<PAGE>
PAINEWEBBER BOND FUNDS ANNUAL REPORT
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
PERFORMANCE AT A GLANCE
================================================================================
Comparison of the change of a $10,000 investment in PaineWebber U.S. Government
Income Fund Class A and the Lehman Brothers Government Bond Index for the 10
years ended 11/30/98.
[THE FOLLOWING DATA WAS REPRESENTED BY A LINE GRAPH]
PaineWebber U.S. Lehman Brothers
Government Income Government Bond
Fund Class A Index
- ------------------------------------------------------
11/30/88 9,597 10,000
11/30/89 10,716 11,447
11/30/90 11,811 12,277
11/30/91 13,214 13,904
11/30/92 14,261 15,164
11/30/93 15,314 16,990
11/30/94 13,641 16,380
11/30/95 15,875 19,230
11/30/96 16,413 20,248
11/30/97 17,605 21,733
11/30/98 19,200 24,072
- ------------------------------------------------------
The graph depicts the performance of PaineWebber U.S. Government Income Fund
Class A versus the Lehman Brothers Government Bond Index. It is important to
note the PaineWebber U.S. Government Income Fund is a professionally managed
mutual fund while the index is not available for investment and is unmanaged.
The comparison is shown for illustrative purposes only.
Past performance is no guarantee of future performance.
The performance of the other classes will vary from the performance of the class
shown because of differences in sales charges and fees paid by shareholders
investing in different classes.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------------------------------------------------------------------------
One Year Five Years Ten Years Life(****)
Ended 11/30/98 Ended 11/30/98 Ended 11/30/98 Through 11/30/98
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Before Deducting Class A(*) 9.06% 4.63% 7.18% 8.16%
Maximum Sales Charge Class B(**) 8.16% 3.82% N/A 5.46%
Class C(***) 8.50% 4.10% N/A 4.33%
After Deducting Class A(*) 4.72% 3.77% 6.74% 7.85%
Maximum Sales Charge Class B(**) 3.16% 3.50% N/A 5.46%
Class C(***) 7.75% 4.10% N/A 4.33%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(*) Maximum sales charge for Class A shares is 4% of the public offering
price. Class A shares bear ongoing 12b-1 service fees.
(**) Maximum contingent deferred sales charge for Class B shares is 5% and is
reduced to 0% after six years. Class B shares bear ongoing 12b-1
distribution and service fees.
(***) Maximum contingent deferred sales charge for Class C shares is 0.75% and
is reduced to 0% after one year. Class C shares bear ongoing 12b-1
distribution and service fees.
(****) Life: since commencement of issuance on August 31,1984 for Class A
shares, July 1, 1991 for Class B shares and July 2, 1992 for Class C shares.
The Fund offers Class Y shares to a limited group of eligible investors,
including participants in certain investment programs that are sponsored by
PaineWebber and that may invest in PaineWebber mutual funds, as well as the
trustee of the Painewebber 401(k) Plus Plan (formerly known as PaineWebber
Savings Investment Plan). For the one year and five year periods ended November
30, 1998, and since inception on September 11, 1991 to November 30, 1998, Class
Y shares have produced average annual total returns of 9.41%, 4.94% and 5.94%,
respectively. Class Y shares do not bear initial or contingent deferred sales
charges or ongoing distribution and service fees.
The investment return and 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.
1
<PAGE>
ANNUAL REPORT
The graph depicts the performance of PaineWebber Low Duration U.S. Government
Income Fund versus the Lehman Brothers ARM Index and the Merrill Lynch 1-3 Year
U.S. Treasury Index. It is important to note PaineWebber Low Duration U.S.
Government Income Fund is a professionally managed mutual fund while the indices
are not available for investment and are unmanaged. The comparisons are shown
for illustrative purposes only.
The Fund's performance benchmark has been changed to the Merrill Lynch 1-3 Year
U.S. Treasury Index. The Merrill Lynch 1-3 Year U.S. Treasury Index is a more
widely followed benchmark of short-duration portfolio returns and is believed to
be a more appropriate index for comparison with the Fund's total return
performance. The Fund's prior benchmark, the Lehman Brothers ARM Index, is also
shown in this report's performance graph but will not appear in subsequent
reports.
PAINEWEBBER LOW DURATION U.S. GOVERNMENT INCOME FUND
PERFORMANCE AT A GLANCE
===============================================================================
Comparison of the change of a $10,000 investment in PaineWebber Low Duration
U.S. Government Income Fund and the Lehman Brothers ARM Index and the Merrill
Lynch 1-3 Year U.S. Treasury Index from 5/31/93 to 11/30/98.
<TABLE>
<CAPTION>
PaineWebber Low Duration PaineWebber Low Duration PaineWebber Low Duration
U.S. Government U.S. Government U.S. Government Merrill Lynch Lehman Bros.
Income Fund Class A Income Fund Class B Income Fund Class C 1-3 Year ARM Index
<S> <C> <C> <C> <C> <C>
5/31/93 9,651 9,960 9,960 9,972 10,024
9,736 10,039 10,042 10,046 10,130
9,780 10,079 10,084 10,069 10,178
9,824 10,117 10,124 10,156 10,239
9,786 10,074 10,083 10,189 10,240
9,829 10,110 10,121 10,209 10,243
11/30/93 9,872 10,147 10,161 10,212 10,216
9,930 10,197 10,214 10,260 10,293
9,948 10,213 10,231 10,316 10,362
9,950 10,207 10,228 10,250 10,329
9,951 10,202 10,225 10,199 10,247
9,788 10,029 10,053 10,163 10,193
9,385 9,610 9,635 10,177 10,185
9,221 9,436 9,463 10,208 10,207
9,466 9,680 9,710 10,295 10,270
9,217 9,420 9,451 10,331 10,321
9,467 9,669 9,703 10,308 10,278
9,470 9,665 9,701 10,330 10,270
11/30/94 9,428 9,615 9,654 10,284 10,241
9,494 9,673 9,715 10,305 10,295
9,561 9,738 9,781 10,451 10,466
9,695 9,867 9,913 10,594 10,675
9,745 9,911 9,960 10,653 10,727
9,881 10,042 10,093 10,748 10,841
10,013 10,168 10,223 10,936 11,016
10,018 10,166 10,223 10,995 11,061
10,086 10,208 10,223 11,040 11,100
10,156 10,291 10,354 11,107 11,169
10,205 10,334 10,399 11,161 11,247
10,300 10,423 10,490 11,255 11,317
11/30/95 10,394 10,510 10,580 11,354 11,413
10,515 10,620 10,695 11,441 11,500
10,585 10,688 10,764 11,538 11,582
10,498 10,592 10,670 11,490 11,606
10,501 10,590 10,668 11,480 11,627
10,504 10,585 10,665 11,489 11,642
10,506 10,580 10,661 11,513 11,676
10,602 10,668 10,753 11,596 11,758
10,606 10,665 10,752 11,641 11,816
10,658 10,710 10,799 11,681 11,886
10,766 10,811 10,903 11,787 11,978
10,915 10,954 11,049 11,920 12,114
11/30/96 11,066 11,098 11,197 12,012 12,231
11,100 11,121 11,223 12,012 12,270
11,174 11,144 11,248 12,068 12,341
11,184 11,194 11,300 12,096 12,410
11,145 11,147 11,255 12,091 12,433
11,242 11,237 11,348 12,190 12,508
11,342 11,329 11,443 12,273 12,634
11,393 11,372 11,488 12,358 12,705
11,540 11,511 11,631 12,494 12,802
11,592 11,555 11,677 12,505 12,835
11,695 11,601 11,726 12,600 12,940
11,797 11,695 11,823 12,694 13,026
11/30/97 11,804 11,743 11,874 12,724 13,066
11,883 11,809 11,944 12,811 13,155
11,960 11,882 12,019 12,935 13,243
12,015 11,930 12,069 12,946 13,272
12,077 11,982 12,124 12,999 13,362
12,128 11,975 12,119 13,061 13,421
12,179 12,068 12,215 13,130 13,484
12,253 12,131 12,281 13,198 13,552
12,312 12,130 12,282 13,260 13,605
12,465 12,272 12,429 13,427 13,675
12,571 12,420 12,581 13,604 13,757
12,526 12,315 12,476 13,671 13,750
11/30/98 12,525 12,359 12,522 13,659 13,825
</TABLE>
Past performance is no guarantee of future performance.
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
One Year Five Years Life(****)
Ended 11/30/98 Ended 11/30/98 Through 11/30/98
<S> <C> <C> <C> <C>
Class A(*) 6.11% 4.88% 4.70%
Before Deducting
Maximum Sales Charge Class B(**) 5.24% 4.02% 3.87%
Class C(***) 5.46% 4.29% 4.13%
Class A(*) 3.07% 4.21% 4.12%
After Deducting
Maximum Sales Charge Class B(**) 2.24% 4.02% 3.87%
Class C(***) 4.71% 4.29% 4.13%
</TABLE>
(*) Maximum sales charge for Class A shares is 3% of the public offering
price. Class A shares bear ongoing 12b-1 service fees.
(**) Maximum contingent deferred sales charge for Class B shares is 3% and is
reduced to 0% after four years. Class B shares bear ongoing 12b-1 distribution
and service fees.
(***) Maximum contingent deferred sales charge for Class C shares is 0.75% and
is reduced to 0% after one year. Class C shares bear ongoing 12b-1 distribution
and service fees.
(****) Life: since commencement of issuance on May 3, 1993 for Class A, B and C
shares.
The Fund offers Class Y shares to a limited group of eligible investors,
including participants in certain investment programs that are sponsored by
PaineWebber and that may invest in PaineWebber mutual funds. For the one year
ended November 30, 1998 and since inception on October 20, 1995 to November
30, 1998, Class Y shares have produced average annual total returns of 6.37% and
6.66%, respectively. Class Y shares do not bear initial or contingent deferred
sales charges or ongoing distribution and service fees.
The investment return and 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.
2
<PAGE>
PAINEWEBBER BOND FUNDS ANNUAL REPORT
PAINEWEBBER INVESTMENT GRADE INCOME FUND
PERFORMANCE AT A GLANCE
================================================================================
Comparison of the change of a $10,000 investment in PaineWebber Investment Grade
Income Fund Class A and the Lehman Brothers Corporate Bond Index for the 10
years ended 11/30/98.
[THE FOLLOWING DATA WAS REPRESENTED BY A LINE GRAPH]
PaineWebber Lehman Brothers
Investment Grade Corporate
Income Fund Bond Index
Class A
- -------------------------------------------------------
11/30/88 9,597 9,904
11/30/89 10,776 11,319
11/30/90 11,374 11,960
11/30/91 13,213 13,918
11/30/92 14,587 15,340
11/30/93 16,740 17,421
11/30/94 15,737 16,698
11/30/95 18,720 20,248
11/30/96 19,905 21,557
11/30/97 21,872 23,189
11/30/98 23,266 25,374
- -------------------------------------------------------
The graph depicts the performance of PaineWebber Investment Grade Income Fund
Class A versus the Lehman Brothers Corporate Bond Index. It is important to note
the PaineWebber Investment Grade Income Fund is a professionally managed mutual
fund while the index is not available for investment and is unmanaged. The
comparison is shown for illustrative purposes only.
Past performance is no guarantee of future performance.
The performance of the other classes will vary from the performance of the class
shown because of differences in sales charges and fees paid by shareholders
investing in different classes.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------------------------------------------------------------------------
One Year Five Years Ten Years Life(****)
Ended 11/30/98 Ended 11/30/98 Ended 11/30/98 Through 11/30/98
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Before Deducting Class A(*) 6.37% 6.80% 9.26% 9.88%
Maximum Sales Charge Class B(**) 5.56% 6.03% N/A 8.24%
Class C(***) 5.84% 6.29% N/A 7.28%
After Deducting Class A(*) 2.14% 5.94% 8.81% 9.57%
Maximum Sales Charge Class B(**) 0.58% 5.72% N/A 8.24%
Class C(***) 5.09% 6.29% N/A 7.28%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(*) Maximum sales charge for Class A shares is 4% of the public offering
price.Class A shares bear ongoing 12b-1 service fees.
(**) Maximum contingent deferred sales charge for Class B shares is 5% and is
reduced to 0% after six years.Class B Shares bear ongoing 12b-1
distribution and service fees.
(***) Maximum contingent deferred sales charge for Class C shares is 0.75% and
is reduced to 0% after one year.Class C Shares bear ongoing 12b-1
distribution and service fees.
(****) Life: since commencement of issuance on August 31,1984 for Class A
shares, July 1, 1991 for Class B shares and July 2, 1992 for Class C
shares.
The Fund offers Class Y shares to a limited group of eligible investors,
including participants in certain investment programs that are sponsored by
PaineWebber and that may invest in PaineWebber mutual funds. Since inception on
February 18, 1998 through November 30, 1998, Class Y shares have produced a
total return of 3.51%. Class Y shares do not bear initial or contingent deferred
sales charges or ongoing distribution and service fees.
The investment return and principal value of an investment in the Fund will
fluctuate, so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
3
<PAGE>
ANNUAL REPORT
The Fund's performance benchmark has been changed to the Credit Suisse First
Boston High Yield Index. The Index is a more widely followed benchmark of high
yield portfolio returns and is believed to be a more appropriate broad-based
index for comparison with the Fund's total return performance. The Fund's prior
benchmark, the Lehman Brothers High Yield Bond Index, is also shown in this
report's performance graph but will not appear in subsequent reports.
PAINEWEBBER HIGH INCOME FUND
PERFORMANCE AT A GLANCE
================================================================================
Comparison of the change of a $10,000 investment in PaineWebber High Income Fund
Class A, the Credit Suisse First Boston High Yield Index and the Lehman Brothers
High Yield Bond Index for the 10 years ended 11/30/98.
[THE FOLLOWING DATA WAS REPRESENTED BY A LINE GRAPH]
PaineWebber High
Income Fund CS First Boston Lehman Brothers
Class A High Yield Index High Yield Bond Index
11/30/88 9,598 10,022 10,000
11/30/89 9,525 10,171 10,115
11/30/90 8,292 9,434 9,108
11/30/91 12,529 13,528 13,199
11/30/92 15,410 15,719 15,324
11/30/93 18,937 18,668 17,930
11/30/94 17,194 18,523 17,835
11/30/95 18,743 21,693 21,081
11/30/96 21,846 24,225 23,678
11/30/97 24,815 27,551 26,657
11/30/98 23,709 28,027 27,363
The graph depicts the performance of PaineWebber High Income Fund Class A versus
the Credit Suisse First Boston ("CSFB") High Yield Index and the Lehman Brothers
High Yield Bond Index. It is important to note PaineWebber High Income Fund is a
professionally managed mutual fund while the indices are not available for
investment and are unmanaged. The comparisons are shown for illustrative
purposes only.
Past performance is no guarantee of future performance. The performance of the
other classes will vary from the performance of the class shown because of
differences in sales charges and fees paid by shareholders investing in
different classes.
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
One Year Five Years Ten Years Life(****)
Ended 11/30/98 Ended 11/30/98 Ended 11/30/98 Through 11/30/98
<S> <C> <C> <C> <C> <C>
Class A(*) -4.46% 4.60% 9.46% 10.05%
Before Deducting
Maximum Sales Charge Class B(**) -5.32% 3.82% N/A 10.00%
Class C(***) -4.92% 4.08% N/A 7.28%
Class A(*) -8.30% 3.76% 9.02% 9.73%
After Deducting
Maximum Sales Charge Class B(**) -9.68% 3.55% N/A 10.00%
Class C(***) -5.58% 4.08% N/A 7.28%
</TABLE>
(*) Maximum sales charge for Class A shares is 4% of the public offering
price. Class A Shares bear ongoing 12b-1 service fees.
(**) Maximum contingent deferred sales charge for Class B shares is 5% and is
reduced to 0% after six years. Class B Shares bear ongoing 12b-1 distribution
and service fees.
(***) Maximum contingent deferred sales charge for Class C shares is 0.75% and
is reduced to 0% after one year. Class C shares bear ongoing 12b-1 distribution
and service fees.
(****) Life: since commencement of issuance on August 31, 1984 for Class A
shares, July 1, 1991 for Class B shares and July 2, 1992 for Class C shares.
The Fund offers Class Y shares to a limited group of eligible investors,
including participants in certain investment programs that are sponsored by
PaineWebber and that may invest in PaineWebber mutual funds. Since inception on
February 20, 1998, through November 30, 1998, Class Y shares have lost 8.43%.
Class Y shares do not bear initial or contingent deferred sales charges or
ongoing distribution and service fees.
The investment return and principal value of an investment in the Fund will
fluctuate, so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
4
<PAGE>
PAINEWEBBER BOND FUNDS ANNUAL REPORT
January 15, 1999
Dear Shareholder,
We are pleased to present you with the annual report for the PaineWebber U.S.
Government Income Fund, the PaineWebber Low Duration U.S. Government Income
Fund, the PaineWebber Investment Grade Income Fund and the PaineWebber High
Income Fund for the fiscal year ended November 30, 1998.
MARKET REVIEW
================================================================================
[GRAPHIC] "Flight to quality" remained the dominant theme in the bond markets
during the fiscal year ended November 30, 1998, as investors sought the safety
and liquidity of U.S. Treasury securities, especially short- to intermediate-
term debt.
Turmoil hit the global capital markets in August when Russia devalued its
currency and effectively defaulted on its internal debt. The ensuing sell-off in
the global equity and emerging debt markets spurred the flight to U.S. Treasurys
to an even higher pitch. Return of capital, not return on capital, became the
dominant theme in the markets. All sectors of the bond market suffered as risk
premiums soared. Emerging market debt fared the worst, with the high yield
sector following a distant second. U.S. corporate bonds were hard hit, and
corporations suffered from a market-induced credit crunch.
The global sell-off continued to disrupt the financial markets in September.
Initial public offerings of stocks and the entire high-yield debt market ground
to a virtual halt. With market conditions so fragile, the Federal Reserve
lowered the Fed Funds rate (the rate for overnight loans) from 5.50% to 5.25%.
The flight to quality became a "flight to liquidity" as investors swarmed to
"on-the-run" (most recently auctioned) benchmark Treasurys. Barely two weeks
into October, the Fed again lowered the Fed Funds rate and also lowered the
discount rate (the rate commercial banks pay to borrow from the Federal
Reserve). The market took this action as a sign of the Fed's resolve to keep the
economy growing in its effort to avoid a recession. Investors reacted
positively--the stock market rose and shorter-maturity Treasurys rallied.
Corporate bonds continued to lose ground as they lagged the rally in Treasury
yields.
The Fed lowered both rates again in November, and several European central
banks followed suit in preparation for the January 1, 1999 debut of the euro
currency. The third rate reduction in as many months boosted corporate bonds and
mortgage-backed securities as market psychology and liquidity improved.
Corporate bonds produced their best monthly return since the inception of the
Lehman indices in 1973, only three months after posting their worst monthly
return.
OUTLOOK
While the U.S. manufacturing sector has been losing jobs and industrial
production has been flat since Asia began
5
<PAGE>
ANNUAL REPORT
unraveling in late 1997, the larger economy has proven resilient. As of this
writing, gross domestic product for 1998 is likely to have reached 3.8%, the
same rate as 1996 and 1997. Ironically, the same forces that weakened
manufacturing stimulated demand--by deflating import prices. This immunity to
weakening U.S. exports is likely to be further tested, as widespread weakness in
commodity prices underscores a global economy at risk of recession.
Consumer spending continues to drive the U.S. economy; the savings rate
recently fell into negative territory. This may be an indication of just how
dependent the U.S. economy is on the strength of the stock market, since the
"wealth effect" of stock gains strongly affects consumers' perceptions of how
much they can afford to spend. If the corporate earnings outlook does not
improve, the wealth effect could dissipate.
Bond market liquidity has improved, but may worsen again if any of a number
of potential problems arises: a further deterioration of Brazil's financial
condition, weakness in the U.S. stock market or further spread of the Asian
crisis. We expect the U.S. economy to grow more slowly in 1999, with inflation
remaining benign, and do not believe a recession is likely. In this economic
environment we foresee the 30-year Treasury bond trading within a 4.75-5.75%
range.
- -------------------------------------------
PAINEWEBBER U.S.
GOVERNEMENT INCOME FUND
FUND PROFILE
[GRAPHIC] Goal:
High current income
consistent with
preservation of capital
and liquidity
[GRAHPIC] Portfolio Managers:
Nirmal Singh,
Craig Varrelman
Mitchell Hutchins
Asset Management Inc.
[GRAPHIC] Total Net Assets:
$338.4 million as of
November 30, 1998
[GRAPHIC] Dividend Payments:
Monthly
- -------------------------------------------
PORTFOLIO REVIEWS
================================================================================
[GRAPHIC] PAINEWEBBER U.S. GOVERNEMT INCOME FUND
PERFORMANCE
The Fund's total return consists of the change in net asset value with
dividends reinvested. For the fiscal year ended November 30, 1998, without
deducting sales charges, Class A shares gained 9.06%, Class B shares gained
8.16%, Class C shares gained 8.50% and Class Y shares gained 9.41%.
The Fund's total return may be lower for shareowners who purchased or
redeemed Fund shares during the period. After deducting the maximum applicable
sales charges, Class A shares gained 4.72%, Class B shares gained 3.16% and
Class C shares gained 7.75%. Class Y shares are not subject to sales charges.
PORTFOLIO
HIGHLIGHTS
The Fund began the latter half of its fiscal year overweighted in mortgage-
backed and government agency securities, as we maintained our focus on adding
portfolio value by enhancing yield. At the same time, we emphasized call
protection in an environment of heightened prepayment risk. As the period began
we perceived the Federal Reserve to be on hold, and therefore expected
relatively low volatility in the bond market.
Instead, market volatility became extreme in August after Russia devalued the
ruble and hedge funds began unwinding their leveraged
6
<PAGE>
PAINEWEBBER BOND FUNDS ANNUAL REPORT
positions. The speed of the financial de-leveraging propelled sector spreads
beyond levels consistent with fundamentals and precluded major allocation
changes to the Fund. The Fund rode out the storm without selling into a down
market, and by fiscal year-end its portfolio had recovered quite well from the
volatility of the August-October period.
We did make some adjustments to the Fund during the period, increasing agency
notes from 14.7% as of May 31, 1998 to 15.5%,(1) and decreasing Treasurys from
28.5% as of May 31 to 24.7%.
GOING FORWARD
During November we increased the Fund's exposure to the mortgage sector--we
believe mortgage spreads to Treasurys are extremely attractive despite high
prepayment risks. We think investors have become more credit-risk averse in
reaction to events in the international markets, and we believe the high credit
quality of mortgage securities and their historically low prices will attract
investors to the sector.
- --------------------------------------------------------------------------------
PAINEWEBBER
U.S. GOVERNMENT
INCOME FUND
Asset Allocation(1)
[THE FOLLOWING DATA WAS REPRESENTED BY A PIE CHART]
Mortgage Pass-Throughs 36.7%
U.S. Treasurys 25.0%
Planned Amortization Class/Sequentials 22.4%
Agencies 15.5%
Cash 0.4%
================================================================================
PAINEWEBBER LOW DURATION U.S. GOVERNMENT INCOME FUND
PERFORMANCE
The Fund's total return consists of the change in net asset value with
dividends reinvested. For the fiscal year ended November 30, 1998, without
deducting sales charges, Class A shares gained 6.11%, Class B shares gained
5.24%, Class C shares gained 5.46% and Class Y shares gained 6.37%.
The Fund's total return may be lower for shareowners who purchased or
redeemed Fund shares during the period. After deducting the maximum applicable
sales charges, Class A shares gained 3.07%, Class B shares gained 2.24% and
Class C shares gained 4.71%. Class Y shares are not subject to sales charges.
PORTFOLIO
HIGHLIGHTS
In May we anticipated that interest rates would fall, and positioned the Fund
to be more sensitive to interest rate declines than its benchmark (the Merrill
Lynch 1-3 Year Treasury Index) seeking to capture potential returns from such a
fall in rates. In technical terms, we maintained a longer "duration" than the
Index. As rates fell during the second half of the fiscal year, the Fund
benefited to a greater extent than did the Index.
Although the Fund's duration was properly positioned for the decline in
interest rates, the Fund's sector allocation proved detrimental. The latter part
of the fiscal year was a period of severe illiquidity in the fixed income
markets as investors fled all sectors but U.S. Treasurys. The result was strong
Treasury performance at the expense of just about every other fixed income
sector. The Fund's holdings of mortgage-backed securities did not keep pace with
Treasurys. Since the Index consists entirely of Treasurys, the Fund
underperformed its benchmark.
- -------------------------------------------
PAINEWEBBER LOW DURATION
U.S. GOVERNEMENT INCOME FUND
FUND PROFILE
[GRAPHIC] Goal:
High income with
preservation of capital
and low NAV volatility
[GRAHPIC] Portfolio Managers/
Subadviser:
Williams Powers
Pacific Investment
Management Company
[GRAPHIC] Total Net Assets:
$152.0 million as of
November 30, 1998
[GRAPHIC] Dividend Payments:
Monthly
- -------------------------------------------
(1) All weightings represent percentages of net assets as of November 30, 1998,
unless noted otherwise. The portfolio is actively managed and all holdings
are subject to change.
7
<PAGE>
ANNUAL REPORT
- --------------------------------------------------------------------------------
PAINEWEBBER
LOW DURATION
U.S. GOVERNMENT
INCOME FUND
Asset Allocation(2)
[THE FOLLOWING DATA WAS REPRESENTED BY A PIE CHART]
U.S. Government Obligations 36.1%
Mortgage Backed Securities 62.6%
Cash Equivalents 1.3%
- --------------------------------------------------------------------------------
GOING FORWARD
We expect the Federal Reserve to continue lowering interest rates in 1999 to
forestall an economic slowdown, and have structured the portfolio accordingly.
We intend to maintain portfolio duration about one-half year above the
benchmark. In anticipation of further economic slowdown, additional Fed easing,
and a steeper yield curve, we have concentrated the portfolio in intermediate
maturities (a "bullet" structure). We continue to believe mortgages are the most
prudent way to enhance portfolio yield without adding undue risk. Since October,
the mortgage market has regained ground. We continue to focus our mortgage
investments in the sectors where prepayment risks are minimal such as discount
coupons and structured collateralized mortgage obligations (CMOs).
================================================================================
PAINEWEBBER INVESTMENT GRADE INCOME FUND
PERFORMANCE
The Fund's total return consists of the change in net asset value with
dividends reinvested. For the fiscal year ended November 30, 1998, without
deducting sales charges, Class A shares gained 6.37%, Class B shares gained
5.56% and Class C shares gained 5.84%. Class Y shares commenced issuance on
February 18, 1998; from commencement through November 30, 1998 Class Y shares
gained 3.51%.
The Fund's total return may be lower for shareowners who purchased or
redeemed Fund shares during the period. After deducting the maximum applicable
sales charges, Class A shares gained 2.14%, Class B shares gained 0.58% and
Class C shares gained 5.09%. Class Y shares are not subject to sales charges.
PORTFOLIO
HIGHLIGHTS
Corporate bonds began to lag Treasurys in July. Russia's effective default in
August upset bond markets around the world and led to losses in most asset
classes, including the Fund's positions in crossover issues(3) and BBB-rated
corporates. Higher quality corporates posted modest gains but significantly
lagged Treasurys. Corporate bonds did not start to recover until mid October,
when the Federal Reserve surprised the market by cutting interest rates between
its regular meetings.
During the second half of the fiscal year we raised portfolio credit quality
by reducing the Fund's exposure to crossovers and BB credits, and by increasing
its U.S. Treasury and government agency positions. The Fund's average credit
quality was A+ at the end of the fiscal year, compared to the BBB average of its
Lipper peer group.
The Fund was hurt during the period by its longer maturity profile. As the
"flight to quality" turned into a "flight to liquidity," shorter-maturity
Treasurys made rapid gains while longer
(2) Percentages of portfolio assets as of November 30, 1998.
(3) Companies that straddle the investment-grade and noninvestment-grade sectors
of the market.
- -------------------------------------------
PAINEWEBBER INVESTMENT
GRADE INCOME FUND
FUND PROFILE
[GRAPHIC] Goal:
High current income
consistent with
preservation of capital
and liquidity
[GRAHPIC] Portfolio Managers:
Julieanna Berry,
James F. Keegan
Mitchell Hutchins Asset
Management Inc.
[GRAPHIC] Total Net Assets:
$294.7 million as of
November 30, 1998
[GRAPHIC] Dividend Payments:
Monthly
- -------------------------------------------
8
<PAGE>
PAINEWEBBER BOND FUNDS ANNUAL REPORT
maturity debt of all classes lagged the front end of the yield curve. The Fund's
overweighting in longer maturities was driven mainly by the relatively steep
corporate credit curves in the market. (A steep curve means the longer the
maturity, the higher the yield.) Many of the Fund's longer-term holdings are
call-protected, high-coupon bonds, which can be hard to find in the marketplace.
We felt that the flight-to-liquidity trade was difficult to time and temporary,
and that the steep curves would flatten over time, so we maintained the Fund's
positions.
During the second half of the fiscal year the Fund raised its allocation to
cable/media (14.3% from 9.7% at the end of May), still its largest industry
weighting.(1) The sector has benefited from its predictable cash flows and
defensive nature. Noteworthy positions include News America Holdings (3.9%),
which sold 18.7% ($2.8 billion) of its Fox Entertainment Group in an initial
public offering and reiterated its commitment to pay down debt. Tele-
Communications Inc. (TCI) (4.4%) is to be acquired by AT&T Corp. in a stock-for-
stock swap. The Fund holds subordinated 9.65% bonds due 3/31/2027, which we
think are likely to receive a credit upgrade after the acquisition.
GOING FORWARD
We believe the credit cycle has matured to the point where industry
allocation and security selection are likely to be primary drivers of
performance. The Fund generally had a more defensive orientation over the last
year, emphasizing higher quality and domestic issuers. We intend to continue the
emphasis on stable industries with favorable risk/return characteristics, and to
make opportunistic use of crossovers and the upper tier of the high-yield market
as permitted.
PAINEWEBBER
INVESTMENT
GRADE
INCOME FUND
Top Five Sectors(1)
U.S. Government
14.8%
Cable/Media
14.3%
Finance/Banking
13.6%
Insurance
12.4%
Hotels/Gaming
4.6%
===============================================================================
PAINEWEBBER HIGH INCOME FUND
PERFORMANCE
The Fund's total return consists of the change in net asset value with
dividends reinvested. For the fiscal year ended November 30, 1998, without
deducting sales charges, Class A shares lost 4.46%, Class B shares lost 5.32%
and Class C shares lost 4.92%. Class Y shares commenced issuance on February 20,
1998; from commencement through November 30, 1998, Class Y shares lost 8.43%.
The Fund's total return may be lower for shareowners who purchased or
redeemed Fund shares during the period. After deducting the maximum applicable
sales charges, Class A shares lost 8.30%, Class B shares lost 9.68% and Class C
shares lost 5.58%. Class Y shares are not subject to sales charges.
PORTFOLIO
HIGHLIGHTS
The Fund's underperformance for the fiscal year may be attributed to its
investment discipline. Our fundamental, value-oriented research style tends to
lead us to smaller domestic issues
PAINEWEBBER HIGH INCOME
FUND
FUND PROFILE
[RIGHT UP ARROW] Goal:
High income
[RIGHT UP ARROW] Portfolio Manager:
Thomas Libassi,
Mitchell Hutchins Asset
Management Inc.
[RIGHT UP ARROW] Total Net Assets:
$537.2 million as of
November 30, 1998
[RIGHT UP ARROW] Dividend Payments:
Monthly
(1) All weightings represent percentages of net assets as of November
30, 1998, unless noted otherwise. The portfolio is actively managed and all
holdings are subject to change.
9
<PAGE>
ANNUAL REPORT
PAINEWEBBER
HIGH INCOME
FUND
Top Five Sectors(1)
Communications
16.2%
Cable
7.8%
Transport Non-Air
7.4%
General Industrial
6.4%
Media
5.8%
and higher-quality, dollar-denominated emerging market issues. During its fiscal
year, the Fund was overweighted in both of these sub-sectors of the high-yield
market, which both lagged the overall market.
Historically, smaller domestic issues (less than $200 million) generally have
shown lower volatility than larger issues, and the Fund has emphasized them to
limit portfolio volatility. While we believe that smaller issues will improve,
we think their higher volatility during the last fiscal year may reflect
structural changes in the market rather than short-term deviations from the
historical norm. Institutional investors--who tend to buy larger issues--are
exerting more influence on the high-yield market and their influence seems
likely to grow. We have reduced the Fund's exposure to smaller issues and have
begun redeploying some of the assets into larger issues. We expect to continue
this redeployment going forward.
We do not think the emerging markets will recover in the next six to twelve
months, and have reduced the Fund's exposure from 6.0% at the end of May to 2.1%
at the end of November.(1) We also reduced its energy holdings from 8.4% in May
to 4.3%.(1) Within the Fund's energy exposure we sold companies with Gulf of
Mexico operations in favor of companies with North Sea operations. Because North
Sea operations are more difficult than Gulf operations, they are more costly and
entail longer-term commitments. These longer-term commitments tend to reduce the
yield volatility of North Sea operators' debt.
We increased the Fund's exposure to communications (16.2% for the Fund vs.
15.3% for the CSFB High Yield Index, the Fund's new performance benchmark).(1)
The Fund's greatest concentrations in this sector are in European long distance
companies and "asset-rich" U.S. carriers, i.e., companies that own the fiber-
optic lines. New acquisitions over the latter half of the fiscal year included
Qwest Communications International (0.3%) and Metromedia Fiber Network (0.6%).
The Fund continues to hold Viatel (2.4%), a European long distance carrier and
fiber-optic line owner.
Other changes to the Fund included an increase in its cable weighting from
6.4% in May to 7.8% in November and a reduction of its media exposure from 7.7%
in May to 5.8%.(1)
We expect the high-yield sector to improve over the next six months. Spreads
to Treasury securities are still much wider than they were at the start of 1998,
and well above their historical average of 491 basis points. (A basis point
equals 1/100th of one percent.) We think spreads could tighten over the next few
months on the strength of new year buying as investors rebalance portfolios.
The default rate for high-yield debt is likely to increase to 2-4% from about
1% currently. Since the risk premium for smaller issues has increased, security
selection will become even more important than it was in 1998. The recent rally
in the high-yield market has focused on an extremely narrow subset of only 77
larger issues out of more than 2,500. We look for the rally to broaden in 1999
and include the smaller issues.
(1) All weightings represent percentages of net assets as of November
30,1998,unless noted otherwise.The portfolio is actively managed and all
holdings are subject to change.
10
<PAGE>
PAINEWEBBER BOND FUNDS ANNUAL REPORT
Our ultimate objective in managing your investments is to help you
successfully meet your financial goals. We thank you for your continued support
and welcome any comments or questions you may have.
For a Quarterly Review on the PaineWebber U.S. Government Income Fund, the
PaineWebber Low Duration U.S. Government Income Fund, the PaineWebber Investment
Grade Income Fund, the PaineWebber High Income Fund or another fund in the
PaineWebber Family of Funds,(4) please contact your Investment Executive.
Sincerely,
/s/ Margo Alexander
MARGO ALEXANDER
President
Mitchell Hutchins Asset Management Inc.
/s/ Julieanna M. Berry
JULIEANNA M. BERRY
Portfolio Manager
PaineWebber Investment Grade Income Fund
/s/ Thomas J. Libassi
THOMAS J. LIBASSI
Portfolio Manager
PaineWebber High Income Fund
/s/ Nirmal Singh
NIRMAL SINGH
Portfolio Manager
PaineWebber U.S. Government Income Fund
/s/ Dennis L. McCauley
DENNIS L. MCCAULEY
Chief Investment Officer - Fixed Income
Mitchell Hutchins Asset Management Inc.
/s/ James F. Keegan
JAMES F. KEEGAN
Portfolio Manager
PaineWebber Investment Grade Income Fund
/s/ William C. Powers
WILLIAM C. POWERS
Managing Director
Pacific Investment Management Company
Portfolio Manager
PaineWebber Low Duration U.S. Government
Income Fund
/s/ Craig M. Varrelman
CRAIG M. VARRELMAN
Portfolio Manager
PaineWebber U.S. Government Income Fund
This letter is intended to assist shareholders in understanding how the Funds
performed during the fiscal year ended November 30, 1998, and reflects our views
at the time of writing this report. Of course, these views may change in
response to changing circumstances. We encourage you to consult your Investment
Executive regarding your personal investment program.
(4) Mutual funds are sold by prospectus only. The prospectuses for the funds
contain more complete information regarding risks, charges and expenses, and
should be read carefully before investing.
11
<PAGE>
[This Page Intentionally Left Blank]
12
<PAGE>
PaineWebber U.S. Government Income Fund
Performance Results
(unaudited)
<TABLE>
<CAPTION>
Net Asset Value Total Return/1/
-------------------------------- -----------------------------
12 Months 6 Months
11/30/98 05/31/98 11/30/97 Ended 11/30/98 Ended 11/30/98
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $9.20 $9.00 $8.94 9.06% 5.28%
- ---------------------------------------------------------------------------------
Class B Shares 9.20 9.00 8.94 8.16 4.82
- ---------------------------------------------------------------------------------
Class C Shares 9.19 8.99 8.93 8.50 5.00
- ---------------------------------------------------------------------------------
Performance Summary Class A Shares
<CAPTION>
Net Asset Value
------------------ Capital Gains Dividends Total
Period Covered Beginning Ending Distributed 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
- ---------------------------------------------------------------------------------
1996 9.21 8.74 -- 0.5454 0.98
- ---------------------------------------------------------------------------------
1997 8.74 9.00 -- 0.5355 9.44
- ---------------------------------------------------------------------------------
01/01/98-11/30/98 9.00 9.20 -- 0.4601 7.52
- ---------------------------------------------------------------------------------
Totals: $0.0080 $11.0670
- ---------------------------------------------------------------------------------
Cumulative Total Return as of 11/30/98: 206.00%
- ---------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------
1996 9.21 8.74 -- 0.4789 0.22
- ---------------------------------------------------------------------------------
1997 8.74 9.00 -- 0.4687 8.61
- ---------------------------------------------------------------------------------
01/01/98-11/30/98 9.00 9.20 -- 0.3934 6.74
- ---------------------------------------------------------------------------------
Totals: $0.0000 $3.9801
- ---------------------------------------------------------------------------------
Cumulative Total Return as of 11/30/98: 48.43%
- ---------------------------------------------------------------------------------
</TABLE>
/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.
13
<PAGE>
PaineWebber U.S. Government Income Fund
Performance Results
(unaudited) (concluded)
Performance Summary Class C Shares
<TABLE>
<CAPTION>
Net Asset Value
---------------- Capital Gains Dividends Total
Period Covered Beginning Ending Distributed 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
- ---------------------------------------------------------------------
1996 9.20 8.73 -- 0.5008 0.47
- ---------------------------------------------------------------------
1997 8.73 8.99 -- 0.4910 8.90
- ---------------------------------------------------------------------
01/01/98-11/30/98 8.99 9.19 -- 0.4182 7.04
- ---------------------------------------------------------------------
Totals: $0.0000 $3.4372
- ---------------------------------------------------------------------
Cumulative Total Return as of 11/30/98: 31.31%
- ---------------------------------------------------------------------
</TABLE>
/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
would be lower if sales charges were included.
Note:The Fund offers Class Y shares to a limited group of investors, including
participants in certain investment programs that are sponsored by PaineWebber
and that may invest in PaineWebber mutual funds. For the year ended November
30, 1998 and since inception, September 11, 1991 through November 30, 1998,
Class Y shares have a total return of 9.41% and 51.70%, respectively.
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.
14
<PAGE>
PaineWebber Low Duration U.S. Government Income Fund
Performance Results
(unaudited)
<TABLE>
<CAPTION>
Net Asset Value Total Return/1/
-------------------------------- -----------------------------
12 Months 6 Months
11/30/98 05/31/98 11/30/97 Ended 11/30/98 Ended 11/30/98
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $2.38 $2.38 $2.37 6.11% 2.85%
- ---------------------------------------------------------------------------------
Class B Shares 2.38 2.38 2.37 5.24 2.41
- ---------------------------------------------------------------------------------
Class C Shares 2.38 2.38 2.37 5.56 2.61
- ---------------------------------------------------------------------------------
Performance Summary Class A Shares
<CAPTION>
Net Asset Value
------------------ Capital Gains Total
Period Covered Beginning Ending Distributed Dividends Paid Return/1/
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
05/03/93-12/31/93 $2.50 $2.48 -- $0.0812 2.48%
- ---------------------------------------------------------------------------------
1994 2.48 2.25 -- 0.1217 (4.39)
- ---------------------------------------------------------------------------------
1995 2.25 2.35 -- 0.1357 10.75
- ---------------------------------------------------------------------------------
1996 2.35 2.34 -- 0.1360 5.57
- ---------------------------------------------------------------------------------
1997 2.34 2.37 -- 0.1307 7.05
- ---------------------------------------------------------------------------------
01/01/98-11/30/98 2.37 2.38 -- 0.1158 5.41
- ---------------------------------------------------------------------------------
Totals: $0.0000 $0.7211
- ---------------------------------------------------------------------------------
Cumulative Total Return as of 11/30/98 29.26%
- ---------------------------------------------------------------------------------
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>
05/03/93-12/31/93 $2.50 $2.48 -- $0.0687 1.97%
- ---------------------------------------------------------------------------------
1994 2.48 2.25 -- 0.1034 (5.14)
- ---------------------------------------------------------------------------------
1995 2.25 2.35 -- 0.1157 9.79
- ---------------------------------------------------------------------------------
1996 2.35 2.34 -- 0.1171 4.72
- ---------------------------------------------------------------------------------
1997 2.34 2.37 -- 0.1115 6.19
- ---------------------------------------------------------------------------------
01/01/98-11/30/98 2.37 2.38 -- 0.0983 4.65
- ---------------------------------------------------------------------------------
Totals: $0.0000 $0.6147
- ---------------------------------------------------------------------------------
Cumulative Total Return as of 11/30/98: 23.58%
- ---------------------------------------------------------------------------------
</TABLE>
/1/Figures assume reinvestment of all dividends 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.
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.
15
<PAGE>
PaineWebber Low Duration U.S. Government Income Fund
Performance Results
(unaudited) (concluded)
Performance Summary Class C Shares
<TABLE>
<CAPTION>
Net Asset Value
---------------- Capital Gains Dividends Total
Period Covered Beginning Ending Distributed Paid Return/1/
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
05/03/93-12/31/93 $2.50 $2.48 -- $0.0730 2.14%
- -------------------------------------------------------------------------
1994 2.48 2.25 -- 0.1094 (4.89)
- -------------------------------------------------------------------------
1995 2.25 2.35 -- 0.1217 10.09
- -------------------------------------------------------------------------
1996 2.35 2.34 -- 0.1221 4.94
- -------------------------------------------------------------------------
1997 2.34 2.37 -- 0.1167 6.43
- -------------------------------------------------------------------------
01/01/98-11/30/98 2.37 2.38 -- 0.1026 4.83
- -------------------------------------------------------------------------
Totals: $0.0000 $0.6455
- -------------------------------------------------------------------------
Cumulative Total Return as of 11/30/98: 25.21%
- -------------------------------------------------------------------------
</TABLE>
/1/Figures assume reinvestment of all dividends at net asset value on the
payable dates and do not include sales charges; results would be lower if
sales charges were included.
Note:The Fund offers Class Y shares to a limited group of investors, including
participants in certain investment programs that are sponsored by PaineWebber
and that may invest in PaineWebber mutual funds. For the year ended November
30, 1998 and since inception, October 20, 1995 through November 30, 1998, Class
Y shares have a total return of 6.37% and 22.23%, 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.
16
<PAGE>
PaineWebber Investment Grade Income Fund
Performance Results
(unaudited)
<TABLE>
<CAPTION>
Net Asset Value Total Return/1/
-------------------------------- -----------------------------
12 Months 6 Months
11/30/98 05/31/98 11/30/97 Ended 11/30/98 Ended 11/30/98
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $10.79 $10.97 $10.85 6.37% 1.76%
- ---------------------------------------------------------------------------------
Class B Shares 10.79 10.97 10.85 5.56 1.36
- ---------------------------------------------------------------------------------
Class C Shares 10.79 10.97 10.85 5.84 1.50
- ---------------------------------------------------------------------------------
Performance Summary Class A Shares
<CAPTION>
Net Asset Value
------------------ Capital Gains Total
Period Covered Beginning Ending Distributed Dividends Paid 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
- ---------------------------------------------------------------------------------
1996 10.79 10.46 -- 0.7287 3.98
- ---------------------------------------------------------------------------------
1997 10.46 10.92 -- 0.7403 11.93
- ---------------------------------------------------------------------------------
01/01/98-11/30/98 10.92 10.79 -- 0.6438 4.80
- ---------------------------------------------------------------------------------
Totals: $0.0404 $12.4278
- ---------------------------------------------------------------------------------
Cumulative Total Return as of 11/30/98: 283.36%
- ---------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------
1996 10.79 10.45 -- 0.6510 3.12
- ---------------------------------------------------------------------------------
1997 10.45 10.92 -- 0.6602 11.20
- ---------------------------------------------------------------------------------
01/01/98-11/30/98 10.92 10.79 -- 0.5698 4.09
- ---------------------------------------------------------------------------------
Totals: $0.0000 $5.0965
- ---------------------------------------------------------------------------------
Cumulative Total Return as of 11/30/98: 80.04%
- ---------------------------------------------------------------------------------
</TABLE>
/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.
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.
17
<PAGE>
PaineWebber Investment Grade Income Fund
Performance Results
(unaudited) (concluded)
Performance Summary Class C Shares
<TABLE>
<CAPTION>
Net Asset Value
---------------- Capital Gains Dividends Total
Period Covered Beginning Ending Distributed 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
- ---------------------------------------------------------------------
1996 10.79 10.46 -- 0.6764 3.46
- ---------------------------------------------------------------------
1997 10.46 10.92 -- 0.6872 11.37
- ---------------------------------------------------------------------
01/01/98-11/30/98 10.92 10.79 -- 0.5958 4.34
- ---------------------------------------------------------------------
Totals: $0.0000 $4.4375
- ---------------------------------------------------------------------
Cumulative Total Return as of 11/30/98: 56.99%
- ---------------------------------------------------------------------
</TABLE>
/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
would be lower if sales charges were included.
Note: The Fund offers Class Y shares to a limited group of investors, including
participants in certain investment programs that are sponsored by PaineWebber
and that may invest in PaineWebber mutual funds. Since inception, February 18,
1998 through November 30, 1998 Class Y shares had a total return of 3.51%.
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.
18
<PAGE>
PaineWebber High Income Fund
Performance Results
(unaudited)
<TABLE>
<CAPTION>
Net Asset Value Total Return/1/
-------------------------------- -----------------------------
12 Months 6 Months
11/30/98 05/31/98 11/30/97 Ended 11/30/98 Ended 11/30/98
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $6.66 $7.80 $7.63 (4.46)% (10.29)%
- ---------------------------------------------------------------------------------
Class B Shares 6.65 7.80 7.63 (5.32) (10.78)
- ---------------------------------------------------------------------------------
Class C Shares 6.67 7.81 7.64 (4.92) (10.51)
- ---------------------------------------------------------------------------------
Performance Summary Class A Shares
<CAPTION>
Net Asset Value
------------------ Capital Gains Dividends Total
Period Covered Beginning Ending Distributed 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
- ---------------------------------------------------------------------------------
1996 6.92 7.39 -- 0.7001 17.73
- ---------------------------------------------------------------------------------
1997 7.39 7.64 -- 0.6727 12.98
- ---------------------------------------------------------------------------------
01/01/98-11/30/98 7.64 6.66 -- 0.5861 (5.60)
- ---------------------------------------------------------------------------------
Totals: $0.0825 $14.2510
- ---------------------------------------------------------------------------------
Cumulative Total Return as of 11/30/98: 291.63%
- ---------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------
1996 6.92 7.38 -- 0.6466 16.70
- ---------------------------------------------------------------------------------
1997 7.38 7.64 -- 0.6163 12.31
- ---------------------------------------------------------------------------------
01/01/98-11/30/98 7.64 6.65 -- 0.5362 (6.37)
- ---------------------------------------------------------------------------------
Totals: $0.0000 $5.5538
- ---------------------------------------------------------------------------------
Cumulative Total Return as of 11/30/98: 102.90%
- ---------------------------------------------------------------------------------
</TABLE>
/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.
19
<PAGE>
PaineWebber High Income Fund
Performance Results
(unaudited) (concluded)
Performance Summary Class C Shares
<TABLE>
<CAPTION>
Net Asset Value
---------------- Capital Gains Dividends Total
Period Covered Beginning Ending Distributed 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
- ----------------------------------------------------------------------------
1996 6.93 7.40 -- 0.6653 17.13
- ----------------------------------------------------------------------------
1997 7.40 7.65 -- 0.6360 12.42
- ----------------------------------------------------------------------------
01/01/98-11/30/98 7.65 6.67 -- 0.5539 (6.00)
- ----------------------------------------------------------------------------
Totals:$0.0000 $4.6762
- ----------------------------------------------------------------------------
Cumulative Total Return as of 11/30/98: 57.02%
- ----------------------------------------------------------------------------
</TABLE>
/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
would be lower if sales charges were included.
Note: The Fund offers Class Y shares to a limited group of investors, including
participants in certain investment programs that are sponsored by PaineWebber
and that may invest in PaineWebber mutual funds. Since inception, February 20,
1998 through November 30, 1998, Class Y shares had a total return of (8.43)%.
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.
20
<PAGE>
PaineWebber U.S. Government Income Fund
Portfolio of Investments November 30, 1998
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
--------- -------------------- ---------------- ------------
<C> <S> <C> <C> <C>
U.S. Government and Agency Obligations -- 40.02%
$18,915 FHLMC Medium Term Note.. 03/18/08 6.220% $ 19,250,722
11,000 FNMA Medium Term Note... 02/11/04 6.830 11,234,564
20,000 FNMA Medium Term Note... 09/04/07 6.970 21,209,100
22,000 U.S. Treasury Bonds* ... 05/15/04 12.375 29,926,886
34,900 U.S. Treasury Bonds .... 08/15/13 to 11/15/14 11.750 to 12.000 53,804,791
------------
Total U.S. Government and Agency
Obligations (cost--$132,691,714)... 135,426,063
------------
Government National Mortgage Association Certificates --
4.35%
6,348 GNMA.................... 04/15/19 8.250 6,769,081
5,779 GNMA.................... 08/15/09 to 05/15/18 9.000 6,217,750
67 GNMA.................... 08/15/17 9.500 72,905
1,242 GNMA.................... 06/15/11 to 02/15/16 11.000 1,374,565
282 GNMA.................... 10/15/25 7.500 291,552
------------
Total Government National Mortgage
Association Certificates (cost --
$14,598,327)...................... 14,725,853
------------
Federal Home Loan Mortgage Corporation Certificates --
6.17%
263 FHLMC................... 03/01/09 6.500 266,924
146 FHLMC................... 08/01/25 7.000 148,752
3,388 FHLMC CMT ARM*.......... 10/01/23 7.639 3,500,154
9,543 FHLMC................... 04/01/25 9.000 10,175,993
1,790 FHLMC................... 06/01/04 to 12/01/05 10.500 1,918,346
4,386 FHLMC*.................. 01/01/16 11.000 4,884,474
------------
Total Federal Home Loan Mortgage
Corporation Certificates (cost --
$20,877,448)...................... 20,894,643
------------
Federal National Mortgage Association Certificates --
27.14%
3,326 FNMA.................... 02/01/14 to 07/01/25 7.500 3,417,905
8,459 FNMA.................... 09/01/25 8.500 8,880,687
2,026 FNMA.................... 05/01/09 9.000 2,135,443
45,825 FNMA 30 year TBA........ TBA 6.000 45,209,249
28,000 FNMA 30 year TBA........ TBA 6.500 28,175,000
FNMA 30 year TBA COFI
4,000 ARM..................... TBA 6.012 4,035,000
------------
Total Federal National Mortgage As-
sociation Certificates (cost --
$91,270,775)...................... 91,853,284
------------
Collateralized Mortgage Obligations -- 20.98%
4,697 Amresco Commercial Mort-
gage Funding I Corpora-
tion, Series 1997-C1,
Class A1............... 06/17/29 6.730 4,870,831
Collateralized Mortgage
Obligation Trust, Series
161 14, Class Z............. 01/01/17 8.000 161,651
CS First Boston Mortgage
Securities Corp., Series
5,000 1998-C2, Class A2....... 11/11/30 6.300 5,090,625
CS First Boston Mortgage
Securities Corp., Series
2,080 1997-2, Class A+........ 06/25/20 7.500 2,116,359
DLJ Commercial Mortgage
Corporation Series 1998-
4,000 CF2,Class A1A........... 11/12/31 5.880 4,020,000
DLJ Mortgage Acceptance
Corp., Series 1997-CF1,
2,689 Class A1A+.............. 05/15/06 7.400 2,830,236
FDIC REMIC Trust, 1996-
2,542 C1, Class 1A............ 05/25/26 6.750 2,540,703
FNMA REMIC Series 1987-
5,377 2, Class Z.............. 11/25/17 11.000 6,134,081
FNMA REMIC Series 1996-
879 M6, Class E............. 09/17/19 7.750 878,778
FNMA REMIC Series 1998-
4,796 7, Class Z.............. 04/25/18 9.250 5,038,161
</TABLE>
21
<PAGE>
PaineWebber U.S. Government Income Fund
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
--------- -------- -------- ------------
<C> <S> <C> <C> <C>
Collateralized Mortgage Obligations -- continued
FNMA REMIC Series 1993-87, Class
$ 5,000 J................................. 04/25/22 6.250% $ 5,015,284
4,646 GMAC Commercial Mortgage Securi-
ties, Inc., Series 1996-C1,
Class A2A........................ 09/15/03 6.790 4,796,701
LB Commercial Conduit Mortgage
7,000 Trust, Series 1998-C4, Class A1A.. 10/15/35 5.870 7,037,187
Merrill Lynch Mortgage Investors,
5,638 Inc., Series 1996-C1, Class A1.... 04/25/28 7.150 5,805,671
Morgan Stanley Capital I, Series
4,000 1997-AL1C, Class A1B.............. 11/15/02 6.440 4,092,240
Morgan Stanley Capital I, Series
5,229 1997-WF1, Class A1+............... 10/15/06 6.830 5,385,677
Mortgage Capital Funding, Inc. Se-
4,935 ries 1998-MCI, Class A2........... 01/18/08 6.663 5,184,020
------------
Total Collateralized Mortgage Obligations
(cost -- $69,703,198)........................ 70,998,205
------------
<CAPTION>
Number of
Options
---------
<C> <S> <C> <C> <C>
Options -- 0.03%
100 CBT U.S.Treasury Bonds (Call); par
value $10,000,000;
exercise price 130; expiring De-
cember 1998, (cost -- $42,788).... 12/18/98 84,375
------------
<CAPTION>
Principal
Amount
(000)
---------
<C> <S> <C> <C> <C>
Short-Term U.S. Government Obligations@ -- 19.16%
Federal Farm Credit Bank Consoli-
30,947 dated Discount Note............... 12/18/98 4.750 30,877,584
Federal Home Loan Bank Consoli-
34,053 dated Discount Note............... 12/18/98 4.780 33,976,135
------------
Total Short-Term U.S. Government Obligations
(cost -- $64,853,719)........................ 64,853,719
------------
Repurchase Agreements -- 5.40%
8,276 Repurchase Agreement dated
11/30/98 with Societe Generale,
collateralized by $8,108,000 U.S.
Treasury Notes, 6.750% due
06/30/99
(value -- $8,442,455); proceeds:
$8,277,218........................ 12/01/98 5.300 8,276,000
10,000 Repurchase Agreement dated
11/30/98 with Salomon Smith Bar-
ney, collateralized by $9,947,000
U.S. Treasury Notes, 5.375% due
01/31/00 (value -- $10,205,082);
proceeds: $10,001,458............. 12/01/98 5.250 10,000,000
------------
Total Repurchase Agreements (cost --
$18,276,000)................................ 18,276,000
------------
Total Investments (cost -- $412,313,969) --
123.25%..................................... 417,112,142
Liabilities in excess of other assets --
(23.25)%.................................... (78,687,984)
------------
Net Assets -- 100.00%........................ $338,424,158
============
</TABLE>
- ---------
@ Yield to maturity for discounted securities.
+ Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from registra-
tion, normally to qualified institutional buyers.
ARM Adjustable Rate Mortgage Security, the interest rate shown is the current
rate at November 30, 1998.
CBT Chicago Board of Trade.
COFI Eleventh District Federal Home Loan Bank Cost of Funds Index.
CMT Constant Maturity Treasury.
REMIC Real Estate Mortgage Investment Conduit.
TBA (To be Assigned) Securities are purchased on a forward commitment basis
with approximately (generally +/-1.0%) principal amount and generally
stated maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
* Entire or partial amount pledged as collateral for futures transactions.
22
<PAGE>
PaineWebber U.S. Government Income Fund
Futures Contracts
<TABLE>
<CAPTION>
Unrealized
Number of In Expiration Appreciation
Contracts Exchange For Date (Depreciation)
--------- ------------ ---------- --------------
<C> <S> <C> <C> <C>
Contracts to Deliver -- 5
362 year U.S. Treasury Notes... $41,188,813 Mar 99 $(263,071)
Contracts to Receive -- 30
528 year U.S. Treasury Bonds... 68,425,500 Mar 99 723,125
---------
$ 460,054
=========
</TABLE>
See accompanying notes to financial statements
23
<PAGE>
PaineWebber Low Duration U.S. Government Income
Portfolio of Investments November 30, 1998
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
--------- -------------------- -------------- ------------
<C> <S> <C> <C> <C>
U.S. Government and Agency
Obligations -- 57.09%
$16,500 Federal Home Loan
Mortgage Discount
Notes@................. 12/21/98 4.790 to 4.800% $ 16,456,052
8,000 Federal National
Mortgage Association
Medium Term Note....... 10/23/00 to 12/19/00 4.840 to 6.030 8,109,942
40 U.S. Treasury Bills@+... 12/03/98 to 03/04/99 3.790 to 5.000 39,663
6,114 U.S. Treasury Inflation
Index Notes............ 07/15/02 to 01/15/08 3.625 6,090,776
53,000 U.S. Treasury Notes..... 07/31/00 5.375 53,596,250
------------
Total U.S. Government and Agency
Obligations (cost -- $84,308,279).. 84,292,683
------------
Government National Mortgage
Association Certificates -- 27.82%
123 GNMA.................... 02/15/23 8.000 127,939
6,862 GNMA.................... 01/15/16 to 09/15/20 10.500 7,511,509
3,967 GNMA.................... 03/15/10 to 05/15/19 11.500 4,456,646
11,418 GNMA II ARM............. 01/20/18 to 04/20/26 6.875 11,609,998
3,381 GNMA II ARM............. 12/20/22 to 12/20/23 7.000 3,454,116
15,000 GNMA TBA................ TBA 6.500 15,131,250
------------
Total Government National Mortgage
Association Certificates (cost --
$42,438,293)....................... 42,291,458
------------
Federal Home Loan Mortgage
Corporation Certificates -- 16.72%
84 FHLMC................... 04/01/28 6.000 83,162
127 FHLMC................... 01/01/23 8.000 131,282
2,682 FHLMC................... 05/01/16 8.500 2,801,319
311 FHLMC................... 07/01/09 to 02/01/10 9.000 326,639
936 FHLMC................... 11/01/16 9.750 1,006,705
803 FHLMC................... 10/01/20 to 11/01/20 10.500 880,590
2,402 FHLMC................... 01/01/99 to 12/01/20 11.000 2,690,514
1,839 FHLMC................... 06/01/04 to 07/01/19 11.500 2,080,765
15,000 FHLMC TBA............... TBA 7.500 15,412,500
------------
Total Federal Home Loan Mortgage
Corporation Certificates (cost --
$25,155,301)...................... 25,413,476
------------
Federal National Mortgage
Association Certificates -- 28.68%
4,104 FNMA.................... 06/25/09 6.500 4,093,854
2,927 FNMA.................... 04/20/27 7.500 3,108,459
1,930 FNMA.................... 02/01/05 9.000 2,020,713
3,724 FNMA.................... 04/01/10 to 12/01/15 9.250 3,947,265
463 FNMA.................... 03/01/06 to 12/01/09 9.500 494,584
760 FNMA.................... 04/01/10 to 06/01/19 10.250 825,126
1,761 FNMA.................... 11/01/10 to 05/01/23 10.500 1,926,597
2,421 FNMA.................... 07/01/13 to 05/01/20 11.000 2,715,849
1,494 FNMA ARM................ 07/01/18 to 06/01/28 6.131 1,504,084
3,408 FNMA ARM................ 05/01/36 6.153 3,439,097
4,216 FNMA ARM................ 11/01/27 6.589 4,293,983
2,463 FNMA ARM................ 09/01/15 6.900 2,549,940
4,512 FNMA ARM................ 09/01/26 7.047 4,571,598
------------
Total Federal National Mortgage
Association Certificates (cost --
$35,189,190)...................... 35,491,149
------------
</TABLE>
24
<PAGE>
PaineWebber Low Duration U.S. Government Income Fund
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
--------- -------- -------- ------------
<C> <S> <C> <C> <C>
Collateralized Mortgage Obligations -- 28.37%
$ 4,992 Citicorp Mortgage Securities
Incorporated, Series 1998-8,
Class A3......................... 09/25/28 6.750% $ 4,868,670
5,000 CMC Securities Corporation, Series
1994-G, Class A4................. 09/25/24 7.000 5,034,064
4,457 Commercial Mortgage Acceptance
Corporation, Series 1998-C2,
Class A1......................... 03/15/06 5.800 4,445,428
3,000 Money Store Home Equity Trust,
Series 1997-D, Class AF3......... 11/15/21 6.345 3,013,710
1,809 Nationsbanc Montgomery Funding
Corporation, Series 1998-4, Class
A2............................... 10/25/28 6.250 1,682,470
6,000 Norwest Asset Securities
Corporation, Series 1998-30,
Class A17........................ 12/25/28 6.250 5,852,812
11,500 PNC Mortgage Securities
Corporation, Series 1998-9, Class
1A3.............................. 10/25/28 6.750 11,599,310
3,500 Prudential Securities CMO Trust,
Series 18, Class E............... 09/25/20 7.000 3,551,937
150 Resolution Trust Corporation,
Series 1994-1, Class A2A, REMIC.. 09/25/29 7.750 149,390
2,815 Ryland Mortgage Acceptance
Corporation, Series 76, Class B,
REMIC............................ 08/01/18 9.000 2,930,350
------------
Total Collateralized Mortgage Obligations
(cost -- $43,149,971)........................ 43,128,141
------------
Repurchase Agreement -- 1.96%
2,977 Repurchase Agreement dated
11/30/98 with State Street Bank &
Trust Company, collateralized by
$2,945,000 U.S. Treasury Notes,
7.125% due 09/30/99 (value --
$3,038,604); proceeds:
$2,977,331 (cost -- $2,977,000).. 12/01/98 4.000 2,977,000
------------
Total Investments (cost -- $233,218,034) --
153.67%..................................... 233,593,907
Liabilities in excess of other assets --
(53.67)%................................... (81,584,771)
------------
Net Assets -- 100.00%........................ $152,009,136
============
</TABLE>
- ---------
@ Yield shown is the yield to maturity for discounted securities.
+ Entire or partial amount pledged as collateral for futures transactions.
ARM Adjustable Rate Mortgage Security, the interest rate shown is the current
rate at November 30, 1998.
REMIC Real Estate Mortgage Investment Conduit
TBA (To be Assigned) Securities are purchased on a forward commitment basis
with an approximate (generally +/-1.0%) principal amount and generally
stated maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
Futures Contracts
<TABLE>
<CAPTION>
Number of In Expiration Unrealized
Contracts Contracts to Deliver Exchange For Date Appreciation
--------- ------------------------------ ------------ ---------- ------------
<C> <S> <C> <C> <C>
15 90 day Eurodollar............. $3,533,575 Sept. 2000 $24,989
15 90 day Eurodollar............. 3,530,600 Dec. 2000 21,027
15 90 day Eurodollar............. 3,531,150 Mar. 2001 22,352
15 90 day Eurodollar............. 3,532,075 June 2001 22,364
-------
$90,732
=======
</TABLE>
See accompanying notes to financial statements.
25
<PAGE>
PaineWebber Investment Grade Income Fund
Portfolio of Investments November 30, 1998
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
--------- -------------------- -------------- ------------
<C> <S> <C> <C> <C>
Corporate Bonds -- 68.32%
Airlines -- 1.11%
$ 2,500 Delta Air Lines
Incorporated............ 12/15/22 10.375% $ 3,285,785
------------
Banking -- 8.29%
5,000 Citigroup............... 11/01/04 8.625 5,132,220
2,200 Greenpoint Capital Trust
I....................... 06/01/27 9.100 2,370,775
3,000 GS Escrow Corporation... 08/01/05 7.125 2,957,475
7,000 Providian Capital I..... 02/01/27 9.525 8,072,316
5,000 Southtrust Bank Alabama. 05/15/25* 7.690 5,889,050
------------
24,421,836
------------
Cable -- 7.42%
3,550 CSC Holdings
Incorporated............ 07/15/18 7.625 3,508,465
10,000 TCI Communications
Incorporated............ 03/31/27 9.650 12,882,760
5,000 TKR Cable Incorporated.. 10/30/07 10.500 5,463,195
------------
21,854,420
------------
Diversified Industries -- 0.97%
3,000 Mark IV Industries
Incorporated............ 09/01/07 7.500 2,862,387
------------
Financial Services -- 5.34%
2,300 Associates Corporation
North America........... 11/01/08 6.250 2,369,800
5,000 A T & T Capital
Corporation Medium Term
Note.................... 11/15/00 7.500 5,094,535
3,750 Macsaver Financial
Services Incorporated... 02/15/02 7.400 3,245,899
5,000 MBNA Corporation........ 12/01/26 8.278 5,026,065
------------
15,736,299
------------
Healthcare -- 3.81%
1,500 Cardinal Health
Incorporated............ 07/15/08 6.250 1,531,755
4,500 Columbia/HCA Healthcare
Corporation............. 03/30/04 to 02/10/10 7.150 to 8.700 4,532,466
5,000 Tenet Healthcare
Corporation............. 12/01/08 8.125 5,162,500
------------
11,226,721
------------
Hotels/Gaming -- 4.63%
3,443 Circus Circus
Enterprises
Incorporated............ 07/15/03 6.750 3,268,615
3,000 HMH Properties
Incorporated............ 08/01/05 7.875 2,977,500
7,700 MGM Grand Incorporated.. 02/01/05 6.950 7,385,440
------------
13,631,555
------------
Industrial Products & Services --
2.63%
2,700 Owens Corning........... 08/01/18 7.500 2,663,307
5,000 Tyco International Group
S A..................... 06/15/01 6.125 5,084,640
------------
7,747,947
------------
</TABLE>
26
<PAGE>
PaineWebber Investment Grade Income Fund
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
--------- -------------------- --------------- ------------
<C> <S> <C> <C> <C>
Corporate Bonds (concluded)
Insurance -- 12.36%
$ 5,800 Chubb Corporation....... 11/15/99 to 08/15/18 6.600 to 8.750% $ 6,027,345
5,000 Hartford Financial
Services Group
Incorporated............ 11/01/08 6.375 5,029,245
7,000 Lumbermans Mutual
Casualty Company........ 07/01/26 9.150 8,402,975
3,000 Markel Capital Trust.... 01/01/46 8.710 3,097,245
3,000 Orion Capital Trust I... 01/01/37 8.730 3,173,460
3,000 Prudential Insurance
Company of America...... 07/01/25 8.300 3,630,552
4,000 USF&G Corporation....... 07/01/46 8.312 4,766,116
2,000 Zurich Capital Trust.... 06/01/37 8.376 2,299,328
------------
36,426,266
------------
Media -- 6.85%
10,200 News America Holdings
Incorporated............ 10/15/12 to 10/17/96 7.900 to 10.125 11,607,998
5,000 Time Warner
Incorporated............ 01/15/08 7.480 5,575,460
3,000 USA Networks
Incorporated............ 11/15/05 6.750 3,000,630
------------
20,184,088
------------
Oil & Gas -- 1.37%
3,750 Occidental Petroleum
Corporation............. 06/01/19 11.125 4,050,750
------------
Printing & Publishing -- 1.18%
3,450 Valassis Inserts
Incorporated............ 03/15/99 9.375 3,484,231
------------
Retail -- 4.20%
5,950 May Department Stores
Company................. 06/15/21 9.875 6,794,067
3,000 Saks Incorporated....... 12/01/04 7.250 3,014,436
2,000 Shopko Stores........... 03/15/22 9.250 2,570,296
------------
12,378,799
------------
Telephone -- 1.82%
5,000 US West Capital Funding
Incorporated............ 07/15/28 6.875 5,353,300
------------
Tobacco -- 1.55%
4,000 Phillip Morris Companies
Incorporated............ 01/15/27 7.750 4,554,220
------------
Utilities -- 2.03%
5,000 Commonwealth Edison
Company................. 06/15/20 9.875 5,986,780
------------
Yankee -- 2.76%
7,300 Loewen Group
International
Incorporated............ 10/15/03 to 06/01/08 7.600 to 8.250 6,059,500
2,000 Rogers Cantel
Incorporated............ 06/01/08 9.375 2,070,000
------------
8,129,500
------------
Total Corporate Bonds (cost --
$194,059,874)..................... 201,314,884
------------
</TABLE>
27
<PAGE>
PaineWebber Investment Grade Income Fund
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
--------- -------------------- -------------- ------------
<C> <S> <C> <C> <C>
Collateralized Mortgage
Obligations -- 1.73%
$ 5,000 CS First Boston
Mortgage, Series 1998-
C2, Class A2 (cost -
$5,075,782)............ 11/11/30 6.300% $ 5,090,625
------------
U.S. Government Obligations --
14.76%
2,000 U.S. Treasury Bonds..... 02/15/21 7.875 2,653,750
38,765 U.S. Treasury Notes .... 09/30/00 to 05/15/08 5.250 to 6.500 40,852,316
------------
Total U.S. Government Obligations
(cost -- $43,001,729).............. 43,506,066
------------
Federal Home Loan Mortgage
Corporation Certificates -- 2.50%
7,480 FHLMC (cost --
$7,321,647)............ 10/15/08 5.125 7,361,711
------------
Federal National Mortgage
Association Certificates -- 4.52%
13,500 FNMA 30 year TBA
(cost -- $13,300,313)... TBA 6.000 13,318,601
------------
Government National Mortgage
Association Certificates -- 1.84%
5,158 GNMA (cost --
$5,444,811)............ 06/15/17 to 11/15/17 8.000 5,428,591
------------
<CAPTION>
Number of
Shares
---------
<C> <S> <C> <C> <C>
Preferred Stock -- 1.41%
160,000 California Federal
Preferred Capital
Corporation (cost --
$4,000,000)............ 9.125 4,150,000
------------
<CAPTION>
Principal
Amount
(000)
---------
<C> <S> <C> <C> <C>
Repurchase Agreements -- 7.97%
$12,000 Repurchase Agreement
dated 11/30/98 with
Bear Stearns,
collateralized by
$12,015,000 U.S.
Treasury Notes, 5.625%
due 11/30/00 (value --
$12,314,591);
proceeds: $12,001,750 . 12/01/98 5.250 12,000,000
11,497 Repurchase Agreement
dated 11/30/98 with
Morgan Stanley,
collateralized by
$7,110,000 U.S.
Treasury Bonds, 8.875%
due 08/15/17 (value --
$10,275,885); and by
$1,305,000 U.S.
Treasury Notes, 8.75%
due 11/15/08 (value -
$1,543,568); proceeds:
$11,498,629 ........... 12/01/98 5.100 11,497,000
------------
Total Repurchase Agreements
(cost -- $23,497,000).............. 23,497,000
------------
Total Investments (cost --
$295,701,156) -- 103.05%.......... 303,667,478
Liabilities in excess of other
assets -- (3.05)%.................. (9,002,159)
------------
Net Assets -- 100.00%.............. $294,665,319
============
</TABLE>
- ---------
TBA (To Be Assigned) Securities are purchased on a forward commitment basis
with approximately (generally +/-1.0%) principal amount and generally
stated maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
* Maturity date reflects earliest date bonds can be put back to issuer.
See accompanying notes to financial statements.
28
<PAGE>
PaineWebber High Income Fund
Portfolio of Investments November 30, 1998
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
--------- -------- -------- -----------
<C> <S> <C> <C> <C>
Corporate Bonds -- 85.73%
Aerospace -- 0.66%
$ 4,000 Sabreliner Corporation**............ 06/15/08 11.000% $ 3,520,000
-----------
Airlines -- 1.18%
6,000 Airplanes Pass-Through Trust........ 03/15/19 10.875 6,345,000
-----------
Cable -- 7.63%
10,000 @Entertainment Incorporated......... 07/15/08 14.500+ 4,400,000
17,000 Knology Holdings Incorporated....... 10/15/07 11.875+ 8,330,000
7,000 NTL Incorporated**.................. 10/01/08 11.500 7,813,750
6,500# Park 'N View Incorporated........... 05/15/08 13.000 5,525,000
7,250 RCN Corporation..................... 10/15/07 11.125+ 4,168,750
12,750 21st Century Telecom Group
Incorporated....................... 02/15/08 12.250+ 5,355,000
10,000 UIH Australia/Pacific Incorporated.. 05/15/06 14.000+ 5,400,000
-----------
40,992,500
-----------
Chemicals -- 0.56%
3,000 American Pacific Corporation........ 03/01/05 9.250 3,030,000
-----------
Communications-Fixed -- 11.19%
4,500 Allegiance Telecom, Incorporated.... 05/15/08 12.875 4,500,000
6,300 Barak ITC........................... 11/15/07 12.500 3,244,500
9,000 COLT Telecom Group PLC.............. 12/15/06 12.000+ 7,560,000
2,000 Esprit Telecom Group PLC............ 06/15/08 10.875 1,960,000
3,750 Facilicom International
Incorporated....................... 01/15/08 10.500 3,075,000
2,000 Flag Limited........................ 01/30/08 8.250 2,010,000
4,000 Global Crossing Holdings Limited.... 05/15/08 9.625 4,270,000
8,215 GST Equipment Funding Incorporated.. 05/01/07 13.250 8,461,450
6,050 Hyperion Telecommunications
Incorporated....................... 09/01/04 12.250 6,261,750
3,000 Metromedia Fiber Network
Incorporated**..................... 11/15/08 10.000 3,120,000
3,000 MetroNet Communications Corporation. 06/15/08 9.950+ 1,860,000
6,750 Pathnet Incorporated................ 04/15/08 12.250 5,163,750
1,500 Qwest Communications International
Incorporated**..................... 11/01/08 7.500 1,541,250
12,250 Viatel Incorporated................. 04/15/08 12.500 7,074,375
-----------
60,102,075
-----------
Communications-Mobile -- 2.75%
2,750 ICO Global Communications Limited... 08/01/05 15.000 2,145,000
19,750 Nextel International Incorporated... 04/15/08 12.125+ 9,282,500
2,000 Orange PLC.......................... 08/01/08 8.000 2,030,000
2,500 Spectrasite Holdings Incorporated**. 07/15/08 12.000+ 1,325,000
-----------
14,782,500
-----------
</TABLE>
29
<PAGE>
PaineWebber High Income Fund
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
--------- -------- -------- ------------
<C> <S> <C> <C> <C>
Corporate Bonds (continued)
Consumer Manufacturing -- 5.15%
$ 3,365 Apparel Ventures Incorporated...... 12/31/00 12.250% $ 3,062,150
875 Cluett American Corporation**...... 05/15/08 10.125 826,875
6,000 Commemorative Brands Incorporated.. 01/15/07 11.000 4,680,000
4,000 Decora Industries Incorporated..... 05/01/05 11.000 3,600,000
3,980 EKCO Group Incorporated............ 04/01/06 9.250 3,980,000
3,750 Phillips Van-Heusen Corporation.... 05/01/08 9.500 3,768,750
7,500 Westpoint Stevens Incorporated..... 06/15/08 7.875 7,734,375
------------
27,652,150
------------
Energy -- 3.71%
3,500 American Eco Corporation........... 05/15/08 9.625 2,275,000
7,500 Grant Geophysical Incorporated..... 02/15/08 9.750 5,625,000
4,000 GulfMark Offshore Incorporated..... 06/01/08 8.750 3,900,000
5,500 Northern Offshore ASA**............ 05/15/05 10.000 3,520,000
6,500 TransAmerican Energy Corporation... 06/15/02 13.000+ 2,275,000
6,600# TransAmerican Refining
Corporation**..................... 06/30/03 16.000 2,310,000
------------
19,905,000
------------
Entertainment -- 1.17%
4,250 Discovery Zone Incorporated........ 08/01/02 13.500 2,040,000
1,000# Discovery Zone Incorporated**...... 05/01/02 13.500 1,000,000
4,000 Silver Cinemas Incorporated........ 04/15/05 10.500 3,240,000
------------
6,280,000
------------
Finance -- 4.44%
2,750 Metris Companies Incorporated...... 11/01/04 10.000 2,688,125
3,750 Nationwide Credit Incorporated..... 01/15/08 10.250 3,112,500
6,000 Olympic Financial Limited.......... 03/15/07 11.500 4,560,000
5,500 Signet Capital Trust I............. 08/15/27 9.50 4,510,000
9,000 Superior National Insurance Group.. 12/01/17 10.750 9,000,000
------------
23,870,625
------------
Food & Beverage -- 4.67%
4,000 Ameriserve Food Distribution
Incorporated...................... 07/15/07 10.125 3,560,000
9,500 Iowa Select Farms L. P.**.......... 12/01/05 10.750 8,075,000
5,000 NuCo2 Incorporated++............... 10/31/04 12.000 4,975,000
8,500 Packaged Ice Incorporated.......... 02/01/05 9.750 8,500,000
------------
25,110,000
------------
Gaming -- 0.43%
2,250 Circus Circus Enterprises
Incorporated...................... 12/01/05 9.250 2,323,125
------------
</TABLE>
30
<PAGE>
PaineWebber High Income Fund
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
--------- -------- -------- ------------
<C> <S> <C> <C> <C>
Corporate Bonds (continued)
General Industrial -- 3.68%
$ 2,000 Coltec Industries Incorporated..... 04/15/08 7.500% $ 2,090,000
6,000 Goss Graphic Systems Incorporated.. 10/15/06 12.000 5,700,000
6,500 Jordan Telecommunications Products. 08/01/07 9.875 6,500,000
5,750 J.B. Poindexter & Company
Incorporated...................... 05/15/04 12.500 5,462,500
------------
19,752,500
------------
Healthcare -- 2.80%
8,160 Fresenius Medical Care Capital
Trust............................. 02/01/08 7.875 8,119,200
2,000 InSight Health Services
Corporation....................... 06/15/08 9.625 1,940,000
2,000 MEDIQ Incorporated**............... 06/01/08 11.000 1,880,000
3,000 Tenet Healthcare Corporation**..... 12/01/08 8.125 3,097,500
------------
15,036,700
------------
Hotels & Lodging -- 1.47%
5,000 Raintree Resorts International
Incorporated...................... 12/01/04 13.000 3,000,000
5,750 Silverleaf Resorts Incorporated.... 04/01/08 10.500 4,887,500
------------
7,887,500
------------
Media -- 5.01%
6,000 Fox Family Worldwide Incorporated.. 11/01/07 9.250 6,030,000
4,750 Impac Group Incorporated........... 03/15/08 10.125 4,678,750
7,000 Source Media Incorporated.......... 11/01/04 12.000 5,390,000
5,000 Sullivan Graphics Incorporated..... 08/01/05 12.750 5,100,000
5,528 Viacom Incorporated................ 07/07/06 8.000 5,707,660
------------
26,906,410
------------
Metals -- 3.05%
4,125 AEI Holding Company**.............. 11/15/07 10.000 4,248,750
5,125 Metal Management Incorporated...... 05/15/08 10.000 2,972,500
5,250 Murrin Murrin Holdings Party
Limited........................... 08/31/07 9.375 4,961,250
4,100 WCI Steel Incorporated............. 12/01/04 10.000 4,192,250
------------
16,374,750
------------
Packaging -- 2.79%
6,250 Bear Island LLC.................... 12/01/07 10.000 6,328,125
3,000 Portola Packaging Incorporated..... 10/01/05 10.750 3,060,000
6,250 Vicap S.A. ........................ 05/15/07 11.375 5,625,000
------------
15,013,125
------------
</TABLE>
31
<PAGE>
PaineWebber High Income Fund
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
--------- -------------------- ---------------- ------------
<C> <S> <C> <C> <C>
Corporate Bonds (concluded)
Real Estate -- 3.24%
$ 6,500 American Architectural
Products Corporation... 12/01/07 11.750% $ 5,525,000
4,125 D.R. Horton
Incorporated........... 06/15/04 8.375 4,145,625
3,875 Forest City Enterprise
Incorporated........... 03/15/08 8.500 3,894,375
3,750 U.S. Home Corporation... 08/15/07 8.880 3,815,625
------------
17,380,625
------------
Restaurants -- 0.59%
3,500 American Restaurant
Group Incorporated..... 02/15/03 11.500 3,150,000
------------
Retail -- 4.64%
2,000 Advance Holding
Corporation**.......... 04/15/09 12.875+ 1,180,000
3,250 Advance Stores Company
Incorporated**......... 04/15/08 10.250 3,347,500
4,750 Big 5 Corporation....... 11/15/07 10.875 4,892,500
3,750 Jafra Cosmetics
International
Incorporated**......... 05/01/08 11.750 3,412,500
5,500# Mrs. Field's Holding
Company Incorporated**. 12/01/05 14.000+ 3,135,000
5,000 Mrs. Field's Original
Cookies Incorporated... 12/01/04 10.125 4,600,000
4,500 Tuesday Morning
Corporation............ 12/15/07 11.000 4,365,000
------------
24,932,500
------------
Technology -- 6.35%
3,000 Ampex Corporation++..... 03/15/03 12.000 3,000,000
13,700 Electronic Retailing
Systems International
Incorporated........... 02/01/04 13.250+ 4,932,000
19,500 Inter Act Systems
Incorporated........... 08/01/03 14.000+ 7,995,000
2,100 PSI Net Incorporated.... 02/15/05 10.000 2,100,000
4,750 Samsung Electronics
America Incorporated**. 05/01/03 9.750 4,346,250
5,000 Verio Incorporated...... 06/15/04 to 04/01/05 10.375 to 13.500 5,340,000
1,250 Verio Incorporated**.... 12/01/08 11.250 1,300,000
10,000 Wam! Net Incorporated... 03/01/05 13.250 5,100,000
------------
34,113,250
------------
Transportation Non-Air -- 7.43%
2,015 American Reefer Company
Limited................ 03/01/08 10.250 1,531,400
3,750 Atlantic Express
Transportation
Corporation............ 02/01/04 10.750 3,796,875
1,500 Eletson Holdings
Incorporated........... 11/15/03 9.250 1,421,250
7,000 Equimar Shipholdings
Limited................ 07/01/07 9.875 5,670,000
3,000 HDA Parts System
Incorporated**......... 08/01/05 12.000 2,760,000
3,000 Millenium Seacarriers
Incorporated........... 07/15/05 12.000 2,475,000
4,000 Navigator Gas Transport
PLC**.................. 06/30/07 10.500 3,680,000
2,750# Navigator Gas Transport
PLC**.................. 06/30/07 12.000 2,612,500
5,000 Pacific & Atlantic
Holdings
Incorporated**......... 05/30/08 11.500 4,200,000
6,250 Stena AB................ 06/15/07 8.750 5,984,375
10,540 TFM S.A. de C.V......... 06/15/09 11.750+ 5,770,650
------------
39,902,050
------------
Utilities -- 1.14%
5,589 Panda Funding
Corporation............ 08/20/12 11.625 6,147,403
------------
Total Corporate Bonds (cost --
$520,010,832)..................... 460,509,788
------------
</TABLE>
32
<PAGE>
PaineWebber High Income Fund
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
--------- -------- -------- ------------
<C> <S> <C> <C> <C>
Convertible Bonds -- 2.34%
Communications - Fixed -- 0.26%
$ 1,925 GST Telecommuncations
Incorporated..................... 12/15/05 13.875%+ $ 1,386,000
------------
Energy -- 0.55%
5,075 Key Energy Group Incorporated..... 09/15/04 5.000 2,956,187
------------
Gaming -- 0.33%
1,750 Argosy Gaming Company............. 06/01/01 12.000 1,760,938
------------
General Industrial -- 1.20%
6,750 Waste Systems International
Incorporated**................... 05/13/05 7.000 6,480,000
------------
Total Convertible Bonds (cost --
$14,054,450)................................. 12,583,125
------------
<CAPTION>
Number of
Shares
---------
<C> <S> <C> <C> <C>
Common Stock(a) -- 4.53%
Communications - Fixed -- 1.62%
70,200 COLT Telecom Group PLC, ADR.......................... 3,685,500
337,616 Viatel Incorporated.................................. 5,022,038
------------
8,707,538
------------
Gaming -- 0.22%
541,666 Hollywood Casino Corporation......................... 744,791
110,185 JCC Holding Company.................................. 440,740
------------
1,185,531
------------
General Industrial -- 0.69%
1,400 Communications & Power............................... 210,000
1,250 Jordan Telecommunication Products.................... 250,000
560,419 Waste Systems International Incorporated............. 3,222,409
------------
3,682,409
------------
Media -- 0.28%
12,000 Affiliated Newspapers Investments Incorporated....... 1,500,000
------------
Retail -- 1.05%
666,011 Samuels Jewelers Incorporated........................ 5,661,094
20,000 Tuesday Morning Corporation.......................... 200
------------
5,661,294
------------
Technology -- 0.67%
594,328 Ampex Corporation++.................................. 594,328
110,000 PSINet Incorporated.................................. 2,062,500
49,292 Verio Incorporated................................... 936,548
------------
3,593,376
------------
Total Common Stock (cost -- $14,318,433)....................... 24,330,148
------------
</TABLE>
33
<PAGE>
PaineWebber High Income Fund
<TABLE>
<CAPTION>
Number of
Shares Value
---------- ------------
<C> <S> <C> <C> <C>
Preferred Stock --
2.50%
Cable -- 0.13%
1,071 21st Century Telecom
Group
Incorporated**...... $ 696,150
------------
Communications -
Fixed -- 0.32%
10,000 Global Crossing
Holdings
Limited(a).......... 1,000,000
6,164 Viatel Incorporated.. 708,860
------------
1,708,860
------------
General
Industrial --
0.87%
31,158 Communications &
Power............... 3,402,454
1,250 Jordan
Telecommunications
Products(a)......... 1,250,000
------------
4,652,454
------------
Media -- 0.33%
91,360 Source Media
Incorporated........ 1,781,514
------------
Restaurants --
0.46%
2,500 American Restaurant
Group
Incorporated(a)..... 2,500,000
------------
Retail -- 0.39%
21,974 Tuesday Morning
Corporation(a)...... 2,109,504
------------
Total Preferred Stock (cost --
$11,501,184)................... 13,448,482
------------
<CAPTION>
Number of
Warrants
----------
<C> <S> <C> <C> <C>
Warrants(a) --
0.56%
Aerospace -- 0.02%
8,400 Sabreliner
Corporation......... 126,000
------------
Cable -- 0.03%
40,000 @Entertainment
Incorporated........ 40,000
1,000 21st Century Telecom
Group Incorporated.. 30,000
17,000 Knology Holdings
Incorporated........ 42,500
10,000 UIH
Australia/Pacific
Incorporated........ 50,000
------------
162,500
------------
Communications -
Fixed -- 0.03%
8,500 Allegiance Telecom
Incorporated........ 82,875
6,750 Pathnet
Incorporated........ 67,500
------------
150,375
------------
Communications -
Mobile -- 0.01%
15,750 McCaw International
Limited............. 39,375
------------
Consumer
Manufacturing --
0.01%
8,718 AVI Holdings......... 43,592
------------
Entertainment --
0.00%
4,250 Discovery Zone
Incorporated........ 43
------------
</TABLE>
34
<PAGE>
PaineWebber High Income Fund
<TABLE>
<CAPTION>
Number of
Warrants Value
--------- ------------
<C> <S> <C> <C> <C>
Warrants(a) (concluded)
Finance -- 0.00%
6,000 Olympic Financial Limited............................. $ 30,000
------------
Food & Beverage -- 0.22%
109,290 NuCo2 Incorporated++.................................. 450,821
7,250 Packaged Ice Incorporated............................. 725,000
------------
1,175,821
------------
Hotels & Lodging -- 0.00%
5,000 Club Regina Resorts Incorporated...................... 5,000
------------
Media -- 0.15%
44,700 Source Media Incorporated............................. 787,837
------------
Restaurants -- 0.00%
2,500 Amercian Restaurant Group Incorporated................ 25
------------
Retail -- 0.00%
44,525 Samuels Jewelers Incorporated......................... 445
------------
Technology -- 0.09%
102,000 Ampex Corporation++................................... 76,500
13,700 Electronic Retailing Systems International............ 68,500
19,500 Inter Act Systems Incorporated........................ 97,500
30,000 Wam! Net Incorporated................................. 240,000
------------
482,500
------------
Transportation Non-Air -- 0.00%
3,000 Millenium Seacarriers Incorporated.................... 1,875
------------
Total Warrants (cost -- $1,274,918)............................. 3,005,388
------------
<CAPTION>
Principal
Amount Maturity Interest
(000) Date Rate
--------- -------- --------
<C> <S> <C> <C> <C>
Repurchase Agreement -- 2.73%
$14,632 Repurchase Agreement dated 11/30/98
with Societe Generale Securities
Corporation, collateralized by
$13,035,000 U.S. Treasury Notes,
7.250% due 08/15/04 (value --
$14,925,075); proceeds:
$14,634,154 (cost -- $14,632,000). 12/01/98 5.300% 14,632,000
------------
Total Investments (cost -- $575,791,817) --
98.39%...................................... 528,508,931
Other assets in excess of liabilities --
1.61%....................................... 8,661,698
------------
Net Assets -- 100.00%......................... $537,170,629
============
</TABLE>
- -------
# Security represents a unit which is composed of the stated bond with attached
warrants or common stock.
++Illiquid securities representing 1.7% of net assets
+ 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.
(a) Non-income producing security
ADR American Depositary Receipt
See accompanying notes to financial statements
35
<PAGE>
PaineWebber
Statement of Assets and Liabilities November 30, 1998
<TABLE>
<CAPTION>
U.S. Low Duration Investment
Government U.S. Government Grade High
Income Fund Income Fund Income Fund Income Fund
------------ --------------- ------------ -------------
<S> <C> <C> <C> <C>
Assets
Investments in
securities, at value
(cost -- $412,313,969,
$233,218,034,
$295,701,156 and
$575,791,817,
respectively).......... $417,112,142 $ 233,593,907 $303,667,478 $ 528,508,931
Cash.................... -- 855,694 -- --
Receivable for
investments sold....... 6,856,719 53,351,549 -- 8,931,410
Dividends and interest
receivable............. 3,135,300 2,963,050 5,463,311 11,343,686
Receivable for shares of
beneficial interest
sold................... 36,435 475,693 158,098 980,086
------------ ------------- ------------ -------------
Total assets............ 427,620,001 291,265,725 309,354,965 549,785,653
------------ ------------- ------------ -------------
Variation margin
receivable............. 451,188 8,062 -- --
Other assets............ 28,217 17,770 66,078 21,540
Liabilities
Payable for investments
purchased.............. 87,864,382 138,743,674 13,300,313 9,922,502
Accrued expenses and
other liabilities...... 178,428 228,858 363,123 244,198
------------ ------------- ------------ -------------
Total liabilities....... 89,195,843 139,256,589 14,689,646 12,615,024
------------ ------------- ------------ -------------
Dividends payable....... 357,526 53,768 341,860 1,101,430
Payable to custodian.... 315,043 -- -- 156,438
Payable for shares of
beneficial interest
repurchased............ 249,112 100,676 464,355 725,030
Payable to affiliates... 231,352 129,613 219,995 465,426
Net unrealized
appreciation
(depreciation) of
investments, futures
and options............ 5,258,227 466,605 7,966,322 (47,282,886)
------------ ------------- ------------ -------------
Net assets.............. $338,424,158 $ 152,009,136 $294,665,319 $ 537,170,629
============ ============= ============ =============
Net Assets
Beneficial interest --
$0.001 par value
(unlimited amount
authorized)............ 418,645,334 268,075,535 305,896,195 706,720,998
Undistributed
(distributions in
excess of) net
investment income...... (357,526) (53,767) (341,860) 3,090,809
Net assets.............. $278,482,843 $ 63,606,416 $216,401,768 $ 258,558,684
------------ ------------- ------------ -------------
Shares outstanding...... 30,275,704 26,690,574 20,053,353 38,844,047
------------ ------------- ------------ -------------
Net asset value and
redemption value per
share.................. $9.20 $2.38 $10.79 $6.66
===== ===== ====== =====
Maximum offering price
per share (net asset
value plus sales charge
of 4.00% of offering
price -- 3.00% for Low
Duration U.S.
Government Income
Fund).................. $9.58 $2.45 $11.24 $6.94
===== ===== ====== =====
Accumulated net realized
losses from investment,
futures and options
transactions........... (85,121,877) (116,479,237) (18,855,338) (125,358,292)
Net assets.............. $ 23,318,040 $ 7,669,941 $ 41,124,396 $ 176,997,079
------------ ------------- ------------ -------------
Shares outstanding...... 2,534,618 3,223,048 3,811,914 26,613,289
------------ ------------- ------------ -------------
Net asset value and
offering price per
share.................. $9.20 $2.38 $10.79 $6.65
===== ===== ====== =====
Class A:
Net assets.............. $ 25,076,352 $ 78,923,009 $ 34,457,067 $ 98,981,524
------------ ------------- ------------ -------------
Shares outstanding...... 2,728,743 33,161,108 3,193,217 14,850,452
------------ ------------- ------------ -------------
Net asset value and
offering price per
share.................. $9.19 $2.38 $10.79 $6.67
===== ===== ====== =====
Net assets.............. $ 11,546,923 $ 1,809,770 $ 2,682,088 $ 2,633,342
------------ ------------- ------------ -------------
Shares outstanding...... 1,256,510 759,609 248,356 396,012
------------ ------------- ------------ -------------
Net asset value,
offering price and
redemption value per
share.................. $9.19 $2.38 $10.80 $6.65
===== ===== ====== =====
</TABLE>
Class B:
Class C:
Class Y:
See accompanying notes to financial statements
36
<PAGE>
PaineWebber
Statement of Operations
<TABLE>
<CAPTION>
For the Year Ended November 30, 1998
-------------------------------------------------------
U.S. Low Duration Investment
Government U.S. Government Grade High
Income Fund Income Fund Income Fund Income Fund
----------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Investment income:
Interest and dividends.... $23,513,085 $9,181,687 $21,794,247 $ 60,680,851
----------- ---------- ----------- ------------
Expenses:
Investment advisory and
administration........... 1,751,719 708,240 1,456,093 3,036,812
Service fees -- Class A... 712,065 120,959 543,534 685,222
Service and distribution
fees -- Class B.......... 295,396 74,245 413,463 2,177,074
Service and distribution
fees -- Class C.......... 195,063 631,062 234,797 857,290
Transfer agency fees...... 405,573 139,794 213,692 406,644
Custody and accounting.... 245,172 73,319 148,636 249,143
Reports and notices to
shareholders............. 104,644 31,887 59,724 104,373
Legal and audit........... 91,904 58,899 52,302 83,250
State registration fees... 78,661 42,490 42,846 80,910
Trustees' fees............ 10,500 10,500 10,500 10,500
Amortization of
organizational expense... -- 20,343 -- --
Other expenses............ 45,806 2,829 3,844 52,243
----------- ---------- ----------- ------------
3,936,503 2,125,385 3,179,431 7,743,461
----------- ---------- ----------- ------------
Net investment income..... 19,576,582 7,056,302 18,614,816 52,937,390
----------- ---------- ----------- ------------
Interest.................. -- 210,818 -- --
Realized and unrealized
gains (losses) from
investment activities:
Net realized gains
(losses) from:
Investment and purchased
options transactions.... 8,090,841 1,714,720 4,171,797 (10,507,346)
Futures contracts........ 3,600,365 6,607 (729,729) --
Options written.......... 1,407,146 -- -- --
Options written.......... (145,925) -- -- --
----------- ---------- ----------- ------------
Net realized and
unrealized gains (losses)
from investment
activities............... 9,717,626 839,373 (1,546,821) (78,049,827)
----------- ---------- ----------- ------------
Net increase (decrease) in
net assets resulting from
operations............... $29,294,208 $7,895,675 $17,067,995 $(25,112,437)
=========== ========== =========== ============
Net change in unrealized
appreciation/depreciation
of:
Investments and purchased
options................. (1,734,667) (972,686) (4,954,576) (67,542,481)
Futures ................. (1,500,134) 90,732 (34,313) --
</TABLE>
See accompanying notes to financial statements
37
<PAGE>
PaineWebber U.S. Government Income Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Years Ended
November 30,
---------------------------
1998 1997
------------ -------------
<S> <C> <C>
From operations:
Net investment income............................. $ 19,576,582 $ 23,828,507
Net realized gains from investment, futures and
options transactions............................. 13,098,352 751,897
Net change in unrealized appreciation/depreciation
of investments, futures and options.............. (3,380,726) 1,124,530
------------ -------------
Net increase in net assets resulting from
operations....................................... 29,294,208 25,704,934
------------ -------------
Dividends to shareholders from:
Net investment income -- Class A.................. (16,195,457) (18,906,488)
Net investment income -- Class B.................. (1,439,609) (2,738,447)
Net investment income -- Class C.................. (1,345,864) (1,784,185)
Net investment income -- Class Y.................. (597,497) (399,385)
------------ -------------
Total dividends to shareholders................... (19,578,427) (23,828,505)
------------ -------------
From beneficial interest transactions:
Net proceeds from the sale of shares.............. 38,402,796 18,010,872
Cost of shares repurchased........................ (89,609,394) (114,604,633)
Proceeds from dividends reinvested................ 11,399,759 13,273,684
------------ -------------
Net decrease in net assets from beneficial
interest transactions............................ (39,806,839) (83,320,077)
------------ -------------
Net decrease in net assets........................ (30,091,058) (81,443,648)
Net assets:
Beginning of year................................. 368,515,216 449,958,864
------------ -------------
End of year....................................... $338,424,158 $ 368,515,216
============ =============
</TABLE>
See accompanying notes to financial statements
38
<PAGE>
PaineWebber Low Duration U.S. Government Income Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Years Ended
November 30,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
From operations:
Net investment income............................ $ 7,056,302 $ 8,613,452
Net realized gains from investment and futures
transactions.................................... 1,721,327 2,277,620
Net change in unrealized
appreciation/depreciation of investments and
futures......................................... (881,954) (1,371,009)
------------- -------------
Net increase in net assets resulting from
operations...................................... 7,895,675 9,520,063
------------- -------------
Dividends to shareholders from:
Net investment income -- Class A................. (2,595,938) (2,934,509)
Net investment income -- Class B................. (339,772) (353,643)
Net investment income -- Class C................. (4,024,907) (5,305,663)
Net investment income -- Class Y................. (95,059) (20,260)
------------- -------------
Total dividends to shareholders.................. (7,055,676) (8,614,075)
------------- -------------
From beneficial interest transactions:
Net proceeds from the sale of shares............. 162,076,404 278,839,540
Cost of shares repurchased....................... (148,445,808) (354,526,498)
Proceeds from dividends reinvested............... 4,889,431 4,961,994
------------- -------------
Net increase (decrease) in net assets from
beneficial interest transactions................ 18,520,027 (70,724,964)
------------- -------------
Net increase (decrease) in net assets............ 19,360,026 (69,818,976)
Net assets:
Beginning of year................................ 132,649,110 202,468,086
------------- -------------
End of year...................................... $ 152,009,136 $ 132,649,110
============= =============
</TABLE>
See accompanying notes to financial statements
39
<PAGE>
PaineWebber Investment Grade Income Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Years Ended
November 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
From operations:
Net investment income.............................. $ 18,614,816 $ 20,187,261
Net realized gains from investment, futures and op-
tion transactions................................. 3,442,068 4,482,892
Net change in unrealized appreciation/depreciation
of investments, futures and options............... (4,988,889) 2,014,325
------------ ------------
Net increase in net assets resulting from opera-
tions............................................. 17,067,995 26,684,478
------------ ------------
Dividends to shareholders from:
Net investment income -- Class A................... (14,293,057) (15,134,222)
Net investment income -- Class B................... (2,398,710) (3,079,256)
Net investment income -- Class C................... (1,897,687) (1,925,784)
Net investment income -- Class Y................... (77,963) --
------------ ------------
Total dividends to shareholders.................... (18,667,417) (20,139,262)
------------ ------------
From beneficial interest transactions:
Net proceeds from the sale of shares............... 56,988,242 17,100,249
Cost of shares repurchased......................... (57,228,784) (67,140,065)
Proceeds from dividends reinvested................. 10,000,701 10,181,074
------------ ------------
Net increase (decrease) in net assets from benefi-
cial interest transactions........................ 9,760,159 (39,858,742)
------------ ------------
Net increase (decrease) in net assets.............. 8,160,737 (33,313,526)
Net assets:
Beginning of year.................................. 286,504,582 319,818,108
------------ ------------
End of year........................................ $294,665,319 $286,504,582
============ ============
</TABLE>
See accompanying notes to financial statements
40
<PAGE>
PaineWebber High Income Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Years Ended
November 30,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
From operations:
Net investment income............................ $ 52,937,390 $ 51,511,747
Net realized losses from investment transactions. (10,507,346) (12,530,231)
Net change in unrealized
appreciation/depreciation of investments........ (67,542,481) 33,236,309
------------- -------------
Net increase (decrease) in net assets resulting
from operations................................. (25,112,437) 72,217,825
------------- -------------
Dividends to shareholders from:
Net investment income -- Class A................. (24,137,016) (23,042,879)
Net investment income -- Class B................. (17,410,119) (18,695,781)
Net investment income -- Class C................. (9,462,206) (8,733,394)
Net investment income -- Class Y................. (120,615) --
------------- -------------
Total dividends to shareholders.................. (51,129,956) (50,472,054)
------------- -------------
From beneficial interest transactions:
Net proceeds from the sale of shares............. 199,547,214 188,961,439
Cost of shares repurchased....................... (234,206,542) (161,226,504)
Proceeds from dividends reinvested............... 23,335,096 21,755,402
------------- -------------
Net increase (decrease) in net assets from
beneficial interest transactions................ (11,324,232) 49,490,337
------------- -------------
Net increase (decrease) in net assets............ (87,566,625) 71,236,108
Net assets:
Beginning of year................................ 624,737,254 553,501,146
------------- -------------
End of year (including undistributed net
investment income of $3,090,809 and $315,338,
respectively)................................... $ 537,170,629 $ 624,737,254
============= =============
</TABLE>
See accompanying notes to financial statements
41
<PAGE>
Notes to Financial Statements
Organization and Significant Accounting Policies
PaineWebber Managed Investments Trust (the "Trust") was organized under Massa-
chusetts law by a Declaration of Trust dated November 21, 1986 and is regis-
tered 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 seven funds: PaineWebber U.S. Government In-
come Fund ("U.S. Government Income Fund"), PaineWebber Low Duration U.S. Gov-
ernment Income Fund ("Low Duration 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 Util-
ity Income Fund, PaineWebber Asia Pacific Growth Fund and PaineWebber Tax-Man-
aged Equity Fund. The financial statements for PaineWebber Utility Income Fund,
PaineWebber Asia Pacific Growth Fund and PaineWebber Tax-Managed Equity Fund
are not included herein.
Costs incurred by Low Duration U.S. Government Income Fund in connection with
its organization were fully deferred as of November 30, 1998 using the
straight-line method over the sixty months from the commencement of operations.
Currently, each Fund offers Class A, Class B, Class C and 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.
Class Y shares have no service or distribution plan.
The preparation of financial statements in accordance with generally accepted
accounting principles requires Fund management to make estimates and assump-
tions that affect the reported amounts and disclosures in the financial state-
ments. 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, port-
folio securities are valued thereon, provided such quotations adequately re-
flect the fair value of the securities, in the judgment of Mitchell Hutchins
Asset Management Inc. ("Mitchell Hutchins"), a wholly owned asset management
subsidiary of PaineWebber Incorporated ("PaineWebber") and investment adviser
and administrator of the Funds. When market quotations are not readily avail-
able, securities are valued based upon appraisals derived from information con-
cerning those securities or similar securities received from recognized dealers
in those securities. All other securities are valued at fair value as deter-
mined in good faith by or under the direction of the Trust's board of trustees
(the "board"). The amortized cost method of valuation, which approximates mar-
ket value, generally is used to value short-term debt instruments with sixty
days or less remaining to maturity, unless the board 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
valued daily on a mark-to-market basis to ensure that the value, including ac-
crued interest, is at least equal to the repurchase price. In the event of de-
fault of the obligation to repurchase, each Fund has the right to liquidate the
collateral and apply the proceeds in satisfaction of the obligation. Under cer-
tain 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 repur-
chase agreement transactions with other funds managed by Mitchell Hutchins.
Investment Transactions and Investment Income--Investment transactions are re-
corded on the trade date. Realized gains and losses from investment transac-
tions are calculated using the identified cost method. Interest income is re-
corded
42
<PAGE>
Notes to Financial Statements
on an accrual basis. Dividend income is recorded on the ex-dividend date. Dis-
counts are accreted and premiums are amortized (with the exception of U.S. Gov-
ernment 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 (af-
ter adjusting for current capital share activity of the respective classes).
Class-specific expenses are charged directly to the applicable class of shares.
Dollar Rolls--Low Duration U.S. Government Income Fund and U.S. Government In-
come Fund may enter into transactions in which these Funds sell securities for
delivery in the current month and simultaneously contracts to repurchase sub-
stantially similar (same type, coupon and maturity) securities on a specified
future date (the "roll period"). During the roll period the Funds forego prin-
cipal and interest paid on the securities. The Funds are compensated by the in-
terest earned on the cash proceeds of the initial sale and by fee income or a
lower repurchase price.
Futures Contracts--Upon entering into a financial futures contract, the Fund
is required to pledge to a broker an amount of cash and/or U.S. Government se-
curities equal to a certain percentage of the contract amount. This amount is
known as the "initial margin." Subsequent payments, known as "variation mar-
gin," are made or received by the Fund each day, depending on the daily fluctu-
ations in the value of the underlying financial futures contracts. Such varia-
tion 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 Funds (except High Income Fund) primarily use financial futures contracts
for hedging or 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 the 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 As-
sets 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 ex-
pires on its stipulated expiration date or the Fund enters into a closing pur-
chase 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 se-
curity) 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.
The U.S. Government Income Fund primarily uses written options for the enhance-
ment of income to the Funds.
Reverse Repurchase Agreements--Each of the Funds may enter into reverse repur-
chase agreements with qualified third party broker-dealers as determined by,
and under the direction of, the board. Interest on the value of reverse repur-
chase agreements issued and outstanding is based upon competitive market rates
at the time of issuance. At the time the Fund
43
<PAGE>
Notes to Financial Statements
enters into a reverse repurchase agreement, it establishes and maintains a seg-
regated account with the Fund's custodian containing liquid securities having a
value not less than the repurchase price, including accrued interest, of the
reverse repurchase agreement.
For the year ended November 30, 1998, the Low Duration U.S. Government Income
Fund is the only Fund which engaged in reverse repurchase agreements. The aver-
age monthly balance of reverse repurchase agreements outstanding during the
year ended November 30, 1998 was $3,751,201 at a weighted average interest rate
of 5.62%.
Dividends and Distributions--Dividends and distributions to shareholders are
recorded on the ex-dividend date. Dividends from net investment income and dis-
tributions from realized capital gains are determined in accordance with fed-
eral 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 fed-
eral tax-basis treatment; temporary differences do not require reclassifica-
tion.
Concentration of Risk
The ability of the issuers of the debt securities including mortgage- and as-
set-backed securities held by the Funds to meet their obligations may be af-
fected by economic developments, including those particular to a specific in-
dustry 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, 1998 were as
follows:
<TABLE>
<CAPTION>
U.S. Government
Income Fund
---------------------
Number of
Options Premiums
--------- -----------
<S> <C> <C>
Options outstanding at November 30, 1997................. 1,200 $ 983,425
Options written ......................................... 8,098 2,646,350
Options terminated in closing purchase transactions...... (7,149) (3,068,794)
Options expired.......................................... (2,149) (560,981)
------- -----------
Options outstanding at November 30, 1998................. 0 $ 0
======= ===========
</TABLE>
Investment Adviser and Administrator
The board 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, 1998,
U.S. Government Income Fund, Low Duration U.S. Government Income Fund, Invest-
ment Grade Income Fund and High Income Fund owed Mitchell Hutchins $139,100,
$61,775, $118,780 and $214,058, respectively, in investment advisory and admin-
istration fees.
Under a separate contract with Mitchell Hutchins ("Sub-Advisory Contract"),
Pacific Investment Management Company ("PIMCO") serves as the sub-adviser for
Low Duration U.S. Government Income Fund. Under the Sub-Advisory Contract,
44
<PAGE>
Notes to Financial Statements
Mitchell Hutchins (not the Fund) pays PIMCO a fee, computed daily and payable
monthly, in an amount equal to one-half of the advisory fee received by Mitch-
ell Hutchins from the Fund.
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 sepa-
rate 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 and Class C shares, re-
spectively. At November 30, 1998, U.S. Government Income Fund, Low Duration
U.S. Government Income Fund, Investment Grade Income Fund and High Income Fund
owed Mitchell Hutchins $92,188, $67,838, $97,178 and $251,368, 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 de-
ferred 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, 1998, it earned $46,733, $76,476, $249,808 and
$1,137,630 in sales charges for the U.S. Government Income Fund, Low Duration
U.S. Government Income Fund, Investment Grade Income Fund and High Income Fund,
respectively.
Security Lending
Each Fund may lend securities 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 se-
curities in an amount at least equal to the market value of the securities
loaned, plus accrued interest, determined on a daily basis and adjusted accord-
ingly. Each Fund will regain record ownership of loaned securities to exercise
certain beneficial rights; however, each Fund may bear the risk of delay in re-
covery of, or even loss of rights in, the securities loaned should the borrower
fail financially. Each Fund receives compensation, which is included in inter-
est 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 bor-
rower plus reasonable administrative and custody fees. Each Fund's lending
agent is PaineWebber, who received compensation for the year ended November 30,
1998 from the following Funds:
<TABLE>
<S> <C>
U.S. Government Income Fund........................ $ 2,938
Investment Grade Income Fund....................... $24,433
</TABLE>
At November 30, 1998, the U.S. Government Income Fund and the Investment Grade
Income Fund owed PaineWebber $64 and $4,037, respectively, in security lending
fees.
For the year ended November 30, 1998, the U.S. Government Income Fund and the
Investment Grade Income Fund earned compensation of $9,098 and $71,790 net of
fees, rebates and expenses, from securities lending transactions. At November
30, 1998 there were no securities on loan from the Funds.
Bank Line of Credit
Each Fund may participate with other funds managed by Mitchell Hutchins in a
$200 million committed credit facility ("Facility") to be utilized for tempo-
rary financing until the settlement of sale or purchase of portfolio securi-
ties, the repurchase or redemption of shares of the Funds at the request of the
shareholders and other temporary or emergency purposes. In connection there-
with, each Fund has agreed to pay a commitment fee, pro rata, based on the rel-
ative asset size of the Funds in the Facility. Interest is charged to each Fund
at rates based on prevailing market rates in effect at the time of borrowings.
For the year ended November 30, 1998, the Funds did not borrow under the Facil-
ity.
45
<PAGE>
Notes to Financial Statements
Transfer Agency Service Fees
PaineWebber provides transfer agency related services to each Fund pursuant to
a delegation of authority from PFPC Inc., each Funds' transfer agent, and is
compensated for these services by PFPC Inc., not the Funds. For the year ended
November 30, 1998, PaineWebber received from PFPC Inc., not the Funds, approxi-
mately 50%, 53%, 53% and 50% of the total transfer agency fees collected by
PFPC Inc. from the U.S. Government Income Fund, Low Duration U.S. Government
Income Fund, Investment Grade Income Fund and High Income Fund, respectively.
Investments in Securities
For federal income tax purposes, the cost of securities owned at November 30,
1998 was substantially the same as the cost of securities for financial state-
ment purposes.
At November 30, 1998, the components of the net unrealized appreciation (de-
preciation) of investments were as follows:
<TABLE>
<CAPTION>
U.S. Low Duration Investment
Government U.S. Government Grade High
Income Fund Income Fund Income Fund Income Fund
----------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Gross appreciation
(investments having an
excess of value over
cost)................. $5,711,064 $1,217,761 $10,668,344 $ 21,135,877
Gross depreciation
(investments having an
excess of cost over
value)................ (912,891) (841,888) (2,702,022) (68,418,763)
---------- ---------- ----------- ------------
Net unrealized
appreciation
(depreciation) of
investments........... $4,798,173 $ 375,873 $ 7,966,322 $(47,282,886)
========== ========== =========== ============
</TABLE>
For the year ended November 30, 1998, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were as follows:
<TABLE>
<CAPTION>
U.S. Low Duration Investment
Government U.S. Government Grade High
Income Fund Income Fund Income Fund Income Fund
-------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Purchases............. $1,245,463,351 $809,579,599 $489,218,359 $946,663,323
Sales................. $1,286,496,627 $776,553,474 $480,957,273 $967,211,644
</TABLE>
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 in-
vestment companies. Accordingly, no provision for federal income taxes is re-
quired. 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, 1998, the reclassifications arising from per-
manent "book/tax" differences resulting in increases (decreases) to the compo-
nents of net assets were as follows:
<TABLE>
<CAPTION>
Undistributed
(Distributions
in Excess
of) Net Accumulated
Investment Net Realized Beneficial
Income Gains (Losses) Interest
-------------- -------------- ------------
<S> <C> <C> <C>
U.S. Government Income Fund....... $571,864 $ (73,700) $ (498,164)
Low Duration U.S. Government
Income Fund...................... 239,207 (24,902) (214,305)
Investment Grade Income Fund...... 187,104 4,707,791 (4,894,895)
High Income Fund.................. 968,037 58,754,539 (59,722,576)
</TABLE>
At November 30, 1998, U.S. Government Income Fund, Low Duration U.S. Govern-
ment Income Fund, Investment Grade Income Fund and High Income Fund had net
capital loss carryforwards of $84,620,234, $116,388,503, $18,781,340 and
$122,502,193, respectively. These loss carryforwards are available as reduc-
tions, to the extent provided in the regulations, of future net realized capi-
tal gains, and will expire between November 30, 1999 and November 30, 2006. To
the extent that such losses are used to offset future net realized capital
gains, it is probable that these gains will not be distributed.
46
<PAGE>
Notes to Financial Statements
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,
1998:
Shares sold..... 505,416 $ 4,607,694 954,146 $ 8,719,746 636,935 $ 5,801,537 2,133,805 $ 19,273,819
Shares
repurchased.... (5,910,608) (53,488,228) (1,135,313) (10,275,294) (1,153,391) (10,446,958) (1,704,454) (15,398,914)
Shares converted
from Class B to
Class A........ 2,084,528 18,889,153 (2,084,528) (18,889,153) -- -- -- --
Dividends
reinvested..... 1,003,345 9,097,712 93,443 846,696 96,378 873,028 64,246 582,323
------------ ------------- ---------- ------------ ----------- ------------ ---------- ------------
Net increase
(decrease)..... (2,317,319) $ (20,893,669) (2,172,252) $(19,598,005) (420,078) $ (3,772,393) 493,597 $ 4,457,228
============ ============= ========== ============ =========== ============ ========== ============
Year ended
November 30,
1997:
Shares sold..... 448,305 $ 3,915,986 476,566 $ 4,168,910 513,532 $ 4,489,464 620,112 $ 5,436,512
Shares
repurchased.... (8,440,372) (73,719,107) (2,295,981) (20,006,468) (1,756,331) (15,337,064) (633,559) (5,541,994)
Shares converted
from Class B to
Class A........ 638,153 5,617,512 (638,038) (5,617,512) -- -- -- --
Dividends
reinvested..... 1,161,115 10,151,112 185,612 1,622,016 128,773 1,124,426 43,054 376,130
------------ ------------- ---------- ------------ ----------- ------------ ---------- ------------
Net increase
(decrease)..... (6,192,799) $ (54,034,497) (2,271,841) $(19,833,054) (1,114,026) $ (9,723,174) 29,607 $ 270,648
============ ============= ========== ============ =========== ============ ========== ============
Low Duration
U.S. Government
Income Fund
Year ended
November 30,
1998:
Shares sold..... 60,572,974 $ 144,153,539 2,117,211 $ 5,048,319 3,615,697 $ 8,612,728 1,791,809 $ 4,261,818
Shares
repurchased.... (49,261,371) (117,238,751) (1,462,663) (3,479,225) (10,439,963) (24,828,123) (1,218,491) (2,899,709)
Shares converted
from Class B to
Class A........ 476,836 1,135,207 (476,915) (1,135,207) -- -- -- --
Dividends
reinvested..... 691,659 1,648,506 107,228 255,055 1,217,274 2,896,014 37,708 89,856
------------ ------------- ---------- ------------ ----------- ------------ ---------- ------------
Net increase
(decrease)..... 12,480,098 $ 29,698,501 284,861 $ 688,942 (5,606,992) $(13,319,381) 611,026 $ 1,451,965
============ ============= ========== ============ =========== ============ ========== ============
Year ended
November 30,
1997:
Shares sold..... 113,760,103 $ 267,296,194 1,233,865 $ 2,895,645 3,650,806 $ 8,554,742 39,524 $ 92,959
Shares
repurchased.... (130,737,967) (307,187,448) (1,200,248) (2,819,918) (18,934,893) (44,424,090) (40,520) (95,042)
Shares converted
from Class B to
Class A........ 481,142 1,132,233 (481,142) (1,132,233) -- -- -- --
Dividends
reinvested..... 409,516 960,304 101,318 237,798 1,596,762 3,745,544 7,819 18,348
------------ ------------- ---------- ------------ ----------- ------------ ---------- ------------
Net increase
(decrease)..... (16,087,206) $ (37,798,717) (346,207) $ (818,708) (13,687,325) $(32,123,804) 6,823 $ 16,265
============ ============= ========== ============ =========== ============ ========== ============
</TABLE>
47
<PAGE>
Notes to Financial Statements
Shares of Beneficial Interest
(concluded)
<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>
Investment Grade
Income Fund
Year ended
November 30,
1998:
Shares sold...... 2,041,843 $ 22,290,767 1,696,765 $ 18,472,491 1,184,652 $ 12,935,515 302,126 $ 3,289,469
Shares
repurchased..... (3,390,614) (37,003,109) (1,020,396) (11,101,156) (775,320) (8,463,655) (60,627) (660,864)
Shares converted
from Class B to
Class A......... 1,114,869 12,177,257 (1,115,095) (12,177,257) -- -- -- --
Dividends
reinvested...... 701,098 7,648,985 117,112 1,277,379 91,680 999,801 6,857 74,536
----------- ------------- ---------- ------------ ---------- ------------ -------- -----------
Net increase
(decrease)...... 467,196 $ 5,113,900 (321,614) $ (3,528,543) 501,012 $ 5,471,661 248,356 $ 2,703,141
=========== ============= ========== ============ ========== ============ ======== ===========
Year ended
November 30,
1997:
Shares sold...... 542,798 $ 5,735,184 621,479 $ 6,583,886 450,938 $ 4,781,179
Shares
repurchased..... (4,130,806) (43,486,178) (1,346,645) (14,139,975) (904,683) (9,513,912)
Shares converted
from Class B to
Class A......... 802,509 8,484,160 (802,826) (8,484,160) -- --
Dividends
reinvested...... 728,494 7,676,225 146,738 1,544,887 91,141 959,962
----------- ------------- ---------- ------------ ---------- ------------
Net decrease..... (2,057,005) $ (21,590,609) (1,381,254) $(14,495,362) (362,604) $ (3,772,771)
=========== ============= ========== ============ ========== ============
High Income Fund
Year ended
November 30,
1998:
Shares sold...... 13,694,125 $ 97,142,363 8,040,949 $ 59,468,319 5,202,992 $ 38,470,183 594,839 $ 4,466,349
Shares
repurchased..... (16,000,259) (117,628,189) (9,418,944) (69,303,434) (6,199,014) (45,640,962) (214,727) (1,633,957)
Shares converted
from Class B to
Class A......... 3,996,052 30,045,750 (3,997,285) (30,045,750) -- -- -- --
Dividends
reinvested...... 1,478,031 10,911,350 962,985 7,113,261 703,058 5,198,786 15,900 111,699
----------- ------------- ---------- ------------ ---------- ------------ -------- -----------
Net increase
(decrease)...... 3,167,949 $ 20,471,274 (4,412,295) $(32,767,604) (292,964) $ (1,971,993) 396,012 $ 2,944,091
=========== ============= ========== ============ ========== ============ ======== ===========
Year ended
November 30,
1997:
Shares sold...... 8,419,577 $ 63,247,235 10,328,507 $ 77,493,859 6,393,414 $ 48,220,345
Shares
repurchased..... (9,189,251) (69,169,822) (7,627,276) (57,048,223) (4,666,813) (35,008,459)
Shares converted
from Class B to
Class A......... 1,959,816 14,783,489 (1,960,888) (14,783,489) -- --
Dividends
reinvested...... 1,353,574 10,173,912 952,658 7,153,842 588,027 4,427,648
----------- ------------- ---------- ------------ ---------- ------------
Net increase..... 2,543,716 $ 19,034,814 1,693,001 $ 12,815,989 2,314,628 $ 17,639,534
=========== ============= ========== ============ ========== ============
</TABLE>
48
<PAGE>
[This Page Intentionally Left Blank]
49
<PAGE>
PaineWebber U.S. Government Income Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
year is presented below:
<TABLE>
<CAPTION>
Class A
---------------------------------------------------
For the Years Ended November 30,
---------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year.................. $8.94 $ 8.86 $ 9.12 $ 8.50 $10.03
----- ------ ------ ------ ------
Net investment income..... 0.51 0.54 0.55 0.58 0.60
Net realized and
unrealized gains (losses)
from investments, futures
and options.............. 0.26 0.08 (0.26) 0.62 (1.53)
----- ------ ------ ------ ------
Net increase (decrease)
from investment
operations............... 0.77 0.62 0.29 1.20 (0.93)
----- ------ ------ ------ ------
Dividends from net
investment income........ (0.51) (0.54) (0.55) (0.58) (0.60)
----- ------ ------ ------ ------
Net asset value, end of
year..................... $9.20 $ 8.94 $ 8.86 $ 9.12 $ 8.50
===== ====== ====== ====== ======
Total investment
return(1)................ 9.06% 7.27% 3.39% 14.70% (9.62)%
===== ====== ====== ====== ======
Ratios/Supplemental data:
Net assets, end of year
(000's).................. $278,483 $291,470 $343,836 $430,285 $428,722
Expenses to average net
assets................... 1.03% 0.94% 0.94% 1.03%(2) 0.95%
Net investment income to
average net assets....... 5.69% 6.15% 6.24% 6.65%(2) 6.48%
Portfolio turnover rate... 370% 322% 359% 206% 358%
</TABLE>
- ---------
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each year 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 year reported. The figures do not include sales charges; results would
be lower if sales charges were included.
(2) These ratios include non-recurring reorganization expenses of 0.03%.
50
<PAGE>
<TABLE>
<CAPTION>
Class B Class C
- ---------------------------------------------- ----------------------------------------------
For the Years Ended November 30, For the Years Ended November 30,
- ---------------------------------------------- ----------------------------------------------
1998 1997 1996 1995 1994 1998 1997 1996 1995 1994
- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 8.94 $ 8.87 $ 9.12 $ 8.50 $ 10.03 $ 8.93 $ 8.86 $ 9.11 $ 8.49 $ 10.02
------ ------ ------ ------ ------- ------ ------ ------ ------ -------
0.44 0.47 0.48 0.51 0.53 0.47 0.49 0.50 0.53 0.55
0.26 0.07 (0.25) 0.63 (1.53) 0.26 0.07 (0.25) 0.63 (1.53)
------ ------ ------ ------ ------- ------ ------ ------ ------ -------
0.70 0.54 0.23 1.14 (1.00) 0.73 0.56 0.25 1.16 (0.98)
------ ------ ------ ------ ------- ------ ------ ------ ------ -------
(0.44) (0.47) (0.48) (0.52) (0.53) (0.47) (0.49) (0.50) (0.54) (0.55)
------ ------ ------ ------ ------- ------ ------ ------ ------ -------
$ 9.20 $ 8.94 $ 8.87 $ 9.12 $ 8.50 $ 9.19 $ 8.93 $ 8.86 $ 9.11 $ 8.49
====== ====== ====== ====== ======= ====== ====== ====== ====== =======
8.16% 6.34% 2.72% 13.81% (10.31)% 8.50% 6.62% 2.98% 14.12% (10.08)%
====== ====== ====== ====== ======= ====== ====== ====== ====== =======
$23,318 $42,097 $61,873 $82,469 $99,581 $25,076 $28,132 $37,754 $53,832 $68,400
1.83% 1.69% 1.70% 1.81%(2) 1.72% 1.54% 1.44% 1.45% 1.55%(2) 1.45%
4.87% 5.40% 5.47% 5.88%(2) 5.71% 5.17% 5.66% 5.74% 6.17%(2) 5.99%
370% 322% 359% 206% 358% 370% 322% 359% 206% 358%
</TABLE>
51
<PAGE>
PaineWebber U.S. Government Income Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
year is presented below:
<TABLE>
<CAPTION>
Class Y
------------------------------------------
For the Years Ended November 30,
------------------------------------------
1998 1997 1996 1995 1994
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year. $ 8.93 $ 8.86 $ 9.11 $ 8.49 $10.02
------ ------ ------ ------ ------
Net investment income.............. 0.54 0.56 0.57 0.61 0.62
Net realized and unrealized gains
(losses) from investments, futures
and options....................... 0.26 0.07 (0.25) 0.62 (1.53)
------ ------ ------ ------ ------
Net increase (decrease) from
investment operations............. 0.80 0.63 0.32 1.23 (0.91)
------ ------ ------ ------ ------
Dividends from net investment
income............................ (0.54) (0.56) (0.57) (0.61) (0.62)
------ ------ ------ ------ ------
Net asset value, end of year....... $ 9.19 $ 8.93 $ 8.86 $ 9.11 $ 8.49
====== ====== ====== ====== ======
Total investment return(1)......... 9.41% 7.43% 3.81% 15.06% (9.37)%
====== ====== ====== ====== ======
Ratios/Supplemental data:
Net assets, end of year (000's).... $11,547 $6,816 $6,495 $7,957 $4,955
Expenses to average net assets..... 0.71% 0.67% 0.64% 0.71%(2) 0.65%
Net investment income to average
net assets........................ 5.99% 6.41% 6.53% 6.96%(2) 6.76%
Portfolio turnover rate............ 370% 322% 359% 206% 358%
</TABLE>
- ---------
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each year 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 year reported. The figures do not include program fees; results would
be lower if program fees were included.
(2) These ratios include non-recurring reorganization expenses of 0.03%.
52
<PAGE>
[This Page Intentionally Left Blank]
53
<PAGE>
PaineWebber Low Duration U.S. Government Income Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
year is presented below:
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------
For the Years Ended November 30,
----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year....... $2.37 $ 2.35 $ 2.34 $ 2.25 $ 2.48
----- ------ ------ ------ ------
Net investment income.... 0.13 0.13 0.14 0.13 0.12
Net realized and
unrealized gains
(losses) from
investments,
futures and options..... 0.01 0.02 0.01 0.09 (0.29)
----- ------ ------ ------ ------
Net increase (decrease)
from operations......... 0.14 0.15 0.15 0.22 (0.17)
----- ------ ------ ------ ------
Dividends from net
investment income....... (0.13) (0.13) (0.14) (0.13) (0.12)
----- ------ ------ ------ ------
Contribution to capital
from adviser............ -- -- -- -- 0.06
----- ------ ------ ------ ------
Net asset value, end of
year.................... $ 2.38 $ 2.37 $ 2.35 $ 2.34 $ 2.25
===== ====== ====== ====== ======
Total investment
return(1)............... 6.11% 6.67% 6.46% 10.25% (4.50)%*
===== ====== ====== ====== ======
Ratios/Supplemental data:
Net assets, end of year
(000's)................. $63,606 $33,648 $71,216 $127,961 $158,712
Expenses to average net
assets(2)............... 1.07%+ 1.04% 1.21% 1.15% 0.84%
Net investment income to
average net assets(2)... 5.37%+ 5.72% 5.84% 5.89% 5.16%
Portfolio turnover rate.. 411% 359% 210% 242% 246%
</TABLE>
- ---------
* Net of $0.06 contribution of capital from adviser. If such contribution had
not been made the total investment returns would have been (7.02)% for Class
A, (7.74)% for Class B and (7.50)% for Class C.
+ Includes 0.13% of interest expense related to the reverse repurchase
agreement transactions entered into during the year.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each year 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 year reported. The figures do not include sales charges; results would
be lower if sales charges were included.
(2) During the year ended November 30, 1994 Mitchell Hutchins waived a portion
of its advisory and administration fees. If such waivers had not been made
the annualized ratios of expenses to average net assets, and net investment
income to average net assets, respectively, would have been 0.88% and 5.12%
for Class A, 1.66% and 4.35% for Class B, and 1.39% and 4.61% for Class C.
54
<PAGE>
<TABLE>
<CAPTION>
Class B Class C
- ---------------------------------------- -----------------------------------------------
For the Years Ended November 30, For the Years Ended November 30,
- ---------------------------------------- -----------------------------------------------
1998 1997 1996 1995 1994 1998 1997 1996 1995 1994
- ------ ------ ------ ------ ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 2.37 $ 2.35 $ 2.34 $ 2.25 $ 2.48 $ 2.37 $ 2.35 $ 2.34 $ 2.25 $ 2.47
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
0.11 0.11 0.12 0.11 0.10 0.12 0.12 0.12 0.12 0.11
0.01 0.02 0.01 0.09 (0.29) 0.01 0.02 0.01 0.09 (0.28)
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
0.12 0.13 0.13 0.20 (0.19) 0.13 0.14 0.13 0.21 (0.17)
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(0.11) (0.11) (0.12) (0.11) (0.10) (0.12) (0.12) (0.12) (0.12) (0.11)
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
-- -- -- -- 0.06 -- -- -- -- 0.06
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$ 2.38 $ 2.37 $ 2.35 $ 2.34 $ 2.25 $ 2.38 $ 2.37 $ 2.35 $ 2.34 $ 2.25
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
5.24% 5.81% 5.60% 9.30% (5.24)%* 5.46% 6.05% 5.82% 9.60% (4.99)%*
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
$7,670 $6,949 $7,716 $9,147 $13,382 $78,923 $91,700 $123,203 $180,169 $296,182
1.91%+ 1.87% 2.03% 2.02% 1.62% 1.72%+ 1.64% 1.80% 1.75% 1.36%
4.58%+ 4.80% 4.99% 5.03% 4.40% 4.78%+ 5.05% 5.22% 5.31% 4.65%
411% 359% 210% 242% 246% 411% 359% 210% 242% 246%
</TABLE>
55
<PAGE>
PaineWebber Low Duration U.S. Government Income Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period is presented below:
<TABLE>
<CAPTION>
Class Y
----------------------------------------------
For the
For the Years Period
Ended November 30, October 20, 1995#
----------------------- to November 30,
1998 1997 1996 1995
------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period......................... $ 2.37 $ 2.35 $ 2.34 $ 2.33
------ ------ ------ ------
Net investment income........... 0.14 0.14 0.14 0.01
Net realized and unrealized
gains (losses) from
investments, futures and
options........................ 0.01 0.02 0.01 0.01
------ ------ ------ ------
Net increase (decrease) from
operations..................... 0.15 0.16 0.15 0.02
------ ------ ------ ------
Dividends from net investment
income......................... (0.14) (0.14) (0.14) (0.01)
------ ------ ------ ------
Net asset value, end of period.. $ 2.38 $ 2.37 $ 2.35 $ 2.34
====== ====== ====== ======
Total investment return(1)...... 6.37% 6.87% 6.64% 0.83%
====== ====== ====== ======
Ratios/Supplemental data:
Net assets, end of period
(000's)........................ $1,810 $ 352 $ 333 $ 321
Expenses to average net assets.. 0.79%+ 0.86% 0.99% 0.99%*
Net investment income to average
net assets..................... 5.60%+ 5.82% 6.00% 5.87%*
Portfolio turnover rate......... 411% 359% 210% 242%
</TABLE>
- ---------
# Commencement of issuance of shares.
* Annualized.
+ Includes 0.13% of interest expense related to the reverse repurchase
agreement transaction entered into during the year.
(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 program fees;
results would be lower if program fees were included. Total investment
return for periods less than one year has not been annualized.
56
<PAGE>
[This Page Intentionally Left Blank]
57
<PAGE>
PaineWebber Investment Grade Income Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period is presented below:
<TABLE>
<CAPTION>
Class A
------------------------------------------------
For the Years Ended November 30,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $10.85 $10.59 $10.68 $ 9.67 $11.08
------ ------ ------ ------ ------
Net investment income........ 0.74 0.74 0.73 0.76 0.77
Net realized and unrealized
gains (losses) from
investments, futures and
options..................... (0.06) 0.26 (0.09) 1.01 (1.41)
------ ------ ------ ------ ------
Net increase (decrease) from
investment operations....... 0.68 1.00 0.64 1.77 (0.64)
------ ------ ------ ------ ------
Dividends from net investment
income...................... (0.74) (0.74) (0.73) (0.76) (0.77)
------ ------ ------ ------ ------
Net asset value, end of
period...................... $10.79 $10.85 $10.59 $10.68 $ 9.67
====== ====== ====== ====== ======
Total investment return(1)... 6.37% 9.88% 6.33% 18.95% (5.99)%
====== ====== ====== ====== ======
Ratios/Supplemental Data:
Net assets, end of period
(000's)..................... $216,402 $212,472 $229,117 $258,898 $271,553
Expenses to average net
assets...................... 0.93% 1.03% 0.94% 0.95% 0.97%
Net investment income to
average net assets.......... 6.56% 7.07% 7.02% 7.42% 7.50%
Portfolio turnover rate...... 173% 109% 115% 149% 142%
</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 or program fees;
results would be lower if sales charges or program fees were included.
Total investment for periods of less than one year has not been annualized.
58
<PAGE>
<TABLE>
<CAPTION>
Class B Class C Class Y
- ------------------------------------------- ------------------------------------------- --------------
For the Period
February 18,
For the Years Ended November 30, For the Years Ended November 30, 1998+ through
- ------------------------------------------- ------------------------------------------- November 30,
1998 1997 1996 1995 1994 1998 1997 1996 1995 1994 1998
- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$10.85 $10.58 $10.67 $ 9.67 $11.07 $10.85 $10.59 $10.68 $ 9.67 $11.08 $10.99
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
0.65 0.66 0.65 0.68 0.69 0.68 0.69 0.68 0.70 0.72 0.57
(0.06) 0.27 (0.09) 1.00 (1.40) (0.06) 0.26 (0.09) 1.01 (1.41) (0.19)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
0.59 0.93 0.56 1.68 (0.71) 0.62 0.95 0.59 1.71 (0.69) 0.38
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(0.65) (0.66) (0.65) (0.68) (0.69) (0.68) (0.69) (0.68) (0.70) (0.72) (0.57)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$10.79 $10.85 $10.58 $10.67 $ 9.67 $10.79 $10.85 $10.59 $10.68 $ 9.67 $10.80
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
5.56% 9.17% 5.54% 17.97% (6.60)% 5.84% 9.34% 5.80% 18.37% (6.40)% 3.51%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
$41,124 $44,829 $58,364 $71,372 $69,359 $34,457 $29,204 $32,337 $39,150 $45,473 $2,682
1.69% 1.78% 1.68% 1.70% 1.72% 1.42% 1.53% 1.44% 1.45% 1.45% 0.62%*
5.79% 6.31% 6.27% 6.67% 6.73% 6.04% 6.57% 6.51% 6.95% 6.99% 6.71%*
173% 109% 115% 149% 142% 173% 109% 115% 149% 142% 173%
</TABLE>
59
<PAGE>
PaineWebber High Income Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period is presented below:
<TABLE>
<CAPTION>
Class A
-------------------------------------------------
For the Years Ended November 30,
-------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................. $ 7.63 $ 7.35 $ 6.96 $ 7.14 $ 8.73
------ ------ ------ ------ ------
Net investment income...... 0.67 0.69 0.72 0.79 0.86
Net realized and unrealized
gains (losses) from
investments............... (0.99) 0.27 0.37 (0.17) (1.59)
------ ------ ------ ------ ------
Net increase (decrease)
from investment
operations................ (0.32) 0.96 1.09 0.62 (0.73)
------ ------ ------ ------ ------
Dividends from net
investment income......... (0.65) (0.68) (0.70) (0.80) (0.86)
------ ------ ------ ------ ------
Net asset value, end of
period.................... $ 6.66 $ 7.63 $ 7.35 $ 6.96 $ 7.14
====== ====== ====== ====== ======
Total investment return(1). (4.46)% 13.59% 16.55% 9.01% (9.20)%
====== ====== ====== ====== ======
Ratios/Supplemental data:
Net assets, end of period
(000's)................... $258,559 $272,325 $243,564 $248,619 $268,397
Expenses to average net
assets.................... 0.91% 0.98% 0.96% 0.93% 0.91%
Net investment income to
average net assets........ 9.10% 9.21% 10.10% 11.17% 10.43%
Portfolio turnover rate.... 161% 160% 142% 94% 156%
</TABLE>
- -------
* Annualized
+ Commencement of issuance of shares
(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 or program fees;
results would be lower if sales charges or program fees were included.
Total investment return for a period of less than one year has not been
annualized.
60
<PAGE>
<TABLE>
<CAPTION>
Class B Class C Class Y
- ------------------------------------------------- ----------------------------------------------- -------------
For the
Period
February 20,
For the Years Ended November 30, For the Years Ended November 30, 1998+ through
- ------------------------------------------------- ----------------------------------------------- November 30,
1998 1997 1996 1995 1994 1998 1997 1996 1995 1994 1998
- -------- -------- -------- -------- -------- ------- -------- ------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 7.63 $ 7.35 $ 6.95 $ 7.14 $ 8.72 $ 7.64 $ 7.36 $ 6.97 $ 7.15 $ 8.74 $ 7.79
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
0.63 0.63 0.66 0.74 0.80 0.64 0.65 0.68 0.76 0.82 0.53
(1.01) 0.27 0.39 (0.18) (1.58) (0.99) 0.27 0.38 (0.18) (1.59) (1.14)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(0.38) 0.90 1.05 0.56 (0.78) (0.35) 0.92 1.06 0.58 (0.77) (0.61)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(0.60) (0.62) (0.65) (0.75) (0.80) (0.62) (0.64) (0.67) (0.76) (0.82) (0.53)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
$ 6.65 $ 7.63 $ 7.35 $ 6.95 $ 7.14 $ 6.67 $ 7.64 $ 7.36 $ 6.97 $ 7.15 $ 6.65
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
(5.32)% 12.76% 15.86% 8.05% (9.77)% (4.92)% 13.03% 15.96% 8.45% (9.62)% (8.43)%
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
$176,997 $236,656 $215,492 $212,946 $235,480 $98,982 $115,757 $94,445 $103,911 $115,196 $2,633
1.66% 1.73% 1.71% 1.68% 1.64% 1.41% 1.48% 1.47% 1.44% 1.38% 0.63%*
8.30% 8.45% 9.34% 10.42% 9.66% 8.58% 8.66% 9.60% 10.63% 9.91% 9.78%*
161% 160% 142% 94% 156% 161% 160% 142% 94% 156% 161%
</TABLE>
61
<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 Low Duration U.S. Government Income Fund, PaineWebber
Investment Grade Income Fund and PaineWebber High Income Fund (four of the
portfolios of PaineWebber Managed Investments Trust) (the "Funds") as of
November 30, 1998, 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 and financial highlights. Our procedures included
confirmation of investments owned at November 30, 1998, 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 Low Duration U.S.
Government Income Fund, PaineWebber Investment Grade Income Fund and
PaineWebber High Income Fund at November 30, 1998, 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.
/s/ Ernst & Young LLP
New York, New York
January 20, 1999
62
<PAGE>
PaineWebber
Tax Information (Unaudited)
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, 1998) 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 PaineWebber U.S. Government
Income Fund, PaineWebber Low Duration U.S. Government Income Fund, PaineWebber
Investment Grade Income Fund and PaineWebber High Income Fund during the fiscal
year were derived from net investment income and are taxable as ordinary
income. Additionally, 2.00% of the distributions paid by PaineWebber High
Income Fund qualify for the dividend received deduction available for corporate
shareholders.
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 1998. 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 1999. Some states exempt interest earned on direct
obligations of the federal government from state and local taxes. A portion of
the distribution paid by the PaineWebber U.S. Government Income Fund and
PaineWebber Low Duration U.S. Government Income Fund qualified as exempt-
interest dividends and therefore, are not subject to state and local income
taxes. Shareholders are advised to consult their own tax advisers with respect
to the tax consequences of their investment in each Fund.
63
<PAGE>
================================================================================
TRUSTEES
E. Garrett Bewkes, Jr.
Chairman
Margo N. Alexander
Richard Q. Armstrong
Richard R. Burt
Mary C. Farrell
Meyer Feldberg
George W. Gowen
Frederic V. Malek
Carl W. Schafer
PRINCIPAL OFFICERS
Margo N. Alexander
President
Victoria E. Schonfeld
Vice President
Dianne E. O'Donnell
Vice President and Secretary
Paul H. Schubert
Vice President and Treasurer
Julieanna Berry
Vice President
James F. Keegan
Vice President
Thomas J. Libassi
Vice President
Nirmal Singh
Vice President
Craig M. Varrelman
Vice President
Dennis McCauley
Vice President
INVESTMENT ADVISER,
ADMINISTRATOR AND DISTRIBUTOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
SUB-INVESTMENT ADVISER
(PaineWebber Low Duration U.S. Government Income Fund)
Pacific Investment Management Company
840 Newport Center Drive
Newport Beach, CA 92660
A prospectus containing more complete information for any of the Funds listed on
the back cover can be obtained from a PaineWebber investment executive or
correspondent firm. Read the prospectus carefully before investing.
This report is not to be used in connection with the offering of shares of the
Funds unless accompanied or preceded by an effective prospectus.
<PAGE>
PaineWebber offers a family of 27 funds which encompass a diversified range of
investment goals.
BOND FUNDS
* High Income Fund
* Investment Grade Income Fund
* Low Duration U.S. Government Income Fund
* Strategic Income Fund
* U.S. Government Income Fund
TAX-FREE BOND FUNDS
* California Tax-Free Income Fund
* Municipal High Income Fund
* National Tax-Free Income Fund
* New York Tax-Free Income Fund
STOCK FUNDS
* Financial Services Growth Fund
* Growth Fund
* Growth and Income Fund
* Mid Cap Fund
* Small Cap Fund
* S&P 500 Index Fund
* Tax-Managed Equity Fund
* Utility Income Fund
ASSET ALLOCATION FUNDS
* Balanced Fund
* Tactical Allocation Fund
GLOBAL FUNDS
* Asia Pacific Growth Fund
* Emerging Markets Equity Fund
* Global Equity Fund
* Global Income Fund
MITCHELL HUTCHINS PORTFOLIOS
* Aggressive Portfolio
* Moderate Portfolio
* Conservative Portfolio
PAINEWEBBER MONEY MARKET FUND
PaineWebber
(C)1999 PaineWebber Incorporated
Member SIPC
PaineWebber
====================================
BOND FUNDS A
N
N
* U.S. GOVERNMENT U
INCOME FUND A
L
* LOW DURATION
U.S. GOVERNMENT R
INCOME FUND E
P
* INVESTMENT GRADE O
INCOME FUND R
T
* HIGH INCOME FUND
NOVEMBER 30, 1998
