MITCHELL HUTCHINS LIR SELECT MONEY FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
Mitchell Hutchins LIR Select Money Fund ("Fund") is a diversified series of
Mitchell Hutchins Institutional Series ("Trust"), an open-end investment company
organized as a Delaware business trust. The Fund seeks maximum current income
consistent with liquidity and the preservation of capital and invests in a
diversified portfolio of high quality, short-term, U.S. dollar-denominated money
market instruments. The Fund offers two separate classes of shares Institutional
shares and Financial Intermediary shares. The Fund is newly organized and has no
operating history.
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly
owned asset management subsidiary of PaineWebber Incorporated ("PaineWebber"),
serves as the Fund's investment adviser and administrator. PaineWebber serves as
distributor of the Fund's shares.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Fund's current Prospectus, dated July 31,
1998. A copy of the Prospectus may be obtained by contacting any PaineWebber
Investment Executive or correspondent firm or by calling 1-888-LIR-FUND.
Customers of banks and other financial intermediaries that purchase the Fund's
Financial Intermediary shares may obtain the Prospectus from their financial
intermediaries. This Statement of Additional Information is dated July 31, 1998.
July 31, 1998
<PAGE>
TABLE OF CONTENTS
Investment Policies and Restrictions ................................. 3
Trustee and Officers; Principal Holders of Securities ................ 7
Investment Advisory, Administration and
Advisory Arrangements ................................................ 12
Portfolio Transactions ............................................... 14
Additional Information Regarding Redemptions ......................... 15
Valuation of Shares .................................................. 15
Taxes ................................................................ 16
Calculation of Yield ................................................. 16
Other Information .................................................... 18
Financial Statements ................................................. 20
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INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Fund's investment policies and limitations.
YIELDS AND RATINGS OF MONEY MARKET INVESTMENTS. The yields on the money
market instruments in which the Fund invests (such as U.S. government
securities, bank obligations, commercial paper and other short-term obligations)
are dependent on a variety of factors, including general money market
conditions, conditions in the particular market for the obligation, the
financial condition of the issuer, the size of the offering, the maturity of the
obligation and the ratings of the issue. The ratings of nationally recognized
statistical rating organizations ("NRSROs") represent their opinions as to the
quality of the obligations they undertake to rate. Ratings, however, are general
and are not absolute standards of quality. Consequently, obligations with the
same rating, maturity and interest rate may have different market prices.
Subsequent to its purchase by the Fund, an issue may cease to be rated or its
rating may be reduced.
The Fund may only purchase securities that are "First Tier Securities." To
qualify as a First Tier Security, a security must either be (1) rated in the
highest short-term rating category by at least two NRSROs, (2) rated in the
highest short-term rating category by a single NRSRO if only that NRSRO has
assigned the obligation a short-term rating, (3) issued by an issuer that has
received such a short-term rating with respect to a security that is comparable
in terms of priority and security, (4) subject to a guarantee rated in the
highest short-term rating category or issued by a guarantor that has received
the highest short-term rating for a comparable debt obligation or (5) unrated,
but determined by Mitchell Hutchins to be of comparable quality. If a security
in the Fund's portfolio ceases to be a First Tier Security or Mitchell Hutchins
becomes aware that a security has received a rating below the second highest
rating by any NRSRO, Mitchell Hutchins or the Trust's board of trustees
("board") will consider whether the Fund should continue to hold the obligation.
A First Tier Security rated in the highest short-term rating category by a
single NRSRO at the time of purchase that subsequently receives a rating below
the highest rating category from a different NRSRO may continue to be considered
a First Tier Security.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Fund purchases securities or other obligations and simultaneously commits to
resell them to the counterparty at an agreed-upon date or upon demand and at a
price reflecting a market rate of interest unrelated to the coupon rate or
maturity of the purchased securities or other obligations. The Fund maintains
custody of the underlying securities or 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
securities or 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 securities or
obligations and the price that was paid by the Fund upon acquisition is accrued
as interest and included in the Fund's net investment income.
FUNDING AGREEMENTS AND GUARANTEED INVESTMENT CONTRACTS. The Fund expects to
invest primarily in funding agreements and guaranteed investment contracts that
are subject to demand features that permit the Fund to tender its interest back
to the issuer in no more than seven days from the date of acquisition. To the
extent the Fund invests in funding agreements and guaranteed investment
contracts that either do not have demand features or have demand features that
may be exercised more than seven days after the date of acquisition, these
investments will be subject to the Fund's limitation on investments in illiquid
securities. See "Investment Policies and Restrictions -- Illiquid Securities."
ILLIQUID SECURITIES. The Fund may not invest more than 10% of its net assets
in illiquid securities. The term "illiquid securities" for this purpose means
securities or other assets that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which the Fund has
valued them and includes, among other things, repurchase agreements maturing in
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more than seven days and restricted securities other than those Mitchell
Hutchins has determined to be liquid pursuant to guidelines established by the
board. To the extent the Fund invests in illiquid securities, it may not be able
readily to liquidate such investments and may have to sell other investments if
necessary to raise cash to meet its obligations.
Restricted securities are not registered under the Securities Act of 1933
("1933 Act") and may be sold only in privately negotiated or other exempted
transactions or after a 1933 Act registration statement has become effective.
Where registration is required, the Fund may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
However, not all restricted securities are illiquid. A large institutional
market has developed for many U.S. and foreign securities that are not
registered under the 1933 Act. Institutional investors generally will not seek
to sell these instruments to the general public, but instead will often depend
either on an efficient institutional market in which such unregistered
securities can be readily resold or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not dispositive of
the liquidity of such investments.
Institutional markets for restricted securities also have developed as a
result of Rule 144A, which establishes a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers, providing both readily ascertainable values for restricted
securities and the ability to liquidate an investment in order to satisfy share
redemption orders. Such markets include automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible securities held by the Fund,
however, could affect adversely the marketability of such portfolio securities,
and the Fund might be unable to dispose of such securities promptly or at
favorable prices.
The board has delegated the function of making day-to-day determinations of
liquidity to Mitchell Hutchins, pursuant to guidelines approved by the board.
Mitchell Hutchins takes into account a number of factors in reaching liquidity
decisions, including (1) the frequency of trades for the security, (2) the
number of dealers that make quotes for the security, (3) the number of dealers
that have undertaken to make a market in the security, (4) the number of other
potential purchasers and (5) the nature of the security and how trading is
effected (E.G., the time needed to sell the security, how offers are solicited
and the mechanics of transfer). Mitchell Hutchins monitors the liquidity of
restricted securities held by the Fund and reports periodically on such
decisions to the board.
FLOATING RATE AND VARIABLE RATE DEMAND INSTRUMENTS. The Fund may invest in
floating rate and variable rate securities with demand features. A demand
feature gives the Fund the right to sell the securities back to a specified
party, usually a remarketing agent, on a specified date, at a price equal to
their amortized cost value plus accrued interest. A demand feature is often
backed by a letter of credit, guarantee or other liquidity support arrangement
from a bank or other financial institution that may be drawn upon demand, after
specified notice, for all or any part of the exercise price of the demand
feature. Generally, the Fund intends to exercise demand features (1) upon a
default under the terms of the underlying security, (2) to maintain the Fund's
portfolio in accordance with its investment objective and policies or applicable
legal or regulatory requirements or (3) as needed to provide liquidity to the
Fund in order to meet redemption requests. The ability of a bank or other
financial institution to fulfill its obligations under a letter of credit,
guarantee or other liquidity arrangement might be affected by possible financial
difficulties of its borrowers, adverse interest rate or economic conditions,
regulatory limitations or other factors. The interest rate on floating rate or
variable rate securities ordinarily is readjusted on the basis of the prime rate
of the bank that originated the financing or some other index or published rate,
such as the 90-day U.S. Treasury bill rate, or is otherwise reset to reflect
market rates of interest. Generally, these interest rate adjustments cause the
market value of floating rate and variable rate securities to fluctuate less
than the market value of fixed rate obligations.
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WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. As stated in the Prospectus,
the Fund may purchase securities on a "when-issued" or "delayed delivery" basis.
A security purchased on a when-issued or delayed delivery basis is recorded as
an asset on the commitment date and is subject to changes in market value,
generally based upon changes in the level of interest rates. Thus, fluctuation
in the value of the security from the time of the commitment date will affect
the Fund's net asset value. When the Fund commits to purchase securities on a
when-issued or delayed delivery basis, its custodian segregates assets to cover
the amount of the commitment. See "Investment Policies and
Restrictions--Segregated Accounts."
SEGREGATED ACCOUNTS. When the 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, the Fund will
maintain with an approved custodian in a segregated account cash or liquid
securities, marked to market daily, in an amount at least equal to the Fund's
obligation or commitment under such transactions.
LENDING OF PORTFOLIO SECURITIES. The Fund is authorized to lend up to 331/3%
of its total assets to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified, but only when the borrower maintains acceptable
collateral with the Fund's custodian, marked to market daily, at least equal to
the market value of the securities loaned, plus accrued interest and dividends.
Acceptable collateral is limited to cash, U.S. government securities and
irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. The Fund may reinvest the cash collateral in money market
instruments or other short-term liquid investments. In determining whether to
lend securities to a particular broker-dealer or institutional investor,
Mitchell Hutchins will consider, and during the period of the loan will monitor,
all relevant facts and circumstances, including the creditworthiness of the
borrower. The Fund will retain authority to terminate any of its loans at any
time. The Fund may pay reasonable fees in connection with a loan and may pay the
borrower or placing broker a negotiated portion of the interest earned on the
reinvestment of cash held as collateral. The Fund will receive amounts
equivalent to any dividends, interest or other distributions on the securities
loaned. The Fund will regain record ownership of loaned securities to exercise
beneficial rights, such as voting and subscription rights, when regaining such
rights is considered to be in the Fund's interest.
Pursuant to procedures approved by the board governing the Fund's securities
lending program, PaineWebber has been retained to serve as lending agent for the
Fund. The board also has authorized the payment of fees (including fees
calculated as a percentage of invested cash collateral) to PaineWebber for these
services. The board periodically reviews all portfolio securities loan
transactions for which PaineWebber acted as lending agent.
OTHER POLICIES. The Fund will not invest in the following instruments during
the coming year: options, futures, currency contracts, swap transactions and
short sales "against the box."
FUNDAMENTAL INVESTMENT LIMITATIONS. The following fundamental investment
limitations cannot be changed for the Fund without the affirmative vote of the
lesser of (1) more than 50% of the outstanding shares of the Fund or (2) 67% or
more of the shares of the Fund present at a shareholders' meeting if more than
50% of the outstanding shares are represented at the meeting in person or by
proxy. If a percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from changing values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations.
The Fund will not:
(1) purchase securities of any one issuer if, as a result, more than 5%
of the Fund's total assets would be invested in securities of that
issuer or the Fund would own or hold more than 10% of the outstanding
voting securities of that issuer, except that up to 25% of the Fund's
total assets may be invested without regard to this limitation, and
except that this limitation does not apply to securities issued or
guaranteed by the U.S. government, its agencies and instrumentalities
or to securities issued by other investment companies.
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The following interpretation applies to, but is not a part of, this
fundamental restriction: Mortgage- and asset-backed securities will
not be considered to have been issued by the same issuer by reason of
the securities having the same sponsor, and mortgage- and
asset-backed securities issued by a finance or other special purpose
subsidiary that are not guaranteed by the parent company will be
considered to be issued by a separate issuer from the parent company.
(2) purchase any security if, as a result of that purchase, 25% or more
of the Fund's total assets would be invested in securities of issuers
having their principal business activities in the same industry,
except that this limitation does not apply to securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities
or to municipal securities or to certificates of deposit and bankers'
acceptances of domestic branches of U.S. banks.
The following interpretations apply to, but are not a part of, this
fundamental restriction: (a) domestic and foreign banking will be
considered to be different industries; and (b) asset-backed
securities will be grouped in industries based upon their underlying
assets and not treated as constituting a single, separate industry.
(3) issue senior securities or borrow money, except as permitted under
the Investment Company Act of 1940 ("1940 Act") and then not in
excess of 33 1/3% of the Fund's total assets (including the amount of
the senior securities issued but reduced by any liabilities not
constituting senior securities) at the time of the issuance or
borrowing, except that the Fund may borrow up to an additional 5% of
its total assets (not including the amount borrowed) for temporary or
emergency purposes.
(4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this
restriction, the acquisition of bonds, debentures, other 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.
The following interpretation applies to, but is not a part of, this
fundamental restriction: The Fund's investments in master notes,
funding agreements and similar instruments will not be considered to
be the making of a loan.
(5) engage in the business of underwriting securities of other issuers,
except to the extent that the Fund might be considered an underwriter
under the federal securities laws in connection with its disposition
of portfolio securities.
(6) purchase or sell real estate, except that investments in securities
of issuers that invest in real estate and investments in
mortgage-backed securities, mortgage participations or other
instruments supported by interests in real estate are not subject to
this limitation, and except that the Fund may exercise rights under
agreements relating to such securities, including the right to
enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an
orderly manner.
(7) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the Fund may purchase,
sell or enter into financial options and futures, forward and spot
currency contracts, swap transactions and other financial contracts
or derivative instruments.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. The following investment
restrictions may be changed by the board without shareholder approval.
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The Fund will not:
(1) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the Fund may
make 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.
(2) 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.
(3) purchase securities of other investment companies, except to the
extent permitted by the 1940 Act and except that this limitation does
not apply to securities received or acquired as dividends, through
offers of exchange or as a result of reorganization, consolidation or
merger.
(4) purchase portfolio securities while borrowings in excess of 5% of its
total assets are outstanding.
(5) invest more than 10% of its net assets in illiquid securities.
TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
The trustees and executive officers of the Trust, their ages, business
addresses and principal occupations during the past five years are:
Position with Business Experience;
Name and Address*;age Trust Other Directorships
- --------------------- ----- -------------------
Margo N. Alexander**; 51 Trustee and Mrs. Alexander is president, chief
President 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
31 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Richard Q. Armstrong; 63 Trustee Mr. Armstrong is chairman and
78 West Brother Drive principal of RQA Enterprises
Greenwich, CT 06830 (management consulting firm) (since
April 1991 and principal occupation
since March 1995). Mr. Armstrong was
chairman of the board, chief executive
officer and co-owner of Adirondack
Beverages (producer and distributor of
soft drinks and sparkling/still
waters) (October 1993-March 1995). He
was a partner of The New England
Consulting Group (management
consulting firm) (December
1992-September 1993). He was managing
director of LVMH U.S. Corporation
(U.S. subsidiary of the French luxury
goods conglomerate, Louis Vuitton Moet
Hennessey Corporation) (1987-1991) and
chairman of its wine and spirits
subsidiary, Schieffelin & Somerset
Company (1987-1991). Mr. Armstrong is
a director or trustee of 30 investment
companies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
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Position with Business Experience;
Name and Address*;age Trust Other Directorships
- --------------------- ----- -------------------
E. Garrett Bewkes, Jr.**; Trustee and Mr. Bewkes is a director of Paine
71 Chairman of Webber Group Inc. ("PW Group")
the (holding company of PaineWebber and
Board of Mitchell Hutchins). Prior to
Trustees 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 also a director of
Interstate Bakeries Corporation and
NaPro BioTherapeutics, Inc. Mr.
Bewkes is a director or trustee of
31 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Richard R. Burt; 51 Trustee Mr. Burt is chairman of IEP Advisors,
1275 Pennsylvania Avenue, Inc. (international investments and
N.W. consulting firm) (since March 1994)
Washington, D.C. 20004 and a partner of McKinsey & Company
(management consulting firm) (since
1991). He is also a director of
Archer-Daniels-Midland Co.
(agricultural commodities).
Hollinger International Co,
(publishing), Homestake Mining
Corp., Powerhouse Technologies,
Inc. and Wierton Steel Corp He was
the chief negotiator in the
Strategic Arms Reduction Talks with
the former Soviet Union (1989-1991)
and the U.S. Ambassador to the
Federal Republic of Germany
(1985-1989). Mr. Burt is a
director or trustee of 30
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Mary C. Farrell**; 48 Trustee Ms. Farrell is a managing director,
senior investment strategist and
member of the Investment Policy
Committee of PaineWebber. Ms.
Farrell joined PaineWebber in
1982. She is a member of the
Financial Women's Association and
Women's Economic Roundtable and
appears as a regular panelist on
Wall $treet Week with Louis
Rukeyser. She also serves on the
Board of Overseers of New York
University's Stern School of
Business. Ms. Farrell is a
director or trustee of 30
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Meyer Feldberg; 56 Trustee Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School
101 Uris Hall of Business, Columbia University.
New York, New York 10027 Prior to 1989, he was president of
the Illinois Institute of
Technology. Dean Feldberg is also
a director of Primedia Inc.,
Federated Department Stores Inc.
and Revlon, Inc. Dean Feldberg is a
director or trustee of 32
investment companies for which
Mitchell Hutchins, PaineWebber or
their affiliates serves as investment
adviser.
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Position with Business Experience;
Name and Address*;age Trust Other Directorships
- --------------------- ----- -------------------
George W. Gowen; 68 Trustee Mr. Gowen is a partner in the law
666 Third Avenue firm of Dunnington, Bartholow &
New York, New York 10017 Miller. Prior to May 1994, he was
a partner in the law firm of Fryer,
Ross & Gowen. Mr. Gowen is also a
director of Columbia Real Estate
Investments, Inc. Mr. Gowen is a
director or trustee of 30
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Frederic V. Malek; 61 Trustee Mr. Malek is chairman of Thayer
1455 Pennsylvania Avenue, Capital Partners (merchant bank).
N.W. From January 1992 to November 1992,
Suite 350 he was campaign manager of
Washington, D.C. 20004 Bush-Quayle `92. From 1990 to 1992,
he was vice chairman and, from 1989
to 1990, he was president of
Northwest Airlines Inc., NWA Inc.
(holding company of Northwest
Airlines Inc.) and Wings Holdings
Inc. (holding company of NWA
Inc.). Prior to 1989, he was
employed by the Marriott
Corporation (hotels, restaurants,
airline catering and contract
feeding), where he most recently
was an executive vice president and
president of Marriott Hotels and
Resorts. Mr. Malek is also a
director of American Management
Systems, Inc. (management
consulting and computer-related
services), Automatic Data
Processing, Inc., CB Commercial
Group, Inc. (real estate services),
Choice Hotels International (hotel
and hotel franchising), FPL Group,
Inc. (electric services), Manor
Care, Inc. (health care) and
Northwest Airlines Inc. Mr. Malek
is a director or trustee of 30
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Carl W. Schafer; 62 Trustee Mr. Schafer is president of the
66 Witherspoon Street, Atlantic Foundation (charitable
#1100 foundation supporting mainly
Princeton, NJ 08542 oceanographic exploration and
research). He also is a director
of Base Ten Systems, Inc.
(software), Roadway Express, Inc.
(trucking), The Guardian Group of
Mutual Funds, the Harding, Loevner
Funds, Evans Systems, Inc. (a motor
fuels, convenience store and
diversified company), Electronic
Clearing House, Inc. (financial
transactions processing), Frontier
Oil Corporation and Nutraceutix,
Inc. (biotechnology company).
Prior to January 1993, he was
chairman of the Investment Advisory
Committee of the Howard Hughes
Medical Institute. Mr. Schafer is
a director or trustee of 30
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
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Position with Business Experience;
Name and Address*;age Trust Other Directorships
- --------------------- ----- -------------------
Anthony G. Balestrieri; Vice President Mr. Balestrieri is a senior vice
35 president and a portfolio manager in
the short-term strategies group of
Mitchell Hutchins. Prior to April
1994, he was a fixed income portfolio
manager at Bankers Trust. Mr.
Balestrieri is a vice president of one
investment company for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Kris L. Dorr; 34 Vice President Ms. Dorr is a first vice president
and a portfolio manager in the
short-term strategies group of
Mitchell Hutchins. Prior to 1994,
she was a vice president and a
portfolio manager in the money
market mutual funds group of Kidder
Peabody Asset Management, Inc..
Ms. Dorr is a vice president of one
investment company for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
John J. Lee; 29 Vice Mr. Lee is a vice president and a
President and manager of the mutual fund finance
Assistant department of Mitchell Hutchins.
Treasurer Prior to September 1997, he was an
audit manager in the financial
services practice of Ernst & Young
LLP. Mr. Lee is a vice president
and assistant treasurer of 31
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Michael H. Markowitz; 33 Vice President Mr. Markowitz is a first vice
president and a portfolio manager
in the short-term strategies group
of Mitchell Hutchins. Prior to
1994, he was an assistant treasurer
and a portfolio manager in the
global investment management group
at Bankers Trust. Mr. Markowitz is
a vice president of one investment
company for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
Dennis McCauley; 51 Vice President Mr. McCauley is a managing director
and chief investment officer--fixed
income of Mitchell Hutchins. Prior
to December 1994, he was director
of fixed income investments of IBM
Corporation. Mr. McCauley is a
vice president of 21 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Ann E. Moran; 41 Vice Ms. Moran is a vice president and a
President manager of the mutual fund finance
and Assistant department of Mitchell Hutchins.
Treasurer Ms. Moran is a vice president and
assistant treasurer of 31 investment
companies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
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Position with Business Experience;
Name and Address*;age Trust Other Directorships
- --------------------- ----- -------------------
Dianne E. O'Donnell; 46 Vice Ms. O'Donnell is a senior vice
President president and deputy general
and Secretary counsel of Mitchell Hutchins. Ms.
O'Donnell is a vice president and
secretary of 30 investment companies
and vice president and assistant
secretary of one investment company
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Emil Polito; 37 Vice President Mr. Polito is a senior vice president
and director of operations and
control for Mitchell Hutchins.
From March 1991 to September 1993
he was director of the Mutual Funds
Sales Support and Service Center
for Mitchell Hutchins and
PaineWebber. Mr. Polito is vice
president of 31 investment
companies for which Mitchell
Hutchins or PaineWebber services as
investment adviser.
Victoria E. Schonfeld; Vice President Ms. Schonfeld is a managing director
47 and general counsel of Mitchell
Hutchins. Prior to May 1994, she was a
partner in the law firm of Arnold &
Porter. Ms. Schonfeld is a vice
president of 30 investment companies
and vice president and secretary of
one investment company for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Paul H. Schubert; 35 Vice Mr. Schubert is a senior vice
President president and the director of the
and Treasurer mutual fund finance department of
Mitchell Hutchins. From August
1992 to August 1994, he was a vice
president of BlackRock Financial
Management, L.P. Prior to August
1992, he was an audit manager with
Ernst & Young LLP. Mr. Schubert is
a vice president and treasurer of
31 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Barney A. Taglialatela; 37Vice Mr. Taglialatela is a vice president
President and a manager of the mutual fund
and Assistant finance department of Mitchell
Treasurer 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 31
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Keith A. Weller; 36 Vice Mr. Weller is a first vice president
President and associate general counsel of
and Assistant Mitchell Hutchins. Prior to May
Secretary 1995, he was an attorney in private
practice. Mr. Weller is a vice
president and assistant secretary
of 30 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
*Unless otherwise indicated, the business address of each listed person is 1285
Avenue of the Americas, New York, New York 10019.
11
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** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of
the Trust as defined in the 1940 Act by virtue of their positions with PW
Group, PaineWebber and/or Mitchell Hutchins.
The Trust pays trustees who are not "interested persons" of the Trust $
1,000 annually for each series and $150 for each board meeting and each meeting
of a board committee (other than committee meetings held on the same day as a
board meeting). The Trust has only one series and thus pays each such Trustee
$1,000 annually, plus any additional amounts due for board or committee
meetings. Each chairman of the audit and contract review committee of individual
funds within the PaineWebber fund complex receives additional compensation
aggregating $15,000 annually from the relevant funds. All trustees are
reimbursed for any expenses incurred in attending meetings. Trustees and
officers own no outstanding shares of the Fund. Because PaineWebber and Mitchell
Hutchins perform substantially all of the services necessary for the operation
of the Trust, the Trust requires no employees. No officer, director or employee
of Mitchell Hutchins or PaineWebber presently receives any compensation from the
Trust for acting as a trustee or officer.
The table below shows the estimated compensation to be paid to each trustee
during the current fiscal year and the compensation of those trustees from other
PaineWebber funds during the calendar year ended December 31, 1997.
COMPENSATION TABLE+
Estimated Total
Aggregate Compensation
Compensation From the Trust
From the and the
Name of Persons, Position Trust* Fund Complex**
- ------------------------- ------ --------------
Richard Q. Armstrong, Trustee................... $1,750 $94,885
Richard R. Burt, Trustee........................ $1,750 $97,085
Meyer Feldberg, Trustee......................... $1,750 $117,853
George W. Gowen, Trustee........................ $2,205 $101,567
Frederic V. Malek, Trustee...................... $1,750 $95,845
Carl W. Schafer, Trustee........................ $1,750 $94,885
+ Only independent trustees are compensated by the Trust and identified above;
trustees who are "interested persons," as defined in the 1940 Act, do not
receive compensation.
*Estimated for the initial fiscal year of the Trust ending April 30, 1999.
** Represents total compensation paid to each trustee during the calendar year
ended December 31, 1997; no fund within the fund complex has a bonus,
pension, profit sharing or retirement plan.
PRINCIPAL HOLDERS OF SECURITIES. As of July 22, 1998, Mitchell Hutchins held
all the outstanding shares of the Fund and thus may be deemed a controlling
person of the Fund until additional investors purchase shares.
INVESTMENT ADVISORY, ADMINISTRATION AND
DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS. Mitchell Hutchins acts
as the Trust's investment adviser and administrator pursuant to a contract dated
July 31, 1998 ("Advisory Contract"). Under the Advisory Contract, the Trust pays
Mitchell Hutchins an annual fee, computed daily and paid monthly, at an annual
rate of 0.18% of the Fund's average daily net assets
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<PAGE>
Under the terms of the Advisory Contract, Mitchell Hutchins bears all
expenses incurred in the Fund's operation other than the investment advisory fee
payable under the Advisory Contract, the fees payable pursuant to the
shareholder service plan adopted by the Trust with respect to the Fund's
Financial Intermediary shares, fees and expenses (including counsel fees) of the
trustees of the Trust who are not "interested persons"of the Trust or Mitchell
Hutchins, as that term is defined in the 1940 Act ("Independent Trustees"),
interest, taxes and the cost (including brokerage commissions and other
transaction costs, if any) of securities purchased or sold by the Fund and any
losses incurred in connection therewith and extraordinary expenses (such as
costs of litigation to which the Trust or Fund is a party and of indemnifying
officers and trustees of the Trust).
Although Mitchell Hutchins is not obligated to pay the fees and expenses of
the Independent Trustees, the Advisory Contract requires that Mitchell Hutchins
reduce its management fee by an amount equal to those fees and expenses.
Expenses borne by Mitchell Hutchins include the following (or the Fund's
share of the following): (1) organizational expenses (if these expenses are
amortized over a period of more than one year, Mitchell Hutchins will bear in
any one year only that portion of the organizational expenses that would have
been borne by the Fund in that year), (2) filing fees and expenses relating to
the registration and qualification of the shares of the Fund under federal and
state securities laws and maintaining such registrations and qualifications, (3)
fees and salaries payable to the trustees (other than the Independent Trustees)
and officers, (4) all expenses incurred in connection with the services of the
trustees (other than the Independent Trustees), including travel expenses, (5)
costs of any liability, uncollectable items of deposit and other insurance or
fidelity bonds, (6) ordinary legal, accounting and auditing expenses, excluding
legal fees of special counsel for the Independent Trustees and, as noted above,
excluding extraordinary expenses, such as litigation or indemnification
expenses, (7) charges of custodians, transfer agents and other agents, (8) costs
of preparing share certificates (if any); (9) expenses of setting in type and
printing prospectuses and supplements thereto, reports and statements to
shareholders and proxy material for existing shareholders, (10) costs of mailing
prospectuses and supplements thereto, statements of additional information and
supplements thereto, reports and proxy materials to existing shareholders, (11)
fees, voluntary assessments and other expenses incurred in connection with
membership in investment company organizations, (12) costs of mailing and
tabulating proxies and costs of meetings of shareholders, the board and any
committees thereof, (13) the cost of investment company literature and other
publications provided to the trustees and officers, (14) costs of mailing,
stationery and communications equipment, (15) expenses incident to any dividend,
withdrawal or redemption options, and (16) charges and expenses of any outside
pricing service used to value portfolio securities.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Mitchell Hutchins in the performance of its duties or from reckless disregard of
its duties and obligations thereunder.
The Advisory Contract is terminable with respect to the Fund at any time
without penalty by vote of the board or by vote of the holders of a majority of
the outstanding voting securities of that Fund on 60 days' written notice to
Mitchell Hutchins, as the case may be. The Advisory Contract is also terminable
without penalty by Mitchell Hutchins on 60 days' written notice to the other
party. The Advisory Contract terminates automatically upon its assignment.
13
<PAGE>
The following table shows the approximate net assets as of June 30, 1998,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment company
may fall into more than one of the categories below.
Investment Category Net Assets
------------------- ----------
( $ mil)
Domestic (excluding Money Market)...............$ 7,856.5
Global.......................................... 3,875.8
Equity/Balanced................................. 6,513.6
Fixed Income (excluding Money Market)........... 5,218.7
Taxable Fixed Income........................ 3,641.0
Tax-Free Fixed Income....................... 1,577.7
Money Market Funds.............................. 28,628.1
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 the 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 mutual funds and other
Mitchell Hutchins advisory clients.
DISTRIBUTION ARRANGEMENTS. PaineWebber acts as distributor of shares of the
Trust under a distribution contract with the Trust, which requires PaineWebber
to use its best efforts, consistent with its other business, to sell shares of
the Trust. Shares of the Trust are offered on a continuous basis, except that
the Trust and PaineWebber reserve the right to reject any purchase order and to
suspend the offering of Fund shares for a period of time.
PORTFOLIO TRANSACTIONS
The Advisory Contract authorizes Mitchell Hutchins (with the approval of the
board) to select brokers and dealers to execute purchases and sales of the
Fund's portfolio securities. The Advisory Contract directs Mitchell Hutchins to
use its best efforts to obtain the best available price and most favorable
execution with respect to all transactions for the Fund. To the extent that the
execution and price offered by more than one dealer are comparable, Mitchell
Hutchins may, in its discretion, effect transactions in portfolio securities
with dealers who provide the Fund with research, analysis, advice and similar
services. Although Mitchell Hutchins may receive certain research or execution
services in connection with these transactions, Mitchell Hutchins will not
purchase securities at a higher price or sell securities at a lower price than
would otherwise be paid had no services been provided by the executing dealer.
Moreover, Mitchell Hutchins will not enter into any explicit soft dollar
arrangements relating to principal transactions and will not receive in
principal transactions the types of services that could be purchased for hard
dollars. Research services furnished by the dealers with which the Fund effects
securities transactions may be used by Mitchell Hutchins in advising other funds
or accounts it advises and, conversely, research services furnished to Mitchell
Hutchins in connection with other funds or accounts that Mitchell Hutchins
advises may be used in advising the Fund. Information and research received from
dealers will be in addition to, and not in lieu of, the services required to be
performed by Mitchell Hutchins under the Advisory Contract.
Mitchell Hutchins may engage in agency transactions in over-the-counter
equity and debt securities in return for research and execution services. These
transactions are entered into only in compliance with procedures ensuring that
the transaction (including commissions) is at least as favorable as it would
have been if effected directly with a market-maker that did not provide research
14
<PAGE>
or execution services. These procedures include a requirement that Mitchell
Hutchins obtain multiple quotes from dealers before executing the transactions
on an agency basis.
The Fund purchases portfolio securities from dealers and underwriters as
well as from issuers. Securities are usually traded on a net basis with dealers
acting as principal for their own accounts without a stated commission. Prices
paid to dealers in principal transactions generally include a "spread," which is
the difference between the prices at which the dealer is willing to purchase and
sell a specific security at the time. When securities are purchased directly
from an issuer, no commissions or discounts are paid. When securities are
purchased in underwritten offerings, they include a fixed amount of compensation
to the underwriter.
Investment decisions for the Fund and for other investment accounts managed
by Mitchell Hutchins are made independently of each other in light of differing
considerations for the various accounts. However, the same investment decision
may occasionally be made for the Fund and one or more of such accounts. In such
cases, simultaneous transactions are inevitable. Purchases or sales are then
averaged as to price and allocated between the Fund and such other account(s) as
to amount according to a formula deemed equitable to the Fund and such
account(s). While in some cases this practice could have a detrimental effect
upon the price or value of the security as far as the Fund is concerned, or upon
its ability to complete its entire order, in other cases it is believed that
coordination and the ability to participate in volume transactions will be
beneficial to the Fund.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
The Fund may suspend redemption privileges or postpone the date of payment
during any period (1) when the New York Stock Exchange ("NYSE") is closed or
trading on the NYSE is restricted as determined by the Securities and Exchange
Commission ("SEC"), (2) when an emergency exists, as defined by the SEC, which
makes it not reasonably practicable for the Fund to dispose of securities owned
by it or to determine fairly the market value of its assets or (3) as the SEC
may otherwise permit. The redemption price may be more or less than the
shareholder's cost, depending on the market value of the Fund's portfolio at the
time, although the Fund seeks to maintain a constant net asset value of $1.00
per share.
If conditions exist that make cash payments undesirable, the 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.
VALUATION OF SHARES
The Fund's net asset value per share is determined by The Bank of New York
("BONY") as of 12:00 noon, Eastern time, 2:30 p.m., Eastern time, and again at
5:00 p.m., Eastern time, on each Business Day. As defined in the Prospectus,
"Business Day" means any day on which the New York offices of BONY, the Fund's
transfer agent, First Data Investor Services Group, Inc. ("Transfer Agent")
PaineWebber and PaineWebber's bank (also The Bank of New York) are all open for
business. One or more of these institutions will be 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, Columbus Day,
Veterans' Day, Thanksgiving Day and Christmas Day.
The Fund values its portfolio securities in accordance with the amortized
cost method of valuation under Rule 2a-7 ("Rule") under the 1940 Act. To use
amortized cost to value its portfolio securities, the Fund must adhere to
certain conditions under the Rule relating to its investments, some of which are
discussed in the Prospectus. Amortized cost is an approximation of market value
15
<PAGE>
of an instrument, whereby the difference between its acquisition cost and value
at maturity is amortized on a straight-line basis over the remaining life of the
instrument. The effect of changes in the market value of a security as a result
of fluctuating interest rates is not taken into account, and thus the amortized
cost method of valuation may result in the value of a security being higher or
lower than its actual market value. If a large number of redemptions take place
at a time when interest rates have increased, the Fund might have to sell
portfolio securities prior to maturity and at a price that might not be
desirable.
The board has established procedures ("Procedures") for the purpose of
maintaining a constant net asset value of $1.00 per share, which include a
review of the extent of any deviation of net asset value per share, based on
available market quotations, from the $1.00 amortized cost per share. If that
deviation exceeds 1/2 of 1% for any Fund, the board will promptly consider
whether any action should be initiated to eliminate or reduce material dilution
or other unfair results to shareholders. Such action may include redeeming
shares in kind, selling portfolio securities prior to maturity, reducing or
withholding dividends and utilizing a net asset value per share as determined by
using available market quotations. The Fund will maintain a dollar-weighted
average portfolio maturity of 90 days or less and will not purchase any
instrument having, or deemed to have, a remaining maturity of more than 397
days, will limit portfolio investments, including repurchase agreements, to
those U.S. dollar-denominated instruments that are of high quality under the
Rule and that Mitchell Hutchins, acting pursuant to the Procedures, determines
present minimal credit risks, and will comply with certain reporting and
recordkeeping procedures. There is no assurance that constant net asset value
per share will be maintained. If amortized cost ceases to represent fair value
per share, the board will take appropriate action.
In determining the approximate market value of portfolio investments, the
Fund may employ outside organizations, which may use a matrix or formula method
that takes into consideration market indices, matrices, yield curves and other
specific adjustments. This may result in the securities being valued at a price
different from the price that would have been determined had the matrix or
formula method not been used.
TAXES
To qualify for treatment as a regulated investment company ("RIC") under the
Internal Revenue Code, the Fund must distribute to its shareholders for each
taxable year at least 90% of its investment company taxable income (consisting
generally of net investment income and net short-term capital gain, if any) and
must meet several additional requirements. Among these requirements are 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, gains from the sale or other disposition of securities and certain other
income; (2) at the close of each quarter of the Fund's taxable year, at least
50% of the value of its total assets must be represented by cash and cash items,
U.S. government securities, securities of other RICs and other securities that
are 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 (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 and securities
of other RICs) of any one issuer. If the Fund failed to qualify for treatment as
a RIC for any taxable year, it would be taxed as an ordinary corporation on its
taxable income for that year (even if that income was distributed to its
shareholders) and all distributions out of its earnings and profits would be
taxable to its shareholders as dividends (that is, ordinary income).
CALCULATION OF YIELD
The Fund computes its yield and effective yield quotations using
standardized methods required by the SEC. The Fund from time to time advertises
(1) its current yield based on a recently ended seven-day period, computed by
determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period, subtracting a hypothetical charge reflecting deductions from that
shareholder account, dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
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<PAGE>
multiplying the base period return by (365/7), with the resulting yield figure
carried to at least the nearest hundredth of one percent, and (2) its effective
yield based on the same seven-day period by compounding the base period return
by adding 1, raising the sum to a power equal to (365/7), and subtracting 1 from
the result, according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)[SUPERSCRIPT]365/7] - 1
Yield may fluctuate daily and does not provide a basis for determining
future yields. Because the yield of the Fund fluctuates, it cannot be compared
with yields on savings accounts or other investment alternatives that provide an
agreed-to or guaranteed fixed yield for a stated period of time. However, yield
information may be useful to an investor considering temporary investments in
money market instruments. In comparing the yield of one money market fund to
another, consideration should be given to each fund's investment policies,
including the types of investments made, the average maturity of the portfolio
securities and whether there are any special account charges that may reduce the
yield.
OTHER INFORMATION. The Fund's performance data quoted in advertising and
other promotional materials ("Performance Advertisements") represent past
performance and are not intended to predict or indicate future results. The
return on an investment in the Fund will fluctuate. In Performance
Advertisements, the Fund may compare its taxable yield with data published by
Lipper Analytical Services, Inc. for money funds ("Lipper"), CDA Investment
Technologies, Inc. ("CDA"), IBC Financial Data, Inc. ("IBC"), Wiesenberger
Investment Companies Service ("Wiesenberger") or Investment Company Data Inc.
("ICD"), or with the performance of recognized stock and other indexes,
including the Standard & Poor's 500 Composite Stock Price Index, the Dow Jones
Industrial Average, the Morgan Stanley Capital International World Index, the
Lehman Brothers Treasury Bond Index, the Lehman Brothers Government/Corporate
Bond Index, the Salomon Brothers Government Bond Index and changes in the
Consumer Price Index as published by the U.S. Department of Commerce. The Fund
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, IBC, Wiesenberger or ICD. Performance Advertisements also may refer to
discussions of the Fund 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 Fund may also compare its performance with the performances of bank
certificates of deposit ("CDs") as measured by the CDA Certificate of Deposit
Index and the Bank Rate Monitor National Index and the average of yields of CDs
of major banks published by Banxquotes(R) Money Markets. In comparing the Fund's
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. Bank accounts are insured in whole or in part by an agency of
the U.S. government and may offer a fixed rate of return. Fund shares are not
insured or guaranteed by the U.S. government and returns thereon will fluctuate.
While the Fund seeks to maintain a stable net asset value of $1.00 per share,
there can be no assurance that it will be able to do so.
The Fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends on the Fund investment are reinvested by being paid in
additional Fund shares, any future income of the 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 the Fund investment
would increase more quickly than if dividends had been paid in cash. The Fund
may also make available to shareholders a daily accrual factor or "mil rate"
representing dividends accrued to shareholder accounts on a given day or days.
Certain shareholders may find that this information facilitates accounting or
recordkeeping.
17
<PAGE>
OTHER INFORMATION
The Trust is a Delaware business trust and has authority to issue an
unlimited number of shares of beneficial interest. The Trust may, without
shareholder approval, divide the authorized shares into an unlimited number of
separate series and divide the shares of any series into classes.
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 the Fund could,
under certain conflicts of laws jurisprudence in various states, be held
personally liable for the obligations of the Trust or Fund. However, the Trust
Instrument of the Trust disclaims shareholder liability for acts or obligations
of the Trust or its series (the Fund). The Trust Instrument provides for
indemnification from the Fund's property for all losses and expenses of any Fund
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 the 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 the 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
Fund in such a way as to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of the Fund.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036, serves as counsel to the Fund. Kirkpatrick
& Lockhart LLP also acts as counsel to PaineWebber and Mitchell Hutchins in
connection with other matters.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for the Fund.
FINANCIAL INTERMEDIARIES
The Trust has adopted a Shareholder Services Plan and Agreement ("Plan")
with respect to the Financial Intermediary shares of the Fund to assure that the
beneficial owners of the Financial Intermediary shares receive certain support
services. PaineWebber will implement the Plan by entering into a service
agreement with each financial intermediary that purchases Financial Intermediary
shares requiring it to provide support services to its customers who are the
beneficial owners of the Financial Intermediary shares. Under the Plan, the Fund
pays PaineWebber an annual fee at the annual rate of 0.25% of the average daily
net asset value of the Financial Intermediary shares held by financial
intermediaries on behalf of their customers. Under each service agreement,
PaineWebber pays an identical fee to the financial intermediary for providing
the support services to its customers specified in the service agreement. These
services may include: (i) aggregating and processing purchase and redemption
requests from customers and placing net purchase and redemption orders with
PaineWebber; (ii) providing customers with a service that invests the assets of
their accounts in Financial Intermediary shares; (iii) processing dividend
payments from the Trust on behalf of customers; (iv) providing information
periodically to customers showing their positions in Financial Intermediary
shares; (v) arranging for bank wires; (vi) responding to customer inquiries
relating to the services performed by the financial intermediary; (vii)
providing sub-accounting with respect to Financial Intermediary shares
beneficially owned by customers or the information necessary for sub-accounting;
(viii) forwarding shareholder communications from the Trust (such as proxies,
shareholder reports and dividend, distribution and tax notices) to customers, if
required by law; and (ix) other similar services if requested by the Trust.
The Plan requires that PaineWebber provide to the board at least annually a
written report of the amounts expended by PaineWebber under service agreements
with financial intermediaries and the purposes for which such expenditures were
made. Each service agreement requires the financial intermediary to cooperate
with PaineWebber in providing information to the board with respect to amounts
expended and services provided under the service agreement. The Plan may be
terminated at any time, without penalty, by vote of the Independent Trustees who
have no direct or indirect financial interest in the operation of the Plan
("Disinterested Trustees"). Any amendment to the Plan must be approved by the
board and any material amendment must be approved by the Disinterested Trustees.
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FINANCIAL STATEMENTS
MITCHELL HUTCHINS INSTITUTIONAL SERIES
MITCHELL HUTCHINS LIR SELECT MONEY FUND
Statement of Assets and Liabilities
July 22, 1998
ASSETS:
Cash....................................................... $100,000
--------
Total assets............................................ 100,000
-------
LIABILiTIES:
Total liabilities....................................... 0
-------
Net Assets (beneficial interest, $0.001 par
value, issued and outstanding)........................... $100,000
========
INSTITUTIONAL SHARES
Net Assets.................................................... $100,000
--------
Shares outstanding............................................ 100,000
-------
Net asset value, offering price and redemption value per share $1.00
=======
ORGANIZATION
Mitchell Hutchins LIR Select Money Fund ("Fund") is a diversified series
of Mitchell Hutchins Institutional Series ("Trust"), an open-end management
investment company organized as a Delaware business trust on April 29, 1998. The
Fund has had no operations other than the sale to Mitchell Hutchins Asset
Management Inc. ("Mitchell Hutchins"), its investment adviser, a wholly owned
subsidiary of PaineWebber Incorporated ("PaineWebber"), of 100,000 shares of
beneficial interest of the Institutional class for the amount of $100,000 on
July 22, 1998. The Fund currently offers two classes of shares - Institutional
shares and Financial Intermediary shares. Each class is sold without any initial
sales charges, and without any contingent deferred sales charge. Each class
represents assets of the Fund, and the classes are identical except for
differences in ongoing service fees. The trustees of the Trust have authority to
issue an unlimited number of shares of beneficial interest, par value $0.001 per
share.
MANAGEMENT AGREEMENT
Mitchell Hutchins acts as the investment adviser and administrator to the Fund
pursuant to a contract ("Advisory Contract") with the Trust dated July 31, 1998.
Under the Advisory Contract, the Fund pays Mitchell Hutchins a fee, computed
daily and paid monthly, at an annual rate of 0.18% of average daily net assets.
Under the Advisory Contract, Mitchell Hutchins has agreed to pay all Fund
expenses other than investment and advisory fees, the fees payable pursuant to
the shareholder service plan adopted by the Trust with respect to the Fund's
Financial Intermediary shares, interest, taxes and the cost (including brokerage
commissions and other transaction costs, if any) of securities purchased or sold
by the Fund and any losses incurred in connection therewith and extraordinary
19
<PAGE>
expenses (such as costs of litigation to which the Trust or Fund is a party and
of indemnifying officers and trustees of the Trust). Mitchell Hutchins has also
agreed to pay all costs in connection with the organization and initial
registration of the Fund under the Advisory Contract. Although Mitchell Hutchins
is not obligated to pay the fees and expenses (including counsel fees) of the
trustees of the Trust who are not "interested persons" of the Fund or Mitchell
Hutchins, as that term is defined in the 1940 Act, the Advisory Contract
requires that Mitchell Hutchins reduce its management fee by an amount equal to
those fees and expenses.
SHAREHOLDER SERVICE PLAN AND AGREEMENT
Under a Shareholder Service Plan and Agreement with respect to its
Financial Intermediary shares, the Fund pays PaineWebber monthly fees at the
annual rate of 0.25% of the average daily net assets of the Financial
Intermediary shares held by financial intermediaries on behalf of their
customers. Under Service Agreements with those financial intermediaries,
PaineWebber pays an identical fee to the financial intermediaries for certain
support services that they provide for the beneficial owners of the Financial
Intermediary shares.
20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholder and Board of Trustees
Mitchell Hutchins LIR Select Money Fund
We have audited the accompanying statement of assets and liabilities of the
Mitchell Hutchins LIR Select Money Fund as of July 22, 1998. This statement of
assets and liabilities is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this statement of assets and
liabilities based on our audit.
We conducted our audit in accordance with generally acceptable auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether this statement of assets and liabilities is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principals used and
significant estimates made by management, as well as evaluating the overall
statement of assets and liabilities presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of Mitchell
Hutchins LIR Select Money Fund at July 22, 1998, in conformity with generally
accepted accounting principals.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
New York, New York
July 24, 1998
21
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MITCHELL HUTCHINS LIR SELECT MONEY FUND
JULY 31, 1998
INVESTORS SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERRED TO IN THE
PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION. THE FUND AND ITS
DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE TO PROVIDE INVESTORS WITH INFORMATION
THAT IS DIFFERENT. THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION
ARE NOT AN OFFER TO SELL SHARES OF THE FUND IN ANY JURISDICTION WHERE THE FUND
OR ITS DISTRIBUTOR MAY NOT LAWFULLY SELL THOSE SHARES.
PAINEWEBBER
(C) 1998 PaineWebber Incorporated
S637
