCHELL HUTCHINS PORTFOLIOS
PROSPECTUS -- SEPTEMBER ___, 1997
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The PAINEWEBBER FAMILY OF MUTUAL FUNDS consists of the six broad categories
presented here. Class A, Class B and Class C shareholders in the Mitchell
Hutchins Portfolios may exchange their shares for the corresponding shares of
funds in the PaineWebber Family of Mutual Funds.
. PAINEWEBBER BOND FUNDS for . PAINEWEBBER STOCK FUNDS for long
income by investing mainly in term growth by investing mainly
bonds. in stocks.
High Income Fund Capital Appreciation Fund
Investment Grade Income Fund Financial Services Growth Fund
Low Duration U.S. Government Growth Fund
Income Fund Growth and Income Fund
Strategic Income Fund Small Cap Fund
U.S. Government Income Fund Utility Income Fund
. PAINEWEBBER TAX-FREE BOND FUNDS . PAINEWEBBER GLOBAL FUNDS for
for income exempt from federal long-term growth by investing
income tax and, in some cases, mainly in foreign stocks or high
state and local income taxes, current income by investing mainly
by investing investing in in global debt instruments.
municipal bonds.
California Tax-Free Income Fund Asia Pacific Growth Fund
Municipal High Income Fund Emerging Markets Equity Fund
National Tax-Free Income Fund Global Equity Fund
New York Tax-Free Income Fund Global Income Fund
. PAINEWEBBER ASSET ALLOCATION FUNDS . PAINEWEBBER MONEY MARKET FUND
for total return by investing in for income and stability by
stocks and bonds. investing in high-quality,
short-term instruments.
Balanced Fund
Tactical Allocation Fund
A prospectus containing more complete information for any of these funds,
including charges and expenses, can be obtained from a PaineWebber investment
executive or correspondent firm. Please read it carefully before investing. It
is important you have all the information you need to make a sound investment
decision.
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[COPYRIGHT] 1997 PaineWebber Incorporated
<PAGE>
Mitchell Hutchins
Portfolios
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Statement of Additional Information
September , 1997
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PaineWebber
<PAGE>
No person has been authorized to give any information or to make any
representations not contained in the Prospectus or in this Statement of
Additional Information in connection with the offering made by the Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Portfolios or their distributor. The
Prospectus and this Statement of Additional Information do not constitute an
offering by the Portfolios or by the distributor in any jurisdiction in which
such offering may not lawfully be made.
------------------
TABLE OF CONTENTS
Portfolios - Investment Policies And Restrictions..............................2
Underlying Funds - Investment Policies.........................................5
Underlying Funds -- Hedging And Other Strategies
Using Derivative Contracts..................................................19
Trustees And Officers; Principal Holders Of Securities........................28
Compensation Table............................................................34
Investment Advisory And Distribution Arrangements.............................34
Portfolio Transactions........................................................37
Reduced Sales Charges, Additional Exchange And Redemption
Information And Other Services..............................................39
Conversion Of Class B Shares..................................................43
Valuation Of Shares...........................................................43
Performance Information.......................................................43
Taxes.........................................................................47
Other Information.............................................................48
Financial Statement...........................................................50
Report Of Ernst & Young, LLP, Independent Auditors............................50
Appendix.....................................................................A-1
(COPYRIGHT)1997 PaineWebber Incorporated
<PAGE>
Mitchell Hutchins Portfolios
1285 Avenue of the Americas
New York, New York 10019
STATEMENT OF ADDITIONAL INFORMATION
The Portfolios described below each a ("Portfolio" and collectively
"Portfolios") are diversified series of Mitchell Hutchins Portfolios ("Trust"),
an open-end management investment company organized as a Delaware business
trust. The Portfolios seek to achieve their investment objectives by investing
in a number of other PaineWebber mutual funds ("Underlying Funds").
Mitchell Hutchins Growth Portfolio seeks long-term growth of capital by
investing the majority of its assets in equity mutual funds.
Mitchell Hutchins Moderate Portfolio seeks total return by investing
its assets in a combination of equity and bond mutual funds.
Mitchell Hutchins Conservative Portfolio seeks income and, secondarily,
growth of capital by investing the majority of its assets in bond
mutual funds.
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), an asset
management subsidiary of PaineWebber Incorporated ("PaineWebber"), is the
investment adviser, administrator and distributor for each Portfolio. As
distributor, Mitchell Hutchins has appointed PaineWebber to serve as the
exclusive dealer for the sale of the Portfolio shares.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Portfolios' current Prospectus dated September
______, 1997. A copy of the Prospectus may be obtained by calling any
PaineWebber investment executive or correspondent firm, or by calling toll-free
1-800-647-1568. This Statement of Additional Information is dated September
______, 1997.
<PAGE>
PORTFOLIOS - INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the investment policies and limitations of the Portfolios. Except as
otherwise indicated in the Prospectus or this Statement of Additional
Information, there are no policy limitations on the Portfolios' ability to use
the investments or techniques discussed in these documents.
Direct Investments In Securities. As stated in the Prospectus, in addition
to investing in the Underlying Funds, each Portfolio may invest directly in
short-term U.S. government securities, commercial paper and other short-term
corporate obligations and other money market instruments, including repurchase
agreements. Under normal conditions, each Portfolio's investments in these
securities, together with its investments in PaineWebber Cashfund, a money
market fund, is not expected to exceed 20% of its total assets. However, when
Mitchell Hutchins believes that unusual market or economic conditions warrant a
temporary defensive posture, each Portfolio may invest without limit in these
securities.
Repurchase Agreements. Repurchase agreements are transactions in which a
Portfolio purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date or upon demand and at a price reflecting a market rate of
interest unrelated to the coupon rate or maturity of the purchased securities.
The Portfolio maintains custody of the underlying securities prior to their
repurchase; thus, the obligation of the bank or dealer to pay the repurchase
price on the date agreed to is, in effect, secured by such securities. If the
value of these securities is less than the repurchase price, plus any
agreed-upon additional amount, the other party to the agreement must provide
additional collateral so that at all times the collateral is at least equal to
the repurchase price, plus any agreed-upon additional amount. The difference
between the total amount to be received upon repurchase of the securities and
the price that was paid by a Portfolio upon acquisition is accrued as interest
and included in its net investment income. Repurchase agreements carry certain
risks not associated with direct investments in securities, including possible
declines in the market value of the underlying securities and delays and costs
to a Portfolio if the other party to a repurchase agreement becomes insolvent.
The Portfolios intend to enter into repurchase agreements only with banks
and dealers in transactions believed by Mitchell Hutchins to present minimal
credit risks in accordance with guidelines established by the Trust's board of
trustees ("board"). Mitchell Hutchins reviews and monitors the creditworthiness
of those institutions under the board's general supervision.
Money Market Instruments. Money market instruments may include securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
investment grade commercial paper and other short-term corporate obligations,
bank certificates of deposit, bankers' acceptances and repurchase agreements
secured by any of the foregoing.
U.S. Government Securities. The Portfolios may invest in various direct
obligations of the U.S. Treasury and obligations issued or guaranteed by the
U.S. government or one of its agencies or instrumentalities (collectively, "U.S.
government securities"). Among the U.S. government securities that may be held
by the Portfolios are securities that are supported by the full faith and credit
of the United States; securities that are supported by the right of the issuer
to borrow from the U.S. Treasury; and securities that are supported solely by
the credit of the instrumentality. U.S. government securities are described in
greater detail in "Underlying Funds - Investment Policies" below.
Illiquid Securities. Each Portfolio may invest up to 15% of its net assets
in illiquid securities, although the Portfolios intend to use this authorization
only in connection with their investment of cash reserves in short-term
securities. The term "illiquid securities" for this purpose means securities
that cannot be disposed of within seven days in the ordinary course of business
at approximately the amount at which a Portfolio has valued the securities and
includes, among other things, repurchase agreements maturing in more than seven
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days and restricted securities other than those Mitchell Hutchins has determined
to be liquid pursuant to guidelines established by the Trust's board. More
information about illiquid securities and the circumstances under which
restricted securities can be determined to be liquid is provided in "Underlying
Funds - Investment Policies, Illiquid Securities" below. If the amount of a
Portfolio's net assets invested in illiquid securities increases to more than
15% as a result of a change in the values of its investments or its amount of
total assets, the Portfolio will engage in an orderly disposition to bring its
holdings of such securities to no more than 15% of its net assets.
Other Investments. Although their fundamental and non-investment
limitations (described below) do not prohibit the Portfolios from purchasing or
selling financial options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative instruments or from
engaging in short sales of securities the Portfolios own (short sales "against
the box"), the Portfolios have no intention of engaging in these transactions
during the coming year.
Investment Limitations of the Portfolios
Fundamental Limitations. The following fundamental investment limitations
cannot be changed for a Portfolio without the affirmative vote of the lesser of
(a) more than 50% of the outstanding shares of the Portfolio or (b) 67% or more
of the shares of the Portfolio present at a shareholders' meeting if more than
50% of the outstanding shares of the Portfolio are represented at the meeting in
person or by proxy. Except with respect to fundamental investment limitation
(2), if a percentage restriction is adhered to at the time of an investment or
transaction, a later increase or decrease in percentage resulting from a change
in values of portfolio securities or amount of total assets will not be
considered a violation of any of the foregoing limitations.
Each Portfolio will not:
(1) purchase any security if, as a result of that purchase, 25% or more of
the Portfolio's total assets would be invested in securities of issuers having
their principal business activities in the same industry, except that this
limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or to municipal securities, and
except that the Portfolio will invest 25% or more of its total assets in the
securities of other investment companies.
(2) issue senior securities or borrow money, except as permitted under the
Investment Company Act of 1940 ("1940 Act") and then not in excess of 33 1/3% of
the Portfolio's total assets (including the amount of the senior securities
issued but reduced by any liabilities not constituting senior securities) at the
time of the issuance or borrowing, except that the Portfolio may borrow up to an
additional 5% of its total assets (not including the amount borrowed) for
temporary or emergency purposes.
(3) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances or
similar instruments will not be considered the making of a loan.
(4) engage in the business of underwriting securities of other issuers,
except to the extent that the Portfolio might be considered an underwriter under
the federal securities laws in connection with its disposition of portfolio
securities.
(5) purchase or sell real estate, except that investments in securities of
issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the Portfolio
may exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by reason
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of such enforcement until that real estate can be liquidated in an orderly
manner.
(6) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the Portfolio may purchase, sell or
enter into financial options and futures, forward and spot currency contracts,
swap transactions and other financial contracts or derivative instruments.
(7) purchase securities of any one issuer if, as a result, more than 5% of
the Portfolio's total assets would be invested in securities of that issuer or
the Portfolio would own or hold more than 10% of the outstanding voting
securities of that issuer, except that up to 25% of the Portfolio's total assets
may be invested without regard to this limitation, and except that this
limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies and instrumentalities or to securities issued by other
investment companies.
Non-Fundamental Limitations. The following investment restrictions may be
changed by the board without shareholder approval.
Each Portfolio will not:
(1) invest more than 15% of its net assets in illiquid securities, a term
which means securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which the Portfolio
has valued the securities and includes, among other things, repurchase
agreements maturing in more than seven days.
(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 Portfolio may make
margin deposits in connection with its use of financial options and futures,
forward and spot currency contracts, swap transactions and other financial
contracts or derivative instruments.
(4) engage in short sales of securities or maintain a short position,
except that the Portfolio may (a) sell short "against the box" and (b) maintain
short positions in connection with its use of financial options and futures,
forward and spot currency contracts, swap transactions and other financial
contracts or derivative instruments.
(5) purchase securities of other investment companies, except to the extent
permitted by the 1940 Act or under the terms of an exemptive order granted by
the Securities and Exchange Commission ("SEC") 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.
Notwithstanding the forgoing investment limitations, the Portfolios may
invest in Underlying Funds that have adopted investment limitations that may be
more or less restrictive than those listed above. As a result, the Portfolios
may engage indirectly in investment strategies that are prohibited under the
investment limitations listed above. The investment limitations and other
investment policies and restrictions of each Underlying Fund are described in
its prospectus and statement of additional information.
In accordance with each Portfolio's investment program as set forth in the
Prospectus, a Portfolio may invest more than 25% of its assets in any one
Underlying Fund. However, each of the Underlying Funds in which a Portfolio may
invest (other than PaineWebber Low Duration U.S. Government Income Fund and
PaineWebber U.S. Government Income Fund) will not concentrate more than 25% of
its total assets in any one industry.
4
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UNDERLYING FUNDS - INVESTMENT POLICIES
The following supplements the information contained in the Prospectus
concerning the investment policies and limitations of the Underlying Funds. With
respect to certain Underlying Funds, Mitchell Hutchins has retained one or more
sub-advisers ("Sub-Adviser" or "Sub-Advisers"), who are identified by name in
the Prospectus. More information about the investment policies and restrictions
and the investment limitations of each Underlying Fund is set forth in its
prospectus and statement of additional information.
Yield Factors and Ratings. Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), and
other nationally recognized statistical rating organizations ("NRSROs") are
private services that provide ratings of the credit quality of debt obligations.
A description of the ratings assigned to corporate debt obligations by Moody's
and S&P is included in the Appendix to this Statement of Additional Information.
The process by which S&P and Moody's determine ratings for mortgage- and
asset-backed securities includes consideration of the likelihood of the receipt
by security holders of all distributions, the nature of the underlying
securities, the credit quality of the guarantor, if any, and the structural,
legal and tax aspects associated with such securities. Not even the highest such
ratings represents an assessment of the likelihood that principal prepayments
will be made by mortgagors or the degree to which such prepayments may differ
from that originally anticipated, nor do such ratings address the possibility
that investors may suffer a lower than anticipated yield or that investors in
such securities may fail to recoup fully their initial investment due to
prepayments.
The Underlying 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,
securities with the same maturity, interest rate and rating may have different
market prices. Also, rating agencies may fail to make timely changes in credit
ratings in response to subsequent events so that an issuer's current financial
condition may be better or worse than the rating indicates. The rating assigned
to a security by a NRSRO does not reflect an assessment of the volatility of the
security's market value or of the liquidity of an investment in the security.
Subsequent to its purchase by an Underlying Fund, an issue of debt obligations
may cease to be rated or its rating may be reduced below the minimum rating
required for purchase by that Underlying Fund.
The yields on bonds and other debt securities in which the Underlying
Funds invest are dependent on a variety of factors, including general money
market conditions, general conditions in the bond market, the financial
condition of the issuer, the size of the offering, the maturity of the
obligation and its rating. There is a wide variation in the quality of bonds,
both within a particular classification and between classifications. An issuer's
obligations under its bonds are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of bond holders or
other creditors of an issuer; litigation or other conditions may also adversely
affect the power or ability of issuers to meet their obligations for the payment
of interest and principal on their bonds.
Below investment grade debt securities are debt securities that are not
rated at the time of purchase within one of the four highest grades assigned by
S&P or Moody's, comparably rated by another NRSRO or determined by Mitchell
Hutchins or the applicable Sub-Adviser to be of comparable quality. These
securities are also commonly referred to as "junk bonds." Lower rated debt
securities generally offer a higher current yield than that available for
investment grade issues; however, they involve higher risks. Lower rated
securities may be less sensitive to interest rate changes than higher rated
investments, but are more sensitive to adverse market conditions. During an
economic downturn or period of rising interest rates, their issuers may
experience financial stress that adversely affects their ability to pay interest
and repay principal and may increase the possibility of default. In addition,
such issuers may not have more traditional methods of financing available to
them and may be unable to repay debt at maturity by refinancing. Lower rated
bonds are frequently unsecured by collateral and will not receive payment until
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more senior claims are paid in full. The prices for lower rated bonds often are
more volatile than those of higher rated securities in response to market
conditions. The market for these bonds is thinner and less active, which may
limit the Underlying Fund's ability to sell them at fair value in response to
changes in the economy or financial markets. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may also decrease the
values and liquidity of lower rated securities, especially in a thinly traded
market.
The market for lower-rated debt securities has expanded rapidly in recent
years, and its growth generally paralleled a long economic expansion. In the
past, many lower rated debt securities 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 debt securities
rose dramatically. However, such higher yields did not reflect the value of the
income stream that holders of such securities expected, but rather the risk that
holders of such securities could lose a substantial portion of their value as a
result of the issuers' financial restructurings or defaults. There can be no
assurance that such declines will not recur.
U.S. Government Securities. The Underlying Funds may invest in various
direct obligations of the U.S. Treasury and obligations issued or guaranteed by
the U.S. government or one of its agencies or instrumentalities. Among the U.S.
government securities that may be held by the Underlying Funds are securities
that are supported by the full faith and credit of the United States; securities
that are supported by the right of the issuer to borrow from the U.S. Treasury;
and securities that are supported solely by the credit of the instrumentality.
Certain Underlying Funds may invest in mortgage-backed securities issued or
guaranteed by the U.S. government, its agencies and instrumentalities. These
securities are described below under "Underlying Funds -- Investment Policies,
Mortgage-Backed Securities."
Certain Underlying Funds may invest in exchange rate-related U.S.
government securities. Such securities are indexed to specific foreign currency
exchange rates and generally provide that the interest rate and/or principal
amount will be adjusted upwards or downwards (but not below zero) to reflect
changes in the exchange rate between two currencies while the obligations are
outstanding. While such securities offer the potential for an attractive rate of
return, they also entail the risk of loss of principal.
Asset-Backed Securities. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed in more
detail below. However, the underlying assets are not first lien mortgage loans
or interests therein, but include assets such as motor vehicle installment sale
contracts, other installment sale contracts, home equity loans, leases of
various types of real and personal property and receivables from revolving
credit (credit card) agreements. Such assets are securitized through the use of
trusts or special purpose corporations. Payments or distributions of principal
and interest may be guaranteed up to a certain amount and for a certain time
period by a letter of credit or pool insurance policy issued by a financial
institution unaffiliated with the issuer, or other credit enhancements may be
present.
Mortgage-Backed Securities. Mortgage-backed securities represent direct or
indirect participations in, or are secured by and payable from, mortgage loans
secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Multi-class pass-through
securities and collateralized mortgage obligations are collectively referred to
herein as CMOs. U.S. government mortgage-backed securities include
mortgage-backed securities issued or guaranteed as to the payment of principal
and interest (but not as to market value) by the Government National Mortgage
Association ("Ginnie Mae"), Fannie Mae (also known as the Federal National
Mortgage Association) or Freddie Mac (also known as the Federal Home Loan
Mortgage Corporation). Other mortgage-backed securities are issued by private
issuers, generally originators of an investors in mortgage loans, including
savings associations, mortgage bankers, commercial banks, investment bankers and
special purpose entities (collectively, "Private Mortgage Lenders"). Payments of
principal and interest (but not the market value) of such private
mortgage-backed securities may be supported by pools of mortgage loans or other
mortgage-backed securities that are guaranteed, directly or indirectly, by the
U.S. government or one of its agencies or instrumentalities, or they may be
issued without any government guarantee of the underlying mortgage assets but
with some form of non-government credit enhancement. New types of
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mortgage-backed securities are developed and marketed from time to time and,
consistent with their investment policies and limitations, the Underlying Funds
expect to invest in these new types of mortgage-backed securities that Mitchell
Hutchins or the applicable Sub-Adviser believes may assist in achieving the
Underlying Fund's investment objective. Similarly, an Underlying Fund may invest
in mortgage-backed securities issued by new or existing governmental or private
issuers other than those identified herein.
Ginnie Mae Certificates. Ginnie Mae guarantees certain mortgage
pass-through certificates ("Ginnie Mae certificates") that are issued by Private
Mortgage Lenders and that represent ownership interests in individual pools of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. Timely payment of interest
and principal is backed by the full faith and credit of the U.S. government.
Each mortgagor's monthly payments to his lending institution on his residential
mortgage are "passed through" to certificate holders such as Global Income Fund.
Mortgage pools consist of whole mortgage loans or participations in loans. The
terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. Lending institutions that originate
mortgages for the pools are subject to certain standards, including credit and
other underwriting criteria for individual mortgages included in the pools.
Fannie Mae Certificates. Fannie Mae facilitates a national secondary market
in residential mortgage loans insured or guaranteed by U.S. government agencies
and in privately insured or uninsured residential mortgage loans (sometimes
referred to as "conventional mortgage loans" or "conventional loans") through
its mortgage purchase and mortgage-backed securities sales activities. Fannie
Mae issues guaranteed mortgage pass-through certificates ("Fannie Mae
certificates"), which represent pro rata shares of all interest and principal
payments made and owed on the underlying pools. Fannie Mae guarantees timely
payment of interest and principal on Fannie Mae certificates. The Fannie Mae
guarantee is not backed by the full faith and credit of the U.S. government.
Freddie Mac Certificates. Freddie Mac also facilitates a national secondary
market for conventional residential and U.S. government-insured mortgage loans
through its mortgage purchase and mortgage-backed securities sales activities.
Freddie Mac issues two types of mortgage pass-through securities: mortgage
participation certificates ("PCs") and guaranteed mortgage certificates
("GMCs"). Each PC represents a pro rata share of all interest and principal
payments made and owed on the underlying pool. Freddie Mac generally guarantees
timely monthly payment of interest on PCs and the ultimate payment of principal,
but it also has a PC program under which it guarantees timely payment of both
principal and interest. GMCs also represent a pro rata interest in a pool of
mortgages. These instruments, however, pay interest semi-annually and return
principal once a year in guaranteed minimum payments. The Freddie Mac guarantee
is not backed by the full faith and credit of the U.S. government.
Private, RTC and Similar Mortgage-Backed Securities. Mortgage-backed
securities issued by Private Mortgage Lenders are structured similarly to CMOs
issued or guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac. Such
mortgage-backed securities may be supported by pools of U.S. government or
agency insured or guaranteed mortgage loans or by other mortgage-backed
securities issued by a government agency or instrumentality, but they generally
are supported by pools of conventional (i.e., non-government guaranteed or
insured) mortgage loans. Since such mortgage-backed securities normally are not
guaranteed by an entity having the credit standing of Ginnie Mae, Fannie Mae and
Freddie Mac, they normally are structured with one or more types of credit
enhancement. See "--Types of Credit Enhancement" below. These credit
enhancements do not protect investors from changes in market value.
The Resolution Trust Corporation ("RTC"), which was organized by the U.S.
government in connection with the savings and loan crisis, held assets of failed
savings associations as either a conservator or receiver for such associations,
or it acquired such assets in its corporate capacity. These assets included,
among other things, single family and multi-family mortgage loans, as well as
commercial mortgage loans. In order to dispose of such assets in an orderly
manner, RTC established a vehicle registered with the SEC through which it sold
mortgage-backed securities. RTC mortgage-backed securities represent pro rata
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interests in pools of mortgage loans that RTC held or had acquired, as described
above, and are supported by one or more of the types of private credit
enhancements used by Private Mortgage Lenders.
Collateralized Mortgage Obligations and Multi-Class Mortgage Pass-Throughs.
CMOs are debt obligations that are collateralized by mortgage loans or mortgage
pass-through securities (such collateral collectively being called "Mortgage
Assets"). Payments of principal of, and interest on, the Mortgage Assets (and in
the case of CMOs, any reinvestment income thereon) provide the funds to pay debt
service on the CMOs or to make scheduled distributions on the multi-class
mortgage pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of 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 accrues on all classes of a CMO (other than any
principal-only or "PO" class) on a monthly, quarterly or semiannual basis. The
principal and interest on the Mortgage Assets may be allocated among the several
classes of a CMO in many ways. In one structure, payments of principal,
including any principal prepayments, on the Mortgage Assets are applied to the
classes of a CMO in the order of their respective stated maturities or final
distribution dates so that no payment of principal will be made on any class of
the CMO until all other classes having an earlier stated maturity or final
distribution date have been paid in full. In some CMO structures, all or a
portion of the interest attributable to one or more of the CMO classes may be
added to the principal amounts attributable to such classes, rather than passed
through to certificateholders on a current basis, until other classes of the CMO
are paid in full.
Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier.
Some CMO classes are structured to pay interest at rates that are adjusted
in accordance with a formula, such as a multiple or fraction of the change in a
specified interest rate index, so as to pay at a rate that will be attractive in
certain interest rate environments but not in others. For example, an inverse
floating rate CMO class pays interest at a rate that increases as a specified
interest rate index decreases but decreases as that index increases. For other
CMO classes, the yield may move in the same direction as market interest
rates--i.e., the yield may increase as rates increase and decrease as rates
decrease--but may do so more rapidly or to a greater degree. The market value of
such securities generally is more volatile than that of a fixed rate obligation.
Such interest rate formulas may be combined with other CMO characteristics. For
example, a CMO class may be an "inverse IO," on which the holders are entitled
to receive no payments of principal and are entitled to receive interest at a
rate that will vary inversely with a specified index or a multiple thereof.
Types of Credit Enhancement. To lessen the effect of failures by obligors
on Mortgage Assets to make payments, mortgage-backed securities may contain
elements of credit enhancement. Such credit enhancement falls into two
categories: (1) liquidity protection and (2) protection against losses resulting
after default by an obligor on the underlying assets and collection of all
amounts recoverable directly from the obligor and through liquidation of the
collateral. Liquidity protection refers to the provision of advances, generally
by the entity administering the pool of assets (usually the bank, savings
association or mortgage banker that transferred the underlying loans to the
issuer of the security), to ensure that the receipt of payments on the
underlying pool occurs in a timely fashion. Protection against losses resulting
after default and liquidation ensures ultimate payment of the obligations on at
least a portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor, from third parties, through various means of structuring the
transaction or through a combination of such approaches. The Underlying Funds
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
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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 less likely to experience substantial
prepayments. Such securities, however, often provide that for a specified time
period the issuers will replace receivables in the pool that are repaid with
comparable obligations. If the issuer is unable to do so, repayment of principal
on the asset-backed securities may commence at an earlier date. Mortgage- and
asset-backed securities may decrease in value as a result of increases in
interest rates and may benefit less than other fixed-income securities from
declining interest rates because of the risk of prepayment.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice was to assume that prepayments on pools of
fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. However, these effects may not be present, or may
differ in degree, if the mortgage loans in the pools have adjustable interest
rates or other special payment terms, such as a prepayment charge. Actual
prepayment experience may cause the yield of mortgage-backed securities to
differ from the assumed average life yield. Reinvestment of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting the yield of an Underlying Fund.
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Additional Information on Adjustable Rate Mortgage and Floating Rate
Mortgage-Backed Securities. Adjustable rate mortgage ("ARM") securities are
mortgage-backed securities that represent a right to receive interest payments
at a rate that is adjusted to reflect the interest earned on a pool of mortgage
loans bearing variable or adjustable rates of interest (such mortgage loans are
referred to as "ARMs"). Floating rate mortgage-backed securities are classes of
mortgage-backed securities that have been structured to represent the right to
receive interest payments at rates that fluctuate in accordance with an index
but that generally are supported by pools comprised of fixed-rate mortgage
loans.
Because the interest rates on ARM and floating rate mortgage-backed
securities are reset in response to changes in a specified market index, the
values of such securities tend to be less sensitive to interest rate
fluctuations than the values of fixed-rate securities. As a result, during
periods of rising interest rates, ARMs generally do not decrease in value as
much as fixed rate securities. Conversely, during periods of declining rates,
ARMs generally do not increase in value as much as fixed rate securities. ARM
mortgage-backed securities represent a right to receive interest payments at a
rate that is adjusted to reflect the interest earned on a pool of ARMs. ARMs
generally specify that the borrower's mortgage interest rate may not be adjusted
above a specified lifetime maximum rate or, in some cases, below a minimum
lifetime rate. In addition, certain ARMs specify limitations on the maximum
amount by which the mortgage interest rate may adjust for any single adjustment
period. ARMs also may limit changes in the maximum amount by which the
borrower's monthly payment may adjust for any single adjustment period. In the
event that a monthly payment is not sufficient to pay the interest accruing on
the ARM, any such excess interest is added to the mortgage loan ("negative
amortization"), which is repaid through future payments. If the monthly payment
exceeds the sum of the interest accrued at the applicable mortgage interest rate
and the principal payment that would have been necessary to amortize the
outstanding principal balance over the remaining term of the loan, the excess
reduces the principal balance of the ARM. Borrowers under ARMs experiencing
negative amortization may take longer to build up their equity in the underlying
property and may be more likely to default.
ARMs also may be subject to a greater rate of prepayments in a declining
interest rate environment. For example, during a period of declining interest
rates, prepayments on ARMs could increase because the availability of fixed
mortgage loans at competitive interest rates may encourage mortgagors to
"lock-in" at a lower interest rate. Conversely, during a period of rising
interest rates, prepayments on ARMs might decrease. The rate of prepayments with
respect to ARMs has fluctuated in recent years.
The rates of interest payable on certain ARMs, and, therefore, on certain
ARM mortgage-backed securities, are based on indices, such as the one-year
constant maturity Treasury rate, that reflect changes in market interest rates.
Others are based on indices, such as the 11th District Federal Home Loan Bank
Cost of Funds Index ("COFI"), that tend to lag behind changes in market interest
rates. The values of ARM mortgage-backed securities supported by ARMs that
adjust based on lagging indices tend to be somewhat more sensitive to interest
rate fluctuations than those reflecting current interest rate levels, although
the values of such ARM mortgage-backed securities still tend to be less
sensitive to interest rate fluctuations than fixed-rate securities.
Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. As with ARM
mortgage-backed securities, interest rate adjustments on floating rate
mortgage-backed securities may be based on indices that lag behind market
interest rates. Interest rates on floating rate mortgage-backed securities
generally are adjusted monthly. Floating rate mortgage-backed securities are
subject to lifetime interest rate caps, but they generally are not subject to
limitations on monthly or other periodic changes in interest rates or monthly
payments.
Duration. Duration is a measure of the expected life of a fixed income
security that was developed as a more precise alternative to the concept "term
to maturity." Traditionally, a debt security's "term to maturity" has been used
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as a proxy for the sensitivity of the security's price to changes in interest
rates (which is the "interest rate risk" or "volatility" of the security).
However, "term to maturity" measures only the time until a debt security
provides for a final payment, taking no account of the pattern of the security's
payments prior to maturity.
For any fixed income security with interest payments occurring prior to the
payment of principal, duration is always less than maturity. For example,
depending upon its coupon and the level of market yields, a 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.
Futures, options and options on futures have durations that, in general,
are closely related to the duration of the securities that underlie them.
Holding long futures or call option positions (backed by a segregated account of
cash and cash equivalents) will lengthen a security's duration by approximately
the same amount as would holding an equivalent amount of the underlying
securities. Short futures or put options have durations roughly equal to the
negative duration of the securities that underlie these positions, and have the
effect of reducing portfolio duration by approximately the same amount as would
selling an equivalent amount of the underlying securities.
There are some situations in which the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by the standard duration calculation is the case of mortgage-backed
securities. The stated final maturity of such securities is generally 30 years,
but current prepayment rates are critical in determining the securities'
interest rate exposure. In these and other similar situations, Mitchell Hutchins
and the applicable Sub-Advisers 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.
Zero Coupon, OID and PIK Bonds. Federal tax law requires that the holder of
a bond with original issue discount ("OID") accrue a portion of the OID on the
bond as income each year, even though the holder may receive no interest payment
on the bond during the year. Accordingly, although an investing Underlying Fund
will receive no payments on its zero coupon bonds prior to their maturity or
disposition, it will have income attributable to such bonds. Similarly, while
payment-in-kind ("PIK") bonds may pay interest in the form of additional
securities rather than cash, that interest must be included in an Underlying
Fund's annual income.
To qualify for pass-through federal income tax treatment as a regulated
investment company, an Underlying Fund must distribute substantially all of its
net investment income each year, including non-cash income. Accordingly, each
Underlying Fund will be required to include in its dividends an amount equal to
the income attributable to its zero coupon, other OID and PIK bonds. See
"Taxes." Those dividends will be paid from the cash assets of an Underlying Fund
or by liquidation of portfolio securities, if necessary, at a time when the
Underlying Fund otherwise might not have done so.
Certain zero coupon bonds 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 (Certificates of Accrual
Treasury Securities), TIGRs (Treasury Income Growth Receipts) and similar
securities. As long as the SEC takes this position, "CATS" and "TIGRs", which
are not issued through the U.S. Treasury, will not be counted as U.S. government
securities for purposes of the 65% investment requirement applicable to
PaineWebber U.S.Government Income Fund and PaineWebber Low Duration U.S.
Government Income Fund.
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Foreign and Emerging Market Securities. 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 are greater for
emerging market securities and may include expropriation, confiscatory taxation,
withholding taxes on interest and/or dividends, limitations on the use of or
transfer of Underlying 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. Securities of many foreign
companies may be less liquid and their prices more volatile than securities of
comparable U.S. companies. Many foreign securities may be difficult to liquidate
rapidly without significantly depressing the price of such securities. There may
be less publicly available information concerning foreign issuers of securities
held by the Underlying Funds than is available concerning 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 Underlying Fund assets may be released prior to
receipt of payment, may expose the Underlying 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. Foreign
securities trading practices, including those involving securities settlement
where an Underlying Fund's assets may be released prior to receipt of payment,
may expose that Underlying Fund to increased risk in the event of a failed trade
or the insolvency of a foreign broker-dealer.
These risks are greater for emerging market securities than for securities
of foreign issuers in more developed markets. Disclosure and regulatory
standards for securities traded in emerging markets are less stringent than in
the U.S. and other major markets. There also may be a lower level of monitoring
and regulation of emerging markets and the activities of investors in such
markets, and enforcement of existing regulations may be extremely limited. In
certain emerging 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 the assets of an Underlying Fund are uninvested and no return is
earned thereon. The inability of an Underlying Fund to make intended securities
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 Underlying Fund due to
subsequent declines in the value of such portfolio security or, if the
Underlying Fund has entered into a contract to sell the security, could result
in possible liability to the purchaser.
To the extent that the Underlying Funds hold securities of foreign issuers,
these securities may not be registered with the SEC, nor may the issuers thereof
be subject to its reporting requirements. Accordingly, there may be less
publicly available information concerning foreign issuers of securities held by
the Underlying Funds than is available concerning U.S. companies. Foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards or to other regulatory requirements comparable to
those applicable to U.S. companies.
The Underlying Funds may invest in foreign securities by purchasing
depository receipts, including American Depository Receipts ("ADRs"), European
Depository Receipts ("EDRs") and Global Depository Receipts ("GDRs"), or other
securities convertible into securities of issuers based in foreign countries.
These securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, in registered
form, are denominated in U.S. dollars and are designed for use in the U.S.
securities markets. EDRs are similar to ADRs, but may be denominated in other
currencies and are designed for use in European securities markets. ADRs are
receipts typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities. GDRs are similar to EDRs and are designed for use
in several international markets. For purposes of each Underlying Fund's
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investment policies, ADRs, EDRs and GDRs are deemed to have the same
classification as the underlying securities they represent. Thus, an ADR, EDR or
GDR representing ownership of common stock will be treated as common stock.
The Underlying Funds 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.
Transactions on foreign exchanges are usually subject to fixed commissions that
are generally higher than negotiated commissions on U.S. transactions, although
each Underlying Fund will endeavor to achieve the best net results in effecting
its portfolio transactions. There is generally less government supervision and
regulation of exchanges and brokers in foreign countries than in the United
States.
From time to time, investments in other investment companies may be the
most effective available means by which the Underlying Funds may invest in
securities of issuers in certain countries. Investment in such investment
companies may involve the payment of management expenses and, in connection with
some purchases, sales loads, and payment of substantial premiums above the value
of such companies' portfolio securities. At the same time, an Underlying Fund
would continue to pay its own management fees and other expenses. The Underlying
Funds may invest in these investment funds and in registered investment
companies subject to the provisions of the 1940 Act.
Investment income on certain foreign securities in which the Underlying
Funds may invest may be subject to foreign income withholding or other taxes
that could reduce the return on these securities. Tax treaties between the
United States and foreign countries, however, may reduce or eliminate the amount
of foreign taxes to which the Underlying Funds would be subject.
Foreign Sovereign Debt. Investment by the Underlying Funds in debt
securities issued by foreign governments and their political subdivisions or
agencies ("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 Underlying 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. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local government
or agency.
The occurrence of political, social or diplomatic changes in one or more of
the countries issuing Sovereign Debt could adversely affect the Underlying
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 and the Sub-Advisers manage the
Underlying Funds' portfolios in a manner that is intended to minimize the
exposure to such risks, there can be no assurance that adverse political changes
will not cause an Underlying Fund to suffer a loss of interest or principal on
any of its holdings.
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Brady Bonds. Brady Bonds are Sovereign Debt securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness. In
restructuring its external debt under the Brady Plan framework, a debtor nation
negotiates with its existing bank lenders as well as multilateral institutions
such as the IMF. The Brady Plan framework, as it has developed, contemplates the
exchange of commercial bank debt for newly issued Brady Bonds. Brady Bonds may
also be issued in respect of new money being advanced by existing lenders in
connection with the debt restructuring. The World Bank and the IMF support the
restructuring by providing funds pursuant to loan agreements or other
arrangements which enable the debtor nation to collateralize the new Brady Bonds
or to repurchase outstanding bank debt at a discount.
Brady Plan debt restructurings totaling more than $80 billion have been
implemented to date in Mexico, Costa Rica, Venezuela, Uruguay, Nigeria,
Argentina and the Philippines and, in addition, Brazil has announced intentions
to issue Brady Bonds. There can be no assurance that the circumstances regarding
the issuance of Brady Bonds by these countries will not change. Investors should
recognize that Brady Bonds have been issued only recently, and accordingly do
not have a long payment history. Agreements implemented under the Brady Plan to
date are designed to achieve debt and debt-service reduction through specific
options negotiated by a debtor nation with its creditors. As a result, the
financial packages offered by each country differ. The types of options have
included the exchange of outstanding commercial bank debt for bonds issued at
100% of face value of such debt, which carry a below-market stated rate of
interest (generally known as par bonds), bonds issued at a discount from the
face value of such debt (generally known as discount bonds), bonds bearing an
interest rate which increases over time and bonds issued in exchange for the
advancement of new money by existing lenders. Regardless of the stated face
amount and stated interest rate of the various types of Brady Bonds, the
Underlying Fund will purchase Brady Bonds in secondary markets, as described
below, in which the price and yield to the investor reflect market conditions at
the time of purchase.
Certain Brady Bonds have been collateralized as to principal due at
maturity by U.S. Treasury zero coupon bonds with maturities equal to the final
maturity of such Brady Bonds. Collateral purchases are financed by the IMF, the
World Bank and the debtor nations' reserves. In the event of a default with
respect to collateralized Brady Bonds as a result of which the payment
obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, interest payments on certain types of Brady Bonds
may be collateralized by cash or high grade securities in amounts that typically
represent between 12 and 18 months of interest accruals on these instruments
with the balance of the interest accruals 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. The
Underlying Funds may purchase Brady Bonds with no or limited collateralizations
and will be relying for payment of interest and (except in the case of principal
collateralized Brady Bonds) repayment of principal primarily on the willingness
and ability of the foreign government to make payment in accordance with the
terms of the Brady Bonds. Brady Bonds issued to date are purchased and sold in
secondary markets through U.S. securities dealers and other financial
institutions and are generally maintained through European transnational
securities depositories.
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Foreign Currency Transactions. Although the Underlying Funds value their
assets daily in U.S. dollars, they do not intend to convert their holdings of
foreign currencies to U.S. dollars on a daily basis. The Underlying Funds'
foreign currencies generally will 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 Underlying Funds could suffer a loss of some or all of the
amounts deposited. The Underlying Funds may convert foreign currency to U.S.
dollars from time to time. Although foreign exchange dealers generally do not
charge a stated commission or fee for conversion, the prices posted generally
include a "spread," which is the difference between the prices at which the
dealers are buying and selling foreign currencies.
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 paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Before conversion, convertible securities have
characteristics similar to non-convertible debt securities in that they
ordinarily provide a stable stream of income with generally higher yields than
those of common stocks of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure but are usually
subordinated to comparable non-convertible securities. While no securities
investment is without some risk, investments in convertible securities generally
entail less risk than the issuer's common stock, although the extent to which
such risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed income security.
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.
The value of a convertible security is a function of its "investment value"
(determined by its yield comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value and
generally the conversion value decreases as the convertible security approaches
maturity. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition, a
convertible security generally will sell at a premium over its conversion value
determined by the extent to which investors place value on the right to acquire
the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by an Underlying Fund is called for
redemption, that Underlying 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.
Warrants. Warrants are securities permitting, but not obligating, their
holder to subscribe for other securities or commodities. Warrants do not carry
with them the right to dividends or voting rights with respect to the securities
that they entitle their holder to purchase, and they do not represent any rights
in the assets of the issuer. As a result, warrants may be considered more
speculative than certain other types of investments. In addition, the value of a
warrant does not necessarily change with the value of the underlying securities,
and a warrant ceases to have value if it is not exercised prior to its
expiration date.
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Illiquid Securities. The Underlying Funds may invest up to 10% or 15% of
their net assets in illiquid securities. The term "illiquid securities" for this
purpose means securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which an Underlying
Fund has valued the securities and includes, among other things, purchased OTC
options, repurchase agreements maturing in more than seven days and restricted
securities other than those Mitchell Hutchins or a Sub-Adviser, as applicable,
have determined are liquid pursuant to guidelines established by each Underlying
Fund's board of trustees or board of directors (each sometimes referred to as a
"board"). The assets used as cover for OTC options written by the Underlying
Funds will be considered illiquid unless the OTC options are sold to qualified
dealers who agree that a Fund may repurchase any OTC option it writes at a
maximum price to be calculated by a formula set forth in the option agreement.
The cover for an OTC option written subject to this procedure would be
considered illiquid only to the extent that the maximum repurchase price under
the formula exceeds the intrinsic value of the option.
Illiquid restricted securities may be sold only in privately negotiated
transactions or in public offerings with respect to which a registration
statement is in effect under the Securities Act of 1933 ("1933 Act"). However,
to the extent that securities are freely tradeable in the country in which they
are principally traded, they are not considered illiquid securities for purposes
of the Underlying Funds' respective percentage limitations, even if they are not
freely tradeable in the United States. Where registration is required, an
Underlying 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, an Underlying Fund might obtain a less favorable price than
prevailed when it decided to sell.
Not all restricted securities are illiquid. In recent years a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and notes.
These instruments are often restricted securities because the securities are
sold in transactions not requiring registration. 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.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
have developed as a result of Rule 144A, providing both readily ascertainable
values for restricted securities and the ability to liquidate an investment to
satisfy share redemption orders. 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
an Underlying Fund, however, could affect adversely the marketability of such
portfolio securities and the Fund might be unable to dispose of such securities
promptly or at favorable prices.
Each 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 offers are solicited and the mechanics of transfer).
Mitchell Hutchins or the Sub-Adviser monitors the liquidity of restricted
securities in each Underlying Fund's portfolio and reports periodically on such
decisions to the applicable board.
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Repurchase Agreements. Repurchase agreements are transactions in which an
Underlying Fund purchases securities from a bank or recognized securities dealer
and simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date or upon demand and at a price reflecting a market rate of
interest unrelated to the coupon rate or maturity of the purchased securities.
The Underlying Fund maintains custody of the underlying securities prior to
their repurchase; thus, the obligation of the bank or dealer to pay the
repurchase price on the date agreed to is, in effect, secured by such
securities. If the value of these securities is less than the repurchase price,
plus any agreed-upon additional amount, the other party to the agreement must
provide additional collateral so that at all times the collateral is at least
equal to the repurchase price, plus any agreed-upon additional amount. The
difference between the total amount to be received upon repurchase of the
securities and the price that was paid by an Underlying Fund upon acquisition is
accrued as interest and included in its net investment income.
The Underlying Funds intend to enter into repurchase agreements only with
banks and dealers in transactions believed by Mitchell Hutchins or a Sub-Adviser
to present minimal credit risks in accordance with guidelines established by the
applicable board. Mitchell Hutchins reviews and monitors the creditworthiness of
those institutions under each board's general supervision.
Reverse Repurchase Agreements. Most of the Underlying Funds may enter into
reverse repurchase agreements with banks and securities dealers. Such agreements
involve the sale of securities held by the Underlying 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. Such agreements are considered
to be borrowings and may be entered into only for temporary or emergency
purposes. While a reverse repurchase agreement is outstanding, the Underlying
Fund's custodian segregates assets to cover the Fund's obligations under the
reverse repurchase agreement. See "Underlying Funds -- Investment Policies,
Segregated Accounts."
Lending of Portfolio Securities. Each Underlying Fund is authorized to lend
up to 33 1/3% of its total assets to broker-dealers or institutional investors
that Mitchell Hutchins deems qualified, but only when the borrower maintains
acceptable collateral with that Underlying 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. 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 Underlying Fund will retain authority to terminate any loans at
any time. Each Underlying Fund may pay reasonable fees in connection with a loan
and may pay a negotiated portion of the interest earned on the cash held as
collateral to the borrower or placing broker. Each Underlying Fund will receive
reasonable interest on the loan or a flat fee from the borrower and amounts
equivalent to any dividends, interest or other distributions on the securities
loaned. Each Underlying 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 Underlying Fund's board governing its
securities lending program, PaineWebber serves as lending agent for that
Underlying Fund. The boards have also authorized the payment of fees (including
fees calculated as a percentage of invested cash collateral) to PaineWebber for
these services. The board of each Underlying Fund periodically review all
portfolio securities loan transactions of that Underlying Fund for which
PaineWebber acted as lending agent.
Short Sales "Against the Box." Each Underlying Fund other than PaineWebber
Cashfund 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 an Underlying Fund, and that Underlying Fund is obligated to replace
the securities borrowed at a date in the future. When an Underlying Fund sells
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short, it will establish a margin account with the broker effecting the short
sale, and will deposit collateral with the broker. In addition, the Underlying
Fund will maintain with its custodian, in a segregated account, the securities
that could be used to cover the short sale. Each Underlying Fund incurs
transaction costs, including interest expense, in connection with opening,
maintaining and closing short sales "against the box."
The Underlying Funds might make a short sale "against the box" in order to
hedge against market risks when Mitchell Hutchins or a Sub-Adviser believes that
the price of a security may decline, thereby causing a decline in the value of a
security owned by a Fund or a security convertible into or exchangeable for a
security owned by the Fund.
Loan Participations and Assignments. Investment Grade Income Fund and High
Income Fund each may invest up to 5% of its net assets in secured or unsecured
fixed or floating rate loans ("Loans") arranged through private negotiations
between a borrowing corporation and one or more financial institutions
("Lenders"). These Underlying Funds' investments in Loans are expected in most
instances to be in the form of participations ("Participations") in Loans and
assignments ("Assignments") of all or a portion of Loans from third parties.
Participations typically result in an Underlying Fund's having a contractual
relationship only with the Lender, not with the borrower. An Underlying 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, an Underlying 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 the Fund may not
directly benefit from any collateral supporting the Loan in which it has
purchased the Participation. As a result, an Underlying 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 Lender selling a Participation, an Underlying
Fund may be treated as a general creditor of the Lender and may not benefit from
any set-off between the Lender and the borrower. The Underlying Funds will
acquire Participations only if the Lender interpositioned between the Fund and
the borrower is determined by Mitchell Hutchins to be creditworthy.
When an Underlying Fund purchases Assignments from Lenders, it acquires
direct rights against the borrower on the Loan. However, because Assignments are
arranged through private negotiations between potential assignees and assignors,
the rights and obligations acquired by an Underlying 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 1933
Act and thus are subject to each Underlying Fund's limitation on investment in
illiquid securities. Because there is no liquid market for such securities, the
Underlying Funds anticipate that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market will
have an adverse impact on the value of such securities and on an Underlying
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.
Segregated Accounts. When an Underlying Fund enters into certain
transactions 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 "Underlying Funds -- Hedging
and Other Strategies Using Derivative Contracts," segregated accounts may also
be required in connection with certain transactions involving options, futures
contracts and forward currency contracts and certain interest rate protection
transactions.
When-Issued and Delayed Delivery Securities. As stated in the Prospectus,
each Underlying Fund may purchase securities on a "when-issued" or delayed
delivery basis. 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
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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 an Underlying Fund agrees to purchase
securities on a when-issued or delayed delivery basis, its custodian segregates
assets to cover the amount of the commitment. See "Underlying Funds - Investment
Policies - Segregated Accounts." An Underlying Fund purchases when-issued
securities only with the intention of taking delivery, but may sell the right to
acquire the security prior to delivery if Mitchell Hutchins or a Sub-Adviser, as
applicable, deems it advantageous to do so, which may result in a gain or loss
to the Fund.
UNDERLYING FUNDS -- HEDGING AND OTHER STRATEGIES USING DERIVATIVE CONTRACTS
General Description of Derivative Instruments. Mitchell Hutchins and the
Sub-Advisers may use a variety of financial contracts ("Derivative
Instruments"), including certain options, futures contracts (sometimes referred
to as "futures") and options on futures contracts to attempt to hedge the
portfolio of each Underlying Fund (other than PaineWebber Cashfund). Certain
Underlying Funds also may use these derivative contracts to attempt to enhance
income or return, including shifting an Underlying Fund's exposure from one
asset class to another. Certain Underlying Funds also may hedge their portfolios
by entering into certain swaps or other interest rate protection transactions
and by using forward currency contracts. An Underlying 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,
an Underlying Fund's use of these derivative contracts will place at risk a much
smaller portion of its assets. The particular Derivative Instruments used by the
Underlying Funds are described below.
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. The writer of the
call option, who receives the premium, has the obligation, upon exercise of the
option during the option term, to deliver the underlying security or currency
against payment of the exercise price. A put option is a similar contract that
gives its purchaser, in return for a premium, the right to sell the underlying
security or currency at a specified price during the option term. The writer of
the put option, who receives the premium, has the obligation, upon exercise of
the option during the option term, to buy the underlying security or currency at
the exercise price.
Options on Securities Indexes--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
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delivery or acceptance of debt securities or currency, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery.
Options on Futures Contracts--Options on futures contracts are similar to
options on securities or currency, except that an option on a futures contract
gives the purchaser the right, in return for the premium, to assume a position
in a futures contract (a long position if the option is a call and a short
position if the option is a put), rather than to purchase or sell a security or
currency, at a specified price at any time during the option term. Upon exercise
of the option, the delivery of the futures position to the holder of the option
will be accompanied by delivery of the accumulated balance that represents the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the future. The writer of an option, upon exercise, will assume a short
position in the case of a call and a long position in the case of a put.
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. 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 to partially or fully offset potential
declines in the value of one or more investments held in an Underlying Fund's
portfolio. Thus, in a short hedge an Underlying 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, an Underlying 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, an Underlying Fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transactions
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, an Underlying 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 an Underlying Fund intends to acquire.
Thus, in a long hedge, an Underlying 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, an Underlying 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, an Underlying Fund could
exercise the call and thus limit its acquisition cost to the exercise price plus
the premium paid and transactions costs. Alternatively, an Underlying Fund might
be able to offset the price increase by closing out an appreciated call option
and realizing a gain.
Derivative Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that an
Underlying 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 an Underlying Fund has invested or expects
to invest. Derivative Instruments on debt securities may be used to hedge either
individual securities or broad fixed income market sectors.
Income strategies include the writing of covered options to obtain the
related option premiums. Return strategies include the use of Derivative
Instruments to increase or reduce an Underlying Fund's exposure to an asset
class without buying or selling the underlying instruments.
The use of Derivative Instruments is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they are traded
and the Commodity Futures Trading Commission ("CFTC"). In addition, an
Underlying Fund's ability to use Derivative Instruments will be limited by tax
considerations. See "Taxes."
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In addition to the products, strategies and risks described below and in
the Prospectus, Mitchell Hutchins and the Sub-Advisers expect to discover
additional opportunities in connection with options, futures contracts and other
derivative contracts and hedging techniques. These new opportunities may become
available as Mitchell Hutchins or the Sub-Advisers develop new techniques, as
regulatory authorities broaden the range of permitted transactions and as new
options, futures contracts, foreign currency contracts or other derivative
contracts and techniques are developed. Mitchell Hutchins or a Sub-Adviser, as
applicable, may utilize these opportunities for an Underlying Fund to the extent
that they are consistent with the Fund's investment objective and permitted by
its investment limitations and applicable regulatory authorities. An Underlying
Fund's prospectus or statement of additional information will be supplemented to
the extent that new products or techniques involve materially different risks
than those described below or in its prospectus.
Special Risks of Hedging Strategies. The use of Derivative Instruments in
hedging strategies 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 a Sub-Adviser, as applicable, to predict movements of
the overall securities and interest rate 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 hedging strategy
adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Derivative Instrument and price movements of the
investments being hedged. For example, if the value of a Derivative Instrument
used in a short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which
Derivative Instruments are traded. 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 an Underlying Fund entered
into a short hedge because Mitchell Hutchins or a Sub-Adviser projected a
decline in the price of a security in that Underlying 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, that Underlying Fund could
suffer a loss. In either such case, the Underlying Fund would have been in a
better position had it not hedged at all.
(4) As described below, an Underlying 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 Underlying
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
an Underlying 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. An Underlying 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 contra party to enter
into a transaction closing out the position. Therefore, there is no assurance
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that any position can be closed out at a time and price that is favorable to an
Underlying Fund.
Cover for Strategies Using Derivative Instruments. Transactions using
Derivative Instruments, other than purchased options, expose the Underlying
Funds to an obligation to another party. An Underlying Fund will not enter into
any such transactions unless it owns either (1) an offsetting ("covered")
position in securities, other options or futures contracts or (2) cash and
liquid securities, with a value sufficient at all times to cover its potential
obligations to the extent not covered as provided in (1) above. Each Underlying
Fund will comply with SEC guidelines regarding cover for these 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, the commitment of a large portion of
an Underlying Fund's assets to cover or segregated accounts could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
Options. The Underlying Funds may purchase put and call options, and write
(sell) covered put or call options on securities on which they are permitted to
invest and indices of those securities. Those Underlying Funds that are
permitted to invest in foreign securities denominated in foreign currencies also
may purchase put and call options on foreign currencies. The purchase of call
options serves as a long hedge, and the purchase of put options serves as a
short hedge. 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 Underlying 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 Underlying Fund will be obligated to purchase
the security at more than its market value. The securities or other assets used
as cover for OTC options written by an Underlying Fund would be considered
illiquid to the extent described under "Underlying Funds -- Investment Policies,
Illiquid Securities."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Options that expire unexercised have no value.
An Underlying Fund may effectively terminate its right or obligation under
an option by entering into a closing transaction. For example, an Underlying
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, an Underlying 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
an Underlying Fund to realize profits or limit losses on an option position
prior to its exercise or expiration.
The Underlying Funds may purchase and write both exchange-traded and OTC
options. Exchange markets for options on debt securities and foreign currencies
exist but are relatively new, and these instruments are primarily traded on the
OTC market. Exchange-traded options in the United States are issued by a
clearing organization affiliated with the exchange on which the option is listed
which, in effect, guarantees completion of every exchange-traded option
transaction. In contrast, OTC options are contracts between an Underlying Fund
and its contra party (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when an Underlying Fund purchases or writes an OTC
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option, it relies on the contra party to make or take delivery of the underlying
investment upon exercise of the option. Failure by the contra party to do so
would result in the loss of any premium paid by the Underlying Fund as well as
the loss of any expected benefit of the transaction. The Underlying Funds will
enter into OTC option transactions only with contra parties that have a net
worth of at least $20 million.
Generally, the OTC debt options or foreign currency options used by the
Underlying 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.
The Underlying Funds' ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The
Underlying Funds intend to purchase or write only those exchange-traded options
for which there appears to be a liquid secondary market. However, there can be
no assurance that such a market will exist at any particular time. Closing
transactions can be made for OTC options only by negotiating directly with the
contra party, or by a transaction in the secondary market if any such market
exists. Although the Underlying Funds will enter into OTC options only with
contra parties that are expected to be capable of entering into closing
transactions with the Underlying Funds, there is no assurance that an Underlying
Fund will in fact be able to close out an OTC option position at a favorable
price prior to expiration. In the event of insolvency of the contra party, an
Underlying Fund might be unable to close out an OTC option position at any time
prior to its expiration.
If an Underlying 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 Underlying 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.
Limitations on the Use of Options. The use of options is governed by the
following guidelines, which can be changed by the board for each Underlying Fund
without shareholder vote:
(1) Each Underlying Fund may purchase a put or call option, including any
straddles or spreads, only if the value of its premium, when aggregated with the
premiums on all other options held by the Underlying Fund, does not exceed 5% of
its total assets.
(2) The aggregate value of securities underlying put options written by an
Underlying Fund determined as of the date the put options are written will not
exceed 50% of that Underlying Fund's net assets.
(3) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock and bond indices and options on futures
contracts) purchased by an Underlying Fund that are held at any time will not
exceed 20% of that Underlying Fund's net assets.
Futures. The Underlying Funds may purchase and sell futures contracts that
are related to securities in which they are permitted to invest, such as
securities index futures contracts for Underlying Funds that invest in equity
securities, interest rate futures contracts for Underlying Funds that invest in
bonds and foreign currency futures contracts for Underlying Funds that invest in
securities that are denominated in foreign currencies. An Underlying 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.
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No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract an Underlying 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 that are 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 an Underlying Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, an
Underlying 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 Underlying Fund's obligations to or from a
futures broker. When an Underlying Fund purchases an option on a future, the
premium paid plus transaction costs is all that is at risk. In contrast, when an
Underlying 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 an Underlying 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 Underlying 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 an Underlying 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. An Underlying Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, an Underlying 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
24
<PAGE>
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 applicable board for each Underlying Fund without shareholder
vote:
(1) To the extent an Underlying Fund enters into futures contracts and
options on futures positions that are not for bona fide hedging purposes (as
defined by the CFTC), the aggregate initial margin and premiums on those
positions (excluding the amount by which options are "in-the-money") may not
exceed 5% of that Underlying Fund's net assets.
(2) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock or bond indices and options on futures
contracts) purchased by an Underlying Fund that are held at any time will not
exceed 20% of that Underlying Fund's net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by an Underlying Fund will not exceed 5% of its total
assets.
Foreign Currency Hedging Strategies--Special Considerations. Those
Underlying Funds that invest in securities that are denominated in foreign
currencies 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 their portfolio
securities are denominated. Such currency hedges can protect against price
movements in a security an Underlying 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 Underlying Funds might seek to hedge against changes in the value of a
particular currency when no Derivative Instruments on that currency are
available or such Derivative Instruments are more expensive than certain other
Hedging Instruments. In such cases, the Underlying Funds 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. The risk that movements
in the price of the Derivative Instrument will not correlate perfectly with
movements in the price of the currency being hedged is magnified when this
strategy is used.
The value of Derivative Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Derivative
Instruments, an Underlying 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.
25
<PAGE>
Settlement of hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the Underlying 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. An Underlying Fund that invests in securities
denominated in foreign currencies 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, an Underlying 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
Underlying Fund intends to acquire. Forward currency contract transactions may
also serve as short hedges--for example, an Underlying 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.
As noted above, an Underlying Fund also may seek to hedge against changes
in the value of a particular currency by using forward contracts on another
foreign currency or a basket of currencies, the value of which Mitchell Hutchins
or a Sub-Adviser believes will have a positive correlation to the values of the
currency being hedged. In addition, an Underlying Fund may use forward currency
contracts to shift its exposure to foreign currency fluctuations from one
country to another. For example, if an Underlying 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 cost to an Underlying 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 an Underlying Fund enters into a forward currency contract,
it relies on the contra party to make or take delivery of the underlying
currency at the maturity of the contract. Failure by the contra party to do so
would result in the loss of any expected benefit of the transaction.
As is the case with futures contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the contra party. Thus, there can be no assurance
that an Underlying 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 contra party, an Underlying Fund might be unable to close out
a forward currency contract at any time prior to maturity. In either event, the
Underlying 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, an Underlying 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.
26
<PAGE>
Limitations on the Use of Forward Currency Contracts. An Underlying 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
Underlying Fund to deliver an amount of foreign currency in excess of the value
of the position being hedged by such contracts or (2) the Underlying 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.
Interest Rate Protection Transactions. Certain Underlying Funds may enter
into interest rate protection transactions, including interest rate swaps and
interest rate caps, floors and collars. Interest rate swap transactions 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.
The Underlying Funds expect to enter into interest rate protection
transactions to preserve a return or spread on a particular investment or
portion of its portfolio or to protect against any increase in the price of
securities it anticipates purchasing at a later date. The Underlying Funds
intend to use these transactions as a hedge and not as a speculative investment.
Interest rate protection transactions are subject to risks comparable to those
described above with respect to other hedging strategies.
Certain Underlying Funds may enter into interest rate swaps, caps, floors
and collars on either an asset-based or liability-based basis, depending on
whether it is hedging its assets or its liabilities, and will usually enter into
interest rate swaps on a net basis, i.e., the two payment streams are netted
out, with the Underlying Fund receiving or paying, as the case may be, only the
net amount of the two payments. Inasmuch as these interest rate protection
transactions are entered into for good faith hedging purposes, and inasmuch as
segregated accounts will be established with respect to such transactions,
Mitchell Hutchins, the applicable Sub-Advisers and the Underlying Funds believe
such obligations do not constitute senior securities and, accordingly, will not
treat them as being subject to the Underlying Funds' borrowing restrictions. The
net amount of the excess, if any, of an Underlying Fund's obligations over its
entitlements with respect to each interest rate swap will be accrued on a daily
basis, and appropriate Underlying 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 "Underlying Funds -- Investment
Policies--Segregated Accounts." The Underlying Fund also will establish and
maintain such segregated accounts with respect to its total obligations under
any interest rate swaps that are not entered into on a net basis and with
respect to any interest rate caps, collars and floors that are written by the
Underlying Fund.
The Underlying Funds will enter into interest rate protection transactions
only with banks and recognized securities dealers believed by Mitchell Hutchins
or the applicable Sub-Adviser to present minimal credit risk in accordance with
guidelines established by each Underlying Fund's board. If there is a default by
the other party to such a transaction, the Underlying 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.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. Caps, floors and collars are more
recent innovations for which documentation is less standardized, and
accordingly, they are less liquid than swaps.
27
<PAGE>
TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
The trustees and executive officers of the Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
Position with Business Experience;
Name and Address*; Age the Trust Other Directorships
---------------------- --------- -------------------
<S> <C> <C>
Margo N. Alexander*,;50 Trustee and President Mrs. Alexander is president, chief executive
officer and a director of Mitchell Hutchins
(since January 1995) and also an executive
vice president and a director of
PaineWebber. Mrs. Alexander is president and
a director or trustee of 28 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Richard Q. Armstrong; 61 Trustee Mr. Armstrong is chairman and principal of
78 West Brother Drive RQA Enterprises (management consulting firm)
Greenwich, CT 06830 (since April 1991 and principal occupation
since March 1995). Mr. Armstrong is also a
director of HiLo Automotive, Inc. He 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). Mr. Armstrong 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, Luis 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 27
investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
28
<PAGE>
Position with Business Experience;
Name and Address*; Age the Trust Other Directorships
---------------------- --------- -------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.*; 70 Trustee and Chairman Mr. Bewkes is a director of Paine Webber
of the Board of Group Inc. ("PW Group") (holding company of
Trustees 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
and NaPro BioTherapeutics, Inc. Mr. Bewkes
is a director of trustee of 28 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Richard R. Burt; 50 Trustee Mr. Burt is chairman of International Equity
1101 Connecticut Avenue, Partners (international investments and
N.W. consulting firm) (since March 1994) and a
Washington, D.C. 20036 partner of McKinsey & Company (management
consulting firm) (since 1991). He is also a
director of American Publishing Company and
Archer-Daniels-Midland Co. (agricultural
commodities). 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 27 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Mary C. Farrell*; 47 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 is employed as a regular panelist on Wall
Street 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 27
investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
29
<PAGE>
Position with Business Experience;
Name and Address*; Age the Trust Other Directorships
---------------------- --------- -------------------
<S> <C> <C>
Meyer Feldberg; 55 Trustee Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of
101 Uris Hall Business, Columbia University. Prior to
New York, New York 10027 1989, he was president of the Illinois
Institute of Technology. Dean Feldberg is
also a director of K-III Communications
Corporation, Federated Department Stores,
Inc. and Revlon, Inc. Dean Feldberg is a
director or trustee of 27 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
George W. Gowan; 67 Trustee Mr. Gowen is a partner in the law firm of
666 Third Avenue Dunnington, Bartholow & Miller. Prior to may
New York, New York 10017 1994, he was a partner in the law firm of
Fryer, Ross & Gowen. Mr. Gowen is a director
of Columbia Real Estate Investments, Inc.
Mr. Gowen is a director or trustee of 27
investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
Frederic V. Malek; 60 Trustee Mr. Malek is chairman of Thayer Capital
1445 Pennsylvania Avenue, N.W. Partners (merchant bank). From January 1992
Suite 350 to November 1992, he was campaign manager of
Washington, D.C. 20004 Bush-Quayle '92. From 1990 to 1992, he was
vice chairman and, from 1989 to 1990, he was
president of Northwest Airlines Inc., NWA
Inc. (holding company of Northwest Airlines
Inc.) and Wings Holdings Inc. (holding
company of NWA Inc.). Prior to 1989, he was
employed by the Marriott Corporation (hotels,
restaurants, airline catering and contract
feeding), where he most recently was an
executive vice president and president of
Marriott Hotels and Resorts. Mr. Malek is
also a director of American Management
Systems, Inc. (management consulting and
computer-related services), Automatic Data
Processing Inc., CB Commercial Group, Inc.
(real estate services), Choice Hotels
International (hotel and hotel franchising),
FPL Group, Inc. (electric services), Integra,
Inc. (bio-medical), Manor Care, Inc. (health
care), National Education Corporation and
Northwest Airlines Inc. Mr. Malek is a
director or trustee of 27 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
30
<PAGE>
Position with Business Experience;
Name and Address*; Age the Trust Other Directorships
---------------------- --------- -------------------
<S> <C> <C>
Carl W. Schafer; 61 Trustee Mr. Schafer is president of the Atlantic
P.O. Box 1164 Foundation (charitable foundation supporting
Princeton, NJ 08542 mainly oceanographic exploration and
research). He also is a director of Roadway
Express, Inc. (trucking), The Guardian Group
of Mutual Funds, Evans Systems, Inc. (a motor
fuels, convenience store and diversified
company), Electronic Clearing House, Inc.
(financial transactions processing), Wainoco
Oil Corporation and Nutraceutix, Inc.
(biotechnology). Prior to January 1993, Mr.
Schafer was chairman of the Investment
Advisory Committee of the Howard Hughes
Medical Institute. Mr. Schafer is a director
or trustee of 27 investment companies for
which Mitchell Hutchins of PaineWebber serves
as investment adviser.
T. Kirkham Barneby; 50 Vice President Mr. Barneby is a managing director and chief
investment officer - quantitative investments
of Mitchell Hutchins. Prior to September
1994, he was a senior vice president at
Vantage Global Management. Prior to June
1993, he was a senior vice president at
Mitchell Hutchins. Mr. Barneby is a vice
president of five investment companies for
which Mitchell Hutchins or PaineWebber serves
as investment adviser.
Dennis McCauley; 50 Vice President Mr. McCauley is a managing director and chief
investment officer - fixed income of
Mitchell Hutchins. Prior to December 1994,
he was director of fixed income investments
of IBM Corporation. Mr. McCauley is a vice
president of 18 investment companies for
which Mitchell Hutchins or PaineWebber serves
as investment adviser.
Ann E. Moran; 40 Vice President and Ms. Moran is a vice president and a manager
Assistant Treasurer of the mutual fund finance division of
Mitchell Hutchins. Ms. Moran is a vice
president and assistant treasurer of 29
investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
31
<PAGE>
Position with Business Experience;
Name and Address*; Age the Trust Other Directorships
---------------------- --------- -------------------
<S> <C> <C>
Dianne E. O'Donnell; 45 Vice President and Ms. O'Donnell is a senior vice president and
Secretary deputy general counsel of Mitchell
Hutchins. Ms. O'Donnell is a vice president
and secretary of 28 investment companies and
vice president and assistant secretary for
which Mitchell Hutchins or PaineWebber serves
as investment adviser.
Emil Polito; 36 Vice President Mr. Polito is a senior vice president and
director of operations and control for
Mitchell Hutchins. From March 1991 to
September 1993 he was director of the Mutual
Funds Sales Support and Service Center for
Mitchell Hutchins and PaineWebber. Mr.
Polito is a vice president for 28 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Victoria E. Schonfeld; 46 Vice President Ms. Schonfeld is a managing director and
general counsel of Mitchell Hutchins. Prior
to May 1994, she was a partner in the law
firm of Arnold & Porter. Ms. Schonfeld is a
vice president of 27 investment companies and
vice president and secretary for one
investment company for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
Paul H. Schubert; 34 Vice President and Mr. Schubert is a first vice president and the
Treasurer director of the mutual fund finance division
of Mitchell Hutchins. From August 1992 to
August 1994, he was a vice president of
BlackRock Financial Management L.P.. Prior to
August 1992, he was an audit manager with
Ernst & Young LLP. Mr. Schubert is a vice
president and treasurer of 28 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Barney A. Taglialatela; 36 Vice President and Mr. Taglialatela is a vice president and a
Assistant Treasurer manager of the mutual fund finance division
of Mitchell Hutchins. Prior to February
1995, he was a manager of the mutual fund
finance division of Kidder Peabody Asset
Management Inc. Mr. Taglialatela is a vice
president and assistant treasurer of 28
investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
32
<PAGE>
Position with Business Experience;
Name and Address*; Age the Trust Other Directorships
---------------------- --------- -------------------
<S> <C> <C>
Mark A. Tincher; 41 Vice President Mr. Tincher is a managing director and chief
investment officer - Equities of Mitchell
Hutchins. Prior to March 1995, he was a vice
president and directed the U.S. funds
management and equity research areas of Chase
Manhattan Private Bank. Mr. Tincher is a
vice president of 13 investment companies for
which Mitchell Hutchins or PaineWebber serves
as investment adviser.
Keith A. Weller; 36 Vice President and Mr. Weller is a first vice president and
Assistant Secretary 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
27 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
Ian W. Williams; 40 Vice President and Mr. Williams is a vice president and a
Assistant Treasurer manager of the mutual fund finance division
of Mitchell Hutchins. Prior to June 1992, he
was an audit senior accountant with Price
Waterhouse LLP. Mr. Williams is a vice
president and assistant treasurer of 28
investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
</TABLE>
------------------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019. Mrs. Alexander, Mr.
Bewkes and Ms. Farrell are "interested persons" of the Trust as defined in the
1940 Act by virtue of their positions with PW Group, PaineWebber and/or Mitchell
Hutchins.
The Trust pays trustees who are not "interested persons" of the Trust
("disinterested members") $1,000 annually for each Portfolio and $150 for each
board meeting and each separate meeting of a board committee. Accordingly, the
Trust pays each such trustee $3,000 annually for its three series, 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. All
trustees are reimbursed for any expenses incurred in attending meetings.
Trustees and officers own in the aggregate less than 1% of the outstanding
shares of each Portfolio. Because PaineWebber and Mitchell Hutchins perform
substantially all the services necessary for the operation of the Trust and each
Portfolio, 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.
The table below shows the estimated compensation to be paid to each trustee
during the current fiscal year and the total compensation of those trustees for
all PaineWebber funds during the calendar year ended December 31, 1996.
33
<PAGE>
COMPENSATION TABLE
Total
Estimated Compensation
Aggregate for the
Compensation Trust and
for the Fund
Name of Person, Position the Trust (1) Complex(2)
- ------------------------ -------------- ---------------
Richard Q. Armstrong, Trustee $59,873
Richard R. Burt, Trustee 51,173
Meyer Feldberg, Trustee 96,181
George W. Gowen, Trustee 92,431
Frederic V. Malek, Trustee 92,431
Carl W. Schafer, Trustee 62,307
- ----------------------------
Only independent members of the board are compensated for their services as
trustees and identified above; trustees who are "interested person," as defined
by the 1940 Act, do not receive compensation
(1) Estimated for the initial fiscal year of the Trust.
(2) Represents total compensation paid to each trustee during the calendar
year ended December 31, 1996; no fund within the fund complex has a
pension or retirement plan.
Principal Holders of Securities. Prior to September , 1997, Mitchell
Hutchins held all outstanding securities of the Portfolios and thus may be
deemed a controlling person of each Portfolio until additional shareholders
purchase shares.
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
Investment Advisory Arrangements. Mitchell Hutchins acts as the investment
adviser and administrator to each Portfolio pursuant to a contract (the
"Advisory Contract") with the Trust. Under the Advisory Contract, each Portfolio
pays Mitchell Hutchins a fee, computed daily and paid monthly, at the annual
rate of 0.35% of average daily net assets.
Under the Advisory Contract, Mitchell Hutchins is responsible for the
payment of all expenses of each Portfolio with the following exceptions: the
investment advisory and administration fee payable under the Advisory Contract,
fees payable pursuant to plans adopted by the Trust pursuant to Rule 12b-1 under
the 1940 Act and extraordinary expenses, such as costs of litigation to which
the Trust or a Portfolio is a party and of indemnifying officers and trustees of
the Trust. The Trust or Series, as applicable, will bear those expenses for
which Mitchell Hutchins is not responsible. Specific expenses borne by Mitchell
Hutchins include the costs of typesetting, printing and mailing prospectuses,
statements of additional information, notices and reports to shareholders; costs
of typesetting, printing and mailing proxy materials to shareholders; legal
expenses of the Trust, including legal fees of special counsel for those
trustees of the Trust who are not interested persons of the Trust; fees of the
custodian, transfer agent and independent auditor of the Trust; each Portfolio's
proportionate share of insurance premiums and dues of membership in voluntary
investment company associations.
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 a Portfolio 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 assignment and is terminable at any time without penalty by
the Trust's board or by vote of the holders of a majority of the Portfolio's
outstanding voting securities on 60 days' written notice to Mitchell Hutchins,
or by Mitchell Hutchins on 60 days' written notice to the Portfolio.
34
<PAGE>
Net Assets. The following table shows the approximate net assets as of June
30, 1997, 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)...........................$ 5,864.6
Global...................................................... 3,208.3
Equity/Balanced............................................. 4,195.0
Fixed Income (excluding Money Market)....................... 4,877.9
Taxable Fixed Income.............................. 3,328.9
Tax-Free Fixed Income............................. 1,549.0
Money Market Funds.......................................... 24,227.8
Personnel Trading Policies. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to a code of ethics that describes
the fiduciary duty owed to shareholders of PaineWebber mutual funds and other
Mitchell Hutchins advisory accounts by all Mitchell Hutchins' directors,
officers and employees, establishes procedures for personal investing and
restricts certain transactions. For example, employee accounts generally must be
maintained at PaineWebber, personal trades in most securities require
pre-clearance and short-term trading and participation in initial public
offerings generally are prohibited. In addition, the code of ethics puts
restrictions on the timing of personal investing in relation to trades by
PaineWebber Funds and other Mitchell Hutchins advisory clients.
Distribution Arrangements. Mitchell Hutchins acts as the distributor of
each class of shares of each Portfolio under separate distribution contracts
with the Trust (collectively, "Distribution Contracts") that require Mitchell
Hutchins to use its best efforts, consistent with its other businesses, to sell
shares of each Portfolio. Shares of each Portfolio are offered continuously.
Under separate exclusive dealer agreements between Mitchell Hutchins and
PaineWebber relating to each class of shares of each Portfolio (collectively,
"Exclusive Dealer Agreements"), PaineWebber and its correspondent firms sell the
Portfolios' shares.
Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares adopted by the Trust in the manner prescribed under Rule 12b-1
under the 1940 Act (each, respectively, a "Class A Plan," "Class B Plan" and
"Class C Plan" and, collectively, "Plans"), each Portfolio pays Mitchell
Hutchins a service fee, accrued daily and payable monthly, at the annual rate of
0.25% of the average daily net assets of each Class of shares for each
respective Portfolio. Under the Class B Plan and Class C Plan, each Portfolio
pays Mitchell Hutchins a distribution fee, accrued daily and payable monthly, at
the annual rate of 0.75% (0.50% for Conservative Portfolio) of the average daily
net assets of that Class. There is no distribution plan with respect to Class Y
shares and the Portfolios pay no service or distribution fees with respect to
their Class Y shares.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the board at least quarterly, and the trustees will review, reports
regarding all amounts expended under the Plan and the purposes for which such
expenditures were made, (2) the Plan will continue in effect only so long as it
is approved at least annually, and any material amendment thereto is approved,
by the board, including those trustees who are not "interested persons" of the
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 Portfolio under the Plan shall not be
materially increased without the affirmative vote of the holders of a majority
of the outstanding shares of the relevant class of that Portfolio and (4) while
the Plan remains in effect, the selection and nomination of trustees who are not
"interested persons" of the Trust shall be committed to the discretion of the
trustees who are not "interested persons" of the Trust.
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In reporting amounts expended under the Plans to the board, Mitchell
Hutchins allocates expenses attributable to the sale of each Class of each
Portfolio's shares to such Class based on the ratio of sales of shares of such
Class to the sales of all Classes of shares. The fees paid by one Class of a
Portfolio's shares will not be used to subsidize the sale of any other Class of
that Portfolio's shares.
In approving the Portfolios' overall Flexible PricingSM system of
distribution, the board considered several factors, including that
implementation of Flexible Pricing would (1) enable investors to choose the
purchasing option best suited to their individual situation, thereby encouraging
current shareholders to make additional investments in each respective Portfolio
and attracting new investors and assets to the Portfolio to the benefit of the
Portfolio and its shareholders, (2) facilitate distribution of the Portfolios'
shares and (3) maintain the competitive position of the Portfolios in relation
to other funds that have implemented or are seeking to implement similar
distribution arrangements.
In approving the Class A Plan for each Portfolio, the board considered all
the features of the distribution system, including (1) the conditions under
which initial sales charges would be imposed and the amount of such charges, (2)
Mitchell Hutchins' belief that the initial sales charge combined with a service
fee would be attractive to PaineWebber investment executives and correspondent
firms, resulting in greater growth of the Portfolio than might otherwise be the
case, (3) the advantages to the shareholders of economies of scale resulting
from growth in the Portfolio's assets and potential continued growth, (4) the
services provided to the Portfolio and its shareholders by Mitchell Hutchins,
(5) the services provided by PaineWebber pursuant to its Exclusive Dealer
Agreement with Mitchell Hutchins and (6) Mitchell Hutchins' shareholder
service-related expenses and costs.
In approving the Class B Plan for each Portfolio, the board considered all
the features of the distribution system, including (1) the conditions under
which contingent deferred sales charges would be imposed and the amount of such
charges, (2) the advantage to investors in having no initial sales charges
deducted from Portfolio purchase payments and instead having the entire amount
of their purchase payments immediately invested in Portfolio shares, (3)
Mitchell Hutchins' belief that the ability of PaineWebber investment executives
and correspondent firms to receive sales commissions when Class B shares are
sold and continuing service fees thereafter while their customers invest their
entire purchase payments immediately in Class B shares would prove attractive to
the investment executives and correspondent firms, resulting in greater growth
of the Portfolio than might otherwise be the case, (4) the advantages to the
shareholders of economies of scale resulting from growth in the Portfolio's
assets and potential continued growth, (5) the services provided to the
Portfolio and its shareholders by Mitchell Hutchins, (6) the services provided
by PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins
and (7) Mitchell Hutchins' shareholder service and distribution-related expenses
and costs. The board also recognized that Mitchell Hutchins' willingness to
compensate PaineWebber and its investment executives, without the concomitant
receipt by Mitchell Hutchins of initial sales charges, was conditioned upon its
expectation of being compensated under the Class B Plan.
In approving the Class C Plan for each Portfolio, the board considered all
the features of the distribution system, including (1) the advantage to
investors in having no initial sales charges deducted from the Portfolio
purchase payments and instead having the entire amount of their purchase
payments immediately invested in Portfolio shares, (2) the advantage to
investors in being free from contingent deferred sales charges upon redemption
for shares held more than one year and paying for distribution on an ongoing
basis, (3) Mitchell Hutchins' belief that the ability of PaineWebber investment
executives and correspondent firms to receive sales compensation for their sales
of Class C shares on an ongoing basis, along with continuing service fees, while
their customers invest their entire purchase payments immediately in Class C
shares and generally do not face contingent deferred sales charges, would prove
attractive to the investment executives and correspondent firms, resulting in
greater growth to the Portfolio than might otherwise be the case, (4) the
advantages to the shareholders of economies of scale resulting from growth in
the Portfolio's assets and potential continued growth, (5) the services provided
to the Portfolio and its shareholders by Mitchell Hutchins, (6) the services
provided by PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell
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Hutchins and (7) Mitchell Hutchins' shareholder and service and
distribution-related expenses and costs. The board also recognized that Mitchell
Hutchins' willingness to compensate PaineWebber and its investment executives
without the concomitant receipt by Mitchell Hutchins of initial sales charges or
contingent deferred sales charges upon redemption, was conditioned upon its
expectation of being compensated under the Class C Plan.
With respect to each Plan, the board considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The board also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that Mitchell
Hutchins would receive service, distribution and advisory fees which are
calculated based upon a percentage of the average net assets of each Portfolio,
which would increase if the Plan were successful and the Portfolio attained and
maintained significant asset levels.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities for the
Portfolios (normally shares of the Underlying Funds) are placed on behalf of a
particular Portfolio by Mitchell Hutchins. A Portfolio will not incur any
commissions or sales charges when it invests in shares of the Underlying Funds,
but it may incur such costs if it invests directly in other types of securities.
When a Portfolio purchases short-term U.S. government securities or commercial
paper directly, it may purchase such securities in dealer transactions, which
generally include a "spread," as explained below.
Subject to policies established by each Underlying Fund's board, Mitchell
Hutchins or the applicable Sub-Adviser is responsible for the execution of the
Underlying Fund's portfolio transactions and the allocation of brokerage
transactions. In executing portfolio transactions, Mitchell Hutchins or a
Sub-Adviser seeks to obtain the best net results for an Underlying 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 a
Sub-Adviser generally seeks reasonably competitive commission rates, payment of
the lowest commission is not necessarily consistent with obtaining the best net
results. Prices paid to dealers in principal transactions, through which most
debt securities and some equity securities are traded, generally include a
"spread," which is the difference between the prices at which the dealer is
willing to purchase and sell a specific security at the time. The Underlying
Funds may invest in securities traded in the OTC 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 Portfolios and the Underlying Funds have no obligation to deal with any
broker or group of brokers in the execution of portfolio transactions. The
Portfolios and the Underlying Funds contemplate that, consistent with the policy
of obtaining the best net results, brokerage transactions may be conducted
through PaineWebber. Each Portfolio and Underlying Fund's board has adopted
procedures in conformity with Rule 17e-1 under the 1940 Act to ensure that all
brokerage commissions paid to PaineWebber are reasonable and fair. Specific
provisions in the Advisory Contract authorize PaineWebber to effect portfolio
transactions for the Portfolios on such exchange and to retain compensation in
connection with such transactions. Any such transactions will be effected and
related compensation paid 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
Underlying Funds' procedures in selecting FCMs to execute their transactions in
futures contracts, including procedures permitting the use of PaineWebber, are
similar to those in effect with respect to brokerage transactions in securities.
Consistent with the interests of the Portfolios and the Underlying Funds
and subject to the review of each Portfolio's or Underlying Fund's board,
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Mitchell Hutchins or a Sub-Adviser may cause a Portfolio or an Underlying Fund
to purchase and sell portfolio securities from and to dealers or through brokers
who provide that Portfolio or Underlying Fund with research, analysis, advice
and similar services. In return for such services, a Portfolio or Underlying
Fund may pay to those brokers a higher commission than may be charged by other
brokers, provided that Mitchell Hutchins or a 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 to that
Portfolio or Underlying Fund and its other clients and that the total
commissions paid by the Fund will be reasonable in relation to the benefits to
the Fund over the long term.
For purchases or sales with broker-dealer firms which act as principal,
Mitchell Hutchins or a Sub-Adviser seeks best execution. Although Mitchell
Hutchins or a Sub-Adviser may receive certain research or execution services in
connection with these transactions, they will not purchase securities at a
higher price or sell securities at a lower price than would otherwise be paid if
no weight was attributed to the services provided by the executing dealer.
Moreover, Mitchell Hutchins and a Sub-Adviser will not enter into any explicit
soft dollar arrangements relating to principal transactions and will not receive
in principal transactions the types of services which could be purchased for
hard dollars. Mitchell Hutchins or a Sub-Adviser may engage in agency
transactions in OTC equity and debt securities in return for research and
execution services. These transactions are entered into only in compliance with
procedures ensuring that the transaction (including commissions) is at least as
favorable as it would have been if effected directly with a market-maker that
did not provide research or execution services. These procedures include
Mitchell Hutchins or a Sub-Adviser receiving multiple quotes from dealers before
executing the transactions on an agency basis.
Information and research services furnished by brokers or dealers through
which or with which the Portfolios or Underlying Funds effect securities
transactions may be used by Mitchell Hutchins or a Sub-Adviser in advising other
funds or accounts and, conversely, research services furnished to Mitchell
Hutchins or a Sub-Adviser by brokers or dealers in connection with other funds
or accounts that either of them advises may be used in advising the Portfolios
or Underlying Funds. Information and research received from brokers or dealers
will be in addition to, and not in lieu of, the services required to be
performed by Mitchell Hutchins under the Advisory Contract or a Sub-Adviser
under its contract with Mitchell Hutchins.
Investment decisions for a Portfolio or Underlying 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 a Portfolio or an
Underlying 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 Portfolio or Underlying Fund and such other
account(s) as to amount according to a formula deemed equitable to the Portfolio
or Underlying Fund and such account(s). While in some cases this practice could
have a detrimental effect upon the price or value of the security as far as the
Portfolios or Underlying Funds are concerned, or upon their ability to complete
their entire order, in other cases it is believed that coordination and the
ability to participate in volume transactions will be beneficial to the
Portfolios and Underlying Funds.
The Portfolios and Underlying Funds 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 each Fund's board of
trustees pursuant to Rule 10f-3 under the 1940 Act. Among other things, these
procedures require that the spread or commission paid in connection with such a
purchase be reasonable and fair, the purchase be at not more than the public
offering price prior to the end of the first business day after the date of the
public offering and that PaineWebber or any affiliate thereof not participate in
or benefit from the sale to the Portfolios or Underlying Funds.
Portfolio Turnover. The Portfolios' 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
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calculated by dividing the lesser of each Portfolio's annual sales or purchases
of portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of securities in the portfolio during the year. Mitchell Hutchins
estimates that each Portfolio's annual portfolio turnover rate will be less than
100% during its first fiscal year.
The portfolio turnover rates of the Underlying Funds have ranged from 33%
to 359% during their most recent full fiscal years. There can be no assurance
that the portfolio turnover rates of the Underlying Funds will remain within
this range during subsequent fiscal years.
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
Combined Purchase Privilege-Class A Shares. Investors and eligible groups
of related Portfolio investors may combine purchases of Class A shares of the
Portfolios with concurrent purchases of Class A shares of any other PaineWebber
mutual fund and thus take advantage of the reduced sales charges indicated in
the table of sales charges for Class A shares in the Prospectus. The sales
charge payable on the purchase of Class A shares of the Portfolios and Class A
shares of such other funds will be at the rates applicable to the total amount
of the combined concurrent purchases.
An "eligible group of related Portfolio investors" can consist of any
combination of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her Individual Retirement Account ("IRA");
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25% or
more of the outstanding voting securities of a corporation will be deemed to
control the corporation, and a partnership will be deemed to be controlled by
each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by individual(s);
(e) an individual (or eligible group of individuals) and a trust created by
the individual(s), the beneficiaries of which are the individual and/or the
individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers to
Minors Act account created by the individual or the individual's spouse;
(g) an employer (or group of related employers) and one or more qualified
retirement plans of such employer or employers (an employer controlling,
controlled by or under common control with another employer is deemed related to
that other employer); or
(h) individual accounts related together under one registered investment
adviser having full discretion and control over the accounts. The registered
investment adviser must communicate at least quarterly through a newsletter or
investment update establishing a relationship with all of the accounts.
Rights of Accumulations-Class A Shares. Reduced sales charges are available
through a right of accumulation, under which investors and eligible groups of
related Portfolio investors (as defined above) are permitted to purchase Class A
shares of the Portfolios among related accounts at the offering price applicable
to the total of (1) the dollar amount then being purchased plus (2) an amount
equal to the then-current net asset value of the purchaser's combined holdings
of Class A Portfolio shares and Class A shares of any other PaineWebber mutual
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fund. The purchaser must provide sufficient information to permit confirmation
of his or her holdings, and the acceptance of the purchase order is subject to
such confirmation. The right of accumulation may be amended or terminated at any
time.
Waivers of Sales Charges-Class B Shares. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where the
decedent is either the individual shareholder or owns the shares with his or her
spouse as a joint tenant with right of survivorship. This waiver applies only to
redemption of shares held at the time of death.
Additional Exchange and Redemption Information. As discussed in the
Prospectus, eligible shares of the Portfolios may be exchanged for shares of the
corresponding Class of most other PaineWebber mutual funds. Shareholders will
receive at least 60 days' notice of any termination or material modification of
the exchange offer, except no notice need be given of an amendment whose only
material effect is to reduce any exchange fee and no notice need be given if,
under extraordinary circumstances, either redemptions are suspended under the
circumstances described below or a Portfolio temporarily delays or ceases the
sales of its shares because it is unable to invest amounts effectively in
accordance with the Portfolio's investment objective, policies and restrictions.
If conditions exist that make cash payments undesirable, each Portfolio
reserves the right to honor any request for redemption by making payment in
whole or in part in securities chosen by the Portfolio and valued in the same
way as they would be valued for purposes of computing the Portfolio's net asset
value. If payment is made in securities, a shareholder may incur brokerage
expenses in converting these securities into cash.
The Portfolios may suspend redemption privileges or postpone the date of
payment during any period (1) when the New York Stock Exchange ("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 Portfolio 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 Portfolio's portfolio at the time.
Automatic Investment Plan. Participation in the Automatic Investment Plan
enables an investor to use the technique of "dollar cost averaging." When an
investor invests the same dollar amount each month under the Plan, the investor
will purchase more shares when a Portfolio's net asset value per share is low
and fewer shares when the net asset value per share is high. Using this
technique, an investor's average purchase price per share over any given period
will be lower than if the investor purchased a fixed number of shares on a
monthly basis during the period. Of course, investing through the automatic
investment plan does not assure a profit or protect against loss in declining
markets. Additionally, because the automatic investment plan involves continuous
investing regardless of price levels, an investor should consider his or her
financial ability to continue purchases through periods of both low and high
price levels.
Systematic Withdrawal Plan. An investor's participation in the systematic
withdrawal plan will terminate automatically if the "Initial Account Balance" (a
term that means the value of the Portfolio account at the time the investor
elects to participate in the systematic withdrawal plan) less aggregate
redemptions made other than pursuant to the systematic withdrawal plan is less
than $5,000 for Class A and Class C shareholders or $20,000 for Class B
shareholders. Purchases of additional shares of a Portfolio concurrent with
withdrawals are ordinarily disadvantageous to shareholders because of tax
liabilities and, for Class A shares, initial sales charges. On or about the 15th
of each month for monthly plans and on or about the 15th of the months selected
for quarterly or semiannual plans and the 15th of December for annual plans,
PaineWebber will arrange for redemption by the Portfolios of sufficient
Portfolio shares to provide the withdrawal payments specified by participants in
the Portfolios' systematic withdrawal plan. The payments generally are mailed
approximately three Business Days (defined under "Valuation of Shares") after
the redemption date. Withdrawal payments should not be considered dividends, but
redemption proceeds, with the tax consequences described under "Dividends &
Taxes" in the Prospectus. If periodic withdrawals continually exceed reinvested
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dividends and other distributions, a shareholder's investment may be
correspondingly reduced. A shareholder may change the amount of the systematic
withdrawal or terminate participation in the systematic withdrawal plan at any
time without charge or penalty by written instructions with signatures
guaranteed to PaineWebber or PFPC Inc. ("Transfer Agent"). Instructions to
participate in the plan, change the withdrawal amount or terminate participation
in the plan will not be effective until five days after written instructions
with signatures guaranteed are received by the Transfer Agent. Shareholders may
request the forms needed to establish a systematic withdrawal plan from their
PaineWebber investment executives, correspondent firms or the Transfer Agent at
1-800-647-1568.
Reinstatement Privilege-Class A Shares. As described in the Prospectus,
shareholders who have redeemed their Class A shares may reinstate their account
in a Portfolio without a sales charge. Shareholders may exercise the
reinstatement privilege by notifying the Transfer Agent of such desire and
forwarding a check for the amount to be purchased within 365 days after the date
of redemption. The reinstatement will be made at the net asset value per share
next computed after the notice of reinstatement and check are received. The
amount of a purchase under this reinstatement privilege cannot exceed the amount
of the redemption proceeds. Gain on a redemption is taxable regardless of
whether the reinstatement privilege is exercised; however, a loss arising out of
a redemption will not be deductible to the extent the reinstatement privilege is
exercised within 30 days after redemption, and an adjustment will be made to the
shareholder's tax basis for shares acquired pursuant to the reinstatement
privilege. Gain or loss on a redemption also will be adjusted for federal income
tax purposes by the amount of any sales charge paid on Class A shares, under the
circumstances and to the extent described in "Dividends & Taxes" in the
Prospectus.
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
PaineWebber RMA Resource Accumulation Plan(SERVICEMARK) PaineWebber Resource
Management Account(REGISTERED TRADEMARK) (RMA(REGISTERED TRADEMARK))
Shares of PaineWebber mutual funds, including the Portfolios, (each a "PW
Fund" and, collectively, the "PW Funds") are available for purchase through the
RMA Resource Accumulation Plan ("Plan") by customers of PaineWebber and its
correspondent firms who maintain Resource Management Accounts ("RMA
accountholders"). The Plan allows an RMA accountholder to continually invest in
one or more of the PW Funds at regular intervals, with payment for shares
purchased automatically deducted from the client's RMA account. The client may
elect to invest at monthly or quarterly intervals and may elect either to invest
a fixed dollar amount (minimum $100 per period) or to purchase a fixed number of
shares. A client can elect to have Plan purchases executed on the first or
fifteenth day of the month. Settlement occurs three Business Days (defined under
"Valuation of Shares") after the trade date, and the purchase price of the
shares is withdrawn from the investor's RMA account on the settlement date from
the following sources and in the following order: uninvested cash balances,
balances in RMA money market funds, or margin borrowing power, if applicable to
the account.
To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client Agreement
and Instruction Form available from PaineWebber. The investor must have received
a current prospectus for each PW Fund selected prior to enrolling in the Plan.
Information about mutual fund positions and outstanding instructions under the
Plan are noted on the RMA accountholder's account statement. Instructions under
the Plan may be changed at any time, but may take up to two weeks to become
effective.
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The terms of the Plan, or an RMA accountholder's participation in the Plan,
may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds may
be offered through the Plan.
Periodic Investing and Dollar Cost Averaging.
Periodic investing in the PW Funds or other mutual funds, whether through
the Plan or otherwise, helps investors establish and maintain a disciplined
approach to accumulating assets over time, de-emphasizing the importance of
timing the market's highs and lows. Periodic investing also permits an investor
to take advantage of "dollar cost averaging." By investing a fixed amount in
mutual fund shares at established intervals, an investor purchases more shares
when the price is lower and fewer shares when the price is higher, thereby
increasing his or her earning potential. Of course, dollar cost averaging does
not guarantee a profit or protect against a loss in a declining market, and an
investor should consider his or her financial ability to continue investing
through periods of both low and high share prices. However, over time, dollar
cost averaging generally results in a lower average original investment cost
than if an investor invested a larger dollar amount in a mutual fund at one
time.
PaineWebber's Resource Management Account.
In order to enroll in the Plan, an investor must have opened an RMA account
with PaineWebber or one of its correspondent firms. The RMA account is
PaineWebber's comprehensive asset management account and offers investors a
number of features, including the following:
. monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold
MasterCard(REGISTERED TRADEMARK) transactions during the period, and provide
unrealized and realized gain and loss estimates for most securities held in the
account;
. comprehensive preliminary 9-month and year-end summary statements that
provide information on account activity for use in tax planning and tax return
preparation;
. automatic "sweep" of uninvested cash into the RMA accountholder's choice
of one of the six RMA money market funds-RMA Money Market Portfolio, RMA U.S.
Government Portfolio, RMA Tax-Free Fund, RMA California Municipal Money Fund,
RMA New Jersey Municipal Money Fund and RMA New York Municipal Money Fund. Each
money market fund attempts to maintain a stable price per share of $1.00,
although there can be no assurance that it will be able to do so. Investments in
the money market funds are not insured or guaranteed by the U.S. government;
. check writing, with no per-check usage charge, no minimum amount on
checks and no maximum number of checks that can be written. RMA accountholders
can code their checks to classify expenditures. All canceled checks are returned
each month;
. Gold MasterCard, with or without a line of credit, which provides RMA
accountholders with direct access to their accounts and can be used with
automatic teller machines worldwide. Purchases on the Gold MasterCard are
debited to the RMA account once monthly, permitting accountholders to remain
invested for a longer period of time;
. 24-hour access to account information through toll-free numbers, and more
detailed personal assistance during business hours from the RMA Service Center;
. expanded account protection to $50 million in the event of the
liquidation of PaineWebber. This protection does not apply to shares of the RMA
money market funds or the PW Funds because those shares are held at the transfer
agent and not through PaineWebber; and
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. automatic direct deposit of checks into your RMA account and automatic
withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of a Portfolio will automatically convert to Class A shares
of that Portfolio, based on the relative net asset values per share of the two
classes, as of the close of business on the first Business Day (as defined under
"Valuation of Shares") of the month in which the sixth anniversary of the
initial issuance of such Class B shares occurs. For the purpose of calculating
the holding period required for conversion of Class B shares, the date of
initial issuance shall mean (i) the date on which such Class B shares were
issued, or (ii) for Class B shares obtained through an exchange, or a series of
exchanges, the date on which the original Class B shares were issued. For
purposes of conversion to Class A shares, Class B shares purchased through the
reinvestment of dividends and other distributions paid in respect of Class B
shares will be held in a separate sub-account. Each time any Class B shares in
the shareholder's regular account (other than those in the sub-account) convert
to Class A shares, a pro rata portion of the Class B shares in the sub-account
will also convert to Class A shares. The portion will be determined by the ratio
that the shareholder's Class B shares converting to Class A shares bears to the
shareholder's total Class B shares not acquired through dividends and other
distributions.
The availability of the conversion feature is subject to the continuing
availability of an opinion of counsel to the effect that the dividends and other
distributions paid on Class A and Class B shares will not result in
"preferential dividends" under the Internal Revenue Code and that the conversion
of shares does not constitute a taxable event. If the conversion feature ceased
to be available, the Class B shares would not be converted and would continue to
be subject to the higher ongoing expenses of the Class B shares beyond six years
from the date of purchase. Mitchell Hutchins has no reason to believe that this
condition for the availability of the conversion feature will not be met.
VALUATION OF SHARES
Each Portfolio determines the net asset values per share separately for
each class of shares as of the close of regular trading (currently 4:00 p.m.,
Eastern time) on the NYSE on each Business Day, which is defined as each Monday
through Friday when the NYSE is open. Currently the NYSE is closed on the
observance of the following holidays: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The value of the shares of each Underlying Fund will be their net asset
value at the time of the net asset value of the Portfolio shares is determined.
The Portfolios generally use the amortized cost method of valuation to value
debt obligations with 60 days or less remaining until maturity, unless the board
determines that this does not represent fair value.
PERFORMANCE INFORMATION
Each Portfolio's performance data quoted in advertising and other
promotional materials ("Performance Advertisements") represents past performance
and are not intended to indicate future performance. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
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Total Return Calculations. Average annual total return quotes
("Standardized Return") used in each Portfolio's Performance Advertisements are
calculated according to the following formula:
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares
of a specified class
T = average annual total return of shares of that class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment at the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value, for Class A shares, the
maximum 4.5% (4% for Conservative Portfolio) sales charge is deducted from the
initial $1,000 payment and, for Class B and Class C shares, the applicable
contingent deferred sales charge imposed on a redemption of Class B or Class C
shares held for the period is deducted. All dividends and other distributions
are assumed to have been reinvested at net asset value.
The Portfolios also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The Portfolios calculate Non-Standardized
Return for specified periods of time by assuming an investment of $1,000 in
Portfolio shares and assuming the reinvestment of all dividends and other
distributions. The rate of return is determined by subtracting the initial value
of the investment from the ending value and by dividing the remainder by the
initial value. Neither initial nor contingent deferred sales charges are taken
into account in calculating Non-Standardized Return; the inclusion of those
charges would reduce the return.
Both Standardized Return and Non-Standardized Return for Class B shares for
periods of over six years will reflect conversion of the Class B shares to Class
A shares at the end of the sixth year.
Yield. Yields used in Moderate Portfolio's and Conservative Portfolio's
Performance Advertisements are calculated by dividing the Portfolio's interest
income attributable to a Class of shares for a 30-day period ("Period"), net of
expenses attributable to such Class, by the average number of shares of such
Class entitled to receive dividends during the Period and expressing the result
as an annualized percentage (assuming semi-annual compounding) of the maximum
offering price per share (in the case of Class A shares) or the net asset value
per share (in the case of Class B and Class C shares) at the end of the Period.
Yield quotations are calculated according to the following formula:
YIELD = 2 [( a-b/cd +1 ) 6 -1 ]
where: a = interest earned during the Period attributable to a
Class of shares
b = expenses accrued for the Period attributable to a
Class of shares (net of
reimbursements)
c = the average daily number of shares of a Class
outstanding during the Period that were entitled
to receive dividends
d = the maximum offering price per share (in the case
of Class A shares) or the net asset value per
share (in the case of Class B and Class C shares) on
the last day of the Period.
Except as noted below, in determining interest income earned during the
Period (variable "a" in the above formula), a Portfolio calculates interest
earned on each debt obligation held by it during the Period by (1) computing the
obligation's yield to maturity, based on the market value of the obligation
(including actual accrued interest) on the last business day of the Period or,
if the obligation was purchased during the Period, the purchase price plus
accrued interest and (2) dividing the yield to maturity by 360, and multiplying
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the resulting quotient by the market value of the obligation (including actual
accrued interest) to determine the interest income on the obligation for each
day of the period that the obligation is in the portfolio. Once interest earned
is calculated in this fashion for each debt obligation held by the Portfolio,
interest earned during the Period is then determined by totalling the interest
earned on all debt obligations. For purposes of these calculations, the maturity
of an obligation with one or more call provisions is assumed to be the next date
on which the obligation reasonably can be expected to be called or, if none, the
maturity date. With respect to Class A shares, in calculating the maximum
offering price per share at the end of the Period (variable "d" in the above
formula) the Portfolio's current maximum 4% initial sales charge on Class A
shares is included.
Other Information. In Performance Advertisements, the Portfolios may
compare their Standardized Return and/or their Non-Standardized Return with data
published by Lipper Analytical Services, Inc. ("Lipper"), CDA Investment
Technologies, Inc. ("CDA"), Wiesenberger Investment Companies Service
("Wiesenberger"), Investment Company Data, Inc. ("ICD") or Morningstar Mutual
Funds ("Morningstar"), with the performance of recognized stock and other
indices, including the Standard & Poor's 500 Composite Stock Price Index ("S&P
500"), the Dow Jones Industrial Average ("DJIA"), the International Finance
Corporation Global Total Return Index, the Nasdaq Composite Index, the Russell
2000 Index, the Wilshire 5000 Index, the Lehman Bond Index, the Lehman Brothers
20+ Year Treasury Bond Index, the Lehman Brothers Government/Corporate Bond
Index, other similar Lehman Brothers indices or components thereof, 30-year and
10-year U.S. Treasury bonds, the Morgan Stanley Capital International
Perspective Indices, the Morgan Stanley Capital International Energy Sources
Index, the Standard & Poor's Oil Composite Index, the Morgan Stanley Capital
International World Index, the Salomon Brothers Non-U.S. Dollar Index, the
Salomon Brothers Non-U.S. World Government Bond Index, the Salomon Brothers
World Government Index, other similar Salomon Brothers indices or components
thereof and changes in the Consumer Price Index as published by the U.S.
Department of Commerce. The Portfolios also may refer in such materials to
mutual fund performance rankings and other data, such as comparative asset,
expense and fee levels, published by Lipper, CDA, Wiesenberger, ICD or
Morningstar. Performance Advertisements also may refer to discussions of the
Portfolios and comparative mutual fund data and ratings reported in independent
periodicals, including) THE WALL STREET JOURNAL, MONEY MAGAZINE, FORBES,
BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES, THE
CHICAGO TRIBUNE, THE WASHINGTON POST AND THE KIPLINGER LETTERS. Comparisons in
Performance Advertisements may be in graphic form.
The Portfolios may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on a Portfolio investment are
reinvested in additional Portfolio shares, any future income or capital
appreciation of a Portfolio would increase the value, not only of the original
Portfolio investment, but also of the additional Portfolio shares received
through reinvestment. As a result, the value of a Portfolio investment would
increase more quickly than if dividends or other distributions had been paid in
cash.
The Portfolios may also compare their performance with the performance of
bank certificates of deposit (CDs) as measured by the CDA Certificate of Deposit
Index, the Bank Rate Monitor National Index and the averages of yields of CDs of
major banks published by Banxquote(Registered) Money Markets. In comparing the
Portfolios' performance to CD performance, investors should keep in mind that
bank CDs are insured in whole or in part by an agency of the U.S. government and
offer fixed principal and fixed or variable rates of interest, and that bank CD
yields may vary depending on the financial institution offering the CD and
prevailing interest rates. Shares of the Portfolios are not insured or
guaranteed by the U.S. government and returns and net asset values will
fluctuate. The debt securities held by the Portfolios may have longer maturities
than most CDs and may reflect interest rate fluctuations for longer term debt
securities. An investment in any Portfolio involves greater risks than an
investment in either a money market fund or a CD.
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The Portfolios may also compare their performance to general trends in the
stock and bond markets, as illustrated by the following graph prepared by
Ibbotson Associates, Chicago.
Year Common Long-Term Inflation/C Treasury Bills
---- ------ --------- ----------- --------------
1926 $10,000 $10,000 $10,000 $10,000
1927 $15,347 $11,739 $9,646 $10,649
1928 $22,039 $11,751 $9,553 $11,028
1929 $20,184 $12,153 $9,572 $11,552
1930 $15,158 $12,719 $8,994 $11,831
1931 $8,588 $12,044 $8,138 $11,957
1932 $7,885 $14,072 $7,300 $12,072
1933 $12,142 $14,062 $7,337 $12,108
1934 $11,967 $15,473 $7,486 $12,128
1935 $17,672 $16,243 $7,710 $12,148
1936 $23,667 $17,465 $7,803 $12,170
1937 $15,376 $17,505 $8,045 $12,208
1938 $20,161 $18,473 $7,822 $12,205
1939 $20,079 $19,570 $7,784 $12,208
1940 $18,115 $20,762 $7,859 $12,208
1941 $16,015 $20,955 $8,623 $12,215
1942 $19,273 $21,630 $9,424 $12,248
1943 $24,265 $22,080 $9,721 $12,291
1944 $29,057 $22,700 $9,926 $12,331
1945 $39,645 $25,136 $10,150 $12,372
1946 $36,446 $25,111 $11,993 $12,415
1947 $38,527 $24,453 $13,074 $12,478
1948 $40,646 $25,284 $13,428 $12,579
1949 $48,283 $26,915 $13,186 $12,717
1950 $63,594 $26,931 $13,950 $12,870
1951 $78,869 $25,873 $14,769 $13,061
1952 $93,357 $28,173 $14,899 $13,278
1953 $92,433 $27,126 $14,991 $13,520
1954 $141,071 $29,076 $14,916 $13,636
1955 $185,594 $28,701 $14,971 $13,850
1956 $197,768 $27,097 $15,399 $14,191
1957 $176,449 $29,118 $15,864 $14,636
1958 $252,957 $27,345 $16,144 $14,862
1959 $283,211 $26,727 $16,386 $15,300
1960 $284,542 $30,410 $16,628 $15,707
1961 $361,055 $30,705 $16,740 $16,042
1962 $329,535 $32,820 $16,944 $16,480
1963 $404,669 $33,217 $17,223 $16,994
1964 $471,359 $34,383 $17,428 $17,596
1965 $530,043 $34,627 $17,763 $18,287
1966 $476,721 $35,891 $18,358 $19,158
1967 $591,038 $32,597 $18,916 $19,964
1968 $656,407 $32,512 $19,809 $21,004
1969 $600,613 $30,863 $21,019 $22,386
1970 $624,697 $34,601 $22,173 $23,846
1971 $714,091 $39,179 $22,918 $24,893
1972 $849,626 $41,408 $23,700 $25,849
1973 $725,071 $40,948 $25,785 $27,640
1974 $533,144 $42,730 $28,931 $29,851
1975 $731,474 $46,661 $30,956 $31,582
1976 $905,565 $54,500 $32,442 $33,193
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Year Common Long-Term Inflation/C Treasury Bills
---- ------ --------- ----------- --------------
1977 $840,364 $54,118 $34,648 $34,886
1978 $895,828 $53,469 $37,767 $37,398
1979 ####### $52,827 $42,790 $41,287
1980 ####### $50,767 $48,096 $45,911
1981 ####### $51,732 $52,376 $52,660
1982 ####### $72,631 $54,419 $58,190
1983 ####### $73,139 $56,487 $63,310
1984 ####### $84,478 $58,748 $69,515
1985 ####### $110,664 $60,979 $74,867
1986 ####### $137,776 $61,649 $79,509
1987 ####### $134,056 $64,362 $83,882
1988 ####### $147,060 $67,194 $89,167
1989 ####### $173,678 $70,285 $96,657
1990 ####### $184,446 $74,572 $104,196
1991 ####### $220,044 $76,884 $110,031
1992 ####### $237,887 $79,114 $113,882
1993 ####### $281,159 $81,250 $117,185
1994 ####### $259,229 $83,443 $121,755
1995 ####### $313,511 $85,404 $126,856
1996 ####### $337,286 $88,451 $135,380
The chart is shown for illustrative purposes only and does not represent
any Portfolio's performance. These returns consist of income and capital
appreciation (or depreciation) and should not be considered an indication or
guarantee of future investment results. Year-to-year fluctuations in certain
markets have been significant and negative returns have been experienced in
certain markets from time to time. Stocks are measured by the S&P 500, an
unmanaged weighted index comprising 500 widely held common stocks and varying in
composition. Unlike investors in bonds and U.S. Treasury bills, common stock
investors do not receive fixed income payments and are not entitled to repayment
of principal. These differences contribute to investment risk. Returns shown for
long-term government bonds are based on U.S. Treasury bonds with 20-year
maturities. Inflation is measured by the Consumer Price Index. The indexes are
unmanaged and are not available for investment.
- ----------
Source: Stocks, Bonds, Bills and Inflation 1997 Yearbook(TRADEMARK)Ibbotson
Assoc., Chi., (annual updates work by Roger G. Ibbotson & Rex A. Sinquefield).
Over time, stocks have outperformed all other investments by a wide margin,
offering a solid hedge against inflation. From 1926 to 1996, stocks beat all
other traditional asset classes. A $10,000 investment in the stocks comprising
the S&P 500 grew to $13,710,736, significantly more than any other investment.
TAXES
To qualify for treatment as a regulated investment company ("RIC") under
the Internal Revenue Code, each Portfolio must distribute to its shareholders
for each taxable year at least 90% of its investment company taxable income
(consisting generally of net investment income and net short-term capital gains)
("Distribution Requirement") and must meet several additional requirements. For
each Portfolio these requirements include the following: (1) the Portfolio must
derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of securities, or other income derived with respect to its
business of investing in securities ("Income Requirement"); (2) at the close of
each quarter of the Portfolio's taxable year, at least 50% of the value of its
total assets must be represented by cash and cash items, U.S. government
securities, securities of other RICs and other securities, with these other
securities limited, in respect of any one issuer, to an amount that does not
exceed 5% of the value of the Portfolio's total assets and that does not
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represent more than 10% of the issuer's outstanding voting securities; and (3)
at the close of each quarter of the Portfolio's taxable year, not more than 25%
of the value of its total assets may be invested in securities (other than U.S.
government securities or the securities of other RICs) of any one issuer.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in any of those months will be deemed to have been paid by the Portfolio and
received by the shareholders on December 31 of that year if the distributions
are paid by the Portfolio during the following January. Accordingly, those
distributions will be taxed to shareholders for the year in which that December
31 falls.
Each Portfolio will invest its assets in shares of Underlying Fund and
money market and other short-term instruments. Accordingly, each Portfolio's
income will consist of distributions from Underlying Funds, net gains realized
from the disposition of Underlying Fund shares and interest. If an Underlying
Fund qualifies for treatment as a RIC under the Internal Revenue Code -- each
has done so for its past taxable years and intends to continue to do so for its
current and future taxable years -- (1) dividends paid to a Portfolio from the
Underlying Fund's investment company taxable income (which may include net gains
from certain foreign currency transactions) will be taxable to the Portfolio as
ordinary income to the extent of the Underlying Fund's earnings and profits, and
(2) distributions paid to a Portfolio from the Underlying Fund's net capital
gain (i.e., the excess of net long-term capital gain over net short-term capital
loss) will be taxable to the Portfolio as long-term capital gains, regardless of
how long the Portfolio has held the Underlying Fund's shares.
A portion of the dividends from a Portfolio's investment company taxable
income (whether paid in cash or additional shares) may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion for
any Portfolio may not exceed its share of the aggregate dividends received from
U.S. corporations by the Underlying Funds in which it invests and which qualify
as RICs. However, dividends received by a corporate shareholder and deducted by
it pursuant to the dividends-received deduction are subject indirectly to the
alternative minimum tax.
If Portfolio shares are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any dividend or capital gain distribution, the shareholder will
pay full price for the shares and receive some portion of the price back as a
taxable distribution.
The portion of each Portfolio's dividends attributable to interest on
U.S. government obligations, including the portion of dividends the Portfolio
receives from Underlying Funds qualifying as RICs that is attributable to such
interest, may be exempt from state and local income tax.
Although each of Global Income Fund and Global Equity Fund will be
eligible to elect to "pass-through" to its shareholders (including a Portfolio)
the benefit of the foreign tax credit with respect to any foreign and U.S.
possessions income taxes it pays if more than 50% in the value of its total
assets at the close of any taxable year consists of securities of foreign
corporations, no Portfolio will qualify to pass that benefit through to its
shareholders because of its inability to satisfy that asset test.
Each Portfolio will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
OTHER INFORMATION
The Trust is a Delaware business trust. The Trust has authority to issue an
unlimited number of shares of beneficial interest. The Trust's board may,
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without shareholder approval, divide the authorized shares into an unlimited
number of separate series and may divide the shares of any series into classes,
and the costs of doing so will be borne by the Trust. The Trust currently
consist of four series, each with four classes of shares. Prior to August 20,
1997, the Trust's name was "PaineWebber Journey Portfolios," and, prior to July
22, 1997, its name was "PaineWebber Select Fund."
Although Delaware law statutorily limits the potential liabilities of a
Delaware business trust's shareholders to the same extent as it limits the
potential liabilities of a Delaware corporation, shareholders of a Portfolio
could, under certain conflicts of laws jurisprudence in various states, be held
personally liable for the obligations of the Trust or a Portfolio. However, the
Trust's trust instrument disclaims shareholder liability for acts or obligations
of the Trust or its series (the Portfolios) and requires that notice of such
disclaimer be given in each written obligation made or issued by the trustees or
by any officers or officer by or on behalf of the Trust, a series, the trustees
or any of them in connection with the Trust. The trust instrument provides for
indemnification from a Portfolio's property for all losses and expenses of any
series shareholder held personally liable for the obligations of the Portfolio.
Thus, the risk of a shareholder's incurring financial loss on account of
shareholder liability is limited to circumstances in which a Portfolio itself
would be unable to meet its obligations, a possibility which 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 of a
Portfolio, the shareholder paying such liability will be entitled to
reimbursement from the general assets of the Portfolio. The trustees intend to
conduct the operations of the Portfolios in such a way as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the
Portfolios.
Each Portfolio is entitled to participate equally in the dividends and
other distribution and the proceeds of any liquidation except that, due to the
differing expenses borne by the classes, dividends and liquidation proceeds for
each class will likely differ. Shares are fully paid and non-assessable and have
no preemptive or other right to subscribe to any additional shares or other
securities issued by the Trust. Shareholders have non-cumulative voting rights.
A shareholder is entitled to one vote for each full share held and a
proportionate fractional vote for each fractional share held.
Annual shareholder meetings are not required. Special meetings of the
shareholders of any class or any series may be called by the trustees and shall
be called by the trustees upon the written request of shareholders owning at
least ten percent of the outstanding shares of such series or class, or at least
ten percent of the outstanding shares entitled to vote. On matters requiring
shareholder approval, all shares shall be voted by individual series or class,
except (a) when required by the 1940 Act, shares shall be voted in the aggregate
and not by individual series or class, and (b) when the trustees have determined
that the matter affects the interests of more than one series or class, then the
shareholders of all such series or classes shall be entitled to one vote
thereon.
Class-Specific Expenses. Each Portfolio may determine to allocate certain
of its expenses (in addition to distribution fees) to the specific Classes of
the Portfolio's shares to which those expenses are attributable. For example, a
Portfolio's Class B shares bear higher transfer agency fees per shareholder
account than those borne by Class A or Class C shares. The higher fee is imposed
due to the higher costs incurred by the Transfer Agent in tracking shares
subject to a contingent deferred sales charge because, upon redemption, the
duration of the shareholder's investment must be determined in order to
determine the applicable charge. Moreover, the tracking and calculations
required by the automatic conversion feature of the Class B shares will cause
the Transfer Agent to incur additional costs. Although the transfer agency fee
will differ on a per account basis as stated above, the specific extent to which
the transfer agency fees will differ between the Classes as a percentage of net
assets is not certain, because the fee as a percentage of net assets will be
affected by the number of shareholder accounts in each Class and the relative
amounts of net assets in each Class.
Counsel. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the Portfolios.
Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and Mitchell
Hutchins in connection with other matters.
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Auditors. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for the Trust and each Portfolio.
FINANCIAL STATEMENT
Statement of Assets and Liabilities
September , 1997
Mitchell Hutchins Mitchell Hutchins Mitchell Hutchins
Growth Portfolio Moderate Portfolio Conservative Portfolio
REPORT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS
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APPENDIX
Description of Moody's Corporate Bond Ratings
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as a
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues; Aa. Bonds which are rated Aa
are judged to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities; A. Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium-grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future; Baa. Bonds which are rated Baa are considered
as medium-grade obligations, 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 B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category, the modifier 2 indicates a mid-range ranking, and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Description of S&P Corporate Debt Ratings
AAA. An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the higher rated
issues only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong; A. An obligation rated A is
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than 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
lowest 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.
A-1
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"BB." An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B." An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC." An obligation rated "CCC" is currently vulnerable to nonpayment and
is dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitments 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.
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.
A-2
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PART C. OTHER INFORMATION
-------------------------
Item 24. Financial Statements and Exhibits
- -------- ---------------------------------
(a) Financial Statements: (to be filed)
(b) Exhibits:
(1) Trust Instrument 1/
(2) By-Laws 1/
(3) Voting trust agreement - none
(4) Instruments defining the rights of holders of Registrant's shares of
beneficial interest 2/
(5) Investment Advisory and Administration Contract (filed herewith)
(6) (a) Distribution Contract with respect to Class A Shares(filed herewith)
(b) Distribution Contract with respect to Class B Shares (filed
herewith)
(c) Distribution Contract with respect to Class C Shares (filed
herewith)
(d) Distribution Contract with respect to Class Y Shares (filed
herewith)
(e) Exclusive Dealer Agreement with respect to Class A Shares (filed
herewith)
(f) Exclusive Dealer Agreement with respect to Class B Shares (filed
herewith)
(g) Exclusive Dealer Agreement with respect to Class C Shares (filed
herewith)
(h) Exclusive Dealer Agreement with respect to Class Y Shares (filed
herewith)
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement (to be filed)
(9) Transfer Agency Agreement (to be filed)
(10) Opinion of Counsel (to be filed)
(11) Other opinions, appraisals, rulings and consents: Accountants' consent (to
be filed)
(12) Financial Statements omitted from Part B - none
(13) Letter of investment intent (to be filed)
(14) Prototype Retirement Plan - none
(15) Rule 12b-1 Plans
(a) Plan of Distribution pursuant to Rule 12b-1 with respect to Class A
Shares (filed herewith)
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class B
Shares (filed herewith)
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to Class C
Shares (filed herewith)
(16) Schedule for Computation of Performance Quotations - none
(17) and (27) Financial Data Schedule (to be filed)
(18) Plan Pursuant to Rule 18f-3 (filed herewith)
- ----------------------
1/ Incorporated by reference from Registrant's Initial Registration Statement
(SEC File No. 33-26087) filed April 29, 1997.
2/ Incorporated by reference from Articles IV, VI, IX and X of Registrant's
Trust Instrument and from Articles VI and IX of Registrant's By-Laws.
C-1
<PAGE>
Item 25. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
None
Item 26. Number of Holders of Securities
-------------------------------
Number of Record
Holders as of
Title of Class August 15, 1997
- -------------- ---------------
Shares of beneficial interest, par value
$0.001 per share, in
Mitchell Hutchins Growth Portfolio
Class A Shares 0
Class B Shares 0
Class C Shares 0
Class Y Shares 0
Mitchell Hutchins Moderate Portfolio
Class A Shares 0
Class B Shares 0
Class C Shares 0
Class Y Shares 0
Mitchell Hutchins Conservative Portfolio
Class A Shares 0
Class B Shares 0
Class C Shares 0
Class Y Shares 0
Item 27. Indemnification
---------------
Section 2 of Article IX of the Trust Instrument, "Indemnification,"
provides that the appropriate series of the Registrant will indemnify the
trustees and officers of the Registrant 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 IX, 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 Article IX also provides that the
Registrant may maintain insurance policies covering such rights of
indemnification.
Additionally, "Limitation of Liability" in Section 1 of Article IX of
the Trust Instrument 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 Registrant or a particular series; 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
C-2
<PAGE>
trustees and officers shall not be liable for neglect or wrongdoing by them or
any officer, agent, employee, investment adviser or independent contractor of
the Registrant.
Section 9 of the Investment Advisory and Administration Contract with
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") provides that
Mitchell Hutchins shall not be liable for any error of judgment or mistake of
law or for any loss suffered by any series of the Registrant in connection with
the matters to which the Contract relates, except for a loss resulting from the
willful misfeasance, bad faith, or gross negligence of Mitchell Hutchins in the
performance of its duties or from its reckless disregard of its obligations and
duties under the Contract. Section 10 of the Contract provides that the Trustees
shall not be liable for any obligations of the Trust or any series under the
Contract and that Mitchell Hutchins shall look only to the assets and property
of the Registrant in settlement of such right or claim and not to the assets and
property of the Trustees.
Section 9 of each 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 each 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 each Distribution
Contract contains provisions similar to Section 10 of the Investment Advisory
and Administration Contract, with respect to Mitchell Hutchins and PaineWebber,
as appropriate.
Section 9 of each Exclusive Dealer Agreement contains provisions
similar to Section 9 of each Distribution Contract, with respect to PaineWebber
Incorporated ("PaineWebber").
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be provided to trustees, officers and controlling
persons of the Registrant, pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding or payment pursuant to any insurance policy) is
asserted against the Registrant by such trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
C-3
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
Mitchell Hutchins, a Delaware corporation, is a registered investment
adviser and is a wholly owned subsidiary of 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, as
filed with the Securities and Exchange Commission (registration number
801-13219), and is incorporated herein by reference.
Item 29. Principal Underwriters
----------------------
a) Mitchell Hutchins serves as principal underwriter and/or investment
adviser for the following investment companies:
ALL AMERICAN TERM TRUST INC.
GLOBAL HIGH INCOME DOLLAR FUND INC.
GLOBAL SMALL CAP FUND INC.
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GRADE INCOME FUND INC.
MANAGED HIGH YIELD FUND INC.
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
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
MITCHELL HUTCHINS PORTFOLIOS
PAINEWEBBER SERIES TRUST
STRATEGIC GLOBAL INCOME FUND, INC.
2002 TARGET TERM TRUST INC.
b) Mitchell Hutchins is the Registrant's principal underwriter.
PaineWebber acts as exclusive dealer of the Registrant's shares. 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 directors and officers of PaineWebber, their principal business
addresses, and their positions and offices with PaineWebber are identified in
its Form ADV, as filed with the Securities and Exchange Commission (registration
number 801-7163). The foregoing information is hereby incorporated herein by
reference. The information set forth below is furnished for those directors and
officers of Mitchell Hutchins or PaineWebber who also serve as trustees or
officers of the Registrant. Unless otherwise indicated, the principal business
address of each person named is 1285 Avenue of the Americas, New York, NY 10019.
C-4
<PAGE>
<TABLE>
<CAPTION>
Position and Offices with
Name Position With Registrant Underwriter or Exclusive Dealer
- ---- ------------------------ -------------------------------
<S> <C> <C>
Margo N. Alexander President and Trustee Director, President and Chief Executive Officer
of Mitchell Hutchins and Director and Executive
Vice President of PaineWebber
Mary C. Farrell Trustee Managing Director, Senior Investment Strategist
and member of Investment Policy Committee of
PaineWebber
T. Kirkham Barneby Vice President Managing Director, Chief Investment Officer-
Quantitative Investments of Mitchell Hutchins
Dennis McCauley Vice President Managing Director and Chief Investment Officer -
Fixed Income of Mitchell Hutchins
Ann E. Moran Vice President and Assistant Vice President of Mitchell Hutchins and a
Treasurer Manager of the Mutual Fund Finance Division of
Mitchell Hutchins
Dianne E. O'Donnell Vice President and Secretary Senior Vice President and Deputy General Counsel
of Mitchell Hutchins
Emil Polito Vice President Senior Vice President and Director of Operations
and Control of Mitchell Hutchins
Victoria E. Schonfeld Vice President Managing Director and General Counsel of
Mitchell Hutchins
Paul H. Schubert Vice President and Treasurer First Vice President and Director of the Mutual
Fund Finance Division of Mitchell Hutchins
Barney A. Taglialatela Vice President and Assistant Vice President and a Manager of the Mutual Fund
Treasurer Finance Division of Mitchell Hutchins
Mark A. Tincher Vice President Managing Director and Chief Investment Officer -
Equities of Mitchell Hutchins
Keith A. Weller Vice President and Assistant First Vice President and Associate General
Secretary Counsel of Mitchell Hutchins
Ian W. Williams Vice President and Assistant Vice President and a Manager of the Mutual Fund
Treasurer Finance Division of Mitchell Hutchins
</TABLE>
c) None
Item 30. Location of Accounts and Records
--------------------------------
The books and other documents required by paragraphs (b)(4), (c) and
(d) of Rule 31a-1 under the Investment Company Act of 1940 are maintained in the
physical possession of Registrant's investment adviser, Mitchell Hutchins, 1285
Avenue of the Americas, New York, New York 10019. All other accounts, books and
C-5
<PAGE>
documents required by Rule 31a-1 are maintained in the physical possession of
Registrant's transfer agent and custodian.
Item 31. Management Services
-------------------
Not applicable.
Item 32. Undertakings
------------
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
Registrant hereby undertakes to file a Post-Effective Amendment to this
Registration Statement, containing financial statements that need not be
certified, within four to six months from the effective date of this
Registration Statement.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Pre-Effective Amendment No. 1 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York, on the 21st day of August, 1997.
MITCHELL HUTCHINS PORTFOLIOS
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
Pre-Effective Amendment No. 1 has been signed below by the following persons in
the capacities and on the dates indicated. The undersigned hereby severally
constitute and appoint Dianne E. O'Donnell, Keith A. Weller, Arthur J. Brown,
Elinor W. Gammon, and Robert A. Wittie, and each of them singly, our true and
lawful attorneys, with full power to sign for each of us, and in each of our
names and in the capacities indicated below, any and all amendments to the
Registration Statement of Mitchell Hutchins Portfolios, and all instruments
necessary or desirable in connection therewith, filed with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by said attorneys to any and all amendments to said registration
statement.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Margo N. Alexander President and Trustee August 21, 1997
- --------------------------- (Chief Executive Officer)
Margo N. Alexander
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman August 21, 1997
- --------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr.
/s/ Richard Q. Armstrong Trustee August 21, 1997
- ---------------------------
Richard Q. Armstrong
/s/ Richard R. Burt Trustee August 21, 1997
- ---------------------------
Richard R. Burt
/s/ Mary C. Farrell Trustee August 21, 1997
- ---------------------------
Mary C. Farrell
/s/ Meyer Feldberg Trustee August 21, 1997
- ---------------------------
Meyer Feldberg
/s/ George W. Gowen Trustee August 21, 1997
- ---------------------------
George W. Gowen
/s/ Frederic V. Malek Trustee August 21, 1997
- ---------------------------
Frederic V. Malek
/s/ Carl W. Schafer Trustee August 21, 1997
- ---------------------------
Carl W. Schafer
/s/ Paul H. Schubert Vice President and Treasurer (Chief August 21, 1997
- --------------------------- Financial and Accounting Officer)
Paul H. Schubert
</TABLE>
<PAGE>
MITCHELL HUTCHINS PORTFOLIOS
EXHIBIT INDEX
-------------
Exhibit
Number
- ------
(1) Trust Instrument 1/
(2) By-Laws 1/
(3) Voting trust agreement - none
(4) Instruments defining the rights of holders of Registrant's shares of
beneficial interest 2/
(5) Investment Advisory and Administration Contract (filed herewith)
(6) (a) Distribution Contract with respect to Class A Shares(filed herewith)
(b) Distribution Contract with respect to Class B Shares (filed
herewith)
(c) Distribution Contract with respect to Class C Shares (filed
herewith)
(d) Distribution Contract with respect to Class Y Shares (filed
herewith)
(e) Exclusive Dealer Agreement with respect to Class A Shares (filed
herewith)
(f) Exclusive Dealer Agreement with respect to Class B Shares (filed
herewith)
(g) Exclusive Dealer Agreement with respect to Class C Shares (filed
herewith)
(h) Exclusive Dealer Agreement with respect to Class Y Shares (filed
herewith)
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement (to be filed)
(9) Transfer Agency Agreement (to be filed)
(10) Opinion of Counsel (to be filed)
(11) Other opinions, appraisals, rulings and consents: Accountants' consent (to
be filed)
(12) Financial Statements omitted from Part B - none
(13) Letter of investment intent (to be filed)
(14) Prototype Retirement Plan - none
(15) Rule 12b-1 Plans
(a) Plan of Distribution pursuant to Rule 12b-1 with respect to Class A
Shares (filed herewith)
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class B
Shares (filed herewith)
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to Class C
Shares (filed herewith)
(16) Schedule for Computation of Performance Quotations - none
(17) and (27) Financial Data Schedule (to be filed)
(18) Plan Pursuant to Rule 18f-3 (filed herewith)
- ----------------------
1/ Incorporated by reference from Registrant's Initial Registration Statement
(SEC File No. 33-26087) filed April 29, 1997.
2/ Incorporated by reference from Articles IV, VI, IX and X of Registrant's
Trust Instrument and from Articles VI and IX of Registrant's By-Laws.
INVESTMENT ADVISORY AND ADMINISTRATION CONTRACT
Contract made as of ____________, 1997 between MITCHELL HUTCHINS
PORTFOLIOS, a Delaware business trust ("Trust"), and MITCHELL HUTCHINS ASSET
MANAGEMENT INC. ("Mitchell Hutchins"), a Delaware corporation registered as a
broker-dealer under the Securities Exchange Act of 1934, as amended ("1934
Act"), and as an investment adviser under the Investment Advisers Act of 1940,
as amended.
WHEREAS, the Trust is registered under the Investment Company Act of
1940, as amended ("1940 Act"), as an open-end management investment company, and
currently has three distinct series of shares of beneficial interest ("Series"),
which correspond to distinct portfolios and which have been designated as the
Mitchell Hutchins Growth Portfolio, Mitchell Hutchins Moderate Portfolio and
Mitchell Hutchins Conservative Portfolio; and
WHEREAS, the Trust and each Series has been organized for the purpose
of investing its assets in registered open-end management investment companies
or series thereof that are Underlying PaineWebber Funds and such other
additional investments as may be permitted under the 1940 Act. (As used in this
Contract, the term "Underlying PaineWebber Funds" shall mean investment
companies that hold themselves out to investors as related companies for
purposes of investment and investor services and for which Mitchell Hutchins,
PaineWebber Incorporated ("PaineWebber") or any entity controlling, controlled
by or under common control with Mitchell Hutchins or PaineWebber now or in the
future acts as investment adviser or principal underwriter); and
WHEREAS, the Trust desires to retain Mitchell Hutchins as investment
adviser and administrator to furnish certain administrative, investment advisory
and portfolio management services to the Trust and each Series as now exists and
as hereafter may be established for the purpose of investing its assets in
Underlying PaineWebber Funds, and Mitchell Hutchins is willing to furnish such
services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Trust hereby appoints Mitchell Hutchins as
investment adviser and administrator of the Trust and each Series for the period
and on the terms set forth in this Contract. Mitchell Hutchins accepts such
appointment and agrees to render the services herein set forth, for the
compensation herein provided.
2. DUTIES AS INVESTMENT ADVISER.
----------------------------
(a) Subject to the supervision of the Trust's Board of Trustees
("Board"), Mitchell Hutchins will provide a continuous investment program for
each Series, including investment research and supervision of the Series'
investments in accordance with the Series' investment objective, policies and
<PAGE>
restrictions as stated in the Trust's Registration Statement. (As used in this
Contract, the term "Registration Statement" shall mean the currently effective
registration statement of the Trust, and any supplements thereto, under the
Securities Act of 1933, as amended, and the 1940 Act.). Mitchell Hutchins shall
determine from time to time what securities and other investments will be
purchased, retained or sold by each Series. As part of its duties with respect
to each Series:
(i) Mitchell Hutchins shall determine the percentage of the Series'
assets invested from time to time in each Underlying PaineWebber
Fund selected by the Board as appropriate for that Series and set
forth in the Registration Statement. The allocation of the Series'
assets among the Underlying PaineWebber Funds shall be made within
investment ranges established by the Board, which designate
minimum and maximum percentages for each the Underlying
PaineWebber Fund. Mitchell Hutchins shall allocate investments for
the Series among the Underlying PaineWebber Funds and other
permitted investments based on factors it considers relevant,
including its outlook for the economy, financial markets and the
relative performance of the Underlying PaineWebber Funds.
(ii) Mitchell Hutchins will recommend to the Board any changes that
Mitchell Hutchins considers necessary or appropriate with respect
to the particular Underlying PaineWebber Funds in which the Series
may invest, the percentage range of assets that the Series may
invest in any one Underlying PaineWebber Fund and the percentage
range of assets that the Series may invest in Underlying
PaineWebber Funds that are equity funds and fixed income funds
(including money market funds).
(b) Mitchell Hutchins will oversee the maintenance of all books and
records with respect to the securities transactions of each Series, and will
furnish the Board with such periodic and special reports as the Board reasonably
may request. In compliance with the requirements of Rule 31a-3 under the 1940
Act, Mitchell Hutchins hereby agrees that all records which it maintains for the
Trust are the property of the Trust, agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any records which it maintains for
the Trust and which are required to be maintained by Rule 31a-1 under the 1940
Act and further agrees to surrender promptly to the Trust any records which it
maintains for the Trust upon request by the Trust.
(c) Mitchell Hutchins will oversee the computation of the net asset
value and the net income of each Series as described in the Registration
Statement or as more frequently requested by the Board.
3. DUTIES AS ADMINISTRATOR. Mitchell Hutchins will administer the
affairs of the Trust and each Series subject to the supervision of the Board and
the following understandings:
(a) Mitchell Hutchins will supervise all aspects of the operations of
the Trust and each Series, including oversight of transfer agency, custodial and
accounting services, except as hereinafter set forth; provided, however, that
noting herein contained shall be deemed to relieve or deprive the Board of its
responsibility for and control of the conduct of the affairs of the Trust and
each Series.
(b) Mitchell Hutchins will provide the Trust and each Series with such
corporate, administrative and clerical personnel (including officers of the
2
<PAGE>
Trust) and services as are reasonably deemed necessary or advisable by the
Board, including the maintenance of certain books and records of the Trust and
each Series.
(c) Mitchell Hutchins will arrange for the periodic preparation,
updating, filing and dissemination (as applicable) of the Trust's Registration
Statement, proxy materials, tax returns and required reports to each Series'
shareholders and the Securities and Exchange Commission and other appropriate
federal or state regulatory authorities.
(d) Mitchell Hutchins will provide the Trust and each Series with, or
obtain for it, adequate office space and all necessary office equipment and
services, including telephone service, heat, utilities, stationery supplies and
similar items.
(e) Mitchell Hutchins will provide the Board on a regular basis with
economic and investment analyses and reports and make available to the Board
upon request any economic, statistical and investment services normally
available to institutional or other customers of Mitchell Hutchins.
4. FURTHER DUTIES. In all matters relating to the performance of this
Contract, Mitchell Hutchins will act in conformity with the Trust Instrument,
By-Laws and Registration Statement of the Trust and with the instructions and
directions of the Board and will comply with the requirements of the 1940 Act,
the rules thereunder, and all other applicable federal and state laws and
regulations.
5. DELEGATION OF MITCHELL HUTCHINS' DUTIES AS INVESTMENT ADVISER AND
ADMINISTRATOR. With respect to any or all Series, Mitchell Hutchins may enter
into one or more contracts ("Sub-Advisory or Sub-Administration Contract") with
a sub-adviser or sub-administrator in which Mitchell Hutchins delegates to such
sub-adviser or sub-administrator any or all its duties specified in Paragraphs 2
and 3 of this Contract, provided that each Sub-Advisory or Sub-Administration
Contract imposes on the sub-adviser or sub-administrator bound thereby all the
duties and conditions to which Mitchell Hutchins is subject by Paragraphs 2, 3
and 4 of this Contract, and further provided that each Sub-Advisory or
Sub-Administration Contract meets all requirements of the 1940 Act and rules
thereunder.
6. SERVICES NOT EXCLUSIVE. The services furnished by Mitchell Hutchins
hereunder are not to be deemed exclusive and Mitchell Hutchins shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired thereby. Nothing in this Contract shall limit or restrict the
right of any director, officer or employee of Mitchell Hutchins, who may also be
a Trustee, officer or employee of the Trust, to engage in any other business or
to devote his or her time and attention in part to the management or other
aspects of any other business, whether of a similar or dissimilar nature.
7. EXPENSES.
(a) Mitchell Hutchins will bear all expenses incurred in the operation
of the Trust and each Series other than the investment advisory and
administration fee payable under this Contract, the fees payable pursuant to
plans adopted by the Trust pursuant to Rule 12b-1 under the 1940 Act and
3
<PAGE>
extraordinary expenses (such as costs of litigation to which the Trust or a
Series is a party and of indemnifying officers and Trustees of the Trust), which
will be borne by the Trust or Series, as applicable. The expenses to be borne by
Mitchell Hutchins include the following: (i) the cost (including brokerage
commissions) of securities purchased or sold by the Series (but not any losses
incurred in connection therewith); (ii) expenses of organizing the Trust and the
Series; (iii) filing fees and expenses relating to the registrations and
qualification of the Series' shares and the Trust under federal and/or
securities laws and maintaining such registration and qualifications; (iv) fees
and salaries payable to the Trust's Trustees and officers; (v) all expenses
incurred in connection with the Trustees' services, including travel expenses;
(vi) taxes (including any income or franchise taxes) and governmental fees;
(vii) costs of any liability, uncollectible items of deposit and other insurance
and fidelity bonds; (viii) legal, accounting and auditing expenses, including
legal fees of special counsel for those Trustees of the Trust who are not
interested persons of the Trust; (ix) charges of custodians, transfer agents and
other agents (including any lending agent); (x) costs of preparing share
certificates; (xi) 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; (xii) costs of
mailing prospectuses and supplements thereto, statements of additional
information and supplements thereto, reports and proxy materials to existing
shareholders; (xiii) fees, voluntary assessments and other expenses incurred in
connection with membership in investment company organizations; (xiv) the cost
of mailing and tabulating proxies and costs of meetings of shareholders, the
Board and any committees thereof; (xv) the cost of investment company literature
and other publications provided by the Trust to its Trustees and officers; and
(xvi) costs of mailing, stationery and communications equipment; (xvii) expenses
incident to any dividend, withdrawal or redemption options; (xviii) charges and
expenses of any outside pricing service used to value portfolio securities; and
(xix) interest on borrowings of the Trust or Series.
(b) The payment or assumption by Mitchell Hutchins of any expenses of
the Trust or a Series that Mitchell Hutchins is not required by this Contract to
pay or assume shall not obligate Mitchell Hutchins to pay or assume the same or
any similar expense of the Trust or a Series on any subsequent occasion.
8. COMPENSATION.
(a) For the services provided and the expenses assumed pursuant to this
Contract, the Trust will pay to Mitchell Hutchins a fee with respect to each
Series at the rate specified below and expressed as an annual percentage of each
Series' average daily net assets, such fee to be computed daily and paid
monthly:
Mitchell Hutchins Growth Portfolio 0.35%
Mitchell Hutchins Moderate Portfolio 0.35%
Mitchell Hutchins Conservative Portfolio 0.35%
(b) For the services provided and the expenses assumed pursuant to this
Contract with respect to any Series hereafter established, the Trust will pay to
Mitchell Hutchins from the assets of such Series a fee in an amount to be agreed
4
<PAGE>
upon in a written fee agreement ("Fee Agreement") executed by the Trust on
behalf of such Series and by Mitchell Hutchins. All such Fee Agreements shall
provide that they are subject to all terms and conditions of this Contract.
(c) The fee shall be computed daily and paid monthly to Mitchell
Hutchins on or before the first business day of the next succeeding calendar
month.
(d) If this Contract becomes effective or terminates before the end of
any month, the fee for the period from the effective day to the end of the month
or from the beginning of such month to the date of termination, as the case may
be, shall be prorated according to the proportion which such period bears to the
full month in which such effectiveness or termination occurs.
9. LIMITATION OF LIABILITY OF MITCHELL HUTCHINS. Mitchell Hutchins and
its delegates, including any Sub-Adviser or Sub-Administrator to any Series or
the Trust, shall not be liable for any error of judgment or mistake of law or
for any loss suffered by any Series, the Trust or any of its shareholders, in
connection with the matters to which this Contract relates, except to the extent
that such a loss results from willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or from reckless disregard by it of
its obligations and duties under this Contract. Any person, even though also an
officer, director, employee, or agent of Mitchell Hutchins, who may be or become
an officer, Trustee, employee or agent of the Trust shall be deemed, when
rendering services to any Series or the Trust or acting with respect to any
business of such Series or the Trust, to be rendering such service to or acting
solely for the Series or the Trust and not as an officer, director, employee, or
agent or one under the control or direction of Mitchell Hutchins even though
paid by it.
10. DURATION AND TERMINATION.
(a) This Contract shall become effective upon the date hereabove
written provided that, with respect to any Series, this Contract shall not take
effect unless it has first been approved (i) by a vote of a majority of those
Trustees of the Trust who are not parties to this Contract or interested persons
of any such party cast in person at a meeting called for the purpose of voting
on such approval, and (ii) by vote of a majority of that Series' outstanding
voting securities.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for two years from the above written date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of those Trustees of the Trust who
are not parties to this Contract or interested persons of any such party, cast
in person at a meeting called for the purpose of voting on such approval, and
(ii) by the Board or with respect to any given Series by vote of a majority of
the outstanding voting securities of such Series.
(c) Notwithstanding the foregoing, with respect to any Series this
Contract may be terminated at any time, without the payment of any penalty, by
vote of the Board or by a vote of a majority of the outstanding voting
securities of such Series on sixty days' written notice to Mitchell Hutchins or
by Mitchell Hutchins at any time, without the payment of any penalty, on sixty
days' written notice to the Trust. Termination of this Contract with respect to
5
<PAGE>
any given Series shall in no way affect the continued validity of this Contract
or the performance thereunder with respect to any other Series. This Contract
will automatically terminate in the event of its assignment.
11. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS OF THE
TRUST. The Trustees of the Trust and the shareholders of any Series shall not be
liable for any obligations of any Series or the Trust under this Contract, and
Mitchell Hutchins agrees that, in asserting any rights or claims under this
Contract, if shall look only to the assets and property of the Trust in
settlement of such right or claim, and not to such Trustees or shareholders.
12. AMENDMENT OF THIS CONTRACT. No provision of this Contract may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Contract as to any
given Series shall be effective until approved by vote of a majority of such
Series' outstanding voting securities.
13. GOVERNING LAW. This Contract shall be construed in accordance with
the laws of the State of Delaware, without giving effect to the conflicts of
laws principles thereof, and in accordance with the 1940 Act. To the extent that
the applicable laws of the State of Delaware conflict with the applicable
provisions of the 1940 Act, the latter shall control.
14. MISCELLANEOUS. The captions in this Contract are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors. As used in this Contract,
the terms "majority of the outstanding voting securities", "affiliated person",
"interested person", "assignment", "investment adviser", "net assets",
"prospectus", "sale", "sell" and "security" shall have the same meaning as such
terms have in the 1940 Act, subject to such exemption as may be granted by the
Securities and Exchange Commission by any rule, regulation or order. Where the
effect of a requirement of the 1940 Act reflected in any provision of this
Contract is relaxed by a rule, regulation or order of the Securities and
Exchange Commission, whether of special or general application, such provision
shall be deemed to incorporate the effect of such rule, regulation or order.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated as of the day and year first above
written.
Attest: MITCHELL HUTCHINS ASSET MANAGEMENT INC.
By:
- ---------------- ------------------------------------
Attest: MITCHELL HUTCHINS PORTFOLIOS
By:
- ---------------- ------------------------------------
7
MITCHELL HUTCHINS PORTFOLIOS
DISTRIBUTION CONTRACT
CLASS A SHARES
CONTRACT made as of _____________________, 1997, between MITCHELL
HUTCHINS PORTFOLIOS, a Delaware business trust ("Fund"), and MITCHELL HUTCHINS
ASSET MANAGEMENT INC., a Delaware corporation ("Mitchell Hutchins").
WHEREAS the Fund is registered under the Investment Company Act of
l940, as amended ("l940 Act"), as an open-end management investment company and
currently has three distinct series of shares of beneficial interest ("Series"),
which correspond to distinct portfolios and have been designated as the Mitchell
Hutchins Growth Portfolio, Mitchell Hutchins Moderate Portfolio and Mitchell
Hutchins Conservative Portfolio; and
WHEREAS the Fund's board of trustees ("Board") has established an
unlimited number of shares of beneficial interest of the above-referenced Series
as Class A shares ("Class A Shares"); and
WHEREAS the Fund has adopted a Plan of Distribution pursuant to Rule
12b-1 under the 1940 Act for its Class A Shares ("Plan") and desires to retain
Mitchell Hutchins as principal distributor in connection with the offering and
sale of the Class A Shares of the above-referenced Series and of such other
Series as may hereafter be designated by the Board and have Class A Shares
established; and
WHEREAS Mitchell Hutchins is willing to act as principal distributor of
the Class A Shares of each such Series on the terms and conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Fund hereby appoints Mitchell Hutchins as its
exclusive agent to be the principal distributor to sell and to arrange for the
sale of the Class A Shares on the terms and for the period set forth in this
Contract. Mitchell Hutchins hereby accepts such appointment and agrees to act
hereunder. It is understood, however, that this appointment does not preclude
sales of the Class A Shares directly through the Fund's transfer agent in the
manner set forth in the Registration Statement. As used in this Contract, the
term "Registration Statement" shall mean the currently effective registration
statement of the Fund, and any supplements thereto, under the Securities Act of
1933, as amended ("1933 Act"), and the 1940 Act.
<PAGE>
2. SERVICES AND DUTIES OF MITCHELL HUTCHINS.
(a) Mitchell Hutchins agrees to sell Class A Shares on a best
efforts basis from time to time during the term of this Contract as agent for
the Fund and upon the terms described in the Registration Statement.
(b) Upon the later of the date of this Contract or the initial
offering of the Class A Shares to the public by a Series, Mitchell Hutchins will
hold itself available to receive purchase orders, satisfactory to Mitchell
Hutchins, for Class A Shares of that Series and will accept such orders on
behalf of the Fund as of the time of receipt of such orders and promptly
transmit such orders as are accepted to the Fund's transfer agent. Purchase
orders shall be deemed effective at the time and in the manner set forth in the
Registration Statement.
(c) Mitchell Hutchins in its discretion may enter into agreements to
sell Class A Shares to such registered and qualified retail dealers, including
but not limited to PaineWebber Incorporated ("PaineWebber"), as it may select.
In making agreements with such dealers, Mitchell Hutchins shall act only as
principal and not as agent for the Fund.
(d) The offering price of the Class A Shares of each Series shall be
the net asset value per Share as next determined by the Fund following receipt
of an order at Mitchell Hutchins' principal office plus the applicable initial
sales charge, if any, computed as set forth in the Registration Statement. The
Fund shall promptly furnish Mitchell Hutchins with a statement of each
computation of net asset value.
(e) Mitchell Hutchins shall not be obligated to sell any certain
number of Class A Shares.
(f) To facilitate redemption of Class A Shares by shareholders
directly or through dealers, Mitchell Hutchins is authorized but not required on
behalf of the Fund to repurchase Class A Shares presented to it by shareholders
and dealers at the price determined in accordance with, and in the manner set
forth in, the Registration Statement. Such price shall reflect the subtraction
of the contingent deferred sales charge, if any, computed in accordance with and
in the manner set forth in the Registration Statement.
(g) Mitchell Hutchins shall provide ongoing shareholder services,
which include responding to shareholder inquiries, providing shareholders with
information on their investments in the Class A Shares and any other services
now or hereafter deemed to be appropriate subjects for the payments of "service
fees" under Rule 2830 of the Conduct Rules of the National Association of
Securities Dealers, Inc. ("NASD") (collectively, "service activities").
(h) Mitchell Hutchins shall have the right to use any list of
shareholders of the Fund or any other list of investors which it obtains in
connection with its provision of services under this Contract; provided,
however, that Mitchell Hutchins shall not sell or knowingly provide such list or
lists to any unaffiliated person.
3. AUTHORIZATION TO ENTER INTO EXCLUSIVE DEALER AGREEMENTS AND TO
DELEGATE DUTIES AS DISTRIBUTOR. With respect to the Class A Shares of any or all
Series, Mitchell Hutchins may enter into an exclusive dealer agreement with
2
<PAGE>
PaineWebber or any other registered and qualified dealer with respect to sales
of the Class A Shares or the provision of service activities. In a separate
contract or as part of any such exclusive dealer agreement, Mitchell Hutchins
also may delegate to PaineWebber or another registered and qualified dealer
("sub-distributor") any or all of its duties specified in this Contract,
provided that such separate contract or exclusive dealer agreement imposes on
the sub-distributor bound thereby all applicable duties and conditions to which
Mitchell Hutchins is subject under this Contract, and further provided that such
separate contract or exclusive dealer agreement meets all requirements of the
1940 Act and rules thereunder.
4. SERVICES NOT EXCLUSIVE. The services furnished by Mitchell Hutchins
hereunder are not to be deemed exclusive and Mitchell Hutchins shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired thereby. Nothing in this Contract shall limit or restrict the
right of any director, officer or employee of Mitchell Hutchins, who may also be
a trustee, officer or employee of the Fund, to engage in any other business or
to devote his or her time and attention in part to the management or other
aspects of any other business, whether of a similar or a dissimilar nature.
5. COMPENSATION.
(a) As compensation for its service activities under this contract
with respect to the Class A Shares, Mitchell Hutchins shall receive from the
Fund a service fee at the rate and under the terms and conditions of the Plan
adopted by the Fund with respect to the Class A Shares of the Series, as such
Plan is amended from time to time, and subject to any further limitations on
such fee as the Board may impose.
(b) As compensation for its activities under this contract with
respect to the distribution of the Class A Shares, Mitchell Hutchins shall
retain the initial sales charge, if any, on purchases of Class A Shares as set
forth in the Registration Statement. Mitchell Hutchins is authorized to collect
the gross proceeds derived from the sale of the Class A Shares, remit the net
asset value thereof to the fund upon receipt of the proceeds and retain the
initial sales charge, if any.
(c) As compensation for its activities under this contract with
respect to the distribution of the Class A Shares, Mitchell Hutchins shall
receive all contingent deferred sales charges imposed on redemptions of Class A
Shares of each Series. Whether and at what rate a contingent deferred sales
charge will be imposed with respect to a redemption shall be determined in
accordance with, and in the manner set forth in, the Registration Statement.
(d) Mitchell Hutchins may reallow any or all of the initial sales
charges, contingent deferred sales charges, or service fees which it is paid
under this Contract to such dealers as Mitchell Hutchins may from time to time
determine.
3
<PAGE>
6. DUTIES OF THE FUND.
(a) The Fund reserves the right at any time to withdraw offering
Class A Shares of any or all Series by written notice to Mitchell Hutchins at
its principal office.
(b) The Fund shall determine in its sole discretion whether
certificates shall be issued with respect to the Class A Shares. If the Fund has
determined that certificates shall be issued, the Fund will not cause
certificates representing Class A Shares to be issued unless so requested by
shareholders. If such request is transmitted by Mitchell Hutchins, the Fund will
cause certificates evidencing Class A Shares to be issued in such names and
denominations as Mitchell Hutchins shall from time to time direct.
(c) The Fund shall keep Mitchell Hutchins fully informed of its
affairs and shall make available to Mitchell Hutchins copies of all information,
financial statements, and other papers which Mitchell Hutchins may reasonably
request for use in connection with the distribution of Class A Shares,
including, without limitation, certified copies of any financial statements
prepared for the Fund by its independent public accountant and such reasonable
number of copies of the most current prospectus, statement of additional
information, and annual and interim reports of any Series as Mitchell Hutchins
may request, and the Fund shall cooperate fully in the efforts of Mitchell
Hutchins to sell and arrange for the sale of the Class A Shares of the Series
and in the performance of Mitchell Hutchins under this Contract.
(d) The Fund shall take, from time to time, all necessary action,
including payment of the related filing fee, as may be necessary to register the
Class A Shares under the 1933 Act to the end that there will be available for
sale such number of Class A Shares as Mitchell Hutchins may be expected to sell.
The Fund agrees to file, from time to time, such amendments, reports, and other
documents as may be necessary in order that there will be no untrue statement of
a material fact in the Registration Statement, nor any omission of a material
fact which omission would make the statements therein misleading.
(e) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of Class A Shares of each Series for sale
under the securities laws of such states or other jurisdictions as Mitchell
Hutchins and the Fund may approve, and, if necessary or appropriate in
connection therewith, to qualify and maintain the qualification of the Fund as a
broker or dealer in such jurisdictions; provided that the Fund shall not be
required to amend its Trust Instrument or By-Laws to comply with the laws of any
jurisdiction, to maintain an office in any jurisdiction, to change the terms of
the offering of the Class A Shares in any jurisdiction from the terms set forth
in its Registration Statement, to qualify as a foreign corporation in any
jurisdiction, or to consent to service of process in any jurisdiction other than
with respect to claims arising out of the offering of the Class A Shares.
Mitchell Hutchins shall furnish such information and other material relating to
its affairs and activities as may be required by the Fund in connection with
such qualifications.
7. EXPENSES OF THE FUND. The Fund shall bear all costs and expenses of
registering the Class A Shares with the Securities and Exchange Commission and
qualifying the Class A shares with state and other regulatory bodies, and shall
4
<PAGE>
assume expenses related to communications with shareholders of each Series,
including (i) fees and disbursements of its counsel and independent public
accountant; (ii) the preparation, filing and printing of registration statements
and/or prospectuses or statements of additional information required under the
federal securities laws; (iii) the preparation and mailing of annual and interim
reports, prospectuses, statements of additional information and proxy materials
to shareholders; and (iv) the qualifications of Class A Shares for sale and of
the Fund as a broker or dealer under the securities laws of such jurisdictions
as shall be selected by the Fund and Mitchell Hutchins pursuant to Paragraph
6(e) hereof, and the costs and expenses payable to each such jurisdiction for
continuing qualification therein.
8. EXPENSES OF MITCHELL HUTCHINS. Mitchell Hutchins shall bear all
costs and expenses of (i) preparing, printing and distributing any materials not
prepared by the Fund and other materials used by Mitchell Hutchins in connection
with the sale of Class A Shares under this Contract, including the additional
cost of printing copies of prospectuses, statements of additional information,
and annual and interim shareholder reports other than copies thereof required
for distribution to existing shareholders or for filing with any federal or
state securities authorities; (ii) any expenses of advertising incurred by
Mitchell Hutchins in connection with such offering; (iii) the expenses of
registration or qualification of Mitchell Hutchins as a broker or dealer under
federal or state laws and the expenses of continuing such registration or
qualification; and (iv) all compensation paid to Mitchell Hutchins' employees
and others for selling Class A Shares, and all expenses of Mitchell Hutchins,
its employees and others who engage in or support the sale of Class A Shares as
may be incurred in connection with their sales efforts.
9. INDEMNIFICATION.
(a) The Fund agrees to indemnify, defend and hold Mitchell Hutchins,
its officers and directors, and any person who controls Mitchell Hutchins within
the meaning of Section 15 of the 1933 Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which Mitchell Hutchins, its officers,
directors or any such controlling person may incur under the 1933 Act, or under
common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement or arising
out of or based upon any alleged omission to state a material fact required to
be stated in the Registration Statement or necessary to make the statements
therein not misleading, except insofar as such claims, demands, liabilities or
expenses arise out of or are based upon any such untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in conformity
with information furnished in writing by Mitchell Hutchins to the Fund for use
in the Registration Statement; provided, however, that this indemnity agreement
shall not inure to the benefit of any person who is also an officer or trustee
of the Fund or who controls the Fund within the meaning of Section 15 of the
1933 Act, unless a court of competent jurisdiction shall determine, or it shall
have been determined by controlling precedent, that such result would not be
5
<PAGE>
against public policy as expressed in the 1933 Act; and further provided, that
in no event shall anything contained herein be so construed as to protect
Mitchell Hutchins against any liability to the Fund or to the shareholders of
any Series to which Mitchell Hutchins would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligations under this
Contract. The Fund shall not be liable to Mitchell Hutchins under this indemnity
agreement with respect to any claim made against Mitchell Hutchins or any person
indemnified unless Mitchell Hutchins or other such person shall have notified
the Fund in writing of the claim within a reasonable time after the summons or
other first written notification giving information of the nature of the claim
shall have been served upon Mitchell Hutchins or such other person (or after
Mitchell Hutchins or the person shall have received notice of service on any
designated agent). However, failure to notify the Fund of any claim shall not
relieve the Fund from any liability which it may have to Mitchell Hutchins or
any person against whom such action is brought otherwise than on account of this
indemnity agreement. The Fund shall be entitled to participate at its own
expense in the defense or, if it so elects, to assume the defense of any suit
brought to enforce any claims subject to this indemnity agreement. If the Fund
elects to assume the defense of any such claim, the defense shall be conducted
by counsel chosen by the Fund and satisfactory to indemnified defendants in the
suit whose approval shall not be unreasonably withheld. In the event that the
Fund elects to assume the defense of any suit and retain counsel, the
indemnified defendants shall bear the fees and expenses of any additional
counsel retained by them. If the Fund does not elect to assume the defense of a
suit, it will reimburse the indemnified defendants for the reasonable fees and
expenses of any counsel retained by the indemnified defendants. The Fund agrees
to notify Mitchell Hutchins promptly of the commencement of any litigation or
proceedings against it or any of its officers or trustees in connection with the
issuance or sale of any of its Class A Shares.
(b) Mitchell Hutchins agrees to indemnify, defend, and hold the
Fund, its officers and trustees and any person who controls the Fund within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending against such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Fund, its trustees or
officers, or any such controlling person may incur under the 1933 Act or under
common law or otherwise arising out of or based upon any alleged untrue
statement of a material fact contained in information furnished in writing by
Mitchell Hutchins to the Fund for use in the Registration Statement, arising out
of or based upon any alleged omission to state a material fact in connection
with such information required to be stated in the Registration Statement
necessary to make such information not misleading, or arising out of any
agreement between Mitchell Hutchins and any retail dealer, or arising out of any
supplemental sales literature or advertising used by Mitchell Hutchins in
connection with its duties under this Contract. Mitchell Hutchins shall be
entitled to participate, at its own expense, in the defense or, if it so elects,
to assume the defense of any suit brought to enforce the claim, but if Mitchell
Hutchins elects to assume the defense, the defense shall be conducted by counsel
chosen by Mitchell Hutchins and satisfactory to the indemnified defendants whose
approval shall not be unreasonably withheld. In the event that Mitchell Hutchins
elects to assume the defense of any suit and retain counsel, the defendants in
the suit shall bear the fees and expenses of any additional counsel retained by
them. If Mitchell Hutchins does not elect to assume the defense of any suit, it
will reimburse the indemnified defendants in the suit for the reasonable fees
and expenses of any counsel retained by them.
10. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS OF THE
FUND. The trustees of the Fund and the shareholders of any Series shall not be
liable for any obligations of the Fund or any Series under this Contract, and
6
<PAGE>
Mitchell Hutchins agrees that, in asserting any rights or claims under this
Contract, it shall look only to the assets and property of the Fund or the
particular Series in settlement of such right or claims, and not to such
trustees or shareholders.
11. Services Provided to the Fund by Employees of Mitchell Hutchins.
Any person, even though also an officer, director, employee or agent of Mitchell
Hutchins, who may be or become an officer, trustee, employee or agent of the
Fund, shall be deemed, when rendering services to the Fund or acting in any
business of the Fund, to be rendering such services to or acting solely for the
Fund and not as an officer, director, employee or agent or one under the control
or direction of Mitchell Hutchins even though paid by Mitchell Hutchins.
12. DURATION AND TERMINATION.
(a) This Contract shall become effective upon the date written
above, provided that, with respect to any Series, this Contract shall not take
effect unless such action has first been approved by vote of a majority of the
Board and by vote of a majority of those trustees of the Fund who are not
interested persons of the Fund, and have no direct or indirect financial
interest in the operation of the Plan relating to the Series or in any
agreements related thereto (all such trustees collectively being referred to
herein as the "Independent Trustees") cast in person at a meeting called for the
purpose of voting on such action.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for one year from the above written date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of the Independent Trustees, cast in
person at a meeting called for the purpose of voting on such approval, and (ii)
by the Board or with respect to any given Series by vote of a majority of the
outstanding voting securities of the Class A Shares of such Series.
(c) Notwithstanding the foregoing, with respect to any Series, this
Contract may be terminated at any time, without the payment of any penalty, by
vote of the Board, by vote of a majority of the Independent Trustees or by vote
of a majority of the outstanding voting securities of the Class A Shares of such
Series on sixty days' written notice to Mitchell Hutchins or by Mitchell
Hutchins at any time, without the payment of any penalty, on sixty days' written
notice to the Fund or such Series. This Contract will automatically terminate in
the event of its assignment.
(d) Termination of this Contract with respect to any given Series
shall in no way affect the continued validity of this Contract or the
performance thereunder with respect to any other Series.
13. AMENDMENT OF THIS CONTRACT. No provision of this Contract may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
7
<PAGE>
14. GOVERNING LAW. This Contract shall be construed in accordance with
the laws of the State of Delaware and the 1940 Act. To the extent that the
applicable laws of the State of Delaware conflict with the applicable provisions
of the l940 Act, the latter shall control.
15. NOTICE. Any notice required or permitted to be given by either
party to the other shall be deemed sufficient upon receipt in writing at the
other party's principal offices.
16. MISCELLANEOUS. The captions in this Contract are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors. As used in this Contract,
the terms "majority of the outstanding voting securities," "interested person"
and "assignment" shall have the same meaning as such terms have in the l940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be
executed by their officers designated as of the day and year first above
written.
ATTEST: MITCHELL HUTCHINS PORTFOLIOS
By:
- --------------------------- ----------------------------------
ATTEST: MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
By:
- --------------------------- ----------------------------------
8
MITCHELL HUTCHINS PORTFOLIOS
DISTRIBUTION CONTRACT
CLASS B SHARES
CONTRACT made as of ____________________, 1997, between MITCHELL
HUTCHINS PORTFOLIOS, a Delaware business trust ("Fund") and MITCHELL HUTCHINS
ASSET MANAGEMENT INC., a Delaware corporation ("Mitchell Hutchins").
WHEREAS the Fund is registered under the Investment Company Act of
l940, as amended ("l940 Act"), as an open-end management investment company and
currently has three distinct series of shares of beneficial interest ("Series"),
which correspond to distinct portfolios and have been designated as the Mitchell
Hutchins Growth Portfolio, Mitchell Hutchins Moderate Portfolio and Mitchell
Hutchins Conservative Portfolio; and
WHEREAS the Fund's board of trustees ("Board") has established an
unlimited number of shares of beneficial interest of the above-referenced Series
as Class B shares ("Class B Shares"); and
WHEREAS the Fund has adopted a Plan of Distribution pursuant to Rule
12b-1 under the 1940 Act for its Class B Shares ("Plan") and desires to retain
Mitchell Hutchins as principal distributor in connection with the offering and
sale of the Class B Shares of the above-referenced Series and of such other
Series as may hereafter be designated by the Board and have Class B Shares
established; and
WHEREAS Mitchell Hutchins is willing to act as principal distributor of
the Class B Shares of each such Series on the terms and conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Fund hereby appoints Mitchell Hutchins as its
exclusive agent to be the principal distributor to sell and to arrange for the
sale of the Class B Shares on the terms and for the period set forth in this
Contract. Mitchell Hutchins hereby accepts such appointment and agrees to act
hereunder. It is understood, however, that this appointment does not preclude
sales of the Class B Shares directly through the Fund's transfer agent in the
manner set forth in the Registration Statement. As used in this Contract, the
term "Registration Statement" shall mean the currently effective registration
statement of the Fund, and any supplements thereto, under the Securities Act of
1933, as amended ("1933 Act"), and the 1940 Act.
<PAGE>
2. SERVICES AND DUTIES OF MITCHELL HUTCHINS.
(a) Mitchell Hutchins agrees to sell Class B Shares on a best
efforts basis from time to time during the term of this Contract as agent for
the Fund and upon the terms described in the Registration Statement.
(b) Upon the later of the date of this Contract or the initial
offering of the Class B Shares to the public by a Series, Mitchell Hutchins will
hold itself available to receive purchase orders, satisfactory to Mitchell
Hutchins, for Class B Shares of that Series and will accept such orders on
behalf of the Fund as of the time of receipt of such orders and promptly
transmit such orders as are accepted to the Fund's transfer agent. Purchase
orders shall be deemed effective at the time and in the manner set forth in the
Registration Statement.
(c) Mitchell Hutchins in its discretion may enter into agreements to
sell Class B Shares to such registered and qualified retail dealers, including
but not limited to PaineWebber Incorporated ("PaineWebber"), as it may select.
In making agreements with such dealers, Mitchell Hutchins shall act only as
principal and not as agent for the Fund.
(d) The offering price of the Class B Shares of each Series shall be
the net asset value per Share as next determined by the Fund following receipt
of an order at Mitchell Hutchins' principal office. The Fund shall promptly
furnish Mitchell Hutchins with a statement of each computation of net asset
value.
(e) Mitchell Hutchins shall not be obligated to sell any certain
number of Class B Shares.
(f) To facilitate redemption of Class B Shares by shareholders
directly or through dealers, Mitchell Hutchins is authorized but not required on
behalf of the Fund to repurchase Class B Shares presented to it by shareholders
and dealers at the price determined in accordance with, and in the manner set
forth in, the Registration Statement. Such price shall reflect the subtraction
of the contingent deferred sales charge, if any, computed in accordance with and
in the manner set forth in the Registration Statement.
(g) Mitchell Hutchins shall provide ongoing shareholder services,
which include responding to shareholder inquiries, providing shareholders with
information on their investments in the Class B Shares and any other services
now or hereafter deemed to be appropriate subjects for the payments of "service
fees" under Rule 2830 of the Conduct Rules of the National Association of
Securities Dealers, Inc. ("NASD") (collectively, "service activities").
(h) Mitchell Hutchins shall have the right to use any list of
shareholders of the Fund or any other list of investors which it obtains in
connection with its provision of services under this Contract; provided,
however, that Mitchell Hutchins shall not sell or knowingly provide such list or
lists to any unaffiliated person.
3. AUTHORIZATION TO ENTER INTO EXCLUSIVE DEALER AGREEMENTS AND TO
DELEGATE DUTIES AS DISTRIBUTOR. With respect to the Class B Shares of any or all
Series, Mitchell Hutchins may enter into an exclusive dealer agreement with
2
<PAGE>
PaineWebber or any other registered and qualified dealer with respect to sales
of the Class B Shares or the provision of service activities. In a separate
contract or as part of any such exclusive dealer agreement, Mitchell Hutchins
also may delegate to PaineWebber or another registered and qualified dealer
("sub-distributor") any or all of its duties specified in this Contract,
provided that such separate contract or exclusive dealer agreement imposes on
the sub-distributor bound thereby all applicable duties and conditions to which
Mitchell Hutchins is subject under this Contract, and further provided that such
separate contract or exclusive dealer agreement meets all requirements of the
1940 Act and rules thereunder.
4. SERVICES NOT EXCLUSIVE. The services furnished by Mitchell Hutchins
hereunder are not to be deemed exclusive and Mitchell Hutchins shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired thereby. Nothing in this Contract shall limit or restrict the
right of any director, officer or employee of Mitchell Hutchins, who may also be
a trustee, officer or employee of the Fund, to engage in any other business or
to devote his or her time and attention in part to the management or other
aspects of any other business, whether of a similar or a dissimilar nature.
5. COMPENSATION.
(a) As compensation for its service activities under this contract
with respect to the Class B Shares, Mitchell Hutchins shall receive from the
Fund a service fee at the rate and under the terms and conditions of the Plan
adopted by the Fund with respect to the Class B Shares of the Series, as such
Plan is amended from time to time, and subject to any further limitations on
such fee as the Board may impose.
(b) As compensation for its activities under this contract with
respect to the distribution of the Class B Shares, Mitchell Hutchins shall
receive from the Fund a distribution fee at the rate and under the terms and
conditions of the Plan adopted by the Fund with respect to the Class B Shares of
the Series, as such Plan is amended from time to time, and subject to any
further limitations on such fee as the Board may impose.
(c) As compensation for its activities under this contract with
respect to the distribution of the Class B Shares, Mitchell Hutchins shall
receive all contingent deferred sales charges imposed on redemptions of Class B
Shares of each Series. Whether and at what rate a contingent deferred sales
charge will be imposed with respect to a redemption shall be determined in
accordance with, and in the manner set forth in, the Registration Statement.
(d) Mitchell Hutchins may reallow any or all of the distribution
fees, contingent deferred sales charges, or service fees which it is paid under
this Contract to such dealers as Mitchell Hutchins may from time to time
determine.
6. DUTIES OF THE FUND.
(a) The Fund reserves the right at any time to withdraw offering
Class B Shares of any or all Series by written notice to Mitchell Hutchins at
its principal office.
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(b) The Fund shall determine in its sole discretion whether
certificates shall be issued with respect to the Class B Shares. If the Fund has
determined that certificates shall be issued, the Fund will not cause
certificates representing Class B Shares to be issued unless so requested by
shareholders. If such request is transmitted by Mitchell Hutchins, the Fund will
cause certificates evidencing Class B Shares to be issued in such names and
denominations as Mitchell Hutchins shall from time to time direct.
(c) The Fund shall keep Mitchell Hutchins fully informed of its
affairs and shall make available to Mitchell Hutchins copies of all information,
financial statements, and other papers which Mitchell Hutchins may reasonably
request for use in connection with the distribution of Class B Shares,
including, without limitation, certified copies of any financial statements
prepared for the Fund by its independent public accountant and such reasonable
number of copies of the most current prospectus, statement of additional
information, and annual and interim reports of any Series as Mitchell Hutchins
may request, and the Fund shall cooperate fully in the efforts of Mitchell
Hutchins to sell and arrange for the sale of the Class B Shares of the Series
and in the performance of Mitchell Hutchins under this Contract.
(d) The Fund shall take, from time to time, all necessary action,
including payment of the related filing fee, as may be necessary to register the
Class B Shares under the 1933 Act to the end that there will be available for
sale such number of Class B Shares as Mitchell Hutchins may be expected to sell.
The Fund agrees to file, from time to time, such amendments, reports, and other
documents as may be necessary in order that there will be no untrue statement of
a material fact in the Registration Statement, nor any omission of a material
fact which omission would make the statements therein misleading.
(e) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of Class B Shares of each Series for sale
under the securities laws of such states or other jurisdictions as Mitchell
Hutchins and the Fund may approve, and, if necessary or appropriate in
connection therewith, to qualify and maintain the qualification of the Fund as a
broker or dealer in such jurisdictions; provided that the Fund shall not be
required to amend its Trust Instrument or By-Laws to comply with the laws of any
jurisdiction, to maintain an office in any jurisdiction, to change the terms of
the offering of the Class B Shares in any jurisdiction from the terms set forth
in its Registration Statement, to qualify as a foreign corporation in any
jurisdiction, or to consent to service of process in any jurisdiction other than
with respect to claims arising out of the offering of the Class B Shares.
Mitchell Hutchins shall furnish such information and other material relating to
its affairs and activities as may be required by the Fund in connection with
such qualifications.
7. EXPENSES OF THE FUND. The Fund shall bear all costs and expenses of
registering the Class B Shares with the Securities and Exchange Commission and
qualifying the Class B shares with state and other regulatory bodies, and shall
assume expenses related to communications with shareholders of each Series,
including (i) fees and disbursements of its counsel and independent public
accountant; (ii) the preparation, filing and printing of registration statements
and/or prospectuses or statements of additional information required under the
federal securities laws; (iii) the preparation and mailing of annual and interim
reports, prospectuses, statements of additional information and proxy materials
4
<PAGE>
to shareholders; and (iv) the qualifications of Class B Shares for sale and of
the Fund as a broker or dealer under the securities laws of such jurisdictions
as shall be selected by the Fund and Mitchell Hutchins pursuant to Paragraph
6(e) hereof, and the costs and expenses payable to each such jurisdiction for
continuing qualification therein.
8. EXPENSES OF MITCHELL HUTCHINS. Mitchell Hutchins shall bear all
costs and expenses of (i) preparing, printing and distributing any materials not
prepared by the Fund and other materials used by Mitchell Hutchins in connection
with the sale of Class B Shares under this Contract, including the additional
cost of printing copies of prospectuses, statements of additional information,
and annual and interim shareholder reports other than copies thereof required
for distribution to existing shareholders or for filing with any federal or
state securities authorities; (ii) any expenses of advertising incurred by
Mitchell Hutchins in connection with such offering; (iii) the expenses of
registration or qualification of Mitchell Hutchins as a broker or dealer under
federal or state laws and the expenses of continuing such registration or
qualification; and (iv) all compensation paid to Mitchell Hutchins' employees
and others for selling Class B Shares, and all expenses of Mitchell Hutchins,
its employees and others who engage in or support the sale of Class B Shares as
may be incurred in connection with their sales efforts.
9. INDEMNIFICATION.
(a) The Fund agrees to indemnify, defend and hold Mitchell Hutchins,
its officers and directors, and any person who controls Mitchell Hutchins within
the meaning of Section 15 of the 1933 Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which Mitchell Hutchins, its officers,
directors or any such controlling person may incur under the 1933 Act, or under
common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement or arising
out of or based upon any alleged omission to state a material fact required to
be stated in the Registration Statement or necessary to make the statements
therein not misleading, except insofar as such claims, demands, liabilities or
expenses arise out of or are based upon any such untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in conformity
with information furnished in writing by Mitchell Hutchins to the Fund for use
in the Registration Statement; provided, however, that this indemnity agreement
shall not inure to the benefit of any person who is also an officer or trustee
of the Fund or who controls the Fund within the meaning of Section 15 of the
1933 Act, unless a court of competent jurisdiction shall determine, or it shall
have been determined by controlling precedent, that such result would not be
against public policy as expressed in the 1933 Act; and further provided, that
in no event shall anything contained herein be so construed as to protect
Mitchell Hutchins against any liability to the Fund or to the shareholders of
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<PAGE>
any Series to which Mitchell Hutchins would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligations under this
Contract. The Fund shall not be liable to Mitchell Hutchins under this indemnity
agreement with respect to any claim made against Mitchell Hutchins or any person
indemnified unless Mitchell Hutchins or other such person shall have notified
the Fund in writing of the claim within a reasonable time after the summons or
other first written notification giving information of the nature of the claim
shall have been served upon Mitchell Hutchins or such other person (or after
Mitchell Hutchins or the person shall have received notice of service on any
designated agent). However, failure to notify the Fund of any claim shall not
relieve the Fund from any liability which it may have to Mitchell Hutchins or
any person against whom such action is brought otherwise than on account of this
indemnity agreement. The Fund shall be entitled to participate at its own
expense in the defense or, if it so elects, to assume the defense of any suit
brought to enforce any claims subject to this indemnity agreement. If the Fund
elects to assume the defense of any such claim, the defense shall be conducted
by counsel chosen by the Fund and satisfactory to indemnified defendants in the
suit whose approval shall not be unreasonably withheld. In the event that the
Fund elects to assume the defense of any suit and retain counsel, the
indemnified defendants shall bear the fees and expenses of any additional
counsel retained by them. If the Fund does not elect to assume the defense of a
suit, it will reimburse the indemnified defendants for the reasonable fees and
expenses of any counsel retained by the indemnified defendants. The Fund agrees
to notify Mitchell Hutchins promptly of the commencement of any litigation or
proceedings against it or any of its officers or trustees in connection with the
issuance or sale of any of its Class B Shares.
(b) Mitchell Hutchins agrees to indemnify, defend, and hold the
Fund, its officers and trustees and any person who controls the Fund within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending against such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Fund, its trustees or
officers, or any such controlling person may incur under the 1933 Act or under
common law or otherwise arising out of or based upon any alleged untrue
statement of a material fact contained in information furnished in writing by
Mitchell Hutchins to the Fund for use in the Registration Statement, arising out
of or based upon any alleged omission to state a material fact in connection
with such information required to be stated in the Registration Statement
necessary to make such information not misleading, or arising out of any
agreement between Mitchell Hutchins and any retail dealer, or arising out of any
supplemental sales literature or advertising used by Mitchell Hutchins in
connection with its duties under this Contract. Mitchell Hutchins shall be
entitled to participate, at its own expense, in the defense or, if it so elects,
to assume the defense of any suit brought to enforce the claim, but if Mitchell
Hutchins elects to assume the defense, the defense shall be conducted by counsel
chosen by Mitchell Hutchins and satisfactory to the indemnified defendants whose
approval shall not be unreasonably withheld. In the event that Mitchell Hutchins
elects to assume the defense of any suit and retain counsel, the defendants in
the suit shall bear the fees and expenses of any additional counsel retained by
them. If Mitchell Hutchins does not elect to assume the defense of any suit, it
will reimburse the indemnified defendants in the suit for the reasonable fees
and expenses of any counsel retained by them.
10. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS OF THE
FUND. The trustees of the Fund and the shareholders of any Series shall not be
liable for any obligations of the Fund or any Series under this Contract, and
Mitchell Hutchins agrees that, in asserting any rights or claims under this
Contract, it shall look only to the assets and property of the Fund or the
particular Series in settlement of such right or claims, and not to such
trustees or shareholders.
11. SERVICES PROVIDED TO THE FUND BY EMPLOYEES OF MITCHELL HUTCHINS.
Any person, even though also an officer, director, employee or agent of Mitchell
Hutchins, who may be or become an officer, trustee, employee or agent of the
6
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Fund, shall be deemed, when rendering services to the Fund or acting in any
business of the Fund, to be rendering such services to or acting solely for the
Fund and not as an officer, director, employee or agent or one under the control
or direction of Mitchell Hutchins even though paid by Mitchell Hutchins.
12. DURATION AND TERMINATION.
(a) This Contract shall become effective upon the date written
above, provided that, with respect to any Series, this Contract shall not take
effect unless such action has first been approved by vote of a majority of the
Board and by vote of a majority of those trustees of the Fund who are not
interested persons of the Fund, and have no direct or indirect financial
interest in the operation of the Plan relating to the Series or in any
agreements related thereto (all such trustees collectively being referred to
herein as the "Independent Trustees"), cast in person at a meeting called for
the purpose of voting on such action.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for one year from the above written date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of the Independent Trustees, cast in
person at a meeting called for the purpose of voting on such approval, and (ii)
by the Board or with respect to any given Series by vote of a majority of the
outstanding voting securities of the Class B Shares of such Series.
(c) Notwithstanding the foregoing, with respect to any Series, this
Contract may be terminated at any time, without the payment of any penalty, by
vote of the Board, by vote of a majority of the Independent Trustees or by vote
of a majority of the outstanding voting securities of the Class B Shares of such
Series on sixty days' written notice to Mitchell Hutchins or by Mitchell
Hutchins at any time, without the payment of any penalty, on sixty days' written
notice to the Fund or such Series. This Contract will automatically terminate in
the event of its assignment.
(d) Termination of this Contract with respect to any given Series
shall in no way affect the continued validity of this Contract or the
performance thereunder with respect to any other Series.
13. AMENDMENT OF THIS CONTRACT. No provision of this Contract may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
14. GOVERNING LAW. This Contract shall be construed in accordance with
the laws of the State of Delaware and the 1940 Act. To the extent that the
applicable laws of the State of Delaware conflict with the applicable provisions
of the l940 Act, the latter shall control.
15. NOTICE. Any notice required or permitted to be given by either
party to the other shall be deemed sufficient upon receipt in writing at the
other party's principal offices.
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<PAGE>
16. MISCELLANEOUS. The captions in this Contract are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors. As used in this Contract,
the terms "majority of the outstanding voting securities," "interested person"
and "assignment" shall have the same meaning as such terms have in the l940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be
executed by their officers designated as of the day and year first above
written.
ATTEST: MITCHELL HUTCHINS PORTFOLIOS
_____________________________ By: _____________________________
ATTEST: MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
_____________________________ By: _____________________________
8
MITCHELL HUTCHINS PORTFOLIOS
DISTRIBUTION CONTRACT
CLASS C SHARES
CONTRACT made as of _____________________, 1997 between MITCHELL
HUTCHINS PORTFOLIOS, a Delaware business trust ("Fund"), and MITCHELL HUTCHINS
ASSET MANAGEMENT INC., a Delaware corporation ("Mitchell Hutchins").
WHEREAS the Fund is registered under the Investment Company Act of
l940, as amended ("l940 Act"), as an open-end management investment company and
currently has three distinct series of shares of beneficial interest ("Series"),
which correspond to distinct portfolios and have been designated as the Mitchell
Hutchins Growth Portfolio, Mitchell Hutchins Moderate Portfolio and Mitchell
Hutchins Conservative Portfolio; and
WHEREAS the Fund's board of trustees ("Board") has established an
unlimited number of shares of beneficial interest of the above-referenced Series
as Class C shares ("Class C Shares"); and
WHEREAS the Fund has adopted a Plan of Distribution pursuant to Rule
12b-1 under the 1940 Act for its Class C Shares ("Plan") and desires to retain
Mitchell Hutchins as principal distributor in connection with the offering and
sale of the Class C Shares of the above-referenced Series and of such other
Series as may hereafter be designated by the Board and have Class C Shares
established; and
WHEREAS Mitchell Hutchins is willing to act as principal distributor of
the Class C Shares of each such Series on the terms and conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Fund hereby appoints Mitchell Hutchins as its
exclusive agent to be the principal distributor to sell and to arrange for the
sale of the Class C Shares on the terms and for the period set forth in this
Contract. Mitchell Hutchins hereby accepts such appointment and agrees to act
hereunder. It is understood, however, that this appointment does not preclude
sales of the Class C Shares directly through the Fund's transfer agent in the
manner set forth in the Registration Statement. As used in this Contract, the
term "Registration Statement" shall mean the currently effective registration
statement of the Fund, and any supplements thereto, under the Securities Act of
1933, as amended ("1933 Act"), and the 1940 Act.
2. SERVICES AND DUTIES OF MITCHELL HUTCHINS.
(a) Mitchell Hutchins agrees to sell Class C Shares on a best
efforts basis from time to time during the term of this Contract as agent for
the Fund and upon the terms described in the Registration Statement.
<PAGE>
(b) Upon the later of the date of this Contract or the initial
offering of the Class C Shares to the public by a Series, Mitchell Hutchins will
hold itself available to receive purchase orders, satisfactory to Mitchell
Hutchins, for Class C Shares of that Series and will accept such orders on
behalf of the Fund as of the time of receipt of such orders and promptly
transmit such orders as are accepted to the Fund's transfer agent. Purchase
orders shall be deemed effective at the time and in the manner set forth in the
Registration Statement.
(c) Mitchell Hutchins in its discretion may enter into agreements to
sell Class C Shares to such registered and qualified retail dealers, including
but not limited to PaineWebber Incorporated ("PaineWebber"), as it may select.
In making agreements with such dealers, Mitchell Hutchins shall act only as
principal and not as agent for the Fund.
(d) The offering price of the Class C Shares of each Series shall be
the net asset value per Share as next determined by the Fund following receipt
of an order at Mitchell Hutchins' principal office. The Fund shall promptly
furnish Mitchell Hutchins with a statement of each computation of net asset
value.
(e) Mitchell Hutchins shall not be obligated to sell any certain
number of Class C Shares.
(f) To facilitate redemption of Class C Shares by shareholders
directly or through dealers, Mitchell Hutchins is authorized but not required on
behalf of the Fund to repurchase Class C Shares presented to it by shareholders
and dealers at the price determined in accordance with, and in the manner set
forth in, the Registration Statement. Such price shall reflect the subtraction
of the contingent deferred sales charge, if any, computed in accordance with and
in the manner set forth in the Registration Statement.
(g) Mitchell Hutchins shall provide ongoing shareholder services,
which include responding to shareholder inquiries, providing shareholders with
information on their investments in the Class C Shares and any other services
now or hereafter deemed to be appropriate subjects for the payments of "service
fees" under Rule 2830 of the Conduct Rules of the National Association of
Securities Dealers, Inc. ("NASD") (collectively, "service activities").
(h) Mitchell Hutchins shall have the right to use any list of
shareholders of the Fund or any other list of investors which it obtains in
connection with its provision of services under this Contract; provided,
however, that Mitchell Hutchins shall not sell or knowingly provide such list or
lists to any unaffiliated person.
3. AUTHORIZATION TO ENTER INTO EXCLUSIVE DEALER AGREEMENTS AND TO
DELEGATE DUTIES AS DISTRIBUTOR. With respect to the Class C Shares of any or all
Series, Mitchell Hutchins may enter into an exclusive dealer agreement with
PaineWebber or any other registered and qualified dealer with respect to sales
of the Class C Shares or the provision of service activities. In a separate
contract or as part of any such exclusive dealer agreement, Mitchell Hutchins
also may delegate to PaineWebber or another registered and qualified dealer
("sub-distributor") any or all of its duties specified in this Contract,
provided that such separate contract or exclusive dealer agreement imposes on
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<PAGE>
the sub-distributor bound thereby all applicable duties and conditions to which
Mitchell Hutchins is subject under this Contract, and further provided that such
separate contract or exclusive dealer agreement meets all requirements of the
1940 Act and rules thereunder.
4. SERVICES NOT EXCLUSIVE. The services furnished by Mitchell Hutchins
hereunder are not to be deemed exclusive and Mitchell Hutchins shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired thereby. Nothing in this Contract shall limit or restrict the
right of any director, officer or employee of Mitchell Hutchins, who may also be
a trustee, officer or employee of the Fund, to engage in any other business or
to devote his or her time and attention in part to the management or other
aspects of any other business, whether of a similar or a dissimilar nature.
5. COMPENSATION.
(a) As compensation for its service activities under this contract
with respect to the Class C Shares, Mitchell Hutchins shall receive from the
Fund a service fee at the rate and under the terms and conditions of the Plan
adopted by the Fund with respect to the Class C Shares of the Series, as such
Plan is amended from time to time, and subject to any further limitations on
such fee as the Board may impose.
(b) As compensation for its activities under this contract with
respect to the distribution of the Class C Shares, Mitchell Hutchins shall
receive from the Fund a distribution fee at the rate and under the terms and
conditions of the Plan adopted by the Fund with respect to the Class C Shares of
the Series, as such Plan is amended from time to time, and subject to any
further limitations on such fee as the Board may impose.
(c) As compensation for its activities under this contract with
respect to the distribution of the Class C Shares, Mitchell Hutchins shall
receive all contingent deferred sales charges imposed on redemptions of Class C
Shares of each Series. Whether and at what rate a contingent deferred sales
charge will be imposed with respect to a redemption shall be determined in
accordance with, and in the manner set forth in, the Registration Statement.
(d) Mitchell Hutchins may reallow any or all of the distribution
fees, contingent deferred sales charges, or service fees which it is paid under
this Contract to such dealers as Mitchell Hutchins may from time to time
determine.
6. DUTIES OF THE FUND.
(a) The Fund reserves the right at any time to withdraw offering
Class C Shares of any or all Series by written notice to Mitchell Hutchins at
its principal office.
(b) The Fund shall determine in its sole discretion whether
certificates shall be issued with respect to the Class C Shares. If the Fund has
determined that certificates shall be issued, the Fund will not cause
certificates representing Class C Shares to be issued unless so requested by
shareholders. If such request is transmitted by Mitchell Hutchins, the Fund will
cause certificates evidencing Class C Shares to be issued in such names and
denominations as Mitchell Hutchins shall from time to time direct.
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<PAGE>
(c) The Fund shall keep Mitchell Hutchins fully informed of its
affairs and shall make available to Mitchell Hutchins copies of all information,
financial statements, and other papers which Mitchell Hutchins may reasonably
request for use in connection with the distribution of Class C Shares,
including, without limitation, certified copies of any financial statements
prepared for the Fund by its independent public accountant and such reasonable
number of copies of the most current prospectus, statement of additional
information, and annual and interim reports of any Series as Mitchell Hutchins
may request, and the Fund shall cooperate fully in the efforts of Mitchell
Hutchins to sell and arrange for the sale of the Class C Shares of the Series
and in the performance of Mitchell Hutchins under this Contract.
(d) The Fund shall take, from time to time, all necessary action,
including payment of the related filing fee, as may be necessary to register the
Class C Shares under the 1933 Act to the end that there will be available for
sale such number of Class C Shares as Mitchell Hutchins may be expected to sell.
The Fund agrees to file, from time to time, such amendments, reports, and other
documents as may be necessary in order that there will be no untrue statement of
a material fact in the Registration Statement, nor any omission of a material
fact which omission would make the statements therein misleading.
(e) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of Class C Shares of each Series for sale
under the securities laws of such states or other jurisdictions as Mitchell
Hutchins and the Fund may approve, and, if necessary or appropriate in
connection therewith, to qualify and maintain the qualification of the Fund as a
broker or dealer in such jurisdictions; provided that the Fund shall not be
required to amend its Trust Instrument or By-Laws to comply with the laws of any
jurisdiction, to maintain an office in any jurisdiction, to change the terms of
the offering of the Class C Shares in any jurisdiction from the terms set forth
in its Registration Statement, to qualify as a foreign corporation in any
jurisdiction, or to consent to service of process in any jurisdiction other than
with respect to claims arising out of the offering of the Class C Shares.
Mitchell Hutchins shall furnish such information and other material relating to
its affairs and activities as may be required by the Fund in connection with
such qualifications.
7. EXPENSES OF THE FUND. The Fund shall bear all costs and expenses of
registering the Class C Shares with the Securities and Exchange Commission and
qualifying the Class C shares with state and other regulatory bodies, and shall
assume expenses related to communications with shareholders of each Series,
including (i) fees and disbursements of its counsel and independent public
accountant; (ii) the preparation, filing and printing of registration statements
and/or prospectuses or statements of additional information required under the
federal securities laws; (iii) the preparation and mailing of annual and interim
reports, prospectuses, statements of additional information and proxy materials
to shareholders; and (iv) the qualifications of Class C Shares for sale and of
the Fund as a broker or dealer under the securities laws of such jurisdictions
as shall be selected by the Fund and Mitchell Hutchins pursuant to Paragraph
6(e) hereof, and the costs and expenses payable to each such jurisdiction for
continuing qualification therein.
8. EXPENSES OF MITCHELL HUTCHINS. Mitchell Hutchins shall bear all
costs and expenses of (i) preparing, printing and distributing any materials not
prepared by the Fund and other materials used by Mitchell Hutchins in connection
4
<PAGE>
with the sale of Class C Shares under this Contract, including the additional
cost of printing copies of prospectuses, statements of additional information,
and annual and interim shareholder reports other than copies thereof required
for distribution to existing shareholders or for filing with any federal or
state securities authorities; (ii) any expenses of advertising incurred by
Mitchell Hutchins in connection with such offering; (iii) the expenses of
registration or qualification of Mitchell Hutchins as a broker or dealer under
federal or state laws and the expenses of continuing such registration or
qualification; and (iv) all compensation paid to Mitchell Hutchins' employees
and others for selling Class C Shares, and all expenses of Mitchell Hutchins,
its employees and others who engage in or support the sale of Class C Shares as
may be incurred in connection with their sales efforts.
9. INDEMNIFICATION.
(a) The Fund agrees to indemnify, defend and hold Mitchell Hutchins,
its officers and directors, and any person who controls Mitchell Hutchins within
the meaning of Section 15 of the 1933 Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which Mitchell Hutchins, its officers,
directors or any such controlling person may incur under the 1933 Act, or under
common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement or arising
out of or based upon any alleged omission to state a material fact required to
be stated in the Registration Statement or necessary to make the statements
therein not misleading, except insofar as such claims, demands, liabilities or
expenses arise out of or are based upon any such untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in conformity
with information furnished in writing by Mitchell Hutchins to the Fund for use
in the Registration Statement; provided, however, that this indemnity agreement
shall not inure to the benefit of any person who is also an officer or trustee
of the Fund or who controls the Fund within the meaning of Section 15 of the
1933 Act, unless a court of competent jurisdiction shall determine, or it shall
have been determined by controlling precedent, that such result would not be
against public policy as expressed in the 1933 Act; and further provided, that
in no event shall anything contained herein be so construed as to protect
Mitchell Hutchins against any liability to the Fund or to the shareholders of
any Series to which Mitchell Hutchins would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligations under this
Contract. The Fund shall not be liable to Mitchell Hutchins under this indemnity
agreement with respect to any claim made against Mitchell Hutchins or any person
indemnified unless Mitchell Hutchins or other such person shall have notified
the Fund in writing of the claim within a reasonable time after the summons or
other first written notification giving information of the nature of the claim
shall have been served upon Mitchell Hutchins or such other person (or after
Mitchell Hutchins or the person shall have received notice of service on any
designated agent). However, failure to notify the Fund of any claim shall not
relieve the Fund from any liability which it may have to Mitchell Hutchins or
any person against whom such action is brought otherwise than on account of this
indemnity agreement. The Fund shall be entitled to participate at its own
5
<PAGE>
expense in the defense or, if it so elects, to assume the defense of any suit
brought to enforce any claims subject to this indemnity agreement. If the Fund
elects to assume the defense of any such claim, the defense shall be conducted
by counsel chosen by the Fund and satisfactory to indemnified defendants in the
suit whose approval shall not be unreasonably withheld. In the event that the
Fund elects to assume the defense of any suit and retain counsel, the
indemnified defendants shall bear the fees and expenses of any additional
counsel retained by them. If the Fund does not elect to assume the defense of a
suit, it will reimburse the indemnified defendants for the reasonable fees and
expenses of any counsel retained by the indemnified defendants. The Fund agrees
to notify Mitchell Hutchins promptly of the commencement of any litigation or
proceedings against it or any of its officers or trustees in connection with the
issuance or sale of any of its Class C Shares.
(b) Mitchell Hutchins agrees to indemnify, defend, and hold the
Fund, its officers and trustees and any person who controls the Fund within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending against such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Fund, its trustees or
officers, or any such controlling person may incur under the 1933 Act or under
common law or otherwise arising out of or based upon any alleged untrue
statement of a material fact contained in information furnished in writing by
Mitchell Hutchins to the Fund for use in the Registration Statement, arising out
of or based upon any alleged omission to state a material fact in connection
with such information required to be stated in the Registration Statement
necessary to make such information not misleading, or arising out of any
agreement between Mitchell Hutchins and any retail dealer, or arising out of any
supplemental sales literature or advertising used by Mitchell Hutchins in
connection with its duties under this Contract. Mitchell Hutchins shall be
entitled to participate, at its own expense, in the defense or, if it so elects,
to assume the defense of any suit brought to enforce the claim, but if Mitchell
Hutchins elects to assume the defense, the defense shall be conducted by counsel
chosen by Mitchell Hutchins and satisfactory to the indemnified defendants whose
approval shall not be unreasonably withheld. In the event that Mitchell Hutchins
elects to assume the defense of any suit and retain counsel, the defendants in
the suit shall bear the fees and expenses of any additional counsel retained by
them. If Mitchell Hutchins does not elect to assume the defense of any suit, it
will reimburse the indemnified defendants in the suit for the reasonable fees
and expenses of any counsel retained by them.
10. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS OF THE
FUND. The trustees of the Fund and the shareholders of any Series shall not be
liable for any obligations of the Fund or any Series under this Contract, and
Mitchell Hutchins agrees that, in asserting any rights or claims under this
Contract, it shall look only to the assets and property of the Fund or the
particular Series in settlement of such right or claims, and not to such
trustees or shareholders.
11. SERVICES PROVIDED TO THE FUND BY EMPLOYEES OF MITCHELL HUTCHINS.
Any person, even though also an officer, director, employee or agent of Mitchell
Hutchins, who may be or become an officer, trustee, employee or agent of the
Fund, shall be deemed, when rendering services to the Fund or acting in any
business of the Fund, to be rendering such services to or acting solely for the
Fund and not as an officer, director, employee or agent or one under the control
or direction of Mitchell Hutchins even though paid by Mitchell Hutchins.
7
<PAGE>
12. DURATION AND TERMINATION.
(a) This Contract shall become effective upon the date written
above, provided that, with respect to any Series, this Contract shall not take
effect unless such action has first been approved by vote of a majority of the
Board and by vote of a majority of those trustees of the Fund who are not
interested persons of the Fund, and have no direct or indirect financial
interest in the operation of the Plan relating to the Series or in any
agreements related thereto (all such trustees collectively being referred to
herein as the "Independent Trustees"), cast in person at a meeting called for
the purpose of voting on such action.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for one year from the above written date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of the Independent Trustees, cast in
person at a meeting called for the purpose of voting on such approval, and (ii)
by the Board or with respect to any given Series by vote of a majority of the
outstanding voting securities of the Class C Shares of such Series.
(c) Notwithstanding the foregoing, with respect to any Series, this
Contract may be terminated at any time, without the payment of any penalty, by
vote of the Board, by vote of a majority of the Independent Trustees or by vote
of a majority of the outstanding voting securities of the Class C Shares of such
Series on sixty days' written notice to Mitchell Hutchins or by Mitchell
Hutchins at any time, without the payment of any penalty, on sixty days' written
notice to the Fund or such Series. This Contract will automatically terminate in
the event of its assignment.
(d) Termination of this Contract with respect to any given Series
shall in no way affect the continued validity of this Contract or the
performance thereunder with respect to any other Series.
13. AMENDMENT OF THIS CONTRACT. No provision of this Contract may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
14. GOVERNING LAW. This Contract shall be construed in accordance with
the laws of the State of Delaware and the 1940 Act. To the extent that the
applicable laws of the State of Delaware conflict with the applicable provisions
of the l940 Act, the latter shall control.
15. NOTICE. Any notice required or permitted to be given by either
party to the other shall be deemed sufficient upon receipt in writing at the
other party's principal offices.
16. MISCELLANEOUS. The captions in this Contract are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to the benefit of
7
<PAGE>
the parties hereto and their respective successors. As used in this Contract,
the terms "majority of the outstanding voting securities," "interested person"
and "assignment" shall have the same meaning as such terms have in the l940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be
executed by their officers designated as of the day and year first above
written.
ATTEST: MITCHELL HUTCHINS PORTFOLIOS
By:
- ---------------------------- ----------------------------------
ATTEST: MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
By:
- ---------------------------- ----------------------------------
8
MITCHELL HUTCHINS PORTFOLIOS
DISTRIBUTION CONTRACT
CLASS Y SHARES
CONTRACT made as of ____________________, 1997 between MITCHELL
HUTCHINS PORTFOLIOS, a Delaware business trust ("Fund"), and MITCHELL HUTCHINS
ASSET MANAGEMENT INC., a Delaware corporation ("Mitchell Hutchins").
WHEREAS the Fund is registered under the Investment Company Act of
l940, as amended ("l940 Act"), as an open-end management investment company and
currently has three distinct series of shares of beneficial interest ("Series"),
which correspond to distinct portfolios and have been designated as Mitchell
Hutchins Growth Portfolio, Mitchell Hutchins Moderate Portfolio and Mitchell
Hutchins Conservative Portfolio; and
WHEREAS the Fund's board of trustees ("Board") has established an
unlimited number of shares of beneficial interest of the above-referenced Series
as Class Y shares ("Class Y Shares"); and
WHEREAS the Fund desires to retain Mitchell Hutchins as principal
distributor in connection with the offering and sale of the Class Y Shares of
the above-referenced Series and of such other Series as may hereafter be
designated by the Board and have Class Y Shares established; and
WHEREAS Mitchell Hutchins is willing to act as principal distributor of
the Class Y Shares of each such Series on the terms and conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Fund hereby appoints Mitchell Hutchins as its
exclusive agent to be the principal distributor to sell and to arrange for the
sale of the Class Y Shares on the terms and for the period set forth in this
Contract. Mitchell Hutchins hereby accepts such appointment and agrees to act
hereunder. It is understood, however, that this appointment does not preclude
sales of the Class Y Shares directly through the Fund's transfer agent in the
manner set forth in the Registration Statement. As used in this Contract, the
term "Registration Statement" shall mean the currently effective registration
statement of the Fund, and any supplements thereto, under the Securities Act of
1933, as amended ("1933 Act"), and the 1940 Act.
2. SERVICES AND DUTIES OF MITCHELL HUTCHINS.
(a) Mitchell Hutchins agrees to sell Class Y Shares on a best
efforts basis from time to time during the term of this Contract as agent for
the Fund and upon the terms described in the Registration Statement.
<PAGE>
(b) Upon the later of the date of this Contract or the initial
offering of the Class Y Shares by a Series, Mitchell Hutchins will hold itself
available to receive purchase orders, satisfactory to Mitchell Hutchins, for
Class Y Shares of that Series and will accept such orders on behalf of the Fund
as of the time of receipt of such orders and promptly transmit such orders as
are accepted to the Fund's transfer agent. Purchase orders shall be deemed
effective at the time and in the manner set forth in the Registration Statement.
(c) Mitchell Hutchins in its discretion may enter into agreements to
sell Class Y Shares to such registered and qualified retail dealers, including
but not limited to PaineWebber Incorporated ("PaineWebber"), as it may select.
In making agreements with such dealers, Mitchell Hutchins shall act only as
principal and not as agent for the Fund.
(d) The offering price of the Class Y Shares of each Series shall be
the net asset value per Share as next determined by the Fund following receipt
of an order at Mitchell Hutchins' principal office. The Fund shall promptly
furnish Mitchell Hutchins with a statement of each computation of net asset
value.
(e) Mitchell Hutchins shall not be obligated to sell any certain
number of Class Y Shares.
(f) To facilitate redemption of Class Y Shares by shareholders
directly or through dealers, Mitchell Hutchins is authorized but not required on
behalf of the Fund to repurchase Class Y Shares presented to it by shareholders
and dealers at the price determined in accordance with, and in the manner set
forth in, the Registration Statement.
(g) Mitchell Hutchins shall have the right to use any list of
shareholders of the Fund or any other list of investors which it obtains in
connection with its provision of services under this Contract; provided,
however, that Mitchell Hutchins shall not sell or knowingly provide such list or
lists to any unaffiliated person.
3. AUTHORIZATION TO ENTER INTO EXCLUSIVE DEALER CONTRACTS AND TO
DELEGATE DUTIES AS DISTRIBUTOR. With respect to the Class Y Shares of any or all
Series, Mitchell Hutchins may enter into an exclusive dealer agreement with
PaineWebber or any other registered and qualified dealer with respect to sales
of the Class Y Shares. In a separate contract or as part of any such exclusive
dealer agreement, Mitchell Hutchins also may delegate to PaineWebber or another
registered and qualified dealer ("sub-distributor") any or all of its duties
specified in this Contract, provided that such separate contract or exclusive
dealer agreement imposes on the sub-distributor bound thereby all applicable
duties and conditions to which Mitchell Hutchins is subject under this Contract,
and further provided that such separate contract or exclusive dealer agreement
meets all requirements of the 1940 Act and rules thereunder.
3
<PAGE>
4. SERVICES NOT EXCLUSIVE. The services furnished by Mitchell Hutchins
hereunder are not to be deemed exclusive and Mitchell Hutchins shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired thereby. Nothing in this Contract shall limit or restrict the
right of any director, officer or employee of Mitchell Hutchins, who may also be
a trustee, officer or employee of the Fund, to engage in any other business or
to devote his or her time and attention in part to the management or other
aspects of any other business, whether of a similar or a dissimilar nature.
5. COMPENSATION AND REIMBURSEMENT OF DISTRIBUTION EXPENSES. The Fund
shall have no obligation to compensate or reimburse Mitchell Hutchins for any
services performed by it hereunder.
6. DUTIES OF THE FUND.
(a) The Fund reserves the right at any time to withdraw offering
Class Y Shares of any or all Series by written notice to Mitchell Hutchins at
its principal office.
(b) The Fund shall determine in its sole discretion whether
certificates shall be issued with respect to the Class Y Shares. If the Fund has
determined that certificates shall be issued, the Fund will not cause
certificates representing Class Y Shares to be issued unless so requested by
shareholders. If such request is transmitted by Mitchell Hutchins, the Fund will
cause certificates evidencing Class Y Shares to be issued in such names and
denominations as Mitchell Hutchins shall from time to time direct.
(c) The Fund shall keep Mitchell Hutchins fully informed of its
affairs and shall make available to Mitchell Hutchins copies of all information,
financial statements, and other papers which Mitchell Hutchins may reasonably
request for use in connection with the distribution of Class Y Shares,
including, without limitation, certified copies of any financial statements
prepared for the Fund by its independent public accountant and such reasonable
number of copies of the most current prospectus, statement of additional
information, and annual and interim reports of any Series as Mitchell Hutchins
may request, and the Fund shall cooperate fully in the efforts of Mitchell
Hutchins to sell and arrange for the sale of the Class Y Shares of the Series
and in the performance of Mitchell Hutchins under this Contract.
(d) The Fund shall take, from time to time, all necessary action,
including payment of the related filing fee, as may be necessary to register the
Class Y Shares under the 1933 Act to the end that there will be available for
sale such number of Class Y Shares as Mitchell Hutchins may be expected to sell.
The Fund agrees to file, from time to time, such amendments, reports, and other
documents as may be necessary in order that there will be no untrue statement of
a material fact in the Registration Statement, nor any omission of a material
fact which omission would make the statements therein misleading.
(e) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of Class Y Shares of each Series for sale
under the securities laws of such states or other jurisdictions as Mitchell
Hutchins and the Fund may approve, and, if necessary or appropriate in
connection therewith, to qualify and maintain the qualification of the Fund as a
3
<PAGE>
broker or dealer in such jurisdictions; provided that the Fund shall not be
required to amend its Trust Instrument or By-Laws to comply with the laws of any
jurisdiction, to maintain an office in any jurisdiction, to change the terms of
the offering of the Class Y Shares in any jurisdiction from the terms set forth
in its Registration Statement, to qualify as a foreign corporation in any
jurisdiction, or to consent to service of process in any jurisdiction other than
with respect to claims arising out of the offering of the Class Y Shares.
Mitchell Hutchins shall furnish such information and other material relating to
its affairs and activities as may be required by the Fund in connection with
such qualifications.
7. EXPENSES OF THE FUND. The Fund shall bear all costs and expenses of
registering the Class Y Shares with the Securities and Exchange Commission and
qualifying the Class Y shares with state and other regulatory bodies, and shall
assume expenses related to communications with shareholders of each Series,
including (i) fees and disbursements of its counsel and independent public
accountant; (ii) the preparation, filing and printing of registration statements
and/or prospectuses or statements of additional information required under the
federal securities laws; (iii) the preparation and mailing of annual and interim
reports, prospectuses, statements of additional information and proxy materials
to shareholders; and (iv) the qualifications of Class Y Shares for sale and of
the Fund as a broker or dealer under the securities laws of such jurisdictions
as shall be selected by the Fund and Mitchell Hutchins pursuant to Paragraph
6(e) hereof, and the costs and expenses payable to each such jurisdiction for
continuing qualification therein.
8. EXPENSES OF MITCHELL HUTCHINS. Mitchell Hutchins shall bear all
costs and expenses of (i) preparing, printing and distributing any materials not
prepared by the Fund and other materials used by Mitchell Hutchins in connection
with the sale of Class Y Shares under this Contract, including the additional
cost of printing copies of prospectuses, statements of additional information,
and annual and interim shareholder reports other than copies thereof required
for distribution to existing shareholders or for filing with any federal or
state securities authorities; (ii) any expenses of advertising incurred by
Mitchell Hutchins in connection with such offering; (iii) the expenses of
registration or qualification of Mitchell Hutchins as a broker or dealer under
federal or state laws and the expenses of continuing such registration or
qualification; and (iv) all compensation paid to Mitchell Hutchins' employees
and others for selling Class Y Shares, and all expenses of Mitchell Hutchins,
its employees and others who engage in or support the sale of Class Y Shares as
may be incurred in connection with their sales efforts.
9. INDEMNIFICATION.
(a) The Fund agrees to indemnify, defend and hold Mitchell Hutchins,
its officers and directors, and any person who controls Mitchell Hutchins within
the meaning of Section 15 of the 1933 Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which Mitchell Hutchins, its officers,
directors or any such controlling person may incur under the 1933 Act, or under
common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement or arising
out of or based upon any alleged omission to state a material fact required to
be stated in the Registration Statement or necessary to make the statements
5
<PAGE>
therein not misleading, except insofar as such claims, demands, liabilities or
expenses arise out of or are based upon any such untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in conformity
with information furnished in writing by Mitchell Hutchins to the Fund for use
in the Registration Statement; provided, however, that this indemnity agreement
shall not inure to the benefit of any person who is also an officer or trustee
of the Fund or who controls the Fund within the meaning of Section 15 of the
1933 Act, unless a court of competent jurisdiction shall determine, or it shall
have been determined by controlling precedent, that such result would not be
against public policy as expressed in the 1933 Act; and further provided, that
in no event shall anything contained herein be so construed as to protect
Mitchell Hutchins against any liability to the Fund or to the shareholders of
any Series to which Mitchell Hutchins would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligations under this
Contract. The Fund shall not be liable to Mitchell Hutchins under this indemnity
agreement with respect to any claim made against Mitchell Hutchins or any person
indemnified unless Mitchell Hutchins or other such person shall have notified
the Fund in writing of the claim within a reasonable time after the summons or
other first written notification giving information of the nature of the claim
shall have been served upon Mitchell Hutchins or such other person (or after
Mitchell Hutchins or the person shall have received notice of service on any
designated agent). However, failure to notify the Fund of any claim shall not
relieve the Fund from any liability which it may have to Mitchell Hutchins or
any person against whom such action is brought otherwise than on account of this
indemnity agreement. The Fund shall be entitled to participate at its own
expense in the defense or, if it so elects, to assume the defense of any suit
brought to enforce any claims subject to this indemnity agreement. If the Fund
elects to assume the defense of any such claim, the defense shall be conducted
by counsel chosen by the Fund and satisfactory to indemnified defendants in the
suit whose approval shall not be unreasonably withheld. In the event that the
Fund elects to assume the defense of any suit and retain counsel, the
indemnified defendants shall bear the fees and expenses of any additional
counsel retained by them. If the Fund does not elect to assume the defense of a
suit, it will reimburse the indemnified defendants for the reasonable fees and
expenses of any counsel retained by the indemnified defendants. The Fund agrees
to notify Mitchell Hutchins promptly of the commencement of any litigation or
proceedings against it or any of its officers or trustees in connection with the
issuance or sale of any of its Class Y Shares.
(b) Mitchell Hutchins agrees to indemnify, defend, and hold the
Fund, its officers and trustees, and any person who controls the Fund within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending against such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Fund, its trustees or
officers, or any such controlling person may incur under the 1933 Act or under
common law or otherwise arising out of or based upon any alleged untrue
statement of a material fact contained in information furnished in writing by
6
<PAGE>
Mitchell Hutchins to the Fund for use in the Registration Statement, arising out
of or based upon any alleged omission to state a material fact in connection
with such information required to be stated in the Registration Statement
necessary to make such information not misleading, or arising out of any
agreement between Mitchell Hutchins and any retail dealer, or arising out of any
supplemental sales literature or advertising used by Mitchell Hutchins in
connection with its duties under this Contract. Mitchell Hutchins shall be
entitled to participate, at its own expense, in the defense or, if it so elects,
to assume the defense of any suit brought to enforce the claim, but if Mitchell
Hutchins elects to assume the defense, the defense shall be conducted by counsel
chosen by Mitchell Hutchins and satisfactory to the indemnified defendants whose
approval shall not be unreasonably withheld. In the event that Mitchell Hutchins
elects to assume the defense of any suit and retain counsel, the defendants in
the suit shall bear the fees and expenses of any additional counsel retained by
them. If Mitchell Hutchins does not elect to assume the defense of any suit, it
will reimburse the indemnified defendants in the suit for the reasonable fees
and expenses of any counsel retained by them.
10. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS OF THE
FUND. The trustees of the Fund and the shareholders of any Series shall not be
liable for any obligations of the Fund or any Series under this Contract, and
Mitchell Hutchins agrees that, in asserting any rights or claims under this
Contract, it shall look only to the assets and property of the Fund or the
particular Series in settlement of such right or claims, and not to such
trustees or shareholders.
11. SERVICES PROVIDED TO THE FUND BY EMPLOYEES OF MITCHELL HUTCHINS.
Any person, even though also an officer, director, employee or agent of Mitchell
Hutchins, who may be or become an officer, trustee, employee or agent of the
Fund, shall be deemed, when rendering services to the Fund or acting in any
business of the Fund, to be rendering such services to or acting solely for the
Fund and not as an officer, director, employee or agent or one under the control
or direction of Mitchell Hutchins even though paid by Mitchell Hutchins.
12. DURATION AND TERMINATION.
(a) This Contract shall become effective upon the date written
above, provided that, with respect to any Series, this Contract shall not take
effect unless such action has first been approved by vote of a majority of the
Board and by vote of a majority of those trustees of the Fund who are not
interested persons of the Fund, and have no direct or indirect financial
interest in this Contract or in any agreements related thereto (all such
Trustees collectively being referred to herein as the "Independent Trustees"),
cast in person at a meeting called for the purpose of voting on such action.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for one year from the above written date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of the Independent Trustees, cast in
person at a meeting called for the purpose of voting on such approval, and (ii)
by the Board or with respect to any given Series by vote of a majority of the
outstanding voting securities of the Class Y Shares of such Series.
(c) Notwithstanding the foregoing, with respect to any Series, this
Contract may be terminated at any time, without the payment of any penalty, by
vote of the Board, by vote of a majority of the Independent Trustees or by vote
of a majority of the outstanding voting securities of the Class Y Shares of such
Series on sixty days' written notice to Mitchell Hutchins or by Mitchell
6
<PAGE>
Hutchins at any time, without the payment of any penalty, on sixty days' written
notice to the Fund or such Series. This Contract will automatically terminate in
the event of its assignment.
(d) Termination of this Contract with respect to any given Series
shall in no way affect the continued validity of this Contract or the
performance thereunder with respect to any other Series.
13. AMENDMENT OF THIS CONTRACT. No provision of this Contract may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
14. GOVERNING LAW. This Contract shall be construed in accordance with
the laws of the State of Delaware and the 1940 Act. To the extent that the
applicable laws of the State of Delaware conflict with the applicable provisions
of the l940 Act, the latter shall control.
15. NOTICE. Any notice required or permitted to be given by either
party to the other shall be deemed sufficient upon receipt in writing at the
other party's principal offices.
16. MISCELLANEOUS. The captions in this Contract are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors. As used in this Contract,
the terms "majority of the outstanding voting securities," "interested person"
and "assignment" shall have the same meaning as such terms have in the l940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be
executed by their officers designated as of the day and year first above
written.
ATTEST: MITCHELL HUTCHINS PORTFOLIOS
By:
- ---------------------------- -----------------------------------
ATTEST: MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
By:
- ---------------------------- ----------------------------------
EXCLUSIVE DEALER AGREEMENT
CLASS A SHARES OF MITCHELL HUTCHINS PORTFOLIOS
AGREEMENT made as of _____________________, 1997, between Mitchell
Hutchins Asset Management Inc. ("Mitchell Hutchins"), a Delaware corporation,
and PaineWebber Incorporated ("PaineWebber"), a Delaware corporation.
WHEREAS Mitchell Hutchins Portfolios ("Fund") is a Delaware business trust
registered under the Investment Company Act of 1940, as amended ("1940 Act"), as
an open-end management investment company; and
WHEREAS the Fund currently has three distinct series of shares of
beneficial interest ("Series"), which correspond to distinct portfolios and have
been designated as the Mitchell Hutchins Growth Portfolio, Mitchell Hutchins
Moderate Portfolio and Mitchell Hutchins Conservative Portfolio; and
WHEREAS the Fund's board of trustees ("Board") has established an
unlimited number of shares of beneficial interest of the above-referenced Series
as Class A shares ("Class A Shares") and has adopted a Plan of Distribution
pursuant to Rule 12b-1 under the 1940 Act ("Plan") with respect to the Class A
Shares of the above-referenced Series and of such other Series as may hereafter
be designated by the Board and have Class A Shares established; and
WHEREAS Mitchell Hutchins has entered into a Distribution Contract with
the Fund ("Distribution Contract") pursuant to which Mitchell Hutchins serves as
principal distributor in connection with the offering and sale of the Class A
Shares of each such Series; and
WHEREAS Mitchell Hutchins desires to retain PaineWebber as its exclusive
agent in connection with the offering and sale of the Class A Shares of each
Series and to delegate to PaineWebber performance of certain of the services
which Mitchell Hutchins provides to the Fund under the Distribution Contract;
and
WHEREAS PaineWebber is willing to act as Mitchell Hutchins' exclusive
agent in connection with the offering and sale of such Class A Shares and to
perform such services on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, Mitchell Hutchins and PaineWebber agree as follows:
1. APPOINTMENT. Mitchell Hutchins hereby appoints PaineWebber as its
exclusive agent to sell and to arrange for the sale of the Class A Shares on the
terms and for the period set forth in this Agreement. Mitchell Hutchins also
appoints PaineWebber as its agent for the performance of certain other services
set forth herein which Mitchell Hutchins provides to the Fund under the
Distribution Contract. PaineWebber hereby accepts such appointments and agrees
<PAGE>
to act hereunder. It is understood, however, that these appointments do not
preclude sales of Class A Shares directly through the Fund's transfer agent in
the manner set forth in the Registration Statement. As used in this Agreement,
the term "Registration Statement" shall mean the currently effective
Registration Statement of the Fund, and any supplements thereto, under the
Securities Act of 1933, as amended ("1933 Act"), and the 1940 Act.
2. SERVICES, DUTIES AND REPRESENTATIONS OF PAINEWEBBER.
(a) PaineWebber agrees to sell the Class A Shares on a best efforts
basis from time to time during the term of this Agreement as agent for Mitchell
Hutchins and upon the terms described in this Agreement and the Registration
Statement.
(b) Upon the later of the date of this Agreement or the initial
offering of Class A Shares by a Series to the public, PaineWebber will hold
itself available to receive orders, satisfactory to PaineWebber and Mitchell
Hutchins, for the purchase of Class A Shares and will accept such orders on
behalf of Mitchell Hutchins and the Fund as of the time of receipt of such
orders and will promptly transmit such orders as are accepted to the Fund's
transfer agent. Purchase orders shall be deemed effective at the time and in the
manner set forth in the Registration Statement.
(c) PaineWebber in its discretion may sell Class A Shares to (i) its
correspondent firms and customers of such firms and (ii) such other registered
and qualified retail dealers as it may select, subject to the approval of
Mitchell Hutchins. In making agreements with such dealers, PaineWebber shall act
only as principal and not as agent for Mitchell Hutchins or the Fund.
(d) The offering price of the Class A Shares of each Series shall be
the net asset value per Share as next determined by the Fund following receipt
of an order at PaineWebber's principal office, plus the applicable initial sales
charge, if any, as set forth in the Registration Statement. Mitchell Hutchins
shall promptly furnish or arrange for the furnishing to PaineWebber of a
statement of each computation of net asset value.
(e) PaineWebber shall not be obligated to sell any certain
number of Class A Shares.
(f) To facilitate redemption of Class A Shares by shareholders
directly or through dealers, PaineWebber is authorized but not required on
behalf of Mitchell Hutchins and the Fund to repurchase Class A Shares presented
to it by shareholders, its correspondent firms and other dealers at the price
-2-
<PAGE>
determined in accordance with, and in the manner set forth in, the Registration
Statement. Such price shall reflect the subtraction of the applicable contingent
deferred sales charge, if any, computed in accordance with and in the manner set
forth in the Registration Statement.
(g) PaineWebber shall provide ongoing shareholder services, which
include responding to shareholder inquiries, providing shareholders with
information on their investments in the Class A Shares and any other services
now or hereafter deemed to be appropriate subjects for the payments of "service
fees" under Rule 2830 of the Conduct Rules of the National Association of
Securities Dealers, Inc. ("NASD") (collectively, "service activities").
(h) PaineWebber represents and warrants that: (i) it is a member in
good standing of the NASD and agrees to abide by the Conduct Rules of the NASD;
(ii) it is registered as a broker-dealer with the Securities and Exchange
Commission; (iii) it will maintain any filings and licenses required by federal
and state laws to conduct the business contemplated under this Agreement; and
(iv) it will comply with all federal and state laws and regulations applicable
to the offer and sale of the Class A Shares.
(i) PaineWebber shall not incur any debts or obligations on behalf
of Mitchell Hutchins or the Fund. PaineWebber shall bear all costs that it
incurs in selling the Class A Shares and in complying with the terms and
conditions of this Agreement as more specifically set forth in paragraph 8.
(j) PaineWebber shall not permit any employee or agent to offer or
sell Class A Shares to the public unless such person is duly licensed under
applicable federal and state laws and regulations.
(k) PaineWebber shall not (i) furnish any information or make any
representations concerning the Class A Shares other than those contained in the
Registration Statement or in sales literature or advertising that has been
prepared or approved by Mitchell Hutchins as provided in paragraph 6 or (ii)
offer or sell the Class A Shares in jurisdictions in which they have not been
approved for offer and sale.
3. SERVICES NOT EXCLUSIVE. The services furnished by PaineWebber hereunder
are not to be deemed exclusive and PaineWebber shall be free to furnish similar
services to others so long as its services under this Agreement are not impaired
thereby. Nothing in this Agreement shall limit or restrict the right of any
director, officer or employee of PaineWebber who may also be a director,
trustee, officer or employee of Mitchell Hutchins or the Fund, to engage in any
other business or to devote his or her time and attention in part to the
management or other aspects of any other business, whether of a similar or a
dissimilar nature.
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4. COMPENSATION.
(a) As compensation for its service activities under this Agreement
with respect to the Class A Shares, Mitchell Hutchins shall pay to PaineWebber
service fees with respect to Class A Shares maintained in shareholder accounts
serviced by PaineWebber employees, correspondent firms and other dealers in such
amounts as Mitchell Hutchins and PaineWebber may from time to time agree upon.
(b) As compensation for its activities under this Agreement with
respect to the distribution of the Class A Shares, PaineWebber shall retain that
portion of the offering price constituting the Discount to Selected Dealers
("Discount"), if any, set forth in the Registration Statement for Class A shares
sold with an initial sales charge under this Agreement. PaineWebber is
authorized to collect the gross proceeds derived from the sale of such Class A
Shares; remit the net asset value thereof to the Fund's Transfer Agent; remit to
Mitchell Hutchins the difference between the offering price of the Class A
Shares and the applicable Discount; and retain said Discount. Whether the
offering price of the Class A Shares includes any initial sales charge out of
which a Discount may be retained by PaineWebber shall be determined in
accordance with the Registration Statement.
(c) Mitchell Hutchins shall pay to PaineWebber such commissions and
other compensation for sales of the Class A Shares by PaineWebber employees,
correspondent firms and other dealers as Mitchell Hutchins and PaineWebber may
from time to time agree upon.
(d) Mitchell Hutchins' obligation to pay compensation to PaineWebber
as agreed upon pursuant to this paragraph 4 is not contingent upon receipt by
Mitchell Hutchins of any compensation from the Fund or Series. Mitchell Hutchins
shall advise the Board of any agreements or revised agreements as to
compensation to be paid by Mitchell Hutchins to PaineWebber at their first
regular meeting held after such agreement but shall not be required to obtain
prior approval for such agreements from the Board.
(e) PaineWebber may reallow all or any part of the service fees,
commissions or other compensation which it is paid under this Agreement to its
correspondent firms or other dealers, in such amounts as PaineWebber may from
time to time determine.
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5. DUTIES OF MITCHELL HUTCHINS.
(a) It is understood that the Fund reserves the right at any time to
withdraw all offerings of Class A Shares of any or all Series by written notice
to Mitchell Hutchins.
(b) Mitchell Hutchins shall keep PaineWebber fully informed of the
Fund's affairs and shall make available to PaineWebber copies of all
information, financial statements and other papers which PaineWebber may
reasonably request for use in connection with the distribution of Class A
Shares, including, without limitation, certified copies of any financial
statements prepared for the Fund by its independent public accountant and such
reasonable number of copies of the most current prospectus, statement of
additional information, and annual and interim reports of any Series as
PaineWebber may request, and Mitchell Hutchins shall cooperate fully in the
efforts of PaineWebber to sell and arrange for the sale of the Class A Shares
and in the performance of PaineWebber under this Agreement.
(c) Mitchell Hutchins shall comply with all state and federal laws
and regulations applicable to a distributor of the Class A Shares.
6. ADVERTISING. Mitchell Hutchins agrees to make available such sales and
advertising materials relating to the Class A Shares as Mitchell Hutchins in its
discretion determines appropriate. PaineWebber agrees to submit all sales and
advertising materials developed by it relating to the Class A Shares to Mitchell
Hutchins for approval. PaineWebber agrees not to publish or distribute such
materials to the public without first receiving such approval in writing.
Mitchell Hutchins shall assist PaineWebber in obtaining any regulatory approvals
of such materials that may be required of or desired by PaineWebber.
7. RECORDS. PaineWebber agrees to maintain all records required by
applicable state and federal laws and regulations relating to the offer and sale
of the Class A Shares. Mitchell Hutchins and its representatives shall have
access to such records during normal business hours for review or copying.
8. EXPENSES OF PAINEWEBBER. PaineWebber shall bear all costs and expenses
of (i) preparing, printing, and distributing any materials not prepared by the
Fund or Mitchell Hutchins and other materials used by PaineWebber in connection
with its offering of Class A Shares for sale to the public; (ii) any expenses of
advertising incurred by PaineWebber in connection with such offering; (iii) the
expenses of registration or qualification of PaineWebber as a dealer or broker
under federal or state laws and the expenses of continuing such registration or
qualification; and (iv) all compensation paid to PaineWebber's Investment
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<PAGE>
Executives or other employees and others for selling Class A Shares, and all
expenses of PaineWebber, its Investment Executives and employees and others who
engage in or support the sale of Class A Shares as may be incurred in connection
with their sales efforts. PaineWebber shall bear such additional costs and
expenses as it and Mitchell Hutchins may agree upon, such agreement to be
evidenced in a writing signed by both parties. Mitchell Hutchins shall advise
the Board of any such agreement as to additional costs and expenses borne by
PaineWebber at their first regular meeting held after such agreement but shall
not be required to obtain prior approval for such agreements from the Board.
9. INDEMNIFICATION.
(a) Mitchell Hutchins agrees to indemnify, defend, and hold
PaineWebber, its officers and directors, and any person who controls PaineWebber
within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, demands, liabilities, and expenses (including the
cost of investigating or defending such claims, demands, or liabilities and any
counsel fees incurred in connection therewith) which PaineWebber, its officers,
directors, or any such controlling person may incur under the 1933 Act, under
common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement; arising
out of or based upon any alleged omission to state a material fact required to
be stated in the Registration Statement thereof or necessary to make the
statements in the Registration Statement thereof not misleading; or arising out
of any sales or advertising materials with respect to the Class A Shares
provided by Mitchell Hutchins to PaineWebber. However, this indemnity agreement
shall not apply to any claims, demands, liabilities, or expenses that 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 PaineWebber to Mitchell Hutchins or the Fund for use in
the Registration Statement or in any sales or advertising material; and further
provided, that in no event shall anything contained herein be so construed as to
protect PaineWebber against any liability to Mitchell Hutchins or the Fund or to
the shareholders of any Series to which PaineWebber 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) PaineWebber agrees to indemnify, defend, and hold Mitchell
Hutchins and its officers and directors, the Fund, its officers and trustees,
and any person who controls Mitchell Hutchins or the Fund within the meaning of
Section 15 of the 1933 Act, free and harmless from and against any and all
claims, demands, liabilities and expenses (including the cost of investigating
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<PAGE>
or defending against such claims, demands or liabilities and any counsel fees
incurred in connection therewith) which Mitchell Hutchins or its officers or
directors or the Fund, its officers or trustees, or any such controlling person
may incur under the 1933 Act, under common law or otherwise arising out of or
based upon any alleged untrue statement of a material fact contained in
information furnished in writing by PaineWebber to Mitchell Hutchins or the Fund
for use in the Registration Statement; arising out of or based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or necessary to make such information
not misleading; or arising out of any agreement between PaineWebber and a
correspondent firm or any other retail dealer; or arising out of any sales or
advertising material used by PaineWebber in connection with its duties under
this Agreement.
10. DURATION AND TERMINATION.
(a) This Agreement shall become effective upon the date written
above, provided that, with respect to any Series, this Contract shall not take
effect unless such action has first been approved by vote of a majority of the
Board and by vote of a majority of those trustees of the Fund who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements related thereto (all
such trustees collectively being referred to herein as the "Independent
Trustees"), cast in person at a meeting called for the purpose of voting on such
action.
(b) Unless sooner terminated as provided herein, this Agreement
shall continue in effect for one year from the above written date. Thereafter,
if not terminated, this Agreement shall continue automatically for successive
periods of twelve months each, provided that such continuance is specifically
approved at least annually (i) by a vote of a majority of the Independent
Trustees, cast in person at a meeting called for the purpose of voting on such
approval, and (ii) by the Board or with respect to any given Series by vote of a
majority of the outstanding voting securities of the Class A Shares of such
Series.
(c) Notwithstanding the foregoing, with respect to any Series this
Agreement may be terminated at any time, without the payment of any penalty, by
either party, upon the giving of 30 days' written notice. Such notice shall be
deemed to have been given on the date it is received in writing by the other
party or any officer thereof. This Agreement may also be terminated at any time,
without the payment of any penalty, by vote of the Board, by vote of a majority
of the Independent Trustees or by vote of a majority of the outstanding voting
securities of the Class A Shares of such Series on 30 days' written notice to
Mitchell Hutchins and PaineWebber.
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<PAGE>
(d) Termination of this Agreement with respect to any given Series
shall in no way affect the continued validity of this Agreement or the
performance thereunder with respect to any other Series. This Agreement will
automatically terminate in the event of its assignment or in the event that the
Distribution Contract is terminated.
(e) Notwithstanding the foregoing, Mitchell Hutchins may terminate
this Agreement without penalty, such termination to be effective upon the giving
of written notice to PaineWebber in the event that the Plan is terminated or is
amended to reduce the compensation payable to Mitchell Hutchins thereunder or in
the event that the Registration Statement is amended so as to reduce the amount
of compensation payable to Mitchell Hutchins under the Distribution Contract,
provided that Mitchell Hutchins gives notice of termination pursuant to this
provision within 90 days of such amendment or termination of the Plan or
amendment of the Registration Statement.
11. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be
amended, 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.
12. USE OF PAINEWEBBER NAME. PaineWebber hereby authorizes Mitchell
Hutchins to use the name "PaineWebber Incorporated" or any name derived
therefrom in any sales or advertising materials prepared and/or used by Mitchell
Hutchins in connection with its duties as distributor of the Class A Shares, but
only for so long as this Agreement or any extension, renewal or amendment hereof
remains in effect, including any similar agreement with any organization which
shall have succeeded to the business of PaineWebber.
13. GOVERNING LAW. This Agreement shall be construed in accordance
with the laws of the State of Delaware and the 1940 Act. To the extent that
the applicable laws of the State of Delaware conflict with the applicable
provisions of the 1940 Act, the latter shall control.
14. 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 "majority of the outstanding voting securities,"
"interested person" and "assignment" shall have the same meaning as such terms
have in the 1940 Act.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated as of the day and year first written
above.
MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
Attest: ______________________ By:_____________________________
PAINEWEBBER INCORPORATED
Attest: ______________________ By:_____________________________
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EXCLUSIVE DEALER AGREEMENT
CLASS B SHARES OF MITCHELL HUTCHINS PORTFOLIOS
AGREEMENT made as of ___________________, 1997, between Mitchell Hutchins
Asset Management Inc. ("Mitchell Hutchins"), a Delaware corporation, and
PaineWebber Incorporated ("PaineWebber"), a Delaware corporation.
WHEREAS Mitchell Hutchins Portfolios ("Fund") is a Delaware business trust
registered under the Investment Company Act of 1940, as amended ("1940 Act"), as
an open-end management investment company; and
WHEREAS the Fund currently has three distinct series of shares of
beneficial interest ("Series"), which correspond to distinct portfolios and have
been designated as the Mitchell Hutchins Growth Portfolio, Mitchell Hutchins
Moderate Portfolio and Mitchell Hutchins Conservative Portfolio; and
WHEREAS the Fund's board of trustees ("Board") has established an
unlimited number of shares of beneficial interest of the above-referenced Series
as Class B shares ("Class B Shares") and has adopted a Plan of Distribution
pursuant to Rule 12b-1 under the 1940 Act ("Plan") with respect to the Class B
Shares of the above-referenced Series and of such other Series as may hereafter
be designated by the Board and have Class B Shares established; and
WHEREAS Mitchell Hutchins has entered into a Distribution Contract with
the Fund ("Distribution Contract") pursuant to which Mitchell Hutchins serves as
principal distributor in connection with the offering and sale of the Class B
Shares of each such Series; and
WHEREAS Mitchell Hutchins desires to retain PaineWebber as its exclusive
agent in connection with the offering and sale of the Class B Shares of each
Series and to delegate to PaineWebber performance of certain of the services
which Mitchell Hutchins provides to the Fund under the Distribution Contract;
and
WHEREAS PaineWebber is willing to act as Mitchell Hutchins' exclusive
agent in connection with the offering and sale of such Class B Shares and to
perform such services on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, Mitchell Hutchins and PaineWebber agree as follows:
1. APPOINTMENT. Mitchell Hutchins hereby appoints PaineWebber as its
exclusive agent to sell and to arrange for the sale of the Class B Shares on the
terms and for the period set forth in this Agreement. Mitchell Hutchins also
appoints PaineWebber as its agent for the performance of certain other services
<PAGE>
set forth herein which Mitchell Hutchins provides to the Fund under the
Distribution Contract. PaineWebber hereby accepts such appointments and agrees
to act hereunder. It is understood, however, that these appointments do not
preclude sales of Class B Shares directly through the Fund's transfer agent in
the manner set forth in the Registration Statement. As used in this Agreement,
the term "Registration Statement" shall mean the currently effective
Registration Statement of the Fund, and any supplements thereto, under the
Securities Act of 1933, as amended ("1933 Act"), and the 1940 Act.
2. SERVICES, DUTIES AND REPRESENTATIONS OF PAINEWEBBER.
(a) PaineWebber agrees to sell the Class B Shares on a best efforts
basis from time to time during the term of this Agreement as agent for Mitchell
Hutchins and upon the terms described in this Agreement and the Registration
Statement.
(b) Upon the later of the date of this Agreement or the initial
offering of Class B Shares by a Series to the public, PaineWebber will hold
itself available to receive orders, satisfactory to PaineWebber and Mitchell
Hutchins, for the purchase of Class B Shares and will accept such orders on
behalf of Mitchell Hutchins and the Fund as of the time of receipt of such
orders and will promptly transmit such orders as are accepted to the Fund's
transfer agent. Purchase orders shall be deemed effective at the time and in the
manner set forth in the Registration Statement.
(c) PaineWebber in its discretion may sell Class B Shares to (i) its
correspondent firms and customers of such firms and (ii) such other registered
and qualified retail dealers as it may select, subject to the approval of
Mitchell Hutchins. In making agreements with such dealers, PaineWebber shall act
only as principal and not as agent for Mitchell Hutchins or the Fund.
(d) The offering price of the Class B Shares of each Series shall be
the net asset value per Share as next determined by the Fund following receipt
of an order at PaineWebber's principal office. Mitchell Hutchins shall promptly
furnish or arrange for the furnishing to PaineWebber of a statement of each
computation of net asset value.
(e) PaineWebber shall not be obligated to sell any certain
number of Class B Shares.
(f) To facilitate redemption of Class B Shares by shareholders
directly or through dealers, PaineWebber is authorized but not required on
behalf of Mitchell Hutchins and the Fund to repurchase Class B Shares presented
to it by shareholders, its correspondent firms and other dealers at the price
determined in accordance with, and in the manner set forth in, the Registration
Statement. Such price shall reflect the subtraction of the applicable contingent
deferred sales charge, if any, computed in accordance with and in the manner set
forth in the Registration Statement.
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<PAGE>
(g) PaineWebber shall provide ongoing shareholder services, which
include responding to shareholder inquiries, providing shareholders with
information on their investments in the Class B Shares and any other services
now or hereafter deemed to be appropriate subjects for the payments of "service
fees" under Rule 2830 of the Conduct Rules of the National Association of
Securities Dealers, Inc. ("NASD") (collectively, "service activities").
(h) PaineWebber represents and warrants that: (i) it is a member in
good standing of the NASD and agrees to abide by the Conduct Rules of the NASD;
(ii) it is registered as a broker-dealer with the Securities and Exchange
Commission; (iii) it will maintain any filings and licenses required by federal
and state laws to conduct the business contemplated under this Agreement; and
(iv) it will comply with all federal and state laws and regulations applicable
to the offer and sale of the Class B Shares.
(i) PaineWebber shall not incur any debts or obligations on behalf
of Mitchell Hutchins or the Fund. PaineWebber shall bear all costs that it
incurs in selling the Class B Shares and in complying with the terms and
conditions of this Agreement as more specifically set forth in paragraph 8.
(j) PaineWebber shall not permit any employee or agent to offer or
sell Class B Shares to the public unless such person is duly licensed under
applicable federal and state laws and regulations.
(k) PaineWebber shall not (i) furnish any information or make any
representations concerning the Class B Shares other than those contained in the
Registration Statement or in sales literature or advertising that has been
prepared or approved by Mitchell Hutchins as provided in paragraph 6 or (ii)
offer or sell the Class B Shares in jurisdictions in which they have not been
approved for offer and sale.
3. SERVICES NOT EXCLUSIVE. The services furnished by PaineWebber hereunder
are not to be deemed exclusive and PaineWebber shall be free to furnish similar
services to others so long as its services under this Agreement are not impaired
thereby. Nothing in this Agreement shall limit or restrict the right of any
director, officer or employee of PaineWebber who may also be a director,
trustee, officer or employee of Mitchell Hutchins or the Fund, to engage in any
other business or to devote his or her time and attention in part to the
management or other aspects of any other business, whether of a similar or a
dissimilar nature.
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<PAGE>
4. COMPENSATION.
(a) As compensation for its service activities under this Agreement
with respect to the Class B Shares, Mitchell Hutchins shall pay to PaineWebber
service fees with respect to Class B Shares maintained in shareholder accounts
serviced by PaineWebber employees, correspondent firms and other dealers in such
amounts as Mitchell Hutchins and PaineWebber may from time to time agree upon.
(b) As compensation for its activities under this Agreement with
respect to the distribution of the Class B Shares, Mitchell Hutchins shall pay
to PaineWebber such commissions for sales of the Class D shares by PaineWebber
employees, correspondent firms and other dealers and such other compensation as
Mitchell Hutchins and PaineWebber may from time to time agree upon.
(c) Mitchell Hutchins' obligation to pay compensation to PaineWebber
as agreed upon pursuant to this paragraph 4 is not contingent upon receipt by
Mitchell Hutchins of any compensation from the Fund or Series. Mitchell Hutchins
shall advise the Board of any agreements or revised agreements as to
compensation to be paid by Mitchell Hutchins to PaineWebber at their first
regular meeting held after such agreement but shall not be required to obtain
prior approval for such agreements from the Board.
(d) PaineWebber may reallow all or any part of the service fees,
commissions or other compensation which it is paid under this Agreement to its
correspondent firms or other dealers, in such amounts as PaineWebber may from
time to time determine.
5. DUTIES OF MITCHELL HUTCHINS.
(a) It is understood that the Fund reserves the right at any time to
withdraw all offerings of Class B Shares of any or all Series by written notice
to Mitchell Hutchins.
(b) Mitchell Hutchins shall keep PaineWebber fully informed of the
Fund's affairs and shall make available to PaineWebber copies of all
information, financial statements and other papers which PaineWebber may
reasonably request for use in connection with the distribution of Class B
Shares, including, without limitation, certified copies of any financial
statements prepared for the Fund by its independent public accountant and such
reasonable number of copies of the most current prospectus, statement of
additional information, and annual and interim reports of any Series as
PaineWebber may request, and Mitchell Hutchins shall cooperate fully in the
efforts of PaineWebber to sell and arrange for the sale of the Class B Shares
and in the performance of PaineWebber under this Agreement.
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<PAGE>
(c) Mitchell Hutchins shall comply with all state and federal laws
and regulations applicable to a distributor of the Class B Shares.
6. ADVERTISING. Mitchell Hutchins agrees to make available such sales and
advertising materials relating to the Class B Shares as Mitchell Hutchins in its
discretion determines appropriate. PaineWebber agrees to submit all sales and
advertising materials developed by it relating to the Class B Shares to Mitchell
Hutchins for approval. PaineWebber agrees not to publish or distribute such
materials to the public without first receiving such approval in writing.
Mitchell Hutchins shall assist PaineWebber in obtaining any regulatory approvals
of such materials that may be required of or desired by PaineWebber.
7. RECORDS. PaineWebber agrees to maintain all records required by
applicable state and federal laws and regulations relating to the offer and sale
of the Class B Shares. Mitchell Hutchins and its representatives shall have
access to such records during normal business hours for review or copying.
8. EXPENSES OF PAINEWEBBER. PaineWebber shall bear all costs and expenses
of (i) preparing, printing, and distributing any materials not prepared by the
Fund or Mitchell Hutchins and other materials used by PaineWebber in connection
with its offering of Class B Shares for sale to the public; (ii) any expenses of
advertising incurred by PaineWebber in connection with such offering; (iii) the
expenses of registration or qualification of PaineWebber as a dealer or broker
under federal or state laws and the expenses of continuing such registration or
qualification; and (iv) all compensation paid to PaineWebber's Investment
Executives or other employees and others for selling Class B Shares, and all
expenses of PaineWebber, its Investment Executives and employees and others who
engage in or support the sale of Class B Shares as may be incurred in connection
with their sales efforts. PaineWebber shall bear such additional costs and
expenses as it and Mitchell Hutchins may agree upon, such agreement to be
evidenced in a writing signed by both parties. Mitchell Hutchins shall advise
the Board of any such agreement as to additional costs and expenses borne by
PaineWebber at their first regular meeting held after such agreement but shall
not be required to obtain prior approval for such agreements from the Board.
9. INDEMNIFICATION.
(a) Mitchell Hutchins agrees to indemnify, defend, and hold
PaineWebber, its officers and directors, and any person who controls PaineWebber
within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, demands, liabilities, and expenses (including the
cost of investigating or defending such claims, demands, or liabilities and any
counsel fees incurred in connection therewith) which PaineWebber, its officers,
directors, or any such controlling person may incur under the 1933 Act, under
common law or otherwise, arising out of or based upon any alleged untrue
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<PAGE>
statement of a material fact contained in the Registration Statement; arising
out of or based upon any alleged omission to state a material fact required to
be stated in the Registration Statement thereof or necessary to make the
statements in the Registration Statement thereof not misleading; or arising out
of any sales or advertising materials with respect to the Class B Shares
provided by Mitchell Hutchins to PaineWebber. However, this indemnity agreement
shall not apply to any claims, demands, liabilities, or expenses that 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 PaineWebber to Mitchell Hutchins or the Fund for use in
the Registration Statement or in any sales or advertising material; and further
provided, that in no event shall anything contained herein be so construed as to
protect PaineWebber against any liability to Mitchell Hutchins or the Fund or to
the shareholders of any Series to which PaineWebber 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) PaineWebber agrees to indemnify, defend, and hold Mitchell
Hutchins and its officers and directors, the Fund, its officers and trustees,
and any person who controls Mitchell Hutchins or the Fund within the meaning of
Section 15 of the 1933 Act, free and harmless from and against any and all
claims, demands, liabilities and expenses (including the cost of investigating
or defending against such claims, demands or liabilities and any counsel fees
incurred in connection therewith) which Mitchell Hutchins or its officers or
directors or the Fund, its officers or trustees, or any such controlling person
may incur under the 1933 Act, under common law or otherwise arising out of or
based upon any alleged untrue statement of a material fact contained in
information furnished in writing by PaineWebber to Mitchell Hutchins or the Fund
for use in the Registration Statement; arising out of or based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or necessary to make such information
not misleading; or arising out of any agreement between PaineWebber and a
correspondent firm or any other retail dealer; or arising out of any sales or
advertising material used by PaineWebber in connection with its duties under
this Agreement.
10. DURATION AND TERMINATION.
(a) This Agreement shall become effective upon the date written
above, provided that, with respect to any Series, this Contract shall not take
effect unless such action has first been approved by vote of a majority of the
Board and by vote of a majority of those trustees of the Fund who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements related thereto (all
such trustees collectively being referred to herein as the "Independent
Trustees"), cast in person at a meeting called for the purpose of voting on such
action.
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<PAGE>
(b) Unless sooner terminated as provided herein, this Agreement
shall continue in effect for one year from the above written date. Thereafter,
if not terminated, this Agreement shall continue automatically for successive
periods of twelve months each, provided that such continuance is specifically
approved at least annually (i) by a vote of a majority of the Independent
Trustees, cast in person at a meeting called for the purpose of voting on such
approval, and (ii) by the Board or with respect to any given Series by vote of a
majority of the outstanding voting securities of the Class B Shares of such
Series.
(c) Notwithstanding the foregoing, with respect to any Series this
Agreement may be terminated at any time, without the payment of any penalty, by
either party, upon the giving of 30 days' written notice. Such notice shall be
deemed to have been given on the date it is received in writing by the other
party or any officer thereof. This Agreement may also be terminated at any time,
without the payment of any penalty, by vote of the Board, by vote of a majority
of the Independent Trustees or by vote of a majority of the outstanding voting
securities of the Class B Shares of such Series on 30 days' written notice to
Mitchell Hutchins and PaineWebber.
(d) Termination of this Agreement with respect to any given Series
shall in no way affect the continued validity of this Agreement or the
performance thereunder with respect to any other Series. This Agreement will
automatically terminate in the event of its assignment or in the event that the
Distribution Contract is terminated.
(e) Notwithstanding the foregoing, Mitchell Hutchins may terminate
this Agreement without penalty, such termination to be effective upon the giving
of written notice to PaineWebber in the event that the Plan is terminated or is
amended to reduce the compensation payable to Mitchell Hutchins thereunder or in
the event that the Registration Statement is amended so as to reduce the amount
of compensation payable to Mitchell Hutchins under the Distribution Contract,
provided that Mitchell Hutchins gives notice of termination pursuant to this
provision within 90 days of such amendment or termination of the Plan or
amendment of the Registration Statement.
11. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be
amended, 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.
-7-
<PAGE>
12. USE OF PAINEWEBBER NAME. PaineWebber hereby authorizes Mitchell
Hutchins to use the name "PaineWebber Incorporated" or any name derived
therefrom in any sales or advertising materials prepared and/or used by Mitchell
Hutchins in connection with its duties as distributor of the Class B Shares, but
only for so long as this Agreement or any extension, renewal or amendment hereof
remains in effect, including any similar agreement with any organization which
shall have succeeded to the business of PaineWebber.
13. GOVERNING LAW. This Agreement shall be construed in accordance
with the laws of the State of Delaware and the 1940 Act. To the extent that
the applicable laws of the State of Delaware conflict with the applicable
provisions of the 1940 Act, the latter shall control.
14. 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 "majority of the outstanding voting securities,"
"interested person" and "assignment" shall have the same meaning as such terms
have in the 1940 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 written
above.
MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
Attest: _________________________ By: ___________________________
PAINEWEBBER INCORPORATED
Attest: _________________________ By: ___________________________
-8-
EXCLUSIVE DEALER AGREEMENT
CLASS C SHARES OF MITCHELL HUTCHINS PORTFOLIOS
AGREEMENT made as of _____________________, 1997, between Mitchell
Hutchins Asset Management Inc. ("Mitchell Hutchins"), a Delaware corporation,
and PaineWebber Incorporated ("PaineWebber"), a Delaware corporation.
WHEREAS Mitchell Hutchins Portfolios ("Fund") is a Delaware business trust
registered under the Investment Company Act of 1940, as amended ("1940 Act"), as
an open-end management investment company; and
WHEREAS the Fund currently has three distinct series of shares of
beneficial interest ("Series"), which correspond to distinct portfolios and have
been designated as the Mitchell Hutchins Growth Portfolio, Mitchell Hutchins
Moderate Portfolio and Mitchell Hutchins Conservative Portfolio; and
WHEREAS the Fund's board of trustees ("Board") has established an
unlimited number of shares of beneficial interest of the above-referenced Series
as Class C shares ("Class C Shares") and has adopted a Plan of Distribution
pursuant to Rule 12b-1 under the 1940 Act ("Plan") with respect to the Class C
Shares of the above-referenced Series and of such other Series as may hereafter
be designated by the Board and have Class C Shares established; and
WHEREAS Mitchell Hutchins has entered into a Distribution Contract with
the Fund ("Distribution Contract") pursuant to which Mitchell Hutchins serves as
principal distributor in connection with the offering and sale of the Class C
Shares of each such Series; and
WHEREAS Mitchell Hutchins desires to retain PaineWebber as its exclusive
agent in connection with the offering and sale of the Class C Shares of each
Series and to delegate to PaineWebber performance of certain of the services
which Mitchell Hutchins provides to the Fund under the Distribution Contract;
and
WHEREAS PaineWebber is willing to act as Mitchell Hutchins' exclusive
agent in connection with the offering and sale of such Class C Shares and to
perform such services on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, Mitchell Hutchins and PaineWebber agree as follows:
1. APPOINTMENT. Mitchell Hutchins hereby appoints PaineWebber as its
exclusive agent to sell and to arrange for the sale of the Class C Shares on the
terms and for the period set forth in this Agreement. Mitchell Hutchins also
appoints PaineWebber as its agent for the performance of certain other services
<PAGE>
set forth herein which Mitchell Hutchins provides to the Fund under the
Distribution Contract. PaineWebber hereby accepts such appointments and agrees
to act hereunder. It is understood, however, that these appointments do not
preclude sales of Class C Shares directly through the Fund's transfer agent in
the manner set forth in the Registration Statement. As used in this Agreement,
the term "Registration Statement" shall mean the currently effective
Registration Statement of the Fund, and any supplements thereto, under the
Securities Act of 1933, as amended ("1933 Act"), and the 1940 Act.
2. SERVICES, DUTIES AND REPRESENTATIONS OF PAINEWEBBER.
(a) PaineWebber agrees to sell the Class C Shares on a best efforts
basis from time to time during the term of this Agreement as agent for Mitchell
Hutchins and upon the terms described in this Agreement and the Registration
Statement.
(b) Upon the later of the date of this Agreement or the initial
offering of Class C Shares by a Series to the public, PaineWebber will hold
itself available to receive orders, satisfactory to PaineWebber and Mitchell
Hutchins, for the purchase of Class C Shares and will accept such orders on
behalf of Mitchell Hutchins and the Fund as of the time of receipt of such
orders and will promptly transmit such orders as are accepted to the Fund's
transfer agent. Purchase orders shall be deemed effective at the time and in the
manner set forth in the Registration Statement.
(c) PaineWebber in its discretion may sell Class C Shares to (i) its
correspondent firms and customers of such firms and (ii) such other registered
and qualified retail dealers as it may select, subject to the approval of
Mitchell Hutchins. In making agreements with such dealers, PaineWebber shall act
only as principal and not as agent for Mitchell Hutchins or the Fund.
(d) The offering price of the Class C Shares of each Series shall be
the net asset value per Share as next determined by the Fund following receipt
of an order at PaineWebber's principal office. Mitchell Hutchins shall promptly
furnish or arrange for the furnishing to PaineWebber of a statement of each
computation of net asset value.
(e) PaineWebber shall not be obligated to sell any certain number of
Class C Shares.
(f) To facilitate redemption of Class C Shares by shareholders
directly or through dealers, PaineWebber is authorized but not required on
behalf of Mitchell Hutchins and the Fund to repurchase Class C Shares presented
to it by shareholders, its correspondent firms and other dealers at the price
-2-
<PAGE>
determined in accordance with, and in the manner set forth in, the Registration
Statement. Such price shall reflect the subtraction of the applicable contingent
deferred sales charge, if any, computed in accordance with and in the manner set
forth in the Registration Statement.
(g) PaineWebber shall provide ongoing shareholder services, which
include responding to shareholder inquiries, providing shareholders with
information on their investments in the Class C Shares and any other services
now or hereafter deemed to be appropriate subjects for the payments of "service
fees" under Rule 2830 of the Conduct Rules of the National Association of
Securities Dealers, Inc. ("NASD") (collectively, "service activities").
(h) PaineWebber represents and warrants that: (i) it is a member in
good standing of the NASD and agrees to abide by the Conduct Rules of the NASD;
(ii) it is registered as a broker-dealer with the Securities and Exchange
Commission; (iii) it will maintain any filings and licenses required by federal
and state laws to conduct the business contemplated under this Agreement; and
(iv) it will comply with all federal and state laws and regulations applicable
to the offer and sale of the Class C Shares.
(i) PaineWebber shall not incur any debts or obligations on behalf of
Mitchell Hutchins or the Fund. PaineWebber shall bear all costs that it incurs
in selling the Class C Shares and in complying with the terms and conditions of
this Agreement as more specifically set forth in paragraph 8.
(j) PaineWebber shall not permit any employee or agent to offer or
sell Class C Shares to the public unless such person is duly licensed under
applicable federal and state laws and regulations.
(k) PaineWebber shall not (i) furnish any information or make any
representations concerning the Class C Shares other than those contained in the
Registration Statement or in sales literature or advertising that has been
prepared or approved by Mitchell Hutchins as provided in paragraph 6 or (ii)
offer or sell the Class C Shares in jurisdictions in which they have not been
approved for offer and sale.
3. SERVICES NOT EXCLUSIVE. The services furnished by PaineWebber
hereunder are not to be deemed exclusive and PaineWebber shall be free to
furnish similar services to others so long as its services under this Agreement
are not impaired thereby. Nothing in this Agreement shall limit or restrict the
right of any director, officer or employee of PaineWebber who may also be a
director, trustee, officer or employee of Mitchell Hutchins or the Fund, to
engage in any other business or to devote his or her time and attention in part
to the management or other aspects of any other business, whether of a similar
or a dissimilar nature.
-3-
<PAGE>
4. COMPENSATION.
(a) As compensation for its service activities under this Agreement
with respect to the Class C Shares, Mitchell Hutchins shall pay to PaineWebber
service fees with respect to Class C Shares maintained in shareholder accounts
serviced by PaineWebber employees, correspondent firms and other dealers in such
amounts as Mitchell Hutchins and PaineWebber may from time to time agree upon.
(b) As compensation for its activities under this Agreement with
respect to the distribution of the Class C Shares, Mitchell Hutchins shall pay
to PaineWebber such commissions for sales of the Class C shares by PaineWebber
employees, correspondent firms and other dealers and such other compensation as
Mitchell Hutchins and PaineWebber may from time to time agree upon.
(c) Mitchell Hutchins' obligation to pay compensation to PaineWebber
as agreed upon pursuant to this paragraph 4 is not contingent upon receipt by
Mitchell Hutchins of any compensation from the Fund or Series. Mitchell Hutchins
shall advise the Board of any agreements or revised agreements as to
compensation to be paid by Mitchell Hutchins to PaineWebber at their first
regular meeting held after such agreement but shall not be required to obtain
prior approval for such agreements from the Board.
(d) PaineWebber may reallow all or any part of the service fees,
commissions or other compensation which it is paid under this Agreement to its
correspondent firms or other dealers, in such amounts as PaineWebber may from
time to time determine.
5. DUTIES OF MITCHELL HUTCHINS.
(a) It is understood that the Fund reserves the right at any time to
withdraw all offerings of Class C Shares of any or all Series by written notice
to Mitchell Hutchins.
(b) Mitchell Hutchins shall keep PaineWebber fully informed of the
Fund's affairs and shall make available to PaineWebber copies of all
information, financial statements and other papers which PaineWebber may
reasonably request for use in connection with the distribution of Class C
Shares, including, without limitation, certified copies of any financial
statements prepared for the Fund by its independent public accountant and such
reasonable number of copies of the most current prospectus, statement of
additional information, and annual and interim reports of any Series as
PaineWebber may request, and Mitchell Hutchins shall cooperate fully in the
efforts of PaineWebber to sell and arrange for the sale of the Class C Shares
and in the performance of PaineWebber under this Agreement.
(c) Mitchell Hutchins shall comply with all state and federal laws
and regulations applicable to a distributor of the Class C Shares.
-4-
<PAGE>
6. ADVERTISING. Mitchell Hutchins agrees to make available such sales
and advertising materials relating to the Class C Shares as Mitchell Hutchins in
its discretion determines appropriate. PaineWebber agrees to submit all sales
and advertising materials developed by it relating to the Class C Shares to
Mitchell Hutchins for approval. PaineWebber agrees not to publish or distribute
such materials to the public without first receiving such approval in writing.
Mitchell Hutchins shall assist PaineWebber in obtaining any regulatory approvals
of such materials that may be required of or desired by PaineWebber.
7. RECORDS. PaineWebber agrees to maintain all records required by
applicable state and federal laws and regulations relating to the offer and sale
of the Class C Shares. Mitchell Hutchins and its representatives shall have
access to such records during normal business hours for review or copying.
8. EXPENSES OF PAINEWEBBER. PaineWebber shall bear all costs and
expenses of (i) preparing, printing, and distributing any materials not prepared
by the Fund or Mitchell Hutchins and other materials used by PaineWebber in
connection with its offering of Class C Shares for sale to the public; (ii) any
expenses of advertising incurred by PaineWebber in connection with such
offering; (iii) the expenses of registration or qualification of PaineWebber as
a dealer or broker under federal or state laws and the expenses of continuing
such registration or qualification; and (iv) all compensation paid to
PaineWebber's Investment Executives or other employees and others for selling
Class C Shares, and all expenses of PaineWebber, its Investment Executives and
employees and others who engage in or support the sale of Class C Shares as may
be incurred in connection with their sales efforts. PaineWebber shall bear such
additional costs and expenses as it and Mitchell Hutchins may agree upon, such
agreement to be evidenced in a writing signed by both parties. Mitchell Hutchins
shall advise the Board of any such agreement as to additional costs and expenses
borne by PaineWebber at their first regular meeting held after such agreement
but shall not be required to obtain prior approval for such agreements from the
Board.
9. INDEMNIFICATION.
(a) Mitchell Hutchins agrees to indemnify, defend, and hold
PaineWebber, its officers and directors, and any person who controls PaineWebber
within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, demands, liabilities, and expenses (including the
cost of investigating or defending such claims, demands, or liabilities and any
counsel fees incurred in connection therewith) which PaineWebber, its officers,
directors, or any such controlling person may incur under the 1933 Act, under
common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement; arising
out of or based upon any alleged omission to state a material fact required to
be stated in the Registration Statement thereof or necessary to make the
statements in the Registration Statement thereof not misleading; or arising out
of any sales or advertising materials with respect to the Class C Shares
-5-
<PAGE>
provided by Mitchell Hutchins to PaineWebber. However, this indemnity agreement
shall not apply to any claims, demands, liabilities, or expenses that 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 PaineWebber to Mitchell Hutchins or the Fund for use in
the Registration Statement or in any sales or advertising material; and further
provided, that in no event shall anything contained herein be so construed as to
protect PaineWebber against any liability to Mitchell Hutchins or the Fund or to
the shareholders of any Series to which PaineWebber 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) PaineWebber agrees to indemnify, defend, and hold Mitchell
Hutchins and its officers and directors, the Fund, its officers and trustees,
and any person who controls Mitchell Hutchins or the Fund within the meaning of
Section 15 of the 1933 Act, free and harmless from and against any and all
claims, demands, liabilities and expenses (including the cost of investigating
or defending against such claims, demands or liabilities and any counsel fees
incurred in connection therewith) which Mitchell Hutchins or its officers or
directors or the Fund, its officers or trustees, or any such controlling person
may incur under the 1933 Act, under common law or otherwise arising out of or
based upon any alleged untrue statement of a material fact contained in
information furnished in writing by PaineWebber to Mitchell Hutchins or the Fund
for use in the Registration Statement; arising out of or based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or necessary to make such information
not misleading; or arising out of any agreement between PaineWebber and a
correspondent firm or any other retail dealer; or arising out of any sales or
advertising material used by PaineWebber in connection with its duties under
this Agreement.
10. DURATION AND TERMINATION.
(a) This Agreement shall become effective upon the date written
above, provided that, with respect to any Series, this Contract shall not take
effect unless such action has first been approved by vote of a majority of the
Board and by vote of a majority of those trustees of the Fund who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements related thereto (all
such trustees collectively being referred to herein as the "Independent
Trustees") cast in person at a meeting called for the purpose of voting on such
action.
(b) Unless sooner terminated as provided herein, this Agreement
shall continue in effect for one year from the above written date. Thereafter,
if not terminated, this Agreement shall continue automatically for successive
periods of twelve months each, provided that such continuance is specifically
-6-
<PAGE>
approved at least annually (i) by a vote of a majority of the Independent
Trustees, cast in person at a meeting called for the purpose of voting on such
approval, and (ii) by the Board or with respect to any given Series by vote of a
majority of the outstanding voting securities of the Class C Shares of such
Series.
(c) Notwithstanding the foregoing, with respect to any Series this
Agreement may be terminated at any time, without the payment of any penalty, by
either party, upon the giving of 30 days' written notice. Such notice shall be
deemed to have been given on the date it is received in writing by the other
party or any officer thereof. This Agreement may also be terminated at any time,
without the payment of any penalty, by vote of the Board, by vote of a majority
of the Independent Trustees or by vote of a majority of the outstanding voting
securities of the Class C Shares of such Series on 30 days' written notice to
Mitchell Hutchins and PaineWebber.
(d) Termination of this Agreement with respect to any given Series
shall in no way affect the continued validity of this Agreement or the
performance thereunder with respect to any other Series. This Agreement will
automatically terminate in the event of its assignment or in the event that the
Distribution Contract is terminated.
(e) Notwithstanding the foregoing, Mitchell Hutchins may terminate
this Agreement without penalty, such termination to be effective upon the giving
of written notice to PaineWebber in the event that the Plan is terminated or is
amended to reduce the compensation payable to Mitchell Hutchins thereunder or in
the event that the Registration Statement is amended so as to reduce the amount
of compensation payable to Mitchell Hutchins under the Distribution Contract,
provided that Mitchell Hutchins gives notice of termination pursuant to this
provision within 90 days of such amendment or termination of the Plan or
amendment of the Registration Statement.
11. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be
amended, 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.
12. USE OF PAINEWEBBER NAME. PaineWebber hereby authorizes Mitchell
Hutchins to use the name "PaineWebber Incorporated" or any name derived
therefrom in any sales or advertising materials prepared and/or used by Mitchell
Hutchins in connection with its duties as distributor of the Class C Shares, but
only for so long as this Agreement or any extension, renewal or amendment hereof
remains in effect, including any similar agreement with any organization which
shall have succeeded to the business of PaineWebber.
-7-
<PAGE>
13. GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of Delaware and the 1940 Act. To the extent that the
applicable laws of the State of Delaware conflict with the applicable provisions
of the 1940 Act, the latter shall control.
14. 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 "majority of the outstanding voting securities,"
"interested person" and "assignment" shall have the same meaning as such terms
have in the 1940 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 written
above.
MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
Attest: _________________________ By: ___________________________
PAINEWEBBER INCORPORATED
Attest: _________________________ By: ___________________________
-8-
EXCLUSIVE DEALER AGREEMENT
CLASS Y SHARES OF MITCHELL HUTCHINS PORTFOLIOS
AGREEMENT made as _____________________, 1997 between Mitchell Hutchins
Asset Management Inc. ("Mitchell Hutchins"), a Delaware corporation, and
PaineWebber Incorporated ("PaineWebber"), a Delaware corporation.
WHEREAS Mitchell Hutchins Portfolios ("Fund") is a Delaware business trust
registered under the Investment Company Act of 1940, as amended ("1940 Act"), as
an open-end management investment company; and
WHEREAS the Fund currently has three distinct series of shares of
beneficial interest ("Series"), which correspond to distinct portfolios and have
been designated as the Mitchell Hutchins Growth Portfolio, Mitchell Hutchins
Moderate Portfolio and Mitchell Hutchins Conservative Portfolio; and
WHEREAS the Fund's board of trustees ("Board") has established an
unlimited number of shares of beneficial interest of the above-referenced Series
as Class Y shares ("Class Y Shares"); and
WHEREAS Mitchell Hutchins has entered into a Distribution Contract with
the Fund ("Distribution Contract") pursuant to which Mitchell Hutchins serves as
principal distributor in connection with the offering and sale of the Class Y
Shares of the above-referenced Series and of such other Series as may hereafter
be designated by the Board and have Class Y Shares established; and
WHEREAS Mitchell Hutchins desires to retain PaineWebber as its exclusive
agent in connection with the offering and sale of the Class Y Shares of each
such Series and to delegate to PaineWebber performance of certain of the
services which Mitchell Hutchins provides to the Fund under the Distribution
Contract; and
WHEREAS PaineWebber is willing to act as Mitchell Hutchins' exclusive
agent in connection with the offering and sale of such Class Y Shares and to
perform such services on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, Mitchell Hutchins and PaineWebber agree as follows:
1. APPOINTMENT. Mitchell Hutchins hereby appoints PaineWebber as its
exclusive agent to sell and to arrange for the sale of the Class Y Shares on the
terms and for the period set forth in this Contract. Mitchell Hutchins also
appoints PaineWebber as its agent for the performance of certain other services
set forth herein which Mitchell Hutchins provides to the Fund under the
Distribution Contract. PaineWebber hereby accepts such appointments and agrees
to act hereunder. It is understood, however, that these appointments do not
preclude sales of Class Y Shares directly through the Fund's transfer agent in
the manner set forth in the Registration Statement. As used in this Contract,
the term "Registration Statement" shall mean the currently effective
Registration Statement of the Fund, and any supplements thereto, under the
Securities Act of 1933, as amended ("1933 Act"), and the 1940 Act.
<PAGE>
2. SERVICES, DUTIES AND REPRESENTATIONS OF PAINEWEBBER.
(a) PaineWebber agrees to sell the Class Y Shares on a best efforts
basis from time to time during the term of this Agreement as agent for Mitchell
Hutchins and upon the terms described in this Contract and the Registration
Statement.
(b) Upon the later of the date of this Contract or the initial
offering of Class Y Shares by a Series, PaineWebber will hold itself available
to receive orders, satisfactory to PaineWebber and Mitchell Hutchins, for the
purchase of Class Y Shares and will accept such orders on behalf of Mitchell
Hutchins and the Fund as of the time of receipt of such orders and will promptly
transmit such orders as are accepted to the Fund's transfer agent. Purchase
orders shall be deemed effective at the time and in the manner set forth in the
Registration Statement.
(c) PaineWebber in its discretion may sell Class Y Shares to (i) its
correspondent firms and customers of such firms and (ii) such other registered
and qualified retail dealers as it may select, subject to the approval of
Mitchell Hutchins. In making agreements with such dealers, PaineWebber shall act
only as principal and not as agent for Mitchell Hutchins or the Fund.
(d) The offering price of the Class Y Shares of each Series shall be
the net asset value per Share as next determined by the Fund following receipt
of an order at PaineWebber's principal office. Mitchell Hutchins shall promptly
furnish or arrange for the furnishing to PaineWebber of a statement of each
computation of net asset value.
(e) PaineWebber shall not be obligated to sell any certain number of
Class Y Shares.
(f) To facilitate redemption of Class Y Shares by shareholders
directly or through dealers, PaineWebber is authorized but not required on
behalf of Mitchell Hutchins and the Fund to repurchase Class Y Shares presented
to it by shareholders, its correspondent firms and other dealers at the price
determined in accordance with, and in the manner set forth in, the Registration
Statement.
(g) PaineWebber represents and warrants that: (i) it is a member in
good standing of the National Association of Securities Dealers, Inc. and agrees
to abide by the Conduct Rules of such Association; (ii) it is registered as a
broker-dealer with the Securities and Exchange Commission; (iii) it will
2
<PAGE>
maintain any filings and licenses required by federal and state laws to conduct
the business contemplated under this Agreement; and (iv) it will comply with all
federal and state laws and regulations applicable to the offer and sale of the
Class Y Shares.
(h) PaineWebber shall not incur any debts or obligations on behalf of
Mitchell Hutchins or the Fund. PaineWebber shall bear all costs that it incurs
in selling the Class Y Shares and in complying with the terms and conditions of
this Contract as more specifically set forth in paragraph 8.
(i) PaineWebber shall not permit any employee or agent to offer or
sell Class Y Shares unless such person is duly licensed under applicable federal
and state laws and regulations.
(j) PaineWebber shall not (i) furnish any information or make any
representations concerning the Class Y Shares other than those contained in the
Registration Statement or in sales literature or advertising that has been
prepared or approved by Mitchell Hutchins as provided in paragraph 6 or (ii)
offer or sell the Class Y Shares in jurisdictions in which they have not been
approved for offer and sale.
3. SERVICES NOT EXCLUSIVE. The services furnished by PaineWebber
hereunder are not to be deemed exclusive and PaineWebber shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired thereby. Nothing in this Contract shall limit or restrict the
right of any director, officer or employee of PaineWebber who may also be a
director, trustee, officer or employee of Mitchell Hutchins or the Fund, to
engage in any other business or to devote his or her time and attention in part
to the management or other aspects of any other business, whether of a similar
or a dissimilar nature.
4. COMPENSATION.
Mitchell Hutchins shall not be obligated to pay any compensation to
PaineWebber hereunder nor to reimburse any of PaineWebber's expenses incurred
hereunder.
5. DUTIES OF MITCHELL HUTCHINS.
(a) It is understood that the Fund reserves the right at any time to
withdraw all offerings of Class Y Shares of any or all Series by written notice
to Mitchell Hutchins.
3
<PAGE>
(b) Mitchell Hutchins shall keep PaineWebber fully informed of the
Fund's affairs and shall make available to PaineWebber copies of all
information, financial statements and other papers which PaineWebber may
reasonably request for use in connection with the distribution of Class Y
Shares, including, without limitation, certified copies of any financial
statements prepared for the Fund by its independent public accountant and such
reasonable number of copies of the most current prospectus, statement of
additional information, and annual and interim reports of any Series as
PaineWebber may request, and Mitchell Hutchins shall cooperate fully in the
efforts of PaineWebber to sell and arrange for the sale of the Class Y Shares
and in the performance of PaineWebber under this Contract.
(c) Mitchell Hutchins shall comply with all state and federal laws
and regulations applicable to a distributor of the Class Y Shares.
6. ADVERTISING. Mitchell Hutchins agrees to make available such sales
and advertising materials relating to the Class Y Shares as Mitchell Hutchins in
its discretion determines appropriate. PaineWebber agrees to submit all sales
and advertising materials developed by it relating to the Class Y Shares to
Mitchell Hutchins for approval. PaineWebber agrees not to publish or distribute
such materials without first receiving such approval in writing. Mitchell
Hutchins shall assist PaineWebber in obtaining any regulatory approvals of such
materials that may be required of or desired by PaineWebber.
7. RECORDS. PaineWebber agrees to maintain all records required by
applicable state and federal laws and regulations relating to the offer and sale
of the Class Y Shares. Mitchell Hutchins and its representatives shall have
access to such records during normal business hours for review or copying.
8. EXPENSES OF PAINEWEBBER. PaineWebber shall bear all costs and
expenses of (i) preparing, printing, and distributing any materials not prepared
by the Fund or Mitchell Hutchins and other materials used by PaineWebber in
connection with its offering of Class Y Shares for sale to the public; (ii) any
expenses of advertising incurred by PaineWebber in connection with such
offering; (iii) the expenses of registration or qualification of PaineWebber as
a dealer or broker under federal or state laws and the expenses of continuing
such registration or qualification; and (iv) all compensation paid to
PaineWebber's investment executives or other employees and others for selling
Class Y Shares, and all expenses of PaineWebber, its investment executives and
employees and others who engage in or support the sale of Class Y Shares as may
4
<PAGE>
be incurred in connection with their sales efforts. PaineWebber shall bear such
additional costs and expenses as it and Mitchell Hutchins may agree upon, such
agreement to be evidenced in a writing signed by both parties. Mitchell Hutchins
shall advise the Board of any such agreement as to additional costs and expenses
borne by PaineWebber at their first regular meeting held after such agreement
but shall not be required to obtain prior approval for such agreements from the
Board.
9. INDEMNIFICATION.
(a) Mitchell Hutchins agrees to indemnify, defend, and hold PaineWebber,
its officers and directors, and any person who controls PaineWebber within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities, and expenses (including the cost of
investigating or defending such claims, demands, or liabilities and any counsel
fees incurred in connection therewith) which PaineWebber, its officers,
directors, or any such controlling person may incur under the 1933 Act, under
common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement; arising
out of or based upon any alleged omission to state a material fact required to
be stated in the Registration Statement thereof or necessary to make the
statements in the Registration Statement thereof not misleading; or arising out
of any sales or advertising materials with respect to the Class Y Shares
provided by Mitchell Hutchins to PaineWebber. However, this indemnity agreement
shall not apply to any claims, demands, liabilities, or expenses that 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 PaineWebber to Mitchell Hutchins or the Fund for use in
the Registration Statement or in any sales or advertising material; and further
provided, that in no event shall anything contained herein be so construed as to
protect PaineWebber against any liability to Mitchell Hutchins or the Fund or to
the shareholders of any Series to which PaineWebber would otherwise be subject
by reason of willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations under this Contract.
(b) PaineWebber agrees to indemnify, defend, and hold Mitchell
Hutchins and its officers and directors, the Fund, its officers and trustees,
and any person who controls Mitchell Hutchins or the Fund within the meaning of
Section 15 of the 1933 Act, free and harmless from and against any and all
claims, demands, liabilities and expenses (including the cost of investigating
or defending against such claims, demands or liabilities and any counsel fees
incurred in connection therewith) which Mitchell Hutchins or its officers or
5
<PAGE>
directors or the Fund, its officers or trustees, or any such controlling person
may incur under the 1933 Act, under common law or otherwise arising out of or
based upon any alleged untrue statement of a material fact contained in
information furnished in writing by PaineWebber to Mitchell Hutchins or the Fund
for use in the Registration Statement; arising out of or based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or necessary to make such information
not misleading; or arising out of any agreement between PaineWebber and a
correspondent firm or any other retail dealer; or arising out of any sales or
advertising material used by PaineWebber in connection with its duties under
this Contract.
10. DURATION AND TERMINATION.
(a) This Contract shall become effective upon the date written
above, provided that, with respect to any Series, this Contract shall not take
effect unless such action has first been approved by vote of a majority of the
Board and by vote of a majority of those trustees of the Fund who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the operation of this Contract or in any agreements related thereto
(all such trustees collectively being referred to herein as the "Independent
Trustees"), cast in person at a meeting called for the purpose of voting on such
action.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for one year from the above written date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of the Independent Trustees, cast in
person at a meeting called for the purpose of voting on such approval, and (ii)
by the Board with respect to any given Series or by vote of a majority of the
outstanding voting securities of the Class Y Shares of such Series.
(c) Notwithstanding the foregoing, with respect to any Series this
Contract may be terminated at any time, without the payment of any penalty, by
either party, upon the giving of 30 days' written notice. Such notice shall be
deemed to have been given on the date it is received in writing by the other
party or any officer thereof. This Contract may also be terminated at any time,
without the payment of any penalty, by vote of the Board, by vote of a majority
of the Independent Trustees or by vote of a majority of the outstanding voting
securities of the Class Y Shares of such Series on 30 days' written notice to
Mitchell Hutchins and PaineWebber.
6
<PAGE>
(d) Termination of this Contract with respect to any given Series
shall in no way affect the continued validity of this Contract or the
performance thereunder with respect to any other Series. This Contract will
automatically terminate in the event of its assignment or in the event that the
Distribution contract is terminated.
11. AMENDMENT OF THIS AGREEMENT. No provision of this Contract may be
amended, 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.
12. USE OF PAINEWEBBER NAME. PaineWebber hereby authorizes Mitchell
Hutchins to use the name "PaineWebber Incorporated" or any name derived
therefrom in any sales or advertising materials prepared and/or used by Mitchell
Hutchins in connection with its duties as distributor of the Class Y Shares, but
only for so long as this Contract or any extension, renewal or amendment hereof
remains in effect, including any similar agreement with any organization which
shall have succeeded to the business of PaineWebber.
13. GOVERNING LAW. This Contract shall be construed in accordance
with the laws of the State of Delaware and the 1940 Act. To the extent that
the applicable laws of the State of Delaware conflict with the applicable
provisions of the 1940 Act, the latter shall control.
14. MISCELLANEOUS. The captions in this Contract are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors. As used in this Contract,
the terms "majority of the outstanding voting securities," "interested person"
and "assignment" shall have the same meaning as such terms have in the 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be
executed by their officers designated as of the day and year first written
above.
MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
Attest: __________________________ By: __________________________
PAINEWEBBER INCORPORATED
Attest: __________________________ By: ___________________________
7
MITCHELL HUTCHINS PORTFOLIOS -- CLASS A SHARES
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
WHEREAS Mitchell Hutchins Portfolios ("Trust") is registered under the
Investment Company Act of 1940, as amended ("1940 Act"), as an open-end
management investment company, and has three distinct series of shares of
beneficial interest ("Series"), which correspond to distinct portfolios and have
been designated as Mitchell Hutchins Growth Portfolio, Mitchell Hutchins
Moderate Portfolio and Mitchell Hutchins Conservative Portfolio; and
WHEREAS the Trust desires to adopt a Plan of Distribution ("Plan")
pursuant to Rule 12b-1 under the 1940 Act with respect to the Class A shares of
the above-referenced Series and of such other Series as may hereafter be
designated by the Trust's board of trustees ("Board") and have Class A shares
established; and
WHEREAS the Trust has entered into a Distribution Contract ("Contract")
with Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") pursuant to
which Mitchell Hutchins has agreed to serve as Distributor of the Class A shares
of each such Series;
NOW, THEREFORE, the Trust hereby adopts this Plan with respect to the
Class A shares of each Series in accordance with Rule 12b-1 under the 1940 Act.
1. A. Each Series is authorized to pay to Mitchell Hutchins, as
compensation for Mitchell Hutchins' services as Distributor of the Series' Class
A shares, a service fee at the rate of 0.25% on an annualized basis of the
average daily net assets of the Series' Class A shares. Such fee shall be
calculated and accrued daily and paid monthly or at such other intervals as the
Board shall determine.
B. Any Series may pay a service fee to Mitchell Hutchins at a lesser
rate than the fee specified in paragraph 1A of this Plan, as agreed upon by the
Board and Mitchell Hutchins and as approved in the manner specified in paragraph
4 of this Plan.
2. As Distributor of the Class A shares of each Series, Mitchell
Hutchins may spend such amounts as it deems appropriate on any activities or
expenses primarily intended to result in the sale of the Series' Class A shares
or the servicing and maintenance of shareholder accounts, including, but not
limited to, compensation to employees of Mitchell Hutchins; compensation to and
expenses, including overhead and telephone and other communication expenses, of
Mitchell Hutchins, PaineWebber Incorporated ("PaineWebber") and other selected
dealers who engage in or support the distribution of shares or who service
shareholder accounts; the printing of prospectuses, statements of additional
information, and reports for other than existing shareholders; and the
preparation, printing and distribution of sales literature and advertising
materials.
<PAGE>
3. If adopted with respect to the Class A shares of a Series after any
public offering of those shares, this Plan shall not take effect with respect to
those shares unless it has first been approved by a vote of a majority of the
voting securities of the Class A shares of that Series.
4. This Plan shall not take effect with respect to the Class A shares
of any Series unless it first has been approved, together with any related
agreements, by votes of a majority of both (a) the Board and (b) those Trustees
of the Trust who are not "interested persons" of the Trust and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related thereto ("Independent Trustees"), cast in person at a meeting (or
meetings) called for the purpose of voting on such approval; and until the
Trustees who approve the Plan's taking effect with respect to such Series' Class
A shares have reached the conclusion required by Rule 12b-1(e) under the 1940
Act.
5. After approval as set forth in paragraphs 3 and 4, this Plan shall
continue in full force and effect with respect to such Series for so long as
such continuance is specifically approved at least annually in the manner
provided for approval of this Plan in paragraph 4.
6. Mitchell Hutchins shall provide to the Board and the Board shall
review, at least quarterly, a written report of the amounts expended with
respect to the Class A shares of each Series by Mitchell Hutchins under this
Plan and the Contract and the purposes for which such expenditures were made.
Mitchell Hutchins shall submit only information regarding amounts expended for
"service activities," as defined in this paragraph 6, to the Board in support of
the service fee payable hereunder.
"Service activities" shall mean activities covered by the
definition of "service fee" contained in Rule 2830 of the Conduct Rules of the
National Association of Securities Dealers, Inc., including the provision by
Mitchell Hutchins or PaineWebber of personal, continuing services to investors
in the Class A shares of the Series. Overhead and other expenses of Mitchell
Hutchins and PaineWebber related to their "service activities," including
telephone and other communications expenses, may be included in the information
regarding amounts expended for such activities.
7. This Plan may be terminated with respect to the Class A shares of
any Series at any time by vote of the Board, by vote of a majority of the
Independent Trustees, or by vote of a majority of the outstanding voting
securities of the Class A shares of that Series.
8. This Plan may not be amended to increase materially the amount of
service fees provided for in paragraph 1A hereof unless such amendment is
approved by a vote of a majority of the outstanding voting securities of each
Series, and no material amendment to the Plan shall be made unless approved in
the manner provided for approval and annual renewal in paragraph 5 hereof.
9. The amount of the service fees payable by any Series to Mitchell
Hutchins under paragraph 1A hereof and the Contract is not related directly to
expenses incurred by Mitchell Hutchins on behalf of such Series in serving as
Distributor of the Class A shares, and paragraph 2 hereof and the Contract do
2
<PAGE>
not obligate the Series to reimburse Mitchell Hutchins for such expenses. The
service fees set forth in paragraph 1A hereof will be paid by the Series to
Mitchell Hutchins until either the Plan or the Contract is terminated or not
renewed. If either the Plan or the Contract is terminated or not renewed with
respect to the Class A shares of any Series, any distribution expenses incurred
by Mitchell Hutchins on behalf of the Series in excess of payments of the
service fees specified in paragraph 1A hereof and the Contract which Mitchell
Hutchins has received or accrued through the termination date are the sole
responsibility and liability of Mitchell Hutchins, and are not obligations of
the Series.
10. While this Plan is in effect, the selection and nomination of the
Trustees who are not interested persons of the Trust shall be committed to the
discretion of the Trustees who are not interested persons of the Trust.
11. As used in this Plan, the terms "majority of the outstanding voting
securities" and "interested person" shall have the same meaning as those terms
have in the 1940 Act.
12. The Trust shall preserve copies of this Plan (including any
amendments thereto) and any related agreements and all reports made pursuant to
paragraph 6 hereof for a period of not less than six years from the date of this
Plan, the first two years in an easily accessible place.
13. The Trustees of the Trust and the shareholders of each Series shall
not be liable for any obligations of the Trust or any Series under this Plan,
and Mitchell Hutchins or any other person, in asserting any rights or claims
under this Plan, shall look only to the assets and property of the Trust or such
Series in settlement of such right or claim, and not to such Trustees or
shareholders.
IN WITNESS WHEREOF, the Trust has executed this Plan of Distribution on
the day and year set forth below in New York, New York.
Date: , 1997
-------------------------------
ATTEST: MITCHELL HUTCHINS PORTFOLIOS
By:
- ---------------------------- ------------------------------
3
MITCHELL HUTCHINS PORTFOLIOS -- CLASS B SHARES
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
WHEREAS Mitchell Hutchins Portfolios ("Trust") is registered under the
Investment Company Act of 1940, as amended ("1940 Act"), as an open-end
management investment company, and has three distinct series of shares of
beneficial interest ("Series"), which correspond to distinct portfolios and have
been designated as Mitchell Hutchins Growth Portfolio, Mitchell Hutchins
Moderate Portfolio and Mitchell Hutchins Conservative Portfolio; and
WHEREAS the Trust desires to adopt a Plan of Distribution ("Plan")
pursuant to Rule 12b-1 under the 1940 Act with respect to the Class B shares of
the above-referenced Series and of such other Series as may hereafter be
designated by the Trust's board of trustees ("Board") and have Class B shares
established; and
WHEREAS the Trust has entered into a Distribution Contract ("Contract")
with Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") pursuant to
which Mitchell Hutchins has agreed to serve as Distributor of the Class B shares
of each such Series;
NOW, THEREFORE, the Trust hereby adopts this Plan with respect to the
Class B shares of each Series in accordance with Rule 12b-1 under the 1940 Act.
I. A. Each Series is authorized to pay to Mitchell Hutchins, as
compensation for Mitchell Hutchins' services as Distributor of the Series' Class
B shares, a distribution fee at the rate of 0.75% on an annualized basis of the
average daily net assets of the Series' Class B shares. Such fee shall be
calculated and accrued daily and paid monthly or at such other intervals as the
Board shall determine.
B. Each Series is authorized to pay to Mitchell Hutchins, as
compensation for Mitchell Hutchins' services as Distributor of the Series' Class
B shares, a service fee at the rate of 0.25% on an annualized basis of the
average daily net assets of the Series' Class B shares. Such fee shall be
calculated and accrued daily and paid monthly or at such other intervals as the
Board shall determine.
C. Any Series may pay a distribution or service fee to Mitchell
Hutchins at a lesser rate than the fees specified in paragraphs 1A and 1B,
respectively, of this Plan, in either case as agreed upon by the Board and
Mitchell Hutchins and as approved in the manner specified in paragraph 4 of this
Plan.
2. As Distributor of the Class B shares of each Series, Mitchell
Hutchins may spend such amounts as it deems appropriate on any activities or
expenses primarily intended to result in the sale of the Class B shares of the
Series or the servicing and maintenance of shareholder accounts, including, but
not limited to, compensation to employees of Mitchell Hutchins; compensation to
and expenses, including overhead and telephone and other communication expenses,
<PAGE>
of Mitchell Hutchins, PaineWebber Incorporated ("PaineWebber") and other
selected dealers who engage in or support the distribution of shares or who
service shareholder accounts; the printing of prospectuses, statements of
additional information, and reports for other than existing shareholders; and
the preparation, printing and distribution of sales literature and advertising
materials.
3. If adopted with respect to the Class B shares of a Series after any
public offering of those shares, this Plan shall not take effect with respect to
those shares unless it first has been approved by a vote of a majority of the
voting securities of the Class B shares of that Series.
4. This Plan shall not take effect with respect to the Class B shares
of any Series unless it first has been approved, together with any related
agreements, by votes of a majority of both (a) the Board and (b) those Trustees
of the Trust who are not "interested persons" of the Trust and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related thereto ("Independent Trustees"), cast in person at a meeting (or
meetings) called for the purpose of voting on such approval; and until the
Trustees who approve the Plan's taking effect with respect to such Series' Class
B shares have reached the conclusion required by Rule 12b-1(e) under the 1940
Act.
5. After approval as set forth in paragraphs 3 and 4, this Plan shall
take effect and continue in full force and effect with respect to the Class B
shares of such Series for so long as such continuance is specifically approved
at least annually in the manner provided for approval of this Plan in paragraph
4.
6. Mitchell Hutchins shall provide to the Board and the Board shall
review, at least quarterly, a written report of the amounts expended with
respect to the Class B shares of each Series by Mitchell Hutchins under this
Plan and the Contract and the purposes for which such expenditures were made.
Mitchell Hutchins shall submit only information regarding amounts expended for
"distribution activities," as defined in this paragraph 6, to the Board in
support of the distribution fee payable hereunder and shall submit only
information regarding amounts expended for "service activities," as defined in
this paragraph 6, to the Board in support of the service fee payable hereunder.
For purposes of this Plan, "distribution activities" shall mean any
activities in connection with Mitchell Hutchins' performance of its obligations
under this Plan or the Contract that are not deemed "service activities."
"Service activities" shall mean activities covered by the definition of "service
fee" contained in Rule 2830 of the Conduct Rules of the National Association of
Securities Dealers, Inc., including the provision by Mitchell Hutchins or
PaineWebber of personal, continuing services to investors in the Class B shares
of the Series. Overhead and other expenses of Mitchell Hutchins and PaineWebber
related to their "distribution activities" or "service activities," including
telephone and other communications expenses, may be included in the information
regarding amounts expended for such activities.
7. This Plan may be terminated with respect to the Class B shares of
any Series at any time by vote of the Board, by vote of a majority of the
Independent Trustees, or by vote of a majority of the outstanding voting
securities of the Class B shares of that Series.
2
<PAGE>
8. This Plan may not be amended to increase materially the amount of
distribution fees provided for in paragraph 1A hereof or the amount of service
fees provided for in paragraph 1B hereof unless such amendment is approved in
the manner provided for initial approval in paragraphs 3 and 4 hereof, and no
material amendment to the Plan shall be made unless approved in the manner
provided for approval and annual renewal in paragraph 5 hereof.
9. The amount of the distribution and service fees payable by the
Series to Mitchell Hutchins under paragraphs 1A and 1B hereof and the Contract
is not related directly to expenses incurred by Mitchell Hutchins on behalf of
such Series in serving as Distributor of the Class B shares, and paragraph 2
hereof and the Contract do not obligate the Series to reimburse Mitchell
Hutchins for such expenses. The distribution and service fees set forth in
paragraphs 1A and 1B hereof will be paid by the Series to Mitchell Hutchins
until either the Plan or the Contract is terminated or not renewed. If either
the Plan or the Contract is terminated or not renewed with respect to the Class
B shares of any Series, any distribution expenses incurred by Mitchell Hutchins
on behalf of the Class B shares of the Series in excess of payments of the
distribution and service fees specified in paragraphs 1A and 1B hereof and the
Contract which Mitchell Hutchins has received or accrued through the termination
date are the sole responsibility and liability of Mitchell Hutchins, and are not
obligations of the Series.
10. While this Plan is in effect, the selection and nomination of the
Trustees who are not interested persons of the Trust shall be committed to the
discretion of the Trustees who are not interested persons of the Trust.
11. As used in this Plan, the terms "majority of the outstanding voting
securities" and "interested person" shall have the same meaning as those terms
have in the 1940 Act.
12. The Trust shall preserve copies of this Plan (including any
amendments thereto) and any related agreements and all reports made pursuant to
paragraph 6 hereof for a period of not less than six years from the date of this
Plan, the first two years in an easily accessible place.
13. The Trustees of the Trust and the shareholders of each Series shall
not be liable for any obligations of the Trust or any Series under this Plan,
and Mitchell Hutchins or any other person, in asserting any rights or claims
under this Plan, shall look only to the assets and property of the Trust or such
Series in settlement of such right or claim, and not to such Trustees or
shareholders.
IN WITNESS WHEREOF, the Trust has executed this Plan of Distribution on
the day and year set forth below in New York, New York.
Date: , 1997
----------------------
ATTEST: MITCHELL HUTCHINS PORTFOLIOS
By:
- ---------------------------- ------------------------------
3
MITCHELL HUTCHINS PORTFOLIOS -- CLASS C SHARES
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
WHEREAS, Mitchell Hutchins Portfolios ("Trust") is registered under the
Investment Company Act of 1940, as amended ("1940 Act"), as an open-end
management investment company, and has three distinct series of shares of
beneficial interest ("Series"), which correspond to distinct portfolios and have
been designated as Mitchell Hutchins Growth Portfolio, Mitchell Hutchins
Moderate Portfolio and Mitchell Hutchins Conservative Portfolio; and
WHEREAS, the Trust desires to adopt a Plan of Distribution ("Plan")
pursuant to Rule 12b-1 under the 1940 Act with respect to the Class C shares of
the above-referenced Series and of such other Series as may hereafter be
designated by the Trust's board of trustees ("Board") and have Class C shares
established; and
WHEREAS, the Trust has entered into a Distribution Contract
("Contract") with Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins")
pursuant to which Mitchell Hutchins has agreed to serve as Distributor of the
Class C shares of each such Series;
NOW, THEREFORE, the Trust hereby adopts this Plan with respect to the
Class C shares of each Series in accordance with Rule 12b-1 under the 1940 Act.
I. A. The following Series of the Trust are authorized to pay to
Mitchell Hutchins, as compensation for Mitchell Hutchins' services as
Distributor of the Series' Class C shares, distribution fees at the rate (on an
annualized basis) set forth below of the average daily net assets of the Series'
Class C shares. Such fee shall be calculated and accrued daily and paid monthly
or at such other intervals as the Board shall determine:
Mitchell Hutchins Growth Portfolio 0.75%
Mitchell Hutchins Moderate Portfolio 0.75%
Mitchell Hutchins Conservative Portfolio 0.50%
B. Any Series hereafter established is authorized to pay to Mitchell
Hutchins, as compensation for Mitchell Hutchins' services as Distributor of the
Series' Class C Shares, a distribution fee in the amount to be agreed upon in a
written distribution fee addendum to this Plan ("Distribution Fee Addendum")
executed by the Trust on behalf of such Series. All such Distribution Fee
Addenda shall provide that they are subject to all terms and conditions of this
Plan.
C. Each Series is authorized to pay to Mitchell Hutchins, as
compensation for Mitchell Hutchins' services as Distributor of the Series' Class
C shares, a service fee at the rate of 0.25%, on an annualized basis, of the
average daily net assets of the Series' Class C shares. Such fee shall be
calculated and accrued daily and paid monthly or at such other intervals as the
Board shall determine.
<PAGE>
D. Any Series may pay a distribution or service fee to Mitchell
Hutchins at a lesser rate than the fees specified above, as agreed upon by the
Board and Mitchell Hutchins and as approved in the manner specified in Paragraph
4 of this Plan.
2. As Distributor of the Class C shares of each Series, Mitchell
Hutchins may spend such amounts as it deems appropriate on any activities or
expenses primarily intended to result in the sale of the Class C shares of the
Series or the servicing and maintenance of shareholder accounts, including, but
not limited to, compensation to employees of Mitchell Hutchins; compensation to
and expenses, including overhead and telephone and other communication expenses,
of Mitchell Hutchins, PaineWebber Incorporated ("PaineWebber") and other
selected dealers who engage in or support the distribution of shares or who
service shareholder accounts; the printing of prospectuses, statements of
additional information, and reports for other than existing shareholders; and
the preparation, printing and distribution of sales literature and advertising
materials.
3. If adopted with respect to the Class C shares of a Series after any
public offering of those shares, this Plan shall not take effect with respect to
those shares unless it first has been approved by a vote of a majority of the
voting securities of the Class C shares of that Series.
4. This Plan shall not take effect with respect to the Class C shares
of any Series unless it first has been approved, together with any related
agreements, by votes of a majority of both (a) the Board and (b) those Trustees
of the Trust who are not "interested persons" of the Trust and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related thereto ("Independent Trustees"), cast in person at a meeting (or
meetings) called for the purpose of voting on such approval; and until the
Trustees who approve the Plan's taking effect with respect to such Series' Class
C shares have reached the conclusion required by Rule 12b-1(e) under the 1940
Act.
5. After approval as set forth in paragraphs 3 and 4, this Plan shall
take effect and continue in full force and effect with respect to the Class C
shares of such Series for so long as such continuance is specifically approved
at least annually in the manner provided for approval of this Plan in Paragraph
4.
6. Mitchell Hutchins shall provide to the Board and the Board shall
review, at least quarterly, a written report of the amounts expended with
respect to the Class C shares of each Series by Mitchell Hutchins under this
Plan and the Contract and the purposes for which such expenditures were made.
Mitchell Hutchins shall submit only information regarding amounts expended for
"distribution activities," as defined in this Paragraph 6, to the Board in
support of the distribution fee payable hereunder and shall submit only
information regarding amounts expended for "service activities," as defined in
this Paragraph 6, to the Board in support of the service fee payable hereunder.
For purposes of this Plan, "distribution activities" shall mean any
activities in connection with Mitchell Hutchins' performance of its obligations
under this Plan or the Contract that are not deemed "service activities."
"Service activities" shall mean activities covered by the definition of "service
fee" contained in Rule 2830 of the Conduct Rules of the National Association of
2
<PAGE>
Securities Dealers, Inc., including the provision by Mitchell Hutchins or
PaineWebber of personal, continuing services to investors in the Class C shares
of the Series. Overhead and other expenses of Mitchell Hutchins and PaineWebber
related to their "distribution activities" or "service activities," including
telephone and other communications expenses, may be included in the information
regarding amounts expended for such activities.
7. This Plan may be terminated with respect to the Class C shares of
any Series at any time by vote of the Board, by vote of a majority of the
Independent Trustees, or by vote of a majority of the outstanding voting
securities of the Class C shares of that Series.
8. This Plan may not be amended to increase materially the amount of
distribution fees provided for in Paragraph 1A or 1B hereof or the amount of
service fees provided for in Paragraph 1C hereof unless such amendment is
approved in the manner provided for initial approval in paragraphs 3 and 4
hereof, and no material amendment to the Plan shall be made unless approved in
the manner provided for approval and annual renewal in Paragraph 5 hereof.
9. The amount of the distribution and service fees payable by the
Series to Mitchell Hutchins under Paragraphs 1 hereof and the Contract is not
related directly to expenses incurred by Mitchell Hutchins on behalf of such
Series in serving as Distributor of the Class C shares, and Paragraph 2 hereof
and the Contract do not obligate the Series to reimburse Mitchell Hutchins for
such expenses. The distribution and service fees set forth in Paragraph 1 hereof
will be paid by the Series to Mitchell Hutchins until either the Plan or the
Contract is terminated or not renewed. If either the Plan or the Contract is
terminated or not renewed with respect to the Class C shares of any Series, any
distribution expenses incurred by Mitchell Hutchins on behalf of the Class C
shares of the Series in excess of payments of the distribution and service fees
specified in Paragraphs 1 hereof and the Contract which Mitchell Hutchins has
received or accrued through the termination date are the sole responsibility and
liability of Mitchell Hutchins, and are not obligations of the Series.
10. While this Plan is in effect, the selection and nomination of the
Trustees who are not interested persons of the Trust shall be committed to the
discretion of the Trustees who are not interested persons of the Trust.
11. As used in this Plan, the terms "majority of the outstanding voting
securities" and "interested person" shall have the same meaning as those terms
have in the 1940 Act.
12. The Trust shall preserve copies of this Plan (including any
amendments thereto) and any related agreements and all reports made pursuant to
Paragraph 6 hereof for a period of not less than six years from the date of this
Plan, the first two years in an easily accessible place.
13. The Trustees of the Trust and the shareholders of each Series shall
not be liable for any obligations of the Trust or any Series under this Plan,
and Mitchell Hutchins or any other person, in asserting any rights or claims
under this Plan, shall look only to the assets and property of the Trust or such
Series in settlement of such right or claim, and not to such Trustees or
shareholders.
3
<PAGE>
IN WITNESS WHEREOF, the Trust has caused this Plan of Distribution to
be executed on the day and year set forth below in New York, New York.
Date: , 1997
-----------------------
ATTEST: MITCHELL HUTCHINS PORTFOLIOS
By:
- ---------------------------- -------------------------------
4
MITCHELL HUTCHINS PORTFOLIOS
MULTIPLE CLASS PLAN PURSUANT TO RULE 18f-3
Mitchell Hutchins Portfolios hereby adopts this amended and restated
Multiple Class Plan pursuant to Rule 18f-3 under the Investment Company Act of
1940, as amended ("1940 Act") on behalf of its current series, Mitchell Hutchins
Growth Portfolio, Mitchell Hutchins Moderate Portfolio and Mitchell Hutchins
Conservative Portfolio, and any series that may be established in the future
(referred to hereinafter collectively as the "Funds" and individually as a
"Fund").
A. GENERAL DESCRIPTION OF CLASSES THAT ARE OFFERED:
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1. CLASS A SHARES. Class A shares of each Fund are sold to the general
public subject to an initial sales charge. The initial sales charge for each
Fund is waived for certain eligible purchasers and reduced or waived for certain
large volume purchases.
The maximum sales charge is 4% of the public offering price for Class A
shares of a Fund that invests primarily in debt securities or in other
investment companies that invest primarily in debt securities.
The maximum sales charge is 4.5% of the public offering price for Class
A shares of a Fund that invests primarily in equity securities or a combination
of equity and debt securities or in other investment companies that invest
primarily in equity securities or a combination of equity and debt securities.
Class A shares of each Fund are subject to an annual service fee of
0.25% of the average daily net assets of the Class A shares of each Fund paid
pursuant to a plan of distribution adopted pursuant to Rule 12b-1 under the 1940
Act.
Class A shares of each Fund are subject to a contingent deferred sales
charge ("CDSC") on redemptions of shares (i) purchased without an initial sales
charge due to a sales charge waiver for purchases of $1 million or more and (ii)
held less than one year. The Class A CDSC is equal to 1% of the lower of: (i)
the net asset value of the shares at the time of purchase or (ii) the net asset
value of the shares at the time of redemption. Class A shares of each Fund held
one year or longer and Class A shares of each Fund acquired through reinvestment
of dividends or capital gains distributions on shares otherwise subject to a
Class A CDSC are not subject to the CDSC. The CDSC for Class A shares of each
Fund will be waived under certain circumstances.
2. CLASS B SHARES. Class B shares of each Fund are sold to the general
public subject to a CDSC, but without imposition of an initial sales charge.
The maximum CDSC for Class B shares of each Fund is equal to 5% of the
lower of: (i) the net asset value of the shares at the time of purchase or (ii)
the net asset value of the shares at the time of redemption.
Class B shares of each Fund held six years or longer and Class B shares
of each Fund acquired through reinvestment of dividends or capital gains
distributions are not subject to the CDSC.
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Class B shares of each Fund are subject to an annual service fee of
0.25% of average daily net assets and a distribution fee of 0.75% of average
daily net assets of the Class B shares of each Fund, each paid pursuant to a
plan of distribution adopted pursuant to Rule 12b-1 under the 1940 Act.
Class B shares of each Fund convert to Class A shares approximately six
years after issuance at relative net asset value.
3. CLASS C SHARES. Class C shares of each Fund are sold to the general
public without imposition of a sales charge.
Class C shares of a Fund that invests primarily in equity securities or
a combination of equity and debt securities (or in other investment companies
that invest primarily in equity securities or a combination of equity and debt
securities) are subject to an annual service fee of 0.25% of average daily net
assets and a distribution fee of 0.75% of average daily net assets of Class C
shares of such Fund, each pursuant to a plan of distribution adopted pursuant to
Rule 12b-1 under the 1940 Act. Class C shares of such a Fund will be subject to
a CDSC on redemptions of Class C shares held less than one year equal to 1% of
the lower of: (i) the net asset value of the shares at the time of purchase or
(ii) the net asset value of the shares at the time of redemption.
Class C shares of a Fund that invests primarily in debt securities (or
in other investment companies that invest primarily in debt securities) are
subject to an annual service fee of 0.25% of average daily net assets and a
distribution fee of 0.50% of average daily net assets of Class C shares of such
Fund, each pursuant to a plan of distribution adopted pursuant to Rule 12b-1
under the 1940 Act. Class C shares of such a Fund will be subject to a CDSC on
redemptions of Class C shares held less than one year equal to 0.75% of the
lower of: (i) the net asset value of the shares at the time of purchase or (ii)
the net asset value of the shares at the time of redemption.
Class C shares of each Fund held one year or longer and Class C shares
of each Fund acquired through reinvestment of dividends or capital gains
distributions are not subject to the CDSC. The CDSC for Class C shares of each
Fund will be waived under certain circumstances.
4. CLASS Y SHARES. Class Y shares are sold without imposition of an
initial sales charge or CDSC and are not subject to any service or distribution
fees.
Class Y shares of each Fund are available for purchase only by: (i)
employee benefit and retirement plans, other than individual retirement accounts
and self-employed retirement plans, of Paine Webber Group Inc. and its
affiliates; (ii) certain unit investment trusts sponsored by PaineWebber
Incorporated ("PaineWebber"); (iii) participants in certain investment programs
that are currently, or will in the future be, sponsored by PaineWebber or its
affiliates and that charge a separate fee for program services, provided that
shares are purchased through or in connection with such programs; (iv) investors
purchasing $10,000,000 or more at one time in any combination of PaineWebber
proprietary funds in the Flexible Pricing System; (v) an employee benefit plan
qualified under section 401 (including a salary reduction plan qualified under
section 401(k)) or section 403(b) of the Internal Revenue Code (each an
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"employee benefit plan"), provided that such employee benefit plan has 5,000 or
more eligible employees; (vi) an employee benefit plan with assets of
$50,000,000 or more,and (vii) any investment company advised by PaineWebber or
its affiliates.
B. EXPENSE ALLOCATIONS OF EACH CLASS:
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Certain expenses may be attributable to a particular Class of shares of
each Fund ("Class Expenses"). Class Expenses are charged directly to the net
assets of the particular Class and, thus, are borne on a pro rata basis by the
outstanding shares of that Class.
In addition to the distribution and service fees described above, each
Class may also pay a different amount of the following other expenses:
(1) printing and postage expenses related to preparing and
distributing materials such as shareholder reports,
prospectuses, and proxies to current shareholders of a
specific Class;
(2) Blue Sky fees incurred by a specific Class of shares;
(3) SEC registration fees incurred by a specific Class of shares;
(4) expenses of administrative personnel and services required to
support the shareholders of a specific Class of shares;
(5) Trustees' fees incurred as a result of issues relating to a
specific Class of shares;
(6) litigation expenses or other legal expenses relating to a
specific Class of shares; and
(7) transfer agent fees identified as being attributable to a
specific Class.
C. EXCHANGE PRIVILEGES:
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Class A, Class B and Class C shares of each Fund may be exchanged for
shares of the corresponding Class of other PaineWebber mutual funds or may be
acquired through an exchange of shares of the corresponding Class of those
funds. Class Y shares of the Funds are not exchangeable.
These exchange privileges may be modified or terminated by a Fund, and
exchanges may only be made into funds that are legally registered for sale in
the investor's state of residence.
D. CLASS DESIGNATION:
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Subject to approval by the Board of Trustees of Mitchell Hutchins
Portfolios, a Fund may alter the nomenclature for the designations of one or
more of its classes of shares.
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E. ADDITIONAL INFORMATION:
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This Multiple Class Plan is qualified by and subject to the terms of
the then current prospectus for the applicable Classes; provided, however, that
none of the terms set forth in any such prospectus shall be inconsistent with
the terms of the Classes contained in this Plan. The prospectus for each Fund
contains additional information about the Classes and each Fund's multiple class
structure.
F. DATE OF EFFECTIVENESS:
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This Multiple Class Plan is effective as of the date hereof, provided
that this Plan shall not become effective with respect to any Fund unless such
action has first been approved by the vote of a majority of the Board and by
vote of a majority of those trustees of the Fund who are not interested persons
of Mitchell Hutchins Portfolios.
July 24, 1997
