<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.
INCOME FUNDS
o MH/KP ADJUSTABLE RATE GOVERNMENT FUND
o MH/KP GLOBAL FIXED INCOME FUND
o MH/KP GOVERNMENT INCOME FUND
o MH/KP INTERMEDIATE FIXED INCOME FUND
o PW GLOBAL INCOME FUND
o PW HIGH INCOME FUND
o PW INVESTMENT GRADE INCOME FUND
o PW SHORT-TERM U.S. GOVERNMENT INCOME FUND
o PW STRATEGIC INCOME FUND
o PW U.S. GOVERNMENT INCOME FUND
TAX-FREE INCOME FUNDS
o MH/KP MUNICIPAL BOND FUND
o PW CALIFORNIA TAX-FREE INCOME FUND
o PW MUNICIPAL HIGH INCOME FUND
o PW NATIONAL TAX-FREE INCOME FUND
o PW NEW YORK TAX-FREE INCOME FUND
GROWTH FUNDS
o MH/KP EMERGING MARKETS EQUITY FUND
o MH/KP SMALL CAP GROWTH FUND
o PW CAPITAL APPRECIATION FUND
o PW GLOBAL EQUITY FUND
o PW GROWTH FUND
o PW REGIONAL FINANCIAL GROWTH FUND
o PW SMALL CAP VALUE FUND
GROWTH AND INCOME FUNDS
o MH/KP ASSET ALLOCATION FUND
o MH/KP EQUITY INCOME FUND
o PW BALANCED FUND
o PW GROWTH AND INCOME FUND
o PW GLOBAL ENERGY FUND
o PW UTILITY INCOME FUND
PAINEWEBBER MONEY MARKET FUND
- ------------------
(COPYRIGHT)1995 PAINEWEBBER INCORPORATED
[LOGO] PRINTED ON
RECYCLED PAPER
MITCHELL HUTCHINS/
KIDDER, PEABODY
SMALL CAP
GROWTH FUND
ANNUAL REPORT
July 31, 1995
<PAGE>
- --------------------------------------------------------------------------------
September 15, 1995
Dear Shareholder,
During the year ended July 31, 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. After seven short-term interest rate hikes between
February 1994 and February 1995, the Federal Reserve Board raised the Federal
Funds rate to 6.0%, and effectively doubled short-term interest rates in twelve
months. On July 6, 1995, the Federal Reserve Board cut the benchmark Federal
Funds rate by 0.25%. 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 from restrictive
toward neutral.
ECONOMIC OVERVIEW
News concerning the economy during the year ended July 31, 1995 was
dominated by debate over whether inflation was likely to become a threat,
discussions about the dismal performance of the dollar and details of efforts in
Washington to implement a plan to balance the budget. Interest rates trended
downward, as the perception that the Federal Reserve Board would win its battle
with inflation and that the next policy action would be to lower short-term
interest rates became widespread. The U.S. bond and stock markets rallied in the
first half of 1995, and strength in corporate earnings pushed stock prices
higher. Employment reports indicated a slowing economy, with consumer spending
declining significantly from 1994 and consumer credit reports showing high
ratios of installment debt to disposable income. Side effects of higher interest
rates lingered, however. Markets for new and existing homes were sluggish until
the close of the twelve-month period, despite historically attractive mortgage
rates. Although the U.S. economy appears to have been flat in the second
quarter, the second half of 1995 should show signs of further, albeit slower,
growth. Despite some slowing in the pace of economic growth, corporate profits
continued to exhibit strength.
PORTFOLIO REVIEW
By any standard, the last six months were terrific! The large-cap oriented
S&P 500 Index was up 21.1%--its best six-month showing since the first two
quarters of 1991. The small-cap Russell 2000 Index was up 22.6%, with especially
strong performance in the months of June and July. The indices' returns were
equally impressive for the year ended July 31, 1995, with the S&P 500 Index up
26.2% and the Russell 2000 Index up 24.9%. The Fund's total return for the year
ended July 31, 1995, without deducting sales charges, was 40.55% for Class A
shares, 39.43% for Class B shares and 40.88% for Class C shares. The Fund's
total return for this period, after deducting the maximum applicable sales
charges, was 34.24% for Class A shares, 39.43% for Class B shares and 40.88% for
Class C shares. The Fund's outperformance can be attributed to the success of
the portfolio's technology sector (24% of net assets on July 31, 1995).
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
The drop in the U.S. dollar and the submerging of many 'emerging' markets
created a renewed interest in domestic, large-cap equities during the first half
of 1995, pushing the popular Dow Jones Industrial Average and S&P 500 indices to
a long string of new highs. In contrast, small-caps struggled to keep up and it
was not until late June that the Russell 2000 Index was able to finally eclipse
its old high made on March 18, 1994. During the months of June and July, there
was a leadership change away from large-cap issues to small-cap securities. For
the two months, the Russell 2000 Index was up 11.3% versus a gain of 5.8% for
the S&P 500 Index.
The small cap rebound from the disappointing first half of 1994 has been
very gratifying. Even more encouraging has been the broad-based performance over
the past two months. While technology has clearly been the market leader, the
engine of this performance has been earnings growth, wherever it has been found.
Improving prospects for a capital gains tax cut, as well as the recent U.S.
dollar recovery, have aided smaller cap stocks recently. While small cap
companies do not directly benefit from a stronger dollar, small cap stocks
generally do since the larger, more internationally sensitive domestic companies
stand to lose sales and earnings momentum overseas. Therefore, some marginal
investment funds may be diverted to those companies whose stocks do not face
this prospect. The most interesting aspect of this diversion of funds is the
leverage it provides to small company stocks. A great majority of the total
capitalization of U.S. equity markets is accounted for by the 500 largest
companies; so a small percentage of funds diverted to small stocks can have a
multiple effect. In addition, the Fed's latest monetary easing reduced fear in
the market (which can play short-term havoc with small stocks) and encouraged
market participants to focus on earnings growth and relative fundamental
valuations with more confidence.
During the year ended July 31, 1995, technology continued to be the most
heavily weighted sector in the portfolio. Recently, significant reductions were
made to decrease weightings in individual stock names and industries in this
sector. The technology companies in the portfolio have had remarkable earnings
per share growth and, more importantly, we believe this growth should continue.
We remain vigilant concerning our overweighting in this sector because of the
outperformance seen so far this year. However, we are encouraged by the healthy
skepticism that has accompanied this sector's stellar performance--while many
investors have been lured by the attractive valuations in this sector, others
are terrified of technology companies.
We remain encouraged by the recent small-cap outperformance. Also, now that
the U.S. dollar appears to have stopped declining against other major
currencies, domestic small cap issues are competing on a level playing field.
This has historically given small cap stocks a performance edge.
- --------------------------------------------------------------------------------
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,
/s/ Frank P.L. Minard /s/ Tom Barry
FRANK P.L. MINARD O. THOMAS BARRY, III
Chairman, Senior Executive Vice President,
Mitchell Hutchins Asset Management Inc. George D. Bjurman & Associates
Portfolio Manager,
Mitchell Hutchins/Kidder, Peabody
Small Cap Growth Fund
- --------------------------------------------------------------------------------
3
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- ------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE FUND AND THE
RUSSELL 2000 INDEX
The following graph depicts the performance of the Mitchell
Hutchins/Kidder, Peabody Small Cap Growth Fund versus the Russell 2000 Index.
It is important to note that the Mitchell Hutchins/Kidder, Peabody Small Cap
Growth Fund is a professionally managed mutual fund while the Russell 2000
Index is not available for investment and is unmanaged. The comparison is
shown for illustrative purposes only.
- ------------------------------------------------------------------------------
[GRAPHS]
MH/KP Small Cap
Growth Fund Russell
------------------------- 2000
Class A Class B Class C Index
------- ------- ------- -------
1993:
Nov. 4 $9,450 $10,000 $10,000 $10,000
Nov. 30 9,117 9,542 9,550 9,674
Dec. 31 9,602 10,042 10,058 10,005
1994:
Jan. 31 9,857 10,308 10,333 10,318
Feb. 28 9,952 10,400 10,425 10,280
March 31 9,014 9,408 9,450 9,739
April 30 9,181 9,583 9,625 9,797
May 31 8,520 8,883 8,933 9,687
June 30 7,844 8,175 8,233 9,360
July 31 7,788 8,117 8,175 9,514
Aug. 31 8,743 9,100 9,175 10,044
Sept. 30 8,799 9,150 9,233 10,010
Oct. 31 9,125 9,483 9,575 9,970
Nov. 30 8,560 8,892 8,983 9,567
Dec. 31 8,592 8,917 9,025 9,823
1995:
Jan. 31 8,290 8,600 8,708 9,699
Feb. 28 8,743 9,067 9,192 10,102
March 31 9,053 9,383 9,517 10,276
April 30 8,998 9,317 9,458 10,504
May 31 9,093 9,408 9,558 10,684
June 30 9,801 10,142 10,308 11,239
July 31 10,951 11,317 11,517 11,886
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.
4
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
Recent Performance Results (unaudited)
- --------------------------------------------------------------------------------
TOTAL RETURN(1)
---------------------------
NET ASSET VALUE 12 MONTHS 6 MONTHS
---------------------------- ENDED ENDED
07/31/95 01/31/95 07/31/94 07/31/95 07/31/95
-------- -------- -------- --------- --------
Class A Shares $13.76 $10.42 $9.79 40.55% 32.05%
Class B Shares 13.58 10.32 9.74 39.43 31.59
Class C Shares 13.82 10.45 9.81 40.88 32.25
PERFORMANCE SUMMARY CLASS A SHARES
NET ASSET VALUE CAPITAL
----------------- GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN(1)
- -------------- --------- ------ ----------- -------------- ---------
11/04/93 - 12/31/93 $12.00 $12.07 -- -- 0.58%
1994 12.07 10.80 -- -- -10.52
01/01/95 - 07/31/95 10.80 13.76 -- -- 27.41
-------
CUMULATIVE TOTAL RETURN AS OF 07/31/95: 14.67%
PERFORMANCE SUMMARY CLASS B SHARES
NET ASSET VALUE CAPITAL
----------------- GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN(1)
- -------------- --------- ------ ----------- -------------- ---------
11/04/93 - 12/31/93 $12.00 $12.05 -- -- 0.42%
1994 12.05 10.70 -- -- -11.20
01/01/95 - 07/31/95 10.70 13.58 -- -- 26.92
-------
CUMULATIVE TOTAL RETURN AS OF 07/31/95: 13.17%
PERFORMANCE SUMMARY CLASS C SHARES
NET ASSET VALUE CAPITAL
----------------- GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN(1)
- -------------- --------- ------ ----------- -------------- ---------
11/04/93 - 12/31/93 $12.00 $12.07 -- -- 0.58%
1994 12.07 10.83 -- -- -10.27
01/01/95 - 07/31/95 10.83 13.82 -- -- 27.61
-------
CUMULATIVE TOTAL RETURN AS OF 07/31/95: 15.17%
AVERAGE ANNUAL RETURN
% RETURN AFTER
% RETURN WITHOUT DEDUCTING
SALES CHARGE MAXIMUM SALES CHARGE
-------------------- ---------------------
CLASS CLASS
-------------------- ---------------------
A* B** C*** A* B** C***
----- ----- ----- ----- ----- -----
Twelve Months
Ended 07/31/95 40.55% 39.43% 40.88% 34.24% 39.43% 40.88%
Commencement of
Operations Through
07/31/95+ 8.25% 7.43% 8.53% 5.38% 7.43% 8.53%
- --------------------------------------------------------------------------------
(1) Figures assume reinvestment of all dividends and capital gains
distributions, if any, at net asset value on the payable date, and do not
include sales charges; results for Class A shares would be lower if sales
charges were included.
* Maximum sales charge for Class A shares is 4.50% 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 an initial or contingent deferred sales
charges and are available exclusively to a limited group of persons,
including PaineWebber employees.
+ Commencement of operations was November 4, 1993 for Class A, Class B and
Class C shares.
- --------------------------------------------------------------------------------
5
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- ------------------------------------------------------------------------------
Portfolio of Investments
July 31, 1995
- ------------------------------------------------------------------------------
COMMON STOCKS--95.09%
- ------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- --------- -----------
BUSINESS MACHINES--12.54%
20,000 Electronics For Imaging, Inc........................... $ 1,280,000
20,000 Fusion Systems Corp.*.................................. 620,000
50,000 Network Equipment Technologies, Inc.*.................. 1,512,500
40,000 Network General Corp.*................................. 1,360,000
30,000 Optical Data Systems, Inc.*............................ 937,500
20,000 S3, Inc.*.............................................. 805,000
-----------
6,515,000
-----------
CHEMICALS--3.00%
30,000 Airgas, Inc.*.......................................... 840,000
60,000 Tetra Technologies, Inc.*.............................. 720,000
-----------
1,560,000
-----------
CONSTRUCTION--0.75%
25,000 Ply-Gem Industries..................................... 387,500
-----------
CONTAINERS--2.88%
30,000 ACX Technologies, Inc.*................................ 1,496,250
-----------
DOMESTIC PETROLEUM--1.23%
50,000 Benton Oil & Gas Co.*.................................. 637,500
-----------
DRUGS, MEDICINE--2.08%
30,000 Watson Pharmaceuticals, Inc.*.......................... 1,080,000
-----------
ELECTRONICS--10.86%
18,300 Altera Corp.*.......................................... 1,023,656
10,000 Coherent Communications Systems Corp................... 200,000
10,000 Credence Systems Corp.*................................ 350,000
10,000 Input/Output, Inc.*.................................... 417,500
30,000 Lo-Jack Corp.*......................................... 356,250
30,000 Microtest, Inc.*....................................... 674,532
48,000 Tencor Instruments..................................... 2,112,000
15,000 Trimble Navigation, Ltd.*.............................. 510,000
-----------
5,643,938
-----------
HEALTH (NON-DRUG)--6.96%
40,000 Conmed Corp.*.......................................... 1,220,000
10,000 Genesis Health Ventures, Inc.*......................... 300,000
60,000 Horizon Healthcare Corp.*.............................. 1,357,500
10,000 Lincare Holdings, Inc.*................................ 347,500
20,000 Mid Atlantic Medical Services*......................... 392,500
-----------
3,617,500
-----------
LEISURE, LUXURY--3.84%
50,000 Cobra Golf Inc.*....................................... 1,568,750
15,000 First Team Sports*..................................... 428,438
-----------
1,997,188
-----------
MEDIA--1.47%
34,000 Microdyne Corp.*....................................... 765,000
-----------
MISCELLANEOUS FINANCE--2.53%
70,000 Olympic Financial, Ltd.*............................... 1,312,500
-----------
6
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
COMMON STOCKS--(concluded)
- ------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- --------- -----------
MOTOR VEHICLES--2.24%
35,000 Automotive Industries*................................. $ 1,161,563
-----------
PAPER--3.18%
50,000 Chesapeake Corp........................................ 1,650,000
-----------
PHOTO-OPTICALS--1.43%
20,000 Ultratech Stepper, Inc.*............................... 745,000
-----------
POLLUTION CONTROL--1.39%
40,000 New Park Resources*.................................... 720,000
-----------
PRODUCER GOODS--21.48%
35,000 Agco Corp.............................................. 1,863,750
15,000 Cidco, Inc.*........................................... 502,500
15,000 Electroglas, Inc.*..................................... 1,087,500
20,000 FSI International, Inc.*............................... 575,000
35,000 JLG Industries, Inc.................................... 1,268,750
6,500 Kulizke & Soffa Industries, Inc........................ 266,500
28,000 Lam Research Corp.*.................................... 1,911,000
23,000 Novellus Systems, Inc.*................................ 1,834,250
15,000 Pairgain Technologie, Inc.*............................ 397,500
10,000 U.S. Robotics, Inc.*................................... 1,455,000
-----------
11,161,750
-----------
PUBLISHING--1.24%
20,400 Reynolds & Reynolds.................................... 645,150
-----------
RETAIL (ALL OTHER)--5.21%
25,000 Health Management Associates, Inc., Class A*........... 803,125
10,000 Micro Warehouse, Inc.*................................. 487,500
35,000 Sunglass Hut International, Inc.*...................... 1,417,500
-----------
2,708,125
-----------
SERVICES--8.14%
30,000 CDI Corp.*............................................. 615,000
15,000 Filenet Corp.*......................................... 658,125
10,000 Macromedia, Inc.*...................................... 477,500
6,000 Medic Computer Systems, Inc.*.......................... 267,000
26,000 Mercury Interactive Corp.*............................. 650,000
15,000 Paychex, Inc........................................... 558,750
30,000 Robert Half International*............................. 828,750
10,000 Santa Cruz Operation, Inc.*............................ 66,250
7,500 TCSI Corp.*............................................ 110,625
-----------
4,232,000
-----------
IRON & STEEL--1.49%
35,000 J & L Specialty Steel, Inc............................. 774,375
-----------
TRUCKING, FREIGHT--1.15%
20,000 Landstar System, Inc.*................................. 600,000
-----------
Total Common Stocks (cost-$34,765,717)............................ 49,410,339
-----------
7
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
SHORT-TERM DEBT SECURITIES--3.83%
- ------------------------------------------------------------------------------
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
- --------- -------- ------- -----------
$ 2,000 U.S. Treasury Bills
(cost-$1,988,890).................. 09/07/95 5.405% $ 1,988,890
-----------
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT--2.92%
- -------------------------------------------------------------------------------
1,515 Repurchase Agreement dated 07/31/95
with Daiwa Securities, Inc.,
collateralized by $970,000 U.S.
Treasury Bonds, 13.25% due
05/15/14; proceeds: $1,515,244
(cost-$1,515,000).................. 08/01/95 5.800 1,515,000
-----------
TOTAL INVESTMENTS
(cost-$38,269,607)-101.84%.................... 52,914,229
Liabilities in excess of other
assets-(1.84%)................................ (952,901)
-----------
NET ASSETS-100.00%............................ $51,961,328
-----------
-----------
- ------------
* Non-income producing security
See accompanying notes to financial statements
8
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
July 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost-$38,269,607)..................... $52,914,229
Cash......................................................... 287,524
Receivable for investments sold.............................. 794,735
Receivable for shares of beneficial interest purchased....... 27,333
Dividends and interest receivable............................ 12,400
Deferred organizational expenses............................. 131,510
Other assets................................................. 4,001
-----------
Total assets............................................. 54,171,732
-----------
LIABILITIES
Payable for investments purchased............................ 1,788,129
Payables for shares of beneficial interest repurchased....... 281,087
Payable to affiliate......................................... 59,542
Accrued expenses and other liabilities....................... 81,646
-----------
Total liabilities........................................ 2,210,404
-----------
NET ASSETS
Beneficial interest shares of $0.001 par value outstanding
(unlimited amount authorized)............................... 45,067,859
Accumulated net realized losses from investments............. (7,751,153)
Net unrealized appreciation on investments................... 14,644,622
-----------
Net assets............................................... $51,961,328
-----------
-----------
CLASS A:
Net assets................................................... $30,927,411
-----------
Shares outstanding........................................... 2,248,348
-----------
Net asset and redemption value per share..................... $13.76
-----------
-----------
Maximum offering price per share (net asset value plus sales
charge of 4.50% of offering price).......................... $14.41
-----------
-----------
CLASS B:
Net assets................................................... $15,139,345
-----------
Shares outstanding........................................... 1,115,071
-----------
Net asset value, offering price and redemption value per
share....................................................... $13.58
-----------
-----------
CLASS C:
Net assets................................................... $ 5,894,572
-----------
Shares outstanding........................................... 426,688
-----------
Net asset value, offering price and redemption value per
share....................................................... $13.82
-----------
-----------
</TABLE>
See accompanying notes to financial statements
9
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Operations
For the Year Ended July 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends..................................................... $ 146,235
Interest...................................................... 100,957
-----------
247,192
-----------
EXPENSES:
Investment advisory and administration........................ 474,177
Service fees--Class A......................................... 76,456
Service and distribution fees--Class B........................ 149,419
Reports and notices to shareholders........................... 71,199
Transfer agency............................................... 65,926
Custody and accounting........................................ 47,667
Amortization of organization expenses......................... 45,635
Legal and audit............................................... 44,014
Trustees' fees................................................ 10,250
Other expenses................................................ 1,625
-----------
986,368
-----------
NET INVESTMENT LOSS.............................................. (739,176)
-----------
REALIZED AND UNREALIZED GAINS FROM INVESTMENT TRANSACTIONS:
Net realized gains from investment transactions............... 1,808,936
Net change in unrealized appreciation/depreciation of
investments................................................. 16,130,447
-----------
NET REALIZED AND UNREALIZED GAINS FROM INVESTMENT TRANSACTIONS... 17,939,383
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............. $17,200,207
-----------
-----------
</TABLE>
See accompanying notes to financial statements
10
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE PERIOD
YEAR ENDED NOVEMBER 4, 1993+
JULY 31, 1995 TO JULY 31, 1994
------------- -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment loss................... $ (739,176) $ (535,554)
Net realized gains (losses) from
investment transactions............. 1,808,936 (9,560,089)
Net change in unrealized
appreciation/depreciation of
investments......................... 16,130,447 (1,485,825)
------------ --------------
Net increase (decrease) in net assets
resulting from operations........... 17,200,207 (11,581,468)
------------ --------------
FROM BENEFICIAL INTEREST TRANSACTIONS:
Net proceeds from the sale of
shares.............................. 8,922,103 76,970,630
Cost of shares repurchased............ (24,675,338) (14,974,814)
------------ --------------
Net increase (decrease) in net assets
derived from
beneficial interest transactions.... (15,753,235) 61,995,816
------------ --------------
Net increase in net assets............ 1,446,972 50,414,348
NET ASSETS:
Beginning of period................... 50,514,356 100,008
------------ --------------
End of period......................... $51,961,328 $50,514,356
------------ --------------
------------ --------------
</TABLE>
- ------------------
+ Commencement of operations.
See accompanying notes to financial statements
11
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mitchell Hutchins/Kidder, Peabody Small Cap Growth Fund (formerly 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 investment company.
Organizational Matters--The Fund offers three classes of shares: Class A,
Class B and Class C shares. Each class represents interests in the same assets
of the Fund, and the classes are identical except for differences in their sales
charge structure and ongoing service and distribution charges. All classes of
shares have equal rights as to voting privileges, except that each class has
exclusive voting rights with respect to its distribution plan.
Valuation of Investments--Securities which are listed on U.S. stock
exchanges are valued at the last sale prices on the day the securities are
valued or, lacking any sales on such day, at the current quoted bid price. In
cases where securities are traded on more than one exchange, the securities are
valued on the exchange designated by Mitchell Hutchins as the primary market.
Securities traded in the over-the-counter ('OTC') market and listed on the
National Association of Securities Dealers Automated Quotation System ('NASDAQ')
are valued at the last trade price on NASDAQ prior to the time of valuation;
other OTC securities are valued at the last bid price available in the OTC
market prior to the time of valuation. The amortized cost method of valuation is
used to value short-term debt instruments with sixty days or less remaining to
maturity. Securities and assets for which market quotations are not readily
available (including restricted securities subject to limitations as to their
sale) are valued at fair value as determined in good faith by or under the
direction of the Fund's Board of Trustees.
Investment Transactions and Investment Income--Investment transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated using the identified cost method. Dividend income is recorded as
of the ex-dividend date. Interest income is recorded on an accrual basis.
Discounts are accreted and premiums are amortized 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 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 underlying
collateral is valued daily on a mark-to-market basis to ensure that the value,
including accrued interest, is at least equal to the repurchase price. In the
event of default of the obligation to repurchase, the Fund has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in
12
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
the event of default or bankruptcy by the other party to the agreement,
realization and/or retention of the collateral may be subject to legal
proceedings. The Fund occasionally participates in joint repurchase agreement
transactions with other funds managed by Mitchell Hutchins.
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 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 July 31, 1995, the Fund had a net capital loss carryforward of
$7,751,153. The loss carryforward is available as a reduction, to the extent
provided in the regulations, of future net realized capital gains, which will
expire by July 31, 2003.
Dividends and Distributions--Dividends and distributions to shareholders
are recorded on the ex-dividend date. Dividends from net investment income and
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. Dividends from net investment income and distributions
from realized gains from investment transactions have been 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. As of July 31, 1995, the effect of such differences totalled
$1,274,730. 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.
CONCENTRATION OF RISK
Small cap companies may be more vulnerable than larger companies to adverse
business or economic developments. Small cap companies may also have limited
product lines, markets or financial resources, and may be dependent on a
relatively small management group. Securities of such companies may be less
liquid and more volatile than securities of larger companies or the market
averages in general and therefore may involve greater risk than investing in
larger companies. In addition, small cap companies may not be well-known to the
investing public, may not have institutional ownership and may have only
cyclical, static or moderate growth prospects.
The ability of the issuers of the debt securities held by the Fund to meet
their obligations may be affected by economic and political developments,
including those particular to a specific industry, country or region.
13
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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 1.00% of the Fund's
average daily net assets on assets up to but not including $25 million and 0.90%
thereafter.
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 PaineWebber Group Inc. That interim period began on
February 13, 1995 and ended on April 13, 1995.
Mitchell Hutchins has entered into a separate Sub-Advisory Agreement with
George D. Bjurman & Associates (the 'Sub-Adviser'). In accordance with the
Sub-Advisory Agreement, Mitchell Hutchins (not the Fund) pays the Sub-Adviser a
fee, accrued daily and paid monthly, at the annual rate of 0.50% of the Fund's
average daily net assets up to but not including $25 million and 0.40%
thereafter.
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 July
31, 1995, no reimbursements were required pursuant to the above limitation.
DISTRIBUTION PLAN
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 daily class 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 daily class net assets.
For the period August 1, 1994 to February 13, 1995 Kidder, Peabody & Co.
Incorporated ('Kidder, Peabody'), the Fund's predecessor distributor, earned
$128,274 in distribution and service fees. For the period from February 13, 1995
to July 31, 1995, Mitchell Hutchins earned $97,601 in such fees. At July 31,
1995, $18,331 was payable to PaineWebber for these services. Mitchell Hutchins
also receives the proceeds of any front-end sales load with respect to the
purchase of Class A shares. For the year ended July 31, 1995, Kidder, Peabody
and Mitchell Hutchins earned approximately $108,000 and $88,700, respectively,
in initial sales charges on the sale of Class A shares.
14
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at July 31,
1995 was substantially the same as the cost of securities for financial
statement purposes.
At July 31, 1995, the components of the net unrealized appreciation of
investments were as follows:
Gross appreciation (investments having an excess of value over
cost).......................................................... $15,175,172
Gross depreciation (investments having an excess of cost over
value)......................................................... (530,550)
-----------
Net unrealized appreciation of investments....................... $14,644,622
-----------
-----------
For the year ended July 31, 1995, aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $49,905,521 and
$64,820,185, respectively.
SHARES OF BENEFICIAL INTEREST
There is an unlimited amount of $0.001 par value of 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>
FOR THE YEAR ENDED
JULY 31, 1995:
Shares sold........... 451,278 $ 4,916,120 188,783 $ 2,035,542
Shares repurchased.... (1,219,110) (13,681,733) (630,850) (7,066,893)
---------- ------------ --------- -----------
Net decrease............ (767,832) $ (8,765,613) (442,067) $(5,031,351)
---------- ------------ --------- -----------
---------- ------------ --------- -----------
FOR THE PERIOD ENDED
JULY 31, 1994+:
Shares sold........... 4,047,875 $ 47,927,657 1,732,431 $20,617,806
Shares repurchased.... (1,034,473) (11,629,093) (178,071) (1,954,410)
---------- ------------ --------- -----------
Net increase............ 3,013,402 $ 36,298,564 1,554,360 $18,663,396
---------- ------------ --------- -----------
---------- ------------ --------- -----------
<CAPTION>
CLASS C
----------------------
SHARES AMOUNT
-------- -----------
<S> <C> <C>
FOR THE YEAR ENDED
JULY 31, 1995:
Shares sold........... 181,812 $ 1,970,441
Shares repurchased.... (349,337) (3,926,712)
-------- -----------
Net decrease............ (167,525) $(1,956,271)
-------- -----------
-------- -----------
FOR THE PERIOD ENDED
JULY 31, 1994+:
Shares sold........... 716,681 $ 8,425,167
Shares repurchased.... (125,246) (1,391,311)
-------- -----------
Net increase............ 591,435 $ 7,033,856
-------- -----------
-------- -----------
</TABLE>
- ------------------
+ For the period November 4, 1993 (commencement of operations) to July 31, 1994.
15
<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
------------------- -------------------
FOR THE FOR THE FOR THE FOR THE
YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED
JULY 31, JULY 31, JULY 31, JULY 31,
1995** 1994+ 1995** 1994+
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period......................... $ 9.79 $12.00 $ 9.74 $12.00
-------- -------- -------- --------
Income (loss) from investment
operations:
Net investment loss.............. (0.20) (0.10) (0.28) (0.13)
Net realized and unrealized gains
(losses) from investment
transactions................... 4.17 (2.11) 4.12 (2.13)
-------- -------- -------- --------
Total increase (decrease) from
investment operations.......... 3.97 (2.21) 3.84 (2.26)
-------- -------- -------- --------
Net asset value, end of period... $13.76 $ 9.79 $13.58 $ 9.74
-------- -------- -------- --------
-------- -------- -------- --------
Total investment return (1)...... 40.55% (18.42)% 39.43% (18.83)%
-------- -------- -------- --------
-------- -------- -------- --------
Ratios/Supplemental data:
Net assets, end of period
(000's)...................... $ 30,927 $ 29,528 $ 15,139 $ 15,159
Ratios of expenses to average
net assets................... 1.72% 1.68%* 2.48% 2.43%*
Ratios of net investment loss
to average
net assets................... (1.24)% (1.06)%* (2.00)% (1.80)%*
Portfolio turnover rate........ 101% 56% 101% 56%
<CAPTION>
CLASS C
-------------------
FOR THE FOR THE
YEAR PERIOD
ENDED ENDED
JULY 31, JULY 31,
1995** 1994+
-------- --------
<S> <C> <C>
Net asset value, beginning of
period......................... $ 9.81 $ 12.00
------- -------
Income (loss) from investment
operations:
Net investment loss.............. (0.28) (0.06)
Net realized and unrealized gains
(losses) from investment
transactions................... 4.29 (2.13)
------- -------
Total increase (decrease) from
investment operations.......... 4.01 (2.19)
------- -------
Net asset value, end of period... $ 13.82 $ 9.81
------- -------
------- -------
Total investment return (1)...... 40.88 % (18.25)%
------- -------
------- -------
Ratios/Supplemental data:
Net assets, end of period
(000's)...................... $ 5,895 $ 5,827
Ratios of expenses to average
net assets................... 1.48% 1.43%*
Ratios of net investment loss
to average net assets........ (0.99)% (0.81)%*
Portfolio turnover rate........ 101% 56%
</TABLE>
- ------------------
* Annualized.
** On February 13, 1995, Mitchell Hutchins became investment adviser to the
Fund.
+ For the period November 4, 1993 (commencement of operations) to July 31,
1994.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and capital
gain distributions, if any, 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 shares would be lower if
sales charges were included. Total investment returns for periods of less
than one year have not been annualized.
16
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
Report of Ernst & Young LLP, Independent Auditors
- --------------------------------------------------------------------------------
The Board of Trustees and Shareholders of
Mitchell Hutchins/Kidder, Peabody Small Cap Growth Fund
We have audited the accompanying statement of assets and liabilities of
Mitchell Hutchins/Kidder, Peabody Small Cap Growth Fund, including the portfolio
of investments, as of July 31, 1995, and the related statements of operations,
changes in net assets, and financial highlights for the year then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit. The statement
of changes in net assets and the financial highlights for the period ended July
31, 1994 were audited by other auditors whose report dated September 9, 1994
expressed an unqualified opinion on that statement and financial highlights.
We have conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at July 31,
1995, by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1995 financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Mitchell Hutchins/Kidder, Peabody Small Cap Growth Fund at July 31,
1995, and the results of its operations, the changes in its net assets, and the
financial highlights for the year then ended in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
September 21, 1995
17
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
Tax Information
- --------------------------------------------------------------------------------
We are required by subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Fund's fiscal year end (July 31,
1995) as to the federal tax status of distributions received by shareholders
during such fiscal year. Accordingly, we are advising you that no distributions
were paid during the fiscal year.
Because the Fund's fiscal year is not the calendar year, another
notification will be sent in respect of calendar 1995. The second notification,
which will reflect the amount to be used by calendar year taxpayers on their
federal income tax returns, will be made in conjunction with Form 1099 DIV and
will be mailed in January 1996. Shareholders are advised to consult their own
tax advisers with respect to the tax consequences of their investment in the
Fund.
18
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
Shareholder Information
- --------------------------------------------------------------------------------
A special meeting of shareholders of Mitchell Hutchins/Kidder, Peabody
Small Cap Growth Fund (the 'Fund'), a series of Mitchell Hutchins/Kidder,
Peabody Investment Trust III, was held on April 13, 1995. At the meeting David
J. Beaubien, William W. Hewitt, Jr., Thomas R. Jordan, Frank P.L. Minard and
Carl W. Schafer were elected as trustees to serve without limit in time, subject
to resignation, retirement or removal. In addition, the selection of Deloitte &
Touche LLP as the Fund's independent accountants was ratified.
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........... 2,371,414 131,900
William W. Hewitt, Jr. ..... 2,371,414 131,900
Thomas R. Jordan............ 2,371,414 131,900
Frank P.L. Minard........... 2,371,414 131,900
Carl W. Schafer............. 2,371,414 131,900
</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................ 2,360,820 21,634 120,860
</TABLE>
(Note: On July 20, 1995, the Board of Trustees appointed Ernst & Young LLP
as the Fund's independent auditors.)
In addition, the following agreements were approved for the Fund:
1) An interim investment advisory agreement between the Fund and Mitchell
Hutchins Asset Management Inc. ('Mitchell Hutchins') containing
substantially the same terms, conditions and fees as the previous
investment advisory agreement with Kidder Peabody Asset Management,
Inc. ('KPAM').
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>
2,328,764 48,452 126,098
</TABLE>
2) An interim investment sub-advisory agreement with the Fund's current
investment sub-adviser containing substantially the same terms,
conditions and fees as its previous investment sub-advisory agreement
with that investment sub-adviser.
The votes were as follows:
<TABLE>
<CAPTION>
All Shares Voting as a Single Class
-----------------------------------------------
Shares Shares Shares
Voted For Voted Against Withhold Authority
--------- ------------- ------------------
<S> <C> <C>
2,325,693 47,355 130,266
</TABLE>
19
<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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>
2,325,967 50,312 127,035
</TABLE>
4) A new investment sub-advisory agreement with the Fund's current
investment sub-adviser containing substantially the same terms,
conditions and fees as its previous investment sub-advisory agreement
with that investment sub-adviser.
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>
2,347,750 26,908 128,655
</TABLE>
Broker non-votes and absentions are included within the 'Shares Withhold
Authority' totals.
20
<PAGE>
- --------------------------------------
TRUSTEES
David J. Beaubien
William W. Hewitt, Jr.
Thomas R. Jordan
Frank P.L. Minard
Carl W. Schafer
- --------------------------------------
OFFICERS
Margo N. Alexander
President
Victoria E. Schonfeld
Vice President
Dianne E. O'Donnell
Vice President and Secretary
Julian F. Sluyters
Vice President and Treasurer
- --------------------------------------
INVESTMENT ADVISER,
ADMINISTRATOR
AND DISTRIBUTOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
- --------------------------------------
INVESTMENT SUB-ADVISER
George D. Bjurman & Associates
10100 Santa Monica Boulevard
Los Angeles, California 90067
- --------------------------------------
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.
