<PAGE>
PAINEWEBBER STRATEGY FUND ANNUAL REPORT
PERFORMANCE AT A GLANCE
================================================================================
Comparison of the change of a $10,000 investment in PaineWebber Strategy Fund
(Classes A, B, C and Y) and the S&P 500 Index from December 2, 1999 through
September 30, 2000.
[GRAPH]
<TABLE>
<CAPTION>
PAINEWEBBER STRATEGY PAINEWEBBER STRATEGY PAINEWEBBER STRATEGY PAINEWEBBER STRATEGY
FUND (A) FUND (B) FUND (C) FUND (Y) S&P 500 INDEX
<S> <C> <C> <C> <C> <C>
12/2 $9,551 $10,000 $10,000 $10,000 $10,000
12/31 $9,761 $10,220 $10,220 $10,230 $10,435
1/31 $9,054 $9,470 $9,470 $9,480 $9,911
2/29 $8,978 $9,380 $9,380 $9,400 $9,724
3/31 $9,799 $10,230 $10,230 $10,270 $10,675
4/30 $9,179 $9,580 $9,580 $9,620 $10,354
5/31 $8,634 $9,010 $9,010 $9,050 $10,141
6/30 $8,625 $8,990 $8,990 $9,040 $10,391
7/31 $8,434 $8,790 $8,780 $8,850 $10,229
8/31 $8,873 $9,230 $9,230 $9,310 $10,864
9/30 $8,300 $8,198 $8,544 $8,710 $10,290
</TABLE>
Past performance is no guarantee of future performance.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
TOTAL RETURNS, PERIOD ENDED 09/30/00
--------------------------------------------------------------------------------
6 Months Inception(0)
--------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS A(*) -15.30% -13.10%
Before Deducting CLASS B(**) -15.64 -13.70
Maximum Sales Charge CLASS C(+) -15.64 -13.70
CLASS Y(++) -15.19 -12.90
--------------------------------------------------------------------------------
CLASS A(*) -19.09 -17.00
After Deducting CLASS B(**) -19.86 -18.02
Maximum Sales Charge CLASS C(+) -16.48 -14.56
--------------------------------------------------------------------------------
S&P 500 Index -3.60 2.90
HIGHLIGHTED STOCKS-SM- List(1) -15.29 N/A
Lipper Large Cap Core Median -3.74 5.70
--------------------------------------------------------------------------------
</TABLE>
Past performance is no guarantee of future performance. Performance results
for the Fund assume reinvestment of all dividends and capital gains, if any.
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.
[SIDENOTE]
The graph depicts the performance of PaineWebber Strategy
Fund (Classes A, B, C and Y) versus the S&P 500 Index. It is important to note
PaineWebber Strategy Fund is a professionally managed mutual fund while the
Index is not available for direct investment and is unmanaged. The comparison is
shown for illustrative purposes only.
1
<PAGE>
ANNUAL REPORT
The UBS Warburg HIGHLIGHTED STOCKS list is not compiled with any client or
product in mind, including PaineWebber Strategy Fund. Price returns of the
HIGHLIGHTED STOCKS list do not predict the future results of the list or the
Fund. Deviations from the HIGHLIGHTED STOCKS list's price returns will result
because those returns do not reflect the execution of actual purchases or sales.
A mutual fund following the HIGHLIGHTED STOCKS list may not be able to execute
purchases and sales at the prices used to calculate the price returns of the
list. Because the HIGHLIGHTED STOCKS list is a paper portfolio that is not
managed to a target number of stocks, no "rebalancing" of actual investments is
done when stocks are added to or deleted from the list. The Fund also will be
subject to daily cash flow, which will result in ongoing purchases and sales of
stocks and transactional expenses, including brokerage commissions, as well as
the advisory fees and other expenses that the Fund bears. In addition, because
the HIGHLIGHTED STOCKS list does not include a cash component, price returns of
the list are based on a constant 100% investment in the stocks on the list.
(0) Inception: since commencement of issuance on December 2, 1999 for share
classes A, B, C and Y. Inception returns for the Lipper Median and the S&P
500 Index are also as of December 2, 1999.
(*) Maximum sales charge for Class A shares is 4.5% 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 1% and is
reduced to 0% after one year. Class C shares bear ongoing 12b-1
distribution and service fees.
(++) The Fund offers Class Y shares to a limited group of eligible investors.
Class Y shares do not bear initial or contingent deferred sales charges or
ongoing 12b-1 distribution and service fees.
(1) Price returns of the HIGHLIGHTED STOCKS list are based on the closing price
on the day the Global Investment Strategy Group announces any additions to
(or deletions from) the list. For the six months ended September 30, 2000,
the price return of the HIGHLIGHTED STOCKS list was -15.29% with the S&P
500 Index down 3.60%. The indicated price returns are based on capital
appreciation, excluding dividends and transaction costs such as
commissions, markups, fees and interest charges. Actual transactions
adjusted for such transaction costs will result in different returns. In
addition, actual transactions in the market following the announcement of a
change to the list, in most instances, will occur at different prices than
those used to calculate the indicated price returns of the list, which
would result in different price returns. A complete record of all the
recommendations upon which the above price returns are based (including the
stocks involved, as well as the number that advanced and declined) is
available from UBS Warburg upon written request.
2
<PAGE>
PAINEWEBBER STRATEGY FUND ANNUAL REPORT
Dear Shareholder, November 15, 2000
We are pleased to present you with the first annual report for PaineWebber
Strategy Fund (the "Fund") for the fiscal period from December 2, 1999 through
September 30, 2000.
MARKET REVIEW
================================================================================
[ICON] During the period ended September 30, 2000, stocks in general and
technology stocks in particular had to endure the "perfect storm," as a
variety of factors combined to help batter equities. Inflationary fears,
which prompted the Federal Reserve (the "Fed") to raise Fed Fund interest
rates another half-percentage point to 6.5%, dominated the markets early in
the period. Since then, oil prices have risen, oil reserves were released in
the U.S. with the hopes of offsetting the price increases, and the Euro
continued to falter in comparison to the dollar.
These factors, in addition to continued warnings from the Fed that
inflationary pressures may yet re-enter the picture, filled the air with
uncertainty during this time, while finally beginning to take a toll on many
companies' bottom lines. Moreover, earnings reports that were just pennies off
expectations spurred investors to punish these stocks, while formerly
high-flying technology darlings were also hurt. The equity markets generally
suffered near the fiscal period-end as investors began to sell and seek
relatively safe havens for their gains. If there is a bright side to the violent
fluctuations of the market, it could be that the market has neared or reached
its bottom, perhaps clearing out weaker equities in which prices were not
supported by valuations or performance.
The Dow Jones Industrial Average declined 3.52% and the Standard & Poor's 500
Index advanced 2.90% during the period. Despite their characteristic volatility,
the technology-driven Nasdaq 100 Index advanced 14.87% and the Nasdaq Composite
trailed it, but gained 6.37% during the Fund's fiscal period, December 2, 1999
through September 30, 2000.
3
<PAGE>
ANNUAL REPORT
OUTLOOK
Signs of the long-anticipated slowdown in the economy are emerging with
increasing regularity. Moreover, there exists the potential for oil prices to
disrupt company profits, as well as the performance of the Euro, particularly
for multinational companies that compete or export heavily overseas. However,
we expect technology spending will continue to be robust as we enter 2001, as
new products and a surge in high-tech patents continue the need for such
spending. Consequently, one of the themes currently serving as the basis for
the HIGHLIGHTED STOCKS-SM- list selection, the Information Revolution, will
likely continue to be an area of better than market performance. With
productivity continuing its impressive gains, we expect real wages in 2001 to
grow and be accompanied by productivity gains. Moreover, the markets are
expected to have absorbed the majority of the double-barreled shock of rising
interest rates and oil prices by then. Declining delivery lead times indicate
that demand is also no longer exceeding supply, which may also help to
suppress inflation fears.
Although the Federal Reserve is expected to keep interest rates at their
current level throughout the next year, rates could rise if inflation once again
becomes a concern. If post-election fiscal policy doesn't produce an expected
stimulus, there is potential for an interest rate decrease. In any event, the
current other theme which characterizes the HIGHLIGHTED STOCKS list, the Age of
Affluence, also seems likely to provide a profitable fishing ground for stock
selection. If general spending slows, affluent consumers will still be in the
market for certain goods, services and entertainment. We remain committed to the
thematic approach to investing and the Fund is open, at the current time, for
additional purchases. The current depressed level in net asset value may well
represent an attractive buying opportunity.
4
<PAGE>
ANNUAL REPORT
PORTFOLIO REVIEW
================================================================================
[ICON] The Fund invests in the stocks included on the UBS Warburg HIGHLIGHTED
STOCKS list maintained by Edward M. Kerschner, UBS Warburg's Chief Global
Strategist, and the Global Investment Strategy Group. The HIGHLIGHTED STOCKS
list is composed of stocks the Global Investment Strategy Group believes are
well positioned to benefit from emerging economic, social and political
themes before they are widely recognized. Current investment themes are The
American Age of Affluence and The Information Revolution Wars. HIGHLIGHTED
STOCKS in these categories include, respectively, Tiffany & Co. and JDS
Uniphase. Of course, investment themes and the stocks comprising each theme
are subject to change.
During the fiscal year, the Fund significantly lagged the market as
measured by the S&P 500 Index. This underperformance is attributable
primarily to declines in the value of certain stocks in the portfolio, for
example, Citrix (sold during the period). While stock selection has hurt
performance year to date, we remain committed to the thematic approach to
investing implemented through the purchase of stocks which are recommended by
the Global Investment Strategy Group. The difference in performance between
the Fund and the HIGHLIGHTED STOCKS list is attributable primarily to fund
operating expenses and the impact of pricing differences(2). We believe that
the impact of these pricing differences is unlikely to be substantial over
time.
The Global Investment Strategy Group made several changes to the HIGHLIGHTED
STOCKS list during the fiscal year:
<TABLE>
<CAPTION>
Date Additions Date Deletions
--------------------------------------------------------------------------------
<S> <C> <C> <C>
4/10/00 Citrix Systems 6/12/00 Citrix Systems
6/20/00 Following the acquisition, 6/13/00 Electronic Data Systems
Pfizer replaces Warner Lambert 6/20/00 Carnival
6/26/00 Johnson & Johnson 8/31/00 Gap
6/29/00 El Paso Energy 9/1/00 AXA Financial
6/29/00 Columbia/HCA Healthcare
6/30/00 Pharmacia
6/30/00 JDS Uniphase
</TABLE>
The following additions and deletions were made shortly after the end of the
fiscal period:
<TABLE>
<CAPTION>
Date Additions Date Deletions
--------------------------------------------------------------------------------
<S> <C> <C> <C>
10/4/00 TMP Worldwide 10/4/00 Weyerhaeuser
10/4/00 Starwood Hotels and Resorts 10/4/00 Wal-Mart Stores
10/4/00 Nortel Networks 10/4/00 Smurfit-Stone Container
10/4/00 Merrill Lynch & Co. 10/4/00 Costco
10/4/00 Hartford Financial Services
10/4/00 Firstar
10/4/00 Fifth Third Bancorp
10/4/00 Citigroup
10/4/00 Check Point Software
Technologies
10/4/00 American Express
10/4/00 AES Corporation
</TABLE>
(2) The pricing used to determine the performance of PaineWebber Strategy Fund
by its custodian is based on prices from the exchange on which the stock
primarily trades. These prices may be the same, less or more than those
reported by FAME (Forecasting and Modeling Environment), which are used by
the Global Investment Strategy Group to determine the performance of the
HIGHLIGHTED STOCKS list.
5
<PAGE>
ANNUAL REPORT
PORTFOLIO STATISTICS
<TABLE>
<CAPTION>
CHARACTERISTICS(*) 9/30/00 3/31/00
--------------------------------------------------------------------------------
<S> <C> <C>
Median Market Capitalization ($bln) $ 71.8 $ 53.0
Average Market Capitalization ($bln) $ 95.5 $105.6
Dividend Yield 0.5% 0.4%
Net Assets ($bln) $ 1.6 $ 2.0
Number of Securities 31 31
Stocks 100% 100%
Cash 0% 0%
--------------------------------------------------------------------------------
<CAPTION>
TOP FIVE SECTORS(*) 9/30/00 3/31/00
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Technology 31.7% Consumer Cyclical 36.8%
Consumer Cyclical 26.9 Technology 30.4
Healthcare 19.2 Healthcare 9.1
Utilities 9.7 Financial Services 7.2
Capital Goods 3.3 Basic Materials 6.9
---------------------------------------------------------------------------------------
Total 90.8 Total 90.4
<CAPTION>
TOP TEN HOLDINGS(*) 9/30/00 3/31/00
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bed, Bath & Beyond 4.4% Bed, Bath & Beyond 4.1%
WorldCom 3.3 Tandy Corp. 3.9
Clear Channel Communications 3.3 Tiffany & Co. 3.9
Microsoft 3.3 Bank of New York 3.7
Tiffany & Co. 3.3 Smurfit-Stone Container 3.7
Smurfit-Stone Container 3.3 AXA Financial 3.5
General Motors Corp. Class H 3.3 Microsoft 3.5
America Online 3.2 Time Warner 3.5
Hewlett Packard 3.2 Cisco Systems 3.4
Lucent Technologies 3.2 Delta Air Lines 3.4
---------------------------------------------------------------------------------------
Total 33.8 Total 36.6
</TABLE>
(*) Weightings represent percentages of net assets as of the dates indicated.
The composition of the Fund's portfolio will vary over time.
6
<PAGE>
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
PaineWebber Strategy Fund or another fund in the PaineWebber Family of Funds,(3)
please contact your Financial Advisor. For additional information, visit us at
www.painewebber.com.
Sincerely,
/s/ BRIAN M. STORMS /s/ T. KIRKHAM BARNEBY
BRIAN M. STORMS T. KIRKHAM BARNEBY
Chief Executive Officer Managing Director and
and President Chief Investment Officer -
Mitchell Hutchins Quantitative Investments
Asset Management Inc. Mitchell Hutchins
Asset Management Inc.
Portfolio Manager,
PaineWebber
Strategy Fund
This letter is intended to assist shareholders in understanding how the Fund
performed during the fiscal year ended September 30, 2000, and reflects our
views at the time of its writing. Of course, these views may change in response
to changing circumstances. We encourage you to consult your Financial Advisor
regarding your personal investment program.
(3) 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.
7
<PAGE>
PAINEWEBBER STRATEGY FUND
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCKS--100.41%
AIRLINES--3.19%
1,113,200 Delta Air Lines, Inc. ........................ $49,398,250
-------------
BANKS--3.21%
885,100 Bank of New York Co., Inc. ................... 49,620,919
-------------
COMPUTER HARDWARE--9.18%
877,400 Cisco Systems, Inc.(*) ....................... 48,476,350
927,200 Gateway, Inc.(*)(1) .......................... 43,346,600
516,800 Hewlett-Packard Co. .......................... 50,129,600
-------------
141,952,550
-------------
COMPUTER SOFTWARE--9.66%
444,800 IBM Corp. .................................... 50,040,000
838,900 Microsoft Corp.(*) ........................... 50,596,156
618,700 Oracle Systems Corp.(*) ...................... 48,722,625
-------------
149,358,781
-------------
DIVERSIFIED RETAIL--6.34%
1,392,900 Costco Wholesale Corp.(*) .................... 48,664,444
1,025,100 Wal-Mart Stores, Inc. ........................ 49,332,937
-------------
97,997,381
-------------
DRUGS & MEDICINE--12.87%
706,200 Amgen, Inc.(*) ............................... 49,312,622
1,111,625 Pfizer, Inc. ................................. 49,953,648
827,700 Pharmacia Corp. .............................. 49,817,194
1,075,900 Schering-Plough Corp. ........................ 50,029,350
-------------
199,112,814
-------------
ELECTRICAL EQUIPMENT--6.45%
1,640,200 Lucent Technologies, Inc. .................... 50,128,612
1,758,600 Motorola, Inc. ............................... 49,680,450
-------------
99,809,062
-------------
FOREST PRODUCTS, PAPER--3.21%
1,230,800 Weyerhaeuser Co. ............................. 49,693,550
-------------
NUMBER OF
SHARES VALUE
------ -----
<S> <C> <C>
GAS UTILITY--3.16%
792,600 El Paso Energy Corp.(1) ...................... $48,843,975
-------------
INFORMATION & COMPUTER SERVICES--3.25%
934,200 America Online, Inc.(*) ...................... 50,213,250
-------------
LONG DISTANCE & PHONE COMPANIES--3.33%
1,695,500 MCI Worldcom, Inc.(*) ........................ 51,500,812
-------------
MANUFACTURING-GENERAL--3.26%
4,200,500 Smurfit-Stone Container Corp.(*) ............. 50,406,000
-------------
MEDIA--9.76%
897,000 Clear Channel Communications(*) .............. 50,680,500
1,355,700 General Motors Corp. - Class H
(Hughes Electronics Corp.)(*) .............. 50,404,926
638,300 Time Warner, Inc.(1) ......................... 49,946,975
-------------
151,032,401
-------------
MEDICAL PRODUCTS--3.22%
530,100 Johnson & Johnson ............................ 49,796,269
-------------
MEDICAL PROVIDERS--3.15%
1,313,200 Columbia/HCA Healthcare Corp ................. 48,752,550
-------------
SEMICONDUCTOR--3.14%
512,600 JDS Uniphase Corp.(*) ........................ 48,536,813
-------------
SPECIALTY RETAIL--10.82%
2,766,500 Bed, Bath & Beyond, Inc.(*)(1) ............... 67,476,664
931,300 Home Depot, Inc. ............................. 49,417,106
1,308,900 Tiffany & Co.(1) ............................. 50,474,457
-------------
167,368,227
-------------
WIRELESS TELECOMMUNICATIONS--3.21%
1,063,100 Nextel Communications, Inc.(*)(1) ............ 49,699,925
-------------
Total Common Stocks (cost--$1,581,754,066) ...................... 1,553,093,529
-------------
</TABLE>
8
<PAGE>
PAINEWEBBER STRATEGY FUND
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATE RATE VALUE
----- ---- ---- -----
<S> <C> <C> <C>
REPURCHASE AGREEMENT--0.03%
$ 495 Repurchase Agreement dated 09/29/00 with State Street Bank & Trust Co.,
collateralized by $486,538 U.S. Treasury Notes, 8.00% due 05/15/01
(value--$506,000); proceeds: $495,217; (cost--$495,000) ..................... 10/02/00 5.250% $ 495,000
--------------
Total Investments (cost--$1,582,249,066)--100.44% ....................................... 1,553,588,529
Liabilities in excess of other assets--(0.44)% .......................................... (6,817,633)
--------------
Net Assets--100.00% ..................................................................... $1,546,770,896
==============
</TABLE>
---------------------------------------
(*) Non-income producing security.
(1) Security, or a portion thereof, was on loan at September 30, 2000.
See accompanying notes to financial statements
9
<PAGE>
PAINEWEBBER STRATEGY FUND
STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 2000
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost--$1,582,249,066) ..................... $1,553,588,529
Investments of cash collateral received for securities loaned, at value
(cost--$44,341,800) ............................................................ 44,341,800
Cash ........................................................................... 1,568
Receivable for investments sold ................................................ 92,069,337
Dividends and interest receivable .............................................. 544,367
Receivable for shares of beneficial interest sold .............................. 1,506,309
Other assets ................................................................... 269,868
--------------
Total assets ................................................................... 1,692,321,778
--------------
LIABILITIES
Payable for investments purchased .............................................. 93,093,914
Collateral for securities loaned ............................................... 44,341,800
Payable for shares of beneficial interest repurchased .......................... 5,689,110
Payable to affiliates .......................................................... 2,012,440
Accrued expenses and other liabilities ......................................... 413,618
--------------
Total liabilities .............................................................. 145,550,882
--------------
NET ASSETS
Beneficial interest--$0.001 par value (unlimited number authorized) ............ 1,790,917,116
Accumulated net investment loss ................................................ (887,081)
Accumulated net realized loss from investment and futures transactions ......... (214,598,602)
Net unrealized depreciation of investments ..................................... (28,660,537)
--------------
Net assets ..................................................................... $1,546,770,896
==============
CLASS A:
Net assets ..................................................................... $465,775,666
--------------
Shares outstanding ............................................................. 53,610,647
--------------
Net asset value and redemption value per share ................................. $8.69
==============
Maximum offering price per share (net asset value plus sales charge of 4.50%
of offering price) ............................................................. $9.10
==============
CLASS B:
Net assets ..................................................................... $616,435,113
--------------
Shares outstanding ............................................................. 71,402,545
--------------
Net asset value and offering price per share ................................... $8.63
==============
CLASS C:
Net assets ..................................................................... $439,329,070
--------------
Shares outstanding ............................................................. 50,887,674
--------------
Net asset value and offering price per share ................................... $8.63
==============
CLASS Y:
Net assets ..................................................................... $25,231,047
--------------
Shares outstanding ............................................................. 2,897,464
--------------
Net asset value, offering price and redemption value per share ................. $8.71
==============
</TABLE>
See accompanying notes to financial statements
10
<PAGE>
PAINEWEBBER STRATEGY FUND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
DECEMBER 2, 1999+
THROUGH
SEPTEMBER 30, 2000
------------------
<S> <C>
INVESTMENT INCOME:
Dividends .................................................................... $ 6,108,420
Interest (net of interest expense of $33,682) ................................ 1,859,653
-------------
7,968,073
-------------
EXPENSES:
Investment advisory and administration ....................................... 11,425,383
Service fees--Class A ........................................................ 1,196,355
Service and distribution fees--Class B ....................................... 5,928,983
Service and distribution fees--Class C ....................................... 4,269,046
Transfer agency service fees ................................................. 1,230,369
Amortization of offering costs ............................................... 530,873
Custody and accounting ....................................................... 313,695
State registration ........................................................... 259,532
Reports and notices to shareholders .......................................... 162,415
Professional fees ............................................................ 124,219
Trustees' fees ............................................................... 10,500
Other expenses ............................................................... 25,583
-------------
25,476,953
Less: Fee waivers from adviser ............................................... (22,702)
-------------
Net expenses ................................................................. 25,454,251
-------------
Net investment loss .......................................................... (17,486,178)
-------------
REALIZED AND UNREALIZED LOSSES FROM INVESTMENT ACTIVITIES:
Net realized losses from:
Investment transactions .................................................... (209,433,282)
Futures transactions ....................................................... (5,165,320)
Net change in unrealized appreciation/depreciation of investments ............ (28,660,537)
-------------
NET REALIZED AND UNREALIZED LOSS FROM INVESTMENT ACTIVITIES .................. (243,259,139)
-------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ......................... $ (260,745,317)
=============
</TABLE>
-----------
+ Commencement of operations.
See accompanying notes to financial statements
11
<PAGE>
PAINEWEBBER STRATEGY FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
DECEMBER 2, 1999+
THROUGH
SEPTEMBER 30, 2000
------------------
<S> <C>
FROM OPERATIONS:
Net investment loss .......................................................... $ (17,486,178)
Net realized loss from investment and futures transactions ................... (214,598,602)
Net change in unrealized appreciation/depreciation of investments ............ (28,660,537)
---------------
Net decrease in net assets resulting from operations ......................... (260,745,317)
---------------
FROM BENEFICIAL INTEREST TRANSACTIONS:
Net proceeds from the sale of shares ......................................... 2,506,332,323
Cost of shares repurchased ................................................... (698,816,120)
---------------
Net increase in net assets derived from beneficial interest transactions ..... 1,807,516,203
---------------
Net increase in net assets ................................................... 1,546,770,886
NET ASSETS:
Beginning of period .......................................................... 10
---------------
End of period ................................................................ $ 1,546,770,896
===============
</TABLE>
------------
+ Commencement of operations.
See accompanying notes to financial statements
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
PaineWebber Strategy Fund (the "Fund") is a diversified series of PaineWebber
Managed Investments Trust (the "Trust"). The Trust was organized as a
Massachusetts business trust and is registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended, as an open-end
management investment company. The Fund's investment objective is to seek
long-term capital appreciation. Offering costs have been fully amortized using
the straight line method through the first fiscal period end, September 30,
2000. Prior to the commencement of operations on December 2, 1999, the Fund had
no activity other than the sale of one Class A share to Mitchell Hutchins Asset
Management Inc. ("Mitchell Hutchins"), the investment adviser, administrator and
distributor, and a wholly owned asset management subsidiary of PaineWebber
Incorporated ("PaineWebber"), an indirect wholly owned subsidiary of UB SAG.
Currently, the Fund offers Class A, Class B, Class C and Class Y shares. Each
class represents interests in the same assets of the 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 rights except that Class A, Class B and
Class C shares have exclusive voting rights with respect to their service and/or
distribution plan. Class Y shares have no service or distribution plan.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires Fund management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
The following is a summary of significant accounting policies:
VALUATION OF INVESTMENTS--The Fund calculates its net asset value based on
the current market value for the portfolio securities. The Fund normally obtains
market values for its securities from independent pricing sources. Independent
pricing sources may use reported last sale prices, current market quotations or
valuations from computerized "matrix" systems that derive values based on
comparable securities. Securities traded in the over-the-counter ("OTC") market
and listed on The Nasdaq Stock Market, Inc. ("Nasdaq") normally are valued at
the last sale price on Nasdaq prior to valuation. Other OTC securities are
valued at the last bid price available prior to valuation. Securities which are
listed on U.S. and foreign stock exchanges normally are valued at the last sale
price on the day the securities are valued or, lacking any sales on such day, at
the last available bid price. In cases where securities are traded on more than
one exchange, the securities are valued on the exchange designated as the
primary market by Mitchell Hutchins. If a market value is not available from an
independent pricing source for a particular security, that security is valued at
fair value as determined 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 market 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 Fund's custodian takes possession of the
collateral pledged for investments in repurchase agreements. The underlying
collateral is valued daily on a mark-to-market basis to ensure that the value,
including accrued interest, is at least equal to the repurchase price. In the
event of default of the obligation to repurchase, the Fund has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
and/or retention of the collateral may be subject to legal proceedings. The Fund
occasionally participates in joint repurchase agreement transactions with other
funds managed by Mitchell Hutchins.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions are calculated using the identified cost method. Interest income is
recorded on an accrual basis. Dividend income is recorded on the ex-dividend
date. Discounts are accreted and premiums are amortized as adjustments to
interest income and the identified cost of investments.
Income, expenses (excluding class-specific expenses) and realized/unrealized
gains/losses are allocated proportionately to each class of shares based upon
the relative net asset value of outstanding shares (or the value of
dividend-eligible shares, as appropriate) of each class at the beginning of the
day (after adjusting for current capital share activity of the respective
classes). Class-specific expenses are charged directly to the applicable class
of shares.
FUTURES CONTRACTS--Upon entering into a financial futures contract, the Fund
is required to deposit in a segregated account with its custodian, in the name
of the futures broker through which the transaction was effected, an amount of
cash and/or U.S. securities equal to a certain percentage of the contract
amount. This amount is known as the "initial margin." Subsequent payments, known
as "variation margin" are made or received by the Fund each day, depending on
the daily fluctuations in the value of the underlying financial futures
contracts. Such variation margin is recorded for financial statement purposes on
a daily basis as unrealized gain or loss until the financial futures contract is
closed, at which time the net gain or loss is reclassified to realized.
Variation margin calls could be substantial in the event of adverse price
movements.
Using financial futures contracts involves various market risks. If the Fund
were unable to liquidate a futures position due to the absence of a liquid
secondary market or the imposition of price limits, it could incur substantial
losses. The Fund would continue to be subject to market risk with respect to the
position. In addition, the Fund would continue to be required to make variation
margin payments and might be required to maintain the position being hedged or
to maintain cash or securities in a segregated account. Furthermore, certain
characteristics of the futures market might increase the risk that movements in
the prices of futures contracts might not correlate perfectly with movements in
the prices of the investments being hedged, including temporary price
distortions.
There were no outstanding futures contracts at September 30, 2000.
DIVIDENDS AND DISTRIBUTIONS--Dividends and distributions to shareholders are
recorded on the ex-dividend date. The amount of dividends and distributions are
determined in accordance with federal income tax regulations, which may differ
from accounting principles generally accepted in the United States. These
"book/tax" differences are either considered temporary or permanent in nature.
To the extent these differences are permanent in nature, such amounts are
reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification.
INVESTMENT ADVISER AND ADMINISTRATOR
The Trust's 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 Fund. In
accordance with the Advisory Contract, the Fund pays Mitchell Hutchins an
investment advisory and administration fee, which is accrued daily and paid
monthly, at an annual rate of 0.75% of the Fund's average daily net assets. At
September 30, 2000, the Fund owed Mitchell Hutchins $999,403 in investment
advisory and administration fees. For the
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
period December 2, 1999 through September 30, 2000, Mitchell Hutchins waived
$22,702 of its investment advisory and administration fees in connection with
the Fund's investment of cash collateral from security lending in the Mitchell
Hutchins Private Money Market Fund LLC.
For the period December 2, 1999 through September 30, 2000, the Fund paid no
brokerage commissions to PaineWebber because no transactions with PaineWebber
were executed on behalf of the Fund.
DISTRIBUTION PLANS
Mitchell Hutchins is the distributor of the Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. Under separate
plans of service and/or distribution pertaining to Class A, Class B and Class C
shares, the 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% of the average daily
net assets of Class B and Class C shares (Class Y shares have no service or
distribution plan). At September 30, 2000, the Fund owed Mitchell Hutchins
$1,010,861 in service and distribution fees.
Mitchell Hutchins also receives the proceeds of the initial sales charges
paid by shareholders upon the purchase of Class A shares and the contingent
deferred sales charges paid by shareholders upon certain redemptions of Class A,
Class B and Class C shares. Mitchell Hutchins has informed the Fund that for the
period December 2, 1999 through September 30, 2000, it earned $21,269,558 in
sales charges.
TRANSFER AGENCY SERVICE FEES
PaineWebber provides transfer agency related services to the Fund pursuant to
a delegation of authority from PFPC, Inc., the Fund's transfer agent, and is
compensated for these services by PFPC, Inc., not the Fund. For the period
December 2, 1999 through September 30, 2000, PaineWebber received from PFPC,
Inc., not the Fund, approximately 57% of the total transfer agency and related
service fees collected by PFPC, Inc. from the Fund.
SECURITY LENDING
The 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, U.S.
government securities or irrevocable letters of credit that meet certain
guidelines established by Mitchell Hutchins, in an amount at least equal to
the market value of the securities loaned, plus accrued interest, determined
on a daily basis and adjusted accordingly. The Fund will regain record
ownership of loaned securities to exercise certain beneficial rights.
However, the Fund may bear the risk of delay in recovery of, or even loss of
rights in, the securities loaned should the borrower fail financially. The
Fund receives compensation for lending its securities from interest earned on
the cash or U.S. government securities held as collateral, net of fee rebates
paid to the borrower plus reasonable administrative and custody fees. For the
period December 2, 1999 through September 30, 2000, the Fund earned $305,539
for lending securities. The Fund's lending agent is PaineWebber, who earned
$104,297 in compensation from the Fund in that capacity for the period
December 2, 1999 through September 30, 2000. At September 30, 2000, the Fund
owed PaineWebber $2,176 in compensation.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
As of September 30, 2000, the Fund held cash having an aggregate value of
$44,341,800 as collateral for portfolio securities loaned having a market value
of $41,434,922 which was invested in the following money market funds:
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
------ -----
<S> <C> <C>
2,248,516 AIM Liquid Assets Portfolio ................................................. $ 2,248,516
2,120 AIM Prime Portfolio ......................................................... 2,120
18,125,494 Mitchell Hutchins Private Money Market Fund LLC ............................. 18,125,494
23,782,898 Provident Temporary Cash Fund ............................................... 23,782,898
182,772 Scudder Institutional Fund Inc. ............................................. 182,772
------------
Total investments of cash collateral received for securities
loaned (cost--$44,341,800) ................................................ $ 44,341,800
============
</TABLE>
BANK LINE OF CREDIT
The Fund may participate with other funds managed by Mitchell Hutchins in a
$200 million committed credit facility ("Facility") to be utilized for temporary
financing until the settlement of sales or purchases of portfolio securities,
the repurchase or redemption of shares of the Fund at the request of the
shareholders and other temporary or emergency purposes. In connection therewith,
the Fund has agreed to pay a commitment fee, pro rata, based on the relative
asset size of the funds in the Facility. Interest is charged to the Fund at
rates based on prevailing market rates in effect at the time of borrowings. For
the period December 2, 1999 through September 30, 2000, the Fund borrowed a
daily weighted average balance of $3,704,255 at a weighted average interest rate
of 6.99%.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at September
30, 2000 was substantially the same as the cost of securities for financial
statement purposes. At September 30, 2000, the components of net unrealized
depreciation of investments were as follows:
<TABLE>
<S> <C>
Gross appreciation (investments having an excess of value over cost) ......... $ 141,281,331
Gross depreciation (investments having an excess of cost over value) ......... (169,941,868)
--------------
Net unrealized depreciation of investments ................................... $ (28,660,537)
==============
</TABLE>
For the period December 2, 1999 through September 30, 2000, total aggregate
purchases and sales of portfolio securities, excluding short-term securities,
were as follows:
<TABLE>
<S> <C>
Purchases .................................................................... $3,993,504,986
Sales ........................................................................ $2,202,316,859
</TABLE>
FEDERAL TAX STATUS
The Fund intends to distribute substantially all of its taxable income and to
comply with the other requirements of the Internal Revenue Code applicable to
regulated investment companies. Accordingly, no provision for federal income
taxes is required. In addition, by distributing during each calendar year,
substantially all of its net investment income, capital gains and certain other
amounts, if any, the Fund intends not to be subject to a federal excise tax.
At September 30, 2000, the Fund had a net capital loss carryforward of
$104,630,955 available as a reduction, to the extent provided in the
regulations, of future net realized capital gains, which will expire by
September 30, 2008. To the extent that such losses are used to offset future
capital gains, it is probable that the gains so offset will not be distributed.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
To reflect reclassifications arising from permanent "book/tax" differences
for the period December 2, 1999 through September 30, 2000, the Fund's
accumulated net investment loss was reduced by $16,599,097 and beneficial
interest was reduced by $16,599,097.
BENEFICIAL INTEREST
There is an unlimited number of $0.001 par value shares of beneficial
interest authorized. Transactions in shares of beneficial interest were as
follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
FOR THE PERIOD DECEMBER 2,
1999+ THROUGH SEPTEMBER 30,
2000:
<S> <C> <C> <C> <C>
Shares sold ............... 88,356,634 $879,833,720 90,925,032 $904,509,062
Shares repurchased ........ (34,747,392) (334,582,875) (19,521,078) (185,100,658)
Shares converted from
Class B to Class A ...... 1,404 13,226 (1,409) (13,226)
---------- ------------ ---------- ------------
Net increase .............. 53,610,646 $545,264,071 71,402,545 $719,395,178
========== ============ ========== ============
<CAPTION>
CLASS C CLASS Y
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
FOR THE PERIOD DECEMBER 2,
1999+ THROUGH SEPTEMBER 30,
2000:
<S> <C> <C> <C> <C>
Shares sold ............... 67,312,424 $670,146,284 5,205,566 $51,843,257
Shares repurchased ........ (16,424,750) (156,609,457) (2,308,102) (22,523,130)
Shares converted from
Class B to Class A ........ -- -- -- --
---------- ------------ ---------- ------------
Net increase .............. 50,887,674 $513,536,827 2,897,464 $29,320,127
========== ============ ========== ============
</TABLE>
--------------
+ Commencement of operations.
17
<PAGE>
PAINEWEBBER STRATEGY FUND
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
period is presented below:
<TABLE>
<CAPTION>
FOR THE PERIOD DECEMBER 2, 1999+ THROUGH SEPTEMBER 30, 2000
-----------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ............................ $ 10.00 $ 10.00 $ 10.00 $ 10.00
-------- -------- -------- -------
Net investment loss ............................................. (0.06) (0.12) (0.12) (0.03)
Net realized and unrealized losses from investment and
futures transactions .......................................... (1.25) (1.25) (1.25) (1.26)
-------- -------- -------- -------
Total decrease from investment operations ....................... (1.31) (1.37) (1.37) (1.29)
-------- -------- -------- -------
Net asset value, end of period .................................. $ 8.69 $ 8.63 $ 8.63 $ 8.71
======== ======== ======== =======
Total investment return (1) ..................................... (13.10)% (13.70)% (13.70)% (12.90)%
======== ======== ======== =======
Ratios/Supplemental Data:
Net assets, end of period (000's) ............................... $465,776 $616,435 $439,329 $25,231
Expenses to average net assets, net of waivers from adviser (2) . 1.16%(*) 1.93%(*) 1.93%(*) 0.89%(*)
Net investment loss to average net assets, net of
waivers from adviser (2) ...................................... (0.63)%(*) (1.41)%(*) (1.41)%(*) (0.37)%(*)
Portfolio turnover rate ......................................... 121% 121% 121% 121%
</TABLE>
-------------
(+) Commencement of operations.
(*) Annualized.
(1) Total investment return is calculated assuming a $10,000 investment on the
first day of the period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates and a sale
at net asset value on the last day of the period reported. The figures do
not include sales charges; results would be lower if sales charges were
included. Total investment return for the period has not been annualized.
(2) For the period December 2, 1999 through September 30, 2000, Mitchell
Hutchins waived a portion of its advisory and administration fees. The
ratios excluding the waiver are the same since the fee waiver represents
less than 0.005%.
18
<PAGE>
PAINEWEBBER STRATEGY FUND
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Trustees and Shareholders of
PaineWebber Strategy Fund
We have audited the accompanying statement of assets and liabilities of
PaineWebber Strategy Fund (the "Fund"), including the portfolio of investments,
as of September 30, 2000, and the related statement of operations, changes in
net assets and the financial highlights for the period December 2, 1999
(commencement of operations) through September 30, 2000. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of investments owned at September 30, 2000, by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund at September 30, 2000, the results of its operations, the changes in its
net assets and the financial highlights for the period December 2, 1999 through
September 30, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
New York, New York
November 21, 2000
19
<PAGE>
================================================================================
TRUSTEES
E. Garrett Bewkes, Jr.
CHAIRMAN
Margo N. Alexander
Richard Q. Armstrong
Richard R. Burt
Meyer Feldberg
George W. Gowen
Frederic V. Malek
Carl W. Schafer
Brian M. Storms
PRINCIPAL OFFICERS
Brian M. Storms
PRESIDENT
Amy R. Doberman
VICE PRESIDENT
Dianne E. O'Donnell
VICE PRESIDENT AND SECRETARY
Paul H. Schubert
VICE PRESIDENT AND TREASURER
T. Kirkham Barneby
VICE PRESIDENT
INVESTMENT ADVISER,
ADMINISTRATOR AND DISTRIBUTOR
Mitchell Hutchins Asset Management Inc.
51 West 52nd Street
New York, New York 10019
A PROSPECTUS CONTAINING MORE COMPLETE INFORMATION FOR ANY OF THE FUNDS LISTED ON
THE BACK COVER CAN BE OBTAINED FROM A PAINEWEBBER FINANCIAL ADVISOR 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
FUND UNLESS ACCOMPANIED OR PRECEDED BY AN EFFECTIVE PROSPECTUS.
<PAGE>
PaineWebber offers a family of 26 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
- Enhanced S&P 500 Fund
- Enhanced Nasdaq-100 Fund
- Financial Services Growth Fund
- Growth Fund
- Growth and Income Fund
- Mid Cap Fund
- Small Cap Fund
- S&P 500 Index Fund
- Strategy Fund
- Tax-Managed Equity Fund
PAINEWEBBER
ASSET ALLOCATION FUNDS
- Balanced Fund ANNUAL REPORT
- Tactical Allocation Fund
=======================
GLOBAL FUNDS STRATEGY FUND
- Asia Pacific Growth Fund
- Emerging Markets Equity Fund
- Global Equity Fund SEPTEMBER 30, 2000
- Global Income Fund
PAINEWEBBER MONEY MARKET FUND
PAINEWEBBER
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All Rights Reserved
