<PAGE>
PAINEWEBBER AND MITCHELL
HUTCHINS/KIDDER, PEABODY
MUTUAL FUNDS
PAINEWEBBER OFFERS A FAMILY OF 22 MUTUAL FUNDS WHICH ENCOMPASS A DIVERSIFIED
RANGE OF INVESTMENT GOALS. INVESTORS MAY EXCHANGE THEIR FUND SHARES WITH OTHER
FUNDS WITHIN THE FAMILY.
INCOME FUNDS
o PW GLOBAL INCOME FUND
o PW HIGH INCOME FUND
o PW INVESTMENT GRADE INCOME FUND
o PW LOW DURATION U.S. GOVERNMENT INCOME FUND
o PW STRATEGIC INCOME FUND
o PW U.S. GOVERNMENT INCOME FUND
TAX-FREE INCOME FUNDS
o PW CALIFORNIA TAX-FREE INCOME FUND
o PW MUNICIPAL HIGH INCOME FUND
o PW NATIONAL TAX-FREE INCOME FUND
o PW NEW YORK TAX-FREE INCOME FUND
GROWTH FUNDS
o MH/KP EMERGING MARKETS EQUITY FUND
o MH/KP SMALL CAP GROWTH FUND
o PW CAPITAL APPRECIATION FUND
o PW GLOBAL EQUITY FUND
o PW GROWTH FUND
o PW REGIONAL FINANCIAL GROWTH FUND
o PW SMALL CAP VALUE FUND
GROWTH AND INCOME FUNDS
o MH/KP ASSET ALLOCATION FUND
o PW BALANCED FUND
o PW GROWTH AND INCOME FUND
o PW UTILITY INCOME FUND
PAINEWEBBER MONEY MARKET FUND
- ------------------
(COPYRIGHT) 1995 PAINEWEBBER INCORPORATED
PRINTED ON
RECYCLED PAPER
MITCHELL HUTCHINS/
KIDDER, PEABODY
INTERMEDIATE FIXED
INCOME FUND
ANNUAL REPORT
August 31, 1995
<PAGE>
[This page intentionally left blank]
2
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY INTERMEDIATE FIXED INCOME FUND
- --------------------------------------------------------------------------------
Recent Performance Results (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN1
NET ASSET VALUE ------------------------------------
---------------------------------------------- 12 MONTHS 6 MONTHS
08/31/95 02/28/95 08/31/94 ENDED 08/31/95 ENDED 08/31/95
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $ 12.11 $11.60 $ 11.66 9.60% 7.24%
Class B Shares 12.11 11.60 11.66 9.14 7.03
Class C Shares 12.10 11.60 11.66 9.83 7.43
</TABLE>
PERFORMANCE SUMMARY CLASS A SHARES
<TABLE>
<CAPTION>
NET ASSET VALUE
----------------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID2 RETURN1
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
03/12/92-12/31/92 $ 12.00 $12.27 -- $ 0.6687 8.74 %
1993 12.27 12.35 $ 0.0930 0.6606 7.90
1994 12.35 11.31 0.2150 0.6003 (3.59)
01/01/95-08/31/95 11.31 12.11 -- 0.4172 10.88
Totals: $ 0.3080 $ 2.3468
</TABLE>
CUMULATIVE TOTAL RETURN AS OF 08/31/95: 25.43%
<TABLE>
<CAPTION>
PERFORMANCE SUMMARY CLASS B SHARES
NET ASSET VALUE
----------------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID2 RETURN1
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
05/10/93-12/31/93 $ 12.63 $12.35 -- $ 0.3542 2.30%
1994 12.35 11.31 $ 0.2150 0.5417 (4.07)
01/01/95-08/31/95 11.31 12.11 -- 0.3867 10.60
Totals: $ 0.2150 $ 1.2826
</TABLE>
CUMULATIVE TOTAL RETURN AS OF 08/31/95: 8.54%
<TABLE>
<CAPTION>
PERFORMANCE SUMMARY CLASS C SHARES
NET ASSET VALUE
----------------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID2 RETURN1
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
05/10/93-12/31/93 $ 12.63 $12.35 -- $ 0.4166 2.81%
1994 12.35 11.30 $ 0.2150 0.6293 (3.43)
01/01/95-08/31/95 11.30 12.10 -- 0.4367 11.11
Totals: $ 0.2150 $ 1.4826
</TABLE>
CUMULATIVE TOTAL RETURN AS OF 08/31/95: 10.31%
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURN
% 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 08/31/95 9.60% 9.14% 9.83% 7.12% 9.14% 9.83%
Commencement of
Operations
Through 08/31/95+ 6.75 3.61 4.34 6.04 3.61 4.34
</TABLE>
(1) Figures assume reinvestment of all dividends and capital gain distributions
at net asset value on the payable dates and do not include sales charges;
results for Class A shares would be lower if sales charges were included.
(2) Certain distributions may contain short-term capital gains.
* Maximum sales charge for Class A shares is 2.25% of the public offering
price. Class A shares incur ongoing 12b-1 service fees.
** Class B shares are sold without initial or contingent deferred sales
charges, but incur ongoing 12b-1 distribution and service fees.
*** Class C shares are sold without initial or contingent deferred sales
charges and are available to certain eligible participants.
+ Commencement of offering of shares dates are March 12, 1992, May 10, 1993
and May 10, 1993 for Class A, Class B and Class C shares, respectively.
- --------------------------------------------------------------------------------
THE DATA ABOVE REPRESENT PAST PERFORMANCE OF THE FUND'S SHARES, WHICH IS NO
GUARANTEE OF FUTURE RESULTS.
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 INTERMEDIATE FIXED INCOME FUND
- --------------------------------------------------------------------------------
Portfolio of Investments
August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSET-BACKED SECURITIES--2.85%
- -------------------------------------------------------------------------
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
$ 138 Charming Shoppes Master
Trust.................... 04/15/03 7.000% $ 140,285
75 MBNA Master Credit
Card..................... 02/15/08 6.450 73,313
150 MBNA Master Credit
Card..................... 01/15/03 6.600 151,148
160 Standard Credit Card
Services................. 06/07/00 6.750 161,800
----------
Total Asset-Backed Securities
(cost--$522,534)..................... 526,546
----------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
CORPORATE NOTES--22.42%
<S> <C> <C> <C> <C>
125 American Home Products... 02/15/00 7.700 130,726
125 BCH Cayman Islands....... 06/15/04 8.250 131,663
125 Bell Telephone Co. of
Pennsylvania............. 12/15/30 8.350 147,029
100 Boise Cascade Corp....... 08/01/97 7.375 101,199
75 Central ME Power Co.
MTN...................... 06/02/98 7.400 75,563
100 Columbia Healthcare
Corp..................... 04/15/24 8.360 109,553
100 Duty Free International
Inc...................... 01/15/04 7.000 92,623
150 Ford Motor Credit
Corp. ................... 05/15/99 7.250 153,206
600 General Motors Acceptance
Corp..................... 09/11/97 6.100 597,090
50 Great Atlantic & Pacific
Tea Co................... 01/15/98 9.125 52,111
100 Great Lakes Power Inc.... 12/01/99 8.900 105,981
245 Hydro Quebec............. 02/01/12 8.250 to
to 11.750
04/15/26 297,726
240 Lehman Brothers.......... 07/15/02 7.125 236,455
100 National Westminster
Bankcorp................. 11/15/03 9.375 115,234
350 News America Holdings
Inc...................... 12/15/01 10.125 to
to 12.000
10/15/12 395,510
100 Nippon Telegraph &
Telephone Corp........... 07/27/98 9.500 108,345
100 Ontario Province CDA..... 08/04/05 7.000 101,175
550 PaineWebber Group
Inc.*.................... 03/11/97 8.760 568,018
200 Paramount Communications
Inc...................... 07/15/00 5.875 190,626
150 Petroleos Mexicanos...... 03/08/99 6.937 133,500
175 Time Warner Entertainment
Co....................... 06/15/05 7.750 to
to 9.150
02/01/23 181,126
125 Woolworth Corp........... 06/01/00 7.000 124,438
----------
Total Corporate Notes
(cost--$4,108,671)................... 4,148,897
----------
<CAPTION>
- -------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES--23.29%
- -------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS--5.34%
<S> <C> <C> <C> <C>
294 Collateralized Mortgage
Obligation Trust......... 01/01/17 8.000 298,366
170 Community Loan Program... 10/01/18 4.500 142,163
200 FHLMC.................... 06/15/21 7.000 196,400
84 FNMA..................... 02/01/24 0.000** 54,781
94 FNMA..................... 04/01/23 7.000*** 29,404
108 Salomon Brothers Mortgage
Securities, Series
1984, Class 2 ......... 11/01/12 8.125 110,352
160 Vornado Financial
Corp..................... 11/23/00 6.360 156,600
----------
Total Collateralized Mortgage
Obligations (cost--$994,407)......... 988,066
----------
<CAPTION>
FEDERAL HOME LOAN MORTGAGE CORPORATION CERTIFICATES--7.71%
<S> <C> <C> <C> <C>
800 FHLMC.................... 09/01/95 5.670 800,000
432 FHLMC.................... 03/01/09 6.500 425,936
204 FHLMC.................... 08/01/25 7.000 200,620
----------
Total Federal Home Loan Mortgage
Corporation Certificates
(cost--$1,426,374)....... 1,426,556
----------
</TABLE>
4
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY INTERMEDIATE FIXED INCOME FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MORTGAGE-BACKED SECURITIES--(CONCLUDED)
- -------------------------------------------------------------------------
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
- ---------- ---------- ---------- ----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION CERTIFICATES--2.47%
<S> <C> <C> <C> <C>
$ 144 FNMA..................... 07/01/17 7.000% $ 144,814
185 FNMA..................... 02/01/14 7.500 187,531
120 FNMA..................... 04/01/17 8.500 125,162
----------
Total Federal National Mortgage
Association Certificates
(cost--$446,867)......... 457,507
----------
<CAPTION>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES--6.55%
<S> <C> <C> <C> <C>
50 GNMA..................... 07/20/25 6.000 49,890
167 GNMA..................... 08/20/25 6.000 166,948
305 GNMA..................... 07/15/08 6.500 301,392
41 GNMA..................... 08/20/25 6.500 41,132
40 GNMA..................... 09/20/25 6.500 40,400
283 GNMA..................... 10/15/16 9.000 299,852
96 GNMA..................... 05/15/18 9.000 101,523
197 GNMA..................... 08/15/17 9.500 210,519
----------
Total Government National Mortgage
Association Certificates
(cost--$1,204,614)....... 1,211,656
----------
<CAPTION>
OTHER MORTGAGE-BACKED SECURITIES--1.22%
<S> <C> <C> <C> <C>
216 Mid State Trust
(cost--$221,363)......... 04/01/30 8.330 226,506
----------
Total Mortgage-Backed Securities
(cost--$4,293,625)................... 4,310,291
----------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. GOVERNMENT OBLIGATIONS-- 45.76%
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5,893 U.S. Treasury Notes...... 05/31/97 5.750 to
to 7.875
05/15/05 6,122,465
1,950 U.S. Treasury Bonds...... 05/15/05 7.625 to
to 12.000
02/15/25 2,345,133
----------
Total U.S. Government Obligations
(cost--$8,231,420)................... 8,467,598
----------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REPURCHASE AGREEMENT-- 4.16%
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
770 Repurchase Agreement
dated 08/31/95 with State
Street Bank & Trust Co.,
collateralized by
$825,000 U.S. Treasury
Bill, 5.250% due
06/27/96; proceeds:
$770,123
(cost--$770,000)......... 09/01/95 5.750 770,000
----------
TOTAL INVESTMENTS
(cost--$17,926,250)--98.48%.......... 18,223,332
Other assets in excess of
liabilities--1.52%................... 281,305
----------
NET ASSETS--100.00%.................. $18,504,637
----------
----------
</TABLE>
- ------------------
* Deemed to be affiliated security. During the year ended August 31, 1995, the
Fund earned $48,180 in interest income on such security.
** Principal only security. This security entitles the holder to receive
principal payments from an underlying pool of mortgages. The risk associated
with this security is related to the speed of principle paydowns. High
prepayments return principal faster than expected and cause the yield to
increase. Low prepayments return principal more slowly than expected and
cause the yield to decrease.
*** 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 INTERMEDIATE FIXED INCOME FUND
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost--$17,926,250)............... $18,223,332
Cash.................................................... 5,571
Receivable for securities sold.......................... 449,503
Interest receivable..................................... 251,296
Receivable from investment adviser...................... 33,358
Receivable for shares of beneficial interest sold....... 629
Deferred organizational expenses........................ 65,211
Other assets............................................ 13,357
-----------
Total assets........................................ 19,042,257
-----------
LIABILITIES
Payable for investments purchased....................... 412,650
Dividends payable....................................... 44,526
Payable for shares of beneficial interest repurchased... 34,064
Accrued expenses........................................ 46,380
-----------
Total liabilities................................... 537,620
-----------
NET ASSETS
Beneficial interest shares of $0.001 par value
outstanding (unlimited amount authorized).............. 19,652,508
Accumulated net realized losses from investment
transactions........................................... (1,444,953)
Net unrealized appreciation of investments.............. 297,082
-----------
Net assets.............................................. $18,504,637
-----------
-----------
CLASS A:
Net assets.............................................. $15,664,222
-----------
Shares outstanding...................................... 1,293,781
-----------
Net asset value and redemption value per share.......... $12.11
-----------
-----------
Maximum offering price per share (net asset value plus
sales charge of 2.25% of offering price)............... $12.39
-----------
-----------
CLASS B:
Net assets.............................................. $1,898,429
-----------
Shares outstanding...................................... 156,795
-----------
Net asset value, offering price and redemption value per
share.................................................. $12.11
-----------
-----------
CLASS C:
Net assets.............................................. $941,986
-----------
Shares outstanding...................................... 77,838
-----------
Net asset value, offering price and redemption value per
share................................................... $12.10
-----------
-----------
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY INTERMEDIATE FIXED INCOME FUND
- --------------------------------------------------------------------------------
Statement of Operations
For the Year Ended August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest................................................. $1,924,346
----------
EXPENSES:
Investment advisory and administration fees.............. 183,922
Service fees--Class A.................................... 56,965
Service and distribution fees--Class B................... 16,206
Custody and accounting fees.............................. 62,779
Legal and audit fees..................................... 50,078
Amortization of organizational expenses.................. 36,513
Reports and notices to shareholders...................... 33,507
Transfer agency and service fees......................... 25,894
Federal and state registration fees...................... 24,033
Trustees' fees and expenses.............................. 10,000
Other.................................................... 4,724
----------
Total expenses........................................... 504,621
Less: Fee waivers........................................ (69,892)
----------
Net expenses............................................. 434,729
----------
NET INVESTMENT INCOME....................................... 1,489,617
----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT AND
OPTION TRANSACTIONS:
Net realized losses from investment and option
transactions........................................... (1,021,879)
Net change in unrealized appreciation/depreciation of
investments and options................................ 1,479,862
----------
NET REALIZED AND UNREALIZED GAINS FROM INVESTMENT AND OPTION
TRANSACTIONS.............................................. 457,983
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $1,947,600
----------
----------
</TABLE>
See accompanying notes to financial statements
7
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY INTERMEDIATE FIXED INCOME FUND
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
1995 1994
---------- ----------
<S> <C> <C>
FROM OPERATIONS:
Net investment income.......................... $1,489,617 $2,358,587
Net realized losses from investment and option
transactions................................. (1,021,879) (1,080,046)
Net change in unrealized
appreciation/depreciation of investments and
options...................................... 1,479,862 (2,781,878)
---------- ----------
Net increase (decrease) in net assets resulting
from operations.............................. 1,947,600 (1,503,337)
---------- ----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income--Class A................. (1,298,081) (2,152,026)
Net investment income--Class B................. (112,596) (126,577)
Net investment income--Class C................. (78,940) (79,984)
Net realized capital gains--Class A............ -- (861,874)
Net realized capital gains--Class B............ -- (49,787)
Net realized capital gains--Class C............ -- (27,420)
---------- ----------
Total dividends and distributions to
shareholders................................. (1,489,617) (3,297,668)
---------- ----------
FROM BENEFICIAL INTEREST TRANSACTIONS:
Net proceeds from the sale of shares........... 1,068,448 9,963,505
Cost of shares repurchased..................... (22,776,107) (29,198,771)
Proceeds from dividends reinvested............. 1,056,362 2,498,504
----------- -----------
Net decrease in net assets from beneficial
interest transactions........................ (20,651,297) (16,736,762)
----------- -----------
Net decrease in net assets..................... (20,193,314) (21,537,767)
NET ASSETS:
Beginning of period............................ 38,697,951 60,235,718
---------- -----------
End of period.................................. $18,504,637 $38,697,951
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY INTERMEDIATE FIXED INCOME FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mitchell Hutchins/Kidder, Peabody Intermediate Fixed Income Fund (formerly
Kidder, Peabody Intermediate Fixed Income Fund) (the 'Fund') is registered under
the Investment Company Act of 1940, as amended, as a diversified, open-end
investment company.
Organizational Matters--The Fund offers 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 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 Fund's investments are valued at market value
or, in the absence of a market value, at fair value as determined by or under
the direction of the Trustees. The value of U.S. government securities for which
quotations are available are based on the average of 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 if their term to maturity from
date of purchase was less than 60 days, or by amortizing their value on the 61st
day prior to maturity if their term to maturity from date of purchase when
acquired by the Fund was greater than 60 days. 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.
Investment Transactions and Investment Income--Investment transactions are
recorded on 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.
Repurchase Agreements--The Fund's custodian takes possession of the
collateral pledged for investments in repurchase agreements. The underlying
collateral is valued daily on a mark-to-market basis to ensure that the value,
including accrued interest, is at least equal to the repurchase price. In the
event of default of the obligation to repurchase, the Fund has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
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
9
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY INTERMEDIATE FIXED INCOME FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements-- (continued)
- --------------------------------------------------------------------------------
investment income, capital gains and certain other amounts, if any, the Fund
intends not to be subject to a Federal excise tax.
At August 31, 1995, the Fund had a net capital loss carryforward of
$1,444,953. The loss carryforward is available as a reduction, to the extent
provided in the regulations, of future net realized capital gains and will
expire August 31, 2003.
Dividends and Distributions--Dividends and distributions to shareholders
are recorded on the ex-dividend date. 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--The Fund may write options to increase its
income or to hedge a portion of its portfolio. 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.
The Fund may purchase a call or put option to hedge against adverse market
shifts. 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
10
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY INTERMEDIATE FIXED INCOME FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements-- (continued)
- --------------------------------------------------------------------------------
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. Certain
risks may arise upon writing or purchasing options from the potential inability
of counterparties to meet the terms of the options.
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.
Securities Lending--The Fund may lend securities to well-known and
recognized U.S. and foreign brokers, dealers and banks. The Fund's loans of
securities will be collateralized by cash, letters of credit or government
securities. The cash or instruments collateralizing the Fund's loans of
securities will be maintained at all times in a segregated account with the
Fund's custodian, or with a designated sub-custodian, in an amount at least
equal to the current market value of the loaned securities.
INVESTMENT ADVISER AND ADMINISTRATOR
The Fund's investment adviser and administrator receive compensation from
the Fund. 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 0.70% to the net assets of the Fund, determined at the close of
business each day.
At a special meeting of shareholders on April 13, 1995, Mitchell Hutchins
Asset Management Inc. ('Mitchell Hutchins'), a wholly owned subsidiary of
PaineWebber Incorporated, was appointed investment adviser and administrator of
the Fund and GE Investment Management Incorporated ('GEIM') was appointed the
Fund's sub-adviser. The Fund pays the same fee for investment advisory and
administration services to Mitchell Hutchins as was previously paid to Kidder
Peabody Asset Management, Inc. ('KPAM'), as described in the Fund's prospectus.
Mitchell Hutchins (not the Fund) pays GEIM a fee for sub-advisory services at
the annual rate of 0.50% of the Fund's average net assets. Mitchell Hutchins and
GEIM continue to manage the Fund in accordance with the Fund's investment
objective, policies and restrictions as stated in the Prospectus.
11
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY INTERMEDIATE FIXED INCOME FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements-- (continued)
- --------------------------------------------------------------------------------
Investment advisory functions for the Fund were previously transferred from
KPAM to Mitchell Hutchins on an interim basis 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. That period began on February 13,
1995 and ended on April 13, 1995.
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, 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.
Pursuant to the above limitation, no expense reimbursement was required for the
year ended August 31, 1995. However, Mitchell Hutchins voluntarily waived
advisory and administration fees in the amount of $69,892 for the year ended
August 31, 1995.
DISTRIBUTION PLANS
Effective February 13, 1995, Mitchell Hutchins has served as the exclusive
distributor of the Fund's shares. Under separate plans of distribution, Class A
shares are sold subject to a front-end sales load and incur a service fee of
0.25% per annum of average class net assets. Class B shares are sold at net
asset value without a sales load and incur 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
the service and distribution fees monthly. For these services for the period
ended Feburary 13, 1995, Kidder, Peabody & Co. Inc., the Fund's predecessor
distributor, earned $38,301 in fees. For the period February 13, 1995 through
August 31, 1995, Mitchell Hutchins earned $34,870 in fees. Mitchell Hutchins
also receives the proceeds of any front-end sales loads with respect to the
purchase of Class A shares.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at August 31,
1995 was substantially the same as the cost of securities for financial
statement purposes.
At August 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)................................................ $352,303
Gross depreciation (investments having an excess of cost
over value)............................................... (55,221)
--------
Net unrealized appreciation of investments.................. $297,082
--------
--------
</TABLE>
For the year ended August 31, 1995, aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $50,260,934 and
$70,828,429, respectively.
12
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY INTERMEDIATE FIXED INCOME FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements-- (concluded)
- --------------------------------------------------------------------------------
SHARES OF BENEFICIAL INTEREST
There is an unlimited amount of $0.001 par value shares of beneficial
interest authorized. Transactions in shares of beneficial interest were as
follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------- ----------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ --------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
For the year ended August 31, 1995:
Shares sold......................... 30,037 $ 352,431 45,548 $ 526,952 16,358 $ 189,065
Dividends reinvested in additional
Fund shares....................... 77,229 897,507 7,792 90,683 5,884 68,172
Shares repurchased.................. (1,748,271) (20,175,720) (136,335) (1,569,195) (88,557) (1,031,192)
---------- ------------ --------- ----------- -------- -----------
Net decrease.......................... (1,641,005) $(18,925,782) (82,995) $ (951,560) (66,315) $ (773,955)
---------- ------------ --------- ----------- -------- -----------
---------- ------------ --------- ----------- -------- -----------
For the year ended August 31, 1994:
Shares sold......................... 452,513 $ 5,600,161 233,486 $ 2,887,987 120,023 $ 1,475,357
Dividends reinvested in additional
Fund shares....................... 184,168 2,245,936 12,288 148,583 8,593 103,985
Shares repurchased.................. (2,197,635) (26,682,102) (138,949) (1,636,839) (73,435) (879,830)
---------- ------------ --------- ----------- -------- -----------
Net increase (decrease)............... (1,560,954) $(18,836,005) 106,825 $ 1,399,731 55,181 $ 699,512
---------- ------------ --------- ----------- -------- -----------
---------- ------------ --------- ----------- -------- -----------
</TABLE>
PROPOSED REORGANIZATION
The Board of Trustees of the Trust have approved a Plan of Reorganization
and Termination (the 'Reorganization') for submission to its shareholders at a
special meeting held on October 19, 1995. If the proposed Reorganization is
approved and implemented, all the Fund's assets will be acquired and its
liabilities assumed by PaineWebber U.S. Government Income Fund ('U.S. Government
Income Fund') in a tax-free reorganization. As a result of the Reorganization,
the two funds' assets would be combined and each Fund shareholder would, on the
closing date of the transaction, receive a number of full and fractional shares
of the corresponding class of shares of U.S. Government Income Fund having an
aggregate value equal to the value of the shareholder's holdings in the Fund.
There can be no assurance that the Fund's shareholders will approve the
Reorganization.
13
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY INTERMEDIATE FIXED INCOME FUND
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout each
period is presented below:
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------
FOR THE YEARS ENDED
AUGUST 31, FOR THE
----------------------------------- PERIOD ENDED
1995 1994 1993 AUGUST 31, 1992+
------- ------- ------- ----------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period.... $11.66 $12.77 $12.56 $12.00
------- ------- ------- --------
Net investment
income............... 0.66 0.57 0.74 0.39
Net realized and
unrealized gains
(losses)
from investment and
option
transactions......... 0.45 (0.89) 0.30 0.56
------- ------- ------- --------
Net increase (decrease)
from investment
operations............. 1.11 (0.32) 1.04 0.95
------- ------- ------- --------
Dividends from net
investment income.... (0.66) (0.57) (0.74) (0.39)
Distributions from net
realized capital
gains................ -- (0.22) (0.09) --
------- ------- ------- --------
Total dividends and
distributions........ (0.66) (0.79) (0.83) (0.39)
------- ------- ------- --------
Net asset value, end of
period................. $12.11 $11.66 $12.77 $12.56
------- ------- ------- --------
------- ------- ------- --------
Total investment return
(1).................... 9.60% (2.62)% 8.80% 17.02%
------- ------- ------- --------
------- ------- ------- --------
Ratios/Supplemental data:
Net assets, end of period
(000's)................ $15,664 $34,222 $57,402 $ 48,632
Ratios of expenses, net
of fee waivers, to
average net assets..... 1.62% 1.46% 1.08% 0.40%*
Ratios of expenses,
before fee waivers, to
average net assets..... 1.91% 1.46% 1.31% 1.63%*
Ratios of net investment
income to average net
assets................. 5.70% 4.69% 5.73% 6.76%*
Portfolio turnover
rate................... 199% 279% 149% 33%
</TABLE>
- ------------------
<TABLE>
<S> <C>
+ For the period March 12, 1992 (commencement of offering of shares) to
August 31, 1992.
++ For the period May 10, 1993 (commencement of offering of shares) to
August 31, 1993.
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on
the first day of each period reported, reinvestment of all dividends
and distributions 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 investment returns for
periods of less than one year have not been annualized.
</TABLE>
14
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY INTERMEDIATE FIXED INCOME FUND
- --------------------------------------------------------------------------------
Financial Highlights--(concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------------- -------------------------------------------
FOR THE YEARS ENDED FOR THE YEARS ENDED
AUGUST 31, FOR THE AUGUST 31, FOR THE
------------------- PERIOD ENDED ------------------- PERIOD ENDED
1995 1994 AUGUST 31, 1993++ 1995 1994 AUGUST 31, 1993++
------ ------ ----------------- ------ ------ -----------------
<S> <C> <C> <C> <C> <C> <C>
$11.66 $12.77 $ 12.63 $11.66 $12.76 $ 12.63
------ ------ ------- ------ ------ -------
0.60 0.51 0.19 0.69 0.60 0.22
0.45 (0.89) 0.14 0.44 (0.88) 0.13
------ ------ ------- ------ ------ -------
1.05 (0.38) 0.33 1.13 (0.28) 0.35
------ ------ ------- ------ ------ -------
(0.60) (0.51) (0.19) (0.69) (0.60) (0.22)
-- (0.22) -- -- (0.22) --
------ ------ ------- ------ ------ -------
(0.60) (0.73) (0.19) (0.69) (0.82) (0.22)
------ ------ ------- ------ ------ -------
$12.11 $11.66 $ 12.77 $12.10 $11.66 $ 12.76
------ ------ ------- ------ ------ -------
------ ------ ------- ------ ------ -------
9.14% (3.11)% 8.53% 9.83% (2.30)% 9.04%
------ ------ ------- ------ ------ -------
------ ------ ------- ------ ------ -------
$1,898 $2,796 $ 1,698 $942 $1,680 $ 1,136
2.12% 1.96% 1.53%* 1.37% 1.21% 0.83%*
2.41% 1.96% 1.76%* 1.66% 1.21% 1.06%*
5.20% 4.20% 5.28%* 5.95% 4.94% 5.98%*
199% 279% 149% 199% 279% 149%
</TABLE>
15
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY INTERMEDIATE FIXED INCOME FUND
- --------------------------------------------------------------------------------
Report of Ernst & Young LLP, Independent Auditors
- --------------------------------------------------------------------------------
The Board of Trustees and Shareholders of
Mitchell Hutchins/Kidder, Peabody Intermediate Fixed Income Fund
(One of the portfolios constituting Mitchell Hutchins/Kidder, Peabody Investment
Trust):
We have audited the accompanying statement of assets and liabilities of
Mitchell Hutchins/Kidder, Peabody Intermediate Fixed Income Fund as of August
31, 1995, and the related statements of operations, changes in net assets, and
financial highlights for the year then ended. 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 audit. The statement of changes in net assets
for the year ended August 31, 1994 and the financial highlights for each of the
three years in the period then ended were audited by other auditors whose report
dated October 14, 1994 expressed an unqualified opinion on that statement and
financial highlights.
We conducted our audit 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 as of
August 31, 1995, by correspondence with the custodian and brokers. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the 1995 financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Mitchell Hutchins/Kidder, Peabody Intermediate Fixed Income Fund as
of August 31, 1995, and the results of its operations, the changes in its net
assets and the financial highlights for the year then ended in conformity with
generally accepted accounting principles.
Ernst & Young LLP
New York, New York
October 18, 1995
16
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY INTERMEDIATE FIXED INCOME FUND
- --------------------------------------------------------------------------------
Tax Information
- --------------------------------------------------------------------------------
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 (August 31,
1995) as to the federal tax status of distributions received by shareholders
during such fiscal year. Accordingly, we are advising you that the distributions
paid during the period by the Fund were derived from net investment income and
are taxable as ordinary income.
Dividends received by tax-exempt recipients (e.g. IRA's 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 reporting.
Because the Fund's fiscal year is not the calendar year, another
notification will be sent in respect of calendar 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.
17
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY INTERMEDIATE FIXED INCOME FUND
- --------------------------------------------------------------------------------
Shareholder Information
- --------------------------------------------------------------------------------
A special meeting of shareholders of Mitchell Hutchins/Kidder, Peabody
Intermediate Fixed Income Fund (the 'Fund'), a series of Mitchell
Hutchins/Kidder, Peabody Investment Trust ('Trust'), was held on April 13, 1995.
At the meeting David J. Beaubien, William W. Hewitt, Jr., Thomas R. Jordan,
Frank P.L. Minard and Carl W. Schafer were elected as trustees to serve without
limit in time, subject to resignation, retirement or removal. In addition, the
selection of Deloitte & Touche LLP as the Fund's independent accountants was
ratified. Each series of the Trust voted separately on all matters being
considered by the series, except for the election of trustees and ratification
or rejection of the Trust's independent accountants, as to which the shares of
all series of the Trust voted together as a single class.
<TABLE>
<CAPTION>
All Shares of the Trust Voting as a Single Class
(Votes of the Fund's Shareholders Noted in
Parenthesis)
------------------------------------------------------
Shares Voted Shares Withhold Authority
---------------------- -------------------------
<S> <C> <C>
David J. Beaubien...... 20,990,961 (1,367,253) 773,340 (61,055)
William W. Hewitt,
Jr................... 20,990,961 (1,367,253) 773,340 (61,055)
Thomas R. Jordan....... 20,990,961 (1,367,253) 773,340 (61,055)
Frank P.L. Minard...... 20,990,961 (1,367,253) 773,340 (61,055)
Carl W. Schafer........ 20,990,961 (1,367,253) 773,340 (61,055)
</TABLE>
<TABLE>
<CAPTION>
All Shares of the Trust Voting as a Single Class
(Votes of the Fund's Shareholders Noted in Parenthesis)
-------------------------------------------------------------
Shares Shares Shares
Voted For Voted Against Withhold Authority
---------------------- --------------- ------------------
<S> <C> <C> <C>
Ratification of the
selection of Deloitte &
Touche LLP............. 20,423,671 (1,379,881) 544,111 (1,503) 796,520 (46,924)
</TABLE>
(Note: On July 20, 1995, the Board of Trustees appointed Ernst & Young LLP
as the Fund's independent auditors.)
In addition, the following agreements were approved for the Fund:
1) An interim investment advisory agreement between the Fund and Mitchell
Hutchins Asset Management Inc. ('Mitchell Hutchins') containing substantially
the same terms, conditions and fees as the previous investment advisory
agreement with Kidder Peabody Asset Management, Inc. ('KPAM').
18
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY INTERMEDIATE FIXED INCOME FUND
- --------------------------------------------------------------------------------
Shareholder Information
- --------------------------------------------------------------------------------
The votes were as follows:
<TABLE>
<CAPTION>
All Shares of the Fund Voting as a Single Class
------------------------------------------------
Shares Shares Shares
Voted For Voted Against Withhold Authority
--------- ------------- ------------------
<S> <C> <C> <C>
1,365,077 565 62,667
</TABLE>
2) An interim investment sub-advisory agreement with the Fund's current
investment sub-adviser containing substantially the same terms, conditions and
fees as its previous investment sub-advisory agreement with that investment
sub-adviser.
The votes were as follows:
<TABLE>
<CAPTION>
All Shares of the Fund Voting as a Single Class
------------------------------------------------
Shares Shares Shares
Voted For Voted Against Withhold Authority
--------- ------------- ------------------
<S> <C> <C> <C>
1,360,964 565 66,779
</TABLE>
3) A new investment advisory and administration agreement between the Fund
and Mitchell Hutchins containing the same fees and substantively similar
material terms and conditions as the previous investment advisory agreement with
KPAM to commence on the termination of the interim agreement.
The votes were as follows:
<TABLE>
<CAPTION>
All Shares of the Fund Voting as a Single Class
------------------------------------------------
Shares Shares Shares
Voted For Voted Against Withhold Authority
--------- ------------- ------------------
<S> <C> <C> <C>
1,362,510 565 65,234
</TABLE>
4) A new investment sub-advisory agreement with the Fund's current
investment sub-adviser containing substantially the same terms, conditions and
fees as its previous investment sub-advisory agreement with that investment
sub-adviser to commence on the termination of the interim agreement.
The votes were as follows:
<TABLE>
<CAPTION>
All Shares of the Fund Voting as a Single Class
------------------------------------------------
Shares Shares Shares
Voted For Voted Against Withhold Authority
--------- ------------- ------------------
<S> <C> <C> <C>
1,361,902 1,503 46,924
</TABLE>
Broker non-votes and abstentions are included within the 'Shares Withhold
Authority' totals.
19
<PAGE>
- --------------------------------------
TRUSTEES
David J. Beaubien
William W. Hewitt, Jr.
Thomas R. Jordan
Frank P.L. Minard
Carl W. Schafer
- --------------------------------------
OFFICERS
Margo N. Alexander
President
Dennis L. McCauley
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
- --------------------------------------
INVESTMENT SUB-ADVISER
GE Investment Management Incorporated
3003 School Street
Stamford, Connecticut 06904
- --------------------------------------
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.
