<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 23, 1995
SECURITIES ACT FILE NO. 2-98557
INVESTMENT COMPANY FILE NO. 811-4332
________________________________________________________________________________
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 13 [x]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
AMENDMENT NO. 15 [x]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
1285 AVENUE OF THE AMERICAS 10019
NEW YORK, NEW YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 713-2000
DIANNE E. O'DONNELL
MITCHELL HUTCHINS ASSET MANAGEMENT INC.
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
JOHN E. BAUMGARDNER, JR., ESQ.
SULLIVAN & CROMWELL
125 BROAD STREET
NEW YORK, NEW YORK 10004
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE
BOX)
[ ] IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (b) OF RULE 485
[ ] ON PURSUANT TO PARAGRAPH (b) OF RULE 485
[x] 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (a)(1) OF RULE 485
[ ] ON PURSUANT TO PARAGRAPH (a)(1) OF RULE 485
[ ] 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (a)(2) OF RULE 485
[ ] ON PURSUANT TO PARAGRAPH (a)(2) OF RULE 485.
The Registrant has registered an indefinite number of its shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940. The notice required by such rule for the Registrant's most recent
fiscal year was filed on March 31, 1995.
________________________________________________________________________________
________________________________________________________________________________
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
--------------------------------------------------------- ------------------------------------------------------
<S> <C>
PART A
1. Cover Page........................................... Cover Page
2. Synopsis............................................. Fee Table; Highlights
3. Condensed Financial Information...................... Financial Highlights; Performance Data
4. General Description of Registrant.................... Cover Page; Highlights; Investment Objective and
Policies
5. Management of the Fund............................... Cover Page; Fee Table; Management of the Fund;
Investment Objective and Policies; Custodian and
Transfer, Dividend Disbursing and Recordkeeping
Agent
5A. Management's Discussion of Fund Performance.......... Not Applicable (in the annual report)
6. Capital Stock and Other Securities................... Cover Page; Dividends, Distributions and Taxes;
General Information
7. Purchase of Securities Being Offered................. Cover Page; Fee Table; Management of the Fund;
Purchase of Shares; Determination of Net Asset
Value; Exchange Privilege; The Distributor
8. Redemption or Repurchase............................. Redemption of Shares
9. Pending Legal Proceedings............................ Not Applicable
PART B
10. Cover Page........................................... Cover Page
11. Table of Contents.................................... Back Cover Page
12. General Information and History...................... Not Applicable
13. Investment Objective and Policies.................... Investment Objective and Policies; Investment
Objective and Policies (in the prospectus)
14. Management of the Fund............................... Management of the Fund
15. Control Persons and Principal Holders of
Securities........................................ Management of the Fund; Principal Shareholders
16. Investment Advisory and Other Services............... Management of the Fund
17. Brokerage Allocation................................. Investment Objective and Policies; Portfolio
Transactions and Turnover
18. Capital Stock and Other Securities................... General Information (in the prospectus)
19. Purchase, Redemption and Pricing of Securities Being
Offered........................................... Redemption of Shares; Exchange Privilege;
Determination of Net Asset Value; Statement of
Assets and Liabilities
20. Tax Status........................................... Taxes
21. Underwriters......................................... Management of the Fund
22. Calculations of Performance Data..................... Determination of Performance
23. Financial Statements................................. Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS MAY 31, 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. 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.'
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 May 31, 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.
--------------------------------------------------------------------------------
INVESTMENT ADVISER, ADMINISTRATOR AND DISTRIBUTOR
Mitchell Hutchins Asset Management Inc.
--------------------------------------------------------------------------------
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.
<PAGE>
--------------------------------------------------------------------------------
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
------- ------- -------
<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
------- ------- -------
<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
------- ------- -------
Total Fund Operating Expenses............................ 1.63% 2.13% 1.13%
------- ------- -------
------- ------- -------
</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. The 12b-1
fees shown in the table, however, have been restated based on these rates.
During the Fund's fiscal year ended January 31, 1995, the Fund actually paid
aggregate Rule 12b-1 fees with respect to Class A shares and Class B shares in
an amount equal to, on an annualized basis, .50% and 1.00%, respectively, of the
value of such Class' average daily net assets. 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
--------- ------- ------- ------- --------
<S> <C> <C> <C> <C>
Class A........................................................... $ 73 $ 106 $ 141 $240
Class B........................................................... $ 22 $ 67 $ 114 $246
Class C........................................................... $ 12 $ 36 $ 62 $137
</TABLE>
------------
* 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
<PAGE>
--------------------------------------------------------------------------------
HIGHLIGHTS
<TABLE>
<S> <C>
------------------------------------------------------------------------------------------------------------------
-------------------
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.'
------------------------------------------------------------------------------------------------------------------
-------------------
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.'
------------------------------------------------------------------------------------------------------------------
-------------------
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 SystemSM, 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
<PAGE>
--------------------------------------------------------------------------------
<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.'
------------------------------------------------------------------------------------------------------------------
-------------------
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
Kidder, Peabody 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
<PAGE>
--------------------------------------------------------------------------------
<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.'
------------------------------------------------------------------------------------------------------------------
-------------------
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.'
------------------------------------------------------------------------------------------------------------------
-------------------
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
<PAGE>
--------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------
YEARS ENDED AUGUST 31,
-----------------------------------------------------------------------------------------------
1986`D' 1987 1988 1989 1990 1991 1992 1993
-----------------------------------------------------------------------------------------------
<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
-----------------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------
Total increase
(decrease) from
investment
operations............ 3.17 3.96 (4.02) 4.67 (0.04) 6.74 1.72 1.70
-----------------------------------------------------------------------------------------------
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) -- -- -- -- --
-----------------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Total return#.......... 27.36%* 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 does not reflect the effects of a sales charge, and is
calculated by giving effect to the reinvestment of dividends on the dividend
payment date.
* Annualized
Note 1 The Fund changed its fiscal year end from August 31 to January 31.
6
<PAGE>
--------------------------------------------------------------------------------
<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>
$27.42 $28.20 $24.79 $27.42 $28.26 $24.87
--------------------------------------------------- ------------------------------------------
0.07 0.11 0.29 0.13 0.19 0.49
0.71 (0.01) (1.57) 0.71 0.03 (1.53)
--------------------------------------------------- ------------------------------------------
0.78 0.10 (1.28) 0.84 0.22 (1.04)
--------------------------------------------------- ------------------------------------------
-- (0.24) (0.28) -- (0.34) (0.50)
-- (3.27) (4.62) -- (3.27) (4.62)
--------------------------------------------------- ------------------------------------------
-- (3.51) (4.90) -- (3.61) (5.12)
--------------------------------------------------- ------------------------------------------
$28.20 $24.79 $18.61 $28.26 $24.87 $18.71
--------------------------------------------------- ------------------------------------------
--------------------------------------------------- ------------------------------------------
13.14%* 1.47%* (4.75)% 14.15%* 2.48%* (3.74)%
$ 557 $ 1,511 $ 1,622 $4,730 $ 5,319 $ 3,454
1.94%* 2.14%* 2.13% .97%* 1.15%* 1.13%
1.34%* 0.64%* 1.22% 2.31%* 1.63%* 2.22%
66.89% 28.27% 178.85% 66.89% 28.27% 178.85%
</TABLE>
7
<PAGE>
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
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 net 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 better
by Standard & Poor's Corporation. 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 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 Mitchell
Hutchins 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
8
<PAGE>
--------------------------------------------------------------------------------
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 purchase securities from the Fund with
an agreement to sell such securities back to 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 fundamental policy of the Fund that such
repurchase agreements may extend for no longer than one week.
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
9
<PAGE>
--------------------------------------------------------------------------------
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 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
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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.
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 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
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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.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by Mitchell Hutchins, investments of the
type the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by Mitchell Hutchins are prepared to
invest in, or desire to dispose of, the same security, available investments or
opportunities for sales are allocated in a manner believed by Mitchell Hutchins
to be equitable to each. In some cases, this procedure may adversely affect the
price paid or received by the Fund or the size of the position obtained or
disposed of by the Fund.
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, on an annualized basis,
represented 1.63%, 2.13% and 1.13%, respectively, of their average daily net
assets. Each Class bears its own expenses, which generally include all costs not
specifically borne by Mitchell Hutchins. Included among a Class' expenses are
costs incurred in connection with the Class' and Fund's organization; investment
advisory and management fees; any service and/or distribution fees; fees for
necessary professional and brokerage services; fees for any pricing service used
in connection with the valuation of shares; the costs of regulatory compliance;
and a portion of the costs associated with maintaining the Fund's legal
existence and corresponding with shareholders of the Fund. 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.
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 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.
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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.
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.
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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.
Certificate holders of unit investment trusts ('UITs') sponsored by
PaineWebber may acquire Class A shares of any Fund without regard to minimum
investment requirements and without sales charges by electing to have dividends
and other distributions from their UIT investment automatically invested in
Class A shares.
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 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.
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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 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 Mitchell
Hutchins 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
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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 seven days of the receipt of a
redemption request. 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 Funds'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 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.'
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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.
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 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
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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 once daily as of 4:00 p.m.,
Eastern time, Monday through Friday, except that net asset value is not computed
on a day in which no orders to purchase, sell, exchange or redeem Fund shares
have been received, any day on which there is not sufficient trading in the
Fund's portfolio securities that the Fund's net asset values per share might be
materially affected by changes in the value of such portfolio securities or on
days on which the NYSE is not open for trading. The days on which net asset
value is determined are the Fund's business days. 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 Code imposes a 4% non-deductible excise tax on mutual funds with
respect to capital gains and ordinary income distributions, above certain
permitted levels, that are distributed by a fund in such a way that the
distributions are not taxed to shareholders until the calendar year following
the calendar year in which the gain or income is earned by the Fund. 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
21
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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. Mitchell
Hutchins has appointed PaineWebber as the exclusive dealer for the sale of the
Fund's shares.
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% (consisting of a .25%
service fee and a .25% distribution fee) 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.
Mitchell Hutchins is paid monthly fees by the Fund in connection with 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, is paid to Mitchell
Hutchins calculated at the annual rate of .25% of the value of the average daily
net assets of the Fund attributable to Class B shares. In addition, pursuant to
the Class B Plan, the Fund pays to Mitchell Hutchins a monthly distribution fee
at the annual rate of .75% of the Fund's average daily net assets attributable
to Class B shares.
Under all the Plans, Mitchell Hutchins uses the service fees primarily to
pay PaineWebber for shareholder servicing, currently at the annual rate of .25%
of the aggregate investment amounts maintained in the Fund by PaineWebber
clients. PaineWebber passes on a portion of these fees to its investment
executives to compensate them for shareholder servicing that they perform and
retains the remainder to offset its own expenses in servicing and maintaining
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shareholder accounts. These expenses may include costs of the PaineWebber branch
office in which the investment executive is based, such as rent, communications
equipment, employee salaries and other overhead costs.
Mitchell Hutchins uses the distribution fees under the Plans to offset the
commissions it pays to PaineWebber for selling the Funds' shares. PaineWebber
passes on to its investment executives a portion of these commissions and
retains the remainder to offset its expenses in selling shares. These expenses
may include the branch office costs noted above. In addition, Mitchell Hutchins
uses the distribution fees under the Plans to offset the Fund's marketing costs
attributable to each Class, such as preparation of sales literature, advertising
and printing and distributing prospectuses and other shareholder materials to
prospective investors. Mitchell Hutchins also may use the distribution fees to
pay additional compensation to PaineWebber and other costs allocated to Mitchell
Hutchins' and PaineWebber's distribution activities, including employee
salaries, bonuses and other overhead expenses.
Mitchell Hutchins expects that, from time to time, PaineWebber will pay
shareholder servicing fees and sales commissions to its investment executives at
the time of sale of Class B shares of the Fund. If PaineWebber makes such
payments, it will retain the service and distribution fees on Class B shares
until it has been reimbursed and thereafter will pass a portion of the service
and distribution fees on Class B shares on to its investment executives.
Mitchell Hutchins receives the proceeds of the initial sales charge paid
upon the purchase of Class A shares, and may use these proceeds for any of the
distribution expenses described above.
During the period they are in effect, the Plans and related distribution
contracts pertaining to each Class of shares ('Distribution Contracts') obligate
the Fund to pay service and distribution fees to Mitchell Hutchins as
compensation for its service and distribution activities, not as reimbursement
for specific expenses incurred. Thus, even if Mitchell Hutchins' expenses exceed
its service or distribution fees for the Fund, the Fund will not be obligated to
pay more than those fees, and, if Mitchell Hutchins' expenses are less than such
fees, it will retain its full fees and realize a profit. The Fund will pay the
service and distribution fees to Mitchell Hutchins until either the applicable
Plan or Distribution Contract is terminated or not renewed. In that event,
Mitchell Hutchins' expenses in excess of service and distribution fees received
or accrued through the termination date will be Mitchell Hutchins' sole
responsibility and not obligations of the Fund. In their annual consideration of
the continuation of the Fund's Plans, the directors will review the Plan and
Mitchell Hutchins' corresponding expenses for each Class separately from the
Plan and corresponding expenses for the other Class.
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.
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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 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 (0.30% 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.
For the period June 14, 1993 (commencement date of the Class B Plan) to
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 B Plan of $0, $4,400 and $18,908, of which $700, $4,400 and
$17,915 were recovered in the form of payments made by the Fund to Kidder,
Peabody at the rate provided in the Class B Plan. There was from June 14, 1993
through the fiscal year ended January 31, 1995, an unreimbursed balance owed to
Kidder, Peabody in the amount of $993 (0.06% of the net assets of Class B shares
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 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 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
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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 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.
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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.
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<PAGE>
No person has been authorized to give any information
or to make any representations not contained in this
Prospectus, or in the Statement of Additional Information
incorporated into this Prospectus by reference, in connection with
the offering made by this Prospectus and, if given or made, any such
information or representations must not be relied upon as having
been authorized by the Fund or its distributor. This Prospectus does
not constitute an offering by the Fund or by its distributor in any
jurisdiction in which 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 10
------------------------------------
Management of the Fund 11
------------------------------------
Purchase of Shares 12
------------------------------------
Redemption of Shares 16
------------------------------------
Other Services and Information 17
------------------------------------
Determination of Net Asset Value 18
------------------------------------
Exchange Privilege 18
------------------------------------
Dividends, Distributions and Taxes 20
------------------------------------
The Distributor 22
------------------------------------
Performance Information 24
------------------------------------
Custodian and Transfer, Dividend
Disbursing and Recordkeeping
Agent 25
------------------------------------
General Information 25
------------------------------------
</TABLE>
MITCHELL
HUTCHINS/
KIDDER,
PEABODY
EQUITY
INCOME
FUND,
INC.
PROSPECTUS
MAY 31, 1995
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION MAY 31, 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 May 31, 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.
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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;
(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.
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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 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 because of the imperfect
4
<PAGE>
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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.
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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
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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 and 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 explicit 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. For the fiscal year ended January 31, 1995, the Fund directed no
portfolio transactions to brokers chosen because they provided research
services. 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. The Fund will not purchase portfolio securities at a higher price or
sell such securities at a lower price in connection with transactions effected
with a dealer, acting as principal, who furnishes research services to Mitchell
Hutchins than would be the case if no weight were given by Mitchell Hutchins to
the dealer's furnishing of such services. 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
8
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connection with other funds or accounts that Mitchell Hutchins advises may be
used in advising the Fund.
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 years ended
August 31, 1993 and August 31, 1992, the Fund paid $382,940, $101,945, $150,217
and $121,830, respectively, in brokerage commissions with respect to securities
transactions. The increase in commissions 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, $21,700 and $43,950, 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 years ended August 31, 1993 and August 31,
1992, the Fund paid $0 $0, $0 and $0, respectively, in 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
Agreementl 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
9
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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
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. Mr. Minard is chairman of
Mitchell Hutchins, chairman of the board of Mitchell Hutchins Institutional
Investors Inc. and a director of PaineWebber. Prior to 1993, Mr. Minard was
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
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director of Ecova Corporation, a toxic waste treatment firm. Prior to May 1990,
principal of Rockefeller and Company, Inc., manager of investments. Mr. Schafer
is a director or trustee of 12 other investment companies for which Mitchell
Hutchins or PaineWebber serves as investment adviser.
T. Kirkham Barneby, 49, Vice President. Mr. Barneby is a managing director
and Chief Investment Officer -- Quantitative Investments of Mitchell Hutchins.
Prior to 1994, Mr. Barneby was a at Vantage Global
Management. Prior to 1993, Mr Barneby was a Senior Vice President at
Mitchell Hutchins. Mr. Barneby is also a vice president of 1 other investment
company for which Mitchell Hutchins or PaineWebber serves as investment adviser.
Ann E. Moran, 37, Vice President and Assistant Treasurer. Ms. Moran is a
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. Ms. O'Donnell is a
senior vice president and senior associate 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. Ms. Schonfeld is a 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. Prior to April 1990, she
was a partner in the law firm of Shereff, Friedman, Hoffman & Goodman. 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. Mr. Schubert
is a 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. Ms. Slezak is
a vice president of Mitchell Hutchins. From September 1991 to April 1992, she
was a fundraising director for a U.S. Senate campaign. Prior to September 1991,
she was a tax manager with Arthur Andersen & Co. 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. Mr. Sluyters is a
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. Mr. Todd is a
first vice president and associate general counsel of Mitchell Hutchins. Prior
to 1993, he was 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.
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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,
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 the outstanding Class C shares as of May 1, 1995 and owned less
than 1% of the outstanding Class A shares and Class B 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 $1,000, and
$375 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 $ 6,563 None None $ 80,700
William W. Hewitt, Jr. $ 6,563 None None $ 74,425
Thomas R. Jordan $ 6,562 None None $ 83,125
Carl W. Schafer $ 6,562 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
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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 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 years ended August 31, 1993 and
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August 31, 1992, the fees paid to Kidder Peabody Asset Management, Inc., the
Fund's predecessor investment adviser and administrator, were $584,713,
$365,451, $1,039,765 and $881,093, 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 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.
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 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
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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, 5999 Dry Oak Drive, San Jose, CA 95120-1768, owned 6.06% of
the Class' outstanding shares.
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, 7 Heights Road, Plandome, NY 11030-1412,
owned 10.53% of the Class' outstanding shares.
15
<PAGE>
--------------------------------------------------------------------------------
Anthony Woodruff, Trustee, Kidder, Peabody & Co. Savings Plan/401(k),
P.O. Box 795, Dorset, VT 05251-0795, 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 once daily as of 4:00 p.m.,
Eastern time, Monday through Friday, except that net asset value is not computed
on a day in which no orders to purchase, sell, exchange or redeem Fund shares
have been received, any day on which there is not sufficient trading in the
Fund's portfolio securities that the Fund's net asset values per share might be
materially affected by changes in the value of such portfolio securities or on
days on which the NYSE is not open for trading. The NYSE is currently closed on
the following holidays (observed): New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. If one of
these holidays falls on a Saturday or Sunday, the NYSE will be closed on the
preceding Friday or the following Monday, respectively. The days on which net
asset value is determined are the Fund's business days. 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
<PAGE>
--------------------------------------------------------------------------------
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).
For Federal income tax purposes, the Fund intends to treat its stock index
futures contracts as 'designated hedges' of the underlying portfolio stocks.
Accordingly, gains realized from the futures contracts will be netted against
losses on the underlying portfolio stocks and any gains offset by such losses
will not be treated as gains from securities held for less than three months and
thus will not be limited to 30% of the Fund's gross income for the taxable year
under the requirements for qualification as a regulated investment company
described above. If the Fund is unable to treat such positions as designated
hedges or such treatment is successfully challenged by the Internal Revenue
Service, the Fund might not qualify as a regulated investment company, and
consequently would be subject to Federal income tax on its net income and
capital gains at normal corporate rates.
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 will generally be subject to an excise tax of 4% of the amount of
any income or capital gain distributed to shareholders on a basis such that such
income or gain is not taxable to shareholders in the calendar year in which it
was earned by the Fund.
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
17
<PAGE>
--------------------------------------------------------------------------------
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.
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.
18
<PAGE>
--------------------------------------------------------------------------------
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.
19
<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 18
---------------------------------------------
General Information 19
---------------------------------------------
Financial Statements 19
---------------------------------------------
</TABLE>
MITCHELL
HUTCHINS/
KIDDER,
PEABODY
EQUITY
INCOME
FUND,
INC.
STATEMENT OF
ADDITIONAL
INFORMATION
MAY 31, 1995
<PAGE>
PAINEWEBBER AND MITCHELL HUTCHINS/KIDDER, PEABODY MUTUAL FUNDS
PAINEWEBBER OFFERS A FAMILY OF 35 MUTUAL
FUNDS WHICH ENCOMPASS A DIVERSIFIED
RANGE OF INVESTMENT GOALS. INVESTORS MAY
EXCHANGE THEIR FUND SHARES WITH OTHER
FUNDS WITHIN THE FAMILY.
INCOME FUNDS
MH/KP Adjustable Rate Government Fund
MH/KP Global Fixed Income Fund
MH/KP Government Income Fund
MH/KP Intermediate Fixed Income Fund
PW Global Income Fund
PW High Income Fund
PW Investment Grade Income Fund
PW Short-Term U.S. Government Income Fund
PW Short-Term U.S. Government Income Fund for Credit Unions
PW Strategic Income Fund
PW U.S. Government Income Fund
TAX-FREE INCOME FUNDS
MH/KP MUNICIPAL BOND FUND
PW CALIFORNIA TAX-FREE INCOME FUND
PW MUNICIPAL HIGH INCOME FUND
PW NATIONAL TAX-FREE INCOME FUND
PW NEW YORK TAX-FREE INCOME FUND
GROWTH FUNDS
MH/KP EMERGING MARKETS EQUITY FUND
MH/KP GLOBAL EQUITY FUND
MH/KP SMALL CAP GROWTH FUND
PW ATLAS GLOBAL GROWTH FUND
PW BLUE CHIP GROWTH FUND
PW CAPITAL APPRECIATION FUND
PW COMMUNICATIONS & TECHNOLOGY GROWTH FUND
PW EUROPE GROWTH FUND
PW GROWTH FUND
PW REGIONAL FINANCIAL GROWTH FUND
PW SMALL CAP VALUE FUND
GROWTH AND INCOME FUNDS
MH/KP ASSET ALLOCATION FUND
MH/KP EQUITY INCOME FUND
PW ASSET ALLOCATION FUND
PW GROWTH AND INCOME FUND
PW GLOBAL ENERGY FUND
PW GLOBAL GROWTH AND INCOME FUND
PW UTILITY INCOME FUND
PAINEWEBBER MONEY MARKET FUND
------------------
'c'1995 PAINEWEBBER INCORPORATED
[Recycled Logo] Printed on
Recycled Paper
MITCHELL HUTCHINS/
KIDDER, PEABODY
EQUITY INCOME
FUND, INC.
ANNUAL REPORT
January 31, 1995
<PAGE>
--------------------------------------------------------------------------------
March 13, 1995
Dear Shareholder,
During the year ended January 31, 1995, the United States economy exhibited
steady growth. In a series of monetary tightenings that began early in 1994, the
Federal Reserve Board raised the benchmark Federal Funds rate, the rate banks
charge each other for overnight borrowing, six times in 1994 for a total
increase of 2.5%. These increases, which were implemented to moderate economic
expansion and forestall inflation, triggered stock and bond market volatility
throughout most of 1994. The Federal Reserve tightened another 0.5% on February
1, 1995, increasing the Federal Funds rate to 6.0%.
Productivity gains in the workplace and the increased competitiveness of United
States corporations in the global marketplace contributed to the low inflation
and steady growth which characterized the U.S. economy during the year ended
January 31, 1995. Unemployment continued to decline, and retail sales remained
brisk, sparked by strengthened consumer confidence and an upward trend in
personal income. However, side effects of higher interest rates, including a
decline in single family housing starts, crept into economic data during the
latter half of 1994. As we move into the new year, the economy remains
healthy -- although it is not yet clear what the full impact of higher interest
rates will be on economic growth.
PORTFOLIO REVIEW
As you are probably aware, the past year has been a very difficult time for both
stock and bond markets. The Federal Funds rate increases triggered a substantial
rise in both short- and long-term interest rates, leading to one of the worst
years in history for bond markets. Weakness in the fixed income markets quickly
spread to stocks. The Fund reacted by assuming a defensive position,
diversifying and riding out the storm. The Fund's total return for the twelve
months ended January 31, 1995 without deducting sales charges was (4.29)% for
Class A shares, (4.75)% for Class B shares and (3.74)% for Class C shares. The
Fund's total return for this period after deducting the maximum applicable sales
charges was (9.80)% for Class A shares, (4.75)% for Class B shares and (3.74)%
for Class C shares. In comparison, the Standard & Poor's 500 Stock Index had a
total return of 0.52% for this period. The Fund's underperformance was due
primarily to weakness in its technology holdings. We believe this sector offers
very favorable long-term prospects, despite suffering disruptive short-term
profit taking over the final three months of the fiscal year. Net asset values
for the Fund's Class A, B and C shares were $18.72, $18.61 and $18.71,
respectively, as of January 31, 1995.
NEW MANAGEMENT
Effective February 13, 1995, as a result of an asset purchase transaction by
and among Kidder, Peabody Group Inc., its parent, General Electric Company, and
Paine Webber Group Inc., the investment management for the Fund was transferred
to Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins').
Mitchell Hutchins, a wholly owned investment management subsidiary of
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
PaineWebber Incorporated, provides investment advisory and portfolio management
services to individuals, pension and endowment funds, trusts and institutions.
As of January 31, 1995, Mitchell Hutchins was adviser or sub-adviser to 36
investment companies with 66 separate portfolios and aggregate assets of
approximately $22 billion.
Although the name has been changed to Mitchell Hutchins/Kidder, Peabody Equity
Income Fund, Inc., the investment objective remains the same: to provide
reasonably high current dividend and interest income and to obtain long-term
capital appreciation. T. Kirkham Barneby, Managing Director and Chief Investment
Officer of Quantitative Investments of Mitchell Hutchins, has assumed day-to-day
portfolio management responsibility for the Fund. Mitchell Hutchins' Yield
Enhanced Investment Strategy (Y.E.S.) will be utilized in the Fund's investment
approach. Y.E.S. is a disciplined, quantitative approach to equity management
that focuses on dividend yield. This investment style attempts to capture market
price appreciation and to generate above-market dividend income, while incurring
less risk than the market (as measured by the Standard & Poor's 500 Stock
Index).
We are excited by the addition of the Kidder, Peabody Funds to the PaineWebber
Funds. Together, our expanded capabilities should enable us to provide enhanced
investment services to our clients.
MARKET OUTLOOK
As we move into a new year, the economy remains healthy. We see corporate
profits increasing by another 10% on top of the 21% advance posted in 1994. The
political environment for investing may be more favorable in the months ahead.
In addition, increased demand for United States securities could result from the
Mexican peso devaluation crisis. This event has underscored the volatility and
risks of investing in emerging markets.
Thank you for your participation in the Mitchell Hutchins/Kidder, Peabody Equity
Income Fund, Inc. We value you as a shareholder and as a client and welcome any
comments or questions you may have.
Sincerely,
<TABLE>
<S> <C>
FRANK P.L. MINARD T. KIRKHAM BARNEBY
FRANK P.L. MINARD T. KIRKHAM BARNEBY
Chairman, Managing Director and
Mitchell Hutchins Asset Management Inc. Chief Investment Officer of
Quantitative Investments,
Mitchell Hutchins Asset Management Inc.
</TABLE>
--------------------------------------------------------------------------------
2
<PAGE>
--------------------------------------------------------------------------------
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
--------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE FUND
AND THE STANDARD & POOR'S 500 INDEX
The following graph depicts the performance of the Mitchell Hutchins/Kidder,
Peabody Equity Income Fund, Inc. versus the Standard & Poor's 500 Index. It is
important to note the Mitchell Hutchins/Kidder, Peabody Equity Income Fund, Inc.
is a professionally managed mutual fund while the index is not available for
investment and is unmanaged. The comparison is shown for illustrative purposes
only.
<TABLE>
<CAPTION>
[GRAPH]
MH/KP EQUITY INCOME FUND, INC.; CLASS A S&P 500 INDEX
<S> <C> <C>
11/22/85 9,427 10,000
--------------------------------------------------------------------------
12/31/85 9,689 10,550
--------------------------------------------------------------------------
12/31/86 11,277 12,514
--------------------------------------------------------------------------
12/31/87 11,712 13,162
--------------------------------------------------------------------------
12/31/88 11,842 15,334
--------------------------------------------------------------------------
12/31/89 15,268 20,177
--------------------------------------------------------------------------
12/31/90 15,568 19,549
--------------------------------------------------------------------------
12/31/91 22,729 25,479
--------------------------------------------------------------------------
12/31/92 22,080 27,418
--------------------------------------------------------------------------
12/31/93 22,461 30,169
--------------------------------------------------------------------------
12/31/94 21,428 30,578
--------------------------------------------------------------------------
1/31/95 21,742 31,321
</TABLE>
Past performance is not predictive of future performance.
The performance of the other classes will vary from the performance of the class
shown based on the difference in sales charges and fees paid by shareholders
investing in different classes.
The investment return and principal value of an investment in the Fund will
fluctuate, so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
AVERAGE ANNUAL RETURN
<TABLE>
<CAPTION>
% RETURN WITHOUT DEDUCTING % RETURN AFTER DEDUCTING
MAXIMUM SALES CHARGES MAXIMUM SALES CHARGES
------------------------------------------- ---------------------------
CLASS CLASS
------------------------------------------- ---------------------------
A* B** C*** A* B**
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------------
Twelve Months Ended 1/31/95 - 4.29% - 4.75% - 3.74% - 9.80% - 4.75%
-------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 1/31/95 8.46% N/A N/A 7.18% N/A
-------------------------------------------------------------------------------------------------------------------------------
Commencement of Operations Through 1/31/95+ 9.51% - 0.88% 0.15% 8.81% - 0.88%
-------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C>
C***
<S> <C>
-------------------------------------------------------
Twelve Months Ended 1/31/95 - 3.74%
-------------------------------------------------------
Five Years Ended 1/31/95 N/A
-------------------------------------------------------
Commencement of Operations Through 1/31/95+ 0.15%
-------------------------------------------------------
</TABLE>
* Maximum sales charge for Class A shares is 5.75% of the public offering
price. Class A shares bear ongoing 12b-1 service fees.
** Class B shares are sold without initial or contingent deferred sales
charges, but bear ongoing 12b-1 distribution and service fees.
*** Class C shares are sold without initial or contingent deferred sales charges
and are available exclusively to PaineWebber employees.
+ Commencement of operations was November 22, 1985, June 14, 1993 and June 14,
1993 for Class A, Class B and Class C shares, respectively.
--------------------------------------------------------------------------------
3
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
--------------------------------------------------------------------------------
RECENT PERFORMANCE RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE TOTAL RETURN (1)
-------------------------------- --------------------------------
12 MONTHS 6 MONTHS
01/31/95 07/31/94 01/31/94 ENDED 01/31/95 ENDED 01/31/95
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------
Class A Shares $18.72 $23.29 $24.89 - 4.29% 1.67%
---------------------------------------------------------------------------------------------------------------------
Class B Shares 18.61 23.17 24.79 - 4.75 1.47
---------------------------------------------------------------------------------------------------------------------
Class C Shares 18.71 23.27 24.87 - 3.74 2.02
---------------------------------------------------------------------------------------------------------------------
</TABLE>
PERFORMANCE SUMMARY CLASS A SHARES
<TABLE>
<CAPTION>
NET ASSET VALUE
-------------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN (1)
<S> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------
11/22/85 - 12/31/95 $ 15.00 $15.42 -- -- 2.80 %
----------------------------------------------------------------------------------------------------------
1986 15.42 17.49 -- $0.450 16.40
----------------------------------------------------------------------------------------------------------
1987 17.49 16.79 $ 0.920 0.478 3.86
----------------------------------------------------------------------------------------------------------
1988 16.79 16.35 -- 0.617 1.11
----------------------------------------------------------------------------------------------------------
1989 16.35 20.49 -- 0.550 28.94
----------------------------------------------------------------------------------------------------------
1990 20.49 20.31 -- 0.570 1.96
----------------------------------------------------------------------------------------------------------
1991 20.31 29.24 -- 0.354 46.00
----------------------------------------------------------------------------------------------------------
1992 29.24 27.92 -- 0.477 - 2.86
----------------------------------------------------------------------------------------------------------
1993 27.92 24.61 3.272 0.482 1.73
----------------------------------------------------------------------------------------------------------
1994 24.61 18.42 4.623 0.376 - 4.75
----------------------------------------------------------------------------------------------------------
01/01/95 - 01/31/95 18.42 18.72 -- -- 1.63
----------------------------------------------------------------------------------------------------------
Total: $ 8.815 $4.354
----------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 01/31/95: 117.35%
----------------------------------------------------------------------------------------------------------
</TABLE>
PERFORMANCE SUMMARY CLASS B SHARES
<TABLE>
<CAPTION>
NET ASSET VALUE
-------------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN (1)
<S> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------
06/14/93 - 12/31/93 $ 27.42 $24.53 $ 3.272 $0.243 - 10.54 %
----------------------------------------------------------------------------------------------------------
1994 24.53 18.32 4.623 0.280 - 5.24
----------------------------------------------------------------------------------------------------------
01/01/95 - 01/31/95 18.32 18.61 -- -- 1.58
----------------------------------------------------------------------------------------------------------
Total: $ 7.895 $0.523
----------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 01/31/95: - 1.44%
----------------------------------------------------------------------------------------------------------
</TABLE>
PERFORMANCE SUMMARY CLASS C SHARES
<TABLE>
<CAPTION>
NET ASSET VALUE
-------------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN (1)
<S> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------
06/14/93 - 12/31/93 $ 27.42 $24.58 $ 3.272 $0.337 - 10.36 %
----------------------------------------------------------------------------------------------------------
1994 24.58 18.39 4.623 0.495 - 4.27
----------------------------------------------------------------------------------------------------------
01/01/95 - 01/31/95 18.39 18.71 -- -- 1.74
----------------------------------------------------------------------------------------------------------
Total: $ 7.895 $0.832
----------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 01/31/95: 0.24%
----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Figures assume reinvestment of all dividends and capital gains distributions
at net asset value on the payable dates, and do not include sales charges;
results would be lower if sales charges were included.
4
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
--------------------------------------------------------------------------------
Portfolio of Investments
January 31, 1995
--------------------------------------------------------------------------------
COMMON STOCKS -- 78.9%
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares
----------- Value
------------
<S> <C> <C>
AGRICULTURE -- 1.8%
100,000 Terra Industries, Inc. .............................................................. $1,137,500
----------
BANKS -- 3.3%
69,150 The Bank of New York................................................................. 2,074,500
----------
BUILDING/PAPER/FOREST PRODUCTS -- 1.7%
38,200 Federal Paper Board.................................................................. 1,069,600
----------
CHEMICALS -- 3.0%
29,850 Dow Chemical Co. .................................................................... 1,861,894
----------
CONSUMER NON-DURABLES -- 2.6%
25,900 Colgate-Palmolive Corp. ............................................................. 1,628,463
----------
DRUGS/HEALTH -- 6.6%
58,650 Baxter International Inc. ........................................................... 1,730,175
27,000 Merck & Company...................................................................... 1,086,750
16,700 Pfizer, Inc. ........................................................................ 1,365,225
-----------
4,182,150
-----------
ELECTRONICS -- 11.6%
29,000 Applied Materials, Inc. ............................................................. 1,116,500
32,200 Integrated Device Technology Industries* ............................................ 966,000
21,000 Intel Corporation.................................................................... 1,456,875
20,450 Texas Instruments.................................................................... 1,411,050
36,000 Varian Associates.................................................................... 1,327,500
21,105 Vishay Intertechnology, Inc. ........................................................ 1,049,974
-----------
7,327,899
-----------
ENTERTAINMENT & MEDIA -- 5.8%
45,500 Eastman Kodak........................................................................ 2,229,500
71,063 Mattell Inc. ........................................................................ 1,465,664
-----------
3,695,164
-----------
FINANCE/INSURANCE -- 4.8%
17,400 American International Group......................................................... 1,811,775
15,150 Chubb Corporation.................................................................... 1,227,150
-----------
3,038,925
-----------
FINANCIAL SERVICES -- 6.4%
24,400 Federal Home Loan Mortgage Corporation............................................... 1,366,400
28,400 Franklin Resources Inc. ............................................................. 962,050
30,000 Student Loan Marketing Association................................................... 1,121,250
20,400 T. Rowe Price Assc. ................................................................. 561,000
-----------
4,010,700
-----------
</TABLE>
5
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMMON STOCKS -- (CONCLUDED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares
----------- Value
------------
<S> <C> <C>
FOOD, BEVERAGE & TOBACCO -- 6.6%
39,500 McDonalds Corp. ..................................................................... $ 1,288,688
29,000 Pepsico lnc. ........................................................................ 1,069,375
30,500 Phillip Morris Companies............................................................. 1,818,562
-----------
4,176,625
-----------
INFORMATION PROCESSING -- 5.5%
67,900 EMC Corp. ........................................................................... 1,264,638
10,550 Hewlett-Packard Co. ................................................................. 1,060,275
63,150 Novell, Inc.* ....................................................................... 1,120,912
-----------
3,445,825
-----------
MACHINERY, ELECTRIC, POLLUTION -- 1.6%
13,850 Deere & Co........................................................................... 986,812
-----------
METALS -- 2.0%
46,550 Inco Ltd. ........................................................................... 1,251,031
-----------
MINING -- 3.9%
70,585 Potash Corp of Saskatchewan.......................................................... 2,479,298
-----------
OIL AND GAS -- 4.7%
24,000 Diamond Shamrock R&M................................................................. 561,000
16,200 Exxon Corp. ......................................................................... 1,012,500
16,200 Mobil Corp. ......................................................................... 1,399,275
-----------
2,972,775
-----------
UTILITIES -- ELECTRIC -- 4.5%
32,200 Duke Power........................................................................... 1,300,075
73,300 Southern Co.......................................................................... 1,530,138
-----------
2,830,213
-----------
UTILITIES -- TELEPHONE -- 2.5%
39,500 NYNEX Corp. ......................................................................... 1,560,250
-----------
Total Common Stocks (cost $47,765,921)............................................................. 49,729,624
-----------
</TABLE>
6
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS -- 17.7%
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000's) Dates Rates Value
--------- -------- -------- -----------
<C> <S> <C> <C> <C>
$ 4,000 United States Treasury Notes......................................... 10/15/98 7.125% $ 3,961,248
5,500 United States Treasury Notes......................................... 01/15/99 6.375 5,290,312
2,000 United States Treasury Notes......................................... 10/15/95 6.000 1,880,000
-----------
Total U.S. Treasury Obligations (cost $11,576,875)............................... 11,131,560
-----------
Total Investments (cost $59,342,796) -- 96.6%.................................... 60,861,184
Assets in excess of liabilities -- 3.4%.......................................... 2,164,762
-----------
Net Assets -- 100.0%............................................................. $63,025,946
-----------
-----------
</TABLE>
------------
* Non-income producing security.
See accompanying notes to financial statements.
7
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
--------------------------------------------------------------------------------
Statement of Assets and Liabilities
January 31, 1995
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (identified cost -- $59,342,796)............................ $60,861,184
Cash............................................................................................ 2,456,610
Receivable for investments sold................................................................. 194,386
Dividends and interest receivable............................................................... 256,096
Prepaid expenses................................................................................ 64,433
-----------
Total assets................................................................................ 63,832,709
-----------
LIABILITIES
Payables for investments purchased.............................................................. 394,800
Payable for Fund shares repurchased............................................................. 287,296
Payable to affiliate............................................................................ 65,377
Accrued expenses and other liabilities.......................................................... 59,290
-----------
Total liabilities........................................................................... 806,763
-----------
NET ASSETS
Capital stock -- $0.01 per value capital stock outstanding (500 million shares authorized)...... 62,059,618
Accumulated undistributed net investment income................................................. 87,731
Accumulated net realized losses from investments................................................ (639,791)
Net unrealized appreciation on investments...................................................... 1,518,388
-----------
Net assets.................................................................................. $63,025,946
-----------
-----------
CLASS A:
Net assets...................................................................................... $57,950,034
-----------
Shares outstanding.............................................................................. 3,095,513
---------
Net asset and redemption value per share.................................................. $18.72
------
------
Maximum offering price per share (net asset value plus sales charge of 5.75% of offering
price)......................................................................................... $19.86
------
------
CLASS B:
Net assets...................................................................................... $ 1,621,844
-----------
Shares outstanding.............................................................................. 87,135
------
Net asset value, offering price and redemption value per share.................................. $18.61
------
------
CLASS C:
Net assets...................................................................................... $ 3,454,068
-----------
Shares outstanding.............................................................................. 184,657
-------
Net asset value, offering price and redemption value per share.................................. $18.71
------
------
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
--------------------------------------------------------------------------------
Statement of Operations
For the Year Ended January 31, 1995
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest and discounts earned................................................................... $ 1,408,506
Dividends (net of foreign withholding taxes).................................................... 1,380,255
-----------
2,788,761
-----------
EXPENSES:
Investment advisory............................................................................. 584,713
Distribution fees -- Class A.................................................................... 193,465
Distribution fees -- Class B.................................................................... 13,436
Service fees -- Class A......................................................................... 193,465
Service fees -- Class B......................................................................... 4,479
Transfer agency fees............................................................................ 96,426
Reports and notices to shareholders............................................................. 78,102
Federal and state registration fees............................................................. 48,701
Custody and accounting fees..................................................................... 43,696
Legal and audit................................................................................. 37,393
Directors' fees and expenses.................................................................... 27,137
Amortization of organization expenses........................................................... 18,435
Other expenses.................................................................................. 4,000
-----------
1,343,448
-----------
NET INVESTMENT INCOME............................................................................... 1,445,313
-----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT ACTIVITIES:
Net realized gain from investment transactions.................................................. 6,493,995
Net change in unrealized appreciation/depreciation of investments............................... (12,793,458)
-----------
NET REALIZED AND UNREALIZED LOSSES FROM INVESTMENT ACTIVITIES....................................... (6,299,463)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................ $(4,854,150)
-----------
-----------
</TABLE>
See accompanying notes to financial statements
9
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
--------------------------------------------------------------------------------
Statement of Changes in Net Assets
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Five Month
Year Ended Period Ended
January 31, 1995 January 31, 1994
---------------- ----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income................................................... $ 1,445,313 $ 576,218
Net realized gain from investment transactions.......................... 6,493,995 7,744,021
Net change in unrealized depreciation of investments.................... (12,793,458) (7,495,559)
---------------- ----------------
Net increase (decrease) in net assets resulting from operations......... (4,854,150) 824,680
---------------- ----------------
Net investment income included in prices of shares sold and redeemed.... -- (41,738)
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- Class A........................................ (1,273,686) (928,945)
Net investment income -- Class B........................................ (23,235) (7,776)
Net investment income -- Class C........................................ (96,548) (62,871)
Net realized short-term gains from investment transactions -- Class A... (752,109) --
Net realized short-term gains from investment transactions -- Class B... (21,139) --
Net realized short-term gains from investment transactions -- Class C... (44,998) --
Net realized long-term gains from investment transactions -- Class A.... (11,891,520) (12,654,048)
Net realized long-term gains from investment transactions -- Class B.... (334,223) (145,078)
Net realized long-term gains from investment transactions -- Class C.... (711,465) (643,536)
---------------- ----------------
(15,148,923) (14,442,254)
---------------- ----------------
FROM CAPITAL STOCK TRANSACTIONS:
Net proceeds from the sale of shares.................................... 3,018,313 4,381,280
Cost of shares repurchased.............................................. (44,211,046) (27,029,121)
Proceeds from dividends reinvested...................................... 14,757,018 14,097,353
---------------- ----------------
Net decrease in net assets resulting from share transactions............ (26,435,715) (8,550,488)
---------------- ----------------
Net decrease in net assets.............................................. (46,438,788) (22,209,800)
NET ASSETS:
Beginning of period..................................................... 109,464,734 131,674,534
---------------- ----------------
End of period (including undistributed net investment income of $87,731
and $35,887, respectively)............................................ $ 63,025,946 $109,464,734
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes to financial statements
10
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
--------------------------------------------------------------------------------
Notes to Financial Statements
--------------------------------------------------------------------------------
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mitchell Hutchins/Kidder, Peabody Equity Income Fund, Inc. (formerly
Kidder, Peabody Equity Income Fund, Inc.) (the 'Fund') was organized under the
laws of the state of Maryland on June 20, 1985 and is registered with the
Securities and Exchange Commission under the Investment Company Act of 1940, as
amended, as an open-end, diversified investment company.
Organizational Matters -- Effective September 1, 1993, the Fund changed its
fiscal year-end from August 31 to January 31.
On June 14, 1993 the Fund adopted the Choice Pricing Systemsm. Prior to
June 14, 1993, the Fund issued only Class A shares; subsequent to that date the
Fund issued Class A, Class B and Class C shares. Each class represents interests
in the same assets of the Fund and the classes are identical except for
differences in their sales charge structure and ongoing service and distribution
charges. All classes of shares have equal rights as to voting privileges, except
that each class has exclusive voting rights with respect to its distribution
plan.
Valuation of Investments -- Securities listed on national securities
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the mean between
closing bid and asked prices. Over-the-counter securities are valued on the
basis of the last sale, if available, or if not, on the basis of the bid price
at the close of business on each day, or, if market quotations for those
securities are not readily available, at fair value, as determined in good faith
by the Fund's Board of Directors. Short-term obligations with maturities of 60
days or less are valued at amortized cost.
Investment Transactions and Investment Income -- Investment transactions
are recorded as of the trade date. Realized gains and losses from investment are
calculated using the identified cost method. Dividend income is recorded on the
ex-dividend date. Interest income is recorded on an accrual basis. Discounts are
accreted and premiums are amortized on straight line basis as adjustments to
interest income and the identified cost of investments.
Income, expenses (excluding class-specific expenses) and
realized/unrealized gains (losses) are allocated proportionately to each class
of shares based upon the relative net asset value of outstanding shares (or the
value of dividend-eligible shares, as appropriate) of each class at the
beginning of the day (after adjusting for current capital share activity of the
respective classes). Class-specific expenses are charged directly to the
applicable class of shares.
Repurchase Agreements -- The Fund's custodian takes possession of the
collateral pledged for investments in repurchase agreements. The value of the
collateral must be a minimum of 100% of the market value of the securities being
loaned, allowing for minor variations arising from marking to market of such
collateral. If the issuer defaults or if bankruptcy or regulatory proceedings
are commenced with respect to the issuer, the realization of the proceeds may be
delayed or limited.
11
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
--------------------------------------------------------------------------------
Notes to Financial Statements -- (continued)
--------------------------------------------------------------------------------
Federal Tax Status -- The Fund intends to distribute substantially all of
its taxable income and to comply with the other requirements of the Internal
Revenue Code applicable to regulated investment companies. Accordingly, no
provision for federal income taxes is required. In addition, by distributing
during each calendar year substantially all of its net investment income,
capital gains and certain other amounts, if any, each Fund intends not to be
subject to a federal excise tax.
Dividends and Distributions -- Dividends and distributions to shareholders
are recorded on ex-dividend date. The Fund declares dividends on quarterly basis
from net investment income. Net capital gains, if any, will be distributed at
least annually, but the Fund may make more frequent distribution of such gains,
if necessary, to avoid income or excise taxes.
The amount of dividends and distributions are determined in accordance with
federal income tax regulations which may differ from generally accepted
accounting principles. These 'book/tax' differences are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax-basis treatment; temporary differences do not require
reclassification. Dividends and distributions which exceed net investment income
and net realized capital gains for financial reporting purposes but not for tax
purposes are reported as dividends in excess of net investment income or
distributions in excess of net realized capital gains. To the extent they exceed
net investment income and net realized capital gains for tax purposes, they are
reported as distributions of paid-in-capital.
INVESTMENT ADVISER AND ADMINISTRATOR
The Fund has entered into an Investment Advisory and Administration
Agreement with Kidder Peabody Asset Management, Inc. ('KPAM'), a wholly owned
subsidiary of Kidder, Peabody & Co. Incorporated ('KP') (see 'Subsequent Events'
below). General Electric Capital Services, Inc., a wholly owned subsidiary of
General Electric Company ('GE'), has a 100% interest in Kidder, Peabody Group
Inc. ('Kidder Group'), the parent company of KP.
Fees paid by the Fund for advisory and administration services are payable
monthly and calculated daily by applying an annual rate of 0.70 of 1% to the net
assets of the Fund determined as of the close of each business day. At January
31, 1995, the Fund owed KPAM $38,619 for investment advisory fees.
In compliance with applicable state securities laws, the Fund's investment
adviser and administrator will reimburse the Fund if and to the extent that the
aggregate operating expenses in any fiscal year, exclusive of taxes, interest,
brokerage fees, distribution fees and extraordinary expenses, exceed limitations
imposed by various state regulations. Currently, the most restrictive limitation
applicable to the Fund is 2.5% of the first $30 million of average daily net
assets, 2.0% of the next $70 million and 1.5% of any excess over $100 million.
No expense reimbursement was required for the year ended January 31, 1995.
12
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
--------------------------------------------------------------------------------
Notes to Financial Statements -- (continued)
--------------------------------------------------------------------------------
DISTRIBUTION PLANS
KP is the exclusive distributor of the Fund's shares (see 'Subsequent
Events' below). Under separate plans of distribution, Class A shares are sold
subject to a front-end sales load and bear a distribution fee of 0.25% per annum
and a service fee of 0.25% per annum of the lesser of (i) aggregate gross sales
of the Class A shares since its inception (not including reinvestments of
dividends or capital gains distributions), less aggregate redemptions since
inception on which a contingent deferred sales charge has been paid or waived or
(ii) the average daily net assets attributable to Class A shares. Class B shares
are sold at net asset value without a sales load and bear a distribution fee of
0.75% per annum and a service fee of 0.25% per annum of average class net
assets. The Fund pays KP monthly the service and distribution fees. KP also
receives the proceeds of any front-end sales loads with respect to the purchase
of Class A shares. At January 31, 1995, the Fund owed KP $26,758 in service and
distribution fees.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at January
31, 1995 was substantially the same as the cost of securities for financial
statement purposes.
At January 31, 1995, the components of the net unrealized appreciation of
investments were as follows:
<TABLE>
<S> <C>
Gross appreciation (investments having an excess of value over cost)............ $3,346,738
Gross depreciation (investments having an excess of cost over value)............ 1,828,350
----------
Net unrealized appreciation of investments...................................... $1,518,388
----------
----------
</TABLE>
For the year ended January 31, 1995, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were as follows:
<TABLE>
<S> <C>
Purchases.............................................................. $138,539,909
Sales.................................................................. $171,044,867
</TABLE>
13
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
--------------------------------------------------------------------------------
Notes to Financial Statements -- (continued)
--------------------------------------------------------------------------------
CAPITAL STOCK
As of January 31, 1995 there were 500,000,000 shares, consisting of several
classes, of $.01 par value common stock authorized. Transactions in shares of
common stock were as follows:
<TABLE>
<CAPTION>
Class A Class B Class C
------------------------- ------------------------ ---------------------
Shares Amount Shares Amount Shares Amount
---------- ------------ ---------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Year ended January 31, 1995:
Shares sold...................... 67,314 $ 1,573,740 39,094 $ 910,526 22,907 $ 534,047
Dividends reinvested in
additional Fund shares......... 724,803 13,551,484 20,501 378,609 44,122 826,925
Shares repurchased............... (1,820,254) (41,334,216) (33,430) (725,094) (96,272) (2,151,736)
---------- ------------ ---------- ----------- -------- ----------
Net increase (decrease).............. (1,028,137) $(26,208,992) 26,165 $ 564,041 (29,243) $ (790,764)
---------- ------------ ---------- ----------- -------- ----------
---------- ------------ ---------- ----------- -------- ----------
Period ended January 31, 1994:
Shares sold...................... 60,092 $ 1,630,973 41,361 $ 1,111,478 60,085 $1,638,829
Dividends reinvested in
additional Fund shares......... 540,822 13,248,531 6,265 152,540 28,453 696,282
Shares repurchased............... (954,262) (25,766,866) (6,418) (165,475) (41,989) (1,096,780)
---------- ------------ ---------- ----------- -------- ----------
Net increase (decrease).............. (353,348) $(10,887,362) 41,208 $ 1,098,543 46,549 $1,238,331
---------- ------------ ---------- ----------- -------- ----------
---------- ------------ ---------- ----------- -------- ----------
</TABLE>
SUBSEQUENT EVENTS
Effective February 13, 1995, as a result of an asset purchase transaction
by and among Kidder Group, its parent, GE, and Paine Webber Group Inc. ('PW
Group'), the investment management for the Fund has been transferred, on an
interim basis, from KPAM to Mitchell Hutchins Asset Management Inc. ('Mitchell
Hutchins'). Mitchell Hutchins is a wholly owned investment management subsidiary
of PaineWebber Incorporated, which is in turn a wholly owned subsidiary of PW
Group. During the interim period, Mitchell Hutchins will provide investment
management services to the Fund pursuant to a contract that has the same terms
and conditions as the prior investment management agreement between the Fund and
KPAM. Fees paid by the Fund for investment management and advisory services
during the interim period will be paid into escrow and, if approved by the
shareholders, will be paid over to Mitchell Hutchins. A special shareholders'
meeting is expected to occur on March 31, 1995.
At the special shareholders' meeting, it is proposed that Mitchell Hutchins
be appointed as investment adviser and administrator of the Fund. If the
shareholders approve Mitchell Hutchins as investment adviser and administrator
for the Fund, Mitchell Hutchins would continue to manage the Fund by making
investment decisions based on the Fund's investment objective,
14
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
--------------------------------------------------------------------------------
Notes to Financial Statements -- (concluded)
--------------------------------------------------------------------------------
policies and restrictions. During the interim period and thereafter, assuming
shareholder approval, Mitchell Hutchins will receive the same fees previously
received by KPAM and GEIM as described in the footnote above.
Also effective February 13, 1995, Mitchell Hutchins serves as the Fund's
distributor pursuant to arrangements described in the footnote above. Finally,
effective February 13, 1995, the Fund's name was changed to 'Mitchell
Hutchins/Kidder, Peabody Equity Income Fund, Inc.'
15
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
--------------------------------------------------------------------------------
Financial Highlights
--------------------------------------------------------------------------------
Selected data for a share of common stock outstanding is presented below:
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------
FIVE MONTH
PERIOD YEAR
YEARS ENDED AUGUST 31, ENDED ENDED
---------------------------------------------- JANUARY 31, JANUARY 31,
1990 1991 1992 1993 1994 1995
------- -------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.............. $20.10 $19.53 $25.71 $27.16 $28.23 $24.89
------- -------- -------- -------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................. 0.64 0.41 0.40 0.55 0.13 0.40
Net realized and unrealized gains (losses) from
investment transactions.......................... (0.68) 6.33 1.32 1.15 0.03 (1.57)
------- -------- -------- -------- ----------- -----------
TOTAL INCREASE (DECREASE) FROM INVESTMENT
OPERATIONS....................................... (0.04) 6.74 1.72 1.70 0.16 (1.17)
------- -------- -------- -------- ----------- -----------
Dividends and distributions:
Dividends from net investment income.............. (0.53) (0.56) (0.27) (0.63) (0.23) (0.38)
Distributions from net realized gains on
investments...................................... -- -- -- -- (3.27) (4.62)
------- -------- -------- -------- ----------- -----------
TOTAL DISTRIBUTIONS............................... (0.53) (0.56) (0.27) (0.63) (3.50) (5.00)
------- -------- -------- -------- ----------- -----------
NET ASSET VALUE, END OF PERIOD.................... $19.53 $25.71 $27.16 $28.23 $24.89 $18.72
------- -------- -------- -------- ----------- -----------
------- -------- -------- -------- ----------- -----------
Total return (1).................................. (6.04)% 27.45% 0.55% 0.22% 1.93% (4.29)%
------- -------- -------- -------- ----------- -----------
------- -------- -------- -------- ----------- -----------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)................. $63,571 $103,722 $147,842 $126,387 $ 102,634 $57,950
Ratio of expenses to average net assets........... 1.60% 1.37% 1.27% 1.35% 1.65%* 1.63%
Ratio of net investment income to average net
assets........................................... 3.19% 1.88% 1.58% 1.93% 1.13%* 1.72%
Portfolio turnover................................ 177.82% 67.18% 60.01% 66.89% 28.27% 178.85%
</TABLE>
------------
* Annualized
`D' From June 14, 1993 (Commencement of offering of shares) to August 31, 1993.
(1) Total return is calculated assuming a $1,000 investment in Fund shares on
the first day of each period reported, reinvestment of all dividends and
capital gain distributions at net asset value on the payable date, and a
sale at net asset value on the last day of each period reported. The figures
do not include sales charges; results of Class A would be lower if sales
charges were included. Total returns for periods less than one year are not
annualized.
16
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
--------------------------------------------------------------------------------
Financial Highlights -- (concluded)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------------ ------------------------------------------
FIVE MONTH FIVE MONTH
PERIOD PERIOD
YEAR ENDED ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
AUGUST 31, JANUARY 31, JANUARY 31, AUGUST 31, JANUARY 31, JANUARY 31,
1993`D' 1994 1995 1993`D' 1994 1995
---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$27.42 $ 28.20 $ 24.79 $27.42 $ 28.26 $ 24.87
---------- ----------- ----------- ---------- ----------- -----------
0.07 0.11 0.29 0.13 0.19 0.49
0.71 (0.01) (1.57) 0.71 0.03 (1.53)
---------- ----------- ----------- ---------- ----------- -----------
0.78 0.10 (1.28) 0.84 0.22 (1.04)
---------- ----------- ----------- ---------- ----------- -----------
-- (0.24) (0.28) -- (0.34) (0.50)
-- (3.27) (4.62) -- (3.27) (4.62)
---------- ----------- ----------- ---------- ----------- -----------
-- (3.51) (4.90) (3.61) (5.12)
---------- ----------- ----------- ---------- ----------- -----------
$28.20 $ 24.79 $ 18.61 $28.26 $ 24.87 $ 18.71
---------- ----------- ----------- ---------- ----------- -----------
---------- ----------- ----------- ---------- ----------- -----------
13.14% 1.47% (4.75)% 14.15% 2.48% (3.74)%
---------- ----------- ----------- ---------- ----------- -----------
---------- ----------- ----------- ---------- ----------- -----------
$ 557 $ 1,511 $ 1,622 $4,730 $ 5,319 $ 3,454
1.94%* 2.14%* 2.13% 0.97%* 1.15%* 1.13%
1.34%* 0.64%* 1.22% 2.31%* 1.63%* 2.22%
66.89% 28.27% 178.85% 66.89% 28.27% 178.85%
</TABLE>
17
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
--------------------------------------------------------------------------------
Report of Independent Auditors
--------------------------------------------------------------------------------
The Board of Directors and Shareholders,
Mitchell Hutchins/Kidder, Peabody Equity Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Mitchell Hutchins/Kidder, Peabody Equity Income
Fund, Inc. as of January 31, 1995, and the related statements of operations for
the year then ended and of changes in net assets and the financial highlights
for each of the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at January
31, 1995 by correspondence, with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Mitchell
Hutchins/Kidder, Peabody Equity Income Fund, Inc. as of January 31, 1995, the
results of its operations, the changes in its net assets and financial
highlights for the periods presented in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
March 13, 1995
18
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
--------------------------------------------------------------------------------
Tax Information (unaudited)
--------------------------------------------------------------------------------
We are required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Fund's fiscal year end (January 31,
1995), as to the federal tax status of distributions received by shareholders
during such fiscal year. Accordingly, we are advising you that the following
distributions paid during the fiscal year by the Fund were taxable and are
derived from the following sources:
<TABLE>
<CAPTION>
EQUITY
INCOME
PER SHARE DATA: FUND
<S> <C>
----------------------------------------------------------------------------------------------
Class A
Net investment income.............................................................. $0.376
Short-term capital gains........................................................... $0.275
Long-term capital gains............................................................ $4.348
Class B
Net investment income.............................................................. $0.280
Short-term capital gains........................................................... $0.275
Long-term capital gains............................................................ $4.348
Class C
Net investment income.............................................................. $0.495
Short-term capital gains........................................................... $0.275
Long-term capital gains............................................................ $4.348
</TABLE>
Of the above net investment income and short-term capital gain distributions,
72.16% qualify for the dividends received deduction available to corporate
shareholders of Equity Income Fund.
Distributions received by tax-exempt recipients (e.g., IRAs and Keoghs) need not
be reported at taxable income. Some retirement trusts (e.g., corporate, Keogh
and 403(b)(7) plans) may need this information for their annual information
reporting.
Because the Fund's fiscal year is not the calendar year, another notification
will be sent in respect of calendar year 1995. The second notification, which
will reflect the amount to be used by calendar year taxpayers on their federal
income tax returns, will be made in conjunction with Form 1099 DIV and will be
mailed in January 1996. Shareholders are advised to consult their own tax
advisers with respect to the tax consequences of their investment in the Fund.
19
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
20
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
21
<PAGE>
-------------------------------------
DIRECTORS
David J. Beaubien
William W. Hewitt, Jr.
Thomas R. Jordan
Carl W. Schafer
-------------------------------------
OFFICERS
Frank P.L. Minard
President
T. Kirkham Barneby
Vice President
Victoria E. Schonfeld
Vice President
Dianne E. O'Donnell
Vice President and Secretary
Julian F. Sluyters
Vice President and Treasurer
-------------------------------------
INVESTMENT ADVISER,
ADMINISTRATOR AND
DISTRIBUTOR
Mitchell Hutchins Asset Management
Inc.
1285 Avenue of the Americas
New York, New York 10019
-------------------------------------
This report is not to be used in
connection with the offering of
shares of the Fund unless accompanied
or preceded by an effective
prospectus.
A Prospectus containing more complete
information for any of the funds
listed on the back cover can be
obtained from a PaineWebber
investment executive or correspondent
firm. Read the prospectus carefully
before investing.
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
The Financial Statements filed as part of this Registration Statement are
as follows:
Financial Statements contained in Part A:
Financial Highlights for the period November 22, 1985 (Commencement
of Operations) to January 31, 1995.
Financial Statements included through incorporation by reference in Part B
and filed with the Annual Report to Shareholders with the Securities and
Exchange Commission on or about March 31, 1995 [File No. 811-4332], and filed
herewith as an attachment:
Portfolio of Investments at January 31, 1995.
Statement of Assets and Liabilities as of January 31, 1995.
Statement of Operations for the year ended January 31, 1995.
Statements of Changes in Net Assets for the five months ended
January 31, 1994 and the year ended January 31, 1995.
Financial Highlights for the period August 31, 1990 to January 31,
1995.
Report of Deloitte & Touche LLP, Independent Auditors, dated March
13, 1995.
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
--------------- ----------------------------------------------------------------------------------------------------
<S> <C>
(1) -- Articles of Amendment and Restatement are incorporated by reference to Exhibit 1 of
Post-Effective Amendment No. 10 to the Registration Statement on Form N-1A, filed on June 11,
1993.
(2) -- An amendment to the Registrant's By-Laws is incorporated by reference to Exhibit 2 of
Post-Effective Amendment No. 5 to the Registration Statement on Form N-1A, filed on December 30,
1988.
(4) -- Specimen certificates for the Registrant's Common Stock, par value $.01 per share are
incorporated by reference to Exhibit 4 of Post-Effective Amendment No. 11 to the Registration
Statement on Form N-1A, filed on December 29, 1993.
(5) -- Form of Investment Advisory and Administration Agreement*.
(6) -- Form of Distribution Agreement*.
(8a) -- Form of Custody Agreement with State Street Bank and Trust Company*.
(8b) -- Safekeeping Agreement is incorporated by reference to Exhibit 8b of Post-Effective Amendment No.
6 to the Registration Statement on Form N-1A, filed on October 31, 1989.
(8c) -- Procedural Agreement is incorporated by reference to Exhibit 8c of Post-Effective Amendment No. 6
to the Registration Statement on Form N-1A, filed on October 31, 1989.
(9) -- Form of Transfer Agency Agreement with PFPC Inc.*
(10) -- The opinion and consent of Venable, Baetjer and Howard is incorporated by reference to Exhibit 10
of Post-Effective Amendment No. 10 to the Registration Statement on Form N-1A, filed on June 11,
1993.
(11) -- The consent of Deloitte & Touche LLP.
(13) -- The investment representation letter is incorporated by reference to Exhibit 13 of Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A, filed on October 7, 1985.
(15) -- Form of Shareholder Servicing Agreement*.
</TABLE>
C-1
<PAGE>
<TABLE>
<S> <C>
(16) -- Schedule for computation of performance quotations in response to Item 22 is incorporated by
reference to Exhibit 16 of Post-Effective Amendment No. 7 to the Registration Statement on Form
N-1A, filed on December 28, 1990.
(17) -- Powers of Attorney.
</TABLE>
------------
* To be supplied by amendment
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
No person is controlled by or under common control with the Registrant.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF RECORDHOLDERS
TITLE OF CLASS AT MAY 15, 1995
---------------------------------------------------------------------------------- -----------------------
<S> <C>
Common Stock, par value $.01 per share
Class A........................................................................... 4,591
Class B........................................................................... 162
Class C........................................................................... 234
</TABLE>
ITEM 27. INDEMNIFICATION.
Reference is made to Section 2-418 of the General Corporation Law of
Maryland, as amended.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant and the principal underwriter pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person or the principal
underwriter in connection with the shares being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), a Delaware
corporation, is a registered investment adviser and is a wholly owned subsidiary
of PaineWebber Inc. ('PaineWebber') which is, in turn, a wholly owned subsidiary
of Paine Webber Group Inc. Mitchell Hutchins is primarily engaged in the
investment advisory business. Information as to the officers and directors of
Mitchell Hutchins is included in its Form ADV filed on April 3, 1995 with the
Securities and Exchange Commission (registration number 801-13219) and is
incorporated herein by reference.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Mitchell Hutchins serves as principal underwriter and/or investment
adviser for the following investment companies:
All-American Term Trust Inc.
Global Income Plus Fund, Inc.
Institutional Series Trust
Mitchell Hutchins/Kidder, Peabody Equity Income Fund, Inc.
Mitchell Hutchins/Kidder, Peabody Government Income Fund, Inc.
Mitchell Hutchins/Kidder, Peabody Investment Trust
Mitchell Hutchins/Kidder, Peabody Investment Trust II
C-2
<PAGE>
Mitchell Hutchins/Kidder, Peabody Investment Trust III
PaineWebber America Fund
PaineWebber Atlas Fund
PaineWebber Investment Series
PaineWebber Managed Assets Trust
PaineWebber Managed Investments Trust
PaineWebber Master Series, Inc.
PaineWebber Municipal Series
PaineWebber Mutual Fund Trust
PaineWebber Olympus Fund
PaineWebber Premier High Income Trust Inc.
PaineWebber Premier Insured Municipal Income Fund Inc.
PaineWebber Premier Tax-Free Income Fund Inc.
PaineWebber Regional Financial Growth Fund Inc.
PaineWebber Securities Trust
PaineWebber Series Trust
Strategic Global Income Fund, Inc.
Triple A and Government Series -- 1995, Inc.
Triple A and Government Series -- 1997, Inc.
2002 Target Term Trust Inc.
Global High Income Dollar Fund Inc.
Global Small Cap Fund Inc.
(b) Mitchell Hutchins is the Registrant's principal underwriter.
PaineWebber acts as exclusive dealer of the Registrant's shares. The directors
and officers of Mitchell Hutchins, their principal business addresses, and their
positions and offices with Mitchell Hutchins are identified in its Form ADV
filed April 3, 1995 with the Securities and Exchange Commission (registration
number 801-13219). The directors and officers of PaineWebber, their principal
business addresses, and their positions and offices with PaineWebber are
identified in its Form ADV filed March 31, 1995 with the Securities and Exchange
Commission (registration number 801-7163). The foregoing information is hereby
incorporated herein by reference. The information set forth below is furnished
for those directors and officers of Mitchell Hutchins or PaineWebber who also
serve as directors or officers of the Registrant:
<TABLE>
<CAPTION>
POSITION AND OFFICES WITH
NAME AND PRINCIPAL BUSINESS ADDRESS POSITION WITH REGISTRANT UNDERWRITER OR EXCLUSIVE DEALER
------------------------------------- -------------------------------- -----------------------------------------
<S> <C> <C>
Frank P.L. Minard Director and President Director and Chairman of Mitchell
1285 Avenue of the Americas Hutchins
New York, New York 10019
Teresa M. Boyle Vice President First Vice President and
1285 Avenue of the Americas Manager -- Advisory Administration of
New York, New York 10019 Mitchell Hutchins
T. Kirkham Barneby Vice President Managing Director and Chief Investment
1285 Avenue of the Americas Officer of Quantitative Investments of
New York, New York 10019 Mitchell Hutchins
Ann E. Moran Vice President and Assistant Vice President of Mitchell Hutchins
1285 Avenue of the Americas Treasurer
New York, New York 10019
Dianne E. O'Donnell Vice President and Secretary Senior Vice President and Senior
1285 Avenue of the Americas Associate General Counsel of Mitchell
New York, New York 10019 Hutchins
Victoria E. Schonfeld Vice President Managing Director and General Counsel of
1285 Avenue of the Americas Mitchell Hutchins
New York, New York 10019
Paul H. Schubert Vice President and Assistant Vice President of Mitchell Hutchins
1285 Avenue of the Americas Treasurer
New York, New York 10019
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
POSITION AND OFFICES WITH
NAME AND PRINCIPAL BUSINESS ADDRESS POSITION WITH REGISTRANT UNDERWRITER OR EXCLUSIVE DEALER
------------------------------------- -------------------------------- -----------------------------------------
<S> <C> <C>
Martha J. Slezak Vice President and Assistant Vice President of Mitchell Hutchins
1285 Avenue of the Americas Treasurer
New York, New York 10019
Julian F. Sluyters Vice President and Treasurer Senior Vice President and Director of
1285 Avenue of the Americas Mutual Fund Finance Division of
New York, New York 10019 Mitchell Hutchins
Gregory K. Todd Vice President and Assistant First Vice President and Associate
1285 Avenue of the Americas Secretary General Counsel of Mitchell Hutchins
New York, New York 10019
</TABLE>
(c) None.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder are
maintained at the offices of: PFPC Inc., 400 Bellevue Parkway, Wilmington,
Delaware 19809, State Street Bank and Trust Company, One Heritage Drive, North
Quincy, Massachusetts 02171, and the Registrant, 1285 Avenue of the Americas,
New York, New York 10019.
ITEM 31. MANAGEMENT SERVICES.
Inapplicable.
ITEM 32. UNDERTAKINGS.
Registrant hereby undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in this City of New York,
and State of New York, on the 18th day of May, 1995.
MITCHELL HUTCHINS/KIDDER, PEABODY
EQUITY INCOME FUND, INC.
By /s/ GREGORY K. TODD
...................................
(GREGORY K. TODD, VICE PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------------------ -------------------------------------------- -------------------
<C> <S> <C>
/s/ FRANK P.L. MINARD* President and Director May 18, 1995
.........................................
(FRANK P.L. MINARD)
/s/ DAVID J. BEAUBIEN* Director May 18, 1995
.........................................
(DAVID J. BEAUBIEN)
/s/ WILLIAM W. HEWITT, JR.* Director May 18, 1995
.........................................
(WILLIAM W. HEWITT, JR.)
/s/ THOMAS R. JORDAN* Director May 18, 1995
.........................................
(THOMAS R. JORDAN)
/s/ CARL W. SCHAFER* Director May 18, 1995
.........................................
(CARL W. SCHAFER)
/s/ JULIAN F. SLUYTERS Vice President and Treasurer (Chief May 18, 1995
......................................... Financial and Accounting Officer)
(JULIAN F. SLUYTERS)
*By: /S/ GREGORY K. TODD May 18, 1995
.........................................
(GREGORY K. TODD, ATTORNEY-IN-FACT)
</TABLE>
C-5
<PAGE>
STATEMENT OF DIFFERENCES
<TABLE>
<S> <C>
The dagger symbol shall be expressed as................. 'D'
The double dagger symbol shall be expressed as.......... 'D''D'
The service mark symbol shall be expressed as ........... 'sm'
Mathematical powers normally expressed as
superscript shall be preceded by......................... 'pp'
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE NO.
------ --------
<S> <C> <C>
(11) -- The consent of Deloitte & Touche LLP.........................................................
(17) -- Powers of Attorney...........................................................................
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
Mitchell Hutchins/Kidder, Peabody Equity Income Fund, Inc.:
We consent to the incorporation by reference in the Statement of Additional
Information in this Post-Effective Amendment No. 13 to Registration Statement
No. 2-98557 of our report dated March 13, 1995, appearing in the annual report
to shareholders for the year ended January 31, 1995, and to the references to us
under the captions 'Independent Auditors' appearing in the Statement of
Additional Information and 'Financial Highlights' appearing in the Prospectus,
which also are a part of such Registration Statement.
Deloitte & Touche LLP
New York, New York
May 23, 1995
<PAGE>
POWER OF ATTORNEY
I, Carl W. Schafer, Director of Mitchell Hutchins/Kidder, Peabody Equity
Income Fund, Inc., Mitchell Hutchins/Kidder, Peabody Government Income Fund,
Inc., PaineWebber/Kidder, Peabody Cash Reserve Fund, Inc., PaineWebber/Kidder,
Peabody Government Money Fund, Inc., and PaineWebber/Kidder, Peabody Tax Exempt
Money Fund, Inc. (collectively, the 'Funds'), hereby constitute and appoint
Victoria E. Schonfeld, Dianne E. O'Donnell, Gregory K. Todd and Scott Griff, and
each of them singly, my true and lawful attorneys, with full power to them to
sign for me, and in my capacity as Director for each of the Funds, any and all
amendments to each of the particular registration statements of the Funds, and
all instruments necessary or desirable in connection therewith, filed with the
Securities and Exchange Commission, hereby ratifying and confirming my signature
as it may be signed by said attorneys to any and all amendments to said
registration statements.
Pursuant to the requirements of the Securities Act of 1933, this instrument
has been signed below by the following in the capacity and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------------------ -------------------------------------------- -------------------
<S> <C> <C>
/s/ CARL W. SCHAFER Director March 8, 1995
.........................................
(CARL W. SCHAFER)
</TABLE>
<PAGE>
POWER OF ATTORNEY
I, Thomas R. Jordan, Director of Mitchell Hutchins/Kidder, Peabody Equity
Income Fund, Inc., Mitchell Hutchins/Kidder, Peabody Government Income Fund,
Inc., PaineWebber/Kidder, Peabody Cash Reserve Fund, Inc., PaineWebber/Kidder,
Peabody Government Money Fund, Inc., and PaineWebber/Kidder, Peabody Tax Exempt
Money Fund, Inc. (collectively, the 'Funds'), hereby constitute and appoint
Victoria E. Schonfeld, Dianne E. O'Donnell, Gregory K. Todd and Scott Griff, and
each of them singly, my true and lawful attorneys, with full power to them to
sign for me, and in my capacity as Director for each of the Funds, any and all
amendments to each of the particular registration statements of the Funds, and
all instruments necessary or desirable in connection therewith, filed with the
Securities and Exchange Commission, hereby ratifying and confirming my signature
as it may be signed by said attorneys to any and all amendments to said
registration statements.
Pursuant to the requirements of the Securities Act of 1933, this instrument
has been signed below by the following in the capacity and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------------------ -------------------------------------------- -------------------
<S> <C> <C>
/s/ THOMAS R. JORDAN Director March 8, 1995
.........................................
(THOMAS R. JORDAN)
</TABLE>
<PAGE>
POWER OF ATTORNEY
I, David J. Beaubien, Director of Mitchell Hutchins/Kidder, Peabody Equity
Income Fund, Inc., Mitchell Hutchins/Kidder, Peabody Government Income Fund,
Inc., PaineWebber/Kidder, Peabody Cash Reserve Fund, Inc., PaineWebber/Kidder,
Peabody Government Money Fund, Inc., and PaineWebber/Kidder, Peabody Tax Exempt
Money Fund, Inc. (collectively, the 'Funds'), hereby constitute and appoint
Victoria E. Schonfeld, Dianne E. O'Donnell, Gregory K. Todd and Scott Griff, and
each of them singly, my true and lawful attorneys, with full power to them to
sign for me, and in my capacity as Director for each of the Funds, any and all
amendments to each of the particular registration statements of the Funds, and
all instruments necessary or desirable in connection therewith, filed with the
Securities and Exchange Commission, hereby ratifying and confirming my signature
as it may be signed by said attorneys to any and all amendments to said
registration statements.
Pursuant to the requirements of the Securities Act of 1933, this instrument
has been signed below by the following in the capacity and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------------------ -------------------------------------------- -------------------
<S> <C> <C>
/s/ DAVID J. BEAUBIEN Director March 8, 1995
.........................................
(DAVID J. BEAUBIEN)
</TABLE>
<PAGE>
POWER OF ATTORNEY
I, William W. Hewitt, Jr., Director of Mitchell Hutchins/Kidder, Peabody
Equity Income Fund, Inc., Mitchell Hutchins/Kidder, Peabody Government Income
Fund, Inc., PaineWebber/Kidder, Peabody Cash Reserve Fund, Inc.,
PaineWebber/Kidder, Peabody Government Money Fund, Inc., and PaineWebber/Kidder,
Peabody Tax Exempt Money Fund, Inc. (collectively, the 'Funds'), hereby
constitute and appoint Victoria E. Schonfeld, Dianne E. O'Donnell, Gregory K.
Todd and Scott Griff, and each of them singly, my true and lawful attorneys,
with full power to them to sign for me, and in my capacity as Director for each
of the Funds, any and all amendments to each of the particular registration
statements of the Funds, and all instruments necessary or desirable in
connection therewith, filed with the Securities and Exchange Commission, hereby
ratifying and confirming my signature as it may be signed by said attorneys to
any and all amendments to said registration statements.
Pursuant to the requirements of the Securities Act of 1933, this instrument
has been signed below by the following in the capacity and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------------------ -------------------------------------------- -------------------
<S> <C> <C>
/s/ WILLIAM W. HEWITT, JR. Director March 8, 1995
.........................................
(WILLIAM W. HEWITT, JR.)
</TABLE>
<PAGE>
POWER OF ATTORNEY
I, Frank P.L. Minard, President and Director of Mitchell Hutchins/Kidder,
Peabody Equity Income Fund, Inc., Mitchell Hutchins/Kidder, Peabody Government
Income Fund, Inc., PaineWebber/Kidder, Peabody Cash Reserve Fund, Inc.,
PaineWebber/Kidder, Peabody Government Money Fund, Inc., and PaineWebber/Kidder,
Peabody Tax Exempt Money Fund, Inc. (collectively, the 'Funds'), hereby
constitute and appoint Victoria E. Schonfeld, Dianne E. O'Donnell, Gregory K.
Todd and Scott Griff, and each of them singly, my true and lawful attorneys,
with full power to them to sign for me, and in my capacity as President and
Director for each of the Funds, any and all amendments to each of the particular
registration statements of the Funds, and all instruments necessary or desirable
in connection therewith, filed with the Securities and Exchange Commission,
hereby ratifying and confirming my signature as it may be signed by said
attorneys to any and all amendments to said registration statements.
Pursuant to the requirements of the Securities Act of 1933, this instrument
has been signed below by the following in the capacity and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------------------ -------------------------------------------- -------------------
<C> <S> <C>
/s/ FRANK P.L. MINARD President and Director May 18, 1995
.........................................
(FRANK P.L. MINARD)
</TABLE>