<PAGE>
Prospectus June 1, 1995
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Mitchell Hutchins/Kidder, Peabody
Equity Income Fund, Inc.
1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019 (800) 647-1568
Mitchell Hutchins/Kidder, Peabody Equity Income Fund, Inc. (the 'Fund') is a
diversified, open-end, management investment company whose objective is to
provide reasonably high current dividend and interest income and to obtain
long-term capital appreciation. The Fund seeks to accomplish this objective
while attempting to limit risk to principal through prudent investing, primarily
in equity securities. See 'Investment Objective and Policies.'
The Board of Directors of the Fund has approved a Plan of Reorganization and
Termination (the 'Reorganization') for submission to its shareholders at a
special meeting to be held August 4, 1995. If the proposed Reorganization is
approved and implemented, all the Fund's assets will be acquired and its
liabilities assumed by PaineWebber Growth and Income Fund ('Growth and Income
Fund') 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 a number of full and fractional shares of the
corresponding Class of shares of Growth and Income Fund 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. See
'Investment Objective and Policies -- Reorganization'.
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 June 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
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 table appearing below shows the costs and expenses that an investor would
incur, either directly or indirectly, as a shareholder of the Fund, based upon
the Fund's annual operating expenses.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
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<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of
offering price)................................................. 5.75% 0% 0%
Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price)................................... 0% 0% 0%
Maximum Contingent Deferred Sales Charge (as a percentage of
redemption proceeds)............................................ 0% 0% 0%
Redemption Fees (as a percentage of amount redeemed).............. 0% 0% 0%
Maximum Exchange Fee.............................................. 0% 0% 0%
Maximum Annual Investment Advisory Fee Payable by Shareholders
Holding Class C Shares through the INSIGHT Investment Advisory
Program (as a percentage of average daily value of shares
held)........................................................... 0% 0% 1.50%
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
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<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees................................................... .70% .70% .70%
12b-1 Fees........................................................ .50 1.00 0
Other Expenses.................................................... .43 .43 .43
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Total Fund Operating Expenses............................ 1.63% 2.13% 1.13%
------- ------- -------
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</TABLE>
The nature of the services provided to, and the aggregate management fees
paid by, the Fund are described below under 'Management of the Fund.' The Fund
reimburses its distributor, Mitchell Hutchins Asset Management Inc. ('Mitchell
Hutchins'), for the expenses it incurs in servicing shareholder accounts in, and
distributing shares of, Class A at the maximum annual rate of .50% of the value
of the average daily net assets of the Class, of which the first .25% is
characterized as a Rule 12b-1 service fee and the balance of which is
characterized as a Rule 12b-1 distribution fee. The Fund bears an annual Rule
12b-1 fee of 1.00% of the value of the average daily net assets of Class B
shares, consisting of a .25% service fee and a .75% distribution fee. Long-term
shareholders of shares that bear a distribution fee may pay more than the
economic equivalent of the maximum front-end sales charge currently permitted by
the rules of the National Association of Securities Dealers, Inc. governing
investment company sales charges. See 'The Distributor.'
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical $1,000 investment in the Fund assuming (1) a 5% annual return,
(2) payment of the shareholder transaction expenses and annual Fund operating
expenses set forth in the table above and (3) complete redemption at the end of
the period.
<TABLE>
<CAPTION>
EXAMPLE* 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
Class A........................................................... $73 $106 $141 $240
Class B........................................................... $22 $ 67 $114 $246
Class C........................................................... $12 $ 36 $ 62 $137
</TABLE>
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* The above example is intended to assist an investor in understanding various
costs and expenses that the investor would bear upon becoming a shareholder of
the Fund. The example should not be considered to be a representation of past
or future expenses. Actual expenses of the Fund may be greater or less than
those shown above. The assumed 5% annual return shown in the example is
hypothetical and should not be considered to be a representation of past or
future annual return; the actual return of the Fund may be greater or less
than the assumed return.
2
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HIGHLIGHTS
<TABLE>
<S> <C>
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The Fund
The Fund, a diversified, open-end, management investment company, generally invests in equity
securities, including dividend paying common stock and securities convertible into common
stock, although if necessary it may invest its assets in all classes of securities in any
proportions deemed prudent for temporary defensive purposes under then existing market and
economic conditions. See 'Investment Objective and Policies.'
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Investment
Objective
To provide reasonably high current dividend and interest income and to obtain long-term capital
appreciation. No assurance can be given that the Fund will achieve its objective. See
'Investment Objective and Policies.'
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Benefits of
Investing
in the
Fund
Mutual funds, such as the Fund, are flexible investment tools that are increasingly
popular -- one of four American households now owns shares of at least one mutual fund -- for
very sound reasons. The Fund offers investors the following important benefits:
Professional Management
By pooling the funds 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
beyond the means of most investors. The Fund's investment adviser reviews the fundamental
characteristics of many more securities than can a typical investor, and may employ portfolio
management techniques that frequently are not used by individual or many institutional
investors.
Brokerage Savings
By investing in the Fund, a shareholder is able to acquire ownership in a diversified
portfolio of securities without paying the higher brokerage costs associated with a series of
small securities purchases.
Convenience
Fund shareholders are relieved of the administrative and recordkeeping burdens normally
associated with direct ownership of securities.
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.'
Choice Pricing System
Under the Choice Pricing System'sm', the Fund presently offers three classes of shares
('Classes') that provide different methods of purchasing shares and allow investment
flexibility and a wider range of investment choices. See 'Purchase of Shares.'
</TABLE>
3
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<TABLE>
<S> <C>
Exchange Privilege
Shareholders of the Fund may exchange all or a portion of their shares for shares of the
corresponding Class of most PaineWebber and Mitchell Hutchins/
Kidder, Peabody ('MH/KP') mutual funds. See 'Exchange Privilege.'
</TABLE>
<TABLE>
<S> <C>
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Purchase of
Shares
Mitchell Hutchins acts as distributor of the Fund's shares. The Fund presently offers three
Classes that differ principally in terms of the sales charges and rate of expenses to which
they are subject and are designed to provide an investor with the flexibility of selecting an
investment best suited to the investor's needs. See 'Purchase of Shares' and 'The Distributor.'
Class A Shares
The public offering price of Class A shares is the net asset value per share next determined
after a purchase order is received, plus a maximum sales charge of 5.75% (6.08% of the net
amount invested). Investors purchasing $50,000 or more are eligible for reduced sales charges
and the entire sales charge is waived for certain eligible purchasers. The Fund reimburses its
distributor, Mitchell Hutchins, for the expenses it incurs in servicing shareholder accounts
in, and distributing shares of, Class A at the maximum annual rate of .50% of the value of the
average daily net assets attributable to Class A, of which the first .25% is characterized as
a Rule 12b-1 service fee and the balance of which is characterized as a Rule 12b-1
distribution fee.
Class B Shares
The public offering price of Class B shares is the net asset value per share next determined
after a purchase order is received, without imposition of a sales charge. The Fund pays
Mitchell Hutchins a service fee at the annual rate of .25%, and a distribution fee at the
annual rate of .75%, of the average daily net assets attributable to this Class.
Class C Shares
The public offering price of Class C shares, which are available exclusively to former
employees of Kidder, Peabody & Co. Incorporated ('Kidder, Peabody') and their associated
accounts, directors or trustees of any PaineWebber/Kidder, Peabody or MH/KP mutual fund,
employee benefit plans of Kidder, Peabody and participants in the INSIGHT Investment Advisory
ProgramSM ('INSIGHT'), is the net asset value per share next determined after a purchase order
is received without imposition of a sales charge. This Class bears no service or distribution
fees. Participation in INSIGHT is subject to payment of an advisory fee at the maximum annual
rate of 1.50% of assets held through INSIGHT, generally charged quarterly in advance.
</TABLE>
4
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<TABLE>
<S> <C>
Investment Minimums
The minimum initial investment is $1,000 and the minimum for subsequent investments is $50,
except that for individual retirement accounts ('IRAs'), other tax qualified retirement plans
and accounts established pursuant to the Uniform Gifts to Minors Act, the minimum initial
investment is $250 and the minimum subsequent investment is $1.00. See 'Purchase of Shares'
and 'Determination of Net Asset Value.'
</TABLE>
<TABLE>
<S> <C>
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Redemption of
Shares
Class A shares, Class B shares and Class C shares of the Fund may be redeemed at the current
net asset value per share without imposition of any charge. The Fund reserves the right to
redeem automatically upon not less than 60 days' written notice any Fund account that is
reduced by a shareholder to a value of $500 or less. See 'Redemption of Shares' and
'Determination of Net Asset Value.'
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Management
Mitchell Hutchins, a wholly owned subsidiary of PaineWebber Incorporated ('PaineWebber'),
serves as investment adviser and administrator of the Fund and receives an annual fee of .70%
of the Fund's average daily net assets. See 'Management of the Fund.'
</TABLE>
5
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FINANCIAL HIGHLIGHTS
The financial information for one Class A, one Class B and one Class C share of
the Fund has been presented in the table below 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 January 31, 1995, which are incorporated by reference into the Statement
of Additional Information. The financial statements and notes, as well as the
information in the table appearing below, have been audited by Deloitte & Touche
LLP, independent auditors, whose report thereon is included in the Annual Report
to Shareholders. Further information about the performance of the Fund is also
included in the Annual Report to Shareholders, which may be obtained without
charge.
<TABLE>
<CAPTION>
CLASS A
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YEARS ENDED AUGUST 31,
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1986`D' 1987 1988 1989 1990 1991 1992 1993
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period... $15.00 $17.96 $21.44 $16.08 $20.10 $19.53 $25.71 $27.16
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INCOME FROM INVESTMENT
OPERATIONS:
Net investment
income................ 0.33 0.44 0.50 0.60 0.64 0.41 0.40 0.55
Net realized and
unrealized gain (loss)
from investment
transactions.......... 2.84 3.52 (4.52) 4.07 (0.68) 6.33 1.32 1.15
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Total increase
(decrease) from
investment
operations............ 3.17 3.96 (4.02) 4.67 (0.04) 6.74 1.72 1.70
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LESS DISTRIBUTIONS TO
SHAREHOLDERS FROM
(NOTE 1g):
Net investment
income................ (0.21) (0.48) (0.42) (0.65) (0.53) (0.56) (0.27) (0.63)
Net realized capital
gains................. -- -- (0.92) -- -- -- -- --
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Total distributions.... (0.21) (0.48) (1.34) (0.65) (0.53) (0.56) (0.27) (0.63)
-----------------------------------------------------------------------------------------------
Net asset value, end of
period................ $17.96 $21.44 $16.08 $20.10 $19.53 $25.71 $27.16 $28.23
-----------------------------------------------------------------------------------------------
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Total return#.......... 21.21% 15.46% (23.67)% 22.46% (6.04)% 27.45% .55% .22%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (in
thousands)............ $40,406 $97,634 $ 66,474 $58,037 $63,571 $103,722 $147,842 $126,387
RATIOS TO AVERAGE NET
ASSETS:
Expenses............... 2.27%* 1.92% 1.97% 2.02% 1.60% 1.37% 1.27% 1.35%
Net investment
income................ 3.39%* 2.44% 2.81% 3.30% 3.19% 1.88% 1.58% 1.93%
Portfolio turnover
rate.................. 139.07% 158.80% 446.95% 242.45% 177.82% 67.18% 60.01% 66.89%
<CAPTION>
FIVE MONTHS
ENDED YEAR
JANUARY 31, ENDED
(NOTE 1) JANUARY 31,
----------------------------
1994 1995
----------------------------
<S> <C> <C>
Net asset value,
beginning of period... $28.23 $24.89
----------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment
income................ 0.13 0.40
Net realized and
unrealized gain (loss)
from investment
transactions.......... 0.03 (1.57)
----------------------
Total increase
(decrease) from
investment
operations............ 0.16 (1.17)
----------------------
LESS DISTRIBUTIONS TO
SHAREHOLDERS FROM
(NOTE 1g):
Net investment
income................ (0.23) (0.38)
Net realized capital
gains................. (3.27) (4.62)
----------------------
Total distributions.... (3.50) (5.00)
----------------------
Net asset value, end of
period................ $24.89 $18.72
======================
Total return#.......... 1.93% (4.29)%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (in
thousands)............ $ 102,634 $ 57,950
RATIOS TO AVERAGE NET
ASSETS:
Expenses............... 1.65%* 1.63%
Net investment
income................ 1.13%* 1.72%
Portfolio turnover
rate.................. 28.27% 178.85%
</TABLE>
`D' From November 22, 1985 (Commencement of Operations) to August 31, 1986.
`D'`D' From June 14, 1993 (Commencement of Class Operations) to August 31, 1993.
# 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.
* Annualized
Note 1 The Fund changed its fiscal year end from August 31 to January 31.
6
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<TABLE>
<CAPTION>
CLASS B CLASS C
- --------------------------------------------------- ------------------------------------------
FIVE MONTHS FIVE MONTHS
YEAR ENDED ENDED
ENDED JANUARY 31, YEAR ENDED YEAR ENDED JANUARY 31, YEAR ENDED
AUGUST 31, (NOTE 1) JANUARY 31, AUGUST 31, (NOTE 1) JANUARY 31,
--------------------------------------------------- ------------------------------------------
1993`D'`D' 1994 1995 1993`D'`D' 1994 1995
--------------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period... $27.42 $28.20 $24.79 $27.42 $28.26 $24.87
--------------------------------------------------- ------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment
income................ 0.07 0.11 0.29 0.13 0.19 0.49
Net realized and
unrealized gain (loss)
from investment
transactions.......... 0.71 (0.01) (1.57) 0.71 0.03 (1.53)
--------------------------------------------------- ------------------------------------------
Total increase
(decrease) from
investment
operations............ 0.78 0.10 (1.28) 0.84 0.22 (1.04)
--------------------------------------------------- ------------------------------------------
LESS DISTRIBUTIONS TO
SHAREHOLDERS FROM
(NOTE 1g):
Net investment
income................ -- (0.24) (0.28) -- (0.34) (0.50)
Net realized capital
gains................. -- (3.27) (4.62) -- (3.27) (4.62)
--------------------------------------------------- ------------------------------------------
Total distributions.... -- (3.51) (4.90) -- (3.61) (5.12)
--------------------------------------------------- ------------------------------------------
Net asset value, end of
period................ $28.20 $24.79 $18.61 $28.26 $24.87 $18.71
--------------------------------------------------- ------------------------------------------
--------------------------------------------------- ------------------------------------------
Total return#.......... 13.14% 1.47% (4.75)% 14.15% 2.48% (3.74)%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (in
thousands)............ $ 557 $ 1,511 $ 1,622 $4,730 $ 5,319 $ 3,454
RATIOS TO AVERAGE NET
ASSETS:
Expenses............... 1.94%* 2.14%* 2.13% .97%* 1.15%* 1.13%
Net investment
income................ 1.34%* 0.64%* 1.22% 2.31%* 1.63%* 2.22%
Portfolio turnover
rate.................. 66.89% 28.27% 178.85% 66.89% 28.27% 178.85%
</TABLE>
7
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INVESTMENT OBJECTIVE AND POLICIES
REORGANIZATION
The Board of Directors of the Fund has approved a Plan of Reorganization and
Termination (the 'Reorganization') for submission to its shareholders of record
on June 19, 1995 ('Shareholders of Record'), at a special meeting to be held
August 4, 1995. All Shareholders of Record will receive a Prospectus/Proxy
Statement describing the terms of the proposed Reorganization and comparing the
investment objectives, policies and restrictions and other salient features of
the two funds. If the proposed Reorganization is approved and implemented, all
the Fund's assets will be acquired and its liabilities assumed by PaineWebber
Growth and Income Fund ('Growth and Income Fund') 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 a
number of full and fractional shares of the corresponding Class of shares of
Growth and Income Fund having an aggregate value equal to the value of the
shareholder's holdings in the Fund. Growth and Income Fund is a series of
PaineWebber America Fund, an open-end management investment company organized as
a Massachusetts business trust. There can be no assurance that the Fund's
shareholders will approve the Reorganization.
If the Reorganization is approved at the meeting scheduled for August 4th
(or any adjournment thereof), sales of all Classes of Fund shares will cease on
such date, so that Fund shares will no longer be available for purchase or
exchange starting on the date of approval through the closing date of the
Reorganization. Redemptions of Fund shares and exchanges of Fund shares for
shares of another PaineWebber or Mitchell Hutchins/Kidder, Peabody mutual fund
may be effected through the closing date of the Reorganization.
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide reasonably high current dividend
and interest income and to obtain long-term capital appreciation. This objective
is a fundamental policy of the Fund and may not be changed without the approval
of the holders of a majority of the Fund's outstanding shares, as defined in the
Investment Company Act of 1940, as amended (the '1940 Act'). The Fund seeks to
accomplish this objective while attempting to limit risk to principal through
prudent investing. This means that in selecting the Fund's diversified group of
securities, Mitchell Hutchins carefully considers their potential returns
relative to risk involved. To this end, the Fund may not concentrate investments
in any particular industry, which means not purchasing any security which would
result in the Fund having more than 25% of its assets invested in any industry,
without the approval of the holders of a majority of the Fund's outstanding
shares, as defined in the Act. The Fund invests under normal market conditions
not less than 65% of its total assets in equity securities, limited to dividend
paying common stock, preferred stock, warrants, rights and securities
convertible into common stock. The Fund's equity investments have tended to be
in issuers with large market capitalizations, although the Fund is not limited
by issuer size in selecting equity securities for investment. The Fund may also
invest a lesser portion of its assets in fixed-income securities, and as needed
to provide liquidity in order to meet redemptions, money market instruments. The
Fund's investments in fixed-income securities are limited to direct obligations
of the U.S. Government (such as bills, notes or bonds) and corporate debt
securities rated Aa or better by Moody's Investors Service, Inc. or AA or
8
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better by Standard & Poor's Ratings Group. Fixed-income securities are generally
subject to both interest rate and credit risks. For temporary defensive
purposes, the Fund may invest its assets in all classes of securities, including
equity and fixed-income, in any proportions deemed prudent under existing market
and economic conditions. It is the Fund's policy not to purchase and sell
securities with a view toward obtaining short-term (less than six months)
profits. For the fiscal year ended August 31, 1993, from September 1, 1993
through the new fiscal year ended January 31, 1994 and for the fiscal year ended
January 31, 1995, the Fund's portfolio turnover rates were 66.89%, 67.44%
(annualized) and 178.85%, respectively. A high portfolio turnover rate (100% or
more) in any year will increase brokerage commissions paid and could result in
high amounts of realized investment gain subject to the payment of tax by
shareholders. Any realized net short-term investment gain will be taxed to
shareholders as ordinary income.
The Fund's annual report for the fiscal year ended January 31, 1995
contains information regarding those factors, including the relevant market
conditions and the investment strategies and techniques pursued by Kidder
Peabody Asset Management, Inc., the Fund's predecessor investment adviser,
during such fiscal year, and is available to shareholders without charge upon
request made to the Fund at the address listed on the front cover page of this
Prospectus.
The Fund is subject to certain investment restrictions which constitute
fundamental policies. Such fundamental policies cannot be changed without the
approval of the holders of a majority of the Fund's outstanding shares. Certain
of these fundamental policies impose restrictions on the Fund's investments in
securities of other investment companies, the purchase of warrants, the making
of loans, borrowings from banks and the purchase of foreign securities and
American Depository Receipts. The Fund does not anticipate at this time that any
of these investments will constitute in excess of 5% of the Fund's net assets.
See 'Investment Objective and Policies' in the Statement of Additional
Information.
To generate additional income, the Fund may lend its securities to
broker-dealers. Loans may be made pursuant to agreements which provide
safeguards for the Fund, e.g., that the loans will be continuously secured by
collateral in any combination of cash, letters of credit and securities of the
U.S. Government or its agencies, equal to at least the market value at all times
of the securities lent. The bank or banks issuing any such letters of credit
must meet creditworthiness standards approved by the Fund's Board of Directors.
The Fund currently does not expect to accept letters of credit from foreign
banks. The Fund will not make securities loans if as a result the aggregate of
all outstanding securities loans exceeds 33% of the value of the Fund's total
assets. The Fund receives compensation for lending its securities in the form of
fees or it retains a portion of interest on the investment of any cash
collateral it receives. The Fund also continues to receive interest or dividends
on the securities lent. However, the amounts received by the Fund may be reduced
by finders' fees paid to broker-dealers and related expenses.
In addition, the Fund may engage in repurchase agreements with other
parties whereby the other party agrees to sell securities to the Fund with an
agreement to repurchase such securities from the Fund within a specified time
(generally one day). The Fund's repurchase agreements, which are in the nature
of secured loans by the Fund, provide safeguards for the Fund, e.g., that the
value of the collateral underlying the repurchase agreement is always at least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement. It is a
9
<PAGE>
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fundamental policy of the Fund that such repurchase agreements may extend for no
longer than one week. The Fund may not invest in any illiquid securities.
STOCK INDEX FUTURES CONTRACTS AND RELATED OPTIONS
The Fund may engage in transactions in stock index futures contracts and options
thereon as a hedge against anticipated market changes which might adversely
effect the value of the Fund's securities or the price of the securities which
the Fund intends to purchase. A stock index futures contract obligates the
seller to deliver (and the purchaser to take) an amount of cash equal to a
specific dollar amount times the difference between the value of a specific
stock index at the close of the last trading day of the contract and the price
at which the agreement is made. No physical delivery of the underlying stocks in
the index is made.
Options on stock index futures contracts give the holder, in return for a
premium, the right, upon exercise of the option at a specified price during the
option period, to assume a position in a stock index futures contract (a long
position if the option is a call and a short position if the option is a put).
Upon exercise of the option, the options writer delivers to the holder a stock
index futures contract position, as well as any balance in the writer's stock
index futures contract margin account.
LIMITATIONS AND RISKS OF STOCK INDEX FUTURES CONTRACTS AND OPTIONS TRANSACTIONS
The Fund will not enter into a stock index futures contract or purchase an
option thereon if immediately thereafter the initial margin deposits for stock
index futures contracts held by the Fund plus premiums paid by it for such
options, less the amount by which any such options are 'in-the-money,' would
exceed 5% of the Fund's total assets.
When purchasing a stock index futures contract or writing a put on a stock
index futures contract, the Fund must maintain with its custodian (or broker, if
legally permitted) cash or high grade short-term securities (including any
margin) equal to the market value of such contracts. When writing a call option
on a stock index futures contract, the Fund similarly will maintain cash or high
grade short-term securities (including any margin) with its custodian equal to
the amount such option is 'in-the-money' until the option expires or is closed
out.
The Fund will not maintain open short positions in stock index futures
contracts and call options written on stock index futures contracts if, in the
aggregate, the value of all such open positions at market exceeds the current
value of the securities in its portfolio, plus or minus unrealized gains and
losses on the open positions, adjusted for the historical relative volatility of
the relationship between the portfolio and the positions.
The Fund's successful use of stock index futures contracts and options
thereon is subject to the ability of Mitchell Hutchins to correctly predict the
direction of the market. There can be no guarantee that there will be a
correlation between price movements in the hedging vehicle and the portfolio
securities being hedged. In addition, because of the low margin deposits
required, stock index futures contract trading involves a high degree of
leverage. As a result, a relatively small price movement in a stock index
futures contract may result in immediate and substantial loss, or gain, to the
investor. A purchase or sale of a stock index futures contract may result in
losses in excess of the amount of the margin deposit. There can be no assurance
that a liquid
10
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market will exist when the Fund seeks to close out a stock index futures
contract or option position. This may prevent the Fund from liquidating an
unfavorable position.
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities, stock index futures contracts and options
thereon for the Fund are made by Mitchell Hutchins, subject to overall
supervision and review by the Fund's Board of Directors. Portfolio transactions
for the Fund are effected by or under the supervision of Mitchell Hutchins.
Orders may be directed to and commissions may be paid to any securities or
commodities broker including, to the extent and in the manner permitted by
applicable law, PaineWebber. See 'Brokerage Allocation' in the Statement of
Additional Information.
Transactions on stock exchanges involve the payment of negotiated brokerage
commissions. There is generally no stated commission in the case of securities
traded in the over-the-counter markets, but the price of those securities
includes an undisclosed commission or mark-up. The cost of securities purchased
from underwriters includes an underwriting commission or concession, and the
prices at which securities are purchased from and sold to dealers include a
dealer's mark-up or mark-down.
While investment decisions for the Fund are made independently from those
of the other accounts managed by Mitchell Hutchins, investments of the kind made
by the Fund may also be made by those other accounts. When the Fund and one or
more accounts managed by Mitchell Hutchins are prepared to invest in, or desire
to dispose of, the same security, available investments or opportunities for
sales will be allocated in a manner believed by Mitchell Hutchins to be
equitable. In some cases, this procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained for or disposed of by
the Fund.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The business and affairs of the Fund are managed under the direction of 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.
INVESTMENT ADVISER AND ADMINISTRATOR
At a special meeting of shareholders that took place on April 13, 1995, Mitchell
Hutchins, 1285 Avenue of the Americas, New York, New York 10019, was approved as
the Fund's investment adviser and administrator. Mitchell Hutchins is a
wholly owned subsidiary of PaineWebber, which in turn is wholly owned by Paine
Webber Group Inc. ('PW Group'), a publicly owned financial services holding
company. Mitchell Hutchins, organized in May 1977, is registered as an
investment adviser under the Investment Advisers Act of 1940 and as a
broker-dealer under the Securities Exchange Act of 1934. As of March 31, 1995,
Mitchell Hutchins or PaineWebber served as investment adviser or sub-adviser to
42 investment companies with an aggregate of 77 separate portfolios having
assets of over $26 billion.
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The Fund pays the same fee for investment advisory and administrative
services to Mitchell Hutchins as previously paid to Kidder Peabody Asset
Management, Inc. ('KPAM'), the Fund's predecessor investment adviser and
administrator, and Mitchell Hutchins continues to manage the Fund in accordance
with the Fund's investment objective, policies and restrictions.
As the Fund's investment adviser, 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.
As the Fund's administrator, Mitchell Hutchins, subject to the supervision
and direction of the Board of Directors, is generally responsible for, among
other things, the maintenance and furnishing of all required records and books
of account pertaining to the Fund to the extent those records or books are not
maintained or furnished by the Fund's transfer agent, custodian or other
agencies employed by the Fund; the providing of general administrative services
to the Fund; and the payment of compensation of its employees including those of
the Fund's officers and employees who are employees of Mitchell Hutchins.
T. Kirkham Barneby is primarily responsible for the day-to-day portfolio
management of the Fund. Mr. Barneby is a Managing Director and Chief Investment
Officer -- Quantitative Investments of Mitchell Hutchins. Mr. Barneby rejoined
Mitchell Hutchins in 1994 after being with Vantage Global Management for one
year. During the eight years that Mr. Barneby was previously with Mitchell
Hutchins, he was a Senior Vice President responsible for quantitative management
and asset allocation models. Before joining Mitchell Hutchins, Mr. Barneby
served as Director of Pension Investment Strategy at the Continental Group in
Stamford, Connecticut, and has held positions in the Economics Department at
both Citibank and Merrill Lynch.
As compensation for Mitchell Hutchins' services rendered to the Fund, the
Fund pays a fee, computed daily and paid monthly, at an annual rate of .70% of
the Fund's average daily net assets. For the fiscal year ended January 31, 1995,
Class A's, Class B's and Class C's total expenses represented 1.63%, 2.13% and
1.13%, respectively, of their average daily net assets. The Fund's agreement
with Mitchell Hutchins provides that Mitchell Hutchins will reduce its fees to
the Fund to the extent required by applicable state laws for certain expenses
that are described in the Statement of Additional Information. From time to
time, Mitchell Hutchins in its sole discretion may waive all or a portion of its
fee and/or reimburse all or a portion of each Class' operating expenses.
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.
PURCHASE OF SHARES
GENERAL INFORMATION
Purchases are effected at the public offering price of the Fund's shares of a
Class next determined after a purchase order is received. The Fund reserves the
right to reject any purchase order for shares of the Fund and to suspend the
offering of shares for any period of time. The minimum initial investment in the
Fund is $1,000 and the minimum subsequent investment is $50, except
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that for IRAs, other tax qualified retirement plans and accounts established
pursuant to the Uniform Gifts to Minors Act, the minimum initial investment
is $250 and the minimum subsequent investment is $1.00. The Fund reserves the
right to vary the minimum initial or subsequent investment amounts.
Purchase orders for shares of the Fund that are received prior to the close
of regular trading on the New York Stock Exchange (the 'NYSE') on a particular
day (currently 4:00 p.m., Eastern time) are priced according to the net asset
values determined on that day. Purchase orders received after the close of
regular trading on the NYSE are priced as of the time each Class' net asset
value per share is next determined. See 'Determination of Net Asset Value' above
for a description of the times at which each Class' net asset value per share is
determined.
The Fund offers shareholders an Automatic Investment Plan under which a
shareholder may authorize PaineWebber to place monthly, quarterly or
semi-annually, as selected by the shareholder, a purchase order for Fund shares
in an amount not less than $100. The purchase price is paid automatically from a
designated bank account of the shareholder. The Fund reserves the right to
terminate or change the provisions of the Automatic Investment Plan.
The Fund presently offers three methods of purchasing shares, enabling
investors to choose the Class that best suits their needs, given the amount of
purchase and intended length of investment. PaineWebber Investment Executives
and other persons remunerated on the basis of sales of shares may receive
different levels of compensation for selling one Class of shares over another.
When purchasing shares of the Fund, investors must specify whether the purchase
is for Class A shares, Class B shares or Class C shares, as described below.
PURCHASES THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. Purchases through
PaineWebber investment executives or correspondent firms may be made in person
or by mail, telephone or wire; the minimum wire purchase is $1 million.
Investment executives and correspondent firms are responsible for transmitting
purchase orders to PaineWebber's New York City offices promptly. Investors may
pay for purchases with checks drawn on U.S. banks or with funds held in
brokerage accounts at PaineWebber or its correspondent firms. For orders
received on or before June 2, 1995, payment is due on the fifth Business Day
after the order is received at PaineWebber's New York City offices. For orders
received on June 5, 1995 and June 6, 1995, payment is due on the fourth Business
Day after the order is received. For orders received on or after June 7, 1995,
payment is due on the third Business Day after the order is received. A
'Business Day' is any day, Monday through Friday, on which the New York Stock
Exchange, Inc. ('NYSE') is open for business.
PURCHASES THROUGH THE TRANSFER AGENT. Investors who are not PaineWebber
clients may purchase shares of the Funds through PFPC Inc., a subsidiary of PNC
Bank, National Association (the 'Transfer Agent'). Shares of a Fund may be
purchased, and an account with the Fund established, by completing and signing a
purchase application and mailing it, together with a check to cover the
purchase, to the Transfer Agent: PFPC Inc., Attn: PaineWebber Mutual Funds, P.O.
Box 8950, Wilmington, Delaware 19899. Subsequent investments need not be
accompanied by an application.
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CLASS A SHARES
The public offering price of Class A shares is the net asset value per Class A
share next determined after a purchase order is received plus a sales charge, if
applicable. The Fund reimburses its distributor, Mitchell Hutchins, for the
expenses it incurs in servicing shareholder accounts in, and distributing shares
of, Class A at the maximum annual rate of .50% of the value of the average daily
net assets attributable to Class A, of which the first .25% is characterized as
a Rule 12b-1 service fee and the balance of which is characterized as a Rule
12b-1 distribution fee. See 'The Distributor.' The sales charge payable upon the
purchase of Class A shares varies with the amount of purchase as set forth
below.
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
-------------------------------------------
AMOUNT OF PURCHASE AS PERCENTAGE AS PERCENTAGE
AT OFFERING PRICE OF OFFERING PRICE OF NET AMOUNT INVESTED
----------------------- ----------------- ----------------------
<S> <C> <C>
Less than $50,000.......................................... 5.75% 6.08%
$50,000 but less than $100,000............................. 4.50% 4.75%
$100,000 but less than $250,000............................ 3.50% 3.67%
$250,000 but less than $500,000............................ 2.50% 2.58%
$500,000 but less than $1,000,000.......................... 2.00% 2.02%
$1,000,000 or more......................................... 0% 0%
</TABLE>
SALES CHARGE WAIVERS -- CLASS A SHARES. Class A shares of the Fund are
available without a sales charge through exchanges for Class A shares of most
other PaineWebber and MH/KP mutual funds. See 'Exchanges.' In addition, Class A
shares may be purchased without a sales charge by employees, directors and
officers of PaineWebber or its affiliates, directors or trustees and officers of
any PaineWebber or MH/KP fund, their spouses, parents and children and advisory
clients of Mitchell Hutchins.
Class A shares of the Fund also may be purchased without a sales charge if
the purchase is made through a PaineWebber investment executive who formerly was
employed as a broker with another firm registered as a broker-dealer with the
SEC, provided (1) the purchaser was the investment executive's client at the
competing brokerage firm, (2) within 90 days of the purchase of Class A shares
the purchaser redeemed shares of one or more mutual funds for which that
competing firm or its affiliates was principal underwriter, provided the
purchaser either paid a sales charge to invest in those funds, paid a contingent
deferred sales charge upon redemption or held shares of those funds for the
period required not to pay the otherwise applicable contingent deferred sales
charge and (3) the total amount of shares of all PaineWebber or MH/KP funds
purchased under this sales charge waiver does not exceed the amount of the
purchaser's redemption proceeds from the competing firm's funds. To take
advantage of this waiver, an investor must provide satisfactory evidence that
all the above-noted conditions are met. Qualifying investors should contact
their PaineWebber investment executives for more information.
REDUCED SALES CHARGE PLANS -- CLASS A SHARES. If an investor or eligible
group of related Fund investors purchases Class A shares of a Fund concurrently
with Class A shares of other PaineWebber or MH/KP mutual funds, the purchases
may be combined to take advantage of the reduced sales charge applicable to
larger purchases. In addition, the right of accumulation
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permits a Fund investor or eligible group of related Fund investors to pay the
lower sales charge applicable to larger purchases by basing the sales charge on
the dollar amount of Class A shares currently being purchased, plus the net
asset value of the investor's or group's total existing Class A shareholdings in
other PaineWebber or MH/KP mutual funds.
An 'eligible group of related Fund investors' includes an individual, the
individual's spouse, parents and children, the individual's individual
retirement account ('IRA'), certain companies controlled by the individual and
employee benefit plans of those companies, and trusts or Uniform Gifts to Minors
Act/Uniform Transfers to Minors Act accounts created by the individual or
eligible group of individuals for the benefit of the individual and/or the
individual's spouse, parents or children. The term also includes a group of
related employers and one or more qualified retirement plans of such employers.
For more information, an investor should consult the Statement of Additional
Information or contact a PaineWebber investment executive or correspondent firm
or the Transfer Agent.
REINSTATEMENT PRIVILEGE. The Fund offers a reinstatement privilege under
which a shareholder that has redeemed Class A shares may reinvest the proceeds
from the redemption without imposition of a sales charge, provided the
reinvestment is made within 365 days of the redemption. The tax status of a gain
realized on a redemption will not be affected by exercise of the reinstatement
privilege but a loss will be nullified if the reinvestment is made within 30
days of the redemption. See the Statement of Additional Information for the tax
consequences when, within 90 days of a purchase of Class A shares, the shares
are redeemed and reinvested in the Fund or another mutual fund.
CLASS B SHARES
The public offering price of Class B shares is the net asset value per share
next determined after a purchase order is received without imposition of any
sales charge. Class B shares are subject to a service fee at the annual rate of
.25%, and a distribution fee at the annual rate of .75%, of the value of the
Fund's average daily net assets attributable to this Class. See 'The
Distributor.'
CLASS C SHARES
The public offering price of Class C shares is the net asset value per share
next determined after a purchase order is received without imposition of any
sales charge. Class C shares, which are not subject to any service fee or
distribution fee, are available exclusively to former employees of Kidder,
Peabody and their associated accounts, directors or trustees of any
PaineWebber/Kidder, Peabody or MH/KP fund, employee benefit plans of Kidder,
Peabody and participants in INSIGHT when shares are purchased through that
program. Investors eligible to purchase Class C shares may not purchase any
other Class of shares.
INSIGHT. An investor purchasing $50,000 or more of shares of
PaineWebber/Kidder, Peabody or MH/KP funds may participate in INSIGHT, a total
portfolio asset allocation program, and receive Class C shares. INSIGHT offers
comprehensive investment services, including a personalized asset allocation
investment strategy using an appropriate combination of funds, professional
investment advice regarding investment among the funds by portfolio
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specialists, monitoring of investment performance and comprehensive quarterly
reports that cover market trends, portfolio summaries and personalized account
information. Participation in INSIGHT is subject to payment of an advisory fee
to PaineWebber at the maximum annual rate of 1.5% of assets held through the
program (generally charged quarterly in advance), which covers all INSIGHT
investment advisory services and program administration fees. Former employees
of Kidder, Peabody are entitled to a 50% reduction in the fee otherwise payable
for participation in INSIGHT. INSIGHT clients may elect to have their INSIGHT
fees charged to their accounts (by the automatic redemption of money market fund
shares) or another of their PaineWebber accounts or, billed separately.
REDEMPTION OF SHARES
As described below, Fund shares may be redeemed at their net asset value and
redemption proceeds will be paid within the time frames set forth below.
PaineWebber clients may redeem non-certificated shares through PaineWebber or
its correspondent firms; all other shareholders must redeem through the Transfer
Agent. If a redeeming shareholder owns shares of more than one Class, the shares
will be redeemed in the following order unless the shareholder specifically
requests otherwise: Class B shares, then Class A shares.
REDEMPTION THROUGH PAINEWEBBER OR CORRESPONDENT FIRMS. PaineWebber clients
may submit redemption requests to their investment executives or correspondent
firms in person or by telephone, mail or wire. As the Fund's agent, PaineWebber
may honor a redemption request by repurchasing Fund shares from a redeeming
shareholder at the shares' net asset value next determined after receipt of the
request by PaineWebber's New York City offices. For requests made on or before
June 2, 1995, repurchase proceeds will be paid within five Business Days after
receipt of the request by check or credited to the shareholder's brokerage
account at the election of the shareholder. For requests made on June 5, 1995
and June 6, 1995, repurchase proceeds will be paid within four Business Days
after receipt of the request. For requests made on or after June 7, 1995,
repurchase proceeds will be paid within three Business Days after receipt of the
request. PaineWebber investment executives and correspondent firms are
responsible for promptly forwarding redemption requests to PaineWebber's New
York City offices.
PaineWebber reserves the right not to honor any redemption request, in
which case PaineWebber promptly will forward the request to the Transfer Agent
for treatment as described below.
REDEMPTION THROUGH THE TRANSFER AGENT. Fund shareholders who are not
PaineWebber clients or who wish to redeem certificated shares must redeem their
shares through the Transfer Agent by mail; other shareholders also may redeem
Fund shares through the Transfer Agent. Shareholders should mail redemption
requests directly to the Transfer Agent: PFPC Inc., Attn: PaineWebber Mutual
Funds, P.O. Box 8950, Wilmington, Delaware 19899. A redemption request will be
executed at the net asset value next computed after it is received in 'good
order.' 'Good order' means that the request must be accompanied by the
following: (1) a letter of instruction or a stock assignment specifying the
number of shares or amount of investment to be redeemed (or that all shares
credited to a Fund account be redeemed), signed by all registered owners of the
shares in the exact names in which they are registered, (2) a guarantee of the
signature of each
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registered owner by an eligible institution acceptable to the Transfer Agent and
in accordance with SEC rules, such as a commercial bank, trust company or member
of a recognized stock exchange, (3) other supporting legal documents for
estates, trusts, guardianships, custodianships, partnerships and corporations
and (4) duly endorsed share certificates, if any. Shareholders are responsible
for ensuring that a request for redemption is received in 'good order.'
ADDITIONAL INFORMATION ON REDEMPTIONS. A shareholder who holds
non-certificated Fund shares may have redemption proceeds of $1 million or more
wired to the shareholder's PaineWebber brokerage account or a commercial bank
account designated by the shareholder. Questions about this option, or
redemption requirements generally, should be referred to the shareholder's
PaineWebber investment executive or correspondent firm, or to the Transfer Agent
if the shares are not held in a PaineWebber brokerage account. If a shareholder
requests redemption of shares which were purchased recently, a Fund may delay
payment until it is assured that good payment has been received. In the case of
purchases by check, this can take up to 15 days from the date of purchase.
Because the Funds incur certain fixed costs in maintaining shareholder
accounts, each Fund reserves the right to redeem all Fund shares in any
shareholder account of less than $500 net asset value. If a Fund elects to do
so, it will notify the shareholder and provide the shareholder the opportunity
to increase the amount invested to $500 or more within 60 days of the notice. A
Fund will not redeem accounts that fall below $500 solely as a result of a
reduction in net asset value per share.
Shareholders who have redeemed Class A shares may reinstate their Fund
account without a sales charge up to the dollar amount redeemed by purchasing
Class A shares of the Fund within 365 days of the redemption. To take advantage
of this reinstatement privilege, shareholders must notify their PaineWebber
investment executive or correspondent firm at the time the privilege is
exercised.
OTHER SERVICES AND INFORMATION
Investors interested in the services described below should consult their
PaineWebber investment executives or correspondent firms or call the Transfer
Agent toll-free at 1-800-647-1568.
SYSTEMATIC WITHDRAWAL PLAN. Shareholders who own non-certificated shares of
a Fund with a value of $5,000 or more may have PaineWebber redeem a portion of
their shares monthly, quarterly or semi-annually under the systematic withdrawal
plan. The minimum amount for all withdrawals of shares is $100. Quarterly
withdrawals are made in March, June, September and December, and semi-annual
withdrawals are made in June and December. Shareholders who receive dividends or
other distributions in cash may not participate in the systematic withdrawal
plan. Purchases of additional shares of the Fund concurrent with withdrawals are
ordinarily disadvantageous to shareholders because of tax liabilities and, for
Class A shares, any sales charges.
INDIVIDUAL RETIREMENT ACCOUNTS. Shares of the Fund may be purchased through
IRAs available through the Fund. In addition, a Self-Directed IRA is available
through PaineWebber under which investments may be made in the Fund as well as
in other investments available
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through PaineWebber. Investors considering establishing an IRA should review
applicable tax laws and should consult their tax advisors.
TRANSFER OF ACCOUNTS. If a shareholder holding shares of the Fund in a
PaineWebber brokerage account transfers his brokerage account to another firm,
the Fund shares normally will be transferred to an account with the Transfer
Agent. However, if the other firm has entered into a selected dealer agreement
with Mitchell Hutchins relating to the Fund, the shareholder may be able to hold
Fund shares in an account with the other firm.
DETERMINATION OF NET ASSET VALUE
The Fund computes each Class' net asset value as of the close of regular trading
on the NYSE (currently 4:00 p.m., Eastern time) each Business Day. Net asset
value per share of a Class is computed by dividing the value of the Fund's total
assets less liabilities attributable to that Class by the total number of shares
outstanding of the Class. The Fund's expenses and fees, including Mitchell
Hutchins' fee, are accrued daily and taken into account in determining net asset
value.
For purposes of computing a Class' net asset value per share, securities
listed on a national securities exchange are valued on the basis of the last
sale on the date on which the valuation is made or, in the absence of sales, at
the mean between the closing bid and asked price. 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. Stock index futures
contracts and options thereon which are traded on commodities exchanges are
valued at their last sale price as of the close of such exchanges. Short-term
obligations with maturities of 60 days or less are valued at amortized cost,
which constitutes fair value as determined by the Fund's Board of Directors.
Securities and other assets for which market quotations are not readily
available are valued at fair value as determined by Mitchell Hutchins under
procedures established by the Board of Directors.
EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged for shares of the corresponding Class of
other PaineWebber and MH/KP mutual funds, or may be acquired through an exchange
of shares of the corresponding Class of those funds. No initial sales charge is
imposed on the shares being acquired, and no contingent deferred sales charge is
imposed on the shares being disposed of, through an exchange. Class B shares of
MH/KP mutual funds differ from those of PaineWebber mutual funds. Class B shares
of MH/KP mutual funds are equivalent to Class D shares of PaineWebber mutual
funds. Thus, contingent deferred sales charges are not applicable to redemptions
of the Class B shares of MH/KP mutual funds. Exchanges may be subject to minimum
investment requirements of the fund into which exchanges are made.
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Exchanges are permitted with other PaineWebber and MH/KP mutual funds,
including:
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
PW Asset Allocation Fund
PW Global Energy Fund
PW Global Growth and Income Fund
PW Growth and Income Fund
PW Utility Income Fund
PAINEWEBBER MONEY MARKET FUND
PaineWebber clients must place exchange orders through their PaineWebber
investment executives or correspondent firms unless the shares to be exchanged
are held in certificated form.
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Shareholders who are not PaineWebber clients or who hold their shares in
certificated form must place exchange orders in writing with the Transfer Agent:
PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington, Delaware
19899. All exchanges will be effected based on the relative net asset values per
share next determined after the exchange order is received at PaineWebber's New
York City offices or by the Transfer Agent. Shares of the Funds purchased
through PaineWebber or its correspondent firms may be exchanged only after the
settlement date has passed and payment for such shares has been made.
OTHER EXCHANGE INFORMATION. This exchange privilege may be modified or
terminated at any time, upon at least 60 days' notice when such notice is
required by SEC rules. See the Statement of Additional Information for further
details. This exchange privilege is available only in those jurisdictions where
the sale of the PaineWebber and MH/KP fund shares to be acquired through such
exchange may be legally made. Before making any exchange, shareholders should
contact their PaineWebber investment executives or correspondent firms or the
Transfer Agent to obtain more information and prospectuses of the PaineWebber
and MH/KP funds to be acquired through the exchange.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute substantially all of its net investment
income quarterly. Any payments from net realized securities profits (net capital
gains) are paid once a year. Unless a shareholder elects otherwise, dividends
and capital gains distributions on shares of any Class are reinvested at net
asset value in additional shares of the same Class that are credited to the
shareholder's account with the Fund. The per share dividends and distributions
on Class C shares will be higher than those on Class A shares, which in turn
will be higher than those on Class B shares, as a result of the different
service, distribution and transfer agency fees applicable to the Classes. See
'Fee Table,' 'Purchase of Shares' and 'The Distributor.'
TAXES
The Fund qualified for the fiscal year ended January 31, 1995 as a 'regulated
investment company' under the Code, and intends to remain qualified. As a
regulated investment company, the Fund pays no Federal income tax on its income
and gains which it distributes to shareholders, provided it distributes at least
90% of the Fund's net investment income and net short-term capital gains for
each year.
Dividends derived from the Fund's net investment income and net short-term
capital gains, whether received in additional shares or paid in cash, are
taxable to shareholders as ordinary income. The aggregate amount of these
dividends designated by the Fund as eligible for the 70% dividends received
deduction allowed to corporate shareholders generally may not exceed the gross
amount of the Fund's qualifying dividends received from domestic corporations.
In
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general, dividend income of the Fund distributed to its shareholders will not be
eligible for the dividends received deduction allowed to corporate shareholders
unless the Fund would have been entitled to the dividends received deductions
with respect to such dividend income if the Fund were not a regulated investment
company. The dividends received deduction will not be available if the
shareholder has held the shares of the Fund for less than 46 days and will be
reduced to the extent that the acquisition of the shares was directly financed
with indebtedness.
Distributions of the Fund's net long-term capital gains (i.e., the excess
of net long-term capital gains over net short-term capital losses) are taxable
as long-term capital gain to a shareholder, whether those distributions are paid
in cash or in additional shares, and regardless of the length of time the
shareholder has held the Fund shares. These distributions are not eligible for
the dividends received deduction.
Any gain or loss realized from the sale or redemption of Fund shares by a
shareholder who is not a dealer in securities will generally be treated as
long-term capital gain or loss if the shares have been held more than one year
and otherwise as short-term capital gain or loss. Any loss realized by a
shareholder upon the sale or redemption of Fund shares held six months or less
will be treated as a long-term capital loss, however, to the extent of any net
long-term capital gain distributions received by the shareholder with respect to
those shares. Any loss realized on a sale or exchange will be disallowed to the
extent that the shares disposed of are replaced, including, for example,
pursuant to the automatic reinvestment of quarterly distributions, within a
61-day period beginning 30 days before and ending 30 days after the date the
shares are disposed. In such a case, a shareholder will adjust the basis of the
shares acquired to reflect the disallowed loss.
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus certain other amounts.
Dividends declared in October, November or December payable to shareholders
of record on a specified date in such a month and paid in the following January
will be treated as having been paid by the Fund and received by each shareholder
on December 31 of the year in which declared. Under this rule, therefore,
shareholders may be taxed in one year on dividends or distributions actually
received in January of the following year.
Investors should consider carefully the tax implications of purchasing
shares of the Fund just prior to the declaration of a dividend or capital gains
distribution. Although a dividend or distribution paid shortly after shares have
been purchased is in effect a return of investment, it is subject to taxation as
described above.
The Fund may be required to withhold Federal income tax at the rate of 31%
('backup withholding') of all taxable distributions payable to shareholders who
fail to provide the Fund with their correct taxpayer identification number or to
make required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate shareholders and
other shareholders specified in the Code are exempt from such
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backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against a shareholder's U.S. Federal income tax
liability.
A shareholder who, as to the United States, is a non-resident alien
individual, a foreign trust or estate, foreign corporation or foreign
partnership may be subject to 30% United States withholding tax unless a reduced
rate of withholding is provided under applicable treaty provisions.
Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually by the Fund's transfer agent. Shareholders are
urged to consult their own tax advisers regarding specific questions as to
Federal, state or local tax.
THE DISTRIBUTOR
Mitchell Hutchins serves as the distributor of the Fund's shares. On December
16, 1994, the Directors of the Fund approved amendments to the Fund's
shareholder servicing and distribution plans under Rule 12b-1 of the Act and the
related agreements thereunder to substitute in such documents the name of the
new distributor, Mitchell Hutchins, for the former distributor, Kidder, Peabody
& Co. Incorporated ('Kidder, Peabody'). Mitchell Hutchins has appointed
PaineWebber as the exclusive dealer for the sale of the Fund's shares.
CLASS A
To reimburse Mitchell Hutchins for the services it provides and for the expenses
it bears under the Distribution Agreement, the Fund has adopted a shareholder
servicing and distribution plan pursuant to Rule 12b-1 of the Act (the 'Class A
Plan') under which the Fund pays Mitchell Hutchins a fee in reimbursement of its
expenses associated with providing shareholder and distribution related services
in respect of Class A shares calculated daily and paid monthly by the Fund at
the annual rate of .50% of the lesser of (1) aggregate gross sales of the Class
of shares (and any predecessor of those shares) since the Fund's inception (not
including reinvestment of dividends or capital gain distributions from the Fund)
less the aggregate net asset value of the Class of shares of the Fund (and any
predecessor of those shares) that have been redeemed since the Fund's inception
upon which a contingent deferred sales charge ('CDSC') has been imposed or upon
which such charge has been waived, or (2) the Fund's average daily net assets
attributable to the Class of shares (the 'Aggregate Fee'). The Fund does not
impose a CDSC on redemptions of Class A shares.
Of the Aggregate Fee payable in respect of Class A shares, the lesser of
that amount or an amount equal to the annual rate of .25% of the value of the
average daily net assets of the Fund attributable to that Class (the 'Service
Fee') will be used to reimburse Mitchell Hutchins for its expenses in paying
PaineWebber for the servicing of shareholder accounts in the Class. Class A's
Service Fee will be used by Mitchell Hutchins to provide compensation to
PaineWebber for ongoing servicing and/or maintenance of shareholder accounts in
shares of that Class and to cover an allocable portion of overhead and other
PaineWebber branch office expenses related to the servicing and/or maintenance
of shareholder accounts in shares of that Class. Compensation
22
<PAGE>
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will be paid by Mitchell Hutchins to persons, including PaineWebber employees,
who respond to inquiries of shareholders of the Fund regarding their ownership
of shares or their accounts with the Fund or who provide other similar services
not otherwise required to be provided by the Fund's investment adviser and
administrator, transfer agent or other agent of the Fund.
Any amount of the Aggregate Fee paid in respect of Class A that is in
excess of the annual rate of .25% of the Fund's average daily net assets
attributable to the Class will be used to reimburse Mitchell Hutchins for its
expenses in paying PaineWebber for providing distribution related services in
respect of the Class (the 'Distribution Fee'). Class A's Distribution Fee will
be used by Mitchell Hutchins to pay PaineWebber to provide initial and ongoing
sales compensation to PaineWebber investment executives in respect of sales of
shares of that Class; costs of printing and distributing the Fund's Prospectus,
Statement of Additional Information and sales literature to prospective
investors in shares of that Class; costs associated with any advertising
relating to shares of that Class; an allocation of overhead and other
PaineWebber branch office expenses related to the distribution of shares of that
Class; and payments to, and expenses of, persons who provide support services in
connection with the distribution of shares of that Class.
Payments under the Class A Plan are tied exclusively to the expenses for
service and distribution related activities actually incurred by Mitchell
Hutchins and PaineWebber, without regard to whether the expenses were incurred
during the period in which the reiumbursement is made. The Fund's Board of
Directors will evaluate the appropriateness of the Class A Plan and its payment
terms on a continuing basis and in doing so will consider all relevant factors,
including expenses borne by Mitchell Hutchins and amounts it receives under the
Class A Plan.
The amount of expenses incurred by Mitchell Hutchins in any twelve-month
period may exceed the rate of reimbursement set forth in the Class A Plan. At
any given time, the aggregate amount of expenses incurred by Mitchell Hutchins
in distributing Class A shares and not recovered through the imposition of CDSCs
may exceed the total payments made by the Fund pursuant to the Class A Plan.
At a meeting of the Board of Directors on May 7, 1986, the Directors who
are not interested persons of the Fund, as defined in the Act, after consulting
with counsel, and with the Directors who are interested persons of the Fund, as
defined in the Act, abstaining, accepted the position that it would not make a
claim for payment of any distribution expenses incurred on or after May 7, 1986
not previously reimbursed or recovered through CDSCs if the Class A Plan is
terminated or not continued.
For the fiscal years ended August 31, 1992 and August 31, 1993, from
September 1, 1993 through the new fiscal year ended January 31, 1994 and for the
fiscal year ended January 31, 1995, Kidder, Peabody, the Fund's predecessor
distributor, incurred distribution expenses under the Class A Plan, with respect
to the Fund's then sole outstanding Class until June 14, 1993, of $1,642,792,
$554,608, $238,434 and $556,922, respectively, of which $63,996, $33,283, $0 and
$0, respectively, were recovered in the form of CDSCs paid by investors and
$439,234, $554,608, $238,434 and $386,930, respectively, were recovered in the
form of payments made by the Fund
23
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to Kidder, Peabody at the rate provided in the Class A Plan. Taking payments of
CDSCs into account, there was from November 22, 1985 through the fiscal year
ended January 31, 1995, an unreimbursed balance owed to Kidder, Peabody in the
amount of $169,992 (0.29% of the net assets of Class A on January 31, 1995),
which is subject to recovery by Mitchell Hutchins, the Fund's new distributor,
in future years in accordance with the terms of the Class A Plan. Such
unreimbursed amount is considered a 'carryforward' that might be recoverable in
future years.
CLASS B
Mitchell Hutchins is paid monthly fees by the Fund in connection with its
payments to PaineWebber for the servicing of shareholder accounts in, and
providing distribution related services in respect of, Class B shares. A monthly
service fee, authorized pursuant to a shareholder servicing and distribution
plan (the 'Class B Plan') adopted by the Fund pursuant to Rule 12b-1 under the
Act, calculated at the annual rate of .25% of the value of the average daily net
assets of the Fund attributable to Class B shares, is used by Mitchell Hutchins
to pay PaineWebber for ongoing servicing and/or maintenance of shareholder
accounts and an allocation of overhead and other PaineWebber branch office
expenses related to servicing shareholder accounts. Compensation is paid by
Mitchell Hutchins to persons, including PaineWebber employees, who respond to
inquiries of shareholders of the Fund regarding their ownership of shares or
their accounts with the Fund or who provide other similar services not otherwise
required to be provided by the Fund's investment adviser and administrator or
transfer agent.
In addition, pursuant to the Class B Plan, the Fund pays to Mitchell
Hutchins a monthly distribution fee at the annual rate of .50% of the Fund's
average daily net assets attributable to Class B shares. The distribution fee is
used by Mitchell Hutchins to pay PaineWebber to provide initial and ongoing
sales compensation to PaineWebber investment executives in respect of sales of
Class B shares; costs of printing and distributing the Fund's Prospectus,
Statement of Additional Information and sales literature to prospective
investors in Class B shares; costs associated with any advertising relating to
Class B shares; an allocation of overhead and other PaineWebber branch office
expenses related to distribution of Class B shares; and payments to, and
expenses of, persons who provide support services in connection with the
distribution of Class B shares.
Payments under the Class B Plan are not tied exclusively to the shareholder
servicing and/or distribution expenses actually incurred by Mitchell Hutchins.
The Directors evaluate the appropriateness of the Class B Plan and its payment
terms on a continuing basis and in doing so will consider all relevant factors,
including expenses borne by Mitchell Hutchins and amounts it receives under the
Class B Plan.
PERFORMANCE INFORMATION
From time to time, the Fund may advertise its 'average annual total return' over
various periods of time for each Class. Total return figures, which are based on
historical earnings and are not
24
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intended to indicate future performance, show the average percentage change in
value of an investment in the Class from the beginning date of a measuring
period to the end of that period. These figures reflect changes in the price of
shares and assume that any income dividends and/or capital gains distributions
made by the Fund during the period were reinvested in shares of the same Class.
Total return figures will be given for the most recent one-, five- and ten-year
periods, or for the life of the Class to the extent that it has not been in
existence for the full length of those periods, and may be given for other
periods as well, such as on a year-by-year basis. The average annual total
return for any one year in a period longer than one year might be greater or
less than the average for the entire period. Average annual total return figures
must take into account the maximum sales charge to which the Class A shares are
subject; however, the Fund may from time to time also quote such figures,
computed exclusive of such sales charges, with respect to Class A shares.
In reports or other communications to Fund shareholders and in advertising
material, the Fund may compare the Classes' performance with (1) the performance
of other mutual funds (or classes thereof) as listed in rankings prepared by
Lipper Analytical Services Inc., CDA Investment Technologies, Inc. or similar
investment services that monitor the performance of mutual funds or as set out
in the nationally recognized publications listed below, (2) the Standard &
Poor's 500 Composite Stock Index, the Russell 2000, the Russell 5000 and the Dow
Jones Industrial Average, each of which is an unmanaged index of common stocks
or (3) other appropriate indexes of investment securities or with data developed
by Mitchell Hutchins derived from those indexes. The Fund may also include in
communications to its shareholders evaluations of the Fund published by
nationally recognized ranking services and by financial publications that are
nationally recognized, such as Barron's, Business Week, Forbes, Institutional
Investor, Investor's Daily, Kiplinger's Personal Finance Magazine, Money,
Morningstar Mutual Fund Values, The New York Times, USA Today and The Wall
Street Journal. Any given performance comparison should not be considered as
representative of the Fund's performance for any future period.
CUSTODIAN AND TRANSFER, DIVIDEND DISBURSING AND RECORDKEEPING AGENT
State Street Bank and Trust Company ('State Street'), One Heritage Drive, North
Quincy, Massachusetts 02171, serves as the Fund's custodian. PFPC Inc. serves as
the Fund's transfer, dividend disbursing and recordkeeping agent.
GENERAL INFORMATION
ORGANIZATION OF THE FUND
The Fund was incorporated under the laws of the State of Maryland on June 20,
1985 and commenced operations on November 22, 1985.
Effective September 1, 1993, the Fund changed its fiscal year end from
August 31 to January 31.
SHARES OF THE FUND
The authorized capital stock of the Fund consists of 500 million shares of
common stock, par value $.01 per share. Each share has one vote and, when issued
and paid for in accordance with
25
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the terms of offering, is fully paid and non-assessable. Shares have no
pre-emptive, subscription or conversion rights and are freely transferable.
Each Class represents an identical interest in the Fund's investment
portfolio. As a result, the Classes have the same rights, privileges and
preferences, except with respect to: (1) the designation of each Class; (2) the
effect of the respective sales charges, if any, for each Class; (3) the
distribution and/or service fees, if any, borne by each Class; (4) the expenses
allocable exclusively to each Class; (5) voting rights on matters exclusively
affecting a single Class; and (6) the exchange privilege of each Class. The
Board of Directors does not anticipate that there will be any conflicts among
the interests of the holders of the different Classes. However, the Board of
Directors, on an ongoing basis, will consider whether any conflict exists and,
if so, take appropriate action.
Generally, shares of the Fund will be voted on a Fund-wide basis on all
matters except those affecting only the interests of one Class, such as the
terms of a shareholder servicing and distribution plan as it relates to a Class.
Certificates representing the Fund's shares are no longer physically
issued. PFPC Inc. maintains a record of each shareholder's ownership.
Shareholders receive confirmations of all transactions in Fund shares and
periodic statements reflecting share balances and dividends.
Unless otherwise required by the Act, ordinarily it will not be necessary
for the Fund to hold meetings of shareholders annually. 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 meeting of shareholders for the purpose of electing Directors if, at any time,
less than a majority of the directors holding office at the time were elected by
shareholders.
REPORTS TO SHAREHOLDERS
The Fund sends shareholders semi-annual and audited annual reports, each of
which includes a list of the investment securities held by the Fund as of the
end of the period covered by the report.
26
<PAGE>
No person has been authorized to give any informa-
tion 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 the offering may not lawfully be made.
<TABLE>
<S> <C>
- ------------------------------------
Contents
- ------------------------------------
Fee Table 2
- ------------------------------------
Highlights 3
- ------------------------------------
Financial Highlights 6
- ------------------------------------
Investment Objective and Policies 8
- ------------------------------------
Portfolio Transactions 11
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Management of the Fund 11
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Purchase of Shares 12
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Redemption of Shares 16
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Other Services and Information 17
- ------------------------------------
Determination of Net Asset Value 18
- ------------------------------------
Exchange Privilege 18
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Dividends, Distributions and Taxes 20
- ------------------------------------
The Distributor 22
- ------------------------------------
Performance Information 25
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Custodian and Transfer, Dividend
Disbursing and Recordkeeping Agent 25
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General Information 25
- ------------------------------------
</TABLE>
Mitchell
Hutchins/
Kidder,
Peabody
Equity
Income
Fund,
Inc.
Prospectus
June 1, 1995
<PAGE>
Statement of Additional Information June 1, 1995
- --------------------------------------------------------------------------------
Mitchell Hutchins/Kidder, Peabody
Equity Income Fund, Inc.
1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019 (800) 647-1568
Mitchell Hutchins/Kidder, Peabody Equity Income Fund, Inc. (the 'Fund') is a
diversified, open-end management investment company whose objective is to
provide reasonably high current dividend and interest income and to obtain
long-term capital appreciation. 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 June 1, 1995.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER, ADMINISTRATOR AND DISTRIBUTOR
Mitchell Hutchins Asset Management Inc.
- --------------------------------------------------------------------------------
<PAGE>
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's objective is to provide reasonably high current dividend and interest
income and to obtain long-term capital appreciation, as fully described in the
Fund's Prospectus under the heading 'Investment Objective and Policies.'
Supplemental information is set out below concerning certain of the securities
and other instruments in which the Fund may invest, the investment techniques
and strategies that the Fund may utilize and certain risks involved with those
investments, techniques and strategies.
INVESTMENT TECHNIQUES AND STRATEGIES
STOCK INDEX FUTURES CONTRACTS. A stock index futures contract obligates the
seller to deliver (and the purchaser to take) an amount of cash equal to a
specific dollar amount times the difference between the value of a specific
stock index at the close of the last trading day of the contract and the price
at which the agreement is made. No physical delivery of the underlying stocks in
the index is made.
When a purchase or sale of a stock index futures contract is made, the Fund
is required to deposit with its custodian (or broker, if legally permitted) a
specified amount of cash or U.S. Treasury securities ('initial margin'). The
margin required for a stock index futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the stock index futures contract which is returned to the Fund
upon termination of the contract, if all contractual obligations have been
satisfied. Each day, the stock index futures contract is valued at the official
settlement price of the exchange on which it is traded. Payment from or to the
Fund in cash equal to the change in value is then made ('variation margin').
This process is known as 'marking to market.' Variation margin does not
represent a borrowing or loan by the Fund but is instead settlement between the
Fund and the broker of the amount one would owe the other if the stock index
futures contract expired. In computing daily net asset value, the Fund will mark
to market its open stock index futures contracts position.
At any time prior to the expiration of the stock index futures contract,
the Fund may elect to close out the position by entering into an offsetting
purchase or sale of a matching stock index futures contract (same exchange,
underlying index and delivery month). If the offsetting purchase price is less
than the original sale price, the Fund realizes a gain, or if it is more, the
Fund realizes a loss. Conversely, if the offsetting sale price is more than the
original purchase price, the Fund realizes a gain, or if it is less, the Fund
realizes a loss. The transaction costs, including commissions, must be included
in these calculations. There can be no assurance, however, that the Fund will be
able to enter into an offsetting transaction with respect to a particular
contract at a particular time. If the Fund is unable to enter into an offsetting
transaction, it will be required to maintain the margin deposits on the
contract.
Stock index futures contracts are currently traded on the following
exchanges, among others: the Chicago Mercantile Exchange, the New York Futures
Exchange and the Kansas City Board of Trade.
2
<PAGE>
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OPTIONS ON STOCK INDEX FUTURES CONTRACTS. The Fund may also purchase and,
subject to obtaining certain regulatory relief from the Commodity Futures
Trading Commission ('CFTC'), write call and put options on stock index futures
contracts ('futures options'). A futures option gives the purchaser the right,
in return for the premium paid, to assume a long position (call) or short
position (put) in a stock index futures contract at a specified exercise price
at any time during the period of the option. The exercise price may be below or
above the value of the stock index futures contract at the time the option is
written. A call option is 'in-the-money' if the value of the stock index futures
contract that is the subject of the option exceeds the exercise price. A put
option is 'in-the-money' if the exercise price exceeds the value of the stock
index futures contract that is the subject of the option. Upon exercise, the
writer of the option assumes an offsetting futures position and pays to the
purchaser cash equal to the difference between the current market price of the
stock index futures contract and the exercise price.
As with stock index futures contracts, the Fund is required to deposit and
maintain margin with respect to futures options written by it. Such margin
deposits will vary depending on the nature of the underlying stock index futures
contract (and the related initial margin requirements), the current market value
of the futures option and the stock index futures contract position held by the
Fund.
LIMITATIONS ON STOCK INDEX FUTURES CONTRACTS AND FUTURES OPTIONS. The Fund
will not enter into a stock index futures contract or purchase a futures option
if immediately thereafter the initial margin deposits for such stock index
futures contracts held by the Fund plus premiums paid by it for such futures
options, less the amount by which any such options are 'in-the-money,' would
exceed 5% of the Fund's total assets.
In order to comply with CFTC Regulation 4.5 and thereby avoid being deemed
a 'commodity pool operator,' the 'underlying commodity value,' as defined in the
Regulation, of each long position in a commodity contract in which the Fund
invests will not at any time exceed the sum of:
(1) The value of short-term United States debt obligations or other
United States dollar-denominated high quality short-term money market
instruments and cash set aside in an identifiable manner, plus any funds
deposited as margin on the contract;
(2) Unrealized appreciation on the contract held at the broker; and
(3) Cash proceeds from existing investments due in not more than 30
days.
'Underlying commodity value' means the size of the contract multiplied by
the daily settlement price of the contract.
As long as it continues to sell its shares in certain states, the Fund may
not: (i) buy or sell a stock index futures contract or a futures option unless
the stock index futures contract or the futures option is offered through the
facilities of a national securities association or listed on a national exchange
or similar entity; (ii) write a put option except as a closing transaction; or
(iii) purchase a put or call option, if the aggregate premiums paid for all put
and call options exceed 2% of net assets (less the amount by which all puts are
'in-the-money'), excluding put and call options purchased as closing
transactions.
3
<PAGE>
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RISKS OF STOCK INDEX FUTURES CONTRACTS. There are several risks associated
with the Fund's use of stock index futures contracts as a hedging device. One
risk arises because of the imperfect correlation between movements in the price
of the stock index futures contract and movements in the price of the securities
which are the subject of the hedge. The risk of imperfect correlation increases
as the composition of the Fund's securities portfolio diverges from the
securities included in the applicable stock index. If the price of the stock
index futures contract moves less than the price of the securities which are the
subject of the hedge, the hedge will not be fully effective but, if the price of
the securities being hedged has moved in an unfavorable direction, the Fund
would be in a better position than if it had not hedged at all. If the price of
the securities being hedged has moved in a favorable direction, this advantage
will be partially offset by the stock index futures contract. If the price of
the stock index futures contract moves more than the price of the stock, the
Fund will experience either a loss or a gain on the stock index futures contract
which will not be completely offset by movements in the price of the securities
which are the subject of the hedge. To compensate for the imperfect correlation
of movements in the price of securities being hedged and movements in the price
of the stock index futures contracts, the Fund may buy or sell stock index
futures contracts in a greater dollar amount than the dollar amount of
securities being hedged if the historical volatility of the price of such
securities has been greater than the historical volatility of the index.
Conversely, the Fund may buy or sell fewer stock index futures contracts if the
historical volatility of the price of the securities being hedged is less than
the historical volatility of the stock index. It is also possible that, where
the Fund has sold stock index futures contracts to hedge its portfolio against
decline in the market, the market may advance and the value of securities held
in the Fund's portfolio may decline. If this occurred, the Fund would lose money
on the stock index futures contract and also experience a decline in the value
of its portfolio securities. However, while this could occur for a very brief
period or to a very small degree, over time the value of a diversified portfolio
should move in the same direction as the market indices upon which the stock
index futures contracts are based.
When stock index futures contracts are purchased to hedge against a
possible increase in the price of stocks before the Fund is able to invest its
cash (or cash equivalents) in stocks in an orderly fashion, it is possible that
the market may decline instead; if the Fund then concludes not to invest in
stocks at that time because of concern as to possible further market decline or
for other reasons, the Fund will realize a loss on the stock index futures
contract that is not offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the stock index futures contract
and the portion of the portfolio being hedged, the price of a stock index
futures contract may not correlate perfectly with the movement in the stock
index due to certain market distortions. All participants in the futures markets
are subject to margin deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors may close stock index futures
contracts through offsetting transactions which would distort the normal
relationship between the index and futures markets. In addition, from the point
of view of speculators, the deposit requirements in the futures markets are less
onerous than margin requirements in the securities markets. Therefore, increased
participation by speculators in the futures markets may also cause temporary
price distortions. Due to the possibility of price distortions in the futures
markets and
4
<PAGE>
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because of the imperfect correlation between movements in the stock index and
movements in the price of stock index futures contracts, a correct forecast of
general market trends by Mitchell Hutchins Asset Management Inc. ('Mitchell
Hutchins'), the Fund's investment adviser and administrator, may still not
result in a successful hedging transaction over a very short time frame.
Positions in stock index futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
Although the Fund intends to purchase or sell stock index futures contracts only
on exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular contract or at any particular time.
In such event, it may not be possible to close a stock index futures contract
position, and in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin. However, in the
event stock index futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the stock index futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the stock
index futures contract. However, as described above, there is no guarantee that
the price of the securities will, in fact, correlate with the price movements in
the stock index futures contract and thus provide an offset to losses on a stock
index futures contract.
The Fund intends to purchase and sell stock index futures contracts on the
stock index for which it can obtain the best price with consideration also given
to liquidity.
Successful use of stock index futures contracts by the Fund is also subject
to Mitchell Hutchins' ability to predict correctly movements in the direction of
the market. For example, if the Fund has hedged against the possibility of a
decline in the market adversely affecting stocks held in its portfolio and stock
prices increase instead, the Fund will lose part or all of the benefit of the
increased value of its stocks which it has hedged because it will have
offsetting losses in its stock index futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. Such sales of securities may be, but
will not necessarily be, at increased prices which reflect the rising market.
The Fund may have to sell securities at a time when it may be disadvantageous to
do so.
RISKS OF FUTURES OPTIONS. Mitchell Hutchins will not purchase futures
options on any exchange unless and until, in Mitchell Hutchins' opinion, the
market for such options has developed sufficiently that the risks in connection
with futures options are no greater than the risks in connection with stock
index futures contracts transactions. However, there can be no assurance that a
liquid market will exist at a time when the Fund seeks to close out a futures
option position. The Fund would continue to be required to meet margin
requirements until the position is closed. Compared to the use of stock index
futures contracts, the purchase of futures options involves less potential risk
to the Fund because the maximum amount at risk is the premium paid for the
options (plus transaction costs). However, there may be circumstances when the
use of a futures option would result in a loss to the Fund when the use of a
stock index futures contract would not, such as when there is no movement in the
level of the index.
5
<PAGE>
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INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies which cannot be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities, defined in the Investment Company Act of 1940, as amended
(the '1940 Act'), as the lesser of (i) 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 (ii) more than 50% of the Fund's outstanding shares. The
Fund may not:
1. Issue senior securities as defined in the Act and any rules, orders
and interpretations thereunder, except insofar as the Fund may be deemed to
have issued senior securities by reason of (1) borrowing money or
purchasing securities on a when-issued or delayed delivery basis, (2)
purchasing or selling futures contracts and options on futures contracts
and other similar instruments and (3) issuing separate classes of shares.
2. Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions
and may make margin payments in connection with transactions in futures and
options).
3. Make short sales of securities or maintain a short position except
for transactions in futures and options.
4. Borrow money or pledge its assets except that the Fund may borrow
from banks for temporary or emergency purposes (including the meeting of
redemption requests which might otherwise require the untimely disposition
of securities) in amounts not exceeding 5% (taken at the lower of cost or
market value) of its total assets (not including the amount borrowed) and
pledge its assets to secure such borrowings (collateral arrangements with
respect to futures and options transactions are not deemed to be a pledge
of assets).
5. Act as underwriter of securities of other issuers except to the
extent that, in connection with the disposition of portfolio securities, it
may be deemed to be an underwriter under certain federal securities laws.
6. Purchase any security if as a result the Fund would then have more
than 5% of its total assets (taken at current value) invested in securities
of companies (including predecessors) less than three years old or in
equity securities for which market quotations are not readily available.
7. Purchase any security if as a result the Fund would then hold more
than 10% of any class of securities of an issuer (taking all common stock
issues of an issuer as a single class, all preferred stock issues as a
single class, and all debt issues as a single class) or more than 10% of
the outstanding voting securities of an issuer.
8. Purchase any security (other than obligations of the U.S.
Government, its agencies or instrumentalities) if as a result: (i) more
than 5% of the Fund's total assets (taken at current value) would then be
invested in securities of a single issuer, or (ii) more than 25% of the
Fund's total assets (taken at current value) would be invested in a single
industry.
9. Invest in securities of any issuer if, to the knowledge of the
Fund, any officer or director of the Fund, the Fund's administrator or the
Fund's investment adviser owns more
6
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than 1/2 of l% of the outstanding securities of such issuer, and such
officers and directors who own more than 1/2 of 1% own in the aggregate
more than 5% of the outstanding securities of such issuer.
10. Purchase or sell real estate or interests in real estate mortgage
loans, although it may purchase and sell securities which are secured by
real estate and securities of companies which invest or deal in real
estate.
11. Buy or sell commodities or commodity contracts, except it may
engage in transactions in futures and options.
12. Make investments for the purpose of exercising control or
management.
13. Participate on a joint or a joint and several basis in any trading
account in securities.
14. Purchase any security restricted as to disposition under federal
securities laws.
15. Invest in securities of other registered investment companies,
except by purchases in the open market involving only customary brokerage
commissions and as a result of which not more than 5% of its total assets
(taken at current value) would be invested in such securities, or except as
part of a merger, consolidation or other acquisition.
16. Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in the common stocks of
companies which invest in or sponsor such programs.
17. Make loans, except through loans of portfolio securities (limited
to 33% of the Fund's total assets) and repurchase agreements of not more
than one week duration with government securities dealers recognized by the
Federal Reserve Board or with member banks of the Federal Reserve System.
18. Purchase foreign securities or currencies except foreign
securities which are (a) listed on the New York or American Stock Exchange,
(b) American Depository Receipts listed on exchanges or otherwise traded in
the United States and (c) certificates of deposit, bankers' acceptances and
other obligations of foreign banks and foreign branches of U.S. banks if
giving effect to such purchase, such obligations would constitute more than
10% of the Fund's total assets (at current value).
19. Purchase warrants if as a result the Fund would then have more
than 5% of its total assets (taken at current value) invested in warrants.
20. Write, purchase or sell puts, calls or combinations thereof,
except for transactions in futures and options.
PORTFOLIO TRANSACTIONS AND TURNOVER
Decisions to buy and sell securities, stock index futures contracts and futures
options for the Fund are made by Mitchell Hutchins, subject to the overall
supervision and review by the Fund's Board of Directors. Portfolio security
transactions for the Fund are effected by or under the supervision of Mitchell
Hutchins.
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Transactions on stock exchanges involve the payment of negotiated brokerage
commissions. There is generally no stated commission in the case of securities
traded in the over-the-counter markets, but the price of those securities
includes an undisclosed commission or mark-up. The cost of securities purchased
from underwriters includes an underwriting commission or concession, and the
prices at which securities are purchased from and sold to dealers include a
dealer's mark-up or mark-down.
In executing portfolio transactions, it is the Fund's policy to give
primary consideration to securing the most favorable price and efficient
execution. Consistent with the interests of the Fund and subject to the review
of the Fund's Board of Directors, Mitchell Hutchins may cause the Fund to
purchase and sell portfolio securities through brokers which provide the Fund
with research, analysis, advice and similar services. In return for such
services, the Fund may pay to those brokers a higher commission than may be
charged by other brokers, provided that Mitchell Hutchins determines in good
faith that such commission is reasonable in terms either of that particular
transaction or of the overall responsibility of Mitchell Hutchins to the Fund
and its other clients and that the total commissions paid by the Fund will be
reasonable in relation to the benefits to the Fund over the long term. For
purchases or sales with broker-dealer firms which act as principal, Mitchell
Hutchins seeks best execution. Although Mitchell Hutchins may receive certain
research or execution services in connection with these transactions, Mitchell
Hutchins will not purchase securities at a higher price or sell securities at a
lower price than would otherwise be paid if no weight was attributed to the
services provided by the executing dealer. Moreover, Mitchell Hutchins will not
enter into any soft dollar arrangements relating to principal transactions and
will not receive in principal transactions the types of services which could be
purchased for hard dollars. Mitchell Hutchins may engage in agency transactions
in OTC debt securities in return for research and execution services. These
transactions are entered into only in compliance with procedures ensuring that
the transaction (including commissions) is at least as favorable as it would
have been if effected directly with a market-maker that did not provide research
or execution services. These procedures include Mitchell Hutchins receiving
multiple quotes from dealers before executing the transaction on an agency
basis.
Research services furnished by brokers through which a Fund effects
securities transactions may be used by Mitchell Hutchins in advising other funds
or accounts and, conversely, research services furnished to Mitchell Hutchins by
brokers in connection with other funds or accounts Mitchell Hutchins advises may
be used by Mitchell Hutchins in advising the Fund. Information and research
received from such brokers will be in addition to, and not in lieu of, the
services required to be performed by Mitchell Hutchins under the Advisory
Contract. The Fund may purchase and sell portfolio securities to and from
dealers who provide the Fund with research services. Portfolio transactions will
not be directed by the Fund to dealers solely on the basis of research services
provided. Research services furnished by the dealers through which or with which
the Fund effects securities transactions may be used by Mitchell Hutchins in
advising other funds or accounts, and, conversely, research services furnished
to Mitchell Hutchins in connection with other funds or accounts that Mitchell
Hutchins advises may be used in advising the Fund.
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PaineWebber may act as a securities broker or futures commission merchant
for the Fund and the Fund's Board of Directors has determined that any portfolio
transaction for the Fund may be effected through PaineWebber. The Board of
Directors has adopted certain policies and procedures which require that the
commissions paid to PaineWebber must be reasonable and fair compared to the
commissions, fees or other remuneration received or to be received by other
brokers or futures commission merchants in connection with comparable
transactions involving similar securities or stock index futures contracts
during a comparable period of time. The procedures also contain review
requirements and require Mitchell Hutchins to furnish reports to the Board of
Directors and to maintain records in connection with such reviews. PaineWebber
will not participate in commissions from brokerage given by the Fund to other
brokers or dealers. Over-the-counter purchases and sales are transacted directly
with principal market makers except in those cases in which better prices and
executions may be obtained elsewhere. The Fund will in no event effect principal
transactions with PaineWebber in over-the-counter securities in which
PaineWebber makes a market.
For the fiscal year ended January 31, 1995, from September 1, 1993 through
the new fiscal year ended January 31, 1994, and for the fiscal year ended August
31, 1993, the Fund paid $382,940, $101,945 and $150,217, respectively, in
brokerage commissions with respect to securities transactions. The increase in
commissions and the increase in portfolio turnover rate for the most recent
fiscal year was due to volatile markets and a change in the size of the Fund. Of
the amounts paid, $28,974, $18,714 and $21,700, respectively, were paid to
Kidder, Peabody & Co. Incorporated ('Kidder, Peabody'), the Fund's predecessor
distributor. For the fiscal year ended January 31, 1995, the commissions paid to
Kidder, Peabody with respect to securities transactions amounted to 7.6% of the
Fund's total commissions paid on securities transactions and 7.6% of the Fund's
aggregate dollar amount of securities transactions involving the payment of
commissions was effected through Kidder, Peabody. For the fiscal year ended
January 31, 1995, from September 1, 1993 through the new fiscal year ended
January 31, 1994 and for the fiscal year ended August 31, 1993, the Fund paid no
brokerage commissions with respect to futures transactions. The Directors
periodically review the commissions paid by the Fund to determine if the
commissions paid over representative periods of time are reasonable in relation
to the benefits inuring to the Fund. It is possible that certain of the services
received will primarily benefit one or more other accounts for which investment
discretion is exercised. Conversely, the Fund may be the primary beneficiary of
services received as a result of portfolio transactions effected for other
accounts. Mitchell Hutchins' fee under the Investment Advisory and
Administration Agreement is not reduced by reason of Mitchell Hutchins'
receiving such brokerage and research services.
Even though investment decisions for the Fund are made independently from
those of the other accounts managed by Mitchell Hutchins, investments of the
kind made by the Fund may also be made by those other accounts. When the Fund
and one or more accounts managed by Mitchell Hutchins are prepared to invest in,
or desire to dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by Mitchell
Hutchins to be equitable. In some cases, this procedure may adversely affect the
price paid or received by the Fund or the size of the position obtained for or
disposed of by the Fund.
9
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MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information regarding the Directors and officers of the Fund, including
information as to their principal business occupations during the last five
years, is listed below. Each Director who is an 'interested person' of the Fund,
as defined in the Act, is indicated by an asterisk.
David J. Beaubien, 60, Director. Chairman of Yankee Environmental Systems,
Inc., manufacturer of meteorological measuring systems. 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 12 other
investment companies for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
William W. Hewitt, Jr., 66, 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 Cash Management
Trust, The Guardian Park Ave. Fund, The Guardian Stock Fund, Inc. and The
Guardian U.S. Government Trust. Mr. Hewitt is a director or trustee of 12 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 12 other investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
*Frank P.L. Minard, 49, Director and President. Chairman of Mitchell
Hutchins, chairman of the board of Mitchell Hutchins Institutional Investors
Inc. and a director of PaineWebber. Prior to 1993, managing director of
Oppenheimer Capital in New York and Director of Oppenheimer Capital Ltd. in
London. Mr. Minard is a director or trustee of 25 other investment companies for
which Mitchell Hutchins or PaineWebber serves as investment adviser.
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. and Hidden Lake Gold
Mines Ltd., gold mining companies, Electronic Clearing House, Inc., a financial
transactions processing company, Wainoco Oil Corporation and Bio Techniques
Laboratories Inc., an agricultural 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 12 other investment companies for which
Mitchell Hutchins or PaineWebber serves as investment adviser.
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T. Kirkham Barneby, 49, Vice President. Managing director and Chief
Investment Officer -- Quantitative Investments of Mitchell Hutchins. Prior to
September 1994, a Senior Vice President at Vantage Global Management. Prior to
June 1993, a Senior Vice President at Mitchell Hutchins. Mr. Barneby is also a
vice president of one other investment company for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Ann E. Moran, 37, Vice President and Assistant Treasurer. Vice president of
Mitchell Hutchins. Ms. Moran is also a vice president and assistant treasurer of
39 other investment companies for which Mitchell Hutchins or PaineWebber serves
as investment adviser.
Dianne E. O'Donnell, 42, 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 39 other investment companies for which
Mitchell Hutchins or PaineWebber serves as investment adviser.
Victoria E. Schonfeld, 44, Vice President. Managing director and general
counsel of Mitchell Hutchins. From April 1990 to May 1994 she was a partner in
the law firm of Arnold & Porter. Ms. Schonfeld is also a vice president and
assistant secretary of 39 other investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
Paul H. Schubert, 32, Vice President and Assistant Treasurer. Vice
president of Mitchell Hutchins. From August 1992 to August 1994, he was a vice
president at BlackRock Financial Management L.P. Prior to August 1992, he was an
audit manager with Ernst & Young LLP. Mr. Schubert is also a vice president and
assistant treasurer of 39 other investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
Martha J. Slezak, 32, Vice President and Assistant Treasurer. Vice
president of Mitchell Hutchins. From September 1991 to April 1992, a fundraising
director for a U.S. Senate campaign. Prior to September 1991, a tax manager with
Arthur Andersen & Co. LLP. Ms. Slezak is also a vice president and assistant
treasurer of 39 other investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Julian F. Sluyters, 34, Vice President and Treasurer. Senior vice president
and the director of the mutual fund finance division of Mitchell Hutchins. Prior
to 1991, he was an audit senior manager with Ernst & Young LLP. Mr. Sluyters is
also a vice president and treasurer of 39 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 39 other investment companies
for which Mitchell Hutchins or PaineWebber serves as investment adviser.
The Directors and officers of the Fund are directors, trustees and/or
officers of other mutual funds managed by Mitchell Hutchins or PaineWebber. The
addresses of the non-interested Trustees are as follows: Mr. Beaubien, Montague
Industrial Park, 101 Industrial Road, Box 746, Turner 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,
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Princeton, New Jersey 08542. The address of Mr. Minard and each of the officers
is 1285 Avenue of the Americas, New York, New York 10019.
By virtue of the management responsibilities assumed by Mitchell Hutchins
under the Investment Advisory and Administration Agreement, the Fund requires no
executive employees other than its officers, and none of whom devotes full time
to the affairs of the Fund. No officer, director or employee of Mitchell
Hutchins or any affiliate receives any compensation from the Fund for serving as
an officer or Director of the Fund. Directors and officers, as a group, owned
less than 1% of each of the outstanding Class A shares, Class B shares and
Class C shares as of May 1, 1995. The Fund pays each Director who is not an
officer, director or employee of Mitchell Hutchins or any of its affiliates an
annual retainer of $3,000, and $750 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 January 31, 1995, and the aggregate
amount of compensation paid to each such Director for the year ended December
31, 1994 by all funds in the former Kidder Family of Funds for which such
person is a Board member were as follows:
<TABLE>
<CAPTION>
(5)
(3) TOTAL COMPENSATION
(2) PENSION OR (4) FROM FUND AND 12
(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 $6,500 None None $80,700
William W. Hewitt, Jr. $6,500 None None $74,425
Thomas R. Jordan $6,500 None None $83,125
Carl W. Schafer $6,750 None None $84,575
</TABLE>
- ------------
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to approximately $173 for all Directors as a group.
** Represents total compensation paid to each Director during the calendar year
ended December 31, 1994.
MANAGER AND INVESTMENT ADVISER
Mitchell Hutchins acts as investment adviser and administrator of the Fund
pursuant to an Investment Advisory and Administration Agreement. As the Fund's
investment adviser, 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.
As the Fund's administrator, 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 Securities and Exchange
Commission (the 'SEC') and state Blue Sky authorities and generally assists in
all aspects of the Fund's
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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, compensation paid to
Mitchell Hutchins under the Fund's shareholder servicing and distribution plans
(the 'Plans'), fees of Directors who are not officers, directors, stockholders
or employees of Mitchell Hutchins, SEC fees and related expenses, state Blue Sky
qualification fees, charges of the custodian, transfer, dividend disbursing and
recordkeeping agents, charges and expenses of any outside service used for
pricing of the Fund's portfolio securities and calculating net asset value,
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.
Mitchell Hutchins 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
distribution fees and extraordinary expenses) exceed the expense limitation of
any state having jurisdiction over the Fund, Mitchell Hutchins will reimburse
the Fund for such excess expense. This expense reimbursement obligation is not
limited to the amount of Mitchell Hutchins' fees. Such expense reimbursement, if
any, will be estimated, reconciled and credited on a monthly basis. The Fund
believes that currently the most stringent state expense limitations are 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 net assets of the Fund. No
expense reimbursement was required for the fiscal year ended January 31, 1995.
The Investment Advisory and Administration Agreement shall continue for
successive annual periods ending on December 31 of each year, provided such
continuance is specifically approved at least annually by (i) the Board of
Directors of the Fund or by (ii) vote of the holders 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 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 at any time without penalty on 60 days' written notice, by the Board
of Directors of the Fund or by vote of the holders of a majority of the
outstanding voting securities of the Fund or by Mitchell Hutchins. The
Investment Advisory and Administration Agreement will terminate automatically in
the event of its assignment.
As compensation for Mitchell Hutchins' services rendered to the Fund, the
Fund pays a fee, computed daily and paid monthly, at an annual rate of .70% of
the average value of the Fund's daily net assets. For the fiscal year ended
January 31, 1995, from September 1, 1993 through the new fiscal year ended
January 31, 1994, and for the fiscal year ended August 31, 1993, the fees paid
to Kidder Peabody Asset Management, Inc., the Fund's predecessor investment
adviser and administrator, were $584,713, $365,451 and $1,039,765, respectively.
Mitchell Hutchins 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 willful misfeasance, bad faith
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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 Mitchell Hutchins/Kidder, Peabody ('MH/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 MH/KP mutual funds and other Mitchell Hutchins advisory clients.
DISTRIBUTOR
Mitchell Hutchins is the distributor of the Fund's shares and is acting on a
best efforts basis. See 'The Distributor' in the Fund's Prospectus.
Under the Plans adopted by the Fund pursuant to Rule 12b-1 under the Act,
the Fund pays Mitchell Hutchins monthly fees based on the value of the Fund's
average daily net assets attributable to Class A shares and Class B shares.
Under its terms, each Plan continues from year to year, so long as its
continuance is approved annually by vote of the Fund's Board of Directors,
including a majority of the Directors who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operation of the
Plan (the 'Independent Directors'). Neither Plan may be amended to increase
materially the amount to be spent for the services provided by Mitchell Hutchins
with respect to the related Class without approval of that class' shareholders,
and all material amendments of the Plan also must be approved by the Directors
in the manner described above. A Plan may be terminated with respect to a Class
at any time, without penalty, by vote of a majority of the Independent Directors
or by a vote of a majority of the outstanding voting securities (as defined in
the Act) represented by the Class on not more than 30 days' written notice to
Mitchell Hutchins.
Pursuant to each Plan, Mitchell Hutchins provides the Fund's Board of
Directors with periodic reports of amounts expended under the Plan and the
purpose for which the expenditures were made. The Directors believe that the
Fund's expenditures under the Plans benefit the Fund and its shareholders by
providing better shareholder services and by facilitating the sale and
distribution of shares. With respect to Class A shares, for the fiscal year
ended January 31, 1995, Kidder, Peabody, the Fund's predecessor distributor,
received $386,930, of which it is estimated that $0 was spent on advertising, $0
spent on printing and mailing of prospectuses to other than current
shareholders, $135,426 was spent on commission credits to branch offices for
payments of commissions to investment executives and $251,504 was spent on
overhead and other branch office distribution-related expenses. With respect to
Class B shares, for the fiscal year ended January 31, 1995, Kidder, Peabody
received $17,915, of which it is estimated that $0 was spent on advertising, $0
was spent on printing and mailing of prospectuses to other than current
shareholders, $8,241 was spent on commission credits to
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branch offices for payments of commissions to investment executives and $9,674
was spent on overhead and other branch office distribution-related expenses. The
term 'overhead and other branch office distribution-related expenses' represents
(1) the expenses of operating branch offices in connection with the sale of Fund
shares, including lease costs, the salaries and employee benefits of operations
and sales support personnel, utility costs, communications costs and the costs
of stationery and supplies, (2) the costs of client sales seminars, (3) travel
expenses of mutual fund sales coordinators to promote the sale of Fund shares
and (4) other incidental expenses relating to branch promotion of Fund sales.
Prior to implementation of the Choice Pricing SystemSM (effective on June
14, 1993), Kidder, Peabody also received the proceeds of contingent deferred
sales charges paid by investors in connection with certain redemptions of
shares. The amount of distribution expenses reimbursable by the Fund was reduced
by the amount of these proceeds.
CUSTODIAN AND TRANSFER, DIVIDEND AND RECORDKEEPING AGENT
State Street Bank and Trust Company ('State Street'), One Heritage Drive, North
Quincy, Massachusetts 02171, serves as the Fund's custodian. PFPC Inc., a
subsidiary of PNC Bank, National Association, whose principal address is 400
Bellevue Parkway, Wilmington, Delaware 19809, serves as the Fund's transfer,
dividend and recordkeeping agent. As custodian, State Street maintains custody
of the Fund's portfolio securities. As transfer agent, PFPC Inc. maintains the
Fund's official record of shareholders; as dividend 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
Deloitte & Touche LLP, located at Two World Financial Center, New York, New York
10281, acts as independent auditors for the Fund. In such capacity, Deloitte &
Touche LLP audits the Fund's financial statements.
LEGAL COUNSEL
Sullivan & Cromwell, located at 125 Broad Street, New York, New York 10004, acts
as counsel for the Fund.
PRINCIPAL SHAREHOLDERS
With respect to Class B shares, to the knowledge of the Fund, the following
person owned of record 5% or more of the Fund's Class B shares of common stock
on May 5, 1995:
Malcolm Richard Bramwell & Jane Ellen Bramwell, Trustees FBO Bramwell
Family Trust, c/o Mitchell Hutchins Asset Management Inc., 1285 Avenue of
the Americas, New York, New York 10019, owned 6.06% of the Class'
outstanding shares.
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With respect to Class C shares, to the knowledge of the Fund, the following
persons owned of record 5% or more of the Fund's Class C shares of common stock
on May 5, 1995:
Francis J. Welsh, Trustee U/W Patricia Welsh, Claudia Brewer, Gregory
Welsh, Paul Welsh Co-Trustees, c/o Mitchell Hutchins Asset Management Inc.,
1285 Avenue of the Americas, New York, New York 10019, owned 10.53% of the
Class' outstanding shares.
Anthony Woodruff, Trustee, Kidder, Peabody & Co. Savings Plan/401(k),
c/o Mitchell Hutchins Asset Management Inc., 1285 Avenue of the Americas,
New York, New York 10019, owned 10.48% of the Class' outstanding shares.
The Fund is not aware whether or to what extent shares owned of record also
are owned beneficially.
REDEMPTION 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 (the '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.
DETERMINATION OF NET ASSET VALUE
The Fund computes each Class' net asset value as of the close of regular trading
(currently 4:00 p.m., Eastern time) on the NYSE on each Business Day, which is
defined as each Monday through Friday when the NYSE is open. The NYSE is
currently closed on the observance of the following holidays: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving and Christmas. Net asset value per share of a Class is
computed by dividing the value of the Fund's total assets less liabilities
attributable to that Class by the total number of shares outstanding of that
Class. The Fund's expenses and fees, including Mitchell Hutchins' fee, are
accrued daily and taken into account in determining net asset value.
EXCHANGE PRIVILEGE
As discussed in the Prospectus, eligible shares of the Fund may be exchanged for
shares of the corresponding Class of most other PaineWebber or Mitchell
Hutchins/Kidder, Peabody mutual funds. Shareholders will receive at least 60
days' notice of any termination or material modification of the exchange offer,
except no notice need be given of an amendment whose only material effect is to
reduce the exchange fee and no notice need be given if, under extraordinary
circumstances, either redemptions are suspended under the circumstances
described below or a Fund temporarily delays or ceases the sales of its shares
because it is unable to invest amounts effectively in accordance with the Fund's
investment objective, policies and restrictions.
16
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TAXES
The Fund qualified for the fiscal year ended January 31, 1995, as a 'regulated
investment company' under the Internal Revenue Code of 1986, as amended (the
'Code'), and intends to remain qualified. As a regulated investment company, the
Fund pays no Federal income tax on net income and net realized capital gains
which it distributes to shareholders, provided at least 90% of its net
investment income and net short-term capital gains are distributed each year. To
qualify for this treatment, the Fund must, among other things, (a) derive at
least 90% of its annual gross income from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities, and other income (including but not limited to gains from options
and futures contracts) derived with respect to the Fund's business of investing
in such stocks or securities; (b) derive less than 30% of its annual gross
income from the sale or other disposition of stock or securities held for fewer
than three months; and (c) diversify its holdings so that, at the end of each
fiscal quarter, (i) 50% of the market value of the Fund's assets is represented
by cash, U.S. Government securities and other securities limited, in respect of
any one issuer, to an amount not greater than 5% of the Fund's assets and 10% of
the outstanding voting securities of such issuer and (ii) not more than 25% of
the value of its assets is invested in the securities of any one issuer (other
than U.S. Government securities).
Special rules contained in the Code apply when a Fund shareholder (1)
disposes of shares of the Fund through a redemption or exchange within 90 days
of purchase and (2) subsequently acquires shares of another PaineWebber or
Mitchell Hutchins/Kidder, Peabody mutual fund on which a sales charge normally
is imposed without paying a sales charge in accordance with the exchange
privilege described in the Prospectus. In these cases, any gain on the
disposition of the Fund shares will be increased, or loss decreased, by the
amount of the sales charge paid when the shares were acquired, and that amount
will increase the adjusted basis of the fund shares subsequently acquired. In
addition, if shares of the Fund are purchased within 30 days of redeeming shares
at a loss, the loss will not be deductible and instead will increase the basis
of the newly purchased shares.
The Fund may also be subject to state or local tax in certain states where
it is deemed to be doing business. Further, in those states, the tax treatment
of the Fund and of shareholders of the Fund with respect to distributions by the
Fund may differ from Federal tax treatment. Distributions to shareholders may be
subject to additional state and local tax.
Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually by the Fund's transfer agent. Shareholders are
urged to consult their own tax advisers regarding specific questions as to
Federal, state or local tax.
DETERMINATION OF PERFORMANCE
As noted in the Prospectus, the Fund, from time to time, may quote its
performance, in terms of the Classes' total returns, in reports or other
communications to shareholders or in advertising material. To the extent any
advertisement or sales literature of the Fund describes the expenses or
performance of any Class, it will also disclose this information for the other
Classes.
17
<PAGE>
- --------------------------------------------------------------------------------
A Class' average annual total return figures described in the Prospectus
are computed according to a formula prescribed by the SEC. The formula can be
expressed as follows:
P(1 + T)'pp'n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = Ending Redeemable Value of a hypothetical $1,000 investment made at
the beginning of a 1-, 5- or 10-year period at the end of a 1-, 5-
or 10-year period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period.
Set forth below is the average annual total return information for the
periods indicated expressed as a percentage:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------------------------------------- -------------- --------------
MAXIMUM SALES CHARGE
--------------------------------------------
INCLUDED EXCLUDED
-------------------- --------------------
<S> <C> <C> <C> <C>
Fiscal year ended January
31, 1995............... (9.80)% (4.29)% (4.75)% (3.74)%
5 years ended January 31,
1995................... 7.18 8.46 N/A N/A
Inception (November 22,
1985) through January
31, 1995............... 8.81 9.51 N/A N/A
Inception (June 14, 1993)
through January 31,
1995................... N/A N/A (0.88) 0.15
</TABLE>
Each Class' performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of a Class' performance for any specified period in the future.
In addition, because a Class' performance will fluctuate, it may not provide a
basis for comparing an investment in a Class with certain bank deposits or other
investments that pay a fixed yield for a stated period of time.
GENERAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain all
the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the SEC under the Securities Act
of 1933 and the Act, to which reference is hereby made.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal year ended January 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.
18
<PAGE>
<TABLE>
<S> <C>
- ---------------------------------------------
Contents
- ---------------------------------------------
Investment Objective and Policies 2
- ---------------------------------------------
Portfolio Transactions and Turnover 7
- ---------------------------------------------
Management of the Fund 10
- ---------------------------------------------
Principal Shareholders 15
- ---------------------------------------------
Redemption of Shares 16
- ---------------------------------------------
Determination of Net Asset Value 16
- ---------------------------------------------
Exchange Privilege 16
- ---------------------------------------------
Taxes 17
- ---------------------------------------------
Determination of Performance 17
- ---------------------------------------------
General Information 18
- ---------------------------------------------
Financial Statements 18
- ---------------------------------------------
</TABLE>
Mitchell
Hutchins/
Kidder,
Peabody
Equity
Income
Fund,
Inc.
Statement of
Additional
Information
June 1, 1995
<PAGE>
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as 'D'
The section mark symbol shall be expressed as 'sm'
A superior number shall be preceded by 'pp'
