<PAGE>
PAINEWEBBER AND MITCHELL HUTCHINS/KIDDER, PEABODY MUTUAL FUNDS
PAINEWEBBER OFFERS A FAMILY OF 35 MUTUAL FUNDS WHICH ENCOMPASS A DIVERSIFIED
RANGE OF INVESTMENT GOALS. INVESTORS MAY EXCHANGE THEIR FUND SHARES WITH OTHER
FUNDS WITHIN THE FAMILY.
INCOME FUNDS
MH/KP ADJUSTABLE RATE GOVERNMENT FUND
MH/KP GLOBAL INCOME FUND
MH/KP GOVERNMENT INCOME FUND
MH/KP INTERMEDIATE FIXED INCOME FUND
PW GLOBAL INCOME FUND
PW HIGH INCOME FUND
PW INVESTMENT GRADE INCOME FUND
PW SHORT-TERM U.S. GOVERNMENT INCOME FUND
PW SHORT-TERM U.S. GOVERNMENT INCOME FUND FOR CREDIT UNIONS
PW STRATEGIC INCOME FUND
PW U.S. GOVERNMENT INCOME FUND
TAX-FREE INCOME FUNDS
MH/KP MUNICIPAL BOND FUND
PW CALIFORNIA TAX-FREE INCOME FUND
PW MUNICIPAL HIGH INCOME FUND
PW NATIONAL TAX-FREE INCOME FUND
PW NEW YORK TAX-FREE INCOME FUND
GROWTH FUNDS
MH/KP EMERGING MARKETS EQUITY FUND
MH/KP GLOBAL EQUITY FUND
MH/KP SMALL CAP GROWTH FUND
PW ATLAS GLOBAL GROWTH FUND
PW BLUE CHIP GROWTH FUND
PW CAPITAL APPRECIATION FUND
PW COMMUNICATIONS & TECHNOLOGY GROWTH FUND
PW EUROPE GROWTH FUND
PW GROWTH FUND
PW REGIONAL FINANCIAL GROWTH FUND
PW SMALL CAP VALUE FUND
GROWTH AND INCOME FUNDS
MH/KP ASSET ALLOCATION FUND
MH/KP EQUITY INCOME FUND
PW ASSET ALLOCATION FUND
PW GROWTH AND INCOME FUND
PW GLOBAL ENERGY FUND
PW GLOBAL GROWTH AND INCOME FUND
PW UTILITY INCOME FUND
PAINEWEBBER MONEY MARKET FUND
------------------
'c'1995 PAINEWEBBER INCORPORATED
['RECYCLED' LOGO]
Printed on
Recycled Paper
- - ---
- - ---
MITCHELL HUTCHINS/
KIDDER, PEABODY
SMALL CAP
GROWTH FUND
(FORMERLY KIDDER, PEABODY
SMALL CAP EQUITY FUND)
SEMI-ANNUAL REPORT
January 31, 1995
<PAGE>
- - --------------------------------------------------------------------------------
March 15, 1995
Dear Shareholder,
During the six months ended January 31, 1995, the United States economy
exhibited steady growth. In a series of monetary tightenings that began early in
1994, the Federal Reserve Board raised the benchmark Federal Funds rate, the
rate banks charge each other for overnight borrowing, six times in 1994 for a
total increase of 2.5%. These increases, which were implemented to moderate
economic expansion and forestall inflation, triggered stock and bond market
volatility throughout most of 1994. The Federal Reserve tightened another 0.5%
on February 1, 1995, increasing the Federal Funds rate to 6.0%.
Productivity gains in the workplace and the increased competitiveness of United
States corporations in the global marketplace contributed to the low inflation
and steady growth which characterized the economy during the six months ended
January 31, 1995. Unemployment continued to decline, and retail sales remained
brisk, sparked by strengthened consumer confidence and an upward trend in
personal income. However, side effects of higher interest rates, including a
decline in single family housing starts, crept into economic data during the
latter half of 1994. As we move into the new year, the economy remains
healthy -- although it is not yet clear what impact higher interest rates will
have on economic growth.
PORTFOLIO REVIEW
Having endured 1994's more difficult first half, investors were treated to
positive equity returns in the last six months. The Fund's total return for the
six months ended January 31, 1995, without deducting sales charges, was 6.44%
for Class A shares, 5.95% for Class B shares and 6.52% for Class C shares, while
its total return after deducting the maximum applicable sales charges was 0.29%
for Class A shares, 5.95% for Class B shares and 6.52% for Class C shares. In
comparison, the Russell 2000 Stock Index had a return of 1.94% over the same
time period. The Fund's outperformance can be attributed to the success of the
portfolio's two largest sector weightings: technology (28.0% of net assets) and
health care (16.8% of net assets). Net asset values as of January 31, 1995 for
the Fund's Classes A, B and C shares were $10.42, $10.32 and $10.45,
respectively.
- - --------------------------------------------------------------------------------
<PAGE>
- - --------------------------------------------------------------------------------
NEW MANAGEMENT
Effective February 13, 1995, as a result of an asset purchase transaction by and
among Kidder, Peabody Group Inc., its parent, General Electric Company, and
Paine Webber Group Inc., the investment management for the Fund was transferred
to Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'). Mitchell
Hutchins, a wholly owned investment management subsidiary of PaineWebber
Incorporated, provides investment advisory and portfolio management services to
individuals, pension and endowment funds, trusts and institutions. As of January
31, 1995, Mitchell Hutchins was adviser or sub-adviser to 36 investment
companies with 66 separate portfolios and aggregate assets of approximately $22
billion.
Although the name has been changed to Mitchell Hutchins/Kidder, Peabody Small
Cap Growth Fund, the investment objective remains the same: to seek long-term
capital appreciation by investing primarily in equity securities of small
capitalization companies. Small capitalization companies are defined as those
which, at the time of purchase, have market capitalizations of less than $1
billion. George D. Bjurman & Associates still serves as the Fund's investment
adviser. They utilize both macroeconomic and fundamental research to select
small, rapidly growing companies for the portfolio. Under normal market
conditions, the Fund remains relatively fully invested. The investment adviser
manages risk by investing in companies with strong balance sheets and low debt
levels. Equities in the portfolio are generally held as long-term investments to
minimize volatility.
We are excited by the addition of the Kidder, Peabody Funds to the PaineWebber
Funds. Together, our expanded capabilities should enable us to provide enhanced
investment services to our clients.
PORTFOLIO FOCUS
Our top-down sector and industry allocations continued to favor technology and
health care in the near term, as well as individual companies which can enhance
productivity within their industries. Current holdings as of January 31, 1995
included Tencor Instruments (2.7% of net assets), a semiconductor services
company which offers innovative wafer defect inspection, Williams-Sonoma, Inc.
(2.5%), a home furnishings retailer, and Diagnostek, Inc. (2.0%), which provides
prescription drugs by mail to corporations, labor unions and government
entities.
While 1994 was not a banner year for small cap stocks, the valuations within
this group are even more compelling as we move forward and we are generally
optimistic about 1995. We believe that returns will come, as they have over
time, from prudent investment in select small cap companies. We remain adamant
in our belief that the only reason markets move higher over time is earnings
growth. While there are clearly times when stock prices deviate from their
earnings trend line, in the longer run, markets generally behave rationally and
reward those companies with the best
- - --------------------------------------------------------------------------------
2
<PAGE>
- - --------------------------------------------------------------------------------
prospects and valuations. The natural corrective forces of the stock market,
which usually result in periodic market declines, are unavoidable. While this
can be unnerving for short-term investors, it can provide excellent
opportunities for a longer term approach such as that employed by the Fund. For
this reason, our outlook is generally positive.
Thank you for your participation in the Mitchell Hutchins/Kidder, Peabody Small
Cap Growth Fund. We value you as a shareholder and as a client and welcome any
comments or questions you may have.
Sincerely,
<TABLE>
<S> <C>
FRANK P.L. MINARD TOM BARRY
FRANK P.L. MINARD O. THOMAS BARRY, III
Chairman, Chief Investment Officer
Mitchell Hutchins Asset Management Inc. Mitchell Hutchins/Kidder, Peabody
Small Cap Growth Fund
</TABLE>
- - --------------------------------------------------------------------------------
3
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- - --------------------------------------------------------------------------------
RECENT PERFORMANCE RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL RETURN (1)
NET ASSET VALUE ----------------------------------
------------------------------------- 12 MONTHS 6 MONTHS
01/31/95 07/31/94 01/31/94 ENDED 01/31/95 ENDED 01/31/95
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $10.42 $9.79 $12.39 - 15.90% 6.44%
- - ------------------------------------------------------------------------------------------------
Class B Shares 10.32 9.74 12.37 - 16.57 5.95
- - ------------------------------------------------------------------------------------------------
Class C Shares 10.45 9.81 12.40 - 15.73 6.52
- - ------------------------------------------------------------------------------------------------
</TABLE>
PERFORMANCE SUMMARY CLASS A SHARES
<TABLE>
<CAPTION>
NET ASSET VALUE
------------------------ CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN (1)
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/04/93 - 12/31/93 $12.00 $12.07 -- -- 0.58%
- - ----------------------------------------------------------------------------------------------------------
1994 12.07 10.80 -- -- -10.52
- - ----------------------------------------------------------------------------------------------------------
01/01/95 - 01/31/95 10.80 10.42 -- -- - 3.52
- - ----------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 01/31/95: -13.17%
- - ----------------------------------------------------------------------------------------------------------
</TABLE>
PERFORMANCE SUMMARY CLASS B SHARES
<TABLE>
<CAPTION>
NET ASSET VALUE
------------------------ CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN (1)
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/04/93 - 12/31/93 $12.00 $12.05 -- -- 0.42%
- - ----------------------------------------------------------------------------------------------------------
1994 12.05 10.70 -- -- -11.20
- - ----------------------------------------------------------------------------------------------------------
01/01/95 - 01/31/95 10.70 10.32 -- -- - 3.55
- - ----------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 01/31/95: -14.00%
- - ----------------------------------------------------------------------------------------------------------
</TABLE>
PERFORMANCE SUMMARY CLASS C SHARES
<TABLE>
<CAPTION>
NET ASSET VALUE
------------------------ CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN (1)
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/04/93 - 12/31/93 $12.00 $12.07 -- -- 0.58%
- - ----------------------------------------------------------------------------------------------------------
1994 12.07 10.83 -- -- -10.27
- - ----------------------------------------------------------------------------------------------------------
01/01/95 - 01/31/95 10.83 10.45 -- -- 3.51
- - ----------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 01/31/95: -12.92%
- - ----------------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL RETURN
<TABLE>
<CAPTION>
% RETURN WITHOUT DEDUCTING % RETURN AFTER DEDUCTING
MAXIMUM SALES CHARGES MAXIMUM SALES CHARGES
------------------------------- -------------------------------
CLASS CLASS
------------------------------- -------------------------------
A* B** C*** A* B** C***
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Twelve Months Ended
12/31/94 - 10.52% - 11.20% - 10.27% - 15.69% - 11.20% - 10.27%
- - ------------------------------------------------------------------------------------------------
Five Years Ended
12/31/94 N/A N/A N/A N/A N/A N/A
- - ------------------------------------------------------------------------------------------------
Commencement of
operations Through
12/31/94 - 8.79% - 9.53% - 8.57% - 13.37% - 9.53% - 8.57%
- - ------------------------------------------------------------------------------------------------
</TABLE>
(1) Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date, and do not include
sales charges; results for Class A would be lower if sales charges were
included.
* Maximum sales charge for Class A shares is 5.75% of the public offering
price. Class A shares bear ongoing 12b-1 service fees.
** Class B shares are sold without initial or contingent deferred sales
charges, but bear ongoing 12b-1 distribution and service fees.
*** Class C shares are sold without initial or contingent deferred sales
charges and are available exclusively to PaineWebber employees.
+ Commencement of operations was November 4, 1993, November 4, 1993 and
November 4, 1993 for Class A, Class B and Class C shares respectively.
4
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- - --------------------------------------------------------------------------------
Portfolio of Investments
January 31, 1995 (unaudited)
- - --------------------------------------------------------------------------------
COMMON STOCKS -- 96.51%
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Shares Value
- - ----------- -----------
<S> <C>
BUILDING/PAPER/FOREST PRODUCTS -- 1.07%
25,000 Ply-Gem Industries................................................................... $515,625
-----------
CHEMICALS -- 3.31%
40,000 Airgas Inc.* ........................................................................
30,500 Borden Chemicals and Plastics, L.P. ................................................. 960,000
632,875
-----------
1,592,875
-----------
COMPUTER SOFTWARE -- 12.02%
10,000 Avid Technology, Inc. ............................................................... 276,250
31,500 Casino Data Systems*................................................................. 433,125
45,000 Filenet Corporation* ................................................................ 1,383,750
45,000 Network General Corporation* ........................................................ 1,068,750
25,000 Peoplesoft, Inc.* ................................................................... 809,375
30,000 Wall Data, Inc.* .................................................................... 1,095,000
45,000 Xircom, Inc.* ....................................................................... 708,750
-----------
5,775,000
-----------
COMPUTER -- OFFICE EQUIPMENT -- 1.22%
45,000 Boston Technology, Inc.*............................................................. 585,000
-----------
CONSUMER DURABLES -- 1.99%
27,500 Wabash National Corporation.......................................................... 955,625
-----------
DISTRIBUTION -- WHOLESALE TRADE -- 1.73%
39,040 Cellstar Corporation*................................................................ 829,600
-----------
ELECTRONICS & COMPONENTS -- 15.33%
28,000 Altera Corporation*.................................................................. 1,246,000
40,000 Electro Scientific Industries*....................................................... 770,000
25,000 Electroglas, Inc.* .................................................................. 715,625
35,000 Input/Output, Inc.* ................................................................. 866,250
35,000 Lam Research Corporation* ........................................................... 1,312,500
50,000 Oak Industries, Inc.* ............................................................... 1,168,750
35,000 Tencor Instruments................................................................... 1,286,250
-----------
7,365,375
-----------
FINANCIAL SERVICES -- 4.95%
25,000 Paychex, Inc. ....................................................................... 975,000
25,400 Reynolds & Reynolds.................................................................. 603,250
34,500 Robert Half International*........................................................... 802,125
-----------
2,380,375
-----------
FOODS & FOOD SERVICE -- 1.11%
45,000 Apple South, Inc. ................................................................... 534,375
-----------
</TABLE>
5
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
COMMON STOCKS -- (CONTINUED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Shares Value
- - ----------- -----------
<S> <C>
HOSPITAL SUPPLIES -- 4.55%
60,600 Diagnostek, Inc. .................................................................... $ 946,875
50,000 Watson Pharmaceuticals, Inc.*........................................................ 1,237,500
-----------
2,184,375
-----------
HOUSEHOLD PRODUCTS -- 4.23%
25,000 Duracraft Corporation* .............................................................. 825,000
49,365 Williams-Sonoma, Inc. ............................................................... 1,209,443
-----------
2,034,443
-----------
MACHINERY -- 6.24%
45,000 Agco Corporation .................................................................... 1,321,875
10,000 JLG Industries, Inc. ................................................................ 380,000
30,000 Novellus Systems, Inc.* ............................................................. 1,297,500
-----------
2,999,375
-----------
MANUFACTURING -- 1.29%
24,375 Bush Industries...................................................................... 359,531
25,000 High Plains Corporation*............................................................. 259,375
-----------
618,906
-----------
MEDICAL SERVICES -- 12.25%
30,000 Genesis Health Ventures, Inc.* ...................................................... 907,500
50,000 Health Management Associates, Inc., Class A*......................................... 1,375,000
47,500 Horizon Healthcare Corporation* ..................................................... 1,258,750
55,000 Mid Atlantic Medical Services*....................................................... 1,306,250
40,000 Lincare Holdings, Inc*............................................................... 1,040,000
-----------
5,887,500
-----------
RETAIL -- 8.85%
35,000 Michaels Stores, Inc.* .............................................................. 1,155,000
50,000 Micro Warehouse, Inc.* .............................................................. 1,362,500
25,000 Sports & Recreation, Inc.* .......................................................... 571,875
50,000 Sunglass Hut International, Inc.* ................................................... 1,162,500
-----------
4,251,875
-----------
STEEL -- 1.68%
70,000 Steel Technologies, Inc. ............................................................ 805,000
-----------
TELECOMMUNICATIONS -- 5.35%
40,000 Aspect Telecommunications*........................................................... 1,360,000
25,000 U.S. Robotics, Inc.* ................................................................ 1,212,500
-----------
2,572,500
-----------
</TABLE>
6
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
COMMON STOCKS -- (CONCLUDED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares Value
- - ----------- -----------
<S> <C> <C>
TOYS & SPORTING GOODS -- 4.69%
30,000 Callaway Golf Company................................................................ $ 963,750
40,000 Cobra Golf Inc.* .................................................................... 1,290,000
-----------
2,253,750
-----------
TRANSPORTATION -- 4.65%
40,000 Landstar System Inc.* ............................................................... 1,340,000
40,000 Swift Transportation Company*........................................................ 900,000
-----------
2,240,000
-----------
TOTAL COMMON STOCKS (Cost -- $42,216,099).......................................................... 46,381,574
Other assets in excess of liabilities -- 3.49%..................................................... 1,675,689
-----------
NET ASSETS -- 100.0%............................................................................... $48,057,263
-----------
-----------
</TABLE>
- - ---------------
* Non-income-producing security.
See accompanying notes to financial statements
7
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- - --------------------------------------------------------------------------------
Statement of Assets and Liabilities
January 31, 1995 (unaudited)
- - --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost -- $42,216,099)....................................... $46,381,574
Cash............................................................................................ 8,727
Receivable for investments sold................................................................. 1,597,993
Dividends receivable............................................................................ 47,685
Receivable for shares of beneficial interest sold............................................... 10,092
Prepaid expenses................................................................................ 178,841
-----------
Total assets................................................................................ 48,224,912
-----------
LIABILITIES
Payable for shares of beneficial interest repurchased........................................... 59,741
Payable to affiliate............................................................................ 59,361
Accrued expenses and other liabilities.......................................................... 48,547
-----------
Total liabilities........................................................................... 167,649
-----------
NET ASSETS
Beneficial interest shares of $.001 par value outstanding (unlimited amount authorized)......... 56,128,242
Accumulated net investment loss................................................................. (894,802)
Undistributed net realized losses from investments.............................................. (11,341,652)
Net unrealized appreciation on investments...................................................... 4,165,475
-----------
Net assets.................................................................................. $48,057,263
-----------
-----------
CLASS A:
Net assets...................................................................................... $28,247,657
-----------
Shares outstanding.............................................................................. 2,710,838
Net asset and redemption value per share........................................................ $10.42
------
------
Maximum offering price per share (net asset value plus sales charge of 5.75% of offering
price)......................................................................................... $11.06
------
------
CLASS B:
Net assets...................................................................................... $14,117,334
-----------
Shares outstanding.............................................................................. 1,367,535
Net asset value, offering price and redemption value per share.................................. $10.32
------
------
CLASS C:
Net assets...................................................................................... $ 5,692,272
-----------
Shares outstanding.............................................................................. 544,608
Net asset value, offering price and redemption value per share.................................. $10.45
------
------
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- - --------------------------------------------------------------------------------
Statement of Operations
For the Six Months Ended January 31, 1995 (unaudited)
- - --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends........................................................................................ $ 108,388
Interest and discounts earned.................................................................... 47,715
----------
156,103
----------
EXPENSES:
Investment advisory.............................................................................. 257,785
Distribution fees -- Class B..................................................................... 60,047
Service fees -- Class A.......................................................................... 40,003
Service fees -- Class B.......................................................................... 20,016
Transfer agency fees............................................................................. 31,909
Legal and audit fees............................................................................. 22,717
Federal and state registration fees.............................................................. 21,813
Amortization of organization expenses............................................................ 21,182
Reports and notices to shareholders.............................................................. 17,052
Custody and accounting........................................................................... 16,735
Trustees' fees and expenses...................................................................... 5,083
Other expenses................................................................................... 1,009
----------
515,351
----------
NET INVESTMENT LOSS.................................................................................. (359,248)
----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT ACTIVITIES:
Net realized losses from investment transactions................................................. (1,781,563)
Net unrealized appreciation on securities........................................................ 5,651,300
----------
NET REALIZED AND UNREALIZED GAINS FROM INVESTMENT ACTIVITIES......................................... 3,869,737
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................. $3,510,489
----------
----------
</TABLE>
See accompanying notes to financial statements
9
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- - --------------------------------------------------------------------------------
Statement of Changes in Net Assets
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
January 31, 1995 November 4, 1993*
(unaudited) to July 31, 1994
---------------- -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment loss................................................... $ (359,248) $ (535,554)
Net realized losses from investment transactions...................... (1,781,563) (9,560,089)
Net change in unrealized appreciation (depreciation) on investments... 5,651,300 (1,485,825)
---------------- -----------------
Net increase (decrease) in net assets resulting from operations....... 3,510,489 (11,581,468)
---------------- -----------------
FROM BENEFICIAL INTEREST TRANSACTIONS:
Net proceeds from sale of shares...................................... 7,047,213 76,970,630
Cost of shares repurchased............................................ (13,014,795) (14,974,814)
---------------- -----------------
Net increase (decrease) in net assets derived from beneficial interest
transactions........................................................ (5,967,582) 61,995,816
---------------- -----------------
Net increase (decrease) in net assets................................. (2,457,093) 50,414,348
NET ASSETS:
Beginning of period................................................... 50,514,356 100,008
---------------- -----------------
End of period (including accumulated net investment losses of $894,802
and $535,554, respectively)......................................... $ 48,057,263 $ 50,514,356
---------------- -----------------
---------------- -----------------
</TABLE>
- - ------------
*Commencement of operations.
See accompanying notes to financial statements
10
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- - --------------------------------------------------------------------------------
Notes to Financial Statements
- - --------------------------------------------------------------------------------
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Mitchell Hutchins/Kidder, Peabody Small Cap Growth Fund (formerly the
Kidder, Peabody Small Cap Equity Fund) (the 'Fund') is registered with the
Securities and Exchange Commission under the Investment Company Act of 1940 as
amended, as a diversified open-end management company.
Organizational Matters -- The Fund has adopted the Choice
PricingSystem'sm'. The Fund issues 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 -- Securities listed on national securities
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the mean between
closing bid and asked prices. Over-the-counter securities are valued on the
basis of the last sale, if available, or if not, on the basis of the bid price
at the close of business on each day, or, if market quotations for those
securities are not readily available, at fair value, as determined in good faith
by the Fund's 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 on trade date. Realized gains and losses from investment are
calculated using the identified cost method. Dividend income is recorded on the
ex-dividend date. Interest income is recorded on an accrual basis. Discounts are
accreted and premiums are amortized on straight line basis as adjustments to
interest income and the identified cost of investments.
Income, expenses (excluding class-specific expenses) and
realized/unrealized gains/losses are allocated proportionately to each class of
shares based upon the relative net asset value of outstanding shares (or the
value of dividend-eligible shares, as appropriate) of each class at the
beginning of the day (after adjusting for current capital share activity of the
respective classes). Class-specific expenses are charged directly to the
applicable class of shares.
Repurchase Agreements -- The Fund's custodian takes possession of the
collateral pledged for investments in repurchase agreements. The value of the
collateral must be a minimum of 102% of the market value of the securities being
loaned, allowing for minor variations arising from marking to market of such
collateral. If the issuer defaults or if bankruptcy or regulatory proceedings
are commenced with respect to the issuer, the realization of the proceeds may be
delayed or limited.
Federal Tax Status -- The Fund intends to distribute all of its taxable
income and to comply with the other requirements of the Internal Revenue Code
applicable to regulated investment
11
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- - --------------------------------------------------------------------------------
Notes to Financial Statements -- (continued)
- - --------------------------------------------------------------------------------
companies. Accordingly, no provision for federal income taxes is required. In
addition, by distributing during each calendar year substantially all of its net
investment income, capital gains and certain other amounts, if any, each Fund
intends not to be subject to a federal excise tax.
Dividends and Distributions -- Dividends and distributions to shareholders
are recorded on ex-dividend date. The Fund declares dividends from net
investment income annually. 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.
INVESTMENT ADVISER AND ADMINISTRATOR
The Fund has entered into an Investment Advisory and Administrative
Agreement with Kidder Peabody Asset Management, Inc. ('KPAM'), a wholly owned
subsidiary of Kidder, Peabody & Co. Incorporated ('KP'). General Electric
Capital Services, Inc., a wholly owned subsidiary of General Electric Company
('GE'), has a 100% interest in Kidder, Peabody Group Inc. ('Kidder Group'), the
parent company of KP. KPAM serves as the Fund's manager and receives a fee, paid
monthly and calculated and accrued daily at the annual rate of 1.00% of the
Fund's average daily net assets on assets up to but not including $25 million
and .90% thereafter (see 'Subsequent Events' below). KPAM in turn employs George
D. Bjurman & Associates ('Bjurman') as the Fund's investment adviser, in which
capacity Bjurman receives from KPAM a fee, accrued daily and paid monthly, at
the annual rate of .50% of the Fund's average daily net assets on assets up to
but not including $25 million and .40% thereafter.
At January 31, 1995, the Fund owed KPAM $40,563 for investment advisory
fees.
In compliance with applicable state securities laws, the Fund's investment
adviser will reimburse the Fund if and to the extent that the aggregate
operating expenses in any fiscal year, exclusive of taxes, interest, brokerage
fees, distribution fees and extraordinary expenses exceed limitations imposed by
various state regulations. Currently, the most restrictive limitations
applicable to the Fund is 2.5% of the first $30 million of average daily net
assets, 2.0% of the next $70 million and 1.5% of any excess over $100 million.
No expense reimbursement was required for the six months ended January 31, 1995.
DISTRIBUTION PLANS
KP is the exclusive distributor of the Fund's shares (see 'Subsequent
Events' below). Under separate plans of distribution the Class A shares are sold
subject to a front-end sales load and bear a service fee of 0.25% of the Class'
daily net assets. Class B shares are sold at net asset value without a sales
load and bear a distribution fee of 0.75% per annum and a service fee of 0.25%
per annum of average class net assets. The Fund pays KP monthly the service and
distribution fees. KP
12
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- - --------------------------------------------------------------------------------
Notes to Financial Statements -- (continued)
- - --------------------------------------------------------------------------------
also receives the proceeds of any front-end sales loads with respect to the
purchase of Class A shares. At January 31, 1995, the Fund owed KP $18,798 in
service and distribution fees.
INVESTMENTS IN SECURITIES
Purchases and sales of securities, excluding short-term securities, for the
six months ended January 31, 1995 were $22,616,748 and $26,488,939,
respectively. As of January 31, 1995 net unrealized appreciation, based on cost
for Federal income tax purposes, aggregated $4,165,475 of which $6,677,324
related to appreciated securities and $2,511,849 related to depreciated
securities. The aggregate cost of securities at January 31, 1995 for book and
Federal income tax purposes was $42,216,099.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest, par value $.001 per share. 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>
Six months ended January 31, 1995:
Shares sold............ 376,314 $ 4,036,416 143,170 $ 1,517,339 140,250 $1,493,458
Shares repurchased..... (681,656) (7,377,799) (332,773) (3,588,175) (189,855) (2,048,821)
---------- ------------ ---------- ----------- -------- ----------
Net decrease............... (305,342) $ (3,341,383) (189,603) $(2,070,836) (49,605) $ (555,363)
---------- ------------ ---------- ----------- -------- ----------
---------- ------------ ---------- ----------- -------- ----------
Period ended July 31, 1994:
Shares sold............ 4,047,875 $ 47,927,657 1,732,431 $20,617,806 716,681 $8,425,167
Shares repurchased..... (1,034,473) (11,629,093) (178,071) (1,954,410) (125,246) (1,391,311)
---------- ------------ ---------- ----------- -------- ----------
Net increase............... 3,013,402 $ 36,298,564 1,554,360 $18,663,396 591,435 $7,033,856
---------- ------------ ---------- ----------- -------- ----------
---------- ------------ ---------- ----------- -------- ----------
</TABLE>
SUBSEQUENT EVENTS
Effective February 13, 1995, as a result of an asset purchase transaction
by and among Kidder Group, its parent, GE, and Paine Webber Group Inc. ('PW
Group'), the investment management for the Fund has been transferred, on an
interim basis, from KPAM to Mitchell Hutchins Asset Management Inc. ('Mitchell
Hutchins'). Mitchell Hutchins is a wholly owned investment management subsidiary
of PaineWebber Incorporated, which is in turn a wholly owned subsidiary of PW
Group. During the interim period, Mitchell Hutchins will provide investment
management services to the Fund pursuant to a contract that has the same terms
and conditions as the prior
13
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- - --------------------------------------------------------------------------------
Notes to Financial Statements -- (concluded)
- - --------------------------------------------------------------------------------
investment management agreement between the Fund and KPAM. During the interim
period, the services of Bjurman as investment adviser to the Fund will be
unchanged. Fees paid by the Fund for investment management and advisory services
during the interim period will be paid into escrow and, if approved by the
shareholders, will be paid over to Mitchell Hutchins and Bjurman.
At the special shareholders' meeting, it is proposed that Mitchell Hutchins
be appointed as investment adviser and administrator of the Fund and that
Bjurman be appointed the sub-adviser of the Fund. If approved by the
shareholders, Bjurman would continue to manage the Fund by making investment
decisions based on the Fund's investment objective, policies and restrictions.
During the interim period and thereafter, assuming shareholder approval,
Mitchell Hutchins and Bjurman will receive the same fees previously received by
KPAM and Bjurman as described in the footnote above.
Also effective February 13, 1995, Mitchell Hutchins serves as the Fund's
distributor pursuant to arrangements described in the footnote above. Finally,
effective February 13, 1995, the Fund's name was changed to 'Mitchell
Hutchins/Kidder, Peabody Small Cap Growth Fund.'
14
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH 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
------------------------ ------------------------ ------------------------
SIX MONTHS SIX MONTHS SIX MONTHS
PERIOD ENDED PERIOD ENDED PERIOD ENDED
ENDED JANUARY 31, ENDED JANUARY 31, ENDED JANUARY 31,
JULY 31, 1995 JULY 31, 1995 JULY 31, 1995
1994`D' (UNAUDITED) 1994`D' (UNAUDITED) 1994`D' (UNAUDITED)
-------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $12.00 $9.79 $12.00 $9.74 $12.00 $9.81
-------- ----------- -------- ----------- -------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss.......................... (0.10) (0.11) (0.13) (0.15) (0.06) (0.06)
Net realized and unrealized gains (losses)
from investment transactions............... (2.11) 0.74 (2.13) 0.73 (2.13) 0.70
-------- ----------- -------- ----------- -------- -----------
TOTAL INCREASE (DECREASE) FROM INVESTMENT
OPERATIONS................................. (2.21) 0.63 (2.26) 0.58 (2.19) 0.64
-------- ----------- -------- ----------- -------- -----------
NET ASSET VALUE, END OF PERIOD............... $9.79 $10.42 $9.74 $10.32 $9.81 $10.45
-------- ----------- -------- ----------- -------- -----------
-------- ----------- -------- ----------- -------- -----------
TOTAL RETURN(1).............................. (18.42%) 6.44% (18.83%) 5.95% (18.25%) 6.52%
-------- ----------- -------- ----------- -------- -----------
-------- ----------- -------- ----------- -------- -----------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)............ $29,528 $28,248 $15,159 $14,117 $5,827 $5,692
Ratios of expenses to average net assets..... 1.68%* 1.70%* 2.43%* 2.45%* 1.43%* 1.45%*
Ratios of net investment (loss) to average
net assets................................. (1.06%)* (1.13%)* (1.80%)* (1.88%)* (0.81%)* (0.88%)*
Portfolio turnover........................... 56.45% 19.27% 56.45% 19.27% 56.45% 19.27%
</TABLE>
- - ------------
* Annualized.
`D' From November 4, 1993 (commencement of offering of shares) to July 31,
1994.
(1) Total return is calculated assuming a $1,000 investment in Fund shares on
the first day of each period reported, reinvestment of all dividends and
capital gain distributions at net asset value on the payable date and a sale
at net asset value on the last day of each period reported. The figures do
not include sales charges; results of Class A would be lower if sales
charges were included. Total returns for periods of less than one year have
not been annualized.
15
<PAGE>
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16
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
17
<PAGE>
-------------------------------------
TRUSTEES
David J. Beaubien
William W. Hewitt, Jr.
Thomas R. Jordan
Carl W. Schafer
-------------------------------------
PRINCIPAL OFFICERS
Frank P.L. Minard
President
Victoria E. Schonfeld
Vice President
Dianne E. O'Donnell
Vice President and Secretary
Julian F. Sluyters
Vice President and Treasurer
-------------------------------------
INVESTMENT ADVISER
George D. Bjurman & Associates
10100 Santa Monica Boulevard
Suite 1200
Los Angeles, California 90067
-------------------------------------
MANAGER, ADMINISTRATOR
AND DISTRIBUTOR
Mitchell Hutchins Asset Management
Inc.
1285 Avenue of the Americas
New York, New York 10019
-------------------------------------
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.
The financial information included
herein is taken from the records of
the Fund without examination by
independent accountants who do not
express an opinion thereon.
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.
<PAGE>
STATEMENT OF DIFFERENCES
------------------------
The copyright symbol shall be expressed as 'c'
The service mark shall be expressed as 'sm'
The dagger shall be expressed as `D'
