<PAGE>
LIQUID INSTITUTIONAL RESERVES
MONEY MARKET FUND
GOVERNMENT SECURITIES FUND
TREASURY SECURITIES FUND
1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
Liquid Institutional Reserves ("Trust") is a no-load, open-end investment
company offering shares in three separate, diversified, money market funds
("Funds"). Each Fund seeks high current income to the extent consistent with
the preservation of capital and the maintenance of liquidity
through investments in a diversified portfolio of high quality, short-term,
U.S. dollar-denominated money market instruments. The investment adviser,
administrator and distributor of each Fund is PaineWebber Incorporated
("PaineWebber"); the sub-adviser and sub-administrator of each Fund is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
asset management subsidiary of PaineWebber. This Statement of Additional
Information is not a prospectus and should be read only in conjunction with
the Funds' current Prospectus, dated September 1, 1998. A copy of the
Prospectus may be obtained by contacting any PaineWebber Investment Executive
or correspondent firm or by calling 1-888-LIR-FUND. This Statement of
Additional Information is dated September 1, 1998.
SEPTEMBER 1, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Investment Policies and Restrictions........................................ 3
Trustee and Officers; Principal Holders of Securities....................... 7
Investment Advisory, Administration and Distribution Arrangements........... 13
Portfolio Transactions...................................................... 15
Additional Information Regarding Redemptions................................ 15
Valuation of Shares......................................................... 16
Taxes....................................................................... 17
Calculation of Yield........................................................ 17
Other Information........................................................... 18
Financial Statements........................................................ 19
</TABLE>
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<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Funds' investment policies and limitations.
YIELDS AND RATINGS OF MONEY MARKET INVESTMENTS. The yields on the money
market instruments in which the Funds invest (such as U.S. government
securities, bank obligations, commercial paper and other short-term
obligations) are dependent on a variety of factors, including general money
market conditions, conditions in the particular market for the obligation, the
financial condition of the issuer, the size of the offering, the maturity of
the obligation and the ratings of the issue. The ratings of nationally
recognized statistical rating organizations ("NRSROs") represent their
opinions as to the quality of the obligations they undertake to rate. Ratings,
however, are general and are not absolute standards of quality. Consequently,
obligations with the same rating, maturity and interest rate may have
different market prices. Subsequent to its purchase by a Fund, an issue may
cease to be rated or its rating may be reduced.
The Fund may only purchase securities that are "First Tier Securities" as
defined in Rule 2a-7 under the Investment Company Act of 1940 ("1940 Act"). To
qualify as a First Tier Security, a security must either be (1) rated in the
highest short-term rating category by at least two NRSROs, (2) rated in the
highest short-term rating category by a single NRSRO if only that NRSRO has
assigned the obligation a short-term rating, (3) issued by an issuer that has
received such a short-term rating with respect to a security that is
comparable in terms of priority and security, (4) subject to a guarantee rated
in the highest short-term rating category or issued by a guarantor that has
received the highest short-term rating for a comparable debt obligation or (5)
unrated, but determined by Mitchell Hutchins to be of comparable quality. If a
security in a Fund's portfolio ceases to be a "First Tier Security" or
Mitchell Hutchins becomes aware that a security has received a rating below
the second highest rating by any NRSRO, Mitchell Hutchins or the Trust's board
of trustees ("board") will consider whether the Fund should continue to hold
the obligation. A First Tier Security rated in the highest short-term rating
category by a single NRSRO at the time of purchase that subsequently receives
a rating below the highest short-term rating category by a single NRSRO may
continue to be considered a First Tier Security.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which Money
Market Fund purchases securities or other obligations and simultaneously
commits to resell them to the counterparty at an agreed-upon date or upon
demand and at a price reflecting a market rate of interest unrelated to the
coupon rate or maturity of the purchased securities or other obligations. The
Fund maintains custody of the underlying securities or obligations prior to
their repurchase, either through its regular custodian or through a special
"tri-party" custodian or sub-custodian that maintains separate accounts for
both the Fund and its counterparty. Thus, the obligation of the counterparty
to pay the repurchase price on the date agreed to or upon demand is, in
effect, secured by such securities or obligations. If their value becomes less
than the repurchase price, plus any agreed-upon additional amount, the
counterparty must provide additional collateral so that at all times the
collateral is at least equal to the repurchase price plus any agreed-upon
additional amount. The difference between the total amount to be received upon
repurchase of the securities or obligations and the price that was paid by the
Fund upon acquisition is accrued as interest and included in the Fund's net
investment income.
PURCHASE AND SALE TRANSACTIONS. The counterparty in a simultaneous purchase
and sale transaction with a Fund agrees to buy from the Fund the same or a
similar security at a mutually agreed-upon time and price. The difference
between the purchase cost and sale proceeds (which includes the accrued
interest on the security) determines the yield during the term of the
transaction. The Fund does not have the right to require the counterparty to
provide additional collateral if the market value of the securities purchased
by the Fund falls below the price at which the securities are to be sold to
the counterparty. In addition, in purchase and sale transactions, full legal
title to the securities sold to a Fund is transferred to the Fund. If the
counterparty defaults, the Fund's return on the transaction is determined by
the difference between the market value of the security bought by the Fund and
the amount paid by the Fund, plus related accrued interest. The Fund would
have rights against a defaulting counterparty for breach of contract with
respect to any losses that result from those market fluctuations.
3
<PAGE>
ILLIQUID SECURITIES. No Fund may invest more than 10% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, repurchase agreements maturing in
more than seven days, simultaneous purchase and sale contracts with terms in
excess of seven days and restricted securities other than those Mitchell
Hutchins has determined to be liquid pursuant to guidelines established by the
board. To the extent a Fund invests in illiquid securities, it may not be able
to readily liquidate such investments and may have to sell other investments
if necessary to raise cash to meet its obligations.
Restricted securities are not registered under the Securities Act of 1933
("1933 Act") and may be sold only in privately negotiated or other exempted
transactions or after a 1933 Act registration statement has become effective.
Where registration is required, 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 a Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, a Fund might obtain a less
favorable price than prevailed when it decided to sell.
However, not all restricted securities are illiquid. A large institutional
market has developed for many U.S. and foreign securities that are not
registered under the 1933 Act. Institutional investors generally will not seek
to sell these instruments to the general public but instead will often depend
either on an efficient institutional market in which such unregistered
securities can be readily resold or on an issuer's ability to honor a demand
for repayment. Therefore, the fact that there are contractual or legal
restrictions on resale to the general public or certain institutions is not
dispositive of the liquidity of such investments.
Institutional markets for restricted securities also have developed as a
result of Rule 144A, which establishes a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers, providing both readily ascertainable values for
restricted securities and the ability to liquidate an investment in order to
satisfy share redemption orders. Such markets include automated systems for
the trading, clearance and settlement of unregistered securities of domestic
and foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc. An insufficient number of qualified
institutional buyers interested in purchasing Rule 144A-eligible restricted
securities held by a Fund, however, could affect adversely the marketability
of such portfolio securities, and a Fund might be unable to dispose of such
securities promptly or at favorable prices.
The board has delegated the function of making day-to-day determinations of
liquidity to Mitchell Hutchins, pursuant to guidelines approved by the board.
Mitchell Hutchins takes into account a number of factors in reaching liquidity
decisions, including (1) the frequency of trades for the security, (2) the
number of dealers that make quotes for the security, (3) the number of dealers
that have undertaken to make a market in the security, (4) the number of other
potential purchasers and (5) the nature of the security and how trading is
effected (e.g., the time needed to sell the security, how offers are solicited
and the mechanics of transfer). Mitchell Hutchins monitors the liquidity of
restricted securities held by the Funds and reports periodically on such
decisions to the board.
FLOATING RATE AND VARIABLE RATE DEMAND INSTRUMENTS. Money Market Fund and
Government Securities Fund may invest in floating rate and variable rate
securities with demand features. A demand feature gives a Fund the right to
sell the securities back to a specified party, usually a remarketing agent, on
a specified date, at a price equal to their amortized cost value plus accrued
interest. A demand feature is often backed by a letter of credit, guarantee or
other liquidity support arrangement from a bank or other financial institution
that may be drawn upon demand, after specified notice, for all or any part of
the exercise price of the demand feature. Generally, a Fund intends to
exercise demand features (1) upon a default under the terms of the underlying
security, (2) to maintain a Fund's portfolio in accordance with its investment
objective and policies or applicable legal or regulatory requirements or (3)
as needed to provide liquidity to a Fund in order to meet redemption requests.
A Fund may also exercise a demand feature if Mitchell Hutchins deems it
prudent to do so. 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
4
<PAGE>
economic conditions, regulatory limitations or other factors. The interest
rate on floating rate or variable rate securities ordinarily is readjusted on
the basis of the prime rate of the bank that originated the financing or some
other index or published rate, such as the 90-day U.S. Treasury bill rate, or
is otherwise reset to reflect market rates of interest. Generally, these
interest rate adjustments cause the market value of floating rate and variable
rate securities to fluctuate less than the market value of fixed rate
obligations.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Fund may purchase
securities on a "when-issued" or "delayed delivery" basis. A security
purchased on a when-issued or delayed delivery basis is recorded as an asset
on the commitment date and is subject to changes in market value, generally
based upon changes in the level of interest rates. Thus, fluctuation in the
value of the security from the time of the commitment date will affect the
Fund's net asset value. When 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 "Investment Policies and Restrictions--
Segregated Accounts."
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, the Fund
will maintain with an approved custodian in a segregated account cash or
liquid securities, marked to market daily, in an amount at least equal to the
Fund's obligation or commitment under such transactions.
LENDING OF PORTFOLIO SECURITIES. Each Fund is authorized to lend up to 33
1/3% of its total assets to broker-dealers or institutional investors that
Mitchell Hutchins deems qualified, but only when the borrower maintains
acceptable collateral with the Funds' custodian, marked to market daily, at
least equal to the market value of the securities loaned, plus accrued
interest. 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 cash collateral in money market
instruments or other short-term liquid investments. In determining whether to
lend securities to a particular broker-dealer or institutional investor,
Mitchell Hutchins will consider, and during the period of the loan will
monitor, all relevant facts and circumstances, including the creditworthiness
of the borrower. The Funds will retain authority to terminate any of its loans
at any time. The Funds may pay reasonable fees in connection with a loan and
may pay the borrower or placing broker a negotiated portion of the interest
earned on the reinvestment of cash held as collateral. The Funds will receive
amounts equivalent to any interest or other distributions on the securities
loaned. The Funds 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 Funds' 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 Funds. 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.
FUNDAMENTAL INVESTMENT LIMITATIONS. The following fundamental investment
limitations cannot be changed for a Fund without the affirmative vote of the
lesser of (1) more than 50% of the outstanding shares of the Fund or (2) 67%
or more of the shares of the Fund present at a shareholders' meeting if more
than 50% of the outstanding shares are represented at the meeting in person or
by proxy. If a percentage restriction is adhered to at the time of an
investment or transaction, later changes in percentage resulting from changing
values of portfolio securities or amount of total assets will not be
considered a violation of any of the following limitations.
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
5
<PAGE>
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) with respect to this limitation,
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 1940 Act and then not in excess of 33 1/3% of the Fund's total
assets (including the amount of the senior securities issued but
reduced by any liabilities not constituting senior securities) at
the time of the issuance or borrowing, except that the Fund may
borrow up to an additional 5% of its total assets (not including the
amount borrowed) for temporary or emergency purposes.
(4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this
restriction, the acquisition of bonds, debentures, other debt
securities or instruments, or participations or other interests
therein and investments in government obligations, commercial paper,
certificates of deposit, bankers' acceptances or similar instruments
will not be considered the making of a loan.
The following interpretation applies to, but is not a part of, this
fundamental restriction: Money Market 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 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 many purchase,
sell or enter into financial options and futures, forward and spot
currency contracts, swap transactions and other financial contracts
or derivative instruments.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. The following investment
restrictions may be changed by the board without shareholder approval.
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 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.
6
<PAGE>
(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 portfolio securities while borrowings in excess of 5% of
its total assets are outstanding.
(4) purchase securities of other investment companies, except to the
extent permitted by the 1940 Act and except that this limitation
does not apply to securities received or acquired as dividends,
through offers of exchange, or as a result of reorganization,
consolidation or merger.
TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
The trustees and executive officers of the Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST OTHER DIRECTORSHIPS
----------------------------- ----------------- ------------------------------
<C> <C> <S>
Margo N. Alexander**; 51 Trustee and Mrs. Alexander is president,
President chief executive officer and a
director of Mitchell Hutchins
(since January 1995), and an
executive vice president and
director of PaineWebber
(since March 1984). Mrs. Al-
exander is president and a
director or trustee of 32 in-
vestment companies for which
Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
Richard Q. Armstrong; 63 Trustee Mr. Armstrong is chairman and
R.Q.A. Enterprises principal of RQA Enterprises
One Old Church Road - Unit #6 (management consulting firm)
Greenwich, CT 06830 (since April 1991 and princi-
pal 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) (Oc-
tober 1993-March 1995). He
was a partner of The New En-
gland Consulting Group (man-
agement consulting firm) (De-
cember 1992-September 1993).
He was managing director of
LVMH U.S. Corporation (U.S.
subsidiary of the French lux-
ury goods conglomerate, Louis
Vuitton Moet Hennessey Corpo-
ration) (1987-1991) and
chairman of its wine and
spirits subsidiary,
Schieffelin & Somerset Com-
pany (1987-1991). Mr. Arm-
strong is a director or
trustee of 31 investment com-
panies for which Mitchell
Hutchins or PaineWebber
serves as investment adviser.
E. Garrett Bewkes, Jr.**; 71 Trustee and Mr. Bewkes is a director of
Chairman of the Paine Webber Group Inc. ("PW
Board of Trustees 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 di-
rector of Interstate Bakeries
Corporation. Mr. Bewkes is a
director or trustee of 32 in-
vestment companies for which
Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
</TABLE>
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<TABLE>
<CAPTION>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST OTHER DIRECTORSHIPS
---------------------------- ------------- -----------------------------------
<C> <C> <S>
Richard R. Burt; 51 Trustee Mr. Burt is chairman of IEP Advi-
1275 Pennsylvania Ave., N.W. sors, Inc. (international invest-
Washington, D.C. 20004 ments and consulting firm) (since
March 1994) and a partner of
McKinsey & Company (management
consulting firm) (since 1991). He
is also a director of Archer-Dan-
iels-Midland Co. (agricultural
commodities), Hollinger Interna-
tional Co. (publishing), Homestake
Mining Corp., Powerhouse Technolo-
gies Inc. and Wierton Steel Corp.
He was the chief negotiator in the
Strategic Arms Reduction Talks
with the former Soviet Union
(1989-1991) and the U.S. Ambassa-
dor to the Federal Republic of
Germany (1985-1989). Mr. Burt is a
director or trustee of 31 invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Mary C. Farrell**; 48 Trustee Ms. Farrell is a managing director,
senior investment strategist and
member of the Investment Policy
Committee of PaineWebber. Ms.
Farrell joined PaineWebber in
1982. She is a member of the Fi-
nancial 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 Busi-
ness. Ms. Farrell is a director or
trustee of 31 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Meyer Feldberg; 56 Trustee Mr. Feldberg is Dean and Professor
Columbia University of Management of the Graduate
101 Uris Hall School of Business, Columbia Uni-
New York, New York 10027 versity. Prior to 1989, he was
president of the Illinois Insti-
tute of Technology. Dean Feldberg
is also a director of Primedia
Inc., Federated Department Stores
Inc. and Revlon, Inc. Dean
Feldberg is a director or trustee
of 33 investment companies for
which Mitchell Hutchins,
PaineWebber or their affiliates
serves as investment adviser.
George W. Gowen; 68 Trustee Mr. Gowen is a partner in the law
666 Third Avenue firm of Dunnington, Bartholow &
New York, New York 10017 Miller. Prior to May 1994, he was
a partner in the law firm of Fry-
er, Ross & Gowen. Mr. Gowen is a
director or trustee of 31 invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST OTHER DIRECTORSHIPS
------------------------------ -------------- --------------------------------
<C> <C> <S>
Frederic V. Malek; 61 Trustee Mr. Malek is chairman of Thayer
1455 Pennsylvania Avenue, N.W. Capital Partners (merchant
Suite 350 bank). From January 1992 to No-
Washington, D.C. 20004 vember 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., NWA
Inc. (holding company of North-
west Airlines Inc.) and Wings
Holdings Inc. (holding company
of NWA Inc.). Prior to 1989, he
was employed by the Marriott
Corporation (hotels, restau-
rants, airline catering and
contract feeding), where he
most recently was an executive
vice president and president of
Marriott Hotels and Resorts.
Mr. Malek is also a director of
American Management Systems,
Inc. (management consulting and
computer-related services), Au-
tomatic Data Processing, Inc.,
CB Commercial Group, Inc. (real
estate services), Choice Hotels
International (hotel and hotel
franchising), FPL Group, Inc.
(electric services), Manor
Care, Inc. (health care) and
Northwest Airlines Inc. Mr.
Malek is a director or trustee
of 31 investment companies for
which Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
Carl W. Schafer; 62 Trustee Mr. Schafer is president of the
66 Witherspoon Street Atlantic Foundation (charitable
#1100 foundation supporting mainly
Princeton, NJ 08542 oceanographic exploration and
research). He is a director of
Base Ten Systems, Inc. (soft-
ware), Roadway Express, Inc.
(trucking), The Guardian Group
of Mutual Funds, Harding,
Loevner Funds, Evans Systems,
Inc. (a motor fuels, conve-
nience store and diversified
company), Electronic Clearing
House, Inc. (financial transac-
tions processing), Frontier Oil
Corporation and Nutraceutix,
Inc. (biotechnology company).
Prior to January 1993, he was
chairman of the Investment Ad-
visory Committee of the Howard
Hughes Medical Institute. Mr.
Schafer is a director or
trustee of 31 investment compa-
nies for which Mitchell
Hutchins or PaineWebber serves
as investment adviser.
John J. Lee; 30 Vice President Mr. Lee is a vice president and
and Assistant a manager of the mutual fund
Treasurer finance department of Mitchell
Hutchins. Prior to September
1997, he was an audit manager
in the financial services prac-
tice of Ernst & Young LLP. Mr.
Lee is a vice president and as-
sistant treasurer of 32 invest-
ment companies for which Mitch-
ell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST OTHER DIRECTORSHIPS
-------------------------- -------------- ------------------------------------
<C> <C> <S>
Dennis McCauley; 51 Vice President Mr. McCauley is a managing director
and chief investment officer--fixed
income of Mitchell Hutchins. Prior
to December 1994, he was director
of fixed income investments of IBM
Corporation. Mr. McCauley is a vice
president of 22 investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Ann E. Moran; 41 Vice President Ms. Moran is a vice president and a
and Assistant manager of the mutual fund finance
Treasurer department of Mitchell Hutchins.
Ms. Moran is a vice president and
assistant treasurer of 32 invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Dianne E. O'Donnell; 46 Vice President Ms. O'Donnell is a senior vice pres-
and Secretary ident and deputy general counsel of
Mitchell Hutchins. Ms. O'Donnell is
a vice president and secretary of
31 investment companies and vice
president and assistant secretary
of one investment company for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Emil Polito; 37 Vice President Mr. Polito is a senior vice presi-
dent and director of operations and
control for Mitchell Hutchins. From
March 1991 to September 1993 he was
director of the mutual funds sales
support and service center for
Mitchell Hutchins and PaineWebber.
Mr. Polito is vice president of 32
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Susan P. Ryan; 38 Vice President Ms. Ryan is a senior vice president
and a portfolio manager of Mitchell
Hutchins. Ms. Ryan has been with
Mitchell Hutchins since 1982. Ms.
Ryan is a vice president of five
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Victoria E. Schonfeld; 47 Vice President Ms. Schonfeld is a managing director
and general counsel of Mitchell
Hutchins. Prior to May 1994, she
was a partner in the law firm of
Arnold & Porter. Ms. Schonfeld is a
vice president of 31 investment
companies and vice president and
secretary of one investment company
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Paul H. Schubert; 35 Vice President Mr. Schubert is a senior vice presi-
and Treasurer dent and the director of the mutual
fund finance department of Mitchell
Hutchins. From August 1992 to Au-
gust 1994, he was a vice president
of BlackRock Financial Management,
L.P. Mr. Schubert is a vice presi-
dent and treasurer of 32 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Barney A. Taglialatela; 37 Vice President Mr. Taglialatela is a vice president
and Assistant and a manager of the mutual fund
Treasurer 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 in-
vestment companies for which Mitch-
ell Hutchins or PaineWebber serves
as investment adviser.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST OTHER DIRECTORSHIPS
---------------------- -------------- ----------------------------------------
<C> <C> <S>
Keith A. Weller; 37 Vice President Mr. Weller is a first vice president and
and Assistant associate general counsel of Mitchell
Secretary Hutchins. Prior to May 1995, he was an
attorney in private practice. Mr.
Weller is a vice president and assis-
tant secretary of 31 investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment advis-
er.
</TABLE>
- --------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of the
Trust as defined in the 1940 Act by virtue of their positions with PW
Group, PaineWebber and/or Mitchell Hutchins.
The Trust pays trustees who are not "interested persons" of the Trust $1,000
annually for each Fund and $150 per Fund for each board meeting and each
meeting of a board committee (other than committee meetings held on the same
day as a board meeting). Each chairman of the audit and contract review
committee of individual funds within the PaineWebber fund complex receives
additional compensation aggregating $15,000 annually from the relevant funds.
All trustees are reimbursed for any expenses incurred in attending meetings.
Trustees and officers of the Trust own in the aggregate less than 1% of the
shares of each Fund. Because PaineWebber and Mitchell Hutchins perform
substantially all of the services necessary for the operation of the Trust,
the Trust requires no employees.
The table below includes certain information relating to the compensation of
the Trust's current trustees who held office with the Trust or other
PaineWebber funds for the last fiscal and calendar years.
COMPENSATION TABLE+
<TABLE>
<CAPTION>
TOTAL COMPENSATION
FROM THE TRUST
AGGREGATE COMPENSATION AND THE
NAME OF PERSONS, POSITION FROM THE TRUST* FUND COMPLEX**
- ------------------------- ---------------------- ------------------
<S> <C> <C>
Richard Q. Armstrong, Trustee......... $6,150 $ 94,885
Richard R. Burt, Trustee.............. $5,700 $ 87,085
Meyer Feldberg, Trustee............... $6,150 $117,853
George W. Gowen, Trustee.............. $7,389 $101,567
Frederic V. Malek, Trustee............ $6,150 $ 95,845
Carl W. Schafer, Trustee.............. $6,150 $ 94,885
</TABLE>
- --------
+ Only independent trustees are compensated by the Trust and identified
above; trustees who are "interested persons," as defined in the 1940 Act,
do not receive compensation.
* Represents fees paid to each trustee during the fiscal year ended April 30,
1998.
** Represents total compensation paid to each trustee during the calendar year
ended December 31, 1997; no fund within the fund complex has a bonus,
pension, profit sharing or retirement plan.
11
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
The following persons are shown on the Trust's records as having owned of
record 5% or more of the indicated Fund's shares:
<TABLE>
<CAPTION>
NUMBER AND PERCENTAGE
OF SHARES
OWNED OF RECORD AS OF
FUND NAME AND ADDRESS* AUGUST 24, 1998
---- ----------------- ---------------------
<S> <C> <C>
Money Market Fund The Crean Foundation 79,880,958 5.11%
Government Securities Fund Reynolds Metals Company 25,000,00019.87%
American Growth Fund Inc. 11,000,000 8.74%
National Plus Plan of the 7,703,864 6.12%
Textile Workers Pension Fund
Treasury Securities Fund Paul B. Kazarian, 21,617,73011.20%
Japonica Partners
Gilbert H. Lamphere 20,873,33710.81%
c/o Fremont Group
Reynolds Metals Company 10,000,000 5.18%
G. Jack Scholz Ttee 9,778,256 5.06%
FBO Scholz Grantor Retained
Annuity Trust #1
G. Jack Scholz Ttee 9,778,256 5.06%
FBO Scholz Grantor Retained
Annuity Trust #2
G. Jack Scholz Ttee 9,778,256 5.06%
FBO Scholz Grantor Retained
Annuity Trust #3
Japonica Partners & Co. 9,666,509 5.01%
</TABLE>
The Trust is not aware as to whether or to what extent shares owned of
record also are owned beneficially.
- --------
* Each shareholder listed above may be contacted c/o Mitchell Hutchins Asset
Management Inc., 1285 Avenue of the Americas, New York, NY 10019.
12
<PAGE>
INVESTMENT ADVISORY, ADMINISTRATION AND
DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS. PaineWebber acts as the
Trust's investment adviser and administrator pursuant to a contract dated
April 13, 1995 ("PaineWebber Contract"). Under the PaineWebber Contract, the
Trust pays PaineWebber an annual fee, computed daily and paid monthly, at an
annual rate of 0.25% of each Fund's average daily net assets.
During each of the periods indicated, PaineWebber earned or accrued advisory
fees in the amounts set forth below. As also set forth below, PaineWebber
during these periods voluntarily waived a portion of its fees and/or
voluntarily paid other Fund expenses.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30
------------------------------
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Money Market Fund............................ $3,572,192 $2,196,654 $669,836
Fee Amount Waived.......................... $ 716,790 $ 439,015 $102,772
Expenses Reimbursed........................ $ 2,739 $ 0 $ 59,795
Government Securities Fund................... $ 215,911 $ 203,152 $124,281
Fee Amount Waived.......................... $ 43,177 $ 40,607 $ 16,752
Expenses Reimbursed........................ $ 210,691 $ 144,536 $105,334
Treasury Securities Fund..................... $ 259,380 $ 99,845 $ 62,167
Fee Amount Waived.......................... $ 51,876 $ 19,956 $ 7,410
Expenses Reimbursed........................ $ 128,386 $ 147,250 $129,447
</TABLE>
Under a contract with PaineWebber dated April 15, 1996 with respect to the
Trust ("Mitchell Hutchins Contract"), Mitchell Hutchins serves as the Trust's
sub-adviser and sub-administrator. Under the Mitchell Hutchins Contract,
PaineWebber (not the Trust) pays Mitchell Hutchins a fee, computed daily and
paid monthly, at an annual rate of 50% of the fee paid by each Fund to
PaineWebber under the PaineWebber Contract, net of waivers and/or
reimbursements.
During each of the periods indicated, PaineWebber paid (or accrued) to
Mitchell Hutchins the fees indicated below under either the Mitchell Hutchins
Contract or a predecessor agreement:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30
----------------------------
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Money Market Fund.............................. $1,503,380 $877,358 $220,065
Government Securities Fund..................... $ 0 $ 8,099 $ 39,863
Treasury Securities Fund....................... $ 39,694 $ 0 $ 17,551
</TABLE>
Under the terms of the PaineWebber Contract, the Trust bears all expenses
incurred in its operation that are not specifically assumed by PaineWebber.
General expenses of the Trust not readily identifiable as belonging to a
specific Fund are allocated among series by or under the direction of the
Trust's board in such manner as the board deems fair and equitable. Expenses
borne by the Trust include the following (or each Fund's share of the
following): (1) the cost (including brokerage commissions and other
transaction costs, if any) of securities purchased or sold by the Funds and
any losses incurred in connection therewith, (2) fees payable to and expenses
incurred on behalf of the Funds by PaineWebber, (3) organizational expenses,
(4) filing fees and expenses relating to the registration and qualification of
the shares of the Funds 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
Trust or PaineWebber, (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,
uncollectable 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 a Fund for violation of any law,
(10) legal, accounting and auditing expenses, including legal fees of special
counsel for those trustees who are not
13
<PAGE>
interested persons of the Trust, (11) charges of custodians, transfer agents
and other agents, (12) expenses of setting in type and printing prospectuses
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 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 PaineWebber and Mitchell Hutchins Contracts (collectively,
"Contracts"), PaineWebber or Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the performance of the Contracts, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of PaineWebber
or Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder.
The Contracts are terminable with respect to each Fund at any time without
penalty by vote of the board or by vote of the holders of a majority of the
outstanding voting securities of that Fund on 60 days' written notice to
PaineWebber or Mitchell Hutchins, as the case may be. The PaineWebber Contract
is also terminable without penalty by PaineWebber on 60 days' written notice
to the Trust, and the Mitchell Hutchins Contract is terminable without penalty
by PaineWebber or Mitchell Hutchins on 60 days' written notice to the other
party. The Contracts terminate automatically upon their assignment, and the
Mitchell Hutchins Contract also terminates automatically upon the assignment
of the PaineWebber Contract.
The following table shows the approximate net assets as of July 31, 1998,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment
company may fall into more than one of the categories below.
<TABLE>
<CAPTION>
INVESTMENT CATEGORY NET ASSETS
------------------- ----------
( $ MIL)
<S> <C>
Domestic (excluding Money Market)............................... $7,867.2
Global.......................................................... 3,938.0
Equity/Balanced................................................. 6,516.0
Fixed Income (excluding Money Market)........................... 5,289.2
Taxable Fixed Income.......................................... 3,709.5
Tax-Free Fixed Income......................................... 1,579.7
Money Market Funds.............................................. 28,787.4
</TABLE>
PERSONNEL TRADING POLICIES. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to a code of ethics that describes
the fiduciary duty owed to shareholders of the PaineWebber mutual funds and
other Mitchell Hutchins' advisory accounts by all Mitchell Hutchins'
directors, officers and employees, establishes procedures for personal
investing and restricts certain transactions. For example, employee accounts
generally must be maintained at PaineWebber, personal trades in most
securities require pre-clearance and short-term trading and participation in
initial public offerings generally are prohibited. In addition, the code of
ethics puts restrictions on the timing of personal investing in relation to
trades by PaineWebber mutual funds and other Mitchell Hutchins advisory
clients.
DISTRIBUTION ARRANGEMENTS. PaineWebber acts as distributor of shares of the
Trust under a distribution contract with the Trust, which requires PaineWebber
to use its best efforts, consistent with its other business, to sell shares of
the Trust. Shares of the Trust are offered continuously.
14
<PAGE>
PORTFOLIO TRANSACTIONS
The Mitchell Hutchins Contract authorizes Mitchell Hutchins (with the
approval of the board) to select brokers and dealers to execute purchases and
sales of the Funds' portfolio securities. The Contract directs Mitchell
Hutchins to use its best efforts to obtain the best available price and most
favorable execution with respect to all transactions for the Funds. To the
extent that the execution and price offered by more than one dealer are
comparable, Mitchell Hutchins may, in its discretion, effect transactions in
portfolio securities with dealers who provide the Funds with research,
analysis, advice and similar services. Although Mitchell Hutchins may receive
certain research or execution services in connection with these transactions,
Mitchell Hutchins will not purchase securities at a higher price or sell
securities at a lower price than would otherwise be paid had no services been
provided by the executing dealer. Moreover, Mitchell Hutchins will not enter
into any explicit soft dollar arrangements relating to principal transactions
and will not receive in principal transactions the types of services that
could be purchased for hard dollars. Research services furnished by the
dealers with which a Fund effects securities transactions may be used by
Mitchell Hutchins in advising other funds or accounts it advises and,
conversely, research services furnished to Mitchell Hutchins in connection
with other funds or accounts that Mitchell Hutchins advises may be used in
advising the Fund. Information and research received from dealers will be in
addition to, and not in lieu of, the services required to be performed by
Mitchell Hutchins under the Mitchell Hutchins Contract. During the past three
fiscal years, none of the Funds has paid any brokerage commissions, nor has
any Fund allocated any transactions to dealers for research, analysis, advice
and similar services.
Mitchell Hutchins may engage in agency transactions in over-the-counter
equity and debt securities in return for research and execution services.
These transactions are entered into only in compliance with procedures
ensuring that the transaction (including commissions) is at least as favorable
as it would have been if effected directly with a market-maker that did not
provide research or execution services. These procedures include a requirement
that Mitchell Hutchins obtain multiple quotes from dealers before executing
the transactions on an agency basis.
The 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.
Investment decisions for each 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 of
such accounts. In such cases, simultaneous transactions are inevitable.
Purchases or sales are then averaged as to price and allocated between a Fund
and such other account(s) as to amount according to a formula deemed equitable
to that Fund and such account(s). While in some cases this practice could have
a detrimental effect upon the price or value of the security as far as the
Fund is concerned, or upon its ability to complete its entire order, in other
cases it is believed that coordination and the ability to participate in
volume transactions will be beneficial to the Fund.
HOLDINGS OF REGULAR BROKER-DEALERS. As of April 30, 1998, Money Market Fund
owned commercial paper and other short-term obligations issued by the
following issuers that are regular broker-dealers for the Fund: Goldman Sachs
Group LP--$9,772,150; Morgan Stanley Group Incorporated--$5,000,000; Merrill
Lynch & Co., Incorporated--$29,005,528; and Bear Stearns Companies, Inc.--
$18,000,000.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
Each Fund may suspend redemption privileges or postpone the date of payment
during any period (1) when the New York Stock Exchange ("NYSE") is closed or
trading on the NYSE is restricted as
15
<PAGE>
determined by the Securities and Exchange Commission ("SEC"), (2) when an
emergency exists, as defined by the SEC, which makes it not reasonably
practicable for a Fund to dispose of securities owned by it or to determine
fairly the market value of its assets or (3) as the SEC may otherwise permit.
The redemption price may be more or less than the shareholder's cost,
depending on the market value of the Fund's portfolio at the time, although
each Fund seeks to maintain a constant net asset value of $1.00 per share.
If conditions exist that make cash payments undesirable, each Fund reserves
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Fund and valued in the same way as they would
be valued for purposes of computing the Fund's net asset value. If payment is
made in securities, a shareholder may incur brokerage expenses in converting
these securities into cash. The Trust is obligated to redeem shares solely in
cash up to the lesser of $250,000 or 1% of the net asset value of a Fund
during any 90-day period for one shareholder.
VALUATION OF SHARES
Money Market Fund's net asset value per share is determined by State Street
Bank and Trust Company ("State Street") as of 12:00 noon and 2:30 p.m.,
Eastern time, on each Business Day. Government Securities Fund's and Treasury
Securities Fund's net asset values per share are determined by State Street as
of 12:00 noon, Eastern time, on each Business Day. As defined in the
Prospectus, "Business Day" means any day on which the Massachusetts offices of
State Street and the Fund's transfer agent, First Data Investor Services
Group, Inc. ("Transfer Agent") and the New York City offices of PaineWebber
and PaineWebber's bank are all open for business. One or more of these
institutions will be closed on the observance of the following holidays: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day and Christmas Day.
Each Fund values its portfolio securities in accordance with the amortized
cost method of valuation under Rule 2a-7 ("Rule") under the 1940 Act. To use
amortized cost to value its portfolio securities, a Fund must adhere to
certain conditions under the Rule relating to its investments, some of which
are discussed in the Prospectus. Amortized cost is an approximation of market
value 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 any Fund, the board will promptly consider
whether any action should be initiated to eliminate or reduce material
dilution or other unfair results to shareholders. Such action may include
redeeming shares in kind, selling portfolio securities prior to maturity,
reducing or withholding dividends and utilizing a net asset value per share as
determined by using available market quotations. 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.
16
<PAGE>
In determining the approximate market value of portfolio investments, each
Fund may employ outside organizations, which may use a matrix or formula
method that takes into consideration market indices, matrices, yield curves
and other specific adjustments. This may result in the securities being valued
at a price different from the price that would have been determined had the
matrix or formula method not been used.
TAXES
To continue to qualify for treatment as a regulated investment company 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. Among these
requirements are the following: (1) the Fund must derive at least 90% of its
gross income each taxable year from dividends, interest, payments with respect
to securities loans, gains from the sale or other disposition of securities
and certain other income; (2) at the close of each quarter of the Fund's
taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. government securities 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) of any one issuer. If a Fund failed to qualify for
treatment as a RIC for any taxable year, it would be taxed as an ordinary
corporation on its taxable income for that year (even if that income was
distributed to its shareholders) and all distributions out of its earnings and
profits would be taxable to its shareholders as dividends (that is, ordinary
income).
CALCULATION OF YIELD
Each Fund computes its yield and effective yield quotations using
standardized methods required by the SEC. The Fund from time to time
advertises (1) its current yield based on a recently ended seven-day period,
computed by determining the net change, exclusive of capital changes, in the
value of a hypothetical pre-existing account having a balance of one share at
the beginning of the period, subtracting a hypothetical charge reflecting
deductions from that shareholder account, dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return, and then multiplying the base period return by (365/7), with the
resulting yield figure carried to at least the nearest hundredth of one
percent, and (2) its effective yield based on the same seven-day period by
compounding the base period return by adding 1, raising the sum to a power
equal to (365/7), and subtracting 1 from the result, according to the
following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)/3//6//5///7/] - 1
The following yields are for the seven-day period ended April 30, 1998:
<TABLE>
<CAPTION>
EFFECTIVE
FUND YIELD YIELD
---- ----- ---------
<S> <C> <C>
Money Market Fund
Institutional Shares.................................... 5.36% 5.50%
Financial Intermediary Shares*.......................... 5.11% 5.23%
Government Securities Fund................................ 5.24% 5.38%
Treasury Securities Fund.................................. 5.02% 5.15%
</TABLE>
- --------
*Issuance for Financial Intermediary shares was January 14, 1998.
A Fund may also advertise other performance data, which may consist of the
annual or cumulative return (including realized net short-term capital gain,
if any) earned on a hypothetical investment in a Fund since it 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
17
<PAGE>
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
Advertisements, the Funds may compare their taxable yield with data published
by Lipper Analytical Services, Inc. for money funds ("Lipper"), CDA Investment
Technologies, Inc. ("CDA"), IBC Financial Data, Inc. ("IBC"), Wiesenberger
Investment Companies Service ("Wiesenberger") or Investment Company Data Inc.
("ICD"), or with the performance of recognized stock and other indexes,
including the Standard & Poor's 500 Composite Stock Price Index, the Dow Jones
Industrial Average, the Morgan Stanley Capital International World Index, the
Lehman Brothers Treasury Bond Index, the Lehman Brothers Government/Corporate
Bond Index, the Salomon Brothers Government Bond Index and changes in the
Consumer Price Index as published by the U.S. Department of Commerce. The
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.
Each Fund may also compare its performance with the performances of bank
certificates of deposit ("CDs") as measured by the CDA Certificate of Deposit
Index and the Bank Rate Monitor National Index and the average of yields of
CDs of major banks published by Banxquotes(R) Money Markets. In comparing 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 each Fund seeks to maintain a stable net asset
value of $1.00 per share, there can be no assurance that it will be able to do
so.
Each Fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends on a Fund investment are reinvested by being paid in
additional Fund shares, any future income of the Fund would increase the
value, not only of the original Fund investment, but also of the additional
Fund shares received through reinvestment. As a result, the value of a Fund
investment would increase more quickly than if dividends had been paid in
cash. Each Fund may also make available to shareholders a daily yield or
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.
OTHER INFORMATION
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given
in each note, bond, contract, instrument, certificate or undertaking made or
issued by the trustees or by any officers or officer by or on behalf of the
Trust, a Fund, the trustees or any of them in connection with the Trust. The
Declaration of Trust provides for indemnification from a Fund's property for
all losses and expenses of any shareholder held personally liable for the
obligations of the Fund. Thus, the risk of a
18
<PAGE>
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which a Fund itself would be unable to meet its
obligations, a possibility which PaineWebber believes is remote and not
material. Upon payment of any liability incurred by a shareholder, 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
each Fund in such a way as to avoid, as far as possible, ultimate liability of
the shareholders for liabilities of the Fund.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036, serves as counsel to the 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 INTERMEDIARIES
The Trust has adopted a Shareholder Services Plan and Agreement ("Plan")
with respect to the Financial Intermediary shares of each Fund to assure that
the beneficial owners of the Financial Intermediary shares receive certain
support services. PaineWebber will implement the Plan by entering into a
service agreement with each financial intermediary that purchases Financial
Intermediary shares requiring it to provide support services to its customers
who are the beneficial owners of the Financial Intermediary shares. Under the
Plan, each Fund pays PaineWebber an annual fee at the annual rate of 0.25% of
the average daily net asset value of the Financial Intermediary shares held by
financial intermediaries on behalf of their customers. Under each service
agreement, PaineWebber pays an identical fee to the financial intermediary for
providing the support services to its customers specified in the service
agreement. These services may include: (i) aggregating and processing purchase
and redemption requests from customers and placing net purchase and redemption
orders with PaineWebber; (ii) providing customers with a service that invests
the assets of their accounts in Financial Intermediary shares; (iii)
processing dividend payments from the Trust on behalf of customers; (iv)
providing information periodically to customers showing their positions in
Financial Intermediary shares; (v) arranging for bank wires; (vi) responding
to customer inquiries relating to the services performed by the financial
intermediary; (vii) providing sub-accounting with respect to Financial
Intermediary shares beneficially owned by customers or the information
necessary for sub-accounting; (viii) forwarding shareholder communications
from the Trust (such as proxies, shareholder reports and dividend,
distribution and tax notices) to customers, if required by law; and (ix) other
similar services if requested by the Trust. No payments were made by
PaineWebber with respect to Government Securities Fund or Treasury Securities
Fund to financial intermediaries during the fiscal year ended April 30, 1998
because those Funds had no Financial Intermediary shares outstanding during
that period. Money Market Fund made payments through PaineWebber to financial
intermediaries in the amount of $10,975 with respect to its Financial
Intermediary shares outstanding during the fiscal year ended April 30, 1998.
The Plan requires that PaineWebber provide to the board at least annually a
written report of the amounts expended by PaineWebber under service agreements
with financial intermediaries and the purposes for which such expenditures
were made. Each service agreement requires the financial intermediary to
cooperate with PaineWebber in providing information to the board with respect
to amounts expended and services provided under the service agreement. The
Plan may be terminated at any time, without penalty, by vote of the trustees
of the Trust who are not "interested persons" of the Trust as defined in the
1940 Act and who have no direct or indirect financial interest in the
operation of the Plan ("Disinterested Trustees"). Any amendment to the Plan
must be approved by the board and any material amendment must be approved by
the Disinterested Trustees.
FINANCIAL STATEMENTS
The Funds' Annual Report to Shareholders for the most recent fiscal year is
a separate document supplied with this Statement of Additional Information,
and the financial statements, accompanying notes and reports of independent
auditors appearing therein are incorporated herein by this reference.
19
<PAGE>
MITCHELL HUTCHINS'
LIQUID INSTITUTIONAL RESERVES
MONEY MARKET FUND
GOVERNMENT SECURITIES FUND
TREASURY SECURITIES FUND
SEPTEMBER 1, 1998
Investors should rely only on the information contained or referred to in the
Prospectus and this Statement of Additional Information. The Funds and their
distributor have not authorized anyone to provide investors with information
that is different. The Prospectus and this Statement of Additional Information
are not an offer to sell shares of the Funds in any jurisdiction where the
Funds or their distributor may not lawfully sell those shares.
PAINEWEBBER
(C)1998 PAINEWEBBER INCORPORATED
S642
