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Prospectus December 1, 1995
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PaineWebber/Kidder, Peabody Cash Reserve Fund, Inc.
1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019 (800) 647-1568
PaineWebber/Kidder, Peabody Cash Reserve Fund, Inc. (the 'Fund') is a
diversified, open-end, management investment company. Its objective is the
maximization of current income to the extent consistent with the preservation of
capital and the maintenance of liquidity. The Fund pursues this objective by
investing in short-term money market instruments. There can be no assurance that
the Fund's objective will be realized. See 'Investment Objective and Management
Policies.' Shares of the Fund are offered exclusively to existing shareholders
and shareholders of other PaineWebber/Kidder, Peabody money market funds who may
exchange their shares for shares of the Fund.
The board of directors of the Fund has approved a Plan of Reorganization and
Termination ('Reorganization') for submission to the Fund's shareholders, at a
special meeting expected to be held on February 13, 1996. If the proposed
Reorganization is approved and implemented, all of the Fund's assets will be
acquired and its liabilities assumed by PaineWebber RMA Money Market Portfolio
in a tax-free reorganization. As a result of the Reorganization, the two funds'
assets would be combined and each Fund shareholder would, on the closing date of
the transaction, receive shares of PaineWebber RMA Money Market Portfolio having
an aggregate value equal to the value of the shareholder's holdings in the Fund.
There can be no assurance that the Fund's shareholders will approve the
Reorganization.
An investment in the Fund is neither insured nor guaranteed by the U.S.
Government. While the Fund seeks to maintain a stable net asset value of $1.00
per share, there can be no assurance that it will be able to do so.
PaineWebber Incorporated ('PaineWebber'), 1285 Avenue of the Americas, New York,
New York 10019, serves as the Fund's investment adviser, administrator and
distributor. Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), 1285
Avenue of the Americas, New York, New York 10019, a wholly owned subsidiary of
PaineWebber, serves as the Fund's sub-adviser and sub-administrator. See
'Management of the Fund.'
The Fund's Board of Directors has approved a Plan of Distribution pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the 'Plan of
Distribution'), pursuant to which the Fund pays a maximum annual fee of .12% of
its average daily net assets to PaineWebber. See 'The Distributor.'
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Investors should read this
Prospectus and retain it for future reference. Additional information about the
Fund has been filed with the Securities and Exchange Commission (the 'SEC') in a
Statement of Additional Information dated December 1, 1995 which is hereby
incorporated by reference and is available without charge upon request made to
the Fund at the above address. Shareholder inquiries may be directed to the Fund
at the same address.
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INVESTMENT ADVISER, ADMINISTRATOR AND DISTRIBUTOR
PaineWebber Incorporated
SUB-ADVISER AND SUB-ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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FEE TABLE
The purpose of the Fee Table is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For more detailed information on these costs and expenses, see
'Management of the Fund' and 'The Distributor.'
<TABLE>
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ANNUAL FUND OPERATING EXPENSES FOR THE FISCAL YEAR ENDED JULY 31, 1995
(as a percentage of average daily net assets)
Management Fees..................................................................................... .47%
12b-1 Fees.......................................................................................... .12
Other Expenses...................................................................................... .15
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Total Fund Operating Expenses.......................................................... .74%
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</TABLE>
<TABLE>
<CAPTION>
EXAMPLE* 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
A shareholder would pay the following
expenses on a $1,000 investment,
assuming (1) 5% annual return, (2)
total annual operating expenses as
shown in the fee table set out above
and (3) redemption at the end of each
time period:......................... $8 $24 $41 $92
-- --- --- ---
</TABLE>
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* The amounts shown in the example assume reinvestment of all dividends and
distributions and should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown. The assumed
5% annual return is hypothetical and should not be considered a representation
of the Fund's past or future annual return. The actual annual return of the
Fund may be greater or less than the assumed return.
2
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HIGHLIGHTS
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The Fund
The Fund is a diversified, open-end, management investment company whose investment objective
is the maximization of current income to the extent consistent with the preservation of capital
and the maintenance of liquidity through investments in short-term money market instruments
including securities issued or guaranteed by the U.S. Government, or its agencies or
instrumentalities, corporate obligations including, but not limited to, bonds, debentures and
notes, certificates of deposit, time deposits, bankers' acceptances and other short-term bank
obligations issued by domestic banks, foreign branches of domestic banks and savings and loan
and similar associations, repurchase agreements and high grade commercial paper. In addition,
the Fund may invest in obligations of foreign banks and institutions which have the equivalent
credit ratings of domestic issues, including, but not limited to, Yankee and foreign bank
bankers' acceptances and commercial paper.
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Benefits of Mutual funds, such as the Fund, are flexible investment tools that are increasingly
Investing popular -- one of four American households now owns shares of at least one mutual fund -- for
in the very sound reasons. The Fund offers investors the following important benefits:
Fund Professional Management
By pooling the monies of many investors, the Fund enables shareholders to obtain the benefits
of full-time professional management and a degree of diversification of investment that is
typically beyond the means of most investors. The Fund's investment adviser reviews the
fundamental characteristics of far more securities than can a typical individual investor and
may employ portfolio management techniques that frequently are not used by individual or many
institutional investors. Additionally, the larger denominations of securities in which the
Fund invests may result in better overall prices for the investments. See 'Investment
Objective and Management Policies.'
Transaction Savings
By investing in the Fund, a shareholder is able to acquire ownership in a diversified
portfolio of securities without paying the higher transaction costs generally associated with
a series of small securities purchases.
Convenience
Fund shareholders are relieved of the administrative and recordkeeping burdens and
coordination of maturities normally associated with direct ownership of securities.
Quality
All securities in which the Fund invests will be determined to be of high quality by a
nationally recognized rating organization, or determined to be of comparable quality by the
Fund's investment adviser acting under the supervision of the Board of Directors if not so
rated, and will also be determined to present minimal credit risks. Any purchase of unrated
</TABLE>
3
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<TABLE>
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securities or securities that are rated only by a single rating agency must be approved or
ratified by the Directors.
Liquidity
The Fund's convenient purchase and redemption procedures provide shareholders with ready
access to their money and reduce the delays frequently involved in the direct purchase and
sale of securities. See 'Purchase of Shares' and 'Redemption of Shares.'
Exchange Privilege
Shareholders of the Fund may exchange all or a portion of their shares for shares of
specified PaineWebber/Kidder, Peabody money market funds. See 'Exchange Privilege.'
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Purchase of The purchase price for shares of the Fund is the net asset value per share next determined
Shares after receipt by the Fund of a purchase order in proper form. Shares of the Fund are offered
exclusively to existing shareholders of the Fund and shareholders of other PaineWebber/Kidder,
Peabody money market funds who may exchange their shares for shares of the Fund. See 'Purchase
of Shares' and 'Determination of Net Asset Value.'
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Redemption of Shares of the Fund may be redeemed at the Fund's net asset value per share next determined
Shares after receipt by the transfer agent of instructions from PaineWebber Incorporated
('PaineWebber'). See 'Redemption of Shares' for a discussion of the various alternative methods
of redeeming shares of the Fund and 'Determination of Net Asset Value.'
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Management PaineWebber serves as investment adviser and administrator of the Fund and receives an annual
Services fee of .50% of the portion of the Fund's average daily net assets not exceeding $750 million;
.475% of the portion of the average daily net assets exceeding $750 million but not exceeding
$1 billion; .45% of the portion of the average daily net assets exceeding $1 billion but not
exceeding $1.25 billion; .425% of the portion of the average daily net assets exceeding $1.25
billion but not exceeding $1.5 billion; and .40% of the portion of the average daily net assets
exceeding $1.5 billion. Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins') serves as
the Fund's sub-adviser and sub-administrator and receives from PaineWebber (not the Fund) 20%
of the fee received by PaineWebber from the Fund. See 'Management of the Fund.'
</TABLE>
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Distributor PaineWebber serves as distributor of the Fund's shares. See 'The Distributor.'
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Dividends The Fund declares dividends on each day the New York Stock Exchange is open for business of all
of its daily net income to shareholders of record. See 'Dividends, Distributions and Taxes.'
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Risk Factors The Fund may invest in securities issued by foreign branches of domestic banks, foreign
subsidiaries of domestic banks, domestic and foreign branches of foreign banks and commercial
paper issued by foreign issuers, which may present certain additional risks. Also, to the
extent the Fund's investments are concentrated in the banking industry, the Fund will have
correspondingly greater exposure to the risk factors which are characteristic of such
investments. In addition, the Fund may enter into repurchase agreements. In the event the other
party to a repurchase agreement defaults, the Fund may experience difficulties and incur
certain costs in exercising its rights to the collateral and may lose the interest it expected
to receive in respect of the repurchase agreement. See 'Investment Objective and Management
Policies -- Risk Factors.'
</TABLE>
5
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FINANCIAL HIGHLIGHTS
The table below provides selected per share data and ratios for each of the
periods shown. This information is supplemented by the financial statements and
accompanying notes appearing in the Fund's Annual Report to Shareholders for the
fiscal year ended July 31, 1995, which are incorporated by reference into the
Statement of Additional Information. The financial statements and notes, and the
financial information for the fiscal year ended July 31, 1995 appearing in the
table below, have been audited by Ernst & Young LLP, independent auditors, whose
report thereon is included in the Annual Report to Shareholders. The financial
information for the prior fiscal years was audited by other auditors whose
reports thereon were unqualified. Further information about the Fund's
performance is also included in the Annual Report to Shareholders, which may be
obtained without charge.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
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1986 1987 1988 1989 1990
<S> <C> <C> <C> <C> <C>
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Net asset value,
beginning of
period............. $1.00 $1.00 $1.00 $1.00 $1.00
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Net investment
income............. 0.0693 0.0563 0.0650 0.0834 0.0785
Dividends from net
investment income.. (0.0693) (0.0563) (0.0650) (0.0834) (0.0785)
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Net asset value, end
of period.......... $1.00 $1.00 $1.00 $1.00 $1.00
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Total investment
return(1).......... 7.14% 5.73% 6.69% 8.63% 8.13%
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
year (000's)....... $1,546,673 $1,528,880 $1,541,747 $1,959,024 $2,091,165
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RATIO TO AVERAGE NET
ASSETS
Expenses,
including
distribution
fees........... 0.65% 0.64% 0.60% 0.65% 0.68%
Net investment
income......... 6.89% 5.62% 6.49% 8.38% 7.85%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
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1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C>
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Net asset value,
beginning of
period............. $1.00 $1.00 $1.00 $1.00 $1.00
------------------------------------------------------------
Net investment
income............. 0.0655 0.0405 0.0258 0.0285 0.0484
Dividends from net
investment income.. (0.0655) (0.0405) (0.0258) (0.0285) (0.0484)
------------------------------------------------------------
Net asset value, end
of period.......... $1.00 $1.00 $1.00 $1.00 $1.00
------------------------------------------------------------
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Total investment
return(1).......... 6.75% 4.22% 2.62% 2.87% 4.95%
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
year (000's)....... $2,171,758 $1,860,557 $1,781,248 $1,750,448 $1,412,127
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RATIO TO AVERAGE NET
ASSETS
Expenses,
including
distribution
fees........... 0.66% 0.68% 0.72% 0.70% 0.74%
Net investment
income......... 6.52% 4.09% 2.58% 2.85% 4.84%
</TABLE>
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(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends at net
asset value on the payable date and a sale at net asset value on the last
day of each period reported.
6
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YIELD
The chart below shows the Fund's current and effective yields, calculated in
accordance with rules of the SEC, and the average portfolio maturity for the
seven-day periods ended July 31, 1995 and November 1, 1995.
<TABLE>
<CAPTION>
7/31/95 11/1/95
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<S> <C> <C>
Current Yield.................................................................. 5.19% 5.08%
Effective Yield................................................................ 5.33% 5.21%
Average Portfolio Maturity..................................................... 47 days 34 days
</TABLE>
From time to time, the Fund advertises its 'current yield' and 'effective
yield.' Both yield figures are based on historical earnings and are not intended
to indicate future performance. The 'current yield' of the Fund refers to the
income generated by an investment in the Fund over a seven-day period (which
period will be stated in the advertisement). This income is then 'annualized.'
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The 'effective yield' is calculated similarly but,
when annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The 'effective yield' will be slightly higher than the 'current
yield' because of the compounding effect of this assumed reinvestment. The
Statement of Additional Information describes in more detail the methods used to
calculate the yields of the Fund.
Performance data for the Fund may, in reports and promotional literature,
be compared to: (i) other mutual funds tracked by IBC/Donoghue's Money Fund
Report and Lipper Analytical Services, widely used independent research firms
which rank mutual funds by overall performance, investment objectives, and
assets, or tracked by other services, companies, publications, or persons who
rank mutual funds on overall performance or other criteria; (ii) unmanaged
indices so that investors may compare the Fund's results with those of a group
of unmanaged securities widely regarded by investors as representative of the
securities markets in general; and (iii) the Consumer Price Index, an inflation
measure. Promotional and advertising literature also may refer to discussions of
the Fund and comparative mutual fund data and ratings reported in independent
periodicals.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund seeks to maximize current income to the extent consistent with the
preservation of capital and the maintenance of liquidity. The Fund's investment
objective cannot be changed without approval by the holders of a majority of the
Fund's outstanding voting shares, as defined in the Investment Company Act of
1940, as amended (the 'Act'). There can be no assurance that the Fund's
investment objective will be achieved. Securities in which the Fund invests may
not earn as high a level of current income as long-term or lower quality
securities which generally have less liquidity, greater market risk and more
fluctuation in market value.
To achieve its investment objective, the Fund invests in debt obligations
(whether or not subject to repurchase agreements) consisting exclusively of the
following short-term money market instruments: securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities, corporate
obligations (including, but not limited to, bonds, debentures and notes),
certificates of deposit ('CDs'), time deposits ('TDs'), bankers' acceptances and
other
7
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short-term bank obligations issued by domestic banks, foreign branches of
domestic banks and savings and loan and similar associations, repurchase
agreements and high grade commercial paper. In addition, the Fund may invest in
obligations of foreign banks and institutions which have the equivalent credit
ratings of domestic issues, including, but not limited to, Yankee and foreign
bank bankers' acceptances and commercial paper. All portfolio securities are
purchased with and payable in U.S. dollars.
Securities issued or guaranteed as to principal and interest by the U.S.
Government include a variety of Treasury securities, which differ in their
interest rates, maturities and times of issuance: Treasury Bills have initial
maturities of one year or less; Treasury Notes have initial maturities of one to
ten years; and Treasury Bonds generally have initial maturities of greater than
ten years. Some obligations issued or guaranteed by agencies or
instrumentalities of the U.S. Government, such as those issued by the Government
National Mortgage Association, are supported by the full faith and credit of the
Treasury; others, such as those issued by the Federal Home Loan Banks, by the
right of the issuer to borrow from the Treasury; others, such as those issued by
the Federal National Mortgage Association, by discretionary authority of the
U.S. Government to purchase certain obligations of the agency or
instrumentality; and others, such as those issued by the Student Loan Marketing
Association, only by the credit of the agency or instrumentality. These
securities bear fixed, floating or variable rates of interest. Interest may
fluctuate based on generally recognized reference rates or the relationship of
rates. No assurance can be given that the U.S. Government will provide financial
support to such U.S. Government sponsored agencies or instrumentalities in the
future, since it is not obligated to do so by law. The Fund invests in such
securities only when the Fund is satisfied that the credit risk with respect to
the issuer is minimal.
CDs are certificates representing the obligation of a bank to repay funds
deposited with it for a specified period of time. TDs are non-negotiable
deposits maintained in a banking institution for a specified period of time at a
stated interest rate. TDs maturing in more than seven days are not purchased by
the Fund. Bankers' acceptances are credit instruments evidencing the obligation
of a bank to pay a draft drawn on it by a customer. These instruments reflect
the obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. Other short-term bank obligations may include
uninsured, direct obligations, bearing fixed, floating or variable interest
rates. Investments in CDs, TDs and bankers' acceptances are limited to banks and
savings and loan and similar associations having total assets in excess of $1
billion. The Fund generally invests at least 25% of its assets in such
securities. See 'Risk Factors' below.
Commercial paper purchased by the Fund consists only of direct obligations
issued by domestic and foreign entities. The other corporate obligations in
which the Fund may invest consist of high quality, U.S. dollar denominated
short-term bonds and notes issued by domestic and foreign corporations.
Under a repurchase agreement, the Fund acquires an underlying debt
instrument for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase and the Fund to resell the
instrument at a fixed price and time, thereby determining the yield during the
Fund's holding period. This results in a fixed rate of return insulated from
market fluctuations during such period. Under the Act, repurchase agreements may
be considered loans by the Fund. The Fund may enter into repurchase agreements
only with domestic banks or selected dealers or foreign banks and dealers which
are primary dealers with
8
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respect to securities of the type in which it invests, and requires that
additional securities be deposited with it if the value of the securities
purchased should decrease below resale price. The Fund's risk of incurring a
loss on a repurchase agreement may be reduced thereby. Certain costs may be
incurred by the Fund in connection with the sale of the securities if the seller
does not repurchase them in accordance with the repurchase agreement. In
addition, if bankruptcy proceedings are commenced with respect to the seller of
the securities, realization upon the securities by the Fund may be delayed or
limited. Repurchase agreements maturing in more than seven days will not exceed
10% of the value of the Fund's net assets.
The Fund from time to time may lend securities from its portfolio to
brokers, dealers and financial institutions and receive collateral consisting of
cash or securities issued or guaranteed by the U.S. Government, which collateral
will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. The Fund continues to be entitled
to the interest payable on the loaned securities and, in addition, receives
interest on the amount of the loans at a rate negotiated with the borrower. Such
loans are terminable at any time upon specified notice. The Fund has the right
to regain record ownership of loaned securities in order to exercise beneficial
rights. The Fund may pay reasonable fees to persons unaffiliated with the Fund
in connection with arranging such loans. Such loans may not exceed 20% of the
value of the Fund's total assets.
The Fund may (i) borrow money, but only from banks for the purpose of
meeting redemption requests which might otherwise require the untimely
disposition of securities, in an amount up to 10% of the value of the Fund's
total assets (including the amount borrowed) valued at the lesser of cost or
market, less liabilities (not including the amount borrowed) at the time the
borrowing is made; (ii) pledge its assets, but only in an amount up to 10% of
the value of its total assets to secure borrowings for temporary or emergency
purposes; (iii) lend its portfolio securities up to 20% of the value of its
assets; and (iv) invest up to 25% of its assets in the securities of issuers in
any other industry, provided that there is no such limitation on investments in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, CDs and bankers' acceptances. Further information about the
investment policies of the Fund, including a list of the Fund's investment
restrictions which cannot be changed without shareholder approval, appears in
the Statement of Additional Information.
The Fund seeks to maintain a net asset value of $1.00 per share for
purchases and redemptions. To do so, the Fund uses the amortized cost method of
valuing its securities pursuant to Rule 2a-7 under the Act, certain requirements
of which are summarized as follows. In accordance with Rule 2a-7, the Fund is
required to maintain a dollar-weighted average portfolio maturity of 90 days or
less, purchase only instruments having remaining maturities of 397 days or less
and invest only in U.S. dollar denominated securities determined in accordance
with procedures established by the Board of Directors to present minimal credit
risks and which are rated in one of the two highest rating categories for debt
obligations by at least two nationally recognized statistical rating
organizations (or one rating organization if the instrument was rated only by
one such organization) or, if unrated, are of comparable quality as determined
in accordance with procedures established by the Board of Directors. The
nationally recognized statistical rating organizations currently rating
instruments of the type the Fund may purchase are Moody's Investors Service,
Inc. and Standard & Poor's, a division of The McGraw Hill Companies, Inc. and
their rating criteria are described in the Fund's Statement of Additional
Information.
9
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In addition, the Fund will not invest more than 5% of its total assets in
the securities (including the securities collateralizing a repurchase agreement)
of, or subject to puts issued by, a single issuer, except that (i) the Fund may
invest more than 5% of its total assets in a single issuer for a period of up to
three business days in certain limited circumstances, (ii) the Fund may invest
in obligations issued or guaranteed by the U.S. Government without any such
limitation, and (iii) the limitation with respect to puts does not apply to
unconditional puts if not more than 10% of the Fund's total assets is invested
in securities issued or guaranteed by the issuer of the unconditional put.
Investments in rated securities not rated in the highest category by at least
two rating organizations (or one rating organization if the instrument was rated
by only one such organization), and unrated securities not determined by the
Board of Directors to be comparable to those rated in the highest category, will
be limited to 5% of the Fund's total assets, with the investment in any one such
issuer being limited to no more than the greater of 1% of the Fund's total
assets or $1,000,000. As to each security, these percentages are measured at the
time the Fund purchases the security. For further information regarding the
amortized cost method of valuing securities, see 'Determination of Net Asset
Value' in the Fund's Statement of Additional Information. There can be no
assurance that the Fund will be able to maintain a stable net asset value of
$1.00 per share.
RISK FACTORS
Since the Fund's portfolio may contain securities issued by foreign branches of
domestic banks, foreign subsidiaries of domestic banks, domestic and foreign
branches of foreign banks, and commercial paper issued by foreign issuers, the
Fund may be subject to additional investment risks with respect to such
securities that are different in some respects from those incurred by a fund
which invests only in debt obligations of U.S. domestic issuers. In making
foreign investments, therefore, the Fund will give appropriate consideration to
the following factors, among others.
Foreign securities markets generally are not as developed or efficient as
those in the United States. Securities of some foreign issuers are less liquid
and more volatile than securities of comparable U.S. issuers. Similarly, volume
and liquidity in most foreign securities markets are less than in the United
States and, at times, volatility of price can be greater than in the United
States. The issuers of some of these securities, such as bank obligations, may
be subject to less stringent or different regulation than are U.S. issuers. In
addition, there may be less publicly available information about a non-U.S.
issuer, and non-U.S. issuers generally are not subject to uniform accounting and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. issuers.
Because evidences of ownership of such securities usually are held outside
the United States, the Fund is subject to additional risks which include
possible adverse political and economic developments, possible seizure or
nationalization of foreign deposits and possible adoption of governmental
restrictions which might adversely affect the payment of principal and interest
on the foreign securities or might restrict the payment of principal and
interest to investors located outside the country of the issuer, whether from
currency blockage or otherwise. The Fund does not purchase securities which the
Fund believes, at the time of purchase, will be subject to exchange controls or
withholding taxes. However, there can be no assurance that such laws may not
become applicable to certain of the Fund's investments.
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To the extent the Fund's investments are concentrated in the banking
industry, the Fund will have correspondingly greater exposure to the risk
factors which are characteristic of such investments. Sustained increases in
interest rates can adversely affect the availability or liquidity and cost of
capital funds for a bank's lending activities, and a deterioration in general
economic conditions could increase the exposure to credit losses. In addition,
the value of and the investment return on the Fund's shares could be affected by
economic or regulatory developments in or related to the banking industry, which
industry also is subject to the effects of the concentration of loan portfolios
in leveraged transactions and in particular businesses, and competition within
the banking industry as well as with other types of financial institutions. The
Fund, however, seeks to minimize its exposure to such risks by investing only in
debt securities which are determined to be of high quality.
The Fund attempts to increase yields by trading to take advantage of
short-term market variations. This policy is expected to result in high
portfolio turnover but should not adversely affect the Fund since the Fund
usually does not pay brokerage commissions when it purchases short-term debt
obligations. The value of the portfolio securities held by the Fund varies
inversely to changes in prevailing interest rates. Thus, if interest rates have
increased from the time a security was purchased, such security, if sold, might
be sold at a price less than its purchase cost. Similarly, if interest rates
have declined from the time a security was purchased, such security, if sold,
might be sold at a price greater than its purchase cost. In either instance, if
the security was purchased at face value and held to maturity, no gain or loss
would be realized.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Overall responsibility for management and supervision of the Fund rests with its
Board of Directors, as required by Maryland law. The day-to-day operations of
the Fund are conducted through or under the direction of its officers. The
Statement of Additional Information contains general background information
regarding each Director and officer of the Fund.
MANAGEMENT
At a special meeting of shareholders on April 13, 1995, shareholders approved a
new investment advisory and administration agreement with PaineWebber and a new
sub-advisory and sub-administration agreement with Mitchell Hutchins.
PaineWebber and Mitchell Hutchins are located at 1285 Avenue of the Americas,
New York, New York 10019. Mitchell Hutchins is a wholly owned subsidiary of
PaineWebber, which in turn is wholly owned by Paine Webber Group Inc., a
publicly owned financial services holding company. As of October 31, 1995,
PaineWebber or Mitchell Hutchins served as investment adviser or sub-adviser to
38 investment companies with an aggregate of 75 separate portfolios and
aggregate assets of over $29 billion.
The Fund pays the same fee for investment advisory and administration
services to PaineWebber as previously paid to Kidder Peabody Asset Management,
Inc. ('KPAM'), the Fund's predecessor investment adviser and administrator.
PaineWebber (not the Fund) pays Mitchell Hutchins a fee for sub-advisory and
sub-administration services at the annual rate of 20% of the fee received by
PaineWebber from the Fund. PaineWebber and Mitchell Hutchins continue to manage
the Fund in accordance with the Fund's investment objective, policies and
restrictions.
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The Fund pays PaineWebber, as compensation for services rendered, a monthly
fee at the annual rate of .50% of the portion of the Fund's average daily net
assets not exceeding $750 million; .475% of the portion of the average daily net
assets exceeding $750 million but not exceeding $1 billion; .45% of the portion
of the average daily net assets exceeding $1 billion but not exceeding $1.25
billion; .425% of the portion of the average daily net assets exceeding $1.25
billion but not exceeding $1.5 billion; and .40% of the portion of the average
daily net assets exceeding $1.5 billion. For the fiscal year ended July 31,
1995, PaineWebber's fee was .47% of the Fund's average daily net assets and the
Fund's total expenses represented .74% of its average daily net assets.
Mitchell Hutchins manages the Fund's portfolio in accordance with the
stated policies of the Fund, makes investment decisions for the Fund and places
the purchase and sale orders for portfolio transactions. Although investment
decisions for the Fund are made independently from those of the other accounts
managed by Mitchell Hutchins, investments of the type the Fund may make may also
be made by those other accounts. When the Fund and one or more other accounts
managed by Mitchell Hutchins are prepared to invest in, or desire to dispose of,
the same security, available investments or opportunities for sales are
allocated in a manner believed by Mitchell Hutchins to be equitable to each. In
some cases, this procedure may adversely affect the price paid or received by
the Fund or the size of the position obtained or disposed of by the Fund.
Mitchell Hutchins investment personnel may engage in securities
transactions for their own accounts pursuant to a code of ethics that
establishes procedures for personal investing and restricts certain
transactions.
PORTFOLIO TRANSACTIONS
Mitchell Hutchins places the orders for the purchase and sale of the Fund's
portfolio securities. Transactions are allocated to various dealers by Mitchell
Hutchins in its best judgment. The primary consideration is prompt and effective
execution of orders at the most favorable price. Subject to that primary
consideration, dealers may be selected for research, statistical or other
services to enable Mitchell Hutchins to supplement its own research and analysis
with the views and information of other securities firms. No brokerage
commissions have been paid to date.
Investment decisions for the Fund are made independently from those of any
other fund(s) managed by Mitchell Hutchins. If, however, funds managed by
Mitchell Hutchins are simultaneously engaged in the purchase or sale of the same
security, the transactions are averaged as to price and allocated equitably to
each fund. In some cases, this system might adversely affect the price paid or
received by the Fund or the size of the position obtainable for the Fund.
PURCHASE OF SHARES
GENERAL INFORMATION
PaineWebber serves as the Fund's distributor. Shares of the Fund are offered
exclusively to existing shareholders and must be maintained through a brokerage
account with PaineWebber (an 'Account'). PaineWebber charges no maintenance fee
in connection with an Account through which an investor purchases or holds
shares of the Fund.
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Shares are sold on a continuous basis at their net asset value next
determined after an order and good funds (e.g., cash, Federal funds or certified
checks drawn on a United States bank) are received. If an investor does not have
a sufficient credit balance in his Account, payment for shares must be converted
into Federal funds before an order to purchase is effective. Purchase orders
received before 12:00 noon, Eastern time, for which payment has been received by
PaineWebber will be executed at that time and the shareholder will receive the
dividend declared on that day. Purchase orders received after 12:00 noon,
Eastern time, and purchase orders received earlier in the same day for which
payment has not been received by 12:00 noon, Eastern time, will be executed at
the close of regular trading on the New York Stock Exchange, if payment has been
received by PaineWebber by that time, and the shareholder will receive the
dividend declared on the following day.
Credit balances for accounts from $1 to $4,999 will be swept as of the
close of business each Friday for settlement on the next business day and credit
balances of $5,000 or more will be swept daily for settlement on the next
business day. The Fund reserves the right at any time to impose minimum initial
and subsequent purchase amounts.
PURCHASES WITH FUNDS HELD AT PAINEWEBBER
All deposits to a brokerage account and any free credit cash balances that may
arise in a brokerage account will be automatically invested in shares of the
Fund, according to sweep rules described above, provided that Federal funds are
available for the investment. Federal funds normally are available for cash
balances arising from the sale of securities held in a brokerage account on the
business day following settlement, but in some cases can take longer.
PURCHASES BY WIRE
Shares of the Fund may also be purchased by transferring Federal funds by wire
to a PaineWebber brokerage account. Wire transfers should be directed to: Bank
of New York, ABA 021000018, PaineWebber Inc., for RMAs/BSAs A/C 890-0114-088 and
for all other accounts A/C 890-0114-096 OBI-FBO [Account Name]/[Brokerage
Account Number]. The wire must include the investor's name and PaineWebber
brokerage account number. Participants wishing to transfer Federal funds into
their accounts should contact their PaineWebber investment executives or
correspondent firms to determine the appropriate wire instructions.
To the extent that the amounts transferred by wire create a cash balance in
an investor's account, that cash balance will be automatically invested in the
Fund, as described above under 'Purchases with Funds Held at PaineWebber.'
Participants wishing to invest amounts transferred by wire in the Fund should so
instruct their PaineWebber investment executives or correspondent firms.
If PaineWebber receives a notice from an investor's bank of a wire transfer
of Federal funds by 12:00 noon, Eastern time, on a business day, the automatic
investment will be executed on that business day. Otherwise, the automatic
investment will be executed at 12:00 noon, Eastern time, on the next business
day. PaineWebber and/or an investor's bank may impose a service charge for wire
transfers.
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REDEMPTION OF SHARES
A shareholder may redeem shares on any day that the Fund's net asset value is
determined by following the procedures set forth below.
REDEMPTION THROUGH PAINEWEBBER
PaineWebber wires the terms of any redemption request properly received to PFPC
Inc. The price at which a redemption request is executed is the net asset value
per share next determined after proper redemption instructions are received.
Payment for redemption orders, if any, that are received before 12:00 noon,
Eastern time, normally is made on the same business day. Shares redeemed in this
manner will not be entitled to the dividend declared on the day of redemption.
Payment for redemption orders, that are received at or after 12:00 noon, Eastern
time, will be made on the next business day following the redemption. Shares
redeemed in this manner are entitled to the dividend declared on the day of
redemption. Proceeds of a redemption generally are credited to the shareholder's
Account, or sent to the shareholder, as applicable.
REDEMPTION BY MAIL
Shares may also be redeemed by submitting a written request in 'good order' to
PFPC Inc. at the following address:
PFPC Inc.
P.O. Box 8950
Wilmington, Delaware 19899
Attn: PaineWebber Mutual Funds
Redemption requests received by PFPC Inc. by mail are processed by PFPC
Inc. which will mail a check in the appropriate redemption amount to the
shareholder the next business day after receipt of a redemption request in 'good
order.'
A redemption request is considered to have been received in 'good order' if
the following conditions are satisfied:
(1) the request is in writing, states the number of shares to be
redeemed and identifies the shareholder's Fund account number;
(2) the request is signed by each registered owner exactly as the
shares are registered;
(3) if the shares to be redeemed were issued in certificate form, the
certificates are endorsed for transfer (or are themselves accompanied by an
endorsed stock power) and accompany the redemption request, which should be
sent by registered mail for the protection of shareholders; and
(4) the signatures on the written redemption request have been
guaranteed by a bank, broker-dealer, municipal securities broker or dealer,
government securities broker or dealer, credit union, a member firm of a
national securities exchange, registered securities association or clearing
agency, or savings association (the purpose of a signature guarantee is to
protect shareholders against the possibility of fraud). The transfer agent
may reject redemption instructions if the guarantor is neither a member of
nor a participant in a signature guarantee program (currently known as
'STAMP'sm'').
Additional supporting documents may be required for redemptions by
corporations, executors, administrators, trustees and guardians.
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GENERAL REDEMPTION POLICIES
Signature guarantees (as described above) are required in connection with any
redemption of shares by mail and share ownership transfer requests. These
requirements may be waived by the Fund in certain instances.
If the shares to be redeemed represent an investment for which the Fund has
not yet received good funds, the Fund reserves the right not to honor the
redemption request until such time as it has assured itself that good funds have
been collected, which may take 15 or more business days. If purchases are made
with good funds, no redemption delay would occur.
Due to the relatively high cost of maintaining a Fund account, the Fund
reserves the right to redeem, upon not less than 60 days' notice, any Fund
account reduced by a shareholder to a value of $500 or less.
PaineWebber has established procedures pursuant to which shares of the Fund
held by a PaineWebber client having a deficiency (i.e., amount owed to
PaineWebber resulting from Account activity or otherwise and other amounts
authorized by the client to be paid to others from the Account, less the amount
of any free credit cash balance) in his Account will be redeemed automatically
to the extent of that deficiency, unless the client notifies PaineWebber to the
contrary in advance. The amount of the redemption will be the lesser of (a) the
total net asset value of Fund shares held in the client's account or (b) the
deficiency in the client's Account at the close of business on the redemption
day adjusted for purchase and sale transactions in other securities settling on
the following business day. Accordingly, a PaineWebber client who has previously
consented to this automatic redemption procedure and who wishes to pay for a
securities transaction other than through such automatic redemption procedure
must do so not later than the day before the settlement date for that
transaction.
THE DISTRIBUTOR
PaineWebber acts as distributor of the Fund's shares pursuant to a Distribution
Agreement dated January 30, 1995. To reimburse PaineWebber for the services it
provides and for the expenses it bears under the Distribution Agreement, the
Fund has adopted the Plan of Distribution. The Board of Directors and
shareholders of the Fund approved the Plan of Distribution on July 28, 1988 and
December 20, 1988, respectively, which was most recently amended on December 16,
1994.
The Plan of Distribution provides that the Fund reimburse PaineWebber for
the expenses incurred by it in connection with the distribution of the Fund's
shares at the annual rate of up to .12% of the Fund's average daily net assets.
The expenses which may be reimbursed include compensation to investment
executives and other employees of PaineWebber, printing of prospectuses and
reports for other than existing shareholders, and the preparation, printing and
distribution of sales literature and advertising materials. It is not
anticipated that items reimbursable under the Plan of Distribution generally
will include any profit to PaineWebber. PaineWebber anticipates that the amount
of expenses reimbursed will not exceed the amount of expenses incurred by
PaineWebber and that there will be no carryover of expenses from one year to the
next. The expenses to be reimbursed are for activities primarily intended to
result in the sale of shares of the Fund and the maintenance of Fund accounts
and account balances. PaineWebber currently intends that .10% per annum of the
Fund's daily net assets will be paid to its investment executives
proportionately in respect of Fund share balances maintained by their
15
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respective clients. For the fiscal year ended July 31, 1995, the Fund reimbursed
PaineWebber in an amount equal to .12% of the Fund's average daily net assets.
The Plan of Distribution remains in effect for as long as such continuance
is approved annually by vote of the Board of Directors, including a majority of
those Directors who are not interested persons and who have no direct or
indirect financial interest in the Plan of Distribution, cast in person at a
meeting called for such purpose. The Plan of Distribution may not be amended to
increase materially the amount to be spent for the services described therein
without approval of the shareholders of the Fund, and all material amendments of
the Plan of Distribution must also be approved by the Directors in the manner
described above. The Plan of Distribution may be terminated at any time, without
payment of any penalty, by vote of a majority of the Directors as described
above, or by vote by the holders of a majority of the outstanding voting
securities of the Fund, as defined in the Act, on not more than 30 days' written
notice to any other party to the Plan of Distribution. So long as the Plan of
Distribution is in effect, the election and nomination of Directors who are not
interested persons of the Fund shall be committed to the discretion of the
Directors who are not interested persons. The Directors have determined that, in
their judgment, there is a reasonable likelihood that the Plan of Distribution
will continue to benefit the Fund and its shareholders.
Pursuant to the Plan of Distribution, PaineWebber provides the Fund's
Directors, at least quarterly, with a written report of the amounts expended
under the Plan of Distribution. The report includes an itemization of the
distribution expenses incurred by PaineWebber on behalf of the Fund and the
purpose of such expenditures. In their quarterly review of the Plan of
Distribution, the Directors consider its continued appropriateness and the level
of compensation provided therein. For the fiscal year ended July 31, 1995,
PaineWebber reported to the Directors that it and Kidder, Peabody & Co.
Incorporated ('Kidder, Peabody'), the Fund's predecessor distributor, incurred
distribution expenses of approximately $1,800,000, of which approximately
$1,824,254 was recovered in the form of reimbursements made by the Fund to
PaineWebber and Kidder, Peabody at the rate provided in the Plan of
Distribution.
EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged for shares of certain other
PaineWebber/Kidder, Peabody funds, to the extent such shares are offered for
sale in the shareholder's state of residence. For a list of the
PaineWebber/Kidder, Peabody funds for which shares may be exchanged and for a
description of each of those funds, please see 'Redemption and Exchange of
Shares' in the Statement of Additional Information.
Although the Fund currently imposes no limit on the number of times the
Exchange Privilege may be exercised by any shareholder, the Fund may impose such
limits in the future, in accordance with applicable provisions of the Act and
rules thereunder. In addition, the Exchange Privilege may be terminated or
revised at any time upon 60 days' prior written notice to Fund shareholders, and
is available only to residents of states in which exchanges are permitted under
state law. The exchange of shares of one fund for shares of another is treated
for Federal income tax purposes as a sale of the shares given in exchange by the
shareholder, so that a shareholder may recognize a taxable gain or loss on an
exchange.
Upon receipt of proper instructions and all necessary supporting documents,
Fund shares submitted for exchange will be redeemed at their net asset value
next determined and simultaneously invested in shares of the fund being
acquired. Settlement of an exchange would
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occur one business day after the date on which the request for exchange was
received in proper form, unless the dollar amount of the transaction exceeds 5%
of the Fund's net assets on any given day, in which case settlement would occur
within five business days after the date on which the request for exchange was
received in proper form. The proceeds of a redemption of Fund shares made to
facilitate the exchange of those shares for shares of another fund must be equal
to at least (1) the minimum initial investment requirement imposed by the fund
into which the exchange is being sought if the shareholder seeking the exchange
has not previously invested in that fund or (2) the minimum subsequent
investment requirement imposed by the fund into which the exchange is being
sought if the shareholder has previously made an investment in that fund.
A shareholder of the Fund wishing to exercise the Exchange Privilege should
obtain from PaineWebber a copy of the current prospectus of the fund into which
an exchange is being sought and review that prospectus carefully before making
the exchange. PaineWebber reserves the right to reject any exchange request at
any time.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund ordinarily declares dividends from its net investment income on each
day that the New York Stock Exchange is open for business. Dividends are paid
monthly and are automatically reinvested in additional Fund shares at net asset
value or, at the shareholder's option, paid in cash. The Fund's earnings for
Saturdays, Sundays and holidays are declared as dividends on the preceding
business day. If a shareholder redeems all of his shares at any time during the
month, all dividends to which the shareholder is entitled are paid to him
together with the proceeds of the redemption. Distributions of net realized
securities gains, if any, are paid once a year, but the Fund may make
distributions on a more frequent basis to comply with the distribution
requirements of the Internal Revenue Code of 1986, as amended (the 'Code'), in
all events in a manner consistent with the provisions of the Act.
The Fund qualified as a regulated investment company under the Code for the
fiscal year ended July 31, 1995, and plans to continue to so qualify as long as
the Fund determines that such qualification is in the best interests of its
shareholders. Such qualification relieves the Fund of liability for Federal
income tax to the extent its income is distributed in accordance with applicable
provisions of the Code. Regulated investment companies, such as the Fund, are
subject to a nondeductible 4% excise tax, measured with respect to certain
undistributed amounts of taxable investment income and capital gains.
Dividends derived from interest and distributions from any net realized
short-term securities gains are taxable as ordinary income, whether or not
reinvested. Distributions from net realized long-term securities gains, if any,
generally are taxable as long-term capital gains, whether or not reinvested. As
the Fund is not expected to realize long-term capital gains, it does not
contemplate paying capital gains distributions as described in the Code. No
dividend will qualify for the dividends received deduction allowable to certain
U.S. corporations.
The Fund is required to withhold and remit to the U.S. Treasury 31% of
dividends and distributions from net realized securities gains of the Fund paid
to a shareholder ('backup withholding') if such shareholder fails to certify
either that the Taxpayer Identification Number, furnished in connection with
opening an account, is correct, or that such shareholder has not received notice
from the Internal Revenue Service ('IRS') of being subject to backup withholding
as a result of a failure to properly report taxable dividend or interest income
on a Federal income
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tax return. Furthermore, the Fund may be notified by the IRS to institute backup
withholding if the IRS determines a shareholder's Taxpayer Identification Number
is incorrect or if a shareholder has failed to properly report taxable dividend
and interest income on a Federal income tax return.
A Taxpayer Identification Number is either the Social Security number or
employer identification number of the record owner of the account. Any tax
withheld as a result of backup withholding does not constitute an additional tax
imposed on the record owner of the account, and may be claimed as a credit on
the record owner's Federal income tax return.
Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually. Dividends and distributions may be subject to
certain state or local taxes. Shareholders are urged to consult their own tax
advisers regarding specific questions as to Federal, state or local taxes.
DETERMINATION OF NET ASSET VALUE
Net asset value is determined daily at 12:00 noon, Eastern time, Monday through
Friday, except that net asset value is not computed on any day when no orders to
purchase, sell, exchange or redeem Fund shares have been received, when there is
not sufficient trading in the Fund's portfolio securities that the Fund's net
asset value per share might be materially affected by changes in the value of
such portfolio securities or when the New York Stock Exchange is not open for
trading. The determination of net asset value is made by subtracting from the
value of the assets of the Fund the amount of its liabilities and dividing the
remainder by the number of outstanding shares of the Fund. Expenses and fees of
the Fund, including PaineWebber's fee, are accrued daily and taken into account
for the purpose of determining net asset value.
The Fund attempts to maintain a net asset value of $1.00 per share for
purchases and redemptions, although there can be no assurance that the Fund will
always be able to do so. In order to effectuate this policy, the Fund may, under
certain circumstances, consider the sale of portfolio instruments prior to
maturity to realize capital gains or losses, withhold dividends, make
distributions from capital or capital gains, or reduce the number of outstanding
shares of the Fund held by a shareholder. The Fund determines the value of its
portfolio securities by the amortized cost method of valuation which involves
valuing a security at its cost at the time of purchase and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
Additional information concerning the amortized cost method of valuation and
certain conditions imposed upon its use is contained in the Statement of
Additional Information.
CUSTODIAN, AND TRANSFER, DIVIDEND DISBURSING AND RECORDKEEPING AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, has been retained to act as custodian, and transfer, dividend disbursing
and recordkeeping agent.
COUNSEL AND INDEPENDENT AUDITORS
Stroock & Stroock & Lavan, 7 Hanover Square, New York, New York 10004-2696, is
counsel for the Fund. Ernst & Young LLP, located at 787 Seventh Avenue, New
York, New York 10019, serves as independent auditors for the Fund. For the
fiscal year ended July 31, 1994, and prior thereto,
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the Fund's independent auditors were Deloitte & Touche LLP, 2 World Financial
Center, New York, New York 10281.
ADDITIONAL INFORMATION ABOUT THE FUND
The Fund was incorporated under the laws of the State of Maryland on May 31,
1979 and commenced operations on August 28, 1979. On April 6, 1992, shareholders
voted to change the name of the Fund from 'Webster Cash Reserve Fund, Inc.' to
'Kidder, Peabody Cash Reserve Fund, Inc.' On January 30, 1995, the Fund's name
changed to 'PaineWebber/Kidder, Peabody Cash Reserve Fund, Inc.'
The authorized capital stock of the Fund consists of 5 billion shares of
common stock, par value $.01 per share. Each share has one vote and, when issued
and paid for in accordance with the terms of offering, is fully paid and
non-assessable. Shares are redeemable at net asset value, at the option of the
shareholder. Shares have no pre-emptive, subscription or conversion rights and
are freely transferable.
In the interest of economy and convenience, certificates representing the
Fund's shares are not physically issued. IFTC maintains a record of each
shareholder's ownership. Each shareholder receives confirmations from IFTC which
show purchases and sales of the Fund's shares. Shares of the Fund owned by a
shareholder and dividends paid thereon are reflected in the shareholder's
monthly statement from PaineWebber.
Unless otherwise required by the Act, ordinarily it will not be necessary
for the Fund to hold annual meetings of shareholders. As a result, Fund
shareholders may not consider each year the election of Directors or the
appointment of independent auditors. However, pursuant to the Fund's By-Laws,
the holders of at least 10% of the shares outstanding and entitled to vote may
require the Fund to hold a special meeting of shareholders for any purpose. Fund
shareholders may remove a Director by the affirmative vote of a majority of the
Fund's outstanding voting shares. In addition, the Board of Directors will call
a special meeting of shareholders for the purpose of electing Directors if, at
any time, less than a majority of Directors then holding office were elected by
shareholders. Shareholders will have the right to call for a meeting to consider
the removal of one or more of the Directors and will be assisted in shareholder
communications in such matters.
As used in this Prospectus, when referring to the approvals to be obtained
from shareholders, the term 'majority' means the vote of the lesser of (1) 67%
of the Fund's shares present at a meeting if the holders of more than 50% of the
outstanding shares are present in person or by proxy, or (2) more than 50% of
the Fund's outstanding shares.
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No person has been authorized to give any information or to make any
representations not contained in this Prospectus or in the Statement
of Additional Information incorporated into this Prospectus by
reference in connection with the offering made by this Prospectus,
and, if given or made, any such information or representations must
not be relied upon as having been authorized by the Fund or its
distributor. This Prospectus does not constitute an offering by the
Fund or by its distributor in any jurisdiction in which such
offering may not lawfully be made.
<TABLE>
<S> <C>
- --------------------------------------------------------
Contents
- --------------------------------------------------------
Fee Table 2
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Highlights 3
- --------------------------------------------------------
Financial Highlights 6
- --------------------------------------------------------
Yield 7
- --------------------------------------------------------
Investment Objective and
Management Policies 7
- --------------------------------------------------------
Management of the Fund 11
- --------------------------------------------------------
Portfolio Transactions 12
- --------------------------------------------------------
Purchase of Shares 12
- --------------------------------------------------------
Redemption of Shares 14
- --------------------------------------------------------
The Distributor 15
- --------------------------------------------------------
Exchange Privilege 16
- --------------------------------------------------------
Dividends, Distributions and Taxes 17
- --------------------------------------------------------
Determination of Net Asset Value 18
- --------------------------------------------------------
Custodian, and Transfer, Dividend
Disbursing and Recordkeeping Agent 18
- --------------------------------------------------------
Counsel and Independent Auditors 18
- --------------------------------------------------------
Additional Information About the
Fund 19
- --------------------------------------------------------
</TABLE>
PaineWebber/
Kidder,
Peabody
Cash
Reserve
Fund,
Inc.
Prospectus
December 1, 1995
<PAGE>
<PAGE>
Statement of Additional Information December 1, 1995
- --------------------------------------------------------------------------------
PaineWebber/Kidder, Peabody Cash Reserve Fund, Inc.
1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019 (800) 647-1568
PaineWebber/Kidder, Peabody Cash Reserve Fund, Inc. (the 'Fund') is a
diversified, open-end, management investment company whose objective is the
maximization of current income to the extent consistent with the preservation of
capital and the maintenance of liquidity. The Fund pursues this objective by
investing in short-term money market instruments. This Statement of Additional
Information relating to the Fund is not a prospectus and should be read in
conjunction with the Fund's Prospectus. A copy of the Fund's Prospectus can be
obtained from the Fund at the above address. The date of the Prospectus to which
this Statement relates is December 1, 1995.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER, ADMINISTRATOR AND DISTRIBUTOR
PaineWebber Incorporated
SUB-ADVISER AND SUB-ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of the Fund are summarized in the Fund's
Prospectus under the heading 'Investment Objective and Management Policies.' The
Fund believes that such description requires no general augmentation as of the
date hereof.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions as fundamental
policies. These restrictions cannot be changed without approval by the holders
of a majority, as defined in the Investment Company Act of 1940, as amended (the
'Act'), of the outstanding shares of the Fund. The Fund may not:
1. Purchase common stocks or other equity securities, state bonds,
municipal bonds or industrial revenue bonds.
2. Borrow money, except from banks for temporary or emergency purposes
including the meeting of redemption requests which might otherwise require
the untimely disposition of securities. Borrowing in the aggregate may not
exceed 10%, and borrowing for purposes other than meeting redemption
requests may not exceed 5%, of the value of the Fund's total assets
(including the amount borrowed) valued at the lesser of cost or market less
liabilities (not including the amount borrowed) at the time the borrowing
is made. The borrowings will be repaid before any additional investments
are made.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except in an amount up to 10% of the value of its total assets but only to
secure borrowings for temporary or emergency purposes.
4. Sell securities short or purchase securities on margin.
5. Write or purchase put or call options.
6. Underwrite the securities of other issuers or purchase any
securities that are illiquid, if, as a result thereof, more than 10% of the
Fund's net assets would be so invested.
7. Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or oil and gas interests.
8. Make loans to others, except through the purchase of qualified debt
obligations, loans of portfolio securities and entry into repurchase
agreements referred to under 'Investment Objective and Management Policies'
in the Fund's Prospectus, provided, however, that repurchase agreements
maturing in more than seven days will not exceed 10% of its net assets.
9. Subject to the diversification requirements of Section 5 of the
Act, invest more than 15% of its assets in the obligations of any one bank,
or invest more than 5% of its assets in the commercial paper of any one
issuer. Notwithstanding the foregoing, to the extent required by the rules
of the Securities and Exchange Commission (the 'SEC'), the Fund will not
invest more than 5% of its assets in the obligations of any one bank.
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10. Invest more than 25% of its assets in the securities of issuers in
any single industry; provided that there shall be no limitation on the
purchase of obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, certificates of deposit ('CDs') (including
those issued by foreign branches of domestic banks) and bankers'
acceptances.
11. Invest in companies for the purpose of exercising control.
12. Invest in securities of other investment companies, except as they
may be acquired as part of a merger, consolidation or acquisition of
assets.
13. Lend its portfolio securities in excess of 20% of its total
assets, taken at market value. Any loans of portfolio securities will be
made according to guidelines established by the SEC and the Fund's Board of
Directors, including maintenance of collateral of the borrower equal at all
times to the current market value of the securities loaned.
If a percentage restriction is adhered to at the time of an investment, a
later increase or decrease in percentage resulting from a change in values or
assets will not constitute a violation of such restriction.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Directors and officers of the Fund, together with information as to their
principal business occupations during the last five years, are shown below.
David J. Beaubien, 61, Director. Chairman of Yankee Environmental Systems,
Inc., manufacturer of meteorological measuring instruments. Director of IEC,
Inc., manufacturer of electronic assemblies, Belfort Instruments, Inc.,
manufacturer of environmental instruments, and Oriel Corp., manufacturer of
optical instruments. Prior to January 1991, Senior Vice President of EG&G, Inc.,
a company that makes and provides a variety of scientific and technically
oriented products and services. Mr. Beaubien is a director or trustee of 11
other investment companies for which Mitchell Hutchins or PaineWebber
Incorporated ('PaineWebber') serves as investment adviser.
William W. Hewitt, Jr., 67, Director. Trustee of The Guardian Asset
Allocation Fund, The Guardian Baillie Gifford International Fund, The Guardian
Bond Fund, Inc., The Guardian Cash Fund, Inc., The Guardian Park Ave. Fund, The
Guardian Stock Fund, Inc., The Guardian Cash Management Trust and The Guardian
U.S. Government Trust. Mr. Hewitt is a director or trustee of 11 other
investment companies for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Thomas R. Jordan, 66, Director. Principal of The Dilenschneider Group,
Inc., a corporate communications and public policy counseling firm. Prior to
January 1992, Senior Vice President of Hill & Knowlton, a public relations and
public affairs firm. Prior to April 1991, President of The Jordan Group, a
management consulting and strategies development firm. Mr. Jordan is a director
or trustee of 10 other investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
3
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Carl W. Schafer, 59, Director. President of the Atlantic Foundation, a
charitable foundation supporting mainly oceanographic exploration and research.
Director of International Agritech Resources, Inc., an agribusiness investment
and consulting firm, Ardic Exploration and Development Ltd., Evans Systems, Inc.
and Hidden Lake Gold Mines Ltd., gold mining companies, Electronic Clearing
House, Inc., a financial transactions processing company, Wainoco Oil
Corporation and Nutraceutix, Inc., a biotechnology company. Prior to January
1993, chairman of the Investment Advisory Committee of the Howard Hughes Medical
Institute and director of Ecova Corporation, a toxic waste treatment firm. Mr.
Schafer is a director or trustee of 10 other investment companies for which
Mitchell Hutchins or PaineWebber serves as investment adviser.
Margo N. Alexander, 48, President. President, chief executive officer and a
director of Mitchell Hutchins. Prior to January 1995, an executive vice
president of PaineWebber. Ms. Alexander is also a director or trustee of two
investment companies and president of 37 other investment companies for which
Mitchell Hutchins or PaineWebber serves as investment adviser.
Teresa M. Boyle, 37, Vice President. First vice president and
manager -- advisory administration of Mitchell Hutchins. Prior to November 1993,
compliance manager of Hyperion Capital Management, Inc., an investment advisory
firm. Prior to April 1993, a vice president and manager -- legal administration
of Mitchell Hutchins. Ms. Boyle is also a vice president of 37 other investment
companies for which Mitchell Hutchins or PaineWebber serves as investment
adviser.
Scott H. Griff, 29, Vice President and Assistant Secretary. Vice president
and attorney of Mitchell Hutchins. Prior to January 1995, an associate at the
law firm of Cleary, Gottlieb, Steen & Hamilton. Mr. Griff is also a vice
president and assistant secretary of 10 other investment companies for which
Mitchell Hutchins or PaineWebber serves as investment adviser.
C. William Maher, 34, Vice President and Assistant Treasurer. Mr. Maher is
a first vice president and a senior manager of the mutual fund finance division
of Mitchell Hutchins. Mr. Maher is also a vice president and assistant treasurer
of 37 other investment companies for which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Dennis L. McCauley, 48, Vice President. Managing Director and Chief
Investment Officer -- Fixed Income of Mitchell Hutchins. Prior to December 1994,
Director of Fixed Income Investments of IBM Corporation. Mr. McCauley is also a
vice president of six other investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Susan P. Messina, 35, Vice President. Senior vice president and portfolio
manager for Mitchell Hutchins. Ms. Messina is also a vice president of three
other investment companies for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Ann E. Moran, 38, Vice President and Assistant Treasurer. Vice president of
Mitchell Hutchins. Ms. Moran is also a vice president and assistant treasurer of
37 other investment companies for which Mitchell Hutchins or PaineWebber serves
as investment adviser.
Dianne E. O'Donnell, 43, Vice President and Secretary. Senior vice
president and deputy general counsel of Mitchell Hutchins. Ms. O'Donnell is also
a vice president and secretary of 37 other investment companies for which
Mitchell Hutchins or PaineWebber serves as investment adviser.
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Victoria E. Schonfeld, 44, Vice President. Managing director and general
counsel of Mitchell Hutchins. From April 1990 to May 1994, a partner in the law
firm of Arnold & Porter. Ms. Schonfeld is also a vice president and assistant
secretary of 37 other investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Paul H. Schubert, 32, Vice President and Assistant Treasurer. First vice
president and a senior manager of the mutual fund finance division of Mitchell
Hutchins. From August 1992 to August 1994, vice president at BlackRock Financial
Management, Inc. Prior to August 1992, an audit manager with Ernst & Young LLP.
Mr. Schubert is also a vice president and assistant treasurer of 37 other
investment companies for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Julian F. Sluyters, 35, Vice President and Treasurer. Senior vice president
and the director of the mutual fund finance division of Mitchell Hutchins. Prior
to 1991, an audit senior manager with Ernst & Young LLP. Mr. Sluyters is also a
vice president and treasurer of 37 other investment companies for which Mitchell
Hutchins or PaineWebber serves as investment adviser.
Gregory K. Todd, 38, Vice President and Assistant Secretary. First vice
president and associate general counsel of Mitchell Hutchins. Prior to 1993, a
partner with the law firm of Shereff, Friedman, Hoffman & Goodman. Mr. Todd is
also a vice president and assistant secretary of 37 other investment companies
for which Mitchell Hutchins or PaineWebber serves as investment adviser.
The address of each of the Directors is: Mr. Beaubien, Montague Industrial
Park, 101 Industrial Road, Box 7461, Turners Falls, Massachusetts 01376; Mr.
Hewitt, P.O. Box 2359, Princeton, New Jersey 08543-2359; Mr. Jordan, 200 Park
Avenue, New York, New York 10166; and Mr. Schafer, P.O. Box 1164, Princeton, New
Jersey 08542. The address of each of the officers listed above is 1285 Avenue of
the Americas, New York, New York 10019.
By virtue of the management responsibilities assumed by PaineWebber under
the Investment Advisory and Administration Agreement, the Fund requires no
executive employees other than its officers, none of whom devotes full time to
the affairs of the Fund. See 'Investment Advisory and Other Services -- Manager
and Investment Adviser.' Directors and officers of the Fund, as a group, owned
less than 1% of the outstanding common stock of the Fund on November 1, 1995. No
officer, director or employee of PaineWebber or Mitchell Hutchins receives any
compensation from the Fund for serving as an officer or Director of the Fund.
The Fund pays each Director who is not an officer, director or employee of
PaineWebber or Mitchell Hutchins or any of its affiliates an annual retainer of
$3,500 and $900 for each Board of Directors meeting attended, and reimburses the
Director for out-of-pocket expenses associated with attendance at Board
meetings. The Chairman of the Board's audit committee receives an annual fee of
$250. The amount of compensation paid by the Fund to each Director for the
fiscal year ended July 31, 1995, and the aggregate amount of compensation paid
to each such Director for the year ended
5
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December 31, 1994 by all investment companies in the same fund complex for which
such person is a Board member were as follows:
<TABLE>
<CAPTION>
(5)
(3) TOTAL COMPENSATION
(2) PENSION OR (4) FROM FUND AND
(1) AGGREGATE RETIREMENT BENEFITS ESTIMATED ANNUAL OTHER INVESTMENT
NAME OF BOARD COMPENSATION FROM ACCRUED AS PART OF BENEFITS UPON COMPANIES IN THE
MEMBER FUND FUND'S EXPENSES RETIREMENT FUND COMPLEX*
- ------------------------------ ----------------- -------------------- ----------------- ------------------
<S> <C> <C> <C> <C>
David J. Beaubien $10,500 None None $ 80,700
William W. Hewitt, Jr. $10,500 None None $ 74,425
Thomas R. Jordan $10,500 None None $ 83,125
Carl W. Schafer $10,750 None None $ 84,575
</TABLE>
- ------------
* Represents total compensation paid to each Director during the calendar year
ended December 31, 1994.
INVESTMENT ADVISORY AND OTHER SERVICES
PaineWebber, the Fund's investment adviser and administrator, and Mitchell
Hutchins, the Fund's sub-adviser and sub-administrator, are located at 1285
Avenue of the Americas, New York, New York 10019.
Subject to the supervision and direction of the Fund's Board of Directors,
Mitchell Hutchins manages the Fund's portfolio in accordance with the stated
policies of the Fund. Mitchell Hutchins makes investment decisions for the Fund
and places the purchase and sale orders for portfolio transactions. In addition,
Mitchell Hutchins pays the salaries of all officers and employees who are
employed by both it and the Fund, maintains office facilities, furnishes
statistical and research data, clerical help and accounting, data processing,
bookkeeping, internal auditing and legal services and certain other services
required by the Fund, prepares reports to shareholders, tax returns to and
filings with the SEC and state Blue Sky authorities, is responsible for the
calculation of the net asset value of shares of the Fund and generally assists
in all aspects of the Fund's operations. Mitchell Hutchins bears all expenses in
connection with the performance of its services.
Expenses incurred in the operation of the Fund, including, but not limited
to, taxes, interest, brokerage fees and commissions, if any, fees of Directors
who are not officers, directors stockholders or employees of PaineWebber or
Mitchell Hutchins, SEC fees and related expenses, state Blue Sky qualification
fees, charges of the custodian and transfer and dividend disbursing agent,
certain insurance premiums, outside auditing and legal expenses, and costs of
maintenance of corporate existence, shareholder services, printing of
prospectuses and statements of additional information for regulatory purposes or
for distribution to shareholders, shareholders' reports and corporate meetings,
are borne by the Fund.
The Investment Advisory and Administration Agreement remains in effect for
successive annual periods provided continuance is approved at least annually by
(i) the Fund's Board of Directors or (ii) vote of a majority, as defined in the
Act, of the outstanding voting securities of the Fund, provided that in either
event the continuance is also approved by a majority of the Directors who are
not 'interested persons,' as defined in the Act, of the Fund or PaineWebber or
6
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Mitchell Hutchins, by vote cast in person at a meeting called for the purpose of
voting on such approval. The Investment Advisory and Administration Agreement is
terminable without penalty, on not less than 60 days' notice, by the Fund's
Board of Directors or by vote of the holders of a majority of the Fund's shares
or by PaineWebber. The Investment Advisory and Administration Agreement will
terminate automatically in the event of its assignment.
The Fund pays PaineWebber, as compensation for services rendered, a monthly
fee at the annual rate of .50% of the portion of the average daily net assets
not exceeding $750 million; .475% of the portion of the average daily net assets
exceeding $750 million but not exceeding $1 billion; .45% of the portion of the
average daily net assets exceeding $1 billion but not exceeding $1.25 billion;
.425% of the portion of the average daily net assets exceeding $1.25 billion but
not exceeding $1.5 billion; and .40% of the portion of the average daily net
assets exceeding $1.5 billion. The fee paid to Kidder Peabody Asset Management,
Inc., the Fund's predecessor investment adviser and administrator, or
PaineWebber for the fiscal years ended July 31, 1993, 1994 and 1995 amounted to
$8,489,968, $8,505,180 and $7,194,947, respectively.
PaineWebber has agreed that if in any fiscal year the aggregate expenses of
the Fund (including fees pursuant to the Investment Advisory and Administration
Agreement but excluding interest, taxes, brokerage and, with the prior written
consent of the necessary state securities commissions, extraordinary expenses)
exceed the expense limitation of any state having jurisdiction over the Fund,
PaineWebber will reimburse the Fund for such excess expense. This expense
reimbursement obligation is not limited to the amount of PaineWebber's fees.
Such expense reimbursement, if any, will be estimated, reconciled and paid on a
monthly basis. The most stringent state expense limitation applicable to the
Fund presently requires reimbursement of expenses in any year that such expenses
exceed 2 1/2% of the first $30 million of the average value of the Fund's net
assets, 2% of the next $70 million and 1 1/2% of the remaining average net
assets of the Fund. No expense reimbursement was required for the fiscal year
ended July 31, 1995.
PaineWebber shall not be liable for any error of judgment or mistake of law
or for any loss suffered by the Fund in connection with the matters to which the
Investment Advisory and Administration Agreement relates, except for a loss
resulting from willfull misfeasance, bad faith or gross negligence on its part
in the performance of its duties or from reckless disregard by it of its
obligations and duties under the Investment Advisory and Administration
Agreement.
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 and PaineWebber/Kidder, Peabody ('PW/KP') 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 and PW/KP mutual funds and other Mitchell Hutchins advisory clients.
7
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DISTRIBUTOR
PaineWebber is the distributor of the Fund's shares and is acting on a best
efforts basis.
The Directors believe that the Fund's expenditures under the Fund's Plan of
Distribution pursuant to Rule 12b-1 benefit the Fund and its shareholders by
providing better shareholder services. For the fiscal year ended July 31, 1995,
PaineWebber and/or Kidder, Peabody & Co. Incorporated, the Fund's predecessor
distributor, received $1,824,254 from the Fund, of which approximately $400,000
was spent on payments to investment executives and $1,400,000 was spent on
overhead-related expenses.
CUSTODIAN, AND TRANSFER, DIVIDEND DISBURSING AND RECORDKEEPING AGENT
Investors Fiduciary Trust Company ('IFTC'), 127 West 10th Street, Kansas City,
Missouri 64105, serves as custodian. PFPC Inc. a subsidiary of PNC Bank,
National Association, whose principal address is 400 Bellevue, Wilmington,
Delaware 19809, acts as transfer, dividend disbursing and recordkeeping agent.
As custodian, IFTC maintains custody of the Fund's portfolio securities. As
transfer agent, PFPC Inc. maintains the Fund's official record of shareholders,
as dividend disbursing agent, it is responsible for crediting dividends to
shareholders' accounts, and as recordkeeping agent, it maintains certain
accounting and financial records of the Fund.
INDEPENDENT AUDITORS
Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019, acts as
independent auditors for the Fund. In such capacity, Ernst & Young LLP audits
the Fund's annual financial statements. For the fiscal year ended July 31, 1994,
and prior thereto, the Fund's independent auditors were Deloitte & Touche LLP, 2
World Financial Center, New York, New York 10281.
COUNSEL
Stroock & Stroock & Lavan, 7 Hanover Square, New York, New York 10004-2696, acts
as counsel for the Fund.
PORTFOLIO TRANSACTIONS
Purchases and sales of portfolio securities usually are principal transactions.
Portfolio securities normally are purchased directly from the issuer or from an
underwriter or market maker for the securities. Usually there are no brokerage
commissions paid by the Fund for such purchases. Purchases from dealers serving
as market makers include the spread between the bid and asked price. While
Mitchell Hutchins generally seeks competitive spreads or commissions, the Fund
does not necessarily pay the lowest spread or commission available on each
transaction. No brokerage commissions have been paid by the Fund to date.
Transactions are allocated to various dealers by Mitchell Hutchins in its
best judgment. The primary consideration is prompt execution of orders in an
effective manner at the most favorable price. Subject to this consideration,
dealers may be selected for research, statistical or other services to enable
Mitchell Hutchins to supplement its own research and analysis with the views and
information of other securities firms.
Information so received supplements but does not replace that to be
provided by Mitchell Hutchins, and Mitchell Hutchins fee is not reduced as a
consequence of the receipt of any such
8
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supplemental information. Such information may be useful to Mitchell Hutchins in
serving both the Fund and other clients and, conversely, supplemental
information obtained by the placement of business of other clients may be useful
to Mitchell Hutchins in carrying out its obligations to the Fund.
Investment decisions for the Fund are made independently from those of any
other funds managed by Mitchell Hutchins. If, however, funds managed by Mitchell
Hutchins are simultaneously engaged in the purchase or sale of the same
security, the transactions will be averaged as to price and allocated equitably
to each fund. In some cases, this system might adversely affect the price paid
or received by the Fund or the size of the position obtainable for the Fund.
REDEMPTION AND EXCHANGE OF SHARES
The right of redemption may be suspended or the date of payment postponed (a)
for any period during which the New York Stock Exchange ('NYSE') is closed other
than for customary weekend and holiday closings, (b) when trading in the markets
the Fund normally utilizes is restricted, or when an emergency, as defined by
the rules and regulations of the SEC, exists, making disposal of the Fund's
investments or determination of its net asset value not reasonably practicable,
or (c) for any other periods as the SEC by order may permit for protection of
the Fund's shareholders.
Shares of the Fund may be exchanged for shares of the following
PaineWebber/Kidder, Peabody funds, to the extent such shares are offered for
sale in the shareholder's state of residence:
PaineWebber/Kidder, Peabody California Tax Exempt Money Fund.
PaineWebber/Kidder, Peabody Municipal Money Market Series -- Connecticut
Series.
PaineWebber/Kidder, Peabody Municipal Money Market Series -- New Jersey
Series.
PaineWebber/Kidder, Peabody Premium Account Fund.
The right of exchange may be suspended or postponed if (a) there is a
suspension of the redemption of Fund shares under Section 22(e) of the Act, or
(b) the Fund temporarily delays or ceases the sale of its shares because it is
unable to invest amounts effectively in accordance with applicable investment
objectives, policies and restrictions.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund will not be calculated on the following NYSE
holidays (observed): New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas. If one of these
holidays falls on a Saturday or Sunday, the NYSE will be closed on the preceding
Friday or the following Monday, respectively. The days on which net asset value
is determined are the Fund's business days. The Fund's net asset value per share
is computed by dividing the value of the net assets of the Fund (i.e, assets
less liabilities) by the total number of shares outstanding. Expenses and fees
of the Fund, including PaineWebber's fee, are accrued daily and taken into
account for the purpose of determining net asset value. It is the policy of the
Fund to attempt to maintain a net asset value of $1.00 per share
9
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for purposes of sales and redemptions, although there can be no assurance that
the Fund will always be able to do so.
The Fund maintains a dollar-weighted average portfolio maturity of 90 days
or less, purchases only instruments having remaining maturities of 397 days or
less and invests only in securities which present minimal credit risks and are
of high quality as determined by any major rating service or, in the case of any
instrument that is not rated, of comparable quality as determined by the Board
of Directors.
The valuation of the Fund's portfolio securities is based on their
amortized cost, which does not take into account unrealized gains or losses.
This involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price the Fund would receive if it sold the instrument.
In connection with the utilization of the amortized cost method of
valuation, the Board of Directors has established procedures reasonably
designed, taking into account current market conditions and the Fund's
investment objective, to stabilize net asset value per share at $1.00 for the
purpose of sales and redemptions. These procedures include periodic review, as
the Board of Directors deems appropriate and at such intervals as are reasonable
in light of current market conditions, of the relationship between the amortized
cost value per share and the net asset value per share based on available
indications of market value. In such review, investments for which market
quotations are readily available are valued at the most recent bid price or
quoted yield equivalent for such securities or for securities of comparable
maturity, quality and type as obtained from one or more of the major market
makers for the securities to be valued. Other investments and assets are valued
at fair value as determined in good faith by the Board of Directors.
The extent of any deviation between the Fund's net asset value based on
available market quotations or market equivalents and $1.00 per share based on
amortized cost is examined by the Board of Directors. If such deviation exceeds
.50%, the Board of Directors promptly will consider what action, if any, will be
initiated. In the event the Board of Directors determines that a deviation
exists which may result in material dilution or other unfair results to
shareholders, it has agreed to take such corrective action as it regards as
necessary and appropriate, including: selling portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity; not declaring dividends or paying distributions from capital or
capital gains; redeeming shares in kind; or establishing a net asset value per
share by using available market quotations.
DETERMINATION OF CURRENT AND EFFECTIVE YIELDS
The Fund provides current and effective yield quotations based on its daily
dividends. See 'Dividends, Distributions and Taxes' in the Fund's Prospectus.
Such quotations are made in reports, sales literature and advertisements
published by the Fund.
10
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Current yield is 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 a seven day calendar period, dividing
the net change in account value by the value of the account at the beginning of
the period and multiplying the return over the seven day period by 365/7. For
purposes of the calculation, net change in account value reflects the value of
additional shares purchased with dividends from the original share and dividends
declared on both the original share and any such additional shares, but does not
reflect realized gains or losses or unrealized appreciation or depreciation.
Effective yield is computed by annualizing the seven-day return with all
dividends reinvested in additional shares of the Fund.
Current and effective yields fluctuate and are not necessarily
representative of future results. The shareholder should remember that yield is
a function of the type and quality of the instruments in the portfolio,
portfolio maturity and operating expenses. See 'Investment Objective and
Management Policies' in the Fund's Prospectus and 'Investment Advisory and Other
Services' above. Current and effective yield information is useful in reviewing
the Fund's performance but because current and effective yields will fluctuate
such information may not provide a basis for comparison with bank deposits,
other investments which pay a fixed yield for a stated period of time or other
investment companies which may use a different method of calculating yield.
A shareholder's principal in the Fund is not guaranteed. See 'Determination
of Net Asset Value' for a discussion of the manner in which the Fund's price per
share is determined.
Historical and comparative yield information may be presented by the Fund.
ADDITIONAL INFORMATION
As used in this statement of additional information, when referring to the
approvals to be obtained from shareholders, the term 'majority' means the vote
of the lesser of (1) 67% of the Fund's shares present at a meeting if the
holders of more than 50% of the outstanding shares are present in person or by
proxy, or (2) more than 50% of the Fund's outstanding shares.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal year ended July 31, 1995
is a separate document supplied with this Statement of Additional Information,
and the financial statements, accompanying notes and report of independent
auditors appearing therein are incorporated by reference in this Statement of
Additional Information.
INFORMATION WITH RESPECT TO SECURITIES RATINGS
The following is a description of Standard & Poor's, a division of The McGraw
Hill Companies, Inc., ('S&P') and Moody's Investors Service, Inc. ('Moody's')
commercial paper and corporate bond ratings:
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COMMERCIAL PAPER RATINGS
The designation A-1 by S&P indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Paper rated A-1 must have the
following characteristics: liquidity ratios are adequate to meet cash
requirements, long-term senior debt is rated A or better, the issuer has access
to at least two additional channels of borrowing, basic earnings and cash flow
have an upward trend with allowance made for unusual circumstances. Typically,
the issuer's industry is well established and the issuer has a strong position
within the industry; the reliability and quality of management are unquestioned.
Those issues determined to possess overwhelming safety characteristics are
denoted with a plus sign (+) designation. Paper rated A-1+ must have either the
direct credit support of an issuer or guarantor that possesses excellent
long-term operating and financial strengths combined with strong liquidity
characteristics (typically, such issuers or guarantors would display credit
quality characteristics which would warrant a senior bond rating of 'AA' or
higher), or the direct credit support of an issuer or guarantor that possesses
above average long-term fundamental operating and financing capabilities
combined with ongoing excellent liquidity characteristics. Capacity for timely
payment on issues with an A-2 designation is strong. However, the relative
degree of safety is not as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
CORPORATE BOND RATINGS
Bonds rated AA by S&P are judged by S&P to be high-grade obligations, and in the
majority of instances differ only in small degrees from issues rated AAA. Bonds
rated AAA are considered by S&P to be the highest grade obligations and possess
the ultimate degree of protection as to principal and interest.
Bonds rated Aa by Moody's are judged by Moody's to be of high quality by
all standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than Aaa bonds because margins
of protection may not be as large or fluctuations of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger. Moody's applies the numeral modifiers 1,
2 and 3 to the Aa rating classification. The modifier 1 indicates that the
security ranks in the higher end of this rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of this rating category.
12
<TABLE>
<S> <C>
- --------------------------------------------------------
Contents
- --------------------------------------------------------
Investment Objective and Policies 2
- --------------------------------------------------------
Management of the Fund 3
- --------------------------------------------------------
Investment Advisory and Other Services 6
- --------------------------------------------------------
Portfolio Transactions 8
- --------------------------------------------------------
Redemption and Exchange of Shares 9
- --------------------------------------------------------
Determination of Net Asset Value 9
- --------------------------------------------------------
Determination of Current and Effective Yields 10
- --------------------------------------------------------
Additional Information 11
- --------------------------------------------------------
Financial Statements 11
- --------------------------------------------------------
Information with Respect to Securities
Ratings 11
- --------------------------------------------------------
</TABLE>
PaineWebber/
Kidder,
Peabody
Cash
Reserve
Fund,
Inc.
Statement of
Additional
Information
December 1, 1995
STATEMENT OF DIFFERENCES
The Service Mark shall be expressed as ........... 'sm'
<PAGE>