<PAGE>
U.S. GOVERNMENT INCOME FUND
PAINEWEBBER
PERFORMANCE RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE TOTAL RETURN/1/
-------------------------------- --------------------------------
12 MONTHS 6 MONTHS
11/30/96 05/31/96 11/30/95 ENDED 11/30/96 ENDED 11/30/96
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A
Shares $8.86 $8.63 $9.12 3.39% 5.89%
- ---------------------------------------------------------------------------------
Class B
Shares 8.87 8.63 9.12 2.72 5.61
- ---------------------------------------------------------------------------------
Class C
Shares 8.86 8.62 9.11 2.98 5.75
- ---------------------------------------------------------------------------------
Performance Summary Class A Shares
<CAPTION>
NET ASSET VALUE
------------------ CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID/2/ RETURN/1/
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
08/31/84-
12/31/84 $9.57 $9.78 $ -- $0.3515 5.95%
- ---------------------------------------------------------------------------------
1985 9.78 10.32 -- 1.2600 19.79
- ---------------------------------------------------------------------------------
1986 10.32 10.21 0.0053 1.1924 11.18
- ---------------------------------------------------------------------------------
1987 10.21 9.34 0.0027 0.9160 0.59
- ---------------------------------------------------------------------------------
1988 9.34 9.18 -- 0.8718 7.83
- ---------------------------------------------------------------------------------
1989 9.18 9.49 -- 0.7994 12.58
- ---------------------------------------------------------------------------------
1990 9.49 9.57 -- 0.7883 9.67
- ---------------------------------------------------------------------------------
1991 9.57 10.18 -- 0.7683 14.89
- ---------------------------------------------------------------------------------
1992 10.18 10.05 -- 0.7372 6.37
- ---------------------------------------------------------------------------------
1993 10.05 10.03 -- 0.6590 6.48
- ---------------------------------------------------------------------------------
1994 10.03 8.40 -- 0.6014 (10.51)
- ---------------------------------------------------------------------------------
1995 8.40 9.21 -- 0.5807 17.04
- ---------------------------------------------------------------------------------
01/01/96-
11/30/96 9.21 8.86 -- 0.4772 1.57
- ---------------------------------------------------------------------------------
Total: $0.0080 $10.0032
- ---------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 11/30/96 : 161.57%
- ---------------------------------------------------------------------------------
Performance Summary Class B Shares
<CAPTION>
NET ASSET VALUE
------------------ CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN/1/
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/01/91-
12/31/91 $9.59 $10.19 $ -- $0.3535 10.09%
- ---------------------------------------------------------------------------------
1992 10.19 10.05 -- 0.6599 5.31
- ---------------------------------------------------------------------------------
1993 10.05 10.04 -- 0.5821 5.78
- ---------------------------------------------------------------------------------
1994 10.04 8.40 -- 0.5317 (11.28)
- ---------------------------------------------------------------------------------
1995 8.40 9.21 -- 0.5119 16.14
- ---------------------------------------------------------------------------------
01/01/96-
11/30/96 9.21 8.87 -- 0.4190 1.02
- ---------------------------------------------------------------------------------
Total: $0.0000 $3.0581
- ---------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 11/30/96 : 27.66%
- ---------------------------------------------------------------------------------
Performance Summary Class C Shares
<CAPTION>
NET ASSET VALUE
------------------ CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN/1/
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/02/92-
12/31/92 $10.13 $10.05 $ -- $0.3281 2.16%
- ---------------------------------------------------------------------------------
1993 10.05 10.02 -- 0.6089 5.85
- ---------------------------------------------------------------------------------
1994 10.02 8.39 -- 0.5557 (10.97)
- ---------------------------------------------------------------------------------
1995 8.39 9.20 -- 0.5345 16.46
- ---------------------------------------------------------------------------------
01/01/96-
11/30/96 9.20 8.86 -- 0.4381 1.24
- ---------------------------------------------------------------------------------
Total: $0.0000 $2.4653
- ---------------------------------------------------------------------------------
</TABLE>
CUMULATIVE TOTAL RETURN AS OF 11/30/96 : 13.52%
- -------------------------------------------------------------------------------
/1/Figures assume reinvestment of all dividends and other distributions at net
asset value on the payable dates and do not include sales charges; results
for each class would be lower if sales charges were included.
/2/Certain distributions may contain short-term capital gains.
Note: The Fund offers Class Y shares to a limited group of investors,
including the trustee of the PaineWebber Savings Investment Plan and
INSIGHT Investment Advisory Program participants. For the year ended
November 30, 1996 and since inception (September 11, 1991 through
November 30, 1996); Class Y shares had a total return of 3.81% and
29.05%, respectively. Class Y shares do not have initial or contingent
deferred sales charges or ongoing distribution and service fees.
The data above represents past performance of the Fund's shares, which is no
guarantee of future results. The 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.
10
<PAGE>
INVESTMENT GRADE INCOME FUND
PAINEWEBBER
PERFORMANCE RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE TOTAL RETURN/1/
-------------------------------- --------------------------------
12 MONTHS 6 MONTHS
11/30/96 05/31/96 11/30/95 ENDED 11/30/96 ENDED 11/30/96
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A
Shares $10.59 $10.16 $10.68 6.33% 7.98%
- ---------------------------------------------------------------------------------
Class B
Shares 10.58 10.16 10.67 5.54 7.48
- ---------------------------------------------------------------------------------
Class C
Shares 10.59 10.16 10.68 5.80 7.71
- ---------------------------------------------------------------------------------
Performance Summary Class A Shares
<CAPTION>
NET ASSET VALUE
------------------ CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID/2/ RETURN/1/
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
08/31/84-
12/31/84 $ 9.57 $ 9.77 $ -- $ 0.3549 5.88%
- ---------------------------------------------------------------------------------
1985 9.77 10.52 -- 1.3080 22.76
- ---------------------------------------------------------------------------------
1986 10.52 10.75 0.0125 1.2060 14.47
- ---------------------------------------------------------------------------------
1987 10.75 9.55 0.0279 0.9846 (1.51)
- ---------------------------------------------------------------------------------
1988 9.55 9.51 -- 0.8603 8.88
- ---------------------------------------------------------------------------------
1989 9.51 9.77 -- 0.8363 11.98
- ---------------------------------------------------------------------------------
1990 9.77 9.54 -- 0.8284 6.47
- ---------------------------------------------------------------------------------
1991 9.54 10.42 -- 0.8180 18.56
- ---------------------------------------------------------------------------------
1992 10.42 10.50 -- 0.8081 8.87
- ---------------------------------------------------------------------------------
1993 10.50 11.08 -- 0.7920 13.35
- ---------------------------------------------------------------------------------
1994 11.08 9.70 -- 0.7659 (5.59)
- ---------------------------------------------------------------------------------
1995 9.70 10.79 -- 0.7525 19.61
- ---------------------------------------------------------------------------------
01/01/96-
11/30/96 10.79 10.59 -- 0.6364 4.35
- ---------------------------------------------------------------------------------
Total: $0.0404 $10.9514
- ---------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 11/30/96 : 227.98%
- ---------------------------------------------------------------------------------
Performance Summary Class B Shares
<CAPTION>
NET ASSET VALUE
------------------ CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN/1/
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/01/91-
12/31/91 $ 9.79 $10.41 $ -- $0.3795 10.39%
- ---------------------------------------------------------------------------------
1992 10.41 10.49 -- 0.7623 8.05
- ---------------------------------------------------------------------------------
1993 10.49 11.08 -- 0.7101 12.63
- ---------------------------------------------------------------------------------
1994 11.08 9.70 -- 0.6894 (6.30)
- ---------------------------------------------------------------------------------
1995 9.70 10.79 -- 0.6742 18.74
- ---------------------------------------------------------------------------------
01/01/96-
11/30/96 10.79 10.58 -- 0.5686 3.58
- ---------------------------------------------------------------------------------
Total: $0.0000 $3.7841
- ---------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 11/30/96 : 54.80%
- ---------------------------------------------------------------------------------
Performance Summary Class C Shares
<CAPTION>
NET ASSET VALUE
------------------ CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN/1/
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/02/92-
12/31/92 $10.48 $10.50 $ -- $0.3377 3.44%
- ---------------------------------------------------------------------------------
1993 10.50 11.08 -- 0.7383 12.80
- ---------------------------------------------------------------------------------
1994 11.08 9.70 -- 0.7022 (6.07)
- ---------------------------------------------------------------------------------
1995 9.70 10.79 -- 0.6999 19.03
- ---------------------------------------------------------------------------------
01/01/96-
11/30/96 10.79 10.59 -- 0.5908 3.90
- ---------------------------------------------------------------------------------
Total: $0.0000 $3.0689
- ---------------------------------------------------------------------------------
</TABLE>
CUMULATIVE TOTAL RETURN AS OF 11/30/96 : 35.53%
- --------------------------------------------------------------------------------
/1/Figures assume reinvestment of all dividends and other distributions at net
asset value on the payable dates and do not include sales charges; results
for each class would be lower if sales charges were included.
/2/Certain distributions may contain short-term capital gains.
The data above represents past performance of the Fund's shares, which is no
guarantee of future results. The 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.
11
<PAGE>
HIGH INCOME FUND
PAINEWEBBER
PERFORMANCE RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE TOTAL RETURN/1/
-------------------------------- --------------------------------
12 MONTHS 6 MONTHS
11/30/96 05/31/96 11/30/95 ENDED 11/30/96 ENDED 11/30/96
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A
Shares $7.35 $7.18 $6.96 16.55% 7.46%
- ---------------------------------------------------------------------------------
Class B
Shares 7.35 7.17 6.95 15.86 7.21
- ---------------------------------------------------------------------------------
Class C
Shares 7.36 7.19 6.97 15.96 7.19
- ---------------------------------------------------------------------------------
Performance Summary Class A Shares
<CAPTION>
NET ASSET VALUE
------------------ CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID/2/ RETURN/1/
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
08/31/84-
12/31/84 $ 9.57 $ 9.80 $0.0100 $ 0.3717 6.46%
- ---------------------------------------------------------------------------------
1985 9.80 10.38 -- 1.4080 21.67
- ---------------------------------------------------------------------------------
1986 10.38 10.36 0.0250 1.4160 14.27
- ---------------------------------------------------------------------------------
1987 10.36 8.88 0.0475 1.3010 (1.98)
- ---------------------------------------------------------------------------------
1988 8.88 8.44 -- 1.2317 9.13
- ---------------------------------------------------------------------------------
1989 8.44 7.26 -- 1.0687 (1.83)
- ---------------------------------------------------------------------------------
1990 7.26 5.70 -- 0.9744 (8.53)
- ---------------------------------------------------------------------------------
1991 5.70 7.23 -- 1.0159 47.02
- ---------------------------------------------------------------------------------
1992 7.23 7.93 -- 0.9698 24.06
- ---------------------------------------------------------------------------------
1993 7.93 8.77 -- 0.8894 22.74
- ---------------------------------------------------------------------------------
1994 8.77 6.96 -- 0.8576 (11.69)
- ---------------------------------------------------------------------------------
1995 6.96 6.92 -- 0.7879 10.96
- ---------------------------------------------------------------------------------
01/01/96-
11/30/96 6.92 7.35 -- 0.6116 15.69
- ---------------------------------------------------------------------------------
Total: $0.0825 $12.9037
- ---------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 11/30/96 : 260.86%
- ---------------------------------------------------------------------------------
Performance Summary Class B Shares
<CAPTION>
NET ASSET VALUE
------------------ CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN/1/
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/01/91-
12/31/91 $ 6.85 $ 7.22 $ -- $0.4960 12.92%
- ---------------------------------------------------------------------------------
1992 7.22 7.92 -- 0.9037 23.07
- ---------------------------------------------------------------------------------
1993 7.92 8.77 -- 0.8237 21.97
- ---------------------------------------------------------------------------------
1994 8.77 6.96 -- 0.7969 (12.34)
- ---------------------------------------------------------------------------------
1995 6.96 6.92 -- 0.7344 10.15
- ---------------------------------------------------------------------------------
01/01/96-
11/30/96 6.92 7.35 -- 0.5650 14.95
- ---------------------------------------------------------------------------------
Total: $0.0000 $4.3197
- ---------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 11/30/96 : 88.12%
- ---------------------------------------------------------------------------------
Performance Summary Class C Shares
<CAPTION>
NET ASSET VALUE
------------------ CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN/1/
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/02/92-
12/31/92 $ 7.80 $ 7.94 $ -- $0.4041 7.07%
- ---------------------------------------------------------------------------------
1993 7.94 8.79 -- 0.8456 22.22
- ---------------------------------------------------------------------------------
1994 8.79 6.97 -- 0.8185 (12.20)
- ---------------------------------------------------------------------------------
1995 6.97 6.93 -- 0.7528 10.40
- ---------------------------------------------------------------------------------
01/01/96-
11/30/96 6.93 7.36 -- 0.5813 15.18
- ---------------------------------------------------------------------------------
Total: $0.0000 $3.4023
- ---------------------------------------------------------------------------------
</TABLE>
CUMULATIVE TOTAL RETURN AS OF 11/30/96 : 46.11%
- -------------------------------------------------------------------------------
/1/Figures assume reinvestment of all dividends and other distributions at net
asset value on the payable dates and do not include sales charges; results
for each class would be lower if sales charges were included.
/2/Certain distributions may contain short-term capital gains.
The data above represents past performance of the Fund's shares which is no
guarantee of future results. The 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.
12
<PAGE>
U.S. GOVERNMENT INCOME FUND
PAINEWEBBER
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------------- ----------------- -------------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS -
24.89%
$75,588 U.S. Treasury Bonds+(1). 08/15/13 to 08/15/26 6.750 to 12.000% $ 85,612,841
25,917 U.S. Treasury Notes..... 10/31/00 to 09/30/01 5.750 to 6.375 26,395,929
-------------
Total U.S. Government Obligations
(cost - $109,403,600)............. 112,008,770
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES -
14.45%
5,010 GNMA TBA................ TBA 7.500 5,078,888
38,407 GNMA.................... 01/15/24 to 03/15/26 7.500 38,934,718
348 GNMA.................... 10/15/16 to 05/15/18 9.000 375,221
156 GNMA.................... 08/15/17 9.500 170,192
2,299 GNMA.................... 06/15/11 to 02/15/16 11.000 2,573,173
15,712 GNMA.................... 09/15/20 11.500 17,867,356
-------------
Total Government National Mortgage
Association Certificates
(cost - $64,191,100).............. 64,999,548
-------------
FEDERAL HOME LOAN MORTGAGE CORPORATION CERTIFICATES -
12.50%
372 FHLMC................... 03/01/09 6.500 372,280
201 FHLMC................... 08/01/25 7.000 199,861
6,439 FHLMC ARM+.............. 10/01/23 7.787* 6,657,492
9,630 FHLMC TBA............... TBA 8.000 9,906,863
15,355 FHLMC................... 04/01/25 9.000 16,403,544
2,858 FHLMC................... 09/01/05 10.000 3,059,196
4,228 FHLMC................... 06/01/04 to 12/01/05 10.500 4,496,498
7,533 FHLMC+.................. 01/01/16 11.000 8,458,489
5,892 FHLMC................... 10/01/16 11.500 6,709,057
-------------
Total Federal Home Loan Mortgage
Corporation Certificates
(cost - $49,302,843).............. 56,263,280
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION CERTIFICATES -
23.15%
19,550 FNMA TBA COFI ARM....... TBA 6.089* 19,525,563
32,352 FNMA.................... 07/01/17 to 02/01/25 7.000 32,110,961
3,600 FNMA TBA................ TBA 7.000 3,572,978
5,192 FNMA.................... 02/01/14 to 07/01/25 7.500 5,253,068
17,774 FNMA TBA................ TBA 7.500 17,979,503
1,923 FNMA.................... 09/17/19 7.750 1,981,673
20,000 FNMA TBA................ TBA 8.000 20,556,240
3,010 FNMA.................... 05/01/09 9.000 3,177,577
-------------
Total Federal National Mortgage
Association Certificates
(cost - $102,096,932)............. 104,157,563
-------------
U.S. GOVERNMENT AGENCY BACKED
NOTES - 32.61%
85,000 Federal Home Loan
Mortgage Discount
Notes.................. 12/11/96 to 12/19/96 5.200 to 5.225 84,826,105
26,500 Federal Home Loan
Mortgage Corporation+.. 09/23/99 to 09/08/04 7.420 to 7.980 26,832,382
35,205 Federal National
Mortgage Association... 12/10/03 to 09/20/06 5.800 to 7.930 35,099,350
-------------
Total U.S. Government Agency Backed
Notes (cost - $152,040,676)....... 146,757,837
-------------
COLLATERALIZED MORTGAGE OBLIGATIONS - 8.23%
9,219 FNMA REMIC, Trust 1987-
2, Class Z............. 11/25/17 11.000 10,444,764
4,993 CS First Boston Mortgage
Securities Corp.,
Series 1995-WF1, Class
A1..................... 12/21/27 6.452 4,947,325
255 Collateralized Mortgage
Obligation Trust,
Series 14, Class Z..... 01/01/17 8.000 259,550
6,080 DLJ Mortgage Acceptance
Corp., Series 1996-CFZ,
Class A1A.............. 11/12/21 6.860 6,213,000
5,350 GMAC Commercial Mortgage
Securities, Inc.,
Series 1996-C1, Class
A2A.................... 09/15/03 6.790 5,436,670
6,551 Merrill Lynch Mortgage
Investors, Inc., Series
1996-C, Class A1....... 04/25/28 7.150 6,677,748
3,052 Morgan Stanley Capital
1, Inc., Series 1996-
BKU1, Class A++........ 10/15/10 6.476 3,059,093
-------------
Total Collateralized Mortgage
Obligations (cost - $36,452,138).. 37,038,150
-------------
</TABLE>
13
<PAGE>
U.S. GOVERNMENT INCOME FUND
PAINEWEBBER
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS VALUE
--------- -------------
<C> <S> <C> <C> <C>
CALL OPTIONS - 0.10%
400 U.S. Treasury Bond; par
value $40,000,000;
price 109.375;
expiring Jan 97
(cost - $343,025)..... $ 437,500
-------------
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES
--------- -------------- ----------
<C> <S> <C> <C> <C>
REPURCHASE AGREEMENTS - 0.88%
3,956 Repurchase agreement
dated 11/29/96 with
First Chicago Capital
Markets, Inc.,
collateralized by
$3,613,067 U.S.
Treasury Notes, 7.875%
due 11/15/04;
proceeds: $3,957,863
(cost - $3,956,000)... 12/02/96 5.650% 3,956,000
-------------
INVESTMENTS OF CASH COLLATERAL FOR SECURITIES
LOANED - 9.59%
REPURCHASE AGREEMENTS - 9.59%
20,000 Repurchase agreement
dated 11/29/96 with
Citicorp Securities,
Inc., collateralized
by $18,695,000 U.S.
Treasury Bonds, 7.125%
due 02/15/23;
proceeds: $20,009,450. 12/02/96 5.670 20,000,000
20,000 Repurchase agreement
dated 11/29/96 with
Dresdner Securities
(USA), Inc.,
collateralized by
$19,691,000 U.S.
Treasury Notes, 6.000%
due 05/31/98;
proceeds: $20,009,417. 12/02/96 5.650 20,000,000
3,150 Repurchase agreement
dated 11/29/96 with
First Chicago Capital
Markets, Inc.,
collateralized by
$2,876,933 U.S.
Treasury Notes, 7.875%
due 11/15/04;
proceeds: $3,151,483.. 12/02/96 5.650 3,150,000
-------------
Total Investments of Cash
Collateral for Securities Loaned
(cost - $43,150,000)............. 43,150,000
-------------
Total Investments (cost -
$560,936,314) - 126.40%......... 568,768,648
Liabilities in excess of other
assets - (26.40)%................ (118,809,784)
-------------
Net Assets - 100.00%.............. $ 449,958,864
=============
</TABLE>
- --------
* Adjustable rate instrument
+ Entire or partial amount pledged as collateral for futures and written
options transactions
++ Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
(1) Portion of security was on loan at November 30, 1996
ARM Adjustable Rate Mortgage Security; the interest rate shown is the current
rate at November 30, 1996
COFI Eleventh District Federal Home Loan Bank Cost of Funds index
REMIC Real Estate Mortgage Investment Conduit
TBA (To Be Announced) Securities are purchased on a forward commitment basis
with approximated (generally +/-1.0%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when mortgage pools are assigned.
WRITTEN OPTIONS OPEN
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT EXPIRATION EXERCISE
OF OPTIONS UNDERLYING CONTRACT DATE PRICE VALUE
---------- ------------------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Call............. 325 Treasury Bonds Feb 97 $116.00 $ 690,628
Call............. 800 Treasury Bonds Jan 97 117.00 537,500
Put.............. 300 Treasury Bonds Feb 97 104.00 18,750
----------
$1,246,878
==========
</TABLE>
FUTURES CONTRACTS
<TABLE>
<CAPTION>
NUMBER OF IN EXPIRATION UNREALIZED
CONTRACTS CONTRACTS TO DELIVER EXCHANGE FOR DATE APPRECIATION
--------- ------------------------------ ------------ ---------- ------------
<C> <S> <C> <C> <C>
114 Treasury Bonds................ $13,146,688 Mar 97 $ 63,063
137 5 year Treasury Notes......... 14,783,156 Mar 97 42,812
--------
$105,875
========
</TABLE>
See accompanying notes to financial statements
14
<PAGE>
INVESTMENT GRADE INCOME FUND
PAINEWEBBER
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------------- ---------------- ------------
<C> <S> <C> <C> <C>
CORPORATE BONDS - 89.84%
Airlines - 4.13%
Delta Air Lines
$10,500 Incorporated........... 04/30/16 to 12/15/22 10.375 to 10.500% $ 13,213,611
------------
Banking - 5.30%
Chase Manhattan
6,000 Corporation............ 08/01/04 7.875 6,182,778
5,000 Citicorp................ 11/01/04 8.625 5,332,745
5,000 Southtrust Bank Alabama. 05/15/25* 7.690 5,418,985
------------
16,934,508
------------
Broker/Dealer - 4.58%
Donaldson Lufkin &
Jenrette Securities
5,000 Corporation............ 11/01/05 6.875 4,983,900
Lehman Brothers
8,800 Incorporated........... 05/01/07 8.500 9,674,940
------------
14,658,840
------------
Business Machines - 1.41%
Digital Equipment
4,500 Corporation............ 11/01/12 8.625 4,491,855
------------
Cable/Communications - 7.25%
Continental Cablevision
7,000 Incorporated........... 05/15/06 8.300 7,637,252
TCI Communications
8,000 Incorporated........... 08/01/15 8.750 7,854,671
7,000 TKR Cable Incorporated.. 10/30/07 10.500 7,705,390
------------
23,197,313
------------
Diversified/Industrial - 5.89%
American Standard
4,000 Incorporated........... 05/15/04 11.375 4,300,000
2,000 Hawk Corporation........ 12/01/03 10.250 2,040,000
International Knife &
2,000 Saw Incorporated....... 11/15/06 11.375 2,050,000
Joy Technologies
5,000 Incorporated........... 09/01/03 10.250 5,475,000
Mark IV Industries
5,000 Incorporated........... 04/01/06 7.750 4,966,520
------------
18,831,520
------------
Hotel/Gaming - 5.00%
Bally's Grand
5,000 Incorporated........... 12/15/03 10.375 5,619,500
4,000 GNS Finance Corporation. 03/15/03 9.250 4,180,000
HMH Properties
6,000 Incorporated........... 05/15/05 9.500 6,195,000
------------
15,994,500
------------
Household & Consumer Products -
1.57%
5,000 Nabisco Incorporated.... 06/15/15 7.550 5,024,405
------------
Insurance -11.60%
7,000 American Re Corporation. 09/15/04 10.875 7,564,081
2,400 Chubb Corporation....... 11/15/99 8.750 2,486,014
Equitable Life
5,000 Assurance.............. 12/01/05 6.950 5,024,755
Lumbermans Mutual
10,625 Casualty Company....... 07/01/26 9.150 11,843,486
Prudential Insurance
9,500 Company of America..... 07/01/25 8.300 10,188,522
------------
37,106,858
------------
</TABLE>
15
<PAGE>
INVESTMENT GRADE INCOME FUND
PAINEWEBBER
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------------- --------------- ------------
<C> <S> <C> <C> <C>
CORPORATE BONDS - (CONTINUED)
Media - 7.70%
News America Holdings
$ 9,000 Incorporated........... 10/17/08 to 10/15/12 7.375 to 10.125% $ 9,818,030
Time Warner
5,000 Incorporated........... 01/15/13 9.125 5,512,825
10,000 Viacom Incorporated..... 01/15/16 7.625 9,303,830
------------
24,634,685
------------
Metals - 2.24%
Ryerson Tull
7,000 Incorporated........... 07/15/01 8.500 7,171,955
------------
Oil/Gas - 2.76%
Columbia Gas System
4,500 Incorporated........... 11/28/25 7.620 4,478,031
Occidental Petroleum
3,750 Corporation............ 06/01/19 11.125 4,355,261
------------
8,833,292
------------
Paper - 3.40%
Owens-Illinois
5,000 Incorporated........... 12/01/03 11.000 5,531,250
Stone Consolidated
5,000 Corporation............ 12/15/00 10.250 5,312,500
------------
10,843,750
------------
Printing/Publishing - 1.53%
Valassis Inserts
4,750 Incorporated........... 03/15/99 9.375 4,901,387
------------
Retail - 5.15%
Hook SuperX
4,500 Incorporated........... 06/01/02 10.125 4,839,971
Mays Department Stores
5,950 Co..................... 06/15/21 9.875 6,922,462
5,000 Shopko Stores........... 03/15/22 9.250 4,720,895
------------
16,483,328
------------
Telephone Companies &
Telecommunications - 3.35%
5,000 Pacific Bell............ 08/15/31 8.500 5,459,260
Rogers Cantel Mobile
5,000 Incorporated........... 06/01/08 9.375 5,250,000
------------
10,709,260
------------
Utilities - 9.68%
Commonwealth Edison
5,000 Company................ 06/15/20 9.875 5,851,130
7,000 Cooperative Utilities... 03/15/19 9.520 7,609,511
7,750 Duke Power Company...... 03/01/21 8.750 8,064,681
Louisiana Power & Light
5,000 Company................ 07/01/22 8.500 5,137,650
New York State Electric
769 & Gas Company.......... 02/01/20 9.875 771,319
Texas Utilities Electric
3,000 Company................ 05/01/21 9.750 3,529,920
------------
30,964,211
------------
Yankee - 7.30%
Banca Commerziale
4,500 Italiana............... 07/15/07 8.250 4,937,099
Loewen Group
International
5,000 Incorporated........... 10/15/03 8.250 5,167,830
Polysindo International
2,000 Finance Company BV..... 06/15/06 11.375 2,150,000
11,000 Quebec Province CDA..... 07/15/23 to 02/09/24 7.125 to 7.500 11,088,746
------------
23,343,675
------------
Total Corporate Bonds (cost -
$276,474,453).................... 287,338,953
------------
</TABLE>
16
<PAGE>
INVESTMENT GRADE INCOME FUND
PAINEWEBBER
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------------- -------------- ------------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS - 4.08%
United States Treasury
Notes(1) (cost -
$12,800 $12,936,945).......... 09/30/00 to 08/15/05 6.125 to 6.500% $ 13,032,625
------------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION CERTIFICATES - 3.71%
FNMA (cost -
11,970 $11,712,259).......... 07/01/25 to 04/01/26 7.000 11,880,521
------------
REPURCHASE AGREEMENTS - 0.83%
2,656 Repurchase agreement
dated 11/29/96, with
Dresdner Securities
(USA), Inc.,
collateralized by
$2,273,000 U.S.
Treasury Bonds, 8.125%
due 05/15/21; proceeds:
$2,657,251 (cost -
$2,656,000)........... 12/02/96 5.650 2,656,000
------------
Total Investments (cost -
$303,779,657) - 98.46%........... 314,908,099
Other assets in excess of
liabilities - 1.54%............... 4,910,009
------------
Net Assets - 100.00%............... $319,818,108
============
</TABLE>
- --------
* Maturity date reflects earliest date bonds can be put back to issuer
(1)Entire amount pledged as collateral for written options transactions.
WRITTEN OPTIONS OPEN
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT EXPIRATION EXERCISE
OF OPTIONS UNDERLYING CONTRACT DATE PRICE VALUE
---------- --------------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Call............. 200 5 year Treasury Notes Feb 97 $116.00 $425,000
Put.............. 200 5 year Treasury Notes Feb 97 104.00 12,500
--------
$437,500
========
</TABLE>
See accompanying notes to financial statements
17
<PAGE>
HIGH INCOME FUND
PAINEWEBBER
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------------- --------------- ------------
<C> <S> <C> <C> <C>
CORPORATE BONDS - 86.22%
Aerospace - 2.00%
SabreLiner Corporation
$ 6,150 Series A............... 04/15/03 12.500% $ 5,719,500
5,000 Wyman Gordon............ 03/15/03 10.750 5,375,000
------------
11,094,500
------------
Airlines - 0.71%
Airplane Pass Through
3,500 Trust.................. 03/15/19 10.875 3,902,500
USAfrica Airways
8,500# Incorporated++......... 05/31/99 12.000(a) 0
------------
3,902,500
------------
Cable - 7.12%
Diamond Cable
7,000 Communications......... 12/15/05 11.750+ 4,882,500
5,000 Fundy Cable............. 11/15/05 11.000 5,250,000
International CableTel
7,500 Incorporated........... 02/01/06 11.500+ 4,818,750
Lenfest Communications
3,000 Incorporated........... 11/01/05 8.375 2,902,500
5,000 Marcus Cable Company.... 12/15/05 14.250+ 3,425,000
13,000 Telewest PLC............ 10/01/07 11.000+ 8,807,500
4,000 Tevecap S.A.**.......... 11/26/04 12.625 4,100,000
UIH Australia Pacific
10,000 Incorporated........... 05/15/06 14.000+ 5,250,000
------------
39,436,250
------------
Chemicals - 0.63%
Texas Petrochemical
3,250 Corporation**.......... 07/01/06 11.125 3,477,500
------------
Communications - 9.78%
10,500 Comcast Cellular........ 03/05/00 7.695* 7,560,000
GST Telecommunications
15,400 Incorporated........... 12/15/05 13.875+ 9,009,000
Intelcom Group USA
8,000 Incorporated**......... 09/15/05 13.500+ 5,520,000
Nextel Communications
10,000 Incorporated........... 09/01/03 to 08/15/04 9.750 to 11.500+ 7,000,312
PageMart Nationwide
2,000 Incorporated........... 02/01/05 15.000+ 1,360,000
Paging Network
4,750 Incorporated........... 10/15/08 10.000 4,750,000
People's
Telecommunications
5,250 Company................ 07/15/02 12.250 5,460,000
RSL Communications
5,000 Limited**.............. 11/15/06 12.250 5,000,000
Shared Technologies
3,500 Fairchild**............ 03/01/06 12.250+ 2,878,750
9,250 Viatel Incorporated..... 01/15/05 15.000+ 5,596,250
------------
54,134,312
------------
Consumer Manufacturing - 3.24%
Apparel Ventures
7,515 Incorporated........... 12/31/00 12.250 5,711,400
4,606 Chattem Incorporated.... 06/15/04 12.750 4,859,330
5,200 Decorative Home Accents. 06/30/02 13.000 3,484,000
7,500 Icon Health & Fitness**. 11/15/06 14.000 3,900,000
------------
17,954,730
------------
Energy - 6.53%
4,000 Cliffs Drilling Company. 05/15/03 10.250 4,210,000
4,400 Crown Central Petroleum. 02/01/05 10.875 4,466,000
8,500 Empire Gas Corporation.. 07/15/04 7.000+ 7,458,750
3,625 Parker Drilling Company. 11/15/06 9.750 3,751,875
8,000 Petroleos Mexicanos..... 12/01/23 8.625 6,480,000
Transamerican Refining
5,000 Corporation............ 02/15/02 18.500+ 4,062,500
TransTexas Gas
5,250 Corporation............ 06/15/02 11.500 5,696,250
------------
36,125,375
------------
</TABLE>
18
<PAGE>
HIGH INCOME FUND
PAINEWEBBER
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------- ---------- ------------
<C> <S> <C> <C> <C>
CORPORATE BONDS - (CONTINUED)
Entertainment - 1.54%
$ 2,500 Cobb Theatres.............. 03/01/03 10.625% $ 2,612,500
United Artists Theatre
6,446 Circuit................... 07/01/15 9.300 5,930,763
------------
8,543,263
------------
Finance - 0.89%
5,000 Imperial Credit Industries. 01/15/04 9.750 4,925,000
------------
Food & Beverage - 7.73%
7,000 American Rice Incorporated. 07/31/02 13.000 6,755,000
Fresh Delmonte Produce
4,500 N.V. ..................... 05/01/03 10.000 4,297,500
42,000 Iowa Select Farms++........ 02/15/04 17.250+ 26,502,000
TLC Beatrice International
5,000 Holdings.................. 10/01/05 11.500 5,256,250
------------
42,810,750
------------
Gaming - 2.12%
El Comandante Capital
4,075 Corporation............... 12/15/03 11.750 3,912,000
Grand Palais Casino
9,401# Incorporated++............ 11/01/97 18.250(a) 0
5,770 PRT Funding Incorporated... 04/15/04 11.625 4,731,400
Sam Houston Race Park
7,391 Limited................... 09/01/01 11.000 3,067,176
------------
11,710,576
------------
General Industrial - 7.71%
5,525 Alpine Group............... 07/15/03 12.250 6,022,250
5,125 Avondale Mills............. 05/01/06 10.250 5,291,563
5,500 Dominion Textile USA....... 04/01/06 9.250 5,610,000
3,750 EKCO Group Incorporated.... 04/01/06 9.250 3,637,500
Goss Graphic Systems
4,250 Incorporated.............. 10/15/06 12.000 4,281,875
6,450 Jordan Industries.......... 08/01/05 11.750+ 4,966,500
6,000 Poindexter JB Incorporated. 05/15/04 12.500 5,880,000
Polysindo International
6,500 Finance Company B.V. ..... 06/15/06 11.375 6,987,500
------------
42,677,188
------------
Healthcare - 0.53%
Mariner Health Group
3,000 Incorporated.............. 04/01/06 9.500 2,925,000
------------
Homebuilding - 1.79%
4,000 Ryland Group Incorporated.. 07/01/06 10.500 4,120,000
5,228 Trizec Finance............. 10/15/05 10.875 5,763,870
------------
9,883,870
------------
Hotels & Lodging - 0.68%
3,750 HMC Acquisition Properties. 12/15/07 9.000 3,750,000
------------
Media - 9.48%
8,000 Affiliated Newspapers...... 07/01/06 13.250+ 6,440,000
11,000 Grupo Televisa S.A.**...... 05/15/08 13.250+ 7,232,500
Hollinger International
4,000 Publishing................ 02/01/06 9.250 3,920,000
Inter Act Systems
9,000 Incorporated**............ 08/01/03 14.000+ 6,120,000
KIII Communications
4,500 Corporation............... 02/01/06 8.500 4,398,750
</TABLE>
19
<PAGE>
HIGH INCOME FUND
PAINEWEBBER
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------- ---------- ------------
<C> <S> <C> <C> <C>
CORPORATE BONDS - (CONTINUED)
Media - (concluded)
NeoData Services
$ 5,500 Incorporated............. 05/01/03 12.000% $ 5,720,000
5,750 Newsquest Capital PLC**... 05/01/06 11.000 5,865,000
Pegasus Media &
Communications
5,000 Incorporated............. 07/01/05 12.500 5,412,500
Petersen Publishing
2,375 Company**................ 11/15/06 11.125 2,434,375
Sullivan Graphics
5,000 Incorporated............. 08/01/05 12.750 4,925,000
------------
52,468,125
------------
Metal/Mineral/Steel - 2.01%
Commonwealth Aluminum
3,500 Corporation**............ 10/01/06 10.750 3,578,750
4,000 WCI Steel Incorporated.... 12/01/04 10.000 4,040,000
Weirton Steel
3,600 Corporation**............ 07/01/04 11.375 3,528,000
------------
11,146,750
------------
Packaging - 5.61%
3,400 Doman Industries Limited.. 03/15/04 8.750 3,170,500
FSW International Finance
3,500 Company B.V.**........... 11/01/06 12.500 3,631,250
Grupo Industrial Durango
2,500 S.A. .................... 08/01/03 12.625 2,700,000
Indah Kiat International
4,000 Finance Company B.V...... 06/15/06 12.500 4,380,000
4,000 Indah Kiat Paper & Pulp... 11/01/00 8.875 3,980,000
Owens-Illinois
7,000 Incorporated............. 12/01/03 11.000 7,743,750
2,250 Printpack Incorporated**.. 08/15/06 10.625 2,362,500
2,950 Quno Corporation.......... 05/15/05 9.125 3,053,250
------------
31,021,250
------------
Retail - 3.85%
6,000 Big Five Holdings......... 09/15/02 13.625 6,120,000
5,000 Brown Group Incorporated.. 10/15/06 9.500 5,012,500
County Seat Stores
2,500 Incorporated............. 10/01/02 12.000(a) 675,000
4,000 CSK Auto Incorporated**... 11/01/06 11.000 4,120,000
Great American Cookie
6,000 Incorporated............. 01/15/01 10.875 5,400,000
------------
21,327,500
------------
Supermarkets & Drugstores - 3.06%
4,367 Di Giorgio Corporation.... 02/15/03 12.000 4,410,670
22,004 Farm Fresh Holdings....... 10/01/02 14.250 2,475,431
6,750 Pantry Incorporated....... 11/15/00 12.000 6,412,500
3,885 Pueblo Xtra International. 08/01/03 9.500 3,651,900
------------
16,950,501
------------
Transport Non-Air - 6.95%
Collins & Aikman Products
4,750 Company.................. 04/15/06 11.500 5,070,625
4,000 Gearbulk Holding Limited.. 12/01/04 11.250 4,360,000
Hayes Wheels International
3,375 Incorporated............. 07/15/06 11.000 3,619,687
Newport News Shipbuilding
3,250 Incorporated**........... 12/01/06 9.250 3,323,125
Petro PSC Properties
7,406 L.P. .................... 06/01/02 12.500 7,480,060
3,250 Stena Shipping............ 12/15/05 10.500 3,461,250
Viking Star Shipping
6,700 Incorporated............. 07/15/03 9.625 7,001,500
4,000 Walbro Corporation........ 07/15/05 9.875 4,130,000
------------
38,446,247
------------
</TABLE>
20
<PAGE>
HIGH INCOME FUND
PAINEWEBBER
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------- ---------- ------------
<C> <S> <C> <C> <C>
CORPORATE BONDS - (CONCLUDED)
Utilities - 2.26%
$ 3,000 Calenergy Incorporated**.. 09/15/06 9.500% $ 3,097,500
5,750 Calpine Corporation....... 02/01/04 9.250 5,778,750
Panda Funding
3,500 Corporation**............ 08/20/12 11.625 3,657,500
------------
12,533,750
------------
Total Corporate Bonds (cost -
$497,173,557)....................... 477,244,937
------------
CONVERTIBLE BONDS - 1.33%
Cable - 0.46%
International CableTel
2,750 Incorporated**........... 06/15/08 7.000 2,516,250
------------
Communications - 0.31%
1,925 GST Telecommunications
Incorporated............. 12/15/05 13.875+ 1,732,500
------------
Technology - 0.56%
Softkey International
3,750 Incorporated............. 11/01/00 5.500 3,112,500
------------
Total Convertible Bonds (cost -
$7,047,726)........................ 7,361,250
------------
<CAPTION>
NUMBER OF
SHARES
---------
<C> <S> <C> <C> <C>
COMMON STOCK (A) - 3.38%
Communications - 0.46%
38,955 PageMart Nationwide Incorporated....................... 277,554
333,925 Viatel Incorporated.................................... 2,253,994
------------
2,531,548
------------
Food & Beverage - 0.03%
240,000 Specialty Foods Acquisition Corporation................ 180,000
------------
Gaming - 1.69%
744,101 Casino America Incorporated............................ 2,511,341
768,570 Colorado Gaming & Entertainment Company................ 3,458,564
481,666 Hollywood Casino Corporation........................... 2,107,289
364,322 Lady Luck Gaming Corporation........................... 819,725
1,968 SHRP Equity Incorporated............................... 452,640
------------
9,349,559
------------
General Industrial - 0.03%
1,400 Communications & Power++............................... 140,000
------------
Supermarkets & Drugstores - 0.07%
21,787 Duane Reade Corporation................................ 183,010
40,000 Farm Fresh Holdings.................................... 200,000
------------
383,010
------------
</TABLE>
21
<PAGE>
HIGH INCOME FUND
PAINEWEBBER
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
---------- -------------
<C> <S> <C> <C> <C>
COMMON STOCK
(A) -
(CONCLUDED)
Technology -
1.10%
Ampex
594,328 Incorporated..... $ 6,091,862
-------------
Total Common Stock (cost -
$11,380,951)............... 18,675,979
-------------
PREFERRED STOCK
(A) - 5.93%
Cable - 0.54%
Cablevision
Systems
32,437 Corporation...... 2,972,813
-------------
Communications -
0.73%
Intelcom Group
USA,
3,757 Incorporated..... 4,039,159
-------------
Entertainment -
2.05%
Time Warner
10,483 Incorporated .... 11,360,951
-------------
Food & Beverage -
0.19%
Ameriking
1,000 Incorporated..... 1,060,000
-------------
General
Industrial -
0.43%
Communications &
23,664 Power++**........ 2,397,329
-------------
Healthcare -
0.65%
Fresenius Medical
Care Capital
3,500 Trust............ 3,561,250
-------------
Retail - 1.34%
70 Signet Group...... 7,420,000
-------------
Total Preferred Stock (cost -
$32,201,863)............... 32,811,502
-------------
<CAPTION>
NUMBER OF
WARRANTS
----------
<C> <S> <C> <C> <C>
WARRANTS (A) -
0.95%
Aerospace - 0.01%
SabreLiner
8,400 Corporation...... 42,000
-------------
Communications -
0.11%
Clearnet
Communications
14,025 Incorporated..... 98,175
Intelcom Group
USA,
26,400 Incorporated..... 422,400
PageMart
Nationwide
27,600 Incorporated..... 151,800
-------------
672,375
-------------
Consumer
Manufacturing -
0.35%
AVI Holdings
8,350 Incorporated..... 41,750
Chattem
11,000 Incorporated..... 134,750
Decorative Home
5,200 Accents.......... 31,200
Icon Health &
14,000 Fitness.......... 1,750,000
-------------
1,957,700
-------------
Energy - 0.08%
Empire Gas
11,730 Corporation...... 46,920
Transamerican
Refining
183,754 Corporation...... 367,508
-------------
414,428
-------------
</TABLE>
22
<PAGE>
HIGH INCOME FUND
PAINEWEBBER
<TABLE>
<CAPTION>
NUMBER OF
WARRANTS VALUE
--------- ------------
<C> <S> <C> <C> <C>
WARRANTS (A) - (CONCLUDED)
Food & Beverage - 0.12%
420,000 Iowa Select Farms++.................................... $ 630,000
------------
Gaming - 0.11%
76,848 Casino America Incorporated............................ 215,174
10,075 HDA Management Corporation............................. 395,545
------------
610,719
------------
Homebuilding - 0.01%
39,500 Capital Pacific Holdings Incorporated.................. 53,325
------------
Media - 0.09%
12,000 Affiliated Newspapers.................................. 360,000
500 Pegasus Media & Communications Incorporated............ 141,500
------------
501,500
------------
Retail - 0.00%
1,080 Cookies USA Incorporated............................... 10,800
8,000 County Seat Stores Incorporated........................ 80
------------
10,880
------------
Transport Non-Air - 0.07%
7,406 Petro PSC Properties L.P............................... 370,300
------------
Total Warrants (cost - $6,529,512)............................... 5,263,227
------------
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATE RATE
--------- -------- --------
<C> <S> <C> <C> <C>
REPURCHASE AGREEMENT - 0.80%
$4,433 Repurchase Agreement dated 11/29/96,
with Citibank Securities
Incorporated, collateralized by
$3,890,000 U.S. Treasury Bonds,
7.625% due 02/15/25; proceeds:
$4,435,095 (cost - $4,433,000)..... 12/02/96 5.670% 4,433,000
------------
Total Investments (cost - $558,766,609) -
98.61%........................................ 545,789,895
Other assets in excess of liabilities - 1.39%.. 7,711,251
------------
Net Assets - 100.00%........................... $553,501,146
============
</TABLE>
- --------
# Security represents a unit which is composed of the stated bond with
attached warrants or common stock.
++Illiquid securities representing 5.4% of portfolio assets
(a) Non-income producing security
+ Denotes a step-up bond or zero coupon bond that converts to the noted fixed
rate at a designated future date.
** Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
* Yield to maturity at purchase date
See accompanying notes to financial statements
23
<PAGE>
PAINEWEBBER
STATEMENT OF ASSETS AND LIABILITIES NOVEMBER 30, 1996
<TABLE>
<CAPTION>
U.S. INVESTMENT
GOVERNMENT GRADE HIGH
INCOME FUND INCOME FUND INCOME FUND
------------- ------------ -------------
<S> <C> <C> <C>
Assets
Investments in securities, at value
(cost--$560,936,314, $303,779,657
and $558,766,609, respectively)... $ 568,768,648 $314,908,099 $ 545,789,895
Cash............................... 6,508 378 1,067,542
Receivable for investments sold.... 13,834,247 8,131,626 6,540,291
Interest receivable................ 4,488,929 7,146,274 10,079,265
Variation margin receivable........ 150,406 -- --
Receivable for shares of beneficial
interest sold..................... 24,925 72,184 1,773,528
Other assets....................... 275,188 63,857 12,802
------------- ------------ -------------
Total assets....................... 587,548,851 330,322,418 565,263,323
------------- ------------ -------------
Liabilities
Payable for investments purchased.. 89,735,553 7,992,186 7,481,141
Collateral for securities loaned... 43,150,000 -- --
Payable for shares of beneficial
interest repurchased.............. 1,558,313 552,539 1,544,119
Outstanding options written........ 1,246,878 437,500 --
Dividends payable.................. 1,126,570 912,342 2,055,645
Payable to affiliates.............. 341,313 251,351 510,987
Accrued expenses and other
liabilities....................... 431,360 358,392 170,285
------------- ------------ -------------
Total liabilities.................. 137,589,987 10,504,310 11,762,177
------------- ------------ -------------
Net Assets
Beneficial interest--$0.001 par
value (unlimited amount
authorized)....................... 571,340,618 352,582,359 775,850,891
Distributions in excess of net
investment income................. (1,124,183) (534,465) (859,701)
Accumulated net realized losses
from investments, futures and
options transactions.............. (127,771,994) (43,170,672) (208,513,330)
Net unrealized appreciation
(depreciation) of investments,
futures and options............... 7,514,423 10,940,886 (12,976,714)
------------- ------------ -------------
Net assets......................... $ 449,958,864 $319,818,108 $ 553,501,146
============= ============ =============
Class A:
Net assets......................... $ 343,836,000 $229,116,927 $ 243,563,844
------------- ------------ -------------
Shares outstanding................. 38,785,822 21,643,162 33,132,382
------------- ------------ -------------
Net asset value and redemption
value per share................... $8.86 $10.59 $7.35
===== ====== =====
Maximum offering price per share
(net asset value plus sales charge
of 4.00% of offering price)....... $9.23 $11.03 $7.66
===== ====== =====
Class B:
Net assets......................... $ 61,873,390 $ 58,364,136 $ 215,491,908
------------- ------------ -------------
Shares outstanding................. 6,978,711 5,514,782 29,332,583
------------- ------------ -------------
Net asset value and offering price
per share......................... $8.87 $10.58 $7.35
===== ====== =====
Class C:
Net assets......................... $ 37,754,398 $ 32,337,045 $ 94,445,394
------------- ------------ -------------
Shares outstanding................. 4,262,847 3,054,809 12,828,788
------------- ------------ -------------
Net asset value and offering price
per share......................... $8.86 $10.59 $7.36
===== ====== =====
Class Y:
Net assets......................... $ 6,495,076
-------------
Shares outstanding................. 733,306
-------------
Net asset value, offering price and
redemption value per share........ $8.86
=====
</TABLE>
See accompanying notes to financial statements
24
<PAGE>
PAINEWEBBER
STATEMENT OF OPERATIONS FOR THE YEAR ENDED NOVEMBER 30, 1996
<TABLE>
<CAPTION>
U.S. INVESTMENT
GOVERNMENT GRADE HIGH
INCOME FUND INCOME FUND INCOME FUND
------------ ----------- -----------
<S> <C> <C> <C>
Investment income:
Interest................................ $ 36,152,792 $26,802,368 $58,748,671
------------ ----------- -----------
Expenses:
Investment advisory and administration.. 2,517,534 1,685,067 2,656,610
Service fees-Class A.................... 948,991 597,257 583,168
Service and distribution fees-Class B... 714,894 636,961 2,043,792
Service and distribution fees-Class C... 336,391 258,103 702,569
Transfer agency and service fees........ 361,268 275,606 427,908
Custody and accounting.................. 203,792 85,582 267,725
Reports and notices to shareholders..... 198,244 126,705 178,012
Legal and audit......................... 96,381 59,477 117,237
State registration...................... 90,899 59,127 60,352
Trustees' fees.......................... 12,250 12,250 12,250
Other expenses.......................... 2,790 10,139 68,570
------------ ----------- -----------
5,483,434 3,806,274 7,118,193
------------ ----------- -----------
Net investment income................... 30,669,358 22,996,094 51,630,478
------------ ----------- -----------
Realized and unrealized gains (losses)
from investment activities:
Net realized gains (losses) from:
Investment transactions................ 1,513,412 3,056,319 (16,654,074)
Futures contracts...................... (6,219,444) -- --
Options................................ (928,844) -- --
Net change in unrealized
appreciation/depreciation of:
Investment transactions................ (10,803,869) (6,910,125) 44,869,407
Futures contracts...................... 69,625 -- --
Options................................ (423,786) (187,556) --
------------ ----------- -----------
Net realized and unrealized gains
(losses) from investment activities.... (16,792,906) (4,041,362) 28,215,333
------------ ----------- -----------
Net increase in net assets resulting
from operations........................ $ 13,876,452 $18,954,732 $79,845,811
============ =========== ===========
</TABLE>
See accompanying notes to financial statements
25
<PAGE>
PAINEWEBBER
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED NOVEMBER 30,
1996
<TABLE>
<CAPTION>
U.S. INVESTMENT
GOVERNMENT GRADE HIGH
INCOME FUND INCOME FUND INCOME FUND
------------- ------------- -------------
<S> <C> <C> <C>
From operations:
Net investment income............ $ 30,669,358 $ 22,996,094 $ 51,630,478
Net realized gains (losses) from
investments, futures and options
transactions ................... (5,634,876) 3,056,319 (16,654,074)
Net change in unrealized
appreciation/depreciation of
investments, futures and
options......................... (11,158,030) (7,097,681) 44,869,407
------------- ------------- -------------
Net increase in net assets
resulting from operations....... 13,876,452 18,954,732 79,845,811
------------- ------------- -------------
Dividends to shareholders from:
Net investment income-Class A.... (23,685,897) (16,762,230) (23,043,268)
Net investment income-Class B.... (3,913,989) (3,992,202) (18,655,102)
Net investment income-Class C.... (2,575,319) (2,241,662) (8,790,237)
Net investment income-Class Y.... (494,153) -- --
------------- ------------- -------------
Total dividends to shareholders.. (30,669,358) (22,996,094) (50,488,607)
------------- ------------- -------------
From beneficial interest
transactions:
Net proceeds from the sale of
shares.......................... 12,039,829 19,750,042 109,863,618
Cost of shares repurchased....... (137,034,365) (77,068,314) (172,117,268)
Proceeds from dividends
reinvested...................... 17,203,944 11,757,555 20,920,719
------------- ------------- -------------
Net decrease in net assets from
beneficial interest
transactions.................... (107,790,592) (45,560,717) (41,332,931)
------------- ------------- -------------
Net decrease in net assets....... (124,583,498) (49,602,079) (11,975,727)
Net assets:
Beginning of year................ 574,542,362 369,420,187 565,476,873
------------- ------------- -------------
End of year...................... $ 449,958,864 $ 319,818,108 $ 553,501,146
============= ============= =============
FOR THE YEAR ENDED NOVEMBER 30, 1995
From operations:
Net investment income............ $ 36,064,828 $ 27,324,143 $ 65,779,842
Net realized gains (losses) from
investments, futures and options
transactions ................... (1,232,223) 5,724,646 (36,987,965)
Net change in unrealized
appreciation/depreciation of
investments, futures and
options......................... 40,643,621 31,522,859 21,627,563
------------- ------------- -------------
Net increase in net assets
resulting from operations....... 75,476,226 64,571,648 50,419,440
------------- ------------- -------------
Dividends to shareholders from:
Net investment income--Class A... (26,985,748) (19,623,343) (29,457,620)
Net investment income--Class B... (5,310,026) (4,818,171) (24,398,534)
Net investment income--Class C... (3,591,061) (2,882,641) (12,058,241)
Net investment income--Class Y... (357,072) -- --
------------- ------------- -------------
Total dividends to shareholders.. (36,243,907) (27,324,155) (65,914,395)
------------- ------------- -------------
From beneficial interest
transactions:
Net proceeds from the sale of
shares.......................... 20,857,803 39,567,386 163,583,471
Proceeds from shares issued in
connection with the acquisition
of Mitchell Hutchins/Kidder,
Peabody Intermediate Fixed
Income Fund..................... 17,397,551 -- --
Proceeds from shares issued in
connection with the acquisition
of Mitchell Hutchins/Kidder,
Peabody Government Income Fund.. 43,064,945 -- --
Cost of shares repurchased....... (167,328,659) (107,864,824) (230,082,157)
Proceeds from dividends
reinvested...................... 19,660,388 14,085,541 28,397,685
------------- ------------- -------------
Net decrease in net assets from
beneficial interest
transactions.................... (66,347,972) (54,211,897) (38,101,001)
------------- ------------- -------------
Net decrease in net assets....... (27,115,653) (16,964,404) (53,595,956)
Net assets:
Beginning of year................ 601,658,015 386,384,591 619,072,829
------------- ------------- -------------
End of year...................... $ 574,542,362 $ 369,420,187 $ 565,476,873
============= ============= =============
</TABLE>
See accompanying notes to financial statements
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS
PAINEWEBBER
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
PaineWebber Managed Investments Trust (the "Trust") was organized under
Massachusetts law by a Declaration of Trust dated November 21, 1986 and is
registered with the Securities and Exchange Commission under the Investment
Company Act of 1940, as amended, as an open-end, diversified investment
company. The Trust is a series mutual fund with six funds: PaineWebber U.S.
Government Income Fund ("U.S. Government Income Fund"), PaineWebber Investment
Grade Income Fund ("Investment Grade Income Fund"), PaineWebber High Income
Fund ("High Income Fund") (collectively, the "Funds"), PaineWebber Low Duration
U.S. Government Income Fund, PaineWebber Utility Income Fund and the newly
created PaineWebber Asia Pacific Growth Fund. The financial statements for
PaineWebber Low Duration U.S. Government Income Fund, PaineWebber Utility
Income Fund and PaineWebber Asia Pacific Growth Fund are not included herein.
Currently, each Fund offers Class A, Class B and Class C shares. U.S.
Government Income Fund also offers Class Y shares. Each class represents
interests in the same assets of the applicable Fund, and the classes are
identical except for differences in their sales charge structures, ongoing
service and distribution charges and certain transfer agency expenses. In
addition, Class B shares and all corresponding reinvested dividend shares
automatically convert to Class A shares approximately six years after issuance.
All classes of shares have equal voting privileges except that each class has
exclusive voting rights with respect to its service and/or distribution plan.
The preparation of financial statements in accordance with generally accepted
accounting principles requires Fund management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. The following is
a summary of significant accounting policies:
Valuation of Investments -- Where market quotations are readily available,
portfolio securities are valued thereon, provided such quotations adequately
reflect, in the judgment of Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins"), a wholly owned subsidiary of PaineWebber Incorporated
("PaineWebber") and investment adviser and administrator of the Funds, the fair
value of the securities. When market quotations are not readily available,
securities are valued based upon appraisals derived from information concerning
those securities or similar securities received from recognized dealers in
those securities. All other securities are valued at fair value as determined
in good faith by or under the direction of the Trust's board of trustees. The
amortized cost method of valuation, which approximates market value, generally
is used to value short-term debt instruments with sixty days or less remaining
to maturity, unless the Trust's board of trustees determines that this does not
represent fair value.
Repurchase Agreements -- The Funds' custodian takes possession of the
collateral pledged for investments in repurchase agreements. The underlying
collateral is
27
<PAGE>
PAINEWEBBER
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, each Fund has the right to liquidate
the collateral and apply the proceeds in satisfaction of the obligation. Under
certain circumstances, in the event of default or bankruptcy by the other party
to the agreement, realization and/or retention of the collateral may be subject
to legal proceedings. Each of the Funds occasionally participates in joint
repurchase agreement transactions with other funds managed by Mitchell
Hutchins.
Investment Transactions and Investment Income -- Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions are calculated using the identified cost method. Interest income
is recorded on an accrual basis. Dividend income is recorded on the ex-dividend
date. Discounts are accreted and premiums are amortized (with the exception of
U.S. Government Income Fund) 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.
Futures Contracts -- Upon entering into a financial futures contract, a Fund is
required to pledge to a broker an amount of cash and/or U.S. Government
securities equal to a certain percentage of the contract amount. This amount is
known as the "initial margin." Subsequent payments, known as "variation
margin," are made or received by the Fund each day, depending on the daily
fluctuations in the value of the underlying financial futures contracts. Such
variation margin is recorded for financial statement purposes on a daily basis
as unrealized gain or loss until the financial futures contract is closed, at
which time the net gain or loss is reclassified to realized.
Using financial futures contracts involves various market risks. The maximum
amount at risk from the purchase of a futures contract is the contract value.
The U.S. Government Income Fund primarily used financial futures contracts to
manage the average duration of the Fund's portfolio. However, imperfect
correlations between futures contracts and the portfolio securities being
hedged, or market disruptions, do not normally permit full control of these
risks at all times.
Option Writing -- When a Fund writes a call or a put option, an amount equal to
the premium received by the Fund is included in the Fund's Statement of Assets
and Liabilities as an asset and as an equivalent liability. The amount of the
liability is subsequently marked-to-market to reflect the current market value
of the option written. If an option which the Fund has written either expires
on its stipulated
28
<PAGE>
PAINEWEBBER
expiration date or the Fund enters into a closing purchase transaction, the
Fund realizes a gain (or loss if the cost of a closing purchase transaction
exceeds the premium received when the option was written) without regard to any
unrealized gain or loss on the underlying security, and the liability related
to such option is extinguished. If a call option which the Fund has written is
exercised, the Fund realizes a capital gain or loss (long-term or short-term,
depending on the holding period of the underlying security) from the sale of
the underlying security and the proceeds from the sale are increased by the
premium originally received. If a put option which a Fund has written is
exercised, the amount of the premium originally received reduces the cost of
the security which the Fund purchases upon exercise of the option.
Dividends and Distributions -- Dividends and distributions to shareholders are
recorded on the ex-dividend date. Dividends from net investment income and
distributions from realized capital gains are determined in accordance with
federal income tax regulations which may differ from generally accepted
accounting principles. These "book/tax" differences are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax-basis treatment; temporary differences do not require
reclassification.
CONCENTRATION OF RISK
The ability of the issuers of the debt securities held by the Funds to meet
their obligations may be affected by economic developments, including those
particular to a specific industry or region. Mortgage- and asset-backed
securities may decrease in value as a result of increases in interest rates and
may benefit less than other fixed-income securities from declining interest
rates because of the risk of prepayments.
WRITTEN OPTION ACTIVITY
Transactions in options written for the year ended November 30, 1996 for the
U.S. Government Income Fund were as follows:
<TABLE>
<CAPTION>
NUMBER OF PREMIUMS
OPTIONS RECEIVED
--------- ----------
<S> <C> <C>
Options outstanding at November 30, 1995.................. 0 $ 0
Options written .......................................... 7,075 2,250,128
Options terminated in closing purchase transactions....... (2,150) (742,725)
Options expired........................................... (3,500) (684,311)
Options exercised......................................... -- --
------ ----------
Options outstanding at November 30, 1996.................. 1,425 $ 823,092
====== ==========
</TABLE>
29
<PAGE>
PAINEWEBBER
Transactions in options written for the year ended November 30, 1996 for the
Investment Grade Income Fund were as follows:
<TABLE>
<CAPTION>
NUMBER OF PREMIUMS
OPTIONS RECEIVED
--------- --------
<S> <C> <C>
Options outstanding at November 30, 1995.................... 0 $ 0
Options written ............................................ 400 249,944
Options terminated in closing purchase transactions......... -- --
Options expired............................................. -- --
Options exercised........................................... -- --
--- --------
Options outstanding at November 30, 1996.................... 400 $249,944
=== ========
</TABLE>
ACQUISITIONS
Acquisition of Mitchell Hutchins/Kidder, Peabody Government Income Fund ("MH/KP
Government Income Fund") -- Effective as of the close of business on October
20, 1995, U.S. Government Income Fund acquired all the net assets of MH/KP
Government Income Fund pursuant to a plan of reorganization approved by MH/KP
Government Income Fund shareholders on October 19, 1995. The acquisition was
accomplished by a tax-free exchange of 4,290,119 Class A, 138,273 Class D
(currently Class C) and 342,128 Class C (currently Class Y) shares of U.S.
Government Income Fund for 2,722,402 Class A, 87,710 Class B, and 217,018 Class
C shares, respectively, of MH/KP Government Income Fund outstanding on October
20, 1995. MH/KP Government Income Fund's net assets at that date, valued at
$43,064,945, including accumulated net realized losses of $9,283,707 and net
unrealized appreciation of investments of $763,982, were combined with those of
the U.S. Government Income Fund.
Acquisition of Mitchell Hutchins/Kidder, Peabody Intermediate Fixed Income Fund
("MH/KP Intermediate Fixed Income Fund") -- Effective as of the close of
business on October 20, 1995, U.S. Government Income Fund acquired all the net
assets of MH/KP Intermediate Fixed Income Fund pursuant to a plan of
reorganization approved by MH/KP Intermediate Fixed Income Fund shareholders on
October 19, 1995. The acquisition was accomplished by a tax-free exchange of
1,619,680 Class A, 209,318 Class D (currently Class C) and 98,013 Class C
(currently Class Y) shares of U.S. Government Income Fund for 1,199,812 Class
A, 154,885 Class B and 72,584 Class C shares, respectively, of MH/KP
Intermediate Fixed Income Fund outstanding on October 20, 1995. MH/KP
Intermediate Fixed Income Fund's net assets at that date, valued at
$17,397,551, including accumulated net realized losses of $2,284,311 and net
unrealized appreciation of investments of $444,710, were combined with those of
the U.S. Government Income Fund.
30
<PAGE>
PAINEWEBBER
INVESTMENT ADVISER AND ADMINISTRATOR
The Trust's board of trustees has approved an Investment Advisory and
Administration Contract ("Advisory Contract") with Mitchell Hutchins, under
which Mitchell Hutchins serves as investment adviser and administrator of the
Funds. In accordance with the Advisory Contract, each Fund pays Mitchell
Hutchins an investment advisory and administration fee, which is accrued daily
and paid monthly, at the annual rate of 0.50% of each Fund's average daily net
assets. At November 30, 1996, U.S. Government Income Fund, Investment Grade
Income Fund and High Income Fund owed Mitchell Hutchins $185,586, $130,591 and
$221,402, respectively, in investment advisory and administration fees.
DISTRIBUTION PLANS
Mitchell Hutchins is the distributor of each Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. Under
separate plans of service and/or distribution pertaining to the Class A, Class
B and Class C shares, each Fund pays Mitchell Hutchins monthly service fees at
the annual rate of 0.25% of the average daily net assets of Class A, Class B
and Class C shares and monthly distribution fees at the annual rate of 0.75%
and 0.50% of the average daily net assets of Class B shares and Class C shares,
respectively. At November 30, 1996, U.S. Government Income Fund, Investment
Grade Income Fund and High Income Fund owed Mitchell Hutchins $145,684,
$114,197 and $279,246, respectively, in service and distribution fees.
Mitchell Hutchins also receives the proceeds of the initial sales charges paid
by the shareholders upon the purchase of Class A shares and the contingent
deferred sales charges paid by the shareholders upon certain redemptions of
Class A, Class B and Class C shares. Mitchell Hutchins has informed each Fund
that for the year ended November 30, 1996, it earned $255,689, $244,736 and
$1,138,056 in sales charges for the U.S. Government Income Fund, Investment
Grade Income Fund and High Income Fund, respectively.
SECURITY LENDING
U.S. Government Income Fund may lend up to 33 1/3% of its total assets to
qualified institutions. The loans are secured at all times by cash or U.S.
government securities in an amount at least equal to the market value of the
securities loaned, plus accrued interest, determined on a daily basis and
adjusted accordingly. U.S. Government Income Fund will retain record ownership
of loaned securities to exercise certain beneficial rights, however, U.S.
Government Income Fund may bear the risk of delay in recovery of, or even loss
of rights in, the securities loaned should the borrower fail financially. U.S.
Government Income Fund receives compensation, which is included in interest
income, for lending its securities from interest earned on the cash or U.S.
government securities held as collateral, net of fee rebates paid to the
borrower plus reasonable administrative
31
<PAGE>
PAINEWEBBER
and custody fees. U.S. Government Income Fund's lending agent is PaineWebber,
who received no compensation from the Fund for the year ended November 30,
1996.
As of November 30, 1996, U.S. Government Income Fund's custodian held cash and
cash equivalents having an aggregate value of $43,150,000 as collateral for
portfolio securities loaned having a market value of $42,549,720 for the U.S.
Government Income Fund.
TRANSFER AGENCY SERVICE FEES
Each Fund pays PaineWebber an annual fee of $4.00 per active PaineWebber
shareholder account for certain services not provided by the Funds' transfer
agent. For these services for the year ended November 30, 1996, PaineWebber
earned $133,159, $83,120 and $131,762 in transfer agency service fees from U.S.
Government Income Fund, Investment Grade Income Fund and High Income Fund,
respectively. At November 30, 1996, U.S. Government Income Fund, Investment
Grade Income Fund and High Income Fund owed PaineWebber $10,043, $6,563 and
$10,339, respectively, for transfer agency service fees.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at November 30,
1996 was substantially the same as the cost of securities for financial
statement purposes.
At November 30, 1996, the components of the net unrealized appreciation
(depreciation) of investments were as follows:
<TABLE>
<CAPTION>
U.S. INVESTMENT
GOVERNMENT GRADE HIGH
INCOME FUND INCOME FUND INCOME FUND
-------------- ------------ ------------
<S> <C> <C> <C>
Gross appreciation (investments
having an excess of value over
cost)............................. $ 8,420,705 $ 12,542,165 $ 43,933,716
Gross depreciation (investments
having an excess of cost over
value)............................ (588,371) (1,413,723) (56,910,430)
-------------- ------------ ------------
Net unrealized appreciation
(depreciation) of investments..... $ 7,832,334 $ 11,128,442 $(12,976,714)
============== ============ ============
For the year ended November 30, 1996, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were as follows:
<CAPTION>
U.S. INVESTMENT
GOVERNMENT GRADE HIGH
INCOME FUND INCOME FUND INCOME FUND
-------------- ------------ ------------
<S> <C> <C> <C>
Purchases.......................... $1,790,823,019 $361,834,435 $735,458,114
Sales.............................. $1,916,832,363 $379,729,741 $781,798,927
</TABLE>
32
<PAGE>
PAINEWEBBER
FEDERAL TAX STATUS
Each 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, each Fund intends not to be subject to a federal excise tax.
For the year ended November 30, 1996, the reclassifications arising from
permanent book/tax differences resulting in increases (decreases) to the
components of net assets as follows:
<TABLE>
<CAPTION>
DISTRIBUTIONS IN
EXCESS OF ACCUMULATED
NET INVESTMENT NET REALIZED BENEFICIAL
INCOME GAINS (LOSSES) INTEREST
---------------- -------------- -------------
<S> <C> <C> <C>
U.S. Government Income Fund...... $350,281 $157,145,827 $(157,496,108)
Investment Grade Income Fund..... 5,814 52,074,614 (52,080,428)
High Income Fund................. (125,716) 64,944,859 (64,819,143)
</TABLE>
At November 30, 1996, U.S. Government Income Fund, Investment Grade Income Fund
and High Income Fund had net capital loss carryforwards of $127,715,208
$43,150,005 and $208,319,708, respectively. These loss carryforwards are
available as reductions, to the extent provided in the regulations, of future
net realized capital gains, and will expire between November 30, 1997 and
November 30, 2004. To the extent that such losses are used to offset future
capital gains, it is probable that the gains so offset will not be distributed.
The capital loss carryforward for U.S. Government Income Fund includes capital
losses acquired pursuant to its reorganizations with MH/KP Government Income
Fund and MH/KP Intermediate Fixed Income Fund in the amounts of $8,927,273 and
$2,239,627, respectively. The capital loss carryforward for Investment Grade
Income Fund includes capital losses acquired during the fiscal year ended
November 30, 1995 pursuant to its reorganization with the PaineWebber Income
Fund of $11,792,034.
33
<PAGE>
PAINEWEBBER
SHARES OF BENEFICIAL INTEREST
THERE IS AN UNLIMITED AMOUNT OF $0.001 PAR VALUE SHARES OF
BENEFICIAL INTEREST AUTHORIZED FOR EACH FUND. TRANSACTIONS IN
SHARES OF BENEFICIAL INTEREST WERE AS FOLLOWS:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------------------------- ------------------------- ------------------------- ---------------------
Shares Amount Shares Amount Shares Amount Shares Amount
----------- ------------ ----------- ------------ ----------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Income Fund
Year Ended November 30,
1996:
Shares sold..... 306,752 $ 2,704,540 497,410 $ 4,426,086 256,396 $ 2,270,244 299,365 $ 2,638,959
Shares
repurchased.... (10,215,853) (89,963,321) (2,756,327) (24,279,586) (2,095,274) (18,501,139) (492,959) (4,290,319)
Shares converted
from Class B to
Class A........ 68,275 595,688 (68,267) (595,688) -- -- -- --
Dividends
reinvested..... 1,441,194 12,708,998 263,381 2,322,854 192,882 1,700,766 53,532 471,326
----------- ------------ ----------- ------------ ----------- ------------ -------- -----------
Net decrease.... (8,399,632) $(73,954,095) (2,063,803) $(18,126,334) (1,645,996) $(14,530,129) (140,062) $(1,180,034)
=========== ============ =========== ============ =========== ============ ======== ===========
Year Ended November 30,
1995:
Shares sold..... 567,868 $ 4,893,780 1,041,362 $ 9,030,263 617,760 $ 5,366,938 178,845 $ 1,566,822
Shares issued in
connection with
the acquisition
of Mitchell
Hutchins/Kidder,
Peabody
Intermediate
Fixed Income
Fund........... 1,619,680 14,625,152 -- -- 209,318 1,888,044 98,013 884,355
Shares issued in
connection with
the acquisition
of Mitchell
Hutchins/Kidder,
Peabody
Government
Income Fund.... 4,290,119 38,732,028 -- -- 138,273 1,247,330 342,128 3,085,587
Shares
repurchased.... (11,424,195) (99,775,829) (3,971,731) (34,673,089) (3,397,945) (29,578,351) (369,283) (3,301,390)
Shares converted
from Class B to
Class A........ 113,269 977,788 (113,269) (977,788) -- -- -- --
Dividends
reinvested..... 1,554,471 13,634,365 365,906 3,205,239 282,504 2,470,539 39,956 350,245
----------- ------------ ----------- ------------ ----------- ------------ -------- -----------
Net increase
(decrease)..... (3,278,788) $(26,912,716) (2,677,732) $(23,415,375) (2,150,090) $(18,605,500) 289,659 $ 2,585,619
=========== ============ =========== ============ =========== ============ ======== ===========
Investment Grade Income Fund
Year Ended November 30,
1996:
Shares sold..... 694,833 $ 7,241,666 790,259 $ 8,263,221 407,391 $ 4,245,155
Shares
repurchased.... (4,369,069) (45,365,354) (1,914,223) (19,907,506) (1,132,379) (11,795,454)
Shares converted
from Class B to
Class A........ 244,309 2,526,391 (244,394) (2,526,391) -- --
Dividends
reinvested..... 822,442 8,550,479 195,960 2,037,499 112,477 1,169,577
----------- ------------ ----------- ------------ ----------- ------------
Net decrease.... (2,607,485) $(27,046,818) (1,172,398) $(12,133,177) (612,511) $ (6,380,722)
=========== ============ =========== ============ =========== ============
Year ended November 30,
1995:
Shares sold..... 1,118,498 $ 11,245,387 1,602,309 $ 16,080,209 1,203,107 $ 12,241,790
Shares
repurchased.... (6,102,145) (61,730,284) (2,170,282) (22,050,209) (2,382,752) (24,084,331)
Shares converted
from Class B to
Class A........ 166,181 1,661,858 (166,181) (1,661,858) -- --
Dividends
reinvested..... 992,104 10,085,704 248,368 2,525,239 145,268 1,474,598
----------- ------------ ----------- ------------ ----------- ------------
Net decrease.... (3,825,362) $(38,737,335) (485,786) $ (5,106,619) (1,034,377) $(10,367,943)
=========== ============ =========== ============ =========== ============
High Income Fund
Year Ended November 30,
1996:
Shares sold..... 3,790,332 $ 27,178,599 8,214,718 $ 58,501,093 3,392,556 $ 24,183,926
Shares
repurchased.... (8,288,303) (58,543,490) (9,936,550) (70,304,426) (6,108,246) (43,269,352)
Shares converted
from Class B to
Class A........ 496,614 3,557,693 (496,939) (3,557,693) -- --
Dividends
reinvested..... 1,394,710 9,900,817 921,703 6,543,700 629,745 4,476,202
----------- ------------ ----------- ------------ ----------- ------------
Net decrease.... (2,606,647) $(17,906,381) (1,297,068) $ (8,817,326) (2,085,945) $(14,609,224)
=========== ============ =========== ============ =========== ============
Year Ended November 30,
1995:
Shares sold..... 4,193,138 $ 29,947,530 10,325,456 $ 73,506,514 8,404,914 $ 60,129,427
Shares
repurchased.... (8,121,352) (57,873,371) (13,672,291) (97,254,677) (10,508,559) (74,954,109)
Shares converted
from Class B to
Class A........ 265,832 1,888,065 (266,021) (1,888,065) -- --
Dividends
reinvested..... 1,814,578 12,966,608 1,246,815 8,905,265 911,864 6,525,812
----------- ------------ ----------- ------------ ----------- ------------
Net decrease.... (1,847,804) $(13,071,168) (2,366,041) $(16,730,963) (1,191,781) $ (8,298,870)
=========== ============ =========== ============ =========== ============
</TABLE>
34
<PAGE>
[This Page Intentionally Left Blank]
35
<PAGE>
U.S. GOVERNMENT INCOME FUND
PAINEWEBBER
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD IS PRESENTED BELOW:
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
For the Years Ended November 30,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 9.12 $ 8.50 $10.03 $ 9.98 $ 9.97
-------- -------- -------- -------- --------
Net investment income... 0.55 0.58 0.60 0.67 0.75
Net realized and
unrealized gains
(losses) from
investments............ (0.26) 0.62 (1.53) 0.05 0.01
-------- -------- -------- -------- -------- ---
Net increase (decrease)
from investment
operations............. 0.29 1.20 (0.93) 0.72 0.76
-------- -------- -------- -------- -------- ---
Dividends from net
investment income...... (0.55) (0.58) (0.60) (0.67) (0.75)
-------- -------- -------- -------- -------- ---
Net asset value, end of
period................. $ 8.86 $9.12 $ 8.50 $10.03 $ 9.98
======== ======== ======== ======== ======== ===
Total investment return
(1).................... 3.39% 14.70% (9.62)% 7.38% 7.92%
======== ======== ======== ======== ======== ===
Ratios/Supplemental
Data:
Net assets, end of
period (000's)......... $343,836 $430,285 $428,722 $648,923 $703,198
Expenses to average net
assets................. 0.94% 1.03%(2) 0.95% 0.91% 0.93%
Net investment income to
average net assets..... 6.24% 6.65%(2) 6.48% 6.60% 7.42%
Portfolio turnover rate. 359% 206% 358% 83% 28%
</TABLE>
- --------
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends at net
asset value on the payable dates and a sale at net asset value on the last
day of each period reported. The figures do not include sales charges;
results would be lower if sales charges were included. Total investment
return for periods of less than one year has not been annualized.
(2) These ratios include non-recurring acquisition expenses of 0.03%.
36
<PAGE>
U.S. GOVERNMENT INCOME FUND
PAINEWEBBER
<TABLE>
<CAPTION>
CLASS B
- -------------------------------------------------------------------------------------------------
For the Years Ended November 30,
- -------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C>
$ 9.12 $ 8.50 $10.03 $ 9.98 $ 9.98
- ------- ------- ------- -------- --------
0.48 0.51 0.53 0.60 0.67
(0.25) 0.63 (1.53) 0.05 0.01
- ------- ------- ------- -------- --------
0.23 1.14 (1.00) 0.65 0.68
- ------- ------- ------- -------- --------
(0.48) (0.52) (0.53) (0.60) (0.68)
- ------- ------- ------- -------- --------
$ 8.87 $ 9.12 $ 8.50 $10.03 $ 9.98
======= ======= ======= ======== ========
2.72% 13.81% (10.31)% 6.57% 6.98%
======= ======= ======= ======== ========
$61,873 $82,469 $99,581 $161,158 $132,357
1.70% 1.81%(2) 1.72% 1.66% 1.67%
5.47% 5.88%(2) 5.71% 5.79% 6.38%
359% 206% 358% 83% 28%
</TABLE>
37
<PAGE>
U.S. GOVERNMENT INCOME FUND
PAINEWEBBER
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD IS PRESENTED BELOW:
<TABLE>
<CAPTION>
CLASS C
--------------------------------------------------------
For the Period
For the Years Ended November 30, July 2, 1992#
--------------------------------------- to November 30,
1996 1995 1994 1993 1992
------- ------- ------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 9.11 $ 8.49 $10.02 $ 9.98 $10.13
------- ------- ------- -------- --------
Net investment income... 0.50 0.53 0.55 0.62 0.25
Net realized and
unrealized gains
(losses) from
investments............ (0.25) 0.63 (1.53) 0.04 (0.15)
------- ------- ------- -------- --------
Net increase (decrease)
from investment
operations............. 0.25 1.16 (0.98) 0.66 0.10
------- ------- ------- -------- --------
Dividends from net
investment income...... (0.50) (0.54) (0.55) (0.62) (0.25)
------- ------- ------- -------- --------
Net asset value, end of
period................. $ 8.86 $ 9.11 $ 8.49 $10.02 $ 9.98
======= ======= ======= ======== ========
Total investment return
(1).................... 2.98% 14.12% (10.08)% 6.75% 0.62%
======= ======= ======= ======== ========
Ratios/Supplemental
Data:
Net assets, end of
period (000's)......... $37,754 $53,832 $68,400 $143,473 $127,026
Expenses to average net
assets................. 1.45% 1.55%(2) 1.45% 1.40% 1.44%*
Net investment income to
average net assets..... 5.74% 6.17%(2) 5.99% 6.06% 6.13%*
Portfolio turnover rate. 359% 206% 358% 83% 28%
</TABLE>
- --------
# Commencement of issuance of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends at net
asset value on the payable dates and a sale at net asset value on the last
day of each period reported. The figures do not include sales charges;
results for Class C would be lower if sales charges were included. Total
investment return for periods of less than one year has not been
annualized.
(2) These ratios include non-recurring reorganization expenses of 0.03%.
38
<PAGE>
U.S. GOVERNMENT INCOME FUND
PAINEWEBBER
<TABLE>
<CAPTION>
CLASS Y
- -------------------------------------------------------------------------------------------------
For the Years Ended November 30,
- -------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
$ 9.11 $ 8.49 $10.02 $ 9.97 $ 9.97
- ------ ------ ------ ------ ------
0.57 0.61 0.62 0.70 0.77
(0.25) 0.62 (1.53) 0.05 0.01
- ------ ------ ------ ------ ------
0.32 1.23 (0.91) 0.75 0.78
- ------ ------ ------ ------ ------
(0.57) (0.61) (0.62) (0.70) (0.78)
- ------ ------ ------ ------ ------
$ 8.86 $ 9.11 $ 8.49 $10.02 $ 9.97
====== ====== ====== ====== ======
3.81% 15.06% (9.37)% 7.69% 8.13%
====== ====== ====== ====== ======
$6,495 $7,957 $4,955 $6,232 $5,517
0.64% 0.71%(2) 0.65% 0.62% 0.63%
6.53% 6.96%(2) 6.76% 6.87% 7.70%
359% 206% 358% 83% 28%
</TABLE>
39
<PAGE>
INVESTMENT GRADE INCOME FUND
PAINEWEBBER
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD IS PRESENTED BELOW:
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------
For the Years Ended November 30,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $10.68 $ 9.67 $11.08 $10.38 $10.17
-------- -------- -------- -------- --------
Net investment income.... 0.73 0.76 0.77 0.79 0.81
Net realized and
unrealized gains
(losses) from
investments............. (0.09) 1.01 (1.41) 0.70 0.22
-------- -------- -------- -------- --------
Net increase (decrease)
from investment
operations.............. 0.64 1.77 (0.64) 1.49 1.03
-------- -------- -------- -------- --------
Dividends from net
investment income....... (0.73) (0.76) (0.77) (0.79) (0.82)
-------- -------- -------- -------- --------
Net asset value, end of
period.................. $10.59 $10.68 $ 9.67 $11.08 $10.38
======== ======== ======== ======== ========
Total investment return
(1)..................... 6.33% 18.95% (5.99)% 14.77% 10.39%
======== ======== ======== ======== ========
Ratios/Supplemental Data:
Net assets, end of period
(000's)................. $229,117 $258,898 $271,553 $204,418 $197,795
Expenses to average net
assets.................. 0.94% 0.95% 0.97% 0.96% 1.01%
Net investment income to
average net assets...... 7.02% 7.42% 7.50% 7.24% 7.81%
Portfolio turnover rate.. 115% 149% 142% 27% 44%
</TABLE>
- --------
# Commencement of issuance of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period, reinvestment of all dividends at net asset value
on the payable dates and a sale at net asset value on the last day of each
period reported. The figures do not include sales charges; results would
be lower if sales charges were included. Total investment return for
periods of less than one year has not been annualized.
40
<PAGE>
INVESTMENT GRADE INCOME FUND
PAINEWEBBER
<TABLE>
<CAPTION>
CLASS B CLASS C
- -------------------------------------------- --------------------------------------------------------
For the Period
For the Years Ended November 30, For the Years Ended November 30, July 2, 1992 #
- -------------------------------------------- --------------------------------------- to November 30,
1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
- ------- ------- ------- ------- ------- -------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.67 $ 9.67 $ 11.07 $ 10.38 $ 10.17 $ 10.68 $ 9.67 $ 11.08 $ 10.38 $ 10.48
- ------- ------- ------- ------- ------- -------- -------- -------- -------- -------
0.65 0.68 0.69 0.71 0.73 0.68 0.70 0.72 0.74 0.28
(0.09) 1.00 (1.40) 0.69 0.22 (0.09) 1.01 (1.41) 0.70 (0.10)
- ------- ------- ------- ------- ------- -------- -------- -------- -------- -------
0.56 1.68 (0.71) 1.40 0.95 0.59 1.71 (0.69) 1.44 0.18
- ------- ------- ------- ------- ------- -------- -------- -------- -------- -------
(0.65) (0.68) (0.69) (0.71) (0.74) (0.68) (0.70) (0.72) (0.74) (0.28)
- ------- ------- ------- ------- ------- -------- -------- -------- -------- -------
$ 10.58 $ 10.67 $ 9.67 $ 11.07 $ 10.38 $ 10.59 $ 10.68 $ 9.67 $ 11.08 $ 10.38
======= ======= ======= ======= ======= ======== ======== ======== ======== =======
5.54% 17.97% (6.60)% 13.81% 9.56% 5.80% 18.37% (6.40)% 14.21% 1.32%
======= ======= ======= ======= ======= ======== ======== ======== ======== =======
$58,364 $71,372 $69,359 $52,301 $20,862 $ 32,337 $ 39,150 $ 45,473 $ 47,527 $16,067
1.68% 1.70% 1.72% 1.70% 1.74% 1.44% 1.45% 1.45% 1.44% 1.49%*
6.27% 6.67% 6.73% 6.40% 6.88% 6.51% 6.95% 6.99% 6.61% 6.83%*
115% 149% 142% 27% 44% 115% 149% 142% 27% 44%
</TABLE>
41
<PAGE>
HIGH INCOME FUND
PAINEWEBBER
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD IS PRESENTED BELOW:
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------
For the Years Ended November 30,
-------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period.................. $ 6.96 $ 7.14 $ 8.73 $ 7.92 $ 7.30
-------- -------- -------- -------- --------
Net investment income....... 0.72 0.79 0.86 0.89 0.98
Net realized and unrealized
gains (losses) from
investments................ 0.37 (0.17) (1.59) 0.83 0.61
-------- -------- -------- -------- --------
Net increase (decrease) from
investment operations...... 1.09 0.62 (0.73) 1.72 1.59
-------- -------- -------- -------- --------
Dividends from net
investment income.......... (0.70) (0.80) (0.86) (0.91) (0.97)
-------- -------- -------- -------- --------
Net asset value, end of
period..................... $ 7.35 $ 6.96 $ 7.14 $ 8.73 $ 7.92
======== ======== ======== ======== ========
Total investment return (1). 16.55% 9.01% (9.20)% 22.89% 22.99%
======== ======== ======== ======== ========
Ratios/Supplemental Data:
Net assets, end of period
(000's).................... $243,564 $248,619 $268,397 $360,281 $279,685
Expenses to average net
assets..................... 0.96% 0.93% 0.91% 0.93% 0.98%
Net investment income to
average net assets......... 10.10% 11.17% 10.43% 10.61% 12.68%
Portfolio turnover rate..... 142% 94% 156% 182% 185%
</TABLE>
- --------
# Commencement of issuance of shares
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period, reinvestment of all dividends at net asset value
on the payable dates and a sale at net asset value on the last day of each
period reported. The figures do not include sales charges; results would
be lower if sales charges were included. Total investment return for
periods of less than one year has not been annualized.
42
<PAGE>
HIGH INCOME FUND
PAINEWEBBER
<TABLE>
<CAPTION>
CLASS B CLASS C
- ------------------------------------------------- -------------------------------------------------------
For the Period
For the Years Ended November 30, For the Years Ended November 30, July 2, 1992#
- ------------------------------------------------- -------------------------------------- to November 30,
1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
-------- -------- -------- -------- ------- ------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 6.95 $ 7.14 $ 8.72 $ 7.91 $ 7.29 $ 6.97 $ 7.15 $ 8.74 $ 7.92 $ 7.80
-------- -------- -------- -------- ------- ------- -------- -------- -------- -------
0.66 0.74 0.80 0.83 0.92 0.68 0.76 0.82 0.85 0.33
0.39 (0.18) (1.58) 0.82 0.61 0.38 (0.18) (1.59) 0.82 0.11
-------- -------- -------- -------- ------- ------- -------- -------- -------- -------
1.05 0.56 (0.78) 1.65 1.53 1.06 0.58 (0.77) 1.67 0.44
-------- -------- -------- -------- ------- ------- -------- -------- -------- -------
(0.65) (0.75) (0.80) (0.84) (0.91) (0.67) (0.76) (0.82) (0.85) (0.32)
-------- -------- -------- -------- ------- ------- -------- -------- -------- -------
$ 7.35 $ 6.95 $ 7.14 $ 8.72 $ 7.91 $ 7.36 $ 6.97 $ 7.15 $ 8.74 $ 7.92
======== ======== ======== ======== ======= ======= ======== ======== ======== =======
15.86% 8.05% (9.77)% 21.89% 22.07% 15.96% 8.45% (9.62)% 22.19% 5.21%
======== ======== ======== ======== ======= ======= ======== ======== ======== =======
$215,492 $212,946 $235,480 $286,525 $99,645 $94,445 $103,911 $115,196 $176,161 $35,992
1.71% 1.68% 1.64% 1.66% 1.70% 1.47% 1.44% 1.38% 1.39% 1.45%*
9.34% 10.42% 9.66% 9.69% 11.42% 9.60% 10.63% 9.91% 9.81% 10.67%*
142% 94% 156% 182% 185% 142% 94% 156% 182% 185%
</TABLE>
43
<PAGE>
PAINEWEBBER
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
PaineWebber Managed Investments Trust
We have audited the accompanying statement of assets and
liabilities, including the portfolio of investments, of
PaineWebber U.S. Government Income Fund, PaineWebber Investment
Grade Income Fund and PaineWebber High Income Fund (three of the
portfolios of PaineWebber Managed Investments Trust) (the
"Funds") as of November 30, 1996, and the related statement of
operations for the year then ended, the statement of changes in
net assets for each of the two years in the period then ended,
and the financial highlights for each of the periods indicated
therein. These financial statements and financial highlights are
the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits 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
investments owned at November 30, 1996, 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 audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of PaineWebber U.S. Government Income Fund,
PaineWebber Investment Grade Income Fund and PaineWebber High
Income Fund at November 30, 1996, and the results of their
operations for the year then ended, the changes in their net
assets for each of the two years in the period then ended, and
the financial highlights for each of the indicated periods, in
conformity with generally accepted accounting principles.
LOGO
New York, New York
January 22, 1997
44
<PAGE>
PAINEWEBBER
TAX INFORMATION
We are required by Subchapter M of the Internal Revenue Code of
1986, as amended, to advise you within 60 days of each Fund's
fiscal year end (November 30, 1996) as to the federal tax status
of distributions received by shareholders during such fiscal year
from each Fund. Accordingly, we are advising you that all of the
distributions paid by U.S. Government Income Fund, Investment
Grade Income Fund and High Income Fund during the fiscal year
were derived from net investment income and are taxable as
ordinary income.
Dividends received by tax-exempt recipients (e.g. IRAs and
Keoghs) need not be reported as taxable income. Some retirement
trusts (e.g., corporate, Keogh and 403(b)(7) plans) may need this
information for their annual reporting.
Because each Fund's fiscal year is not the calendar year, another
notification will be sent in respect of calendar year 1996. The
second notification, which will reflect the amounts to be used by
calendar year taxpayers on their federal income tax returns, will
be made in conjunction with Form 1099 DIV and is mailed in
January 1997. Shareholders are advised to consult their own tax
advisers with respect to the tax consequences of their investment
in each Fund.
45
