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 series of Mitchell Hutchins LIR
Money Series ("Trust"), a professionally managed open-end investment company.
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.
Portions of each fund's Annual Report to Shareholders are incorporated
by reference into this Statement of Additional Information ("SAI"). The Annual
Report accompanies this SAI. You may obtain an additional copy of a fund's
Annual Report without charge by calling toll-free 1-800-647-1568.
This SAI is not a Prospectus and should be read only in conjunction
with a fund's Prospectus, dated September 1, 2000. 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 September 1, 2000.
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 and Management Ownership of Securities..................... 8
Investment Advisory, Administration and Distribution Arrangements...... 16
Portfolio Transactions................................................. 18
Additional Purchase and Redemption Information; Service
Organizations...................................................... 19
Valuation of Shares.................................................... 20
Performance Information................................................ 20
Taxes.................................................................. 22
Other Information...................................................... 23
Financial Statements................................................... 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. They also include longer term bonds that have variable interest
rates or other special features that give them the financial characteristics of
short-term debt. 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. Each fund maintains a
dollar-weighted average portfolio maturity of 90 days or less.
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 calendar 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"). First
Tier Securities include U.S. government securities and securities of other
registered investment companies that are money market funds. Other First Tier
Securities are either (1) rated in the highest short-term rating category by at
least two nationally recognized statistical rating organizations ("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 from banks or through reverse repurchase
agreements for temporary purposes, but not in excess of 10% of its total assets.
The costs associated with borrowing may reduce the fund's net income.
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. New forms of money market instruments
continue to be developed. The funds may invest in these instruments to the
extent consistent with their investment objectives.
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
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obligation and the ratings of the issue. The ratings assigned by rating agencies
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 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 program, the
principal and interest components are individually numbered and separately
issued by the U.S. Treasury.
COMMERCIAL PAPER AND OTHER SHORT-TERM OBLIGATIONS. Commercial paper
includes short-term obligations issued by corporations, partnerships, trusts or
other entities to finance short-term credit needs. A fund also may purchase
other types of non-convertible debt obligations subject to maturity constraints
imposed by the Securities and Exchange Commission ("SEC"). 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 that have been securitized through the use of
trusts or special purpose corporations or other entities. 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.
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 a 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 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
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
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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 (subject to any applicable advance notice provisions) 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.
Changes in the credit quality of these financial institutions could cause losses
to a fund and affect its share price. 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.
ILLIQUID SECURITIES. The term "illiquid securities" 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. The
lack of a liquid secondary market for illiquid securities may make it more
difficult for a fund to assign a value to those securities for purposes of
valuing its portfolio and calculating its net asset value.
Restricted securities are not registered under the Securities Act 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.
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 under the Securities Act, 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 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
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marketability of such portfolio securities, and the fund might be unable to
dispose of them 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 exceed its
limitation on investments in illiquid securities for any reason (such as a
particular security becoming illiquid, changes in the relative market values of
liquid and illiquid portfolio securities or shareholder redemptions), Mitchell
Hutchins will consider what action would be in the best interests of the fund
and its shareholders. Such action may include engaging in an orderly disposition
of securities to reduce the fund's holdings of illiquid securities. However, a
fund is not required to dispose of illiquid securities under these
circumstances.
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 or securities
dealers or their affiliates. 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 a fund might be unable to deliver them when the fund seeks to
repurchase. If the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, the buyer or trustee or receiver may
receive an extension of time to determine whether to enforce a 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 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's when-issued and
delayed delivery purchase commitments could cause its net asset value per share
to be more volatile.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. Each fund may invest in
securities of other money market funds, subject to limitations under the
Investment Company Act. Among other things, these limitations currently restrict
a fund's aggregate investments in other investment companies to no more than 10%
of its total assets. A fund's investments in certain private investment vehicles
are not subject to this restriction. 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. Each fund may reinvest any cash collateral in money market
investments or other short-term liquid investments, including other investment
companies. A fund also may reinvest cash collateral in private investment
vehicles similar to money market funds, including one managed by Mitchell
Hutchins. 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. A fund will
retain authority to terminate any of its loans at any time. A 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. A fund will receive amounts equivalent to any interest, dividends or
other distributions on the securities loaned. A 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 funds' 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 and reverse
repurchase agreements, they will maintain with an approved custodian in a
segregated account cash or liquid securities, marked to market daily, in an
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amount at least equal to each fund's obligation or commitment under such
transactions.
INVESTMENT LIMITATIONS OF THE FUNDS
FUNDAMENTAL LIMITATIONS. The following 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, a later
increase or decrease in percentage resulting from changing values of portfolio
securities or amount of total assets will not be considered a violation of any
of the following limitations. With regard to the borrowings limitation in
fundamental limitation (3), each fund will comply with the applicable
restrictions of Section 18 of the Investment Company Act.
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.
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(6) purchase or sell real estate, except that investments in
securities of issuers that invest in real estate and investments in
mortgage-backed securities, mortgage participations or other instruments
supported by interests in real estate are not subject to this limitation, and
except that the fund may exercise rights under agreements relating to such
securities, including the right to enforce security interests and to hold real
estate acquired by reason of such enforcement until that real estate can be
liquidated in an orderly manner.
(7) purchase or sell physical commodities unless acquired as a
result of owning securities or other instruments, but the fund may purchase,
sell or enter into financial options and futures, forward and spot currency
contracts, swap transactions and other financial contracts or derivative
instruments.
NON-FUNDAMENTAL 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 changing 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 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 AND MANAGEMENT OWNERSHIP OF SECURITIES
The Trust was organized on April 29, 1998, as a business trust under
the laws of Delaware and has five series. The board has authority to establish
additional series and to issue an unlimited number of shares of beneficial
interest of each existing or future series, par value $0.001 per share.
The 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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BUSINESS EXPERIENCE;
NAME AND ADDRESS; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
--------------------- ------------------- --------------------
Margo N. Alexander*+; 53 Trustee and President Mrs. Alexander is
Chairman (since March
1999), chief executive
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 30
investment companies
for which Mitchell
Hutchins, PaineWebber
or one of their
affiliates serves as
investment adviser.
Richard Q. Armstrong; 65 Trustee Mr. Armstrong is
R.Q.A. Enterprises chairman and principal
One Old Church Road of R.Q.A. Enterprises
Unit #6 (management consulting
Greenwich, CT 06830 firm) (since April
1991 and principal
occupation since March
1995). Mr. Armstrong
was chairman of the
board, chief executive
officer and co-owner
of Adirondack
Beverages (producer
and distributor of
soft drinks and
sparkling/still
waters) (October
1993-March 1995). He
was a partner of The
New England Consulting
Group (management
consulting firm)
(December 1992-
September 1993). He
was managing
director of LVMH U.S.
Corporation (U.S.
subsidiary of the
French luxury goods
conglomerate, Louis
Vuitton Moet Hennessey
Corporation)
(1987-1991) and
chairman of its wine
and spirits
subsidiary,
Schieffelin &
Somerset Company
(1987-1991). Mr.
Armstrong is a
director or trustee of
29 investment
companies for which
Mitchell Hutchins,
PaineWebber or one of
their affiliates
serves as
investment adviser.
E. Garrett Bewkes, Jr.**+; 73 Trustee and Chairman Mr. Bewkes is a
of the Board of director of Paine
Trustees Webber Group Inc. ("PW
Group") (holding
company of PaineWebber
and Mitchell
Hutchins). He serves
as a consultant to
PaineWebber (since May
1999). Prior to 1996,
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 40
investment companies
for which Mitchell
Hutchins, PaineWebber
or one of their
affiliates serves as
investment adviser.
9
<PAGE>
BUSINESS EXPERIENCE;
NAME AND ADDRESS; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
--------------------- ------------------- --------------------
Richard R. Burt; 53 Trustee Mr. Burt is chairman
1275 Pennsylvania Ave, N.W. of IEP Advisors, LLP
Washington, DC 20004 (international
investments and
consulting 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), six
investment companies
in the Deutsche Bank
family of funds, nine
investment companies
in the Flag Investors
family of funds, The
Central European Fund,
Inc. and The Germany
Fund, Inc., vice
chairman of Anchor
Gaming (provides
technology to gaming
and wagering industry)
(since July 1999) and
chairman of Weirton
Steel Corp. (makes and
finishes steel
products) (since April
1996). 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 29
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 28
investment companies
for which Mitchell
Hutchins, PaineWebber
or one of their
affiliates serves as
investment adviser.
Meyer Feldberg; 58 Trustee Mr. Feldberg is Dean
Columbia University and Professor of
101 Uris Hall Management of the
New York, NY 10027 Graduate School of
Business, Columbia
University. Prior to
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 37
investment companies
for which Mitchell
Hutchins, PaineWebber
or one of their
affiliates serves as
investment adviser.
10
<PAGE>
BUSINESS EXPERIENCE;
NAME AND ADDRESS; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
--------------------- ------------------- --------------------
George W. Gowen; 70 Trustee Mr. Gowen is a partner
666 Third Avenue in the law firm of
New York, NY 10017 Dunnington, Bartholow
& Miller. Prior to May
1994, he was a partner
in the law firm of
Fryer, Ross & Gowen.
Mr. Gowen is a
director or trustee of
37 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
1455 Pennsylvania Ave, N.W. of Thayer Capital
Suite 350 Partners (merchant
Washington, DC 20004 bank) and chairman of
Thayer Hotel Investors
II and Lodging
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
29 investment
companies for which
Mitchell Hutchins,
PaineWebber or one of
their affiliates
serves as investment
adviser.
11
<PAGE>
BUSINESS EXPERIENCE;
NAME AND ADDRESS; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
--------------------- ------------------- --------------------
Carl W. Schafer; 64 Trustee Mr. Schafer is
66 Witherspoon Street, #1100 president of the
Princeton, NJ 08542 Atlantic Foundation
(charitable foundation
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 29
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).
Mr. Storms 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 29
investment companies
for which Mitchell
Hutchins, PaineWebber
or one of their
affiliates serves as
investment adviser.
Thomas Disbrow***; 34 Vice President and Mr. Disbrow is a
Assistant Treasurer first vice president
and a senior manager
of the mutual fund
finance department of
Mitchell Hutchins.
Prior to November
1999, he was a vice
president of Zweig/
Glaser Advisers. Mr.
Disbrow is a vice
president and
assistant treasurer
of 30 investment
companies for which
Mitchell Hutchins,
PaineWebber or one
of their affiliates
serves as investment
adviser.
Kris L. Dorr*; 36 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.
12
<PAGE>
BUSINESS EXPERIENCE;
NAME AND ADDRESS; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
--------------------- ------------------- --------------------
Elbridge T. Gerry III*; 43 Vice President Mr. Gerry is a
managing director 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
six investment
companies for which
Mitchell Hutchins,
PaineWebber or one of
their affiliates
serves as investment
adviser.
John J. Lee***; 32 Vice President and Mr. Lee is a vice
Assistant Treasurer president and a
manager 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
30 investment
companies for which
Mitchell Hutchins,
PaineWebber or one
of their affiliates
serves as investment
adviser.
Kevin J. Mahoney***; 34 Vice President and Mr. Mahoney is a
Assistant Treasurer first vice president
and a 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 30 investment
companies for which
Mitchell Hutchins,
PaineWebber or one of
their affiliates
serves as investment
adviser.
Michael H. Markowitz*; 35 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.
Mr. McCauley is a
vice president of 20
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 two
investment companies
for which Mitchell
Hutchins, PaineWebber
or one of their
affiliates serves as
investment adviser.
13
<PAGE>
BUSINESS EXPERIENCE;
NAME AND ADDRESS; AGE POSITION WITH TRUST OTHER DIRECTORSHIPS
--------------------- ------------------- --------------------
Ann E. Moran***; 43 Vice President and Ms. Moran is a vice
Assistant Treasurer president and a
manager of the mutual
fund finance
department of Mitchell
Hutchins. Ms. Moran
is a vice president
and assistant
treasurer of 30
investment companies
for which Mitchell
Hutchins, PaineWebber
or one of their
affiliates serves as
investment adviser.
Dianne E. O'Donnell**; 48 Vice President Ms. O'Donnell is a
and Secretary senior vice president
and deputy general
counsel of Mitchell
Hutchins. Ms.
O'Donnell is a vice
president and
secretary of 30
investment companies
for which Mitchell
Hutchins, PaineWebber
or one of their
affiliates serves as
investment adviser.
Susan P. Ryan*; 40 Vice President Ms. Ryan is a senior
vice president and a
portfolio manager of
Mitchell Hutchins.
Ms. Ryan is a vice
president of six
investment companies
for which Mitchell
Hutchins, PaineWebber
or one of their
affiliates serves as
investment adviser.
Paul H. Schubert***; 37 Vice President Mr. Schubert is a
and Treasurer senior vice president
and the director of
the mutual fund
finance department of
Mitchell Hutchins.
Mr. Schubert is a vice
president and
treasurer of 30
investment companies
for which Mitchell
Hutchins, PaineWebber
or one of their
affiliates serves as
investment adviser.
Barney A. Taglialatela***; 39 Vice President and Mr. Taglialatela is a
Assistant Treasurer vice president and a
manager of the mutual
fund finance
department of Mitchell
Hutchins.
Mr. Taglialatela is a
vice president and
assistant treasurer of
30 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 four
investment companies
for which Mitchell
Hutchins, PaineWebber
or one of their
affiliates serves
as investment adviser.
Keith A. Weller**; 39 Vice President and Mr. Weller is a first
Assistant Secretary vice president and
associate general
counsel of Mitchell
Hutchins. Mr. Weller
is a vice president
and assistant
secretary of 29
investment companies
for which Mitchell
Hutchins, PaineWebber
or one of their
affiliates serves as
investment adviser.
14
<PAGE>
-------------
* 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.
*** This person's business address is Newport Center III, 499 Washington
Blvd., 14th Floor, Jersey City, New Jersey 07310-1998.
+ Mrs. Alexander, Mr. Bewkes, Ms. Farrell and Mr. Storms are "interested
persons" of the funds as defined in the Investment Company Act by
virtue of their positions with Mitchell Hutchins, PaineWebber and/or PW
Group.
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
attending 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. 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 held office with the Trust
or with other PaineWebber funds during the periods indicated.
COMPENSATION TABLE+
ESTIMATED
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FROM THE
NAME OF PERSON, POSITION THE TRUST* FUND COMPLEX**
Richard Q. Armstrong,
Trustee.............................. $ 8,180 $ 104,650
Richard R. Burt,
Trustee.............................. 8,180 102,850
Meyer Feldberg,
Trustee.............................. 8,180 143,650
George W. Gowen,
Trustee.............................. 9,994 138,400
Frederic V. Malek,
Trustee.............................. 8,180 104,650
Carl W. Schafer,
Trustee.............................. 8,180 104,650
--------------------
+ 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 PaineWebber
funds.
* Represents fees estimated to be paid to each board member by the Trust during
the funds' first full fiscal year of operations ending April 30, 2001.
** Represents total compensation paid during the calendar year ended December
31, 1999, 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.
15
<PAGE>
PRINCIPAL HOLDERS AND MANAGEMENT OWNERSHIP OF SECURITIES. As of August
1, 2000, trustees and officers owned in the aggregate less than 1% of the
outstanding shares of either fund.
As of August 1, 2000, no shareholders were shown in the funds' records
as owning 5% or more of a fund's shares.
INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS. Mitchell Hutchins
acts as the Trust's investment adviser and administrator for each fund pursuant
to separate contracts with the Trust (respectively, "Cash Reserves Contract" and
"Liquid Assets Contract"; collectively, "Advisory Contracts"). During the fiscal
period February 14, 2000 (commencement of operations) to April 30, 2000, Cash
Reserves Fund paid (or accrued) to Mitchell Hutchins investment advisory and
administration fees of $191,184 of which $38,205 was waived. During the fiscal
period February 14, 2000 (commencement of operations) to April 30, 2000, Liquid
Assets Fund paid (or accrued) to Mitchell Hutchins investment advisory and
administration fees of $21,138 (all of which was waived).
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 (or the fund's proportionate share of 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 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
16
<PAGE>
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 Liquid Assets Fund will include 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
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.
SECURITIES LENDING. During the fiscal period from February 14, 2000
(commencement of operations) to April 30, 2000, the funds paid no fees to
PaineWebber for its services as securities lending agent because the funds did
not engage in any securities lending activities.
17
<PAGE>
NET ASSETS. The following table shows the approximate net assets as of
July 31, 2000, 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)................... $9,156.5
Global............................................... 4,703.4
Equity/Balanced...................................... 9,585.7
Fixed Income (excluding Money Market)................ 4,274.2
Taxable Fixed Income........................ 2,859.4
Tax-Free Fixed Income....................... 1,414.8
Money Market Funds................................... 39,450.0
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.
Mitchell Hutchins is located at 51 West 52nd Street, New York, New York
10019-6114.
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.
During the fiscal period February 14, 2000 (commencement of operations)
to April 30, 2000, the funds paid no brokerage commissions. Therefore, the funds
have not allocated any brokerage transactions for research, analysis, advice and
similar services.
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 in a manner 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
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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.
As of April 30, 2000, each fund owned securities issued by the
following companies that are its regular broker-dealers:
CASH RESERVES FUND
ISSUER TYPE OF SECURITY VALUE
------ ---------------- -----
Merrill Lynch & Co., Inc. Commercial Paper $9,999,163
LIQUID ASSETS FUND
ISSUER TYPE OF SECURITY VALUE
------ ---------------- -----
American Express Credit Corp. Commercial Paper $14,965,000
ADDITIONAL PURCHASE AND REDEMPTION
INFORMATION; SERVICE ORGANIZATIONS
ADDITIONAL PURCHASE INFORMATION. Shares of the funds are primarily
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, subject to approval by the board, accept securities in
which the fund is authorized to invest as consideration for the issuance of its
shares, provided that the value of the securities is at least equal to the net
asset value of the fund's shares at the time the transaction occurs. A fund may
accept or reject any such securities in its discretion.
ADDITIONAL REDEMPTION INFORMATION. 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
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.
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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.
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 ("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.
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.
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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).
CASH RESERVES FUND
INCEPTION DATE (2/14/00)
Inception to April 30, 2000:
Standardized Return........................... 1.18%
LIQUID ASSETS FUND
INCEPTION DATE (2/14/00)
Inception to April 30, 2000:
Standardized Return........................... 1.24%
CALCULATION OF YIELD. Each fund computes its 7-day current yield and
its 7-day 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
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. The funds may also advertise non-standardized yields calculated in a
manner similar to that described above, but for different time periods (E.G.,
one-day yield, 30-day yield).
For the seven day period ended April 30, 2000, the yield and effective
yield of the funds was as follows:
YIELD EFFECTIVE YIELD
Cash Reserves Fund 5.75% 5.91%
Liquid Assets Fund 5.99% 6.17%
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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
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 continue to qualify for treatment as a regulated investment company
("RIC") under the Internal Revenue Code, each fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income and net short-term
capital gain, if any) and must meet several additional requirements. With
respect to 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, (1) 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 (2) 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. State
Street Bank and Trust Company, located at 1776 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 auditors for the funds.
FINANCIAL STATEMENTS
Each fund's Annual Report to Shareholders for its initial fiscal period
ended April 30, 2000 is a separate document supplied with this SAI, and the
financial statements, accompanying notes and report of independent auditors
appearing therein are incorporated herein by this reference.
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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 LIR Cash Reserves Fund
ANYONE TO PROVIDE YOU WITH INFORMATION LIR Liquid Assets Fund
THAT IS DIFFERENT. THE PROSPECTUSES AND
THIS STATEMENT OF ADDITIONAL
INFORMATION ARE NOT AN OFFER TO SELL -----------------------------------
SHARES OF THE FUNDS IN ANY
JURISDICTION WHERE THE FUNDS OR THEIR Statement of Additional Information
DISTRIBUTOR MAY NOT LAWFULLY SELL THOSE
SHARES. September 1, 2000
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(C)2000 PaineWebber Incorporated. All rights reserved.
