<PAGE>
PAINEWEBBER AND MITCHELL HUTCHINS/KIDDER, PEABODY MUTUAL FUNDS
PAINEWEBBER OFFERS A FAMILY OF 35 MUTUAL
FUNDS WHICH ENCOMPASS A DIVERSIFIED
RANGE OF INVESTMENT GOALS. INVESTORS MAY
EXCHANGE THEIR FUND SHARES WITH OTHER
FUNDS WITHIN THE FAMILY.
INCOME FUNDS
MH/KP ADJUSTABLE RATE GOVERNMENT FUND
MH/KP GLOBAL FIXED INCOME FUND
MH/KP GOVERNMENT INCOME FUND
MH/KP INTERMEDIATE FIXED INCOME FUND
PW GLOBAL INCOME FUND
PW HIGH INCOME FUND
PW INVESTMENT GRADE INCOME FUND
PW SHORT-TERM U.S. GOVERNMENT INCOME FUND
PW SHORT-TERM U.S. GOVERNMENT INCOME FUND FOR CREDIT UNIONS
PW STRATEGIC INCOME FUND
PW U.S. GOVERNMENT INCOME FUND
TAX-FREE INCOME FUNDS
MH/KP MUNICIPAL BOND FUND
PW CALIFORNIA TAX-FREE INCOME FUND
PW MUNICIPAL HIGH INCOME FUND
PW NATIONAL TAX-FREE INCOME FUND
PW NEW YORK TAX-FREE INCOME FUND
GROWTH FUNDS
MH/KP EMERGING MARKETS EQUITY FUND
MH/KP GLOBAL EQUITY FUND
MH/KP SMALL CAP GROWTH FUND
PW ATLAS GLOBAL GROWTH FUND
PW BLUE CHIP GROWTH FUND
PW CAPITAL APPRECIATION FUND
PW COMMUNICATIONS & TECHNOLOGY GROWTH FUND
PW EUROPE GROWTH FUND
PW GROWTH FUND
PW REGIONAL FINANCIAL GROWTH FUND
PW SMALL CAP VALUE FUND
GROWTH AND INCOME FUNDS
MH/KP ASSET ALLOCATION FUND
MH/KP EQUITY INCOME FUND
PW ASSET ALLOCATION FUND
PW GROWTH AND INCOME FUND
PW GLOBAL ENERGY FUND
PW GLOBAL GROWTH AND INCOME FUND
PW UTILITY INCOME FUND
PAINEWEBBER MONEY MARKET FUND
------------------
'c'1995 PAINEWEBBER INCORPORATED
['RECYCLED' LOGO]
Printed on
Recycled Paper
MITCHELL HUTCHINS/
KIDDER, PEABODY
EQUITY INCOME
FUND, INC.
ANNUAL REPORT
January 31, 1995
<PAGE>
- - --------------------------------------------------------------------------------
March 13, 1995
Dear Shareholder,
During the year ended January 31, 1995, the United States economy exhibited
steady growth. In a series of monetary tightenings that began early in 1994, the
Federal Reserve Board raised the benchmark Federal Funds rate, the rate banks
charge each other for overnight borrowing, six times in 1994 for a total
increase of 2.5%. These increases, which were implemented to moderate economic
expansion and forestall inflation, triggered stock and bond market volatility
throughout most of 1994. The Federal Reserve tightened another 0.5% on February
1, 1995, increasing the Federal Funds rate to 6.0%.
Productivity gains in the workplace and the increased competitiveness of United
States corporations in the global marketplace contributed to the low inflation
and steady growth which characterized the U.S. economy during the year ended
January 31, 1995. Unemployment continued to decline, and retail sales remained
brisk, sparked by strengthened consumer confidence and an upward trend in
personal income. However, side effects of higher interest rates, including a
decline in single family housing starts, crept into economic data during the
latter half of 1994. As we move into the new year, the economy remains
healthy -- although it is not yet clear what the full impact of higher interest
rates will be on economic growth.
PORTFOLIO REVIEW
As you are probably aware, the past year has been a very difficult time for both
stock and bond markets. The Federal Funds rate increases triggered a substantial
rise in both short- and long-term interest rates, leading to one of the worst
years in history for bond markets. Weakness in the fixed income markets quickly
spread to stocks. The Fund reacted by assuming a defensive position,
diversifying and riding out the storm. The Fund's total return for the twelve
months ended January 31, 1995 without deducting sales charges was (4.29)% for
Class A shares, (4.75)% for Class B shares and (3.74)% for Class C shares. The
Fund's total return for this period after deducting the maximum applicable sales
charges was (9.80)% for Class A shares, (4.75)% for Class B shares and (3.74)%
for Class C shares. In comparison, the Standard & Poor's 500 Stock Index had a
total return of 0.52% for this period. The Fund's underperformance was due
primarily to weakness in its technology holdings. We believe this sector offers
very favorable long-term prospects, despite suffering disruptive short-term
profit taking over the final three months of the fiscal year. Net asset values
for the Fund's Class A, B and C shares were $18.72, $18.61 and $18.71,
respectively, as of January 31, 1995.
NEW MANAGEMENT
Effective February 13, 1995, as a result of an asset purchase transaction by and
among Kidder, Peabody Group Inc., its parent, General Electric Company, and
Paine Webber Group Inc., the investment management for the Fund was transferred
to Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'). Mitchell
Hutchins, a wholly owned investment management subsidiary of
- - --------------------------------------------------------------------------------
<PAGE>
- - --------------------------------------------------------------------------------
PaineWebber Incorporated, provides investment advisory and portfolio management
services to individuals, pension and endowment funds, trusts and institutions.
As of January 31, 1995, Mitchell Hutchins was adviser or sub-adviser to 36
investment companies with 66 separate portfolios and aggregate assets of
approximately $22 billion.
Although the name has been changed to Mitchell Hutchins/Kidder, Peabody Equity
Income Fund, Inc., the investment objective remains the same: to provide
reasonably high current dividend and interest income and to obtain long-term
capital appreciation. T. Kirkham Barneby, Managing Director and Chief Investment
Officer of Quantitative Investments of Mitchell Hutchins, has assumed day-to-day
portfolio management responsibility for the Fund. Mitchell Hutchins' Yield
Enhanced Investment Strategy (Y.E.S.) will be utilized in the Fund's investment
approach. Y.E.S. is a disciplined, quantitative approach to equity management
that focuses on dividend yield. This investment style attempts to capture market
price appreciation and to generate above-market dividend income, while incurring
less risk than the market (as measured by the Standard & Poor's 500 Stock
Index).
We are excited by the addition of the Kidder, Peabody Funds to the PaineWebber
Funds. Together, our expanded capabilities should enable us to provide enhanced
investment services to our clients.
MARKET OUTLOOK
As we move into a new year, the economy remains healthy. We see corporate
profits increasing by another 10% on top of the 21% advance posted in 1994. The
political environment for investing may be more favorable in the months ahead.
In addition, increased demand for United States securities could result from the
Mexican peso devaluation crisis. This event has underscored the volatility and
risks of investing in emerging markets.
Thank you for your participation in the Mitchell Hutchins/Kidder, Peabody Equity
Income Fund, Inc. We value you as a shareholder and as a client and welcome any
comments or questions you may have.
Sincerely,
<TABLE>
<S> <C>
FRANK P.L. MINARD T. KIRKHAM BARNEBY
FRANK P.L. MINARD T. KIRKHAM BARNEBY
Chairman, Managing Director and
Mitchell Hutchins Asset Management Inc. Chief Investment Officer of
Quantitative Investments,
Mitchell Hutchins Asset Management Inc.
</TABLE>
- - --------------------------------------------------------------------------------
2
<PAGE>
- - --------------------------------------------------------------------------------
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
- - --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE FUND
AND THE STANDARD & POOR'S 500 INDEX
The following graph depicts the performance of the Mitchell Hutchins/Kidder,
Peabody Equity Income Fund, Inc. versus the Standard & Poor's 500 Index. It is
important to note the Mitchell Hutchins/Kidder, Peabody Equity Income Fund, Inc.
is a professionally managed mutual fund while the index is not available for
investment and is unmanaged. The comparison is shown for illustrative purposes
only.
[GRAPH]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FUND NAME 11/22/85 12/31/85 12/31/86 12/31/87 12/31/88 12/31/89 12/31/90 12/31/91
KIDDER EQUITY INCOME; A $9,427 $9,689 $11,277 $11,712 $11,842 $15,268 $15,568 $22,729
S&P 500 INDEX $10,000 $10,550 $12,514 $13,612 $15,334 $20,177 $19,549 $25,479
12/31/92 12/31/93 12/31/94 01/31/95
KIDDER EQUITY INCOME; A $22,080 $22,461 $21,428 $21,742
S&P 500 INDEX $27,418 $30,169 $30,578 $31,321
</TABLE>
Past performance is not predictive of future performance.
The performance of the other classes will vary from the performance of the class
shown based on the difference in sales charges and fees paid by shareholders
investing in different classes.
The investment return and principal value of an investment in the Fund will
fluctuate, so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
AVERAGE ANNUAL RETURN
<TABLE>
<CAPTION>
% RETURN WITHOUT DEDUCTING % RETURN AFTER DEDUCTING
MAXIMUM SALES CHARGES MAXIMUM SALES CHARGES
------------------------------- -------------------------------
CLASS CLASS
A* B** C*** A* B** C***
- - --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Twelve Months Ended 1/31/95 - 4.29% - 4.75% - 3.74% - 9.80% - 4.75% - 3.74%
- - --------------------------------------------------------------------------------------------------
Five Years Ended 1/31/95 8.46% N/A N/A 7.18% N/A N/A
- - --------------------------------------------------------------------------------------------------
Commencement of Operations
Through 1/31/95+ 9.51% - 0.88% 0.15% 8.81% - 0.88% 0.15%
- - --------------------------------------------------------------------------------------------------
</TABLE>
* Maximum sales charge for Class A shares is 5.75% of the public offering
price. Class A shares bear ongoing 12b-1 service fees.
** Class B shares are sold without initial or contingent deferred sales
charges, but bear ongoing 12b-1 distribution and service fees.
*** Class C shares are sold without initial or contingent deferred sales
charges and are available exclusively to PaineWebber employees.
+ Commencement of operations was November 22, 1985, June 14, 1993 and June
14, 1993 for Class A, Class B and Class C shares, respectively.
- - --------------------------------------------------------------------------------
3
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
- - ------------------------------------------------------------------------------
RECENT PERFORMANCE RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL RETURN (1)
NET ASSET VALUE ----------------------------------
------------------------------------- 12 MONTHS 6 MONTHS
01/31/95 07/31/94 01/31/94 ENDED 01/31/95 ENDED 01/31/95
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $ 18.72 $ 23.29 $ 24.89 - 4.29% 1.67%
- - ------------------------------------------------------------------------------------------------------------
Class B Shares 18.61 23.17 24.79 - 4.75 1.47
- - ------------------------------------------------------------------------------------------------------------
Class C Shares 18.71 23.27 24.87 - 3.74 2.02
- - ------------------------------------------------------------------------------------------------------------
</TABLE>
PERFORMANCE SUMMARY CLASS A SHARES
<TABLE>
<CAPTION>
NET ASSET VALUE
------------------------ CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN (1)
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/22/85 - 12/31/95 $ 15.00 $ 15.42 -- -- 2.80%
- - -----------------------------------------------------------------------------------------------
1986 15.42 17.49 -- $ 0.450 16.40
- - -----------------------------------------------------------------------------------------------
1987 17.49 16.79 $ 0.920 0.478 3.86
- - -----------------------------------------------------------------------------------------------
1988 16.79 16.35 -- 0.617 1.11
- - -----------------------------------------------------------------------------------------------
1989 16.35 20.49 -- 0.550 28.94
- - -----------------------------------------------------------------------------------------------
1990 20.49 20.31 -- 0.570 1.96
- - -----------------------------------------------------------------------------------------------
1991 20.31 29.24 -- 0.354 46.00
- - -----------------------------------------------------------------------------------------------
1992 29.24 27.92 -- 0.477 - 2.86
- - -----------------------------------------------------------------------------------------------
1993 27.92 24.61 3.272 0.482 1.73
- - -----------------------------------------------------------------------------------------------
1994 24.61 18.42 4.623 0.376 - 4.75
- - -----------------------------------------------------------------------------------------------
01/01/95 - 01/31/95 18.42 18.72 -- -- 1.63
- - -----------------------------------------------------------------------------------------------
Total: $ 8.815 $ 4.354
- - -----------------------------------------------------------------------------------------------
Cumulative Total Return as of 01/31/95: 117.35%
- - -----------------------------------------------------------------------------------------------
</TABLE>
PERFORMANCE SUMMARY CLASS B SHARES
<TABLE>
<CAPTION>
NET ASSET VALUE
------------------------ CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN (1)
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
06/14/93 - 12/31/93 $ 27.42 $ 24.53 $ 3.272 $ 0.243 - 10.54%
- - -----------------------------------------------------------------------------------------------
1994 24.53 18.32 4.623 0.280 - 5.24
- - -----------------------------------------------------------------------------------------------
01/01/95 - 01/31/95 18.32 18.61 -- -- 1.58
- - -----------------------------------------------------------------------------------------------
Total: $ 7.895 $ 0.523
- - -----------------------------------------------------------------------------------------------
Cumulative Total Return as of 01/31/95: - 1.44%
- - -----------------------------------------------------------------------------------------------
</TABLE>
PERFORMANCE SUMMARY CLASS C SHARES
<TABLE>
<CAPTION>
NET ASSET VALUE
------------------------ CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN (1)
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
06/14/93 - 12/31/93 $ 27.42 $ 24.58 $ 3.272 $ 0.337 - 10.36%
- - -----------------------------------------------------------------------------------------------
1994 24.58 18.39 4.623 0.495 - 4.27
- - -----------------------------------------------------------------------------------------------
01/01/95 - 01/31/95 18.39 18.71 -- -- 1.74
- - -----------------------------------------------------------------------------------------------
Total: $ 7.895 $ 0.832
- - -----------------------------------------------------------------------------------------------
Cumulative Total Return as of 01/31/95: 0.24%
- - -----------------------------------------------------------------------------------------------
</TABLE>
(1) Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable dates, and do not include
sales charges; results would be lower if sales charges were included.
4
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Portfolio of Investments
January 31, 1995
- - --------------------------------------------------------------------------------
COMMON STOCKS -- 78.9%
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares Value
- - ------------- ---------
<S> <C> <C>
Agriculture -- 1.8%
100,000 Terra Industries, Inc. ............................................. $1,137,500
---------
Banks -- 3.3%
69,150 The Bank of New York................................................ 2,074,500
---------
Building/Paper/Forest Products -- 1.7%
38,200 Federal Paper Board................................................. 1,069,600
---------
Chemicals -- 3.0%
29,850 Dow Chemical Co. ................................................... 1,861,894
---------
Consumer Non-Durables -- 2.6%
25,900 Colgate-Palmolive Corp. ............................................ 1,628,463
---------
Drugs/Health -- 6.6%
58,650 Baxter International Inc. .......................................... 1,730,175
27,000 Merck & Company..................................................... 1,086,750
16,700 Pfizer, Inc. ....................................................... 1,365,225
---------
4,182,150
---------
Electronics -- 11.6%
29,000 Applied Materials, Inc. ............................................ 1,116,500
32,200 Integrated Device Technology Industries* ........................... 966,000
21,000 Intel Corporation................................................... 1,456,875
20,450 Texas Instruments................................................... 1,411,050
36,000 Varian Associates................................................... 1,327,500
21,105 Vishay Intertechnology, Inc. ....................................... 1,049,974
---------
7,327,899
---------
Entertainment & Media -- 5.8%
45,500 Eastman Kodak....................................................... 2,229,500
71,063 Mattell Inc. ....................................................... 1,465,664
---------
3,695,164
---------
Finance/Insurance -- 4.8%
17,400 American International Group........................................ 1,811,775
15,150 Chubb Corporation................................................... 1,227,150
---------
3,038,925
---------
Financial Services -- 6.4%
24,400 Federal Home Loan Mortgage Corporation.............................. 1,366,400
28,400 Franklin Resources Inc. ............................................ 962,050
30,000 Student Loan Marketing Association.................................. 1,121,250
20,400 T. Rowe Price Assc. ................................................ 561,000
---------
4,010,700
</TABLE>
5
<PAGE>
Mitchell Hutchins/Kidder, Peabody Equity Income Fund, Inc.
- - ------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------
COMMON STOCKS -- (Concluded)
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares Value
- - ------------- ---------
<S> <C> <C>
Food, Beverage & Tobacco -- 6.6%
39,500 McDonalds Corp. ................................................... $1,288,688
29,000 Pepsico lnc. ....................................................... 1,069,375
30,500 Phillip Morris Companies............................................ 1,818,562
----------
4,176,625
----------
Information Processing -- 5.5%
67,900 EMC Corp. .......................................................... 1,264,638
10,550 Hewlett-Packard Co. ................................................ 1,060,275
63,150 Novell, Inc.* ...................................................... 1,120,912
----------
3,445,825
----------
Machinery, Electric, Pollution -- 1.6%
13,850 Deere & Co.......................................................... 986,812
----------
Metals -- 2.0%
46,550 Inco Ltd. .......................................................... 1,251,031
----------
Mining -- 3.9%
70,585 Potash Corp of Saskatchewan......................................... 2,479,298
----------
Oil and Gas -- 4.7%
24,000 Diamond Shamrock R&M................................................ 561,000
16,200 Exxon Corp. ........................................................ 1,012,500
16,200 Mobil Corp. ........................................................ 1,399,275
----------
2,972,775
----------
Utilities -- Electric -- 4.5%
32,200 Duke Power.......................................................... 1,300,075
73,300 Southern Co......................................................... 1,530,138
----------
2,830,213
----------
Utilities -- Telephone -- 2.5%
39,500 NYNEX Corp. ........................................................ 1,560,250
----------
Total Common Stocks (cost $47,765,921)............................................. 49,729,624
----------
</TABLE>
6
<PAGE>
Mitchell Hutchins/Kidder, Peabody Equity Income Fund, Inc.
- - ------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS -- 17.7%
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000's) Dates Rates Value
- - --------- --------- ----------- ---------
<S> <C> <C> <C> <C>
$ 4,000 United States Treasury Notes........................... 10/15/98 7.125% $3,961,248
5,500 United States Treasury Notes........................... 01/15/99 6.375 5,290,312
2,000 United States Treasury Notes........................... 10/15/95 6.000 1,880,000
-----------
Total U.S. Treasury Obligations (cost $11,576,875)................ 11,131,560
-----------
Total Investments (cost $59,342,796) -- 96.6%..................... 60,861,184
Assets in excess of liabilities -- 3.4%........................... 2,164,762
-----------
Net Assets -- 100.0%.............................................. $63,025,946
-----------
-----------
</TABLE>
- - ------------
* Non-income producing security.
See accompanying notes to financial statements
7
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Statement of Assets and Liabilities
January 31, 1995
- - --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (identified cost -- $59,342,796)............................ $60,861,184
Cash............................................................................................ 2,456,610
Receivable for investments sold................................................................. 194,386
Dividends and interest receivable............................................................... 256,096
Prepaid expenses................................................................................ 64,433
-----------
Total assets................................................................................ 63,832,709
-----------
LIABILITIES
Payables for investments purchased.............................................................. 394,800
Payable for Fund shares repurchased............................................................. 287,296
Payable to affiliate............................................................................ 65,377
Accrued expenses and other liabilities.......................................................... 59,290
-----------
Total liabilities........................................................................... 806,763
-----------
NET ASSETS
Capital stock -- $0.01 per value capital stock outstanding (500 million shares authorized)...... 62,059,618
Accumulated undistributed net investment income................................................. 87,731
Accumulated net realized losses from investments................................................ (639,791)
Net unrealized appreciation on investments...................................................... 1,518,388
-----------
Net assets.................................................................................. $63,025,946
-----------
-----------
CLASS A:
Net assets...................................................................................... $57,950,034
-----------
Shares outstanding.............................................................................. 3,095,513
Net asset and redemption value per share........................................................ $18.72
-----------
-----------
Maximum offering price per share (net asset value plus sales charge of 5.75% of offering
price)......................................................................................... $19.86
------
------
CLASS B:
Net assets...................................................................................... $ 1,621,844
-----------
Shares outstanding.............................................................................. 87,135
-----------
Net asset value, offering price and redemption value per share.................................. $18.61
------
------
CLASS C:
Net assets...................................................................................... $ 3,454,068
-----------
Shares outstanding.............................................................................. 184,657
-----------
Net asset value, offering price and redemption value per share.................................. $18.71
------
------
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Statement of Operations
For the Year Ended January 31, 1995
- - --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest and discounts earned................................................................... $ 1,408,506
Dividends (net of foreign withholding taxes).................................................... 1,380,255
-----------
2,788,761
-----------
EXPENSES:
Investment advisory............................................................................. 584,713
Distribution fees -- Class A.................................................................... 193,465
Distribution fees -- Class B.................................................................... 13,436
Service fees -- Class A......................................................................... 193,465
Service fees -- Class B......................................................................... 4,479
Transfer agency fees............................................................................ 96,426
Reports and notices to shareholders............................................................. 78,102
Federal and state registration fees............................................................. 48,701
Custody and accounting fees..................................................................... 43,696
Legal and audit................................................................................. 37,393
Directors' fees and expenses.................................................................... 27,137
Amortization of organization expenses........................................................... 18,435
Other expenses.................................................................................. 4,000
-----------
1,343,448
-----------
NET INVESTMENT INCOME............................................................................... 1,445,313
-----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT ACTIVITIES:
Net realized gain from investment transactions.................................................. 6,493,995
Net change in unrealized appreciation/depreciation of investments............................... (12,793,458)
-----------
NET REALIZED AND UNREALIZED LOSSES FROM INVESTMENT ACTIVITIES....................................... (6,299,463)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................ $(4,854,150)
-----------
-----------
</TABLE>
See accompanying notes to financial statements
9
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Statement of Changes in Net Assets
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Five Month
Year Ended Period Ended
January 31, 1995 January 31, 1994
---------------- ----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income................................................... $ 1,445,313 $ 576,218
Net realized gain from investment transactions.......................... 6,493,995 7,744,021
Net change in unrealized depreciation of investments.................... (12,793,458) (7,495,559)
---------------- ----------------
Net increase (decrease) in net assets resulting from operations......... (4,854,150) 824,680
---------------- ----------------
Net investment income included in prices of shares sold and redeemed.... -- (41,738)
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- Class A........................................ (1,273,686) (928,945)
Net investment income -- Class B........................................ (23,235) (7,776)
Net investment income -- Class C........................................ (96,548) (62,871)
Net realized short-term gains from investment transactions -- Class A... (752,109) --
Net realized short-term gains from investment transactions -- Class B... (21,139) --
Net realized short-term gains from investment transactions -- Class C... (44,998) --
Net realized long-term gains from investment transactions -- Class A.... (11,891,520) (12,654,048)
Net realized long-term gains from investment transactions -- Class B.... (334,223) (145,078)
Net realized long-term gains from investment transactions -- Class C.... (711,465) (643,536)
---------------- ----------------
(15,148,923) (14,442,254)
---------------- ----------------
FROM CAPITAL STOCK TRANSACTIONS:
Net proceeds from the sale of shares.................................... 3,018,313 4,381,280
Cost of shares repurchased.............................................. (44,211,046) (27,029,121)
Proceeds from dividends reinvested...................................... 14,757,018 14,097,353
---------------- ----------------
Net decrease in net assets resulting from share transactions............ (26,435,715) (8,550,488)
---------------- ----------------
Net decrease in net assets.............................................. (46,438,788) (22,209,800)
NET ASSETS:
Beginning of period..................................................... 109,464,734 131,674,534
---------------- ----------------
End of period (including undistributed net investment income of $87,731
and $35,887, respectively)............................................ $ 63,025,946 $109,464,734
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes to financial statements
10
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Notes to Financial Statements
- - --------------------------------------------------------------------------------
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mitchell Hutchins/Kidder, Peabody Equity Income Fund, Inc. (formerly
Kidder, Peabody Equity Income Fund, Inc.) (the 'Fund') was organized under the
laws of the state of Maryland on June 20, 1985 and is registered with the
Securities and Exchange Commission under the Investment Company Act of 1940, as
amended, as an open-end, diversified investment company.
Organizational Matters -- Effective September 1, 1993, the Fund changed its
fiscal year-end from August 31 to January 31.
On June 14, 1993 the Fund adopted the Choice Pricing System'sm'. Prior to
June 14, 1993, the Fund issued only Class A shares; subsequent to that date the
Fund issued Class A, Class B and Class C shares. Each class represents interests
in the same assets of the Fund and the classes are identical except for
differences in their sales charge structure and ongoing service and distribution
charges. All classes of shares have equal rights as to voting privileges, except
that each class has exclusive voting rights with respect to its distribution
plan.
Valuation of Investments -- Securities listed on national securities
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the mean between
closing bid and asked prices. Over-the-counter securities are valued on the
basis of the last sale, if available, or if not, on the basis of the bid price
at the close of business on each day, or, if market quotations for those
securities are not readily available, at fair value, as determined in good faith
by the Fund's Board of Directors. Short-term obligations with maturities of 60
days or less are valued at amortized cost.
Investment Transactions and Investment Income -- Investment transactions
are recorded as of the trade date. Realized gains and losses from investment are
calculated using the identified cost method. Dividend income is recorded on the
ex-dividend date. Interest income is recorded on an accrual basis. Discounts are
accreted and premiums are amortized on straight line basis as adjustments to
interest income and the identified cost of investments.
Income, expenses (excluding class-specific expenses) and
realized/unrealized gains (losses) are allocated proportionately to each class
of shares based upon the relative net asset value of outstanding shares (or the
value of dividend-eligible shares, as appropriate) of each class at the
beginning of the day (after adjusting for current capital share activity of the
respective classes). Class-specific expenses are charged directly to the
applicable class of shares.
Repurchase Agreements -- The Fund's custodian takes possession of the
collateral pledged for investments in repurchase agreements. The value of the
collateral must be a minimum of 100% of the market value of the securities being
loaned, allowing for minor variations arising from marking to market of such
collateral. If the issuer defaults or if bankruptcy or regulatory proceedings
are commenced with respect to the issuer, the realization of the proceeds may be
delayed or limited.
11
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Notes to Financial Statements -- (continued)
- - --------------------------------------------------------------------------------
Federal Tax Status -- The Fund intends to distribute substantially all of
its taxable income and to comply with the other requirements of the Internal
Revenue Code applicable to regulated investment companies. Accordingly, no
provision for federal income taxes is required. In addition, by distributing
during each calendar year substantially all of its net investment income,
capital gains and certain other amounts, if any, each Fund intends not to be
subject to a federal excise tax.
Dividends and Distributions -- Dividends and distributions to shareholders
are recorded on ex-dividend date. The Fund declares dividends on quarterly basis
from net investment income. Net capital gains, if any, will be distributed at
least annually, but the Fund may make more frequent distribution of such gains,
if necessary, to avoid income or excise taxes.
The amount of dividends and distributions are determined in accordance with
federal income tax regulations which may differ from generally accepted
accounting principles. These 'book/tax' differences are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax-basis treatment; temporary differences do not require
reclassification. Dividends and distributions which exceed net investment income
and net realized capital gains for financial reporting purposes but not for tax
purposes are reported as dividends in excess of net investment income or
distributions in excess of net realized capital gains. To the extent they exceed
net investment income and net realized capital gains for tax purposes, they are
reported as distributions of paid-in-capital.
INVESTMENT ADVISER AND ADMINISTRATOR
The Fund has entered into an Investment Advisory and Administration
Agreement with Kidder Peabody Asset Management, Inc. ('KPAM'), a wholly owned
subsidiary of Kidder, Peabody & Co. Incorporated ('KP') (see 'Subsequent Events'
below). General Electric Capital Services, Inc., a wholly owned subsidiary of
General Electric Company ('GE'), has a 100% interest in Kidder, Peabody Group
Inc. ('Kidder Group'), the parent company of KP.
Fees paid by the Fund for advisory and administration services are payable
monthly and calculated daily by applying an annual rate of 0.70 of 1% to the net
assets of the Fund determined as of the close of each business day. At January
31, 1995, the Fund owed KPAM $38,619 for investment advisory fees.
In compliance with applicable state securities laws, the Fund's investment
adviser and administrator will reimburse the Fund if and to the extent that the
aggregate operating expenses in any fiscal year, exclusive of taxes, interest,
brokerage fees, distribution fees and extraordinary expenses, exceed limitations
imposed by various state regulations. Currently, the most restrictive limitation
applicable to the Fund is 2.5% of the first $30 million of average daily net
assets, 2.0% of the next $70 million and 1.5% of any excess over $100 million.
No expense reimbursement was required for the year ended January 31, 1995.
12
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Notes to Financial Statements -- (continued)
- - --------------------------------------------------------------------------------
DISTRIBUTION PLANS
KP is the exclusive distributor of the Fund's shares (see 'Subsequent
Events' below). Under separate plans of distribution, Class A shares are sold
subject to a front-end sales load and bear a distribution fee of 0.25% per annum
and a service fee of 0.25% per annum of the lesser of (i) aggregate gross sales
of the Class A shares since its inception (not including reinvestments of
dividends or capital gains distributions), less aggregate redemptions since
inception on which a contingent deferred sales charge has been paid or waived or
(ii) the average daily net assets attributable to Class A shares. Class B shares
are sold at net asset value without a sales load and bear a distribution fee of
0.75% per annum and a service fee of 0.25% per annum of average class net
assets. The Fund pays KP monthly the service and distribution fees. KP also
receives the proceeds of any front-end sales loads with respect to the purchase
of Class A shares. At January 31, 1995, the Fund owed KP $26,758 in service and
distribution fees.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at January
31, 1995 was substantially the same as the cost of securities for financial
statement purposes.
At January 31, 1995, the components of the net unrealized appreciation of
investments were as follows:
<TABLE>
<S> <C>
Gross appreciation (investments having an excess of value over cost)........... $3,346,738
Gross depreciation (investments having an excess of cost over value)........... 1,828,350
----------
Net unrealized appreciation of investments..................................... $1,518,388
----------
----------
</TABLE>
For the year ended January 31, 1995, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were as follows:
<TABLE>
<S> <C>
Purchases............................................................ $138,539,909
Sales................................................................ $171,044,867
</TABLE>
13
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Notes to Financial Statements -- (continued)
- - --------------------------------------------------------------------------------
CAPITAL STOCK
As of January 31, 1995 there were 500,000,000 shares, consisting of several
classes, of $.01 par value common stock authorized. Transactions in shares of
common stock were as follows:
<TABLE>
<CAPTION>
Class A Class B Class C
------------------------- ------------------------ ---------------------
Shares Amount Shares Amount Shares Amount
---------- ------------ ---------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Year ended January 31, 1995:
Shares sold................ 67,314 $ 1,573,740 39,094 $ 910,526 22,907 $ 534,047
Dividends reinvested in
additional Fund shares... 724,803 13,551,484 20,501 378,609 44,122 826,925
Shares repurchased......... (1,820,254) (41,334,216) (33,430) (725,094) (96,272) (2,151,736)
---------- ------------ ---------- ----------- -------- ----------
Net increase (decrease)........ (1,028,137) $(26,208,992) 26,165 $ 564,041 (29,243) $ (790,764)
---------- ------------ ---------- ----------- -------- ----------
---------- ------------ ---------- ----------- -------- ----------
Period ended January 31, 1994:
Shares sold................ 60,092 $ 1,630,973 41,361 $ 1,111,478 60,085 $1,638,829
Dividends reinvested in
additional Fund shares... 540,822 13,248,531 6,265 152,540 28,453 696,282
Shares repurchased......... (954,262) (25,766,866) (6,418) (165,475) (41,989) (1,096,780)
---------- ------------ ---------- ----------- -------- ----------
Net increase (decrease)........ (353,348) $(10,887,362) 41,208 $ 1,098,543 46,549 $1,238,331
---------- ------------ ---------- ----------- -------- ----------
---------- ------------ ---------- ----------- -------- ----------
</TABLE>
SUBSEQUENT EVENTS
Effective February 13, 1995, as a result of an asset purchase transaction
by and among Kidder Group, its parent, GE, and Paine Webber Group Inc. ('PW
Group'), the investment management for the Fund has been transferred, on an
interim basis, from KPAM to Mitchell Hutchins Asset Management Inc. ('Mitchell
Hutchins'). Mitchell Hutchins is a wholly owned investment management subsidiary
of PaineWebber Incorporated, which is in turn a wholly owned subsidiary of PW
Group. During the interim period, Mitchell Hutchins will provide investment
management services to the Fund pursuant to a contract that has the same terms
and conditions as the prior investment management agreement between the Fund and
KPAM. Fees paid by the Fund for investment management and advisory services
during the interim period will be paid into escrow and, if approved by the
shareholders, will be paid over to Mitchell Hutchins. A special shareholders'
meeting is expected to occur on March 31, 1995.
At the special shareholders' meeting, it is proposed that Mitchell Hutchins
be appointed as investment adviser and administrator of the Fund. If the
shareholders approve Mitchell Hutchins as investment adviser and administrator
for the Fund, Mitchell Hutchins would continue to manage the Fund by making
investment decisions based on the Fund's investment objective,
14
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Notes to Financial Statements -- (concluded)
- - --------------------------------------------------------------------------------
policies and restrictions. During the interim period and thereafter, assuming
shareholder approval, Mitchell Hutchins will receive the same fees previously
received by KPAM and GEIM as described in the footnote above.
Also effective February 13, 1995, Mitchell Hutchins serves as the Fund's
distributor pursuant to arrangements described in the footnote above. Finally,
effective February 13, 1995, the Fund's name was changed to 'Mitchell
Hutchins/Kidder, Peabody Equity Income Fund, Inc.'
15
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Financial Highlights
- - --------------------------------------------------------------------------------
Selected data for a share of common stock outstanding is presented below:
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------
FIVE MONTH
PERIOD YEAR
YEARS ENDED AUGUST 31, ENDED ENDED
---------------------------------------------- JANUARY 31, JANUARY 31,
1990 1991 1992 1993 1994 1995
------- -------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period......... $20.10 $19.53 $25.71 $27.16 $28.23 $24.89
------- -------- -------- -------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................ 0.64 0.41 0.40 0.55 0.13 0.40
Net realized and unrealized gains (losses)
from investment transactions................ (0.68) 6.33 1.32 1.15 0.03 (1.57)
------- -------- -------- -------- ----------- -----------
TOTAL INCREASE (DECREASE) FROM INVESTMENT
OPERATIONS.................................. (0.04) 6.74 1.72 1.70 0.16 (1.17)
------- -------- -------- -------- ----------- -----------
Dividends and distributions:
Dividends from net investment income......... (0.53) (0.56) (0.27) (0.63) (0.23) (0.38)
Distributions from net realized gains on
investments................................. -- -- -- -- (3.27) (4.62)
------- -------- -------- -------- ----------- -----------
TOTAL DISTRIBUTIONS.......................... (0.53) (0.56) (0.27) (0.63) (3.50) (5.00)
------- -------- -------- -------- ----------- -----------
NET ASSET VALUE, END OF PERIOD............... $19.53 $25.71 $27.16 $28.23 $24.89 $18.72
------- -------- -------- -------- ----------- -----------
------- -------- -------- -------- ----------- -----------
Total return (1)............................. (6.04)% 27.45% 0.55% 0.22% 1.93% (4.29)%
------- -------- -------- -------- ----------- -----------
------- -------- -------- -------- ----------- -----------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)............ $63,571 $103,722 $147,842 $126,387 $ 102,634 $57,950
Ratio of expenses to average net assets...... 1.60% 1.37% 1.27% 1.35% 1.65%* 1.63%
Ratio of net investment income to average net
assets...................................... 3.19% 1.88% 1.58% 1.93% 1.13%* 1.72%
Portfolio turnover........................... 177.82% 67.18% 60.01% 66.89% 28.27% 178.85%
</TABLE>
- - ------------
* Annualized
`D' From June 14, 1993 (Commencement of offering of shares) to August 31, 1993.
(1) Total return is calculated assuming a $1,000 investment in Fund shares on
the first day of each period reported, reinvestment of all dividends and
capital gain distributions at net asset value on the payable date, and a
sale at net asset value on the last day of each period reported. The figures
do not include sales charges; results of Class A would be lower if sales
charges were included. Total returns for periods less than one year are not
annualized.
16
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Financial Highlights -- (concluded)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------------ ------------------------------------------
FIVE MONTH FIVE MONTH
PERIOD PERIOD
YEAR ENDED ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
AUGUST 31, JANUARY 31, JANUARY 31, AUGUST 31, JANUARY 31, JANUARY 31,
1993`D' 1994 1995 1993`D' 1994 1995
---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$27.42 $ 28.20 $ 24.79 $27.42 $ 28.26 $ 24.87
---------- ----------- ----------- ---------- ----------- -----------
0.07 0.11 0.29 0.13 0.19 0.49
0.71 (0.01) (1.57) 0.71 0.03 (1.53)
---------- ----------- ----------- ---------- ----------- -----------
0.78 0.10 (1.28) 0.84 0.22 (1.04)
---------- ----------- ----------- ---------- ----------- -----------
-- (0.24) (0.28) -- (0.34) (0.50)
-- (3.27) (4.62) -- (3.27) (4.62)
---------- ----------- ----------- ---------- ----------- -----------
-- (3.51) (4.90) (3.61) (5.12)
---------- ----------- ----------- ---------- ----------- -----------
$28.20 $ 24.79 $ 18.61 $28.26 $ 24.87 $ 18.71
---------- ----------- ----------- ---------- ----------- -----------
---------- ----------- ----------- ---------- ----------- -----------
13.14% 1.47% (4.75)% 14.15% 2.48% (3.74)%
---------- ----------- ----------- ---------- ----------- -----------
---------- ----------- ----------- ---------- ----------- -----------
$ 557 $ 1,511 $ 1,622 $4,730 $ 5,319 $ 3,454
1.94%* 2.14%* 2.13% 0.97%* 1.15%* 1.13%
1.34%* 0.64%* 1.22% 2.31%* 1.63%* 2.22%
66.89% 28.27% 178.85% 66.89% 28.27% 178.85%
</TABLE>
17
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Report of Independent Auditors
- - --------------------------------------------------------------------------------
The Board of Directors and Shareholders,
Mitchell Hutchins/Kidder, Peabody Equity Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Mitchell Hutchins/Kidder, Peabody Equity Income
Fund, Inc. as of January 31, 1995, and the related statements of operations for
the year then ended and of changes in net assets and the financial highlights
for each of the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at January
31, 1995 by correspondence, with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Mitchell
Hutchins/Kidder, Peabody Equity Income Fund, Inc. as of January 31, 1995, the
results of its operations, the changes in its net assets and financial
highlights for the periods presented in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
March 13, 1995
18
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Tax Information (unaudited)
- - --------------------------------------------------------------------------------
We are required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Fund's fiscal year end (January 31,
1995), as to the federal tax status of distributions received by shareholders
during such fiscal year. Accordingly, we are advising you that the following
distributions paid during the fiscal year by the Fund were taxable and are
derived from the following sources:
<TABLE>
<CAPTION>
EQUITY
INCOME
PER SHARE DATA: FUND
<S> <C>
- - ---------------------------------------------------------------------------------------------
Class A
Net investment income............................................................. $0.376
Short-term capital gains.......................................................... $0.275
Long-term capital gains........................................................... $4.348
Class B
Net investment income............................................................. $0.280
Short-term capital gains.......................................................... $0.275
Long-term capital gains........................................................... $4.348
Class C
Net investment income............................................................. $0.495
Short-term capital gains.......................................................... $0.275
Long-term capital gains........................................................... $4.348
</TABLE>
Of the above net investment income and short-term capital gain distributions,
72.16% qualify for the dividends received deduction available to corporate
shareholders of Equity Income Fund.
Distributions received by tax-exempt recipients (e.g., IRAs and Keoghs) need not
be reported at taxable income. Some retirement trusts (e.g., corporate, Keogh
and 403(b)(7) plans) may need this information for their annual information
reporting.
Because the Fund's fiscal year is not the calendar year, another notification
will be sent in respect of calendar year 1995. The second notification, which
will reflect the amount to be used by calendar year taxpayers on their federal
income tax returns, will be made in conjunction with Form 1099 DIV and will be
mailed in January 1996. Shareholders are advised to consult their own tax
advisers with respect to the tax consequences of their investment in the Fund.
19
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
20
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
21
<PAGE>
-------------------------------------
DIRECTORS
David J. Beaubien
William W. Hewitt, Jr.
Thomas R. Jordan
Carl W. Schafer
-------------------------------------
OFFICERS
Frank P.L. Minard
President
T. Kirkham Barneby
Vice President
Victoria E. Schonfeld
Vice President
Dianne E. O'Donnell
Vice President and Secretary
Julian F. Sluyters
Vice President and Treasurer
-------------------------------------
INVESTMENT ADVISER,
ADMINISTRATOR AND
DISTRIBUTOR
Mitchell Hutchins Asset Management
Inc.
1285 Avenue of the Americas
New York, New York 10019
-------------------------------------
This report is not to be used in
connection with
the offering of shares of the Fund
unless
accompanied or preceded by an
effective
prospectus.
A Prospectus containing more complete
information
for any of the funds listed on the
back cover
can be obtained from a PaineWebber
investment executive or correspondent
firm.
Read the prospectus carefully before
investing.
<PAGE>
STATEMENT OF DIFFERENCES
------------------------
The copyright symbol shall be expressed as 'c'
The dagger symbol shall be expressed as 'D'
The service mark shall be expressed as 'sm'
