<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
GOVERNMENT
INCOME FUND, INC.
ANNUAL REPORT
January 31, 1995
<PAGE>
- - --------------------------------------------------------------------------------
March 15, 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 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 impact higher interest rates will have on economic growth.
PORTFOLIO REVIEW
During the year ended January 31, 1995, domestic fixed income markets were
adversely affected by the increases in short-term interest rates. As a result,
the Fund's total return for the twelve months ended January 31, 1995, without
deducting sales charges was (3.95)% for Class A shares, (4.20)% for Class B
shares and (3.49)% for Class C shares. The Fund's total return for this period
after deducting the maximum applicable sales charges was (6.09)% for Class A
shares, (4.20)% for Class B shares and (3.49)% for Class C shares. In
comparison, the Lehman Brothers Mortgage-Backed Securities Index posted a return
of (0.49)% for the same period. The Fund underperformed primarily because of
differences in portfolio weighting and a decrease in the underlying value of
current coupon mortgage investments due to rising interest rates.
During the year ended January 31, 1995, the Fund paid distributions from net
investment income totalling $0.78 for Class A shares, $0.74 for Class B shares
and $0.84 for Class C shares. 30-day SEC yields at the end of January were 6.44%
for Class A shares, 6.34% for Class B shares and 7.09% for Class C shares.
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 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.
- - --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- - --------------------------------------------------------------------------------
Although the name has been changed to Mitchell Hutchins/Kidder, Peabody
Government Income Fund, Inc., the investment objective remains the same: to seek
high current income. Dennis L. McCauley and Nirmal Singh are jointly responsible
for the day-to-day portfolio management of the Fund. Mr. McCauley is a Managing
Director and Chief Investment Officer-Fixed Income of Mitchell Hutchins
responsible for overseeing all active fixed income investments, including
domestic and global taxable and tax-exempt mutual funds. Mr. Singh is a vice
president of Mitchell Hutchins responsible for overseeing investments in the
mortgage-backed securities section.
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.
PORTFOLIO FOCUS
During the year ended January 31, 1995, the Fund continued to invest primarily
in triple A rated securities. In response to market conditions, the duration of
the portfolio was lengthened slightly to bring the portfolio in line with the
Lehman Brothers Mortgage-Backed Securities Index. The duration of a fixed income
security is the weighted average term to maturity of the present value of its
cashflows, including interest and repayment of principal.
Our near term outlook for fixed income markets remains cautiously neutral. This
posture is based on recent economic developments, including the Mexican peso
crisis as well as the Barings P.L.C. debacle, that have reconfirmed a global
preference for safe havens such as the United States and German capital markets.
While some economic indicators suggest that the United States' economic growth
has slowed, further Federal Reserve tightening cannot be ruled out.
Thank you for your participation in the Mitchell Hutchins/Kidder, Peabody
Government 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 DENNIS L. MCCAULEY
FRANK P.L. MINARD DENNIS L. MCCAULEY
Chairman, Managing Director and Chief Investment
Mitchell Hutchins Asset Management Inc. Officer-Fixed Income,
Mitchell Hutchins Asset Management Inc.
NIRMAL SINGH
NIRMAL SINGH
Portfolio Manager,
Mitchell Hutchins/Kidder, Peabody
Government Income Fund, Inc.
</TABLE>
- - --------------------------------------------------------------------------------
2
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
- - --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE FUND
AND THE LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX
The following graph depicts the performance of the Mitchell Hutchins/Kidder,
Peabody Government Income Fund, Inc. versus the Lehman Brothers Mortgage-Backed
Securities Index. It is important to note the Mitchell Hutchins/Kidder, Peabody
Government Income Fund, Inc. is a professionally managed mutual fund while the
index is not available for investment and is unmanaged. The comparison is shown
for illustrative purposes only.
[GRAPH]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
11/22/85 12/31/85 12/31/86 12/31/87 12/31/88 12/31/89 12/31/90 12/31/91
KIDDER GOVT INCOME; A $10,000 $10,841 $11,597 $11,913 $12,756 $14,397 $15,217 $17,233
LEHMAN MTGE $10,000 $10,271 $11,650 $12,150 $13,210 $15,237 $15,871 $19,523
12/31/92 12/31/93 12/31/94 01/31/95
KIDDER GOVT INCOME; A $18,328 $19,457 $18,649 $18,931
LEHMAN MTGE $20,883 $22,312 $21,952 $22,422
</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.
AVERAGE ANNUAL RETURN
<TABLE>
<CAPTION>
% RETURN WITHOUT
DEDUCTING % RETURN AFTER DEDUCTING
MAXIMUM SALES CHARGE MAXIMUM SALES CHARGE
------------------------- -------------------------
CLASS CLASS
------------------------- -------------------------
A* B** C*** A* B** C***
<S> <C> <C> <C> <C> <C> <C>
- - --------------------------------------------------------------------------------------------------------------------
Twelve Months Ended 1/31/95 (3.95)% (4.20)% (3.49)% (6.09)% (4.20)% (3.49)%
- - --------------------------------------------------------------------------------------------------------------------
Five Years Ended 1/31/95 5.97 N/A N/A 5.49 N/A N/A
- - --------------------------------------------------------------------------------------------------------------------
Commencement of Operations Through 1/31/95`D' 6.65 (1.32) (0.60) 6.38 (1.32) (0.60)
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Maximum sales charge for Class A shares is 2.25% 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.
`D' Commencement of operations was November 22, 1985, June 14, 1993 and June
14, 1993 for Class A, Class B and Class C shares, respectively.
- - --------------------------------------------------------------------------------
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.
3
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
- - --------------------------------------------------------------------------------
RECENT PERFORMANCE RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL RETURN (1)
NET ASSET VALUE ------------------------------------
---------------------------------------- 12 MONTHS 6 MONTHS
01/31/95 07/31/94 01/31/94 ENDED 01/31/95 ENDED 01/31/95
<S> <C> <C> <C> <C> <C>
- - --------------------------------------------------------------------------------------------------------------------
Class A Shares $13.58 $13.94 $14.93 (3.95)% 0.23%
- - --------------------------------------------------------------------------------------------------------------------
Class B Shares 13.57 13.93 14.92 (4.20) 0.11
- - --------------------------------------------------------------------------------------------------------------------
Class C Shares 13.57 13.93 14.92 (3.49) 0.48
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
PERFORMANCE SUMMARY CLASS A SHARES
<TABLE>
<CAPTION>
NET ASSET VALUE
----------------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID (2) RETURN (1)
<S> <C> <C> <C> <C> <C>
- - ------------------------------------------------------------------------------------------------------------------------
11/22/85 - 12/31/85 $ 15.00 $15.42 $-- $ .1310 3.67%
- - ------------------------------------------------------------------------------------------------------------------------
1986 15.42 15.11 .1600 1.1662 6.98
- - ------------------------------------------------------------------------------------------------------------------------
1987 15.11 14.28 .0980 1.1227 2.73
- - ------------------------------------------------------------------------------------------------------------------------
1988 14.28 14.12 -- 1.1478 7.07
- - ------------------------------------------------------------------------------------------------------------------------
1989 14.12 14.70 -- 1.1679 12.88
- - ------------------------------------------------------------------------------------------------------------------------
1990 14.70 14.27 -- 1.2135 5.66
- - ------------------------------------------------------------------------------------------------------------------------
1991 14.27 14.91 -- 1.1740 13.26
- - ------------------------------------------------------------------------------------------------------------------------
1992 14.91 14.74 -- 1.0786 6.35
- - ------------------------------------------------------------------------------------------------------------------------
1993 14.74 14.82 -- .8221 6.23
- - ------------------------------------------------------------------------------------------------------------------------
1994 14.82 13.45 -- .7613 (4.15)
- - ------------------------------------------------------------------------------------------------------------------------
01/01/95 - 01/31/95 13.45 13.58 -- .0449 1.30
- - ------------------------------------------------------------------------------------------------------------------------
Totals: $ .2580 $ 9.8300
- - ------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 01/31/95: 80.77%
- - ------------------------------------------------------------------------------------------------------------------------
</TABLE>
PERFORMANCE SUMMARY CLASS B SHARES
<TABLE>
<CAPTION>
NET ASSET VALUE
----------------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID(2) RETURN (1)
<S> <C> <C> <C> <C> <C>
- - ------------------------------------------------------------------------------------------------------------------------
06/14/93 - 12/31/93 $ 15.00 $14.82 $-- $ .3480 1.15%
- - ------------------------------------------------------------------------------------------------------------------------
1994 14.82 13.45 -- .7245 (4.40)
- - ------------------------------------------------------------------------------------------------------------------------
01/01/95 - 01/31/95 13.45 13.57 -- .0431 1.21
- - ------------------------------------------------------------------------------------------------------------------------
Totals: $-- $1.1156
- - ------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 01/31/95: (2.15)%
- - ------------------------------------------------------------------------------------------------------------------------
</TABLE>
PERFORMANCE SUMMARY CLASS C SHARES
<TABLE>
<CAPTION>
NET ASSET VALUE
----------------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID(2) RETURN (1)
<S> <C> <C> <C> <C> <C>
- - ------------------------------------------------------------------------------------------------------------------------
06/14/93 - 12/31/93 $ 15.00 $14.82 $-- $ .4079 1.53%
- - ------------------------------------------------------------------------------------------------------------------------
1994 14.82 13.45 -- .8293 (3.68)
- - ------------------------------------------------------------------------------------------------------------------------
01/01/95 - 01/31/95 13.45 13.57 -- .0483 1.25
- - ------------------------------------------------------------------------------------------------------------------------
Totals: $-- $1.2855
- - ------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 01/31/95: (0.98)%
- - ------------------------------------------------------------------------------------------------------------------------
</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 for Class A would be lower if sales charges were included.
(2) Certain distributions may contain short-term capital gains.
4
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Portfolio of Investments
January 31, 1995
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000's) Dates Rates Value
- - ----------- ------------------------- -------- -----------
<C> <S> <C> <C> <C>
FEDERAL NATIONAL MORTGAGE ASSOCIATION CERTIFICATES -- 37.8%
$10,089 FNMA................................................ 04/01/2017-08/01/2024 7.50% $ 9,597,576
9,613 FNMA................................................ 03/01/2022-05/01/2024 8.00 9,372,970
-----------
Total Federal National Mortgage Association Certificates
(Cost -- $19,580,819)........................................ 18,970,546
-----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES -- 48.4%
9,063 GNMA................................................ 12/15/2021-10/15/2024 8.00 8,822,608
15,120 GNMA................................................ 09/15/2024-10/15/2024 8.50 15,110,401
76 GNMA................................................ 09/15/2015-11/15/2019 10.00 81,265
236 GNMA................................................ 09/15/2014-02/15/2016 10.50 255,253
-----------
Total Government National Mortgage Association Certificates
(Cost -- $24,301,386)........................................ 24,269,527
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 2.2%
22,296 Donaldson, Lufkin & Jenrette Mtg. Acceptance Corp.
(Cost -- $1,528,301).............................. 07/25/2023 2.113* 1,086,929
-----------
REPURCHASE AGREEMENT -- 11.6%
5,800 Morgan Stanley, dated 01/31/1995, collateralized by
$5,835,000 U.S. Treasury Notes, 7.875%, due
7/15/96; proceeds: $5,800,931
(Cost -- $5,800,000).............................. 02/01/1995 5.78 5,800,000
-----------
Total Investments (Cost -- $51,210,506) -- 100.0%................ 50,127,002
Liabilities in excess of other assets............................ (2,441)
-----------
Net Assets -- 100.0%............................................. $50,124,561
-----------
-----------
</TABLE>
- - ------------------
* Adjustable rate interest only security. This security entitles the holder to
receive interest payments from an underlying pool of mortgages. The risk
associated with this security is related to the speed of principal paydowns.
High prepayments would result in a smaller amount of interest being received
and cause the yield to decrease. Low prepayments would result in a greater
amount of interest being received and cause the yield to increase.
See accompanying notes to financial statements
5
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Statement of Assets and Liabilities
January 31, 1995
- - --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost -- $51,210,506)....................................... $50,127,002
Cash............................................................................................ 73,649
Interest receivable............................................................................. 327,073
Receivable for common stock sold................................................................ 500
Other........................................................................................... 66,338
-----------
Total assets................................................................................ 50,594,562
-----------
LIABILITIES
Payable for common stock repurchased............................................................ 274,734
Dividends payable............................................................................... 107,670
Payable to affiliate............................................................................ 47,489
Accrued expenses and other...................................................................... 40,108
-----------
Total liabilities........................................................................... 470,001
-----------
NET ASSETS
Aggregate paid-in-capital -- $0.01 par value.................................................... $60,877,775
Accumulated net realized capital losses from investment activities.............................. (9,669,710)
Net unrealized depreciation of investments...................................................... (1,083,504)
-----------
Net assets applicable to shares outstanding..................................................... $50,124,561
-----------
-----------
CLASS A:
Net assets...................................................................................... $44,984,779
-----------
Shares outstanding.............................................................................. 3,313,196
-----------
Net asset value and redemption value per share.................................................. $13.58
-----------
-----------
Maximum offering price per share (net asset value plus sales charge
of 2.25% of offering price)................................................................... $13.89
-----------
-----------
CLASS B:
Net assets...................................................................................... $ 1,279,684
-----------
Shares outstanding.............................................................................. 94,291
-----------
Net asset value, offering price and redemption value per share.................................. $13.57
-----------
-----------
CLASS C:
Net assets...................................................................................... $ 3,860,098
-----------
Shares outstanding.............................................................................. 284,478
-----------
Net asset value, offering price and redemption value per share.................................. $13.57
-----------
-----------
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Statement of Operations
For the Year Ended January 31, 1995
- - --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest......................................................................................... $4,612,000
----------
EXPENSES:
Investment advisory and administration........................................................... 407,105
Service and distribution fees -- Class A......................................................... 295,530
Service and distribution fees -- Class B......................................................... 11,183
Transfer agency and service fees................................................................. 54,413
Federal and state registration fees.............................................................. 47,914
Reports and notices to shareholders.............................................................. 44,371
Custody and accounting fees...................................................................... 37,927
Directors' fees and expenses..................................................................... 22,364
Legal and audit fees............................................................................. 22,205
Amortization of organization expenses............................................................ 18,441
Other............................................................................................ 12,186
----------
Total expenses................................................................................... 973,639
----------
NET INVESTMENT INCOME................................................................................ 3,638,361
----------
REALIZED AND UNREALIZED LOSSES FROM INVESTMENT ACTIVITIES:
Net realized losses from investment activities................................................... (4,973,951)
Net change in unrealized appreciation/depreciation of investments................................ (1,972,889)
----------
NET REALIZED AND UNREALIZED LOSSES FROM INVESTMENT ACTIVITIES........................................ (6,946,840)
----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................. ($3,308,479)
----------
----------
</TABLE>
See accompanying notes to financial statements
7
<PAGE>
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Five Months Ended
January 31, 1995 January 31, 1994
---------------- -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income................................................ $ 3,638,361 $ 1,420,972
Net realized gains (losses) on investment activities................. (4,973,951) 699,037
Net change in unrealized appreciation/depreciation of investments.... (1,972,889) (1,104,690)
---------------- -----------------
Net increase (decrease) in net assets resulting from operations...... (3,308,479) 1,015,319
---------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- Class A..................................... (3,309,531) (1,349,922)
Net investment income -- Class B..................................... (79,144) (22,796)
Net investment income -- Class C..................................... (249,686) (48,254)
---------------- -----------------
Total distributions from net investment income....................... (3,638,361) (1,420,972)
---------------- -----------------
FROM COMMON STOCK TRANSACTIONS:
Net proceeds from the sale of shares................................. 4,765,260 4,702,768
Cost of shares repurchased........................................... (30,984,562) (13,306,509)
Proceeds from distributions reinvested............................... 2,706,257 1,047,430
---------------- -----------------
Net decrease in net assets from common stock transactions............ (23,513,045) (7,556,311)
---------------- -----------------
Total decrease in net assets......................................... (30,459,885) (7,961,964)
---------------- -----------------
NET ASSETS:
Beginning of period.................................................. 80,584,446 88,546,410
---------------- -----------------
End of period........................................................ $ 50,124,561 $ 80,584,446
---------------- -----------------
---------------- -----------------
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Notes to Financial Statements
- - --------------------------------------------------------------------------------
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mitchell Hutchins/Kidder, Peabody Government Income Fund, Inc. (formerly
Kidder, Peabody Government Income Fund, Inc.) (the 'Fund') is registered under
the Investment Company Act of 1940, as amended, as a diversified, open-end
investment company.
Effective September 1, 1993, the Fund changed its fiscal year end from
August 31 to January 31.
Organizational Matters -- On June 14, 1993 the Fund adopted the Choice
Pricing System'sm'. Prior to June 14, 1993, the Fund issued only Class A shares;
subsequent to that date the Fund issued Class A, Class B and Class C shares.
Each class represents interests in the same assets of the Fund and the classes
are identical except for differences in their sales charge structure and ongoing
service and distribution charges. All classes of shares have equal rights as to
voting privileges, except that each class has exclusive voting rights with
respect to its distribution plan.
Valuation of Investments -- The value of each U.S. Government security for
which quotations are available is based on the average of the quoted bid and
asked prices. An independent pricing service is used to determine valuations for
normal institutional-size trading units of securities. Options which are traded
on exchanges are valued at their last sales price as of the close of such
exchanges. Futures are valued daily using the last sales price as of the close
of trading on the Chicago Board of Trade. Short-term obligations with maturities
of 60 days or less are valued at amortized cost. The ability of the issuers of
the debt securities held by the Fund to meet their obligations may be affected
by economic developments, including those particular to a specific industry or
region.
Repurchase Agreements -- The Fund's custodian takes possession of
securities under repurchase agreements before releasing any money to the
counterparty under such agreement. Eligible collateral for repurchase agreement
transactions are the instruments that the Fund is allowed to invest in, as
stated in the Prospectus. 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. 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.
Investment Transactions and Investment Income -- Investment transactions
are recorded as of the trade date. Realized gains and losses are determined on
the identified cost basis. Interest income is earned from settlement date and is
recognized on an accrual basis. Income and Fund-level expenses are allocated to
each class on a pro-rata basis based upon each class' daily settled net assets.
Class-specific expenses are charged directly to each class. Dividends from net
investment income are calculated daily based upon the respective classes net
investment income. Distributions from net realized gains are allocated based
upon the outstanding shares of each class.
9
<PAGE>
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Notes to Financial Statements -- (continued)
- - --------------------------------------------------------------------------------
Federal Tax Status -- It is the Fund's policy to continue to comply with
the requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no Federal income tax provision 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, the Fund
intends not to be subject to a Federal excise tax.
At January 31, 1995, the Fund had a net capital loss carryforward of
$9,669,710. The loss carryforward is available as a reduction, to the extent
provided in the regulations, of future net realized capital gains, and will
expire between January 31, 1998 and January 31, 2003.
Dividends and Distributions -- Dividends and distributions to shareholders
are recorded on the ex-dividend date. The Fund declares dividends on a daily
basis from net investment income. Net capital gains, if any, will be distributed
at least annually, but the Fund may make more frequent distributions 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 considered either 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 that 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.
Option Writing/Purchasing -- When the Fund writes a call or put option, an
amount equal to the premium received is included in the Fund's statement of
assets and liabilities as an asset and an equivalent liability. The amount of
the liability is subsequently 'marked to market' to reflect the current market
value of the option written. If an option which the Fund has written expires on
its stipulated date, the Fund realizes a gain in the amount of the premium
originally received, and the liability related to such option is extinguished.
If the Fund enters into a closing purchase transaction, it realizes a gain or
loss determined by the difference between the premium received and the cost of
the closing transaction. If a call option which the Fund has written is
exercised, the Fund realizes a gain or loss from the sale of the underlying
security and the proceeds from such sale are increased by the premium originally
received. If a put option which the Fund has written is exercised, the amount of
the premium originally received reduces the cost of the security that the Fund
purchases upon exercise of the option. As the writer of an option, the Fund may
have no control over whether the underlying securities are sold (called) or
purchased (put) and as a result bears the market risk of an unfavorable change
in price of the security underlying the written option.
10
<PAGE>
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Notes to Financial Statements -- (continued)
- - --------------------------------------------------------------------------------
The premium paid by the Fund for the purchase of a call or put option is
included in the Fund's statement of assets and liabilities as an investment and
subsequently 'marked to market' to reflect the current market value of the
option purchased. If a call or put option which the Fund has purchased expires
on the stipulated expiration date, the Fund realizes a loss in the amount of the
cost of the option. If the Fund enters into a closing sale transaction, it
realizes a gain or loss, depending on whether the proceeds from the sale are
greater or less than the cost of the option. If the Fund exercises a put option,
it realizes a gain or loss from the sale of the underlying security and the
proceeds from such sale are decreased by the premium originally paid. If the
Fund exercises a call option, the cost of the security that the Fund purchases
upon exercise is increased by the premium originally paid.
Futures Contracts -- A futures contract is an agreement between two parties
to buy and sell a security for a set price on a future date. Initial margin
deposits are made upon entering into futures contracts and can be either cash or
securities. During the period the futures contract is open, changes in the value
of the contract are recognized as unrealized gains or losses by 'marking to
market' on a daily basis to reflect the market value of the contract at the end
of each day's trading. Variation margin payments are made or received, depending
upon whether unrealized gains or losses are incurred. When the contract is
closed, the Fund records a realized gain or loss equal to the difference between
the proceeds from (or cost of) the closing transaction and the Fund's basis in
the contract.
The Fund invests in financial futures contracts solely for the purpose of
hedging its existing portfolio securities against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Fund may not achieve the anticipated benefits of the financial
futures contracts and may realize a loss. The use of futures transactions
involves the risk of imperfect correlation in the movement of the futures
contracts and the underlying hedged asset.
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
investment advisory and administration services are payable monthly, and
calculated and accrued daily by applying an annual rate of .625 of 1% to the net
assets of the Fund, determined at the close of business each day. At January 31,
1995, the Fund owed KPAM $27,109 for investment advisory fees.
In compliance with applicable state securities laws, the Fund's investment
adviser will reimburse the Fund if and to the extent that the aggregate
operating expenses in any fiscal year,
11
<PAGE>
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Notes to Financial Statements -- (continued)
- - --------------------------------------------------------------------------------
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.
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
0.50% per annum and a service fee of 0.25% per annum of average class net
assets. The Fund pays KP the service and distribution fees monthly. 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 $20,380 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 depreciation of
investments were as follows:
<TABLE>
<S> <C>
Gross depreciation (investments having an excess of cost over value).......... $(1,134,409)
Gross appreciation (investments having an excess of value over cost).......... 50,905
-----------
Net unrealized depreciation of investments.................................... $(1,083,504)
-----------
-----------
</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............................................................ $245,380,388
Sales................................................................ $263,243,681
</TABLE>
12
<PAGE>
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Notes to Financial Statements -- (concluded)
- - --------------------------------------------------------------------------------
SHARES OF COMMON STOCK
At 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............................. 154,271 $ 2,160,857 27,481 $ 389,801 158,331 $2,214,602
Shares issued in reinvestment of
dividends and distributions........... 173,778 2,408,464 5,144 71,137 16,434 226,656
Shares repurchased...................... (2,056,749) (28,426,526) (48,732) (678,196) (136,770) (1,879,840)
---------- ------------ ------- ---------- -------- ----------
Net increase (decrease)............. (1,728,700) $(23,857,205) (16,107) $ (217,258) 37,995 $ 561,418
---------- ------------ ------- ---------- -------- ----------
---------- ------------ ------- ---------- -------- ----------
Five months ended January 31, 1994:
Shares sold............................. 81,186 $ 1,211,457 80,178 $1,197,599 154,132 $2,293,712
Shares issued in reinvestment of
dividends and distributions........... 66,104 985,316 1,363 20,300 2,808 41,814
Shares repurchased...................... (804,007) (11,994,039) (45,310) (676,265) (42,643) (636,205)
---------- ------------ ------- ---------- -------- ----------
Net increase (decrease)............. (656,717) $ (9,797,266) 36,231 $ 541,634 114,297 $1,699,321
---------- ------------ ------- ---------- -------- ----------
---------- ------------ ------- ---------- -------- ----------
</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, policies and
restrictions. During the interim period and thereafter, assuming shareholder
approval, Mitchell Hutchins will receive the same fees previously received by
KPAM 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 Government Income Fund, Inc.'
13
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Financial Highlights
- - --------------------------------------------------------------------------------
Selected data for a share of common stock outstanding is presented below:
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------
FIVE MONTHS YEAR
FOR THE 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........................ $14.43 $14.21 $14.58 $14.88 $15.00 $14.93
-------- ------- ------- ------- --------- ---------
Net increase (decrease) from
investment operations:
Net investment income........... 1.20 1.18 1.13 0.97 0.25 0.78
Net realized and unrealized
gains (losses) on
investments................... (0.22) 0.37 0.30 0.12 (0.07) (1.35)
-------- ------- ------- ------- --------- ---------
Net increase (decrease) in net
asset value from investment
operations.................... 0.98 1.55 1.43 1.09 0.18 (0.57)
-------- ------- ------- ------- --------- ---------
Less Distributions:
Dividends from net investment
income........................ (1.20) (1.18) (1.13) (0.97) (0.25) (0.78)
-------- ------- ------- ------- --------- ---------
Net asset value, end of
period........................ $14.21 $14.58 $14.88 $15.00 $14.93 $13.58
-------- ------- ------- ------- --------- ---------
-------- ------- ------- ------- --------- ---------
Total investment return#........ 6.98% 11.41% 10.13% 7.70% 1.20% (3.95)%
-------- ------- ------- ------- --------- ---------
-------- ------- ------- ------- --------- ---------
Ratios/Supplemental Data:
Net assets, end of period (in
thousands).................... $100,148 $96,920 $91,955 $85,453 $75,260 $44,985
Ratios of expenses to average
net assets.................... 1.40% 1.23% 1.18% 1.23% 1.56%* 1.53%
Ratios of net investment income
to average net assets......... 8.33% 8.29% 7.67% 6.38% 4.02%* 5.57%
Portfolio turnover.............. 142.98% 3.27% 74.95% 138.77% 126.76% 255.76%
</TABLE>
- - ------------
`D' From June 14, 1993 (commencement of offering of shares) to August 31, 1993.
* Annualized
# Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends at net asset
value on the payable dates, 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 of less than one year have not been annualized.
14
<PAGE>
<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B CLASS C
- - ------------------------------------------ ------------------------------------------
PERIOD FIVE MONTHS YEAR PERIOD FIVE MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED 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>
$15.00 $14.99 $14.92 $15.00 $14.99 $14.92
- - --------- --------- --------- --------- --------- ---------
0.17 0.23 0.74 0.20 0.28 0.84
(0.01) (0.07) (1.35) (0.01) (0.07) (1.35)
- - --------- --------- --------- --------- --------- ---------
0.16 0.16 (0.61) 0.19 0.21 (0.51)
- - --------- --------- --------- --------- --------- ---------
(0.17) (0.23) (0.74) (0.20) (0.28) (0.84)
- - --------- --------- --------- --------- --------- ---------
$14.99 $14.92 $13.57 $14.99 $14.92 $13.57
- - --------- --------- --------- --------- --------- ---------
- - --------- --------- --------- --------- --------- ---------
0.79% 1.06% (4.20)% 1.22% 1.37% (3.49)%
- - --------- --------- --------- --------- --------- ---------
- - --------- --------- --------- --------- --------- ---------
$ 1,112 $ 1,647 $ 1,280 $ 1,981 $ 3,677 $ 3,860
1.59%* 1.87%* 1.78% .93%* 1.14%* 1.03%
6.02%* 3.70%* 5.32% 6.68%* 4.44%* 6.07%
138.77% 126.76% 255.76% 138.77% 126.76% 255.76%
</TABLE>
15
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
- - --------------------------------------------------------------------------------
Report of Independent Auditors
- - --------------------------------------------------------------------------------
The Board of Directors and Shareholders,
Mitchell Hutchins/Kidder, Peabody Government Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Mitchell Hutchins/Kidder, Peabody Government
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. 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 Government Income Fund, Inc. as of January 31, 1995,
the results of its operations, the changes in its net assets and the financial
highlights for the periods presented in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
March 13, 1995
16
<PAGE>
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT 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 from the Fund. Accordingly, we are advising you that all
of the distributions paid by the Mitchell Hutchins/Kidder, Peabody Government
Income Fund, Inc. during the period were derived from net investment income and
are taxable as ordinary income.
Dividends received by tax-exempt recipients (e.g., IRAs and Keoghs) need not be
reported as 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 to calendar year 1995. The notification, which will
reflect the amounts 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.
17
<PAGE>
- - ------------------------------------------------------
Mitchell Hutchins/Kidder, Peabody
Government Income Fund, Inc.
(formerly Kidder, Peabody
Government Income Fund, Inc.)
1285 Avenue of the Americas
New York, New York 10019
- - ------------------------------------------------------
DIRECTORS
David J. Beaubien
William W. Hewitt, Jr.
Thomas R. Jordan
Carl W. Schafer
- - ------------------------------------------------------
OFFICERS
Frank P.L. Minard
President
Dennis L. McCauley
Vice President
Nirmal Singh
Vice President
Victoria E. Schonfeld
Vice President
Dianne E. O'Donnell
Vice President and Secretary
Julian F. Sluyters
Vice President and Treasurer
- - ------------------------------------------------------
INVESTMENT ADVISER, ADMINISTRATOR AND DISTRIBUTOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
- - ------------------------------------------------------
This report is not to be used in connection with the offering of shares of the
Fund unless accompanied or preceded by an effective prospectus.
A prospectus containing more complete information for any of the funds listed on
the back cover can be obtained from a PaineWebber investment executive or
correspondent firm. Read the prospectus carefully before investing.
<PAGE>
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as 'D'
The copyright symbol shall be expressed as 'c'
The service mark shall be expressed as 'sm'
