LIR CASH RESERVES FUND
LIR LIQUID ASSETS FUND
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
STATEMENT OF ADDITIONAL INFORMATION
LIR Cash Reserves Fund ("Cash Reserves Fund") and LIR Liquid Assets Fund
("Liquid Assets Fund") are diversified no-load series of Mitchell Hutchins LIR
Money Series, a professionally managed open-end investment company organized as
a Delaware business trust ("Trust"). Each fund seeks to provide as high a level
of current interest income as is consistent with maintaining liquidity and
stability of principal. Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins"), a wholly owned asset management subsidiary of PaineWebber
Incorporated ("PaineWebber"), serves as the funds' investment adviser,
administrator and distributor.
This Statement of Additional Information ("SAI") is not a Prospectus and
should be read only in conjunction with a fund's Prospectus, dated December 22,
1999. A copy of each fund's Prospectus may be obtained by calling toll-free
1-800-647-1568. The Prospectuses contain more information about the funds. You
should read a fund's Prospectus carefully before investing. This SAI is dated
December 22, 1999.
TABLE OF CONTENTS
PAGE
The Funds and Their Investment Policies................... 2
The Funds' Investments, Related Risks and Limitations..... 2
Organization of the Trust; Trustees and Officers; Principal
Holders of Securities.................................. 8
Investment Advisory, Administration and Distribution 16
Arrangements..............................................
Portfolio Transactions.................................... 19
Additional Purchase and Redemption Information; Service
Organizations.......................................... 19
Valuation of Shares....................................... 20
Performance Information................................... 21
Taxes..................................................... 22
Other Information......................................... 23
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THE FUNDS AND THEIR INVESTMENT POLICIES
Each fund's investment objective may not be changed without shareholder
approval. Except where noted, the other investment policies of a fund may be
changed by its board without shareholder approval. As with other mutual funds,
there is no assurance that a fund will achieve its investment objective.
Each fund's investment objective is to provide as high a level of
current interest income as is consistent with maintaining liquidity and
stability of principal. The funds invest in high quality money market
instruments that have, or are deemed to have, remaining maturities of 13 months
or less. Money market instruments are short-term debt obligations and similar
securities. These instruments include (1) U.S. and foreign government
securities, (2) obligations of U.S. and foreign banks, (3) commercial paper and
other short-term obligations of U.S. and foreign corporations, partnerships,
trusts and similar entities, (4) repurchase agreements regarding any of the
foregoing and (5) investment company securities. Money market instruments also
include longer term bonds that have variable interest rates or other special
features that give them the financial characteristics of short-term debt.
The funds may invest in obligations (including certificates of deposit,
bankers' acceptances, time deposits and similar obligations) of U.S. and foreign
banks only if the institution has total assets at the time of purchase in excess
of $1.5 billion. Each fund's investments in non-negotiable time deposits of
these institutions will be considered illiquid if they have maturities greater
than seven days.
The funds may purchase only those obligations that Mitchell Hutchins
determines, pursuant to procedures adopted by the board, present minimal credit
risks and are "First Tier Securities" as defined in Rule 2a-7 under the
Investment Company Act of 1940, as amended ("Investment Company Act"). A First
Tier Security is either (1) rated in the highest short-term rating category by
at least two nationally recognized statistical rating agencies ("rating
agencies"), (2) rated in the highest short-term rating category by a single
rating agency if only that rating agency has assigned the obligation a
short-term rating, (3) issued by an issuer that has received such a short-term
rating with respect to a security that is comparable in priority and security,
(4) subject to a guarantee rated in the highest short-term rating category or
issued by a guarantor that has received the highest short-term rating for a
comparable debt obligation or (5) unrated, but determined by Mitchell Hutchins
to be of comparable quality.
Each fund generally may invest no more than 5% of its total assets in
the securities of a single issuer (other than U.S. government securities),
except that the fund may invest up to 25% of its total assets in First Tier
Securities of a single issuer for a period of up to three business days. The
funds may purchase only U.S. dollar-denominated obligations of foreign issuers.
Each fund may invest up to 10% of its net assets in illiquid securities.
The funds may purchase securities on a when-issued or delayed delivery basis.
Each fund may lend its portfolio securities to qualified broker-dealers or
institutional investors in an amount up to 33 1/3% of its total assets. Each
fund may borrow up to 10% of its total assets for temporary purposes, including
reverse repurchase agreements. The costs associated with borrowing may reduce
the fund's net income. The funds may invest in the securities of other
investment companies.
THE FUNDS' INVESTMENTS, RELATED RISKS AND LIMITATIONS
The following supplements the information contained in the Prospectuses
and above concerning the funds' investments, related risks and limitations.
Except as otherwise indicated in the Prospectuses or this SAI, the funds have
established no policy limitations on their ability to use the investments or
techniques discussed in these documents.
YIELDS AND CREDIT RATINGS OF MONEY MARKET INSTRUMENTS; FIRST TIER
SECURITIES. The yields on the money market instruments in which each fund
invests (such as U.S. government securities, commercial paper and bank
obligations) are dependent on a variety of factors, including general money
market conditions, conditions in the particular market for the obligation, the
financial condition of the issuer, the size of the offering, the maturity of the
obligation and the ratings of the issue. The ratings assigned by rating agencies
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represent their opinions as to the quality of the obligations they undertake to
rate. Ratings, however, are general and are not absolute standards of quality.
Consequently, obligations with the same rating, maturity and interest rate may
have different market prices.
Subsequent to its purchase by a fund, an issue may cease to be rated or
its rating may be reduced. If a security in a fund's portfolio ceases to be a
First Tier Security (as defined above) or Mitchell Hutchins becomes aware that a
security has received a rating below the second highest rating by any rating
agency, Mitchell Hutchins and, in certain cases, the board, will consider
whether the fund should continue to hold the obligation. A First Tier Security
rated in the highest short-term category at the time of purchase that
subsequently receives a rating below the highest rating category from a
different rating agency may continue to be considered a First Tier Security.
U.S. GOVERNMENT SECURITIES. Each fund may purchase U.S. government
securities, which include direct obligations of the U.S. Treasury (such as
Treasury bills, notes or bonds) and obligations issued or guaranteed as to
principal and interest (but not as to market value) by the U.S. government, its
agencies or its instrumentalities. These U.S. government securities may include
mortgage-backed securities issued or guaranteed by government agencies or
government-sponsored enterprises. Other U.S. government securities may be backed
by the full faith and credit of the U.S. government or supported primarily or
solely by the creditworthiness of the government-related issuer or, in the case
of mortgage-backed securities, by pools of assets.
U.S. government securities also include separately traded principal and
interest components of securities issued or guaranteed by the U.S. Treasury,
which are traded independently under the Separate Trading of Registered Interest
and Principal of Securities ("STRIPS") program. Under the STRIPS programs, the
principal and interest components are individually numbered and separately
issued by the U.S. Treasury.
COMMERCIAL PAPER AND OTHER SHORT-TERM OBLIGATIONS. Each fund may
purchase commercial paper, which includes short-term obligations issued by
corporations, partnerships, trusts or other entities to finance short-term
credit needs. A fund also may purchase non-convertible debt obligations subject
to maturity constraints imposed by Rule 2a-7 under the Investment Company Act.
Descriptions of certain types of short-term obligations are provided below.
ASSET-BACKED SECURITIES. Each fund may invest in securities that are
comprised of financial assets. Such assets may include motor vehicle and other
installment sales contracts, home equity loans, leases of various types of real
and personal property and receivables from revolving credit (credit card)
agreements or other types of financial assets. Such assets are securitized
through the use of trusts or special purpose corporations or other entities.
Payments or distributions of principal and interest may be guaranteed up to a
certain amount and for a certain time period by a letter of credit or pool
insurance policy issued by a financial institution unaffiliated with the issuer,
or other credit enhancements may be present. See "The Funds' Investments,
Related Risks and Limitations -- Credit and Liquidity Enhancements."
VARIABLE AND FLOATING RATE SECURITIES AND DEMAND INSTRUMENTS. Each fund
may purchase variable and floating rate securities with remaining maturities in
excess of 13 months issued by U.S. government agencies or instrumentalities or
guaranteed by the U.S. government. In addition, a fund may purchase variable and
floating rate securities of other issuers with remaining maturities in excess of
13 months if the securities are subject to a demand feature exercisable within
13 months or less. The yields on these securities are adjusted in relation to
changes in specific rates, such as the prime rate, and different securities may
have different adjustment rates. Certain of these obligations carry a demand
feature that gives the fund the right to tender them back to a specified party,
usually the issuer or a remarketing agent, prior to maturity. A fund's
investments in variable and floating rate securities must comply with conditions
established by the Securities and Exchange Commission ("SEC") under which they
may be considered to have remaining maturities of 13 months or less. See "The
Funds' Investments, Related Risks and Limitations -- Credit and Liquidity
Enhancements."
Generally, a fund may exercise demand features (1) upon a default under
the terms of the underlying security, (2) to maintain its portfolio in
accordance with its investment objective and policies or applicable legal or
regulatory requirements or (3) as needed to provide liquidity to the fund in
order to meet redemption requests. The ability of a bank or other financial
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institution to fulfill its obligations under a letter of credit, guarantee or
other liquidity arrangement might be affected by possible financial difficulties
of its borrowers, adverse interest rate or economic conditions, regulatory
limitations or other factors. The interest rate on floating rate or variable
rate securities ordinarily is readjusted on the basis of the prime rate of the
bank that originated the financing or some other index or published rate, such
as the 90-day U.S. Treasury bill rate, or is otherwise reset to reflect market
rates of interest. Generally, these interest rate adjustments cause the market
value of floating rate and variable rate securities to fluctuate less than the
market value of fixed rate securities.
VARIABLE AMOUNT MASTER DEMAND NOTES. Each fund may invest in variable
amount master demand notes, which are unsecured redeemable obligations that
permit investment of varying amounts at fluctuating interest rates under a
direct agreement between a fund and an issuer. The principal amount of these
notes may be increased from time to time by the parties (subject to specified
maximums) or decreased by a fund or the issuer. These notes are payable on
demand and may or may not be rated.
INVESTING IN FOREIGN SECURITIES. Each fund's investments in U.S.
dollar-denominated securities of foreign issuers may involve risks that are
different from investments in U.S. issuers. These risks may include future
unfavorable political and economic developments, possible withholding taxes,
seizure of foreign deposits, currency controls, interest limitations or other
governmental restrictions that might affect the payment of principal or interest
on the fund's investments. Additionally, there may be less publicly available
information about foreign issuers because they may not be subject to the same
regulatory requirements as domestic issuers.
CREDIT AND LIQUIDITY ENHANCEMENTS. Each fund may invest in securities
that have credit or liquidity enhancements or a fund may purchase these types of
enhancements in the secondary market. Such enhancements may be structured as
demand features that permit a fund to sell the instrument at designated times
and prices. These credit and liquidity enhancements may be backed by letters of
credit or other instruments provided by banks or other financial institutions
whose credit standing affects the credit quality of the underlying obligation.
The credit and liquidity enhancements may have conditions that limit the ability
of a fund to use them when a fund wishes to do so. Changes in the credit quality
of these financial institutions could cause losses to a fund and affect its
share price.
ILLIQUID SECURITIES. The term "illiquid securities" for purposes of the
Prospectuses and SAI means securities that cannot be disposed of within seven
days in the ordinary course of business at approximately the amount at which a
fund has valued the securities and includes, among other things, repurchase
agreements maturing in more than seven days and restricted securities other than
those Mitchell Hutchins has determined are liquid pursuant to guidelines
established by the board. A fund may not be able readily to liquidate its
investments in illiquid securities and may have to sell other investments if
necessary to raise cash to meet its obligations.
Restricted securities are not registered under the Securities Act of
1933, as amended ("Securities Act") and may be sold only in privately negotiated
or other exempted transactions or after a registration statement under the
Securities Act has become effective. Where registration is required, a fund may
be obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the fund
might obtain a less favorable price than prevailed when it decided to sell.
However, not all restricted securities are illiquid. A large
institutional market has developed for many U.S. and foreign securities that are
not registered under the Securities Act. Institutional investors generally will
not seek to sell these instruments to the general public, but instead will often
depend either on an efficient institutional market in which such unregistered
securities can be readily resold or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not dispositive of
the liquidity of such investments.
Institutional markets for restricted securities also have developed as a
result of Rule 144A, which establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. Such markets include automated systems for the
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trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held by
a fund, however, could affect adversely the marketability of such portfolio
securities, and the fund might be unable to dispose of such securities promptly
or at favorable prices.
The board has delegated the function of making day-to-day determinations
of liquidity to Mitchell Hutchins pursuant to guidelines approved by the board.
Mitchell Hutchins takes into account a number of factors in reaching liquidity
decisions, which may include (1) the frequency of trades for the security, (2)
the number of dealers that make quotes for the security, (3) the nature of the
security and how trading is effected (E.G., the time needed to sell the
security, how bids are solicited and the mechanics of transfer) and (4) the
existence of demand features or similar liquidity enhancements. Mitchell
Hutchins monitors the liquidity of restricted securities in each fund's
portfolio and reports periodically on such decisions to the board.
Mitchell Hutchins also monitors each fund's overall holdings of illiquid
securities. If a fund's holdings of illiquid securities comes to exceed 10% of
its net assets for any reason, such as a security ceasing to qualify as liquid,
changes in relative market values of portfolio securities or shareholder
redemptions, Mitchell Hutchins will consider what action would be in the best
interests of the fund and its shareholders.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
fund purchases securities or other obligations from a bank or securities dealer
(or its affiliate) and simultaneously commits to resell them to the counterparty
at an agreed-upon date or upon demand and at a price reflecting a market rate of
interest unrelated to the coupon rate or maturity of the purchased obligations.
Securities or other obligations subject to repurchase agreements may have
maturities in excess of 13 months. The fund maintains custody of the underlying
obligations prior to their repurchase, either through its regular custodian or
through a special "tri-party" custodian or sub-custodian that maintains separate
accounts for both the fund and its counterparty. Thus, the obligation of the
counterparty to pay the repurchase price on the date agreed to or upon demand
is, in effect, secured by such obligations. Repurchase agreements carry certain
risks not associated with direct investments in securities, including a possible
decline in the market value of the underlying obligations. If their value
becomes less than the repurchase price, plus any agreed-upon additional amount,
the counterparty must provide additional collateral so that at all times the
collateral is at least equal to the repurchase price plus any agreed-upon
additional amount. The difference between the total amount to be received upon
repurchase of the obligations and the price that was paid by the fund upon
acquisition is accrued as interest and included in its net investment income.
Repurchase agreements involving obligations other than U.S. government
securities (such as commercial paper and corporate bonds) may be subject to
special risks and may not have the benefit of certain protections in the event
of the counterparty's insolvency. If the seller or guarantor becomes insolvent,
the fund may suffer delays, costs and possible losses in connection with the
disposition of collateral. Each fund intends to enter into repurchase agreements
only in transactions with counterparties believed by Mitchell Hutchins to
present minimum credit risks.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements involve the
sale of securities held by a fund subject to its agreement to repurchase the
securities at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest. Reverse repurchase agreements are subject to a fund's
limitation on borrowings and may be entered into only with banks and securities
dealers. While a reverse repurchase agreement is outstanding, a fund will
maintain, in a segregated account with its custodian, cash or liquid securities,
marked to market daily, in an amount at least equal to its obligations under the
reverse repurchase agreement. See "The Funds' Investments, Related Risks and
Limitations -- Segregated Accounts."
Reverse repurchase agreements involve the risk that the buyer of the
securities sold by the fund might be unable to deliver them when a fund seeks to
repurchase. If the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, such buyer or trustee or receiver may
receive an extension of time to determine whether to enforce that fund's
obligation to repurchase the securities, and a fund's use of the proceeds of the
reverse repurchase agreement may effectively be restricted pending such
decision.
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WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each fund may purchase
securities on a "when-issued" basis or may purchase or sell securities for
delayed delivery, I.E., for issuance or delivery to or by the fund later than
the normal settlement date for such securities at a stated price and yield. A
fund generally would not pay for such securities or start earning interest on
them until they are received. However, when a fund undertakes a when-issued or
delayed delivery obligation, it immediately assumes the risks of ownership,
including the risks of price fluctuation. Failure of the issuer to deliver a
security purchased by a fund on a when-issued or delayed delivery basis may
result in the fund's incurring a loss or missing an opportunity to make an
alternative investment.
A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in market
value, generally based upon changes in the level of interest rates. Thus,
fluctuation in the value of the security from the time of the commitment date
will affect the fund's net asset value. When a fund commits to purchase
securities on a when-issued or delayed delivery basis, its custodian segregates
assets to cover the amount of the commitment. See "The Funds' Investments,
Related Risks and Limitations -- Segregated Accounts." A fund may sell the right
to acquire the security prior to delivery if Mitchell Hutchins deems it
advantageous to do so, which may result in a gain or loss to the fund.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. Each fund may invest in
securities of other money market funds, subject to Investment Company Act
limitations, which at present restrict a fund's investments in registered
investment companies to no more than 10% of its total assets. The shares of
other money market funds are subject to the management fees and other expenses
of those funds. At the same time, a fund would continue to pay its own
management fees and expenses with respect to all its investments, including
shares of other money market funds. A fund may invest in the securities of other
money market funds when Mitchell Hutchins believes that (1) the amounts to be
invested are too small or are available too late in the day to be effectively
invested in other money market instruments, (2) shares of other money market
funds otherwise would provide a better return than direct investment in other
money market instruments or (3) such investments would enhance the fund's
liquidity.
LENDING OF PORTFOLIO SECURITIES. Each fund is authorized to lend its
portfolio securities to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified. Lending securities enables a fund to earn additional
income, but could result in a loss or delay in recovering these securities. The
borrower of the fund's portfolio securities must maintain acceptable collateral
with the fund's custodian in an amount, marked to market daily, at least equal
to the market value of the securities loaned, plus accrued interest and
dividends. Acceptable collateral is limited to cash, U.S. government securities
and irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. The fund may reinvest any cash collateral in money market
investments or other short-term liquid investments. In determining whether to
lend securities to a particular broker-dealer or institutional investor,
Mitchell Hutchins will consider, and during the period of the loan will monitor,
all relevant facts and circumstances, including the creditworthiness of the
borrower. The fund will retain authority to terminate any of its loans at any
time. The fund may pay fees in connection with a loan and may pay the borrower
or placing broker a negotiated portion of the interest earned on the
reinvestment of cash held as collateral. The fund will receive amounts
equivalent to any interest, dividends or other distributions on the securities
loaned. The fund will regain record ownership of loaned securities to exercise
beneficial rights, such as voting and subscription rights, when regaining such
rights is considered to be in the fund's interest.
Pursuant to procedures adopted by the board governing each fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for the fund. The board also has authorized the payment of fees (including
fees calculated as a percentage of invested cash collateral) to PaineWebber for
these services. The board periodically reviews all portfolio securities loan
transactions for which PaineWebber acted as lending agent. PaineWebber also has
been approved as a borrower under the fund's securities lending program.
SEGREGATED ACCOUNTS. When a fund enters into certain transactions that
involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis or reverse
repurchase agreements, they will maintain with an approved custodian in a
segregated account cash or liquid securities, marked to market daily, in an
amount at least equal to each fund's obligation or commitment under such
transactions.
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INVESTMENT LIMITATIONS OF THE FUNDS
FUNDAMENTAL LIMITATIONS. The following fundamental investment
limitations cannot be changed for a fund without the affirmative vote of the
lesser of (a) more than 50% of the outstanding shares of the fund or (b) 67% or
more of the shares of the fund present at a shareholders' meeting if more than
50% of the outstanding shares are represented at the meeting in person or by
proxy. If a percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations.
Each fund will not:
(1) purchase securities of any one issuer if, as a result, more than
5% of the fund's total assets would be invested in securities of that issuer or
the fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 25% of the fund's total assets may be invested
without regard to this limitation, and except that this limitation does not
apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment companies.
The following interpretation applies to, but is not a part of, this
fundamental restriction: Mortgage- and asset-backed securities will not be
considered to have been issued by the same issuer by reason of the securities
having the same sponsor, and mortgage- and asset-backed securities issued by a
finance or other special purpose subsidiary that are not guaranteed by the
parent company will be considered to be issued by a separate issuer from the
parent company.
(2) purchase any security if, as a result of that purchase, 25% or
more of the fund's total assets would be invested in securities of issuers
having their principal business activities in the same industry, except that
this limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or to municipal securities or to
certificates of deposit and bankers' acceptances of domestic branches of U.S.
banks.
The following interpretations apply to, but are not a part of, this
fundamental restriction: (a) domestic and foreign banking will be considered to
be different industries; and (b) asset-backed securities will be grouped in
industries based upon their underlying assets and not treated as constituting a
single, separate industry.
(3) issue senior securities or borrow money, except as permitted under
the Investment Company Act and then not in excess of 33 1/3% of the fund's total
assets (including the amount of the senior securities issued but reduced by any
liabilities not constituting senior securities) at the time of the issuance or
borrowing, except that the fund may borrow up to an additional 5% of its total
assets (not including the amount borrowed) for temporary or emergency purposes.
(4) make loans, except through loans of portfolio securities or
through repurchase agreements, provided that for purposes of this restriction,
the acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances or
similar instruments will not be considered the making of a loan.
The following interpretation applies to, but is not a part of, this
fundamental restriction: the fund's investments in master notes and similar
instruments will not be considered to be the making of a loan.
(5) engage in the business of underwriting securities of other
issuers, except to the extent that the fund might be considered an underwriter
under the federal securities laws in connection with its disposition of
portfolio securities.
(6) purchase or sell real estate, except that investments in
securities of issuers that invest in real estate and investments in
mortgage-backed securities, mortgage participations or other instruments
supported by interests in real estate are not subject to this limitation, and
except that the fund may exercise rights under agreements relating to such
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securities, including the right to enforce security interests and to hold real
estate acquired by reason of such enforcement until that real estate can be
liquidated in an orderly manner.
(7) purchase or sell physical commodities unless acquired as a result
of owning securities or other instruments, but the fund may purchase, sell or
enter into financial options and futures, forward and spot currency contracts,
swap transactions and other financial contracts or derivative instruments.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are
non-fundamental and may be changed by the vote of the board without shareholder
approval. If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in values or
assets will not constitute a violation of that restriction.
Each fund will not:
(1) purchase securities on margin, except for short-term credit
necessary for clearance of portfolio transactions and except that the fund may
make margin deposits in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
(2) engage in short sales of securities or maintain a short position,
except that the fund may (a) sell short "against the box" and (b) maintain short
positions in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
(3) purchase securities of other investment companies, except to the
extent permitted by the Investment Company Act and except that this limitation
does not apply to securities received or acquired as dividends, through offers
of exchange, or as a result of reorganization, consolidation, or merger.
(4) purchase portfolio securities while borrowings in excess of 5% of
its total assets are outstanding.
(5) invest more than 10% of its net assets in illiquid securities.
ORGANIZATION OF THE TRUST; TRUSTEES AND OFFICERS;
PRINCIPAL HOLDERS OF SECURITIES
The Trust was organized on April 29, 1998, as a business trust under the
laws of Delaware and has five series. The Trust has authority to issue an
unlimited number of shares of beneficial interest, par value $0.001 per share,
of existing or future series.
The Trust is governed by a board of trustees, which oversees the funds'
operations. The board also is authorized to establish additional series. The
trustees and executive officers of the Trust, their ages, business addresses and
principal occupations during the past five years are:
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<TABLE>
<CAPTION>
<S> <C> <C>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------- ----------------------------------------
Margo N. Alexzander*+; 52 Trustee and President Mrs. Alexander is chairman (since March
1999), chief executive officer and a
director of Mitchell Hutchins (since
January 1995), and an executive vice
president and a director of PaineWebber
(since March 1984). Mrs. Alexander is
president and a director or trustee of 32
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Richard Q. Armstrong; 64 Trustee Mr. Armstrong is chairman and principal of
R.Q.A. Enterprises R.Q.A. Enterprises (management consulting
One Old Church Road firm) (since April 1991 and principal
Unit #6 occupation since March 1995). Mr. Armstrong
Greenwich, CT 06830 was chairman of the board, chief executive
officer and co-owner of Adirondack
Beverages (producer and distributor of soft
drinks and sparkling/still waters) (October
1993-March 1995). He was a partner of The
New England Consulting Group (management
consulting firm) (December 1992-September
1993). He was managing director of LVMH
U.S. Corporation (U.S. subsidiary of the
French luxury goods conglomerate, Louis
Vuitton Moet Hennessey Corporation)
(1987-1991) and chairman of its wine and
spirits subsidiary, Schieffelin & Somerset
Company (1987-1991). Mr. Armstrong is a
director or trustee of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
E. Garret Bewkes, Jr. **+; 73 Trustee and Chairman of the Mr. Bewkes is a director of Paine Webber
Board of Trustees Group Inc. ("PW Group") (holding company of
PaineWebber and Mitchell Hutchins). Prior
to December 1995, he was a consultant to PW
Group. Prior to 1988, he was chairman of
the board, president and chief executive
officer of American Bakeries Company. Mr.
Bewkes is a director of Interstate Bakeries
Corporation. Mr. Bewkes is a director or
trustee of 35 investment companies for
which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment
adviser.
9
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------- ----------------------------------------
Richard R. Burt; 52 Trustee Mr. Burt is chairman of IEP Advisors, Inc.
1275 Pennsylvania Ave., N.W. (international investments and consulting
Washington, DC 20004 firm) (since March 1994) and a partner of
McKinsey & Company (management consulting
firm) (since 1991). He is also a director
of Archer-Daniels-Midland Co. (agricultural
commodities), Hollinger International Co.
(publishing) and Homestake Mining Corp.
(gold mining), vice chairman (since July
1999) of Anchor Gaming (provides technology
to gaming and wagering industry) and
chairman (since April 1996) of Weirton
Steel Corp. (makes and finishes steel
products). He was the chief negotiator in
the Strategic Arms Reduction Talks with the
former Soviet Union (1989-1991) and the
U.S. Ambassador to the Federal Republic of
Germany (1985-1989). Mr. Burt is a director
or trustee of 31 investment companies for
which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment
adviser.
Mary C. Farrell**+; 50 Trustee Ms. Farrell is a managing director, senior
investment strategist and member of the
Investment Policy Committee of PaineWebber.
Ms. Farrell joined PaineWebber in 1982. She
is a member of the Financial Women's
Association and Women's Economic Roundtable
and appears as a regular panelist on Wall
$treet Week with Louis Rukeyser. She also
serves on the Board of Overseers of New
York University's Stern School of Business.
Ms. Farrell is a director or trustee of 30
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Meyer Feldberg; 57 Trustee Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of
101 Uris Hall Business, Columbia University. Prior to
New York, NY 10027 1989, he was president of the Illinois
Institute of Technology. Dean Feldberg is
also a director of Primedia, Inc.
(publishing), Federated Department Stores,
Inc. (operator of department stores) and
Revlon, Inc. (cosmetics). Dean Feldberg is
a director or trustee of 34 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
10
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------- ----------------------------------------
George W. Gowen; 70 Trustee Mr. Gowen is a partner in the law firm of
666 Third Avenue Dunnington, Bartholow & Miller. Prior to
New York, NY 10017 May 1994, he was a partner in the law firm
of Fryer, Ross & Gowen. Mr. Gowen is a
director or trustee of 34 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Frederic V. Malek; 63 Trustee Mr. Malek is chairman of Thayer Capital
1455 Pennsylvania Ave, N.W. Partners (merchant bank) and chairman of
Suite 350 Thayer Hotel Investors II and Lodging
Washington, DC 20004 Opportunities Fund (hotel investment
partnerships). From January 1992 to
November 1992, he was campaign manager of
Bush-Quayle '92. From 1990 to 1992, he was
vice chairman and, from 1989 to 1990, he
was president of Northwest Airlines Inc.
and NWA Inc. (holding company of Northwest
Airlines Inc.). Prior to 1989, he was
employed by the Marriott Corporation
(hotels, restaurants, airline catering and
contract feeding), where he most recently
was an executive vice president and
president of Marriott Hotels and Resorts.
Mr. Malek is also a director of Aegis
Communications, Inc. (tele-services),
American Management Systems, Inc.
(management consulting and computer related
services), Automatic Data Processing, Inc.
(computing services), CB Richard Ellis,
Inc. (real estate services), FPL Group,
Inc. (electric services), Global Vacation
Group (packaged vacations), HCR/Manor Care,
Inc. (health care), SAGA Systems, Inc. and
Northwest Airlines Inc. Mr. Malek is a
director or trustee of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
11
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------- ----------------------------------------
Carl W. Schafer; 53 Trustee Mr. Schafer is president of the Atlantic
66 Witherspoon Street, #1100 Foundation (charitable foundation
Princeton, NJ 08542 supporting mainly oceanographic exploration
and research). He is a director of Labor
Ready, Inc. (temporary employment), Roadway
Express, Inc. (trucking), The Guardian
Group of Mutual Funds, the Harding, Loevner
Funds, E.I.I. Realty Trust (investment
company), Evans Systems, Inc. (motor fuels,
convenience store and diversified company),
Electronic Clearing House, Inc. (financial
transactions processing), Frontier Oil
Corporation and Nutraceutix, Inc.
(biotechnology company). Prior to January
1993, he was chairman of the Investment
Advisory Committee of the Howard Hughes
Medical Institute. Mr. Schafer is a
director or trustee of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Brian M. Storms*+; 45 Trustee Mr. Storms is president and chief operating
officer of Mitchell Hutchins (since March
1999). Prior to joining Mitchell Hutchins,
he was president of Prudential Investments
(1996-1999). Prior to joining Prudential,
he was a managing director at Fidelity
Investments. Mr. Storms is a director or
trustee of 31 investment companies for
which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment
adviser.
Kris L. Dorr*; 35 Vice President Ms. Dorr is a first vice president and a
portfolio manager in the short-term
strategies group of Mitchell Hutchins. Ms.
Dorr is a vice president of one investment
company for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Elbridge T. Gerry III*; 42 Vice President Mr. Gerry is a senior vice president and a
portfolio manager of Mitchell Hutchins.
Prior to January 1996, he was with J. P.
Morgan Private Banking where he was
responsible for managing municipal assets,
including several municipal bond funds. Mr.
Gerry is a vice president of five
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
12
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------- ----------------------------------------
John J. Lee**; 31 Vice President and Mr. Lee is a vice president and a manager
Assistant Treasurer of the mutual fund finance department of
Mitchell Hutchins. Prior to September 1997,
he was an audit manager in the financial
services practice of Ernst & Young LLP. Mr.
Lee is a vice president and assistant
treasurer of 32 investment companies for
which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as an investment
adviser.
Kevin J. Mahoney**; 34 Vice President and Mr. Mahoney is a first vice president and a
Assistant Treasurer senior manager of the mutual fund finance
department of Mitchell Hutchins. From
August 1996 through March 1999, he was the
manager of the mutual fund internal control
group of Salomon Smith Barney. Prior to
August 1996, he was an associate and
assistant treasurer of BlackRock Financial
Management L.P. Mr. Mahoney is a vice
president and assistant treasurer of 32
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Michael H. Markowitz*; 34 Vice President Mr. Markowitz is a first vice president and
a portfolio manager in the short-term
strategies group of Mitchell Hutchins. Mr.
Markowitz is a vice president of one
investment company for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Dennis McCauley*; 53 Vice President Mr. McCauley is a managing director and
chief investment officer-fixed income of
Mitchell Hutchins. Prior to December 1994,
he was director of fixed income investments
of IBM Corporation. Mr. McCauley is a vice
president of 22 investment companies for
which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment
adviser.
Kevin P. McIntyre*; 33 Vice President Mr. McIntyre is a vice president and a
portfolio manager of Mitchell Hutchins. Mr.
McIntyre is a vice president of one
investment company for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
13
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------- ----------------------------------------
Ann E. Moran**; 42 Vice President and Ms. Moran is a vice president and a manager
Assistant Treasurer of the mutual fund finance department of
Mitchell Hutchins. Ms. Moran is a vice
president and assistant treasurer of 32
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Dianne E. O'Donnell**; 47 Vice President and Secretary Ms. O'Donnell is a senior vice president
and deputy general counsel of Mitchell
Hutchins. Ms. O'Donnell is a vice president
and secretary of 31 investment companies
and a vice president and assistant
secretary of one investment company for
which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment
adviser.
Emil Polito*; 38 Vice President Mr. Polito is a senior vice president and
director of operations and control for
Mitchell Hutchins. Mr. Polito is a vice
president of 32 investment companies for
which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment
adviser.
Susan Ryan*; 39 Vice President Ms. Ryan is a senior vice president and
portfolio manager of Mitchell Hutchins and
has been with Mitchell Hutchins since 1982.
Ms. Ryan is a vice president of five
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Victoria E. Schonfeld**; 49 Vice President Ms. Schonfeld is a managing director and
general counsel of Mitchell Hutchins (since
May 1994) and a senior vice president of
PaineWebber (since July 1995). Ms.
Schonfeld is a vice president of 31
investment companies and a vice president
and secretary of one investment company for
which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment
adviser.
Paul H. Schubert**; 35 Vice PResident and Treasurer Mr. Schubert is a senior vice president and
director of the mutual fund finance
department of Mitchell Hutchins. Mr.
Schubert is a vice president and treasurer
of 32 investment companies for which
Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment
adviser.
14
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------- ----------------------------------------
Barney A. Taglialatela**; 38 Vice President and Mr. Taglialatela is a vice president and a
Assistant Treasurer manager of the mutual fund finance
department of Mitchell Hutchins. Prior to
February 1995, he was a manager of the
mutual fund finance division of Kidder
Peabody Asset Management, Inc. Mr.
Taglialatela is a vice president and
assistant treasurer of 32 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Debbie Vermann*; 41 Vice President Ms. Vermann is a vice president and a
portfolio manager of Mitchell Hutchins. Ms.
Vermann is a vice president of three
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Keith A. Weller**; 38 Vice President and Mr. Weller is a first vice president and
Assistant Secretary associate general counsel of Mitchell
Hutchins. Prior to May 1995, he was an
attorney in private practice. Mr. Weller is
a vice president and assistant secretary of
31 investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
- -----------
* This person's business address is 51 West 52nd Street, New York, New York 10019-6114.
** This person's business address is 1285 Avenue of the Americas, New York, New York 10019-6028.
+ Mrs. Alexander, Mr. Bewkes, Ms. Farrell and Mr. Storms are "interested persons" of the funds as defined
in the Investment Company Act of by virtue of their positions with Mitchell Hutchins, PaineWebber and/or
PW Group.
</TABLE>
The Trust pays each board member who is not an "interested person" of
the Trust $1,000 for each series annually and up to $150 per series for each
board meeting and each separate meeting of a board committee. Each chairman of
the audit and contract review committees of individual funds within the
PaineWebber fund complex receives additional compensation, aggregating $15,000
annually, from the relevant funds. All board members are reimbursed for any
expenses incurred in attending meetings. As of December 22, 1999, board members
and officers of the Trust owned no shares of either fund. Because Mitchell
Hutchins performs substantially all the services necessary for the operation of
the Trust, the Trust requires no employees. No officer, director or employee of
Mitchell Hutchins or PaineWebber presently receives any compensation from the
Trust for acting as a board member or officer.
The table below includes certain information relating to the
compensation of the Trust's current board members who currently hold office with
the Trust, and the compensation of those board members from all or with other
PaineWebber funds during the 1998 calendar year.
15
<PAGE>
COMPENSATION TABLE+
ESTIMATED
---------
AGGREGATE
---------
COMPENSATION TOTAL COMPENSATION FROM
------------ -----------------------
NAME OF PERSON, POSITION FROM THE TRUST* THE FUND COMPLEX**
------------------------ --------------- ------------------
Richard Q. Armstrong, $8,160 $101,372
Trustee
Richard R. Burt, $8,130 $101,372
Trustee
Meyer Feldberg, $8,160 $116,222
Trustee
George W. Gowen, $8,474 $108,272
Trustee
Frederic V. Malek, $8,160 $101,372
Trustee
Carl W. Schafer, $8,160 $101,372
Trustee
- --------------------
+ Only independent board members are compensated by the PaineWebber funds and
identified above; board members who are "interested persons," as defined by
the Investment Company Act, do not receive compensation from the funds.
* Represents fees estimated to be paid to each board member by the Trust during
the funds' first full fiscal year of operations.
** Represents total compensation paid during the calendar year ended December
31, 1998, to each board member by 31 investment companies (34 in the case of
Messrs. Feldberg and Gowen) for which Mitchell Hutchins, PaineWebber or one
of their affiliates served as investment adviser. No fund within the
PaineWebber fund complex has a bonus, pension, profit sharing or retirement
plan.
PRINCIPAL HOLDERS OF SECURITIES
As of December 22, 1999, the funds had no outstanding shares.
INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS. Mitchell Hutchins
acts as the Trust's investment adviser and administrator on behalf of each fund
pursuant two separate contracts ( the "Cash Reserves Contract" and the "Liquid
Assets Contract," respectively) (collectively, the "Advisory and Administration
Contracts").
Under the Cash Reserves Contract, Cash Reserves Fund pays Mitchell
Hutchins an annual fee, computed daily and paid monthly, at the rate of 0.33% of
average daily net assets. Under the terms of the Cash Reserves Contract, Cash
Reserves Fund bears all expenses incurred in its operation that are not
specifically assumed by Mitchell Hutchins. Expenses borne by the fund include
the following: (1) the cost (including brokerage commissions and other
transaction costs, if any) of securities purchased or sold by the fund and any
losses incurred in connection therewith; (2) fees payable to and expenses
incurred on behalf of the fund by Mitchell Hutchins; (3) organizational
expenses; (4) filing fees and expenses relating to the registration and
qualification of fund shares under federal and state securities laws and
maintaining such registrations and qualifications; (5) fees and salaries payable
to the trustees and officers who are not interested persons of the fund or
Mitchell Hutchins; (6) all expenses incurred in connection with the trustees'
services, including travel expenses; (7) taxes (including any income or
16
<PAGE>
franchise taxes) and governmental fees; (8) costs of any liability,
uncollectible items of deposit and other insurance or fidelity bonds; (9) any
costs, expenses or losses arising out of a liability of or claim for damages or
other relief asserted against the Trust or the fund for violation of any law;
(10) legal, accounting and auditing expenses, including legal fees of special
counsel for those trustees who are not interested persons of the Trust; (11)
charges of custodians, transfer agents and other agents; (12) expenses of
setting in type and printing prospectuses and statements of additional
information and supplements thereto, reports and statements to shareholders and
proxy material for existing shareholders; (13) costs of mailing prospectuses and
supplements thereto, statements of additional information and supplements
thereto, reports, statements and proxy materials to existing shareholders; (14)
any extraordinary expenses (including fees and disbursements of counsel, costs
of actions, suits or proceedings to which the Trust is a party and the expenses
the Trust may incur as a result of its legal obligation to provide
indemnification to its officers, trustees, agents and shareholders) incurred by
a fund; (15) fees, voluntary assessments and other expenses incurred in
connection with membership in investment company organizations; (16) costs of
mailing and tabulating proxies and costs of meetings of shareholders, the board
and any committees thereof; (17) the cost of investment company literature and
other publications provided to the trustees and officers; and (18) costs of
mailing, stationery and communications equipment.
Under the terms of the Liquid Assets Contract, Mitchell Hutchins manages
the investment operations of Liquid Assets Fund and also administers the fund's
business affairs. In return, Liquid Assets Fund will pay to Mitchell Hutchins a
fee, computed daily and paid monthly. Where the services are provided directly
by Mitchell Hutchins or an affiliate, the fees will be limited to reimbursement
of Mitchell Hutchins' direct advisory/administrative costs and expenses and will
exclude any profit or overhead charges. Where Mitchell Hutchins arranges for an
unaffiliated person to provide services, the fund will reimburse Mitchell
Hutchins for the cost of the services provided by the unaffiliated person, but
no additional profit or overhead charge will be included or the fund will pay
the service provider directly. (These fees and expenses of the fund are referred
to as "Direct Expenses.") Mitchell Hutchins has advised the fund that it expects
its direct advisory/administrative costs and expenses to approximate an annual
rate of 0.03% of the average daily net assets of the fund for its initial fiscal
year. These expenses are estimated amounts in addition to other expenses of the
fund. Mitchell Hutchins periodically will review fund expenses in an effort to
confirm that only direct costs and expenses are paid to Mitchell Hutchins by the
fund.
The Direct Expenses borne by the fund will include but not be limited to
the following (or the fund's proportionate share of the following): (1) expenses
of paying the salaries and expenses of the Trust's officers and other personnel
engaged in administering the Trust's business; (2) expenses of monitoring
financial and shareholder accounting services provided by the Trust's custodian
and transfer agent, respectively; (3) expenses of responding to shareholder
inquiries and disseminating information to shareholders; (4) expenses of
monitoring compliance with the Trust's registration statements and other
operating documents, with federal and state securities laws and rules thereunder
and with the Internal Revenue Code; (5) expenses of preparing semi-annual and
annual reports to shareholders; (6) expenses of preparing filings required by
the SEC; (7) expenses of assisting in the preparation of federal, state and
local tax returns; (8) expenses of assisting with the payment of notice filing
fees under state securities laws; (9) expenses of organizing annual and special
meetings of shareholders; (10) the cost (including brokerage commissions) of
securities purchased or sold by the fund and any losses incurred in connection
therewith; (11) expenses incurred on behalf of the fund by Mitchell Hutchins
under the Liquid Assets Contract; (12) expenses of organizing the Trust and the
fund; (13) filing fees and expenses relating to the registration and
qualification of the fund's shares and the Trust under federal and/or state
securities laws and maintaining such registration and qualifications; (14) fees
and salaries payable to the Trust's trustees and officers who are not interested
persons of the Trust or Mitchell Hutchins; (15) all expenses incurred in
connection with the trustees' services, including travel expenses; (16) taxes
(including any income or franchise taxes) and governmental fees; (17) costs of
any liability, uncollectible items of deposit and other insurance and fidelity
bonds; (18) any costs, expenses or losses arising out of a liability of or claim
for damages or other relief asserted against the Trust or the fund for violation
of any law; (19) legal, accounting and auditing expenses, including legal fees
of special counsel for those trustees of the Trust who are not interested
persons of the Trust; (20) charges of custodians, transfer agents and other
agents (including any lending agent); (21) costs of preparing any share
certificates; (22) expenses of setting in type and printing prospectuses and
supplements thereto, statements of additional information and supplements
thereto, reports and proxy materials for existing shareholders; (23) costs of
17
<PAGE>
mailing prospectuses and supplements thereto, statements of additional
information and supplements thereto, reports, statements and proxy materials to
existing shareholders; (24) any extraordinary expenses (including fees and
disbursements of counsel, costs of actions, suits or proceedings to which the
Trust is a party and the expenses the Trust may incur as a result of its legal
obligation to provide indemnification to its officers, trustees, agents and
shareholders) incurred by the Trust or the fund; (25) fees, voluntary
assessments and other expenses incurred in connection with membership in
investment company organizations; (26) the cost of mailing and tabulating
proxies and costs of meetings of shareholders, the Board and any committees
thereof; (27) the cost of investment company literature and other publications
provided by the Trust to its trustees and officers; (28) costs of mailing,
stationery and communications equipment; (29) expenses incident to any dividend,
withdrawal or redemption options; (30) charges and expenses of any outside
pricing service used to value portfolio securities; and (31) interest on
borrowings of the fund; and (32) any other costs and expenses incurred in
managing the portfolio of the fund.
General expenses of the Trust not readily identifiable as belonging to a
fund or to the Trust's other series are allocated among series by or under the
direction of the board of trustees in such manner as the board deems fair and
equitable. Services provided by Mitchell Hutchins under the Advisory and
Administration Contracts, as discussed above, include the provision of a
continuous investment program for the funds and supervision of all matters
relating to the administration and operation of the funds.
Under the Advisory and Administration Contracts, Mitchell Hutchins will
not be liable for any error of judgment of mistake of law or for any loss
suffered by the funds in connection with the performance of the Advisory and
Administration Contracts, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of Mitchell Hutchins in the performance of
its duties or from reckless disregard of its duties and obligations thereunder.
The Advisory and Administration Contracts terminate automatically upon
assignment, and each is terminable at any time without penalty by the board or
by vote of the holders of a majority of a fund's outstanding voting securities
on 60 days' written notice to Mitchell Hutchins, or by Mitchell Hutchins on 60
days' written notice to the fund.
NET ASSETS. The following table shows the approximate net assets as of
October 31, 1999, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
NET ASSETS
INVESTMENT CATEGORY ($MIL)
Domestic (excluding Money Market) 7,873.9
Global.................................... 4,651.4
Equity/Balanced........................... 7,822.0
Fixed Income (excluding Money Market)..... 4,703.3
Taxable Fixed Income.............. 3,233.7
Tax-Free Fixed Income............ 1,469.6
Money Market Funds........................ 36,069.2
PERSONAL TRADING POLICIES. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to a code of ethics that describes
the fiduciary duty owed to shareholders of PaineWebber funds and other Mitchell
Hutchins advisory accounts by all Mitchell Hutchins' directors, officers and
employees, establishes procedures for personal investing and restricts certain
transactions. For example, employee accounts generally must be maintained at
PaineWebber, personal trades in most securities require pre-clearance, and
short-term trading and participation in initial public offerings generally are
prohibited. In addition, the code of ethics puts restrictions on the timing of
personal investing in relation to trades by PaineWebber funds and other Mitchell
Hutchins advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
each fund's shares under a distribution contract with the Trust, which requires
Mitchell Hutchins to use its best efforts, consistent with its other business,
to sell shares of the funds. Shares of the funds are offered continuously.
18
<PAGE>
PORTFOLIO TRANSACTIONS
The funds purchase portfolio securities from dealers and underwriters as
well as from issuers. Securities are usually traded on a net basis with dealers
acting as principal for their own accounts without a stated commission. Prices
paid to dealers in principal transactions generally include a "spread," which is
the difference between the prices at which the dealer is willing to purchase and
sell a specific security at the time. When securities are purchased directly
from an issuer, no commissions or discounts are paid. When securities are
purchased in underwritten offerings, they include a fixed amount of compensation
to the underwriter.
For purchases or sales with broker-dealer firms that act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with these transactions, it
will not purchase securities at a higher price or sell securities at a lower
price than would otherwise be paid if no weight was attributed to the services
provided by the executing dealer. Mitchell Hutchins may engage in agency
transactions in over-the-counter securities in return for research and execution
services. These transactions are entered into only pursuant to procedures that
are designed to ensure that the transaction (including commissions) is at least
as favorable as it would have been if effected directly with a market-maker that
did not provide research or execution services.
Research services and information received from brokers or dealers are
supplemental to Mitchell Hutchins' own research efforts and, when utilized, are
subject to internal analysis before being incorporated into its investment
processes. Information and research services furnished by brokers or dealers
through which or with which the funds effect securities transactions may be used
by Mitchell Hutchins in advising other funds or accounts and, conversely,
research services furnished to Mitchell Hutchins by brokers or dealers in
connection with other funds or accounts that it advises may be used in advising
the funds.
Investment decisions for a fund and for other investment accounts
managed by Mitchell Hutchins are made independently of each other in light of
differing considerations for the various accounts. However, the same investment
decision may occasionally be made for a fund and one or more accounts. In those
cases, simultaneous transactions are inevitable. Purchases or sales are then
averaged as to price and allocated between that fund and the other account(s) as
to amount according to a formula deemed equitable to the fund and the other
account(s). While in some cases this practice could have a detrimental effect
upon the price or value of the security as far as a fund is concerned, or upon
its ability to complete its entire order, in other cases it is believed that
simultaneous transactions and the ability to participate in volume transactions
will benefit the fund.
ADDITIONAL PURCHASE AND REDEMPTION
INFORMATION; SERVICE ORGANIZATIONS
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION. Shares of the funds are
offered to the eligible benefit plans that participate in the programs described
in the funds' Prospectuses. A listing of the types of eligible benefit plans
that may buy fund shares is included in the Prospectuses. A PaineWebber or
Mitchell Hutchins client who applies to participate in a program described in
the applicable fund's Prospectus will be eligible to purchase shares of that
fund upon acceptance of the application by PaineWebber. Eligibility of
participants is within the discretion of PaineWebber. In the event a client of
PaineWebber leaves a program, the client may not continue to hold shares of the
fund.
Each fund may suspend redemption privileges or postpone the date of
payment during any period (1) when the New York Stock Exchange is closed or
trading on the New York Stock Exchange is restricted as determined by the SEC,
(2) when an emergency exists, as defined by the SEC, that makes it not
reasonably practicable for a fund to dispose of securities owned by it or fairly
to determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of a fund's portfolio at the time; although the funds attempt
to maintain a constant net asset value of $1.00 per share.
Under normal circumstances, the funds will redeem shares when so
requested by a shareholder's broker-dealer, the shareholder's Financial Advisor
or his or her financial institution. Such a redemption order will be executed at
19
<PAGE>
the net asset value next determined after the order is received by Mitchell
Hutchins. Redemptions of each fund's shares effected through a broker-dealer or
other financial institution may be subject to a service charge by that
broker-dealer or other financial institution.
SERVICE ORGANIZATIONS. The funds may authorize service organizations,
and their agents, to accept on their behalf purchase and redemption orders that
are in "good form" in accordance with the policies of those service
organizations. The funds will be deemed to have received these purchase and
redemption orders when a service organization or its agent accepts them. Like
all customer orders, these orders will be priced based on each fund's net asset
value next computed after receipt of the order by the service organizations or
their agents. Service organizations may include retirement plan service
providers who aggregate purchase and redemption instructions received from
numerous retirement plans or plan participants.
VALUATION OF SHARES
The funds' net asset values per share are determined by the funds'
custodian, State Street Bank and Trust Company, twice each business day at noon
and the close of regular trading on the New York Stock Exchange (generally, 4:00
p.m., Eastern time), on days when the New York Stock Exchange is open, except
Columbus Day and Veterans Day. Generally, the net asset value will not be
determined on the following holidays: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans' Day, Thanksgiving Day and Christmas Day. Your price for
buying or selling your shares will be the net asset value that is next
calculated after the fund accepts your order.
Each fund values its portfolio securities in accordance with the
amortized cost method of valuation under Rule 2a-7 ("Rule") under the Investment
Company Act. To use amortized cost to value its portfolio securities, the funds
must adhere to certain conditions under the Rule relating to its investments,
some of which are discussed in this SAI. Amortized cost is an approximation of
market value of an instrument, whereby the difference between its acquisition
cost and value at maturity is amortized on a straight-line basis over the
remaining life of the instrument. The effect of changes in the market value of a
security as a result of fluctuating interest rates is not taken into account,
and thus the amortized cost method of valuation may result in the value of a
security being higher or lower than its actual market value. If a large number
of redemptions take place at a time when interest rates have increased, a fund
might have to sell portfolio securities prior to maturity and at a price that
might not be desirable.
The board has established procedures for the purpose of maintaining a
constant net asset value of $1.00 per share, which include a review of the
extent of any deviation of net asset value per share, based on available market
quotations, from the $1.00 amortized cost per share. If that deviation exceeds
1/2 of 1% for each fund, the board will promptly consider whether any action
should be initiated to eliminate or reduce material dilution or other unfair
results to shareholders. Such action may include redeeming shares in kind,
selling portfolio securities prior to maturity, reducing or withholding
dividends and utilizing a net asset value per share as determined by using
available market quotations. Each fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less and will not purchase any instrument
having, or deemed to have, a remaining maturity of more than 397 days, will
limit portfolio investments, including repurchase agreements, to those U.S.
dollar-denominated instruments that are of high quality under the Rule and that
Mitchell Hutchins, acting pursuant to the procedures, determines present minimal
credit risks, and will comply with certain reporting and recordkeeping
procedures. There is no assurance that constant net asset value per share will
be maintained. If amortized cost ceases to represent fair value per share, the
board will take appropriate action.
In determining the approximate market value of portfolio investments,
the funds may employ outside organizations, which may use a matrix or formula
method that takes into consideration market indices, matrices, yield curves and
other specific adjustments. This may result in the securities being valued at a
price different from the price that would have been determined had the matrix or
formula method not been used. Other assets, if any, are valued at fair value as
determined in good faith by or under the direction of the board.
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PERFORMANCE INFORMATION
The funds' performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to indicate future performance. The investment return will fluctuate.
TOTAL RETURN CALCULATIONS. Average annual total return quotes
("Standardized Return") used in each fund's Performance Advertisements are
calculated according to the following formula:
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares
T = average annual total return of shares
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment at
the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. All dividends are assumed to have been reinvested at net asset value.
Each fund may also advertise other performance data, which may consist
of the annual or cumulative return (including net short-term capital gain, if
any) earned on a hypothetical investment in the fund since it began operations
or for shorter periods. This return data may or may not assume reinvestment of
dividends (compounding).
CALCULATION OF YIELD. Each fund computes its yield and effective yield
quotations using standardized methods required by the SEC. The funds from time
to time advertise (1) their current yield based on a recently ended seven-day
period, computed by determining the net change, exclusive of capital changes, in
the value of a hypothetical pre-existing account having a balance of one share
at the beginning of the period, subtracting a hypothetical charge reflecting
deductions from that shareholder account, dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return and then multiplying the base period return by (365/7), with the
resulting yield figure carried to at least the nearest hundredth of one percent;
and (2) their effective yield based on the same seven-day period by compounding
the base period return by adding 1, raising the sum to a power equal to (365/7)
and subtracting 1 from the result, according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)365/7] - 1
The funds may also advertise other performance data, which may consist
of the annual or cumulative return (including net short-term capital gain, if
any) earned on a hypothetical investment in each fund since they began
operations or for shorter periods. This return data may or may not assume
reinvestment of dividends (compounding).
Yield may fluctuate daily and does not provide a basis for determining
future yields. Because the yield of each fund fluctuates, it cannot be compared
with yields on savings accounts or other investment alternatives that provide an
agreed to or guaranteed fixed yield for a stated period of time. However, yield
information may be useful to an investor considering temporary investments in
money market instruments. In comparing the yield of one money market fund to
another, consideration should be given to each fund's investment policies,
including the types of investments made, the average maturity of the portfolio
securities and whether there are any special account charges that may reduce the
yield.
OTHER INFORMATION. The funds' performance data quoted in advertising and
other promotional materials ("Performance Advertisements") represent past
performance and are not intended to predict or indicate future results. The
return on an investment in each fund will fluctuate. In Performance
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Advertisements, a fund may compare its yield with data published by Lipper
Analytical Services, Inc. for money funds ("Lipper"), CDA Investment
Technologies, Inc. ("CDA"), IBC Financial Data, Inc. ("IBC"), Wiesenberger
Investment Companies Service ("Wiesenberger") or Investment Company Data Inc.
("ICD"), or with the performance of recognized stock and other indexes,
including the Standard & Poor's 500 Composite Stock Price Index, the Dow Jones
Industrial Average, the Morgan Stanley Capital International World Index, the
Lehman Brothers Treasury Bond Index, the Lehman Brothers Government/Corporate
Bond Index, the Salomon Smith Barney Government Bond Index and changes in the
Consumer Price Index as published by the U.S. Department of Commerce. The funds
also may refer in such materials to mutual fund performance rankings and other
data, such as comparative asset, expense and fee levels, published by Lipper,
CDA, IBC, Wiesenberger or ICD. Performance Advertisements also may refer to
discussions of the funds and comparative mutual fund data and ratings reported
in independent periodicals, including THE WALL STREET JOURNAL, MONEY MAGAZINE,
FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES,
THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS. Comparisons
in Performance Advertisements may be in graphic form.
The funds may also compare their performance with the performance of
bank certificates of deposit ("CDs") as measured by the CDA Certificate of
Deposit Index and the Bank Rate Monitor National Index and the average of yields
of CDs of major banks published by Banxquotes(R) Money Markets. In comparing a
fund's performance to CD performance, investors should keep in mind that bank
CDs are insured in whole or in part by an agency of the U.S. government and
offer fixed principal and fixed or variable rates of interest, and that bank CD
yields may vary depending on the financial institution offering the CD and
prevailing interest rates. Bank accounts are insured in whole or in part by an
agency of the U.S. government and may offer a fixed rate of return. Fund shares
are not insured or guaranteed by the U.S. government and returns thereon will
fluctuate. While the funds seek to maintain a stable net asset value of $1.00
per share, there can be no assurance that they will be able to do so.
The funds may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends on fund shares are reinvested by being paid in additional
fund shares, any future income of the funds would increase the value, not only
of the original funds' investments, but also of the additional fund shares
received through reinvestment. As a result, the value of the funds' investment
would increase more quickly than if dividends had been paid in cash. The funds
may also make available to shareholders a daily accrual factor or "mil rate"
representing dividends accrued to shareholder accounts on a given day or days.
Certain shareholders may find that this information facilitates accounting or
recordkeeping.
TAXES
To qualify for treatment as a regulated investment company ("RIC") under
the Internal Revenue Code, each fund must distribute to its shareholders for
each taxable year at least 90% of its investment company taxable income
(consisting generally of net investment income and net short-term capital gains,
if any) and must meet several additional requirements. For each fund, these
requirements include the following: (1) the fund must derive at least 90% of its
gross income each taxable year from dividends, interest, payments with respect
to securities loans and gains from the sale or other disposition of securities
and certain other income; (2) at the close of each quarter of the fund's taxable
year, at least 50% of the value of its total assets must be represented by cash
and cash items, U.S. government securities, securities of other RICs and other
securities that are limited, in respect of any one issuer, to an amount that
does not exceed 5% of the value of the fund's total assets; and (3) at the close
of each quarter of the fund's taxable year, not more than 25% of the value of
its total assets may be invested in securities (other than U.S. government
securities or the securities of other RICs) of any one issuer. If a fund failed
to qualify for treatment as a RIC for any taxable year, (a) it would be taxed as
an ordinary corporation on the full amount of its taxable income for that year
without being able to deduct the distributions it makes to its shareholders and
(b) the shareholders would treat all those distributions as dividends (that is,
ordinary income) to the extent of the fund's earnings and profits. In addition,
the fund could be required to recognize unrealized gains, pay substantial taxes
and interest, and make substantial distributions before requalifying for RIC
treatment.
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OTHER INFORMATION
DELAWARE BUSINESS TRUST. Although Delaware law statutorily limits the
potential liabilities of a Delaware business trust's shareholders to the same
extent as it limits the potential liabilities of a Delaware corporation,
shareholders of the funds could, under certain conflicts of laws jurisprudence
in various states, be held personally liable for the obligations of the Trust or
a fund. However, the Trust Instrument of the Trust disclaims shareholder
liability for acts or obligations of the Trust or its series (the funds). The
Trust Instrument provides for indemnification from a fund's property for all
losses and expenses of any fund shareholder held personally liable for the
obligations of the fund. Thus, the risk of a shareholder's incurring financial
loss on account of shareholder liability is limited to circumstances in which
the fund itself would be unable to meet its obligations, a possibility which
Mitchell Hutchins believes is remote and not material. Upon payment of any
liability incurred by a shareholder solely by reason of being or having been a
shareholder of a fund, the shareholder paying such liability will be entitled to
reimbursement from the general assets of the fund. The trustees intend to
conduct the operations of the funds in such a way as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of each fund.
VOTING RIGHTS. Shareholders of the funds are entitled to one vote for
each full share held and fractional votes for fractional shares held. Voting
rights are not cumulative and, as a result, the holders of more than 50% of all
the shares of the Trust may elect all its board members. The shares of each
series of the Trust will be voted separately, except when an aggregate vote of
all the series is required by law.
The Trust does not hold annual meetings. There normally will be no
meetings of shareholders to elect trustees unless fewer than a majority of the
trustees holding office have been elected by the shareholders. Shareholders of
record of no less than two-thirds of the outstanding shares of the Trust may
remove a trustee by vote cast in person or by proxy at a meeting called for that
purpose. A meeting will be called to vote on the removal of a trustee at the
written request of holders of record of at least 10% of the outstanding shares
of the Trust.
PRIOR NAME. Prior to July 28, 1999, the Trust was known as "Mitchell
Hutchins Institutional Series."
CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT. The
funds' custodian, State Street Bank and Trust Company, located at One Heritage
Drive, North Quincy, Massachusetts 02171, serves as custodian and recordkeeping
agent for the funds. PFPC Inc., a subsidiary of PNC Bank, N.A., serves as the
funds' transfer and dividend disbursing agent. It is located at 400 Bellevue
Parkway, Wilmington, DE 19809.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the funds.
Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and Mitchell
Hutchins in connection with other matters.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York
10019, serves as independent accountants for the funds.
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YOU SHOULD RELY ONLY ON THE INFORMATION
CONTAINED OR REFERRED TO IN A FUND'S
PROSPECTUS AND THIS STATEMENT OF
ADDITIONAL INFORMATION. THE FUNDS AND
THEIR DISTRIBUTOR HAVE NOT AUTHORIZED
ANYONE TO PROVIDE YOU WITH INFORMATION LIR Cash Reserves Fund
THAT IS DIFFERENT. THE PROSPECTUSES AND LIR Liquid Assets Fund
THIS STATEMENT OF ADDITIONAL INFORMATION
IS NOT AN OFFER TO SELL SHARES OF THE
FUNDS IN ANY JURISDICTION WHERE THE
FUNDS OR THEIR DISTRIBUTOR MAY NOT
LAWFULLY SELL THOSE SHARES.
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Statement of Additional Information
December 22, 1999
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(C)1999 PaineWebber Incorporated. All rights reserved.
