As filed with the Securities and Exchange Commission on September 29, 1999
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. 3 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 4 [X]
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 SEPTEMBER 30, 1999, pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(1)
[ ] On pursuant to Rule 485(a)(1)
[ ] 75 days after filing pursuant to Rule 485(a)(2)
[ ] On pursuant to Rule 485(a)(2)
Title of Securities Being Registered: Class A, B, C and Y Shares of Beneficial
Interest.
<PAGE>
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Mitchell Hutchins Aggressive Portfolio
Mitchell Hutchins Moderate Portfolio
Mitchell Hutchins Conservative Portfolio
------------------
PROSPECTUS
SEPTEMBER 30, 1999
------------------
The funds offered in this prospectus are "funds of funds" -- which means that
they invest in a number of other PaineWebber mutual funds rather than investing
directly in stocks, bonds and other investments. This prospectus offers four
classes of shares in each fund -- Class A, Class B, Class C and Class Y. Each
class has different sales charges and ongoing expenses. You can choose the class
that is best for you based on how much you plan to invest and how long you plan
to hold your fund shares. Class Y shares are available only to certain types of
investors.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any fund's shares or determined whether this prospectus
is complete or accurate. To state otherwise is a crime.
<PAGE>
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Mitchell Hutchins Aggressive Portfolio
Moderate Portfolio Conservative Portfolio
Contents
THE FUNDS
-----------------------------------------------------------
What every investor
should know about
the funds
3 Mitchell Hutchins Aggressive Portfolio
6 Mitchell Hutchins Moderate Portfolio
9 Mitchell Hutchins Conservative Portfolio
9 More About Risks and Investment Strategies
YOUR INVESTMENT
-----------------------------------------------------------
Information for
managing your fund
account
14 Managing Your Fund Account
-- Flexible Pricing
-- Buying Shares
-- Selling Shares
-- Exchanging Shares
-- Pricing and Valuation
ADDITIONAL INFORMATION
-----------------------------------------------------------
Additional important
information about
the funds
20 Management
21 Dividends and Taxes
22 Financial Highlights
-----------------------------------------------------------
Where to learn more
about PaineWebber
mutual funds
Back cover
The funds are not complete or
balanced investment programs
- --------------------------------------------------------------------------------
Prospectus Page 2
<PAGE>
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Mitchell Hutchins Aggressive Portfolio
Mitchell Hutchins Aggressive Portfolio
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- --------------------------------------------------------------------------------
FUND OBJECTIVE
Long-term growth of capital.
PRINCIPAL INVESTMENT STRATEGIES
The fund is designed for investors in their accumulation years, who can accept
equity market volatility in return for potentially higher returns. As a result,
the fund invests primarily in a combination of PaineWebber equity mutual funds
that have a long-term growth orientation. It also invests, to a lesser extent,
in PaineWebber bond and money market mutual funds. These underlying funds, in
turn, invest in a wide range of securities. Certain underlying funds invest in
stocks and bonds of foreign issuers.
The fund's board has established target allocations for the fund's assets of 80%
to equity funds and 20% to bond and money market funds. The fund may deviate
from these target allocations within ranges of 10% above or below the target
amount. The board also has established the following maximum and minimum
percentages for investment of the fund's assets in specific underlying funds:
UNDERLYING FUND RANGE
- -------------- -----
EQUITY FUNDS
PaineWebber Global Equity Fund............ 0%-30%
PaineWebber Growth Fund................... 0%-10%
PaineWebber Growth and Income Fund........ 20%-40%
PaineWebber Small Cap Fund................ 20%-40%
BOND FUNDS
PaineWebber Global Income Fund............ 0%-10%
PaineWebber High Income Fund.............. 0%-20%
PaineWebber Investment Grade Income Fund.. 0%-10%
PAINEWEBBER CASHFUND........................ 0%-20%
Subject to these percentage requirements, the fund's investment adviser,
Mitchell Hutchins Asset Management Inc., allocates the fund's investments among
the underlying funds using fundamental and quantitative analysis, its outlook
for the economy and financial markets and the relative performance of the
underlying funds.
PRINCIPAL RISKS
An investment in the fund is not guaranteed; you may lose money by investing in
the fund.
The fund is subject to all the risks of the underlying funds it holds and its
performance will directly reflect the investment performance of those funds. In
addition, the fund will bear both its own operating expenses and its pro rata
share of the operating expenses of the underlying funds. Common stocks, which
are the main type of investment for most of the underlying funds, generally
fluctuate in value more than other investments.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies." In particular,
see the following headings:
o Fund of Funds Risk
o Equity Risk
o Foreign Securities Risk
o Small Cap Companies Risk
o Interest Rate Risk
o Credit Risk
o Derivatives Risk
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THOSE REPORTS).
The fund commenced operations on February 24, 1998. As a result, it does not
have performance information of at least one calendar year to include in a bar
chart or table reflecting average annual returns.
- --------------------------------------------------------------------------------
Prospectus Page 3
<PAGE>
- --------------------------------------------------------------------------------
Mitchell Hutchins Aggressive Portfolio
EXPENSES AND FEE TABLES
- --------------------------------------------------------------------------------
FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investment)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a % of offering price) .............................................. 4.5% None None None
Maximum Contingent Deferred Sales Charge (Load) (CDSC)
(as a % of offering price) .............................................. None 5% 1% None
Exchange Fee.............................................................. None None None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- --------
Management Fees........................................................... 0.35% 0.35% 0.35% 0.35%
Distribution and/or Service (12b-1) Fees.................................. 0.25 1.00 1.00 0.00
Other Expenses............................................................ 3.94 3.94 3.94 3.94
----- ----- ----- -----
Total Annual Fund Operating Expenses...................................... 4.54% 5.29% 5.29% 4.29%
----- ----- ----- -----
Expense Reimbursements and Management Fee Waivers*........................ 4.29 4.29 4.29 4.29
----- ----- ----- -----
Net Expenses*............................................................. 0.25% 1.00% 1.00% 0.00%
===== ===== ===== =====
</TABLE>
* Mitchell Hutchins has agreed to waive its 0.35% management fee through the
end of the fund's current fiscal year. In addition, the fund has entered into
special servicing agreements with the underlying funds and Mitchell Hutchins
under which the underlying funds reimburse the fund for certain administrative
expenses and Mitchell Hutchins reimburses the fund for any remaining
administrative expenses through the end of the current fiscal year. These
agreements are reviewed annually by the fund and the underlying funds pursuant
to an SEC exemptive order.
EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same, except for the
one year period when the fund's expenses are lower due to Mitchell Hutchins' fee
waiver and the special servicing agreements with the underlying funds and
Mitchell Hutchins. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A....................................................... $ 474 $1,387 $2,308 $4,648
Class B (assuming sale of all shares at end of period)........ 602 1,499 2,490 4,712
Class B (assuming no sale of shares).......................... 102 1,199 2,290 4,712
Class C (assuming sale of all shares at end of period)........ 202 1,199 2,290 4,989
Class C (assuming no sale of shares).......................... 102 1,199 2,290 4,989
Class Y....................................................... 0 907 1,828 4,186
</TABLE>
- --------------------------------------------------------------------------------
Prospectus Page 4
<PAGE>
- --------------------------------------------------------------------------------
Mitchell Hutchins Moderate Portfolio
Mitchell Hutchins Moderate Portfolio
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- --------------------------------------------------------------------------------
FUND OBJECTIVE
Total return.
PRINCIPAL INVESTMENT STRATEGIES
The fund is designed for investors who seek capital appreciation in conjunction
with income. As a result, the fund invests in a combination of long-term,
growth-oriented equity mutual funds and income-producing bond mutual funds.
These underlying funds, in turn, invest in a wide range of securities. Certain
underlying funds invest in stocks and bonds of foreign issuers.
The fund's board has established target allocations for the fund's assets of 60%
to equity funds and 40% to bond and money market funds. The fund may deviate
from these target allocations within ranges of 10% above or below the target
amount. The board also has established the following maximum and minimum
percentages for investment of the fund's assets in specific underlying funds:
UNDERLYING FUND RANGE
- -------------- -----
PaineWebber Global Equity Fund............ 0%-20%
PaineWebber Growth Fund................... 0%-20%
PaineWebber Growth and Income Fund........ 20%-40%
PaineWebber Small Cap Fund................ 0%-20%
BOND FUNDS
PaineWebber Global Income Fund............ 0%-20%
PaineWebber High Income Fund.............. 0%-10%
PaineWebber Investment Grade Income Fund.. 0%-20%
PaineWebber Low Duration U.S. Government
Income Fund ............................. 0%-10%
PaineWebber U.S. Government Income Fund 0%-20%
PAINEWEBBER CASHFUND........................ 0%-20%
Subject to these percentage requirements, the fund's investment adviser,
Mitchell Hutchins Asset Management Inc., allocates the fund's investments among
the underlying funds using fundamental and quantitative analysis, its outlook
for the economy and financial markets and the relative performance of the
underlying funds.
PRINCIPAL RISKS
An investment in the fund is not guaranteed; you may lose money by investing in
the fund.
The fund is subject to all the risks of the underlying funds it holds and its
performance will directly reflect the investment performance of those funds. In
addition, the fund will bear both its own operating expenses and its pro rata
share of the operating expenses of the underlying funds. Because its underlying
funds invest in both common stocks and bonds, the fund is subject to both equity
risk and interest rate risk. Common stocks generally fluctuate in value more
than other investments. The value of bonds generally will fall when interest
rates rise.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies." In particular,
see the following headings:
o Fund of Funds Risk
o Equity Risk
o Interest Rate Risk
o Foreign Securities Risk
o Small Cap Companies Risk
o Credit Risk
o Derivatives Risk
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THOSE REPORTS).
The fund commenced operations on February 24, 1998. As a result, it does not
have performance information of at least one calendar year to include in a bar
chart or table reflecting average annual returns.
- --------------------------------------------------------------------------------
Prospectus Page 5
<PAGE>
- --------------------------------------------------------------------------------
Mitchell Hutchins Moderate Portfolio
EXPENSES AND FEE TABLES
- --------------------------------------------------------------------------------
FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investment)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a % of offering price) .............................................. 4.5% None None None
Maximum Contingent Deferred Sales Charge (Load) (CDSC)
(as a % of offering price) .............................................. None 5% 1% None
Exchange Fee.............................................................. None None None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Management Fees........................................................... 0.35% 0.35% 0.35% 0.35%
Distribution and/or Service (12b-1) Fees.................................. 0.25 1.00 1.00 0.00
Other Expenses............................................................ 2.06 2.06 2.06 2.06
----- ----- ----- -----
Total Annual Fund Operating Expenses...................................... 2.66% 3.41% 3.41% 2.41%
----- ----- ----- -----
Expense Reimbursement*.................................................... 2.41 2.41 2.41 2.41
----- ----- ----- -----
Net Expenses*............................................................. 0.25% 1.00% 1.00% 0.00%
===== ===== ===== =====
</TABLE>
* Mitchell Hutchins has agreed to waive its 0.35% management fee through the
end of the fund's current fiscal year. In addition, the fund has entered into
special servicing agreements with the underlying funds and Mitchell Hutchins
under which the underlying funds reimburse the fund for certain administrative
expenses and Mitchell Hutchins reimburses the fund for any remaining
administrative expenses through the end of the current fiscal year. These
agreements are reviewed annually by the fund and the underlying funds pursuant
to an SEC exemptive order.
EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same, except for the
one year period when the fund's expenses are lower due to Mitchell Hutchins' fee
waiver and the special servicing agreements with the underlying funds and
Mitchell Hutchins. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A ........................................................ $474 $1,019 $1,590 $3,137
Class B (assuming sale of all shares at end of period).......... 602 1,123 1,766 3,202
Class B (assuming no sale of shares)............................ 102 823 1,566 3,202
Class C (assuming sale of all shares at end of period).......... 202 823 1,566 3,532
Class C (assuming no sale of shares)............................ 102 823 1,566 3,532
Class Y ........................................................ 0 519 1,066 2,561
</TABLE>
- --------------------------------------------------------------------------------
Prospectus Page 6
<PAGE>
- --------------------------------------------------------------------------------
Mitchell Hutchins Conservative Portfolio
Mitchell Hutchins Conservative Portfolio
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
- --------------------------------------------------------------------------------
FUND OBJECTIVE
Income and, secondarily, growth of capital.
PRINCIPAL INVESTMENT STRATEGIES
The fund is designed for 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. As a result, the fund invests primarily
in income-producing bond mutual funds. It also invests, to a lesser extent, in
equity mutual funds to provide growth of capital. These underlying funds, in
turn, invest in a wide range of securities. Several underlying funds invest
significantly in mortgage-backed securities. Certain underlying funds invest in
stocks and bonds of foreign issuers.
The fund's board has established target allocations for the fund's assets of 80%
to bond and money market funds and 20% to equity funds. The fund may deviate
from these target allocations within ranges of 10% above or below the target
amount. The board also has established the following maximum and minimum
percentages for investment of the fund's assets in specific underlying funds:
UNDERLYING FUND RANGE
- -------------- -----
EQUITY FUNDS
PaineWebber Growth and Income Fund........ 10%-30%
BOND FUNDS
PaineWebber Global Income Fund............ 5%-15%
PaineWebber Investment Grade Income Fund.. 0%-20%
PaineWebber Low Duration U.S. Government
Income Fund ............................. 20%-40%
PaineWebber U.S. Government Income
Fund .................................... 20%-40%
PAINEWEBBER CASHFUND........................ 0%-20%
Subject to these percentage requirements, the fund's investment adviser,
Mitchell Hutchins Asset Management Inc., allocates the fund's investments among
the underlying funds using fundamental and quantitative analysis, its outlook
for the economy and financial markets and the relative performance of the
underlying funds.
PRINCIPAL RISKS
An investment in the fund is not guaranteed; you may lose money by investing in
the fund.
The fund is subject to all the risks of the underlying funds it holds and its
performance will directly reflect the investment performance of those funds. In
addition, the fund will bear both its own operating expenses and its pro rata
share of the operating expenses of the underlying funds. The value of bonds
generally will fall when interest rates rise. Mortgage-backed securities are
subject to prepayment risk, which means that the underlying mortgages may be
paid earlier or later than expected. The underlying fund may have to reinvest
the proceeds of a prepayment that occur faster than expected at lower interest
rates. The market value of mortgage-backed securities with prepayments that
occur more slowly than expected may fall, adversely affecting the fund's
performance. The fund is also subject to credit risk in that the issuers of the
securities held by underlying funds may not make principal or interest payments
when due.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies." In particular,
see the following headings:
o Fund of Funds Risk
o Interest Rate Risk
o Credit Risk
o Prepayment Risk
o Equity Risk
o Foreign Securities Risk
o Derivatives Risk
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THOSE REPORTS).
The fund commenced operations on February 24, 1998. As a result, it does not
have performance information of at least one calendar year to include in a bar
chart or table reflecting average annual returns.
- --------------------------------------------------------------------------------
Prospectus Page 7
<PAGE>
- --------------------------------------------------------------------------------
Mitchell Hutchins Conservative Portfolio
EXPENSES AND FEE TABLES
- --------------------------------------------------------------------------------
FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investment)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a % of offering price) .............................................. 4% None None None
Maximum Contingent Deferred Sales Charge (Load) (CDSC)
(as a % of offering price) .............................................. None 5% 0.75%
None......................................................................
Exchange Fee.............................................................. None None None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
Management Fees........................................................... 0.35% 0.35% 0.35% 0.35%
Distribution and/or Service (12b-1) Fees.................................. 0.25 1.00 0.75 0.00
Other Expenses............................................................ 5.45 5.45 5.45 5.45
----- ----- ----- -----
Total Annual Fund Operating Expenses...................................... 6.05% 6.80% 6.55% 5.80%
----- ----- ----- -----
Expense Reimbursement*.................................................... 5.80 5.80 5.80 5.80
----- ----- ----- -----
Net Expenses*............................................................. 0.25% 1.00% 0.75% 0.00%
===== ===== ===== =====
</TABLE>
* Mitchell Hutchins has agreed to waive its 0.35% management fee through the
end of the fund's current fiscal year. In addition, the fund has entered into
special servicing agreements with the underlying funds and Mitchell Hutchins
under which the underlying funds reimburse the fund for certain administrative
expenses and Mitchell Hutchins reimburses the fund for any remaining
administrative expenses through the end of the current fiscal year. These
agreements are reviewed annually by the fund and the underlying funds pursuant
to an SEC exemptive order.
EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same, except for the
one year period when the fund's expenses are lower due to Mitchell Hutchins' fee
waiver and the special servicing agreements with the underlying funds and
Mitchell Hutchins. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A ............................................................ $ 425 $1,629 $2,807 $5,648
Class B (assuming sale of all shares at end of period).............. 602 1,791 3,031 5,733
Class B (assuming no sale of shares)................................ 102 1,491 2,831 5,733
Class C (assuming sale of all shares at end of period).............. 152 1,421 2,724 5,810
Class C (assuming no sale of shares)................................ 77 1,421 2,724 5,810
Class Y ............................................................ 0 1,208 2,397 5,288
</TABLE>
- --------------------------------------------------------------------------------
Prospectus Page 8
<PAGE>
- --------------------------------------------------------------------------------
Mitchell Hutchins Aggressive Portfolio
Moderate Portfolio Conservative Portfolio
MORE ABOUT RISKS
AND INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
PRINCIPAL RISKS OF INVESTING IN THE FUNDS
The funds are a type of investment company known as a "fund of funds" -- a term
that means a fund that invests in other mutual funds instead of investing
directly in stocks, bonds and other investments. A fund that invests in other
mutual funds involves the special risks described below.
FUND OF FUNDS RISK
o Your investment in a fund of funds is subject to all the risks of an
investment directly in the underlying funds it holds. These risks are
summarized below under "Principal Risks of Investing in the Underlying Funds."
o A fund of funds' performance directly reflects the investment performance of
the underlying funds it holds. Its performance thus depends both on the
allocation of its assets among the various underlying funds and their ability
to meet their investment objectives. Mitchell Hutchins may not accurately
assess the attractiveness or risk potential of particular underlying funds,
asset classes, or investment styles.
o Each fund invests in a limited number of underlying funds and may invest more
than 25% of its assets in a single underlying fund. Therefore, the performance
of a single underlying fund can have a significant effect on the performance
of a fund and the price of its shares. As with any mutual fund, there is no
assurance that any underlying fund will achieve its investment objective.
o Each underlying fund pays its own management fees and also pays other
operating expenses. An investor in a fund of funds will indirectly pay both
that fund's management fee and other expenses and the management fees and
other expenses of the underlying funds it holds.
o "One underlying fund may purchase the same securities that another underlying
fund sells. The fund of funds that invests in both underlying funds would
indirectly bear the costs of these trades without accomplishing any investment
purpose.
o An investor may receive taxable gains from both a fund of funds' transactions
in shares of the underlying funds and from the underlying funds' portfolio
transactions.
MORE INFORMATION ABOUT THE UNDERLYING FUNDS
The following is a concise description of the investment objectives and policies
and the principal risks of the underlying funds. The Statement of Additional
Information ("SAI") includes more information about their investment policies
and risks. Those policies and risks also are described more fully in the
prospectus of each underlying fund. Except where noted otherwise, Mitchell
Hutchins is the investment adviser for each underlying fund. No offer is made in
this prospectus of the shares of any underlying fund.
GLOBAL EQUITY FUND'S investment objective is long-term growth of capital. It
invests primarily in stocks of companies in the U.S. and in foreign countries
that are represented in the Morgan Stanley Capital International Europe,
Australia and Far East Index. Its principal risks are equity risk, sector
allocation risk, foreign securities risk, emerging markets risk, interest rate
risk, credit risk and derivatives risk.
Mitchell Hutchins is responsible for allocating Global Equity Fund's investments
between U.S. and foreign securities markets and for the management of its U.S.
investments. The fund's foreign investments are managed by Invista Capital
Management, Inc. under a sub-advisory contract.
GLOBAL INCOME FUND'S primary investment objective is high current income
consistent with prudent investment risk; capital appreciation is a secondary
objective. It invests primarily in high quality bonds of governmental and
private issuers in the U.S. and developed foreign countries. It invests, to a
lesser extent, in lower quality bonds, including bonds of issuers in emerging
markets. Its principal risks are interest rate risk, foreign securities risk,
sovereign risk, sector allocation risk, emerging markets risk, credit risk,
non-diversified status risk, prepayment risk and derivatives risk.
Global Income Fund is a non-diversified fund, as defined in the Investment
Company Act of 1940, and is subject to greater risk than funds that have a
broader range of investments.
- --------------------------------------------------------------------------------
Prospectus Page 9
<PAGE>
- --------------------------------------------------------------------------------
Mitchell Hutchins Aggressive Portfolio
Moderate Portfolio Conservative Portfolio
GROWTH FUND'S investment objective is long-term capital appreciation. It invests
primarily in stocks of companies that Mitchell Hutchins believes have
substantial potential for capital growth. It may invest in companies of any
size. Its primary risks are equity risk and foreign securities risk.
GROWTH AND INCOME FUND'S investment objective is current income and capital
growth. It invests primarily in stocks of companies that Mitchell Hutchins
believes have the potential for rapid earnings growth and also invests, to a
lesser extent, in income-producing securities, which may include dividend-paying
stocks, bonds and money market instruments. Its primary risks are equity risk,
interest rate risk, credit risk and foreign securities risk.
HIGH INCOME FUND'S investment objective is high income. It invests primarily in
a diversified range of high yield U.S. and foreign corporate bonds (sometimes
called "junk bonds"). High Income Fund's principal risks are credit risk,
interest rate risk, foreign securities risk, emerging markets risk and equity
risk.
INVESTMENT GRADE INCOME FUND'S investment objective is high current income
consistent with the preservation of capital and liquidity. It invests primarily
in a diversified range of investment grade bonds, including U.S. government
bonds, U.S. and foreign corporate bonds and bonds that are backed by mortgages.
Its principal risks are interest rate risk, credit risk, prepayment risk,
foreign securities risk and derivatives risk.
LOW DURATION U.S. GOVERNMENT INCOME FUND'S investment objective is the highest
level of income consistent with the preservation of capital and low volatility
of net asset value. It invests primarily in U.S. government bonds, including
bonds that are backed by mortgages. It concentrates at least 25% of its total
assets in U.S. government and privately issued mortgage- and asset-backed
securities. The fund normally limits its portfolio "duration" to between one and
three years. "Duration" is a measure of the fund's exposure to interest rate
risk. Its principal risks are interest rate risk, prepayment risk, concentration
risk, leverage risk, credit risk and derivatives risk.
SMALL CAP FUND'S investment objective is long-term capital appreciation. It
invests primarily in stocks of small capitalization ("small cap") companies,
which are defined as companies that have market capitalizations of up to $1.5
billion. Its primary risks are small cap companies risk, equity risk, foreign
securities risk, interest rate risk and credit risk.
U.S. GOVERNMENT INCOME FUND'S investment objective is high income consistent
with the preservation of capital and liquidity. It invests primarily in U.S.
government bonds, including bonds that are backed by mortgages. It concentrates
at least 25% of its total assets in U.S. government and privately issued
mortgage- and asset-backed securities. Its principal risks are interest rate
risk, prepayment risk, concentration risk, leverage risk, credit risk and
derivatives risk.
CASHFUND is a money market fund with an investment objective of current income,
stability of principal and high liquidity. It seeks to maintain a stable price
of $1.00 per share and invests in a diversified portfolio of high quality money
market instruments of governmental and private issuers. Its principal risks are
credit risk, interest rate risk and foreign securities risk.
PRINCIPAL RISKS OF INVESTING IN THE UNDERLYING FUNDS
As noted above, your investment in a fund of funds is subject to all the risks
of a direct investment in the underlying funds. The main risks of investing in
the underlying funds are described below. Not all of these risks apply to each
fund. You can find a list of the main risks that apply to a particular
underlying fund by looking under the heading for that fund.
Other risks of investing in a fund, along with further detail about some of the
risks described below, are discussed in the funds' SAI. Information on how you
can obtain the SAI is on the back cover of this prospectus.
CONCENTRATION RISK. This means that a fund normally invests at least 25% of its
total assets in a single industry group. Concentration increases a fund's
exposure to that industry group and might cause the fund's net asset value to
change more than it otherwise would.
CREDIT RISK. Credit risk is the risk that the issuer of a bond will not make
principal or interest payments when they are due. Even if an issuer does not
default on a payment, a bond's value may decline if the market believes that the
issuer has become less able, or less willing, to make payments on time. Even
high quality bonds are subject to some credit risk. However, credit risk is
higher for lower quality bonds. Bonds that are not investment grade involve high
credit risk and are considered speculative. Lower quality bonds may fluctuate in
value more than higher quality bonds and, during periods of market volatility,
may be more difficult to sell at the time and price a fund desires.
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DERIVATIVES RISK. The value of "derivatives" - so-called because their value
"derives" from the value of an underlying asset, reference rate or index - may
rise or fall more rapidly than other investments. For some derivatives, it is
possible for a fund to lose more than the amount it invested in the derivative.
Options, futures contracts and forward currency contracts are examples of
derivatives. If a fund uses derivatives to adjust or "hedge" the overall risk of
its portfolio, it is possible that the hedge will not succeed. This may happen
for various reasons, including unexpected changes in the value of the
derivatives that are not matched by opposite changes in the value of the rest of
the fund's portfolio.
EMERGING MARKETS RISK. Securities of issuers located in emerging market
countries are subject to all of the risks of other foreign securities (see
below). However, the level of those risks often is higher due to the fact that
political, legal and economic systems in emerging market countries may be less
fully developed and less stable than those in developed countries. Emerging
market securities also may be subject to additional risks, such as lower
liquidity and larger changes in value.
EQUITY RISK. The prices of common stocks and other equity securities generally
fluctuate more than those of other investments. They reflect changes in the
issuing company's financial condition and changes in the overall market. A fund
may lose a substantial part, or even all, of its investment in a company's
stock.
FOREIGN SECURITIES RISK. Foreign securities involve risks that normally are not
associated with securities of U.S. issuers. These include risks relating to
political, social and economic developments abroad and differences between U.S.
and foreign regulatory requirements and market practices. When securities are
denominated in foreign currencies, they also are subject to the risk that the
value of the foreign currency will fall in relation to the U.S. dollar. Currency
exchange rates can be volatile and can be affected by, among other factors, the
general economics of a country, the actions of the U.S. and foreign governments
or central banks, the imposition of currency controls and speculation.
INTEREST RATE RISK. The value of bonds can be expected to fall when interest
rates rise and to rise when interest rates fall. Interest rate risk is the risk
that interest rates will rise, so that the value of a fund's investments in
bonds will fall. Because interest rate risk is the primary risk presented by
U.S. government and other very high quality bonds, changes in interest rates may
actually have a larger effect on the value of those bonds than on lower quality
bonds.
LEVERAGE RISK. Leverage involves increasing the total assets in which a fund can
invest beyond the level of the fund's net assets. Because leverage increases the
amount of a fund's assets, it can magnify the effect on the fund of changes in
market values. As a result, while leverage can increase a fund's income and
potential for gain. It also can increase expenses and the risk of loss.
NON-DIVERSIFIED STATUS RISK. A non-diversified fund is not subject to certain
limitations on its ability to invest more than 5% of its total assets in
securities of a single issuer. When a fund holds a large position in the
securities of one issuer, changes in the financial condition or in the market's
assessment of that issuer may cause larger changes in the fund's total return
and in the price of its shares than if the fund held only a smaller position.
PREPAYMENT RISK. Payments on bonds that are backed by mortgage loans or other
similar assets may be received earlier or later than expected due to changes in
the rate at which the underlying loans are prepaid. Faster prepayments often
happen when market interest rates are falling. As a result, a fund may need to
reinvest these early payments at those lower interest rates, thus reducing its
income. Conversely, when interest rates rise, prepayments may happen more
slowly, causing the underlying loans to be outstanding for a longer time. This
can cause the market value of the security to fall because the market may view
its interest rate as too low for a longer term investment.
SECTOR ALLOCATION RISK. Mitchell Hutchins or a sub-adviser of an underlying fund
may not be successful in choosing the best allocation among geographic or other
market sectors. A fund that allocates its assets among market sectors is more
dependent on its investment adviser's or sub-adviser's ability to successfully
assess the relative values in each sector than are funds that do not do so.
SMALL CAP COMPANIES RISK. Securities of small cap companies generally involve
greater risk than securities of larger companies because small cap companies may
be more vulnerable to adverse business or economic developments. Small cap
companies also may have limited product lines, markets or financial resources,
and may be dependent on a relatively small management group. Securities of small
cap companies may be less liquid and more volatile than securities of larger
companies or the market averages in general. In addition, small cap
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Mitchell Hutchins Aggressive Portfolio
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companies may not be well-known to the investing public, may not have
institutional ownership and may have only cyclical, static or moderate growth
prospects.
SOVEREIGN RISK. Investments in foreign government bonds involve special risks
because the investors may have limited legal recourse in the event of default.
Political conditions, especially a country's willingness to meet the terms of
its debt obligations, can be of considerable significance.
ADDITIONAL RISKS
YEAR 2000 RISK. The funds could be adversely affected by problems relating to
the inability of computer systems used by Mitchell Hutchins and the funds' other
service providers to recognize the year 2000. While year 2000-related computer
problems could have a negative effect on the funds, Mitchell Hutchins is working
to avoid these problems with respect to its own computer systems and to obtain
assurances from service providers that they are taking similar steps.
Similarly, the companies in which the funds invest and trading systems used by
the funds could be adversely affected by this issue. The ability of a company or
trading system to respond successfully to the issue requires both technological
sophistication and diligence, and there can be no assurance that any steps taken
will be sufficient to avoid an adverse impact on the funds. This risk may be
greater with respect to trading systems in foreign countries.
ADDITIONAL INFORMATION ON PRINCIPAL INVESTMENT STRATEGIES
Mitchell Hutchins' team of three chief investment officers employs a two-step
approach to allocating each fund's investments among the underlying funds.
First, the team allocates a fund's assets among the following five basic asset
categories:
o U.S. equity;
o global equity;
o bond;
o global bond; and
o money market (the funds may invest in a money market fund or directly in
money market instruments).
The team bases its category allocation decisions in part on Mitchell Hutchins'
quantitative models, which include an analysis of price-to-earnings ratios;
inflation rates; real interest rates; and the yield curves in the United States
and overseas. Analysis of these variables generates
o estimated returns of equities in four major stock markets (the United States,
the United Kingdom, Germany and Japan) that represent more than 70% of
global market capitalization;
o estimated changes of bond yields in the U.S. bond market and global bond
markets; and
o the estimated spreads between these yields.
Second, the team allocates a fund's investments among the underlying funds
within each of the five asset categories. For example, in deciding how to
allocate investments among the underlying funds that invest in U.S. bonds, the
team 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 the relative valuations of different sectors of the equity market (for
example, large capitalization or small capitalization) and the risks of these
different sectors in deciding the appropriate allocation among U.S. equity
funds.
In addition to using quantitative analysis, team members also rely on their own
judgment and that of the underlying funds' portfolio managers in making
investment decisions for the funds. The team normally considers reallocating
fund investments at least quarterly, but may change allocations more frequently
if market conditions warrant.
The equity fund/bond fund target allocations and the investment percentage
ranges for each fund are based on Mitchell Hutchins' expectation that the
selected underlying funds, in combination, will be appropriate to achieve the
fund's investment objective. If appreciation or depreciation in the value of an
underlying fund's shares causes the percentage of a fund's assets invested in
that underlying fund or the fund's equity fund/bond fund allocation to exceed or
be less than the applicable investment range, Mitchell Hutchins will consider
whether to reallocate the assets of the fund, but is not required to do so. The
underlying funds, the equity fund/bond fund targets allocations and the
investment percentage ranges for each fund may be changed by the board at any
time.
ADDITIONAL INVESTMENT STRATEGIES
DEFENSIVE POSITIONS; CASH RESERVES. In order to protect itself from adverse
market conditions, a fund may take a temporary defensive position that is
different from its normal investment strategy. This means that the fund may
temporarily invest a larger-than-normal part, or even all, of its assets in
Cashfund or in cash or money market
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Mitchell Hutchins Aggressive Portfolio
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instruments. Since these investments provide relatively low income, a defensive
position may not be consistent with achieving a fund's investment objective.
Cashfund invests all its assets in money market instruments. Each other
underlying fund may invest up to 35% of its total assets in cash or money market
instruments as a cash reserve for liquidity or, in the case of certain
underlying funds, as part of its ordinary investment strategy.
PORTFOLIO TURNOVER. Although the funds do not expect to engage in frequent
trading (high portfolio turnover), most of the underlying funds may engage in
frequent trading in order to achieve their investment objectives.
Frequent trading may increase the portion of an underlying fund's capital gains
that are recognized for tax purposes in any given year. This may increase the
fund's taxable dividends for that year. Frequent trading also may increase the
portion of a fund's realized capital gains that are considered "short-term" for
tax purposes. Shareholders will pay higher taxes on dividends that represent
short-term gains than they would pay on dividends that represent long-term
gains. Frequent trading also may result in higher underlying fund expenses due
to transaction costs.
The underlying funds do not restrict the frequency of trading in order to limit
expenses or the tax effect that the fund's dividends may have on shareholders.
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MANAGING YOUR FUND ACCOUNT
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FLEXIBLE PRICING
The funds offer four classes of shares - Class A, Class B, Class C and Class Y.
Each class has different sales charges and ongoing expenses. You can choose the
class that is best for you, based on how much you plan to invest and how long
you plan to hold your fund investment. Class Y shares are only available to
certain types of investors.
Each fund has adopted a plan under rule 12b-1 for its Class A, Class B and Class
C shares that allows it to pay service and (for Class B and Class C shares)
distribution fees for the sale of its shares and services provided to
shareholders. Because the 12b-1 distribution fees for Class B and Class C shares
are paid out of a fund's assets on an ongoing basis, over time they will
increase the cost of your investment and may cost you more than if you paid a
front-end sales charge.
CLASS A SHARES
Class A shares have a front-end sales charge that is included in the offering
price of the Class A shares. This sales charge is not invested in the fund.
Class A shares pay an annual 12b-1 service fee of 0.25% of average net assets,
but they pay no 12b-1 distribution fees. The ongoing expenses for Class A shares
are lower than for Class B and Class C shares.
The Class A sales charges for each fund are described in the following table.
<TABLE>
<CAPTION>
CLASS A SALES CHARGES FOR: AGGRESSIVE PORTFOLIO AND MODERATE PORTFOLIO
SALES CHARGE AS A PERCENTAGE OF: DISCOUNT TO SELECTED DEALERS AS
AMOUNT OF INVESTMENT OFFERING PRICE NET AMOUNT INVESTED PERCENTAGE OF 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)
<CAPTION>
CLASS A SALES CHARGES FOR: CONSERVATIVE PORTFOLIO
SALES CHARGE AS A PERCENTAGE OF: DISCOUNT TO SELECTED DEALERS AS
AMOUNT OF INVESTMENT OFFERING PRICE NET AMOUNT INVESTED PERCENTAGE OF 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>
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(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 dividends are not subject
to this 1% charge. Withdrawals in the first year after purchase of up to 12%
of the value of the fund account under the funds' Systematic Withdrawal Plan
are not subject to this charge. (2) Mitchell Hutchins pays 1% to
PaineWebber.
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SALES CHARGE REDUCTIONS AND WAIVERS. You may qualify for a lower sales charge if
you already own Class A shares of a PaineWebber mutual fund. You can combine the
value of Class A shares that you own in other PaineWebber funds and the purchase
amount of the Class A shares of the PaineWebber fund that you are buying.
You may also qualify for a lower sales charge if you combine your purchases with
those of:
o your spouse, parents or children under age 21;
o your Individual Retirement Accounts (IRAs);
o certain employee benefit plans, including 401(k) plans;
o a company that you control;
o a trust that you created;
o Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts created
by you or by a group of investors for your children; or
o accounts with the same adviser.
You may qualify for a complete waiver of the sales charge if you:
o Are an employee of PaineWebber or its affiliates or the spouse, parent or
child under age 21 of a PaineWebber employee;
o Buy these shares through a PaineWebber Financial Advisor who was formerly
employed as an investment executive with a competing brokerage firm that was
registered as a broker-dealer with the SEC, and
-- you were the Financial Advisor's client at the competing brokerage firm;
-- within 90 days of buying shares in a fund, you sell shares of one or more
mutual funds that were principally underwritten by the competing
brokerage firm or its affiliates, and you either paid a sales charge to
buy those shares, pay a contingent deferred sales charge when selling
them or held those shares until the contingent deferred sales charge was
waived; and
-- you purchase an amount that does not exceed the total amount of money you
received from the sale of the other mutual fund;
o "Acquire these shares through the reinvestment of dividends of a PaineWebber
unit investment trust;
o Are a 401(k) or 403(b) qualified employee benefit plan with 50 or more
eligible employees in the plan or at least $1 million in assets; or
o Are a participant in the PaineWebber Members Onlysm Program. 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.
o Acquire fund shares through a PaineWebber InsightOne brokerage account.
Note: See the funds' SAI for some other sales charge waivers. If you think you
qualify for any sales charge reductions or waivers, you will need to provide
documentation to PaineWebber or the fund. For more information, you should
contact your PaineWebber Financial Advisor or correspondent firm or call
1-800-647-1568. If you want information on the funds' Systematic Withdrawal
Plan, see the SAI or contact your PaineWebber Financial Advisor or correspondent
firm.
CLASS B SHARES
Class B shares have a contingent deferred sales charge. When you purchase Class
B shares, we invest 100% of your purchase in fund shares. However, you may have
to pay the deferred sales charge when you sell your fund shares, depending on
how long you own the shares.
Class B shares pay an annual 12b-1 distribution fee of 0.75% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
If you hold your Class B shares for six years, they will automatically convert
to Class A shares, which have lower ongoing expenses.
If you sell Class B shares before the end of six years, you will pay a deferred
sales charge. We calculate the deferred sales charge by multiplying the lesser
of the net asset value of the Class B shares at the time of purchase or the net
asset value at the time of sale by the percentage shown below:
PERCENTAGE BY WHICH THE
IF YOU SELL SHARES' NET ASSET
SHARES WITHIN: VALUE IS MULTIPLIED:
-------------- -----------------------
1st year since purchase 5%
2nd year since purchase 4
3rd year since purchase 3
4th year since purchase 2
5th year since purchase 2
6th year since purchase 1
7th year since purchase None
We will not impose the deferred sales charge on Class B shares representing
reinvestment of dividends or on withdrawals in any year of up to 12% of the
value of your Class B shares under the Systematic Withdrawal Plan.
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To minimize your deferred sales charge, we will assume that you are selling:
o First, Class B shares representing reinvested dividends, and o -Second, Class
B shares that you have owned the longest.
SALES CHARGE WAIVERS. You may qualify for a waiver of the deferred sales charge
on a sale of shares if:
o You participate in the Systematic Withdrawal Plan;
o You are older than 59-1/2 and are selling shares to take a distribution from
certain types of retirement plans;
o You receive a tax-free return of an excess IRA contribution;
o You receive a tax-qualified retirement plan distribution following retirement;
or
o The shares are sold within one year of your death and you owned the shares
either (1) as the sole shareholder or (2) with your spouse as a joint tenant
with the right of survivorship.
o You are eligible to invest in certain offshore investment pools offered by
PaineWebber, your shares are sold before March 31, 2000, and the proceeds are
used to purchase interests in one or more of these pools.
NOTE: If you think you qualify for any of these sales charge waivers, you will
need to provide documentation to PaineWebber or the fund. For more information,
you should contact your PaineWebber Financial Advisor or correspondent firm or
call 1-800-647-1568. If you want information on the Systematic Withdrawal Plan,
see the SAI or contact your PaineWebber Financial Advisor or correspondent firm.
CLASS C SHARES
Class C shares have a level load sales charge in the form of ongoing 12b-1
distribution fees. When you purchase Class C shares, we will invest 100% of your
purchase in fund shares.
Class C shares pay an annual 12b-1 distribution fee of 0.75% (0.50% for
Conservative Portfolio) of average net assets, as well as an annual 12b-1
service fee of 0.25% of average net assets. Class C shares do not convert to
another class of shares. This means that you will pay the 12b-1 fees for as long
as you own your shares.
Class C shares also have a contingent deferred sales charge. You may have to pay
the deferred sales charge if you sell your shares within one year of the date
you purchased them. We calculate the deferred sales charge on sales of Class C
shares by multiplying 1.00% (0.75% for Conservative Portfolio) by the lesser of
the net asset value of the Class C shares at the time of purchase or the net
asset value at the time of sale. We will not impose the deferred sales charge on
Class C shares representing reinvestment of dividends or on withdrawals in the
first year after purchase, of up to 12% of the value of your Class C shares
under the Systematic Withdrawal Plan.
You may be eligible to sell your shares without paying a contingent deferred
sales charge if:
o You are a qualified retirement plan with 100 or more employees or $1 million
in assets; or
o You are eligible to invest in certain offshore investment pools offered by
PaineWebber, your shares are sold before March 31, 2000, and the proceeds are
used to purchase interests in one or more of these pools.
NOTE: If you want information on the funds' Systematic Withdrawal Plan, see the
SAI or contact your PaineWebber Financial Advisor or correspondent firm.
CLASS Y SHARES
Class Y shares have no sales charge. Only specific types of investors can
purchase Class Y shares. You may be eligible to purchase Class Y shares if you:
o Buy shares through PaineWebber's PACE Multi Advisor Program;
o Buy $10 million or more of PaineWebber fund shares at any one time;
o Are a qualified retirement plan with 5,000 or more eligible employees or $50
million in assets; or
o Are an investment company advised by PaineWebber or an affiliate of
PaineWebber.
The trustee of PaineWebber's 401(k) Plus Plan for its employees is also eligible
to purchase Class Y shares.
Class Y shares do not pay ongoing distribution or service fees or sales charges.
The ongoing expenses for Class Y shares are the lowest for all the classes.
BUYING SHARES
If you are a PaineWebber client, or a client of a PaineWebber correspondent
firm, you can purchase fund shares through your Financial Advisor. Otherwise,
you can invest in the funds through the funds' transfer agent, PFPC Inc. You can
obtain an application by calling 1-800-647-1568. You must
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complete and sign the application and mail it, along with a check, to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.
If you wish to invest in other PaineWebber Funds, you can do so by:
o Contacting your Financial Advisor (if you have an account at PaineWebber or at
a PaineWebber correspondent firm);
o Mailing an application with a check; or
o "Opening an account by exchanging shares from another PaineWebber fund.
You do not have to complete an application when you make additional investments
in the same fund.
The funds and Mitchell Hutchins reserve the right to reject a purchase order or
suspend the offering of shares.
MINIMUM INVESTMENTS
To open an account.................... $1,000
To add to an account ................. $ 100
Each fund may waive or reduce these amounts for:
o Employees of PaineWebber or its affiliates; or
o Participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the funds' automatic investment plans.
FREQUENT TRADING. The interests of a fund's long-term shareholders and its
ability to manage its investments may be adversely affected when its shares are
repeatedly bought and sold in response to short-term market fluctuations -- also
known as "market timing." When large dollar amounts are involved, the fund may
have difficulty implementing long-term investment strategies, because it cannot
predict how much cash it will have to invest. Market timing also may force the
fund to sell portfolio securities at disadvantageous times to raise the cash
needed to buy a market timer's fund shares. These factors may hurt the fund's
performance and its shareholders. When Mitchell Hutchins believes frequent
trading would have a disruptive effect on a fund's ability to manage its
investments, Mitchell Hutchins and the fund may reject purchase orders and
exchanges into the fund by any person, group or account that Mitchell Hutchins
believes to be a market timer. A fund may notify the market timer that a
purchase order or an exchange has been rejected after the day the order is
placed.
SELLING SHARES
You can sell your fund shares at any time. If you own more than one class of
shares, you should specify which class you want to sell. If you do not, the fund
will assume that you want to sell shares in the following order: Class A, then
Class C, then Class B and last, Class Y.
If you want to sell shares that you purchased recently, the fund may delay
payment until it verifies that it has received good payment. If you purchased
shares by check, this can take up to 15 days.
If you have an account with PaineWebber or a PaineWebber correspondent firm, you
can sell shares by contacting your Financial Advisor.
If you do not have an account at PaineWebber or a correspondent firm, and you
bought your shares through the transfer agent, you can sell your shares by
writing to the fund's transfer agent. Your letter must include:
o Your name and address;
o The fund's name;
o The fund account number;
o The dollar amount or number of shares you want to sell; and
o A guarantee of each registered owner's signature. A signature guarantee may be
obtained from a financial institution, broker, dealer or clearing agency that
is a participant in one of the medallion programs recognized by the Securities
Transfer Agents Association. These are: Securities Transfer Agents Medallion
Program (STAMP), Stock Exchanges Medallion Program (SEMP) and the New York
Stock Exchange Medallion Signature Program (MSP). The funds will not accept
signature guarantees that are not a part of these programs.
Mail the letter to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.
If you sell Class A shares and then repurchase Class A shares of the same fund
within 365 days of the sale, you can reinstate your account without paying a
sales charge.
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It costs each fund money to maintain shareholder accounts. Therefore, the funds
reserve the right to repurchase all shares in any account that has a net asset
value of less than $500. If a fund elects to do this with your account, it will
notify you that you can increase the amount invested to $500 or more within 60
days. A fund will not repurchase shares in accounts that fall below $500 solely
because of a decrease in the fund's net asset value.
EXCHANGING SHARES
You may exchange Class A, Class B or Class C shares of each fund for shares of
the same class of most other PaineWebber funds. You may not exchange Class Y
shares.
You will not pay either a front-end sales charge or a deferred sales charge when
you exchange shares. However, you may have to pay a deferred sales charge if you
later sell the shares you acquired in the exchange. Each fund will use the date
that you purchased the shares in the first fund to determine whether you must
pay a deferred sales charge when you sell the shares in the acquired fund.
Other PaineWebber funds may have different minimum investment amounts. You may
not be able to exchange your shares if your exchange is not as large as the
minimum investment amount in that other fund.
You may exchange shares of one fund for shares of another fund only after the
first purchase has settled and the first fund has received your payment.
PAINEWEBBER CLIENTS. If you bought your shares through PaineWebber or a
correspondent firm, you may exchange your shares by placing an order with your
PaineWebber Financial Advisor.
OTHER INVESTORS. If you are not a PaineWebber client, you may exchange your
shares by writing to the fund's transfer agent. You must include:
o Your name and address;
o The name of the fund whose shares you are selling and the name of the fund
whose shares you want to buy;
o Your account number;
o How much you are exchanging (by dollar amount or by number of shares to be
sold); and
o A guarantee of your signature. (See "Buying Shares" for information on
obtaining a signature guarantee.)
Mail the letter to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.
A fund may modify or terminate the exchange privilege at any time.
PRICING AND VALUATION
The price at which you may buy, sell or exchange fund shares is based on net
asset value per share. Each fund calculates net asset value on days that the New
York Stock Exchange is open. Each fund calculates net asset value separately for
each class as of the close of regular trading on the NYSE (generally, 4:00 p.m.,
Eastern time). The NYSE normally is not open, and the funds do not price their
shares, on national holidays and on Good Friday. If trading on the NYSE is
halted for the day before 4:00 p.m., Eastern time, the fund's net asset value
per share will be calculated as of the time trading was halted.
Your price for buying, selling or exchanging shares will be based on the net
asset value that is next calculated after the fund accepts your order. If you
place your order through PaineWebber, your PaineWebber Financial Advisor is
responsible for making sure that your order is promptly sent to the fund.
You should keep in mind that a front-end sales charge may be applied to your
purchase if you buy Class A shares. A deferred sales charge may be applied when
you sell Class B or Class C shares.
Each fund calculates its net asset value based on the current market value for
its portfolio securities. Most of the funds' portfolio securities will consist
of shares in the underlying funds. The value of each underlying fund will be its
net asset value at the time the funds' shares are priced. The funds normally use
the amortized cost method to value bonds that will mature in 60 days or less. If
a market value is not available from an independent pricing source for a
particular security, that security is valued at fair value determined by or
under the direction of the funds' board.
- --------------------------------------------------------------------------------
Prospectus Page 18
<PAGE>
- --------------------------------------------------------------------------------
Mitchell Hutchins Aggressive Portfolio
Moderate Portfolio Conservative Portfolio
MANAGEMENT
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Mitchell Hutchins Asset Management Inc. is the investment adviser and
administrator of the funds. Mitchell Hutchins also is the investment adviser and
administrator of the underlying funds other than PaineWebber Cashfund.
PaineWebber Incorporated 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.
Mitchell Hutchins is located at 1285 Avenue of the Americas, New York, New York,
10019, and is a wholly owned asset management subsidiary of PaineWebber, which
is wholly owned by Paine Webber Group Inc., a publicly owned financial services
holding company. On August 31, 1999, Mitchell Hutchins was adviser or
sub-adviser of 33 investment companies with 75 separate portfolios and aggregate
assets of approximately $58.8 billion.
PORTFOLIO MANAGERS
T. Kirkham Barneby, Dennis McCauley and Mark A. Tincher are responsible for the
day-to-day management of each fund'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.
Mr. 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.
Mr. 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 and oversaw the management of all
Chase U.S. equity funds.
ADVISORY FEES
Mitchell Hutchins waived all its advisory fees from the funds for the most
recent fiscal year. The contract rate for each fund's advisory fee is at the
annual rate of 0.35% of its average annual net assets.
OTHER INFORMATION
The funds, Mitchell Hutchins, PaineWebber and the underlying funds have entered
into servicing agreements pursuant to an exemptive order from the SEC that
permits the underlying funds to reimburse the funds for certain administrative
expenses to the extent the underlying funds realize estimated savings from the
funds' investments. These administrative expenses include transfer agent
expenses, shareholder servicing expenses, custody, legal and accounting fees,
but do not include 12b-1 fees or extraordinary expenses. The estimated savings
to the underlying funds are expected to result from the elimination of separate
shareholder accounts for the funds' investors, who otherwise might invest
directly in the underlying funds.
The funds have received an exemptive order from the SEC that permits their board
to appoint and replace sub-advisers and to amend sub-advisory contracts without
obtaining shareholder approval. A fund's shareholders must approve this policy
before the board may implement it. As of the date of this prospectus, the funds
have not asked their shareholders to do so.
Each underlying fund pays a management fee to Mitchell Hutchins (PaineWebber for
Cashfund) and also pays other operating expenses. An investor in a fund of funds
will indirectly pay both that fund's management fee and other expenses and the
management fees and other expenses of the underlying funds it holds. Investors
who do not wish to take advantage of the funds' allocation of their assets among
several underlying funds may invest directly in the underlying funds and thereby
avoid incurring the management fee and other expenses paid by each fund.
- --------------------------------------------------------------------------------
Prospectus Page 19
<PAGE>
- --------------------------------------------------------------------------------
Mitchell Hutchins Aggressive Portfolio
Moderate Portfolio Conservative Portfolio
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS
Conservative Portfolio and Moderate Portfolio normally declare and pay dividends
quarterly. Aggressive Portfolio normally declares and pays dividends annually.
Each fund normally distributes substantially all of its gains, if any, annually.
Classes with higher expenses are expected to have lower dividends. For example,
Class B shares and Class C are expected to have the lowest dividends of any
class of a fund's shares, while Class Y shares are expected to have the highest.
You will receive dividends in additional shares of the same class unless you
elect to receive them in cash. Contact your Financial Advisor at PaineWebber or
one of its correspondent firms if you prefer to receive dividends in cash.
TAXES
The dividends that you receive from a fund generally are subject to federal
income tax regardless of whether you receive them in additional fund shares or
in cash. If you hold fund shares through a tax-exempt account or plan, such as
an IRA or 401(k) plan, dividends on your shares generally will not be subject to
tax.
When you sell fund shares, you generally will be subject to federal income tax
on any gain you realize. If you exchange any fund's shares for shares of another
PaineWebber mutual fund, the transaction will be treated as a sale of the first
fund's shares, and any gain will be subject to federal income tax.
Conservative Portfolio expects that its dividends will be taxed primarily as
ordinary income. Moderate Portfolio expects that its dividends will include both
ordinary income and capital gain distributions. Aggressive Portfolio expects
that its dividends will be comprised primarily of capital gain distributions. A
fund's capital gain distributions will include distributions to it of net
capital gain from the underlying funds that it holds. The distribution of
capital gains will be taxed at a lower rate than ordinary income if the fund
held the assets that generated the gains for more than 12 months. Your fund will
tell you how you should treat its dividends for tax purposes.
- --------------------------------------------------------------------------------
Prospectus Page 20
<PAGE>
- --------------------------------------------------------------------------------
Mitchell Hutchins Aggressive Portfolio
Moderate Portfolio Conservative Portfolio
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following financial highlights tables are intended to help you understand
the funds' financial performance for the period since they commenced operations.
Certain information reflects financial results for a single fund share. In the
tables, "total investment return" represents the rate that an investor would
have earned (or lost) on an investment in a fund (assuming reinvestment of all
dividends).
This information in the financial highlights has been audited by Ernst & Young
LLP, independent auditors, whose report, along with the funds' financial
statements, is included in the funds' Annual Report to Shareholders. The Annual
Report may be obtained without charge by calling 1-800-647-1568.
- --------------------------------------------------------------------------------
Prospectus Page 21
<PAGE>
- --------------------------------------------------------------------------------
Mitchell Hutchins Aggressive Portfolio
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGRESSIVE PORTFOLIO
CLASS A CLASS B CLASS C CLASS Y
FOR THE FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD PERIOD
FOR THE FEBRUARY 24, FOR THE FEBRUARY 24, FOR THE FEBRUARY 24, FOR THE FEBRUARY 24,
YEAR 1998+ YEAR 1998+ YEAR 1998+ YEAR 1998+
ENDED THROUGH ENDED THROUGH ENDED THROUGH ENDED THROUGH~
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1999 1998 1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period ................... $12.98 $12.50 $12.96 $12.50 $12.96 $12.50 $12.99 $12.50
------ ------ ------ ------ ------ ------ ------ ------
Net investment income......... 0.19 0.03 0.09 0.01 0.10 0.01 0.23 0.05
Net realized and unrealized gains
(losses) from investments (0.39) 0.45 (0.39) 0.45 (0.40) 0.45 (0.40) 0.44
------ ------ ------ ------ ------ ------ ------ ------
Net increase (decrease) from
investment operations ....... (0.20) 0.48 (0.30) 0.46 (0.30) 0.46 (0.17) 0.49
Dividends from net investment
income ...................... (0.15) -- (0.10) -- (0.08) -- (0.17) --
Distributions from net realized
gains from investment transactions (0.06) -- (0.06) -- (0.06) -- (0.06) --
------ ------ ------ ------ ------ ------ ------ ------
Total dividends and distributions
to shareholders ............. (0.21) -- (0.16) -- (0.14) -- (0.23) --
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period $12.57 $12.98 $12.50 $12.96 $12.52 $12.96 $12.59 $12.99
====== ====== ====== ====== ====== ====== ====== ======
Total investment return(1).... (1.57)% 3.84% (2.32)% 3.68% (2.32)% 3.68% (1.33)% 3.92%
====== ====== ====== ====== ====== ====== ====== ======
Ratios/Supplemental data:
Net assets, end of period
(000's) $1,626 $1,622 $2,057 $1,440 $2,406 $2,048 $ 10 $ 10
Expenses to average net assets,
net of waivers and reimbursements
from adviser and Underlying Funds 0.25% 0.25%* 1.00% 1.00%* 1.00% 1.00%* 0.00% 0.00%*
Expenses to average net assets,
before waivers and reimbursements
from adviser and Underlying Funds 4.54% 3.98%* 5.29% 4.80%* 5.29% 4.55%* 4.29% 3.76%*
Net investment income to average
net assets, net of waivers and
reimbursements from adviser
and Underlying Funds ........ 1.65% 1.49%* 0.87% 0.70%* 0.81% 0.69%* 1.86% 1.57%*
Net investment loss to average
net assets, before waivers and
reimbursements from adviser
and Underlying Funds ........ (2.64)% (2.24)%* (3.42)% (3.10)%* (3.48)% (2.86)%* (2.43)% (2.19)%*
Portfolio turnover rate....... 104% 6% 104% 6% 104% 6% 104% 6%
</TABLE>
- -------------
+ Commencement of issuance of shares.
* Annualized.
(1)Total investment return is calculated assuming a $1,000 investment on the
first day of each 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 each period reported. The figures do not
include sales charges or program fees; results would be lower if sales
charges or program fees were included. Total investment return for periods
of less than one year have not been annualized.
- -------------------------------------------------------------------------------
Prospectus Page 22
<PAGE>
- -------------------------------------------------------------------------------
Mitchell Hutchins Moderate Portfolio
FINANCIAL HIGHLIGHTS
(Continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MODERATE PORTFOLIO
CLASS A CLASS B CLASS C CLASS Y
FOR THE FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD PERIOD
FOR THE FEBRUARY 24, FOR THE FEBRUARY 24, FOR THE FEBRUARY 24, FOR THE FEBRUARY 24,
YEAR 1998+ YEAR 1998+ YEAR 1998+ YEAR 1998+
ENDED THROUGH ENDED THROUGH ENDED THROUGH ENDED THROUGH~
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1999 1998 1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $12.93 $12.50 $12.90 $12.50 $12.90 $12.50 $12.94 $12.50
------ ------ ------ ------ ------ ------ ------ ------
Net investment income......... 0.31 0.06 0.21 0.04 0.21 0.04 0.36 0.09
Net realized and unrealized gains
(losses) from investments ... (0.08) 0.37 (0.07) 0.36 (0.07) 0.36 (0.10) 0.35
------ ------ ------ ------ ------ ------ ------ ------
Total increase from investment
operations .................. 0.23 0.43 0.14 0.40 0.14 0.40 0.26 0.44
------ ------ ------ ------ ------ ------ ------ ------
Dividends from net investment
income (0.29) -- (0.21) -- (0.21) -- (0.32) --
Distributions from net realized
gains from ~investment
transactions ................ (0.06) -- (0.06) -- (0.06) -- (0.06) --
------ ------ ------ ------ ------ ------ ------ ------
Total dividends and distributions
to shareholders ............. (0.35) -- (0.27) -- (0.27) -- (0.38) --
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period $12.81 $12.93 $12.77 $12.90 $12.77 $12.90 $12.82 $12.94
====== ====== ====== ====== ====== ====== ====== ======
Total investment return(1).... 1.85% 3.44% 1.14% 3.20% 1.11% 3.20% 2.08% 3.52%
====== ====== ====== ====== ====== ====== ====== ======
Ratios/Supplemental data:
Net assets, end of period
(000's) $2,169 $1,676 $6,532 $2,956 $5,758 $2,801 $13 $12
Expenses to average net assets,
net of waivers and reimbursements
from adviser and Underlying Funds 0.25% 0.25%* 1.00% 1.00%* 1.00% 1.00%* 0.00% 0.00%*
Expenses to average net assets,
before waivers and reimbursements
from adviser and Underlying Funds 2.66% 2.78%* 3.41% 3.57%* 3.41% 3.29%* 2.41% 2.59%*
Net investment income to average
net assets, net of waivers and
reimbursements from adviser
and Underlying Funds.......... 2.61% 2.63%* 1.86% 1.87%* 1.85% 1.92%* 2.88% 2.76%*
Net investment income (loss)
to average net assets, before
waivers and ~reimbursements
from adviser and Underlying Funds 0.20% 0.10%* (0.55)% (0.70)%* (0.56)% (0.37)%* 0.47% 0.17%*
Portfolio turnover rate....... 88% 13% 88% 13% 88% 13% 88% 13%
</TABLE>
- -------------
+ Commencement of issuance of shares.
* Annualized.
(1)Total investment return is calculated assuming a $1,000 investment on the
first day of each 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 each period reported. The figures do not
include sales charges or program fees; results would be lower if sales
charges or program fees were included. Total investment return for periods
of less than one year have not been annualized.
- ------------------------------------------------------------------------------
Prospectus Page 23
<PAGE>
- -------------------------------------------------------------------------------
Mitchell Hutchins Conservative Portfolio
FINANCIAL HIGHLIGHTS
(Continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSERVATIVE PORTFOLIO
CLASS A CLASS B CLASS C CLASS Y
FOR THE FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD PERIOD
FOR THE FEBRUARY 24, FOR THE FEBRUARY 24, FOR THE FEBRUARY 24, FOR THE FEBRUARY 24,
YEAR 1998+ YEAR 1998+ YEAR 1998+ YEAR 1998+
ENDED THROUGH ENDED THROUGH ENDED THROUGH ENDED THROUGH~
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
1999 1998 1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period ................... $12.81 $12.50 $12.79 $12.50 $12.80 $12.50 $12.82 $12.50
------ ------ ------ ------ ------ ------ ------ ------
Net investment income......... 0.52 0.10 0.40 0.07 0.44 0.08 0.56 0.16
Net realized and unrealized gains
from investments 0.16 0.21 0.17 0.22 0.17 0.22 0.15 0.16
------ ------ ------ ------ ------ ------ ------ ------
Net increase from investment
operations ................. 0.68 0.31 0.57 0.29 0.61 0.30 0.71 0.32
------ ------ ------ ------ ------ ------ ------ ------
Dividends from net investment
income ..................... (0.47) -- (0.39) -- (0.42) -- (0.50) --
Distributions from net
realized gains
from investment transactions (0.05) -- (0.05) -- (0.05) -- (0.05) --
------ ------ ------ ------ ------ ------ ------ ------
Total dividends and distributions
to shareholders ............. (0.52) -- (0.44) -- (0.47) -- (0.55) --
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period $12.97 $12.81 $12.92 $12.79 $12.94 $12.80 $12.98 $12.82
====== ====== ====== ====== ====== ====== ====== ======
Total investment return(1).... 5.38% 2.48% 4.51% 2.32% 4.77% 2.40% 5.61% 2.56%
====== ====== ====== ====== ====== ====== ====== ======
Ratios/Supplemental data:
Net assets, end of period (000's) $717 $519 $3,189 $1,667 $823 $485 $ 5 $ 5
Expenses to average net assets,
net of waivers and reimbursements
from adviser and Underlying Funds 0.25% 0.25%* 1.00% 1.00%* 0.75% 0.75%* 0.00% 0.00%*
Expenses to average net assets,
before waivers and reimbursements
from adviser and Underlying Funds 6.05% 6.43%* 6.80% 7.13%* 6.55% 6.99%* 5.80% 6.19%*
Net investment income to average
net assets, net of waivers and
reimbursements from adviser
and Underlying Funds ........... 4.11% 4.66%* 3.37% 3.92%* 3.63% 4.23%* 4.40% 4.75%*
Net investment loss to average
net assets, before waivers and
reimbursements from adviser
and Underlying Funds ........ (1.69)% (1.52)%* (2.43)% (2.21)%* (2.17)% (2.00)%* (1.40)% (1.43)%*
Portfolio turnover rate....... 83% 11% 83% 11% 83% 11% 83% 11%
</TABLE>
- ---------------
+ Commencement of issuance of shares.
* Annualized.
(1)Total investment return is calculated assuming a $1,000 investment on the
first day of each 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 each period reported. The figures do not
include sales charges or program fees; results would be lower if sales charges
or program fees were included. Total investment return for periods of less
than one year have not been annualized. Mitchell Hutchins Aggressive Portfolio
Moderate Portfolio Conservative Portfolio
- ------------------------------------------------------------------------------
Prospectus Page 24
<PAGE>
- --------------------------------------------------------------------------------
Mitchell Hutchins Aggressive Portfolio
Moderate Portfolio Conservative Portfolio
If you want more information about the funds, the following documents are
available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS
Additional information about the funds' investments is available in the funds'
annual and semi-annual reports to shareholders. In the funds' annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the funds' performance during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the funds and is incorporated
by reference into this prospectus.
You may discuss your questions about the funds by contacting your PaineWebber
Financial Advisor. You may obtain free copies of annual and semi-annual reports
and the SAI by contacting the funds directly at 1-800-647-1568.
You may review and copy information about the funds, including shareholder
reports and the SAI, at the Public Reference Room of the Securities and Exchange
Commission. You can get text-only copies of reports and other information about
the funds and about the operations of the SEC's Public Reference Room:
o For a fee, by writing to or calling the SEC's Public Reference Room,
Washington, D.C. 20549-6009~Telephone: 1-800-SEC-0330
o Free, from the SEC's Internet website at: http://www.sec.gov
Mitchell Hutchins Portfolios:
-- Mitchell Hutchins Aggressive Portfolio
-- Mitchell Hutchins Moderate Portfolio
-- Mitchell Hutchins Conservative Portfolio
Investment Company Act File No. 811-7757
(C) 1999 PaineWebber Incorporated
- -------------------------------------------------------------------------------
Prospectus Page 25
<PAGE>
MITCHELL HUTCHINS AGGRESSIVE PORTFOLIO
MITCHELL HUTCHINS MODERATE PORTFOLIO
MITCHELL HUTCHINS CONSERVATIVE PORTFOLIO
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
STATEMENT OF ADDITIONAL INFORMATION
The three funds named above are diversified series of Mitchell Hutchins
Portfolios ("Trust"), a professionally managed, open-end management investment
company. The funds seek to achieve their investment objectives by investing in a
number of other PaineWebber mutual funds ("underlying funds").
The investment adviser, administrator and distributor for each fund is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
asset management subsidiary of PaineWebber Incorporated ("PaineWebber"). As
distributor for the funds, Mitchell Hutchins has appointed PaineWebber to serve
as the exclusive dealer for the sale of fund shares.
Portions of the funds' Annual Report to Shareholders are incorporated
by reference into this Statement of Additional Information ("SAI"). The Annual
Report accompanies this SAI. You may obtain an additional copy of the funds'
Annual Report by calling toll-free 1-800-647-1568.
This SAI is not a prospectus and should be read only in conjunction
with the funds' current Prospectus dated September 30, 1999. A copy of the
Prospectus may be obtained by calling any PaineWebber Financial Advisor or
correspondent firm, or by calling toll-free 1-800-647-1568. This SAI is dated
September 30, 1999.
TABLE OF CONTENTS
PAGE
The Funds and Their Investment Policies ............................... 2
The Funds' Investments, Related Risks and Limitations.................. 2
Underlying Funds' Investment Policies.................................. 5
Underlying Funds--Strategies Using Derivative Instruments.............. 23
Organization of Trust; Trustees And Officers;
Principal Holders Of Securities..................................... 33
Investment Advisory, Administration and Distribution Arrangements...... 39
Portfolio Transactions................................................. 43
Reduced Sales Charges, Additional Exchange And
Redemption Information And Other Services........................... 45
Conversion Of Class B Shares........................................... 50
Valuation Of Shares.................................................... 50
Performance Information................................................ 51
Taxes.................................................................. 54
Other Information...................................................... 56
Financial Statements................................................... 57
Appendix............................................................... 58
<PAGE>
THE FUNDS AND THEIR INVESTMENT POLICIES
MITCHELL HUTCHINS AGGRESSIVE PORTFOLIO'S investment objective is
long-term growth of capital. The fund invests primarily in equity mutual funds.
It also invests, to a lesser extent, in bond mutual funds.
MITCHELL HUTCHINS MODERATE PORTFOLIO'S investment objective is total
return by investing. The fund invests in a combination of equity and bond mutual
funds.
MITCHELL HUTCHINS CONSERVATIVE PORTFOLIO'S investment objective is to
seek income and, secondarily, growth of capital. The fund invests primarily in
bond mutual funds. It also invests, to a lesser extent, in equity mutual funds.
Each fund may also invest directly in short-term bonds and money market
instruments for cash management purposes or for temporary defensive purposes.
Each fund also may invest up to 15% of its net assets in illiquid securities and
may borrow for temporary or emergency purposes, but not in excess of 33 1/3% of
its total assets.
THE FUNDS' INVESTMENTS, RELATED RISKS AND LIMITATIONS
The following supplements the information contained in the Prospectus
concerning the funds' investment policies and limitations. Except as otherwise
indicated in the Prospectus or this SAI, there are no policy limitations on the
funds' ability to use the investments or techniques discussed in these
documents.
DIRECT INVESTMENTS IN SECURITIES. Each fund 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 fund'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 fund may invest without
limit in these securities.
MONEY MARKET INSTRUMENTS. Money market instruments are short-term debt
obligations and similar securities and include: (1) securities issued or
guaranteed as to interest and principal by the U.S. government or one of its
agencies or instrumentalities; (2) debt obligations of U.S. banks, savings
associations, insurance companies and mortgage bankers, (3) commercial paper and
other short-term obligations of corporations, partnerships, trusts and similar
entities; and (4) repurchase agreements regarding any of the foregoing. Money
market instruments include longer-term bonds that have variable interest rates
or other special features that give them the financial characteristics of
short-term debt. In addition, the funds may hold cash and may invest in
participation interests in the money market securities mentioned above.
U.S. GOVERNMENT SECURITIES. U.S. government securities include 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 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. U.S. government securities are described in
greater detail in "Underlying Funds--Investment Policies" below.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which
a fund purchases securities or other obligations from a bank or securities
dealer (or its affiliate) and simultaneously commits to resell them to the
counterparty at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest unrelated to the coupon rate or maturity of the
purchased obligations. A fund maintains custody of the underlying obligations
prior to their repurchase, either through its regular custodian or through a
special "tri-party" custodian or sub-custodian that maintains separate accounts
for both the fund and its counterparty. Thus, the obligation of the counterparty
to pay the repurchase price on the date agreed to or upon demand is, in effect,
secured by such obligations. Repurchase agreements carry certain risks not
associated with direct investments in securities,
2
<PAGE>
including a possible decline in the market value of the underlying obligations.
If their value becomes less than the repurchase price, plus any agreed-upon
additional amount, the counterparty must provide additional collateral so that
at all times the collateral is at least equal to the repurchase price plus any
agreed-upon additional amount. The difference between the total amount to be
received upon repurchase of the obligations and the price that was paid by a
fund upon acquisition is accrued as interest and included in its net investment
income. Repurchase agreements involving obligations other than U.S. government
securities (such as commercial paper and corporate bonds) may be subject to
special risks and may not have the benefit of certain protections in the event
of the counterparty's insolvency. If the seller or guarantor becomes insolvent,
the fund may suffer delays, costs and possible losses in connection with the
disposition of collateral. Each fund intends to enter into repurchase agreements
only with counterparties in transactions believed by Mitchell Hutchins to
present minimum credit risks.
ILLIQUID SECURITIES. Each fund may invest up to 15% of its net assets
in illiquid securities, although the funds 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 fund 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 funds' 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."
INVESTMENT LIMITATIONS OF THE FUNDS
FUNDAMENTAL LIMITATIONS. The following fundamental investment
limitations cannot be changed for a fund without the affirmative vote of the
lesser of (a) more than 50% of the outstanding shares of the fund or (b) 67% or
more of the shares of the fund present at a shareholders' meeting if more than
50% of the outstanding shares of the fund 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 fund will not:
(1) purchase any security if, as a result of that purchase, 25% or more
of the fund's total assets would be invested in securities of issuers having
their principal business activities in the same industry, except that this
limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or to municipal securities, and
except that the fund will invest 25% or more of its total assets in the
securities of other investment companies.
(2) issue senior securities or borrow money, except as permitted under
the Investment Company Act of 1940 ("1940 Act") and then not in excess of 331/3%
of the fund's total assets (including the amount of the senior securities issued
but reduced by any liabilities not constituting senior securities) at the time
of the issuance or borrowing, except that the fund may borrow up to an
additional 5% of its total assets (not including the amount borrowed) for
temporary or emergency purposes.
(3) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other 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 fund might be considered an underwriter under the
federal securities laws in connection with its disposition of portfolio
securities.
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(5) purchase or sell real estate, except that investments in securities
of issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the fund may
exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an orderly
manner.
(6) purchase or sell physical commodities unless acquired as a result
of owning securities or other instruments, but the fund may purchase, sell or
enter into financial options and futures, forward and spot currency contracts,
swap transactions and other financial contracts or derivative instruments.
(7) purchase securities of any one issuer if, as a result, more than 5%
of the fund's total assets would be invested in securities of that issuer or the
fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 25% of the fund's total assets may be invested
without regard to this limitation, and except that this limitation does not
apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment companies.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions may
be changed by the board without shareholder approval.
Each fund 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 fund 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 fund may
make margin deposits in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
(4) engage in short sales of securities or maintain a short position,
except that the fund may (a) sell short "against the box" and (b) maintain short
positions in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
(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 funds 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 funds 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 SAI.
In accordance with each fund's investment program as set forth in the
Prospectus, a fund may invest more than 25% of its assets in any one underlying
fund. However, each underlying fund in which a fund 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.
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UNDERLYING FUNDS--INVESTMENT POLICIES
The following supplements the information contained in the Prospectus
concerning the investment policies and limitations of the underlying funds. With
respect to certain underlying funds, Mitchell Hutchins has retained one or more
sub-advisers ("Sub-Adviser" or "Sub-Advisers"), who are identified by name in
the Prospectus. More information about the investment policies and restrictions
and the investment limitations of each underlying fund is set forth in its
prospectus and SAI.
EQUITY SECURITIES. Equity securities include common stocks, most
preferred stocks and securities that are convertible into them, including common
stock purchase warrants and rights, equity interests in trusts, partnerships,
joint ventures or similar enterprises and depository receipts. Common stocks are
the most familiar type of equity security. They represent an equity (ownership)
interest in a corporation.
Preferred stock has certain fixed income features, like a bond, but
actually it is equity that is senior to a company's common stock. Convertible
securities include debentures, notes and preferred equity securities, that may
be converted into or exchanged for a prescribed amount of common stock of the
same or a different issuer within a particular period of time at a specified
price or formula. Depository receipts typically are issued by banks or trust
companies and evidence ownership of underlying equity securities.
While past performance does not guarantee future results, equity
securities historically have provided the greatest long-term growth potential in
a company. However, the prices of equity securities generally fluctuate more
than bonds and reflect changes in a company's financial condition and in overall
market and economic conditions. Common stocks generally represent the riskiest
investment in a company. It is possible that a fund may experience a substantial
or complete loss on an individual equity investment. While this is possible with
bonds, it is less likely.
BONDS. Bonds are fixed or variable rate debt obligations, including
notes, debentures, and similar instruments and securities, including money
market instruments. Mortgage- and asset-backed securities are types of bonds,
and certain types of income-producing, non-convertible preferred stocks may be
treated as bonds for investment purposes. Bonds generally are used by
corporations, governments and other issuers to borrow money from investors. The
issuer pays the investor a fixed or variable rate of interest and normally must
repay the amount borrowed on or before maturity. Many preferred stocks and some
bonds are "perpetual" in that they have no maturity date.
Bonds are subject to interest rate risk and credit risk. Interest rate
risk is the risk that interest rates will rise and that, as a result, bond
prices will fall, lowering the value of a fund's investments in bonds. In
general, bonds having longer durations are more sensitive to interest rate
changes than are bonds with shorter durations. Credit risk is the risk that an
issuer may be unable or unwilling to pay interest and/or principal on the bond,
or that a market may become less confident as to the issuer's ability or
willingness to do so. Credit risk can be affected by many factors, including
adverse changes in the issuer's own financial condition or in economic
conditions.
CONVERTIBLE SECURITIES. A convertible security is a bond, preferred
stock or other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. A convertible security entitles
the holder to receive interest or dividends until the convertible security
matures or is redeemed, converted or exchanged. Convertible securities have
unique investment characteristics in that they generally (1) have higher yields
than common stocks, but lower yields than comparable non-convertible securities,
(2) are less subject to fluctuation in value than the underlying stock because
they have fixed income characteristics and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases. While
no securities investment is without some risk, investments in convertible
securities generally entail less risk than the issuer's common stock. However,
the extent to which such risk is reduced depends in large measure upon the
degree to which the convertible security sells above its value as a fixed income
security.
WARRANTS. Warrants are securities permitting, but not obligating,
holders to subscribe for other securities. Warrants do not carry with them the
right to dividends or voting rights with respect to the securities that they
entitle their holder to purchase, and they do not represent any rights in the
assets of the issuer. As a result, warrants may be
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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.
CREDIT RATINGS; NON-INVESTMENT GRADE BONDS. Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's, a division of The McGraw-Hill Companies,
Inc. (" S&P") and other rating agencies are private services that provide
ratings of the credit quality of bonds and certain other securities. A
description of the ratings assigned to corporate bonds by Moody's and S&P is
included in the Appendix to this SAI. The process by which Moody's and S&P
determine ratings for mortgage-backed securities includes consideration of the
likelihood of the receipt by security holders of all distributions, the nature
of the underlying assets, the credit quality of the guarantor, if any, and the
structural, legal and tax aspects associated with these securities. Not even the
highest such 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. References to rated bonds include
bonds that are not rated by a rating agency but that Mitchell Hutchins or the
applicable sub-adviser determines to be of comparable quality.
Credit ratings attempt to evaluate the safety of principal and interest
payments, but they do not evaluate the volatility of a bond's value or its
liquidity and do not guarantee the performance of the issuer. Rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than the rating indicates. There is a risk that rating agencies may downgrade
the rating of a bond. Subsequent to a bond's purchase by an underlying fund, it
may cease to be rated or its rating may be reduced below the minimum rating
required for purchase by the fund. 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, bonds with the same maturity, interest rate and rating
may have different market prices.
In addition to ratings assigned to individual bond issues, Mitchell
Hutchins or the applicable sub-adviser analyzes interest rate trends and
developments that may affect individual issuers, including factors such as
liquidity, profitability and asset quality. The yields on bonds are dependent on
a variety of factors, including general money market conditions, general
conditions in the bond market, the financial condition of the issuer, the size
of the offering, the maturity of the obligation and its rating. There is a wide
variation in the quality of bonds, both within a particular classification and
between classifications. An issuer's obligations under its bonds are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of bond holders or other creditors of an issuer; litigation or other
conditions may also adversely affect the power or ability of issuers to meet
their obligations for the payment of interest and principal on their bonds.
Investment grade bonds are rated in one of the four highest rating
categories by Moody's or S&P, comparably rated by another rating agency or
considered of comparable quality by Mitchell Hutchins or the applicable
sub-adviser. Moody's considers bonds rated Baa (its lowest investment grade
rating) to have speculative characteristics. This means that changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case for higher rated bonds.
High yield bonds (commonly known as "junk bonds") are non-investment
grade bonds. This means they are rated Ba or lower by Moody's, BB or lower by
S&P, comparably rated by another rating agency or determined by Mitchell
Hutchins or the sub-adviser to be of comparable quality. Bonds rated D by S&P
are in payment default or such rating is assigned upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized. Bonds rated C by Moody's are in the lowest rated
class and can be regarded as having extremely poor prospects of attaining any
real investment standing.
An underlying fund's investments in non-investment grade bonds entail
greater risk than its investments in higher rated bonds. Non-investment grade
bonds are considered predominantly speculative with respect to the issuer's
ability to pay interest and repay principal and may involve significant risk
exposure to adverse conditions. Non-investment grade bonds generally offer a
higher current yield than that available for investment grade issues;
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however, they involve higher risks, in that they are especially sensitive to
adverse changes in general economic conditions and in the industries in which
the issuers are engaged, to changes in the financial condition of the issuers
and to price fluctuations in response to changes in interest rates. During
periods of economic downturn or rising interest rates, highly leveraged issuers
may experience financial stress which could adversely affect their ability to
make payments of interest and principal and increase the possibility of default.
In addition, such issuers may not have more traditional methods of financing
available to them and may be unable to repay debt at maturity by refinancing.
The risk of loss due to default by such issuers is significantly greater because
such securities frequently are unsecured by collateral and will not receive
payment until more senior claims are paid in full.
The market for non-investment grade bonds, especially those of foreign
issuers, has expanded rapidly in recent years, which has been a period of
generally expanding growth and lower inflation. These securities will be
susceptible to greater risk when economic growth slows or reverses and when
inflation increases or deflation occurs. This has been reflected in recent
volatility in emerging market securities. In the past, many lower rated bonds
experienced substantial price declines reflecting an expectation that many
issuers of such securities might experience financial difficulties. As a result,
the yields on lower rated bonds rose dramatically. However, those higher yields
did not reflect the value of the income stream that holders of such securities
expected. Rather, they reflected the risk that holders of such securities could
lose a substantial portion of their value due to the issuers' financial
restructurings or defaults by the issuers. There can be no assurance that those
declines will not recur.
The market for non-investment grade bonds generally is thinner and less
active than that for higher quality securities, which may limit a fund's ability
to sell such securities at fair value in response to changes in the economy or
financial markets. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may also decrease the values and liquidity of
non-investment grade bonds, especially in a thinly traded market.
U.S. GOVERNMENT SECURITIES include direct obligations of the U.S.
Treasury (such as Treasury bills, notes or bonds) and obligations issued or
guaranteed as to principal and interest (but not as to market value) by the U.S.
government, its agencies or its instrumentalities. U.S. government securities
include mortgage-backed securities issued or guaranteed by government agencies
or government-sponsored enterprises. Other U.S. government securities may be
backed by the full faith and credit of the U.S. government or supported
primarily or solely by the creditworthiness of the government-related issuer or,
in the case of mortgage-backed securities, by pools of assets.
U.S. government securities also include separately traded principal and
interest components of securities issued or guaranteed by the U.S. Treasury,
which are traded independently under the Separate Trading of Registered Interest
and Principal of Securities ("STRIPS") program. Under the STRIPS programs, the
principal and interest components are individually numbered and separately
issued by the U.S. Treasury.
Treasury inflation protected securities ("TIPS") are Treasury bonds on
which the principal value is adjusted daily in accordance with changes in the
Consumer Price Index. Interest on TIPS is payable semi-annually on the adjusted
principal value. The principal value of TIPS would decline during periods of
deflation, but the principal amount payable at maturity would not be less than
the original par amount. If inflation is lower than expected while a fund holds
TIPS, the fund may earn less on the TIPS than it would on conventional Treasury
bonds. Any increase in the principal value of TIPS is taxable in the year the
increase occurs, even though holders do not receive cash representing the
increase at that time.
ASSET-BACKED SECURITIES. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed in more
detail below. However, the underlying assets are not first lien mortgage loans
or interests therein, but include assets such as motor vehicle installment sales
contracts, other installment sales contracts, home equity loans, leases of
various types of real and personal property and receivables from revolving
credit (credit card) agreements. Such assets are securitized through the use of
trusts or special purpose corporations. Payments or distributions of principal
and interest may be guaranteed up to a certain amount and for a certain time
period by a letter of credit or pool insurance policy issued by a financial
institution unaffiliated with the issuer, or other credit enhancements may be
present.
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MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent direct
or indirect interests in pools of underlying mortgage loans that are secured by
real property. U.S. government mortgage-backed securities are issued or
guaranteed as to the payment of principal and interest (but not as to market
value) by Ginnie Mae (also known as the Government National Mortgage
Association), Fannie Mae (also known as the Federal National Mortgage
Association), Freddie Mac (also known as the Federal Home Loan Mortgage
Corporation) or other government sponsored enterprises. Other domestic
mortgage-backed securities are sponsored or issued by private entities,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and special
purposes entities (collectively, "Private Mortgage Lenders"). Payments of
principal and interest (but not the market value) of such private
mortgage-backed securities may be supported by pools of mortgage loans or other
mortgage-backed securities that are guaranteed, directly or indirectly, by the
U.S. government or one of its agencies or instrumentalities, or they may be
issued without any government guarantee of the underlying mortgage assets but
with some form of non-government credit enhancement. Foreign mortgage-backed
securities may be issued by mortgage banks and other private or governmental
entities outside the United States and are supported by interests in foreign
real estate.
Mortgage-backed securities may be composed of one or more classes and
may be structured either as pass-through securities or collateralized debt
obligations. Multiple-class mortgage-backed securities are referred to herein as
"CMOs." Some CMOs are directly supported by other CMOs, which in turn are
supported by mortgage pools. Investors typically receive payments out of the
interest and principal on the underlying mortgages. The portions of these
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class. CMOs
involve special risk and evaluating them requires special knowledge.
A major difference between mortgage-backed securities and traditional
bonds is that interest and principal payments are made more frequently (usually
monthly) and that principal may be repaid at any time because the underlying
mortgage loans may be prepaid at any time. When interest rates go down and
homeowners refinance their mortgages, mortgage-backed securities may be paid off
more quickly than investors expect. When interest rates rise, mortgage-backed
securities may be paid off more slowly than originally expected. Changes in the
rate or "speed" of these prepayments can cause the value of mortgage-backed
securities to fluctuate rapidly.
Mortgage-backed securities also may decrease in value as a result of
increases in interest rates and, because of prepayments, may benefit less than
other bonds from declining interest rates. Reinvestments of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting 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. Prepayments at a slower rate than
expected may lengthen the effective life of a mortgage-backed security. The
value of securities with longer effective lives generally fluctuates more widely
in response to changes in interest rates than the value of securities with
shorter effective lives.
CMO classes may be specially structured in a manner that provides any
of a wide variety of investment characteristics, such as yield, effective
maturity and interest rate sensitivity. As market conditions change, however,
and particularly during periods of rapid or unanticipated changes in market
interest rates, the attractiveness of the CMO classes and the ability of the
structure to provide the anticipated investment characteristics may be
significantly reduced. These changes can result in volatility in the market
value, and in some instances reduced liquidity, of the CMO class.
Certain classes of CMOs and other mortgage-backed securities are
structured in a manner that makes them extremely sensitive to changes in
prepayment rates. Interest-only ("IO") and principal-only ("PO") classes are
examples of this. IOs are entitled to receive all or a portion of the interest,
but none (or only a nominal amount) of the principal payments, from the
underlying mortgage assets. If the mortgage assets underlying an IO experience
greater than anticipated principal prepayments, then the total amount of
interest payments allocable to the IO class, and therefore the yield to
investors, generally will be reduced. In some instances, an investor in an IO
may fail to recoup all of his or her initial investment, even if the security is
government issued or guaranteed or is rated AAA or the equivalent. Conversely,
PO classes are entitled to receive all or a portion of the principal payments,
but none of the interest, from the underlying mortgage assets. PO classes are
purchased at substantial discounts from par, and
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the yield to investors will be reduced if principal payments are slower than
expected. Some IOs and POs, as well as other CMO classes, are structured to have
special protections against the effects of prepayments. These structural
protections, however, normally are effective only within certain ranges of
prepayment rates and thus will not protect investors in all circumstances.
Inverse floating rate CMO classes also may be extremely volatile. These classes
pay interest at a rate that decreases when a specified index of market rates
increases.
The market for privately issued mortgage-backed securities is smaller
and less liquid than the market for U.S. government mortgage-backed securities.
Foreign mortgage-backed securities markets are substantially smaller than U.S.
markets, but have been established in several countries, including Germany,
Denmark, Sweden, Canada and Australia, and may be developed elsewhere. Foreign
mortgage-backed securities generally are structured differently than domestic
mortgage-backed securities, but they normally present substantially similar
investment risks as well as the other risks normally associated with foreign
securities.
During 1994, the value and liquidity of many mortgage-backed securities
declined sharply due primarily to increases in interest rates. There can be no
assurance that such declines will not recur. The market value of certain
mortgage-backed securities, including IO and PO classes of mortgage-backed
securities, can be extremely volatile, and these securities may become illiquid.
Mitchell Hutchins or the applicable sub-adviser seeks to manage an underlying
fund's investments in mortgage-backed securities so that the volatility of its
portfolio, taken as a whole, is consistent with its investment objective.
Management of portfolio duration is an important part of this. However,
computing the duration of mortgage-backed securities is complex. See,
"--Duration." If Mitchell Hutchins or the sub-adviser does not compute the
duration of mortgage-backed securities correctly, the value of the underlying
fund's portfolio may be either more or less sensitive to changes in market
interest rates than intended. In addition, if market interest rates or other
factors that affect the volatility of securities held by an underlying fund
change in ways that Mitchell Hutchins or the sub-adviser does not anticipate,
the underlying fund's ability to meet its investment objective may be reduced.
More information concerning these mortgage-backed securities and the
related risks of investments therein is set forth below. New types of
mortgage-backed securities are developed and marketed from time to time and,
consistent with their investment limitations, the underlying funds expect to
invest in those new types of mortgage-backed securities that Mitchell Hutchins
or the applicable sub-adviser believe may assist the underlying funds in
achieving their investment objectives. Similarly, the underlying funds may
invest in mortgage-backed securities issued by new or existing governmental or
private issuers other than those identified herein.
GINNIE MAE CERTIFICATES -- Ginnie Mae guarantees certain mortgage
pass-through certificates ("Ginnie Mae certificates") that are issued by Private
Mortgage Lenders and that represent ownership interests in individual pools of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. Timely payment of interest
and principal is backed by the full faith and credit of the U.S. government.
Each mortgagor's monthly payments to his lending institution on his residential
mortgage are "passed through" to certificateholders such as the underlying
funds. Mortgage pools consist of whole mortgage loans or participations in
loans. The terms and characteristics of the mortgage instruments are generally
uniform within a pool but may vary among pools. Lending institutions that
originate mortgages for the pools are subject to certain standards, including
credit and other underwriting criteria for individual mortgages included in the
pools.
FANNIE MAE CERTIFICATES -- Fannie Mae facilitates a national secondary
market in residential mortgage loans insured or guaranteed by U.S. government
agencies and in privately insured or uninsured residential mortgage loans
(sometimes referred to as "conventional mortgage loans" or "conventional loans")
through its mortgage purchase and mortgage-backed securities sales activities.
Fannie Mae issues guaranteed mortgage pass-through certificates ("Fannie Mae
certificates"), which represent pro rata shares of all interest and principal
payments made and owed on the underlying pools. Fannie Mae guarantees timely
payment of interest and principal on Fannie Mae certificates. The Fannie Mae
guarantee is not backed by the full faith and credit of the U.S. government.
FREDDIE MAC CERTIFICATES -- Freddie Mac also facilitates a national
secondary market for conventional residential and U.S. government-insured
mortgage loans through its mortgage purchase and mortgage-backed securities
sales activities. Freddie Mac issues two types of mortgage pass-through
securities: mortgage participation
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certificates ("PCs") and guaranteed mortgage certificates ("GMCs"). Each PC
represents a pro rata share of all interest and principal payments made and owed
on the underlying pool. Freddie Mac generally guarantees timely monthly payment
of interest on PCs and the ultimate payment of principal, but it also has a PC
program under which it guarantees timely payment of both principal and interest.
GMCs also represent a pro rata interest in a pool of mortgages. These
instruments, however, pay interest semi-annually and return principal once a
year in guaranteed minimum payments. The Freddie Mac guarantee is not backed by
the full faith and credit of the U.S. government.
PRIVATE MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities issued
by Private Mortgage Lenders are structured similarly to CMOs issued or
guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac. Such mortgage-backed
securities may be supported by pools of U.S. government or agency insured or
guaranteed mortgage loans or by other mortgage-backed securities issued by a
government agency or instrumentality, but they generally are supported by pools
of conventional (i.e., non-government guaranteed or insured) mortgage loans.
Since such mortgage-backed securities normally are not guaranteed by an entity
having the credit standing of Ginnie Mae, Fannie Mae and Freddie Mac, they
normally are structured with one or more types of credit enhancement. See
"--Types of Credit Enhancement." These credit enhancements do not protect
investors from changes in market value.
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 underlying funds to pay the debt service on the CMOs or to make
scheduled distributions on the multi-class mortgage pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMO, also referred to as a "tranche," is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause CMOs
to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrued on all classes of a CMO (other
than any principal-only or "PO" class) on a monthly, quarterly or semiannual
basis. The principal and interest on the Mortgage Assets may be allocated among
the several classes of a CMO in many ways. In one structure, payments of
principal, including any principal prepayments, on the Mortgage Assets are
applied to the classes of a CMO in the order of their respective stated
maturities or final distribution dates so that no payment of principal will be
made on any class of the CMO until all other classes having an earlier stated
maturity or final distribution date have been paid in full. In some CMO
structures, all or a portion of the interest attributable to one or more of the
CMO classes may be added to the principal amounts attributable to such classes,
rather than passed through to certificateholders on a current basis, until other
classes of the CMO are paid in full.
Parallel pay CMOs are structured to provide payments of principal on
each payment date to more than one class. These simultaneous payments are taken
into account in calculating the stated maturity date or final distribution date
of each class, which, as with other CMO structures, must be retired by its
stated maturity date or final distribution date but may be retired earlier.
Some CMO classes are structured to pay interest at rates that are
adjusted in accordance with a formula, such as a multiple or fraction of the
change in a specified interest rate index, so as to pay at a rate that will be
attractive in certain interest rate environments but not in others. For example,
an inverse floating rate CMO class pays interest at a rate that increases as a
specified interest rate index decreases but decreases as that index increases.
For other CMO classes, the yield may move in the same direction as market
interest rates -- i.e., the yield may increase as rates increase and decrease as
rates decrease--but may do so more rapidly or to a greater degree. The market
value of such securities generally is more volatile than that of a fixed rate
obligation. Such interest rate formulas may be combined with other CMO
characteristics. For example, a CMO class may be an inverse interest-
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only ("IO") class, on which the holders are entitled to receive no payments of
principal and are entitled to receive interest at a rate that will vary
inversely with a specified index or a multiple thereof.
TYPES OF CREDIT ENHANCEMENT -- To lessen the effect of failures by
obligors on Mortgage Assets to make payments, mortgage-backed securities may
contain elements of credit enhancement. Such credit enhancement falls into two
categories: (1) liquidity protection and (2) loss protection. Loss protection
relates to losses resulting after default by an obligor on the underlying assets
and collection of all amounts recoverable directly from the obligor and through
liquidation of the collateral. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets (usually the
bank, savings association or mortgage banker that transferred the underlying
loans to the issuer of the security), to ensure that the receipt of payments on
the underlying pool occurs in a timely fashion. Loss protection ensures ultimate
payment of the obligations on at least a portion of the assets in the pool. Such
protection may be provided through guarantees, insurance policies or letters of
credit obtained by the issuer or sponsor, from third parties, through various
means of structuring the transaction or through a combination of such
approaches. An underlying fund will not pay any additional fees for such credit
enhancement, although the existence of credit enhancement may increase the price
of a security. Credit enhancements do not provide protection against changes in
the market value of the security. Examples of credit enhancement arising out of
the structure of the transaction include "senior-subordinated securities"
(multiple class securities with one or more classes subordinate to other classes
as to the payment of principal thereof and interest thereon, with the result
that defaults on the underlying assets are borne first by the holders of the
subordinated class), creation of "spread accounts" or "reserve funds" (where
cash or investments, sometimes funded from a portion of the payments on the
underlying assets, are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed that required to make payment of the
securities and pay any servicing or other fees). The degree of credit
enhancement provided for each issue generally is based on historical information
regarding the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that anticipated could adversely affect the
return on an investment in such a security.
SPECIAL CHARACTERISTICS OF MORTGAGE- AND ASSET-BACKED SECURITIES -- The
yield characteristics of mortgage- and asset-backed securities differ from those
of traditiona1 debt securities. Among the major differences are that interest
and principal payments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans or
other obligations generally may be prepaid at any time. Prepayments on a pool of
mortgage loans are influenced by a variety of economic, geographic, social and
other factors, including changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and servicing
decisions. Generally, however, prepayments on fixed-rate mortgage loans will
increase during a period of falling interest rates and decrease during a period
of rising interest rates. Similar factors apply to prepayments on asset-backed
securities, but the receivables underlying asset-backed securities generally are
of a shorter maturity and thus are less likely to experience substantial
prepayments. Such securities, however, often provide that for a specified time
period the issuers will replace receivables in the pool that are repaid with
comparable obligations. If the issuer is unable to do so, repayment of principal
on the asset-backed securities may commence at an earlier date. Mortgage- and
asset-backed securities may decrease in value as a result of increases in
interest rates and may benefit less than other fixed-income securities from
declining interest rates because of the risk of prepayment.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through
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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 an underlying fund's yield.
ADJUSTABLE RATE MORTGAGE AND FLOATING RATE MORTGAGE-BACKED SECURITIES
- -- Adjustable rate mortgage ("ARM") securities are mortgage-backed securities
(sometimes referred to as ARMs) that represent a right to receive interest
payments at a rate that is adjusted to reflect the interest earned on a pool of
mortgage loans bearing variable or adjustable rates of interest. Floating rate
mortgage-backed securities are classes of mortgage-backed securities that have
been structured to represent the right to receive interest payments at rates
that fluctuate in accordance with an index but that generally are supported by
pools comprised of fixed-rate mortgage loans. Because the interest rates on ARM
and floating rate mortgage-backed securities are reset in response to changes in
a specified market index, the values of such securities tend to be less
sensitive to interest rate fluctuations than the values of fixed-rate
securities. As a result, during periods of rising interest rates, ARMs generally
do not decrease in value as much as fixed rate securities. Conversely, during
periods of declining rates, ARMs generally do not increase in value as much as
fixed rate securities. ARMs represent a right to receive interest payments at a
rate that is adjusted to reflect the interest earned on a pool of adjustable
rate mortgage loans. These mortgage loans generally specify that the borrower's
mortgage interest rate may not be adjusted above a specified lifetime maximum
rate or, in some cases, below a minimum lifetime rate. In addition, certain
adjustable rate mortgage loans specify limitations on the maximum amount by
which the mortgage interest rate may adjust for any single adjustment period.
These mortgage loans also may limit changes in the maximum amount by which the
borrower's monthly payment may adjust for any single adjustment period. In the
event that a monthly payment is not sufficient to pay the interest accruing on
the ARM, any such excess interest is added to the mortgage loan ("negative
amortization"), which is repaid through future payments. If the monthly payment
exceeds the sum of the interest accrued at the applicable mortgage interest rate
and the principal payment that would have been necessary to amortize the
outstanding principal balance over the remaining term of the loan, the excess
reduces the principal balance of the adjustable rate mortgage loan. Borrowers
under these mortgage loans experiencing negative amortization may take longer to
build up their equity in the underlying property and may be more likely to
default.
Adjustable rate mortgage loans also may be subject to a greater rate of
prepayments in a declining interest rate environment. For example, during a
period of declining interest rates, prepayments on these mortgage loans could
increase because the availability of fixed mortgage loans at competitive
interest rates may encourage mortgagors to "lock-in" at a lower interest rate.
Conversely, during a period of rising interest rates, prepayments on adjustable
rate mortgage loans might decrease. The rate of prepayments with respect to
adjustable rate mortgage loans has fluctuated in recent years.
The rates of interest payable on certain adjustable rate mortgage
loans, and therefore on certain ARM securities, are based on indices, such as
the one-year constant maturity Treasury rate, that reflect changes in market
interest rates. Others are based on indices, such as the 11th District Federal
Home Loan Bank Cost of Funds Index ("COFI"), that tend to lag behind changes in
market interest rates. The values of ARM securities supported by adjustable rate
mortgage loans that adjust based on lagging indices tend to be somewhat more
sensitive to interest rate fluctuations than those reflecting current interest
rate levels, although the values of such ARM securities still tend to be less
sensitive to interest rate fluctuations than fixed-rate securities.
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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 debt security
on a present value basis. Duration incorporates the debt security's yield,
coupon interest payments, final maturity and call features into one measure and
is one of the underlying fundamental tools used by Mitchell Hutchins or, where
applicable, a sub-adviser in portfolio selection and yield curve positioning an
underlying fund's investments in debt securities. Duration was developed as a
more precise alternative to the concept "term to maturity." Traditionally, a
debt security's "term to maturity" has been used as a proxy for the sensitivity
of the security's price to changes in interest rates (which is the "interest
rate risk" or "volatility" of the security). However, "term to maturity"
measures only the time until a debt security provides for a final payment,
taking no account of the pattern of the security's payments prior to maturity.
Duration takes the length of the time intervals between the present
time and the time that the interest and principal payments are scheduled or, in
the case of a callable debt security, expected to be made, and weights them by
the present values of the cash to be received at each future point in time. For
any debt security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. For example, depending on its
coupon and the level of market yields, a Treasury note with a remaining maturity
of five years might have a duration of 4.5 years. For mortgage-backed and other
securities that are subject to prepayments, put or call features or adjustable
coupons, the difference between the remaining stated maturity and the duration
is likely to be much greater.
Duration allows Mitchell Hutchins or a sub-adviser to make certain
predictions as to the effect that changes in the level of interest rates will
have on the value of an underlying fund's portfolio of debt securities. For
example, when the level of interest rates increases by 1%, a debt security
having a positive duration of three years generally will decrease by
approximately 3%. Thus, if Mitchell Hutchins or a sub-adviser calculates the
duration of an underlying fund's portfolio of bonds as three years, it normally
would expect the portfolio to change in value by approximately 3% for every 1%
change in the level of interest rates. However, various factors, such as changes
in anticipated prepayment rates, qualitative considerations and market supply
and demand, can cause particular securities to respond somewhat differently to
changes in interest rates than indicated in the above example. Moreover, in the
case of mortgage-backed and other complex securities, duration calculations are
estimates and are not precise. This is particularly true during periods of
market volatility. Accordingly, the net asset value of an underlying fund's
portfolio of bonds may vary in relation to interest rates by a greater or lesser
percentage than indicated by the above example.
Futures, options and options on futures have durations that, in
general, are closely related to the duration of the securities that underlie
them. Holding long futures or call option positions will lengthen portfolio
duration by approximately the same amount as would holding an equivalent amount
of the underlying securities. Short futures or put options have durations
roughly equal to the negative duration of the securities that underlie these
positions, and have the effect of reducing portfolio duration by approximately
the same amount as would selling an equivalent amount of the underlying
securities.
There are some situations in which the standard duration calculation
does not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by the standard duration calculation is the case of mortgage-backed
securities. The stated final maturity of such securities is generally 30 years,
but current prepayment rates are critical in determining the securities'
interest rate exposure. In these and other similar situations, Mitchell Hutchins
or a sub-adviser will use more sophisticated analytical techniques that
incorporate the economic life of a security into the determination of its
duration and, therefore, its interest rate exposure.
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INVESTING IN FOREIGN SECURITIES. Investing in foreign securities
involves more risks than investing in the United States. The value of foreign
securities is subject to economic and political developments in the countries
where the companies operate and to changes in foreign currency values.
Investments in foreign securities involve risks relating to political, social
and economic developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign issuers and
markets are subject. These risks may include expropriation, confiscatory
taxation, withholding taxes on interest and/or dividends, limitations on the use
of or transfer of fund assets and political or social instability or diplomatic
developments. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. In those European countries that have begun using
the Euro as a common currency unit, individual national economies may be
adversely affected by the inability of national governments to use monetary
policy to address their own economic or political concerns.
Securities of many foreign companies may be less liquid and their
prices more volatile than securities of comparable U.S. companies. Transactions
in foreign securities may be subject to less efficient settlement practices.
Foreign securities trading practices, including those involving securities
settlement where underlying fund assets may be released prior to receipt of
payment, may expose a fund to increased risk in the event of a failed trade or
the insolvency of a foreign broker-dealer. Legal remedies for defaults and
disputes may have to be pursued in foreign courts, whose procedures differ
substantially from those of U.S. courts. Additionally, the costs of investing
outside the United States are frequently higher than those in the United States.
These costs include relatively higher brokerage commissions and foreign custody
expenses.
Securities of foreign issuers may not be registered with the SEC, and
the issuers thereof may not be subject to its reporting requirements.
Accordingly, there may be less publicly available information concerning foreign
issuers of securities held by the underlying funds than is available concerning
U.S. companies. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards or to other regulatory
requirements comparable to those applicable to U.S.
companies.
The underlying funds may invest in foreign securities by purchasing
depository receipts, including American Depository Receipts ("ADRs"), European
Depository Receipts ("EDRs") and Global Depository Receipts ("GDRs"), or other
securities convertible into securities of issuers based in foreign countries.
These securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by a U.S. bank or trust company evidencing ownership of the underlying
securities. They generally are in registered form, are denominated in U.S.
dollars and are designed for use in the U.S. securities markets. EDRs are
European receipts evidencing a similar arrangement, may be denominated in other
currencies and are designed for use in European securities markets. GDRs are
similar to EDRs and are designed for use in several international financial
markets. For purposes of each underlying fund's investment policies, depository
receipts generally are deemed to have the same classification as the underlying
securities they represent. Thus, a depository receipt representing ownership of
common stock will be treated as common stock.
ADRs are publicly traded on exchanges or over-the-counter in the United
States and are issued through "sponsored" or "unsponsored" arrangements. In a
sponsored ADR arrangement, the foreign issuer assumes the obligation to pay some
or all of the depository's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depository's
transaction fees are paid directly by the ADR holders. In addition, less
information is available in the United States about an unsponsored ADR than
about a sponsored ADR.
The underlying funds that invest outside the United States anticipate
that their brokerage transactions involving foreign securities of companies
headquartered in countries other than the United States will be conducted
primarily on the principal exchanges of such countries. However, from time to
time, foreign securities may be difficult to liquidate rapidly without
significantly depressing the price of such securities. Although each underlying
fund will endeavor to achieve the best net results in effecting its portfolio
transactions, transactions on foreign exchanges are usually subject to fixed
commissions that are generally higher than negotiated commissions on U.S.
transactions. There is generally less government supervision and regulation of
exchanges and brokers in foreign countries than in the United States.
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[Foreign markets have different clearance and settlement procedures,
and in certain markets there have been times when settlements have failed to
keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Delays in settlement could result in temporary
periods when assets of an underlying fund are uninvested and no return is earned
thereon. The inability of an underlying fund to make intended security purchases
due to settlement problems could cause the underlying 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.]
Investment income and gains on certain foreign securities in which the
underlying funds may invest may be subject to foreign withholding or other taxes
that could reduce the return on these securities. Tax treaties between the
United States and certain foreign countries, however, may reduce or eliminate
the amount of foreign taxes to which the underlying funds would be subject. In
addition, substantial limitations may exist in certain countries with respect to
the underlying funds' ability to repatriate investment capital or the proceeds
of sales of securities.
FOREIGN CURRENCY RISKS. Currency risk is the risk that changes in
foreign exchange rates may reduce the U.S. dollar value of an underlying fund's
foreign investments. An underlying fund's share value may change significantly
when its 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 also can be affected by the intervention of the U.S. and foreign
governments or central banks, the imposition of currency controls, speculation,
devaluation or other political or economic developments inside and outside the
United States.
Each underlying fund values its assets daily in U.S. dollars and does
not intend to convert its holdings of foreign currencies to U.S. dollars on a
daily basis. From time to time an underlying fund's foreign currencies may be
held as "foreign currency call accounts" at foreign branches of foreign or
domestic banks. These accounts bear interest at negotiated rates and are payable
upon relatively short demand periods. If a bank became insolvent, an underlying
fund could suffer a loss of some or all of the amounts deposited. Each
underlying fund may convert foreign currency to U.S. dollars from time to time.
The value of the assets of an underlying fund as measured in U.S.
dollars may be affected favorably or unfavorably by fluctuations in currency
rates and exchange control regulations. Further, an underlying fund may incur
costs in connection with conversions between various currencies. Currency
exchange dealers realize a profit based on the difference between the prices at
which they are buying and selling various currencies. Thus, a dealer normally
will offer to sell a foreign currency to an underlying fund at one rate, while
offering a lesser rate of exchange should an underlying fund desire immediately
to resell that currency to the dealer. Each underlying fund conducts its
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or through entering
into forward, futures or options contracts to purchase or sell foreign
currencies.
SPECIAL CHARACTERISTICS OF EMERGING MARKET SECURITIES AND SOVEREIGN DEBT
EMERGING MARKET INVESTMENTS. The special risks of investing in foreign
securities are heightened when emerging markets are involved. For example, many
emerging market currencies recently have experienced significant devaluations
relative to the U.S. dollar. Emerging market countries typically have economic
and political systems that are less fully developed and can be expected to be
less stable than those of developed countries. Emerging market countries may
have policies that restrict investment by foreigners, and there is a higher risk
of government expropriation or nationalization of private property. The
possibility of low or nonexistent trading volume in the securities of companies
in emerging markets also may result in a lack of liquidity and in price
volatility. Issuers in emerging markets typically are subject to a greater
degree of change in earnings and business prospects than are companies in
developed markets.
INVESTMENT AND REPATRIATION RESTRICTIONS -- Foreign investment in the
securities markets of several emerging market countries is restricted or
controlled to varying degrees. These restrictions may limit an underlying
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fund's investment in these countries and may increase its expenses. For example,
certain countries may require governmental approval prior to investments by
foreign persons in a particular company or industry sector or limit investment
by foreign persons to only a specific class of securities of a company, which
may have less advantageous terms (including price) than securities of the
company available for purchase by nationals. Certain countries may restrict or
prohibit investment opportunities in issuers or industries deemed important to
national interests. In addition, the repatriation of both investment income and
capital from some emerging market countries is subject to restrictions, such as
the need for certain government consents. Even where there is no outright
restriction on repatriation of capital, the mechanics of repatriation may affect
certain aspects of an underlying fund's operations. These restrictions may in
the future make it undesirable to invest in the countries to which they apply.
In addition, if there is a deterioration in a country's balance of payments or
for other reasons, a country may impose restrictions on foreign capital
remittances abroad. An underlying fund could be adversely affected by delays in,
or a refusal to grant, any required governmental approval for repatriation, as
well as by the application to it of other restrictions on investments.
If, because of restrictions on repatriation or conversion, an
underlying fund were unable to distribute substantially all of its net
investment income and net short-term and long-term capital gains within
applicable time periods, the underlying fund would be subject to federal income
and/or excise taxes that would not otherwise be incurred and could cease to
qualify for the favorable tax treatment afforded to regulated investment
companies under the Internal Revenue Code. In that case, it would become subject
to federal income tax on all of its income and net gains.
SOCIAL, POLITICAL AND ECONOMIC FACTORS -- Many emerging market
countries may be subject to a greater degree of social, political and economic
instability than is the case in the United States. Any change in the leadership
or policies of these countries may halt the expansion of or reverse any
liberalization of foreign investment policies now occurring. Such instability
may result from, among other things, the following: (i) authoritarian
governments or military involvement in political and economic decision making,
and changes in government through extra-constitutional means; (ii) popular
unrest associated with demands for improved political, economic and social
conditions; (iii) internal insurgencies; (iv) hostile relations with neighboring
countries; and (v) ethnic, religious and racial disaffection. Such social,
political and economic instability could significantly disrupt the financial
markets in those countries and elsewhere and could adversely affect the value of
an underlying fund's assets. In addition, there may be the possibility of asset
expropriations or future confiscatory levels of taxation affecting an underlying
fund.
The economies of many emerging markets are heavily dependent upon
international trade and are accordingly affected by protective trade barriers
and the economic conditions of their trading partners, principally the United
States, Japan, China and the European Community. The enactment by the United
States or other principal trading partners of protectionist trade legislation,
reduction of foreign investment in the local economies and general declines in
the international securities markets could have a significant adverse effect
upon the securities markets of these countries. In addition, the economies of
some countries are vulnerable to weakness in world prices for their commodity
exports, including crude oil.
FINANCIAL INFORMATION AND LEGAL STANDARDS -- Issuers in emerging market
countries generally are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
to U.S. issuers. In particular, the assets and profits appearing on the
financial statements of an emerging market issuer may not reflect its financial
position or results of operations in the way they would be reflected had the
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. In addition, for an issuer that keeps accounting records
in local currency, inflation accounting rules may require, for both tax and
accounting purposes, that certain assets and liabilities be restated on the
issuer's balance sheet in order to express items in terms of currency of
constant purchasing power. Inflation accounting may indirectly generate losses
or profits. Consequently, financial data may be materially affected by
restatements for inflation and may not accurately reflect the real condition of
those issuers and securities markets.
In addition, existing laws and regulations are often inconsistently
applied. As legal systems in some of the emerging market countries develop,
foreign investors may be adversely affected by new laws and regulations,
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changes to existing laws and regulations and preemption of local laws and
regulations by national laws. In circumstances where adequate laws exist, it may
not be possible to obtain swift and equitable enforcement of the law.
FOREIGN SOVEREIGN DEBT. Sovereign debt includes bonds that are issued
by foreign governments or their agencies, instrumentalities or political
subdivisions or by foreign central banks. Sovereign debt also may be issued by
quasi-governmental entities that are owned by foreign governments but are not
backed by their full faith and credit or general taxing powers. Investment in
sovereign debt involves special risks. The issuer of the debt or the
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal and/or interest when due in accordance with the
terms of such debt, and the underlying funds may have limited legal recourse in
the event of a default.
Sovereign debt differs from debt obligations issued by private entities
in that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore somewhat diminished. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt obligations, are of considerable significance. Also, there can be no
assurance that the holders of commercial bank debt issued by the same sovereign
entity may not contest payments to the holders of sovereign debt in the event of
default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and
interest due in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which a
sovereign debtor may be subject. A country whose exports are concentrated in a
few commodities could be vulnerable to a decline in the international price of
such commodities. Increased protectionism on the part of a country's trading
partners, or political changes in those countries, could also adversely affect
its exports. Such events could diminish a country's trade account surplus, if
any, or the credit standing of a particular local government or agency. Another
factor bearing on the ability of a country to repay sovereign debt is the level
of the country's international reserves. Fluctuations in the level of these
reserves can affect the amount of foreign exchange readily available for
external debt payments and, thus, could have a bearing on the capacity of the
country to make payments on its sovereign debt.
The occurrence of political, social or diplomatic changes in one or
more of the countries issuing sovereign debt could adversely affect the
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 or the
sub-adviser manages an underlying fund's portfolio in a manner that is intended
to minimize the exposure to such risks, there can be no assurance that adverse
political changes will not cause the underlying funds to suffer a loss of
interest or principal on any of its sovereign debt holdings.
With respect to sovereign debt of emerging market issuers, investors
should be aware that certain emerging market countries are among the largest
debtors to commercial banks and foreign governments. Some emerging market
countries have from time to time declared moratoria on the payment of principal
and interest on external debt.
Some emerging market countries have experienced difficulty in servicing
their sovereign debt on a timely basis which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit agreements
or converting outstanding principal and unpaid interest to Brady Bonds
(discussed below), and obtaining new credit to finance interest payments.
Holders of sovereign debt, including the underlying funds, may be requested to
participate in the rescheduling of such debt and to extend further loans to
sovereign debtors. The interests of holders of sovereign debt could be adversely
affected in the course of restructuring arrangements or by certain other factors
referred to below. Furthermore, some of the participants in the secondary market
for sovereign debt may also be directly involved in negotiating the terms of
these arrangements and may, therefore, have access to information not available
to other market participants. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of certain issuers of
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sovereign debt. There is no bankruptcy proceeding by which sovereign debt on
which a sovereign has defaulted may be collected in whole or in part.
Foreign investment in certain sovereign debt is restricted or
controlled to varying degrees. These restrictions or controls may at times limit
or preclude foreign investment in such sovereign debt and increase the costs and
expenses of an underlying fund. Certain countries in which an underlying fund
may invest require governmental approval prior to investments by foreign
persons, limit the amount of investment by foreign persons in a particular
issuer, limit the investment by foreign persons only to a specific class of
securities of an issuer that may have less advantageous rights than the classes
available for purchase by domiciliaries of the countries or impose additional
taxes on foreign investors. Certain issuers may require governmental approval
for the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in a
country's balance of payments the country could impose temporary restrictions on
foreign capital remittances. An underlying fund could be adversely affected by
delays in, or a refusal to grant, any required governmental approval for
repatriation of capital, as well as by the application to the underlying fund of
any restrictions on investments. Investing in local markets may require an
underlying fund to adopt special procedures, seek local government approvals or
take other actions, each of which may involve additional costs to the underlying
fund.
BRADY BONDS -- Brady Bonds are sovereign bonds issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness. In
restructuring its external debt under the Brady Plan framework, a debtor nation
negotiates with its existing bank lenders as well as multilateral institutions
such as the International Monetary Fund ("IMF"). The Brady Plan framework, as it
has developed, contemplates the exchange of commercial bank debt for newly
issued Brady Bonds. Brady Bonds may also be issued in respect of new money being
advanced by existing lenders in connection with the debt restructuring. The
World Bank and the IMF support the restructuring by providing underlying 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, an
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 that would have then been due on the Brady Bonds in the
normal course. Interest payments on Brady Bonds may be wholly uncollateralized
or may be collateralized by cash or high grade securities in amounts that
typically represent between 12 and 18 months of interest accruals on these
instruments, with the balance of the interest accruals being uncollateralized.
Brady Bonds are often viewed as having several valuation components:
(1) the collateralized repayment of principal, if any, at final maturity, (2)
the collateralized interest payments, if any, (3) the uncollateralized interest
payments and (4) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with
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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.
An underlying fund may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) repayment of principal
primarily on the willingness and ability of the foreign government to make
payment in accordance with the terms of the Brady Bonds.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. The underlying funds may
invest in securities of other investment companies, subject to Investment
Company Act limitations which at present restrict these investments in the
aggregate to no more than 10% of a fund's total assets. The shares of other
investment companies are subject to the management fees and other expenses of
those underlying funds, and the purchase of shares of some investment companies
requires the payment of sales loads and sometimes 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 expenses with respect to
all its investments, including the securities of other investment companies.
Each underlying fund may invest in the shares of other investment companies
when, in the judgment of Mitchell Hutchins or the applicable sub-adviser, the
potential benefits of such investment outweigh the payment of any management
fees and expenses and, where applicable, premium or sales load.
ZERO COUPON, OID AND PIK SECURITIES. Zero coupon securities are
securities on which no periodic interest payments are made but instead are sold
at a deep discount from their face value. The buyer of these securities receives
a rate of return by the gradual appreciation of the security, which results from
the fact that it will be paid at face value on a specified maturity date. There
are many types of zero coupon securities. Some are issued in zero coupon form,
including Treasury bills, notes and bonds that have been stripped of (separated
from) their unmatured interest coupons (unmatured interest payments) and
receipts or certificates representing interests in such stripped debt
obligations and coupons. Others are created by brokerage firms that strip the
coupons from interest-paying bonds and sell the principal and the coupons
separately.
Other securities are sold with original issue discount ("OID"), a term
that means the securities are issued at a price that is lower than their value
at maturity, even though interest on the securities may be paid prior to
maturity. In addition, payment-in-kind ("PIK") securities pay interest in
additional securities, not in cash. OID and PIK securities usually trade at a
discount from their face value.
Zero coupon securities are generally more sensitive to changes in
interest rates than debt obligations of comparable maturities that make current
interest payments. This means that when interest rates fall, the value of zero
coupon securities rises more rapidly than securities paying interest on a
current basis. However, when interest rates rise, their value falls more
dramatically. Other OID securities and PIK securities also are subject to
greater fluctuations in market value in response to changing interest rates than
bonds of comparable maturities that make current distributions of interest in
cash.
Federal tax law requires that the holder of a zero coupon security or
other OID security include in gross income each year the OID that accrues on the
security for the year, even though the holder receives no interest payment on
the security during the year. Similarly, while PIK securities may pay interest
in the form of additional securities rather than cash, that interest must be
included in an underlying fund's current income. These distributions would have
to be made from the underlying fund's cash assets or, if necessary, from the
proceeds of sales of portfolio securities. An underlying fund would not be able
to purchase additional securities with cash used to make such distributions and
its current income and the value of its shares would ultimately be reduced as a
result.
Certain zero coupon securities are U.S. Treasury notes and bonds that
have been stripped of their unmatured interest coupon receipts or interests in
such U.S. Treasury securities or coupons. The staff of the SEC currently takes
the position that "stripped" U.S. government securities that are not issued
through the U.S. Treasury are not U.S. government securities. This technique is
frequently used with U.S. Treasury bonds to create CATS (Certificate of Accrual
Treasury Securities), TIGRs (Treasury Income Growth Receipts) and similar
securities.
LOAN PARTICIPATIONS AND ASSIGNMENTS. PaineWebber Investment Grade
Income Fund and PaineWebber High Income Fund may each invest up to 5% of its net
assets, and PaineWebber Global Income Fund may invest
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without limitation, in secured or unsecured fixed or floating rate loans
("Loans") arranged through private negotiations between a borrowing corporation,
government or other entity and one or more financial institutions ("Lenders").
These investments are expected in most instances to be in the form of
participations ("Participations") in Loans or assignments ("Assignments") of all
or a portion of Loans from third parties. Participations typically result in the
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 an underlying 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
selling Lender, the underlying fund may be treated as a general creditor of that
Lender and may not benefit from any set-off between the Lender and the borrower.
An underlying fund will acquire Participations only if Mitchell Hutchins or the
applicable sub-adviser determines that the selling Lender is creditworthy.
When an underlying fund purchases Assignments from Lenders, it acquires
direct rights against the borrower on the Loan. In an 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 onto the underlying
fund. However, because Assignments are arranged through private negotiations
between potential assignees and assignors, the rights and obligations acquired
by the 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
Securities Act of 1933, as amended ("Securities Act") and thus may be subject to
an underlying fund's limitation on investment in illiquid securities. Because
there may be no liquid market for such securities, such securities may be sold
only to a limited number of institutional investors. The lack of a liquid
secondary market could have an adverse impact on the value of such securities
and on an underlying fund's ability to dispose of particular Assignments or
Participations when necessary to meet the underlying fund's liquidity needs or
in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower.
ILLIQUID SECURITIES. The term "illiquid securities" for purposes of the
Prospectus and SAI means securities that cannot be disposed of within seven days
in the ordinary course of business at approximately the amount at which an
underlying fund has valued the securities and includes, among other things,
purchased over-the-counter options, repurchase agreements maturing in more than
seven days and restricted securities other than those Mitchell Hutchins or the
applicable sub-adviser has determined are liquid pursuant to guidelines
established by the board. The assets used as cover for over-the-counter options
written by the underlying funds will be considered illiquid unless the
over-the-counter options are sold to qualified dealers who agree that the
underlying funds may repurchase any over-the-counter options they write at a
maximum price to be calculated by a formula set forth in the option agreements.
The cover for an over-the-counter option written subject to this procedure would
be considered illiquid only to the extent that the maximum repurchase price
under the formula exceeds the intrinsic value of the option. Under current SEC
guidelines, interest only and principal only classes of mortgage-backed
securities generally are considered illiquid. However, interest only and
principal only classes of fixed-rate mortgage-backed securities issued by the
U.S. government or one of its agencies or instrumentalities will not be
considered illiquid if Mitchell Hutchins or the sub-adviser has determined that
they are liquid pursuant to guidelines established by the board. To the extent
an underlying fund invests in illiquid securities, it may not be able to readily
liquidate such investments and may have to sell other investments if necessary
to raise cash to meet its obligations. The lack of a liquid secondary market for
illiquid securities may make it more difficult for an underlying fund to assign
a value to those securities for purposes of valuing its portfolio and
calculating its net asset value.
Restricted securities are not registered under the Securities Act and
may be sold only in privately negotiated or other exempted transactions or after
a Securities Act registration statement has become effective. Where registration
is required, 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 an underlying fund may
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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 generally are not considered illiquid, even if they are
restricted in the United States. A large institutional market has developed for
many U.S. and foreign securities that are not registered under the Securities
Act. Institutional investors generally will not seek to sell these instruments
to the general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not dispositive of the liquidity of such investments.
Institutional markets for restricted securities also have developed as
a result of Rule 144A under the Securities Act, which establishes a "safe
harbor" from the registration requirements of that Act for resales of certain
securities to qualified institutional buyers. Such markets include automated
systems for the trading, clearance and settlement of unregistered securities of
domestic and foreign issuers, such as the PORTAL System sponsored by the
National Association of Securities Dealers, Inc. An insufficient number of
qualified institutional buyers interested in purchasing Rule 144A-eligible
restricted securities held by an underlying fund, however, could affect
adversely the marketability of such portfolio securities, and the underlying
fund might be unable to dispose of such securities promptly or at favorable
prices.
The board has delegated the function of making day-to-day
determinations of liquidity to Mitchell Hutchins or the applicable sub-adviser
pursuant to guidelines approved by the board. Mitchell Hutchins or the
sub-adviser takes into account a number of factors in reaching liquidity
decisions, including (1) the frequency of trades for the security, (2) the
number of dealers that make quotes for the security, (3) the number of dealers
that have undertaken to make a market in the security, (4) the number of other
potential purchasers and (5) the nature of the security and how trading is
effected (e.g., the time needed to sell the security, how bids are solicited and
the mechanics of transfer). Mitchell Hutchins or the sub-adviser monitors the
liquidity of restricted securities in each underlying fund's portfolio and
reports periodically on such decisions to the board.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which
an underlying fund purchases securities or other obligations from a bank or
securities dealer (or its affiliate) and simultaneously commits to resell them
to the counterparty at an agreed-upon date or upon demand and at a price
reflecting a market rate of interest unrelated to the coupon rate or maturity of
the purchased obligations. An 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 sub-custodian 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. Repurchase
agreements carry certain risks not associated with direct investments in
securities, including a possible decline in the market value of the underlying
obligations. If their value becomes less than the repurchase price, plus any
agreed-upon additional amount, the counterparty must provide additional
collateral so that at all times the collateral is at least equal to the
repurchase price plus any agreed-upon additional amount. The difference between
the total amount to be received upon repurchase of the obligations and the price
that was paid by an underlying fund upon acquisition is accrued as interest and
included in its net investment income. Repurchase agreements involving
obligations other than U.S. government securities (such as commercial paper and
corporate bonds) may be subject to special risks and may not have the benefit of
certain protections in the event of the counterparty's insolvency. If the seller
or guarantor becomes insolvent, the underlying fund may suffer delays, costs and
possible losses in connection with the disposition of collateral. Each
underlying fund intends to enter into repurchase agreements only with
counterparties in transactions believed by Mitchell Hutchins to present minimum
credit risks.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements involve
the sale of securities held by an underlying fund subject to its agreement to
repurchase the securities at an agreed-upon date or upon demand and at a price
reflecting a market rate of interest. Reverse repurchase agreements are subject
to each underlying fund's
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limitation on borrowings. While a reverse repurchase agreement is outstanding,
an underlying fund will maintain, in a segregated account with its custodian,
cash or liquid securities, marked to market daily, in an amount at least equal
to its obligations under the reverse repurchase agreement.
Reverse repurchase agreements involve the risk that the buyer of the
securities sold by an underlying fund might be unable to deliver them when that
underlying fund seeks to repurchase. If the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
trustee or receiver may receive an extension of time to determine whether to
enforce that underlying fund's obligation to repurchase the securities, and the
underlying fund's use of the proceeds of the reverse repurchase agreement may
effectively be restricted pending such decision.
TEMPORARY AND DEFENSIVE INVESTMENTS; MONEY MARKET INVESTMENTS. Each
underlying fund may invest in money market investments for temporary or
defensive purposes or as part of its normal investment program. Such investments
include, among other things, (1) securities issued or guaranteed by the U.S.
government or one of its agencies or instrumentalities, (2) debt obligations of
banks, savings and loan institutions, insurance companies and mortgage bankers,
(3) commercial paper and notes, including those with variable and floating rates
of interest, (4) debt obligations of foreign branches of U.S. banks, U.S.
branches of foreign banks and foreign branches of foreign banks, (5) debt
obligations issued or guaranteed by one or more foreign governments or any of
their political subdivisions, agencies or instrumentalities, including
obligations of supranational entities, (6) bonds issued by foreign issuers, (7)
repurchase agreements and (8) other investment companies that invest exclusively
in money market instruments.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each underlying fund may
purchase securities on a "when-issued" basis or may purchase or sell securities
for delayed delivery, that is, for issuance or delivery to the underlying fund
later than the normal settlement date for such securities at a stated price and
yield. When issued securities include TBA ("to be announced") securities. TBA
securities, which are usually mortgage-backed securities, are purchased on a
forward commitment basis with an approximate principal amount and no defined
maturity date. The actual principal amount and maturity date are determined upon
settlement when the specific mortgage pools are assigned. An underlying fund
generally would not pay for such securities or start earning interest on them
until they are received. However, when an underlying fund undertakes a
when-issued or delayed-delivery obligation, it immediately assumes the risks of
ownership, including the risks of price fluctuation. Failure of the issuer to
deliver a security purchased by an underlying fund on a when-issued or
delayed-delivery basis may result in the underlying fund's incurring or missing
an opportunity to make an alternative investment. Depending on market
conditions, an underlying fund's when-issued and delayed-delivery purchase
commitments could cause its net asset value per share to be more volatile,
because such securities may increase the amount by which the underlying fund's
total assets, including the value of when-issued and delayed-delivery securities
held by that underlying fund, exceeds its net assets.
A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in market
value, generally based upon changes in the level of interest rates. Thus,
fluctuation in the value of the security from the time of the commitment date
will affect an underlying fund's net asset value. When an underlying fund
commits to purchase securities on a when-issued or delayed delivery basis, its
custodian segregates assets to cover the amount of the commitment. An underlying
fund may sell the right to acquire the security prior to delivery if Mitchell
Hutchins or a sub-adviser, as applicable, deems it advantageous to do so, which
may result in a gain or loss to the underlying fund.
LENDING OF PORTFOLIO SECURITIES. Each underlying fund is authorized to
lend its portfolio securities in an amount up to 33 1/3% of its total assets to
broker-dealers or institutional investors that Mitchell Hutchins deems
qualified. Lending securities enables an underlying fund to earn additional
income, but could result in a loss or delay in recovering these securities. The
borrower of an underlying fund's portfolio securities must maintain 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. Each underlying fund may reinvest
any cash collateral in money market investments or other short-term
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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 reinvestment of cash held as collateral. An underlying fund will receive
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 underlying fund's
interest.
Pursuant to procedures adopted by the board governing each underlying
fund's securities lending program, PaineWebber has been retained to serve as
lending agent for each underlying fund. The boards also have authorized the
payment of fees (including fees calculated as a percentage of invested cash
collateral) to PaineWebber for these services. Each board periodically reviews
all portfolio securities loan transactions for which PaineWebber acted as
lending agent. PaineWebber also has been approved as a borrower under each
underlying fund's securities lending program.
SHORT SALES "AGAINST THE BOX." Each underlying fund may engage in short
sales of securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales "against the
box"). To make delivery to the purchaser in a short sale, the executing broker
borrows the securities being sold short on behalf of 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, in a segregated account
with its custodian, the securities that could be used to cover the short sale.
Each underlying fund incurs transaction costs, including interest expense, in
connection with opening, maintaining and closing short sales "against the box."
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 underlying fund or a security convertible into or
exchangeable for a security owned by the underlying fund. In such case, any loss
in the 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 an 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.
SEGREGATED ACCOUNTS. When an underlying fund enters into certain
transactions that involve obligations to make future payments to third parties,
including the purchase of securities on a when-issued or delayed delivery basis,
or reverse repurchase agreements, it will maintain with an approved custodian in
a segregated account cash or liquid securities, marked to market daily, in an
amount at least equal to the underlying fund's obligation or commitment under
such transactions. As described below under "Strategies Using Derivative
Instruments," segregated accounts may also be required in connection with
certain transactions involving options, futures or forward currency contracts
and swaps.
UNDERLYING FUNDS--STRATEGIES
USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. Mitchell Hutchins or the
applicable sub-adviser may use a variety of financial instruments ("Derivative
Instruments"), including certain options, futures contracts (sometimes referred
to as "futures"), and options on futures contracts, to attempt to hedge each
underlying fund's portfolio and also to attempt to enhance income or return or
realize gains and (for underlying funds that invest in bonds) to manage the
duration of its portfolio. For underlying funds that are permitted to invest
outside the United States, Mitchell Hutchins or the sub-adviser also may use
forward currency contracts, foreign currency options and futures and options on
foreign currency futures. Underlying funds that invest primarily in bonds also
may enter into
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interest rate swap transactions. 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, each
underlying fund's use of these instruments will place at risk a much smaller
portion of its assets. PaineWebber Cashfund does not use these Derivative
Instruments. The particular Derivative Instruments used by the other underlying
funds are described below.
The underlying funds might not use any derivative instruments or
strategies, and there can be no assurance that using any strategy will succeed.
If Mitchell Hutchins or a sub-adviser is incorrect in its judgment on market
values, interest rates or other economic factors in using a derivative
instrument or strategy, an underlying fund may have lower net income and a net
loss on the investment.
OPTIONS ON SECURITIES AND FOREIGN CURRENCIES--A call option is a
short-term contract pursuant to which the purchaser of the option, in return for
a premium, has the right to buy the security or currency underlying the option
at a specified price at any time during the term of the option or at specified
times or at the expiration of the option, depending on the type of option
involved. The writer of the call option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to deliver the
underlying security or currency against payment of the exercise price. A put
option is a similar contract that gives its purchaser, in return for a premium,
the right to sell the underlying security or currency at a specified price
during the option term or at specified times or at the expiration of the option,
depending on the type of option involved. The writer of the put option, who
receives the premium, has the obligation, upon exercise of the option during the
option term, to buy the underlying security or currency at the exercise price.
OPTIONS ON SECURITIES INDICES--A securities index assigns relative
values to the securities included in the index and fluctuates with changes in
the market values of those securities. A securities index option operates in the
same way as a more traditional securities option, except that exercise of a
securities index option is effected with cash payment and does not involve
delivery of securities. Thus, upon exercise of a securities index option, the
purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the securities
index.
SECURITIES INDEX FUTURES CONTRACTS--A securities index futures contract
is a bilateral agreement pursuant to which one party agrees to accept, and the
other party agrees to make, delivery of an amount of cash equal to a specified
dollar amount times the difference between the securities index value at the
close of trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the securities comprising the index
is made. Generally, contracts are closed out prior to the expiration date of the
contract.
INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS--Interest rate and
foreign currency futures contracts are bilateral agreements pursuant to which
one party agrees to make, and the other party agrees to accept, delivery of a
specified type of debt security or currency at a specified future time and at a
specified price. Although such futures contracts by their terms call for actual
delivery or acceptance of bonds or currency, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar
to options on securities 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.
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GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS. Hedging
strategies can be broadly categorized as "short hedges" and "long hedges." A
short hedge is a purchase or sale of a Derivative Instrument intended partially
or fully to offset potential declines in the value of one or more investments
held in 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 transactions costs. Alternatively, an underlying
fund might be able to offset the price increase by closing out an appreciated
call option and realizing a gain.
An underlying fund may purchase and write (sell) straddles on
securities or indices of securities. A long straddle is a combination of a call
and a put option purchased on the same security or on the same futures contract,
where the exercise price of the put is equal to the exercise price of the call.
An underlying fund might enter into a long straddle when Mitchell Hutchins or a
sub-adviser believes it likely that the prices of the securities will be more
volatile during the term of the option than the option pricing implies. A short
straddle is a combination of a call and a put written on the same security where
the exercise price of the put is equal to the exercise price of the call. An
underlying fund might enter into a short straddle when Mitchell Hutchins or a
sub-adviser believes it unlikely that the prices of the securities will be as
volatile during the term of the option as the option pricing implies.
Derivative Instruments on securities generally are used to hedge
against price movements in one or more particular securities positions that 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 bonds may be used to hedge either
individual securities or broad fixed income market sectors.
Income strategies using Derivative Instruments may include the writing
of covered options to obtain the related option premiums. Return or gain
strategies may include using Derivative Instruments to increase or decrease an
underlying fund's exposure to different asset classes without buying or selling
the underlying instruments. An underlying fund also may use derivatives to
simulate full investment by the underlying fund while maintaining a cash balance
for underlying fund management purposes (such as to provide liquidity to meet
anticipated shareholder sales of underlying fund shares and for underlying fund
operating expenses).
The use of Derivative Instruments is subject to applicable regulations
of the SEC, the several options and futures exchanges upon which they are traded
and the Commodity Futures Trading Commission ("CFTC"). In addition, 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 may discover
additional opportunities in connection with Derivative Instruments and with
hedging, income, return and gain strategies. These new opportunities may become
available as regulatory authorities broaden the range of permitted transactions
and as new Derivative Instruments and techniques are developed. Mitchell
Hutchins or the applicable sub-adviser may utilize these opportunities for an
underlying fund
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to the extent that they are consistent with the underlying fund's investment
objective and permitted by its investment limitations and applicable regulatory
authorities. The underlying funds' Prospectus or SAI will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.
SPECIAL RISKS OF STRATEGIES USING DERIVATIVE INSTRUMENTS. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.
(1) Successful use of most Derivative Instruments depends upon the
ability of Mitchell Hutchins or the applicable sub-adviser to predict movements
of the overall securities, interest rate or currency exchange markets, which
requires different skills than predicting changes in the prices of individual
securities. While Mitchell Hutchins and the sub-advisers are experienced in the
use of Derivative Instruments, there can be no assurance that any particular
strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of a Derivative Instrument and price movements of the
investments that are being hedged. For example, if the value of a Derivative
Instrument used in a short hedge increased by less than the decline in value of
the hedged investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors affecting the markets in which Derivative
Instruments are traded, rather than the value of the investments being hedged.
The effectiveness of hedges using Derivative Instruments on indices will depend
on the degree of correlation between price movements in the index and price
movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can also
reduce opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if 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, the underlying fund could suffer
a loss. In either such case, the underlying fund would have been in a better
position had it not hedged at all.
(4) As described below, an underlying fund might be required to
maintain assets as "cover," maintain segregated accounts or make margin payments
when it takes positions in Derivative Instruments involving obligations to third
parties (i.e., Derivative Instruments other than purchased options). If the
underlying fund was unable to close out its positions in such Derivative
Instruments, it might be required to continue to maintain such assets or
accounts or make such payments until the positions expired or matured. These
requirements might impair an underlying fund's ability to sell a portfolio
security or make an investment at a time when it would otherwise be favorable to
do so, or require that the underlying 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 counterparty to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to 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, currencies or other options or futures contracts or (2)
cash or liquid securities, with a value sufficient at all times to cover its
potential obligations to the extent not covered as provided in (1) above. Each
underlying fund will comply with SEC guidelines regarding cover for such
transactions and will, if the guidelines so require, set aside cash or liquid
securities in a segregated account with its custodian in the prescribed amount.
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Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding Derivative Instrument is open, unless
they are replaced with similar assets. As a result, committing a large portion
of an underlying fund's assets to cover positions or to segregated accounts
could impede portfolio management or the underlying fund's ability to meet
redemption requests or other current obligations.
OPTIONS. The underlying funds may purchase put and call options, and
write (sell) covered put or call options on securities in which they invest and
related indices. Underlying funds that may invest outside the United States also
may purchase put and call options and write covered options on foreign
currencies. The purchase of call options may serve as a long hedge, and the
purchase of put options may serve as a short hedge. In addition, an underlying
fund may also use options to attempt to enhance return or realize gains by
increasing or reducing its exposure to an asset class without purchasing or
selling the underlying securities. Writing covered put or call options can
enable an underlying fund to enhance income by reason of the premiums paid by
the purchasers of such options. Writing covered call options serves as a limited
short hedge, because declines in the value of the hedged investment would be
offset to the extent of the premium received for writing the option. However, if
the security appreciates to a price higher than the exercise price of the call
option, it can be expected that the option will be exercised and the affected
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 over-the-counter options written by
an underlying fund would be considered illiquid to the extent described under
"Underlying Funds--Investment Policies--Illiquid Securities."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Generally, over-the-counter options on bonds are
European-style options. This means that the option can only be exercised
immediately prior to its expiration. This is in contrast to American-style
options that may be exercised at any time. There are also other types of options
that may be exercised on certain specified dates before expiration. Options that
expire unexercised have no value.
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
over-the-counter options. Currently, many options on equity securities are
exchange-traded. Exchange markets for options on bonds and foreign currencies
exist but are relatively new, and these instruments are primarily traded on the
over-the-counter market. Exchange-traded options in the United States are issued
by a clearing organization affiliated with the exchange on which the option is
listed which, in effect, guarantees completion of every exchange-traded option
transaction. In contrast, over-the-counter options are contracts between an
underlying fund and its counterparty (usually a securities dealer or a bank)
with no clearing organization guarantee. Thus, when an underlying fund purchases
or writes an over-the-counter option, it relies on the counterparty to make or
take delivery of the underlying investment upon exercise of the option. Failure
by the counterparty to do so would result in the loss of any premium paid by the
underlying fund as well as the loss of any expected benefit of the transaction.
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 over-the-counter options only by negotiating
directly with the counterparty, or by a transaction in the secondary market if
any such market exists. Although the
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underlying funds will enter into over-the-counter 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 over-the-counter 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
over-the-counter 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 underlying fund would be unable to sell the investment used as cover
for the written option until the option expires or is exercised.
An underlying fund may purchase and write put and call options on
indices in much the same manner as the more traditional options discussed above,
except the index options may serve as a hedge against overall fluctuations in a
securities market (or market sector) rather than anticipated increases or
decreases in the value of a particular security.
LIMITATIONS ON THE USE OF OPTIONS. The underlying funds' use of options
is governed by the following guidelines, which can be changed by the board
without shareholder vote:
(1) An underlying fund may purchase a put or call option, including any
straddle or spread, only if the value of its premium, when aggregated with the
premiums on all other options held by the 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 its net assets.
(3) The aggregate premiums paid on all options (including options on
securities, foreign currencies and securities indices and options on futures
contracts) purchased by an underlying fund that are held at any time will not
exceed 20% of its net assets.
FUTURES. The underlying funds may purchase and sell securities index
futures contracts, interest rate futures contracts, debt security index futures
contracts and (for those underlying funds that invest outside the United States)
foreign currency futures contracts. 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. In addition, an
underlying fund may purchase or sell futures contracts or purchase options
thereon to increase or reduce its exposure to an asset class without purchasing
or selling the underlying securities, either as a hedge or to enhance return or
realize gains.
Futures strategies also can be used to manage the average duration of
an underlying fund's portfolio. If Mitchell Hutchins or the applicable
sub-adviser wishes to shorten the average duration of an underlying fund's
portfolio, the underlying fund may sell a futures contract or a call option
thereon, or purchase a put option on that futures contract. If Mitchell Hutchins
or the sub-adviser wishes to lengthen the average duration of the underlying
fund's portfolio, the underlying fund may buy a futures contract or a call
option thereon, or sell a put option thereon.
An underlying fund may also write put options on futures contracts
while at the same time purchasing call options on the same futures contracts in
order synthetically to create a long futures contract position. Such options
would have the same strike prices and expiration dates. An underlying fund will
engage in this strategy only when it is more advantageous to an underlying fund
than is purchasing the futures contract.
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No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract an underlying fund is required to deposit in a
segregated account with its custodian, in the name of the futures broker through
whom the transaction was effected, "initial margin" consisting of cash,
obligations of the United States or obligations fully guaranteed as to principal
and interest by the United States, in an amount generally equal to 10% or less
of the contract value. Margin must also be deposited when writing a call option
on a futures contract, in accordance with applicable exchange rules. Unlike
margin in securities transactions, initial margin on futures contracts does not
represent a borrowing, but rather is in the nature of a performance bond or
good-faith deposit that is returned to an underlying fund at the termination of
the transaction if all contractual obligations have been satisfied. Under
certain circumstances, such as periods of high volatility, an underlying fund
may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of each underlying fund's obligations to or from a
futures broker. When an underlying fund purchases an option on a future, the
premium paid plus transaction costs is all that is at risk. In contrast, when an
underlying fund purchases or sells a futures contract or writes a call option
thereon, it is subject to daily variation margin calls that could be substantial
in the event of adverse price movements. If an underlying fund has insufficient
cash to meet daily variation margin requirements, it might need to sell
securities at a time when such sales are disadvantageous.
Holders and writers of futures positions and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The underlying funds intend to enter into futures transactions only on exchanges
or boards of trade where there appears to be a liquid secondary market. However,
there can be no assurance that such a market will exist for a particular
contract at a particular time.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or related option can vary from
the previous day's settlement price; once that limit is reached, no trades may
be made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If an underlying fund were unable to liquidate a futures or related
options position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. An underlying
fund would continue to be subject to market risk with respect to the position.
In addition, except in the case of purchased options, an underlying fund would
continue to be required to make daily variation margin payments and might be
required to maintain the position being hedged by the future or option or to
maintain cash or securities in a segregated account.
Certain characteristics of the futures market might increase the risk
that movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
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.
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LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. The underlying
funds' use of futures and related options is governed by the following
guidelines, which can be changed by the board without shareholder vote:
(1) To the extent an underlying fund enters into futures contracts and
options on futures positions that are not for bona fide hedging purposes (as
defined by the CFTC), the aggregate initial margin and premiums on those
positions (excluding the amount by which options are "in-the-money") may not
exceed 5% of its net assets.
(2) The aggregate premiums paid on all options (including options on
securities, foreign currencies and securities indices and options on futures
contracts) purchased by each underlying fund that are held at any time will not
exceed 20% of its net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by each underlying fund will not exceed 5% of its total
assets.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. Each
underlying fund that may invest outside the United States may use options and
futures on foreign currencies, as described above, and forward currency
contracts, as described below, to hedge against movements in the values of the
foreign currencies in which the underlying fund's 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.
An underlying fund might seek to hedge against changes in the value of
a particular currency when no Derivative Instruments on that currency are
available or such Derivative Instruments are considered expensive. In such
cases, the underlying fund may hedge against price movements in that currency by
entering into transactions using Derivative Instruments on another currency or a
basket of currencies, the value of which Mitchell Hutchins or the applicable
sub-adviser believes will have a positive correlation to the value of the
currency being hedged. In addition, an underlying fund may use forward currency
contracts to shift 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 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 Derivative Instruments 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
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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. Underlying funds that may invest outside
the United States may enter into forward currency contracts to purchase or sell
foreign currencies for a fixed amount of U.S. dollars or another foreign
currency. Such transactions may serve as long hedges--for example, 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.
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 counterparty to make or take delivery of the
underlying currency at the maturity of the contract. Failure by the counterparty
to do so would result in the loss of any expected benefit of the transaction.
As is the case with futures contracts, parties to forward currency
contracts can enter into offsetting closing transactions, similar to closing
transactions on futures, by entering into an instrument identical to the
instrument purchased or sold, but in the opposite direction. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the counterparty. Thus, there can be no assurance
that 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 counterparty, 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 that may invest outside the United States may enter into forward currency
contracts or maintain a net exposure to such contracts only if (1) the
consummation of the contracts would not obligate the 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.
SWAP TRANSACTIONS. An underlying fund that invests primarily in bonds
may enter into interest swap transactions, including swaps, caps, floors and
collars. Interest rate swaps involve an agreement between two parties to
exchange payments that are based, for example, on variable and fixed rates of
interest and that are calculated on the basis of a specified amount of principal
(the "notional principal amount") for a specified period of time. Interest rate
cap and floor transactions involve an agreement between two parties in which the
first party agrees to make payments to the counterparty when a designated market
interest rate goes above (in the case of a cap) or below (in the case of a
floor) a designated level on predetermined dates or during a specified time
period. Interest rate collar transactions involve an agreement between two
parties in which payments are made when a designated market interest rate either
goes above a designated ceiling level or goes below a designated floor level on
predetermined dates or during a specified time period. Currency swaps, caps,
floors and collars are similar to interest rate swaps, caps, floors and collars,
but they are based on currency exchange rates rather than interest rates.
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An underlying fund may enter into interest rate swap transactions to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities it
anticipates purchasing at a later date. An underlying fund may only use these
transactions as a hedge and not as a speculative investment. Interest rate swap
transactions are subject to risks comparable to those described above with
respect to other hedging strategies.
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 an underlying fund receiving or paying, as the case may be, only the
net amount of the two payments. Inasmuch as these interest rate swap
transactions are entered into for good faith hedging purposes, and inasmuch as
segregated accounts will be established with respect to such transactions,
Mitchell Hutchins and the sub-advisers (if applicable) believe such obligations
do not constitute senior securities and, accordingly, will not treat them as
being subject to an underlying fund's 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 "Investment Policies and Restrictions--Segregated Accounts."
An underlying fund also will establish and maintain such segregated accounts
with respect to its total obligations under any swaps that are not entered into
on a net basis and with respect to any caps, floors and collars that are written
by the underlying fund.
An underlying fund will enter into swap transactions only with banks
and recognized securities dealers believed by Mitchell Hutchins or a sub-adviser
to present minimal credit risk in accordance with guidelines established by the
underlying fund's board. If there is a default by the other party to such a
transaction, an 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.
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ORGANIZATION OF TRUST; TRUSTEES AND OFFICERS
AND PRINCIPAL HOLDERS OF SECURITIES
The Trust was formed on August 9, 1996, as a business trust under the
laws of Delaware and has three operating series. The Trust is governed by a
board of trustees, which is authorized to establish additional series and to
issue an unlimited number of shares of beneficial interest of each existing or
future series, par value $0.001 per share. The board oversees each underlying
fund's operations.
The trustees and executive officers of the Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
<S> <C> <C>
Margo N. Alexander*+; 52 Trustee and President Mrs. Alexander is chairman (since March 1999), chief
executive officer and a director of Mitchell Hutchins
(since January 1995), and an executive vice president
and a director of PaineWebber (since March 1984).
Mrs. Alexander is president and a director or trustee
of 32 investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.
Richard Q. Armstrong; 64 Trustee Mr. Armstrong is chairman and principal of R.Q.A.
R.Q.A. Enterprises Enterprises (management consulting firm) (since April
One Old Church Road 1991 and principal occupation since March 1995). Mr.
Unit #6 Armstrong was chairman of the board, chief executive
Greenwich, CT 06830 officer and co-owner of Adirondack Beverages
(producer and distributor of soft drinks and
sparkling/still waters) (October 1993-March 1995). He
was a partner of The New England Consulting Group
(management consulting firm) (December 1992-September
1993). He was managing director of LVMH U.S.
Corporation (U.S. subsidiary of the French luxury
goods conglomerate, Louis Vuitton Moet Hennessey
Corporation) (1987-1991) and chairman of its wine and
spirits subsidiary, Schieffelin & Somerset Company
(1987-1991). Mr. Armstrong is a director or trustee
of 31 investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
<S> <C> <C>
E. Garrett Bewkes, Jr.**+; 73 Trustee and Chairman Mr. Bewkes is a director of Paine Webber Group Inc.
of the Board of ("PW Group") (holding company of PaineWebber and
Trustees Mitchell Hutchins). Prior to December 1995, he was a
consultant to PW Group. Prior to 1988, he was
chairman of the board, president and chief executive
officer of American Bakeries Company. Mr. Bewkes is a
director of Interstate Bakeries Corporation. Mr.
Bewkes is a director or trustee of 35 investment
companies for which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as investment adviser.
Richard R. Burt; 52 Trustee Mr. Burt is chairman of IEP Advisors, Inc.
1275 Pennsylvania Ave, N.W. (international investments and consulting firm)
Washington, DC 20004 (since March 1994) and a partner of McKinsey &
Company (management consulting firm) (since 1991). He
is also a director of Archer-Daniels-Midland Co.
(agricultural commodities), Hollinger International
Co. (publishing), Homestake Mining Corp. (gold
mining), Powerhouse Technologies Inc. (provides
technology to gaming and wagering industry) and
Weirton Steel Corp. (makes and finishes steel
products). He was the chief negotiator in the
Strategic Arms Reduction Talks with the former Soviet
Union (1989-1991) and the U.S. Ambassador to the
Federal Republic of Germany (1985-1989). Mr. Burt is
a director or trustee of 31 investment companies for
which Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Mary C. Farrell**+; 49 Trustee Ms. Farrell is a managing director, senior investment
strategist and member of the Investment Policy
Committee of PaineWebber. Ms. Farrell joined
PaineWebber in 1982. She is a member of the Financial
Women's Association and Women's Economic Roundtable
and appears as a regular panelist on Wall $treet Week
with Louis Rukeyser. She also serves on the Board of
Overseers of New York University's Stern School of
Business. Ms. Farrell is a director or trustee of 23
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
Meyer Feldberg; 57 Trustee Mr. Feldberg is Dean and Professor of Management of
Columbia University the Graduate School of Business, Columbia University.
101 Uris Hall Prior to 1989, he was president of the Illinois
New York, NY 10027 Institute of Technology. Dean Feldberg is also a
director of Primedia, Inc. (publishing), Federated
Department Stores, Inc. (operator of department
stores) and Revlon, Inc. (cosmetics). Dean Feldberg
is a director or trustee of 34 investment companies
for which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.
George W. Gowen; 70 Trustee Mr. Gowen is a partner in the law firm of Dunnington,
666 Third Avenue Bartholow & Miller. Prior to May 1994, he was a
New York, NY 10017 partner in the law firm of Fryer, Ross & Gowen. Mr.
Gowen is a director or trustee of 34 investment
companies for which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as investment adviser.
34
<PAGE>
Frederic V. Malek; 62 Trustee Mr. Malek is chairman of Thayer Capital Partners
1455 Pennsylvania Ave, N.W. (merchant bank). From January 1992 to November 1992,
Suite 350 he was campaign manager of Bush-Quayle `92. From 1990
Washington, DC 20004 to 1992, he was vice chairman and, from 1989 to 1990,
he was president of Northwest Airlines Inc. and NWA
Inc. (holding company of Northwest Airlines Inc.).
Prior to 1989, he was employed by the Marriott
Corporation (hotels, restaurants, airline catering
and contract feeding), where he most recently was an
executive vice president and president of Marriott
Hotels and Resorts. Mr. Malek is also a director of
Aegis Communications, Inc. (tele-services), American
Management Systems, Inc. (management consulting and
computer related services), Automatic Data
Processing, Inc. (computing), CB Richard Ellis, Inc.
(real estate services), FPL Group, Inc. (electric
services), Global Vacation Group (packaged
vacations), HCR/Manor Care, Inc. (health care) and
Northwest Airlines Inc. Mr. Malek is a director or
trustee of 31 investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.
Carl W. Schafer; 63 Trustee Mr. Schafer is president of the Atlantic Foundation
66 Witherspoon Street, #1100 (charitable foundation supporting mainly
Princeton, NJ 08542 oceanographic exploration and research). He is a
director of Base Ten Systems, Inc. (software),
Roadway Express, Inc. (trucking), The Guardian Group
of Mutual Funds, the Harding, Loevner Funds, Evans
Systems, Inc. (motor fuels, convenience store and
diversified company), Electronic Clearing House,
Inc., (financial transactions processing), Frontier
Oil Corporation and Nutraceutix, Inc. (biotechnology
company). Prior to January 1993, he was chairman of
the Investment Advisory Committee of the Howard
Hughes Medical Institute. Mr. Schafer is a director
or trustee of 31 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Brian M. Storms*+;45 Trustee Mr. Storms is president and chief operating officer
of Mitchell Hutchins (since March 1999). Prior to
March 1999, he was president of Prudential
Investments (1996-1999). Prior to joining
Prudential, he was a managing director at Fidelity
Investments. Mr. Storms is a director or trustee of
31 investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
35
<PAGE>
T. Kirkham Barneby*; 53 Vice President Mr. Barneby is a managing director and chief
investment officer--quantitative investments of
Mitchell Hutchins. Prior to September 1994, he was a
senior vice president at Vantage Global Management.
Mr. Barneby is a vice president of seven investment
companies for which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as investment adviser.
John J. Lee**; 31 Vice President and Mr. Lee is a vice president and a manager of the
Assistant Treasurer mutual fund finance department of Mitchell Hutchins.
Prior to September 1997, he was an audit manager in
the financial services practice of Ernst & Young LLP.
Mr. Lee is a vice president and assistant treasurer
of 32 investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as an investment adviser.
Kevin J. Mahoney**; 34 Vice President and Mr. Mahoney is a first vice president and a senior
Assistant Treasurer manager of the mutual fund finance department of
Mitchell Hutchins. From August 1996 through March
1999, he was the manager of the mutual fund internal
control group of Salomon Smith Barney. Prior to
August 1996, he was an associate and assistant
treasurer for BlackRock Financial Management L.P.
Mr. Mahoney is a vice president and assistant
treasurer of 32 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Dennis McCauley*; 52 Vice President Mr. McCauley is a managing director and chief
investment officer--fixed income of Mitchell Hutchins.
Prior to December 1994, he was director of fixed
income investments of IBM Corporation. Mr. McCauley
is a vice president of 22 investment companies for
which Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Ann E. Moran**; 41 Vice President and Ms. Moran is a vice president and a manager of the
Assistant Treasurer mutual fund finance department of Mitchell Hutchins.
Ms. Moran is a vice president and assistant treasurer
of 32 investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.
Dianne E. O'Donnell**; 47 Vice President and Ms. O'Donnell is a senior vice president and deputy
Secretary general counsel of Mitchell Hutchins. Ms. O'Donnell
is a vice president and secretary of 31 investment
companies and a vice president and assistant
secretary of one investment company for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Emil Polito*; 38 Vice President Mr. Polito is a senior vice president and director of
operations and control for Mitchell Hutchins. Mr.
Polito is a vice president of 32 investment companies
for which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.
36
<PAGE>
Victoria E. Schonfeld**; 48 Vice President Ms. Schonfeld is a managing director and general
counsel of Mitchell Hutchins since May 1994 and a
senior vice president of PaineWebber since July 1995.
Ms. Schonfeld is a vice president of 31 investment
companies and a vice president and secretary of one
investment company for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
Paul H. Schubert**; 36 Vice President and Mr. Schubert is a senior vice president and director
Treasurer of the mutual fund finance department of Mitchell
Hutchins. From August 1992 to August 1994, he was a
vice president at BlackRock Financial Management L.P.
Mr. Schubert is a vice president and treasurer of 32
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
Barney A. Taglialatela**; 38 Vice President and Mr. Taglialatela is a vice president and a manager of
Assistant Treasurer the mutual fund finance department of Mitchell
Hutchins. Prior to February 1995, he was a manager of
the mutual fund finance division of Kidder Peabody
Asset Management, Inc. Mr. Taglialatela is a vice
president and assistant treasurer of 32 investment
companies for which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as investment adviser.
Mark A. Tincher*; 43 Vice President Mr. Tincher is a managing director and chief
investment officer--equities of Mitchell Hutchins.
Prior to March 1995, he was a vice president and
directed the U.S. funds management and equity
research areas of Chase Manhattan Private Bank. Mr.
Tincher is a vice president of 13 investment
companies for which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as investment adviser.
Keith A. Weller**; 38 Vice President and Mr. Weller is a first vice president and associate
Assistant Secretary general counsel of Mitchell Hutchins. Prior to May
1995, he was an attorney in private practice. Mr.
Weller is a vice president and assistant secretary of
31 investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
</TABLE>
- ---------------
* The business address of each listed person is 51 West 52nd Street, New
York, New York 10019-6114.
** The business address of each listed person is 1285 Avenue of the Americas,
New York, New York 10019.
+ Mrs. Alexander, Mr. Bewkes, Ms. Farrell and Mr. Storms are "interested
persons" of the Trust and each fund as defined in the Investment Company
Act by virtue of their positions with Mitchell Hutchins, PaineWebber,
and/or PW Group.
The Trust pays trustees who are not "interested persons" of the Trust
$1,000 annually for each fund and $150 per fund 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
37
<PAGE>
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
fund. Because PaineWebber and Mitchell Hutchins perform substantially all the
services necessary for the operation of the Trust and each fund, the Trust
requires no employees. No officer, director or employee of Mitchell Hutchins or
PaineWebber presently receives any compensation from the Trust for acting as a
trustee or officer.
The table below includes certain information related to the
compensation of the current trustees who held office with the Trust during the
fiscal year ended May 31, 1999, and the total compensation of those trustees
from all PaineWebber funds during the 1998 calendar year.
The table below includes certain information relating to the
compensation of the current board members who held office with the Trust during
the fiscal year ended May 31, 1999 and the compensation of those trustees from
all PaineWebber funds during the 1998 year.
COMPENSATION TABLE+
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
AGGREGATE COMPENSATION THE TRUST AND THE FUND
NAME OF PERSON, POSITION FROM THE TRUST* COMPLEX
<S> <C> <C>
Richard Q. Armstrong,
Trustee........................................ $ 5,430 $101,372
Richard R. Burt,
Trustee........................................ 5,340 101,372
Meyer Feldberg,
Trustee........................................ 7,409 116,222
George W. Gowen,
Trustee........................................ 4,980 108,272
Frederic V. Malek,
Trustee........................................ 5,430 101,372
Carl W. Schafer,
Trustee........................................ 5,430 101,372
</TABLE>
- --------------------
+ Only independent board members are compensated by the Trust and the fund
complex and identified above; board members who are "interested persons,"
as defined by the Investment Company Act, do not receive compensation from
the funds.
* Represents fees paid to each trustee from the Trust for the year ended May
31, 1999.
** Represents total compensation paid during the calendar year ended December
31, 1998 to each board member by 31 investment companies (34 in the case of
Messrs. Feldberg and Gowen) for which Mitchell Hutchins, PaineWebber or one
of their affiliates served as investment adviser. No fund within the
PaineWebber fund complex has a bonus, pension, profit sharing or retirement
plan.
38
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
The following shareholders are shown in the funds' records as owning
more than 5% of their shares:
NUMBER AND PERCENTAGE OF
FUND AND SHAREHOLDER SHARES BENEFICIALLY OWNED AS OF
NAME AND ADDRESS* AUGUST 31, 1999
CONSERVATIVE PORTFOLIO
PaineWebber FBO
Wilfred Robinson 24,468 shares 7.10%
Richard J. Agostini 20,135 shares 5.84%
- ---------
* The shareholders listed may be contacted c/o Mitchell Hutchins Asset
Management, Inc., 51 West 52nd Street, New York, NY 10019-6114.
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the
investment adviser and administrator to each fund pursuant to a contract
("Advisory Contract") with the Trust dated January 9, 1998. Under the Advisory
Contract, each fund pays Mitchell Hutchins a fee, computed daily and paid
monthly, at the annual rate of 0.35% of average daily net assets.
During the fiscal year ended May 31, 1999 and the period February 24,
1998 (commencement of operations) to May 31, 1998, Mitchell Hutchins earned (or
accrued) advisory fees in the following amounts:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL PERIOD ENDED
MAY 31, 1999 MAY 31, 1998*
------------ -------------
<S> <C> <C>
Aggressive $ 20,903 $ 2,560
Portfolio........................ (all of which was waived) (all of which was waived)
Moderate 39,597 4,531
Portfolio........................ (all of which was waived) (all of which was waived)
Conservative 13,968 1,408
Portfolio........................ (all of which was waived) (all of which was waived)
* February 24, 1998 (commencement of operations) to May 31, 1998.
</TABLE>
Under the terms of the Advisory Contract, each fund bears all of its
expenses incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Trust not readily identifiable as belonging to
a particular fund are allocated among the appropriate funds by or under the
direction of the board in such manner as the board deems fair and equitable.
Expenses borne by each fund include the following: (1) the cost (including
brokerage commissions) of securities purchases or sold by the fund and any
losses incurred in connection therewith; (2) fees payable to and expenses
incurred on behalf of the funds by Mitchell Hutchins; (3) organizational
expenses; (4) filing fees and expenses relating to the registration and
qualification of the fund's shares under federal and state securities laws and
maintenance of such registrations and qualifications; (5) fees and salaries
payable to board members and officers who are not "interested persons" (as
defined in the Investment Company Act) of the Trust or Mitchell Hutchins; (6)
all expenses incurred in connection with the board members' services, including
travel expenses; (7) taxes (including any income or franchise taxes) and
governmental fees; (8) costs of any liability, uncollectible items of deposit
and other insurance or fidelity bonds; (9) any costs, expenses or losses arising
out of a liability of or claim for damages or other relief asserted against the
Trust or fund for violation of any law; (10) legal, accounting and auditing
expenses, including legal fees of special counsel for the independent board
members; (11) charges of custodians,
39
<PAGE>
transfer agents and other agents; (12) costs of preparing share certificates;
(13) expenses of setting in type and printing prospectuses, statements of
additional information and supplements thereto, reports and proxy materials for
existing shareholders, and costs of mailing such materials to shareholders; (14)
any extraordinary expenses (including fees and disbursements of counsel)
incurred by the fund; (15) fees, voluntary assessments and other expenses
incurred in connection with membership in investment company organizations; (16)
costs of mailing and tabulating proxies and costs of meetings of shareholders,
the board 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 fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Mitchell Hutchins in the performance of its duties or from reckless disregard of
its duties and obligations thereunder. The Advisory Contract terminates
automatically upon assignment and is terminable with respect to a fund at any
time without penalty by the Trust's board or by vote of the holders of a
majority of the fund's outstanding voting securities on 60 days' written notice
to Mitchell Hutchins, or by Mitchell Hutchins on 60 days' written notice to the
fund.
NET ASSETS. The following table shows the approximate net assets as of
August 31, 1999, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
INVESTMENT CATEGORY NET ASSETS
$ MIL
Domestic (excluding Money Market)........................... $ 7,939.9
Global...................................................... 4,537.1
Equity/Balanced............................................. 7,677.7
Fixed Income (excluding Money Market)....................... 4,799.3
Taxable Fixed Income...................................... 3,290.8
Tax-Free Fixed Income..................................... 1,508.5
Money Market Funds.......................................... 35,356.5
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 fund 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 fund. Shares of each fund are offered continuously. Under separate
exclusive dealer agreements between Mitchell Hutchins and PaineWebber relating
to each class of shares of each fund (collectively, "Exclusive Dealer
Agreements"), Paine Webber and its correspondent firms sell the funds' 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 fund 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 fund.
Under the Class B Plan and Class C Plan, each fund 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 funds pay no service or distribution fees with respect to their
Class Y shares.
40
<PAGE>
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 fund 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 fund 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
fund'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 fund's
shares will not be used to subsidize the sale of any other class of that fund's
shares.
The funds paid (or accrued) the following service and/or distribution
fees to Mitchell Hutchins under the Class A, Class B and Class C Plans during
the fiscal year ended May 31, 1999:
<TABLE>
<CAPTION>
AGGRESSIVE MODERATE CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C>
Class A...................................... $ 4,478 $ 4,816 $ 1,619
Class B...................................... 19,521 53,778 26,620
Class C...................................... 22,195 39,979 5,079
</TABLE>
Mitchell Hutchins estimates that it and its parent corporation,
PaineWebber, incurred the following shareholder service-related and
distribution-related expenses with respect to the funds during the fiscal year
ended May 31, 1999:
<TABLE>
<CAPTION>
AGGRESSIVE MODERATE CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
CLASS A
<S> <C> <C> <C>
Marketing and advertising............................................. $ 27,625 $ 17,601 $14,620
Amortization of commissions........................................... 0 0 0
Printing of prospectuses and statements of additional information..... 165 173 60
Branch network costs allocated and interest expense................... 22,815 13,341 11,594
Service fee paid to investment executives............................. 1,713 1,844 620
AGGRESSIVE MODERATE CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
CLASS B
Marketing and advertising............................................. $ 31,007 $ 49,345 $ 59,450
Amortization of commissions........................................... 6,788 19,082 9,413
Printing of prospectuses and statements of additional information..... 187 479 252
Branch network costs allocated and interest expense................... 23,774 39,945 50,374
Service fee paid to investment executives............................. 1,868 5,152 2,548
41
<PAGE>
AGGRESSIVE MODERATE CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
CLASS C
Marketing and advertising............................................. $ 35,424 $ 37,410 $ 15,182
Amortization of commissions........................................... 6,373 11,494 1,297
Printing of prospectuses and statements of additional information..... 216 367 64
Branch network costs allocated and interest expense................... 26,917 26,665 12,376
Service fee paid to investment executives............................. 2,123 3,832 648
</TABLE>
"Marketing and advertising" includes various internal costs allocated
by Mitchell Hutchins to its efforts at distributing fund 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 fund's
shares, including the PaineWebber retail branch system.
In approving the funds' overall Flexible PricingSM system of
distribution, the board considered several factors, including that
implementation of Flexible PricingSM 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 fund and
attracting new investors and assets to the fund to the benefit of the fund and
its shareholders, (2) facilitate distribution of the funds' shares and (3)
maintain the competitive position of the funds in relation to other funds that
have implemented or are seeking to implement similar distribution arrangements.
In approving the Class A Plan for each fund, the board considered all
the features of the distribution system, including (1) the conditions under
which initial sales charges would be imposed and the amount of such charges, (2)
Mitchell Hutchins' belief that the initial sales charge combined with a service
fee would be attractive to PaineWebber investment executives and correspondent
firms, resulting in greater growth of the fund than might otherwise be the case,
(3) the advantages to the shareholders of economies of scale resulting from
growth in the fund's assets and potential continued growth, (4) the services
provided to the fund 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 fund, 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 fund purchase payments and instead having the entire amount of
their purchase payments immediately invested in fund shares, (3) Mitchell
Hutchins' belief that the ability of Paine Webber 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 fund than might otherwise be the case, (4) the advantages to the
shareholders of economies of scale resulting from growth in the fund's assets
and potential continued growth, (5) the services provided to the fund 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 fund, 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 fund purchase
payments and instead having the entire amount of their purchase payments
immediately invested in fund 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
42
<PAGE>
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 fund than might otherwise be the case, (4)
the advantages to the shareholders of economies of scale resulting from growth
in the fund's assets and potential continued growth, (5) the services provided
to the fund 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 fund, which
would increase if the Plan were successful and the fund attained and maintained
significant asset levels.
Under the Distribution Contract between the Trust and Mitchell Hutchins
for the Class A shares for the periods shown, Mitchell Hutchins earned the
following approximate amounts of sales charges and retained the following
approximate amounts, net of concessions to PaineWebber as exclusive dealer:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED PERIOD ENDED MAY 31,
MAY 31, 1999 1998*
<S> <C> <C>
AGGRESSIVE PORTFOLIO
Earned........................................ $ 489,382 $ 50,393
Retained...................................... 47,984 31,244
MODERATE PORTFOLIO
Earned........................................ 21,895 59,932
Retained...................................... 13,643 37,158
CONSERVATIVE PORTFOLIO
Earned........................................ 11,404 13,243
Retained...................................... 7,068 8,211
</TABLE>
* February 24, 1998 (commencement of operations) to May 31, 1998.
For the fiscal year ended May 31, 1999, 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.............................................. 840,208 31,873 6,942
Class C.............................................. 67,709 2,176 1,649
</TABLE>
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities for the
funds (normally shares of the underlying funds) are placed on behalf of a
particular fund by Mitchell Hutchins. A fund 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
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of securities. When a fund 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
fiscal year ended May 31, 1999 and the period February 24, 1998 (commencement of
operations) to May 31, 1998, the funds paid no brokerage commission.
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 over-the-counter market and will
engage primarily in transactions directly with the dealers who make markets in
such securities, unless a better price or execution could be obtained by using a
broker.
The funds and the underlying funds have no obligation to deal with any
broker or group of brokers in the execution of portfolio transactions. The funds
and the underlying funds contemplate that, consistent with the policy of
obtaining the best net results, brokerage transactions may be conducted through
PaineWebber. Each fund 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 funds 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 year
ended May 31, 1999 and the fiscal period ended May 31, 1998, the funds 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.
In selecting brokers, Mitchell Hutchins or a Sub-Adviser will consider
the full range and quality of a broker's services. Consistent with the interests
of the funds or underlying funds and subject to the review of the board,
Mitchell Hutchins or a Sub-Adviser may cause a fund to purchase and sell
portfolio securities through brokers who provide Mitchell Hutchins or the
Sub-Adviser with brokerage or research services. The funds may pay those brokers
a higher commission than may be charged by other brokers, provided that Mitchell
Hutchins or 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 or the Sub-Adviser to that fund and its
other clients.
Research services obtained from brokers may include written reports,
pricing and appraisal services, analysis of issues raised in proxy statements,
educational seminar, subscriptions, portfolio attribution and monitoring
services, and computer hardware, software and access charges which are directly
related to investment research. Research services may be received in the form of
written reports, online services, telephone contacts and personal meetings with
security analysts, economists, corporate and industry spokespersons and
government representatives.
For the fiscal year ended May 31, 1999, Mitchell Hutchins directed no
portfolio transactions to brokers chosen because they provided research
services.
For purchases or sales with broker-dealer firms which act as principal,
Mitchell Hutchins or the applicable Sub-Adviser seeks best execution. Although
Mitchell Hutchins or a Sub-Adviser may receive certain
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<PAGE>
research or execution services in connection with these transactions, it will
not purchase securities at a higher price or sell securities at a lower price
than would otherwise be paid if no weight were attributed to the services
provided by the executing dealer. Mitchell Hutchins or a Sub-Adviser may engage
in agency transactions in over-the-counter equity and debt securities in return
for research and execution services. These transactions are entered into only
pursuant to procedures that are designed to ensure that the transaction
(including commissions) is at least as favorable as it would have been if
effected directly with a market-maker that did not provide research or execution
services.
Research services and information received from brokers or dealers are
supplemental to Mitchell Hutchins' or the Sub-Adviser's own research efforts
and, when utilized, are subject to internal analysis before being incorporated
into their own investment processes. Information and research services furnished
by brokers or dealers through which or with which a fund effects 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 it advises may be used in advising the funds or underlying
funds.
Investment decisions for a fund 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 fund or an
underlying fund and one or more accounts. In those cases, simultaneous
transactions are inevitable. Purchases or sales are then averaged as to price
and allocated between that fund or underlying fund and the other account(s) as
to amount according to a formula deemed equitable to the fund or underlying fund
and the other account(s). While in some cases this practice could have a
detrimental effect upon the price or value of the security as far as a funds or
underlying fund is concerned, or upon its ability to complete its entire order,
in other cases it is believed that coordination and the ability to participate
in volume transactions will benefit the fund.
The funds 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 funds or underlying
funds.
PORTFOLIO TURNOVER. The funds' annual portfolio turnover rates may vary
greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate is
calculated by dividing the lesser of each fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of securities in the portfolio during the year. For the periods
shown, the funds' portfolio turnover rates were:
FISCAL YEAR ENDED FISCAL PERIOD ENDED
MAY 31, 1999 MAY 31, 1998*
Aggressive Portfolio.............. 104% 6%
Moderate Portfolio................. 88% 13%
Conservative Portfolio............. 83% 11%
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
WAIVERS OF SALES CHARGES/CONTINGENT DEFERRED SALES CHARGES -- CLASS A
SHARES. The following additional sales charge waivers are available for Class A
shares if you:
o Purchase shares through 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
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PaineWebber and to the variable annuity's sponsor, adviser or
distributor in a total amount not to exceed l% of the amount
invested;
o Acquire 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 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;
o Acquire shares in connection with a reorganization pursuant to
which the fund acquires substantially all of the assets and
liabilities of another fund in exchange solely for shares of the
acquiring fund; or
o Acquire shares in connection with the disposition of proceeds
from the sale of shares of Managed High Yield Plus Fund Inc. that
were acquired during the fund's initial public offering of shares
and that meet certain other conditions described in its
prospectus
In addition, reduced sales charges on Class A shares are available
through the combined purchase plan or through rights of accumulation described
below. Class A share purchases of $1 million or more are not subject to an
initial sales charge; however, if a shareholder sells these shares within one
year after purchase, a contingent deferred sales charge of 1% of the offering
price or the net asset value of the shares at the time of sale by the
shareholder, whichever is less, is imposed. This contingent deferred sales
charged is waived if you are eligible to invest in certain offshore investment
pools offered by PaineWebber, your shares are sold before March 31, 2000 and the
proceeds are used to purchase interests in one or more of these pools.
COMBINED PURCHASE PRIVILEGE-CLASS A SHARES. Investors and eligible
groups of related fund investors may combine purchases of Class A shares of the
funds 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 funds 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 fund 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;
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<PAGE>
(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 fund investors (as defined above) are permitted to purchase
Class A shares of the funds 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 fund 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.
PURCHASES OF CLASS A SHARES THROUGH THE INSIGHTONE PROGRAM. An investor
who participates in the PaineWebber InsightOne Program is eligible to purchase
Class A shares without a sales load. The PaineWebber InsightOne Program provides
a brokerage account to investors for an asset-based sales charge at the annual
rate of up to 1.50% of assets in the account. Accountholders may purchase or
sell certain investment products without paying any commissions or other
markups/markdowns apart from the account sales charge.
NON-RESIDENT ALIEN WAIVER OF CONTINGENT DEFERRED SALES CHARGE FOR CLASS
A AND C SHARES. Until March 31, 2000, investors who are non-resident aliens will
be able to sell their fund shares without incurring a contingent deferred sales
charge, if they use the sales proceeds to immediately purchase shares of certain
offshore investment pools available through PaineWebber. The fund will waive the
contingent deferred sales charge that would otherwise apply to a sale of Class A
or Class C shares of the fund. Fund shareholders who want to take advantage of
this waiver should review the offering documents of the offshore investment
pools for further information, including investment minimums, and fees and
expenses. Shares of the offshore investment pools are available only in those
jurisdictions where the sale is authorized and are not available to any U.S.
person, including, but not limited to, any citizen or resident of the United
States, and U.S. partnership or U.S. trust, and are not available to residents
of certain other countries. For more information on how to take advantage of the
deferred sales charge waiver, investors should contact their PaineWebber
Financial Advisors.
REINSTATEMENT PRIVILEGE-CLASS A SHARES. Shareholders who have redeemed
Class A shares of a fund may reinstate their account without a sales charge 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, although a loss arising out of a
redemption will not be deductible under certain circumstances. See "Taxes"
below.
WAIVERS OF CONTINGENT DEFERRED SALES CHARGES-CLASS B SHARES. 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. Among other circumstances, the contingent
deferred sales charge on Class B shares is waived where a total or partial
redemption is made within one year following the death of the shareholder. The
contingent deferred sales charge waiver is available where the decedent is
either the sole 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.
PURCHASES OF CLASS Y SHARES THROUGH THE PACE MULTI ADVISOR PROGRAM. An
investor who participates in the 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
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<PAGE>
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
Financial Advisor or PaineWebber's correspondent firms for more information
concerning mutual funds that are available through the PACE Multi Advisor
Program.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of the funds 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 fund temporarily delays or ceases the sales
of its shares because it is unable to invest amounts effectively in accordance
with the fund's investment objective, policies and restrictions.
If conditions exist that make cash payments undesirable, each fund
reserves the right to honor any request for redemption by making payment in
whole or in part in securities chosen by the fund and valued in the same way as
they would be valued for purposes of computing the fund's net asset value. If
payment is made in securities, a shareholder may incur brokerage expenses in
converting these securities into cash.
The funds may suspend redemption privileges or postpone the date of
payment during any period (1) when the New York Stock Exchange is closed or
trading on the New York Stock Exchange is restricted as determined by the SEC,
(2) when an emergency exists, as defined by the SEC, that makes it not
reasonably practicable for a fund to dispose of securities owned by it or fairly
to determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of a fund's securities at the time.
SERVICE ORGANIZATIONS. A fund may authorize service organizations, and
their agents, to accept on its behalf purchase and redemption orders that are in
"good form." A fund will be deemed to have received these purchase and
redemption orders when a service organization or its agent accepts them. Like
all customer orders, these orders will be priced based on the fund's net asset
value next computed after receipt of the order by the service organizations or
their agents. Service organizations may include retirement plan service
providers who aggregate purchase and redemption instructions received from
numerous retirement plans or plan participants.
AUTOMATIC INVESTMENT PLAN. PaineWebber offers an automatic investment
plan with a minimum initial investment of $1,000 through which a fund will
deduct $50 or more on a monthly, quarterly, semi-annual or annual basis from the
investor's bank account to invest directly in the fund. 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 fund'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. The systematic withdrawal plan allows
investors to set up monthly, quarterly (March, June, September and December),
semi-annual (June and December) or annual (December) withdrawals from their
PaineWebber Mutual Fund accounts. Minimum balances and withdrawals vary
according to the class of shares:
o Class A and Class C shares. Minimum value of fund shares is
$5,000; minimum withdrawals of $100.
o Class B shares. Minimum value of fund shares is $20,000; minimum
monthly, quarterly, and
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semi-annual 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 if the investor withdraws no more than 12% of
the value of the fund account when the investor signed up for the Plan (for
Class B shares, annually; for Class A and Class C shares, during the first year
under the Plan). Shareholders who elect to receive dividends or other
distributions in cash may not participate in this 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 fund 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 the minimum values specified
above. Purchases of additional shares of a fund 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, semi-annual and annual plans, PaineWebber will arrange for
redemption by the funds of sufficient fund shares to provide the withdrawal
payments specified by participants in the funds' 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. 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. 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 PFPC. Shareholders may request the
forms needed to establish a systematic withdrawal plan from their PaineWebber
Financial Advisors, correspondent firms or PFPC at 1-800-647-1568.
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 fund in a
PaineWebber brokerage account transfer their brokerage accounts to another firm,
the fund shares will be moved to an account with PFPC. However, if the other
firm has entered into a selected dealer agreement with Mitchell Hutchins
relating to the fund, the shareholder may be able to hold fund shares in an
account with the other firm.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLANSM
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT7 (RMA7)
Shares of PaineWebber mutual funds, including the funds (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
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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 PaineWebber's comprehensive asset
management account and offers investors a number of features, including the
following:
o monthly Premier account statements that itemize all account
activity, including investment transactions, checking activity
and Gold MasterCard(Registered) transactions during the period,
and provide unrealized and realized gain and loss estimates for
most securities held in the account;
o comprehensive year-end summary statements that provide
information on account activity for use in tax planning and tax
return preparation;
o 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. AN
INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY. ALTHOUGH A MONEY MARKET FUND SEEKS TO PRESERVE THE VALUE
OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN A MONEY MARKET FUND.
o 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;
o 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;
o unlimited electronic funds transfers and bill payment service for
an additional fee;
o 24-hour access to account information through toll-free numbers,
and more detailed personal assistance during business hours from
the RMA Service Center;
o expanded account protection to the net equity securities balance
in the event of the liquidation of PaineWebber. This protection
does not apply to shares of PW Funds that are held at PFPC and
not through PaineWebber; and
o automatic direct deposit of checks into your RMA account and
automatic withdrawals
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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 fund will automatically convert to Class A shares
of that fund, 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 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 fund determines the net asset values per share separately for each
class of shares, normally as of the close of regular trading (usually 4:00 p.m.,
Eastern time) on the New York Stock Exchange on each Business Day, which is
defined as each Monday through Friday when the New York Stock Exchange is open.
Prices will be calculated earlier when the NYSE closes early because trading has
been halted for the day. Currently the New York Stock Exchange is closed on the
observance of the following holidays: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The value of the shares of each underlying fund will be their net asset
value at the time the net asset value of the fund shares is determined. The
funds 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 fund's performance data quoted in advertising and other
promotional materials ("Performance Advertisements") represents past performance
and are not intended to indicate future performance. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
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TOTAL RETURN CALCULATIONS. Average annual total return quotes
("Standardized Return") used in each fund's Performance Advertisements are
calculated according to the following formula:
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000 to purchase
shares of a specified class
T = average annual total return of shares of that class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment at the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value, for Class A shares, the
maximum 4.5% (4% for Conservative fund) 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 funds 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 funds calculate Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in fund 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.
The following tables show performance information for each class of the
funds' shares for the periods indicated.
<TABLE>
<CAPTION>
AGGRESSIVE PORTFOLIO
CLASS CLASS A CLASS B CLASS C CLASS Y
(INCEPTION DATE) 2/24/98 2/24/98 2/24/98 2/24/98
<S> <C> <C> <C> <C>
Year ended May 31, 1999
Standardized Return*......... (5.99)% (7.14)% (3.29)% (1.33)%
Non-Standardized Return...... (1.57)% (2.32)% (2.32)% (1.33)%
Inception to May 31, 1999:
Standardized Return*......... (2.40)% (3.72)% (0.27)% 2.54%
Non-Standardized Return...... 2.21% 1.28% 1.27% 2.54%
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MODERATE PORTFOLIO
CLASS CLASS A CLASS B CLASS C CLASS Y
(INCEPTION DATE) 2/24/98 2/24/98 2/24/98 2/24/98
Year ended May 31, 1999
Standardized Return*......... (2.74)% (3.81)% 0.12% 2.08%
Non-Standardized Return...... 1.85% 1.14% 1.11% 2.08%
Inception to May 31, 1999:
Standardized Return*......... 0.48% (0.49)% 3.64% 4.46%
Non-Standardized Return...... 4.21% 3.44% 3.42% 4.46%
CONSERVATIVE PORTFOLIO
CLASS CLASS A CLASS B CLASS C CLASS Y
(INCEPTION DATE)
Year ended May 31, 1999*
Standardized Return*......... 0.67% (0.49)% 4.02% 5.61%
Non-Standardized Return...... 5.38% 4.51% 4.77% 5.61%
Inception to May 31, 1999:
Standardized Return*......... 2.46% 1.52% 5.13% 6.52%
Non-Standardized Return...... 6.27% 5.44% 5.71% 6.52%
</TABLE>
* 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 fund'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 the other classes of shares) at the end of the Period.
Yield quotations are calculated according to the following formula:
YIELD = 2 [( a-b/cd +1 )6 - 1 ]
where: a = interest earned during the Period attributable to a
class of shares
b = expenses accrued for the Period attributable to a
class of shares (net of reimbursements)
c = the average daily number of shares of a class
outstanding during the Period that were entitled to
receive dividends
d = the maximum offering price per share (in the case of
Class A shares) or the net asset value per share (in
the case of Class B and Class C shares) on the last
day of the Period.
Except as noted below, in determining interest income earned during the
Period (variable "a" in the above formula), a fund 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 income on the obligation for each
day of the
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<PAGE>
period that the obligation is in the portfolio. Once interest earned
is calculated in this fashion for each debt obligation held by the fund,
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 fund's current maximum 4.5% (4% for Conservative fund) 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, 1999.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
MODERATE PORTFOLIO:......................... 2.10% 1.44% 1.45% 2.44%
CONSERVATIVE PORTFOLIO:..................... 3.75% 3.15% 3.41% 4.15%
</TABLE>
OTHER INFORMATION. In Performance Advertisements, the funds 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 funds 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 funds 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 funds 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 fund investment are reinvested in
additional fund shares, any future income or capital appreciation of a fund
would increase the value, not only of the original fund investment, but also of
the additional fund shares received through reinvestment. As a result, the value
of a fund investment would increase more quickly than if dividends or other
distributions had been paid in cash.
The funds 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
funds' 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 funds are not insured or guaranteed by
the U.S. government and returns and net asset values will fluctuate. The debt
securities held by the funds may have longer maturities than most CDs and may
reflect interest rate fluctuations for longer term debt securities. An
investment in any fund involves greater risks than an investment in either a
money market fund or a CD.
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The funds 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.
[CHART TO BE INSERTED HERE]
Source: Stocks, Bonds, Bills and Inflation 1998 YearbookJ 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 fund'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 1998, stocks beat
all other traditional asset classes. A $10,000 investment in the stocks
comprising the S&P 500 grew to $23,495,420, significantly more than any other
investment.
TAXES
BACKUP WITHHOLDING. Each fund is required to withhold 31% of all
taxable dividends, capital gain distributions and redemption proceeds payable to
individuals and certain other non-corporate shareholders who do not provide the
fund or PaineWebber with a correct taxpayer identification number. Withholding
at that rate also is required from taxable dividends and capital gain
distributions payable to those shareholders who otherwise are subject to backup
withholding.
SALE OR EXCHANGE OF FUND SHARES. A shareholder's sale (redemption) of
shares may result in a taxable gain or loss, depending on whether the
shareholder receives more or less than his or her adjusted basis for the shares
(which normally includes any initial sales charge paid on Class A shares). An
exchange of any fund's shares for shares of another PaineWebber mutual fund
generally will have similar tax consequences. In addition, if a fund's shares
are bought within 30 days before or after selling other shares of the fund
(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 RULE FOR CLASS A SHAREHOLDERS. A special tax rule applies when
a shareholder sells or exchanges Class A shares within 90 days of purchase and
subsequently acquires Class A shares of the same or another 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 would increase the basis of the PaineWebber mutual fund shares
subsequently acquired.
CONVERSION OF CLASS B SHARES. A shareholder will recognize no gain or
loss as a result of a conversion from Class B shares to Class A shares.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. To continue to qualify
for treatment as a regulated investment company ("RIC") under the Internal
Revenue Code, each fund must distribute to its shareholders for each taxable
year at least 90% of its investment company taxable income (consisting generally
of net investment income and net short-term capital gains) ("Distribution
Requirement") and must meet several additional requirements. For each fund these
requirements include the following: (1) the fund must derive at least 90% of its
gross income each taxable year from dividends, interest, payments with respect
to securities loans and gains from the sale or other disposition of securities,
or other income derived with respect to its business of investing in securities
("Income Requirement"); (2) at
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the close of each quarter of the fund's taxable year, at least 50% of the value
of its total assets must be represented by cash and cash items, U.S. government
securities, securities of other RICs (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 fund's total assets and
that does not represent more than 10% of the issuer's outstanding voting
securities; and (3) at the close of each quarter of the fund's taxable year, not
more than 25% of the value of its total assets may be invested in securities
(other than U.S. government securities or the securities of other RICs,
including the underlying funds) of any one issuer.
Each fund will invest its assets in shares of underlying funds and
money market and other short-term instruments. Accordingly, each fund'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 fund from the underlying
fund's investment company taxable income (which may include net gains from
certain foreign currency transactions) will be taxable to the fund as ordinary
income to the extent of the underlying fund's earnings and profits, and (2)
distributions paid to a fund 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 fund as long-term capital gains, regardless of how long
the fund has held the underlying fund's shares. If a fund 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 fund's
portfolio or otherwise), all or part of the loss will not be deductible by the
fund 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 fund) 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 fund will qualify to pass that benefit through to its
shareholders because of its inability to satisfy that test.
Each fund 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 FUNDS' SHAREHOLDERS. Dividends and other distributions
declared by a fund 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 fund and received by the shareholders on December 31 of that
year even if the distributions are paid by the fund 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 fund'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 fund 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 fund shares are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any dividend or capital gain distribution, the shareholder will
pay full price for the shares and receive some portion of the price back as a
taxable distribution.
The portion of each fund's dividends attributable to interest on U.S.
government obligations, including the portion of dividends the fund receives
from underlying funds qualifying as RICs that is attributable to such interest,
may be exempt from state and local income tax.
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OTHER INFORMATION
DELAWARE BUSINESS TRUST. The Trust is an entity of the type commonly
known as a Delaware business trust. 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 fund could, under certain conflicts of laws jurisprudence in
various states, be held personally liable for the obligations of the Trust or a
fund. However, the trust instrument of the Trust disclaims shareholder liability
for acts or obligations of the Trust or its series (the funds) 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 fund's property for all losses
and expenses of any series shareholder held personally liable for the
obligations of the fund. Thus, the risk of a shareholder's incurring financial
loss on account of shareholder liability is limited to circumstances in which a
fund 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 fund, the shareholder paying such liability will be entitled to
reimbursement from the general assets of the fund. The trustees intend to
conduct the operations of the funds in such a way as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the funds.
CLASSES OF SHARES. A share of each class of a fund represents an
identical interest in that fund's investment portfolio and has the same rights,
privileges and preferences. However, each class may differ with respect to sales
charges, if any, distribution and/or service fees, if any, other expenses
allocable exclusively to each class, voting rights on matters exclusively
affecting that class, and its exchange privilege, if any. The different sales
charges and other expenses applicable to the different classes of shares of the
funds will affect the performance of those classes. Each share of a fund is
entitled to participate equally in dividends, other distributions and the
proceeds of any liquidation of that fund. However, due to the differing expenses
of the classes, dividends and liquidation proceeds on Class A, B, C and Y shares
will differ.
VOTING RIGHTS. Shareholders of each fund are entitled to one vote for
each full share held and fractional votes for fractional shares held. Voting
rights are not cumulative and, as a result, the holders of more than 50% of all
the shares of the funds as a group may elect all of the board members of the
Trust. The shares of a fund will be voted together, except that only the
shareholders of a particular class of a fund may vote on matters affecting only
that class, such as the terms of a Rule 12b-1 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 series of the Trust is required by law.
The funds do not hold annual meetings. Shareholders of record of no
less than two-thirds of the outstanding shares of the Trust or fund (as
applicable) 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.
CLASS-SPECIFIC EXPENSES. Each fund may determine to allocate certain of
its expenses (in addition to distribution fees) to the specific classes of the
fund's shares to which those expenses are attributable. For example, a fund's
Class B and Class C shares bear higher transfer agency fees per shareholder
account than those borne by Class A or Class Y 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. Although the transfer agency fee will differ on
a per account basis as stated above, the specific extent to which the transfer
agency fees will differ between the classes as a percentage of net assets is not
certain, because the fee as a percentage of net assets will be affected by the
number of shareholder accounts in each class and the relative amounts of net
assets in each class.
PRIOR NAMES. 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."
CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT. State
Street Bank and Trust Company, located at One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian and
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recordkeeping agent for each fund. PFPC Inc., a subsidiary of PNC Bank, N.A.,
serves as each fund's transfer and dividend disbursing agent. It is located at
400 Bellevue Parkway, Wilmington, DE 19809.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the funds.
Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and Mitchell
Hutchins in connection with other matters.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York
10019, serves as independent auditors for the Trust and each fund.
FINANCIAL STATEMENTS
The funds' Annual Report to Shareholders for the period ended May 31,
1999 is a separate document supplied with this SAI, and the financial
statements, accompanying notes and report of independent auditors appearing
therein are incorporated herein by this reference.
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APPENDIX
RATINGS INFORMATION
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
AAA. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues; AA.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risk appear somewhat larger than in Aaa securities; A. Bonds which
are rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future; BAA. Bonds
which are rated Baa are considered as medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payment and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well; BA. Bonds which are rated Ba are judged to
have speculative elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class; B. Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small; CAA. Bonds which are rated Caa are of
poor standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest; CA. Bonds which are rated Ca
represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings; C. Bonds which are rated C
are the lowest rated class of bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from AA through CAA. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category, the modifier
2 indicates a mid-range ranking, and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong; A. An obligation rated A is
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than obligations in higher rated categories. However, the
obligor's capacity to meet its financial commitment on the obligation is still
strong; BBB. An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation; BB, B, CCC, CC, C. Obligations rated BB, B, CCC, CC and C are
regarded as having significant speculative characteristics. BB indicates the
least degree of speculation and C the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions; BB. An
obligation rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation; B. An
obligation rated B is more vulnerable to nonpayment than obligations rated BB,
but the obligor currently has the capacity to meet its financial
59
<PAGE>
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
commitment on the obligation. In the event of adverse business, financial, or
economic conditions, the obligor is not likely to have the capacity to meet its
financial commitment on the obligation; CC. An obligation rated CC is currently
highly vulnerable to nonpayment; C. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has been
taken, but payments on this obligation are being continued; D. An obligation
rated D is in payment default. The D rating category is used when payments on an
obligation are not made on the date due even if the applicable grace period has
not expired, unless S&P believes that such payments will be made during such
grace period. The D rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an obligation are
jeopardized.
CI. The rating CI is reserved for income bonds on which no interest is
being paid.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
R. This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
60
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERRED TO IN THE
PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION. THE FUNDS AND THEIR
DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS
DIFFERENT. THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN
OFFER TO SELL SHARES OF THE FUNDS IN ANY JURISDICTION WHERE THE FUNDS OR THEIR
DISTRIBUTOR MAY NOT LAWFULLY SELL THOSE SHARES.
------------
MITCHELL HUTCHINS AGGRESSIVE PORTFOLIO
MITCHELL HUTCHINS MODERATE PORTFOLIO
MITCHELL HUTCHINS CONSERVATIVE PORTFOLIO
----------------------------------------
Statement of Additional Information
September 30, 1999
----------------------------------------
PAINEWEBBER
(C)1999 PaineWebber Incorporated
- -------------------------------------
<PAGE>
PART C. OTHER INFORMATION
Item 23. EXHIBITS
(1) Amended and Restated Trust Instrument (filed herewith)
(2) Amended and Restated By-Laws (filed herewith)
(3) Instruments defining the rights of holders of Registrant's shares of
beneficial interest 2/
(4) Investment Advisory and Administration Contract 3/
(5) (a) Distribution Contract with respect to Class A Shares 3/
(b) Distribution Contract with respect to Class B Shares 3/
(c) Distribution Contract with respect to Class C Shares 3/
(d) Distribution Contract with respect to Class Y Shares 3/
(e) Exclusive Dealer Agreement with respect to Class A Shares 3/
(f) Exclusive Dealer Agreement with respect to Class B Shares 3/
(g) Exclusive Dealer Agreement with respect to Class C Shares 3/
(h) Exclusive Dealer Agreement with respect to Class Y Shares 3/
(6) Bonus, profit sharing or pension plans - none
(7) Custodian Agreement 3/
(8) Transfer Agency Agreement 3/
(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 1/
(13) (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 (not applicable)
(15) Plan Pursuant to Rule 18f-3 1/
- ----------------------
1/ 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.
2/ Incorporated by reference from Articles IV, VI, IX and X of
Registrant's Trust Instrument and from Articles VI and IX of
Registrant's By-Laws.
<PAGE>
3/ Incorporated by reference from Post-Effective Amendment No. 1 to the
registration statement of Mitchell Hutchins Portfolios, SEC File No.
333-26087, filed September 30, 1998.
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
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").
<PAGE>
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.
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 LIR MONEY 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
PAINEWEBBER SECURITIES TRUST
STRATEGIC GLOBAL INCOME FUND, INC.
2002 TARGET TERM TRUST INC.
<PAGE>
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.
<TABLE>
<CAPTION>
Position and Offices With
Name Position With Registrant Underwriter or Exclusive Dealer
- ---- ------------------------ -------------------------------
<S> <C> <C>
Margo N. Alexander Trustee and President Chairman, Chief Executive Officer and a
Director of Mitchell Hutchins and Executive
Vice President and a Director of PaineWebber
Mary C. Farrell Trustee Managing Director, Senior Investment Strategist
and member of the Investment Policy Committee
of PaineWebber
Brian M. Storms Trustee President and Chief Operating Officer of
Mitchell Hutchins
T. Kirkham Barneby Vice President Managing Director and Chief Investment Officer-
Quantitative Investments of Mitchell Hutchins
John J. Lee Vice President and Assistant Vice President and a Manager of the Mutual Fund
Treasurer Finance Department of Mitchell Hutchins
Kevin J. Mahoney Vice President and Assistant First Vice President and a Senior Manager of
Treasurer 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 Assistant Vice President and a Manager of the Mutual Fund
Treasurer Finance Department of Mitchell Hutchins
Dianne E. O'Donnell Vice President and Secretary Senior Vice President and Deputy General
Counsel of Mitchell Hutchins
Emil Polito Vice President Senior Vice President and Director of
Operations and Control for Mitchell Hutchins
Victoria E. Schonfeld Vice President Managing Director and General Counsel of
Mitchell Hutchins and a Senior Vice President
of PaineWebber
Paul H. Schubert Vice President and Treasurer Senior Vice President and Director of the
Mutual Fund Finance Department of Mitchell
Hutchins
<PAGE>
<CAPTION>
Position and Offices With
Name Position With Registrant Underwriter or Exclusive Dealer
- ---- ------------------------ -------------------------------
Barney A. Taglialatela Vice President and Assistant Vice President and a Manager of the Mutual Fund
Treasurer 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 Assistant First Vice President and Associate General
Secretary Counsel of Mitchell Hutchins
</TABLE>
c) None
Item 28. LOCATION OF ACCOUNTS AND RECORDS
The books and other documents required by paragraphs (b)(4), (c) and
(d) of Rule 31a-1 under the Investment Company Act of 1940 are maintained in the
physical possession of Registrant's investment adviser, 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.
<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 29th day of September, 1999.
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 29, 1999
- -------------------------- (Chief Executive Officer)
Margo N. Alexander *
/S/ E. GARRETT BEWKES, JR. Trustee and Chairman September 29, 1999
- -------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr. *
/S/ RICHARD Q. ARMSTRONG Trustee September 29, 1999
- --------------------------
Richard Q. Armstrong *
/S/ RICHARD R. BURT Trustee September 29, 1999
- --------------------------
Richard R. Burt *
/S/ MARY C. FARRELL Trustee September 29, 1999
- --------------------------
Mary C. Farrell *
/S/ MEYER FELDBERG Trustee September 29, 1999
- --------------------------
Meyer Feldberg *
/S/ GEORGE W. GOWEN Trustee September 29, 1999
- --------------------------
George W. Gowen *
/S/ FREDERIC V. MALEK Trustee September 29, 1999
- --------------------------
Frederic V. Malek *
/S/ CARL W. SCHAFER Trustee September 29, 1999
- --------------------------
Carl W. Schafer *
/S/ BRIAN M. STORMS Trustee September 29, 1999
- --------------------------
Brian M. Storms **
/S/ PAUL H. SCHUBERT Vice President and Treasurer (Chief September 29, 1999
- -------------------------- 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.
** Signature affixed by Elinor W. Gammon pursuant to power of attorney
dated May 14, 1999 and incorporated by reference from Post-Effective
Amendment No. 61 to the registration statement of PaineWebber Managed
Investments Trust, SEC File 2-91362, filed June 1, 1999.
<PAGE>
MITCHELL HUTCHINS PORTFOLIOS
EXHIBIT INDEX
Exhibit
Number
- -------
(1) Amended and Restated Trust Instrument (filed herewith)
(2) Amended and Restated By-Laws (filed herewith)
(3) Instruments defining the rights of holders of Registrant's shares of
beneficial interest 2/
(4) Investment Advisory and Administration Contract 3/
(5) (a) Distribution Contract with respect to Class A Shares 3/
(b) Distribution Contract with respect to Class B Shares 3/
(c) Distribution Contract with respect to Class C Shares 3/
(d) Distribution Contract with respect to Class Y Shares 3/
(e) Exclusive Dealer Agreement with respect to Class A Shares 3/
(f) Exclusive Dealer Agreement with respect to Class B Shares 3/
(g) Exclusive Dealer Agreement with respect to Class C Shares 3/
(h) Exclusive Dealer Agreement with respect to Class Y Shares 3/
(6) Bonus, profit sharing or pension plans - none
(7) Custodian Agreement 3/
(8) Transfer Agency Agreement 3/
(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 1/
(13) (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 (not applicable)
(15) Plan Pursuant to Rule 18f-3 1/
- ----------------------
1/ 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.
2/ Incorporated by reference from Articles IV, VI, IX and X of
Registrant's Trust Instrument and from Articles VI and IX of
Registrant's By-Laws.
3/ Incorporated by reference from Post-Effective Amendment No. 1 to the
registration statement of Mitchell Hutchins Portfolios, SEC File No.
333-26087, filed September 30, 1998.
MITCHELL HUTCHINS PORTFOLIOS
AMENDED AND RESTATED TRUST INSTRUMENT
May 13, 1999
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
ARTICLE I DEFINITIONS..............................................................................................1
ARTICLE II TRUSTEES................................................................................................2
<S> <C> <C>
Section 1. Management of the Trust........................................................................2
Section 2. Initial Trustees; Number and Election of Trustees..............................................2
Section 3. Term of Office.................................................................................2
Section 4. Vacancies; Appointment of Trustees.............................................................3
Section 5. Temporary Vacancy or Absence...................................................................3
Section 6. Chairman.......................................................................................3
Section 7. Action by the Trustees.........................................................................3
Section 8. Ownership of Trust Property....................................................................4
Section 9. Effect of Trustees Not Serving.................................................................4
Section 10. Trustees, Etc. as Shareholders................................................................4
ARTICLE III POWERS OF THE TRUSTEES.................................................................................4
Section 1. Powers.........................................................................................4
Section 2. Certain Transactions...........................................................................7
ARTICLE IV SERIES; CLASSES; SHARES.................................................................................8
Section 1. Establishment of Series or Class...............................................................8
Section 2. Shares.........................................................................................8
Section 3. Investment in the Trust........................................................................9
Section 4. Assets and Liabilities of Series...............................................................9
Section 5. Ownership and Transfer of Shares..............................................................10
Section 6. Status of Shares; Limitation of Shareholder Liability.........................................10
ARTICLE V DISTRIBUTIONS AND REDEMPTIONS...........................................................................10
Section 1. Distributions.................................................................................10
Section 2. Redemptions...................................................................................11
Section 3. Determination of Net Asset Value..............................................................11
Section 4. Suspension of Right of Redemption.............................................................11
Section 5. Redemptions Necessary for Qualification as Regulated Investment Company.......................12
ARTICLE VI SHAREHOLDERS' VOTING POWERS AND MEETINGS...............................................................12
Section 1. Voting Power..................................................................................12
i
<PAGE>
Section 2. Meetings of Shareholders......................................................................13
Section 3. Quorum; Required Vote.........................................................................13
ARTICLE VII CONTRACTS WITH SERVICE PROVIDERS......................................................................13
Section 1. Investment Adviser............................................................................13
Section 2. Principal Underwriter.........................................................................14
Section 3. Transfer Agency, Shareholder Services, and Administration Agreements..........................14
Section 4. Custodian.....................................................................................14
Section 5. Parties to Contracts With Service Providers...................................................14
Section 6. Requirements of the 1940 Act..................................................................14
ARTICLE VIII EXPENSES OF THE TRUST AND SERIES.....................................................................15
ARTICLE IX LIMITATION OF LIABILITY AND INDEMNIFICATION............................................................16
Section 1. Limitation of Liability.......................................................................16
Section 2. Indemnification...............................................................................16
Section 3. Indemnification of Shareholder................................................................16
ARTICLE X MISCELLANEOUS...........................................................................................18
Section 1. Trust Not a Partnership.......................................................................18
Section 2. Trustee Action; Expert Advice; No Bond or Surety..............................................18
Section 3. Record Dates..................................................................................18
Section 4. Termination of the Trust......................................................................19
Section 5. Reorganization................................................................................20
Section 6. Trust Instrument.............................................................................20
Section 7. Applicable Law................................................................................20
Section 8. Amendments....................................................................................21
Section 9. Fiscal Year...................................................................................21
Section 10. Severability.................................................................................21
</TABLE>
ii
<PAGE>
MITCHELL HUTCHINS PORTFOLIOS
TRUST INSTRUMENT
This AMENDED AND RESTATED TRUST INSTRUMENT is adopted on May 13, 1999,
with respect to the business trust established by the Trustees on August 9, 1996
and previously named first PaineWebber Select Fund and then Mitchell Hutchins
Journey Portfolios, to establish a business trust for the investment and
reinvestment of funds contributed to the Trust by investors. The Trustees
declare that all money and property contributed to the Trust shall be held and
managed in trust pursuant to this Trust Instrument. The name of the Trust
created by this Trust Instrument has been changed to Mitchell Hutchins
Portfolios.
ARTICLE I
DEFINITIONS
Unless otherwise provided or required by the context:
(a) "By-laws" means the By-laws of the Trust adopted by the Trustees,
as amended from time to time;
(b) "Class" means a class of Shares in a Series established pursuant to
Article IV;
(c) "Commission," "Interested Person," and "Principal Underwriter" have
the meanings provided in the 1940 Act;
(d) "Covered Person" means a person so defined in Article IX,
Section2;
(e) "Delaware Act" means Chapter 38 of Title 12 of the Delaware Code
entitled "Treatment of Delaware Business Trusts," as amended from time to time;
(f) "Majority Shareholder Vote" means "the vote of a majority of the
outstanding voting securities" as defined in the 1940 Act;
(g) "Net Asset Value" means the net asset value of each Series of the
Trust, determined as provided in Article V, Section 3;
(h) "Registered Investment Company" means a company registered as a
management investment company under the 1940 Act.
(i) "Outstanding Shares" means Shares shown on the books of the Trust
or its transfer agent as then issued and outstanding, but does not include
Shares which have been repurchased or redeemed by the Trust;
(j) "Series" means a series of Shares established pursuant to
Article IV;
(k) "Shareholder" means a record owner of Outstanding Shares;
1
<PAGE>
(l) "Shares" means the equal proportionate transferable units of
interest into which the beneficial interest of each Series or Class is divided
from time to time (including whole Shares and fractions of Shares);
(m) "Trust" means Mitchell Hutchins Portfolios established hereby, and
reference to the Trust, when applicable to one or more Series, refers to that
Series;
(n) "Trustees" means the persons who have signed this Trust Instrument,
so long as they shall continue in office in accordance with the terms hereof,
and all other persons who may from time to time be duly qualified and serving as
Trustees in accordance with Article II, in all cases in their capacities as
Trustees hereunder;
(o) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the Trust or any Series
or the Trustees on behalf of the Trust or any Series; and
(p) The "1940 Act" means the Investment Company Act of 1940, as amended
from time to time.
ARTICLE II
TRUSTEES
Section 1. MANAGEMENT OF THE TRUST. The business and affairs of the
Trust shall be managed by or under the direction of the Trustees, and they shall
have all powers necessary or desirable to carry out that responsibility. No
Shareholder shall have any right to conduct any Trust business solely by reason
of being a Shareholder. The Trustees may execute all instruments and take all
action they deem necessary or desirable to promote the interests of the Trust.
Any determination made by the Trustees in good faith as to what is in the
interests of the Trust shall be conclusive.
Section 2. INITIAL TRUSTEES; NUMBER AND ELECTION OF TRUSTEES. The
initial Trustees shall be the persons initially signing this Trust Instrument.
The number of Trustees (other than the initial Trustees) shall be fixed from
time to time by a majority of the Trustees; provided, that there shall be at
least two (2) Trustees. The Shareholders shall elect the Trustees (other than
the initial Trustees) on such dates as the Trustees may fix from time to time.
Section 3. TERM OF OFFICE. Each Trustee shall hold office for life or
until his or her successor is elected or the Trust terminates; except that (a)
any Trustee may resign by delivering to the other Trustees or to any Trust
officer a written resignation effective upon such delivery or a later date
specified therein; (b) any Trustee may be removed with or without cause at any
time by a written instrument signed by at least two-thirds of the other
Trustees, specifying the effective date of removal; (c) any Trustee who requests
to be retired, or who has become physically or mentally incapacitated or is
otherwise unable to serve, may be retired by a written instrument signed by a
majority of the other Trustees, specifying the effective date of retirement;
2
<PAGE>
and (d) any Trustee may be removed at any meeting of the Shareholders by a vote
of at least two-thirds of the Outstanding Shares.
Section 4. VACANCIES; APPOINTMENT OF TRUSTEES. Whenever a vacancy shall
exist in the Board of Trustees, regardless of the reason for such vacancy, the
remaining Trustees shall appoint any person as they determine in their sole
discretion to fill that vacancy, consistent with the limitations under the 1940
Act. Such appointment shall be made by a written instrument signed by a majority
of the Trustees or by a resolution of the Trustees, duly adopted and recorded in
the records of the Trust, specifying the effective date of the appointment. The
Trustees may appoint a new Trustee as provided above in anticipation of a
vacancy expected to occur because of the retirement, resignation, or removal of
a Trustee, or an increase in number of Trustees, provided that such appointment
shall become effective only at or after the expected vacancy occurs. As soon as
any such Trustee has accepted his or her appointment in writing, the trust
estate shall vest in the new Trustee, together with the continuing Trustees,
without any further act or conveyance, and he or she shall be deemed a Trustee
hereunder.
Section 5. TEMPORARY VACANCY OR ABSENCE. Whenever a vacancy in the
Board of Trustees shall occur, until such vacancy is filled, or while any
Trustee is absent from his or her domicile (unless that Trustee has made
arrangements to be informed about, and to participate in, the affairs of the
Trust during such absence), or is physically or mentally incapacitated, the
remaining Trustees shall have all the powers hereunder and their certificate as
to such vacancy, absence, or incapacity shall be conclusive. Any Trustee may, by
power of attorney, delegate his or her powers as Trustee for a period not
exceeding six (6) months at any one time to any other Trustee or Trustees to the
extent permitted by the 1940 Act.
Section 6. CHAIRMAN. The Trustees shall appoint one of their number to
be Chairman of the Board of Trustees. The Chairman shall preside at all meetings
of the Trustees, shall be responsible for the execution of policies established
by the Trustees and the administration of the Trust, and may be the chief
executive, financial and/or accounting officer of the Trust.
Section 7. ACTION BY THE TRUSTEES. The Trustees shall act by majority
vote at a meeting duly called (including a meeting by telephonic or other
electronic means, unless the 1940 Act requires that a particular action be taken
only at a meeting of Trustees in person) at which a quorum is present or by
written consent of a majority of Trustees (or such greater number as may be
required by applicable law) without a meeting. A majority of the Trustees shall
constitute a quorum at any meeting. Meetings of the Trustees may be called
orally or in writing by the Chairman of the Board of Trustees or by any two
other Trustees. Notice of the time, date and place of all Trustees meetings
shall be given to each Trustee by telephone, facsimile or other electronic
mechanism sent to his or her home or business address at least twenty-four hours
in advance of the meeting or by written notice mailed to his or her home or
business address at least seventy-two hours in advance of the meeting. Notice
need not be given to any Trustee who attends the meeting without objecting to
the lack of notice or who signs a waiver of notice either before or after the
meeting. Subject to the requirements of the 1940 Act, the Trustees by majority
vote may delegate to any Trustee or Trustees authority to approve
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particular matters or take particular actions on behalf of the Trust. Any
written consent or waiver may be provided and delivered to the Trust by
facsimile or other similar electronic mechanism.
Section 8. OWNERSHIP OF TRUST PROPERTY. The Trust Property of the Trust
and of each Series shall be held separate and apart from any assets now or
hereafter held in any capacity other than as Trustee hereunder by the Trustees
or any successor Trustees. All of the Trust Property and legal title thereto
shall at all times be considered as vested in the Trustees on behalf of the
Trust, except that the Trustees may cause legal title to any Trust Property to
be held by or in the name of the Trust, or in the name of any person as nominee.
No Shareholder shall be deemed to have a severable ownership in any individual
asset of the Trust or of any Series or any right of partition or possession
thereof, but each Shareholder shall have, as provided in Article IV, a
proportionate undivided beneficial interest in the Trust or Series represented
by Shares.
Section 9. EFFECT OF TRUSTEES NOT SERVING. The death, resignation,
retirement, removal, incapacity, or inability or refusal to serve of the
Trustees, or any one of them, shall not operate to annul the Trust or to revoke
any existing agency created pursuant to the terms of this Trust Instrument.
Section 10. TRUSTEES, ETC. AS SHAREHOLDERS. Subject to any restrictions
in the By-laws, any Trustee, officer, agent or independent contractor of the
Trust may acquire, own and dispose of Shares to the same extent as any other
Shareholder; the Trustees may issue and sell Shares to and buy Shares from any
such person or any firm or company in which such person is interested, subject
only to any general limitations herein.
ARTICLE III
POWERS OF THE TRUSTEES
Section 1. POWERS. The Trustees shall have exclusive and absolute
control over the Trust Property and over the business of the Trust to the same
extent as if they were the sole owners of the Trust Property and business in
their own right, but with such powers of delegation as may be permitted in this
Trust Instrument. The Trustees in all instances shall act as principals, free of
the control of the Shareholders. The Trustees shall have full power and
authority to take or refrain from taking any action and to execute any contracts
and instruments that they may consider necessary or desirable in the management
of the Trust. The Trustees shall not in any way be bound or limited by current
or future laws or customs applicable to trust investments, but shall have full
power and authority to make any investments which they, in their sole
discretion, deem proper to accomplish the purposes of the Trust. The Trustees
may exercise all of their powers without recourse to any court or other
authority. Subject to any applicable limitation herein or in the By-laws,
operating documents or resolutions of the Trust, the Trustees shall have power
and authority, without limitation:
(a) To operate as and carry on the business of a Registered Investment
Company and to exercise all the powers necessary and proper to conduct such a
business
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(b) To subscribe for, invest in, reinvest in, purchase, or otherwise
acquire, hold, pledge, sell, assign, transfer, exchange, distribute, or
otherwise deal in or dispose of any form of property, including cash (U.S.
currency), foreign currencies and related instruments, and securities (including
common and preferred stocks, warrants, bonds, debentures, time notes, and all
other evidences of indebtedness, negotiable or non-negotiable instruments,
obligations, certificates of deposit or indebtedness, commercial paper,
repurchase agreements, reverse repurchase agreements, convertible securities,
forward contracts, options, and futures contracts) issued, guaranteed, or
sponsored by any state, territory, or possession of the United States or the
District of Columbia or their political subdivisions, agencies, or
instrumentalities, or by the U.S. government, any foreign government, or any
agency, instrumentality, or political subdivision thereof, or by any
international instrumentality, or by any bank, savings institution, corporation,
or other business entity organized under the laws of the United States
(including a Registered Investment Company or any series thereof, subject to the
provisions of the 1940 Act) or under foreign laws, without regard to whether any
such securities mature before or after the possible termination of the Trust; to
exercise any and all rights, powers, and privileges of ownership or interest in
respect of any and all such investments of every kind and description; and to
hold cash or other property uninvested, without in any event being bound or
limited by any current or future law or custom concerning investments by
trustees;
(c) To adopt By-laws not inconsistent with this Trust Instrument
providing for the conduct of the business of the Trust and to amend and repeal
them to the extent such right is not reserved to the Shareholders;
(d) To elect and remove such officers and appoint and terminate such
agents as they deem appropriate;
(e) To employ as custodian of any assets of the Trust, subject to any
provisions herein or in the By-laws, one or more banks, trust companies or
companies that are members of a national securities exchange, or other entities
permitted by the Commission to serve as such;
(f) To retain one or more transfer agents and Shareholder servicing
agents, or both;
(g) To provide for the distribution of Shares either through a
Principal Underwriter as provided herein or by the Trust itself, or both, or
pursuant to a distribution plan of any kind;
(h) To set record dates in the manner provided for herein or in the
By-laws;
(i) To delegate such authority as they consider desirable to any
officers of the Trust and to any agent, independent contractor, manager,
investment adviser, custodian or underwriter;
(j) To sell, exchange or otherwise dispose of any or all of the assets
of the Trust, subject to Article X, Section 4;
(k) To vote or give assent, or exercise any rights of ownership, with
respect to other securities or property; and to execute and deliver powers of
attorney delegating such power to other persons;
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(l) To exercise powers and rights of subscription or otherwise which in
any manner arise out of ownership of securities or other property;
(m) To hold any security or other property (i) in a form not indicating
any trust, whether in bearer, book entry, unregistered or other negotiable form,
or (ii) either in the Trust's or Trustees' own name or in the name of a
custodian or a nominee or nominees, subject to safeguards according to the usual
practice of business trusts or investment companies;
(n) To establish separate and distinct Series with separately defined
investment objectives and policies and distinct investment purposes, and with
separate Shares representing beneficial interests in such Series, and to
establish separate Classes, all in accordance with the provisions of Article IV;
(o) To incur and pay all expenses that in the Trustees' opinion are
necessary or incidental to carry out any of the purposes of this Trust
Instrument; to pay reasonable compensation to themselves as Trustees from the
Trust Property or the assets belonging to any appropriate Series or Class; to
pay themselves such compensation for special services, including legal and
brokerage services, and such reimbursement for expenses reasonably incurred by
themselves on behalf of the Trust or any Series or Class, as they in good faith
may deem reasonable; and to fix the compensation of all officers and employees
of the Trust;
(p) To the full extent permitted by Section 3804 of the Delaware Act,
to allocate assets, liabilities and expenses of the Trust to a particular Series
and liabilities and expenses to a particular Class or to apportion the same
between or among two or more Series or Classes, provided that any liabilities or
expenses incurred by a particular Series or Class shall be payable solely out of
the assets belonging to that Series or Class as provided for in Article IV,
Section 4;
(q) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or concern whose securities are held
by the Trust; to consent to any contract, lease, mortgage, purchase, or sale of
property by such corporation or concern; and to pay calls or subscriptions with
respect to any security held in the Trust;
(r) To compromise, arbitrate, or otherwise adjust claims in favor of or
against the Trust or any matter in controversy including, but not limited to,
claims for taxes;
(s) To make distributions of income and of capital gains to
Shareholders in the manner hereinafter provided for;
(t) To borrow money or otherwise obtain credit and to secure the same
by mortgaging, pledging, or otherwise subjecting as security any assets of the
Trust, including the lending of portfolio securities, and to endorse, guarantee,
or undertake the performance of any obligation, contract, or engagement of any
other person, firm, association, or corporation;
(u) To establish, from time to time, a minimum total investment for
Shareholders, and to require the redemption of the Shares of any Shareholders
whose investment is less than such minimum;
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(v) To purchase, and pay for, out of Trust Property or the assets
belonging to any appropriate Series, insurance policies insuring the
Shareholders, Trustees, officers, employees, agents, and/or independent
contractors of the Trust (including the investment adviser of any Series)
against all claims arising by reason of holding any such position or by reason
of any action taken or omitted by any such person in such capacity, whether or
not the Trust would have the power to indemnify such person against such claim
(w) To establish committees for such purposes, with such membership,
and with such responsibilities as the Trustees may consider proper, including a
committee consisting of fewer than all of the Trustees then in office, which may
act for and bind the Trustees and the Trust with respect to the institution,
prosecution, dismissal, settlement, review or investigation of any legal action,
suit or proceeding, pending or threatened;
(x) To interpret the investment policies, practices, or limitations
of any Series;
(y) To establish a registered office and have a registered agent in the
State of Delaware;
(z) To issue, sell, repurchase, redeem, cancel, retire, acquire, hold,
resell, reissue, dispose of and otherwise deal in Shares; to establish terms and
conditions regarding the issuance, sale, repurchase, redemption, cancellation,
retirement, acquisition, holding, resale, reissuance, disposition of or dealing
in Shares; and, subject to Articles IV and V, to apply to any such repurchase,
redemption, retirement, cancellation or acquisition of Shares any funds or
property of the Trust or of the particular Series with respect to which such
Shares are issued; and
(aa) To carry on any other business in connection with or incidental to
any of the foregoing powers, to do everything necessary or desirable to
accomplish any purpose or to further any of the foregoing powers, and to take
every other action incidental to the foregoing business or purposes, objects or
powers.
(bb) To select such name for the Trust, or any Series or Class, as the
Trustees deem proper in their discretion, without Shareholder approval, in which
event the Trust may hold its property and conduct its activities under such
other name
The clauses above shall be construed as objects and powers, and the
enumeration of specific powers shall not limit in any way the general powers of
the Trustees. Any action by one or more of the Trustees in their capacity as
such hereunder shall be deemed an action on behalf of the Trust or the
applicable Series, and not an action in an individual capacity. No one dealing
with the Trustees shall be under any obligation to make any inquiry concerning
the authority of the Trustees, or to see to the application of any payments made
or property transferred to the Trustees or upon their order. In construing this
Trust Instrument, the presumption shall be in favor of a grant of power to the
Trustees.
Section 2. CERTAIN TRANSACTIONS. Except as prohibited by applicable
law, the Trustees may, on behalf of the Trust, buy any securities from or sell
any securities to, or lend any assets of the Trust to, any Trustee or officer
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of the Trust or any firm of which any such Trustee or officer is a member acting
as principal, or have any such dealings with any investment adviser,
administrator, distributor or transfer agent for the Trust or with any
Interested Person of such person. The Trust may employ any such person or entity
in which such person is an Interested Person, as broker, legal counsel,
registrar, investment adviser, administrator, distributor, transfer agent,
dividend disbursing agent, custodian or in any other capacity upon customary
terms.
ARTICLE IV
SERIES; CLASSES; SHARES
Section 1. ESTABLISHMENT OF SERIES OR CLASS. The Trust shall consist of
one or more Series. The Trustees hereby establish the Series listed in Schedule
A attached hereto and made a part hereof. Each additional Series shall be
established by the adoption of a resolution by the Trustees. The Trustees may
designate the relative rights and preferences of the Shares of each Series. The
Trustees may divide the Shares of any Series into Classes and hereby establish
the Classes listed in Schedule A. In such case each Class of a Series shall
represent a proportional beneficial interest in the assets of that Series and
have identical voting, dividend, liquidation and other rights and the same terms
and conditions, except that expenses allocated to a Class may be borne solely by
such Class as determined by the Trustees and a Series or Class may have
exclusive voting rights with respect to matters affecting only that Series or
Class. The Trust shall maintain separate and distinct records for each Series
and hold and account for the assets thereof separately from the other assets of
the Trust or of any other Series. A Series may issue any number of Shares and
need not issue Shares. Each Share of a Series shall represent an equal
beneficial interest in the net assets of such Series. Each holder of Shares of a
Series shall be entitled to receive his or her pro rata share of all
distributions made with respect to such Series, provided that, if Classes of a
Series are outstanding, each holder of Shares of a Class shall be entitled to
receive his or her pro rata share of all distributions made with respect to such
Class of the Series. Upon redemption of his or her Shares, such Shareholder
shall be paid solely out of the assets and property of such Series.
Section 2. SHARES. The beneficial interest in the Trust shall be
divided into Shares of one or more separate and distinct Series or Classes
established by the Trustees. The number of Shares of the Trust and of each
Series and Class is unlimited and each Share shall have a par value of $0.001
per Share. All Shares issued hereunder shall be fully paid and nonassessable.
Shareholders shall have no preemptive or other right to subscribe to any
additional Shares or other securities issued by the Trust. The Trustees shall
have full power and authority, in their sole discretion and without obtaining
Shareholder approval: to issue original or additional Shares and fractional
Shares at such times and on such terms and conditions as they deem appropriate;
to establish and to change in any manner Shares of any Series or Classes with
such preferences, terms of conversion, voting powers, rights and privileges as
the Trustees may determine (but the Trustees may not change Outstanding Shares
in a manner materially adverse to the Shareholders of such Shares); to divide or
combine the Shares of any Series or Classes into a greater or lesser number; to
classify or reclassify any unissued Shares of any Series or Classes into one or
more Series or Classes of Shares; to abolish any one or more Series or Classes
of Shares; to issue Shares to acquire other assets (including assets subject to,
and in connection
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with, the assumption of liabilities) and businesses; and to take such other
action with respect to the Shares as the Trustees may deem desirable.
Section 3. INVESTMENT IN THE TRUST. The Trustees shall accept
investments in any Series from such persons and on such terms as they may from
time to time authorize. At the Trustees' discretion, such investments, subject
to applicable law, may be in the form of cash or securities in which that Series
is authorized to invest, valued as provided in Article V, Section 3. Investments
in a Series shall be credited to each Shareholder's account in the form of full
and fractional Shares at the Net Asset Value per Share next determined after the
investment is received or accepted in good form as may be determined by the
Trustees; provided, however, that the Trustees may, in their sole discretion,
(a) impose a sales charge upon investments in any Series or Class, or (b)
determine the Net Asset Value per Share of the initial capital contribution. The
Trustees shall have the right to refuse to accept investments in any Series at
any time without any cause or reason therefor whatsoever.
Section 4. ASSETS AND LIABILITIES OF SERIES. All consideration received
by the Trust for the issue or sale of Shares of a particular Series, together
with all assets in which such consideration is invested or reinvested, all
income, earnings, profits, and proceeds thereof (including any proceeds derived
from the sale, exchange or liquidation of such assets, and any funds or payments
derived from any reinvestment of such proceeds in whatever form the same may
be), shall be held and accounted for separately from the other assets of the
Trust and every other Series and are referred to as "assets belonging to" that
Series. The assets belonging to a Series shall belong only to that Series for
all purposes, and to no other Series, subject only to the rights of creditors of
that Series. Any assets, income, earnings, profits, and proceeds thereof, funds,
or payments which are not readily identifiable as belonging to any particular
Series shall be allocated by the Trustees between and among one or more Series
as the Trustees deem fair and equitable. Each such allocation shall be
conclusive and binding upon the Shareholders of all Series for all purposes, and
such assets, earnings, income, profits or funds, or payments and proceeds
thereof shall be referred to as assets belonging to that Series. The assets
belonging to a Series shall be so recorded upon the books of the Trust, and
shall be held by the Trustees in trust for the benefit of the Shareholders of
that Series. The assets belonging to a Series shall be charged with the
liabilities of that Series and all expenses, costs, charges and reserves
attributable to that Series, except that liabilities and expenses allocated
solely to a particular Class shall be borne by that Class. Any general
liabilities, expenses, costs, charges or reserves of the Trust which are not
readily identifiable as belonging to any particular Series or Class shall be
allocated and charged by the Trustees between or among any one or more of the
Series or Classes in such manner as the Trustees deem fair and equitable. Each
such allocation shall be conclusive and binding upon the Shareholders of all
Series or Classes for all purposes.
Without limiting the foregoing, but subject to the right of the
Trustees to allocate general liabilities, expenses, costs, charges or reserves
as herein provided, the debts, liabilities, obligations and expenses incurred,
contracted for or otherwise existing with respect to a particular Series shall
be enforceable against the assets of such Series only, and not against the
assets of the Trust generally or of any other Series. Notice of this contractual
limitation on liabilities among Series may, in the Trustees' discretion, be set
forth in the certificate of trust of the Trust (whether
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originally or by amendment) as filed or to be filed in the Office of the
Secretary of State of the State of Delaware pursuant to the Delaware Act, and
upon giving of such notice in the certificate of trust, the statutory provisions
of Section 3804 of the Delaware Act relating to limitations on liabilities among
Series (and the statutory effect under Section 3804 of setting forth such notice
in the certificate of trust) shall become applicable to the Trust and each
Series. Any person extending credit to, contracting with or having any claim
against any Series may look only to the assets of that Series to satisfy or
enforce any debt, with respect to that Series. No Shareholder or former
Shareholder of any Series shall have a claim on or any right to any assets
allocated or belonging to any other Series.
Section 5. OWNERSHIP AND TRANSFER OF SHARES. The Trust shall maintain a
register containing the names and addresses of the Shareholders of each Series
and Class thereof, the number of Shares of each Series and Class held by such
Shareholders, and a record of all Share transfers. The register shall be
conclusive as to the identity of Shareholders of record and the number of Shares
held by them from time to time. The Trustees shall not be required to, but may
authorize the issuance of certificates representing Shares and adopt rules
governing their use. The Trustees may make rules governing the transfer of
Shares, whether or not represented by certificates.
Section 6. STATUS OF SHARES; LIMITATION OF SHAREHOLDER LIABILITY.
Shares shall be deemed to be personal property giving Shareholders only the
rights provided in this Trust Instrument. Every Shareholder, by virtue of having
acquired a Share, shall be held expressly to have assented to and agreed to be
bound by the terms of this Trust Instrument and to have become a party hereto.
No Shareholder shall be personally liable for the debts, liabilities,
obligations and expenses incurred by, contracted for, or otherwise existing with
respect to, the Trust or any Series. Neither the Trust nor the Trustees shall
have any power to bind any Shareholder personally or to demand payment from any
Shareholder for anything, other than as agreed by the Shareholder. Shareholders
shall have the same limitation of personal liability as is extended to
shareholders of a private corporation for profit incorporated in the State of
Delaware. Every written obligation of the Trust or any Series may contain a
statement to the effect that such obligation may only be enforced against the
assets of the Trust or such Series; however, the omission of such statement
shall not operate to bind or create personal liability for any Shareholder or
Trustee.
ARTICLE V
DISTRIBUTIONS AND REDEMPTIONS
Section 1. DISTRIBUTIONS. The Trustees may declare and pay dividends
and other distributions, including dividends on Shares of a particular Series
and other distributions from the assets belonging to that Series. The amount and
payment of dividends or distributions and their form, whether they are in cash,
Shares or other Trust Property, shall be determined by the Trustees. Dividends
and other distributions may be paid pursuant to a standing resolution adopted
once or more often as the Trustees determine. All dividends and other
distributions on Shares of a particular Series shall be distributed pro rata to
the Shareholders of that Series in
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proportion to the number of Shares of that Series they held on the record
date established for such payment, except that such dividends and distributions
shall appropriately reflect expenses allocated to a particular Class of such
Series. The Trustees may adopt and offer to Shareholders such dividend
reinvestment plans, cash dividend payout plans or similar plans as the Trustees
deem appropriate.
Section 2. REDEMPTIONS. Each Shareholder of a Series shall have the
right at such times as may be permitted by the Trustees to require the Series to
redeem all or any part of his or her Shares at a redemption price per Share
equal to the Net Asset Value per Share at such time as the Trustees shall have
prescribed by resolution less such charges as are determined by the Trustees and
described in the Trust's Registration Statement for that Series under the
Securities Act of 1933 or any prospectus or statement of additional information
contained therein, as supplemented. In the absence of such resolution, the
redemption price per Share shall be the Net Asset Value next determined after
receipt by the Series of a request for redemption in proper form less such
charges as are determined by the Trustees and described in the Trust's
Registration Statement for that Series under the Securities Act of 1933 or any
prospectus or statement of additional information contained therein, as
supplemented.
The Trustees may specify conditions, prices, and places of redemption,
and may specify binding requirements for the proper form or forms of requests
for redemption. Payment of the redemption price may be wholly or partly in
securities or other assets at the value of such securities or assets used in
such determination of Net Asset Value, or may be in cash. Upon redemption,
Shares may be reissued from time to time. The Trustees may require Shareholders
to redeem Shares for any reason under terms set by the Trustees, including the
failure of a Shareholder to supply a personal identification number if required
to do so, or to have the minimum investment required, or to pay when due for the
purchase of Shares issued to him or her. To the extent permitted by law, the
Trustees may retain the proceeds of any redemption of Shares required by them
for payment of amounts due and owing by a Shareholder to the Trust or any Series
or Class. Notwithstanding the foregoing, the Trustees may postpone payment of
the redemption price and may suspend the right of the Shareholders to require
any Series or Class to redeem Shares during any period of time when and to the
extent permissible under the 1940 Act.
Section 3. DETERMINATION OF NET ASSET VALUE. The Trustees shall cause
the Net Asset Value of Shares of each Series or Class to be determined from time
to time in a manner consistent with applicable laws and regulations. The
Trustees may delegate the power and duty to determine Net Asset Value per Share
to one or more Trustees or officers of the Trust or to an investment manager,
administrator or investment adviser, custodian, depository or other agent
appointed for such purpose. The Net Asset Value of Shares shall be determined
separately for each Series or Class at such times as may be prescribed by the
Trustees or, in the absence of action by the Trustees, as of the close of
regular trading on the New York Stock Exchange on each day for all or part of
which such Exchange is open for unrestricted trading.
Section 4. SUSPENSION OF RIGHT OF REDEMPTION. If, as referred to in
Section 2 of this Article, the Trustees postpone payment of the redemption price
and suspend the right of Shareholders to redeem their Shares, such suspension
shall take effect at the time the Trustees
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shall specify, but not later than the close of business on the business day next
following the declaration of suspension. Thereafter Shareholders shall have no
right of redemption or payment until the Trustees declare the end of the
suspension. If the right of redemption is suspended, a Shareholder may either
withdraw his request for redemption or receive payment based on the Net Asset
Value per Share next determined after the suspension terminates.
Section 5. REDEMPTIONS NECESSARY FOR QUALIFICATION AS REGULATED
INVESTMENT COMPANY. If the Trustees shall determine that direct or indirect
ownership of Shares of any Series has or may become concentrated in any person
to an extent which would disqualify any Series as a regulated investment company
under the Internal Revenue Code, then the Trustees shall have the power (but not
the obligation) by lot or other means they deem equitable to (a) call for
redemption by any such person of a number, or principal amount, of Shares
sufficient to maintain or bring the direct or indirect ownership of Shares into
conformity with the requirements for such qualification and (b) refuse to
transfer or issue Shares to any person whose acquisition of Shares in question
would, in the Trustees' judgment, result in such disqualification. Any such
redemption shall be effected at the redemption price and in the manner provided
in this Article. Shareholders shall upon demand disclose to the Trustees in
writing such information concerning direct and indirect ownership of Shares as
the Trustees deem necessary to comply with the requirements of any taxing
authority.
ARTICLE VI
SHAREHOLDERS' VOTING POWERS AND MEETINGS
Section 1. VOTING POWER. The Shareholders shall have power to vote only
with respect to (a) the election of Trustees as provided in Section 2 of this
Article; (b) the removal of Trustees as provided in Article II, Section 3(d);
(c) any investment advisory or management contract as provided in Article VII,
Section 1; (d) any termination of the Trust as provided in Article X, Section 4;
(e) the amendment of this Trust Instrument to the extent and as provided in
Article X, Section 8; and (f) such additional matters relating to the Trust as
may be required or authorized by law, this Trust Instrument, or the By-laws or
any registration of the Trust with the Commission or any State, or as the
Trustees may consider desirable.
On any matter submitted to a vote of the Shareholders, all Shares shall
be voted by individual Series, except (a) when required by the 1940 Act, Shares
shall be voted in the aggregate and not by individual Series, and (b) when the
Trustees have determined that the matter affects only the interests of one or
more Classes, then the Shareholders of only such Class or Classes shall be
entitled to vote thereon. Each whole Share shall be entitled to one vote as to
any matter on which it is entitled to vote, and each fractional Share shall be
entitled to a proportionate fractional vote. There shall be no cumulative voting
in the election of Trustees. Shares may be voted in person or by proxy or in any
manner provided for in the By-laws. The By-laws may provide that proxies may be
given by any electronic or telecommunications device or in any other manner, but
if a proposal by anyone other than the officers or Trustees is submitted to a
vote of the Shareholders of any Series or Class, or if there is a proxy contest
or proxy solicitation or proposal in opposition to any proposal by the officers
or Trustees, Shares may be voted only in person or by written proxy. Until
Shares of a Series or Class thereof are issued, as to that Series or Class, the
Trustees may
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exercise all rights of Shareholders and may take any action required or
permitted to be taken by Shareholders by law, this Trust Instrument or the
By-laws.
Section 2. MEETINGS OF SHAREHOLDERS. The first Shareholders' meeting of
the Trust (but not the first shareholders' meeting of a Series that is not also
the first shareholders' meeting of the Trust) shall be held to elect Trustees at
such time and place as the Trustees designate. Annual meetings shall not be
required. Special meetings of the Shareholders of any Series or Class 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 of the
Trust entitled to vote. Special meetings of Shareholders shall be held, notice
of such meetings shall be delivered and waiver of notice shall occur according
to the provisions of the Trust's By-laws. Any action that may be taken at a
meeting of Shareholders may be taken without a meeting according to the
procedures set forth in the By-laws.
Section 3. QUORUM; REQUIRED VOTE. One-third of the Outstanding Shares
of each Series or Class, or one-third of the Outstanding Shares of the Trust,
entitled to vote in person or by proxy shall be a quorum for the transaction of
business at a Shareholders' meeting with respect to such Series or Class, or
with respect to the entire Trust, respectively. Any lesser number shall be
sufficient for adjournments. Any adjourned session of a Shareholders' meeting
may be held within a reasonable time without further notice. Except when a
Majority Shareholder Vote or other larger vote is required by law, this Trust
Instrument or the By-laws, a majority of the Outstanding Shares voted, in person
or by proxy, shall decide any matters to be voted upon with respect to the
entire Trust and a plurality of such Outstanding Shares voted shall elect a
Trustee; provided, that if this Trust Instrument or applicable law permits or
requires that Shares be voted on any matter by an individual Series or Class,
then a majority of the Outstanding Shares voted, in person or by proxy, of that
Series or Class (or, if required by law, regulation, Commission order, or
no-action letter, a Majority Shareholder Vote or other larger vote of that
Series or Class) voted, in person or by proxy, on the matter shall decide that
matter insofar as that Series or Class is concerned. Shareholders may act as to
the Trust or any Series or Class by the written consent of a majority (or such
greater amount as may be required by applicable law) of the Outstanding Shares
of the Trust or of such Series or Class, as the case may be.
ARTICLE VII
CONTRACTS WITH SERVICE PROVIDERS
Section 1. INVESTMENT ADVISER. The Trustees may enter into one or more
investment advisory contracts on behalf of the Trust or any Series, providing
for investment advisory services, statistical and research facilities and
services, and other facilities and services to be furnished to the Trust or
Series on terms and conditions acceptable to the Trustees. Any such contract may
provide for the investment adviser to effect purchases, sales or exchanges of
portfolio securities or other Trust Property on behalf of the Trustees or may
authorize any officer or agent of the Trust to effect such purchases, sales or
exchanges pursuant to recommendations
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of the investment adviser. The Trustees may authorize the investment adviser to
employ one or more sub-advisers or servicing agents.
Section 2. PRINCIPAL UNDERWRITER. The Trustees may enter into contracts
on behalf of the Trust or any Series or Class, providing for the distribution
and sale of Shares by the other party, either directly or as sales agent, on
terms and conditions acceptable to the Trustees. The Trustees may adopt a plan
or plans of distribution with respect to Shares of any Series or Class and enter
into any related agreements, whereby the Series or Class finances directly or
indirectly any activity that is primarily intended to result in sales of its
Shares, subject to the requirements of Section 12 of the 1940 Act, Rule 12b-1
thereunder, and other applicable rules and regulations.
Section 3. TRANSFER AGENCY, SHAREHOLDER SERVICES, AND ADMINISTRATION
AGREEMENTS. The Trustees, on behalf of the Trust or any Series or Class, may
enter into transfer agency agreements, Shareholder service agreements, and
administration and management agreements with any party or parties on terms and
conditions acceptable to the Trustees.
Section 4. CUSTODIAN. The Trustees shall at all times place and
maintain the securities and similar investments of the Trust and of each Series
with a custodian meeting the requirements of Section 17(f) of the 1940 Act and
the rules thereunder or as otherwise permitted by the Commission or its staff.
The Trustees, on behalf of the Trust or any Series, may enter into an agreement
with a custodian on terms and conditions acceptable to the Trustees, providing
for the custodian, among other things, (a) to hold the securities owned by the
Trust or any Series and deliver the same upon written order or oral order
confirmed in writing, (b) to receive and receipt for any moneys due to the Trust
or any Series and deposit the same in its own banking department or elsewhere,
(c) to disburse such funds upon orders or vouchers, and (d) to employ one or
more sub-custodians.
Section 5. PARTIES TO CONTRACTS WITH SERVICE PROVIDERS. The Trustees
may enter into any contract referred to in this Article with any entity,
although one or more of the Trustees or officers of the Trust may be an officer,
director, trustee, partner, shareholder, or member of such entity, and no such
contract shall be invalidated or rendered void or voidable because of such
relationship. No person having such a relationship shall be disqualified from
voting on or executing a contract in his or her capacity as Trustee and/or
Shareholder, or be liable merely by reason of such relationship for any loss or
expense to the Trust with respect to such a contract or accountable for any
profit realized directly or indirectly therefrom; provided, that the contract
was reasonable and fair and not inconsistent with this Trust Instrument or the
By-laws.
Section 6. REQUIREMENTS OF THE 1940 ACT. Any contract referred to in
Sections 1 and 2 of this Article shall be consistent with and subject to the
applicable requirements of Section 15 of the 1940 Act and the rules and orders
thereunder with respect to its continuance in effect, its termination, and the
method of authorization and approval of such contract or renewal. No amendment
to a contract referred to in Section 1 of this Article shall be effective unless
assented to in a manner consistent with the requirements of Section 15 of the
1940 Act, and the rules and orders thereunder, if applicable.
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ARTICLE VIII
EXPENSES OF THE TRUST AND SERIES
Subject to Article IV, Section 4, the Trust or a particular Series
shall pay, or shall reimburse the Trustees from the Trust estate or the assets
belonging to the particular Series, for their expenses and disbursements,
including, but not limited to, interest charges, taxes, brokerage fees and
commissions; expenses of issue, repurchase and redemption of Shares; insurance
premiums; applicable fees, interest charges and expenses of third parties,
including the Trust's investment advisers, managers, administrators,
distributors, custodians, transfer agents and fund accountants; fees of pricing,
interest, dividend, credit and other reporting services; costs of membership in
trade associations; telecommunications expenses; funds transmission expenses;
auditing, legal and compliance expenses; costs of forming the Trust and its
Series and maintaining its existence; costs of preparing and printing the
prospectuses of the Trust and each Series, statements of additional information
and reports for Shareholders and delivering them to Shareholders; expenses of
meetings of Shareholders and proxy solicitations therefor (unless otherwise
agreed to by another party); costs of maintaining books and accounts; costs of
reproduction, stationery and supplies; fees and expenses of the Trustees;
compensation of the Trust's officers and employees and costs of other personnel
performing services for the Trust or any Series; costs of Trustee meetings;
Commission registration fees and related expenses; state or foreign securities
laws registration fees and related expenses; and for such non-recurring items as
may arise, including litigation to which the Trust or a Series (or a Trustee or
officer of the Trust acting as such) is a party, and for all losses and
liabilities by them incurred in administering the Trust. The Trustees shall have
a lien on the assets belonging to the appropriate Series, or in the case of an
expense allocable to more than one Series, on the assets of each such Series,
prior to any rights or interests of the Shareholders thereto, for the
reimbursement to them of such expenses, disbursements, losses and liabilities.
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ARTICLE IX
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 1. LIMITATION OF LIABILITY. All persons contracting with or
having any claim against the Trust or a particular Series shall look only to the
assets of the Trust or such Series for payment under such contract or claim; and
neither the Trustees nor any of the Trust's officers, employees or agents,
whether past, present or future, shall be personally liable therefor. Any
written instrument or obligation on behalf of the Trust or any Series may
contain a statement to the foregoing effect, but the absence of such statement
shall not operate to make any Trustee or officer of the Trust liable thereunder.
Provided they have exercised reasonable care and have acted under the reasonable
belief that their actions are in the best interest of the Trust, the Trustees
and officers of the Trust shall not be responsible or liable for any act or
omission or for neglect or wrongdoing of them or any officer, agent, employee,
investment adviser or independent contractor of the Trust, but nothing contained
in this Trust Instrument or in the Delaware Act shall protect any Trustee or
officer of the Trust against liability to the Trust or to Shareholders to which
he or she would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office.
Section 2. INDEMNIFICATION. (a) Subject to the exceptions and
limitations contained in subsections (b) and (c) below:
(i) every person who is, or has been, a Trustee or an officer,
employee, investment manager and administrator, director, officer
or employee of an investment manager and administrator, investment
adviser or agent of the Trust ("Covered Person") shall be
indemnified by the Trust or the appropriate Series to the fullest
extent permitted by law against liability and against all expenses
reasonably incurred or paid by him or her in connection with any
claim, action, suit or proceeding in which he or she becomes
involved as a party or otherwise by virtue of his or her being or
having been a Covered Person and against amounts paid or incurred
by him or her in the settlement thereof; and
(ii) as used herein, the words "claim," "action," "suit," or
"proceeding" shall apply to all claims, actions, suits or
proceedings (civil, criminal or other, including appeals), actual
or threatened, and the words "liability" and "expenses" shall
include, without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person
who is, or has been: an investment manager and administrator; director, officer
or employee of an investment manager and administrator; an investment adviser or
an agent of the Trust and:
(i) who shall have been adjudicated by a court or body before which
the proceeding was brought (A) to be liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith,
negligence or reckless disregard of the duties
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involved in the conduct of his or her office, or (B) not to have
acted in good faith in the reasonable belief that his or her action
was in the best interest of the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Covered Person did not engage in willful
misfeasance, bad faith, negligence or reckless disregard of the
duties involved in the conduct of his or her office; (A) by the
court or other body approving the settlement; (B) by the vote of at
least a majority of those Trustees who are neither Interested
Persons of the Trust nor are parties to the proceeding based upon a
review of readily available facts (as opposed to a full trial-type
inquiry); or (C) by written opinion of independent legal counsel
based upon a review of readily available facts (as opposed to a
full trial-type inquiry).
(c) No indemnification shall be provided hereunder to a Covered Person
who is, or has been, a Trustee or an officer or employee of the Trust, and
(i) who shall have been adjudicated by a court or body before which
the proceeding was brought (A) to be liable to the Trust 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 (B) not to have acted in good
faith in the reasonable belief that his or her action was in the
best interest of the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Covered Person did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his or her office; (A) by the
court or other body approving the settlement; (B) by the vote of at
least a majority of those Trustees who are neither Interested
Persons of the Trust nor are parties to the proceeding based upon a
review of readily available facts (as opposed to a full trial-type
inquiry); or (C) by written opinion of independent legal counsel
based upon a review of readily available facts (as opposed to a
full trial-type inquiry).
(d) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not be
exclusive of or affect any other rights to which any Covered Person may now or
hereafter be entitled, and shall inure to the benefit of the heirs, executors
and administrators of a Covered Person.
(e) To the maximum extent permitted by applicable law, expenses in
connection with the preparation and presentation of a defense to any claim,
action, suit or proceeding of the character described in subsection (a) of this
Section may be paid by the Trust or applicable Series from time to time prior to
final disposition thereof upon receipt of an undertaking by or on behalf of such
Covered Person that such amount will be paid over by him or her to the Trust or
applicable Series if it is ultimately determined that he or she is not entitled
to indemnification under this Section; provided, however, that either (i) such
Covered Person shall have provided appropriate security for such undertaking,
(ii) the Trust is insured against losses arising out of any such advance
payments or (iii) either a majority of the Trustees who are neither Interested
Persons of the Trust
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nor parties to the proceeding, or independent legal counsel in a written
opinion, shall have determined, based upon a review of readily available facts
(as opposed to a full trial-type inquiry) that there is reason to believe that
such Covered Person will not be disqualified from indemnification under this
Section.
(f) Any repeal or modification of this Article IX by the Shareholders
of the Trust, or adoption or modification of any other provision of the Trust
Instrument or By-laws inconsistent with this Article, shall be prospective only,
to the extent that such repeal or modification would, if applied
retrospectively, adversely affect any limitation on the liability of any Covered
Person or indemnification available to any Covered Person with respect to any
act or omission which occurred prior to such repeal, modification or adoption.
Section 3. INDEMNIFICATION OF SHAREHOLDER. If any Shareholder or former
Shareholder of any Series shall be held personally liable solely by reason of
his or her being or having been a Shareholder and not because of his or her acts
or omissions or for some other reason, the Shareholder or former Shareholder (or
his or her heirs, executors, administrators or other legal representatives or in
the case of any entity, its general successor) shall be entitled out of the
assets belonging to the applicable Series to be held harmless from and
indemnified against all loss and expense arising from such liability. The Trust,
on behalf of the affected Series, shall, upon request by such Shareholder,
assume the defense of any claim made against such Shareholder for any act or
obligation of the Series and satisfy any judgment thereon from the assets of the
Series.
ARTICLE X
MISCELLANEOUS
Section 1. TRUST NOT A PARTNERSHIP. This Trust Instrument creates a
trust and not a partnership. No Trustee shall have any power to bind personally
either the Trust's officers or any Shareholder.
Section 2. TRUSTEE ACTION; EXPERT ADVICE; NO BOND OR SURETY. The
exercise by the Trustees of their powers and discretion hereunder in good faith
and with reasonable care under the circumstances then prevailing shall be
binding upon everyone interested. Subject to the provisions of Article IX, the
Trustees shall not be liable for errors of judgment or mistakes of fact or law.
The Trustees may take advice of counsel or other experts with respect to the
meaning and operation of this Trust Instrument, and subject to the provisions of
Article IX, shall not be liable for any act or omission in accordance with such
advice or for failing to follow such advice. The Trustees shall not be required
to give any bond as such, nor any surety if a bond is obtained.
Section 3. RECORD DATES. The Trustees may fix in advance a date up to
ninety (90) days before the date of any Shareholders' meeting, or the date for
the payment of any dividends or other distributions, or the date for the
allotment of rights, or the date when any change or conversion or exchange of
Shares shall go into effect as a record date for the determination of the
Shareholders entitled to notice of, and to vote at, any such meeting, or
entitled to receive
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payment of such dividend or other distribution, or to receive any such allotment
of rights, or to exercise such rights in respect of any such change, conversion
or exchange of Shares. Record dates for adjourned meetings of Shareholders shall
be set according to the Trust's By-laws.
Section 4. TERMINATION OF THE TRUST. (a) This Trust shall have
perpetual existence. Subject to a Majority Shareholder Vote of the Trust or of
each Series to be affected, the Trustees may
(i) sell and convey all or substantially all of the assets of
the Trust or any affected Series to another Series or to
another entity which is a a Registered Investment Company, or
a series thereof, for adequate consideration, which may
include the assumption of all outstanding obligations, taxes
and other liabilities, accrued or contingent, of the Trust or
any affected Series, and which may include shares of or
interests in such Series, entity, or series thereof; or
(ii) at any time sell and convert into money all or
substantially all of the assets of the Trust or any affected
Series.
Upon making reasonable provision for the payment of all known liabilities of the
Trust or any affected Series in either (i) or (ii), by such assumption or
otherwise, the Trustees shall distribute the remaining proceeds or assets (as
the case may be) ratably among the Shareholders of the Trust or any affected
Series then outstanding; however, the payment to any particular Class of such
Series may be reduced by any fees, expenses or charges allocated to that Class.
Nothing in this Trust Instrument shall preclude the Trustees from distributing
such remaining proceeds or assets so that holders of the Shares of a particular
Class of the Trust or any affected Series receive as their ratable distribution
shares solely of an analogous class, as determined by the Trustees, of a
Registered Investment Company or series thereof.
(b) The Trustees may take any of the actions specified in subsection
(a) (i) and (ii) above without obtaining a Majority Shareholder Vote of the
Trust or any Series if a majority of the Trustees determines that the
continuation of the Trust or Series is not in the best interests of the Trust,
such Series, or their respective Shareholders as a result of factors or events
adversely affecting the ability of the Trust or such Series to conduct its
business and operations in an economically viable manner. Such factors and
events may include the inability of the Trust or a Series to maintain its assets
at an appropriate size, changes in laws or regulations governing the Trust or
the Series or affecting assets of the type in which the Trust or Series invests,
or economic developments or trends having a significant adverse impact on the
business or operations of the Trust or such Series.
(c) Upon completion of the distribution of the remaining proceeds or
assets pursuant to subsection (a), the Trust or affected Series shall terminate
and the Trustees and the Trust shall be discharged of any and all further
liabilities and duties hereunder with respect thereto and the right, title and
interest of all parties therein shall be canceled and discharged. Upon
termination of the Trust, following completion of winding up of its business,
the Trustees shall cause a certificate of cancellation of the Trust's
certificate of trust to be filed in accordance with the Delaware Act, which
certificate of cancellation may be signed by any one Trustee.
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Section 5. REORGANIZATION. Notwithstanding anything else herein, to
change the Trust's form of organization the Trustees may, without Shareholder
approval, (a) cause the Trust to merge or consolidate with or into one or more
entities, if the surviving or resulting entity is the Trust or another open-end
management investment company under the 1940 Act, or a series thereof, that will
succeed to or assume the Trust's registration under the 1940 Act, or (b) cause
the Trust to incorporate to the extent permitted by law. Any agreement of merger
or consolidation or certificate of merger may be signed by a majority of
Trustees and facsimile signatures conveyed by electronic or telecommunication
means shall be valid.
Pursuant to and in accordance with the provisions of Section 3815(f) of
the Delaware Act, an agreement of merger or consolidation approved by the
Trustees in accordance with this Section 5 may effect any amendment to the Trust
Instrument or effect the adoption of a new trust instrument of the Trust if it
is the surviving or resulting trust in the merger or consolidation.
Section 6. TRUST INSTRUMENT. The original or a copy of this Trust
Instrument and of each amendment hereto or Trust Instrument supplemental shall
be kept at the office of the Trust where it may be inspected by any Shareholder.
Anyone dealing with the Trust may rely on a certificate by a Trustee or an
officer of the Trust as to the authenticity of the Trust Instrument or any such
amendments or supplements and as to any matters in connection with the Trust.
The masculine gender herein shall include the feminine and neuter genders.
Headings herein are for convenience only and shall not affect the construction
of this Trust Instrument. This Trust Instrument may be executed in any number of
counterparts, each of which shall be deemed an original.
Section 7. APPLICABLE LAW. This Trust Instrument and the Trust created
hereunder are governed by and shall be construed and administered according to
the Delaware Act and the applicable laws of the State of Delaware; provided,
however, that there shall not be applicable to the Trust, the Trustees or this
Trust Instrument (a) the provisions of Section 3540 of Title 12 of the Delaware
Code, or (b) any provisions of the laws (statutory or common) of the State of
Delaware (other than the Delaware Act) pertaining to trusts which relate to or
regulate (i) the filing with any court or governmental body or agency of trustee
accounts or schedules of trustee fees and charges, (ii) affirmative requirements
to post bonds for trustees, officers, agents or employees of a trust, (iii) the
necessity for obtaining court or other governmental approval concerning the
acquisition, holding or disposition of real or personal property, (iv) fees or
other sums payable to trustees, officers, agents or employees of a trust, (v)
the allocation of receipts and expenditures to income or principal, (vi)
restrictions or limitations on the permissible nature, amount or concentration
of trust investments or requirements relating to the titling, storage or other
manner of holding of trust assets, or (vii) the establishment of fiduciary or
other standards of responsibilities or limitations on the acts or powers of
trustees, which are inconsistent with the limitations or liabilities or
authorities and powers of the Trustees set forth or referenced in this Trust
Instrument. The Trust shall be of the type commonly called a Delaware business
trust, and, without limiting the provisions hereof, the Trust may exercise all
powers which are ordinarily exercised by such a trust under Delaware law. The
Trust specifically reserves the right to exercise any of the powers or
privileges afforded to trusts or actions that may be engaged in by trusts under
the Delaware Act, and the absence of a specific reference herein to any such
power,
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privilege or action shall not imply that the Trust may not exercise such
power or privilege or take such actions.
Section 8. AMENDMENTS. The Trustees may, without any Shareholder vote,
amend or otherwise supplement this Trust Instrument by making an amendment, a
Trust Instrument supplemental hereto or an amended and restated trust
instrument; provided, that Shareholders shall have the right to vote on any
amendment (a) which would affect the voting rights of Shareholders granted in
Article VI, Section 1, (b) to this Section 8, (c) required to be approved by
Shareholders by law or by the Trust's registration statement(s) filed with the
Commission, or (d) submitted to them by the Trustees in their discretion. Any
amendment submitted to Shareholders which the Trustees determine would affect
the Shareholders of any Series shall be authorized by vote of the Shareholders
of such Series and no vote shall be required of Shareholders of a Series not
affected. Notwithstanding anything else herein, any amendment to Article IX
which would have the effect of reducing the indemnification and other rights
provided thereby to Trustees, officers, employees, and agents of the Trust or to
Shareholders or former Shareholders, and any repeal or amendment of this
sentence shall each require the affirmative vote of the holders of two-thirds of
the Outstanding Shares of the Trust entitled to vote thereon.
Section 9. FISCAL YEAR. The fiscal year of the Trust shall end on a
specified date as set forth in the By-laws. The Trustees may change the fiscal
year of the Trust or any Series without Shareholder approval.
Section 10. SEVERABILITY. The provisions of this Trust Instrument are
severable. If the Trustees determine, with the advice of counsel, that any
provision hereof conflicts with the 1940 Act, the Internal Revenue Code or with
other applicable laws and regulations, the conflicting provision shall be deemed
never to have constituted a part of this Trust Instrument; provided, however,
that such determination shall not affect any of the remaining provisions of this
Trust Instrument or render invalid or improper any action taken or omitted prior
to such determination. If any provision hereof shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach to such provision only in such jurisdiction and shall not affect such
provision in any other jurisdiction or any other provision of this Trust
Instrument.
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SCHEDULE A
SERIES OF THE TRUST
Mitchell Hutchins Aggressive Portfolio
Mitchell Hutchins Moderate Portfolio
Mitchell Hutchins Conservative Portfolio
CLASSES OF SHARES OF EACH SERIES
An unlimited number of shares of beneficial interest have been established by
the Board as Class A shares, Class B shares, Class C shares and Class Y shares
of each of the above Series. Each of the Class A shares, Class B shares, Class C
shares and Class Y shares of a Series represents interests in the assets of only
that Series and has the same preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of shares, except as provided in the Trust's Trust
Instrument and as set forth below with respect to the Class B shares of each
Series:
1. Each Class B share, other than a share purchased through the
reinvestment of a dividend or a distribution with respect to the
Class B share, shall be converted automatically, and without any
action or choice on the part of the holder thereof, into Class A
shares of the same Series, based on the relative net asset value of
each such class at the time of the calculation of the net asset
value of such class of shares on the date that is the first
Business Day (as defined in the Series' prospectus and/or statement
of additional information) of the month in which the sixth
anniversary of the issuance of such Class B shares occurs (which,
for the purpose of calculating the holding period required for
conversion, shall mean (i) the date on which the issuance of such
Class B shares occurred or (ii) for Class B shares obtained through
an exchange, the date on which the issuance of the Class B shares
of an eligible PaineWebber fund occurred, if such shares were
exchanged directly, or through a series of exchanges for the
Series' Class B shares (the "Conversion Date")).
2. Each Class B share purchased through the reinvestment of a dividend
or a distribution with respect to the Class B shares and the
dividends and distributions on such shares shall be segregated in a
separate sub-account on the stock records of the Series for each of
the holders of record thereof. On any Conversion Date, a number of
the shares held in the sub-account of the holder of record of the
share or shares being converted, calculated in accordance with the
next following sentence, shall be converted automatically, and
without any action or choice on the part of the holder thereof,
into Class A shares of the same Series. The number of shares in the
holder's sub-account so converted shall bear the same relation to
the total number of shares maintained in the sub-account on the
Conversion Date as the number of shares of the holder converted on
the Conversion Date pursuant to Paragraph 2(a) hereof bears to the
total number of Class B shares of the holder on the Conversion Date
not
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purchased through the automatic reinvestment of dividends or
distributions with respect to the Class B shares.
3. The number of Class A shares into which a Class B share is
converted pursuant to paragraphs 1 and 2 hereof shall equal the
number (including for this purpose fractions of a share) obtained
by dividing the net asset value per share of the Class B shares for
purposes of sales and redemptions thereof at the time of the
calculation of the net asset value on the Conversion Date by the
net asset value per share of the Class A shares for purposes of
sales and redemptions thereof at the time of the calculation of the
net asset value on the Conversion Date.
4. On the Conversion Date, the Class B shares converted into Class A
shares will cease to accrue dividends and will no longer be
outstanding and the rights of the holders thereof will cease
(except the right to receive declared but unpaid dividends to the
Conversion Date).
For purposes of Paragraph 1 above, the term "eligible PaineWebber fund" includes
any and all mutual funds for which PaineWebber Incorporated or Mitchell Hutchins
Asset Management Inc. serves as investment adviser that offer shares with a
contingent deferred sales charge imposed upon certain redemptions of such shares
and that are exchangeable with the Class B shares of the Series.
<PAGE>
IN WITNESS WHEREOF, the undersigned, being all the Trustees of the
Trust, have executed this Amended and Restated Trust Instrument as of the date
and year first above written.
/S/ Margo N. Alexander /S/ Meyer Feldberg
- -------------------------- --------------------------
Margo N. Alexander * Meyer Feldberg *
/S/ E. Garrett Bewkes, Jr. /S/ George W. Gowen
- -------------------------- --------------------------
E. Garrett Bewkes, Jr. * George W. Gowen *
/S/ Richard Q. Armstrong /S/ Frederic V. Malek
- -------------------------- --------------------------
Richard Q. Armstrong * Frederic V. Malek *
/S/ Richard R. Burt /S/ Carl W. Schafer
- -------------------------- --------------------------
Richard R. Burt * Carl W. Schafer *
/S/ Mary C. Farrell /S/ Brian M. Storms
- -------------------------- --------------------------
Mary C. Farrell * Brian M. Storms **
AMENDED AND RESTATED BY-LAWS
OF
MITCHELL HUTCHINS PORTFOLIOS
May 13, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I PRINCIPAL OFFICE AND SEAL.........................................1
Section 1. Principal Office........................................1
Section 2. Seal....................................................1
ARTICLE II MEETINGS OF TRUSTEES.............................................1
Section 1. Action by Trustees......................................1
Section 2. Compensation of Trustees................................1
Section 3. Retirement of Trustees..................................1
ARTICLE III COMMITTEES......................................................2
Section 1. Establishment...........................................2
Section 2. Proceedings; Quorum; Action.............................2
Section 3. Compensation of Committee Members.......................2
ARTICLE IV OFFICERS.........................................................2
Section 1. General.................................................2
Section 2. Election................................................2
Section 3. Vacancies and Newly Created Offices.....................2
Section 4. Removal and Resignation.................................2
Section 5. Chairman................................................3
Section 6. President...............................................3
Section 7. Vice President(s).......................................3
Section 8. Treasurer and Assistant Treasurer(s)....................3
Section 9. Secretary and Assistant Secretaries.....................4
Section 10. Compensation of Officers.................................4
Section 11. Surety Bond..............................................4
ARTICLE V MEETINGS OF SHAREHOLDERS..........................................4
Section 1. No Annual Meetings......................................4
Section 2. Special Meetings........................................4
Section 3. Notice of Meetings; Waiver..............................5
Section 4. Adjourned Meetings......................................5
Section 5. Validity of Proxies.....................................5
Section 6. Record Date.............................................6
Section 7. Action Without a Meeting................................6
ARTICLE VI SHARES OF BENEFICIAL INTEREST....................................6
Section 1. No Share Certificates...................................6
Section 2. Transfer of Shares......................................6
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ARTICLE VII CUSTODY OF SECURITIES...........................................6
Section 1. Employment of a Custodian...............................6
Section 2. Termination of Custodian Agreement......................6
Section 3. Other Arrangements......................................7
ARTICLE VIII FISCAL YEAR AND ACCOUNTANT.....................................7
Section 1. Fiscal Year.............................................7
Section 2. Accountant..............................................7
ARTICLE IX AMENDMENTS.......................................................7
Section 1. General.................................................7
Section 2. By Shareholders Only....................................7
ARTICLE X NET ASSET VALUE...................................................7
ARTICLE XI MISCELLANEOUS....................................................8
Section 1. Inspection of Books.....................................8
Section 2. Severability............................................8
Section 3. Headings................................................8
ii
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BY-LAWS
OF
MITCHELL HUTCHINS PORTFOLIO
These By-laws of Mitchell Hutchins Portfolios (the "Trust"), a Delaware
business trust, are subject to the Trust Instrument of the Trust dated as of
August 9, 1996, as amended and restated as of July 22, 1997, August 20, 1997,
November 19, 1997 and May 13, 1999, and as from time to time further amended,
supplemented or restated (the "Trust Instrument"). Capitalized terms used herein
have the same meanings as in the Trust Instrument.
ARTICLE I
PRINCIPAL OFFICE AND SEAL
SECTION 1. PRINCIPAL OFFICE. The principal office of the Trust shall be
located in New York, New York, or such other location as the Trustees determine.
The Trust may establish and maintain other offices and places of business as the
Trustees determine.
SECTION 2. SEAL. The Trustees may adopt a seal for the Trust in such
form and with such inscription as the Trustees determine. Any Trustee or officer
of the Trust shall have authority to affix the seal to any document.
ARTICLE II
MEETINGS OF TRUSTEES
SECTION 1. ACTION BY TRUSTEES. Trustees may take actions at meetings
held at such places and times as the Trustees may determine, or without
meetings, all as provided in Article II, Section 7, of the Trust Instrument.
SECTION 2. COMPENSATION OF TRUSTEES. Each Trustee who is neither an
employee of an investment adviser of the Trust or any Series nor an employee of
an entity affiliated with the investment adviser may receive such compensation
from the Trust for services as the Trustees may determine. Each Trustee may
receive such reimbursement for expenses as the Trustees may determine.
SECTION 3. RETIREMENT OF TRUSTEES. Each Trustee who has attained the
age of seventy-two (72) years as of December 31 of any year shall retire from
service as a Trustee on such date unless that retirement would cause the Trust
to be required to call a meeting of Shareholders to fill the resulting vacancy
on the Board of Trustees; provided, however, that this requirement may be waived
on an annual basis for individual Trustees by resolution of the Board of
Trustees. Such waiver may include a period ending at the close of business on
December 31 of the following year. Notwithstanding anything in this Section, a
Trustee may retire at any time as provided for in the Trust Instrument.
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ARTICLE III
COMMITTEES
SECTION 1. ESTABLISHMENT. The Trustees may designate one or more committees of
the Trustees, which may include an Executive Committee, a Nominating Committee,
and an Audit Committee. The Trustees shall determine the number of members of
each committee and its powers and shall appoint its members and its chair. Each
committee member shall serve at the pleasure of the Trustees. The Trustees may
abolish any committee at any time. Each committee shall maintain records of its
meetings and report its actions to the Trustees. The Trustees may rescind any
action of any committee, but such rescission shall not have retroactive effect.
The Trustees may delegate to any committee any of its powers, subject to the
limitations of applicable law.
SECTION 2. PROCEEDINGS; QUORUM; ACTION. Each committee may adopt such rules
governing its proceedings, quorum and manner of acting as it shall deem proper
and desirable. In the absence of such rules, a majority of any committee shall
constitute a quorum, and a committee shall act by the vote of a majority of a
quorum.
SECTION 3. COMPENSATION OF COMMITTEE MEMBERS. Each committee member who
is not an "interested person" of the Trust, as defined in the 1940 Act
("Disinterested Trustees") may receive such compensation from the Trust for
services as the Trustees may determine. Each Trustee may receive such
reimbursement for expenses as the Trustees may determine.
ARTICLE IV
OFFICERS
SECTION 1. GENERAL. The officers of the Trust shall be a Chairman, a
President, one or more Vice Presidents, a Treasurer, and a Secretary, and may
include one or more Assistant Treasurers or Assistant Secretaries and such other
officers ("Other Officers") as the Trustees may determine.
SECTION 2. ELECTION. Tenure and Qualifications of Officers. The
Trustees shall elect the officers of the Trust. Each officer elected by the
Trustees shall hold office until his or her successor shall have been elected
and qualified or until his or her earlier death, inability to serve, or
resignation. Any person may hold one or more offices, except that the Chairman
and the Secretary may not be the same individual. A person who holds more than
one office in the Trust may not act in more than one capacity to execute,
acknowledge, or verify an instrument required by law to be executed,
acknowledged, or verified by more than one officer. No officer other than the
Chairman need be a Trustee or Shareholder.
SECTION 3. VACANCIES AND NEWLY CREATED OFFICES. Whenever a vacancy
shall occur in any office or if any new office is created, the Trustees may fill
such vacancy or new office.
SECTION 4. REMOVAL AND RESIGNATION. Officers serve at the pleasure of
the Trustees and may be removed at any time with or without cause. The Trustees
may delegate this power to the Chairman or President with respect to any Other
Officer. Such removal shall be without
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prejudice to the contract rights, if any, of the person so removed. Any officer
may resign from office at any time by delivering a written resignation to the
Trustees, Chairman, or the President. Unless otherwise specified therein, such
resignation shall take effect upon delivery.
SECTION 5. CHAIRMAN. The Chairman shall preside at all meetings of the
Trustees and shall in general exercise the powers and perform the duties of the
Chairman of the Trustees. The Chairman shall exercise such other powers and
perform such other duties as the Trustees may assign to the Chairman.
SECTION 6. PRESIDENT. The President shall be the chief executive
officer of the Trust. The President shall preside at any Shareholders' meetings.
Subject to the direction of the Trustees, the President shall have general
charge, supervision and control over the Trust's business affairs and shall be
responsible for the management thereof and the execution of policies established
by the Trustees. Except as the Trustees may otherwise order, the President shall
have the power to grant, issue, execute or sign powers of attorney, proxies,
agreements or other documents. The President also shall have the power to employ
attorneys, accountants and other advisers and agents for the Trust, except as
otherwise required by the 1940 Act. At the request or in the absence or
disability of the Chairman, the President shall perform all the duties of the
Chairman and, when so acting, shall have all the powers of the Chairman.
SECTION 7. VICE PRESIDENT(S). The Vice President(s) shall have such
powers and perform such duties as the Trustees or the Chairman may determine. At
the request or in the absence or disability of the President, the Vice President
(or, if there are two or more Vice Presidents, then the senior of the Vice
Presidents present and able to act) shall perform all the duties of the
President and, when so acting, shall have all the powers of the President. The
Trustees may designate a Vice President as the principal financial officer of
the Trust or to serve one or more other functions. If a Vice President is
designated as principal financial officer of the Trust, he or she shall have
general charge of the finances and books of the Trust and shall report to the
Trustees annually regarding the financial condition of each Series as soon as
possible after the close of such Series's fiscal year. The Trustees also may
designate one of the Vice Presidents as Executive Vice President.
SECTION 8. TREASURER AND ASSISTANT TREASURER(S). The Treasurer may be
designated as the principal financial officer or as the principal accounting
officer of the Trust. If designated as principal financial officer, the
Treasurer shall have general charge of the finances and books of the Trust, and
shall report to the Trustees annually regarding the financial condition of each
Series as soon as possible after the close of such Series' fiscal year. The
Treasurer shall be responsible for the delivery of all funds and securities of
the Trust to such company as the Trustees shall retain as Custodian. The
Treasurer shall furnish such reports concerning the financial condition of the
Trust as the Trustees may request. The Treasurer shall perform all acts
incidental to the office of Treasurer, subject to the Trustees' supervision, and
shall perform such additional duties as the Trustees may designate.
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Any Assistant Treasurer may perform such duties of the Treasurer as the Trustees
or the Treasurer may assign, and, in the absence of the Treasurer, may perform
all the duties of the Treasurer.
SECTION 9. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall
record all votes and proceedings of the meetings of Trustees and Shareholders in
books to be kept for that purpose. The Secretary shall be responsible for giving
and serving notices of the Trust. The Secretary shall have custody of any seal
of the Trust and shall be responsible for the records of the Trust, including
the Share register and such other books and documents as may be required by the
Trustees or by law. The Secretary shall perform all acts incidental to the
office of Secretary, subject to the supervision of the Trustees, and shall
perform such additional duties as the Trustees may designate.
Any Assistant Secretary may perform such duties of the Secretary as the
Trustees or the Secretary may assign, and, in the absence of the Secretary, may
perform all the duties of the Secretary.
SECTION 10. COMPENSATION OF OFFICERS. Each officer may receive such
compensation from the Trust for services and reimbursement for expenses as the
Trustees may determine.
SECTION 11. SURETY BOND. The Trustees may require any officer or agent
of the Trust to execute a bond (including, without limitation, any bond required
by the 1940 Act and the rules and regulations of the Securities and Exchange
Commission ("Commission")) to the Trust in such sum and with such surety or
sureties as the Trustees may determine, conditioned upon the faithful
performance of his or her duties to the Trust, including responsibility for
negligence and for the accounting of any of the Trust's property, funds or
securities that may come into his or her hands.
ARTICLE V
MEETINGS OF SHAREHOLDERS
SECTION 1. NO ANNUAL MEETINGS. There shall be no annual Shareholders'
meetings, unless required by law.
SECTION 2. SPECIAL MEETINGS. The Secretary shall call a special meeting
of Shareholders of any Series or Class whenever ordered by the Trustees.
The Secretary also shall call a special meeting of Shareholders of any
Series or Class upon the written request of Shareholders owning at least ten
percent of the Outstanding Shares of such Series or Class entitled to vote at
such meeting; provided, that (1) such request shall state the purposes of such
meeting and the matters proposed to be acted on, and (2) the Shareholders
requesting such meeting shall have paid to the Trust the reasonably estimated
cost of preparing and mailing the notice thereof, which the Secretary shall
determine and specify to such Shareholders. If the Secretary fails for more than
thirty days to call a special meeting when required to do so, the Trustees or
the Shareholders requesting such a meeting may, in the name of the Secretary,
call the meeting by giving the required notice. The Secretary shall not call a
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special meeting upon the request of Shareholders of any Series or Class to
consider any matter that is substantially the same as a matter voted upon at any
special meeting of Shareholders of such Series or Class held during the
preceding twelve months, unless requested by the holders of a majority of the
Outstanding Shares of such Series or Class entitled to be voted at such meeting.
A special meeting of Shareholders of any Series or Class shall be held
at such time and place as is determined by the Trustees and stated in the notice
of that meeting.
SECTION 3. NOTICE OF MEETINGS; WAIVER. The Secretary shall call a
special meeting of Shareholders by giving written notice of the place, date,
time, and purposes of that meeting at least fifteen days before the date of such
meeting. The Secretary may deliver or mail, postage prepaid, the written notice
of any meeting to each Shareholder entitled to vote at such meeting. If mailed,
notice shall be deemed to be given when deposited in the United States mail
directed to the Shareholder at his or her address as it appears on the records
of the Trust.
SECTION 4. ADJOURNED MEETINGS. A Shareholders' meeting may be adjourned
one or more times for any reason, including the failure of a quorum to attend
the meeting. No notice of adjournment of a meeting to another time or place need
be given to Shareholders if such time and place are announced at the meeting at
which the adjournment is taken or reasonable notice is given to Persons present
at the meeting, and if the adjourned meeting is held within a reasonable time
after the date set for the original meeting. Determination of reasonable notice
and a reasonable time for purposes of the foregoing sentence is to be made by
the officers of the Trust. Any business that might have been transacted at the
original meeting may be transacted at any adjourned meeting. If after the
adjournment a new record date is fixed for the adjourned meeting, the Secretary
shall give notice of the adjourned meeting to Shareholders of record entitled to
vote at such meeting. Any irregularities in the notice of any meeting or the
nonreceipt of any such notice by any of the Shareholders shall not invalidate
any action otherwise properly taken at any such meeting.
SECTION 5. VALIDITY OF PROXIES. Subject to the provisions of the Trust
Instrument, Shareholders entitled to vote may vote either in person or by proxy;
provided, that either (1) the Shareholder or his or her duly authorized attorney
has signed and dated a written instrument authorizing such proxy to act, or (2)
the Trustees adopt by resolution an electronic, telephonic, computerized or
other alternative to execution of a written instrument authorizing the proxy to
act, but if a proposal by anyone other than the officers or Trustees is
submitted to a vote of the Shareholders of any Series or Class, or if there is a
proxy contest or proxy solicitation or proposal in opposition to any proposal by
the officers or Trustees, Shares may be voted only in person or by written
proxy. Unless the proxy provides otherwise, it shall not be valid for more than
eleven months before the date of the meeting. All proxies shall be delivered to
the Secretary or other person responsible for recording the proceedings before
being voted. A proxy with respect to Shares held in the name of two or more
persons shall be valid if executed by one of them unless at or prior to exercise
of such proxy the Trust receives a specific written notice to the contrary from
any one of them. Unless otherwise specifically limited by their terms, proxies
shall entitle the Shareholder to vote at any adjournment of a Shareholders'
meeting. A proxy purporting to be executed by or on behalf of a Shareholder
shall be deemed valid unless challenged at or prior to
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its exercise, and the burden of proving invalidity shall rest on the challenger.
At every meeting of Shareholders, unless the voting is conducted by inspectors,
the chairman of the meeting shall decide all questions concerning the
qualifications of voters, the validity of proxies, and the acceptance or
rejection of votes. Subject to the provisions of the Delaware Business Trust
Act, the Trust Instrument, or these By-laws, the General Corporation Law of the
State of Delaware relating to proxies, and judicial interpretations thereunder
shall govern all matters concerning the giving, voting or validity of proxies,
as if the Trust were a Delaware corporation and the Shareholders were
shareholders of a Delaware corporation.
SECTION 6. RECORD DATE. The Trustees may fix in advance a date up to
ninety days before the date of any Shareholders' meeting as a record date for
the determination of the Shareholders entitled to notice of, and to vote at, any
such meeting. The Shareholders of record entitled to vote at a Shareholders'
meeting shall be deemed the Shareholders of record at any meeting reconvened
after one or more adjournments, unless the Trustees have fixed a new record
date.
SECTION 7. ACTION WITHOUT A MEETING. Shareholders may take any action
without a meeting if a majority (or such greater amount as may be required by
law) of the Outstanding Shares entitled to vote on the matter consent to the
action in writing and such written consents are filed with the records of
Shareholders' meetings. Such written consent shall be treated for all purposes
as a vote at a meeting of the Shareholders.
ARTICLE VI
SHARES OF BENEFICIAL INTEREST
SECTION 1. NO SHARE CERTIFICATES. Neither the Trust nor any Series or
Class shall issue certificates certifying the ownership of Shares, unless the
Trustees may otherwise specifically authorize such certificates.
SECTION 2. TRANSFER OF SHARES. Shares shall be transferable only by a
transfer recorded on the books of the Trust by the Shareholder of record in
person or by his or her duly authorized attorney or legal representative. Shares
may be freely transferred and the Trustees may, from time to time, adopt rules
and regulations regarding the method of transfer of such Shares.
ARTICLE VII
CUSTODY OF SECURITIES
SECTION 1. EMPLOYMENT OF A CUSTODIAN. The Trust shall at all times place and
maintain all cash, securities and other assets of the Trust and of each Series
in the custody of a custodian meeting the requirements set forth in Article VII,
Section 4 of the Trust Instrument ("Custodian"). The Custodian shall be
appointed from time to time by the Board of Trustees, who shall determine its
remuneration
SECTION 2. TERMINATION OF CUSTODIAN AGREEMENT. Upon termination of any
Custodian Agreement or the inability of the Custodian to continue to serve as
custodian, in either case with respect to the Trust or any Series, the Board of
Trustees shall (a) use its best efforts to obtain a
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successor Custodian; and (b) require that the cash, securities and other assets
owned by the Trust or any Series be delivered directly to the successor
Custodian.
SECTION 3. OTHER ARRANGEMENTS. The Trust may make such other
arrangements for the custody of its assets (including deposit arrangements) as
may be required by any applicable law, rule or regulation.
ARTICLE VIII
FISCAL YEAR AND ACCOUNTANT
SECTION 1. FISCAL YEAR. The fiscal year of the Trust shall end on May 31 or such
other date with respect to the Trust or a Series of the Trust as the Trustees
may hereafter determine by resolution.
SECTION 2. ACCOUNTANT. The Trust shall employ independent certified public
accountants as its Accountant to examine the accounts of the Trust and to sign
and certify financial statements filed by the Trust. The Accountant's
certificates and reports shall be addressed both to the Trustees and to the
Shareholders. A majority of the Disinterested Trustees shall select the
Accountant, acting upon the recommendation of the Audit Committee. The
employment of the Accountant shall be conditioned upon the right of the Trust to
terminate such employment without any penalty by vote of a Majority Shareholder
Vote at any Shareholders' meeting called for that purpose.
ARTICLE IX
AMENDMENTS
SECTION 1. GENERAL. Except as provided in Section 2 of this Article,
these By-laws may be amended by the Trustees, or by the affirmative vote of a
majority of the Outstanding Shares entitled to vote at any meeting.
SECTION 2. BY SHAREHOLDERS ONLY. After the issue of any Shares, this
Article may only be amended by the affirmative vote of the holders of the lesser
of (a) at least two-thirds of the Outstanding Shares present and entitled to
vote at any meeting, or (b) at least fifty percent of the Outstanding Shares.
ARTICLE X
NET ASSET VALUE
The term "Net Asset Value" of any Series shall mean that amount by
which the assets belonging to that Series exceed its liabilities, all as
determined by or under the direction of the Trustees. Net Asset Value per Share
shall be determined separately for each Series and each Class and shall be
determined on such days and at such times as the Trustees may determine. The
Trustees shall make such determination with respect to securities for which
market quotations are readily available, at the market value of such securities,
and with respect to other securities and assets, at the fair value as determined
in good faith by the Trustees; provided, however, that the Trustees, without
Shareholder approval, may alter the method of appraising
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portfolio securities insofar as permitted under the 1940 Act and the rules,
regulations and interpretations thereof promulgated or issued by the SEC or
insofar as permitted by any order of the SEC applicable to the Series or to the
Class. The Trustees may delegate any of their powers and duties under this
Article X with respect to appraisal of assets and liabilities. At any time the
Trustees may cause the Net Asset Value per Share last determined to be
determined again in a similar manner and may fix the time when such redetermined
values shall become effective.
ARTICLE XI
MISCELLANEOUS
SECTION 1. INSPECTION OF BOOKS. The Board of Trustees shall from time
to time determine whether and to what extent, and at what times and places, and
under what conditions the accounts and books of the Trust or any Series or Class
shall be open to the inspection of Shareholders. No Shareholder shall have any
right to inspect any account or book or document of the Trust except as
conferred by law or otherwise by the Board of Trustees or by resolution of
Shareholders.
SECTION 2. SEVERABILITY. The provisions of these By-laws are severable.
If the Board of Trustees determine, with the advice of counsel, that any
provision hereof conflicts with the 1940 Act, the regulated investment company
provisions of the Internal Revenue Code or with other applicable laws and
regulations, the conflicting provision shall be deemed never to have constituted
a part of these By-laws; provided, however, that such determination shall not
affect any of the remaining provisions of these By-laws or render invalid or
improper any action taken or omitted prior to such determination. If any
provision hereof shall be held invalid or unenforceable in any jurisdiction,
such invalidity or unenforceability shall attach only to such provision only in
such jurisdiction and shall not affect any other provision of these Bylaws
SECTION 3. HEADINGS. Headings are placed in these By-laws for
convenience of reference only and in case of any conflict, the text of these
By-laws rather than the headings shall control.
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Exhibit No. 9
KIRKPATRICK & LOCKHART LLP
1800 MASSACHUSETTS AVENUE, N.W.
2ND FLOOR
WASHINGTON, D.C. 20036-1800
TELEPHONE 202-778-9000
FACSIMILE 202-778-9100
WWW.KL.COM
September 29, 1999
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 that may be issued during the time that Post-Effective
Amendment No. 3 to the Trust's Registration Statement on Form N-1A ("PEA") is
effective and has not been superseded by another post-effective amendment. The
series of the Trust are Mitchell Hutchins Aggressive Portfolio, Mitchell
Hutchins Moderate Portfolio and Mitchell Hutchins Conservative 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) of 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.
<PAGE>
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
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 16,
1999, in this Registration Statement (Form N-1A No. 333-26087) of Mitchell
Hutchins Portfolios (comprising, the Mitchell Hutchins Aggressive Portfolio,
Mitchell Hutchins Moderate Portfolio and Mitchell Hutchins Conservative
Portfolio).
ERNST & YOUNG LLP
New York, New York
September 27, 1999
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 ("Fund") 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
Conservative Portfolio and Mitchell Hutchins Moderate Portfolio; and
WHEREAS, the Fund has adopted a Plan of Distribution pursuant to Rule
12b-1 under the 1940 Act with respect to the above-referenced Series and desires
to replace it with this amended Plan of Distribution ("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 Fund's board of trustees ("Board") and have
Class A shares established; and
WHEREAS, the Fund 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 Fund 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 Class A 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.
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3. If adopted with respect to 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. This provision does not
apply to adoption as an amended Plan of Distribution where the prior Plan of
Distribution either was approved by a vote of a majority of the voting
securities of the Class A shares of the applicable Series or such approval was
not required under Rule 12b-1.
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 Board
members of the Fund who are not "interested persons" of the Fund and have no
direct or indirect financial interest in the operation of this Plan or any
agreements related thereto ("Independent Board Members"), cast in person at a
meeting (or meetings) called for the purpose of voting on such approval; and
until the Board members 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 Paragraph 3 (if applicable) and
Paragraph 4, this Plan shall take effect and continue in full force and effect
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.
For purposes of this Plan, "service activities" shall mean
activities in connection with the provision by Mitchell Hutchins or PaineWebber
of personal, continuing services to investors in the Class A shares of the
Series; provided, however, that if the National Association of Securities
Dealers, Inc. ("NASD") adopts a definition of "service fee" for purposes of
Section 2830(b)(9) of the NASD Conduct Rules that differs from the definition of
"service activities" hereunder, or if the NASD adopts a related definition
intended to define the same concept, the definition of "service activities" in
this Paragraph shall be automatically amended, without further action of the
parties, to conform to such NASD definition. 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 A shares of
any Series at any time by vote of the Board, by vote of a majority of the
Independent Board Members, 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 majority of the
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outstanding voting securities of the Class A shares of the affected Series and
no material amendment to the Plan shall be made unless approved in the manner
provided for initial approval in Paragraph 4 hereof.
9. The amount of the service fees payable by the 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 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 service-related expenses
incurred by Mitchell Hutchins on behalf of the Class A shares 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
Board members who are not interested persons of the Fund shall be committed to
the discretion of the Board members who are not interested persons of the Fund.
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 Fund 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 Board members of the Fund and the shareholders of each Series
shall not be liable for any obligations of the Fund 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 Fund
or such Series in settlement of such right or claim, and not to such Board
members or shareholders.
IN WITNESS WHEREOF, the Fund has executed this Amended Plan of
Distribution on the day and year set forth below in New York, New York.
Date: September 10, 1998
ATTEST: MITCHELL HUTCHINS PORTFOLIOS
/S/ Cristina Paradiso By: /S/ Dianne E. O'Donnell
- --------------------- --------------------------
3
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 ("Fund") 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
Conservative Portfolio and Mitchell Hutchins Moderate Portfolio; and
WHEREAS, the Fund has adopted a Plan of Distribution pursuant to Rule
12b-1 under the 1940 Act with respect to the above-referenced Series and desires
to replace it with this amended Plan of Distribution ("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 Fund's board of trustees ("Board") and have
Class B shares established; and
WHEREAS, the Fund 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 Fund hereby adopts this Plan with respect to the
Class B 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
B shares, distribution fees at the rate of 0.75%, on an annualized basis, of the
average daily net assets of the Series' Class B shares. Such fees 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 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 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>
accounts, including, but not limited to, 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 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 has first been approved by a majority of the voting
securities of the Class B shares of that Series. This provision does not apply
to adoption as an amended Plan of Distribution where the prior Plan of
Distribution either was approved by a vote of a majority of the voting
securities of the Class B shares of the applicable Series or such approval was
not required under Rule 12b-1.
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 Board
members of the Fund who are not "interested persons" of the Fund and have no
direct or indirect financial interest in the operation of this Plan or any
agreements related thereto ("Independent Board Members"), cast in person at a
meeting (or meetings) called for the purpose of voting on such approval; and
until the Board members 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 Paragraph 3 (if applicable) and
Paragraph 4, this Plan shall take effect and continue in full force and effect
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 in connection with the
provision by Mitchell Hutchins or PaineWebber of personal, continuing services
to investors in the Class B shares of the Series; provided, however, that if the
National Association of Securities Dealers, Inc. ("NASD") adopts a definition of
"service fee" for purposes of Section 2830(b)(9) of the NASD Conduct Rules that
differs from the definition of "service activities"
2
<PAGE>
hereunder, or if the NASD adopts a related definition intended to define the
same concept, the definition of "service activities" in this Paragraph shall be
automatically amended, without further action of the parties, to conform to such
NASD definition. Overhead and other expenses of Mitchell Hutchins and
PaineWebber related to their "distribution activities" or "service activities,"
including telephone and other communications expenses, may be included in the
information regarding amounts expended for such activities.
7. This Plan may be terminated with respect to the Class B shares of
any Series at any time by vote of the Board, by vote of a majority of the
Independent Board Members, 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 or the amount of service fees
provided for in Paragraph 1B hereof unless such amendment is approved by a
majority of the outstanding voting securities of the Class B shares of the
affected Series and no material amendment to the Plan shall be made unless
approved in the manner provided for initial approval in Paragraph 4 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
Board members who are not interested persons of the Fund shall be committed to
the discretion of the Board members who are not interested persons of the Fund.
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 Fund 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 Board members of the Fund and the shareholders of each Series
shall not be liable for any obligations of the Fund 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 Fund
or such Series in settlement of such right or claim, and not to such Board
members or shareholders.
3
<PAGE>
IN WITNESS WHEREOF, the Fund has executed this Amended Plan of
Distribution on the day and year set forth below in New York, New York.
Date: September 10, 1998
ATTEST: MITCHELL HUTCHINS PORTFOLIOS
/S/ Cristina Paradiso By: /S/ Dianne E. O'Donnell
- --------------------- -----------------------
Exhibit No. 13(c)
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 ("Fund") 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
Conservative Portfolio and Mitchell Hutchins Moderate Portfolio; and
WHEREAS, the Fund has adopted a Plan of Distribution pursuant to Rule
12b-1 under the 1940 Act with respect to the above-referenced Series and desires
to replace it with this amended Plan of Distribution ("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 Fund's board of trustees ("Board") and have
Class C shares established; and
WHEREAS, the Fund 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 Fund 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. Each Series listed below is authorized to pay to Mitchell
Hutchins, as compensation for Mitchell Hutchins' services as Distributor of the
Series' Class C shares, distribution fees at the rates (on an annualized basis)
set forth below of the average daily net assets of the Series' Class C shares.
Such fees shall be calculated and accrued daily and paid monthly or at such
other intervals as the Board shall determine:
Mitchell Hutchins Aggressive Portfolio 0.75%
Mitchell Hutchins Conservative Portfolio 0.50%
Mitchell Hutchins Moderate Portfolio 0.75%
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 Fund 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 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 has first been approved by a majority of the voting
securities of the Class C shares of that Series. This provision does not apply
to adoption as an amended Plan of Distribution where the prior Plan of
Distribution either was approved by a vote of a majority of the voting
securities of the Class C shares of the applicable Series or such approval was
not required under Rule 12b-1.
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 Board
members of the Fund who are not "interested persons" of the Fund and have no
direct or indirect financial interest in the operation of this Plan or any
agreements related thereto ("Independent Board Members"), cast in person at a
meeting (or meetings) called for the purpose of voting on such approval; and
until the Board members 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 Paragraph 3 (if applicable) and
Paragraph 4, this Plan shall take effect and continue in full force and effect
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
2
<PAGE>
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 in connection with the
provision by Mitchell Hutchins or PaineWebber of personal, continuing services
to investors in the Class C shares of the Series; provided, however, that if the
National Association of Securities Dealers, Inc. ("NASD") adopts a definition of
"service fee" for purposes of Section 2830(b)(9) of the NASD Conduct Rules that
differs from the definition of "service activities" hereunder, or if the NASD
adopts a related definition intended to define the same concept, the definition
of "service activities" in this Paragraph shall be automatically amended,
without further action of the parties, to conform to such NASD definition.
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 Board Members, 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 Paragraph 1B hereof or the
amount of service fees provided for in Paragraph 1C hereof unless such amendment
is approved by a majority of the outstanding voting securities of the Class C
shares of the affected Series and no material amendment to the Plan shall be
made unless approved in the manner provided for initial approval in Paragraph 4
hereof.
9. The amount of the distribution and service fees payable by the
Series to Mitchell Hutchins under Paragraphs 1A, 1B and 1C 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 Paragraphs 1A, 1B and 1C 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 1A, 1B 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
Board members who are not interested persons of the Fund shall be committed to
the discretion of the Board members who are not interested persons of the Fund.
3
<PAGE>
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 Fund 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 Board members of the Fund and the shareholders of each Series
shall not be liable for any obligations of the Fund 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 Fund
or such Series in settlement of such right or claim, and not to such Board
members or shareholders.
IN WITNESS WHEREOF, the Fund has executed this Amended Plan of
Distribution on the day and year set forth below in New York, New York.
Date: September 10, 1998
ATTEST: MITCHELL HUTCHINS PORTFOLIOS
/S/ Cristina Paradiso By: /S/ Dianne E. O'Donnell
- ---------------------- ------------------------
4