<PAGE>
As filed with the Securities and Exchange Commission on September 30, 1998
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. [ ]
Post-Effective Amendment No. 1 [ X ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 4
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.
BENJAMIN J. HASKIN, 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: Effective Date of this
Post-Effective Amendment.
It is proposed that this filing will become effective:
[ ] Immediately upon filing pursuant to Rule 485(b)
[ X ] On OCTOBER 1, 1998 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(1)
[ ] On pursuant to Rule 485(a)(1)
[ ] 75 days after filing pursuant to Rule 485(a)(2)
[ ] On pursuant to Rule 485(a)(2)
Title of Securities Being Registered: Shares of Beneficial Interest.
<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
<PAGE>
MITCHELL HUTCHINS PORTFOLIOS:
Mitchell Hutchins Aggressive Portfolio, Mitchell Hutchins Moderate Portfolio,
Mitchell Hutchins Conservative Portfolio
Form N-1A Cross Reference Sheet
Part A Item No. and Caption Prospectus Caption
--------------------------- ------------------
1. Cover Page Cover Page
2. Synopsis The Portfolios at a Glance; Expense Table
3. Condensed Financial Financial Highlights; Performance
Information
4. General Description of The Portfolios at a Glance; Investment
Registrant 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 Financial Highlights
Fund Performance
6. Capital Stock and Other Cover Page; Flexible Pricing-SM-;
Securities Dividends & Taxes; General Information
7. Purchase of Securities Being Flexible Pricing-SM-; How to Buy Shares;
Offered Other Services; Determining the Shares'
Net Asset Value
8. Redemption or Repurchase How to Sell Shares; Other Services
9. Pending Legal Proceedings Not Applicable
Part B Item No. and Caption Statement of Additional Information Caption
--------------------------- -------------------------------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and Other Information
History
13. Investment Objective and Portfolios - Investment Policies and
Policies Restrictions; Underlying Funds - Investment
Policies; Underlying Funds - Hedging and
Other Strategies Using Derivative
Instruments; Portfolio Transactions
14. Management of the Fund Trustees and Officers; Principal Holders
of Securities
15. Control Persons and Principal Trustees and Officers; Principal Holders
Holders of Securities of Securities
16. Investment Advisory and Investment Advisory and Distribution
Other Services Arrangements
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Other Conversion of Class B Shares; Other
Securities Information
19. Purchase, Redemption and Reduced Sales Charges, Additional
Pricing of Securities Being Exchange and Redemption Information and
Offered Other Services; Valuation of Shares
20. Tax Status Taxes
21. Underwriters Investment Advisory and Distribution
Arrangements
22. Calculation of Performance Performance Information
Data
23. Financial Statements Financial Statements
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 -- OCTOBER 1, 1998
- --------------------------------------------------------------------------------
The Mitchell Hutchins Portfolios ("Portfolios") seek
to achieve their investment objectives by investing in
a number of other PaineWebber mutual funds.
MITCHELL HUTCHINS AGGRESSIVE 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 October 1,
1998 has been filed with the Securities and Exchange
Commission ("SEC" or "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. In addition, the
Commission maintains a website (http://www.sec.gov)
that contains the Statement of Additional Information,
material incorporated by reference, and other
information regarding registrants that file
electronically with the Commission.
------------------------------------------------------
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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Prospectus Page 1
<PAGE>
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
The Portfolios at a Glance............................................................ 3
Expense Table......................................................................... 5
Financial Highlights.................................................................. 10
Investment Objectives & Policies...................................................... 13
Investment Philosophy & Process....................................................... 16
Performance........................................................................... 17
Investments of the Portfolios and the Underlying Funds................................ 19
Flexible Pricing(SM).................................................................. 26
How To Buy Shares..................................................................... 30
How To Sell Shares.................................................................... 31
Other Services........................................................................ 32
Management............................................................................ 32
Determining the Shares' Net Asset Value............................................... 34
Dividends & Taxes..................................................................... 35
General Information................................................................... 36
</TABLE>
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Prospectus Page 2
<PAGE>
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
THE PORTFOLIOS AT A GLANCE
- --------------------------------------------------------------------------------
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. Although the Portfolios may make adjustments in response to
market conditions, 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
adviser, allocates each Portfolio's assets among Underlying Funds using
fundamental and quantitative analysis. Mitchell Hutchins will consider
reallocating each Portfolio's investments at least quarterly, but may change
allocations more frequently if market conditions warrant. Any reallocations of
investments would be within the established investment ranges. 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 receive 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 AGGRESSIVE PORTFOLIO
GOAL: To increase the value of an investment by investing the majority of its
assets in long-term, growth-oriented 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 long-term, growth-oriented equity and income-producing bond
mutual funds.
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
income-producing bond mutual funds and, secondarily, to increase the value of an
investment by providing some 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 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.
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 Fund 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.
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Prospectus Page 3
<PAGE>
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
THE PORTFOLIOS AT A GLANCE
(Continued)
- --------------------------------------------------------------------------------
Some Underlying Funds are subject to the special risks of investing in foreign
equity securities or foreign bonds, which include possible adverse currency
fluctuations and political, social and economic developments abroad and
differing characteristics of foreign economies and markets. These risks are
greater with respect to securities of foreign 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 its investment activities. Each type of derivative instrument
presents its own special risks.
Investors may lose money by investing in a Portfolio; investments in the
Portfolios are 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
for Class B and Class C shares.
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 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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Prospectus Page 4
<PAGE>
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
EXPENSE TABLE
- --------------------------------------------------------------------------------
The following tables are intended to assist investors in understanding the
expenses associated with investing in each class of shares of the Portfolios.
Investors should note that they may invest directly in the Underlying Funds and
thereby avoid incurring the fees and other expenses paid by each 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 the time of sale, whichever is
less)....................................................... None 5% 1%(2) None
ANNUAL FUND OPERATING EXPENSES
(as a % of average net assets)(3)
AGGRESSIVE PORTFOLIO
Management Fees (after waivers)............................... None None None None
12b-1 Fees.................................................... 0.25 1.00 1.00 None
Other Expenses (after reimbursements)......................... None None None None
----- ----- ----- -----
Total Operating Expenses...................................... 0.25% 1.00% 1.00% None
----- ----- ----- -----
----- ----- ----- -----
MODERATE PORTFOLIO
Management Fees (after waivers)............................... None None None None
12b-1 Fees.................................................... 0.25 1.00 1.00 None
Other Expenses (after reimbursements)......................... None None None None
----- ----- ----- -----
Total Operating Expenses...................................... 0.25% 1.00% 1.00% None
----- ----- ----- -----
----- ----- ----- -----
CONSERVATIVE PORTFOLIO
Management Fees (after waivers)............................... None None None None
12b-1 Fees.................................................... 0.25 1.00 0.75 None
Other Expenses (after reimbursements)......................... None None None None
----- ----- ----- -----
Total Operating Expenses...................................... 0.25% 1.00% 0.75% None
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
- ---------
(1) 4.00% for Conservative Portfolio
(2) 0.75% for Conservative Portfolio
(3) Mitchell Hutchins intends to waive its 0.35% Management Fees and to
reimburse expenses for each portfolio (to the extent that those expenses are
not paid by the Underlying Funds pursuant to an SEC exemptive order), so
that the Total Operating Expenses for each class of each Portfolio do not
exceed the amounts shown in the table for the fiscal year ending May 31,
1999. Although Mitchell Hutchins currently expects to continue such waivers
and expense reimbursements after May 31, 1999, it may discontinue or change
them at any time after that date. The expense reimbursements by Mitchell
Hutchins do not include 12b-1 fees or extraordinary expenses.
If fee waivers and expense reimbursement were not in effect, 12b-1 fees
would remain the same; annualized Management Fees, estimated Other Expenses
and Total Operating Expenses would be:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
AGGRESSIVE PORTFOLIO:
Management Fees........................................................ 0.35% 0.35% 0.35% 0.35%
Other Expenses (estimated)............................................. 3.38% 3.45% 3.20% 3.41%
Total Operating Expenses............................................... 3.98% 4.80% 4.55% 3.76%
</TABLE>
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Prospectus Page 5
<PAGE>
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
EXPENSE TABLE
(Continued)
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<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
MODERATE PORTFOLIO:
Management Fees........................................................ 0.35% 0.35% 0.35% 0.35%
Other Expenses (estimated)............................................. 2.18% 2.22% 1.94% 2.24%
Total Operating Expenses............................................... 2.78% 3.57% 3.29% 2.59%
CONSERVATIVE PORTFOLIO:
Management Fees........................................................ 0.35% 0.35% 0.35% 0.35%
Other Expenses (estimated)............................................. 5.83% 5.78% 5.89% 5.84%
Total Operating Expenses............................................... 6.43% 7.13% 6.99% 6.19%
</TABLE>
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 certain investment programs
that are sponsored by PaineWebber and that may invest in PaineWebber mutual
funds ("PW Programs"), when Class Y shares are purchased through that PW
Program. Participation in a PW Program is subject to an advisory fee at an
effective maximum annual rate of 1.5% of assets held through that PW
Program. This account charge is not included in the table because investors
who are not PW Program participants also are permitted to purchase Class Y
shares.
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:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
12b-1 service fees............................................................ 0.25% 0.25% 0.25% None
12b-1 distribution fees....................................................... 0.00% 0.75% 0.75%(1) None
</TABLE>
- ---------
(1) 0.50% for Conservative Portfolio
For more information, see "Management" and "Flexible Pricing-SM-."
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Prospectus Page 6
<PAGE>
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
EXPENSE TABLE
(Continued)
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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 August 31, 1998 (except for High Income Fund and Investment Grade
Income Fund, for which the expense ratios are based on the last reporting period
ended May 31, 1998, 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.
<TABLE>
<CAPTION>
EXPENSE RATIO OF
CLASS Y SHARES OF THE
UNDERLYING FUNDS (AS A
PERCENTAGE OF AVERAGE NET
UNDERLYING PAINEWEBBER FUND ASSETS)
- ---------------------------------------------------------------------------------------------- -------------------------------
<S> <C>
PAINEWEBBER GLOBAL FUNDS
PaineWebber Global Equity Fund.............................................................. 1.10%
PaineWebber Global Income Fund.............................................................. 0.94%
PAINEWEBBER STOCK FUNDS
PaineWebber Growth Fund..................................................................... 1.00%
PaineWebber Growth and Income Fund.......................................................... 0.88%
PaineWebber Small Cap Fund.................................................................. 1.39%
PAINEWEBBER BOND FUNDS
PaineWebber High Income Fund................................................................ 0.64%
PaineWebber Investment Grade Income Fund.................................................... 0.61%
PaineWebber Low Duration U.S. Government Income Fund........................................ 0.86%
PaineWebber U.S. Government Income Fund..................................................... 0.67%
PAINEWEBBER MONEY MARKET FUND
PaineWebber Cashfund(1)..................................................................... 0.56%
</TABLE>
- ---------
(1) PaineWebber Cashfund offers only one class of shares but does not charge
any sales load or 12b-1 service or distribution fees.
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Prospectus Page 7
<PAGE>
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
EXPENSE TABLE
(Continued)
- --------------------------------------------------------------------------------
The following table shows the expense ratios of each Portfolio (after waivers
and reimbursements) 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 that Portfolio currently expects to invest during the current
fiscal year. 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.
<TABLE>
<CAPTION>
AGGREGATE ESTIMATED EXPENSE RATIO
OF THE PORTFOLIOS INCLUDING
INDIRECT
EXPENSES OF CLASS Y SHARES OF THE
UNDERLYING FUNDS (AS A
MITCHELL HUTCHINS PORTFOLIO PERCENTAGE OF AVERAGE NET ASSETS)
- ------------------------------------------------------------------------------------------- ---------------------------------
<S> <C>
AGGRESSIVE PORTFOLIO
Class A.................................................................................. 1.29%
Class B.................................................................................. 2.04%
Class C.................................................................................. 2.04%
Class Y.................................................................................. 1.04%
MODERATE PORTFOLIO
Class A.................................................................................. 1.15%
Class B.................................................................................. 1.90%
Class C.................................................................................. 1.90%
Class Y.................................................................................. 0.90%
CONSERVATIVE PORTFOLIO
Class A.................................................................................. 1.04%
Class B.................................................................................. 1.79%
Class C.................................................................................. 1.54%
Class Y.................................................................................. 0.79%
</TABLE>
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Prospectus Page 8
<PAGE>
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
EXPENSE TABLE
(Continued)
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EXAMPLES OF EFFECT OF FUND EXPENSES
The following examples should assist investors in understanding various costs
and expenses they incur as shareholders of a Portfolio. These expenses reflect
the aggregate estimated expense ratio of each Portfolio (net of any waivers and
reimbursements), which includes the indirect estimated expenses of the
Underlying Funds. The assumed 5% annual return shown in the examples is required
by regulations of the 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:
<TABLE>
<CAPTION>
AGGRESSIVE PORTFOLIO
<S> <C> <C>
EXAMPLE 1 YEAR 3 YEARS
- ------------------------------------------------------------------------------------- ----------- -----------
Class A.............................................................................. $ 58 $ 84
Class B (Assuming sale of all shares at end of period)............................... $ 71 $ 94
Class B (Assuming no sale of shares)................................................. $ 21 $ 64
Class C (Assuming sale of all shares at end of period)............................... $ 31 $ 64
Class C (Assuming no sale of shares)................................................. $ 21 $ 64
Class Y.............................................................................. $ 11 $ 33
<CAPTION>
MODERATE PORTFOLIO
EXAMPLE 1 YEAR 3 YEARS
- ------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Class A.............................................................................. $ 56 $ 80
Class B (Assuming sale of all shares at end of period)............................... $ 69 $ 90
Class B (Assuming no sale of shares)................................................. $ 19 $ 60
Class C (Assuming sale of all shares at end of period)............................... $ 30 $ 60
Class C (Assuming no sale of shares)................................................. $ 19 $ 60
Class Y.............................................................................. $ 9 $ 29
<CAPTION>
CONSERVATIVE PORTFOLIO
EXAMPLE 1 YEAR 3 YEARS
- ------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Class A.............................................................................. $ 50 $ 72
Class B (Assuming sale of all shares at end of period)............................... $ 68 $ 86
Class B (Assuming no sale of shares)................................................. $ 18 $ 56
Class C (Assuming sale of all shares at end of period)............................... $ 26 $ 49
Class C (Assuming no sale of shares)................................................. $ 16 $ 49
Class Y.............................................................................. $ 8 $ 25
</TABLE>
ASSUMPTIONS MADE IN THE EXAMPLES
- - ALL CLASSES: Fee waivers and expense reimbursements to continue;
reinvestment of all dividends and other distributions; allocation of each
Portfolio's assets among the Underlying Funds; and percentage amounts
listed under "Annual Fund Operating Expenses" remain the same for the years
shown.
- - CLASS A SHARES: Deduction of the maximum 4.5% (4.0% for Conservative
Portfolio) initial sales charge at the time of purchase.
- - 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.
- - 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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Prospectus Page 9
<PAGE>
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following tables provide investors with data and ratios for one Class A,
Class B, Class C and Class Y share of the Portfolio indicated for the period
shown. This information is supplemented by the financial statements and
accompanying notes and the report of Ernst & Young LLP, independent auditors,
which appear in the Portfolios' Annual Report to Shareholders for the period
ended May 31, 1998 and are incorporated by reference into the Statement of
Additional Information. The financial statements and notes, as well as the
financial information in the tables below have been audited by Ernst & Young
LLP. Further information about the Portfolios' performance is also included in
the Annual Report to Shareholders, which may be obtained without charge by
calling 1-800-647-1568.
MITCHELL HUTCHINS AGGRESSIVE PORTFOLIO
<TABLE>
<CAPTION>
FOR THE PERIOD FEBRUARY 24, 1998+
THROUGH MAY 31, 1998
-------------------------------------------------
CLASS A CLASS B CLASS C CLASS Y
------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net asset value, beginning of period......... $ 12.50 $ 12.50 $ 12.50 $ 12.50
------- --------- --------- ---------
Net investment income........................ 0.03 0.01 0.01 0.05
Net realized and unrealized gains from
investments................................ 0.45 0.45 0.45 0.44
------- --------- --------- ---------
Total increase from investment operations.... 0.48 0.46 0.46 0.49
------- --------- --------- ---------
Net asset value, end of period............... $ 12.98 $ 12.96 $ 12.96 $ 12.99
------- --------- --------- ---------
------- --------- --------- ---------
Total investment return(1)................... 3.84% 3.68% 3.68% 3.92%
------- --------- --------- ---------
------- --------- --------- ---------
Ratios/Supplemental Data:
Net assets, end of period (000's)............ $ 1,622 $ 1,440 $ 2,048 $ 10
Expenses to average net assets, net of
waivers and reimbursements from adviser.... 0.25%* 1.00%* 1.00%* 0.00%*
Expenses to average net assets, before
waivers and reimbursements from adviser.... 3.98%* 4.80%* 4.55%* 3.76%*
Net investment income to average net assets,
net of waivers and reimbursements from
adviser.................................... 1.49%* 0.70%* 0.69%* 1.57%*
Net investment loss to average net assets,
before waivers and reimbursements from
adviser.................................... (2.24)%* (3.10)%* (2.86)%* (2.19)%*
Portfolio turnover rate...................... 6% % 6 % 6 % 6
</TABLE>
- ---------
+ Commencement of operations.
* Annualized.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the period reported, reinvestment of all dividends and other
distributions, if any, at net asset value on the payable dates and a sale at
net asset value on the last day of the period reported. The figures do not
include sales charges; results for Class A, Class B and Class C would be
lower if sales charges were included. Total investment return for the period
has not been annualized.
- --------------------------------------------------------------------------------
Prospectus Page 10
<PAGE>
- --------------------------------------------------------------------------------
--------------------------
Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
MITCHELL HUTCHINS MODERATE PORTFOLIO
<TABLE>
<CAPTION>
FOR THE PERIOD FEBRUARY 24, 1998+
THROUGH MAY 31, 1998
---------------------------------------------------
CLASS A CLASS B CLASS C CLASS Y
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net asset value, beginning of period......... $ 12.50 $ 12.50 $ 12.50 $ 12.50
--------- --------- --------- ---------
Net investment income........................ 0.06 0.04 0.04 0.09
Net realized and unrealized gains from
investments................................ 0.37 0.36 0.36 0.35
--------- --------- --------- ---------
Total increase from investment operations.... 0.43 0.40 0.40 0.44
--------- --------- --------- ---------
Net asset value, end of period............... $ 12.93 $ 12.90 $ 12.90 $ 12.94
--------- --------- --------- ---------
--------- --------- --------- ---------
Total investment return(1)................... 3.44% 3.20% 3.20% 3.52%
--------- --------- --------- ---------
--------- --------- --------- ---------
Ratios/Supplemental Data:
Net assets, end of period (000's)............ $ 1,676 $ 2,956 $ 2,801 $ 12
Expenses to average net assets, net of
waivers and reimbursements from adviser.... 0.25%* 1.00%* 1.00%* 0.00%*
Expenses to average net assets, before
waivers and reimbursements from adviser.... 2.78%* 3.57%* 3.29%* 2.59%*
Net investment income to average net assets,
net of waivers and reimbursements from
adviser.................................... 2.63%* 1.87%* 1.92%* 2.76%*
Net investment income (loss) to average net
assets, before waivers and reimbursements
from adviser............................... 0.10%* (0.70)%* (0.37)%* 0.17%*
Portfolio turnover rate...................... %13 %13 %13 %13
</TABLE>
- ---------
+ Commencement of operations.
* Annualized.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates and a sale at
net asset value on the last day of the period reported. The figures do not
include sales charges; results for Class A, Class B and Class C would be
lower if sales charges were included. Total investment return for the period
has not been annualized.
- --------------------------------------------------------------------------------
Prospectus Page 11
<PAGE>
- --------------------------------------------------------------------------------
--------------------------
Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
MITCHELL HUTCHINS CONSERVATIVE PORTFOLIO
<TABLE>
<CAPTION>
FOR THE PERIOD FEBRUARY 24, 1998+
THROUGH MAY 31, 1998
---------------------------------------------------
CLASS A CLASS B CLASS C CLASS Y
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net asset value, beginning of period......... $ 12.50 $ 12.50 $ 12.50 $ 12.50
--------- --------- --------- ---------
Net investment income........................ 0.10 0.07 0.08 0.16
Net realized and unrealized gains from
investments................................ 0.21 0.22 0.22 0.16
--------- --------- --------- ---------
Total increase in net asset value from
operations................................. 0.31 0.29 0.30 0.32
--------- --------- --------- ---------
Net asset value, end of period............... $ 12.81 $ 12.79 $ 12.80 $ 12.82
--------- --------- --------- ---------
--------- --------- --------- ---------
Total investment return(1)................... 2.48% 2.32% 2.40% 2.56%
--------- --------- --------- ---------
--------- --------- --------- ---------
Ratios/Supplemental Data:
Net assets, end of period (000's)............ $ 519 $ 1,667 $ 485 $ 5
Expenses to average net assets, net of
waivers and reimbursements from adviser.... 0.25%* 1.00%* 0.75%* 0.00%*
Expenses to average net assets, before
waivers and reimbursements from adviser.... 6.43%* 7.13%* 6.99%* 6.19%*
Net investment income to average net assets,
net of waivers and reimbursements from
adviser.................................... 4.66%* 3.92%* 4.23%* 4.75%*
Net investment loss to average net assets,
before waivers and reimbursements from
adviser.................................... (1.52)%* (2.21)%* (2.00)%* (1.43)%*
Portfolio turnover rate...................... %11 %11 %11 %11
</TABLE>
- ---------
+ Commencement of operations.
* Annualized.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates and a sale at
net asset value on the last day of the period reported. The figures do not
include sales charges; results for Class A, Class B and Class C would be
lower if sales charges were included. Total investment return for the period
has not been annualized.
- --------------------------------------------------------------------------------
Prospectus Page 12
<PAGE>
- --------------------------------------------------------------------------------
------------------------
Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
INVESTMENT OBJECTIVES & POLICIES
- --------------------------------------------------------------------------------
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 investable 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 table below sets forth for each Portfolio the equity fund/bond fund
allocation targets and the permissible investment ranges for the Underlying
Funds.
<TABLE>
<CAPTION>
AGGRESSIVE MODERATE CONSERVATIVE
UNDERLYING FUND PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
EQUITY FUND/BOND FUND TARGET*....................................................... 80/20% 60/40% 20/80%
EQUITY FUNDS
PaineWebber Global Equity Fund.................................................... 0%-30% 0%-20% 0%
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%
BOND FUNDS
PaineWebber Global Income Fund.................................................... 0%-10% 0%-20% 5%-15%
PaineWebber High Income Fund...................................................... 0%-20% 0%-10% 0%
PaineWebber Investment Grade Income Fund.......................................... 0%-10% 0%-20% 0%-20%
PaineWebber Low Duration U.S. Government Income Fund.............................. 0% 0%-10% 20%-40%
PaineWebber U.S. Government Income Fund........................................... 0% 0%-20% 20%-40%
PAINEWEBBER CASHFUND................................................................ 0%-20% 0%-20% 0%-20%
</TABLE>
- ---------
* Each Portfolio may deviate from its equity fund/bond fund targets within
ranges of ten percent above or below the relevant target percentages.
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 or the
Portfolio's equity fund/bond fund target 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 fund/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.
- --------------------------------------------------------------------------------
Prospectus Page 13
<PAGE>
- --------------------------------------------------------------------------------
------------------------
Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
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.
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. Under normal circumstances, Global Equity Fund invests at least
80% of its total assets in securities of issuers in the United States and
countries represented in the Morgan Stanley Capital International Europe,
Australia and Far East Index ("EAFE Index"). The EAFE Index is a well known
index that reflects most major equity markets outside the United States. The
Fund may invest up to 20% of its total assets in securities of issuers located
in other countries (for example, Canada) and in emerging markets. The Fund may
invest up to 35% of its total assets in investment grade bonds that are issued
by corporate or governmental entities and that have maturities no longer than
seven years. The Fund may invest up to 10% of its net assets in convertible
securities rated below investment grade. 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.
Mitchell Hutchins is responsible for allocating Global Equity Fund's investments
between U.S. and foreign securities markets and for the management of the Fund's
U.S. investments. The Fund's foreign investments are managed by Invista Capital
Management, Inc. under a sub-advisory contract.
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 bonds 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 bonds rated within one of the two highest grades
assigned by a nationally recognized rating agency or, if unrated, determined by
Mitchell Hutchins to be of comparable quality. Normally, at least 65% of the
Fund's total assets consist of high-quality bonds (and receivables from the sale
of such bonds), denominated in foreign currencies or U.S. dollars, of issuers
located in at least three of the following countries: Australia, Austria,
Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy,
Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland, 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. Up to 5% of the Fund's total
assets may be invested in bonds convertible into equity securities. At least 65%
of the Fund's total assets normally are invested in income producing securities.
Global Income Fund may invest up to 35% of its total assets in bonds rated below
the two highest grades assigned by a rating agency. Except as noted below, these
bonds must be at least investment grade. Within this 35% limitation, the Fund
may invest up to 20% of its total assets in bonds rated below investment grade.
Many emerging market bonds are not investment grade. The Fund's total
investments in emerging market bonds may exceed 20%, however, if it also invests
in emerging market bonds with investment grade ratings.
Global Income Fund is a non-diversified fund as defined in the Investment
Company Act of 1940 ("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.
- --------------------------------------------------------------------------------
Prospectus Page 14
<PAGE>
- --------------------------------------------------------------------------------
------------------------
Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
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, at least 65% of its total assets are invested 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 rating agency or, if unrated, are considered to be of comparable quality
by Mitchell Hutchins. The Fund may include in this 65% of its total assets any
equity securities (including common stocks and rights and warrants for equity
securities) that are attached to corporate bonds or are part of a unit including
corporate bonds, so long as the corporate bonds meet these requirements. The
Fund also may invest up to 35% of its total assets in (1) bonds that are rated
below B (and rated as low as D by S&P or C by Moody's) or comparable unrated
bonds (2) U.S. government bonds, (3) equity securities and (4) money market
instruments, including repurchase agreements. Up to 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 other than mortgage-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 issued or guaranteed by the U.S. government 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. The Fund may invest no more than
10% of its total assets in interest-only and principal-only classes of
mortgage-backed securities.
Up to 20% of 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
- --------------------------------------------------------------------------------
Prospectus Page 15
<PAGE>
- --------------------------------------------------------------------------------
------------------------
Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
maintaining an overall portfolio duration between 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.
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, Pacific Investment Management Company ("PIMCO").
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- and
asset-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.
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 (1) U.S. government securities, (2) obligations
of U.S. and foreign banks, (3) commercial paper and other short-term obligations
of U.S. and foreign companies, governments and similar entities, including
variable and floating rate securities and participation interests and (4)
repurchase agreements involving any of the foregoing. Shares of Cashfund are not
insured or guaranteed by the U.S. government.
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY & PROCESS
- --------------------------------------------------------------------------------
Mitchell Hutchins' team of three Chief Investment Officers ("Team") employs a
two-step approach and allocates each Portfolio's investments among the
Underlying Funds.
First, in accordance with each Portfolio's current equity fund/bond fund target,
the Team allocates the Portfolio's assets among five basic asset categories of
the 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).
When the Team's analysis indicates that a different allocation is more likely to
achieve a Portfolio's goals, the Portfolio may deviate from its target
allocations within the established investment ranges for equity and bond
securities. The Team bases its category allocation decisions in part on Mitchell
Hutchins' quantitative models, which include an analysis of the following
factors:
- - 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.
Second, after deciding the appropriate asset category allocation for each
Portfolio, the Team allocates each Portfolio's investments among the Underlying
Funds within each of the five asset categories. For example, in making a
decision to allocate investments among the Underlying Funds that invest in U.S.
bonds, the Team
- --------------------------------------------------------------------------------
Prospectus Page 16
<PAGE>
- --------------------------------------------------------------------------------
------------------------
Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
evaluates relevant factors including the outlook for the direction of interest
rates, the duration of the relevant Underlying Funds' portfolios and yield
differentials among sectors of the bond markets. Similarly, the Team may
consider factors such as the relative valuations of different sectors of the
equity market (for example, 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 change allocations more frequently if
market conditions warrant.
- --------------------------------------------------------------------------------
PERFORMANCE
- --------------------------------------------------------------------------------
The following tables show total returns for each Portfolio for its initial
fiscal period (February 24, 1998 to May 31, 1998) of each class of shares before
and after deducting the maximum sales charges. Past results are not a guarantee
of future results.
TOTAL RETURN
LIFE (2/24/98 - 5/31/98)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
SHARES SHARES SHARES SHARES
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
AGGRESSIVE PORTFOLIO
Before deducting maximum sales charges........................................... 3.84% 3.68% 3.68% 3.92%
After deducting maximum sales charges............................................ (0.84)% (1.32)% 2.68% 3.92%
MODERATE PORTFOLIO
Before deducting maximum sales charges........................................... 3.44% 3.20% 3.20% 3.52%
After deducting maximum sales charges............................................ (1.22)% (1.80)% 2.20% 3.52%
CONSERVATIVE PORTFOLIO
Before deducting maximum sales charges........................................... 2.48% 2.32% 2.40% 2.56%
After deducting maximum sales charges............................................ (2.14)% (2.68)% 1.65% 2.56%
</TABLE>
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 shown 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.
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.
- --------------------------------------------------------------------------------
Prospectus Page 17
<PAGE>
- --------------------------------------------------------------------------------
------------------------
Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
PERFORMANCE OF UNDERLYING FUNDS
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
ASSETS OF ALL THROUGH 8/31/98
CLASSES AS OF INCEPTION ---------------------------------
UNDERLYING FUND 8/31/98 ($000'S) DATE CLASS(1) ONE YEAR FIVE YEARS TEN YEARS
- ---------------------------------------- ---------------- ----------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
EQUITY FUNDS
PaineWebber Global Equity Fund........ $ 380,690 11/14/91(3) A
Standardized Return................. (10.44)% 6.75% 8.24%(3)
Non-Standardized Return............. (6.22) 7.75 8.98(3)
PaineWebber Growth Fund............... 319,500 03/18/85 A
Standardized Return................. (1.27) 9.05 13.23
Non-Standardized Return............. 3.37 10.06 13.75
PaineWebber Growth and Income Fund.... 1,238,731 12/20/83 A
Standardized Return................. (7.85) 12.63 12.22
Non-Standardized Return............. (3.51) 13.67 12.74
PaineWebber Small Cap Fund............ 107,276 02/01/93(3) B
Standardized Return................. (23.70) 5.39 5.69(3)
Non-Standardized Return............. (20.05) 5.70 5.83(3)
BOND FUNDS
PaineWebber Global Income Fund........ 482,116 03/20/87 B
Standardized Return................. 2.14 4.41 7.92
Non-Standardized Return............. 7.14 4.72 7.92
PaineWebber High Income Fund.......... 532,630 08/31/84 A
Standardized Return................. (6.32) 4.43 9.13
Non-Standardized Return............. (2.37) 5.29 9.57
PaineWebber Investment Grade Income
Fund................................. 291,908 08/31/84 A
Standardized Return................. 5.76 5.83 9.15
Non-Standardized Return............. 10.14 6.70 9.59
PaineWebber Low Duration U.S.
Government Income Fund............... 149,664 05/03/93(3) C
Standardized Return................. 5.79 4.21 4.18(3)
Non-Standardized Return............. 6.54 4.21 4.18(3)
PaineWebber U.S. Government Income
Fund................................. 341,802 08/31/84 A
Standardized Return................. 6.44 3.20 6.87
Non-Standardized Return............. 10.94 4.05 7.30
<CAPTION>
30-DAY
YIELD FOR
PERIOD
ENDED
UNDERLYING FUND 8/31/98(2)
- ---------------------------------------- -----------
<S> <C>
EQUITY FUNDS
PaineWebber Global Equity Fund........
Standardized Return................. N/A
Non-Standardized Return............. N/A
PaineWebber Growth Fund...............
Standardized Return................. N/A
Non-Standardized Return............. N/A
PaineWebber Growth and Income Fund....
Standardized Return................. N/A
Non-Standardized Return............. N/A
PaineWebber Small Cap Fund............
Standardized Return................. N/A
Non-Standardized Return............. N/A
BOND FUNDS
PaineWebber Global Income Fund........
Standardized Return................. 3.71%
Non-Standardized Return............. 3.71
PaineWebber High Income Fund..........
Standardized Return................. 9.80
Non-Standardized Return............. 9.80
PaineWebber Investment Grade Income
Fund.................................
Standardized Return................. 5.70
Non-Standardized Return............. 5.70
PaineWebber Low Duration U.S.
Government Income Fund...............
Standardized Return................. 4.50
Non-Standardized Return............. 4.50
PaineWebber U.S. Government Income
Fund.................................
Standardized Return................. 4.88
Non-Standardized Return............. 4.88
</TABLE>
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(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 August 31, 1998, PaineWebber Cashfund's
yield was 5.11% and its effective yield was 5.24%.
(3) No class has been outstanding for ten years. The average annual return
figure represents the return for the life of the longest outstanding class
of the Underlying Fund.
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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, known as "Life."
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 shares, 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.
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
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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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 effect on the
performance of a Portfolio and the price of that Portfolio's shares.
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 of the same or a different issuer within a particular period of
time at a specified price or formula. Depository receipts typically are issued
by banks or trust companies and evidence ownership of underlying equity
securities.
BONDS (including notes and debentures) are used by corporations and governments
to borrow money from investors. The issuer pays the investors 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-sponsored entity,
such as the Resolution Funding Corporation, Sallie Mae (also known as the
Student Loan Marketing Association), 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.
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 Ginnie Mae (also known as the
Government National Mortgage Association), Fannie Mae (also known as the Federal
National Mortgage Association), Freddie Mac (also known as the Federal Home Loan
Mortgage Corporation) or other government-sponsored enterprises. Other
mortgage-backed securities are sponsored or issued by private entities,
including investment banking firms and mortgage originators. Foreign
mortgage-backed securities may be issued by mortgage banks and other private or
governmental entities outside the United States and are supported by interests
in foreign real estate. Mortgage-backed securities may be composed of one or
more classes and may be structured 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
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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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.
BONDS--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 bond investments. Long-term bonds are generally more sensitive
to interest rate changes than short-term bonds. 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 is a measure of the expected life of a bond on a present
value basis. 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. For example, when the level of interest
rates increases by 1%, a fixed income security having a positive duration of
three years generally will decrease by approximately 3%. Thus, if Mitchell
Hutchins or a sub-adviser calculates the duration of the Fund's portfolio as
three years, it normally would expect the portfolio to change in value by
approximately 3% for every 1% change in the level of interest rates. However,
various factors such as changes in anticipated prepayment rates, qualitative
considerations and market supply and demand, can cause particular securities to
respond somewhat differently to changes in interest rates than 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. Accordingly, the net asset value of an Underlying
Fund's portfolio may vary in relation to interest rates by a greater or lesser
percentage than indicated by the above example.
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 bond's value or its liquidity and do not guarantee the
performance of the issuer. Rating agencies may fail to make timely changes in
credit ratings in response to subsequent events, so that an issuer's current
financial condition may be better or worse than the rating indicates. There is a
risk that rating agencies may downgrade bonds.
Investment grade bonds are rated in one of the four highest rating categories by
a rating agency, such as S&P or Moody's, or, if unrated, are considered to be of
comparable quality by Mitchell Hutchins or a 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. Investment Grade
Income Fund and High Income Fund may invest without limit in bonds with the
lowest investment grade rating.
High yield, high risk bonds are rated below investment grade and are commonly
referred to as "junk bonds." High Income Fund may invest its entire portfolio in
these bonds. Investment Grade Income Fund may invest up to 35% of its its total
assets in these bonds. 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
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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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, devaluations, speculation or other
political or economic developments inside and outside the United States.
CURRENCY-LINKED INVESTMENTS. Some Underlying Funds may invest in securities that
are indexed to specific foreign currency exchange rates. The principal amount of
these securities may be adjusted up or down (but not below zero) at maturity to
reflect changes in the exchange rate between two currencies. The Underlying
Funds may experience loss of principal due to these adjustments.
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 swaps and similar instruments. 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 or the sub-advisers take these risks into account in
their management of the Underlying Funds.
ZERO COUPON BONDS, OID AND PIK SECURITIES. Zero coupon bonds are securities that
pay no periodic interest but instead are sold at a deep discount from their face
value. The buyer of these bonds receives a rate of return by the gradual
appreciation of the security, which results from the fact that it will be paid
at face value on a specified maturity date. There are many kinds of zero coupon
bonds. Some are issued in zero-coupon form, including stripped U.S. government
securities issued through the U.S. Treasury. Others are created by brokerage
firms that strip (separate) the coupons (unmatured interest payments) from
interest-paying bonds and sell the principal and the coupons separately.
Some Underlying Funds may invest in other securities with original issue
discount ("OID"), a term that means the securities are issued at a price lower
than their value at maturity even though the securities also may pay cash
dividends. In addition, Investment Grade Income Fund and High Income Fund may
invest in payment-in-kind ("PIK") securities, a term that means interest is paid
in additional securities and not in cash. OID and PIK securities also are more
sensitive to changes in interest rates than securities that pay interest in
cash.
TREASURY INFLATION-PROTECTION SECURITIES. The Underlying Funds may invest in
Treasury Inflation-Protection Securities ("TIPS"), which are Treasury bonds on
which the principal value is adjusted daily in accordance with changes in the
Consumer Price Index. Interest on TIPS is payable semiannually on the adjusted
principal value. The principal value of TIPS would decline during periods of
deflation, but the principal amount payable at maturity would not be less than
the original par amount. If inflation is lower than expected while a Fund holds
TIPS, the Fund may earn less on the TIPS than it would on conventional Treasury
bonds. Any
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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increase in the principal value of TIPS is taxable in the year the increase
occurs, even though holders do not receive cash representing the increase at
that time.
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.
Brady bonds are sovereign debt securities issued under a 1989 plan 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- AND ASSET-BACKED SECURITIES. The yield characteristics of mortgage-and
asset-backed securities differ from those of traditional bonds. A major
difference is that interest and principal payments are made more frequently
(usually monthly) and that principal may be repaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
Generally, prepayments on fixed-rate mortgage loans will increase during a
period of falling interest rates and decrease during a period of rising interest
rates. Mortgage-and asset-backed securities may also decrease in value as a
result of increases in interest rates and, because of prepayments, may benefit
less than other bonds from declining interest rates. Reinvestments of
prepayments may occur at lower interest rates than the original investment, thus
adversely affecting an Underlying Fund's 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 value of securities with
longer effective lives generally fluctuates more widely in response to changes
in interest rates than the value of securities with shorter effective lives.
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
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.
CONVERTIBLE SECURITIES. Several Underlying Funds may invest in convertible
securities. A convertible security is a bond, debenture, note, preferred stock
or other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. A convertible security entitles
the holder to receive interest or dividends until the convertible security
matures or is redeemed, converted or exchanged. Convertible securities have
unique investment
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characteristics in that they generally (1) have higher yields than common
stocks, but lower yields than comparable non-convertible securities, (2) are
less subject to fluctuation in value than the underlying stock because they have
fixed income characteristics and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases. While
no securities investment is without some risk, investments in convertible
securities generally entail less risk than the issuer's common stock. However,
the extent to which such risk is reduced depends in large measure upon the
degree to which the convertible security sells above its value as a fixed income
security.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Certain Underlying Funds may invest in
fixed and floating rate loans arranged through private negotiations with a U.S.
or foreign borrower. These investments normally are participations in or
assignments of all or a portion of loans made by banks. Participations typically
will result in the Underlying Funds' having a contractual relationship only with
the lender, not with the borrower. In a participation, the Underlying Fund is
entitled to receive payments of principal, interest and any loan fees by the
lender only when and if they are received. Also, the Underlying Fund may not
directly benefit from any collateral supporting the underlying loan. As a
result, the Underlying Fund assumes the credit risk of both the borrower and the
lender that is selling the participation. If the lender becomes insolvent, the
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. In a loan
assignment, the Underlying Fund is entitled to receive payments directly from
the borrower and, therefore, does not depend on the selling bank to pass these
payments on to the Underlying Fund.
COUNTERPARTIES. An Underlying Fund may be exposed to the risk of 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, that 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.
YEAR 2000 RISKS. Like other mutual funds, financial and business organizations
around the world, each of the Portfolios and Underlying Funds could be adversely
affected if the computer systems used by Mitchell Hutchins, other service
providers and entities with computer systems that are linked to Portfolio
records do not properly process and calculate date-related information and data
from and after January 1, 2000. This is commonly known as the "Year 2000 Issue."
Mitchell Hutchins is taking steps that it believes are reasonably designed to
address the Year 2000 Issue with respect to the computer systems that it uses
and to obtain satisfactory assurances that comparable steps are being taken by
each of the Portfolio's other major service providers. However, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
Portfolios.
Similarly, the companies in which Underlying Funds invest and trading systems
used by the Underlying Funds could be adversely affected by the Year 2000 Issue.
The ability of a company or trading system to respond successfully to the Year
2000 Issue requires both technological sophistication and diligence, and there
can be no assurance that any steps taken will be sufficient to avoid an adverse
impact.
INVESTMENT TECHNIQUES AND STRATEGIES
HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS. Each Underlying Fund
except Cashfund may use derivative instruments, which may include options (both
exchange traded and OTC), 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 instruments 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
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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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 instruments and related strategies. The
Underlying Funds might not use any derivative instruments 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
instruments 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 instruments 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
obligations from a bank or recognized securities dealer (or their affiliates)
and simultaneously commits to resell the obligations to that counterparty,
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 obligations. The Funds or Portfolios
maintain custody of the underlying obligations prior to their repurchase, either
through a regular custodian or through a special "tri-party" custodian or
sub-custodian that maintains separate accounts for both the Fund or Portfolio
and its counterparty. Thus, the obligation of the counterparty to pay the
repurchase price on the date agreed to or upon demand is, in effect, secured by
such obligations. Repurchase agreements carry certain risks not associated with
direct investments in securities, including a possible decline in the market
value of the underlying obligations. Repurchase agreements involving obligations
other than U.S. government securities (such as commercial paper and corporate
bonds) may be subject to special risks and may not have the benefit of certain
protections in the event of the counterparty's insolvency. If the seller or
guarantor becomes insolvent, the Fund or Portfolio may suffer delays, costs and
possible losses in connection with the disposition of collateral. The Funds and
Portfolios intend to enter into repurchase agreements only with banks and
dealers in transactions believe by Mitchell Hutchins or the sub-adviser to
present minimum credit risks in accordance with the guidelines established by
the applicable board.
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. Certain Underlying Funds may also
enter into reverse repurchase agreements. 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 of these 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
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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.
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 and 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. The lack of a liquid
secondary market for illiquid securities may make it more difficult for an
Underlying Fund to assign a value to those securities for purposes of
calculating its net asset value.
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-SM-
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Each Portfolio offers through this Prospectus four classes of shares that differ
in terms of sales charges and expenses. An eligible investor can select the
class that is best suited to his or her investment needs, based upon the holding
period and the amount of investment.
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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AGGRESSIVE PORTFOLIO AND MODERATE PORTFOLIO
<TABLE>
<CAPTION>
SALES CHARGE AS DISCOUNT TO
A PERCENTAGE OF SELECTED
--------------------- DEALERS
OFFERING NET AMOUNT AS PERCENTAGE OF
AMOUNT OF INVESTMENT PRICE INVESTED OFFERING PRICE
- --------------------------------------------- -------- ---------- ----------------
<S> <C> <C> <C>
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)
</TABLE>
CONSERVATIVE PORTFOLIO
<TABLE>
<CAPTION>
SALES CHARGE AS DISCOUNT TO
A PERCENTAGE OF SELECTED
--------------------- DEALERS
OFFERING NET AMOUNT AS PERCENTAGE OF
AMOUNT OF INVESTMENT PRICE INVESTED OFFERING PRICE
- --------------------------------------------- -------- ---------- ----------------
<S> <C> <C> <C>
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)
</TABLE>
- ---------
(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 withdraw no 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.
SALES CHARGE REDUCTIONS & WAIVERS
Investors 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
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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those shares, paid a contingent deferred sales charge when selling them or
held those shares until the contingent deferred sales charge was waived; and
- 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, the 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;
- - 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; or
- - acquires Class A shares in connection with a reorganization pursuant to which
a Portfolio acquires substantially all of the assets and liabilities of
another investment company in exchange solely for shares of the Portfolio.
- - acquires Class A shares in connection with the disposition of proceeds from
the sale of shares of Managed High Yield Plus Fund Inc. that were acquired
during that Fund's initial public offering of shares and that meet certain
other conditions described in its prospectus.
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.
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.
<TABLE>
<CAPTION>
IF THE INVESTOR PERCENTAGE BY WHICH THE SHARES'
SELLS SHARES WITHIN: NET ASSET VALUE IS MULTIPLIED
- ----------------------------- ---------------------------------
<S> <C>
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
</TABLE>
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.
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Prospectus Page 28
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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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.
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 withdraw annually no 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.
Investors must provide satisfactory information to PaineWebber or the Portfolio
if they seek 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. Because investors do not pay an initial sales
charge when they buy Class C shares, 100% of their purchase is immediately
invested. 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 withdraw no more than 12% of the value of
the Portfolio account under the Plan in the first year after purchase.
CLASS Y SHARES
HOW PRICE IS CALCULATED. Eligible investors may purchase Class Y shares 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 GROUP OF INVESTORS. Only the following investors are eligible to buy
Class Y shares:
- - a participant in the PW Program listed below when Class Y shares are purchased
through that PW Program;
- - an investor who buys $10 million or more at any one time in any combination of
PaineWebber mutual funds in the Flexible Pricing-SM- System; or
- - a qualified plan that has either
5,000 or more eligible employees or
$50 million or more in assets.
PACE MULTI-ADVISOR PROGRAM. An investor who participates in PACE Multi-Advisor
Program is eligible to purchase Class Y shares. The PACE Multi-Advisor Program
is an advisory program sponsored by PaineWebber that provides comprehensive
investment services, including investor profiling, a personalized asset
allocation strategy using an appropriate combination of funds and a quarterly
investment performance review. Participation in the PACE Multi-Advisor Program
is subject to payment of an advisory fee at the effective maximum annual rate of
1.5% of assets. Employees of PaineWebber and its affiliates are entitled to a
waiver of this fee.
Please contact your PaineWebber investment executive or PaineWebber's
correspondent firms for more information concerning mutual funds that are
available in the PACE Multi-Advisor Program.
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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HOW TO BUY SHARES
- --------------------------------------------------------------------------------
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 (usually
4:00 p.m., Eastern time). Prices will be calculated earlier when the New York
Stock Exchange closes early because trading has been halted for the day. 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.
Each Portfolio and Mitchell Hutchins reserve the right to reject any purchase
order and to suspend the offering of Portfolio shares for a period of time.
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.
New investors to PaineWebber may complete and sign an account application and
mail it along with a check. Investors may also open an account in person.
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
<TABLE>
<S> <C>
To open an account.................... $ 1,000
To add to an account.................. $100
</TABLE>
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 most 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.
- - 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;
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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- 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. A signature guarantee may
be obtained from a domestic bank or trust company, broker, dealer, clearing
agency or savings association which is a participant in a medallion program
recognized by the Securities Transfer Association. The three recognized
medallion programs are Securities Transfer Agent Medallion Program (STAMP),
Stock Exchanges Medallion Program (SEMP) and the New York Stock Exchange
Medallion Signature Program (MSP). Signature guarantees which are not a part
of these programs will not be accepted.
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 Class B or C shares are
exchanged for Class B or C 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. PaineWebber S&P 500
Index Fund does not participate in the Flexible Pricing System-SM- and is not
available for exchanges.
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HOW TO SELL SHARES
- --------------------------------------------------------------------------------
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 (usually 4:00 p.m.,
Eastern time). Prices will be calculated earlier when the New York Stock
Exchange closes early because trading has been halted for the day.
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. 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.
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
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:
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 withdraw no 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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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.
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Prospectus Page 32
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
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 August 31, 1998 Mitchell Hutchins was adviser or sub-adviser
of 32 investment companies with 68 separate portfolios and aggregate assets of
approximately $38.9 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 service fees paid with
respect to the various classes, custody and transfer agency fees, brokerage
commissions, 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. Each
Portfolio has agreed to pay Mitchell Hutchins a monthly fee for its services at
the annual rate of 0.35% of its average daily net assets. Mitchell Hutchins
intends to waive its management fees and reimburse expenses for each Portfolio
(to the extent that those expenses are not paid by the Underlying Funds pursuant
to an SEC exemptive order, as described below), so that the total operating
expenses for each class of shares of each Portfolio do not exceed the amounts
shown in the Expense Table for the fiscal year ending May 31, 1999. Although
Mitchell Hutchins currently expects to continue such waivers and expense
reimbursements after May 31, 1999, it may discontinue or change them at any time
after that date.
The Portfolios, Mitchell Hutchins, PaineWebber and the Underlying Funds have
received exemptive relief from the SEC that permits them to enter into a
"Servicing Agreement." Under the proposed Servicing Agreement, Mitchell Hutchins
would arrange for all services pertaining to the operation of the Portfolios.
The officers of the Underlying Funds, at the direction of the Funds' boards,
would determine annually whether the aggregate administrative expenses (which
include transfer agent expenses, shareholder servicing expenses, custody, legal
and accounting fees, but do not include 12b-1 distribution and service fees or
extraordinary expenses) of a Portfolio with respect to its investment in an
Underlying Fund are greater than the estimated savings to the Underlying Fund
from the operation of the Portfolio. If the aggregate financial benefits to the
Underlying Fund equal or exceed the administrative expenses of a Portfolio with
respect to its investment in the Underlying Fund, there would be no charge to
the Portfolio for the services under the Servicing Agreement. The expenses would
be passed through to the Underlying Fund in proportion to the average daily
value of each Underlying Fund's shares held by each Portfolio, provided further
that no Underlying Fund would bear such expenses in excess of the estimated
savings to it. Consequently, no Underlying Fund would be expected to carry
expenses that are in excess of the estimated savings to it. The estimated
savings are expected to result from the reduction of shareholder servicing costs
due to the elimination of separate shareholder accounts which otherwise might be
invested in the Underlying Funds. All expenses of the Portfolios, excluding
certain non-recurring and extraordinary expenses, would be paid for in
accordance with the Servicing Agreement.
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 other expenses 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
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Prospectus Page 33
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
Underlying Funds may invest directly in the Underlying Funds and thereby avoid
incurring the management fee and other expenses 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 Conservative
Portfolio) of the average daily net assets of Class C shares.
Under the Plans, Mitchell Hutchins primarily uses the service fees 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.
- - 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 purchased 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 purchased.
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 Class A, Class B and Class
C 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 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, normally as of the close of regular trading on the
New York Stock Exchange ("NYSE") (usually 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.
If trading on the NYSE is halted for the day before 4:00 p.m., Eastern time, and
trading on the NYSE will not resume again that day, the Fund's net asset value
per share will be calculated at the time trading was halted.
Short-term investments that have a maturity of more than 60 days are valued at
prices based on market quotations
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Prospectus Page 34
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
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 its net investment income quarterly; Aggressive 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 classes have higher expenses resulting from
their distribution and service fees. Similarly, 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.
TAXES
Each Portfolio intends to continue 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 net gains realized from the Portfolio's
disposition of Underlying Fund 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.
Under the Taxpayer Relief Act of 1997, as modified by recent legislation, the
maximum tax rate applicable to a non-corporate taxpayers net capital gain
recognized on capital assets held for more than one year is 20% (10% for
taxpayers in the 15% marginal tax bracket). In the case of regulated investment
companies such as the Portfolios and the Underlying Funds, the relevant holding
period is determined by how long they have held the securities on which the gain
was realized, not by how long the shareholders have held their shares.
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
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Prospectus Page 35
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
capital gain distributions paid (or deemed paid) for that year and any portion
of those dividends that qualifies for special treatment.
BACKUP WITHHOLDING
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 those shareholders who
otherwise are subject to backup withholding.
TAXES ON THE SALE OR EXCHANGE OF PORTFOLIO SHARES
A shareholder's sale (redemption) of Portfolio shares may result in a taxable
gain or loss. This depends upon whether the shareholder receives more or less
than the 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 (redeems) 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 to 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.
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 and liquidation
proceeds 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,
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Prospectus Page 36
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Mitchell Hutchins Aggressive Portfolio Moderate Portfolio Conservative
Portfolio
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.
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.
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Prospectus Page 37
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MITCHELL HUTCHINS PORTFOLIOS
PROSPECTUS--OCTOBER 1, 1998
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THE PAINEWEBBER FAMILY OF MUTUAL FUNDS consists of the seven
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 most funds in the
PaineWebber Family of Mutual Funds.
/ / PAINEWEBBER BOND FUNDS for income by investing mainly in bonds.
High Income Fund
Investment Grade Income Fund
Low Duration U.S. Government
Income Fund
Strategic Income Fund
U.S. Government Income Fund
/ / PAINEWEBBER TAX-FREE BOND FUNDS for income exempt from federal income tax
and, in some cases, state and local income taxes, by investing in municipal
bonds.
California Tax-Free Income Fund
Municipal High Income Fund
National Tax-Free Income Fund
New York Tax-Free Income Fund
/ / PAINEWEBBER ASSET ALLOCATION FUNDS for high total return by investing in
stocks and bonds.
Balanced Fund
Tactical Allocation Fund
/ / PAINEWEBBER STOCK FUNDS for long term growth by investing mainly in equity
securities.
Financial Services Growth Fund
Growth Fund
Growth and Income Fund
Mid Cap Fund
Small Cap Fund
S&P 500 Index Fund
Utility Income Fund
/ / PAINEWEBBER GLOBAL FUNDS for long-term growth by investing mainly in foreign
stocks or high current income by investing mainly in global debt
instruments.
Asia Pacific Growth Fund
Emerging Markets Equity Fund
Global Equity Fund
Global Income Fund
/ / PAINEWEBBER MONEY MARKET FUND for income and stability by investing in
high-quality, short-term instruments.
/ / PAINEWEBBER FUNDS OF FUNDS for either long-term growth of capital; total
return; or income and, secondarily, growth of capital by investing in other
PaineWebber mutual funds.
Mitchell Hutchins Aggressive Portfolio
Mitchell Hutchins Moderate Portfolio
Mitchell Hutchins Conservative Portfolio
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.
- -C- 1998 PaineWebber Incorporated
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<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 AGGRESSIVE 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 October
1, 1998. 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 October 1,
1998.
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, an Underlying
Fund that is 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 or other obligations and simultaneously commits
to resell them to the counterparty at an agreed-upon date or upon demand and at
a price reflecting a market rate of interest unrelated to the coupon rate or
maturity of the purchased securities. The Portfolio maintains custody of the
underlying obligations prior to their repurchase, either through its regular
custodian or through a special "tri-party" custodian or subcustodian that
maintains separate accounts for both the Portfolio and its counterparty. Thus,
the obligation of the counterparty to pay the repurchase price on the date
agreed to or upon demand is, in effect, secured by such obligations. If their
value becomes less than the repurchase price, plus any agreed-upon additional
amount, the counterparty must provide additional collateral so that at all times
the collateral is at least equal to the repurchase price, plus any agreed-upon
additional amount. The difference between the total amount to be received upon
repurchase of the
<PAGE>
obligations and the price that was paid by a Portfolio upon acquisition is
accrued as interest and included in its net investment income.
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
days and restricted securities other than those Mitchell Hutchins has determined
to be liquid pursuant to guidelines established by the Trust's board of trustees
("board"). More information about illiquid securities and the circumstances
under which restricted securities can be determined to be liquid is provided
below in "Underlying Funds--Investment Policies, Illiquid Securities". 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 do not intend to engage 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.
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(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
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
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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 foregoing 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 Underlying Fund 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.
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 rating organizations ("NRSROs") are private services
that provide ratings of the credit quality of debt obligations, bonds and
certain other securities. A description of the ratings assigned to corporate
bonds and commercial paper, 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 assets, 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 represent an assessment of
the likelihood that principal prepayments will be made by obligors on the
underlying assets or the degree to which such prepayments may differ from that
originally anticipated, nor do such ratings address the possibility that
investors may suffer a lower than anticipated yield or that investors in such
securities may fail to recoup fully their initial investment due to prepayments.
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,
debt obligations with the same maturity, interest rate and rating may have
different market prices. Also, NRSROs 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.
In addition to ratings assigned to individual bond issues, Mitchell Hutchins
or the sub-adviser will analyze interest rate trends and developments that may
affect individual issuers, including factors such as liquidity, profitability
and asset quality.
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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.
Debt securities rated Ba or lower by Moody's, BB or lower by S&P, comparably
rated by another NRSRO or determined by Mitchell Hutchins to be of comparable
quality are below investment grade, are deemed by those agencies to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal and may involve significant risk exposure to adverse
conditions. Lower rated debt securities generally offer a higher current yield
than that available for investment grade issues, but they involve higher risks,
in that they are especially sensitive to adverse changes in general economic
conditions and in the industries in which the issuers are engaged, to changes in
the financial condition of the issuers and to price fluctuations in response to
changes in interest rates. During periods of economic downturn or rising
interest rates, highly leveraged issuers may experience financial stress which
could adversely affect their ability to make payments of interest and principal
and increase the possibility of default. In addition, such issuers may not have
more traditional methods of financing available to them and may be unable to
repay debt at maturity by refinancing. The risk of loss due to default by such
issuers is significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness.
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, the prices of many lower-rated debt securities declined substantially,
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
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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 mortgage
pass-through securities and collateralized mortgage obligations. 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 Ginnie Mae (also known as the Government National Mortgage
Association), Fannie Mae (also known as the Federal National Mortgage
Association), Freddie Mac (also known as the Federal Home Loan Mortgage
Corporation) or other government-sponsored enterprises. Other mortgage-backed
securities are issued by private issuers, generally originators of and 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 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 an underlying 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 semiannually and return
principal once a year
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in guaranteed minimum payments. The Freddie Mac guarantee is not backed by the
full faith and credit of the U.S. government.
PRIVATE MORTGAGE-BACKED SECURITIES. Mortgage-backed securities issued by
Private Mortgage Lenders are structured similarly to the pass-through
certificates and collateralized mortgage obligations ("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.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE
PASS-THROUGHS. CMOs are debt obligations that are collateralized by mortgage
loans or mortgage pass-through securities (such collateral collectively being
called "Mortgage Assets"). CMOs may be issued by Private Mortgage Lenders or by
government entities such as Fannie Mae or Freddie Mac. Multi-class mortgage
pass-through securities are interests in trusts that are comprised of Mortgage
Assets and that have multiple classes similar to those in CMOs. Unless the
context indicates otherwise, references herein to CMOs include multi-class
mortgage pass-through securities. Payments of principal of, and interest on, the
Mortgage Assets (and in the case of CMOs, any reinvestment income thereon)
provide the funds to pay debt service on the CMOs or to make scheduled
distributions on the multi-class mortgage pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, also referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrued on all classes of a CMO (other than any principal
only or "PO" class) on a monthly, quarterly or semiannual basis. The principal
and interest on the Mortgage Assets may be allocated among the several classes
of a CMO in many ways. In one structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of a
CMO in the order of their respective stated maturities or final distribution
dates so that no payment of principal will be made on any class of the CMO until
all other classes having an earlier stated maturity or final distribution date
have been paid in full. In some CMO structures, all or a portion of the interest
attributable to one or more of the CMO classes may be added to the principal
amounts attributable to such classes, rather than passed through to
certificateholders on a current basis, until other classes of the CMO are paid
in full.
Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier.
Some CMO classes are structured to pay interest at rates that are adjusted
in accordance with a formula, such as a multiple or fraction of the change in a
specified interest rate index, so as to pay at a rate that will be attractive in
certain interest rate environments but not in others. For example, an inverse
floating rate CMO class pays interest at a rate that increases as a specified
interest rate index decreases but decreases as that index increases. For other
CMO classes, the yield may move in the same direction as market interest
rates--I.E., the yield may increase as rates increase and decrease as rates
decrease but may do so more rapidly or to a greater degree. The market value of
such securities generally is more volatile than that of a fixed rate obligation.
Such interest rate formulas may be combined with other CMO characteristics. For
example, a CMO class may be an inverse interest-only "IO class" on which the
holders are entitled to receive no payments of principal and are entitled to
receive interest at a rate that will vary inversely with a specified index or a
multiple thereof.
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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
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
traditional 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 average
of 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-
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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.
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, ARM securities generally do not decrease in
value as much as fixed rate securities. Conversely, during periods of declining
rates, ARM securities generally do not increase in value as much as fixed rate
securities. ARM 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 securities, are based on indices, such as the one-year constant maturity
Treasury rate, that reflect changes in market interest rates. Others are based
on indices, such as the 11th District Federal Home Loan Bank Cost of Funds Index
("COFI"), that tend to lag behind changes in market interest rates. The values
of ARM securities supported by ARMs that adjust based on lagging indices tend to
be somewhat more sensitive to interest rate fluctuations than those
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reflecting current interest rate levels, although the values of such ARM
securities still tend to be less sensitive to interest rate fluctuations than
fixed-rate securities.
Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. As with ARM
securities, interest rate adjustments on floating rate mortgage-backed
securities may be based on indices that lag behind market interest rates.
Interest rates on floating rate mortgage-backed securities generally are
adjusted monthly. Floating rate mortgage-backed securities are subject to
lifetime interest rate caps, but they generally are not subject to limitations
on monthly or other periodic changes in interest rates or monthly payments.
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
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 will lengthen a portfolio duration by approximately the same
amount as would holding an equivalent amount of the underlying securities. Short
futures or put options have durations roughly equal to the negative duration of
the securities that underlie these positions, and have the effect of reducing
portfolio duration by approximately the same amount as would selling an
equivalent amount of the underlying securities.
There are some situations in which the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by the standard duration calculation is the case of mortgage-backed
securities. The stated final maturity of such securities is generally 30 years,
but current prepayment rates are critical in determining the securities'
interest rate exposure. In these and other similar situations, Mitchell Hutchins
and the 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 BONDS, OID AND PIK SECURITIES. 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") securities 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 bonds and other OID and PIK
securities. Those dividends will be paid from the
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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 Securities and Exchange
Commission ("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.
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.
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 portfolio
security purchases due to settlement problems could cause the Fund to miss
attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could result either in losses to the
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, and the issuers may not 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
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Receipts ("GDRs"), or other securities convertible into securities of issuers
based in foreign countries. These securities may not necessarily be denominated
in the same currency as the securities into which they may be converted. ADRs
are receipts typically issued by a U.S. bank or trust company evidencing
ownership of the underlying securities. They generally are in registered form,
are denominated in U.S. dollars and are designed for use in the U.S. securities
markets. EDRs are European receipts evidencing a similar arrangement, may be
denominated in other currencies and are designed for use in European securities
markets. GDRs are similar to EDRs and are designed for use in several
international markets. For purposes of each Underlying Fund's 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.
ADRs are publicly traded on exchanges or over the counter ("OTC") in the
United States and are issued through "sponsored" or "unsponsored" arrangements.
In a sponsored ADR arrangement, the foreign issuer assumes the obligation to pay
some or all of the depositary's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depositary's
transactions fees are paid directly by the ADR holders. In addition, less
information is available in the United States about an unsponsored ADR than
about a sponsored ADR.
The 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.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. 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.
Such investments may include, for example, World Equity Benchmark Shares-SM-
(commonly known as "WEBS"), which are exchange-traded shares of investment
company series that are designed to replicate the composition and performance of
publicly traded issuers in particular foreign 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 make these investments when, in the judgment
of Mitchell Hutchins or the applicable Sub-Adviser, the potential benefits
outweigh the payment of any applicable premium, sales load and expenses. The
Underlying Funds investments in other investment companies are subject to the
provisions of the 1940 Act, except that an Underlying Fund will not purchase
securities of registered open-end investment companies or registered unit
investment trusts in reliance on section 12(d)(1)(F) or (12)(d)(1)(G) of the
1940 Act.
Investment income on certain foreign securities in which the Underlying
Funds may invest, and gains realized on the disposition thereof, may be subject
to foreign income, withholding or other taxes that could reduce the yield and/or
total 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.
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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.
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 International Monetary Fund ("IMF"). The Brady Plan framework, as it
has developed, contemplates the exchange of commercial bank debt for newly
issued Brady Bonds. Brady Bonds may also be issued in respect of new money being
advanced by existing lenders in connection with the debt restructuring. The
World Bank and the IMF support the restructuring by providing funds pursuant to
loan agreements or other arrangements which enable the debtor nation to
collateralize the new Brady Bonds or to repurchase outstanding bank debt at a
discount.
Brady Bonds have been issued only in recent years, and accordingly do not
have a long payment history. Agreements implemented under the Brady Plan to date
are designed to achieve debt and debt-service reduction through specific options
negotiated by a debtor nation with its creditors. As a result, the financial
packages offered by each country differ. The types of options have included the
exchange of outstanding commercial bank debt for bonds issued at 100% of face
value of such debt, which carry a below-market stated rate of interest
(generally known as par bonds), bonds issued at a discount from the face value
of such debt (generally known as discount bonds), bonds bearing an interest rate
which increases over time and bonds issued in exchange for the advancement of
new money by existing lenders. Regardless of the stated face amount and stated
interest rate of the various types of Brady Bonds, the Underlying Fund will
purchase Brady Bonds, in which the price and yield to the investor reflect
market conditions at the time of purchase.
Certain Brady Bonds have been collateralized as to principal due at maturity
by U.S. Treasury zero coupon bonds with maturities equal to the final maturity
of such Brady Bonds. Collateral purchases are financed by the IMF, the World
Bank and the debtor nations' reserves. In the event of a default with respect to
collateralized Brady Bonds as a result of which the payment obligations of the
issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent until the scheduled maturity of the
defaulted Brady Bonds, which will continue to be outstanding, at which time the
face amount of the collateral will equal the principal payments which would have
then been due on the Brady Bonds
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in the normal course. Interest payments on Brady Bonds may be wholly
uncollateralized or maybe 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.
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. 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.
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.
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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.
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. Under current SEC
guidelines, interest-only ("IO") and principal-only ("PO") classes of
mortgage-backed securities, in which certain Underlying Funds may invest, are
considered illiquid. However, IO and PO classes of fixed-rate mortgage-backed
securities issued by the U.S. government or one of its agencies or
instrumentalities will not be considered illiquid if Mitchell Hutchins or the
Sub-Adviser has determined that they are liquid pursuant to guidelines
established by the applicable board. To the extent an Underlying Fund invests in
illiquid securities, it may not be able readily to liquidate these investments
and may have to sell other investments if necessary to raise cash to meet its
obligations.
Restricted securities are not registered under the Securities Act of 1933
("1933 Act") and may be sold only in privately negotiated or other exempt
transactions or after a 1933 Act registration statement has become effective.
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.
However, not all restricted securities are illiquid. To the extent that
foreign securities are freely tradeable in the country in which they are
principally traded, they are not considered illiquid for an Underlying Fund that
may invest in securities in that country even if the securities are restricted
in the United States. In addition, a large institutional market has developed
for many U.S. and foreign securities that are not registered under the 1933 Act.
Institutional investors generally will not seek to sell these instruments to the
general public but, instead, will often depend either on an efficient
institutional market in which such unregistered securities can be readily resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not dispositive of the liquidity of such investments.
Institutional markets for restricted securities also have developed as a
result of Rule 144A, which establishes a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers, 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 adversely affect the marketability of such
portfolio securities and the Fund might be unable to dispose of such securities
promptly or at favorable prices.
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Each board of the Underlying Funds 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.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which an
Underlying Fund purchases securities or other obligations and simultaneously
commits to resell them to the counterparty at an agreed-upon date or upon demand
and at a price reflecting a market rate of interest unrelated to the coupon rate
or maturity of the purchased securities. The Underlying Fund maintains custody
of the underlying obligations prior to their repurchase, either through its
regular custodian or through a special "tri-party" custodian or subcustodian
that maintains separate accounts for both the Underlying Fund and its
counterparty. Thus, the obligation of the counterparty to pay the repurchase
price on the date agreed to or upon demand is, in effect, secured by such
obligations. If the value of these securities is less than the repurchase price,
plus any agreed-upon additional amount, the counterparty must provide additional
collateral so that at all times the collateral is at least equal to the
repurchase price, plus any agreed-upon additional amount. The difference between
the total amount to be received upon repurchase of the securities and the price
that was paid by an Underlying Fund upon acquisition is accrued as interest and
included in its net investment income.
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. The Underlying Fund may reinvest
cash collateral in money market instruments or other short-term liquid
investments. In determining whether to lend securities to a particular
broker-dealer or institutional investor, Mitchell Hutchins will consider, and
during the period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. Each Underlying
Fund will retain authority to terminate any of its loans at any time. Each
Underlying Fund may pay reasonable fees in connection with a loan and may pay
the borrower or placing broker a negotiated portion of the interest earned on
the cash held as collateral. 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 each Underlying Fund's board governing its
securities lending program, PaineWebber has been retained to serve as lending
agent for the Underlying Fund. The boards have also authorized the payment of
fees (including fees calculated as a percentage of invested cash collateral) to
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PaineWebber for these services. The board of each Underlying Fund periodically
reviews 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
short, it establishes a margin account with the broker effecting the short sale,
and deposits collateral with the broker. In addition, the Underlying Fund
maintains with its custodian, in a segregated account, the securities that could
be used to cover the short sale. An Underlying Fund incurs transaction costs,
including interest expense, in connection with opening, maintaining and closing
short sales "against the box."
An Underlying Fund might make a short sale "against the box" to hedge
against market risks when Mitchell Hutchins or a Sub-Adviser believes that the
price of a security may decline, thereby causing a decline in the value of a
security owned by the Fund or a security convertible into or exchangeable for a
security owned by the Fund. In such case, any loss in an Underlying Fund's long
position after the short sale should be reduced by a corresponding gain in the
short position. Conversely, any gain in the long position after the short sale
should be reduced by a corresponding loss in the short position. The extent to
which gains or losses in the long position are reduced will depend upon the
amount of the securities sold short relative to the amount of the securities the
Underlying Fund owns, either directly or indirectly, and in the case where the
Underlying Fund owns convertible securities, changes in the investment values or
conversion premiums of such securities. As a result of the Taxpayer Relief Act
of 1997, short sales "against the box" no longer may be used to defer the
recognition of gain for federal income tax purposes.
LOAN PARTICIPATIONS AND ASSIGNMENTS. PaineWebber Investment Grade Income
Fund and PaineWebber High Income Fund each may invest up to 5% of its net
assets, and PaineWebber Global Income Fund may invest without limitation, 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
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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 Instruments," segregated accounts may also be
required in connection with certain transactions involving options, futures
contracts and forward currency contracts, swaps or similar instruments.
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
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 INSTRUMENTS
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 an Underlying Fund or to enhance income or gains, 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 Instruments will place at risk a much smaller portion of its assets.
PaineWebber Cashfund does not use options or futures contracts. 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 INDICES--A securities index assigns relative values to
the securities included in the index and fluctuates with changes in the market
values of those securities. A securities index option operates in the same way
as a more traditional securities option, except that exercise of a securities
index option is effected with cash payment and does not involve delivery of
securities. Thus, upon exercise of a securities index option, the purchaser will
realize, and the writer will pay, an amount based on the difference between the
exercise price and the closing price of the securities index.
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SECURITIES INDEX FUTURES CONTRACTS--A securities index futures contract is a
bilateral agreement pursuant to which one party agrees to accept, and the other
party agrees to make, delivery of an amount of cash equal to a specified dollar
amount times the difference between the securities index value at the close of
trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the securities comprising the index
is made. Generally, contracts are closed out prior to the expiration date of the
contract.
INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS--Interest rate and
foreign currency futures contracts are bilateral agreements pursuant to which
one party agrees to make, and the other party agrees to accept, delivery of a
specified type of debt security or currency at a specified future time and at a
specified price. Although such futures contracts by their terms call for actual
delivery or acceptance of debt securities or currency, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to
options on securities or currency, except that an option on a futures contract
gives the purchaser the right, in return for the premium, to assume a position
in a futures contract (a long position if the option is a call and a short
position if the option is a put), rather than to purchase or sell a security or
currency, at a specified price at any time during the option term. Upon exercise
of the option, the delivery of the futures position to the holder of the option
will be accompanied by delivery of the accumulated balance that represents the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the future. The writer of an option, upon exercise, will assume a short
position in the case of a call and a long position in the case of a put.
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 partially or fully to 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 transaction
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, 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 transaction 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.
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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 may be limited by tax
considerations. See "Taxes."
In addition to the products, strategies and risks described below and in the
Prospectus, Mitchell Hutchins and the Sub-Advisers expect to discover additional
opportunities in connection with options, futures contracts and other derivative
instruments 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 instruments
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
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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 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. Certain of 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 will 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
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and its counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when an Underlying Fund purchases or writes an OTC
option, it relies on the counterparty to make or take delivery of the underlying
investment upon exercise of the option. Failure by the counterparty to do so
would result in the loss of any premium paid by the Underlying Fund as well as
the loss of any expected benefit of the transaction.
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
counterparty, or by a transaction in the secondary market if any such market
exists. Although the Underlying Funds will enter into OTC options only with
counterparties 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 counterparty, 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 of 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.
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
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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
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
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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.
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.
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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.
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
25
<PAGE>
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.
An Underlying Fund may enter into interest rate swaps, caps, floors and
collars on either an asset-based or liability-based basis, depending on whether
it is hedging its assets or its liabilities, and will usually enter into
interest rate swaps on a net basis, I.E., the two payment streams are netted
out, with 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, floors and collars 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.
26
<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 THE BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST OTHER DIRECTORSHIPS
- ------------------------------------ ------------------------- ------------------------------------------------
<S> <C> <C>
Margo N. Alexander*; 51 Trustee and President Mrs. Alexander is president, chief executive
officer and a director of Mitchell Hutchins
(since January 1995) and an executive vice
president and a director of PaineWebber (since
March 1994). Mrs. Alexander is president and a
director or trustee of 32 investment companies
for which Mitchell Hutchins, PaineWebber or
their affiliates serve as investment adviser.
Richard Q. Armstrong; 63 Trustee Mr. Armstrong is chairman and principal of
R.Q.A. Enterprises R.Q.A. Enterprises (management consulting firm)
One Old Church Road (since April 1991 and principal occupation
Unit #6 since March 1995). Mr. Armstrong was chairman
Greenwich, CT 06830 of the board, chief executive officer and
co-owner of Adirondack Beverages (producer and
distributor of soft drinks and sparkling/still
waters) (October 1993-March 1995). He was a
partner of the New England Consulting Group
(management consulting firm) (December
1992-September 1993). He was managing director
of LVMH U.S. Corporation (U.S. subsidiary of
the French luxury goods conglomerate, Louis
Vuitton Moet Hennessey Corporation) (1987-1991)
and chairman of its wine and spirits
subsidiary, Schieffelin & Somerset Company
(1987-1991). Mr. Armstrong is a director or
trustee of 31 investment companies for which
Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.
E. Garrett Bewkes, Jr.*; 72 Trustee and Chairman of Mr. Bewkes is a director of Paine Webber Group
the Board of Trustees Inc. ("PW Group") (holding company of
PaineWebber and Mitchell Hutchins). Prior to
December 1995, he was a consultant to PW Group.
Prior to 1988, he was chairman of the board,
president and chief executive officer of
American Bakeries Company. Mr. Bewkes is a
director of Interstate Bakeries Corporation.
Mr. Bewkes is a director or trustee of 34
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve
as investment adviser.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH THE BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST OTHER DIRECTORSHIPS
- ------------------------------------ ------------------------- ------------------------------------------------
<S> <C> <C>
Richard R. Burt; 51 Trustee Mr. Burt is chairman of IEP Advisors, Inc.
1275 Pennsylvania Ave., N.W. (international investments and consulting firm)
Washington, D.C. 20004 (since March 1994) and a partner of McKinsey &
Company (management consulting firm) (since
1991). He is also a director of
Archer-Daniels-Midland Co. (agricultural
commodities), Hollinger International Co.
(publishing), Homestake Mining Corp.,
Powerhouse Technologies Inc. and Wierton Steel
Corp. He was the chief negotiator in the
Strategic Arms Reduction Talks with the former
Soviet Union (1989-1991) and the U.S.
Ambassador to the Federal Republic of Germany
(1985-1989). Mr. Burt is a director or trustee
of 31 investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve
as investment adviser.
Mary C. Farrell*; 48 Trustee Ms. Farrell is a managing director, senior
investment strategist and member of the
Investment Policy Committee of PaineWebber. Ms.
Farrell joined PaineWebber in 1982. She is a
member of the Financial Women's Association and
Women's Economic Roundtable and appears as a
regular panelist on Wall $treet Week with Louis
Rukeyser. She also serves on the Board of
Overseers of New York University's Stern School
of Business. Ms. Farrell is a director or
trustee of 31 investment companies for which
Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.
Meyer Feldberg; 56 Trustee Mr. Feldberg is Dean and Professor of Management
Columbia University of the Graduate School of Business, Columbia
101 Uris Hall University. Prior to 1989, he was president of
New York, New York 10027 the Illinois Institute of Technology. Dean
Feldberg is also a director of Primedia Inc.,
Federated Department Stores, Inc. and Revlon,
Inc. Dean Feldberg is a director or trustee of
33 investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve
as investment adviser.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH THE BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST OTHER DIRECTORSHIPS
- ------------------------------------ ------------------------- ------------------------------------------------
<S> <C> <C>
George W. Gowen; 69 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 or
trustee of 31 investment companies for which
Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.
Frederic V. Malek; 61 Trustee Mr. Malek is chairman of Thayer Capital Partners
1455 Pennsylvania Avenue, N.W. (merchant bank). From January 1992 to November
Suite 350 1992, he was campaign manager of Bush-Quayle
Washington, D.C. 20004 '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), Manor
Care, Inc. (health care), and Northwest
Airlines Inc. Mr. Malek is a director or
trustee of 31 investment companies for which
Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH THE BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST OTHER DIRECTORSHIPS
- ------------------------------------ ------------------------- ------------------------------------------------
<S> <C> <C>
Carl W. Schafer; 62 Trustee Mr. Schafer is president of the Atlantic
66 Witherspoon Street Foundation (charitable foundation supporting
#1100 mainly oceanographic exploration and research).
Princeton, NJ 08542 He also is a director of Base Ten Systems, Inc.
(software), Roadway Express, Inc. (trucking),
The Guardian Group of Mutual Funds, The
Harding, Loevner Funds, Evans Systems, Inc. (a
motor fuels, convenience store and diversified
company), Electronic Clearing House, Inc.
(financial transactions processing), Frontier
Oil Corporation and Nutraceutix, Inc.
(biotechnology company). Prior to January 1993,
Mr. Schafer was chairman of the Investment
Advisory Committee of the Howard Hughes Medical
Institute. Mr. Schafer is a director or trustee
of 31 investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve
as investment adviser.
T. Kirkham Barneby; 52 Vice President Mr. Barneby is a managing director and chief
investment officer--quantitative investments of
Mitchell Hutchins. Prior to September 1994, he
was a senior vice president at Vantage Global
Management. Mr. Barneby is a vice president of
six investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serves as investment adviser.
Lawrence Chinsky; 29 Vice President and Mr. Chinsky is an assistant vice president and
Assistant Treasurer investment monitoring officer of the mutual
fund finance department of Mitchell Hutchins.
Prior to August 1997, he was a securities
compliance examiner with the Office of
Compliance, Inspections and Examinations in the
New York Regional Office of the SEC. Mr.
Chinsky is vice president and assistant
treasurer of 32 investment companies for which
Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.
John J. Lee; 30 Vice President and Mr. Lee is a vice president and a manager of the
Assistant Treasurer mutual fund finance department of Mitchell
Hutchins. Prior to September 1997, he was an
audit manager in the financial services
practice of Ernst & Young LLP. Mr. Lee is a
vice president and assistant treasurer of 32
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve
as investment adviser.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH THE BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST OTHER DIRECTORSHIPS
- ------------------------------------ ------------------------- ------------------------------------------------
<S> <C> <C>
Dennis McCauley; 51 Vice President Mr. McCauley is a managing director and chief
investment officer--fixed income of Mitchell
Hutchins. Prior to December 1994, he was
director of fixed income investments of IBM
Corporation. Mr. McCauley is a vice president
of 22 investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve
as investment adviser.
Ann E. Moran; 41 Vice President and Ms. Moran is a vice president and a manager of
Assistant Treasurer the mutual fund finance department of Mitchell
Hutchins. Ms. Moran is a vice president and
assistant treasurer of 32 investment companies
for which Mitchell Hutchins, PaineWebber or
their affiliates serve as investment adviser.
Dianne E. O'Donnell; 46 Vice President and Ms. O'Donnell is a senior vice president and
Secretary deputy general counsel of Mitchell Hutchins.
Ms. O'Donnell is a vice president and secretary
of 31 investment companies and vice president
and assistant secretary for one investment
company which Mitchell Hutchins, PaineWebber or
their affiliates serve as investment adviser.
Emil Polito; 37 Vice President Mr. Polito is a senior vice president and
director of operations and control for Mitchell
Hutchins. Mr. Polito is a vice president for 32
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve
as investment adviser.
Victoria E. Schonfeld; 47 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 31 investment companies and vice
president and secretary of one investment
company for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
Paul H. Schubert; 35 Vice President and Mr. Schubert is a senior vice president and the
Treasurer director of the mutual fund finance department
of Mitchell Hutchins. From August 1992 to
August 1994, he was a vice president of
BlackRock Financial Management L.P. Mr.
Schubert is a vice president and treasurer of
32 investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve
as investment adviser.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH THE BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST OTHER DIRECTORSHIPS
- ------------------------------------ ------------------------- ------------------------------------------------
<S> <C> <C>
Barney A. Taglialatela; 37 Vice President and Mr. Taglialatela is a vice president and a
Assistant Treasurer manager of the mutual fund finance department
of Mitchell Hutchins. Prior to February 1995,
he was a manager of the mutual fund finance
division of Kidder Peabody Asset Management,
Inc. Mr. Taglialatela is a vice president and
assistant treasurer of 32 investment companies
for which Mitchell Hutchins, PaineWebber or
their affiliates serve as investment adviser.
Mark A. Tincher; 43 Vice President Mr. Tincher is a managing director and chief
investment officer--equities of Mitchell
Hutchins. Prior to March 1995, he was a vice
president and directed the U.S. funds
management and equity research areas of Chase
Manhattan Private Bank. Mr. Tincher is a vice
president of 13 investment companies for which
Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.
Keith A. Weller; 37 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 31
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates serve
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.
32
<PAGE>
The Trust pays trustees who are not "interested persons" of the Trust
("disinterested members") $1,000 annually for each Portfolio and $150 per
Portfolio 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 includes certain information related to the compensation of
the Trust's trustees during its initial fiscal period ended May 31, 1998, and
the total compensation of those trustees for all PaineWebber funds during the
calendar year ended December 31, 1997.
COMPENSATION TABLE+
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
ESTIMATED FOR THE
AGGREGATE TRUST
COMPENSATION AND
FOR THE THE FUND
NAME OF PERSON, POSITION TRUST(1) COMPLEX(2)
- -------------------------------------------------------------------------------- ------------- -----------------
<S> <C> <C>
Richard Q. Armstrong, Trustee................................................... $ 700 $ 94,885
Richard R. Burt, Trustee........................................................ 700 87,085
Meyer Feldberg, Trustee......................................................... 1,211 117,853
George W. Gowen, Trustee........................................................ 700 101,567
Frederic V. Malek, Trustee...................................................... 700 95,845
Carl W. Schafer, Trustee........................................................ 700 94,885
</TABLE>
- ------------
+ 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) For the period February 24, 1998 (commencement of operations) through May
31, 1998.
(2) Represents total compensation paid to each trustee during the calendar year
ended December 31, 1997; no fund within the fund complex has a bonus,
pension, profit sharing or retirement plan.
PRINCIPAL HOLDERS OF SECURITIES
The following shareholders are shown in the Portfolios' records as owning
more than 5% of their shares:
<TABLE>
<CAPTION>
NUMBER AND PERCENTAGE
OF
SHARES BENEFICIALLY
OWNED AS OF
NAME AND ADDRESS* AUGUST 31, 1998
- ---------------------------------------------------- ---------------------
<S> <C> <C>
MITCHELL HUTCHINS CONSERVATIVE PORTFOLIO
PaineWebber Custodian
PaineWebber FBO
Wilfred Robinson 23,536 8.02%
PaineWebber Custodian
Richard Agostini 31,649 11.26%
</TABLE>
- ------------
* The shareholders listed may be contacted c/o Mitchell Hutchins Asset
Management, Inc., 1285 Avenue of the Americas, New York, NY 10019.
33
<PAGE>
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator to each Portfolio pursuant to a contract ("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.
During the period February 24, 1998 (commencement of operations) to May 31,
1998, Mitchell Hutchins earned advisory fees in the amount of $2,560 with
respect to Aggressive Portfolio, $4,531 with respect to Moderate Portfolio and
$1,408 with respect to Conservative Portfolio. All these amounts were waived by
Mitchell Hutchins.
Under the terms of the Advisory Contract, each Portfolio bears all of its
expenses incurred in its operation that are not specifically assumed by Mitchell
Hutchins. Expenses borne by the Portfolio include the following: (1) the cost
(including brokerage commissions) of securities purchases or sold by the
Portfolio and any losses incurred in connection therewith; (2) fees payable to
and expenses incurred on behalf of the Portfolios by Mitchell Hutchins; (3)
organizational expenses; (4) filing fees and expenses relating to the
registration and qualification of the Portfolio's shares under federal and state
securities laws and maintenance of such registrations and qualifications; (5)
fees and salaries payable to board members and officers who are not "interested
persons" (as defined in the 1940 Act) of the Trust or Mitchell Hutchins; (6) all
expenses incurred in connection with the board members' services, including
travel expenses; (7) taxes (including any income or franchise taxes) and
governmental fees; (8) costs of any liability, uncollectible items of deposit
and other insurance or fidelity bonds; (9) any costs, expenses or losses arising
out of a liability of or claim for damages or other relief asserted against the
Trust or Portfolio for violation of any law; (10) legal, accounting and auditing
expenses, including legal fees of special counsel for the independent board
members; (11) charges of custodians, transfer agents and other agents; (12)
costs of preparing share certificates; (13) expenses of setting in type and
printing prospectuses, statements of additional information and supplements
thereto, reports and proxy materials for existing shareholders, and costs of
mailing such materials to shareholders; (14) any extraordinary expenses
(including fees and disbursements of counsel) incurred by the Portfolio; (15)
fees, voluntary assessments and other expenses incurred in connection with
membership in investment company organizations; (16) costs of mailing and
tabulating proxies and costs of meetings of shareholders, the board or any
committee thereof; (17) the cost of investment literature and other publications
provided to board members and officers; and (18) costs of mailing, stationery
and communications equipment.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by 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.
NET ASSETS. The following table shows the approximate net assets as of
August 31, 1998, 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.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY $ MIL
- ---------------------------------------------------------------------------------- ----------
<S> <C>
Domestic (excluding Money Market)................................................. $ 7,065.7
Global............................................................................ 3,506.5
Equity/Balanced................................................................... 5,530.6
Fixed Income (excluding Money Market)............................................. 5,058.7
Taxable Fixed Income............................................................ 3,474.7
Tax-Free Fixed Income........................................................... 1,584.0
Money Market Funds................................................................ 29,448.7
</TABLE>
34
<PAGE>
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 Class C shares of 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.
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.
The Portfolios paid (or accrued) the following distribution fees to Mitchell
Hutchins under the Class A, Class B and Class C Plans during the period February
24, 1998 (commencement of operations) to May 31, 1998:
<TABLE>
<CAPTION>
AGGRESSIVE MODERATE CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ------------
<S> <C> <C> <C>
Class A...................................................................... $ 568 $ 774 $ 221
Class B...................................................................... 1,842 5,431 2,412
Class C...................................................................... 3,173 4,389 565
</TABLE>
35
<PAGE>
Mitchell Hutchins estimates that it and its parent corporation, PaineWebber,
incurred the following shareholder service-related and distribution-related
expenses with respect to the Portfolios during the fiscal period ended May 31,
1998:
<TABLE>
<CAPTION>
CLASS A
--------------------------------------
AGGRESSIVE MODERATE CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ------------
<S> <C> <C> <C>
Marketing and advertising.................................................... $ 5,722 $ 4,396 $ 3,891
Printing of prospectuses and statements of additional information............ 0 0 0
Branch network costs allocated and interest expense.......................... 7,575 5,820 5,150
Service fee paid to investment executives.................................... 216 294 80
<CAPTION>
CLASS B
--------------------------------------
AGGRESSIVE MODERATE CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ------------
<S> <C> <C> <C>
Marketing and advertising.................................................... $ 4,633 $ 7,701 $ 11,002
Amortization of commissions.................................................. 562 1,606 725
Printing of prospectuses and statements of additional information............ 0 0 0
Branch network costs allocated and interest expense.......................... 6,311 10,634 14,794
Service fee paid to investment executives.................................... 175 516 229
<CAPTION>
CLASS C
--------------------------------------
AGGRESSIVE MODERATE CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ------------
<S> <C> <C> <C>
Marketing and advertising.................................................... $ 7,974 $ 6,232 $ 3,436
Amortization of commissions.................................................. 904 1,251 143
Printing of prospectuses and statements of additional information............ 0 0 0
Branch network costs allocated and interest expense.......................... 10,572 8,270 4,553
Service fee paid to investment executives.................................... 301 417 71
</TABLE>
"Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing Portfolio shares. These
internal costs encompass office rent, salaries and other overhead expenses of
various departments and areas of operations of Mitchell Hutchins. "Branch
network costs allocated and interest expense" consist of an allocated portion of
the expenses of various PaineWebber departments involved in the distribution of
each Portfolio's shares, including the PaineWebber retail branch system.
In approving the Portfolios' overall Flexible Pricing-SM- 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
36
<PAGE>
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
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.
Under the Distribution Contract between the Trust and Mitchell Hutchins for
the Class A shares for the fiscal period February 24, 1998 (commencement of
operations) to May 31, 1998, Mitchell Hutchins earned the following approximate
amounts of sales charges and retained the following approximate amounts, net of
concessions to PaineWebber as exclusive dealer:
37
<PAGE>
<TABLE>
<CAPTION>
AGGRESSIVE MODERATE CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ------------
<S> <C> <C> <C>
Earned....................................................................... $ 50,393 $ 59,932 $ 13,243
Retained..................................................................... 31,244 37,158 8,211
</TABLE>
For the fiscal period February 24, 1998 (commencement of operations) to May
31, 1998, Mitchell Hutchins earned and retained the following contingent
deferred sales charges paid upon certain redemptions of Class A, Class B and
Class C shares:
<TABLE>
<CAPTION>
AGGRESSIVE MODERATE CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ------------
<S> <C> <C> <C>
Class A...................................................................... $ 0 $ 0 $ 0
Class B...................................................................... 49 0 18
Class C...................................................................... 44 1,245 0
</TABLE>
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. For the period February 24,
1998 (commencement of operations) to May 31, 1998, the Portfolios paid no
brokerage commissions.
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 an 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.
For the fiscal period ended May 31, 1998, the Portfolios paid no brokerage
commissions to PaineWebber or any other affiliate of Mitchell Hutchins.
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.
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<PAGE>
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, 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 Portfolio or Underlying Fund will be reasonable in
relation to the benefits to the each over the long term. During the fiscal
period ended May 31, 1998, the Portfolios directed no brokerage transactions to
brokers chose because they provided research services.
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 the Trust's and each
Underlying Fund's board pursuant to Rule 10f-3 under the 1940 Act. Among other
things, these procedures require that the spread or commission paid in
connection with such a purchase be reasonable and fair, the purchase be at not
more than the public offering price prior to the end of the first business day
after the date of the public offering and that PaineWebber or any affiliate
thereof 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
calculated by dividing the lesser of each Portfolio's annual sales or purchases
of portfolio securities
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<PAGE>
(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. For the period February 24, 1998 (commencement of
operations) to May 31, 1998, the portfolio turnover rate was 6% for Aggressive
Portfolio, 13% for Moderate Portfolio and 11% for Conservative Portfolio.
The portfolio turnover rates of the Underlying Funds have ranged from 45% 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
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
40
<PAGE>
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 securities 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 20th
of a month for monthly, quarterly, semiannual or 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 five
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 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.
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<PAGE>
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.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN-SM-
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 continually to 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.
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
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<PAGE>
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 $100 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
- 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 each
class, 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
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<PAGE>
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. Prices will be calculated earlier when the NYSE
closes early because trading has been halted for the day. 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 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.
TOTAL RETURN CALCULATIONS. Average annual total return quotes
("Standardized Return") used in each Portfolio's Performance Advertisements are
calculated according to the following formula:
<TABLE>
<S> <C> <C> <C>
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.
</TABLE>
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.
44
<PAGE>
The following tables show performance information for each class of the
Portfolios' shares for the period indicated.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
AGGRESSIVE PORTFOLIO:
Inception to May 31, 1998*
Standardized Return**.................... (0.84%) (1.32%) 2.68% 3.92%
Non Standardized Return.................. 3.84% 3.68% 3.68% 3.92%
MODERATE PORTFOLIO:
Inception to May 31, 1998*
Standardized Return**.................... (1.22%) (1.80%) 2.20% 3.52%
Non Standardized Return.................. 3.44% 3.20% 3.20% 3.52%
CONSERVATIVE PORTFOLIO:
Inception to May 31, 1998*
Standardized Return**.................... (2.14%) (2.68%) 1.65% 2.56%
Non Standardized Return.................. 2.48% 2.32% 2.40% 2.56%
</TABLE>
- ------------
* The inception date for all Classes was February 24, 1998.
** All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5% (4.0% for Conservative Portfolio). All
Standardized Return figures for Class B and Class C shares reflect deduction
of the applicable contingent deferred sales charges imposed on a redemption
of shares held for the period.
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:
<TABLE>
<S> <C> <C>
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.
</TABLE>
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
the resulting quotient by the market value of the obligation (including actual
accrued interest) to determine the interest
45
<PAGE>
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 4.5% (4% for Conservative Portfolio) initial sales charge on
Class A shares is included.
The following table shows the 30-day yield for each class of Moderate
Portfolio and Conservative Portfolio for the 30 days period ended May 31, 1998.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
MODERATE PORTFOLIO:..................................................... 2.49 1.89 1.93 2.79
CONSERVATIVE PORTFOLIO:................................................. 4.24 3.76 3.99 4.66
</TABLE>
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
46
<PAGE>
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.
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.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S.
S&P 500 TR U.S. LT GVT TR U.S. 30 DAY TBILL TR INFLATION
<S> <C> <C> <C> <C>
1925 $10,000 $10,000 $10,000 $10,000
1926 $11,162 $10,777 $10,327 $9,851
1927 $15,347 $11,739 $10,649 $9,646
1928 $22,040 $11,751 $11,028 $9,553
1929 $20,185 $12,153 $11,552 $9,572
1930 $15,159 $12,719 $11,630 $8,994
1931 $8,590 $12,044 $11,957 $8,138
1932 $7,886 $14,073 $12,072 $7,300
1933 $12,144 $14,062 $12,108 $7,337
1934 $11,969 $15,472 $12,128 $7,486
1935 $17,674 $16,243 $12,148 $7,710
1936 $23,669 $17,464 $12,170 $7,603
1937 $15,379 $17,504 $12,207 $8,045
1938 $20,165 $18,473 $12,205 $7,821
1939 $20,082 $19,570 $12,208 $7,784
1940 $18,117 $20,761 $12,208 $7,859
1941 $16,017 $20,955 $12,216 $8,622
1942 $19,275 $21,629 $12,248 $9,423
1943 $24,267 $22,080 $12,291 $9,721
1944 $29,060 $22,702 $12,332 $9,926
1945 $39,649 $25,139 $12,372 $10,149
1946 $36,449 $25,113 $12,416 $11,993
1947 $38,529 $24,454 $12,478 $13,073
1948 $40,649 $25,285 $12,580 $13,426
1949 $48,287 $26,918 $12,718 $13,184
1950 $63,601 $26,932 $12,870 $13,948
1951 $78,875 $25,873 $13,063 $14,767
1952 $93,363 $26,173 $13,279 $14,898
1953 $92,439 $27,125 $13,521 $14,991
1954 $141,084 $29,075 $13,638 $14,916
1955 $185,614 $28,699 $13,852 $14,972
1956 $197,783 $27,096 $14,193 $15,400
1957 $176,457 $29,117 $14,639 $15,866
1958 $252,975 $27,342 $14,864 $16,145
1959 $283,219 $26,725 $15,303 $16,387
1960 $284,549 $30,407 $15,711 $16,629
1961 $361,060 $30,703 $16,045 $16,741
1962 $329,545 $32,818 $16,483 $16,946
1963 $404,685 $33,216 $16,997 $17,225
1964 $471,388 $34,381 $17,598 $17,430
1965 $530,081 $34,625 $18,289 $17,765
1966 $476,737 $35,889 $19,159 $18,361
1967 $591,038 $32,594 $19,966 $18,920
1968 $656,415 $32,509 $21,005 $19,814
1969 $600,590 $30,860 $22,388 $21,024
1970 $624,653 $34,596 $23,848 $22,179
1971 $714,058 $38,173 $24,895 $22,924
1972 $849,559 $41,400 $25,851 $23,706
1973 $725,003 $40,942 $27,643 $25,792
1974 $533,110 $42,725 $29,855 $28,939
1975 $731,443 $46,653 $31,588 $30,969
1976 $905,842 $54,470 $33,193 $32,458
1977 $840,766 $54,095 $34,893 $34,656
1978 $895,922 $53,458 $37,398 $37,784
1979 $1,061,126 $52,799 $41,279 $42,812
1980 $1,405,137 $50,715 $45,917 $48,120
1981 $1,336,161 $51,657 $52,671 $52,421
1982 $1,622,226 $72,507 $58,224 $54,451
1983 $1,987,451 $72,979 $63,347 $56,518
1984 $2,111,991 $84,274 $69,586 $58,753
1985 $2,791,168 $110,371 $74,960 $60,968
1986 $3,306,709 $137,446 $79,580 $62,657
1987 $3,479,675 $133,716 $83,929 $64,376
1988 $4,064,583 $146,650 $89,257 $67,221
1989 $5,344,555 $173,215 $96,728 $70,345
1990 $5,174,990 $183,924 $104,286 $74,640
1991 $6,755,922 $219,420 $110,121 $76,927
1992 $7,274,115 $237,092 $113,982 $79,159
1993 $8,000,785 $280,339 $117,284 $81,334
1994 $8,105,379 $258,556 $121,862 $83,510
1995 $11,139,184 $340,436 $128,681 $85,630
1996 $13,709,459 $337,265 $135,381 $88,475
1997 $18,272,762 $390,736 $142,496 $90,092
</TABLE>
- ------------
Source: Stocks, Bonds, Bills and Inflation 1997 Yearbook-TM- Ibbotson Assoc.,
Chi., (annual updates work by Roger G. Ibbotson & Rex A. Sinquefield).
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 indices are
unmanaged and are not available for investment.
Over time, stocks have outperformed all other investments by a wide margin,
offering a solid hedge against inflation. From 1925 to 1997, stocks beat all
other traditional asset classes. A $10,000 investment in the stocks comprising
the S&P 500 grew to $18,272,762, significantly more than any other investment.
TAXES
TAXATION OF THE PORTFOLIOS. To continue 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
47
<PAGE>
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 (including the Underlying Funds) 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 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, including the Underlying Funds) of any one issuer.
Each Portfolio will invest its assets in shares of Underlying Funds 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 (that is, 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. If a
Portfolio purchases shares of an Underlying Fund within 30 days before or after
redeeming at a loss other shares of that Underlying Fund (whether pursuant to a
rebalancing of the Portfolio's portfolio or otherwise), all or part of the loss
will not be deductible by the Portfolio and instead will increase its basis for
the newly purchased shares.
Although each of PaineWebber Global Income Fund and PaineWebber 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% of 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
test.
Each Portfolio will be subject to a nondeductible 4% 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.
TAXATION OF THE PORTFOLIOS' SHAREHOLDERS. 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 even 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.
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 the total of its proportionate share of the
aggregate dividends received from U.S. corporations by the Underlying Funds in
which it invests that 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.
48
<PAGE>
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.
OTHER INFORMATION
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."
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,
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; three series currently
offer shares to the public.
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 instrument of the Trust 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
distributions 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
49
<PAGE>
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.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for the Trust and each Portfolio.
50
<PAGE>
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;
51
<PAGE>
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.
"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.
52
<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
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Portfolios--Investment Policies And
Restrictions........................
Underlying Funds--Investment
Policies............................ 4
Underlying Funds--Hedging And Other
Strategies Using Derivative
Instruments......................... 18
Trustees And Officers; Principal
Holders Of Securities............... 27
Investment Advisory And Distribution
Arrangements........................ 34
Portfolio Transactions................ 38
Reduced Sales Charges, Additional
Exchange And Redemption Information
And Other Services.................. 40
Conversion Of Class B Shares.......... 43
Valuation Of Shares................... 44
Performance Information............... 44
Taxes................................. 47
Other Information..................... 49
Financial Statements..................
Notes to Financial Statements.........
Appendix.............................. 51
</TABLE>
- -C-1998 PaineWebber Incorporated
MITCHELL HUTCHINS
PORTFOLIOS
--------------------------
Statement of Additional Information
October 1, 1998
--------------------------------
PAINEWEBBER
<PAGE>
PART C. OTHER INFORMATION
Item 23. EXHIBITS
(1) Amended and Restated Trust Instrument 2/
(2) Amended and Restated By-Laws 2/
(3) Instruments defining the rights of holders of Registrant's shares of
beneficial interest 1/
(4) Investment Advisory and Administration Contract (filed herewith)
(5) (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)
(6) Bonus, profit sharing or pension plans - none
(7) Custodian Agreement (filed herewith)
(8) Transfer Agency Agreement (filed herewith)
(9) Opinion and consent of counsel (filed herewith)
(10) Other opinions, appraisals, rulings and consents: Auditor's consent
(filed herewith)
(11) Financial Statements omitted from Part B - none
(12) Letter of investment intent 2/
(13) 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)
(14) and
(27) Financial Data Schedule (filed herewith)
(15) Plan Pursuant to Rule 18f-3 2/
______________________
1/ 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.
2/ Incorporated by reference from Pre-Effective Amendment No. 3 to the
registration statement of Mitchell Hutchins Portfolios, SEC File No.
333-26087, filed on January 9, 1998.
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
C-1
<PAGE>
Item 25. 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 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-2
<PAGE>
Item 26. 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 27. PRINCIPAL UNDERWRITERS
a) Mitchell Hutchins serves as principal underwriter and/or
investment adviser for the following investment companies:
ALL AMERICAN TERM TRUST INC.
GLOBAL HIGH INCOME DOLLAR FUND INC.
GLOBAL SMALL CAP FUND INC.
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GRADE INCOME FUND INC.
MANAGED HIGH YIELD FUND INC.
MANAGED HIGH YIELD PLUS FUND INC.
MITCHELL HUTCHINS INSTITUTIONAL SERIES
MITCHELL HUTCHINS PORTFOLIOS
MITCHELL HUTCHINS SERIES TRUST
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INDEX TRUST
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER MASTER SERIES, INC.
PAINEWEBBER MUNICIPAL SERIES
PAINEWEBBER MUTUAL FUND TRUST
PAINEWEBBER OLYMPUS FUND
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.
Position and Offices with
Position With Underwriter or Exclusive
Name Registrant Dealer
---- ------------- -------------------------
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
C-3
<PAGE>
Position and Offices with
Position With Underwriter or Exclusive
Name Registrant Dealer
---- ------------- -------------------------
Lawrence Chinsky Vice President and Assistant Vice President and
Assistant Treasurer Investment Monitoring Officer
of the Mutual Fund Finance
Department of Mitchell
Hutchins
John J. Lee Vice President and Vice President and a Manager
Assistant Treasurer of the Mutual Fund Finance
Department of Mitchell
Hutchins
Dennis McCauley Vice President Managing Director and Chief
Investment Officer - Fixed
Income of Mitchell Hutchins
Ann E. Moran Vice President and Vice President and a Manager
Assistant Treasurer of the Mutual Fund Finance
Department of Mitchell
Hutchins
Dianne E. O'Donnell Vice President and Senior Vice President and
Secretary 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 Senior Vice President and
Treasurer Director of the Mutual Fund
Finance Department of Mitchell
Hutchins
Barney A. Vice President and Vice President and a Manager
Taglialatela Assistant Treasurer of the Mutual Fund Finance
Department of Mitchell
Hutchins
Mark A. Tincher Vice President Managing Director and Chief
Investment Officer - Equities
of Mitchell Hutchins
Keith A. Weller Vice President and First Vice President and
Assistant Secretary Associate General Counsel of
Mitchell Hutchins
c) None
Item 28. LOCATION OF ACCOUNTS AND RECORDS
The books and other documents required by paragraphs (b)(4), (c) and
(d) of Rule 31a-1 under the Investment Company Act of 1940 are maintained in
the physical possession of Registrant's investment adviser, Mitchell
Hutchins, 1285 Avenue of the Americas, New York, New York 10019. All other
accounts, books and documents required by Rule 31a-1 are maintained in the
physical possession of Registrant's transfer agent and custodian.
Item 29. MANAGEMENT SERVICES
Not applicable.
Item 30. UNDERTAKINGS
None.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York and State of
New York, on the 28th day of September, 1998.
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
Post-Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Margo N. Alexander President and Trustee September 28, 1998
- ------------------------------ (Chief Executive Officer)
Margo N. Alexander *
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman September 28, 1998
- ------------------------------ of the Board of Trustees
E. Garrett Bewkes, Jr. *
/s/ Richard Q. Armstrong Trustee September 28, 1998
- ------------------------------
Richard Q. Armstrong *
/s/ Richard R. Burt Trustee September 28, 1998
- ------------------------------
Richard R. Burt *
/s/ Mary C. Farrell Trustee September 28, 1998
- ------------------------------
Mary C. Farrell *
/s/ Meyer Feldberg Trustee September 28, 1998
- ------------------------------
Meyer Feldberg *
/s/ George W. Gowen Trustee September 28, 1998
- ------------------------------
George W. Gowen *
/s/ Frederic V. Malek Trustee September 28, 1998
- ------------------------------
Frederic V. Malek *
/s/ Carl W. Schafer Trustee September 28, 1998
- ------------------------------
Carl W. Schafer *
/s/ Paul H. Schubert Vice President and Treasurer (Chief September 28, 1998
- ------------------------------ Financial and Accounting Officer)
Paul H. Schubert
</TABLE>
<PAGE>
SIGNATURES (CONTINUED)
* Signature affixed by Elinor W. Gammon pursuant to powers of attorney dated
August 21, 1997 and incorporated by reference from Pre-Effective Amendment
No. 1 to the registration statement of Mitchell Hutchins Portfolios, SEC
File 333-26087, filed August 26, 1997.
<PAGE>
MITCHELL HUTCHINS PORTFOLIOS
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
- ------
<S> <C>
(1) Amended and Restated Trust Instrument (2)
(2) Amended and Restated By-Laws (2)
(3) Instruments defining the rights of holders of Registrant's shares of
beneficial interest (1)
(4) Investment Advisory and Administration Contract (filed herewith)
(5) (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)
(6) Bonus, profit sharing or pension plans - none
(7) Custodian Agreement (filed herewith)
(8) Transfer Agency Agreement (filed herewith)
(9) Opinion and consent of counsel (filed herewith)
(10) Other opinions, appraisals, rulings and consents: Auditor's consent
(filed herewith)
(11) Financial Statements omitted from Part B - none
(12) Letter of investment intent (2)
(13) 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)
(14) and
(27) Financial Data Schedule (filed herewith)
(15) Plan Pursuant to Rule 18f-3 (2)
</TABLE>
- --------------------
(1) 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.
(2) Incorporated by reference from Pre-Effective Amendment No. 3 to the
registration statement of Mitchell Hutchins Portfolios, SEC File No.
333-26087, filed on January 9, 1998.
<PAGE>
Exhibit No. 4
INVESTMENT ADVISORY AND ADMINISTRATION CONTRACT
Contract made as of January 9, 1998 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 intends to offer for public sale three distinct series of shares of
beneficial interest ("Series"), which correspond to distinct portfolios and
which have been designated as Mitchell Hutchins Aggressive 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 management with respect to all
securities and investments and cash equivalents in
<PAGE>
each Series. Mitchell Hutchins will determine from time to time what
securities and other investments will be purchased, retained or sold by each
Series.
(b) Mitchell Hutchins agrees that in placing orders with brokers, it
will attempt to obtain the best net result in terms of price and execution;
provided that, on behalf of any Series, Mitchell Hutchins may, in its
discretion, use brokers who provide the Series with research, analysis,
advice and similar services to execute portfolio transactions on behalf of
the Series, and Mitchell Hutchins may pay to those brokers in return for
brokerage and research services a higher commission than may be charged by
other brokers, subject to Mitchell Hutchins' determining in good faith that
such commission is reasonable in terms either of the particular transaction
or of the overall responsibility of Mitchell Hutchins to such Series and its
other clients and that the total commissions paid by such Series will be
reasonable in relation to the benefits to the Series over the long term. In
no instance will portfolio securities be purchased from or sold to Mitchell
Hutchins, or any affiliated person thereof, except in accordance with the
federal securities laws and the rules and regulations thereunder. Whenever
Mitchell Hutchins simultaneously places orders to purchase or sell the same
security on behalf of a Series and one or more other accounts advised by
Mitchell Hutchins, such orders will be allocated as to price and amount among
all such accounts in a manner believed to be equitable to each account. The
Trust recognizes that in some cases this procedure may adversely affect the
results obtained for the Series.
(c) Mitchell Hutchins will oversee the maintenance of all books and
records with respect to the securities transactions of each Series, and will
furnish the Board with such periodic and special reports as the Board
reasonably may request. In compliance with the requirements of Rule 31a-3
under the 1940 Act, Mitchell Hutchins hereby agrees that all records which it
maintains for the Trust are the property of the Trust, agrees to preserve for
the periods prescribed by Rule 31a-2 under the 1940 Act any records which it
maintains for the Trust and which are required to be maintained by Rule 31a-l
under the 1940 Act and further agrees to surrender promptly to the Trust any
records which it maintains for the Trust upon request by the Trust.
(d) Mitchell Hutchins will oversee the computation of the net asset
value and the net income of each Series as described in the currently
effective registration statement of the Trust under the Securities Act of
1933, as amended, and the 1940 Act and any supplements thereto ("Registration
Statement") or as more frequently requested by the Board.
(e) The Trust hereby authorizes Mitchell Hutchins and any entity or
person associated with Mitchell Hutchins which is a member of a national
securities exchange to effect any transaction on such exchange for the
account of any Series, which transaction is permitted by Section 11(a) of the
1934 Act and Rule 11a2-2(T) thereunder, and the Trust hereby consents to the
retention of compensation by Mitchell Hutchins or any person or entity
associated with Mitchell Hutchins for such transactions in accordance with
Rule 11a2-2(T)(a)(2)(iv).
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:
-2-
<PAGE>
(a) Mitchell Hutchins will supervise all aspects of the operations of
the Trust and each Series, including oversight of transfer agency, custodial
and accounting services, except as hereinafter set forth; provided, however,
that nothing herein contained shall be deemed to relieve or deprive the Board
of its responsibility for and control of the conduct of the affairs of the
Trust and each Series.
(b) Mitchell Hutchins will provide the Trust and each Series with such
corporate, administrative and clerical personnel (including officers of the
Trust) and services as are reasonably deemed necessary or advisable by the
Board, including the maintenance of certain books and records of the Trust
and each Series.
(c) Mitchell Hutchins will arrange, but not pay, for the periodic
preparation, updating, filing and dissemination (as applicable) of the
Trust's Registration Statement, proxy material, tax returns and required
reports to each Series' shareholders and the Securities and Exchange
Commission and other appropriate federal or state regulatory authorities.
(d) Mitchell Hutchins will provide the Trust and each Series with, or
obtain for it, adequate office space and all necessary office equipment and
services, including telephone service, heat, utilities, stationery supplies
and similar items.
(e) Mitchell Hutchins will provide the Board on a regular basis with
economic and investment analyses and reports and make available to the Board
upon request any economic, statistical and investment services normally
available to institutional or other customers of Mitchell Hutchins.
4. FURTHER DUTIES. In all matters relating to the performance of
this Contract, Mitchell Hutchins will act in conformity with the Declaration
of Trust, By-Laws, and Registration Statement of the Trust and with the
instructions and directions of the Board and will comply with the
requirements of the 1940 Act, the rules thereunder, and all other applicable
federal and state laws and regulations.
5. DELEGATION OF MITCHELL HUTCHINS' DUTIES AS INVESTMENT ADVISER AND
ADMINISTRATOR. With respect to any or all Series, Mitchell Hutchins may enter
into one or more contracts ("Sub-Advisory or Sub-Administration Contract")
with 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
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<PAGE>
to devote his or her time and attention in part to the management or other
aspects of any other business, whether of a similar nature or a dissimilar
nature.
-4-
<PAGE>
7. EXPENSES.
(a) During the term of this Contract, each Series will bear all
expenses, not specifically assumed by Mitchell Hutchins, incurred in its
operations and the offering of its shares.
(b) Expenses borne by each Series will include but not be limited to
the following (or each Series' proportionate share of the following): (i)
the cost (including brokerage commissions) of securities purchased or sold by
the Series and any losses incurred in connection therewith; (ii) fees payable
to and expenses incurred on behalf of the Series by Mitchell Hutchins under
this Contract; (iii) expenses of organizing the Trust and the Series; (iv)
filing fees and expenses relating to the registrations and qualification of
the Series' shares and the Trust under federal and/or securities laws and
maintaining such registration and qualifications; (v) fees and salaries
payable to the Trust's Trustees and officers who are not interested persons
of the Trust or Mitchell Hutchins; (vi) all expenses incurred in connection
with the Trustees' services, including travel expenses; (vii) taxes
(including any income or franchise taxes) and governmental fees; (viii) costs
of any liability, uncollectible items of deposit and other insurance and
fidelity bonds; (ix) any costs, expenses or losses arising out of a liability
of or claim for damages or other relief asserted against the Trust or Series
for violation of any law; (x) legal, accounting and auditing expenses,
including legal fees of special counsel for those Trustees of the Trust who
are not interested persons of the Trust; (xi) charges of custodians, transfer
agents and other agents; (xii) costs of preparing share certificates; (xiii)
expenses of setting in type and printing prospectuses and supplements
thereto, statements of additional information and supplements thereto,
reports and proxy materials for existing shareholders; (xiv) costs of mailing
prospectuses and supplements thereto, statements of additional information
and supplements thereto, reports and proxy materials to existing
shareholders; (xv) any extraordinary expenses (including fees and
disbursements of counsel, costs of actions, suits or proceedings to which the
Trust is a party and the expenses the Trust may incur as a result of its
legal obligation to provide indemnification to its officers, Trustees, agents
and shareholders) incurred by the Trust or Series; (xvi) fees, voluntary
assessments and other expenses incurred in connection with membership in
investment company organizations; (xvii) cost of mailing and tabulating
proxies and costs of meetings of shareholders, the Board and any committees
thereof; (xviii) the cost of investment company literature and other
publications provided by the Trust to its Trustees and officers; and (xix)
costs of mailing, stationery and communications equipment.
(c) The Trust or a Series may pay directly any expenses incurred by it
in its normal operations and, if any such payment is consented to by Mitchell
Hutchins and acknowledged as otherwise payable by Mitchell Hutchins pursuant
to this Contract, the Series may reduce the fee payable to Mitchell Hutchins
pursuant to Paragraph 8 thereof by such amount. To the extent that such
deductions exceed the fee payable to Mitchell Hutchins on any monthly payment
date, such excess shall be carried forward and deducted in the same manner
from the fee payable on succeeding monthly payment dates.
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<PAGE>
(d) Mitchell Hutchins will assume the cost of any compensation for
services provided to the Trust received by the officers of the Trust and by
those Trustees who are interested persons of the Trust.
(e) The payment or assumption by Mitchell Hutchins of any expenses of
the Trust or a Series that Mitchell Hutchins is not required by this Contract
to pay or assume shall not obligate Mitchell Hutchins to pay or assume the
same or any similar expense of the Trust or a Series on any subsequent
occasion.
8. COMPENSATION.
(a) For the services provided and the expenses assumed pursuant to this
Contract, 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:
<TABLE>
<S> <C>
Mitchell Hutchins Aggressive Portfolio 0.35%
Mitchell Hutchins Moderate Portfolio 0.35%
Mitchell Hutchins Conservative Portfolio 0.35%
</TABLE>
(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 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
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<PAGE>
or the Trust and not as an officer, director, employee, or agent or one under
the control or direction of Mitchell Hutchins even though paid by it.
10. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS OF THE
TRUST. 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, it 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.
11. DURATION AND TERMINATION.
(a) This Contract shall become effective upon the date hereabove
written provided that, with respect to any Series, this Contract shall not
take effect unless it has first been approved (i) by a vote of a majority of
those Trustees of the Trust who are not parties to this Contract or
interested persons of any such party cast in person at a meeting called for
the purpose of voting on such approval, and (ii) by vote of a majority of
that Series' outstanding voting securities.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for two years from the above written date. Thereafter, if
not terminated, this Contract shall continue automatically for successive
periods of twelve months each, provided that such continuance is specifically
approved at least annually (i) by a vote of a majority of those Trustees of
the Trust who are not parties to this Contract or interested persons of any
such party, cast in person at a meeting called for the purpose of voting on
such approval, and (ii) by the Board or with respect to any given Series by
vote of a majority of the outstanding voting securities of such Series.
(c) Notwithstanding the foregoing, with respect to any Series this
Contract may be terminated at any time, without the payment of any penalty,
by vote of the board or by a vote of a majority of the outstanding voting
securities of such Series on sixty days' written notice to Mitchell Hutchins
or by Mitchell Hutchins at any time, without the payment of any penalty, on
sixty days' written notice to the Trust. Termination of this Contract with
respect to any given Series shall in no way affect the continued validity of
this Contract or the performance thereunder with respect to any other Series.
This Contract will automatically terminate in the event of its assignment.
12. AMENDMENT OF THIS CONTRACT. No provision of this Contract may be
changed, waived, discharged or terminated orally, but only by an instrument
in writing signed by the party against which enforcement of the change,
waiver, discharge or termination is sought, and no amendment of this contract
as to any given Series shall be effective until approved by vote of a
majority of such Series' outstanding voting securities.
13. GOVERNING LAW. This Contract shall be construed in accordance
with the laws of the State of Delaware, without giving effect to the
conflicts of laws principles thereof, and in accordance with the 1940 Act.
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.
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<PAGE>
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," "broker," "investment
adviser," "national securities exchange," "net assets," "prospectus," "sale,"
"sell" and "security" shall have the same meaning as such terms have in the
1940 Act, subject to such exemption as may be granted by the Securities and
Exchange Commission by any rule, regulation or order. Where the effect of a
requirement of the 1940 Act reflected in any provision of this contract is
relaxed by a rule, regulation or order of the Securities and Exchange
Commission, whether of special or general application, such provision shall
be deemed to incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated as of the day and year first above
written.
MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
Attest: /s/ Teresa M. Ritchie By /s/ Julian Sluyters
-------------------------- ----------------------------
MITCHELL HUTCHINS PORTFOLIOS
Attest: /s/ Teresa M. Ritchie By /s/ Dianne E. O'Donnell
-------------------------- ----------------------------
-8-
<PAGE>
Exhibit No. 5(a)
MITCHELL HUTCHINS PORTFOLIOS
DISTRIBUTION CONTRACT
CLASS A SHARES
CONTRACT made as of a January 9, 1998, 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 Aggressive 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.
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<PAGE>
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 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.
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<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 assume expenses related to
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<PAGE>
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 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
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<PAGE>
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.
-6-
<PAGE>
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 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.
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<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
/s/ Teresa M. Ritchie By: /s/ Dianne E. O'Donnell
----------------------------- ------------------------------
ATTEST: MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
/s/ Teresa M. Ritchie By: /s/ Julian Sluyters
----------------------------- ------------------------------
-8-
<PAGE>
Exhibit No. 5(b)
MITCHELL HUTCHINS PORTFOLIOS
DISTRIBUTION CONTRACT
CLASS B SHARES
CONTRACT made as of January 9, 1998, 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 Aggressive 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
-2-
<PAGE>
enter into an exclusive dealer agreement with 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.
-3-
<PAGE>
(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,
-4-
<PAGE>
statements of additional information and proxy materials 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 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
-5-
<PAGE>
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
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<PAGE>
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 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.
-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
/s/ Teresa M. Ritchie By: /s/ Dianne E. O'Donnell
---------------------------- ----------------------------
ATTEST: MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
/s/ Teresa M. Ritchie By: /s/ Julian Sluyters
---------------------------- ----------------------------
-8-
<PAGE>
Exhibit No. 5(c)
MITCHELL HUTCHINS PORTFOLIOS
DISTRIBUTION CONTRACT
CLASS C SHARES
CONTRACT made as of January 9, 1998 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 Aggressive 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 the sub-distributor bound thereby all applicable duties and
conditions to
-2-
<PAGE>
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
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<PAGE>
cause certificates evidencing Class C 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 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
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<PAGE>
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 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
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<PAGE>
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 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.
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<PAGE>
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 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.
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<PAGE>
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
/s/ Teresa M. Ritchie By: /s/ Dianne E. O'Donnell
----------------------------- ---------------------------
ATTEST: MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
/s/ Teresa M. Ritchie By: /s/ Julian Sluyters
----------------------------- ---------------------------
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<PAGE>
MITCHELL HUTCHINS PORTFOLIOS
DISTRIBUTION CONTRACT
CLASS Y SHARES
CONTRACT made as of January 9, 1998 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 Aggressive 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.
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<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
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<PAGE>
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 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
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<PAGE>
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 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 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
-5-
<PAGE>
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
-6-
<PAGE>
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 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
/s/ Teresa M. Ritchie By: /s/ Dianne E. O'Donnell
--------------------------- -------------------------------
ATTEST: MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
/s/ Teresa M. Ritchie By: /s/ Julian Sluyters
--------------------------- -------------------------------
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<PAGE>
Exhibit No. 5(e)
EXCLUSIVE DEALER AGREEMENT
CLASS A SHARES OF MITCHELL HUTCHINS PORTFOLIOS
AGREEMENT made as of January 9, 1998, 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 Aggressive 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
<PAGE>
agrees 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 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
-2-
<PAGE>
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.
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
-3-
<PAGE>
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.
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.
-4-
<PAGE>
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 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.
-5-
<PAGE>
(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 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.
(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
-6-
<PAGE>
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.
-7-
<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: /s/ Teresa M. Ritchie By: /s/ Dianne E. O'Donnell
--------------------------- -------------------------
PAINEWEBBER INCORPORATED
Attest: /s/ Teresa M. Ritchie By: /s/ Victoria Schonfeld
--------------------------- -------------------------
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<PAGE>
Exhibit No. 5(f)
EXCLUSIVE DEALER AGREEMENT
CLASS B SHARES OF MITCHELL HUTCHINS PORTFOLIOS
AGREEMENT made as of January 9, 1998, 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 Aggressive 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 set forth herein which Mitchell Hutchins provides to the Fund under
the Distribution Contract. PaineWebber hereby accepts such appointments and
agrees to act
<PAGE>
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.
(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
-2-
<PAGE>
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.
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.
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<PAGE>
(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.
(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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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 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: /s/ Teresa M. Ritchie By: /s/ Dianne E. O'Donnell
------------------------- ----------------------------
PAINEWEBBER INCORPORATED
Attest: /s/ Teresa M. Ritchie By: /s/ Victoria Schonfeld
------------------------- ----------------------------
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<PAGE>
Exhibit No. 5(g)
EXCLUSIVE DEALER AGREEMENT
CLASS C SHARES OF MITCHELL HUTCHINS PORTFOLIOS
AGREEMENT made as of January 9, 1998, 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 Aggressive 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 set forth herein which Mitchell Hutchins provides to the Fund under
the Distribution Contract. PaineWebber hereby accepts such appointments and
<PAGE>
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 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
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<PAGE>
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.
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.
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<PAGE>
(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.
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
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<PAGE>
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
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
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<PAGE>
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 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
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<PAGE>
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.
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: /s/ Teresa M. Ritchie By: /s/ Dianne E. O'Donnell
------------------------ ----------------------------
PAINEWEBBER INCORPORATED
Attest: /s/ Teresa M. Ritchie By: /s/ Victoria Schonfeld
------------------------ ----------------------------
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<PAGE>
Exhibit No. 5(h)
EXCLUSIVE DEALER AGREEMENT
CLASS Y SHARES OF MITCHELL HUTCHINS PORTFOLIOS
AGREEMENT made as January 9, 1998 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 Aggressive 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
<PAGE>
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, 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 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
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<PAGE>
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.
(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
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<PAGE>
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 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
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<PAGE>
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 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
-5-
<PAGE>
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.
(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: /s/ Teresa M. Ritchie By: /s/ Dianne E. O'Donnell
--------------------------- -----------------------------
PAINEWEBBER INCORPORATED
Attest: /s/ Teresa M. Ritchie By: /s/ Victoria Schonfeld
--------------------------- -----------------------------
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<PAGE>
Exhibit No. 7
CUSTODIAN CONTRACT
Between
MITCHELL HUTCHINS PORTFOLIOS
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
Page
----
1. Employment of Custodian and Property to be Held By It . . . . . . . . . 1
2. Duties of the Custodian with Respect to Property of the Fund
Heldby the Custodian in the United States . . . . . . . . . . . . . . . 2
2.1 Holding Securities . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 Delivery of Securities . . . . . . . . . . . . . . . . . . . . . . 2
2.3 Registration of Securities . . . . . . . . . . . . . . . . . . . . 4
2.4 Bank Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.5 Availability of Federal Funds. . . . . . . . . . . . . . . . . . . 5
2.6 Collection of Income . . . . . . . . . . . . . . . . . . . . . . . 5
2.7 Payment of Fund Monies . . . . . . . . . . . . . . . . . . . . . . 5
2.8 Appointment of Agents. . . . . . . . . . . . . . . . . . . . . . . 6
2.9 Deposit of Fund Assets in Securities Systems . . . . . . . . . . . 7
2.10 Deposit of Fund Assets with the Paine Webber Transfer Agent. . . . 8
2.11 Fund Assets Held in the Direct Paper System. . . . . . . . . . . . 9
2.12 Segregated Account . . . . . . . . . . . . . . . . . . . . . . . . 9
2.13 Ownership Certificates for Tax Purposes. . . . . . . . . . . . . . 10
2.14 Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.15 Communications Relating to Portfolio Securities. . . . . . . . . . 10
3. Payments for Repurchase, Redemption and Sale of Shares. . . . . . . . . 11
4. Proper Instructions . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5. Actions Permitted Without Express Authority . . . . . . . . . . . . . . 11
6. Evidence of Authority . . . . . . . . . . . . . . . . . . . . . . . . . 12
7. Duties of Custodian With Respect to the Books of Account and
Calculation of Net Asset Value and Net Income . . . . . . . . . . . . . 12
8. Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
9. Opinion of Fund's Independent Accountants . . . . . . . . . . . . . . . 13
10. Reports to Fund by Independent Public Accountants . . . . . . . . . . . 13
11. Compensation of Custodian . . . . . . . . . . . . . . . . . . . . . . . 13
12. Responsibility of Custodian . . . . . . . . . . . . . . . . . . . . . . 13
<PAGE>
13. Effective Period, Termination and Amendment. . . . . . . . . . . . 14
14. Successor Custodian. . . . . . . . . . . . . . . . . . . . . . . . 15
15. Interpretive and Additional Provisions . . . . . . . . . . . . . . 15
16. Additional Funds . . . . . . . . . . . . . . . . . . . . . . . . . 16
17. Massachusetts Law to Apply . . . . . . . . . . . . . . . . . . . . 16
18. Prior Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . 16
19. Production of Documents. . . . . . . . . . . . . . . . . . . . . . 16
20. Shareholder Communications Election. . . . . . . . . . . . . . . . 16
21. Limitation of Liability. . . . . . . . . . . . . . . . . . . . . . 17
<PAGE>
CUSTODIAN CONTRACT
This Contract is between Mitchell Hutchins Portfolios, a business trust
organized and existing under the laws of Delaware with its principal place of
business at 1285 Avenue of the Americas, New York, New York 10019 (the '"Fund"),
and State Street Bank and Trust Company, a Massachusetts trust company with its
principal place of business at 225 Franklin Street, Boston, Massachusetts 02110
(the "Custodian").
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets; and
WHEREAS, the Fund intends to initially offer shares in three series,
Mitchell Hutchins Aggressive Portfolio, Mitchell Hutchins Moderate Portfolio and
Mitchell Hutchins Conservative Portfolio (such series together with all other
series subsequently established by the Fund and made subject to this Contract in
accordance with Article 16, being herein referred to as the Portfolio(s)"); and
WHEREAS, each Portfolio will invest in uncertificated shares of registered
investment companies advised and administered by Mitchell Hutchins Asset
Management Inc. or an affiliate thereof (the "Paine Webber Funds"),
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT.
The Fund hereby employs the Custodian as the custodian of the assets of the
Portfolios. The Fund on behalf of the Portfolios agrees to deliver to the
Custodian all securities and cash of the Portfolios, and all payments of income,
payments of principal or capital distributions received by it with respect to
all securities owned by the Portfolio(s) from time to time, and the cash
consideration received by it for such new or treasury shares of beneficial
interest of the Fund representing interests in the Portfolios ("Shares") as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of a Portfolio held or received by the Portfolio and not delivered
to the Custodian. With respect to uncertificated shares of the Paine Webber
Funds (the "Underlying Shares") as defined in Rule 11a-3 of the Investment
Company Act of 1940, as amended (the "1940 Act") the holding of confirmation
statements that identify the shares as being recorded in the Custodian's name on
behalf of the Portfolios will be deemed custody for purposes hereof.
Upon receipt of "Proper Instructions" (within the meaning of Article 4),
the Custodian shall on behalf of the applicable Portfolio(s) from time to time
employ one or more sub-
<PAGE>
custodians located in the United States, but only in accordance with an
applicable vote by the Fund's board of trustees (the "Board") on behalf of the
applicable Portfolio(s), and provided that the Custodian shall have no more or
less responsibility or liability to the Fund on account of any actions or
omissions of any sub-custodian so employed than any such sub-custodian has to
the Custodian.
2. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD BY THE
CUSTODIAN IN THE UNITED STATES
2.1 HOLDING SECURITIES. The Custodian shall hold and physically segregate for
the account of each Portfolio all non-cash property, including all
securities owned by such Portfolio, other than (a) securities which are
maintained pursuant to Section 2.9 in a clearing agency registered with the
Securities and Exchange Commission under Section 17A of the Securities
Exchange Act of 1934, which acts as a securities depository, or in the
book-entry system authorized by the U.S. Department of the Treasury and
certain federal agencies (collectively referred to herein as a "Securities
System"); (b) commercial paper of an issuer for which State Street Bank and
Trust Company acts as issuing and paying agent ("Direct Paper") which is
deposited and/or maintained in the Custodian's Direct Paper book-entry
system (the "Direct Paper System") pursuant to Section 2.11; and (c) the
Underlying Shares owned by the Fund which are maintained pursuant to
Section 2.10 in an account with PFPC, Inc. or such other entity which may
from time to time act as transfer agent for the Paine Webber Funds and with
respect to which the Custodian is provided with proper Instructions (the
"Paine Webber Transfer Agent").
2.2 DELIVERY OF SECURITIES. The Custodian shall release and deliver securities
owned by a Portfolio held by the Custodian, in a Securities System account
of the Custodian (a "Securities System Account"), in the Custodian's Direct
Paper System account (the "Direct Paper System Account") or in an account
at the Paine Webber Transfer Agent only upon receipt of Proper Instructions
from the Fund on behalf of the applicable Portfolio, which may be
continuing instructions when deemed appropriate by the parties, and only in
the following cases:
1) Upon sale of such securities for the account of the Portfolio and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Portfolio;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.9 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities of the Portfolio;
2
<PAGE>
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of the
Portfolio or into the name of any nominee or nominees of the Custodian
or into the name or nominee name of any agent appointed pursuant to
Section 2.8 or into the name or nominee name of any sub-custodian
appointed pursuant to Article 1; or for exchange for a different
number of bonds, certificates or other evidence representing the same
aggregate face amount or number of units; PROVIDED that, in any such
case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Portfolio, to
the broker or its clearing agent, against a receipt, for examination
in accordance with "street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or liability for any
loss arising from the delivery of such securities prior to receiving
payment for such securities except as may arise from the Custodian's
own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions
for conversion contained in such securities, or pursuant to any
deposit agreement; provided that, in any such case, the new securities
and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities
or the surrender of interim receipts or temporary securities for
definitive securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the
Portfolio, BUT ONLY against receipt of adequate collateral as agreed
upon from time to time by the Custodian and the Fund on behalf of the
Portfolio, which may be in the form of cash or obligations issued by
the United States government, its agencies or instrumentalities,
except that in connection with any loans for which collateral is to be
credited to the Custodian's Securities System Account, the Custodian
will not be held liable or responsible for the delivery of securities
owned by the Portfolio prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by the Fund
on behalf of the Portfolio requiring a pledge of assets by the Fund on
behalf of the Portfolio, BUT ONLY against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the "Exchange
Act") and a member of The
3
<PAGE>
National Association of Securities Dealers, Inc. ("NASD"), relating to
compliance with the rules of The Options Clearing Corporation and of
any registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other arrangements
in connection with transactions by the Portfolio of the Fund;
13) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange Act,
relating to compliance with the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any similar organization or
organizations, regarding account deposits in connection with
transactions by the Portfolio of the Fund;
14) Upon receipt of instructions from the Fund's transfer agent (the
"Transfer Agent"), for delivery to such Transfer Agent or to the
holders of Shares in connection with distributions in kind, as may be
described from time to time in the currently effective prospectus and
statement of additional information of the Fund related to the
Portfolio (the "Prospectus"), in satisfaction of requests by holders
of Shares for repurchase or redemption;
15) In the case of a sale processed through the Paine Webber Transfer
Agent for the Underlying Shares, in accordance with Section 2.10
hereof; and
16) For any other proper corporate purpose, BUT ONLY upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the
applicable Portfolio, a certified copy of a resolution of the Board or
of the Executive Committee thereof signed by an officer of the Fund
and certified by the Secretary or an Assistant Secretary (a "Certified
Resolution"), specifying the securities of the Portfolio to be
delivered, setting forth the purpose for which such delivery is to be
made, declaring such purpose to be a proper corporate purpose, and
naming the person or persons to whom delivery of such securities shall
be made.
2.3 REGISTRATION OF SECURITIES. Securities held by the Custodian (other than
bearer securities) shall be registered in the name of the Portfolio or in
the name of any nominee of the Fund on behalf of the Portfolio or of any
nominee of the Custodian which nominee shall be assigned exclusively to the
Portfolio, UNLESS the Fund has authorized in writing the appointment of a
nominee to be used in common with other registered investment companies
having the same investment adviser as the Portfolio, or in the name or
nominee name of any agent appointed pursuant to Section 2.8 or in the name
or nominee name of any sub-custodian appointed pursuant to Article 1. All
securities accepted by the Custodian on behalf of the Portfolio under the
terms of this Contract shall be in "street name" or other good delivery
form. If, however, the Fund directs the Custodian to maintain securities in
"street name", the Custodian shall utilize its best efforts only to timely
collect income due the Fund on such securities and to notify the Fund on a
best efforts basis only of relevant corporate actions including, without
limitation, pendency of calls, maturities, tender or exchange offers
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2.4 BANK ACCOUNTS. The Custodian shall open and maintain a separate bank
account or accounts in the name of each Portfolio of the Fund, subject only
to draft or order by the Custodian acting pursuant to the terms of this
Contract, and shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for the account of the
Portfolio, other than cash maintained by the Portfolio in a bank account
established and used in accordance with Rule 17f-3 under the 1940 Act.
Funds held by the Custodian for a Portfolio may be deposited by it to its
credit as Custodian in the banking department of State Street Bank and
Trust Company or in such other banks or trust companies as it may in its
discretion deem necessary or desirable; PROVIDED, however, that every such
bank or trust company shall be qualified to act as a custodian under the
1940 Act and that each such bank or trust company and the funds to be
deposited with each such bank or trust company shall on behalf of each
applicable Portfolio be approved by vote of a majority of the Board. Such
funds shall be deposited by the Custodian in its capacity as Custodian and
shall be withdrawable by the Custodian only in that capacity.
2.5 AVAILABILITY OF FEDERAL FUNDS. Upon mutual agreement between the Fund on
behalf of each applicable Portfolio and the Custodian, the Custodian shall,
upon the receipt of Proper Instructions from the Fund on behalf of a
Portfolio, make federal funds available to such Portfolio as of specified
times agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of such Portfolio which are
deposited into the Portfolio's account.
2.6 COLLECTION OF INCOME. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to registered securities held hereunder to which each
Portfolio shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and
other payments with respect to bearer securities if, on the date of payment
by the issuer, such securities are held by the Custodian or its agent
thereof and shall credit such income, as collected, to such Portfolio's
custodian account. Without limiting the generality of the foregoing, the
Custodian shall detach and present for payment all coupons and other income
items requiring presentation as and when they become due and shall collect
interest when due on securities held hereunder. Income due each Portfolio
on securities loaned pursuant to the provisions of Section 2.2 (10) shall
be the responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the Fund with
such information or data as may be necessary to assist the Fund in
arranging for the timely delivery to the Custodian of the income to which
the Portfolio is properly entitled.
2.7 PAYMENT OF FUND MONIES. Upon receipt of Proper Instructions from the Fund
on behalf of the applicable Portfolio, which may be continuing instructions
when deemed appropriate by the parties, the Custodian shall pay out monies
of a Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options, futures contracts
or options on futures contracts for the account of the Portfolio but
only (a) against the delivery of such securities or evidence of title
to such options, futures contracts or options on futures contracts to
the Custodian (or any bank, banking firm or trust company
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doing business in the United States or abroad which is qualified under
the 1940 Act to act as a custodian and has been designated by the
Custodian as its agent for this purpose) registered in the name of the
Portfolio or in the name of a nominee of the Custodian referred to in
Section 2.3 hereof or in proper form for transfer; (b) in the case of
a purchase effected through a Securities System, in accordance with
the conditions set forth in Section 2.9 hereof; (c) in the case of a
purchase of Underlying Shares, in accordance with the conditions set
forth in Section 2.10 hereof; (d) in the case of a purchase involving
the Direct Paper System, in accordance with the conditions set forth
in Section 2.11; (e) in the case of repurchase agreements entered into
between the Fund on behalf of the Portfolio and the Custodian, or
another bank, or a broker-dealer which is a member of NASD, (i)
against delivery of the securities either in certificate form or
through an entry crediting the Custodian's account at the Federal
Reserve Bank with such securities or (ii) against delivery of the
receipt evidencing purchase by the Portfolio of securities owned by
the Custodian along with written evidence of the agreement by the
Custodian to repurchase such securities from the Portfolio or (f) for
transfer to a time deposit account of the Fund in any bank, whether
domestic or foreign; such transfer may be effected prior to receipt of
a confirmation from a broker and/or the applicable bank pursuant to
Proper Instructions from the Fund as defined in Article 4;
2) In connection with conversion, exchange or surrender of securities
owned by the Portfolio as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by the Portfolio as
set forth in Article 3 hereof;
4) For the payment of any expense or liability incurred by the Portfolio,
including but not limited to the following payments for the account of
the Portfolio: interest, taxes, management, accounting, transfer agent
and legal fees, and operating expenses of the Fund whether or not such
expenses are to be in whole or part capitalized or treated as deferred
expenses;
5) For the payment of any dividends on Shares of the Portfolio declared
pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, BUT ONLY upon receipt of, in addition to
Proper Instructions from the Fund a Certified Resolution specifying
the amount of such payment, setting forth the purpose for which such
payment is to be made, declaring such purpose to be a proper purpose,
and naming the person or persons to whom such payment is to be made.
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2.8 APPOINTMENT OF AGENTS. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the 1940 Act to act as a custodian,
as its agent to carry out such of the provisions of this Article 2 as the
Custodian may from time to time direct; PROVIDED, however, that the
appointment of any agent shall not relieve the Custodian of its
responsibilities or liabilities hereunder. The Paine Webber Transfer Agent
shall not be deemed an agent or subcustodian of the Custodian for purposes
of this Section 2.8 or any other provision of this Agreement.
2.9 DEPOSIT OF FUND ASSETS IN SECURITIES SYSTEMS. The Custodian may deposit
and/or maintain securities owned by a Portfolio in a Securities System in
accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the
following provisions:
1) The Custodian may keep securities of the Portfolio in a Securities
System provided that such securities are represented in the Securities
System Account, which Account shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a Securities System shall identify
by book-entry those securities belonging to the Portfolio;
3) The Custodian shall pay for securities purchased for the account of
the Portfolio upon (i) receipt of advice from the Securities System
that such securities have been transferred to the Securities System
Account, and (ii) the making of an entry on the records of the
Custodian to reflect such payment and transfer for the account of the
Portfolio. The Custodian shall transfer securities sold for the
account of the Portfolio upon (i) receipt of advice from the
Securities System that payment for such securities has been
transferred to the Securities System Account, and (ii) the making of
an entry on the records of the Custodian to reflect such transfer and
payment for the account of the Portfolio. Copies of all advices from
the Securities System of transfers of securities for the account of
the Portfolio shall identify the Portfolio, be maintained for the
Portfolio by the Custodian and be provided to the Fund at its request.
Upon request, the Custodian shall furnish the Fund on behalf of the
Portfolio confirmation of each transfer to or from the account of the
Portfolio in the form of a written advice or notice and shall furnish
to the Fund on behalf of the Portfolio copies of daily transaction
sheets reflecting each day's transactions in the Securities System for
the account of the Portfolio;
4) The Custodian shall provide the Fund for the Portfolio with any report
obtained by the Custodian on the Securities System's accounting
system, internal accounting control and procedures for safeguarding
securities deposited in the Securities System;
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5) The Custodian shall have received from the Fund on behalf of the
Portfolio the initial or annual certificate, as the case may be,
required by Article 13 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the Portfolio
for any loss or damage to the Portfolio resulting from use of the
Securities System by reason of any negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any of its or
their employees or from failure of the Custodian or any such agent to
enforce effectively such rights as it may have against the Securities
System; at the election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claim
against the Securities System or any other person which the Custodian
may have as a consequence of any such loss or damage if and to the
extent that the Portfolio has not been made whole for any such loss or
damage.
2.10 DEPOSIT OF FUND ASSETS WITH THE PAINE WEBBER TRANSFER AGENT. Underlying
Shares shall be deposited and/or maintained in an account or accounts
maintained with Paine Webber Transfer Agent. Paine Webber Transfer Agent
shall be deemed to be acting as if it is a "depositary" for purposes of
Rule l 7f-4 of the 1940 Act. The Fund hereby directs the Custodian to
deposit and/or maintain such securities with Paine Webber Transfer Agent,
subject to the following provisions:
1) The Custodian shall keep Underlying Shares owned by a Portfolio with
Paine Webber Transfer Agent provided that such securities are
maintained in an account or accounts on the books and records of Paine
Webber Transfer Agent in the name of the Custodian as custodian for
the Portfolio.
2) The records of the Custodian with respect to Underlying Shares which
are maintained with Paine Webber Transfer Agent shall identify by
book-entry those Underlying Shares belonging to the Portfolio;
3) The Custodian shall pay for Underlying Shares purchased for the
account of the Portfolio upon (i) receipt of advice from the
Portfolio's investment adviser that such Underlying Shares have been
purchased and will be transferred to the account of the Custodian, on
behalf of the Portfolio, on the books and records of Paine Webber
Transfer Agent, and (ii) the making of an entry on the records of the
Custodian to reflect such payment and transfer for the account of the
Portfolio. The Custodian shall receive confirmation from Paine Webber
Transfer Agent of the purchase of such securities and the transfer of
such securities to the Custodian's account with Paine Webber Transfer
Agent only after such payment is made. The Custodian shall transfer
Underlying Shares redeemed for the account of a Portfolio (i) upon
receipt of an advice from the Portfolio's investment adviser that such
securities have been redeemed and that payment for such securities
will be transferred to the Custodian and (ii) the making of an entry
on the records of the Custodian to reflect such transfer and payment
for the account of the Portfolio. The Custodian will receive
confirmation from Paine Webber Transfer Agent of the redemption of
such securities and payment therefor only after such securities
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are redeemed. Copies of all advices from the Portfolio's investment
adviser of purchases and sales of Underlying Shares for the account
of the Portfolio shall identify the Portfolio, be maintained for
the Portfolio by the Custodian, and be provided to the investment
adviser at its request;
4) The Custodian shall not be liable to the Fund or any Portfolio for
any loss or damage to the Fund or any Portfolio resulting from
maintenance of Underlying Shares with Paine Webber Transfer Agent
except for losses resulting directly from the negligence,
misfeasance or misconduct of the Custodian or any of its agents or
of any of its or their employees.
2.11 FUND ASSETS HELD IN THE DIRECT PAPER SYSTEM. The Custodian may deposit
and/or maintain securities owned by a Portfolio in the Direct Paper System
subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System will
be effected in the absence of Proper Instructions from the Fund on
behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the Direct Paper
System only if such securities are represented in the Direct Paper
System Account, which Account shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Portfolio;
4) The Custodian shall pay for securities purchased for the account of
the Portfolio upon the making of an entry on the records of the
Custodian to reflect such payment and transfer of securities to the
account of the Portfolio. The Custodian shall transfer securities sold
for the account of the Portfolio upon the making of an entry on the
records of the Custodian to reflect such transfer and receipt of
payment for the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the Portfolio
confirmation of each transfer to or from the account of the Portfolio,
in the form of a written advice or notice, of Direct Paper on the next
business day following such transfer and shall furnish to the Fund on
behalf of the Portfolio copies of daily transaction sheets reflecting
each day's transaction in the Direct Paper System for the account of
the Portfolio;
6) The Custodian shall provide the Fund on behalf of the Portfolio with
any report on its system of internal accounting control as the Fund
may reasonably request from time to time.
2.12 SEGREGATED ACCOUNT. The Custodian shall upon receipt of Proper Instructions
from the Fund on behalf of each applicable Portfolio establish and maintain
a segregated account
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or accounts for and on behalf of each such Portfolio, into which
account or accounts may be transferred cash and/or securities,
including securities maintained in an account by the Custodian pursuant
to Section 2.9 hereof, (i) in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the Custodian and
a broker-dealer registered under the Exchange Act and a member of the
NASD (or any futures commission merchant registered under the Commodity
Exchange Act), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities exchange
(or the Commodity Futures Trading Commission or any registered contract
market), or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Portfolio, (ii) for purposes of segregating cash or government
securities in connection with options purchased, sold or written by the
Portfolio or commodity futures contracts or options thereon purchased
or sold by the Portfolio, (iii) for the purposes of compliance by the
Portfolio with the procedures required by Investment Company Act
Release No. 10666, or any subsequent release or releases of the
Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies and (iv) for
other proper corporate purposes, BUT ONLY, in the case of clause (iv),
upon receipt of, in addition to Proper Instructions from the Fund on
behalf of the applicable Portfolio, a Certified Resolution setting
forth the purpose or purposes of such segregated account and declaring
such purposes to be proper corporate purposes.
2.13 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to securities of each Portfolio held by it and in connection with
transfers of securities.
2.14 PROXIES. The Custodian shall, with respect to the securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Portfolio or a nominee of the Portfolio, all proxies, without
indication of the manner in which such proxies are to be voted, and shall
promptly deliver to the Portfolio such proxies, all proxy soliciting
materials and all notices relating to such securities.
2.15 COMMUNICATIONS RELATING TO PORTFOLIO SECURITIES. Subject to the provisions
of Section 2.3, the Custodian shall transmit promptly to the Fund for each
Portfolio all written information (including, without limitation, pendency
of calls and maturities of securities and expirations of rights in
connection therewith and notices of exercise of call and put options
written by the Fund on behalf of the Portfolio and the maturity of futures
contracts purchased or sold by the Portfolio) received by the Custodian
from issuers of the securities being held for the Portfolio. With respect
to tender or exchange offers, the Custodian shall transmit promptly to the
Portfolio all written information received by the Custodian from issuers of
the securities whose tender or exchange is sought and from the party (or
his agents) making the tender or exchange offer. If the Portfolio desires
to take action with respect to any tender offer, exchange offer or any
other similar transaction, the Portfolio shall notify the Custodian at
least three business days prior to the date on which the Custodian is to
take such action.
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3. PAYMENTS FOR REPURCHASE, REDEMPTION AND SALE OF SHARES
From such funds as may be available for the purpose but subject any
applicable votes of the Board pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a request
for redemption or repurchase of their Shares. In connection with the redemption
or repurchase of Shares of a Portfolio, the Custodian is authorized upon receipt
of instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares, the Custodian shall honor checks drawn on the Custodian
by a holder of Shares, which checks have been furnished by the Fund to the
holder of Shares, when presented to the Custodian in accordance with such
procedures and controls as are mutually agreed upon from time to time between
the Fund and the Custodian.
The Custodian shall receive from the distributor for the Shares or from the
Transfer Agent and deposit into the account of the appropriate Portfolio such
payments as are received for Shares of that Portfolio issued or sold from time
to time by the Fund. The Custodian will provide timely notification to the Fund
on behalf of each such Portfolio and the Transfer Agent of any receipt by it of
payments for Shares of such Portfolio.
4. PROPER INSTRUCTIONS
Proper Instructions as used herein means a writing signed or initialed by
one or more person or persons as the Board shall have from time to time
authorized. Each such writing shall set forth the specific transaction or type
of transaction involved, including a specific statement of the purpose for which
such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in writing.
Upon receipt of a certificate of the Secretary or an Assistant Secretary as to
the authorization by the Board accompanied by a detailed description of
procedures approved by the Board, Proper Instructions may include communications
effected directly between electro-mechanical or electronic devices provided that
the Board and the Custodian are satisfied that such procedures afford adequate
safeguards for the Portfolios' assets. For purposes of this Section, Proper
Instructions shall include instructions received by the Custodian pursuant to
any three-party agreement which requires a segregated asset account in
accordance with Section 2.12.
5. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority from the
Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Contract, PROVIDED that all such payments shall be accounted for to
the Fund on behalf of the Portfolio;
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2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Portfolio, checks, drafts
and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Portfolio except as
otherwise directed by the Board.
6. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board as
conclusive evidence (a) of the authority of any person to act in accordance with
such vote or (b) of any determination or of any action by the Board as described
in such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
7. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND CALCULATION OF
NET ASSET VALUE AND NET INCOME
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board to keep the books of account of each
Portfolio and/or compute the net asset value per share of the outstanding Shares
of each Portfolio or, if directed in writing to do so by the Fund on behalf of
the Portfolio, shall itself keep such books of account and/or compute such net
asset value per share. If so directed, the Custodian shall also calculate daily
the net income of the Portfolio as described in the Fund's currently effective
prospectus related to such Portfolio and shall advise the Fund and the Transfer
Agent daily of the total amounts of such net income and, if instructed in
writing by an officer of the Fund to do so, shall advise the Transfer Agent
periodically of the division of such net income among its various components.
The Fund acknowledges and agrees that, with respect to investments maintained
with the Paine Webber Transfer Agent, the Paine Webber Transfer Agent is the
sole source of information on the number of shares of a fund held by it on
behalf of a Portfolio and that the Custodian has the right to rely on holdings
information furnished by the Paine Webber Transfer Agent to the Custodian in
performing its duties under this Contract, including without limitation, the
duties set forth in this Section 7 and in Section 8 hereof; provided, however,
that the Custodian shall be obligated to reconcile information as to purchases
and sales of Underlying Shares contained in trade instructions and confirmations
received by the Custodian and to report promptly any discrepancies to Paine
Webber Transfer Agent. The calculations of the net asset value per share and the
daily income of each Portfolio shall be made at the time or times described from
time to time in the Fund's currently effective prospectus related to such
Portfolio.
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8. RECORDS
The Custodian shall with respect to each Portfolio create and maintain all
records relating to its activities and obligations under this Contract in such
manner as will meet the obligations of the Fund under the 1940 Act, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.
All such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Fund and employees and agents of
the Securities and Exchange Commission. The Custodian shall, at the Fund's
request, supply the Fund with a tabulation of securities owned by each Portfolio
and held by the Custodian and shall, when requested to do so by the Fund and for
such compensation as shall be agreed upon between the Fund and the Custodian,
include certificate numbers in such tabulations.
9. OPINION OF FUND'S INDEPENDENT ACCOUNTANT
The Custodian shall take all reasonable action, as the Fund on behalf of
each applicable Portfolio may from time to time request, to obtain from year to
year favorable opinions from the Fund's independent accountants with respect to
its activities hereunder in connection with the preparation of the Fund's Form
N-1A, and Form N-SAR or other annual reports to the Securities and Exchange
Commission and with respect to any other requirements of such Commission.
10. REPORTS TO FUND BY INDEPENDENT PUBLIC ACCOUNTANTS
The Custodian shall provide the Fund, on behalf of each of the Portfolios
at such times as the Fund may reasonably require, with reports by independent
public accountants on the accounting system, internal accounting control and
procedures for safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a Securities
System, relating to the services provided by the Custodian under this Contract;
such reports, shall be of sufficient scope and in sufficient detail, as may
reasonably be required by the Fund to provide reasonable assurance that any
material inadequacies would be disclosed by such examination, and, if there are
no such inadequacies, the reports shall so state.
11. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund on
behalf of each applicable Portfolio and the Custodian.
12. RESPONSIBILITY OF CUSTODIAN
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties, including any
futures commission merchant acting pursuant to the terms of a three-party
futures or options agreement. The
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Custodian shall be held to the exercise of reasonable care in carrying out the
provisions of this Contract, but shall be kept indemnified by and shall be
without liability to the Fund for any action taken or omitted by it in good
faith without negligence. It shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Fund) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to such
advice.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Fund or the Portfolio being liable for the payment
of money or incurring liability of some other form, the Fund on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
If the Fund requires the Custodian, its affiliates, subsidiaries or agents,
to advance cash or securities for any purpose (including but not limited to
securities settlements, foreign exchange contracts and assumed settlement) for
the benefit of a Portfolio or in the event that the Custodian or its nominee
shall incur or be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract, except such as
may arise from its or its nominee's own negligent action, negligent failure to
act or willful misconduct, any property at any time held for the account of the
applicable Portfolio shall be security therefor and should the Fund fail to
repay the Custodian promptly, the Custodian shall be entitled to utilize
available cash and to dispose of such Portfolio's assets to the extent necessary
to obtain reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
13. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than thirty (30)
days after the date of such delivery or mailing; PROVIDED, however that the
Custodian shall not with respect to a Portfolio act under Section 2.9 hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board has approved the initial use of a particular
Securities System by such Portfolio, as required by Rule 17f-4 under 1940 Act
and that the Custodian shall not with respect to a Portfolio act under Section
2.11 hereof in the absence of receipt of an initial certificate of the Secretary
or an Assistant Secretary that the Board has approved the initial use of the
Direct Paper System by such Portfolio; PROVIDED FURTHER, however, that the Fund
shall not amend or terminate this Contract in contravention of any applicable
federal or state regulations, or any provision of the Fund's Trust Instrument,
and further provided, that the Fund on behalf of one or more of the Portfolios
may at any time by action of its Board (i) substitute another bank or trust
company for the Custodian by giving notice as described above to the Custodian,
or (ii) immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the
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Currency or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
14. SUCCESSOR CUSTODIAN
If a successor custodian for the Fund or one or more of the Portfolios
shall be appointed by the Board, the Custodian shall, upon termination, deliver
to such successor custodian at the office of the Custodian, duly endorsed and in
the form for transfer, all securities of each applicable Portfolio then held by
it hereunder and shall transfer to an account of the successor custodian all of
the securities of each such Portfolio held in a Securities System or at the
Paine Webber Transfer Agent.
If no such successor custodian shall be appointed, the Custodian shall, in like
manner, upon receipt of a certified copy of a vote of the Board, deliver at the
office of the Custodian and transfer such securities, funds and other properties
in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board shall have been delivered to the Custodian
on or before the date when such termination shall become effective, then the
Custodian shall have the right to deliver to a bank or trust company, which is a
"bank" as defined in the 1940 Act doing business in Boston, Massachusetts, or
New York, New York, of its own selection, having an aggregate capital, surplus,
and undivided profits, as shown by its last published report, of not less than
$25,000,000, all securities, funds and other properties held by the Custodian on
behalf of each applicable Portfolio and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract on behalf
of each applicable Portfolio and to transfer to an account of such successor
custodian all of the securities of each such Portfolio held in any Securities
System or at the Paine Webber Transfer Agent. Thereafter, such bank or trust
company shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board to appoint a successor custodian, the Custodian shall be entitled to
fair compensation for its services during such period as the Custodian retains
possession of such securities, funds and other properties and the provisions of
this Contract relating to the duties and obligations of the Custodian shall
remain in full force and effect.
15. INTERPRETIVE AND ADDITIONAL PROVISIONS
In connection with the operation of this Contract, the Custodian and the
Fund on behalf of each of the Portfolios, may from time to time agree on such
provisions interpretive of or in addition to the provisions of this Contract as
may in their joint opinion be consistent with the
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general tenor of this Contract. Any such interpretive or additional provisions
shall be in a writing signed by both parties and shall be annexed hereto,
PROVIDED that no such interpretive or additional provisions shall contravene any
applicable federal or state regulations or any provision of the Fund's Trust
Instrument. No interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this Contract.
16. ADDITIONAL FUNDS
In the event that the Fund establishes one or more series of Shares in
addition to, the Mitchell Hutchins Aggressive Portfolio, Mitchell Hutchins
Moderate Portfolio, Mitchell Hutchins Conservative Portfolio with respect to
which it desires to have the Custodian render services as custodian under the
terms hereof, it shall so notify the Custodian in writing, and if the Custodian
agrees in writing to provide such services, such series of Shares shall become a
Portfolio hereunder.
17. MASSACHUSETTS LAW TO APPLY
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
18. PRIOR CONTRACTS
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund on behalf of each of the Portfolios and the Custodian
relating to the custody of the Fund's assets.
19. REPRODUCTION OF DOCUMENTS
This Agreement and all schedules, exhibits, attachments and amendments
hereto may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process. The parties hereto
each agree that any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding, whether or not the
original is in existence and whether or not such reproduction was made by a
party in the regular course of business, and that any enlargement, facsimile or
further reproduction of such reproduction shall likewise be admissible in
evidence.
20. SHAREHOLDER COMMUNICATIONS ELECTION
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check
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either "yes" or "no" below, the Custodian is required by the rule to treat the
Fund as consenting to disclosure of this information for all securities owned by
the Fund or any funds or accounts established by the Fund. For the Fund's
protection, the Rule prohibits the requesting company from using the Fund's name
and address for any purpose other than corporate communications. Please indicate
below whether the Fund consents or objects by checking one of the alternatives
below.
YES [ ] The Custodian is authorized to release the Fund's name, address, and
share positions.
NO [ ] The Custodian is not authorized to release the Fund's name, address,
and share positions.
21. LIMITATION OF LIABILITY
The Custodian agrees that the Contract may only be enforced against the
assets of the Fund or the particular Portfolio of the Fund
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IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of January 12, 1998.
ATTEST MITCHELL HUTCHINS PORTFOLIOS
/s/ Scott Griff By: /s/ Dianne E. O'Donnell
- ----------------------------- -----------------------------------
Name: Scott Griff Name: DIANNE E. O'DONNELL
Title: Vice President Title: SECRETARY AND VICE PRESIDENT
of Mitchell Hutchins
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ Glenn Ciotti By: /s/ Ronald E. Logue
- ----------------------------- -------------------------------------
Name: Glenn Ciotti Ronald E. Logue
Title: VP & Assoc. Counsel Executive Vice President
<PAGE>
Exhibit No. 8
TRANSFER AGENCY AND RELATED SERVICES AGREEMENT
THIS AGREEMENT is made as of February 24, 1998 by and between PFPC
INC., a Delaware corporation ("PFPC"), and MITCHELL HUTCHINS PORTFOLIOS, a
Delaware business trust (the "Fund").
W I T N E S S E T H:
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940
Act"); and WHEREAS, the Fund wishes to retain PFPC to serve as transfer
agent, registrar, dividend disbursing agent and related services agent to the
Fund's Portfolios (as hereinafter defined) and PFPC wishes to furnish such
services.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, the parties
hereto agree as follows:
1. DEFINITIONS. AS USED IN THIS AGREEMENT:
(a) "1933 ACT" means the Securities Act of 1933, as amended.
(b) "1934 ACT" means the Securities Exchange Act of 1934, as
amended.
(c ) "AUTHORIZED PERSON" means any officer of the Fund and any
other person duly authorized by the Fund's Board of Directors or Trustees
("Board") to give Oral Instructions and Written Instructions on behalf of the
Fund and listed on the Authorized Persons Appendix attached hereto and made a
part hereof or any amendment thereto as may be received by PFPC. An
Authorized Person's scope of authority may be limited by the Fund by setting
forth such limitation in the Authorized Persons Appendix.
<PAGE>
(d) "CEA" means the Commodities Exchange Act, as amended.
(e) "ORAL INSTRUCTIONS" mean oral instructions received by
PFPC from an Authorized Person.
(f) "PORTFOLIO" means a series or investment portfolio of the
Fund identified on Annex A hereto, as the same may from time to time be
amended, if the Fund consists of more than one series or investment
portfolio; however, if the Fund does not have separate series or investment
portfolios, then this term shall be deemed to refer to the Fund itself.
(g) "SEC" means the Securities and Exchange Commission.
(h) "SECURITIES LAWS" mean the 1933 Act, the 1934 Act, the
1940 Act and the CEA.
(i) "SHARES" mean the shares of common stock or beneficial
interest of any series or class of the Fund.
(j) "WRITTEN INSTRUCTIONS" mean written instructions signed
by an Authorized Person and received by PFPC. The instructions may be
delivered by hand, mail, tested telegram, cable, telex or facsimile sending
device.
2. APPOINTMENT. The Fund hereby appoints PFPC to serve as transfer
agent, registrar, dividend disbursing agent and related services agent to the
Fund, and should the Fund have separate Portfolios, those Portfolios which
are listed on Annex A hereto, in accordance with the terms set forth in this
Agreement. PFPC accepts such appointment and agrees to furnish such
services.
3. DELIVERY OF DOCUMENTS. The Fund (or a particular Portfolio, as
appropriate) has provided or, where applicable, will provide PFPC with the
following:
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(a) Certified or authenticated copies of the resolutions of the
Fund's Board approving the appointment of PFPC to provide
services to the Fund and approving this Agreement;
(b) A copy of each executed broker-dealer agreement with respect
to each Fund; and
(c) Copies (certified or authenticated if requested by PFPC) of
any post-effective amendment to the Fund's registration
statement, advisory agreement, distribution agreement,
shareholder servicing agreement and all amendments or
supplements to the foregoing upon request.
4. COMPLIANCE WITH RULES AND REGULATIONS. PFPC undertakes to comply
with all applicable requirements of the Securities Laws and any laws, rules
and regulations of governmental authorities having jurisdiction with respect
to the duties to be performed by PFPC hereunder. Except as specifically set
forth herein, PFPC assumes no responsibility for such compliance by the Fund
or any of its Portfolios.
5. INSTRUCTIONS.
(a) Unless otherwise provided in this Agreement, PFPC shall act only
upon Oral Instructions and Written Instructions.
(b) PFPC shall be entitled to rely upon any Oral Instructions and
Written Instructions it receives from an Authorized Person pursuant to this
Agreement. PFPC may assume that any Oral Instruction or Written Instruction
received hereunder is not in any way inconsistent with the provisions of
organizational documents or of any vote, resolution or proceeding of the
Fund's Board or of the Fund's shareholders, unless and until PFPC receives
Written Instructions to the contrary.
(c ) The Fund agrees to forward to PFPC Written Instructions confirming
Oral Instructions so that PFPC receives the Written Instructions by the close of
business on the next day after such Oral Instructions are received. The fact
that such confirming Written Instructions
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are not received by PFPC shall in no way invalidate the transactions or
enforceability of the transactions authorized by the Oral Instructions.
Where Oral Instructions or Written Instructions reasonably appear to have
been received from an Authorized Person, PFPC shall incur no liability to the
Fund in acting upon such Oral Instructions or Written Instructions provided
that PFPC's actions comply with the other provisions of this Agreement.
6. RIGHT TO RECEIVE ADVICE.
(a) ADVICE OF THE FUND. If PFPC is in doubt as to any action it
should or should not take, PFPC may request directions or advice, including
Oral Instructions or Written Instructions, from the Fund.
(b) ADVICE OF COUNSEL. If PFPC shall be in doubt as to any question
of law pertaining to any action it should or should not take, PFPC may
request advice at its own cost from such counsel of its own choosing (who may
be counsel for the Fund, the Fund's investment adviser or PFPC, at the option
of PFPC).
(c ) CONFLICTING ADVICE. In the event of a conflict between
directions, advice or Oral Instructions or Written Instructions PFPC receives
from the Fund, and the advice it receives from counsel, PFPC may rely upon
and follow the advice of counsel. In the event PFPC so relies on the advice
of counsel, PFPC remains liable for any action or omission on the part of
PFPC which constitutes willful misfeasance, bad faith, negligence or reckless
disregard by PFPC of any duties, obligations or responsibilities set forth in
this Agreement.
(d) PROTECTION OF PFPC. PFPC shall be protected in any action it
takes or does not take in reliance upon directions, advice or Oral
Instructions or Written Instructions it receives from the Fund or from
counsel and which PFPC believes, in good faith, to be consistent with those
directions, advice or Oral Instructions or Written Instructions. Nothing in
this section shall
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<PAGE>
be construed so as to impose an obligation upon PFPC (i) to seek such
directions, advice or Oral Instructions or Written Instructions, or (ii) to
act in accordance with such directions, advice or Oral Instructions or
Written Instructions unless, under the terms of other provisions of this
Agreement, the same is a condition of PFPC's properly taking or not taking
such action. Nothing in this subsection shall excuse PFPC when an action or
omission on the part of PFPC constitutes willful misfeasance, bad faith,
negligence or reckless disregard by PFPC of any duties, obligations or
responsibilities set forth in this Agreement.
7. RECORDS; VISITS. PFPC shall prepare and maintain in complete and
accurate form all books and records necessary for it to serve as transfer
agent, registrar, dividend disbursing agent and related services agent to
each Portfolio, including (a) all those records required to be prepared and
maintained by the Fund under the 1940 Act, by other applicable Securities
Laws, rules and regulations and by state laws and (b) such books and records
as are necessary for PFPC to perform all of the services it agrees to provide
in this Agreement and the appendices attached hereto, including but not
limited to the books and records necessary to effect the conversion of Class
B shares, the calculation of any contingent deferred sales charges and the
calculation of front-end sales charges. The books and records pertaining to
the Fund, which are in the possession or under the control of PFPC, shall be
the property of the Fund. The Fund and Authorized Persons shall have access
to such books and records in the possession or under the control of PFPC at
all times during PFPC's normal business hours. Upon the reasonable request
of the Fund, copies of any such books and records in the possession or under
the control of PFPC shall be provided by PFPC to the Fund or to an Authorized
Person. Upon reasonable notice by the Fund, PFPC shall make available during
regular business hours its facilities and premises employed in connection
with its performance of this Agreement for reasonable visits by the
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<PAGE>
Fund, any agent or person designated by the Fund or any regulatory agency
having authority over the Fund.
8. CONFIDENTIALITY. PFPC agrees to keep confidential all records of
the Fund and information relating to the Fund and its shareholders (past,
present and future), its investment adviser and its principal underwriter,
unless the release of such records or information is otherwise consented to,
in writing, by the Fund prior to its release. The Fund agrees that such
consent shall not be unreasonably withheld and may not be withheld where PFPC
may be exposed to civil or criminal contempt proceedings or when required to
divulge such information or records to duly constituted authorities.
9. COOPERATION WITH ACCOUNTANTS. PFPC shall cooperate with the
Fund's independent public accountants and shall take all reasonable actions
in the performance of its obligations under this Agreement to ensure that the
necessary information is made available to such accountants for the
expression of their opinion, as required by the Fund.
10. DISASTER RECOVERY. PFPC shall enter into and shall maintain in
effect with appropriate parties one or more agreements making reasonable
provisions for periodic backup of computer files and data with respect to the
Fund and emergency use of electronic data processing equipment. In the event
of equipment failures, PFPC shall, at no additional expense to the Fund, take
reasonable steps to minimize service interruptions. PFPC shall have no
liability with respect to the loss of data or service interruptions caused by
equipment failure, provided such loss or interruption is not caused by PFPC's
own willful misfeasance, bad faith, negligence or reckless disregard of its
duties or obligations under this Agreement and provided further that PFPC has
complied with the provisions of this paragraph 10.
6
<PAGE>
11. COMPENSATION. As compensation for services rendered by PFPC
during the term of this Agreement, the Fund will pay to PFPC a fee or fees as
may be agreed to from time to time in writing by the Fund and PFPC.
12. INDEMNIFICATION.
(a) The Fund agrees to indemnify and hold harmless PFPC and its
affiliates from all taxes, charges, expenses, assessments, penalties, claims
and liabilities (including, without limitation, liabilities arising under the
Securities Laws and any state and foreign securities and blue sky laws, and
amendments thereto), and expenses, including (without limitation) reasonable
attorneys' fees and disbursements, arising directly or indirectly from (i)
any action or omission to act which PFPC takes (a) at the request or on the
direction of or in reliance on the advice of the Fund or (b) upon Oral
Instructions or Written Instructions or (ii) the acceptance, processing
and/or negotiation of checks or other methods utilized for the purchase of
Shares. Neither PFPC, nor any of its affiliates, shall be indemnified against
any liability (or any expenses incident to such liability) arising out of
PFPC's or its affiliates' own willful misfeasance, bad faith, negligence or
reckless disregard of its duties and obligations under this Agreement. The
Fund's liability to PFPC for PFPC's acceptance, processing and/or negotiation
of checks or other methods utilized for the purchase of Shares shall be
limited to the extent of the Fund's policy(ies) of insurance that provide for
coverage of such liability, and the Fund's insurance coverage shall take
precedence.
(b) PFPC agrees to indemnify and hold harmless the Fund from all
taxes, charges, expenses, assessments, penalties, claims and liabilities
arising from PFPC's obligations pursuant to this Agreement (including,
without limitation, liabilities arising under the Securities Laws, and any
state and foreign securities and blue sky laws, and amendments thereto) and
expenses,
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<PAGE>
including (without limitation) reasonable attorneys' fees and disbursements
arising directly or indirectly out of PFPC's or its nominee's own willful
misfeasance, bad faith, negligence or reckless disregard of its duties and
obligations under this Agreement.
(c) In order that the indemnification provisions contained in this
Paragraph 12 shall apply, upon the assertion of a claim for which either
party may be required to indemnify the other, the party seeking
indemnification shall promptly notify the other party of such assertion, and
shall keep the other party advised with respect to all developments
concerning such claim. The party who may be required to indemnify shall have
the option to participate with the party seeking indemnification in the
defense of such claim. The party seeking indemnification shall in no case
confess any claim or make any compromise in any case in which the other party
may be required to indemnify it except with the other party's prior written
consent.
(d) The members of the Board of the Fund, its officers and
Shareholders, or of any Portfolio thereof, shall not be liable for any
obligations of the Fund, or any such Portfolio, under this Agreement, and
PFPC agrees that in asserting any rights or claims under this Agreement, it
shall look only to the assets and property of the Fund or the particular
Portfolio in settlement of such rights or claims and not to such members of
the Board, its officers or Shareholders. PFPC further agrees that it will
look only to the assets and property of a particular Portfolio of the Fund,
should the Fund have established separate series, in asserting any rights or
claims under this Agreement with respect to services rendered with respect to
that Portfolio and will not seek to obtain settlement of such rights or
claims from the assets of any other Portfolio of the Fund.
13. INSURANCE. PFPC shall maintain insurance of the types and in the
amounts deemed by it to be appropriate. To the extent that policies of
insurance may provide for coverage of claims for liability or indemnity by
the parties set forth in this Agreement, the contracts of
8
<PAGE>
insurance shall take precedence, and no provision of this Agreement shall be
construed to relieve an insurer of any obligation to pay claims to the Fund,
PFPC or other insured party which would otherwise be a covered claim in the
absence of any provision of this Agreement.
14. SECURITY.
(a) PFPC represents and warrants that, to the best of its knowledge,
the various procedures and systems which PFPC has implemented with regard to
the safeguarding from loss or damage attributable to fire, theft or any other
cause (including provision for twenty-four hours a day restricted access) of
the Fund's blank checks, certificates, records and other data and PFPC's
equipment, facilities and other property used in the performance of its
obligations hereunder are adequate, and that it will make such changes
therein from time to time as in its judgment are required for the secure
performance of its obligations hereunder. PFPC shall review such systems and
procedures on a periodic basis, and the Fund shall have reasonable access to
review these systems and procedures.
(b) Y2K Compliance. PFPC further represents and warrants that any
and all electronic data processing systems and programs that it uses or
retains in connection with the provision of services hereunder on or before
January 1, 1999 will be year 2000 compliant.
15. RESPONSIBILITY OF PFPC.
(a) PFPC shall be under no duty to take any action on behalf of the
Fund except as specifically set forth herein or as may be specifically agreed to
by PFPC in writing. PFPC shall be obligated to exercise care and diligence in
the performance of its duties hereunder, to act in good faith and to use its
best efforts in performing services provided for under this Agreement. PFPC
shall be liable for any damages arising out of PFPC's failure to perform its
duties under
9
<PAGE>
this Agreement to the extent such damages arise out of PFPC's willful
misfeasance, bad faith, negligence or reckless disregard of such duties.
(b) Without limiting the generality of the foregoing or of any other
provision of this Agreement, PFPC shall not be under any duty or obligation
to inquire into and shall not be liable for (A) the validity or invalidity or
authority or lack thereof of any Oral Instruction or Written Instruction,
notice or other instrument which conforms to the applicable requirements of
this Agreement, and which PFPC reasonably believes to be genuine; or (B)
subject to Section 10, delays or errors or loss of data occurring by reason
of circumstances beyond PFPC's control, including acts of civil or military
authority, national emergencies, labor difficulties, fire, flood,
catastrophe, acts of God, insurrection, war, riots or failure of the mails,
transportation, communication or power supply.
(c) Notwithstanding anything in this Agreement to the contrary,
neither PFPC nor its affiliates shall be liable to the Fund for any
consequential, special or indirect losses or damages which the Fund may incur
or suffer by or as a consequence of PFPC's or its affiliates' performance of
the services provided hereunder, whether or not the likelihood of such losses
or damages was known by PFPC or its affiliates.
(d) Notwithstanding anything in this Agreement to the contrary, the
Fund shall not be liable to PFPC nor its affiliates for any consequential,
special or indirect losses or damages which PFPC or its affiliates may incur
or suffer by or as a consequence of PFPC's performance of the services
provided hereunder, whether or not the likelihood of such losses or damages
was known by the Fund.
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16. DESCRIPTION OF SERVICES.
(a) SERVICES PROVIDED ON AN ONGOING BASIS, IF APPLICABLE.
(i) Calculate 12b-1 payments to financial intermediaries,
including brokers, and financial intermediary trail
commissions;
(ii) Develop, monitor and maintain, in consultation with the
Fund, all systems necessary to implement and operate the
fourtier distribution system, including Class B conversion
feature, as described in the registration statement and
related documents of the Fund, as they may be amended from
time to time;
(iii) Calculate contingent deferred sales charge amounts upon
redemption of Fund shares and deduct such amounts from
redemption proceeds;
(iv) Calculate front-end sales load amounts at time of
purchase of shares;
(v) Determine dates of Class B conversion and effect the same;
(vi) Establish and maintain proper shareholder registrations;
(vii) Review new applications and correspond with shareholders
to complete or correct information;
(viii) Direct payment processing of checks or wires;
(ix) Prepare and certify stockholder lists in conjunction with
proxy solicitations;
(x) Prepare and mail to shareholders confirmation of activity;
(xi) Provide toll-free lines for direct shareholder use, plus
customer liaison staff for on-line inquiry response;
(xii) Send duplicate confirmations to broker-dealers of their
clients' activity, whether executed through the
broker-dealer or directly with PFPC;
(xiii) Provide periodic shareholder lists, outstanding share
calculations and related statistics to the Fund;
(xiv) Provide detailed data for underwriter/broker
confirmations;
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(xv) Prepare and mail required calendar and taxable year-end
tax and statement information (including forms 1099-DIV
and 1099-B and accompanying statements);
(xvi) Notify on a daily basis the investment adviser, accounting
agent, and custodian of fund activity;
(xvii) Perform, itself or through a delegate, all of the
services, whether or not included within the scope of
another paragraph of this Paragraph 16(a), specified on
Annex B hereto; and
(xviii) Perform other participating broker-dealer shareholder
services as may be agreed upon from time to time.
(b) SERVICES PROVIDED BY PFPC UNDER ORAL INSTRUCTIONS OR WRITTEN
INSTRUCTIONS.
(i) Accept and post daily Fund and class purchases and
redemptions;
(ii) Accept, post and perform shareholder transfers and
exchanges;
(iii) Pay dividends and other distributions;
(iv) Solicit and tabulate proxies; and
(v) Cancel certificates.
(c) PURCHASE OF SHARES. PFPC shall issue and credit an account of an
investor, in the manner described in the Fund's prospectus, once it receives:
(i) A purchase order;
(ii) Proper information to establish a shareholder account;
and
(iii) Confirmation of receipt or crediting of funds for such
order to the Fund's custodian.
(d) REDEMPTION OF SHARES. PFPC shall redeem Shares only if that
function is properly authorized by the Fund's organizational documents or
resolutions of the Fund's Board. Shares shall be redeemed and payment therefor
shall be made in accordance with the Fund's or Portfolio's prospectus.
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(i) BROKER-DEALER ACCOUNTS.
When a broker-dealer notifies PFPC of a redemption desired
by a customer, and the Fund's or Portfolio's custodian
(the "Custodian") has provided PFPC with funds, PFPC shall
(a) transfer by Fedwire or other agreed upon electronic
means such redemption payment to the broker-dealer for the
credit to, and for the benefit of, the customer's account
or (b) shall prepare and send a redemption check to the
broker-dealer, made payable to the broker-dealer on behalf
of its customer.
(ii) FUND-ONLY ACCOUNTS.
If Shares (or appropriate instructions) are received in
proper form, at the Fund's request Shares may be redeemed
before the funds are provided to PFPC from the Custodian.
If the recordholder has not directed that redemption
proceeds be wired, when the Custodian provides PFPC with
funds, the redemption check shall be sent to and made
payable to the recordholder, unless:
(a) the surrendered certificate is drawn to the order
of an assignee or holder and transfer
authorization is signed by the recordholder; or
(b) transfer authorizations are signed by the
recordholder when Shares are held in book-entry
form.
(e) DIVIDENDS AND DISTRIBUTIONS. Upon receipt of a resolution of the
Fund's Board authorizing the declaration and payment of dividends and
distributions, PFPC shall issue dividends and distributions declared by the
Fund in Shares, or, upon shareholder election, pay such dividends and
distributions in cash, if provided for in the appropriate Fund's or
Portfolio's prospectus. Such issuance or payment, as well as payments upon
redemption as described above,
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shall be made after deduction and payment of the required amount of funds to
be withheld in accordance with any applicable tax law or other laws, rules or
regulations. PFPC shall mail to the Fund's shareholders and the IRS and
other appropriate taxing authorities such tax forms, or permissible
substitute forms, and other information relating to dividends and
distributions paid by the Fund (including designations of the portions of
distributions of net capital gain that are 20% rate gain distributions and
28% rate gain distributions pursuant to IRS Notice 97-64) as are required to
be filed and mailed by applicable law, rule or regulation within the time
required thereby. PFPC shall prepare, maintain and file with the IRS and
other appropriate taxing authorities reports relating to all dividends above
a stipulated amount paid by the Fund to its shareholders as required by tax
or other law, rule or regulation.
(f) SHAREHOLDER ACCOUNT SERVICES.
(i) PFPC will arrange, in accordance with the appropriate
Fund's or Portfolio's prospectus, for issuance of Shares
obtained through:
- The transfer of funds from shareholders' accounts at
financial institutions, provided PFPC receives advance
Oral or Written Instruction of such transfer;
- Any pre-authorized check plan; and
- Direct purchases through broker wire orders, checks
and applications.
(ii) PFPC will arrange, in accordance with the appropriate
Fund's or Portfolio's prospectus, for a shareholder's:
- Exchange of Shares for shares of another fund with
which the Fund has exchange privileges;
Automatic redemption from an account where that
shareholder participates in a systematic withdrawal
plan; and/or
- Redemption of Shares from an account with a
checkwriting privilege.
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(g) COMMUNICATIONS TO SHAREHOLDERS. Upon timely Written Instructions,
PFPC shall mail all communications by the Fund to its shareholders, including:
(i) Reports to shareholders;
(ii) Confirmations of purchases and sales of Fund shares;
(iii) Monthly or quarterly statements;
(iv) Dividend and distribution notices;
(v) Proxy material; and
(vi) Tax forms (including substitute forms) and accompanying
information containing the information required by
paragraph 16(e).
If requested by the Fund, PFPC will receive and tabulate the proxy cards
for the meetings
of the Fund's shareholders and supply personnel to serve as inspectors of
election.
(h) RECORDS. PFPC shall maintain those records required by the
Securities Laws and any laws, rules and regulations of governmental authorities
having jurisdiction with respect to the duties to be performed by PFPC hereunder
with respect to shareholder accounts or by transfer agents generally, including
records of the accounts for each shareholder showing the following information:
(i) Name, address and United States Taxpayer Identification or Social
Security number;
(ii) Number and class of Shares held and number and class of
Shares for which certificates, if any, have been issued,
including certificate numbers and denominations;
(iii) Historical information regarding the account of each
shareholder, including dividends and distributions paid,
their character (e.g. ordinary income, net capital gain
(including 20% rate gain and 28% rate gain),
exempt-interest, foreign tax-credit and dividends
received deduction eligible) for federal income tax
purposes and the date and price for all transactions on
a shareholder's account;
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(iv) Any stop or restraining order placed against a
shareholder's account;
(v) Any correspondence relating to the current maintenance of
a shareholder's account;
(vi) Information with respect to withholdings; and
(vii) Any information required in order for the transfer agent
to perform any calculations contemplated or required by
this Agreement.
(i) LOST OR STOLEN CERTIFICATES. PFPC shall place a stop notice
against any certificate reported to be lost or stolen and comply with all
applicable federal regulatory requirements for reporting such loss or alleged
misappropriation. The lost or stolen certificate will be canceled and
uncertificated Shares will be issued to a shareholder's account only upon:
(i) The shareholder's pledge of a lost instrument bond or such
other appropriate indemnity bond issued by a surety
company approved by PFPC; and
(ii) Completion of a release and indemnification agreement
signed by the shareholder to protect PFPC and its
affiliates.
(j) SHAREHOLDER INSPECTION OF STOCK RECORDS. Upon a request from any
Fund shareholder to inspect stock records, PFPC will notify the Fund, and the
Fund will issue instructions granting or denying each such request. Unless PFPC
has acted contrary to the Fund's instructions, the Fund agrees and does hereby
release PFPC from any liability for refusal of permission for a particular
shareholder to inspect the Fund's shareholder records.
(k) WITHDRAWAL OF SHARES AND CANCELLATION OF CERTIFICATES. Upon receipt
of Written Instructions, PFPC shall cancel outstanding certificates surrendered
by the Fund to reduce the total amount of outstanding shares by the number of
shares surrendered by the Fund.
16
<PAGE>
17. DURATION AND TERMINATION.
(a) This Agreement shall be effective on the date first written above
and shall continue for a period of three (3) years (the "Initial Term").
Upon the expiration of the Initial Term, this Agreement shall automatically
renew for successive terms of one (1) year ("Renewal Terms") each provided
that it may be terminated by either party during a Renewal Term upon written
notice given at least ninety (90) days prior to termination. During either
the Initial Term or the Renewal Terms, this Agreement may also be terminated
on an earlier date by either party for cause.
(b) With respect to the Fund, cause includes, but is not limited to,
(i) PFPC's material breach of this Agreement causing it to fail to
substantially perform its duties under this Agreement. In order for such
material breach to constitute "cause" under this Paragraph, PFPC must receive
written notice from the Fund specifying the material breach and PFPC shall
not have corrected such breach within a 15-day period; (ii) financial
difficulties of PFPC evidenced by the authorization or commencement of a
voluntary or involuntary bankruptcy under the U.S. Bankruptcy Code or any
applicable bankruptcy or similar law, or under any applicable law of any
jurisdiction relating to the liquidation or reorganization of debt, the
appointment of a receiver or to the modification or alleviation of the rights
of creditors; and (iii) issuance of an administrative or court order against
PFPC with regard to the material violation or alleged material violation of
the Securities Laws or other applicable laws related to its business of
performing transfer agency services;
(c) With respect to PFPC, cause includes, but is not limited to, the
failure of the Fund to pay the compensation set forth in writing pursuant to
Paragraph 11 of this Agreement.
17
<PAGE>
(d) Any notice of termination for cause in conformity with
subparagraphs (a), (b) and (c ) of this Paragraph by the Fund shall be
effective thirty (30) days from the date of any such notice. Any notice of
termination for cause by PFPC shall be effective 90 days from the date of
such notice.
(e) Upon the termination hereof, the Fund shall pay to PFPC such
compensation as may be due for the period prior to the date of such
termination. In the event that the Fund designates a successor to any of
PFPC's obligations under this Agreement, PFPC shall, at the direction and
expense of the Fund, transfer to such successor all relevant books, records
and other data established or maintained by PFPC hereunder including, a
certified list of the shareholders of the Fund or any Portfolio thereof with
name, address, and if provided, taxpayer identification or Social Security
number, and a complete record of the account of each shareholder. To the
extent that PFPC incurs expenses related to a transfer of responsibilities to
a successor, other than expenses involved in PFPC's providing the Fund's
books and records described in the preceding sentence to the successors, PFPC
shall be entitled to be reimbursed for such extraordinary expenses, including
any out-of-pocket expenses reasonably incurred by PFPC in connection with the
transfer.
(f) Any termination effected pursuant to this Paragraph shall not
affect the rights and obligations of the parties under Paragraph 12 hereof.
(g) Notwithstanding the foregoing, this Agreement shall terminate
with respect to the Fund or any Portfolio thereof upon the liquidation,
merger, or other dissolution of the Fund or Portfolio or upon the Fund's
ceasing to be a registered investment company.
18. REGISTRATION AS A TRANSFER AGENT. PFPC represents that it is
currently registered with the appropriate federal agency for the registration
of transfer agents, or is otherwise
18
<PAGE>
permitted to lawfully conduct its activities without such registration and
that it will remain so registered or able to so conduct such activities for
the duration of this Agreement. PFPC agrees that it will promptly notify the
Fund in the event of any material change in its status as a registered
transfer agent. Should PFPC fail to be registered with the SEC as a transfer
agent at any time during this Agreement, and such failure to register does
not permit PFPC to lawfully conduct its activities, the Fund may, on written
notice to PFPC, terminate this Agreement upon five days written notice to
PFPC.
19. NOTICES. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. Notices shall be addressed (a) if to PFPC, at 400
Bellevue Parkway, Wilmington, Delaware 19809; (b) if to the Fund, at the
address of the Fund or (c) if to neither of the foregoing, at such other
address as shall have been given by like notice to the sender of any such
notice or other communication by the other party. If notice is sent by
confirming telegram, cable, telex or facsimile sending device during regular
business hours, it shall be deemed to have been given immediately; if sent at
a time other than regular business hours, such notice shall be deemed to have
been given at the opening of the next business day. If notice is sent by
first-class mail, it shall be deemed to have been given three days after it
has been mailed. If notice is sent by messenger, it shall be deemed to have
been given on the day it is delivered. All postage, cable, telegram, telex
and facsimile sending device charges arising from the sending of a notice
hereunder shall be paid by the sender.
20. AMENDMENTS. This Agreement, or any term thereof, may be changed
or waived only by a written amendment, signed by the party against whom
enforcement of such change or waiver is sought.
19
<PAGE>
21. ADDITIONAL PORTFOLIOS. In the event that the Fund establishes
one or more investment series in addition to and with respect to which it
desires to have PFPC render services as transfer agent, registrar, dividend
disbursing agent and related services agent under the terms set forth in this
Agreement, it shall so notify PFPC in writing, and PFPC shall agree in
writing to provide such services, and such investment series shall become a
Portfolio hereunder, subject to such additional terms, fees and conditions as
are agreed to by the parties.
22. DELEGATION; ASSIGNMENT.
(a) PFPC may, at its own expense, assign its rights and delegate its
duties hereunder to any wholly-owned direct or indirect subsidiary of PNC
Bank, National Association or PNC Bank Corp., provided that (i) PFPC gives
the Fund thirty (30) days' prior written notice; (ii) the delegate (or
assignee) agrees with PFPC and the Fund to comply with all relevant
provisions of the Securities Laws; and (iii) PFPC and such delegate (or
assignee) promptly provide such information as the Fund may request, and
respond to such questions as the Fund may ask, relative to the delegation (or
assignment), including (without limitation) the capabilities of the delegate
(or assignee). The assignment and delegation of any of PFPC's duties under
this subparagraph (a) shall not relieve PFPC of any of its responsibilities
or liabilities under this Agreement.
(b) PFPC may delegate to PaineWebber Incorporated its obligation to
perform the services described on Annex B hereto. In addition, PFPC may assign
its rights and delegate its other duties hereunder to PaineWebber Incorporated
or Mitchell Hutchins Asset Management Inc. or an affiliated person of either,
provided that (i) PFPC gives the Fund thirty (30) days' prior written notice;
(ii) the delegate (or assignee) agrees with PFPC and the Fund to comply with all
relevant provisions of the Securities Laws; and (iii) PFPC and such delegate (or
assignee)
20
<PAGE>
promptly provide such information as the Fund may request, and respond to
such questions as the Fund may ask, relative to the delegation (or
assignment), including (without limitation) the capabilities of the delegate
(or assignee). In assigning its rights and delegating its duties under this
paragraph, PFPC may impose such conditions or limitations as it determines
appropriate including the condition that PFPC be retained as a sub-transfer
agent.
(c) In the event that PFPC assigns its rights and delegates its
duties under this section, no amendment of the terms of this Agreement shall
become effective without the written consent of PFPC.
23. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
24. FURTHER ACTIONS. Each party agrees to perform such further acts
and execute such further documents as are necessary to effectuate the
purposes hereof.
25. MISCELLANEOUS.
(a) ENTIRE AGREEMENT. This Agreement embodies the entire agreement
and understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the
parties may embody in one or more separate documents their agreement, if any,
with respect to services to be performed and fees payable under this
Agreement.
(b) CAPTIONS. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
21
<PAGE>
(c) GOVERNING LAW. This Agreement shall be deemed to be a contract
made in Delaware and governed by Delaware law, without regard to principles
of conflicts of law.
(d) PARTIAL INVALIDITY. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
(e) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
(f) FACSIMILE SIGNATURES. The facsimile signature of any party to
this Agreement shall constitute the valid and binding execution hereof by
such party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
PFPC INC.
By: /s/ Robert F. Crouse
-----------------------------
Title: Senior Vice President
MITCHELL HUTCHINS PORTFOLIOS
By: /s/ Dianne E. O'Donnell
-----------------------------
Title: Secretary and Vice President
22
<PAGE>
ANNEX A
Portfolios
Aggressive Growth Portfolio
Moderate Portfolio
Conservative Portfolio
23
<PAGE>
AUTHORIZED PERSONS APPENDIX
<TABLE>
<CAPTION>
NAME (TYPE) SIGNATURE
<S> <C>
- ------------- -------------
- ------------- -------------
- ------------- -------------
- ------------- -------------
- ------------- -------------
- ------------- -------------
</TABLE>
24
<PAGE>
ANNEX B
a. Establish and maintain a dedicated service center with sufficient
facilities, equipment and skilled personnel to address all shareholder
inquiries received by telephone, mail or in-person regarding the Funds
and their accounts
b. Provide timely execution of redemptions, exchanges and non-financial
transactions directed to investment executives and specifically requested
by Fund shareholders
c. Issue checks from proceeds of Fund share redemptions to shareholders as
directed by the shareholders or their agents
d. Process and maintain shareholder account registration information
e. With respect to customer accounts maintained through PaineWebber
Incorporated ("PaineWebber"), review new applications and correspond with
shareholders to complete or correct information
f. Prepare and mail monthly or quarterly consolidated account statements
that reflect PaineWebber Mutual Fund balances and transactions (such
information to be combined with other activity and holdings in investors'
brokerage accounts if this responsibility is delegated to PaineWebber)
g. Establish and maintain a dedicated service center with sufficient
facilities, equipment and skilled personnel to address all branch
inquiries regarding operational issues and performance
h. Capture, process and mail required tax information to shareholders and
report this information to the Internal Revenue Service
i. Provide the capability to margin PaineWebber Mutual Funds held within the
client's brokerage account (if this responsibility is delegated to
PaineWebber)
j. Prepare and provide shareholder registrations for mailing of proxies,
reports and other communications to shareholders
k. Develop, maintain and issue checks from the PaineWebber systematic
withdrawal plan offered within the client's brokerage account (if this
responsibility is delegated to PaineWebber)
l. Maintain duplicate shareholder records and reconcile those records with
those at the transfer agent (if this responsibility is delegated to
PaineWebber)
25
<PAGE>
m. Process and mail duplicate PaineWebber monthly or quarterly statements to
PaineWebber Investment Executives
n. Establish and maintain shareholder distribution options (i.e., election
to have dividends paid in cash, rather than reinvested in Fund shares)
o. Process and mail purchase, redemption and exchange confirmations to Fund
shareholders and PaineWebber Investment Executives
p. Issue dividend checks to shareholders that select cash distributions to
their brokerage account (if this responsibility is delegated to
PaineWebber)
q. Develop and maintain the automatic investment plan offered within the
client's brokerage account (if this responsibility is delegated to
PaineWebber)
r. Provide bank-to-bank wire transfer capabilities related to transactions
in Fund shares
s. Maintain computerized compliance programs for blue sky and non-resident
alien requirements (only with respect to PaineWebber Cashfund, Inc.)
26
<PAGE>
Exhibit No. 9
KIRKPATRICK & LOCKHART LLP
1800 MASSACHUSETTS AVENUE, N.W.
2ND FLOOR
WASHINGTON, D.C. 20036-1800
TELEPHONE 202-778-9000
www.kl.com
September 29, 1998
Mitchell Hutchins Portfolios
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
You have requested our opinion, as counsel to Mitchell Hutchins
Portfolios ("Trust"), as to certain matters regarding the issuance of certain
Shares of the Trust. As used in this letter, the term "Shares" means the
Class A, Class B, Class C and Class Y shares of beneficial interest of the
series of the Trust listed below during the time that Post-Effective
Amendment No. 1 to the Trust's Registration Statement on Form N-1A ("PEA") is
effective and has not been superseded by another post-effective amendment.
These series of the Trust are Mitchell Hutchins Aggressive Portfolio,
Mitchell Hutchins Conservative Portfolio and Mitchell Hutchins Moderate
Portfolio.
As such counsel, we have examined certified or other copies, believed by
us to be genuine, of the Trust's Trust Instrument and by-laws and such
resolutions and minutes of meetings of the Trust's Board of Trustees as we
have deemed relevant to our opinion, as set forth herein. Our opinion is
limited to the laws and facts in existence on the date hereof, and it is
further limited to the laws (other than the conflict of law rules) in the
State of Delaware that in our experience are normally applicable to the
issuance of shares by investment companies organized as business trusts in
that State and to the Securities Act of 1933 ("1933 Act"), the Investment
Company Act of 1940 ("1940 Act") and the regulations of the Securities and
Exchange Commission ("SEC") thereunder.
Based on the foregoing, we are of the opinion that the issuance of the
Shares has been duly authorized by the Trust and that, when sold in
accordance with the terms contemplated by the PEA, including receipt by the
Trust of full payment for the Shares and compliance with the 1933 Act and the
1940 Act, the Shares will have been validly issued, fully paid and
non-assessable.
We hereby consent to this opinion accompanying the PEA when it is filed
with the SEC and to the reference to our firm in the statement of additional
information that is being filed as part of the PEA.
Very truly yours,
/s/ Kirkpatrick & Lockhart LLP
KIRKPATRICK & LOCKHART LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Auditors" in the Statement of Additional
Information and to the incorporation by reference of our report dated
July 24, 1998, in this Registration Statement (Form N-1A No. 333-26087) of
Mitchell Hutchins Portfolios (comprising, respectively, the Mitchell Hutchins
Aggressive Portfolio, Mitchell Hutchins Moderate Portfolio and Mitchell
Hutchins Conservative Portfolio).
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
New York, New York
September 28, 1998
<PAGE>
Exhibit No. 13(a)
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 Aggressive 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 not obligate the Series to reimburse Mitchell Hutchins for such
-2-
<PAGE>
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: January 9, 1998
ATTEST: MITCHELL HUTCHINS PORTFOLIOS
/s/ Teresa M. Ritchie By: /s/ Dianne E. O'Donnell
- ----------------------------- --------------------------------
-3-
<PAGE>
Exhibit No. 13(b)
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 Aggressive 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;
<PAGE>
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 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.
-2-
<PAGE>
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.
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.
-3-
<PAGE>
IN WITNESS WHEREOF, the Trust has executed this Plan of Distribution on
the day and year set forth below in New York, New York.
Date: January 9, 1998
ATTEST: MITCHELL HUTCHINS PORTFOLIOS
/s/ Teresa M. Ritchie By: /s/ Dianne E. O'Donnell
- ------------------------------ -------------------------------
-4-
<PAGE>
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 Aggressive 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.
1. 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:
<TABLE>
<S> <C>
Mitchell Hutchins Aggressive Portfolio 0.75%
Mitchell Hutchins Moderate Portfolio 0.75%
Mitchell Hutchins Conservative Portfolio 0.50%
</TABLE>
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
<PAGE>
fee shall be calculated and accrued daily and paid monthly or at such other
intervals as the Board shall determine.
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.
-2-
<PAGE>
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 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
-3-
<PAGE>
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 caused this Plan of Distribution to be
executed on the day and year set forth below in New York, New York.
Date: January 9, 1998
ATTEST: MITCHELL HUTCHINS PORTFOLIOS
/s/ Teresa M. Ritchie By: Dianne E. O'Donnell
- --------------------------- -------------------------------
-4-
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001020735
<NAME> MITCHELL HUTCHINS PORTFOLIOS
<SERIES>
<NUMBER> 1
<NAME> AGGRESSIVE PORTFOLIO CLASS A
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> FEB-24-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 1652
<INVESTMENTS-AT-VALUE> 1628
<RECEIVABLES> 7
<ASSETS-OTHER> 36
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1671
<PAYABLE-FOR-SECURITIES> 12
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 37
<TOTAL-LIABILITIES> 48
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1641
<SHARES-COMMON-STOCK> 125
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 2
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (25)
<NET-ASSETS> 1623
<DIVIDEND-INCOME> 4
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (1)
<NET-INVESTMENT-INCOME> 3
<REALIZED-GAINS-CURRENT> 3
<APPREC-INCREASE-CURRENT> (25)
<NET-CHANGE-FROM-OPS> (18)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1901
<NUMBER-OF-SHARES-REDEEMED> (273)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1609
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1
<AVERAGE-NET-ASSETS> 872
<PER-SHARE-NAV-BEGIN> 12.50
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 0.45
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.98
<EXPENSE-RATIO> 0.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001020735
<NAME> MITCHELL HUTCHINS PORTFOLIOS
<SERIES>
<NUMBER> 2
<NAME> AGGRESSIVE PORTFOLIO CLASS B
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> FEB-24-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 1467
<INVESTMENTS-AT-VALUE> 1445
<RECEIVABLES> 6
<ASSETS-OTHER> 32
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1483
<PAYABLE-FOR-SECURITIES> 10
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 33
<TOTAL-LIABILITIES> 43
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1457
<SHARES-COMMON-STOCK> 111
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 2
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (22)
<NET-ASSETS> 1440
<DIVIDEND-INCOME> 3
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (2)
<NET-INVESTMENT-INCOME> 1
<REALIZED-GAINS-CURRENT> 3
<APPREC-INCREASE-CURRENT> (22)
<NET-CHANGE-FROM-OPS> (18)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1582
<NUMBER-OF-SHARES-REDEEMED> (130)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1435
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2
<AVERAGE-NET-ASSETS> 708
<PER-SHARE-NAV-BEGIN> 12.50
<PER-SHARE-NII> 0.01
<PER-SHARE-GAIN-APPREC> 0.45
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.96
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001020735
<NAME> MITCHELL HUTCHINS PORTFOLIOS
<SERIES>
<NUMBER> 3
<NAME> AGGRESSIVE PORTFOLIO CLASS C
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> FEB-24-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 2087
<INVESTMENTS-AT-VALUE> 2056
<RECEIVABLES> 9
<ASSETS-OTHER> 45
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2110
<PAYABLE-FOR-SECURITIES> 15
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 47
<TOTAL-LIABILITIES> 62
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2073
<SHARES-COMMON-STOCK> 158
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 3
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (31)
<NET-ASSETS> 2048
<DIVIDEND-INCOME> 5
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (3)
<NET-INVESTMENT-INCOME> 2
<REALIZED-GAINS-CURRENT> 4
<APPREC-INCREASE-CURRENT> (31)
<NET-CHANGE-FROM-OPS> (25)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2387
<NUMBER-OF-SHARES-REDEEMED> (325)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2037
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3
<AVERAGE-NET-ASSETS> 1219
<PER-SHARE-NAV-BEGIN> 12.50
<PER-SHARE-NII> 0.01
<PER-SHARE-GAIN-APPREC> 0.45
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.96
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001020735
<NAME> MITCHELL HUTCHINS PORTFOLIOS
<SERIES>
<NUMBER> 4
<NAME> AGGRESSIVE PORTFOLIO CLASS Y
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> FEB-24-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 11
<INVESTMENTS-AT-VALUE> 10
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11
<SHARES-COMMON-STOCK> 1
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 10
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 11
<PER-SHARE-NAV-BEGIN> 12.50
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0.44
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.99
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001020735
<NAME> MITCHELL HUTCHINS PORTFOLIOS
<SERIES>
<NUMBER> 1
<NAME> MODERATE PORTFOLIO CLASS A
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> FEB-24-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 1686
<INVESTMENTS-AT-VALUE> 1676
<RECEIVABLES> 23
<ASSETS-OTHER> 26
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1725
<PAYABLE-FOR-SECURITIES> 22
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 28
<TOTAL-LIABILITIES> 49
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1672
<SHARES-COMMON-STOCK> 130
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 6
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (10)
<NET-ASSETS> 1676
<DIVIDEND-INCOME> 9
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (1)
<NET-INVESTMENT-INCOME> 8
<REALIZED-GAINS-CURRENT> 7
<APPREC-INCREASE-CURRENT> (10)
<NET-CHANGE-FROM-OPS> 6
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2042
<NUMBER-OF-SHARES-REDEEMED> (394)
<SHARES-REINVESTED> 12
<NET-CHANGE-IN-ASSETS> 1664
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1
<AVERAGE-NET-ASSETS> 1188
<PER-SHARE-NAV-BEGIN> 12.50
<PER-SHARE-NII> 0.06
<PER-SHARE-GAIN-APPREC> 0.37
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.93
<EXPENSE-RATIO> 0.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001020735
<NAME> MITCHELL HUTCHINS PORTFOLIOS
<SERIES>
<NUMBER> 2
<NAME> MODERATE PORTFOLIO CLASS B
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> FEB-24-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 2975
<INVESTMENTS-AT-VALUE> 2957
<RECEIVABLES> 41
<ASSETS-OTHER> 46
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3044
<PAYABLE-FOR-SECURITIES> 39
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 50
<TOTAL-LIABILITIES> 89
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2949
<SHARES-COMMON-STOCK> 229
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 11
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 13
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (17)
<NET-ASSETS> 2955
<DIVIDEND-INCOME> 16
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (5)
<NET-INVESTMENT-INCOME> 11
<REALIZED-GAINS-CURRENT> 13
<APPREC-INCREASE-CURRENT> (17)
<NET-CHANGE-FROM-OPS> 6
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
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