<PAGE>
PAINEWEBBER AND
MITCHELL HUTCHINS/KIDDER,
PEABODY MUTUAL FUNDS
PaineWebber offers a family of 29 mutual
funds which encompass a diversified range
of investment goals. Investors may
exchange their Fund shares with other
Funds within the family.
MITCHELL HUTCHINS/
Income Fund KIDDER, PEABODY
- - MH/KP Adjustable RateGovernment Fund
- - MH/KP Global Fixed Income Fund MUNICIPAL
- - MH/KP Government Income Fund BOND 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 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 Small Cap Growth Fund
- - PW Capital Appreciation Fund
- - PW Global Equity Fund
- - PW Growth Fund
- - PW Regional Financial Growth Fund
- - PW Small Cap Value Fund ANNUAL REPORT
Growth and Income Funds June 30, 1995
- - MH/KP Asset Allocation Fund
- - MH/KP Equity Income Fund
- - PW Balanced Fund
- - PW Growth and Income Fund
- - PW Global Energy Fund
- - PW Utility Income Fund
PaineWebber Money Market Fund
--------------
- -C-1994 PaineWebber Incorporated
M Printed on
Recycled Paper
<PAGE>
- --------------------------------------------------------------------------------
August 15, 1995
Dear Shareholder,
During the year ended June 30, 1995, the pace of U.S. economic growth was
perceived to have slowed in response to the Federal Reserve Board's repeated
increases in the benchmark Federal Funds rate, the rate banks charge each other
for overnight borrowing. The Federal Reserve Board raised the Federal Funds rate
to 6.0% after seven short-term interest rate hikes between February 1994 and
February 1995. On July 6, 1995, the Federal Reserve cut the benchmark Federal
Funds rate by 0.25% to 5.75%. This decrease, the first in nearly three years,
signals that the Federal Reserve Board believes that inflationary pressures have
eased enough to accommodate an adjustment in monetary conditions.
THE MUNICIPAL MARKET
The Federal Reserve Board's monetary tightening policy set off a turbulent
year in fixed income markets. For example, in June of 1994, interest rates were
still rising in response to the Fed's tightening maneuvers to control the
burgeoning economy. By November 1994, interest rates peaked as the economy
slowed and inflation remained under control. By the end of June 1995, long-term
interest rates had declined approximately 1.5%, with economic indicators
exhibiting a "soft landing"--a slowdown in economic growth without a decline
into recession.
In early December 1994, the municipal market was shaken by the bankruptcy of
Orange County, California. Please note that none of our Funds owned any Orange
County general obligation bonds. Although the bankruptcy initially destabilized
the municipal market, investors ultimately concluded that other municipalities
that had invested in derivatives had not leveraged themselves to the extent
Orange County had. Consequently, the market regained investors' confidence, and
put in a very strong performance.
After years of high volume, new issue supply declined dramatically in 1994
and early 1995. With fewer bonds in the market, demand increases, pushing up the
prices of existing bonds. The combination of limited supply and the perception
that the next Federal Reserve Board action would be a decrease in short-term
interest rates led to a bond market rally during the first six months of 1995.
Recently, the market has become sensitive to the talk of tax reform, which is
expected to become an item of discussion in the 1996 Presidential campaign. We
will monitor these developments and keep you, our shareholders, apprised of
events.
PORTFOLIO REVIEW
The first half of the Fund's fiscal year was dominated by declining
municipal bond prices--a result of increasing interest rates. However, during
the first six months of 1995, the market essentially recouped all of the losses
and even added some very positive returns to municipal portfolios. As a result,
the Fund's total return for the year ended June 30, 1995, without deducting
sales charges, was 8.20% for Class A shares, 7.69% for Class B shares and 8.25%
for Class C shares. The Fund's total return for this period, after deducting the
maximum applicable sales charges, was 5.76% for Class A shares, 7.69% for Class
B shares and 8.25% for Class C shares.
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
At a special meeting of shareholders that took place on April 13, 1995,
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") was appointed as
investment adviser and administrator of the Fund. 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. Gregory W. Serbe and Richard S.
Murphy are jointly responsible for the day-to-day management of the Fund. Mr.
Serbe is a Managing Director of Mitchell Hutchins responsible for overseeing
tax-free fixed income investments. Mr. Murphy is a senior vice president and
portfolio manager at Mitchell Hutchins.
The board of trustees of Mitchell Hutchins/Kidder, Peabody Municipal Bond
Fund has approved a Plan of Reorganization and Termination ("Reorganization")
for submission to the Fund's shareholders, at a special meeting scheduled to be
held on October 27, 1995. If the proposed Reorganization is approved and
implemented, all of the Fund's assets will be acquired and its liabilities
assumed by PaineWebber National Tax-Free Income Fund ("National Tax-Free 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 National Tax-Free Income Fund having an
aggregate value equal to the value of the shareholder's holdings in the Fund.
National Tax-Free Income Fund is also managed by Gregory W. Serbe and Richard S.
Murphy.
Going forward, our outlook is one of cautious optimism. The Federal Reserve
Board appears to have engineered a "soft landing"--a slowdown in economic growth
without a decline into recession. If the Fed has been successful, it appears as
though the direction for short-term interest rates will continue to decline.
However, if inflation becomes problematic, further increases in short-term
interest rates could be possible. Municipal bond supply remains extremely light,
and demand has been able to absorb this supply, which should cause municipal
bonds to perform better than taxable debt instruments in the coming months. Our
long-term outlook is for strength in the municipal market after the domestic
economic picture becomes clearer.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
We value you as a shareholder and as a client, and thank you for your
continued support. We welcome any comments or questions you may have.
Sincerely,
<TABLE>
<S> <C>
FRANK P. L. MINARD GREGORY W. SERBE
Chairman, Managing Director,
Mitchell Hutchins Asset Management Inc. Mitchell Hutchins Asset Management Inc.
RICHARD S. MURPHY
Portfolio Manager,
Mitchell Hutchins/Kidder, Peabody
Municipal Bond Fund
</TABLE>
- --------------------------------------------------------------------------------
3
<PAGE>
- ----------------------------------------------------------------------
MITCHELL HUTCHINS/KIDDER, PEABODY MUNICIPAL BOND FUND (UNAUDITED)
- ----------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE FUND AND THE LEHMAN
BROTHERS MUNICIPAL BOND INDEX
The following graph depicts the performance of the Mitchell Hutchins/Kidder,
Peabody Municipal Bond Fund versus the Lehman Brothers Municipal Bond Index. It
is important to note the Mitchell Hutchins/Kidder, Peabody Municipal Bond Fund
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.
- --------------------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CLASS A INDEX
<S> <C> <C>
9/8/93 $10,000 $10,000
12/93 $9,849 $10,140
$9,100 $9,584
6/93 $9,189 $9,692
$9,243 $9,756
12/94 $9,080 $9,620
$9,812 $10,296
6/95 $9,943 $10,544
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CLASS B INDEX
<S> <C> <C>
9/8/93 $ 10,000 $ 10,000
12/93 $ 10,063 $ 10,140
$ 9,287 $ 9,584
6/93 $ 9,366 $ 9,692
$ 9,409 $ 9,756
12/94 $ 9,231 $ 9,620
$ 9,965 $ 10,296
6/95 $ 10,086 $ 10,544
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CLASS C INDEX
<S> <C> <C>
09/08/93 $ 10,000 $ 10,000
12/93 $ 10,079 $ 10,140
$ 9,313 $ 9,584
6/93 $ 9,405 $ 9,692
$ 9,464 $ 9,756
12/94 $ 9,298 $ 9,620
$ 10,047 $ 10,296
6/95 $ 10,181 $ 10,544
</TABLE>
Past performance is not predictive of future performance.
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.
Capital gain distributions and gains realized on the sale of Fund shares are
taxable.
4
<PAGE>
AVERAGE ANNUAL RETURN
<TABLE>
<CAPTION>
% Return Without Deducting % Return After Deducting
Maximum Sales Charges Maximum Sales Charges
------------------------------- --------------------------------
Class Class
------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
A* B** C*** A* B** C***
- --------------------------------------------------------------------------------------------------------------------
Twelve Months Ended 06/30/95 8.20% 7.69% 8.25% 5.76% 7.69% 8.25%
- --------------------------------------------------------------------------------------------------------------------
Five Years Ended 06/30/95 N/A N/A N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------
Commencement of Operations through 06/30/95+ 1.75% 0.86% 1.81% -0.57% 0.86% 1.81%
- --------------------------------------------------------------------------------------------------------------------
</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 an initial or contingent deferred sales
charge but bear ongoing 12b-1 distribution and service fees.
***Class C shares are sold without an initial or contingent deferred sales
charge and are available exclusively to certain eligible participants.
+Commencement of investment operations was September 8, 1993 for Class A, Class
B and Class C shares.
- --------------------------------------------------------------------------------
5
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY MUNICIPAL BOND FUND
- ----------------------------------------------------------------------
Portfolio of Investments
June 30, 1995
- ----------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- 97.06%
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- ---------- --------- ---------- -----------
<C> <S> <C> <C> <C>
ARIZONA--6.88%
$1,000 Arizona St Transportation Board Highway Revenue
Refunding Subordinated Series A....................................... 07/01/11 4.750 % $892,490
-----------
FLORIDA--7.60%
500 Florida St Division Bond Finance Department General Services Revenues
Department Natural Resources Preservation 2000........................ 07/01/10 6.250 519,710
500 Orlando Florida Utilities Commission Water and Electric Revenue
Refunding Subordinated Series D D&P Light............................. 10/01/20 5.500 466,425
-----------
986,135
-----------
GEORGIA--7.42%
500 Atlanta Georgia School Improvement...................................... 12/01/10 5.500 491,315
500 De Kalb County Georgia Refunding........................................ 01/01/13 5.250 470,550
-----------
961,865
-----------
HAWAII--3.69%
500 Hawaii St Refunding Series CC........................................... 02/01/08 5.125 478,315
-----------
ILLINOIS--4.34%
500 Chicago Illinois Metropolitan Water Reclamation District Greater Chicago
Capital Improvement Fitch Light....................................... 12/01/10 7.000 563,260
-----------
MAINE--5.88%
750 Maine St Turnpike Authority Turnpike Revenue............................ 07/01/11 6.000 762,660
-----------
MARYLAND--3.80%
500 Howard County Maryland
Consolidated Public Improvement Series A Fitch Light.................. 02/15/12 5.600 492,535
-----------
MASSACHUSETTS--7.55%
500 Massachusetts St Consolidated Loan Series D Fitch Light................. 05/01/12 5.750 488,890
500 Massachusetts St Special Obligation Revenue
Series A Fitch Light.................................................. 06/01/11 5.750 490,275
-----------
979,165
-----------
MISSOURI--7.44%
1,000 St. Louis County Missouri
Refunding and Improvement Series B (MBIA-Insured)..................... 02/01/13 5.500 965,030
-----------
NEW YORK--7.43%
500 New York State Environmental Facilities Corporation
Pollution Control Revenue
State Water Revolving Fund NYC
Municipal Water Refunding Series A.................................... 06/15/14 5.875 501,775
500 New York State Local Government Assistance Corporation.................. 04/01/18 5.500 461,565
-----------
963,340
-----------
</TABLE>
6
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY MUNICIPAL BOND FUND
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- (concluded)
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- ----------- --------- ---------- -----------
<C> <S> <C> <C> <C>
OREGON--8.54%
$600 Portland Oregon Sewer Systems Revenue Series A.......................... 06/01/11 6.150 % $ 614,802
500 Tualatin Hills Oregon Park and Recreation District...................... 03/01/15 5.750 493,010
-----------
1,107,812
-----------
PENNSYLVANIA--3.74%
500 Pennsylvania Intergovernmental Cooperative Authority
Special Tax Revenue
City Of Philadelphia Funding Program
(MBIA-Insured) IBC Fitch Light........................................ 06/15/15 5.750 485,550
-----------
TEXAS--11.14%
500 Keller Texas Independent School District
(PSF Guaranteed)...................................................... 08/15/13 5.500 476,825
500 Lewisville Texas Independent School District
Building Bonds........................................................ 08/15/16 5.500 474,845
500 North Central Texas Health Facility Development Corporation Revenue
Childrens Medical Center Of Dallas
Refunding Hospital Childrens Medical Center Project................... 08/15/13 5.750 493,325
-----------
1,444,995
-----------
VIRGINIA--11.61%
500 Fairfax County Virginia Public Improvement Series A..................... 06/01/12 5.625 495,930
500 Prince William County Virginia Industrial Development Authority
Hospital Revenue Refunding Potomac Hospital Corporation............... 10/01/05 6.550 524,255
500 Virginia St Transportation Board Transportation Contract Revenue
U.S. Route 58 Corridor Development Program B.......................... 05/15/13 5.625 485,440
-----------
1,505,625
-----------
TOTAL INVESTMENTS (cost--$12,262,690)--97.06%........................................ 12,588,777
Other assets in excess of liabilities--2.94%......................................... 381,477
-----------
NET ASSETS--100.00%.................................................................. $12,970,254
-----------
-----------
</TABLE>
See accompanying notes to financial statements
7
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY MUNICIPAL BOND FUND
- ----------------------------------------------------------------------
Statement of Assets and Liabilities
June 30, 1995
- ----------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost--$12,262,690).......................................... $12,588,777
Cash............................................................................................. 55,009
Interest receivable.............................................................................. 226,184
Deferred organization expenses................................................................... 138,782
Receivable from investment adviser............................................................... 74,544
Other assets..................................................................................... 20,317
------------
Total assets................................................................................. 13,103,613
------------
LIABILITIES
Payable for shares of beneficial interest repurchased............................................ 53,208
Accrued expenses................................................................................. 52,356
Dividends payable................................................................................ 27,795
------------
Total liabilities............................................................................ 133,359
------------
NET ASSETS
Beneficial interest shares of $0.001 par value................................................... 15,376,872
Undistributed net investment income.............................................................. 1,610
Accumulated net realized capital losses from investment transactions............................. (2,734,315)
Net unrealized appreciation of investments....................................................... 326,087
------------
Net assets....................................................................................... $12,970,254
------------
------------
CLASS A
Net assets....................................................................................... $9,340,107
------------
Shares outstanding............................................................................... 840,492
------------
Net asset value and redemption value per share................................................... $11.11
------------
------------
Maximum offering price per share (net asset value plus sales charge of 2.25% of offering
price)......................................................................................... $11.37
------------
------------
CLASS B
Net assets....................................................................................... $ 3,236,275
------------
Shares outstanding............................................................................... 291,211
------------
Net asset value, offering price and redemption value per share................................... $11.11
------------
------------
CLASS C
Net assets....................................................................................... $ 393,872
------------
Shares outstanding............................................................................... 35,441
------------
Net asset value, offering price and redemption value per share................................... $11.11
------------
------------
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY MUNICIPAL BOND FUND
- ----------------------------------------------------------------------
Statement of Operations
For the Year Ended June 30, 1995
- ----------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest........................................................................................... $1,004,378
----------
EXPENSES:
Investment advisory and administration............................................................. 102,578
Service fees--Class A.............................................................................. 30,262
Service and distribution fees--Class B............................................................. 33,742
Custody and accounting............................................................................. 53,360
Amortization of organization expenses.............................................................. 43,826
Federal and state registration..................................................................... 37,883
Legal and audit.................................................................................... 34,264
Transfer agency.................................................................................... 23,182
Reports and notices to shareholders................................................................ 15,460
Trustees' fees and expenses........................................................................ 10,393
Other.............................................................................................. 3,478
----------
Total expenses..................................................................................... 388,428
Less: Fee waivers and expense reimbursements....................................................... (321,044)
----------
Net expenses..................................................................................... 67,384
----------
NET INVESTMENT INCOME................................................................................. 936,994
----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT ACTIVITIES:
Net realized losses from investment transactions................................................... (1,129,593)
Net change in unrealized appreciation/depreciation of investments.................................. 1,343,574
----------
NET REALIZED AND UNREALIZED GAINS FROM INVESTMENT ACTIVITIES.......................................... 213,981
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................................. $1,150,975
----------
----------
</TABLE>
See accompanying notes to financial statements
9
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY MUNICIPAL BOND FUND
- ----------------------------------------------------------------------
Statement of Changes in Net Assets
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the
Year Ended Period Ended
June 30, 1995 June 30, 1994+
------------- --------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income.......................................................... $ 936,994 $ 994,517
Net realized losses from investment transactions............................... (1,129,593) (1,604,722)
Net change in unrealized appreciation/depreciation of investments.............. 1,343,574 (1,017,487)
------------- --------------
Net increase (decrease) in net assets resulting from operations................ 1,150,975 (1,627,692)
------------- --------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income--Class A................................................. (667,413) (741,410)
Net investment income--Class B................................................. (229,163) (196,353)
Net investment income--Class C................................................. (38,808) (56,754)
------------- --------------
Total dividends to shareholders................................................ (935,384) (994,517)
------------- --------------
FROM BENEFICIAL INTEREST TRANSACTIONS:
Net proceeds from the sale of shares of beneficial interest.................... 992,519 38,793,602
Cost of shares of beneficial interest repurchased.............................. (12,248,776) (13,713,303)
Proceeds from dividends reinvested............................................. 693,301 809,525
------------- --------------
Net increase (decrease) in net assets from beneficial interest transactions.... (10,562,956) 25,889,824
------------- --------------
Net increase (decrease) in net assets.......................................... (10,347,365) 23,267,615
NET ASSETS:
Beginning of period............................................................ 23,317,619 50,004
------------- --------------
End of period.................................................................. $12,970,254 $ 23,317,619
------------- --------------
------------- --------------
</TABLE>
+ For the period September 8, 1993 (commencement of investment operations) to
June 30, 1994.
See accompanying notes to financial statements
10
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY MUNICIPAL BOND FUND
- ----------------------------------------------------------------------
Notes to Financial Statements
- ----------------------------------------------------------------------
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mitchell Hutchins/Kidder, Peabody Municipal Bond Fund (formerly Kidder,
Peabody Municipal Bond 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 commenced investment operations on
September 8, 1993. The Fund adopted the Choice Pricing SystemSM. The Fund offers
three classes of shares, Class A, Class B and Class C. Each class represents
interests in the same assets of the Fund and the classes are identical except
for differences in their sales charge structures 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 in government securities
and other securities traded over-the-counter are valued at the average of the
quoted bid and asked prices in the over-the-counter market. In the absence of a
market value, investments are valued at fair value as determined by or under the
direction of the Board of Trustees. Short-term obligations with maturities of 60
days or less are valued at amortized cost.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded as of the trade date. Realized gains and losses from investment
transactions are calculated on the identified cost method. Interest income is
recorded on an accrual basis. Discounts are accrued and premiums are amortized
as adjustments to interest income and the identified cost of investments.
Income and expenses (excluding class-specific expenses) are allocated
proportionately to each class of shares based upon each class' daily settled net
assets. Realized and unrealized gains and losses are allocated proportionately
to each class of shares based on the relative value of shares outstanding at the
beginning of the day. Class specific expenses are charged directly to the
applicable class of shares.
FEDERAL TAX STATUS--The Fund intends to distribute all of its tax-exempt
income and any taxable income and to comply with the other requirements of the
Internal Revenue Code applicable to regulated investment companies. Accordingly,
no provision for federal income taxes is required. In addition, by distributing
during each calendar year substantially all of its net investment income,
capital gains and certain other amounts, if any, the Fund intends not to be
subject to a federal excise tax. At June 30, 1995, the Fund had a net capital
loss carryforward of approximately $2,100,000. This loss carryforward is
available as a reduction, to the extent provided in the regulations, of future
net realized capital gains, and will expire at June 30, 2003.
In accordance with Treasury Regulations, the Fund has elected to defer
realized losses arising after October 31, 1994. Such losses have been treated
for tax purposes as arising on July 1, 1995.
To the extent that such losses are used to offset future capital gains, it
is probable that the gains so offset will not be distributed to shareholders.
11
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY MUNICIPAL BOND FUND
- ----------------------------------------------------------------------
Notes to Financial Statements--(continued)
- ----------------------------------------------------------------------
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 either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions 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.
INVESTMENT ADVISER AND ADMINISTRATOR
The Fund's investment adviser and administrator receives compensation from
the Fund accrued daily and paid monthly at an annual rate of 0.60% of the Fund's
average daily net assets.
At a special meeting of shareholders held on April 13, 1995, Mitchell
Hutchins Asset Management Inc. ("Mitchell Hutchins") was appointed as investment
adviser and administrator of the Fund. The Fund pays the same fee for investment
advisory and administration services to Mitchell Hutchins as previously paid to
Kidder Peabody Asset Management, Inc. ("KPAM"), as described in the Fund's
prospectus. Mitchell Hutchins continues to manage the Fund in accordance with
the Fund's investment objective, policies and restrictions as stated in the
prospectus.
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, Mitchell Hutchins 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. For the year ended June
30, 1995, no reimbursement was required pursuant to the above limitation.
Mitchell Hutchins voluntarily reimbursed the Fund for a portion of its expenses
and waived its investment advisory and administration fee.
12
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY MUNICIPAL BOND FUND
- ----------------------------------------------------------------------
Notes to Financial Statements--(continued)
- ----------------------------------------------------------------------
DISTRIBUTION PLANS
Effective February 13, 1995, Mitchell Hutchins serves 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 bear 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 bear a distribution fee of 0.50% per annum
and a service fee of 0.25% per annum of average class net assets. For the period
ended February 13, 1995, Kidder Peabody & Co. Incorporated, the Fund's
predecessor distributor, earned $43,560 in distribution and service fees. For
the period February 13, 1995 to June 30, 1995, Mitchell Hutchins earned $20,444
in such fees. For the year ended June 30, 1995, Kidder Peabody & Co.
Incorporated, voluntarily waived $18,922 in distribution and service fees, and
Mitchell Hutchins voluntarily waived $13,134 in distribution and service 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 June 30,
1995 was substantially the same as the cost of securities for financial
statement purposes.
At June 30, 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)............................................. $401,755
Gross depreciation (investments having an excess
of cost over value)............................................. (75,668)
--------
Net unrealized appreciation of investments....................... $326,087
--------
--------
</TABLE>
For the year ended June 30, 1995, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $28,074,797 and
$37,050,890, respectively.
CONCENTRATION OF RISK
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 state.
13
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY MUNICIPAL BOND 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
---------------------- ---------------------
Shares Amount Shares Amount
--------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Year ended June 30, 1995:
Shares sold..................................................................... 57,433 $ 622,162 33,510 $ 356,442
Dividends reinvested in additional Fund shares.................................. 42,874 464,185 17,977 194,408
Shares repurchased.............................................................. (828,941) (8,899,615) (259,390) (2,789,624)
--------- ----------- -------- -----------
Net decrease.................................................................... (728,634) $(7,813,268) (207,903) $(2,238,774)
--------- ----------- -------- -----------
--------- ----------- -------- -----------
Period ended June 30, 1994:+
Shares sold..................................................................... 2,447,232 $29,301,905 650,951 $ 7,735,676
Dividends reinvested in additional Fund shares.................................. 50,698 581,153 15,270 174,587
Shares repurchased.............................................................. (932,971) (11,019,636) (167,107) (1,918,882)
--------- ----------- -------- -----------
Net increase.................................................................... 1,564,959 $18,863,422 499,114 $ 5,991,381
--------- ----------- -------- -----------
--------- ----------- -------- -----------
<CAPTION>
Class C
-------------------
Shares Amount
------- ----------
<S> <C> <C>
Year ended June 30, 1995:
Shares sold..................................................................... 1,308 $ 13,915
Dividends reinvested in additional Fund shares.................................. 3,224 34,708
Shares repurchased.............................................................. (52,144) (559,537)
------- ----------
Net decrease.................................................................... (47,612) $ (510,914)
------- ----------
------- ----------
Period ended June 30, 1994:+
Shares sold..................................................................... 146,741 $1,756,021
Dividends reinvested in additional Fund shares.................................. 4,678 53,785
Shares repurchased.............................................................. (68,366) (774,785)
------- ----------
Net increase.................................................................... 83,053 $1,035,021
------- ----------
------- ----------
</TABLE>
+ For the period September 8, 1993 (commencement of investment operations) to
June 30, 1994.
14
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY MUNICIPAL BOND FUND
- ----------------------------------------------------------------------
Financial Highlights
- ---------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout each
period is presented below:
<TABLE>
<CAPTION>
Class A Class B Class C
------------------------------ ------------------------------ ------------------------------
For the For the For the For the For the For the
Year Ended Period Ended Year Ended Period Ended Year Ended Period Ended
June 30, 1995 June 30, 1994+ June 30, 1995 June 30, 1994+ June 30, 1995 June 30, 1994+
------------- -------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $10.84 $12.00 $10.84 $12.00 $10.84 $12.00
------------- -------------- ------------- -------------- ------------- --------------
Net increase (decrease) from
investment operations:
Net investment income......... 0.61 0.46 0.56 0.42 0.62 0.47
Net realized and unrealized
gains (losses) from
investment transactions...... 0.27 (1.16) 0.27 (1.16) 0.27 (1.16)
------------- -------------- ------------- -------------- ------------- --------------
Net increase (decrease) in net
assets resulting from
investment operations........ 0.88 (0.70) 0.83 (0.74) 0.89 (0.69)
------------- -------------- ------------- -------------- ------------- --------------
Less dividends to shareholders
from:
Net investment income......... (0.61) (0.46) (0.56) (0.42) (0.62) (0.47)
------------- -------------- ------------- -------------- ------------- --------------
Net asset value, end of
period....................... $11.11 $10.84 $11.11 $10.84 $11.11 $10.84
------------- -------------- ------------- -------------- ------------- --------------
------------- -------------- ------------- -------------- ------------- --------------
Total investment return (1)... 8.20% (5.96)% 7.69% (6.34)% 8.25% (5.95)%
------------- -------------- ------------- -------------- ------------- --------------
------------- -------------- ------------- -------------- ------------- --------------
Ratios/Supplemental Data:
Net assets, end of period
(000's omitted).............. $9,340 $17,007 $3,236 $5,410 $394 $900
Ratios of expenses, net of fee
waivers and expense
reimbursements, to average
net assets................... 0.27% 0.09%* 0.76% 0.59%* 0.21% 0.07%*
Ratios of expenses, before fee
waivers and expense
reimbursements, to average
net assets................... 2.15% 1.72%* 2.65% 2.22%* 1.90% 1.47%*
Ratios of net investment
income to average net
assets....................... 5.61% 4.95%* 5.13% 4.45%* 5.72% 4.97%*
Portfolio turnover rate....... 203% 161% 203% 161% 203% 161%
</TABLE>
+ For the period September 8, 1993 (commencement of investment operations) to
June 30, 1994.
(1) Total 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 for Class
A would be lower if sales charges were included. Total investment returns
for periods of less than one year have not been annualized.
* Annualized
15
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY MUNICIPAL BOND FUND
- ----------------------------------------------------------------------
Report of Independent Auditors
- ----------------------------------------------------------------------
The Board of Trustees and Shareholders of
Mitchell Hutchins/Kidder, Peabody Municipal Bond Fund
(One of the portfolios constituting the Mitchell Hutchins/Kidder, Peabody
Investment Trust II):
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Mitchell Hutchins/Kidder, Peabody
Municipal Bond Fund as of June 30, 1995, and the related statements of
operations 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 as of June
30, 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 Municipal Bond Fund as of June 30, 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
August 16, 1995
16
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY MUNICIPAL BOND FUND
- ----------------------------------------------------------------------
Shareholder Information
- ----------------------------------------------------------------------
A special meeting of shareholders of Mitchell Hutchins/Kidder, Peabody
Municipal Bond Fund ("Fund") a series of Mitchell Hutchins/Kidder, Peabody
Investment Trust II was held on April13, 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. The selection of Deloitte & Touche LLP as the Fund's
independent accountants was ratified.
The votes were as follows:
<TABLE>
<CAPTION>
All Shares Voting as a Single Class
--------------------------------------------
Shares Voted For Shares Withhold Authority
---------------- -------------------------
<S> <C> <C>
David J. Beaubien............................................................... 910,624 26,672
William W. Hewitt, Jr........................................................... 910,624 26,672
Thomas R. Jordan................................................................ 910,624 26,672
Frank P. L. Minard.............................................................. 910,624 26,672
Carl W. Schafer................................................................. 910,624 26,672
</TABLE>
<TABLE>
<CAPTION>
All Shares Voting as a Single Class
----------------------------------------------
Shares Shares Shares
Voted For Voted Against Withhold Authority
--------- ------------- ------------------
<S> <C> <C> <C>
Ratification of the selection
of Deloitte & Touche LLP............................................. 911,968 14,384 10,944
</TABLE>
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").
The votes were as follows:
<TABLE>
<CAPTION>
All Shares Voting as a Single Class
----------------------------------------------
Shares Shares Shares
Voted For Voted Against Withhold Authority
--------- ------------- ------------------
<S> <C> <C> <C>
909,482 13,242 14,572
</TABLE>
18
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY MUNICIPAL BOND FUND
- ----------------------------------------------------------------------
Shareholder Information--(continued)
- ----------------------------------------------------------------------
2) An interim investment advisory agreement with GE Investment Management
Incorporated, the Fund's former investment adviser, containing
substantially the same terms, conditions and fees as its former investment
advisory agreement with that investment adviser.
The votes were as follows:
<TABLE>
<CAPTION>
All Shares Voting as a Single Class
----------------------------------------------
Shares Shares Shares
Voted For Voted Against Withhold Authority
--------- ------------- ------------------
<S> <C> <C> <C>
909,482 13,242 14,572
</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 Voting as a Single Class
----------------------------------------------
Shares Shares Shares
Voted For Voted Against Withhold Authority
--------- ------------- ------------------
<S> <C> <C> <C>
909,482 13,242 14,572
</TABLE>
Note: 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
-----------------------------------
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.
