<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 1995
SECURITIES ACT FILE NO. 33-70362
INVESTMENT COMPANY ACT FILE NO. 811-8080
________________________________________________________________________________
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 2 [x]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
AMENDMENT NO. 3 [x]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
INSTITUTIONAL SERIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 713-2000
DIANNE E. O'DONNELL
MITCHELL HUTCHINS ASSET MANAGEMENT INC.
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES TO:
JON S. RAND, ESQ.
WILLKIE FARR & GALLAGHER
ONE CITICORP CENTER
153 EAST 53RD STREET
NEW YORK, NEW YORK 10022-4669
------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[ ] IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (b) OF RULE 485
[ ] ON (DATE) PURSUANT TO PARAGRAPH (b) OF RULE 485
[x] 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (a)(1) OF RULE 485
[ ] ON (DATE) PURSUANT TO PARAGRAPH (a)(1) OF RULE 485
[ ] 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (a)(2) OF RULE 485
[ ] ON (DATE) PURSUANT TO PARAGRAPH (a)(2) OF RULE 485
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW EFFECTIVE
DATE FOR A PREVIOUSLY FILED POST-EFFECTIVE AMENDMENT.
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24f-2 UNDER THE INVESTMENT COMPANY ACT
OF 1940, AS AMENDED. THE NOTICE REQUIRED BY SUCH RULE FOR THE REGISTRANT'S
FISCAL YEAR ENDED NOVEMBER 30, 1994 WAS FILED ON OR ABOUT JANUARY 27, 1995.
________________________________________________________________________________
________________________________________________________________________________
<PAGE>
Prospectus March 28, 1995
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INSTITUTIONAL ADJUSTABLE RATE GOVERNMENT PORTFOLIO
INSTITUTIONAL SHARES
1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019 (800) 543-3373
Institutional Adjustable Rate Government Portfolio (the 'Fund'), a series of
Institutional Series Trust (the 'Trust'), seeks to provide high current income
while limiting the degree of fluctuation of its net asset value resulting from
movements in interest rates. The Fund seeks to achieve this objective by
investing primarily in adjustable rate securities ('Adjustable Rate
Securities'). The Fund invests only in securities that are issued or guaranteed
by the U.S. Government, its agencies or instrumentalities ('Government
Securities'). Although the Fund's portfolio may be expected to experience low
volatility due to the unique characteristics of Adjustable Rate Securities, the
Fund is not a money market fund that attempts to maintain a constant net asset
value and the Fund's investment portfolio can be expected to experience greater
volatility than that of a money market fund.
Institutional shares of the Fund are available for purchase by institutional
investors without imposition of any sales charge, deferred sales charge or any
other transaction fee. These institutional investors include municipalities,
national banks, federal savings institutions, federal credit unions,
corporations, trust companies, investment bankers and brokers, insurance
companies, investment counsellors, pension funds, employee benefit plans, law
firms, trusts, estates and educational, religious and charitable organizations.
The Fund intends to limit its investments to those that would be permissible for
national banks, federal savings institutions and federal credit unions.
This Prospectus briefly sets forth certain information about the Fund, including
applicable operating expenses, that prospective investors should know before
investing. Investors are advised to read this Prospectus and retain it for
future reference.
Additional information about the Fund, contained in a Statement of Additional
Information dated the same date as this Prospectus, has been filed with the
Securities and Exchange Commission (the 'SEC') and is available to investors
upon request and without charge by calling or writing the Trust at the telephone
number or address listed above. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
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FEE TABLE
The table below shows the costs and expenses that an investor would incur,
either directly or indirectly, as a holder of Institutional shares of the Fund,
based upon an estimate of the Fund's projected annual operating expenses. See
'Purchase and Redemption of Shares' and 'General Information.' Shares of the
Fund are sold without imposition of any sales charge, deferred sales charge or
any other transaction fee.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(AS A PERCENTAGE OF AVERAGE NET ASSETS)* SHARES
------------------------------------------------------------------------------------------ -------------
<S> <C>
Management Fee............................................................................ .45%
Total Other Expenses (after reimbursements)*.............................................. .10%
------
Total Operating Expenses (after reimbursements)*..................................... .55%
</TABLE>
The nature of the services provided to, and the aggregate management fees
paid by, the Fund are described below under 'Management of the Fund.' Expenses
associated with distributing the Fund's shares are borne by the Trust's
distributor out of its own resources and are not borne directly or indirectly by
shareholders. For more complete descriptions of the various costs and expenses,
see 'Management of the Fund.' The percentage of 'Other Expenses' in the table
above has been restated and is based on amounts expected to be incurred for the
current fiscal year; these expenses include fees for shareholder services,
custodial fees, legal and accounting fees, printing costs and registration fees,
the costs of regulatory compliance, a portion of the costs associated with
maintaining the Trust's legal existence and the costs involved in communicating
with the Fund's shareholders.
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical $1,000 investment in Institutional shares of the Fund assuming
(1) a 5% annual return, (2) payment of annual total operating expenses set forth
in the table above and (3) complete redemption at the end of the period.
<TABLE>
<CAPTION>
EXAMPLE* 1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Institutional shares............................................. $6 $18 $31 $ 69
</TABLE>
*The expense table and the example reflect an undertaking by the Trust's
investment adviser and administrator to reduce or otherwise limit the expenses
of the Fund, on an annualized basis, to .55% of the Fund's average daily net
assets in respect of Institutional shares. In the absence of this undertaking,
which may be terminated at any time, 'Total Other Expenses' and 'Total Operating
Expenses' would be .24% and .69%, respectively. See 'Management of the Fund.'
The above example is intended to assist an investor in understanding
various costs and expenses that the investor would bear upon becoming a
shareholder of the Fund. The example should not be considered to be a
representation of past or future expenses. Actual expenses of the Fund may be
greater or less than those shown above. The assumed 5% annual return shown in
the example is hypothetical and should not be considered to be a representation
of past or future annual return; the actual return of the Fund may be greater or
less than the assumed return.
2
<PAGE>
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HIGHLIGHTS
<TABLE>
<S> <C> <C>
------------------------------------------------------------------------------------------------------------------
-------------------
The Trust
The Trust is an open-end management investment company. See 'General Information.'
------------------------------------------------------------------------------------------------------------------
-------------------
The Fund
The Fund, the initial series of the Trust, is a diversified fund that seeks to provide high
current income while limiting the degree of fluctuation of its net asset value resulting from
movements in interest rates. See 'Investment Objective and Policies' and 'General Information.'
------------------------------------------------------------------------------------------------------------------
-------------------
Benefits of
Investing
in the
Fund
Mutual funds, such as the Fund, are flexible investment tools that are increasingly
popular -- one of four American households now owns shares of at least one mutual fund -- for
very sound reasons. The Fund offers investors the following important benefits:
Fund Designed For Institutions
Institutional shares of the Fund are designed primarily for institutions as an economical and
convenient means for the investment of short term funds that they hold for their own account
or invest for others. These institutions include municipalities, national banks, federal
savings institutions, federal credit unions, corporations, trust companies, investment bankers
and brokers, insurance companies, investment counsellors, pension funds, employee benefit
plans, law firms, trusts, estates and educational, religious and charitable organizations. See
'Purchase and Redemption of Shares.'
Permissible Investment for Certain Depository Institutions
The Fund intends to limit its investments to those that would be permissible for national
banks, federal savings institutions and federal credit unions.
Attractive Investment Alternative
The Fund is designed for investors who desire (1) a higher yield than is generally available
from traditional fixed income investments that seek to maintain stable principal values, such
as bank money market deposit accounts, money market mutual funds or certificates of deposit,
(2) less fluctuation in net asset value than longer term fixed income funds and (3) the credit
safety of a portfolio comprised of Government Securities. During a period of declining
interest rates, however, the Fund's total return may be lower than that of a fund investing in
fixed rate longer term instruments such as U.S. Treasury bonds. In addition, the Fund's net
asset value can be expected to experience greater volatility than the value of a bank money
market deposit account, money market mutual fund or certificate of deposit. See 'Investment
Objective and Policies.'
</TABLE>
3
<PAGE>
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<TABLE>
<S> <C> <C>
Adjustable Rate Securities
The Fund invests at least 65% of its total assets in Adjustable Rate Securities, all of which
are also Government Securities. Unlike fixed rate securities, Adjustable Rate Securities
adjust their rate of interest to general market interest rate conditions, subject in some
instances to certain limitations typically referred to as 'caps' and 'floors.' Because their
rates of interest adjust at regular intervals, Adjustable Rate Securities can be expected to
experience less volatility of principal than is generally inherent in securities with similar
or longer terms that have fixed rates of interest.
High Quality Securities
The Fund also invests 100% of its assets in Government Securities, many of which are also
Adjustable Rate Securities.
Professional Management
By pooling the monies of many investors, the Fund enables shareholders to obtain the benefits
of full-time professional management and an array of investments that is typically beyond the
means of most investors. The Fund's investment adviser reviews the fundamental characteristics
of far more securities than can a typical investor and may employ portfolio management
techniques that frequently are not used by many institutional investors. Additionally, the
larger denominations in which the Fund invests may result in better overall prices for the
investment. See 'Management of the Fund.'
Transaction Savings
By investing in the Fund, an investor is able to acquire ownership in a portfolio of
securities without paying the higher transaction costs generally associated with a series of
small securities purchases.
Convenience
Fund shareholders are relieved of the administrative and recordkeeping burdens normally
associated with direct ownership of securities. See 'Purchase and Redemption of Shares.'
Liquidity
The Fund's convenient purchase and redemption procedures provide shareholders with ready
access to their money and reduce the delays frequently involved in the direct purchase and
sale of securities. See 'Purchase and Redemption of Shares.'
Exchange Privilege
Holders of Institutional shares may exchange all or a portion of their shares for
Institutional shares of any of the investment portfolios of Liquid Institutional Reserves. See
'Purchase and Redemption of Shares -- Exchanges.'
</TABLE>
4
<PAGE>
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<TABLE>
<S> <C> <C>
-------------------
Purchase
and
Redemption
of Shares
The minimum initial investment in the Fund is $250,000 and there is no subsequent investment
minimum. An initial purchase of Institutional shares must be made through PaineWebber
Incorporated ('PaineWebber') and its correspondent firms for investors who are clients of
PaineWebber or those firms ('PaineWebber clients') and, for other investors, through PFPC Inc.,
the Fund's transfer agent ('Transfer Agent'). See 'Purchase and Redemption of Shares.'
------------------------------------------------------------------------------------------------------------------
-------------------
Management
Services
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), a wholly owned subsidiary of
PaineWebber, serves as investment adviser and administrator of the Fund and receives a fee,
accrued daily and paid monthly, at the annual rate of .45% of the Fund's average daily net
assets. Mitchell Hutchins has undertaken to maintain the Fund's total annual operating expenses
at a level not exceeding .55% of the Fund's average daily net assets annually for Institutional
shares. This undertaking may be terminated at any time. See 'Management of the Fund.'
------------------------------------------------------------------------------------------------------------------
-------------------
Distributor
Mitchell Hutchins serves as the distributor of the Fund's shares.
------------------------------------------------------------------------------------------------------------------
-------------------
Dividends
Substantially all of the Fund's net investment income is declared daily as of 4:00 p.m.,
Eastern time, as a dividend and distributed to shareholders monthly. See 'Dividends,
Distributions and Taxes.'
------------------------------------------------------------------------------------------------------------------
-------------------
Risk Factors
and Special
Considera-
tions
No assurance can be given that the Fund will achieve its investment objective. Changes in
interest rates generally will result in increases or decreases in the market value of the
obligations held by the Fund and, unlike that of a money market fund, the Fund's net asset
value per share will fluctuate. Certain of the instruments held by the Fund, and certain of the
investment techniques that the Fund may employ, might expose the Fund to certain risks, such as
mortgage-backed securities ('MBS') (which include adjustable rate mortgage securities and
collateralized mortgage obligations). MBS are subject to prepayment or early payout risks,
which are affected by changes in prevailing interest rates and numerous economic, geographic,
social and other factors. The Fund's reverse repurchase agreement transactions involve a form
of leverage. The other investment techniques presenting the Fund with risks are lending
portfolio securities, entering into repurchase agreement transactions and purchasing securities
on a when-issued or delayed delivery basis. See 'Investment Objective and Policies -- Risk
Factors and Special Considerations' at page 12.
</TABLE>
5
<PAGE>
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FINANCIAL HIGHLIGHTS
The financial information for Institutional shares of the Fund has been
presented in the table below for the period from March 24, 1994 (commencement of
operations) through November 30, 1994. This information is supplemented by the
financial statements and accompanying notes appearing in the Fund's Annual
Report to Shareholders for the fiscal year ended November 30, 1994, which are
incorporated by reference into the Statement of Additional Information. The
financial statements and notes, as well as the information in the table
appearing below, have been audited by Deloitte & Touche LLP, independent
auditors, whose report thereon is included in the Annual Report to Shareholders.
Further information about the performance of the Fund is also included in the
Annual Report to Shareholders, which may be obtained without charge.
<TABLE>
<CAPTION>
MARCH 24, 1994* TO
NOVEMBER 30, 1994
---------------------
<S> <C>
Net asset value, beginning of period.......................................................... $ 12.00
----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income......................................................................... 0.39
Net realized and unrealized losses on investments............................................. (0.19)
----------
Total from investment operations.............................................................. 0.20
----------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income......................................................................... (0.39)
----------
Net asset value, end of period................................................................ $ 11.81
----------
----------
Total return (Annualized)#.................................................................... 2.39%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands)...................................................... $52,018
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses, net of reimbursement................................................................ 0.46%
Expenses, before reimbursement from manager................................................... 0.69%
Net investment income......................................................................... 4.75%
PORTFOLIO TURNOVER RATE....................................................................... 170.25%
</TABLE>
* Commencement of Operations.
# Total return is calculated by giving effect to the reinvestment of dividends
on the dividend payment date.
6
<PAGE>
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INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide high current income while limiting
the degree of fluctuation of its net asset value resulting from movements in
interest rates. No assurance can be given that the Fund will be able to achieve
its investment objective, which may be changed only with the approval of a
majority of the Fund's outstanding voting securities, which is defined in the
Investment Company Act of 1940, as amended (the '1940 Act'), as the lesser of
(1) 67% or more of the shares present at a Fund meeting, if the holders of more
than 50% of the outstanding shares of the Fund are present or represented by
proxy or (2) more than 50% of the outstanding shares of the Fund.
TYPES OF PORTFOLIO INVESTMENTS
The Fund invests exclusively in Government Securities and, under normal market
conditions, invests at least 65% of its total assets in Adjustable Rate
Securities. The Fund may invest up to 35% of its net assets in securities that
are not Adjustable Rate Securities. The Fund may not invest its assets in
securities subject to legal or contractual restrictions on resale and securities
for which no readily available market exists or other illiquid securities,
including repurchase agreements having maturities of more than seven days.
The Fund seeks to achieve low volatility of net asset value by investing in
a diversified portfolio of securities that Mitchell Hutchins believes, in the
aggregate, is resistant to significant fluctuations in market value. In
selecting securities for the Fund, Mitchell Hutchins takes into account various
factors that will affect the volatility of the Fund's assets, such as the time
to the next coupon reset date for the securities, the payment characteristics of
the securities and the dollar weighted average life of the securities.
ADJUSTABLE RATE SECURITIES
Adjustable Rate Securities are instruments that bear interest at rates that
adjust at periodic intervals at a fixed amount (typically referred to as a
'spread') over the market levels of interest rates as reflected in specified
indexes. The Adjustable Rate Securities in which the Fund invests consist of MBS
that are Government Securities. MBS are securities that directly or indirectly
represent an interest in, or are backed by and are payable from, mortgage loans
secured by real property. MBS are issued in structured financings through which
a sponsor securitizes the underlying mortgage loans to liquify the underlying
assets or to achieve certain other financial goals.
The interest paid on Adjustable Rate Securities and, therefore, the current
income earned by the Fund by investing in them, is a function primarily of the
indexes upon which adjustments are based and the applicable spread relating to
the securities. Examples of indexes that may be used are (1) one-, three- and
five-year U.S. Treasury securities adjusted to a constant maturity index, (2)
U.S. Treasury bills of three or six months, (3) the daily Bank Prime Loan Rate
made available by the Federal Reserve Board, (4) the cost of funds of member
institutions for the Federal Home
7
<PAGE>
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Loan Bank of San Francisco and (5) the offered quotations to leading banks in
the London interbank market for Eurodollar deposits of a specified duration
('LIBOR').
The interest rates paid on Adjustable Rate Securities are generally
readjusted periodically to an increment over the chosen interest rate index.
Readjustments occur at intervals ranging from one to 60 months. The degree of
volatility in the market value of the Adjustable Rate Securities in the Fund's
portfolio is a function of the frequency of the adjustment period, the
applicable index and the degree of volatility in the applicable index. It is
also a function of the maximum increase or decrease of the interest rate
adjustment on any one adjustment date, in any one year and over the life of the
securities. These maximum increases and decreases are typically referred to as
'caps' and 'floors,' respectively. The Fund does not seek to maintain an overall
average cap or floor, although Mitchell Hutchins considers caps or floors in
selecting Adjustable Rate Securities for the Fund.
The adjustable interest rate feature underlying the Adjustable Rate
Securities in which the Fund invests generally acts as a buffer to reduce sharp
changes in the Fund's net asset value in response to normal interest rate
fluctuations. As the interest rates on the mortgages underlying the Fund's MBS
are reset periodically, yields of portfolio securities gradually align
themselves to reflect changes in market rates and should cause the net asset
value of Institutional shares to fluctuate less dramatically than they would if
the Fund invested in more traditional long-term, fixed rate debt securities.
During periods of rapidly rising interest rates, however, changes in the coupon
rate may temporarily lag behind changes in the market rate, possibly resulting
in lower net asset values until the coupon resets to market rates. Thus,
investors could suffer some principal loss if they sell their shares of the Fund
before the interest rates on the underlying mortgages are adjusted to reflect
current market rates.
Unlike fixed rate mortgages, which generally decline in value during
periods of rising interest rates, the Fund's adjustable rate MBS allow the Fund
to participate in increases in interest rates through periodic adjustments in
the coupons of the underlying mortgages, resulting in both higher current yields
and lower price fluctuations. In addition, if prepayments of principal are made
on the underlying mortgages during periods of rising interest rates, the Fund
generally is able to reinvest those amounts in securities with a higher current
rate of return. The Fund does not benefit from increases in interest rates to
the extent that interest rates rise to the point at which they cause the current
coupon of Adjustable Rate Securities to exceed the maximum allowable caps. The
Fund's net asset values could vary to the extent that current yields on
Adjustable Rate Securities are different from market yields during interim
periods between the coupon reset dates.
MBS. The Fund limits its investments in MBS to those issued or guaranteed
by the U.S. Government or one of its agencies or instrumentalities, primarily
consisting of securities either guaranteed by the Government National Mortgage
Association ('GNMA') or issued by the Federal National Mortgage Association
('FNMA') or the Federal Home Loan Mortgage Corporation ('FHLMC'). GNMA, FNMA and
FHLMC are agencies or instrumentalities of the U.S. Government and MBS issued or
guaranteed by them are generally considered to be of comparable quality to, or
higher than, privately issued securities rated Aaa by Moody's or AAA by Standard
& Poor's. GNMA MBS are guaranteed by GNMA and consist of pass-through interests
in pools of mortgage loans guaranteed or insured by agencies or
instrumentalities of the
8
<PAGE>
--------------------------------------------------------------------------------
United States. FNMA and FHLMC MBS are issued by FNMA and FHLMC, respectively,
and most often represent pass-through interests in pools of similarly insured or
guaranteed mortgage loans or pools of conventional mortgage loans or
participations in the pools. GNMA, FNMA and FHLMC 'pass-through' MBS are so
named because they represent undivided interests in the underlying mortgage
pools and a proportionate share of both regular interest and principal payments
(net of fees assessed by GNMA, FNMA and FHLMC and any applicable loan servicing
fees), as well as unscheduled early prepayments on the underlying mortgage pool,
are passed through monthly to the holder of the MBS.
Timely payment of principal and interest on GNMA MBS is guaranteed by GNMA,
a wholly owned corporate instrumentality of the U.S. Government within the
Department of Housing and Urban Development, which guarantee is backed by the
full faith and credit of the U.S. Government. FNMA, a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act, guarantees timely payment of principal and
interest on FNMA MBS. FHLMC, a corporate instrumentality of the U.S. Government,
guarantees (1) the timely payment of interest on all FHLMC MBS, (2) the ultimate
collection of principal with respect to some FHLMC MBS and (3) the timely
payment of principal with respect to other FHLMC MBS. Neither the obligations of
FNMA nor those of FHLMC are backed by the full faith and credit of the United
States. Nevertheless, because of the relationship of each of these entities to
the United States, MBS issued by them are generally considered to be high
quality securities with minimal credit risk.
Among the specific types of MBS in which the Fund may invest are adjustable
rate mortgages ('ARMs'), which are pass-through mortgage securities
collateralized by mortgages with adjustable rather than fixed rates. ARMs
eligible for inclusion in a mortgage pool generally provide for a fixed initial
mortgage interest rate for either the first three, six, 12, 13, 36 or 60
scheduled monthly payments. Thereafter, the interest rates are subject to
periodic adjustment based on changes to a designated benchmark index.
A second type of MBS in which the Fund may invest are collateralized
mortgage obligations ('CMOs'), which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities, issued by instrumentalities
of the U.S. Government. The Fund will not invest in privately issued CMOs. Such
CMOs are collateralized by GNMA, FNMA or FHLMC certificates (this collateral
being referred to collectively in this Prospectus as 'Mortgage Assets').
Multi-class pass-through securities are equity interests in a trust composed of
Mortgage Assets. Payments of principal of and interest on the Mortgage Assets,
and any reinvestment income on the Mortgage Assets, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multi-class
pass-through securities. The issuer of a series of CMOs may elect to be treated
as a Real Estate Mortgage Investment Conduit.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often 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 the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a CMO series in a number of
different ways. Generally, the purpose of the
9
<PAGE>
--------------------------------------------------------------------------------
allocation of the cash flow of a CMO to the various classes is to obtain a more
predictable cash flow to the individual tranches than exists with the underlying
collateral of the CMO. As a general rule, the more predictable the cash flow is
on a CMO tranche, the lower the anticipated yield will be on that tranche at the
time of issuance relative to prevailing market yields on MBSs.
The specific types of CMOs the Fund may invest in include, but are not
limited to, parallel pay CMOs and Planned Amortization Class CMOs ('PAC Bonds')
issued by instrumentalities of the U.S. Government. 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, like other
CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier. PAC Bonds are parallel pay CMOs
that generally require payments of a specified amount of principal on each
payment date; the required principal payment on PAC Bonds have the highest
priority after interest has been paid to all classes.
OTHER INVESTMENTS OF THE FUND
FIXED RATE MBS. Fixed rate MBS in which the Fund may invest consist
primarily of fixed rate pass-through securities and fixed rate CMOs. Like
Adjustable Rate Securities, these fixed rate securities may only be issued
either by agencies or instrumentalities of the U.S. Government. Similarly, the
basic structures with respect to fixed rate MBS are the same as those described
above with respect to Adjustable Rate Securities. The principal difference
between fixed rate securities and Adjustable Rate Securities is that the
interest rate on the former type of securities is set at a predetermined amount
and does not vary according to changes in any index.
GOVERNMENT SECURITIES. The Fund may invest in, in addition to Government
Securities guaranteed by GNMA and issued by FNMA and FHLMC described above,
other Government Securities such as bills, certificates of indebtedness and
notes and bonds issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Among the Government Securities that may be held by the Fund
are instruments that are supported by the full faith and credit of the U.S.
Government; instruments that are supported by the right of the issuer to borrow
from the U.S. Treasury; and instruments that are supported solely by the credit
of the instrumentality.
MONEY MARKET INSTRUMENTS. Pending the investment of funds resulting from
the sale of Fund shares or the liquidation of portfolio holdings in longer term
securities, in order to shorten the Fund's average portfolio maturity during
temporary defensive periods or in order to have available highly liquid assets
to meet anticipated redemptions of Fund shares or to pay the Fund's operating
expenses, the Fund may invest in short-term Government Securities and repurchase
agreements with respect to those securities.
INVESTMENT TECHNIQUES AND STRATEGIES
The Fund, in seeking to meet its investment objective, is authorized to engage
in any one or more of the specialized investment techniques and strategies
described below:
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. To secure prices or yields
deemed advantageous at a particular time in an effort to reduce interest rate
risk, the Fund may purchase securities on a when-issued or delayed-delivery
basis, in which case delivery of and payment for
10
<PAGE>
--------------------------------------------------------------------------------
the securities occurs beyond the normal settlement period. The Fund enters into
when-issued or delayed-delivery transactions for the purpose of acquiring
securities and not for the purpose of leverage or trading. When-issued
securities purchased by the Fund may include securities purchased on a 'when, as
and if issued' basis under which the issuance of the securities depends on the
occurrence of a subsequent event, such as approval of a merger, corporate
reorganization or debt restructuring. The Fund will establish with its
custodian, or with a designated sub-custodian, a segregated account consisting
of cash, Government Securities in an amount equal to the amount of its
when-issued or delayed-delivery purchase commitments.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase agreement
transactions with respect to instruments in which the Fund is authorized to
invest. The Fund may engage in repurchase agreement transactions with certain
member banks of the Federal Reserve System and with certain dealers listed on
the Federal Reserve Bank of New York's list of reporting dealers. Under the
terms of a typical repurchase agreement, the Fund would acquire an underlying
debt obligation for a relatively short period (not more than seven days) subject
to an obligation of the seller to repurchase, and the Fund to resell, the
obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. Thus, repurchase agreements are considered to
be collateralized loans. This arrangement results in a fixed rate of return that
is not subject to market fluctuations during the Fund's holding period. The
value of the securities underlying a repurchase agreement of the Fund is
monitored on an ongoing basis by Mitchell Hutchins to ensure that the value is
at least equal at all times to the total amount of the repurchase obligation,
including interest. Mitchell Hutchins also monitors, on an ongoing basis to
evaluate potential risks, the creditworthiness of those banks and dealers with
which the Fund enters into repurchase agreements.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreement transactions with certain member banks of the Federal Reserve System
and with certain dealers listed on the Federal Reserve Bank of New York's list
of reporting dealers. A reverse repurchase agreement, which is considered a
borrowing by the Fund, involves a sale by the Fund of securities that it holds
concurrently with an agreement by the Fund to repurchase the same securities at
an agreed upon price and date. The Fund typically invests the proceeds of a
reverse repurchase agreement in securities in which the Fund is authorized to
invest or repurchase agreements relating to those securities maturing not later
than the expiration of the reverse repurchase agreement. This use of the
proceeds is known as leverage. The Fund enters into a reverse repurchase
agreement for leverage purposes only when the interest income to be earned from
the investment of the proceeds is greater than the interest expense of the
transaction. The Fund may also use the proceeds of reverse repurchase agreements
to provide liquidity to meet redemption requests when the sale of the Fund's
securities is considered to be disadvantageous. The Fund will establish a
segregated account with its custodian, or a designated sub-custodian, in which
the Fund will maintain cash or Government Securities equal in value to its
obligations with respect to reverse repurchase agreements.
LENDING PORTFOLIO SECURITIES. In seeking to achieve its investment
objective and to hedge against the risk of interest rate fluctuations, the Fund
may lend securities guaranteed by the United States or by specified agencies of
the United States to well-known and recognized registered brokers or dealers and
banks insured by the Federal Deposit Insurance Corporation
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('FDIC'). These loans, if and when made, may not exceed 33 1/3% of the Fund's
assets taken at value. The Fund's loans of securities will be collateralized by
cash, letters of credit or Government Securities. The cash or instruments
collateralizing the Fund's loans of securities will be maintained at all times
in a segregated account with the Fund's custodian, or with a designated
sub-custodian, in an amount at least equal to the current market value of the
loaned securities.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental investment restrictions with respect
to the Fund that may not be changed without approval of a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act). Included among those
fundamental restrictions are the following:
1. The Fund will not purchase securities (other than Government
Securities) of any issuer if, as a result of the purchase, more than 5% of
the value of the Fund's total assets would be invested in the securities of
the issuer, except that up to 25% of the value of the Fund's total assets
may be invested without regard to this 5% limitation.
2. The Fund will not purchase more than 10% of the voting securities
of any one issuer, except that this limitation is not applicable to the
Fund's investments in Government Securities, and up to 25% of the value of
the Fund's total assets may be invested without regard to this 10%
limitation.
3. The Fund will not issue senior securities or borrow money, except
that the Fund may borrow from banks for temporary, extraordinary or
emergency purposes and enter into reverse repurchase agreements.
4. The Fund will not lend money to other persons, except through
purchasing debt obligations, entering into repurchase agreements and
lending portfolio securities in an amount not to exceed 33 1/3% of the
value of the Fund's total assets.
5. The Fund will invest no more than 25% of the value of its total
assets in securities of issuers in any one industry, except that this
limitation is not applicable to the Fund's investment in Government
Securities.
Notwithstanding the foregoing investment restrictions, which are imposed
under the 1940 Act and certain state laws, the Fund will invest exclusively in
Government Securities, repurchase agreements and reverse repurchase agreements
with respect to those securities and loans of those securities. Certain other
investment restrictions adopted by the Trust with respect to the Fund are
described in the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investing in the Fund involves risks and special considerations, such as those
described below:
INTEREST RATE RISK. The Fund's portfolio is affected by general changes in
interest rates that result in increases or decreases in the market value of the
obligations held by the Fund. The market value of the obligations in the Fund's
portfolio can be expected to vary inversely to changes in prevailing interest
rates. Investors should also recognize that, in periods of declining
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interest rates, the Fund's yield tends to be somewhat higher than prevailing
market rates, and in periods of rising interest rates, the Fund's yield tends to
be somewhat lower. In addition, when interest rates are falling, money received
by the Fund from the continuous sale of its shares normally is invested in
portfolio instruments producing lower yields than the balance of its portfolio,
thereby reducing the Fund's current yield. In periods of rising interest rates,
the opposite result can be expected to occur.
PREPAYMENT RISK. The types of securities in which the Fund invests have
certain unique attributes that warrant special consideration or that present
risks that may not exist in other types of mutual fund investments. Some of
these risks and special considerations are peculiar to Adjustable Rate
Securities whereas others, most notably the risk of prepayments, pertain to the
characteristics of MBS generally.
Payments of principal of and interest on MBS are made more frequently than
are payments on conventional debt securities. In addition, holders of MBS may
receive unscheduled payments of principal at any time representing prepayments
on the underlying mortgage loans. These prepayments may usually be made by the
related obligor without penalty. Prepayment rates are affected by changes in
prevailing interest rates and numerous other 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. Changes in the rate of prepayments will generally affect the yield to
maturity of the security. Moreover, when the holder of the security attempts to
reinvest prepayments or even the scheduled payments of principal and interest,
it may receive a rate of interest that is higher or lower than the rate on the
MBS originally held. Mortgage foreclosures and principal prepayments on
securities purchased by the Fund at a premium also impose a risk of loss of
principal because the premium may not have been fully amortised at the time the
principal is repaid in full. If MBS are bought at a discount, however, both
scheduled payments of principal and unscheduled prepayments will increase
current and total returns and will accelerate the recognition of income which,
when distributed to shareholders, will be taxable as ordinary income. Mitchell
Hutchins will consider remaining maturities or estimated average lives of MBS in
selecting them for the Fund.
ADJUSTABLE RATE SECURITIES. The interest rate reset features of Adjustable
Rate Securities held by the Fund reduces the effect on the net asset values of
Fund shares caused by changes in market interest rates. The market value of
Adjustable Rate Securities and, therefore, the Fund's net asset value, however,
may vary to the extent that the current interest rates on the securities differs
from market interest rates during periods between interest reset dates. These
variations in value occur inversely to changes in market interest rates. As a
result, if market interest rates rise above the current rate on the securities,
the value of the securities will decrease; conversely, if market interest rates
fall below the current rate on the securities, the value of the securities will
rise. If investors in the Fund sold their shares during periods of rising rates
before an adjustment occurred, those investors may suffer some loss. The longer
the adjustment intervals on Adjustable Rate Securities held by the Fund, the
greater the potential for fluctuations in the Fund's net asset value.
Fund shareholders receive increased income as a result of upward
adjustments of the interest rates on Adjustable Rate Securities held by the Fund
in response to market interest rates. The Fund and its shareholders do not
benefit, however, from increases in market interest rates
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once those rates rise to the point at which they cause the rates on the
Adjustable Rate Securities to reach their maximum adjustment rate, annual or
lifetime caps. Because of their interest rate adjustment feature, Adjustable
Rate Securities are not an effective means of 'locking-in' attractive rates for
periods in excess of the adjustment period. In addition, mortgagors on loans
underlying MBS with respect to which the underlying mortgage assets carry no
agency or instrumentality guarantee are often qualified for the loans on the
basis of the original payment amounts; the mortgagor's income may not be
sufficient to enable it to continue making its loan payments as the payments
increase, resulting in a greater likelihood of default.
Any benefits to the Fund and its shareholders from an increase in the
Fund's net asset values caused by declining market interest rates is reduced by
the potential for increased prepayments and a decline in the interest rates paid
on Adjustable Rate Securities held by the Fund. When market rates decline
significantly, the prepayment rate on Adjustable Rate Securities is likely to
increase as borrowers refinance with fixed rate mortgage loans, thereby
decreasing the capital appreciation potential of Adjustable Rate Securities. As
a result, the Fund should not be viewed as consistent with any objectives of
seeking capital appreciation.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Securities purchased on a
when-issued or delayed-delivery basis may expose the Fund to risk because the
securities may experience fluctuations in value prior to their actual delivery.
The Fund will not accrue income with respect to a when-issued or
delayed-delivery security prior to its stated delivery date. Purchasing
securities on a when-issued or delayed-delivery basis can involve the additional
risk that the yield available in the market when the delivery takes place may be
higher than that obtained in the transaction itself.
REPURCHASE AGREEMENTS. In entering into a repurchase agreement, the Fund
bears a risk of loss in the event that the other party to the transaction
defaults on its obligations and the Fund is delayed or prevented from exercising
its rights to dispose of the underlying securities, including the risk of a
possible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or a
part of the income from the agreement.
REVERSE REPURCHASE AGREEMENTS. A reverse repurchase agreement involves the
risk that the market value of the securities retained by the Fund may decline
below the price of the securities the Fund has sold but is obligated to
repurchase under the agreement. In the event the buyer of securities under a
reverse repurchase agreement files for bankruptcy or becomes insolvent, the
Fund's use of the proceeds of the agreement may be restricted pending a
determination by the party, or its trustee or receiver, whether to enforce the
Fund's obligation to repurchase the securities.
LENDING PORTFOLIO SECURITIES. In lending securities to registered brokers
or dealers and FDIC insured banks, the Fund may be subject to risks, which, like
those associated with other extensions of credit, include possible loss of
rights in the collateral should the borrower fail financially.
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PORTFOLIO TURNOVER
The Fund's portfolio is actively managed. The portfolio turnover rate for the
period March 24, 1994 through November 30, 1994 was 170.25%. Portfolio turnover
may vary greatly from year to year and will not be a limiting factor when
Mitchell Hutchins deems portfolio changes appropriate. A higher turnover rate
(100% or more) will involve correspondingly greater transaction costs, which
will be borne directly by the Fund, and may increase the potential for
short-term capital gains. Short-term gains realized from portfolio transactions
are taxable to shareholders as ordinary income. See 'Dividends, Distributions
and Taxes -- Taxes.'
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Trust's Board of Trustees, and the day-to-day operations of the Fund are
conducted through or under the direction of officers of the Trust. The Statement
of Additional Information contains general background information regarding each
Trustee and officer of the Trust.
INVESTMENT ADVISER AND ADMINISTRATOR
Mitchell Hutchins, 1285 Avenue of the Americas, New York, New York 10019, serves
as the Fund's investment adviser and administrator. Mitchell Hutchins is a
wholly owned subsidiary of PaineWebber, which in turn is wholly owned by Paine
Webber Group Inc. ('PW Group'), a publicly owned financial services holding
company. Mitchell Hutchins, organized in May 1977, is registered as an
investment adviser under the Investment Advisers Act of 1940 and as a broker-
dealer under the Securities Exchange Act of 1934. As of February 28, 1995,
Mitchell Hutchins or PaineWebber served as investment adviser or sub-adviser to
42 investment companies with an aggregate of 77 separate portfolios having
aggregate assets of over $26.8 billion.
As a result of an asset purchase transaction by and among Kidder, Peabody
Group Inc., its parent, General Electric Company, and PW Group, the investment
advisory services provided to the Fund by Kidder Peabody Asset Management, Inc.
('KPAM'), the Fund's predecessor manager and investment adviser, were assumed,
on an interim basis, by Mitchell Hutchins as of February 13, 1995. After the
interim period, and subject to shareholder approval, Mitchell Hutchins will
serve as the Fund's investment adviser and administrator. During the interim
period and thereafter, assuming shareholder approval, the Fund has agreed to pay
Mitchell Hutchins the same fee for investment advisory and administrative
services that the Fund agreed to pay KPAM for such services. No assurance can be
made that requisite shareholder approval of these arrangements will be obtained.
As the Fund's investment adviser and administrator, Mitchell Hutchins,
subject to the supervision and direction of the Trust's Board of Trustees, is
generally responsible for furnishing, or causing to be furnished to the Fund,
investment advisory and management services. Included among the specific
services provided by Mitchell Hutchins as administrator are: the maintenance and
furnishing of all required records or reports pertaining to the Fund to the
extent those records or reports are not maintained or furnished by the Fund's
transfer agent, custodian or
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other agents employed by the Fund; the providing of general administrative
services to the Fund not otherwise provided by the Fund's transfer agent,
custodian or other agents employed by the Fund; and the payment of reasonable
salaries and expenses of those of the Fund's officers and employees, and the
fees and expenses of those members of the Trust's Board of Trustees, who are
directors, officers or employees of Mitchell Hutchins.
As the Fund's investment adviser, Mitchell Hutchins, subject to the
supervision and direction of the Trust's Board of Trustees, manages the Fund's
portfolio in accordance with the investment objective and stated policies of the
Fund, makes investment decisions for the Fund and places purchase and sale
orders for the Fund's portfolio transactions. Mitchell Hutchins also provides
the Fund with investment officers who are authorized by the Board of Trustees to
execute purchases and sales of securities on behalf of the Fund and employs a
professional staff of portfolio managers who draw upon a variety of sources for
research information for the Fund.
Dennis L. McCauley and Nirmal Singh are jointly responsible for the day-to-day
management of the Fund. Mr. McCauley is a Managing Director and Chief Investment
Officer -- Fixed Income of Mitchell Hutchins responsible for overseeing all
active fixed income investments, including domestic and global taxable and
tax-exempt mutual funds. Prior to joining Mitchell Hutchins in 1994, Mr.
McCauley worked for IBM Corporation where he was Director of Fixed Income
Investments responsible for developing and managing investment strategy for all
fixed income and cash managment investments of IBM's pension fund and self-
insured medical funds. Mr. McCauley has also served as Vice President of IBM
Credit Corporation's mutual funds and as a member of the Retirement Fund
Investment Committee.
Nirmal Singh is a Vice President of Mitchell Hutchins responsible for
overseeing investments in the mortgage-backed securities section. Prior to
joining Mitchell Hutchins in 1993, Mr. Singh worked for Merrill Lynch Asset
Management where he was a member of the portfolio management team responsible
for several diversified funds, including mortgage-backed securities funds, with
assets totalling $8 billion. Mr. Singh has also held the position of Senior
Portfolio Manager at Nomura Mortgage Funds Management and prior to Nomura, he
worked as a transactions strategist at Shearson Lehman Brothers Inc. and for two
years at the Federal National Mortgage Association.
The Fund pays Mitchell Hutchins for its services as investment adviser and
administrator to the Fund a fee that is accrued daily and paid monthly at the
annual rate of .45% of the Fund's average daily net assets. Mitchell Hutchins
has undertaken to reduce or otherwise limit the expenses of the Fund, on an
annualized basis, to .55% of the Fund's average daily net assets in respect of
Institutional shares. This undertaking may be terminated by Mitchell Hutchins at
any time in its sole discretion. From time to time, Mitchell Hutchins in its
sole discretion may waive all or a portion of its fee and/or reimburse all or a
portion of the Fund's operating expenses.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by Mitchell Hutchins, investments of the
type the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by Mitchell Hutchins are prepared to
invest in, or desire to dispose of, the same security, available investments or
opportunities for sales are allocated in a manner believed by Mitchell
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Hutchins to be equitable to each. In some cases, this procedure may adversely
affect the price paid or received by the Fund or the size of the position
obtained or disposed of by the Fund.
PURCHASE AND REDEMPTION OF SHARES
PURCHASE PROCEDURES
Mitchell Hutchins is the distributor of the Trust's shares. The Fund's
Institutional shares are available for purchase by institutional investors,
although the Trust and Mitchell Hutchins reserve the right to waive this
requirement. Purchase orders for Institutional shares of the Fund that are
received prior to the close of regular trading on the New York Stock Exchange
(the 'NYSE') on a particular day (currently 4:00 p.m., Eastern time) are priced
according to the net asset value determined on that day. Purchase orders
received after the close of regular trading on the NYSE are priced as of the
time net asset value per share is next determined. See 'Determination of Net
Asset Value' below for a description of the times at which net asset value per
share is determined.
In order to maximize earnings, the Fund attempts to be invested as
completely as practicable and is normally required to make settlement in Federal
funds for securities purchased. Accordingly, payment for Institutional shares is
not effective until received in or converted to Federal funds immediately
available to the Trust. The minimum initial investment in the Fund is $250,000,
which may be waived at the discretion of Mitchell Hutchins. There is no minimum
subsequent investment. The Trust and Mitchell Hutchins each reserve the right to
reject any purchase order for any reason.
PURCHASES THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. Purchases through
PaineWebber investment executives or correspondent firms may be made in person
or by mail, telephone or wire; the minimum wire purchase is $1 million.
Investment executives and correspondent firms are responsible for transmitting
purchase orders to PaineWebber's New York City offices promptly. Investors may
pay for purchases with checks drawn on U.S. banks or with funds held in
brokerage accounts at PaineWebber or its correspondent firms. Payment is due on
the same Business Day after the order is received at PaineWebber's New York City
offices. A 'Business Day' is any day, Monday through Friday, on which the New
York Stock Exchange, Inc. ('NYSE') is open for business. See 'Determination of
Net Asset Value.'
PURCHASES THROUGH THE TRANSFER AGENT. Investors who are not PaineWebber
clients may purchase shares of the Fund through the Transfer Agent. Shares of
the Fund may be purchased, and an account with the Fund established, by
completing and signing an application form and mailing it, together with a check
to cover the purchase, to the Transfer Agent: PFPC Inc., Attn: Institutional
Adjustable Rate Government Portfolio, P.O. Box 8950, Wilmington, Delaware 19899.
Subsequent investments need not be accompanied by an application.
REDEMPTION PROCEDURES
As described below, Fund shares may be redeemed at their net asset value
(subject to to any applicable contingent deferred sales charge) and redemption
proceeds will be paid on the same
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day of the receipt of a redemption request. PaineWebber clients may redeem
non-certificated shares through PaineWebber or its correspondent firms; all
other shareholders must redeem through the Transfer Agent.
REDEMPTION THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. PaineWebber clients
may submit redemption requests to their investment executives or correspondent
firms in person or by telephone, mail or wire. As the Fund's agent, PaineWebber
may honor a redemption request by repurchasing Fund shares from a redeeming
shareholder at the shares' net asset value next determined after receipt of the
request by PaineWebber's New York City offices. On the same day, repurchase
proceeds will be paid by check or credited to the shareholder's brokerage
account at the election of the shareholder. PaineWebber investment executives
and correspondent firms are responsible for promptly forwarding redemption
requests to PaineWebber's New York City offices.
PaineWebber reserves the right not to honor any redemption request, in
which case PaineWebber promptly will forward the request to the Transfer Agent
for treatment as described below.
REDEMPTION THROUGH THE TRANSFER AGENT. Fund shareholders who are not
PaineWebber clients must redeem their shares through the Transfer Agent by mail;
other shareholders also may redeem Fund shares through the Transfer Agent.
Shareholders should mail redemption requests directly to the Transfer Agent:
PFPC Inc., Attn: Institutional Adjustable Rate Governmental Portfolio, P.O. Box
8950, Wilmington, Delaware 19899. A redemption request will be executed at the
net asset value next computed after it is received in 'good order.' 'Good order'
means that the request must be accompanied by the following: (1) a letter of
instruction or a stock assignment specifying the number of shares or amount of
investment to be redeemed (or that all shares credited to the Fund account be
redeemed), signed by all registered owners of the shares in the exact names in
which they are registered, (2) a guarantee of the signature of each registered
owner by an eligible institution acceptable to the Transfer Agent and in
accordance with SEC rules, such as a commercial bank, trust company or member of
a recognized stock exchange, (3) other supporting legal documents for estates,
trusts, guardianships, custodianships, partnerships and corporations and (4)
duly endorsed share certificates, if any. Shareholders are responsible for
ensuring that a request for redemption is received in 'good order.'
ADDITIONAL INFORMATION ON REDEMPTIONS. A shareholder who holds
non-certificated Fund shares may have redemption proceeds of $1 million or more
wired to the shareholder's PaineWebber brokerage account or a commercial bank
account designated by the shareholder. Questions about this option, or
redemption requirements generally, should be referred to the shareholder's
PaineWebber investment executive or correspondent firm, or the Transfer Agent if
the shares are not held in a PaineWebber brokerage account. If a shareholder
requests redemption of shares which were purchased recently, the Fund may delay
payment until it is assured that good payment has been received. In the case of
purchases by check, this can take up to 15 days.
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EXCHANGES
Institutional shares of the Fund may be exchanged for Institutional shares of
the Money Market Fund, Government Securities Fund and Treasury Securities Fund,
all of which are investment portfolios of Liquid Institutional Reserves, at the
net asset value next determined. Exchange transactions may be effected through a
PaineWebber Investment Executive. The exchange privilege may be modified or
terminated in accordance with the rules of the SEC and is available to
shareholders resident in any state in which the fund shares being acquired
legally may be sold.
OTHER MATTERS
Fund shares are sold and redeemed without charge by the Fund. The Trust may
suspend the right of redemption or postpone the date of payment upon redemption
(as well as suspend or postpone the recording of the transfer of its shares) for
such periods as permitted under the 1940 Act. The Trust may also redeem shares
involuntarily under certain special circumstances described in the Statement of
Additional Information under 'Purchase and Redemption of Shares.'
DETERMINATION OF NET ASSET VALUE
Net asset value per Institutional share of the Fund is calculated by Investors
Fiduciary Trust Company ('IFTC'), the Fund's custodian, on each day, Monday
through Friday, except on days on which the NYSE is closed. The NYSE is
currently scheduled to be closed on New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas,
and on the preceding Friday when one of those holidays falls on a Saturday or on
the subsequent Monday when one of those holidays falls on a Sunday.
Net asset value per Institutional share of the Fund is determined as of the
close of regular trading on the NYSE, and is computed by dividing the value of
the Fund's net assets attributable to Institutional shares by the total number
of Institutional shares outstanding. Generally, the Fund's investments are
valued at market value or, in the absence of a market value, at fair value as
determined by or under the direction of the Trust's Board of Trustees.
Investments in Government Securities and other securities traded
over-the-counter, other than short-term investments that mature in 60 days or
less, are valued at the average of the quoted bid and asked prices in the
over-the-counter market. Short-term investments that mature in 60 days or less
are valued on the basis of amortized cost (which involves valuing an investment
at its cost and, thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the effect of fluctuating interest rates on
the market value of the investment) when the Board of Trustees has determined
that amortized cost represents fair value. A security that is primarily traded
on a stock exchange is valued at the last sale price on that exchange or, if no
sales occurred during the day, at the current quoted bid price.
In carrying out the Board's valuation policies, IFTC may consult with an
independent pricing service retained by the Trust. Further information regarding
the Fund's valuation policies is contained in the Statement of Additional
Information.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income of the Fund are declared daily and
distributed monthly and distributions of net realized capital gains of the Fund,
if any, are declared and distributed at least annually. Unless a shareholder
instructs the Fund that dividends and capital gain distributions should be paid
in cash and credited to the shareholder's Account, dividends and capital gains
distributions are reinvested automatically at net asset value in additional
Institutional shares. The Fund is subject to a 4% nondeductible excise tax
measured with respect to certain undistributed amounts of net investment income
and capital gains. If necessary to avoid the imposition of this tax, and if in
the best interests of its shareholders, the Fund will declare and pay dividends
of its net investment income and distributions of its net capital gains more
frequently than stated above.
Shares of the Fund begin earning dividends on the day on which the shares
are issued, the date of issuance customarily being the settlement date, which is
the date on which the Fund receives payment for the shares. Shares continue to
earn dividends until the day prior to the settlement date of a redemption.
TAXES
The Trust intends that the Fund continue to qualify each year as a regulated
investment company within the meaning of the Internal Revenue Code of 1986, as
amended. To qualify as a regulated investment company for federal income tax
purposes, the Fund limits its income and investments so that (1) less than 30%
of its gross income is derived from the sale or disposition of stocks, other
securities and certain financial instruments (including certain forward
contracts) that were held for less than three months and (2) at the close of
each quarter of the taxable year (a) not more than 25% of the market value of
the Fund's total assets is invested in the securities (other than Government
Securities) of a single issuer or of two or more issuers controlled by the Fund
that are engaged in the same or similar trades or businesses or in related
trades or businesses and (b) at least 50% of the market value of the Fund's
total assets is represented by (i) cash and cash items, (ii) Government
Securities and (iii) other securities limited in respect of any one issuer to an
amount not greater in value than 5% of the market value of the Fund's total
assets and to not more than 10% of the outstanding voting securities of the
issuer. The requirements for qualification may cause the Fund to restrict the
degree to which it sells or otherwise disposes of securities and certain
financial instruments held for less than three months. If the Fund qualifies as
a regulated investment company and meets certain distribution requirements, the
Fund will not be subject to federal income tax on its net investment income and
net realized capital gains that it distributes to its shareholders.
Dividends paid by the Fund out of net investment income and distributions
of net realized short-term capital gains will be taxable to shareholders as
ordinary income, whether received in cash or reinvested in additional Fund
shares. Distributions of net realized long-term capital gains will be taxable to
shareholders as long-term capital gain, regardless of how long shareholders have
held their shares and whether the distributions are received in cash or
reinvested in
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additional shares. Dividends and distributions paid by the Fund will generally
not qualify for the federal dividends received deduction for corporate
shareholders.
Statements as to the tax status of each Fund shareholder's dividends and
distributions will be mailed annually. Shareholders will also receive, as
appropriate, various written notices regarding the tax status of certain
dividends and distributions that were paid (or that are treated as having been
paid) by the Fund to its shareholders during the preceding calendar year,
including the amount of dividends that represent interest derived from
Government Securities.
Shareholders are urged to consult their tax advisors regarding the
application of federal, state, local and foreign tax laws to their specific
situations before investing in the Fund.
PERFORMANCE INFORMATION
From time to time, the Trust may advertise the 30-day 'yield' of the Fund's
Institutional shares. The yield refers to the income generated by an investment
in Institutional shares over the 30-day period identified in the advertisement
and is computed by dividing the net investment income per share earned by the
Institutional shares during the period by the net asset value per share of the
Institutional shares on the last day of the period. This income is 'annualized'
by assuming that the amount of income is generated each month over a one-year
period and is compounded semi-annually. The annualized income is then shown as a
percentage of the net asset value.
From time to time, the Trust may advertise the Fund's 'average annual total
return' over various periods of time for Institutional shares. Total return
figures, which are based on historical earnings and are not intended to indicate
future performance, show the average percentage change in value of an investment
in Institutional shares from the beginning date of a measuring period to the end
of that period. These figures reflect changes in the price of shares and assume
that any income dividends and/or capital gains distributions made by the Fund
during the period were reinvested in Institutional shares. Total return figures
will be given for the most recent one- and five-year periods, or for the life of
the Fund to the extent that it has not been in existence for the full length of
those periods, and may be given for other periods as well, such as on a
year-by-year basis. The average annual total return for any one year in a period
longer than one year might be greater or less than the average for the entire
period.
The Trust may quote 'aggregate total return' figures with respect to
Institutional shares for various periods, representing the cumulative change in
value of an investment for the specific period and reflecting changes in share
prices and assuming reinvestment of dividends and distributions. Aggregate total
return may be shown by means of schedules, charts or graphs, and may indicate
subtotals of the various components of total return (that is, changes in value
of initial investment, income dividends and capital gains distributions).
Reflecting compounding over a longer period of time, aggregate total return data
generally will be higher than average annual total return data.
The Trust may, in addition to quoting the Institutional shares' average
annual and aggregate total returns, advertise actual annual and annualized total
return performance data for various periods of time. Actual annual and
annualized total returns may be shown by means of
21
<PAGE>
--------------------------------------------------------------------------------
schedules, charts or graphs. Actual annual or annualized total return data
generally will be lower than average annual total return data, which reflects
compounding of return.
In reports or other communications to Fund shareholders and in advertising
material, the Trust may compare the Institutional shares' performance with the
performance of other mutual funds (or analogous classes thereof) as listed in
rankings prepared by Lipper Analytical Services Inc., CDA Investment
Technologies, Inc. or similar investment services that monitor the performance
of mutual funds or as set out in the nationally recognized publications listed
below. The Trust may also include in communications to Fund shareholders
evaluations of the Fund published by nationally recognized ranking services and
by financial publications that are nationally recognized, such as Barron's,
Business Week, Forbes, Institutional Investor, Investor's Daily, Kiplinger's
Personal Finance Magazine, Morningstar Mutual Fund Values, Money, The New York
Times, USA Today and The Wall Street Journal. Any given performance comparison
should not be considered as representative of the Institutional shares'
performance for any future period.
GENERAL INFORMATION
ORGANIZATION OF THE TRUST
The Trust is registered under the 1940 Act as an open-end management investment
company and was formed as a business trust pursuant to a Declaration of Trust,
as amended from time to time (the 'Declaration'), under the laws of The
Commonwealth of Massachusetts on October 14, 1993. The Fund commenced operations
on March 24, 1994. The Declaration authorizes the Trust's Board of Trustees to
create separate series, and within each series separate classes, of an unlimited
number of shares of beneficial interest, par value $.001 per share. The Fund
offers two separate classes of shares -- Institutional shares and Financial
Intermediary shares. Shares of each class represent equal, pro rata interests in
the Fund and bear expenses and accrue daily dividends in the same manner except
that Financial Intermediary shares bear fees payable by the Fund to financial
intermediaries for services they provide to the beneficial owners of these
shares at the maximum annual rate of .25% of the Fund's net assets attributable
to Financial Intermediary shares. Mitchell Hutchins has agreed to limit the
expenses of the Fund, on an annualized basis, to .80% of the Fund's average
daily net asset value in respect of Financial Intermediary shares. In addition,
financial intermediaries may directly charge beneficial owners of Financial
Intermediary shares with fees relating to their investments, which are required
to be disclosed to those owners by the intermediaries. PaineWebber Investment
Executives and other persons remunerated on the basis of sales of shares may
receive different levels of compensation for selling one class of shares over
another.
When issued, Fund shares are fully paid and non-assessable. Shares are
freely transferable and have no pre-emptive, subscription or conversion rights.
Each class represents an identical interest in the Fund's investment portfolio.
As a result, the classes have the same rights, privileges and preferences,
except with respect to: (1) the designation of each class; (2) the expenses
allocable exclusively to each class; (3) voting rights on matters exclusively
affecting a single class; and (4) the exchange privilege of each class. The
Board of Trustees does not anticipate that there will be any conflicts among the
interests of the holders of the different classes. The Trustees, on an ongoing
basis, will consider whether any conflict exists and, if so,
22
<PAGE>
--------------------------------------------------------------------------------
take appropriate action. Certain aspects of the shares may be changed, upon
notice to Fund shareholders, to satisfy certain tax regulatory requirements, if
the change is deemed necessary by the Trust's Board of Trustees.
Shareholders of the 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 the aggregate
shares of the Trust may elect all of the Trustees. Generally, shares of the
Trust will be voted on a Trust-wide basis on all matters except those affecting
only the interests of one series, such as the Fund's investment advisory
agreement. In turn, shares of the Fund will be voted on a Fund-wide basis on all
matters except those affecting only the interests of one class, such as the
shareholder servicing arrangements relating to Financial Intermediary shares.
The Trust intends to hold no annual meetings of shareholders for the
purpose of electing Trustees unless, and until such time as, less than a
majority of the Trustees holding office have been elected by shareholders.
Shareholders of record of no less than two-thirds of the outstanding shares of
the Trust may remove a Trustee 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 for the purpose of voting on the removal of a Trustee at the written
request of holders of 10% of the Trust's outstanding shares. Shareholders of the
Fund who satisfy certain criteria will be assisted by the Trust in communicating
with other shareholders in seeking the holding of the meeting.
REPORTS TO SHAREHOLDERS
The Trust sends Fund shareholders semi-annual and annual reports, each of which
includes a list of the investment securities held by the Fund as of the end of
the period covered by the report.
CUSTODIAN AND TRANSFER, DIVIDEND
AND RECORDKEEPING AGENT
IFTC, located at 127 West 10th Street, Kansas City, Missouri 64105, serves as
the Fund's custodian. PFPC Inc., a subsidiary of PNC Bank, National Association,
whose principal address is 400 Bellevue Parkway, Wilmington, Delaware 19809,
serves as the Fund's transfer, dividend and recordkeeping agent.
23
<PAGE>
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the
Statement of Additional Information incorporated into this
Prospectus by reference, in connection with the offering made by
this Prospectus and, if given or made, any such information or
representations must not be relied upon as having been authorized by
the Fund or its distributor. This Prospectus does not constitute an
offering by the Fund or by its distributor in any jurisdiction in
which the offering may not lawfully be made.
<TABLE>
<S> <C>
---------------------------------------------------
CONTENTS
---------------------------------------------------
Fee Table 2
---------------------------------------------------
Highlights 3
---------------------------------------------------
Financial Highlights 6
---------------------------------------------------
Investment Objective and Policies 7
---------------------------------------------------
Management of the Fund 15
---------------------------------------------------
Purchase and Redemption of Shares 17
---------------------------------------------------
Determination of Net Asset Value 19
---------------------------------------------------
Dividends, Distributions and Taxes 20
---------------------------------------------------
Performance Information 21
---------------------------------------------------
General Information 22
---------------------------------------------------
Custodian and Transfer, Dividend
and Recordkeeping Agent 23
---------------------------------------------------
</TABLE>
------------------
<TABLE>
<S> <C>
INSTITUTIONAL
ADJUSTABLE
RATE
GOVERNMENT
PORTFOLIO
PROSPECTUS
MARCH 28, 1995
INSTITUTIONAL SHARES
</TABLE>
------------------
<PAGE>
Prospectus March 28, 1995
--------------------------------------------------------------------------------
INSTITUTIONAL ADJUSTABLE RATE GOVERNMENT PORTFOLIO
FINANCIAL INTERMEDIARY SHARES
1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019 (800) 543-3373
Institutional Adjustable Rate Government Portfolio (the 'Fund'), a series of
Institutional Series Trust (the 'Trust'), seeks to provide high current income
while limiting the degree of fluctuation of its net asset value resulting from
movements in interest rates. The Fund seeks to achieve this objective by
investing primarily in adjustable rate securities ('Adjustable Rate
Securities'). The Fund invests only in securities that are issued or guaranteed
by the U.S. Government, its agencies or instrumentalities ('Government
Securities'). Although the Fund's portfolio may be expected to experience low
volatility due to the unique characteristics of Adjustable Rate Securities, the
Fund is not a money market fund that attempts to maintain a constant net asset
value and the Fund's investment portfolio can be expected to experience greater
volatility than that of a money market fund.
Financial Intermediary shares of the Fund are available for purchase by banks
and other financial intermediaries, without imposition of any sales charge,
deferred sales charge or any other transaction fee for the benefit of their
members and customers and bear all fees payable by the Fund to financial
intermediaries for certain services they provide to the beneficial owners of
these shares. Financial Intermediaries may include national banks, federal
savings institutions, federal credit unions, corporations, trust companies,
investment bankers and brokers, insurance companies, investment counsellors,
pension funds, employee benefit plans, law firms, trusts, estates and
educational, religious and charitable organizations. The Fund intends to limit
its investments to those that would be permissible for national banks, federal
savings institutions and federal credit unions.
This Prospectus briefly sets forth certain information about the Fund, including
applicable operating expenses, that prospective investors should know before
investing. Investors are advised to read this Prospectus and retain it for
future reference.
Additional information about the Fund, contained in a Statement of Additional
Information dated the same date as this Prospectus, has been filed with the
Securities and Exchange Commission (the 'SEC') and is available to investors
upon request and without charge by calling or writing the Trust at the telephone
number or address listed above. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
--------------------------------------------------------------------------------
FEE TABLE
The table below shows the costs and expenses that an investor would incur,
either directly or indirectly, as a holder of Financial Intermediary shares of
the Fund, based upon an estimate of the Fund's projected annual operating
expenses. See 'Purchase and Redemption of Shares' and 'General Information.'
Shares of the Fund are sold without imposition of any sales charge, deferred
sales charge or any other transaction fee.
<TABLE>
<CAPTION>
FINANCIAL
ANNUAL FUND OPERATING EXPENSES INTERMEDIARY
(AS A PERCENTAGE OF AVERAGE NET ASSETS)* SHARES
----------------------------------------------------------------------------------------- -------------------------
<S> <C> <C>
Management Fee........................................................................... .45%
Other Expenses (after reimbursements)
Shareholder Servicing Fees.......................................................... .25%
Miscellaneous*...................................................................... .10%
Total Other Expenses (after reimbursements)*................................... .35%
Total Operating Expenses (after reimbursements)*.................................... .80%
</TABLE>
The nature of the services provided to, and the aggregate management fees
paid by, the Fund are described below under 'Management of the Fund.' Expenses
associated with distributing the Fund's shares are borne by the Trust's
distributor out of its own resources and are not borne directly or indirectly by
shareholders. For more complete descriptions of the various costs and expenses,
see 'Management of the Fund.' The percentage of 'Other Expenses' in the table
above has been restated and is based on amounts expected to be incurred for the
current fiscal year; these expenses include fees for shareholder services,
custodial fees, legal and accounting fees, printing costs and registration fees,
the costs of regulatory compliance, a portion of the costs associated with
maintaining the Trust's legal existence and the costs involved in communicating
with the Fund's shareholders.
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical $1,000 investment in Financial Intermediary shares of the Fund
assuming (1) a 5% annual return, (2) payment of annual total operating expenses
set forth in the table above and (3) complete redemption at the end of the
period.
<TABLE>
<CAPTION>
EXAMPLE* 1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Financial Intermediary shares.................................... $8 $26 $44 $ 99
</TABLE>
*The expense table and the example reflect an undertaking by the Trust's
investment adviser and administrator to reduce or otherwise limit the expenses
of the Fund, on an annualized basis, to .80% of the Fund's average daily net
assets in respect of Financial Intermediary shares. In the absence of this
undertaking, which may be terminated at any time 'Miscellaneous Other Expenses,'
'Total Other Expenses' and 'Total Operating Expenses' would be .24%, .49% and
.94%, respectively. See 'Management of the Fund.'
The above example is intended to assist an investor in understanding
various costs and expenses that the investor would bear upon becoming a
shareholder of the Fund. The example should not be considered to be a
representation of past or future expenses. Actual expenses of the Fund may be
greater or less than those shown above. The assumed 5% annual return shown in
the example is hypothetical and should not be considered to be a representation
of past or future annual return; the actual return of the Fund may be greater or
less than the assumed return.
2
<PAGE>
--------------------------------------------------------------------------------
HIGHLIGHTS
<TABLE>
<S> <C> <C>
------------------------------------------------------------------------------------------------------------------
-------------------
The Trust
The Trust is an open-end management investment company. See 'General Information.'
------------------------------------------------------------------------------------------------------------------
-------------------
The Fund
The Fund, the initial series of the Trust, is a diversified fund that seeks to provide high
current income while limiting the degree of fluctuation of its net asset value resulting from
movements in interest rates. See 'Investment Objective and Policies' and 'General Information.'
------------------------------------------------------------------------------------------------------------------
-------------------
Benefits of
Investing
in the
Fund
Mutual funds, such as the Fund, are flexible investment tools that are increasingly
popular -- one of four American households now owns shares of at least one mutual fund -- for
very sound reasons. The Fund offers investors the following important benefits:
Fund Designed For Institutions
Financial Intermediary shares of the Fund are designed primarily for institutions as an
economical and convenient means for the investment of short term funds that they hold or
manage for others. Financial intermediaries may include national banks, federal savings
institutions, federal credit unions, corporations, trust companies, investment bankers and
brokers, insurance companies, investment counsellors, pension funds, employee benefit plans,
law firms, trusts, estates and educational, religious and charitable organizations. See
'Purchase and Redemption of Shares' and 'Management of the Fund -- Financial Intermediaries.'
Permissible Investment for Certain Depository Institutions
The Fund intends to limit its investments to those that would be permissible for national
banks, federal savings institutions and federal credit unions.
Attractive Investment Alternative
The Fund is designed for investors who desire (1) a higher yield than is generally available
from traditional fixed income investments that seek to maintain stable principal values, such
as bank money market deposit accounts, money market mutual funds or certificates of deposit,
(2) less fluctuation in net asset value than longer term fixed income funds and (3) the credit
safety of a portfolio comprised of Government Securities. During a period of declining
interest rates, however, the Fund's total return may be lower than that of a fund investing in
fixed rate longer term instruments such as U.S. Treasury bonds. In addition, the Fund's net
asset value can be expected to experience greater volatility than the value of a bank money
market deposit account, money market mutual fund or certificate of deposit. See 'Investment
Objective and Policies.'
</TABLE>
3
<PAGE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Adjustable Rate Securities
The Fund invests at least 65% of its total assets in Adjustable Rate Securities, all of which
are also Government Securities. Unlike fixed rate securities, Adjustable Rate Securities
adjust their rate of interest to general market interest rate conditions, subject in some
instances to certain limitations typically referred to as 'caps' and 'floors.' Because their
rates of interest adjust at regular intervals, Adjustable Rate Securities can be expected to
experience less volatility of principal than is generally inherent in securities with similar
or longer terms that have fixed rates of interest.
High Quality Securities
The Fund also invests 100% of its assets in Government Securities, many of which are also
Adjustable Rate Securities.
Professional Management
By pooling the monies of many investors, the Fund enables shareholders to obtain the benefits
of full-time professional management and an array of investments that is typically beyond the
means of most investors. The Fund's investment adviser reviews the fundamental characteristics
of far more securities than can a typical investor and may employ portfolio management
techniques that frequently are not used by many institutional investors. Additionally, the
larger denominations in which the Fund invests may result in better overall prices for the
investment. See 'Management of the Fund.'
Transaction Savings
By investing in the Fund, an investor is able to acquire ownership in a portfolio of
securities without paying the higher transaction costs generally associated with a series of
small securities purchases.
Convenience
Fund shareholders are relieved of the administrative and recordkeeping burdens normally
associated with direct ownership of securities. Owners of Financial Intermediary shares
receive various services from financial intermediaries through which they acquire and hold
their shares. See 'Purchase and Redemption of Shares' and 'Management of the Fund -- Financial
Intermediaries.'
Liquidity
The Fund's convenient purchase and redemption procedures provide shareholders with ready
access to their money and reduce the delays frequently involved in the direct purchase and
sale of securities. See 'Purchase and Redemption of Shares.'
</TABLE>
4
<PAGE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Exchange Privilege
Holders of Financial Intermediary shares may exchange all or a portion of their shares for
Financial Intermediary shares of any of the investment portfolios of Liquid Institutional
Reserves to the extent available through the shareholder's financial intermediary. See
'Purchase and Redemption of Shares -- Exchanges.'
------------------------------------------------------------------------------------------------------------------
-------------------
Purchase
and
Redemption
of Shares
Financial Intermediary shares of the Fund may be purchased and redeemed pursuant to policies
and procedures, including initial and subsequent investment minimums, established by the
participating financial intermediary. See 'Purchase and Redemption of Shares.'
------------------------------------------------------------------------------------------------------------------
-------------------
Management
Services
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), a wholly-owned subsidiary of
PaineWebber Incorporated ('PaineWebber'), serves as investment adviser and administrator of the
Fund and receives a fee, accrued daily and paid monthly, at the annual rate of .45% of the
Fund's average daily net assets. Mitchell Hutchins has undertaken to maintain the Fund's total
annual operating expenses at a level not exceeding .80% of the Fund's average daily net assets
annually for Financial Intermediary shares. This undertaking may be terminated at any time. See
'Management of the Fund.'
------------------------------------------------------------------------------------------------------------------
-------------------
Distributor
Mitchell Hutchins serves as the distributor of the Fund's shares.
------------------------------------------------------------------------------------------------------------------
-------------------
Dividends
Substantially all of the Fund's net investment income is declared daily as of 4:00 p.m.,
Eastern time, as a dividend and distributed to shareholders monthly. See 'Dividends,
Distributions and Taxes.'
------------------------------------------------------------------------------------------------------------------
-------------------
Risk Factors
and Special
Considera-
tions
No assurance can be given that the Fund will achieve its investment objective. Changes in
interest rates generally will result in increases or decreases in the market value of the
obligations held by the Fund and, unlike that of a money market fund, the Fund's net asset
value per share will fluctuate. Certain of the instruments held by the Fund, and certain of the
investment techniques that the Fund may employ, might expose the Fund to certain risks, such as
mortgage-backed securities ('MBS') (which include adjustable rate mortgage securities and
collateralized mortgage obligations). MBS are subject to prepayment or early payout risks,
which are affected by changes in prevailing interest rates and numerous economic, geographic,
social and other factors. The Fund's reverse repurchase agreement transactions involve a form
of leverage. The other investment techniques presenting the Fund with risks are lending
portfolio securities, entering into repurchase agreement transactions and purchasing securities
on a when-issued or delayed delivery basis. See 'Investment Objective and Policies -- Risk
Factors and Special Considerations' at page 12.
</TABLE>
5
<PAGE>
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial information for Financial Intermediary shares of the Fund has been
presented in the table below for the period from March 24, 1994 (commencement of
operations) through November 30, 1994. This information is supplemented by the
financial statements and accompanying notes appearing in the Fund's Annual
Report to Shareholders for the fiscal year ended November 30, 1994, which are
incorporated by reference into the Statement of Additional Information. The
financial statements and notes, as well as the information in the table
appearing below, have been audited by Deloitte & Touche LLP, independent
auditors, whose report thereon is included in the Annual Report to Shareholders.
Further information about the performance of the Fund is also included in the
Annual Report to Shareholders, which may be obtained without charge.
<TABLE>
<CAPTION>
MARCH 24, 1994*
TO
NOVEMBER 30, 1994
-----------------
<S> <C>
Net asset value, beginning of period............................................................. $ 12.00
-----------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................................................................ 0.37
Net realized and unrealized losses on investments................................................ (0.19)
-----------------
Total from investment operations................................................................. 0.18
-----------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income............................................................................ (0.37)
-----------------
Net asset value, end of period................................................................... $ 11.81
-----------------
-----------------
Total return (Annualized)#....................................................................... 2.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands)......................................................... $13,131
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses, net of reimbursement................................................................... 0.67%
Expenses, before reimbursement from manager...................................................... 0.94%
Net investment income............................................................................ 4.54%
PORTFOLIO TURNOVER RATE.......................................................................... 170.25%
</TABLE>
* Commencement of Operations.
# Total return is calculated by giving effect to the reinvestment of dividends
on the dividend payment date.
6
<PAGE>
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide high current income while limiting
the degree of fluctuation of its net asset value resulting from movements in
interest rates. No assurance can be given that the Fund will be able to achieve
its investment objective, which may be changed only with the approval of a
majority of the Fund's outstanding voting securities, which is defined in the
Investment Company Act of 1940, as amended (the '1940 Act'), as the lesser of
(1) 67% or more of the shares present at a Fund meeting, if the holders of more
than 50% of the outstanding shares of the Fund are present or represented by
proxy or (2) more than 50% of the outstanding shares of the Fund.
TYPES OF PORTFOLIO INVESTMENTS
The Fund invests exclusively in Government Securities and, under normal market
conditions, invests at least 65% of its total assets in Adjustable Rate
Securities. The Fund may invest up to 35% of its net assets in securities that
are not Adjustable Rate Securities. The Fund may not invest its assets in
securities subject to legal or contractual restrictions on resale and securities
for which no readily available market exists or other illiquid securities,
including repurchase agreements having maturities of more than seven days.
The Fund seeks to achieve low volatility of net asset value by investing in
a diversified portfolio of securities that Mitchell Hutchins believes, in the
aggregate, is resistant to significant fluctuations in market value. In
selecting securities for the Fund, Mitchell Hutchins takes into account various
factors that will affect the volatility of the Fund's assets, such as the time
to the next coupon reset date for the securities, the payment characteristics of
the securities and the dollar weighted average life of the securities.
ADJUSTABLE RATE SECURITIES
Adjustable Rate Securities are instruments that bear interest at rates that
adjust at periodic intervals at a fixed amount (typically referred to as a
'spread') over the market levels of interest rates as reflected in specified
indexes. The Adjustable Rate Securities in which the Fund invests consist of MBS
that are Government Securities. MBS are securities that directly or indirectly
represent an interest in, or are backed by and are payable from, mortgage loans
secured by real property. MBS are issued in structured financings through which
a sponsor securitizes the underlying mortgage loans to liquify the underlying
assets or to achieve certain other financial goals.
The interest paid on Adjustable Rate Securities and, therefore, the current
income earned by the Fund by investing in them, is a function primarily of the
indexes upon which adjustments are based and the applicable spread relating to
the securities. Examples of indexes that may be used are (1) one-, three- and
five-year U.S. Treasury securities adjusted to a constant maturity index, (2)
U.S. Treasury bills of three or six months, (3) the daily Bank Prime Loan Rate
made available by the Federal Reserve Board, (4) the cost of funds of member
institutions for the Federal Home Loan Bank of San Francisco and (5) the offered
quotations to leading banks in the London interbank market for Eurodollar
deposits of a specified duration ('LIBOR').
7
<PAGE>
--------------------------------------------------------------------------------
The interest rates paid on Adjustable Rate Securities are generally
readjusted periodically to an increment over the chosen interest rate index.
Readjustments occur at intervals ranging from one to 60 months. The degree of
volatility in the market value of the Adjustable Rate Securities in the Fund's
portfolio is a function of the frequency of the adjustment period, the
applicable index and the degree of volatility in the applicable index. It is
also a function of the maximum increase or decrease of the interest rate
adjustment on any one adjustment date, in any one year and over the life of the
securities. These maximum increases and decreases are typically referred to as
'caps' and 'floors,' respectively. The Fund does not seek to maintain an overall
average cap or floor, although Mitchell Hutchins considers caps or floors in
selecting Adjustable Rate Securities for the Fund.
The adjustable interest rate feature underlying the Adjustable Rate
Securities in which the Fund invests generally acts as a buffer to reduce sharp
changes in the Fund's net asset value in response to normal interest rate
fluctuations. As the interest rates on the mortgages underlying the Fund's MBS
are reset periodically, yields of portfolio securities gradually align
themselves to reflect changes in market rates and should cause the net asset
value of Financial Intermediary shares to fluctuate less dramatically than they
would if the Fund invested in more traditional long-term, fixed rate debt
securities. During periods of rapidly rising interest rates, however, changes in
the coupon rate may temporarily lag behind changes in the market rate, possibly
resulting in lower net asset values until the coupon resets to market rates.
Thus, investors could suffer some principal loss if they sell their shares of
the Fund before the interest rates on the underlying mortgages are adjusted to
reflect current market rates.
Unlike fixed rate mortgages, which generally decline in value during
periods of rising interest rates, the Fund's adjustable rate MBS allow the Fund
to participate in increases in interest rates through periodic adjustments in
the coupons of the underlying mortgages, resulting in both higher current yields
and lower price fluctuations. In addition, if prepayments of principal are made
on the underlying mortgages during periods of rising interest rates, the Fund
generally is able to reinvest those amounts in securities with a higher current
rate of return. The Fund does not benefit from increases in interest rates to
the extent that interest rates rise to the point at which they cause the current
coupon of Adjustable Rate Securities to exceed the maximum allowable caps. The
Fund's net asset values could vary to the extent that current yields on
Adjustable Rate Securities are different from market yields during interim
periods between the coupon reset dates.
MBS. The Fund limits its investments in MBS to those issued or guaranteed
by the U.S. Government or one of its agencies or instrumentalities, primarily
consisting of securities either guaranteed by the Government National Mortgage
Association ('GNMA') or issued by the Federal National Mortgage Association
('FNMA') or the Federal Home Loan Mortgage Corporation ('FHLMC'). GNMA, FNMA and
FHLMC are agencies or instrumentalities of the U.S. Government and MBS issued or
guaranteed by them are generally considered to be of comparable quality to, or
higher than, privately issued securities rated Aaa by Moody's or AAA by Standard
& Poor's. GNMA MBS are guaranteed by GNMA and consist of pass-through interests
in pools of mortgage loans guaranteed or insured by agencies or
instrumentalities of the United States. FNMA and FHLMC MBS are issued by FNMA
and FHLMC, respectively, and most often represent pass-through interests in
pools of similarly insured or guaranteed mortgage loans or pools of conventional
mortgage loans or participations in the pools. GNMA, FNMA and
8
<PAGE>
--------------------------------------------------------------------------------
FHLMC 'pass-through' MBS are so-named because they represent undivided interests
in the underlying mortgage pools and a proportionate share of both regular
interest and principal payments (net of fees assessed by GNMA, FNMA and FHLMC
and any applicable loan servicing fees), as well as unscheduled early
prepayments on the underlying mortgage pool, are passed through monthly to the
holder of the MBS.
Timely payment of principal and interest on GNMA MBS is guaranteed by GNMA,
a wholly-owned corporate instrumentality of the U.S. Government within the
Department of Housing and Urban Development, which guarantee is backed by the
full faith and credit of the U.S. Government. FNMA, a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act, guarantees timely payment of principal and
interest on FNMA MBS. FHLMC, a corporate instrumentality of the U.S. Government,
guarantees (1) the timely payment of interest on all FHLMC MBS, (2) the ultimate
collection of principal with respect to some FHLMC MBS and (3) the timely
payment of principal with respect to other FHLMC MBS. Neither the obligations of
FNMA nor those of FHLMC are backed by the full faith and credit of the United
States. Nevertheless, because of the relationship of each of these entities to
the United States, MBS issued by them are generally considered to be high
quality securities with minimal credit risk.
Among the specific types of MBS in which the Fund may invest are adjustable
rate mortgages ('ARMs'), which are pass-through mortgage securities
collateralized by mortgages with adjustable rather than fixed rates. ARMs
eligible for inclusion in a mortgage pool generally provide for a fixed initial
mortgage interest rate for either the first three, six, 12, 13, 36 or 60
scheduled monthly payments. Thereafter, the interest rates are subject to
periodic adjustment based on changes to a designated benchmark index.
A second type of MBS in which the Fund may invest are collateralized
mortgage obligations ('CMOs'), which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities, issued by instrumentalities
of the U.S. Government. The Fund will not invest in privately issued CMOs. Such
CMOs are collateralized by GNMA, FNMA or FHLMC certificates (this collateral
being referred to collectively in this Prospectus as 'Mortgage Assets').
Multi-class pass-through securities are equity interests in a trust composed of
Mortgage Assets. Payments of principal of and interest on the Mortgage Assets,
and any reinvestment income on the Mortgage Assets, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multi-class
pass-through securities. The issuer of a series of CMOs may elect to be treated
as a Real Estate Mortgage Investment Conduit.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often 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 the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a CMO series in a number of
different ways. Generally, the purpose of the allocation of the cash flow of a
CMO to the various classes is to obtain a more predictable cash flow to the
individual tranches than exists with the underlying collateral of the CMO. As a
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general rule, the more predictable the cash flow is on a CMO tranche, the lower
the anticipated yield will be on that tranche at the time of issuance relative
to prevailing market yields on MBS.
The specific types of CMOs the Fund may invest in include, but are not
limited to, parallel pay CMOs and Planned Amortization Class CMOs ('PAC Bonds')
issued by instrumentalities of the U.S. Government. 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, like other
CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier. PAC Bonds are parallel pay CMOs
that generally require payments of a specified amount of principal on each
payment date; the required principal payment on PAC Bonds have the highest
priority after interest has been paid to all classes.
OTHER INVESTMENTS OF THE FUND
FIXED RATE MBS. Fixed rate MBS in which the Fund may invest consist
primarily of fixed rate pass-through securities and fixed rate CMOs. Like
Adjustable Rate Securities, these fixed rate securities may only be issued
either by agencies or instrumentalities of the U.S. Government. Similarly, the
basic structures with respect to fixed rate MBS are the same as those described
above with respect to Adjustable Rate Securities. The principal difference
between fixed rate securities and Adjustable Rate Securities is that the
interest rate on the former type of securities is set at a predetermined amount
and does not vary according to changes in any index.
GOVERNMENT SECURITIES. The Fund may invest in, in addition to Government
Securities guaranteed by GNMA and issued by FNMA and FHLMC described above,
other Government Securities such as bills, certificates of indebtedness and
notes and bonds issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Among the Government Securities that may be held by the Fund
are instruments that are supported by the full faith and credit of the U.S.
Government; instruments that are supported by the right of the issuer to borrow
from the U.S. Treasury; and instruments that are supported solely by the credit
of the instrumentality.
MONEY MARKET INSTRUMENTS. Pending the investment of funds resulting from
the sale of Fund shares or the liquidation of portfolio holdings in longer term
securities, in order to shorten the Fund's average portfolio maturity during
temporary defensive periods or in order to have available highly liquid assets
to meet anticipated redemptions of Fund shares or to pay the Fund's operating
expenses, the Fund may invest in short-term Government Securities and repurchase
agreements with respect to those securities.
INVESTMENT TECHNIQUES AND STRATEGIES
The Fund, in seeking to meet its investment objective, is authorized to engage
in any one or more of the specialized investment techniques and strategies
described below:
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. To secure prices or yields
deemed advantageous at a particular time in an effort to reduce interest rate
risk, the Fund may purchase securities on a when-issued or delayed-delivery
basis, in which case delivery of and payment for the securities occurs beyond
the normal settlement period. The Fund enters into when-issued or
delayed-delivery transactions for the purpose of acquiring securities and not
for the purpose of leverage or trading. When-issued securities purchased by the
Fund may include securities
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purchased on a 'when, as and if issued' basis under which the issuance of the
securities depends on the occurrence of a subsequent event, such as approval of
a merger, corporate reorganization or debt restructuring. The Fund will
establish with its custodian, or with a designated sub-custodian, a segregated
account consisting of cash, Government Securities in an amount equal to the
amount of its when-issued or delayed-delivery purchase commitments.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase agreement
transactions with respect to instruments in which the Fund is authorized to
invest. The Fund may engage in repurchase agreement transactions with certain
member banks of the Federal Reserve System and with certain dealers listed on
the Federal Reserve Bank of New York's list of reporting dealers. Under the
terms of a typical repurchase agreement, the Fund would acquire an underlying
debt obligation for a relatively short period (not more than seven days) subject
to an obligation of the seller to repurchase, and the Fund to resell, the
obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. Thus, repurchase agreements are considered to
be collateralized loans. This arrangement results in a fixed rate of return that
is not subject to market fluctuations during the Fund's holding period. The
value of the securities underlying a repurchase agreement of the Fund is
monitored on an ongoing basis by Mitchell Hutchins to ensure that the value is
at least equal at all times to the total amount of the repurchase obligation,
including interest. Mitchell Hutchins also monitors, on an ongoing basis to
evaluate potential risks, the creditworthiness of those banks and dealers with
which the Fund enters into repurchase agreements.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreement transactions with certain member banks of the Federal Reserve System
and with certain dealers listed on the Federal Reserve Bank of New York's list
of reporting dealers. A reverse repurchase agreement, which is considered a
borrowing by the Fund, involves a sale by the Fund of securities that it holds
concurrently with an agreement by the Fund to repurchase the same securities at
an agreed upon price and date. The Fund typically invests the proceeds of a
reverse repurchase agreement in securities in which the Fund is authorized to
invest or repurchase agreements relating to those securities maturing not later
than the expiration of the reverse repurchase agreement. This use of proceeds is
known as leverage. The Fund enters into a reverse repurchase agreement for
leverage purposes only when the interest income to be earned from the investment
of the proceeds is greater than the interest expense of the transaction. The
Fund may also use the proceeds of reverse repurchase agreements to provide
liquidity to meet redemption requests when the sale of the Fund's securities is
considered to be disadvantageous. The Fund will establish a segregated account
with its custodian, or a designated sub-custodian, in which the Fund will
maintain cash or Government Securities equal in value to its obligations with
respect to reverse repurchase agreements.
LENDING PORTFOLIO SECURITIES. In seeking to achieve its investment
objective and to hedge against the risk of interest rate fluctuations, the Fund
may lend securities guaranteed by the United States or by specified agencies of
the United States to well-known and recognized registered brokers or dealers and
banks insured by the Federal Deposit Insurance Corporation ('FDIC'). These
loans, if and when made, may not exceed 33 1/3% of the Fund's assets taken at
value. The Fund's loans of securities will be collateralized by cash, letters of
credit or Government Securities. The cash or instruments collateralizing the
Fund's loans of securities will be maintained at all times in a segregated
account with the Fund's custodian, or with a
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designated sub-custodian, in an amount at least equal to the current market
value of the loaned securities.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental investment restrictions with respect
to the Fund that may not be changed without approval of a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act). Included among those
fundamental restrictions are the following:
1. The Fund will not purchase securities (other than Government
Securities) of any issuer if, as a result of the purchase, more than 5% of
the value of the Fund's total assets would be invested in the securities of
the issuer, except that up to 25% of the value of the Fund's total assets
may be invested without regard to this 5% limitation.
2. The Fund will not purchase more than 10% of the voting securities
of any one issuer, except that this limitation is not applicable to the
Fund's investments in Government Securities, and up to 25% of the value of
the Fund's total assets may be invested without regard to this 10%
limitation.
3. The Fund will not issue senior securities or borrow money, except
that the Fund may borrow from banks for temporary, extraordinary or
emergency purposes and enter into reverse repurchase agreements.
4. The Fund will not lend money to other persons, except through
purchasing debt obligations, entering into repurchase agreements and
lending portfolio securities in an amount not to exceed 33 1/3% of the
value of the Fund's total assets.
5. The Fund will invest no more than 25% of the value of its total
assets in securities of issuers in any one industry, except that this
limitation is not applicable to the Fund's investment in Government
Securities.
Notwithstanding the foregoing investment restrictions, which are imposed
under the 1940 Act and certain state laws, the Fund invests exclusively in
Government Securities, repurchase agreements and reverse repurchase agreements
with respect to those securities and loans of those securities. Certain other
investment restrictions adopted by the Trust with respect to the Fund are
described in the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investing in the Fund involves risks and special considerations, such as those
described below:
INTEREST RATE RISK. The Fund's portfolio is affected by general changes in
interest rates that will result in increases or decreases in the market value of
the obligations held by the Fund. The market value of the obligations in the
Fund's portfolio can be expected to vary inversely to changes in prevailing
interest rates. Investors should also recognize that, in periods of declining
interest rates, the Fund's yield tends to be somewhat higher than prevailing
market rates, and in periods of rising interest rates, the Fund's yield tends to
be somewhat lower. In addition, when interest rates are falling, money received
by the Fund from the continuous sale of its shares normally is invested in
portfolio instruments producing lower yields than the balance of its portfolio,
thereby reducing the Fund's current yield. In periods of rising interest rates,
the opposite result can be expected to occur.
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PREPAYMENT RISK. The types of securities in which the Fund invests have
certain unique attributes that warrant special consideration or that present
risks that may not exist in other types of mutual fund investments. Some of
these risks and special considerations are peculiar to Adjustable Rate
Securities whereas others, most notably the risk of prepayments, pertain to the
characteristics of MBS generally.
Payments of principal of and interest on MBS are made more frequently than
are payments on conventional debt securities. In addition, holders of MBS may
receive unscheduled payments of principal at any time representing prepayments
on the underlying mortgage loans. These prepayments may usually be made by the
related obligor without penalty. Prepayment rates are affected by changes in
prevailing interest rates and numerous other 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. Changes in the rate of prepayments will generally affect the yield to
maturity of the security. Moreover, when the holder of the security attempts to
reinvest prepayments or even the scheduled payments of principal and interest,
it may receive a rate of interest that is higher or lower than the rate on the
MBS originally held. Mortgage foreclosures and principal prepayments on
securities purchased by the Fund at a premium also impose a risk of loss of
principal because the premium may not have been fully amortized at the time the
principal is repaid in full. If MBS are bought at a discount, however, both
scheduled payments of principal and unscheduled prepayments will increase
current and total returns and will accelerate the recognition of income which,
when distributed to shareholders, will be taxable as ordinary income. Mitchell
Hutchins will consider remaining maturities or estimated average lives of MBS in
selecting them for the Fund.
ADJUSTABLE RATE SECURITIES. The interest rate reset features of Adjustable
Rate Securities held by the Fund reduces the effect on the net asset values of
Fund shares caused by changes in market interest rates. The market value of
Adjustable Rate Securities and, therefore, the Fund's net asset value, however,
may vary to the extent that the current interest rates on the securities differs
from market interest rates during periods between interest reset dates. These
variations in value occur inversely to changes in market interest rates. As a
result, if market interest rates rise above the current rate on the securities,
the value of the securities will decrease; conversely, if market interest rates
fall below the current rate on the securities, the value of the securities will
rise. If investors in the Fund sold their shares during periods of rising rates
before an adjustment occurred, those investors may suffer some loss. The longer
the adjustment intervals on Adjustable Rate Securities held by the Fund, the
greater the potential for fluctuations in the Fund's net asset value.
Fund shareholders receive increased income as a result of upward
adjustments of the interest rates on Adjustable Rate Securities held by the Fund
in response to market interest rates. The Fund and its shareholders do not
benefit, however, from increases in market interest rates once those rates rise
to the point at which they cause the rates on the Adjustable Rate Securities to
reach their maximum adjustment rate, annual or lifetime caps. Because of their
interest rate adjustment feature, Adjustable Rate Securities are not an
effective means of 'locking-in' attractive rates for periods in excess of the
adjustment period. In addition, mortgagors on loans underlying MBS with respect
to which the underlying mortgage assets carry no agency or instrumentality
guarantee are often qualified for the loans on the basis of the original payment
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amounts; the mortgagor's income may not be sufficient to enable it to continue
making its loan payments as the payments increase, resulting in a greater
likelihood of default.
Any benefits to the Fund and its shareholders from an increase in the
Fund's net asset values caused by declining market interest rates is reduced by
the potential for increased prepayments and a decline in the interest rates paid
on Adjustable Rate Securities held by the Fund. When market rates decline
significantly, the prepayment rate on Adjustable Rate Securities is likely to
increase as borrowers refinance with fixed rate mortgage loans, thereby
decreasing the capital appreciation potential of Adjustable Rate Securities. As
a result, the Fund should not be viewed as consistent with any objectives of
seeking capital appreciation.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Securities purchased on a
when-issued or delayed-delivery basis may expose the Fund to risk because the
securities may experience fluctuations in value prior to their actual delivery.
The Fund will not accrue income with respect to a when-issued or
delayed-delivery security prior to its stated delivery date. Purchasing
securities on a when-issued or delayed-delivery basis can involve the additional
risk that the yield available in the market when the delivery takes place may be
higher than that obtained in the transaction itself.
REPURCHASE AGREEMENTS. In entering into a repurchase agreement, the Fund
bears a risk of loss in the event that the other party to the transaction
defaults on its obligations and the Fund is delayed or prevented from exercising
its rights to dispose of the underlying securities, including the risk of a
possible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or a
part of the income from the agreement.
REVERSE REPURCHASE AGREEMENTS. A reverse repurchase agreement involves the
risk that the market value of the securities retained by the Fund may decline
below the price of the securities the Fund has sold but is obligated to
repurchase under the agreement. In the event the buyer of securities under a
reverse repurchase agreement files for bankruptcy or becomes insolvent, the
Fund's use of the proceeds of the agreement may be restricted pending a
determination by the party, or its trustee or receiver, whether to enforce the
Fund's obligation to repurchase the securities.
LENDING PORTFOLIO SECURITIES. In lending securities to registered brokers
or dealers and FDIC insured banks, the Fund may be subject to risks, which, like
those associated with other extensions of credit, include possible loss of
rights in the collateral should the borrower fail financially.
PORTFOLIO TURNOVER
The Fund's portfolio is actively managed. The portfolio turnover rate for the
period March 24, 1994 through November 30, 1994 was 170.25%. Portfolio turnover
may vary greatly from year to year and will not be a limiting factor when
Mitchell Hutchins deems portfolio changes appropriate. A higher turnover rate
(100% or more) will involve correspondingly greater transaction costs, which
will be borne directly by the Fund, and may increase the potential for
short-term capital gains. Short-term gains realized from portfolio transactions
are taxable to shareholders as ordinary income. See 'Dividends, Distributions
and Taxes -- Taxes.'
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MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Trust's Board of Trustees, and the day-to-day operations of the Fund are
conducted through or under the direction of officers of the Trust. The Statement
of Additional Information contains general background information regarding each
Trustee and officer of the Trust.
INVESTMENT ADVISER AND ADMINISTRATOR
Mitchell Hutchins, 1285 Avenue of the Americas, New York, New York 10019, serves
as the Fund's investment adviser and administrator. Mitchell Hutchins is a
wholly owned subsidiary of PaineWebber, which in turn is wholly owned by Paine
Webber Group Inc. ('PW Group'), a publicly owned financial services holding
company. Mitchell Hutchins, organized in May 1977, is registered as an
investment adviser under the Investment Advisers Act of 1940 and as a broker-
dealer under the Securities Exchange Act of 1934. As of February 28, 1995,
Mitchell Hutchins or PaineWebber served as investment adviser or sub-adviser to
42 investment companies with an aggregate of 77 separate portfolios having
aggregate assets of over $26.8 billion.
As a result of an asset purchase transaction by and among Kidder, Peabody
Group Inc., its parent, General Electric Company, and PW Group, the investment
advisory services provided to the Fund by Kidder Peabody Asset Management, Inc.
('KPAM'), the Fund's predecessor manager and investment adviser, were assumed,
on an interim basis, by Mitchell Hutchins as of February 13, 1995. After the
interim period, and subject to shareholder approval, which is expected to occur
on or about March 31, 1995, Mitchell Hutchins will serve as the Fund's
investment adviser and administrator. During the interim period and thereafter,
assuming shareholder approval, the Fund has agreed to pay Mitchell Hutchins the
same fee for investment advisory and administrative services that the Fund
agreed to pay KPAM for such services. No assurance can be made that requisite
shareholder approval of these arrangements will be obtained.
As the Fund's investment adviser and administrator, Mitchell Hutchins,
subject to the supervision and direction of the Trust's Board of Trustees, is
generally responsible for furnishing, or causing to be furnished to the Fund,
investment advisory and management services. Included among the specific
services provided by Mitchell Hutchins as administrator are: the maintenance and
furnishing of all required records or reports pertaining to the Fund to the
extent those records or reports are not maintained or furnished by the Fund's
transfer agent, custodian or other agents employed by the Fund; the providing of
general administrative services to the Fund not otherwise provided by the Fund's
transfer agent, custodian or other agents employed by the Fund; and the payment
of reasonable salaries and expenses of those of the Fund's officers and
employees, and the fees and expenses of those members of the Trust's Board of
Trustees, who are directors, officers or employees of Mitchell Hutchins.
As the Fund's investment adviser, Mitchell Hutchins, subject to the
supervision and direction of the Trust's Board of Trustees, manages the Fund's
portfolio in accordance with the investment objective and stated policies of the
Fund, makes investment decisions for the Fund and places purchase and sale
orders for the Fund's portfolio transactions. Mitchell Hutchins also provides
the Fund with investment officers who are authorized by the Board of Trustees to
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execute purchases and sales of securities on behalf of the Fund and employs a
professional staff of portfolio managers who draw upon a variety of sources for
research information for the Fund.
Dennis L. McCauley and Nirmal Singh are jointly responsible for the day-to-day
management of the Fund. Mr. McCauley is a Managing Director and Chief Investment
Officer -- Fixed Income of Mitchell Hutchins responsible for overseeing all
active fixed income investments, including domestic and global taxable and
tax-exempt mutual funds. Prior to joining Mitchell Hutchins in 1994, Mr.
McCauley worked for IBM Corporation where he was Director of Fixed Income
Investments responsible for developing and managing investment strategy for all
fixed income and cash management investments of IBM's pension fund and self-
insured medical funds. Mr. McCauley has also served as Vice President of IBM
Credit Corporation's mutual funds and a member of the Retirement Fund Investment
Committee.
Nirmal Singh is a Vice President of Mitchell Hutchins responsible for
overseeing investments in the mortgage-backed securities section. Prior to
joining Mitchell Hutchins in 1993, Mr. Singh worked for Merrill Lynch Asset
Management where he was a member of the portfolio management team responsible
for several diversified funds, including mortgage-backed securities funds, with
assets totalling $8 billion. Mr. Singh has also held the position of Senior
Portfolio Manager at Nomura Mortgage Funds Management and prior to Nomura, he
worked as a transactions strategist at Shearson Lehman Brothers Inc. and for two
years at the Federal National Mortgage Association.
The Trust pays Mitchell Hutchins for its services as investment adviser and
administrator to the Fund a fee that is accrued daily and paid monthly at the
annual rate of .45% of the Fund's average daily net assets. Mitchell Hutchins
has undertaken to reduce or otherwise limit the expenses of the Fund, on an
annualized basis, to .80% of the Fund's average daily net assets in respect of
Financial Intermediary shares. This undertaking may be terminated by Mitchell
Hutchins at any time in its sole discretion. From time to time, Mitchell
Hutchins in its sole discretion may waive all or a portion of its fee and/or
reimburse all or a portion of the Fund's operating expenses.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by Mitchell Hutchins, investments of the
type the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by Mitchell Hutchins are prepared to
invest in, or desire to dispose of, the same security, available investments or
opportunities for sales are allocated in a manner believed by Mitchell Hutchins
to be equitable to each. In some cases, this procedure may adversely affect the
price paid or received by the Fund or the size of the position obtained or
disposed of by the Fund.
FINANCIAL INTERMEDIARIES
Financial intermediaries, such as banks and savings and loan associations, may
purchase Financial Intermediary shares for the accounts of their customers.
Beneficial owners of Financial Intermediary shares receive certain services
directly from financial intermediaries, bear the service fees described below
and enjoy certain exclusive voting rights on matters relating to these services
and fees. The Trust will enter 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
Financial Intermediary shares in consideration of the
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Trust's payment of .25%, on an annualized basis, of the average daily net asset
value of the Financial Intermediary shares held by the financial intermediary
for the benefit of its customers. These services, which are described in greater
detail in the Statement of Additional Information under 'Management of the
Fund -- Financial Intermediaries,' include: aggregating and processing purchase
and redemption requests from customers and placing net purchase and redemption
orders with PaineWebber; providing customers with a service that invests the
assets of their accounts in Financial Intermediary shares; processing dividend
payments on behalf of customers; providing information periodically to customers
showing their positions in Financial Intermediary shares; arranging for bank
wires; responding to customer inquiries relating to the services performed by
the financial intermediary; providing sub-accounting with respect to Financial
Intermediary shares beneficially owned by customers or the information necessary
for sub-accounting; forwarding shareholder communications from the Fund to
customers, if required by law; and such other similar services as the Trust may
reasonably request from time to time to the extent the financial intermediary is
permitted to do so under federal and state statutes, rules and regulations.
Under the terms of the service agreements, financial intermediaries are required
to provide to their customers a schedule of any additional fees that they may
charge customers in connection with their investments in Financial Intermediary
shares. Financial Intermediary shares will be available for purchase only by
financial intermediaries that have entered into service agreements with the
Trust in connection with their investment. Financial intermediaries providing
services to beneficial owners of Financial Intermediary shares in certain states
may be required to be registered as dealers under the laws of those states.
Should future legislative, judicial or administrative action prohibit or
restrict the activities of banks serving as financial intermediaries in
connection with the provision of support services to their customers, the Trust
might be required to alter or discontinue its arrangements with financial
intermediaries and change its method of operations with respect to Financial
Intermediary shares. It is not anticipated, however, that any change in the
Trust's method of operations would affect the Fund's net asset value per share
with respect to Financial Intermediary shares or result in a financial loss to
any shareholder.
PURCHASE AND REDEMPTION OF SHARES
Mitchell Hutchins is the distributor of the Trust's shares. The Fund's Financial
Intermediary shares are available for purchase by banks and other financial
intermediaries for the benefit of their customers and bear all fees payable by
the Fund to financial intermediaries for certain services they provide to the
beneficial owners of these shares. Financial Intermediary shares must be
purchased, maintained and redeemed pursuant to policies and procedures,
including initial and subsequent investment minimums, established by
participating financial intermediaries. Shareholder inquiries regarding the
Trust may be made through a participating financial intermediary.
Purchase orders for Financial Intermediary shares of the Fund that are
received prior to the close of regular trading on the New York Stock Exchange
(the 'NYSE') on a particular day (currently 4:00 p.m., Eastern time) are priced
according to the net asset value determined on that day. Purchase orders
received after the close of regular trading on the NYSE are priced as of the
time net asset value per share is next determined. See 'Determination of Net
Asset Value' below for a description of the times at which net asset value per
share is determined.
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In order to maximize earnings, the Fund attempts to be invested as
completely as practicable and is normally required to make settlement in Federal
funds for securities purchased. Accordingly, payment for Financial Intermediary
shares is not effective until received in or converted to Federal funds
immediately available to the Trust. The Trust and Mitchell Hutchins each reserve
the right to reject any purchase order for any reason.
Shares are redeemed at the net asset value per share next determined after
Mitchell Hutchins receipt of the redemption order. Payment for redeemed shares
for which a redemption order is received by Mitchell Hutchins before 4:00 p.m.,
Eastern time, is normally made in Federal funds wired to the redeeming
shareholder's financial intermediary on the next business day following the
redemption.
EXCHANGES
Financial Intermediary shares of the Fund may be exchanged for Financial
Intermediary shares of the Money Market Fund, Government Securities Fund and
Treasury Securities Fund, all of which are investment portfolios of Liquid
Institutional Reserves, to the extent available through the shareholder's
financial intermediary, at the net asset value next determined. The exchange
privilege may be modified or terminated in accordance with the rules of the SEC
and is available to shareholders resident in any state in which the fund shares
being acquired legally may be sold.
OTHER MATTERS
The Fund may suspend the right of redemption or postpone the date of payment
upon redemption (as well as suspend or postpone the recording of the transfer of
its shares) for such periods as permitted under the 1940 Act. The Fund may also
redeem shares involuntarily under certain special circumstances described in the
Statement of Additional Information under 'Purchase and Redemption of Shares.'
Financial Intermediary shares are sold and redeemed without charge by the
Fund, although financial intermediaries purchasing or holding shares for their
customer accounts may charge customers for cash management and other services
provided in connection with their accounts including, for instance, account
maintenance fees, compensating balance requirements or fees based on account
transactions, assets or income. Further, the dividends payable to beneficial
owners of Financial Intermediary shares are reduced in respect of fees paid by
the Fund to financial intermediaries through which those shares are purchased
and held. See 'Management of the Fund -- Financial Intermediaries.' A customer
should consider the terms of his or her account with a financial intermediary
before purchasing shares. A financial intermediary purchasing or redeeming
shares on behalf of its customers is responsible for transmitting orders to
PaineWebber in accordance with its customer agreements.
DETERMINATION OF NET ASSET VALUE
Net asset value per Financial Intermediary share is calculated by Investors
Fiduciary Trust Company ('IFTC'), the Fund's custodian, on each day, Monday
through Friday, except on days on which the NYSE is closed. The NYSE is
currently scheduled to be closed on New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
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Christmas, and on the preceding Friday when one of those holidays falls on a
Saturday or on the subsequent Monday when one of those holidays falls on a
Sunday.
Net asset value per Financial Intermediary share of a class is determined
as of the close of regular trading on the NYSE, and is computed by dividing the
value of the Fund's net assets attributable to Financial Intermediary shares by
the total number of Financial Intermediary shares outstanding. Generally, the
Fund's investments are valued at market value or, in the absence of a market
value, at fair value as determined by or under the direction of the Trust's
Board of Trustees.
Investments in Government Securities and other securities traded
over-the-counter, other than short-term investments that mature in 60 days or
less, are valued at the average of the quoted bid and asked prices in the
over-the-counter market. Short-term investments that mature in 60 days or less
are valued on the basis of amortized cost (which involves valuing an investment
at its cost and, thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the effect of fluctuating interest rates on
the market value of the investment) when the Board of Trustees has determined
that amortized cost represents fair value. A security that is primarily traded
on a stock exchange is valued at the last sale price on that exchange or, if no
sales occurred during the day, at the current quoted bid price.
In carrying out the Board's valuation policies, IFTC may consult with an
independent pricing service retained by the Trust. Further information regarding
the Fund's valuation policies is contained in the Statement of Additional
Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income of the Fund are declared daily and
distributed monthly and distributions of net realized capital gains of the Fund,
if any, are declared and distributed at least annually. Unless a shareholder
instructs the Fund that dividends and capital gain distributions should be paid
in cash and credited to the shareholder's Account, dividends and capital gains
distributions are reinvested automatically at net asset value in additional
Financial Intermediary shares. The Fund is subject to a 4% nondeductible excise
tax measured with respect to certain undistributed amounts of net investment
income and capital gains. If necessary to avoid the imposition of this tax, and
if in the best interests of its shareholders, the Fund will declare and pay
dividends of its net investment income and distributions of its net capital
gains more frequently than stated above.
Shares of the Fund begin earning dividends on the day on which the shares
are issued, the date of issuance customarily being the settlement date, which is
the date on which the Fund receives payment for the shares. Shares continue to
earn dividends until the day prior to the settlement date of a redemption.
TAXES
The Trust intends that the Fund continue to qualify each year as a regulated
investment company within the meaning of the Internal Revenue Code of 1986, as
amended. To qualify as a regulated investment company for federal income tax
purposes, the Fund limits its income and
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investments so that (1) less than 30% of its gross income is derived from the
sale or disposition of stocks, other securities and certain financial
instruments (including certain forward contracts) that were held for less than
three months and (2) at the close of each quarter of the taxable year (a) not
more than 25% of the market value of the Fund's total assets is invested in the
securities (other than Government Securities) of a single issuer or of two or
more issuers controlled by the Fund that are engaged in the same or similar
trades or businesses or in related trades or businesses and (b) at least 50% of
the market value of the Fund's total assets is represented by (i) cash and cash
items, (ii) Government Securities and (iii) other securities limited in respect
of any one issuer to an amount not greater in value than 5% of the market value
of the Fund's total assets and to not more than 10% of the outstanding voting
securities of the issuer. The requirements for qualification may cause the Fund
to restrict the degree to which it sells or otherwise disposes of securities and
certain financial instruments held for less than three months. If the Fund
qualifies as a regulated investment company and meets certain distribution
requirements, the Fund will not be subject to federal income tax on its net
investment income and net realized capital gains that it distributes to its
shareholders.
Dividends paid by the Fund out of net investment income and distributions
of net realized short-term capital gains will be taxable to shareholders as
ordinary income, whether received in cash or reinvested in additional Fund
shares. Distributions of net realized long-term capital gains will be taxable to
shareholders as long-term capital gain, regardless of how long shareholders have
held their shares and whether the distributions are received in cash or
reinvested in additional shares. Dividends and distributions paid by the Fund
will generally not qualify for the federal dividends received deduction for
corporate shareholders.
Statements as to the tax status of each Fund shareholder's dividends and
distributions will be mailed annually. Shareholders will also receive, as
appropriate, various written notices regarding the tax status of certain
dividends and distributions that were paid (or that are treated as having been
paid) by the Fund to its shareholders during the preceding calendar year,
including the amount of dividends that represent interest derived from
Government Securities.
Shareholders are urged to consult their tax advisors regarding the
application of federal, state, local and foreign tax laws to their specific
situations before investing in the Fund.
PERFORMANCE INFORMATION
From time to time, the Trust may advertise the 30-day 'yield' of the Fund's
Financial Intremediary shares. The yield refers to the income generated by an
investment in Financial Intermediary shares over the 30-day period identified in
the advertisement and is computed by dividing the net investment income per
share earned by the Financial Intermediary shares during the period by the net
asset value per share of the Financial Intermediary shares on the last day of
the period. This income is 'annualized' by assuming that the amount of income is
generated each month over a one-year period and is compounded semi-annually. The
annualized income is then shown as a percentage of the net asset value.
From time to time, the Trust may advertise the Fund's 'average annual total
return' over various periods of time for Financial Intermediary shares. Total
return figures, which are based on historical earnings and are not intended to
indicate future performance, show the average percentage change in value of an
investment in Financial Intermediary shares from the beginning date of a
measuring period to the end of that period. These figures reflect changes in the
price of
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shares and assume that any income dividends and/or capital gains distributions
made by the Fund during the period were reinvested in Financial Intermediary
shares. Total return figures will be given for the most recent one- and
five-year periods, or for the life of the Fund to the extent that it has not
been in existence for the full length of those periods, and may be given for
other periods as well, such as on a year-by-year basis. The average annual total
return for any one year in a period longer than one year might be greater or
less than the average for the entire period.
The Trust may quote 'aggregate total return' figures with respect to
Financial Intermediary shares for various periods, representing the cumulative
change in value of an investment for the specific period and reflecting changes
in share prices and assuming reinvestment of dividends and distributions.
Aggregate total return may be shown by means of schedules, charts or graphs, and
may indicate subtotals of the various components of total return (that is,
changes in value of initial investment, income dividends and capital gains
distributions). Reflecting compounding over a longer period of time, aggregate
total return data generally will be higher than average annual total return
data.
The Trust may, in addition to quoting the Financial Intermediary shares'
average annual and aggregate total returns, advertise actual annual and
annualized total return performance data for various periods of time. Actual
annual and annualized total returns may be shown by means of schedules, charts
or graphs. Actual annual or annualized total return data generally will be lower
than average annual total return data, which reflects compounding of return.
In reports or other communications to Fund shareholders and in advertising
material, the Trust may compare the Financial Intermediary shares' performance
with the performance of other mutual funds (or analogous classes thereof) as
listed in rankings prepared by Lipper Analytical Services Inc., CDA Investment
Technologies, Inc. or similar investment services that monitor the performance
of mutual funds or as set out in the nationally recognized publications listed
below. The Trust may also include in communications to Fund shareholders
evaluations of the Fund published by nationally recognized ranking services and
by financial publications that are nationally recognized, such as Barron's,
Business Week, Forbes, Institutional Investor, Investor's Daily, Kiplinger's
Personal Finance Magazine, Morningstar Mutual Fund Values, Money, The New York
Times, USA Today and The Wall Street Journal. Any given performance comparison
should not be considered as representative of the Financial Intermediary shares'
performance for any future period.
GENERAL INFORMATION
ORGANIZATION OF THE TRUST
The Trust is registered under the 1940 Act as an open-end management investment
company and was formed as a business trust pursuant to a Declaration of Trust,
as amended from time to time (the 'Declaration'), under the laws of The
Commonwealth of Massachusetts on October 14, 1993. The Fund commenced operations
on March 24, 1994. The Declaration authorizes the Trust's Board of Trustees to
create separate series, and within each series separate classes, of an unlimited
number of shares of beneficial interest, par value $.001 per share. The Fund
offers two separate classes of shares -- Institutional shares and Financial
Intermediary shares. Shares of each class represent equal, pro rata interests in
the Fund and bear expenses and accrue daily dividends in the same manner except
that Institutional shares do not bear fees payable by the Fund to
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financial intermediaries. Mitchell Hutchins has agreed to limit the expenses of
the Fund, on an annualized basis, to .55% of the Fund's average daily net asset
value in respect of Institutional shares. PaineWebber Investment Executives and
other persons remunerated on the basis of sales of shares may receive different
levels of compensation for selling one class of shares over another.
When issued, Fund shares are fully paid and non-assessable. Shares are
freely transferable and have no pre-emptive, subscription or conversion rights.
Each class represents an identical interest in the Fund's investment portfolio.
As a result, the classes have the same rights, privileges and preferences,
except with respect to: (1) the designation of each class; (2) the expenses
allocable exclusively to each class; (3) voting rights on matters exclusively
affecting a single class; and (4) the exchange privilege of each class. The
Board of Trustees does not anticipate that there will be any conflicts among the
interests of the holders of the different classes. The Trustees, on an ongoing
basis, will consider whether any conflict exists and, if so, take appropriate
action. Certain aspects of the shares may be changed, upon notice to Fund
shareholders, to satisfy certain tax regulatory requirements, if the change is
deemed necessary by the Trust's Board of Trustees.
Shareholders of the 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 the aggregate
shares of the Trust may elect all of the Trustees. Generally, shares of the
Trust will be voted on a Trust-wide basis on all matters except those affecting
only the interests of one series, such as the Fund's investment advisory
agreement. In turn, shares of the Fund will be voted on a Fund-wide basis on all
matters except those affecting only the interests of one class, such as the
shareholder servicing arrangements relating to Financial Intermediary shares.
The Trust intends to hold no annual meetings of shareholders for the
purpose of electing Trustees unless, and until such time as, less than a
majority of the Trustees holding office have been elected by shareholders.
Shareholders of record of no less than two-thirds of the outstanding shares of
the Trust may remove a Trustee 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 for the purpose of voting on the removal of a Trustee at the written
request of holders of 10% of the Trust's outstanding shares. Shareholders of the
Fund who satisfy certain criteria will be assisted by the Trust in communicating
with other shareholders in seeking the holding of the meeting.
REPORTS TO SHAREHOLDERS
The Trust sends Fund shareholders semi-annual and annual reports, each of which
includes a list of the investment securities held by the Fund as of the end of
the period covered by the report.
CUSTODIAN AND TRANSFER, DIVIDEND
AND RECORDKEEPING AGENT
IFTC, located at 127 West 10th Street, Kansas City, Missouri 64105, serves as
the Fund's custodian. PFPC Inc., a subsidiary of PNC Bank, National Association,
whose principal address is 400 Bellevue Parkway, Wilmington, Delaware 19809,
serves as the Fund's transfer, dividend and recordkeeping agent.
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No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the
Statement of Additional Information incorporated into this
Prospectus by reference, in connection with the offering made by
this Prospectus and, if given or made, any such information or
representations must not be relied upon as having been authorized by
the Fund or its distributor. This Prospectus does not constitute an
offering by the Fund or by its distributor in any jurisdiction in
which the offering may not lawfully be made.
<TABLE>
<S> <C>
---------------------------------------------------
CONTENTS
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Fee Table 2
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Highlights 3
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Financial Highlights 6
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Investment Objective and Policies 7
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Management of the Fund 15
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Purchase and Redemption of Shares 17
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Determination of Net Asset Value 18
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Dividends, Distributions and Taxes 19
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Performance Information 20
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General Information 21
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Custodian and Transfer, Dividend
and Recordkeeping Agent 22
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</TABLE>
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<TABLE>
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INSTITUTIONAL
ADJUSTABLE
RATE
GOVERNMENT
PORTFOLIO
PROSPECTUS
MARCH 28, 1995
FINANCIAL INTERMEDIARY SHARES
</TABLE>
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<PAGE>
Statement of Additional Information March 28, 1995
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INSTITUTIONAL ADJUSTABLE RATE GOVERNMENT PORTFOLIO
1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019 (800) 543-3373
This Statement of Additional Information supplements the information contained
in the Prospectuses dated March 28, 1995, of Institutional Adjustable Rate
Government Portfolio (the 'Fund'), a series of Institutional Series Trust (the
'Trust'). The Fund seeks to provide high current income while limiting the
degree of fluctuation of its net asset value resulting from movements in
interest rates. The Fund seeks to achieve this objective by investing primarily
in adjustable rate securities ('Adjustable Rate Securities'). The Fund will
invest only in the securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities ('Government Securities').
Although the Fund's portfolio may be expected to experience low volatility due
to the unique characteristics of Adjustable Rate Securities, the Fund is not a
money market fund that attempts to maintain a constant net asset value and the
Fund's investment portfolio can be expected to experience greater volatility
than that of a money market fund.
--------------------------------------------------------------------------------
This Statement of Additional Information should be read together with a
Prospectus of the Fund. A Prospectus may be obtained without charge by writing
or calling the Trust at the address or the telephone number listed above. This
Statement of Additional Information, although not a prospectus, is incorporated
in its entirety by reference into the Prospectus. For ease of reference, the
section headings used in this Statement of Additional Information are identical
to those used in the Prospectus except as noted in parentheses in the Table of
Contents.
<PAGE>
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INVESTMENT OBJECTIVE AND POLICIES
The Prospectus discusses the investment objective of the Fund and the policies
to be employed to achieve that objective. Supplemental information is set out
below concerning certain of the securities and other instruments in which the
Fund may invest, the investment techniques and strategies that the Fund may
utilize and certain risks involved with those investments, techniques and
strategies.
ADJUSTABLE RATE SECURITIES
The Fund invests at least 65% of its total assets in Adjustable Rate Securities,
consisting principally of mortgage-backed securities ('MBS'). The collateral
backing MBS is usually held by an independent bailee, custodian or trustee on
behalf of the holders of the related MBS. The holder of the related MBS (such as
the Fund) will have either an ownership interest or security interest in the
underlying collateral and can exercise its rights to it through the bailee,
custodian or trustee.
INDEXES. The key determinant of the interest rates paid on Adjustable Rate
Securities is the interest rate index chosen (and the spread relating to the
securities). Certain indexes are tied to interest rates paid on specified
securities, such as one-, three- or five-year U.S. Treasury securities, whereas
other indexes are more general. A prominent example of a general type of index
is the cost of funds for member institutions (that is, savings and loan
associations and savings banks) for the Federal Home Loan Bank (the 'FHLB') of
San Francisco (the 'COFI').
A number of factors may affect the COFI and cause it to behave differently
from indexes tied to specific types of securities. The COFI is dependent upon,
among other things, the origination dates and maturities of the member
institutions' liabilities. Consequently, the COFI may not reflect the average
prevailing market interest rates on new liabilities of similar maturities. No
assurance can be given that the COFI will necessarily move in the same direction
as prevailing interest rates since as longer term deposits or borrowings mature
and are renewed at market interest rates the COFI will rise or fall depending
upon the differential between the prior and the new rates on the deposits and
borrowings. In addition, associations in the thrift industry in recent years
have caused and may continue to cause the cost of funds of thrift institutions
to change for reasons unrelated to changes in general interest rate levels. Any
movement in the COFI as compared to other indexes based upon specific interest
rates may be affected by changes instituted by the FHLB of San Francisco in the
method used to calculate the COFI. To the extent that the COFI may reflect
interest changes on a more delayed basis than other indexes, in a period of
rising interest rates any increase may produce a higher yield later than would
be produced by such other indexes. In a period of declining interest rates, the
COFI may remain higher than other market interest rates, which may result in a
higher level of principal prepayments on mortgage loans that adjust in
accordance with the COFI than mortgage or other loans that adjust in accordance
with other indexes. In addition, to the extent that COFI may lag behind other
indexes in a period of rising interest rates, securities based on COFI may have
a lower market value than would result from use of other indexes. In a period of
declining interest rates, securities based on COFI may reflect a higher market
value than would securities based on other indexes.
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GOVERNMENT SECURITIES
Government Securities in which the Fund may invest include debt obligations of
varying maturities issued by the U.S. Treasury or issued or guaranteed by the
following agencies or instrumentalities of the U.S. Government: the Federal
Housing Administration, Farmers Home Administration, Export-Import Bank of the
United States, Government National Mortgage Association ('GNMA'), General
Services Administration, Central Bank for Cooperatives, Federal Farm Credit
Banks, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation
('FHLMC'), Federal National Mortgage Association ('FNMA'), Maritime
Administration, Student Loan Marketing Association and Resolution Trust
Corporation. Direct obligations of the U.S. Treasury include a variety of
securities that differ in their interest rates, maturities and dates of
issuance. Because the U.S. Government is not obligated by law to provide support
to an instrumentality that it sponsors, the Fund invests in obligations issued
by an instrumentality of the U.S. Government only if Mitchell Hutchins Asset
Management Inc. ('Mitchell Hutchins'), the Fund's investment adviser and
administrator, determines that the instrumentality's credit risk does not make
its securities unsuitable for investment by the Fund.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. GNMA is a wholly owned corporate
instrumentality of the U.S. Government within the Department of Housing and
Urban Development. The National Housing Act of 1934, as amended (the 'Housing
Act'), authorizes GNMA to guarantee the timely payment of the principal of and
interest on securities that are based on and backed by a pool of specified
mortgage loans. For these types of securities to qualify for a GNMA guarantee,
the underlying mortgages must be insured by the Federal Housing Administration
under the Housing Act, or Title V of the Housing Act of 1949 ('FHA Loans'), or
be guaranteed by the Veterans' Administration under the Servicemen's
Readjustment Act of 1944, as amended ('VA Loans'), or be pools of other eligible
mortgage loans. The Housing Act provides that the full faith and credit of the
U.S. Government is pledged to the payment of all amounts that may be required to
be paid under any guarantee. In order to meet its obligations under such
guarantee, GNMA is authorized to borrow from the U.S. Treasury with no
limitations as to amount.
GNMA pass-through MBS may represent a proportionate interest in one or more
pools of the following types of mortgage loans, among others: (1) fixed rate
level payment mortgage loans; (2) fixed rate graduated payment mortgage loans;
(3) fixed rate growing equity mortgage loans; (4) fixed rate mortgage loans
secured by manufactured (mobile) homes; (5) mortgage loans on multifamily
residential properties under construction; (6) mortgage loans on completed
multifamily projects; (7) fixed rate mortgage loans as to which escrowed funds
are used to reduce the borrower's monthly payments during the early years of the
mortgage loans ('buydown' mortgage loans); (8) mortgage loans that provide for
adjustments on payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (9) mortgage-backed serial notes.
FEDERAL NATIONAL MORTGAGE ASSOCIATION. FNMA is a federally chartered and
privately owned corporation established under the Federal National Mortgage
Association Charter Act. FNMA was originally organized in 1938 as a U.S.
Government agency to add greater liquidity to the mortgage market. FNMA was
transformed into a private sector corporation by legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing home mortgage
loans from local lenders, thereby providing them with funds for additional
lending.
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FNMA acquires funds to purchase loans from investors that may not ordinarily
invest in mortgage loans directly, thereby expanding the total amount of funds
available for housing.
Each FNMA pass-through MBS represents a proportionate interest in one or
more pools of FHA Loans, VA Loans or conventional mortgage loans (that is,
mortgage loans that are not insured or guaranteed by any governmental agency).
The loans contained in those pools consist of: (1) fixed rate level payment
mortgage loans; (2) fixed rate growing equity mortgage loans; (3) fixed rate
graduated payment mortgage loans; (4) variable rate mortgage loans; (5) other
adjustable rate mortgage loans; and (6) fixed rate mortgage loans secured by
multifamily projects.
FEDERAL HOME LOAN MORTGAGE CORPORATION. FHLMC is a corporate
instrumentality of the U.S. Government established by the Emergency Home Finance
Act of 1970, as amended (the 'FHLMC Act'). FHLMC was organized primarily for the
purpose of increasing the availability of mortgage credit to finance needed
housing. The operations of FHLMC currently consist primarily of the purchase of
first lien, conventional, residential mortgage loans and participation interests
in mortgage loans and the resale of the mortgage loans in the form of
mortgage-backed securities.
The mortgage loans underlying the FHLMC MBS typically consist of fixed rate
or adjustable rate mortgage loans with original terms to maturity of between 10
and 30 years, substantially all of which are secured by first liens on one- to
four-family residential properties or multifamily projects. Each mortgage loan
must meet the applicable standards set out in the FHLMC Act. Mortgage loans
underlying FHLMC MBS may include whole loans, participation interests in whole
loans and undivided interests in whole loans and participations in another FHLMC
MBS.
INVESTMENT TECHNIQUES AND STRATEGIES
LENDING PORTFOLIO SECURITIES. The Fund may lend portfolio securities
guaranteed by the United States or by specified agencies of the United States to
well-known and recognized registered brokers or dealers and Federal Deposit
Insurance Company ('FDIC') insured banks. These loans, if and when made, may not
exceed 33 1/3% of the value of the Fund's total assets. The Fund's loans of
securities will be collateralized by cash, letters of credit or Government
Securities. The cash or instruments collateralizing the Fund's loans of
securities will be maintained at all times in a segregated account with the
Fund's custodian, or with a designated sub-custodian, in an amount at least
equal to the current market value of the loaned securities. From time to time,
the Fund may pay a part of the interest earned from the investment of collateral
received for securities loaned to the borrower and/or a third party that is
unaffiliated with the Fund and is acting as a 'finder.' The Fund will comply
with the following conditions whenever it loans securities: (1) the Fund must
receive at least 100% cash collateral or equivalent securities from the
borrower; (2) the borrower must increase the collateral whenever the market
value of the securities loaned rises above the level of the collateral; (3) the
Fund must be able to terminate the loan at any time; (4) the Fund must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions on the loaned securities, and any increase in market value; (5)
the Fund may pay only reasonable custodian fees in connection with the loan; and
(6) voting rights on the loaned securities may pass to the borrower except that,
if a material
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event adversely affecting the investment in the loaned securities occurs, the
Trust's Board of Trustees must terminate the loan and regain the right to vote
the securities.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. When the Fund engages in
when-issued or delayed-delivery securities transactions, it relies on the other
party to consummate the trade. Failure of the seller to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price considered
to be advantageous.
INVESTMENT RESTRICTIONS
Investment restrictions numbered 1 through 10 below have been adopted by the
Trust as fundamental policies with respect to the Fund. Under the Investment
Company Act of 1940, as amended (the '1940 Act'), a fundamental policy may not
be changed without the vote of a majority of the outstanding voting securities
of the Fund, as defined in the 1940 Act. Investment restrictions numbered 11
through 13 may be changed by a vote of a majority of the Trust's Board of
Trustees at any time.
Under the investment restrictions adopted by the Trust with respect to the
Fund:
1. The Fund will not purchase securities (other than Government
Securities) of any issuer if, as a result of the purchase, more than 5% of
the value of the Fund's total assets would be invested in the securities of
the issuer, except that up to 25% of the value of the Fund's total assets
may be invested without regard to this 5% limitation.
2. The Fund will not purchase more than 10% of the voting securities
of any one issuer, except that this limitation is not applicable to the
Fund's investments in Government Securities, and up to 25% of the value of
the Fund's total assets may be invested without regard to this 10%
limitation.
3. The Fund will not issue senior securities or borrow money, except
that the Fund may borrow from banks for temporary, extraordinary or
emergency purposes and enter into reverse repurchase agreements.
4. The Fund will not lend money to other persons, except through
purchasing debt obligations, entering into repurchase agreements and
lending portfolio securities in an amount not to exceed 33 1/3% of the
value of the Fund's total assets.
5. The Fund will invest no more than 25% of the value of its total
assets in securities of issuers in any one industry, except that this
limitation is not applicable to the Fund's investment in Government
Securities.
6. The Fund will not purchase securities on margin, except that the
Fund may obtain any short-term credits necessary for the clearance of
purchases and sales of securities.
7. The Fund will not purchase or sell real estate or real estate
limited partnership interests, except that the Fund may purchase and sell
securities collateralized by interests in real estate.
8. The Fund will not purchase or sell commodities or commodity
contracts or futures contracts and related options and other similar
contracts.
9. The Fund will not invest in oil, gas or other mineral leases or
exploration or development programs.
10. The Fund will not act as an underwriter of securities, except that
the Fund may acquire securities under circumstances in which, if the
securities were sold, the Fund might be deemed to be an underwriter for
purposes of the Securities Act of 1933.
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11. The Fund will not make investments for the purpose of exercising
control of management.
12. The Fund will not purchase or retain securities of any company if,
to the knowledge of the Fund, any of the Trust's Trustees or officers or
any officer or director of Mitchell Hutchins individually owns more than
.5% of the outstanding securities of the company and together they own
beneficially more than 5% of the securities.
13. The Fund will not invest in warrants (other than warrants acquired
by the Fund as part of a unit or attached to securities at the time of
purchase) if, as a result, the investments (valued at the lower of cost or
market) would exceed 5% of the value of the Fund's net assets of which not
more than 2% of the Fund's net assets may be invested in warrants not
listed on a recognized foreign or domestic stock exchange.
Notwithstanding the foregoing investment restrictions, which are imposed
under the 1940 Act and certain state laws, the Fund invests exclusively in
Government Securities, repurchase agreements and reverse repurchase agreements
with respect to those securities and loans of those securities. The Trust may
make commitments regarding the Fund more restrictive than the restrictions
listed above so as to permit the sale of the Fund's shares in certain states.
Should the Trust determine that a commitment is no longer in the best interests
of the Fund and its shareholders, the Trust will revoke the commitment by
terminating the sale of the Fund's shares in the state involved. The percentage
limitations contained in the restrictions listed above apply at the time of
purchases of securities.
PORTFOLIO TRANSACTIONS AND TURNOVER
Decisions to buy and sell securities for the Fund are made by Mitchell Hutchins,
subject to review by the Trust's Board of Trustees. The Fund's portfolio
securities ordinarily are purchased from and sold to parties acting as either
principal or agent. Newly issued securities ordinarily are purchased directly
from the issuer or from an underwriter; other purchases and sales usually are
placed with those dealers from which it appears that the best price or execution
will be obtained. Usually no brokerage commissions, as such, are paid by the
Fund for purchases and sales undertaken through principal transactions, although
the price paid usually includes an undisclosed compensation to the dealer acting
as agent. The prices paid to underwriters of newly issued securities usually
include a concession paid by the issuer to the underwriter, and purchases of
after-market securities from dealers ordinarily are executed at a price between
the bid and asked price.
In selecting brokers or dealers to execute securities transactions on
behalf of the Fund, Mitchell Hutchins seeks the best overall terms available. In
assessing the best overall terms available for any transaction, Mitchell
Hutchins considers factors that it deems relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis.
Consistent with the Fund's interests and subject to the review of the Board
of Directors, Mitchell Hutchins may cause the Fund to purchase and sell
portfolio securities from and to dealers, or through brokers which provide the
Fund with research, analysis, advice and similar services. In return for such
services, the Fund may pay to those brokers a higher commission than may be
charged by other brokers, provided that Mitchell Hutchins determines in good
faith that such commission is reasonable in terms either of that particular
transaction or of the overall
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responsibility of Mitchell Hutchins to the Fund and its other clients and that
the total commissions paid by the Fund will be reasonable in relation to the
benefits to the Fund over the long term. For purchases or sales with
broker-dealer firms which act as principal, Mitchell Hutchins seeks best
execution. 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 if no weight was attributed to the services 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 which could be
purchased for hard dollars. Mitchell Hutchins may engage in agency transactions
in OTC equity and debt securities in return for research and execution services.
These transactions are entered into only in compliance with procedures ensuring
that the transaction (including commissions) is at least as favorable as it
would have been if effected directly with a market-maker that did not provide
research or execution services. These procedures include Mitchell Hutchins
receiving multiple quotes from dealers before executing the transaction on an
agency basis.
Research services furnished by dealers or brokers with or through which the
Fund effects securities transactions may be used by Mitchell Hutchins in
advising other funds or accounts and, conversely, research services furnished to
Mitchell Hutchins by dealers or brokers in connection with other funds or
accounts Mitchell Hutchins advises may be used by Mitchell Hutchins in advising
the Fund. Information and research received from such brokers or dealers will be
in addition to, and not in lieu of, the services required to be performed by
Mitchell Hutchins under the investment advisory and administration agreement
between the Trust and Mitchell Hutchins relating to the Fund (the 'Advisory
Agreement').
Over-the-counter purchases and sales by the Fund are transacted directly
with principal market makers except in those cases in which better prices and
executions may be obtained elsewhere. The Fund does not purchase any security,
including Government Securities, during the existence of any underwriting or
selling group relating to the security of which Mitchell Hutchins or any of its
affiliates is a member, except to the extent permitted under rules,
interpretations or exemptions of the Securities and Exchange Commission (the
'SEC').
The Fund does not consider portfolio turnover rate a limiting factor in
making investment decisions. The Fund's turnover rate is calculated by dividing
the lesser of purchases or sales of portfolio securities for the year by the
monthly average value of portfolio securities. Securities with remaining
maturities of one year or less on the date of acquisition are excluded from the
calculation.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The names of Trustees and officers of the Trust, together with information as to
their principal business occupations during the last five years, are shown
below. An asterisk appears before the name of each Trustee who is an 'interested
person' of the Trust, as defined in the 1940 Act.
David J. Beaubien, 60, Trustee. Chairman of Yankee Environmental Systems,
Inc., manufacturer of meteorological measuring instruments. Director of IEC,
Inc., manufacturer of electronic assemblies, Belfort Instruments, Inc.,
manufacturer of environmental instruments, and Oriel Corp., a manufacturer of
optical instruments. Prior to January 1991, Senior Vice President
7
<PAGE>
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of EG&G, Inc., a company that makes and provides a variety of scientific and
technically oriented products and services. Mr. Beaubien is a director or
trustee of 12 other investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
William W. Hewitt, Jr., 66, Trustee. Trustee of The Guardian Asset
Allocation Fund, The Guardian Baillie Gifford International Fund, The Guardian
Bond Fund, Inc., The Guardian Cash Fund, Inc., The Guardian Park Ave. Fund, The
Guardian Stock Fund, Inc., The Guardian Cash Management Trust, The Guardian
Investment Quality Bond Fund, The Guardian Tax-Exempt Fund and The Guardian U.S.
Government Trust. Mr. Hewitt is a director or trustee of 12 other investment
companies for which Mitchell Hutchins or PaineWebber serves as investment
adviser.
Thomas R. Jordan, 66, Trustee. Principal of The Dilenschneider Group, Inc.,
a corporate communications and public policy counseling firm. Prior to January
1992, Senior Vice President of Hill & Knowlton, a public relations and public
affairs firm. Prior to April 1991, President of The Jordan Group, a management
consulting and strategies development firm. Mr. Jordan is a director or trustee
of 12 other investment companies for which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Carl W. Schafer, 59, Trustee. President of the Atlantic Foundation, a
charitable foundation supporting mainly oceanographic exploration and research.
Director of International Agritech Resources, Inc., an agribusiness investment
and consulting firm, Ardic Exploration and Development Ltd. and Hidden Lake Gold
Mines Ltd., gold mining companies, Electronic Clearing House, Inc., a financial
transactions processing company, Wainoco Oil Corporation and Bio Techniques
Laboratories Inc., an agricultural biotechnology company. Prior to January 1993,
chairman of the Investment Advisory Committee of the Howard Hughes Medical
Institute and director of Ecova Corporation, a toxic waste treatment firm. Prior
to May 1990, principal of Rockefeller and Company, Inc., manager of investments.
Mr. Schafer is a director or trustee of 12 other investment companies for which
Mitchell Hutchins or PaineWebber serves as investment adviser.
* Frank P.L. Minard, 49, President. Mr. Minard is chairman of Mitchell
Hutchins, chairman of the board of Mitchell Hutchins Institutional Investors
Inc. and a director of PaineWebber Incorporated ('PaineWebber'). Prior to 1993,
Mr. Minard was managing director of Oppenheimer Capital in New York and Director
of Oppenheimer Capital Ltd. in London. Mr. Minard is a director or trustee of 26
other investment companies for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Dennis L. McCauley, 48, Vice President. Mr. McCauley is a Managing Director
and Chief Investment Officer -- Fixed Income of Mitchell Hutchins. Prior to
1994 he was Director of Fixed Income Investments of IBM Corporation.
Mr. McCauley is also a vice president of 8 other investment companies for which
Mitchell Hutchins or PaineWebber serves as investment adviser.
Ann E. Moran, 37, Vice President and Assistant Treasurer. Ms. Moran is a
vice president of Mitchell Hutchins. Ms. Moran is also a vice president and
assistant treasurer of 39 other investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
Dianne E. O'Donnell, 42, Vice President and Secretary. Ms. O'Donnell is a
senior vice president and senior associate general counsel of Mitchell Hutchins.
Ms. O'Donnell is also a vice president and secretary of 39 other investment
companies for which Mitchelll Hutchins or PaineWebber serves as investment
adviser.
8
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Victoria E. Schonfeld, 44, Vice President. Ms. Schonfeld is a managing
director and general counsel of Mitchell Hutchins. From April 1990 to May 1994
she was a partner in the law firm of Arnold & Porter. Prior to April 1990, she
was a partner in the law firm of Shereff, Friedman, Hoffman & Goodman. Ms.
Schonfeld is also a vice president and assistant secretary of 39 other
investment companies for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Paul H. Schubert, 31, Vice President and Assistant Treasurer. Mr. Schubert
is a vice president of Mitchell Hutchins. From August 1992 to August 1994, he
was a vice president at BlackRock Financial Management L.P. Prior to August
1992, he was an audit manager with Ernst & Young LLP. Mr. Schubert is also a
vice president and assistant treasurer of 39 other investment companies for
which Mitchell Hutchins or PaineWebber serves as investment adviser.
Nirmal Singh, 38, Vice President. Mr. Singh is a vice president of Mitchell
Hutchins. Prior to 1993 he was a member of the portfolio management
team at Merrill Lynch Asset Management. Mr. Singh is also a vice president of 2
other investment companies for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Martha J. Slezak, 32, Vice President and Assistant Treasurer. Ms. Slezak is
a vice president of Mitchell Hutchins. From September 1991 to April 1992, she
was a fundraising director for a U.S. Senate campaign. Prior to September 1991,
she was a tax manager with Arthur Andersen & Co. Ms. Slezak is also a vice
president and assistant treasurer of 39 other investment companies for which
Mitchell Hutchins or PaineWebber serves as investment adviser.
Julian F. Sluyters, 34, Vice President and Treasurer. Mr. Sluyters is a
senior vice president and the director of the mutual fund finance division of
Mitchell Hutchins. Prior to 1991, he was an audit senior manager with Ernst &
Young LLP. Mr. Sluyters is also a vice president and treasurer of 39 other
investment companies for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Gregory K. Todd, 38, Vice President and Assistant Secretary. Mr. Todd is a
first vice president and associate general counsel of Mitchell Hutchins. Prior
to 1993, he was a partner with the law firm of Shereff, Friedman, Hoffman &
Goodman. Mr. Todd is also a vice president and assistant secretary of 39 other
investment companies for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
The Trustees and officers of the Trust are directors, trustees and/or
officers of other mutual funds managed by Mitchell Hutchins or PaineWebber. The
addresses of the non-interested Trustees are as follows: Mr. Beaubien, Montague
Industrial Park, 101 Industrial Road, Box 746, Turner Falls, Massachusetts
01376; Mr. Hewitt, P.O. Box 2359, Princeton, New Jersey 08543-2359; Mr. Jordan,
200 Park Avenue, New York, New York 10166; and Mr. Schafer, P.O. Box 1164,
Princeton, New Jersey 08542. The address of Mr. Minard and each of the officers
is 1285 Avenue of the Americas, New York, New York 10019.
By virtue of the responsibilities assumed by Mitchell Hutchins under its
Advisory Agreement with the Trust, the Fund requires no executive employees
other than officers of the Trust, none of whom devotes full time to the affairs
of the Fund. Trustees and officers of the Trust, as a group, owned less than 1%
of the outstanding shares of beneficial interest of the Fund's Financial
Intermediary shares and Institutional shares as of February 1, 1995. The Trust
pays each Trustee who is not an officer, director or employee of Mitchell
Hutchins, or any of its affiliates, an annual retainer of $1,000, and $375 for
each Trustees meeting attended, and reimburses the Trustee for out-of-pocket
expenses associated with attendance at Board meetings.
9
<PAGE>
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The Chairman of the Board's audit committee receives an annual fee of $250. No
officer, director or employee of Mitchell Hutchins, or any of its affiliates,
receives any compensation from the Trust for serving as an officer or Trustee of
the Trust. The amount of compensation paid by the Trust to each Trustee for the
period from March 24, 1994 (commencement of operations) through the fiscal year
ended November 30, 1994, and the aggregate amount of compensation paid to each
such Trustee for the year ended December 31, 1994 by all funds in the former
Kidder Family of Funds for which such person is a Board member were as follows:
<TABLE>
<CAPTION>
(5)
TOTAL
(3) COMPENSATION
(2) PENSION OR (4) FROM TRUST AND 12
(1) AGGREGATE RETIREMENT BENEFITS ESTIMATED ANNUAL OTHER INVESTMENT
NAME OF BOARD COMPENSATION FROM ACCRUED AS PART OF BENEFITS UPON COMPANIES IN THE
MEMBER TRUST* TRUST'S EXPENSES RETIREMENT FUND COMPLEX
----------------------------- ----------------- ------------------- ---------------- -----------------
<S> <C> <C> <C> <C>
David J. Beaubien $ 1,250 None None $80,700
William W. Hewitt, Jr. $ 1,250 None None $74,425
Thomas R. Jordan $ 1,250 None None $83,125
Carl W. Schafer $ 1,250 None None $84,575
</TABLE>
------------
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to approximately $73 for all Trustees as a group.
INVESTMENT ADVISER AND ADMINISTRATOR
Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, bears all expenses in connection with the performance of its services as
the Fund's investment adviser and administrator. Under the Advisory Agreement,
Mitchell Hutchins has agreed that, if in any fiscal year of the Fund, the
aggregate expenses of the Fund (including management fees, but excluding
interest, taxes, brokerage and, with the prior written consent of the necessary
state securities commissions, extraordinary expenses) exceed the expense
limitation of any state having jurisdiction over the Trust, Mitchell Hutchins
will reimburse the Trust for the excess expense. This expense reimbursement
obligation is limited to the amount of Mitchell Hutchins's fees under the
Advisory Agreement. Any expense reimbursement will be estimated, reconciled and
paid on a monthly basis. As of the date of this Statement of Additional
Information, the most restrictive state expense limitation applicable to the
Fund requires reimbursement of expenses in any year that the Fund's expenses
subject to the limitation exceed 2 1/2% of the first $30 million of the average
daily value of the Fund's net assets, 2% of the next $70 million of the average
daily value of the Fund's net assets and 1 1/2% of the remaining average daily
value of the Fund's net assets. For the period from March 24, 1994 (commencement
of operations) through the fiscal year ended November 30, 1994, the Trust paid
(or accrued) to Kidder Peabody Asset Management, Inc. ('KPAM'), the Fund's
predecessor investment adviser and administrator, investment advisory and
administrative fees of $393,116 (of which $171,511 was waived).
10
<PAGE>
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DISTRIBUTOR
Mitchell Hutchins is the distributor of the Fund's shares and is acting on a
best efforts basis.
CUSTODIAN AND TRANSFER, DIVIDEND AND RECORDKEEPING AGENT
Investors Fiduciary Trust Company ('IFTC'), located at 127 West 10th Street,
Kansas City, Missouri 64105, serves as the Fund's custodian. As custodian, IFTC
maintains custody of the Fund's portfolio securities and calculates the Fund's
net asset value per share. Under its custodial agreement with the Trust, IFTC is
authorized to appoint one or more banking institutions as sub-custodians of
assets owned by the Fund. PFPC Inc., a subsidiary of PNC Bank, National
Association, whose principal address is 400 Bellevue Parkway, Wilmington,
Delaware 19809, serves as the Fund's transfer, dividend and recordkeeping agent.
As transfer agent, PFPC Inc. maintains the Trust's official record of Fund
shareholders and, as dividend agent, PFPC Inc. is responsible for crediting
dividends to the accounts of Fund shareholders. As recordkeeping agent, PFPC
Inc. maintains certain accounting and financial records of the Fund.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, located at Two World Financial Center, New York, New York
10281, serves as independent auditors for the Fund. In that capacity, Deloitte &
Touche LLP audits the Fund's annual financial statements.
COUNSEL
Willkie Farr & Gallagher, located at One Citicorp Center, 153 East 53rd Street,
New York, New York 10022, serves as counsel to the Trust.
FINANCIAL INTERMEDIARIES
The Trust will enter into an agreement with each financial intermediary that
purchases Financial Intermediary shares requiring it to provide support services
to its customers who beneficially own Financial Intermediary shares in
consideration of the Trust's payment of .25% (on an annualized basis) of the
average daily net asset value of the Financial Intermediary shares held by the
financial intermediary for the benefit of its customers. These services 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 for 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. For the period from March 24, 1994 (commencement of
operations) through the fiscal year ended November 30, 1994, the Trust paid
11
<PAGE>
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(or accrued) to financial intermediaries shareholder servicing fees of $26,679
(of which $3,942 was reimbursed by KPAM).
The Trust's agreements with financial intermediaries are governed by a
Shareholder Services Plan (the 'Plan') adopted by the Board of Trustees in
connection with the offering of Financial Intermediary shares. Pursuant to the
Plan, the Trustees review, at least quarterly, a written report of the amounts
expended under the Trust's agreements with financial intermediaries and the
purposes for which the expenditures were made. In addition, the Trust's
arrangements with financial intermediaries must be approved annually by a
majority of the Trustees, including a majority of Trustees who are not
'interested persons' of the Trust as defined in the 1940 Act and have no direct
or indirect financial interest in these arrangements (the 'Disinterested
Trustees').
The Board of Trustees may approve the Trust's arrangements with financial
intermediaries if, based on information provided by the Trust's service
contractors, there is a reasonable likelihood that the arrangements will benefit
the Trust and its shareholders by affording the Trust greater flexibility in
connection with the servicing of the accounts of the beneficial owners of its
shares in an efficient manner. Any material amendment to the Fund's arrangements
with financial intermediaries must be approved by a majority of the Board of
Trustees including a majority of the Disinterested Trustees. So long as the
Trust's arrangements with financial intermediaries are in effect, the selection
and nomination of the members of the Board of Trustees who are not 'interested
persons' of the Trust, as defined in the 1940 Act, will be committed to the
discretion of those non-interested Trustees.
Conflict of interest restrictions may apply to a financial intermediary's
receipt of compensation paid by the Fund in connection with the investment of
fiduciary funds in Financial Intermediary shares. Financial intermediaries,
including banks regulated by the Comptroller of the Currency and investment
advisers subject to the jurisdiction of the SEC, the Department of Labor or
state securities commissions, are urged to consult their legal advisors before
investing fiduciary funds in Financial Intermediary shares. See also 'Management
of the Fund -- Financial Intermediaries' in the Fund's Prospectus relating to
Financial Intermediary shares.
PRINCIPAL SHAREHOLDERS
With respect to the Fund, to the knowledge of the Trust, the following
persons owned of record 5% or more of the Fund's Financial Intermediary shares
of beneficial interest on March 20, 1995:
For CCHHED Main Line Health, First Fidelity Bank NA Trustee, c/o
Mitchell Hutchins Asset Management Inc., 1285 Avenue of the Americas, New
York, New York 10019, owned 95.14% of the Financial Intermediary shares.
With respect to the Fund, to the knowledge of the Trust, the following
persons owned of record 5% or more of the Fund's Institutional shares of
beneficial interest on March 20, 1995:
Cyrk International Foundation, Attention David H. Brault, c/o Mitchell
Hutchins Asset Management Inc., 1285 Avenue of the Americas, New York, New
York 10019, owned 5.43% of the outstanding Institutional shares.
Psychiatric Hospitals of Pennsylvania, T/A Eugenia Hospital, c/o
Mitchell Hutchins Asset Management Inc., 1285 Avenue of the Americas, New
York, New York 10019, owned 18.45% of the outstanding Institutional shares.
12
<PAGE>
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Texas Commerce Bank NA, as escrow for Trinity Industries Inc./Platzer,
c/o Mitchell Hutchins Asset Management Inc., 1285 Avenue of the Americas,
New York, New York 10019, owned 11.85% of the outstanding Institutional
shares.
Applied Business Technology Corp., c/o Mitchell Hutchins Asset
Management Inc., 1285 Avenue of the Americas, New York, New York 10019,
owned 9.11% of the outstanding Institutional shares.
Larry & Janet Sanders Trustees, FBO Sanders Trust, c/o Mitchell
Hutchins Asset Management Inc., 1285 Avenue of the Americas, New York, New
York 10019, owned 5.15% of the outstanding Institutional shares.
Cyrk Foundation, Gregory P. Shlopak Trustee, c/o Mitchell Hutchins
Asset Management Inc., 1285 Avenue of the Americas, New York, New York
10019, owned 11.88% of the outstanding Institutional shares.
Lucille Salter Packard Childrens Hospital at Stanford, General Fund
1992, c/o Mitchell Hutchins Asset Management Inc., 1285 Avenue of the
Americas, New York, New York 10019, owned 15.5% of the outstanding
Institutional shares.
Fountain Valley Regional, Hospital Employee Benefit Plan & Trust, c/o
Mitchell Hutchins Asset Management Inc., 1285 Avenue of the Americas, New
York, New York 10019, owned 11.76% of the outstanding Institutional shares.
The Fund is not aware as to whether or to what extent shares owned of
record also are owned beneficially.
PURCHASE AND REDEMPTION OF SHARES
PURCHASE AND REDEMPTION
Information on how to purchase and redeem Fund shares is included in the
Prospectuses.
Under the 1940 Act, the Trust may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange is closed, other than customary weekend and holiday
closings, during which trading on that exchange is restricted or during which
(as determined by the SEC by rule or regulation) an emergency exists as a result
of which disposal or valuation of portfolio securities is not reasonably
practicable or for such other periods as the SEC may permit. The Trust may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions. In addition, the Trust may redeem
shares involuntarily in certain other instances if the Board of Trustees
determines that failure to redeem may have material adverse consequences to the
Trust's shareholders in general. The Trust is obligated to redeem shares solely
in cash up to $250,000 or 1% of a Fund's net asset value, whichever is less, for
any one shareholder within a 90-day period. Any redemption beyond this amount
also will be in cash unless the Board of Trustees determines that conditions
exist that make payment of redemption proceeds wholly in cash unwise or
undesirable. In such a case, the Trust may make payment wholly or partly in
securities or other property (known as 'redemption in kind'), valued in the same
way as the Trust determines net asset value. Redemption in kind is not as liquid
as a cash redemption. Shareholders who receive a redemption in kind may incur
transaction costs if they sell the securities or property and may receive less
than the redemption value of the securities or property upon sale, particularly
where the securities are sold prior to maturity.
13
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Any financial intermediary purchasing shares on behalf of separate accounts
will be required to hold the shares in a single nominee name (a 'Master
Account'). Investors investing in both Institutional shares and Financial
Intermediary shares, must maintain a separate Master Account for each class of
shares. Financial intermediaries may arrange with Mitchell Hutchins, the Trust's
distributor, for certain sub-accounting services (such as purchase, redemption,
and dividend recordkeeping) with respect to holders of Institutional shares if
Mitchell Hutchins is provided with the information necessary for sub-accounting.
Sub-accounting may be established by name or number either when the Master
Account is opened or later.
After a wire transfer has been initiated by Mitchell Hutchins, neither
Mitchell Hutchins nor the Trust assumes any further responsibility for the
performance of financial intermediaries or the shareholder's bank in the
transfer process. If a problem of this nature arises, the shareholder should
deal directly with the financial intermediaries or bank.
DETERMINATION OF NET ASSET VALUE
As noted in the Prospectuses, net asset value will not be calculated on certain
holidays. On those days, securities held by the Fund may nevertheless be
actively traded, and the value of the Fund's shares could be significantly
affected.
EXCHANGE PRIVILEGE
The exchange privilege described in the Prospectuses may be suspended or
postponed if (1) redemption of Fund shares is suspended under Section 22(e) of
the 1940 Act or (2) the Trust temporarily delays or ceases the sale of the
Fund's shares because the Fund is unable to invest amounts effectively in
accordance with its investment objective, policies and restrictions.
Shares of each class may be exchanged for shares of the same class in the
following funds, each of which is a series of Liquid Institutional Reserves, to
the extent shares are offered for sale in the shareholder's state of residence
and, with respect to Financial Intermediary shares, through the shareholder's
financial intermediary. Each of the following funds seeks high current income to
the extent consistent with the preservation of capital and the maintenance of
liquidity through investments in a diversified portfolio of high quality, short
term, U.S. dollars denominated money market instruments.
Government Securities Fund
Money Market Fund
Treasury Securities Fund
TAXES
Set forth below is a summary of certain income tax considerations generally
affecting the Fund and its shareholders. The summary is not intended as a
substitute for individual tax planning, and shareholders are urged to consult
their tax advisors regarding the application of federal, state, local and
foreign tax laws to their specific tax situations.
14
<PAGE>
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TAX STATUS OF THE FUND AND ITS SHAREHOLDERS
The Trust intends for the Fund to continue to qualify each year as a 'regulated
investment company' under the Internal Revenue Code of 1986, as amended. If the
Fund (1) is a regulated investment company and (2) distributes to its
shareholders at least 90% of its net investment income (including for this
purpose its net realized short-term capital gains), the Fund will not be liable
for federal income taxes to the extent that its net investment income and its
net realized long-term and short-term capital gains, if any, are distributed to
its shareholders.
As a general rule, a shareholder's gain or loss on a sale or redemption of
Fund shares is a long-term capital gain or loss if the shareholder has held the
shares for more than one year. The gain or loss is a short-term capital gain or
loss if the shareholder has held the shares for one year or less.
The Fund's net realized long-term capital gains are distributed as
described in the Prospectuses. The distributions ('capital gain dividends'), if
any, are taxable to shareholders as long-term capital gains, regardless of how
long a shareholder has held Fund shares, and are designated as capital gain
dividends in a written notice mailed by the Trust to the shareholders of the
Fund after the close of the Fund's taxable year. If a shareholder receives a
capital gain dividend with respect to any Fund share, and if the share is sold
before it has been held by the shareholder for six months or less, then any loss
on the sale or exchange of the share, to the extent of the capital gain
dividend, is treated as a long-term capital loss. Investors considering buying
Fund shares on or just prior to the record date for a distribution of short- or
long-term capital gains should be aware that the amount of the forthcoming
distribution payment will be a taxable distribution payment. In addition, if
shares of the Fund are purchased within 30 days of redeeming shares at a loss,
the loss will not be deductible and instead will increase the basis of the newly
purchased shares.
If a shareholder fails to furnish the Trust with a correct taxpayer
identification number, fails to report fully dividend or interest income, or
fails to certify that he or she has provided a correct taxpayer identification
number and that he or she is not subject to 'backup withholding,' then the
shareholder may be subject to a 31% 'backup withholding' tax with respect to (1)
taxable dividends and distributions from the Fund and (2) the proceeds of any
redemptions of Fund shares. An individual's taxpayer identification number is
his or her social security number. The backup withholding tax is not an
additional tax and may be credited against a taxpayer's regular federal income
tax liability.
DETERMINATION OF PERFORMANCE
As noted in the Prospectuses, the Trust, from time to time, may quote the Fund's
performance, in terms of the classes' total returns, in reports or other
communications to shareholders or in advertising material. To the extent any
advertisement or sales literature of the Fund describes the expenses or
performance of any class, it will also disclose this information for the other
classes.
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<PAGE>
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The 30-day yield figure described in the Prospectuses is calculated for a
class according to a formula prescribed by the SEC, expressed as follows:
YIELD = 2[( a-b +1)6'pp'-1]
---
cd
<TABLE>
<S> <C> <C> <C>
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the period that were entitled to receive
dividends.
d = the maximum offering price per share on the last day of the period.
</TABLE>
For the purposes of determining the interest earned (variable 'a' in the
formula) on debt obligations that were purchased by the Fund, at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Investors should recognize that in periods of declining interest rates, the
Fund's yield will tend to be somewhat higher than prevailing market rates, and
in periods of rising interest rates will tend to be somewhat lower. In addition,
when interest rates are falling, the inflow of net new money to the Fund from
the continuous sale of its shares will likely be invested in instruments
producing lower yields than the balance of its portfolio of securities, thereby
reducing the current yield of the Fund. In periods of rising interest rates the
opposite can be expected to occur.
The average annual total return figures described in the Prospectuses are
computed for a class according to a formula prescribed by the SEC. The formula
can be expressed as follows:
P(1 + T)n'pp' = ERV
<TABLE>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = Ending Redeemable Value of a hypothetical $1,000 investment made at the beginning of a 1-, 5-
or 10-year period at the end of the 1-, 5- or 10-year period (or fractional portion thereof),
assuming reinvestment of all dividends and distributions.
</TABLE>
The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period.
The aggregate total return figures described in the Prospectuses represent
the cumulative change in the value of an investment in shares of a class for the
specified period and are computed by the following formula:
16
<PAGE>
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<TABLE>
<S> <C>
ERV-P
-------
AGGREGATE TOTAL RETURN = P
</TABLE>
<TABLE>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment of $1,000; and
ERV = Ending Redeemable Value of a hypothetical $1,000 investment made at the beginning of a 1-, 5-
or 10-year period at the end of the 1-, 5- or 10-year period (or fractional portion thereof),
assuming reinvestment of all dividends and distributions.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL
INTERMEDIARY INSTITUTIONAL
SHARES SHARES
------------ -------------
30-DAY YIELD
-----------------------------
<S> <C> <C>
Thirty days ended November 30, 1994.................................................. 4.90% 5.16%
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL
INTERMEDIARY INSTITUTIONAL
SHARES SHARES
------------ -------------
AVERAGE ANNUAL TOTAL RETURN
-----------------------------
<S> <C> <C>
Inception (March 24, 1994) to November 30, 1994...................................... 1.50% 1.65%
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL
INTERMEDIARY INSTITUTIONAL
SHARES SHARES
------------ -------------
ANNUAL TOTAL RETURN
-----------------------------
<S> <C> <C>
Inception (March 24, 1994) to November 30, 1994...................................... 1.50% 1.65%
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL
INTERMEDIARY INSTITUTIONAL
SHARES SHARES
------------ -------------
AGGREGATE TOTAL RETURN
-----------------------------
<S> <C> <C>
Inception (March 24, 1994) to November 30, 1994...................................... 1.50% 1.65%
</TABLE>
Each class' performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of a class' performance for any specified period in the future.
In addition, because each class' performance fluctuates, it may not provide a
basis for comparing an investment in the Fund with certain bank deposits or
other investments that pay a fixed yield for a stated period of time.
17
<PAGE>
--------------------------------------------------------------------------------
GENERAL INFORMATION
The Trust was organized as an unincorporated business trust under the laws of
The Commonwealth of Massachusetts pursuant to a Declaration of Trust dated
October 14, 1993, as amended from time to time (the 'Declaration'). PFPC
maintains a record of each shareholder's ownership of Fund shares.
Massachusetts law provides that shareholders of the Trust could, under
certain circumstances, be held personally liable for the obligations of the
Trust. The Declaration disclaims shareholder liability for acts or obligations
of the Trust, however, and requires that notice of the disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration provides for indemnification from the Trust's
property for all losses and expenses of any shareholder of the Trust held
personally liable for the obligations of the Trust. Thus, the risk of a Fund
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust would be unable to meet its
obligations, a possibility that the Trust's management believes is remote. Upon
payment of any liability incurred by the Trust, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the
Trust. The Trustees intend to conduct the operations of the Trust in such a way
so as to avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Trust.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal year ended November 30,
1994 is a separate document supplied with this Statement of Additional
Information and the financial statements, accompanying notes and report of
independent auditors appearing therein are incorporated by reference in this
Statement of Additional Information.
18
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
<TABLE>
<S> <C>
---------------------------------------------------
CONTENTS
---------------------------------------------------
Investment Objective and Policies 2
---------------------------------------------------
Management of the Fund 7
---------------------------------------------------
Principal Shareholders 12
---------------------------------------------------
Purchase and Redemption of Shares 13
---------------------------------------------------
Determination of Net Asset Value 14
---------------------------------------------------
Exchange Privilege 14
---------------------------------------------------
Taxes
(See in the Prospectuses 'Dividends,
Distributions and Taxes') 14
---------------------------------------------------
Determination of Performance (See in the
Prospectuses 'Performance Information') 15
---------------------------------------------------
General Information 18
---------------------------------------------------
Financial Statements 18
---------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
INSTITUTIONAL
ADJUSTABLE
RATE
GOVERNMENT
PORTFOLIO
</TABLE>
<TABLE>
<S> <C>
STATEMENT OF
ADDITIONAL
INFORMATION
MARCH 28, 1995
INSTITUTIONAL SHARES
FINANCIAL INTERMEDIARY SHARES
</TABLE>
<PAGE>
Institutional Adjustable Rate Government Portfolio
--------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES AS OF NOVEMBER 30, 1994
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (identified cost-$66,900,675) (Note 1a)................................ $65,993,019
Receivables:
Interest................................................................................ $448,033
Paydowns................................................................................ 52,503 500,536
--------
Deferred organization expenses (Note 1d)..................................................... 174,884
Prepaid expenses (Note 1e)................................................................... 36,987
-----------
TOTAL ASSETS....................................................... 66,705,426
-----------
LIABILITIES
Payables:
Shares redeemed......................................................................... 758,802
Due to custodian........................................................................ 650,396
Dividends (Note 1b)..................................................................... 22,399
Due to manager (Note 2)................................................................. 12,124
Service fees (Note 2)................................................................... 2,559 1,446,280
--------
Accrued expenses............................................................................. 110,342
-----------
TOTAL LIABILITIES.................................................. 1,556,622
-----------
NET ASSETS
At value..................................................................................... $65,148,804
-----------
-----------
Net assets were comprised of:
Aggregate paid-in-capital............................................................... $66,887,652
Undistributed net investment income..................................................... --
Net unrealized depreciation on investments.............................................. (907,656)
Accumulated net realized capital losses................................................. (831,192)
-----------
Net assets................................................................................... $65,148,804
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL
INSTITUTIONAL INTERMEDIARY
SHARES SHARES
------------- ------------
<S> <C> <C>
Net assets................................................................................ $ 52,017,580 $ 13,131,224
Outstanding shares of beneficial interest, ($.001 par value).............................. 4,403,724 1,111,688
Net asset values per share................................................................ $11.81 $11.81
</TABLE>
See Notes to Financial Statements.
<PAGE>
Institutional Adjustable Rate Government Portfolio
--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS FOR THE PERIOD MARCH 24, 1994* TO NOVEMBER 30, 1994
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest income (net of $168,272, amortization of premiums and discounts) (Note 1c)...... $4,553,134
EXPENSES
Investment advisory (Note 2)............................................................. $ 393,116
Professional............................................................................. 72,000
Federal and state registration........................................................... 36,591
Prospectus and shareholders' reports..................................................... 27,900
Amortization of organization expenses (Note 1d).......................................... 27,104
Servicing -- Financial Intermediary Shares (Note 2)...................................... 26,679
Pricing.................................................................................. 17,505
Transfer Agent........................................................................... 11,000
Custodian................................................................................ 8,800
Trustees' fees and expenses (Note 2)..................................................... 7,573
Miscellaneous............................................................................ 1,553
-------------
TOTAL EXPENSES................................................. 629,821
Expenses absorbed by manager (Note 2).................................................... (207,288)
-------------
NET EXPENSES................................................... 422,533
----------
NET INVESTMENT INCOME.................................................................... 4,130,601
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTE 3)
Realized loss from investment transactions (excluding short-term securities):
Proceeds from sales................................................................. 162,488,260
Cost of securities sold............................................................. (163,319,452)
-------------
Net realized loss on investment transactions............................................. (831,192)
Change in unrealized depreciation on securities.......................................... (907,656)
----------
NET INCREASE IN NET ASSETS
Resulting from operations................................................................ $2,391,753
----------
----------
</TABLE>
*Commencement of Operations.
See Notes to Financial Statements.
<PAGE>
Institutional Adjustable Rate Government Portfolio
--------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 24, 1994*
TO
NOVEMBER 30, 1994
------------------
<S> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Net investment income....................................................................................... $ 4,130,601
Net realized loss on investment transactions................................................................ (831,192)
Change in unrealized depreciation on securities............................................................. (907,656)
------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............................................. 2,391,753
------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (NOTE 1E)
Institutional Shares........................................................................................ (3,641,953)
Financial Intermediary Shares............................................................................... (488,648)
------------------
TOTAL DISTRIBUTIONS FROM NET INVESTMENT INCOME.................................................... (4,130,601)
------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares............................................................................ 224,767,944
Net asset value of shares issued to shareholders in connection with the reinvestment of dividends........... 2,190,960
Cost of shares redeemed..................................................................................... (160,171,260)
------------------
NET INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS................................ 66,787,644
------------------
TOTAL INCREASE IN NET ASSETS...................................................................... 65,048,796
NET ASSETS
Beginning of period......................................................................................... 100,008
------------------
End of period............................................................................................... $ 65,148,804
------------------
------------------
</TABLE>
*Commencement of Operations.
See Notes to Financial Statements.
<PAGE>
Institutional Adjustable Rate Government Portfolio
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FINANCIAL
INSTITUTIONAL INTERMEDIARY
SHARES SHARES
----------------------------------------
MARCH 24, 1994* MARCH 24, 1994*
TO TO
NOVEMBER 30, 1994 NOVEMBER 30, 1994
----------------------------------------
<S> <C> <C>
Net asset value, beginning of period..................................................... $ 12.00 $ 12.00
--------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................................................................... 0.39 0.37
Net realized and unrealized losses on investments........................................ (0.19) (0.19)
--------- ---------
Total from investment operations......................................................... 0.20 0.18
--------- ---------
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 1E)
Net investment income.................................................................... (0.39) (0.37)
--------- ---------
Net asset value, end of period........................................................... $ 11.81 $ 11.81
--------- ---------
--------- ---------
Total return (Annualized)#............................................................... 2.39% 2.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands)................................................. $ 52,018 $ 13,131
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses, excluding distribution fees, net of reimbursement.............................. 0.46% 0.46%
Expenses, including distribution fees, net of reimbursement.............................. 0.46% 0.67%
Expenses, before reimbursement from manager.............................................. 0.69% 0.94%
Net investment income.................................................................... 4.75% 4.54%
PORTFOLIO TURNOVER RATE.................................................................. 170.25% 170.25%
</TABLE>
* Commencement of Operations.
# Total return does not reflect the effects of a sales charge, and is calculated
by giving effect to the reinvestment of dividends on the dividend payment
date.
See Notes to Financial Statements.
<PAGE>
Institutional Adjustable Rate Government Portfolio
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. The Fund is a series of Institutional Series Trust (the 'Trust') which is
registered under the Investment Company Act of 1940 as a diversified, open-end
management company. Currently the Fund is the only series offered by the Trust.
The Fund commenced operations on March 24, 1994. The Fund offers investors the
choice of investing in two separate classes of shares representing equal,
pro-rata interests in its investment portfolio -- 'Institutional' shares and
'Financial Intermediary' shares. Financial Intermediary shares are identical in
all respects to Institutional shares except that beneficial owners of Financial
Intermediary shares receive certain services directly from financial
intermediaries, bear certain service fees and enjoy certain exclusive voting
rights on matters relating to these services and fees. The following is a
summary of significant accounting policies consistently followed by the Fund.
(a) Generally, the Fund's investments are valued at market value or, in the
absence of a market value, at fair value as determined by or under the direction
of the Trustees. Investments in Government Securities and other securities
traded over-the-counter, other than short-term investments that mature in 60
days or less, are valued at the average of the quoted bid and asked prices in
the over-the-counter market. Short-term investments that mature in 60 days or
less are valued on the basis of amortized cost when the Trustees have determined
that amortized cost represents fair value. A security that is primarily traded
on a stock exchange is valued at the last sale price on that exchange or, if no
sales occurred during the day, at the quoted bid price. In carrying out the
Trustees' valuation policies, the Fund may consult with an independent pricing
service.
(b) It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
substantially all of its taxable income to its shareholders. Distributions, for
purposes of maintaining regulated investment company status, are recognized on a
Fund level, rather than a class level, under the requirements of the Internal
Revenue Code. Therefore, no Federal income tax provision is required.
(c) Security transactions are recorded on a trade date basis. Interest income
is earned from settlement date and is recognized on an accrual basis.
Distributions to shareholders are recorded on the ex-dividend dates. The Fund
amortizes premium and accretes discount using the interest method. Realized
gains and losses on security transactions are determined on the identified cost
basis.
(d) Prepaid registration fees are charged to income as the related shares are
issued. Organization costs are being amortized evenly over a sixty month period.
(e) Income and Fund level expenses are allocated to each class on a pro-rata
basis based upon each class' daily settled net assets. Class specific expenses
are charged directly to each class. Dividends from net investment income are
calculated daily based upon the respective classes net investment income.
Distributions from net realized gains are allocated based upon the outstanding
shares of each class.
The Fund distributes monthly substantially all its net investment income. Net
long-term realized gains, if any, will be distributed annually. At November 30,
1994, the Fund had accumulated net realized capital losses of $831,192 for book
purposes.
2. The Fund has entered into a Management and Investment Advisory Agreement with
Kidder Peabody Asset Management, Inc. ('KPAM'), a wholly-owned subsidiary of
Kidder, Peabody & Co. Incorporated ('KP'). General Electric Capital Services,
Inc., a wholly-owned subsidiary of General Electric Company, has a 100% interest
in Kidder, Peabody Group Inc., the parent company of KP. KPAM is responsible for
the management of the Fund's portfolio and provides the necessary personnel,
facilities, equipment, and other services necessary to the operations of the
Fund. Fees paid by the Fund for such services are payable monthly, calculated
and accrued daily by applying an annual rate of .45 of 1% to the net assets of
the Fund as determined as of the close of business each day. Total annual
expenses of the Fund, exclusive of taxes, interest, all brokers' commissions and
other normal charges incidental to the purchase and sale of portfolio
securities, but including fees paid to KPAM, are not expected to exceed the
limits prescribed by any state in which the Fund's shares are offered for sale,
and KPAM will reimburse the Fund for any expenses in excess of such limits. No
expense reimbursement was required for the period ended November 30, 1994,
however, KPAM voluntarily reimbursed the Fund for a portion of its expenses.
KP is the exclusive distributor of the Fund's shares. Its services include
payment of sales commissions to registered representatives and various other
promotional and
<PAGE>
Institutional Adjustable Rate Government Portfolio
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
sales-related expenses. KP receives monthly, from the Financial Intermediary
shares, service fees which are calculated and accrued daily.
Certain officers and/or Trustees of the Fund are officers and/or directors of
KPAM. Each Trustee who is not an 'affiliated person' receives an annual fee of
$1,000 and an attendance fee of $375 per meeting.
3. Purchases and sales of securities, excluding short-term securities and
maturities, for the period ended November 30, 1994 were $230,238,527 and
$162,488,260, respectively. As of November 30, 1994 net unrealized depreciation
on investments, based on cost for Federal income tax purposes, aggregated
$907,656, all of which related to depreciated securities. The aggregate cost of
securities at November 30, 1994, for book and Federal income tax purposes, was
$66,900,675.
4. The Declaration of Trust of the Fund permits the Trustees to issue an
unlimited number of shares of beneficial interest, par value $.001 per share.
Transactions totaling $224,767,944 from net proceeds from sale of shares,
$160,171,260 representing cost of shares redeemed and $2,190,960 reinvestment of
dividends for the period ended November 30, 1994 as follows for each class:
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES SHARES AMOUNT
-----------------------------------------------------------
<S> <C> <C>
For the period March 24, 1994*
to November 30, 1994:
Shares sold................... 16,853,030 $202,045,773
Shares issued to shareholders
in connection with the
reinvestment of dividends... 175,059 2,094,308
Shares redeemed............... (12,624,365) (150,714,269)
----------------------------
NET INCREASE............. 4,403,724 $ 53,425,812
----------------------------
----------------------------
FINANCIAL INTERMEDIARY SHARES SHARES AMOUNT
-----------------------------------------------------------
For the period March 24, 1994*
to November 30, 1994:
Shares sold................... 1,895,496 $ 22,722,171
Shares issued to shareholders
in connection with the
reinvestment of dividends... 8,105 96,652
Shares redeemed............... (791,913) (9,456,991)
----------------------------
NET INCREASE............. 1,111,688 $ 13,361,832
----------------------------
----------------------------
</TABLE>
5. The Fund takes possession of securities under repurchase agreements before
releasing any money to the counterparty under such agreement. Eligible
collateral for repurchase agreement transactions are the instruments that the
Fund is allowed to invest in, as stated in the Prospectus. The Fund attempts to
attain a short maturity (2 years or less), although that is not always
available. The value of the collateral must be a minimum of 102% of the market
value of the securities being loaned, allowing for minor variations arising from
marking to market of such collateral. If the issuer defaults, or if bankruptcy
or regulatory proceedings are commenced with respect to the issuer, the
realization of the proceeds may be delayed or limited. The shares of the Fund
are not guaranteed by the U.S. Government.
6. Under an agreement dated as of October 17, 1994, General Electric Company has
agreed to sell to PaineWebber Group, Inc. certain assets of Kidder Group and its
subsidiaries, including certain assets of Kidder and KPAM. The consummation of
this transaction, which is subject to a number of conditions and cannot be
assured, will result in the deemed assignment and automatic termination of the
agreements pursuant to which Kidder serves as the principal underwriter of the
Fund's shares and KPAM serves as the Fund's manager and investment adviser.
Continuation of the Fund's relationship with Kidder and KPAM or their successors
following the consummation of the transaction will require approval of the
Trustees and the separate approval of the majority of the Trustees who are not
'interested persons' of the Fund within the meaning of the Act. In addition,
continuation of the Fund's management arrangements will require approval of a
'majority of the outstanding voting securities' of the Fund, as defined in the
Act. No assurance can be given that any of the foregoing required approvals will
be obtained and, if they are not, the Trustees will take such action as it
determines to be appropriate and in the best interests of the Fund and its
shareholders.
*Commencement of Operations.
<PAGE>
Institutional Adjustable Rate Government Portfolio
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
--------------------------------------------------------------------------------
The Trustees and Shareholders,
Institutional Adjustable Rate Government Portfolio
of Institutional Series Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Institutional Adjustable Rate Government
Portfolio of Institutional Series Trust (the 'Fund') as of November 30, 1994,
and the related statement of operations, changes in net assets and the financial
highlights for the period from March 24, 1994 (commencement of operations) to
November 30, 1994. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of November 30, 1994 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Institutional
Adjustable Rate Government Portfolio of Institutional Series Trust as of
November 30, 1994, the results of its operations, the changes in its net assets
and the financial highlights for the period presented in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
December 30, 1994
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Included in Part A:
Financial Highlights for Financial Intermediary shares of the Fund
for the period from March 24, 1994 (commencement of operations) through
November 30, 1994.
Financial Highlights for Institutional shares of the Fund for the
period from March 24, 1994 (commencement of operations) through November
30, 1994.
Included through incorporation by reference in Part B and filed with
the Annual Report to Shareholders with the Securities and Exchange
Commission on or about January 30, 1995 [File No. 811-8080], and filed
herewith as an attachment:
Schedule of Investments as of November 30, 1994.
Statement of Assets and Liabilities as of November 30, 1994.
Statement of Operations from March 24, 1994 (commencement of
operations) through November 30, 1994.
Statement of Changes in Net Assets from March 24, 1994
(commencement of operations) to November 30, 1994.
Financial Highlights for the period from March 24, 1994
(commencement of operations) to November 30, 1994.
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- -----------------------------------------------------------------------------------------------------------
<S> <C>
1 -- Declaration of Trust*
2 -- By-Laws*
3 -- Inapplicable
4 -- Forms of certificates for shares of beneficial interest*
5 -- Form of Investment Advisory and Administration Agreement**
6 -- Form of Distribution Agreement**
7 -- Inapplicable
8 -- Form of Custody Contract with Investors Fiduciary Trust Company*
9 -- Form of Transfer Agency Agreement with PFPC Inc.**
10 -- Opinion of Willkie Farr & Gallagher, including consent*
11 -- Consent of Independent Auditors
12 -- Inapplicable
13 -- Form of Purchase Agreement*
14 -- Inapplicable
15(a) -- Form of Shareholder Services Plan**
15(b) -- Form of Shareholder Service Agreement**
16 -- The schedule for computation of each performance quotation provided in the Registration Statement in
response to Item 22.*
</TABLE>
------------
* Previously filed
**To be supplied by amendment
C-1
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
No person is controlled by or under common control with the Registrant.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF RECORD
TITLE OF CLASS HOLDERS AS OF MARCH 20, 1995
-------------------------------------- -------------------------------
<S> <C>
Shares representing beneficial
interests, par value $.001 per
share:
Institutional shares 14
Financial Intermediary shares 2
</TABLE>
ITEM 27. INDEMNIFICATION
Reference is made to Article IV of Registrant's Declaration of Trust filed
as Exhibit 1 to this Registration Statement. Insofar as indemnification for
liability arising under the Securities Act of 1933, as amended (the 'Securities
Act'), may be permitted for Trustees, officers and controlling persons of
Registrant pursuant to provisions of Registrant's Declaration of Trust, or
otherwise, Registrant has been advised that, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by Registrant of expenses incurred or paid by a Trustee, officer, or
controlling person of Registrant in the successful defense of any action, suit
or proceeding) is asserted by such Trustee, officer or controlling person in
connection with the securities being registered, 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 Securities
Act and will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), a Delaware
corporation, is a registered investment adviser and is a wholly owned subsidiary
of PaineWebber Inc. ('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 filed on August 22, 1994 with the
Securities and Exchange Commission (registration number 801-13219) and is
incorporated herein by reference.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Mitchell Hutchins serves as principal underwriter and/or investment
adviser for the following investment companies:
All-American Term Trust Inc.
Global Income Plus Fund, Inc.
Institutional Series Trust
Mitchell Hutchins/Kidder, Peabody Equity Income Fund, Inc.
Mitchell Hutchins/Kidder, Peabody Government Income Fund, Inc.
Mitchell Hutchins/Kidder, Peabody Investment Trust
Mitchell Hutchins/Kidder, Peabody Investment Trust II
Mitchell Hutchins/Kidder, Peabody Investment Trust III
PaineWebber America Fund
PaineWebber Atlas Fund
PaineWebber Investment Series
PaineWebber Managed Assets Trust
PaineWebber Managed Investments Trust
PaineWebber Master Series, Inc.
C-2
<PAGE>
PaineWebber Municipal Series
PaineWebber Mutual Fund Trust
PaineWebber Olympus Fund
PaineWebber Premier High Income Trust Inc.
PaineWebber Premier Insured Municipal Income Fund Inc.
PaineWebber Premier Tax-Free Income Fund Inc.
PaineWebber Regional Financial Growth Fund Inc.
PaineWebber Securities Trust
PaineWebber Series Trust
Strategic Global Income Fund, Inc.
Triple A and Government Series -- 1995, Inc.
Triple A and Government Series -- 1997, Inc.
2002 Target Term Trust Inc.
Global High Income Dollar Fund Inc.
Global Small Cap Fund Inc.
(b) Mitchell Hutchins is the Registrant's principal underwriter.
PaineWebber acts as exclusive dealer of the Registrant's shares. The directors
and officers of Mitchell Hutchins, their principal business addresses, and their
positions and offices with Mitchell Hutchins are identified in its Form ADV
filed August 22, 1994 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 filed March 31, 1994 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:
<TABLE>
<CAPTION>
POSITION AND OFFICES WITH
NAME AND PRINCIPAL BUSINESS ADDRESS POSITION WITH REGISTRANT UNDERWRITER OR EXCLUSIVE DEALER
------------------------------------- -------------------------------- -----------------------------------------
<S> <C> <C>
Frank P.L. Minard President Director and Chairman of Mitchell
1285 Avenue of the Americas Hutchins
New York, New York 10019
Teresa M. Boyle Vice President First Vice President and
1285 Avenue of the Americas Manager -- Advisory Administration of
New York, New York 10019 Mitchell Hutchins
Dennis L. McCauley Vice President Managing Director and Chief Investment
1285 Avenue of the Americas Officer -- Fixed Income of Mitchell
New York, New York 10019 Hutchins
Ann E. Moran Vice President and Assistant Vice President of Mitchell Hutchins
1285 Avenue of the Americas Treasurer
New York, New York 10019
Dianne E. O'Donnell Vice President and Secretary Senior Vice President and Senior
1285 Avenue of the Americas Associate General Counsel of Mitchell
New York, New York 10019 Hutchins
Victoria E. Schonfeld Vice President Managing Director and General Counsel of
1285 Avenue of the Americas Mitchell Hutchins
New York, New York 10019
Paul H. Schubert Vice President and Assistant Vice President of Mitchell Hutchins
1285 Avenue of the Americas Treasurer
New York, New York 10019
Nirmal Singh Vice President Vice President of Mitchell Hutchins
1285 Avenue of the Americas
New York, New York 10019
Martha J. Slezak Vice President and Assistant Vice President of Mitchell Hutchins
1285 Avenue of the Americas Treasurer
New York, New York 10019
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
POSITION AND OFFICES WITH
NAME AND PRINCIPAL BUSINESS ADDRESS POSITION WITH REGISTRANT UNDERWRITER OR EXCLUSIVE DEALER
------------------------------------- -------------------------------- -----------------------------------------
<S> <C> <C>
Julian F. Sluyters Vice President and Treasurer Senior Vice President and Director of
1285 Avenue of the Americas Mutual Fund Finance Division of
New York, New York 10019 Mitchell Hutchins
Gregory K. Todd Vice President and Assistant First Vice President and Associate
1285 Avenue of the Americas Secretary General Counsel of Mitchell Hutchins
New York, New York 10019
</TABLE>
(c) None.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940, as
amended (the '1940 Act'), and the rules thereunder, are maintained at the
offices of: PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809,
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, and the Fund, 1285 Avenue of the Americas, New York, New York 10019.
ITEM 31. MANAGEMENT SERVICES
Inapplicable.
ITEM 32. UNDERTAKINGS
Registrant undertakes to call a meeting of its shareholders for the purpose
of voting upon the question of removal of a trustee or trustees of Registrant
when requested in writing to do so by the holders of at least 10% of
Registrant's outstanding shares and, in connection with the meeting, to comply
with the provisions of Section 16(c) of the 1940 Act relating to communications
with the shareholders of certain common-law trusts.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant has duly caused
this Post-Effective Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in this City of New York,
and State of New York, on the 28th day of March, 1995.
INSTITUTIONAL SERIES TRUST
By: /s/ FRANK P.L. MINARD
...................................
FRANK P.L. MINARD,
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment to the Registrant's Registration Statement on Form
N-1A 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/ FRANK P.L. MINARD President (Chief Executive Officer) March 28, 1995
........................................
FRANK P.L. MINARD
/s/ JULIAN F. SLUYTERS Vice President and Treasurer (Chief Financial March 28, 1995
........................................ and Accounting Officer)
JULIAN F. SLUYTERS
* Trustee March 28, 1995
........................................
DAVID J. BEAUBIEN
* Trustee March 28, 1995
........................................
WILLIAM W. HEWITT, JR.
* Trustee March 28, 1995
........................................
THOMAS R. JORDAN
* Trustee March 28, 1995
........................................
CARL W. SCHAFER
*By: /s/ DIANNE E. O'DONNELL
........................................
DIANNE E. O'DONNELL
ATTORNEY-IN-FACT
</TABLE>
C-5
<PAGE>
POWER OF ATTORNEY
I, Thomas R. Jordan, Trustee of PaineWebber/Kidder, Peabody California Tax
Exempt Money Fund, PaineWebber/Kidder, Peabody Premium Account Fund,
PaineWebber/Kidder, Peabody Municipal Money Market Series, Mitchell
Hutchins/Kidder, Peabody Investment Trust, Mitchell Hutchins/Kidder, Peabody
Investment Trust II, Mitchell Hutchins/Kidder, Peabody Investment Trust III,
Institutional Series Trust, and Liquid Institutional Reserves (collectively, the
'Funds'), hereby constitute and appoint Victoria E. Schonfeld, Dianne E.
O'Donnell, Gregory K. Todd and Scott Griff, and each of them singly, my true and
lawful attorneys, with full power to them to sign for me, and in my capacity as
Trustee for each of the Funds, any and all amendments to each of the particular
registration statements of the Funds, and all instruments necessary or desirable
in connection therewith, filed with the Securities and Exchange Commission,
hereby ratifying and confirming my signature as it may be signed by said
attorneys to any and all amendments to said registration statements.
Pursuant to the requirements of the Securities Act of 1933, this instrument
has been signed below by the following in the capacity and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----------------------------------------- --------------------------------------------------- ---------------
<S> <C> <C>
/s/ THOMAS R. JORDAN Trustee March 8, 1995
........................................
THOMAS R. JORDAN
</TABLE>
<PAGE>
POWER OF ATTORNEY
I, David J. Beaubien, Trustee of PaineWebber/Kidder, Peabody California Tax
Exempt Money Fund, PaineWebber/Kidder, Peabody Premium Account Fund,
PaineWebber/Kidder, Peabody Municipal Money Market Series, Mitchell
Hutchins/Kidder, Peabody Investment Trust, Mitchell Hutchins/Kidder, Peabody
Investment Trust II, Mitchell Hutchins/Kidder, Peabody Investment Trust III,
Institutional Series Trust, and Liquid Institutional Reserves (collectively, the
'Funds'), hereby constitute and appoint Victoria E. Schonfeld, Dianne E.
O'Donnell, Gregory K. Todd and Scott Griff, and each of them singly, my true and
lawful attorneys, with full power to them to sign for me, and in my capacity as
Trustee for each of the Funds, any and all amendments to each of the particular
registration statements of the Funds, and all instruments necessary or desirable
in connection therewith, filed with the Securities and Exchange Commission,
hereby ratifying and confirming my signature as it may be signed by said
attorneys to any and all amendments to said registration statements.
Pursuant to the requirements of the Securities Act of 1933, this instrument
has been signed below by the following in the capacity and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----------------------------------------- --------------------------------------------------- ---------------
<S> <C> <C>
/s/ DAVID J. BEAUBIEN Trustee March 8, 1995
........................................
DAVID J. BEAUBIEN
</TABLE>
<PAGE>
POWER OF ATTORNEY
I, William W. Hewitt, Jr., Trustee of PaineWebber/Kidder, Peabody
California Tax Exempt Money Fund, PaineWebber/Kidder, Peabody Premium Account
Fund, PaineWebber/Kidder, Peabody Municipal Money Market Series, Mitchell
Hutchins/Kidder, Peabody Investment Trust, Mitchell Hutchins/Kidder, Peabody
Investment Trust II, Mitchell Hutchins/Kidder, Peabody Investment Trust III,
Institutional Series Trust, and Liquid Institutional Reserves (collectively, the
'Funds'), hereby constitute and appoint Victoria E. Schonfeld, Dianne E.
O'Donnell, Gregory K. Todd and Scott Griff, and each of them singly, my true and
lawful attorneys, with full power to them to sign for me, and in my capacity as
Trustee for each of the Funds, any and all amendments to each of the particular
registration statements of the Funds, and all instruments necessary or desirable
in connection therewith, filed with the Securities and Exchange Commission,
hereby ratifying and confirming my signature as it may be signed by said
attorneys to any and all amendments to said registration statements.
Pursuant to the requirements of the Securities Act of 1933, this instrument
has been signed below by the following in the capacity and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----------------------------------------- --------------------------------------------------- ---------------
<S> <C> <C>
/s/ WILLIAM W. HEWITT, JR. Trustee March 8, 1995
........................................
WILLIAM W. HEWITT, JR.
</TABLE>
<PAGE>
POWER OF ATTORNEY
I, Carl W. Schafer, Trustee of PaineWebber/Kidder, Peabody California Tax
Exempt Money Fund, PaineWebber/Kidder, Peabody Premium Account Fund,
PaineWebber/Kidder, Peabody Municipal Money Market Series, Mitchell
Hutchins/Kidder, Peabody Investment Trust, Mitchell Hutchins/Kidder, Peabody
Investment Trust II, Mitchell Hutchins/Kidder, Peabody Investment Trust III,
Institutional Series Trust, and Liquid Institutional Reserves (collectively, the
'Funds'), hereby constitute and appoint Victoria E. Schonfeld, Dianne E.
O'Donnell, Gregory K. Todd and Scott Griff, and each of them singly, my true and
lawful attorneys, with full power to them to sign for me, and in my capacity as
Trustee for each of the Funds, any and all amendments to each of the particular
registration statements of the Funds, and all instruments necessary or desirable
in connection therewith, filed with the Securities and Exchange Commission,
hereby ratifying and confirming my signature as it may be signed by said
attorneys to any and all amendments to said registration statements.
Pursuant to the requirements of the Securities Act of 1933, this instrument
has been signed below by the following in the capacity and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----------------------------------------- --------------------------------------------------- ---------------
<S> <C> <C>
/s/ CARL W. SCHAFER Trustee March 8, 1995
........................................
CARL W. SCHAFER
</TABLE>
<PAGE>
STATEMENT OF DIFFERENCES
Alpha or numeric characters that represent mathematical powers shall be
immediately followed by 'pp'.
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
Institutional Adjustable Rate Government Portfolio
of Institutional Series Trust:
We consent to the incorporation by reference in the Statement of Additional
Information in this Post-Effective Amendment No. 2 to Registration Statement
No. 33-70362 of our report dated December 30, 1994, appearing in the annual
report to shareholders for the year ended November 30, 1994, and to the
references to us under the captions "Independent Auditors" appearing in
the Statement of Additional Information and "Financial Highlights" appearing
in the Prospectus, which also are a part of such Registration Statement.
Deloitte & Touche LLP
New York, New York
March 27, 1995
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 913604
<NAME> INSTITUTIONAL SERIES TRUST
<SERIES>
<NUMBER> 101
<NAME> INSTITUTIONAL ADJUSTABLE RATE GOVERNMENT PORTFOLIO
- CLASS A
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-START> MAR-24-1994
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 53,416,348
<INVESTMENTS-AT-VALUE> 52,691,637
<RECEIVABLES> 399,649
<ASSETS-OTHER> 169,167
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 53,260,453
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,242,873
<TOTAL-LIABILITIES> 1,242,873
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 53,405,950
<SHARES-COMMON-STOCK> 4,403,724
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (663,659)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (724,711)
<NET-ASSETS> 52,017,580
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,635,416
<OTHER-INCOME> 0
<EXPENSES-NET> (337,368)
<NET-INVESTMENT-INCOME> 3,298,048
<REALIZED-GAINS-CURRENT> (663,659)
<APPREC-INCREASE-CURRENT> (724,711)
<NET-CHANGE-FROM-OPS> 1,909,678
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,641,953)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 202,045,773
<NUMBER-OF-SHARES-REDEEMED> (150,714,269)
<SHARES-REINVESTED> 2,094,308
<NET-CHANGE-IN-ASSETS> 51,693,537
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 313,881
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 502,876
<AVERAGE-NET-ASSETS> 110,936,579
<PER-SHARE-NAV-BEGIN> 12.00
<PER-SHARE-NII> .39
<PER-SHARE-GAIN-APPREC> (.19)
<PER-SHARE-DIVIDEND> (.39)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.81
<EXPENSE-RATIO> .69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 913604
<NAME> INSTITUTIONAL SERIES TRUST
<SERIES>
<NUMBER> 102
<NAME> INSTITUTIONAL ADJUSTABLE RATE GOVERNMENT PORTFOLIO
- CLASS B
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-START> MAR-24-1994
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 13,484,327
<INVESTMENTS-AT-VALUE> 13,301,382
<RECEIVABLES> 100,887
<ASSETS-OTHER> 42,704
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 13,444,973
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 313,749
<TOTAL-LIABILITIES> 313,749
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 13,481,702
<SHARES-COMMON-STOCK> 1,111,688
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (167,533)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (182,945)
<NET-ASSETS> 13,131,224
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 917,718
<OTHER-INCOME> 0
<EXPENSES-NET> (85,165)
<NET-INVESTMENT-INCOME> 832,553
<REALIZED-GAINS-CURRENT> (167,533)
<APPREC-INCREASE-CURRENT> (182,945)
<NET-CHANGE-FROM-OPS> 482,075
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (488,648)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 22,722,171
<NUMBER-OF-SHARES-REDEEMED> (9,456,991)
<SHARES-REINVESTED> 96,652
<NET-CHANGE-IN-ASSETS> 13,355,259
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 79,235
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 126,945
<AVERAGE-NET-ASSETS> 15,640,150
<PER-SHARE-NAV-BEGIN> 12.00
<PER-SHARE-NII> .37
<PER-SHARE-GAIN-APPREC> (.19)
<PER-SHARE-DIVIDEND> (.37)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.81
<EXPENSE-RATIO> .94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
