<PAGE>
MITCHELL HUTCHINS PORTFOLIOS ANNUAL REPORT
July 15, 1998
Dear Shareholder,
We are pleased to present you with the first annual report for the Mitchell
Hutchins Portfolios, covering the period from commencement of operations
(February 24, 1998) to the end of the Portfolios' fiscal year (May 31, 1998).
MITCHELL HUTCHINS PORTFOLIOS
PROFILES
Goals:
Aggressive--long-term capital growth
Moderate--total return
Conservative--income; secondarily, capital growth
Portfolio Managers:
T. Kirkham Barneby, Mark Tincher, Dennis McCauley, Mitchell Hutchins Asset
Management Inc.
Total Net Assets at
May 31, 1998:
Aggressive--$5.1 million
Moderate--$7.4 million
Conservative--$2.7 million
GENERAL MARKET OVERVIEW
- -------------------------------------------------------------------------------
After getting off to a slow start in January, the S&P 500 Index recorded one of
its best quarters ever, advancing 13.5% by the end of March. Robust economic
growth, which produced low unemployment and low inflation, contributed to the
market's overall strength.
Sectors that fared poorly at the end of 1997 turned in outstanding
performances in early 1998. Technology stocks, department stores, auto supply
companies and airlines all rebounded sharply from year-end slumps. Financial
services companies also performed reasonably well. Energy stocks performed the
worst as weakening economies in Asia drove down oil prices. Consumer
nondurables, a traditionally defensive sector, lagged during the market's
advance.
The U.S. Treasury market rally of 1997 carried over into January 1998. Bonds
lost some of their momentum in February, as investors grew concerned that the
Federal Reserve would raise interest rates. Although the Fed took no action,
uncertainty, both about the economy and the effects of the Asian crisis, kept
the bond markets volatile through April and May.
PORTFOLIO REVIEW
- -------------------------------------------------------------------------------
PERFORMANCE
Aggressive Portfolio
The Aggressive Portfolio's total return (the net asset value change with
dividends reinvested) for the 131/2-week period ended May 31, 1998, without
deducting sales charges, was 3.84% for Class A shares, 3.68% for Class B shares,
3.68% for Class C shares and 3.92% for Class Y shares. The commencement of
issuance for all classes of shares was February 24, 1998.
For shareowners who purchased or redeemed Portfolio shares during the period
the Aggressive Portfolio's total return may be lower; for example, after
deducting the maximum applicable sales charges, Class A shares lost 0.84%, Class
B shares lost 1.32% and Class C shares gained 2.68%. Class Y shares are not
subject to sales charges.
Moderate Portfolio
The Moderate Portfolio's total return (the net asset value change with
dividends reinvested) for the 131/2-week period ended May 31, 1998, without
deducting sales charges, was 3.44% for Class A shares, 3.20% for Class B shares,
3.20% for Class C shares and 3.52% for Class Y shares. The commencement of
issuance for all classes of shares was February 24, 1998.
For shareowners who purchased or redeemed Portfolio shares during the period
the Moderate 1 Portfolio's total return may be lower; for example, after
deducting the maximum applicable sales charges, Class A shares lost 1.22%, Class
B shares lost 1.80% and
1
<PAGE>
ANNUAL REPORT
Class C shares gained 2.20%. Class Y shares are not subject to sales charges.
Conservative
Portfolio
The Conservative Portfolio's total return (the net asset value change with
dividends reinvested) for the 131/2-week period ended May 31, 1998, without
deducting sales charges, was 2.48% for Class A shares, 2.32% for Class B shares,
2.40% for Class C shares and 2.56% for Class Y shares. The commencement of
issuance for all classes of shares was February 24, 1998.
For shareowners who purchased or redeemed Portfolio shares during the period
the Conservative Portfolio's total return may be lower; for example, after
deducting the maximum applicable sales charges, Class A shares lost 2.14%, Class
B shares lost 2.68% and Class C shares gained 1.65%. Class Y shares are not
subject to sales charges.
PORTFOLIO
HIGHLIGHTS
The Mitchell Hutchins Portfolios commenced operations on February 24, 1998
with all three portfolios at their "normal" targeted stock/bond allocations. The
Aggressive Portfolio had an 80% stock/20% bond mix, the Moderate Portfolio had a
60% stock/40% bond mix and the Conservative Portfolio had a 20% stock/80% bond
mix.
On April 7, 1998, we shifted 5% of the Portfolios' U.S. equity portions to
the money market fund. All three Portfolios thus were underweighted in stocks
compared to their normal allocations. Within the stock portion of the Moderate
and Aggressive Portfolios, we slightly lowered the allocation to the large cap,
PaineWebber Growth and Income Fund and increased the allocation to the
PaineWebber Small Cap Fund. We believe the price-earnings multiples of small-cap
stocks are extremely attractive and their earnings growth potential is superior
to that of large caps.
Within the fixed income portions of the Conservative and Moderate Portfolios
we increased positions in the PaineWebber Low Duration U.S. Government Income
Fund to reduce the bond portion's sensitivity to interest rate changes. The Low
Duration Fund primarily invests in debt securities with maturities between one
and three years, which are less sensitive to interest rate changes than
longer-maturity securities.
<TABLE>
<CAPTION>
Mitchell Hutchins Portfolios
Allocations as percent of Portfolio assets, May 31, 1998(1)
Aggressive Moderate Conservative
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stock Funds PaineWebber Growth Fund 4.9% 9.8% 0.0%
PaineWebber Growth and Income Fund 20.0 19.8 14.7
PaineWebber Small Cap Fund 39.3 19.5 0.0
- ------------------------------------------------------------------------------------------------
Bond Funds PaineWebber Low Duration
U.S. Gov't Income Fund 0.0 10.2 40.1
PaineWebber U.S. Government Income Fund 0.0 2.5 20.1
PaineWebber Investment Grade Income Fund 5.2 7.7 10.1
PaineWebber High Income Fund 10.2 10.1 0.0
- ------------------------------------------------------------------------------------------------
Global Funds PaineWebber Global Equity Fund 10.2 5.1 0.0
PaineWebber Global Income Fund 5.1 10.2 10.0
- ------------------------------------------------------------------------------------------------
Money Market
Fund PaineWebber Cashfund Inc. 5.1 5.1 5.0
- ------------------------------------------------------------------------------------------------
Totals 100.0% 100.0% 100.0%
</TABLE>
(1) The Portfolios are actively managed, as are the underlying funds, and their
composition will differ over time.
2
<PAGE>
MITCHELL HUTCHINS PORTFOLIOS ANNUAL REPORT
OUTLOOK
- -------------------------------------------------------------------------------
We consider the stock market a bit overvalued though not enough to raise
fears of a prolonged sell-off. A decline in interest rates or an improved
earnings outlook could bring valuations into line. With inflation nearly absent,
we expect a fairly stable interest rate environment. In these conditions stock
selection by the underlying funds -- particularly attempting to avoid companies
that may produce negative earnings surprises -- should take on greater
importance.
The extent of the economic turmoil in Asia and its ultimate impact on
corporate profits remains unclear. We are cautious in the near term and expect
choppy markets ahead as negative earnings announcements take their toll. Over
the longer term, however, we see little cause for the market to lose strength.
As earnings trends stabilize, we expect S&P 500 earnings growth to rebound and
pave the way for a fairly good second half of 1998.
We think 1998 will continue to be a strong year for the bond markets. The
ongoing financial problems in Asia are slowing the U.S. economy slightly, and
inflation is likely to remain low. The Federal budget is now running a surplus,
which should reduce government borrowing and ease the upward pressure on market
interest rates. We believe market rates can continue to fall in 1998.
Our ultimate objective in managing your investments is to help you
successfully meet your financial goals. We thank you for your continued support
and welcome any comments or questions you may have.
For a quarterly Fund Profile on the Mitchell Hutchins Portfolios or any of
the funds in the PaineWebber Family of Funds,(2) please contact your investment
executive.
Sincerely,
/s/ MARGO ALEXANDER /s/ T. KIRKHAM BARNEBY
MARGO ALEXANDER T. KIRKHAM BARNEBY
President Managing Director and Chief Investment
Mitchell Hutchins Asset Management Inc. Officer -- Quantitative Investments
Mitchell Hutchins Asset Management Inc.
Manager of the Portfolios
/s/ DENNIS L. McCAULEY /s/ MARK A. TINCHER
DENNIS L. McCAULEY MARK A. TINCHER
Managing Director and Chief Investment Managing Director and Chief Investment
Officer -- Fixed Income Officer -- Equities
Mitchell Hutchins Asset Management Inc. Mitchell Hutchins Asset Management Inc.
Manager of the Portfolios Manager of the Portfolios
This letter is intended to assist shareholders in understanding how the
Portfolios performed during the period ended May 31, 1998, and reflects our
views at the time we are writing this report. Of course, these views may change
in response to changing circumstances. We encourage you to consult your
investment executive regarding your personal investment program.
(2) Mutual funds are sold by prospectus only. The prospectuses for the funds
contain more complete information regarding risks, charges and expenses, and
should be read carefully before investing.
3
<PAGE>
MITCHELL HUTCHINS AGGRESSIVE PORTFOLIO
PORTFOLIO OF INVESTMENTS MAY 31, 1998
Number of
Shares Value
- ---------- ---------
PaineWebber Stock Funds--74.72%
26,936 PaineWebber Global Equity Fund ................... $ 524,184
10,564 PaineWebber Growth Fund .......................... 253,755
31,525 PaineWebber Growth and Income Fund ............... 1,026,771
141,441 PaineWebber Small Cap Fund ....................... 2,021,198
-----------
3,825,908
-----------
PaineWebber Bond Funds--20.52%
25,982 PaineWebber Global Income Fund ................... 263,715
67,006 PaineWebber High Income Fund ..................... 521,974
24,105 PaineWebber Investment Grade Income Fund ......... 264,667
-----------
1,050,356
-----------
PaineWebber Money Market Fund--5.14%
263,338 PaineWebber Cashfund, Inc. ....................... 263,338
-----------
Total Investments (cost--$5,217,459)--100.38%.................. 5,139,602
Liabilities in excess of other assets--(0.38%)................. (19,338)
-----------
Net Assets--100.00%............................................ $ 5,120,264
===========
See accompanying notes to financial statements
4
<PAGE>
MITCHELL HUTCHINS MODERATE PORTFOLIO
PORTFOLIO OF INVESTMENTS MAY 31, 1998
Number of
Shares Value
- ---------- ---------
PaineWebber Stock Funds--54.24%
19,401 PaineWebber Global Equity Fund ................... $ 377,551
30,372 PaineWebber Growth Fund .......................... 729,526
45,312 PaineWebber Growth and Income Fund ............... 1,475,803
101,820 PaineWebber Small Cap Fund ....................... 1,455,008
-----------
4,037,888
-----------
PaineWebber Bond Funds--40.72%
74,813 PaineWebber Global Income Fund ................... 759,347
96,576 PaineWebber High Income Fund ..................... 752,324
52,037 PaineWebber Investment Grade Income Fund ......... 571,372
318,860 PaineWebber Low Duration U.S. Government Income Fund 758,887
21,091 PaineWebber U.S. Government Income Fund .......... 189,613
-----------
3,031,543
-----------
PaineWebber Money Market Fund--5.09%
379,082 PaineWebber Cashfund, Inc. ....................... 379,082
-----------
Total Investments (cost--$7,491,705)--100.05%.................. 7,448,513
Liabilities in excess of other assets--(0.05%)................. (3,590)
-----------
Net Assets--100.00%............................................ $ 7,444,923
===========
See accompanying notes to financial statements
5
<PAGE>
MITCHELL HUTCHINS CONSERVATIVE PORTFOLIO
PORTFOLIO OF INVESTMENTS MAY 31, 1998
Number of
Shares Value
- ---------- ---------
PaineWebber Stock Fund--14.65%
12,033 PaineWebber Growth and Income Fund ............... $ 391,921
-----------
PaineWebber Bond Funds--80.29%
26,441 PaineWebber Global Income Fund ................... 268,373
24,538 PaineWebber Investment Grade Income Fund ......... 269,427
451,116 PaineWebber Low Duration U.S. Government Income Fund 1,073,657
59,683 PaineWebber U.S. Government Income Fund .......... 536,552
-----------
2,148,009
PaineWebber Money Market Fund--5.01%
134,040 PaineWebber Cashfund, Inc. ....................... 134,040
-----------
Total Investments (cost--$2,673,913)--99.95%................... 2,673,970
Other assets in excess of liabilities--0.05%................... 1,387
-----------
Net Assets--100.00%............................................ $ 2,675,357
===========
See accompanying notes to financial statements
6
<PAGE>
MITCHELL HUTCHINS PORTFOLIOS
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES MAY 31, 1998
Aggressive Moderate Conservative
Portfolio Portfolio Portfolio
--------- --------- ---------
<S> <C> <C> <C>
Assets
Investments in securities, at value
(cost--$5,217,459, $7,491,705 and $2,673,913, respectively) ..... $5,139,602 $7,448,513 $2,673,970
Receivable for investments sold ................................ 1,475 146 --
Receivable for shares of beneficial interest sold ............... 18,930 97,180 40,000
Dividends receivable ............................................ 2,657 6,863 4,641
Deferred organizational expenses, net ........................... 85,315 85,315 85,315
Receivable from affiliate ....................................... 24,284 27,344 23,380
Other assets .................................................... 2,512 2,512 2,512
---------- ---------- ----------
Total assets .................................................... 5,274,775 7,667,873 2,829,818
---------- ---------- ----------
Liabilities
Payable for investments purchased ............................... 36,816 97,180 40,065
Payable to custodian ............................................ 31,299 31,078 31,343
Accrued expenses and other liabilities .......................... 86,396 94,692 83,053
---------- ---------- ----------
Total Liabilities ............................................... 154,511 222,950 154,461
---------- ---------- ----------
Net Assets
Beneficial interest--$0.001 par value (unlimited amount authorized) 5,181,133 7,428,478 2,652,326
Accumulated net investment income ............................... 6,928 26,759 16,651
Accumulated net realized gains from investment transactions ..... 10,060 32,878 6,323
Net unrealized appreciation/(depreciation) of investments ....... (77,857) (43,192) 57
---------- ---------- ----------
Net assets ...................................................... $5,120,264 $7,444,923 $2,675,357
========== ========== ==========
Class A:
Net assets ...................................................... $1,621,577 $1,675,541 $ 518,609
---------- ---------- ----------
Shares outstanding .............................................. 124,912 129,595 40,474
---------- ---------- ----------
Net asset value and redemption price per share .................. $ 12.98 $ 12.93 $ 12.81
========== ========== ==========
Maximum offering price per share (net asset value plus sales charge
of 4.50%, 4.50% and 4.00% of offering price, respectively) . $ 13.59 $ 13.54 $ 13.34
========== ========== ==========
Class B:
Net assets ...................................................... $1,439,935 $2,956,005 $1,666,848
---------- ---------- ----------
Shares outstanding .............................................. 111,096 229,098 130,307
---------- ---------- ----------
Net asset value and offering price per share .................... $ 12.96 $ 12.90 $ 12.79
========== ========== ==========
Class C:
Net assets ...................................................... $2,048,359 $2,801,020 $ 484,771
---------- ---------- ----------
Shares outstanding .............................................. 158,027 217,132 37,873
---------- ---------- ----------
Net asset value and offering price per share .................... $ 12.96 $ 12.90 $ 12.80
========== ========== ==========
Class Y:
Net assets ...................................................... $ 10,393 $ 12,357 $ 5,129
---------- ---------- ----------
Shares outstanding .............................................. 800 955 400
---------- ---------- ----------
Net asset value, offering price and redemption value per share .. $ 12.99 $ 12.94 $ 12.82
========== ========== ==========
</TABLE>
See accompanying notes to financial statements
7
<PAGE>
MITCHELL HUTCHINS PORTFOLIOS
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Period February 24, 1998+
through May 31, 1998
----------------------------------------------
Aggressive Moderate Conservative
Portfolio Portfolio Portfolio
---------- ---------- ------------
<S> <C> <C> <C>
Investment income:
Dividends ....................................................... $ 12,512 $ 37,357 $ 19,839
---------- ---------- ----------
Expenses:
Investment advisory and administration .......................... 2,560 4,531 1,408
Service fees--Class A ........................................... 568 775 211
Service and distribution fees--Class B .......................... 1,842 5,433 2,412
Service and distribution fees--Class C .......................... 3,174 4,390 565
Custody and accounting .......................................... 179 366 87
Amortization of organizational expenses ......................... 4,685 4,685 4,685
Transfer agency and service fees ............................... 749 866 667
Legal and audit ................................................. 14,421 15,934 14,351
Reports and notices to shareholders ............................. 2,225 2,884 2,184
Federal and state registration .................................. 1,580 2,110 1,000
Trustees' fees .................................................. 350 350 350
Other expenses .................................................. 95 150 57
---------- ---------- ----------
32,428 42,474 27,977
Less: Fee waivers and expense reimbursements from adviser ....... (26,844) (31,876) (24,789)
---------- ---------- ----------
Net expenses .................................................... 5,584 10,598 3,188
---------- ---------- ----------
Net investment income ........................................... 6,928 26,759 16,651
---------- ---------- ----------
Realized and unrealized gains (losses) from investment activities:
Net realized gains from investment transactions ................. 10,060 32,878 6,323
Net change in unrealized appreciation/(depreciation) of investments (77,857) (43,192) 57
---------- ---------- ----------
Net realized and unrealized gains (losses) from investment activities (67,797) (10,314) 6,380
---------- ---------- ----------
Net increase (decrease) in net assets resulting from operations . $ (60,869) $ 16,445 $ 23,031
========== ========== ==========
</TABLE>
- ------------
+ Commencement of operations
See accompanying notes to financial statements
8
<PAGE>
MITCHELL HUTCHINS AGGRESSIVE PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Period
February 24,
1998+ through
May 31, 1998
-----------
<S> <C>
From operations:
Net investment income ................................................. $ 6,928
Net realized gain from investment transactions ........................ 10,060
Net change in unrealized depreciation of investments .................. (77,857)
-----------
Net decrease in net assets resulting from operations .................. (60,869)
-----------
From beneficial interest transactions:
Net proceeds from the sale of shares .................................. 5,869,254
Cost of shares repurchased ............................................ (728,121)
-----------
Net increase in net assets from beneficial interest transactions ...... 5,141,133
-----------
Net increase in net assets ............................................ 5,080,264
Net assets:
Beginning of period ................................................... 40,000
-----------
End of period (including undistributed net investment income of $6,928) $ 5,120,264
===========
</TABLE>
- ------------
+ Commencement of operations
See accompanying notes to financial statements
9
<PAGE>
MITCHELL HUTCHINS MODERATE PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Period
February 24,
1998+ through
May 31, 1998
--------------
<S> <C>
From operations:
Net investment income ................................................. $ 26,759
Net realized gain from investment transactions ........................ 32,878
Net change in unrealized depreciation of investments .................. (43,192)
-----------
Net increase in net assets resulting from operations .................. 16,445
-----------
From beneficial interest transactions:
Net proceeds from the sale of shares .................................. 8,439,503
Cost of shares repurchased ............................................ (1,051,025)
-----------
Net increase in net assets from beneficial interest transactions ...... 7,388,478
-----------
Net increase in net assets ............................................ 7,404,923
Net assets:
Beginning of period ................................................... 40,000
-----------
End of period (including undistributed net investment income of $26,759) $ 7,444,923
===========
</TABLE>
- ------------
+ Commencement of operations
See accompanying notes to financial statements
10
<PAGE>
MITCHELL HUTCHINS CONSERVATIVE PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Period
February 24,
1998+ through
May 31, 1998
--------------
<S> <C>
From operations:
Net investment income ................................................. $ 16,651
Net realized gain from investment transactions ........................ 6,323
Net change in unrealized appreciation of investments .................. 57
-----------
Net increase in net assets resulting from operations .................. 23,031
-----------
From beneficial interest transactions:
Net proceeds from the sale of shares .................................. 2,749,388
Cost of shares repurchased ............................................ (117,062)
-----------
Net increase in net assets from beneficial interest transactions ...... 2,632,326
-----------
Net increase in net assets ............................................ 2,655,357
Net assets:
Beginning of period ................................................... 20,000
-----------
End of period (including undistributed net investment income of $16,651) $ 2,675,357
===========
</TABLE>
- ------------
+ Commencement of operations
See accompanying notes to financial statements
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mitchell Hutchins Aggressive Portfolio ("Aggressive Portfolio"), Mitchell
Hutchins Moderate Portfolio ("Moderate Portfolio") and Mitchell Hutchins
Conservative Portfolio ("Conservative Portfolio") (collectively "the
Portfolios") are diversified series of Mitchell Hutchins Portfolios (the
"Trust"), an open-end management investment company organized as a Delaware
business trust on August 20, 1997. Prior to commencement of operations, February
24, 1998, the Portfolios had no activity other than the sale of shares on
December 29, 1997 to Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins"), the investment adviser and an asset management subsidiary of
PaineWebber Incorporated ("PaineWebber"), as follows:
<TABLE>
<CAPTION>
Aggressive Moderate Conservative
Portfolio Portfolio Portfolio
---------- --------- ------------
<S> <C> <C> <C>
Class A
Shares sold 800,800 and 400, respectively $ 10,000 $ 10,000 $ 5,000
Class B
Shares sold 800,800 and 400, respectively 10,000 10,000 5,000
Class C
Shares sold 800,800 and 400, respectively 10,000 10,000 5,000
Class Y
Shares sold 800,800 and 400, respectively 10,000 10,000 5,000
</TABLE>
Costs incurred by the Portfolios in connection with their organization have
been deferred and are being amortized using the straight-line method over a
period not to exceed sixty months from the commencement of operations. If any
initial shares are redeemed by Mitchell Hutchins during the amortization period,
the redemption proceeds shall be reduced by the pro rata portion of unamortized
organizational expenses which the number of shares redeemed bears to the number
of initial shares then outstanding.
Currently, each Portfolio offers Class A, Class B, Class C and Class Y
shares. Each class represents interests in the assets of the applicable
Portfolio. The classes are identical except for differences in the sales charge
structures, ongoing service and distribution charges and certain transfer agency
and related expenses. In addition, Class B shares and all corresponding dividend
reinvested shares automatically convert to Class A shares approximately six
years after issuance. All classes of shares have equal voting privileges except
that Class A, Class B and Class C shares have exclusive voting rights with
respect to their service and/or distribution plan. There is no distribution plan
with respect to the Portfolios' Class Y shares.
The preparation of financial statements in accordance with generally accepted
accounting principles requires the Portfolios' management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. The following is a
summary of significant accounting policies:
Valuation of Investments--The net asset value of a Portfolio's shares
fluctuates and is determined separately for each class as of the close of
regular trading on the New York Stock Exchange (currently 4:00 p.m., Eastern
time) each Business Day. Each Portfolio's net asset value per share is
determined by dividing the value of the securities it holds (that is, the shares
of Underlying Funds), plus any cash or other assets, minus all liabilities, by
the total number of Portfolio shares outstanding. The value of each Underlying
Fund will be its net asset value at the time of computation.
Investment Transactions and Investment Income--Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions are calculated using the identified cost method. Dividend income is
recorded on the ex-dividend date.
Income, expenses (excluding class-specific expenses) and realized/unrealized
gains/losses are allocated proportionately to each class of shares based upon
the relative net asset value of outstanding shares (or the value of
dividend-eligible shares,
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
as appropriate) of each class at the beginning of the day (after adjusting
for current capital share activity of the respective classes). Class specific
expenses are charged directly to the applicable class of shares.
Dividends and Distributions--Dividends and distributions to shareholders are
recorded on the ex-dividend date. Dividends from net investment income and
distributions from realized capital gains are determined in accordance with
federal income tax regulations which may differ from generally accepted
accounting principles. These "book/tax" differences are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
the tax-basis treatment; temporary differences do not require reclassification.
INVESTMENT RISK
All the Portfolios hold Underlying Funds that invest in the 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 Portfolios hold Underlying Funds that invest 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 the interest rates will rise and as a result
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 or unwilling
to pay interest or repay principal on the bond. Some Underlying Funds may invest
in bonds rated below investment grade, which are subject to greater risks of
default or price fluctuation than investment grade bonds and are considered
predominantly speculative.
Some Underlying Funds are subject to the special risks of investing in
foreign equity securities or foreign bonds, which include possible adverse
political, social and economic developments abroad and differing characteristics
of foreign economics and markets. These risks are greater with respect to
securities of issuers located in emerging markets.
Each Underlying Fund (other than PaineWebber Cashfund, Inc.) 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.
INVESTMENT ADVISER AND ADMINISTRATOR
The Trust's board of trustees has approved an Investment Advisory and
Administration Contract ("Advisory Contract") with Mitchell Hutchins, under
which Mitchell Hutchins serves as investment adviser and administrator of the
Portfolios. In accordance with the Advisory Contract, each Portfolio pays
Mitchell Hutchins an investment advisory and administration fee, which is
computed and accrued daily and paid monthly, at the annual rate of 0.35% of each
Portfolio's average daily net asset. For the period February 24, 1998
(commencement of operations) through May 31, 1998, Mitchell Hutchins waived
their entire fee. In addition, Mitchell Hutchins reimbursed other expenses of
$24,284, $27,345, and $23,381, to the Aggressive Portfolio, Moderate Portfolio
and Conservative Portfolio, respectively, for the period February 24, 1998
(commencement of operations) through May 31, 1998.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DISTRIBUTION PLANS
Mitchell Hutchins is the distributor of each Portfolio's shares and has
appointed PaineWebber as the exclusive dealer for the sale of those shares.
Under separate plans of service and/or distribution pertaining to Class A, Class
B, and Class C shares, each Portfolio pays Mitchell Hutchins monthly service
fees at the annual rate of 0.25% of the average daily net assets of Class A,
Class B, and Class C shares. The Aggressive Portfolio and Moderate Portfolio
each pay Mitchell Hutchins monthly distribution fees at the annual rate of 0.75%
of the average daily net assets of Class B and Class C shares while the
Conservative Portfolio pays monthly distribution fees at the annual rate of
0.75% and 0.50% of the average daily net assets of Class B and Class C shares,
respectively. There is no distribution plan with respect to the Portfolios'
Class Y shares. At May 31, 1998 the Aggressive Portfolio, Moderate Portfolio and
Conservative Portfolio owed Mitchell Hutchins $3,095, $4,864 and $1,618,
respectively in service and distribution fees.
Mitchell Hutchins also receives the proceeds of the initial sales charges
paid by the shareholders upon the purchase of Class A shares and the contingent
deferred sales charges paid by the shareholders upon certain redemptions of
Class A, Class B, and Class C shares. Mitchell Hutchins has informed each
Portfolio that for the period ended May 31, 1998, it earned $50,393, $59,932 and
$13,243 in sales charges for the Aggressive Portfolio, Moderate Portfolio and
Conservative Portfolio, respectively.
TRANSFER AGENCY AND RELATED SERVICES FEES
PaineWebber provides transfer agency related services to each Portfolio
pursuant to a delegation of authority from PFPC, Inc., the Portfolios' transfer
agent, and is compensated for these services by PFPC Inc., not the Portfolios.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at May 31, 1998
was substantially the same as the cost of securities for financial statement
purposes.
At May 31, 1998, the components of net unrealized appreciation (depreciation)
were as follows:
<TABLE>
<CAPTION>
AGGRESSIVE MODERATE CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
---------- --------- ------------
<S> <C> <C> <C>
Gross appreciation (investments having
an excess of value over cost)..................... $ 12,779 $ 19,972 $4,974
Gross depreciation (investments having
an excess of cost over value)..................... (90,636) (63,164) (4,917)
Net appreciation (depreciation) of investments...... $ (77,857) $ (43,192) $ 57
</TABLE>
For the period February 24, 1998 (commencement of operations) through May 31,
1998, total aggregate purchases and sales of portfolio securities (Underlying
Funds), excluding short-term securities, were as follows:
<TABLE>
<CAPTION>
AGGRESSIVE MODERATE CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
---------- --------- ------------
<S> <C> <C> <C>
Purchases........................................... $5,107,225 $7,726,939 $2,713,841
Sales............................................... 163,165 647,194 180,291
</TABLE>
FEDERAL INCOME TAX STATUS
Each Portfolio intends to distribute substantially all of its taxable income
and to comply with the other requirements of the Internal Revenue Code to
qualify for treatment as a regulated investment company. Accordingly, no
provision for federal income taxes is required. In addition, by distributing
during each calendar year, substantially all of its net investment income and
capital gains, if any, each Portfolio intends not to be subject to a federal
excise tax.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
BENEFICIAL INTEREST
There is an unlimited amount of $0.001 par value shares of beneficial
interest authorized. Transactions in shares of beneficial interest were as
follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------------------- ------------------- ------------------- -----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ---------- ------- ---------- ------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AGGRESSIVE PORTFOLIO
FOR THE PERIOD FEBRUARY 24, 1998+
THROUGH MAY 31, 1998
Shares sold............ 145,085 $1,900,691 120,084 $1,581,786 182,148 $2,386,777 -- --
Shares repurchased..... (20,973) (272,878) (9,788) (129,843) (24,921) (325,400) -- --
------- ---------- ------- ---------- ------- ---------- ------- -------
Net increase........... 124,112 $1,627,813 110,296 $1,451,943 157,227 $2,061,377 -- --
======= ========== ======= ========== ======= ========== ======= =======
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------------------- ------------------- -------------------- -----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ---------- ------- ---------- ------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MODERATE PORTFOLIO
FOR THE PERIOD FEBRUARY 24, 1998+
THROUGH MAY 31, 1998
Shares sold............ 158,341 $2,042,155 244,089 $3,131,455 251,127 $3,252,346 155 $ 1,969
Shares repurchased..... (30,428) (393,832) (14,909) (190,950) (34,795) (454,665) -- --
Shares converted from
Class B to Class A.... 882 11,578 (882) (11,578) -- -- -- --
------- ---------- ------- ---------- ------- ---------- ------- -------
Net increase 128,795 $1,659,901 228,298 $2,928,927 216,332 $2,797,681 155 $ 1,969
======= ========== ======= ========== ======= ========== ======= =======
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------------------ ------------------- -------------------- -----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ---------- ------- ---------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSERVATIVE PORTFOLIO
FOR THE PERIOD FEBRUARY 24, 1998+
THROUGH MAY 31, 1998
Shares sold............ 40,074 $508,222 139,078 $1,765,172 37,473 $475,994 -- --
Shares repurchased..... -- -- (9,171) (117,062) -- -- -- --
------- ---------- ------- ---------- ------- -------- ------- -------
Net increase........... 40,074 $508,222 129,907 $1,648,110 37,473 $475,994 -- --
======= ========== ======= ========== ======= ======== ======= =======
</TABLE>
- ----------
+ Commencement of issuance of shares
15
<PAGE>
MITCHELL HUTCHINS AGGRESSIVE PORTFOLIO
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
period is presented below:
<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 issuance of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the period reported, reinvestment of all dividends and
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.
16
<PAGE>
MITCHELL HUTCHINS MODERATE PORTFOLIO
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
period is presented below:
<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 issuance of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the period reported, reinvestment of all dividends and
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.
17
<PAGE>
MITCHELL HUTCHINS CONSERVATIVE PORTFOLIO
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
period is presented below:
<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 issuance of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the period reported, reinvestment of all dividends and
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.
18
<PAGE>
MITCHELL HUTCHINS PORTFOLIOS
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Trustees and Shareholders
Mitchell Hutchins Portfolios
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of the Mitchell Hutchins Portfolios
(comprising, respectively, the Mitchell Hutchins Aggressive Portfolio, Mitchell
Hutchins Moderate Portfolio and Mitchell Hutchins Conservative Portfolio) as of
May 31, 1998, and the related statements of operations, changes in net assets
and financial highlights for the period February 24, 1998 (commencement of
operations) to May 31, 1998. These financial statements and financial highlights
are the responsibility of the Portfolios' management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of May 31, 1998, by correspondence with the custodian and
others. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios constituting the Mitchell Hutchins Portfolios as of
May 31, 1998, the results of their operations, the changes in their net assets,
and their financial highlights for the period February 24, 1998 to May 31, 1998,
in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
July 24, 1998
19
<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
================================================================================
TRUSTEES
E. Garrett Bewkes, Jr. Mary C. Farrell
Chairman
Meyer Feldberg
Margo N. Alexander
George W. Gowen
Richard Q. Armstrong
Frederic V. Malek
Richard R. Burt
Carl W. Schafer
PRINCIPAL OFFICERS
Margo N. Alexander T. Kirkham Barneby
President Vice President
Victoria E. Schonfeld Dennis McCauley
Vice President Vice President
Dianne E. O'Donnell Mark A. Tincher
Vice President and Secretary Vice President
Paul H. Schubert
Vice President and Treasurer
INVESTMENT ADVISER,
ADMINISTRATOR AND DISTRIBUTOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
This report is not to be used in conjunction with the offering of shares of the
Portfolios unless accompanied or preceded by an effective prospectus.
A prospectus containing more complete information for any of the Funds listed on
the back cover can be obtained from a PaineWebber investment executive or
corresponding firm. Read the prospectus carefully before investing.
<PAGE>
PaineWebber offers a family of 26 funds which encompass a diversified range of
investment goals.
BOND FUNDS
o High Income Fund
o Investment Grade Income Fund
o Low Duration U.S. Government Income Fund
o Strategic Income Fund
o U.S. Government Income Fund
TAX-FREE BOND FUNDS
o California Tax-Free Income Fund
o Municipal High Income Fund
o National Tax-Free Income Fund
o New York Tax-Free Income Fund
STOCK FUNDS
o Financial Services Growth Fund
o Growth Fund
o Growth and Income Fund
o Mid Cap Fund
o Small Cap Fund
o S&P500 Index Fund
o Utility Income Fund
ASSET ALLOCATION FUNDS
o Balanced Fund
o Tactical Allocation Fund
GLOBAL FUNDS
o Asia Pacific Growth Fund
o Emerging Markets Equity Fund
o Global Equity Fund
o Global Income Fund
MITCHELL HUTCHINS PORTFOLIOS
o Aggressive Portfolio
o Moderate Portfolio
o Conservative Portfolio
PAINEWEBBER MONEY MARKET FUND
[LOGO]
(C) PaineWebber Incorporated
Member SIPC
=================================
MITCHELL HUTCHINS
PORTFOLIOS
o AGGRESSIVE PORTFOLIO
o MODERATE PORTFOLIO
o CONSERVATIVE PORTFOLIO
ANNUAL REPORT
MAY 31, 1998
