<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PERFORMANCE RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE TOTAL RETURN/1/
-------------------------- -----------------------------
12 MONTHS 6 MONTHS
03/31/96 09/30/95 03/31/95 ENDED 03/31/96 ENDED 03/31/96
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $21.16 $21.68 $17.11 39.02% 9.71%
- -------------------------------------------------------------------------
Class B Shares 20.75 21.27 16.85 37.97 9.30
- -------------------------------------------------------------------------
Class C Shares* 20.75 21.28 16.86 37.92 9.27
- -------------------------------------------------------------------------
</TABLE>
Performance Summary Class A Shares
<TABLE>
<CAPTION>
NET ASSET VALUE
---------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN/1/
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
05/22/86 - 12/31/86 $9.25 $8.31 $ -- $ -- (10.16)%
- ----------------------------------------------------------------------------
1987 8.31 6.88 0.2265 0.3703 (11.05)
- ----------------------------------------------------------------------------
1988 6.88 7.70 -- 0.2375 15.39
- ----------------------------------------------------------------------------
1989 7.70 9.08 -- 0.2900 21.71
- ----------------------------------------------------------------------------
1990 9.08 7.73 -- 0.2410 (12.33)
- ----------------------------------------------------------------------------
1991 7.73 12.55 -- 0.2070 65.37
- ----------------------------------------------------------------------------
1992 12.55 17.38 -- 0.0237 38.68
- ----------------------------------------------------------------------------
1993 17.38 17.22 1.8425 0.0820 10.32
- ----------------------------------------------------------------------------
1994 17.22 15.68 1.2660 0.1345 (0.75)
- ----------------------------------------------------------------------------
1995 15.68 20.57 2.2099 0.2942 47.46
- ----------------------------------------------------------------------------
01/01/96 - 03/31/96 20.57 21.16 -- -- 2.87
- ----------------------------------------------------------------------------
Total: $5.5449 $1.8802
- ----------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF
03/31/96: 274.73%
- ----------------------------------------------------------------------------
</TABLE>
Performance Summary Class B Shares
<TABLE>
<CAPTION>
NET ASSET VALUE
---------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN/1/
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/01/91 - 12/31/91 $10.24 $12.56 $ -- $0.0640 23.30%
- ----------------------------------------------------------------------------
1992 12.56 17.31 -- -- 37.82
- ----------------------------------------------------------------------------
1993 17.31 17.04 1.8425 0.0571 9.57
- ----------------------------------------------------------------------------
1994 17.04 15.47 1.2660 0.0344 (1.53)
- ----------------------------------------------------------------------------
1995 15.47 20.21 2.2099 0.1766 46.36
- ----------------------------------------------------------------------------
01/01/96 - 03/31/96 20.21 20.75 -- -- 2.67
- ----------------------------------------------------------------------------
Total: $5.3184 $0.3321
- ----------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF
03/31/96: 175.53%
- ----------------------------------------------------------------------------
</TABLE>
Performance Summary Class C Shares*
<TABLE>
<CAPTION>
NET ASSET VALUE
---------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN/1/
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/02/92 - 12/31/92 $14.61 $17.32 $ -- $0.0359 18.80%
- ----------------------------------------------------------------------------
1993 17.32 17.03 1.8425 0.0691 9.52
- ----------------------------------------------------------------------------
1994 17.03 15.48 1.2660 0.0209 (1.50)
- ----------------------------------------------------------------------------
1995 15.48 20.21 2.2099 0.1819 46.30
- ----------------------------------------------------------------------------
01/01/96 - 03/31/96 20.21 20.75 -- -- 2.67
- ----------------------------------------------------------------------------
Total: $5.3184 $0.3078
- ----------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF
3/31/96: 92.52%
- ----------------------------------------------------------------------------
</TABLE>
/1/Figures assume reinvestment of all dividends and capital gains 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.
* Formerly Class D shares
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.
1
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PORTFOLIO OF INVESTMENTS MARCH 31, 1996
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- ----------
COMMON STOCKS - 89.43%
BUSINESS SERVICES - 0.84%
<C> <S> <C>
4,000 Sterling Commerce Incorporated*......................... $ 123,000
10,000 Sterling Software Incorporated*......................... 705,000
----------
828,000
----------
FINANCIAL SERVICES - 12.96%
10,000 AT&T Capital Corporation................................ 416,250
46,500 Ceridian Corporation*................................... 1,999,500
15,000 Contifinancial Corporation*............................. 468,750
20,000 Federal Home Loan Mortgage Corporation.................. 1,705,000
58,000 Federal National Mortgage Association................... 1,848,750
35,000 Finova Group Incorporated............................... 1,911,875
25,000 First Data Corporation.................................. 1,762,500
35,000 Green Tree Financial.................................... 1,203,125
50,000 Olympic Financial Limited*.............................. 968,750
25,000 RAC Financial Group Incorporated*....................... 562,500
----------
12,847,000
----------
INSURANCE - 13.53%
25,000 ACE Limited............................................. 1,115,625
22,500 Allstate Corporation.................................... 947,813
22,500 American Re Corporation................................. 900,000
7,500 CIGNA Corporation....................................... 856,875
6,200 CNA Financial Corporation*.............................. 689,750
20,000 Equitable of Iowa Companies............................. 715,000
15,750 Frontier Insurance Group, Incorporated.................. 482,344
20,000 ITT Hartford Group, Incorporated........................ 980,000
60,000 PennCorp Financial Group, Incorporated.................. 1,890,000
38,300 Prudential Reinsurance Holdings, Incorporated........... 904,838
40,000 Reinsurance Group of America, Incorporated.............. 1,465,000
30,000 Reliastar Financial Corporation......................... 1,357,500
20,000 St. Paul Companies Incorporated......................... 1,110,000
----------
13,414,745
----------
MONEY CENTER BANKS - 5.09%
23,173 The Chase Manhattan Corporation......................... 1,682,250
22,500 Citicorp................................................ 1,800,000
26,250 Republic New York Corporation........................... 1,561,875
----------
5,044,125
----------
REAL ESTATE - 0.68%
20,000 Starwood Lodging Trust.................................. 675,000
----------
</TABLE>
2
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- -----------
COMMON STOCKS - (CONCLUDED)
<C> <S> <C>
REGIONAL BANKS - 49.97%
100,000 Atlantic Bancorp*...................................... $ 950,000
35,000 Bancorp Hawaii Incorporated............................ 1,229,375
40,000 Bank of New York Company, Incorporated................. 2,060,000
32,800 Banknorth Group, Incorporated.......................... 1,156,200
33,000 Barnett Banks, Incorporated............................ 2,054,250
35,000 CCB Financial Corporation.............................. 1,758,750
37,500 Chittenden Corporation................................. 1,003,125
42,000 Comerica Incorporated.................................. 1,753,500
39,690 Commerce Bancshares, Incorporated...................... 1,379,227
45,000 Corestates Financial Corporation....................... 1,906,875
25,000 Crestar Financial Corporation.......................... 1,437,500
25,000 Cullen Frost Bankers Incorporated...................... 1,231,250
35,000 First American Corporation of Tennessee................ 1,557,500
8,500 First Empire State Corporation......................... 2,091,000
30,000 First Hawaiian Incorporated............................ 828,750
36,748 First Michigan Bank Corporation........................ 1,111,627
50,625 First Security Corporation............................. 1,404,844
39,375 First Western Bancorp, Incorporated.................... 1,053,280
25,000 Fleet Financial Group, Incorporated.................... 1,012,500
50,000 Heritage Financial Group, Incorporated................. 912,500
41,250 HUBCO, Incorporated.................................... 804,375
65,000 Marshall and Ilsley Corporation........................ 1,698,125
20,000 Mercantile Bancorporation, Incorporated................ 915,000
30,000 Northern Trust Corporation............................. 1,620,000
55,000 Norwest Corporation.................................... 2,021,250
26,250 Old Kent Financial Corporation......................... 1,046,719
100,000 Riggs National Corporation............................. 1,237,500
35,000 Seacoast Banking Corporation of Florida................ 778,750
25,000 Southern National Corporation.......................... 693,750
55,000 Summit Bancorp, Incorporated........................... 2,035,000
56,100 Synovus Financial Corporation.......................... 1,893,375
40,000 Trans Financial Bancorp, Incorporated.................. 665,000
36,750 US Bancorp of Oregon................................... 1,249,500
30,000 Westamerica Bancorporation............................. 1,417,500
45,000 Wilmington Trust Corporation........................... 1,451,250
30,000 Zions Bancorporation................................... 2,122,500
-----------
49,541,647
-----------
THRIFT INSTITUTIONS - 6.36%
50,000 American Federal Bank, FSB............................. 750,000
33,750 Charter One Financial, Incorporated.................... 1,139,063
60,000 Coast Savings Financial, Incorporated*................. 1,875,000
30,000 First Palm Beach Bancorp Incorporated.................. 667,500
55,000 Glendale Federal Bank FSB*............................. 996,875
20,000 Queens County Bancorp Incorporated..................... 880,000
-----------
6,308,438
-----------
Total Common Stocks (cost - $56,154,141).......................... 88,658,955
-----------
</TABLE>
3
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
------- -------- ---------------- -----------
U.S.-GOVERNMENT-OBLIGATIONS - 8.04%
<C> <S> <C> <C> <C>
U.S. Treasury Bills (cost -
$8,000 $7,972,693).............. 04/25/96 5.100 to 5.140%@ $ 7,972,693
-----------
REPURCHASE AGREEMENT - 3.18%
3,148 Repurchase Agreement dated
03/29/96, with Morgan
Stanley & Co. Inc.,
collateralized by
$2,505,000 U.S. Treasury
Bonds, 9.125% due
05/15/18; proceeds:
$3,149,403 (cost -
$3,148,000).............. 04/01/96 5.350 3,148,000
-----------
Total Investments (cost -
$67,274,834) - 100.65%............... 99,779,648
Liabilities in excess of other
assets - (0.65)%...................... (640,509)
-----------
Net Assets - 100%..................... $99,139,139
===========
</TABLE>
- -------
*Non-income producing security
@Yield to maturity at date of purchase
See accompanying notes to financial statements
4
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1996
<TABLE>
<S> <C>
Assets
Investments in securities, at value (cost - $67,274,834)........... $99,779,648
Dividends and interest receivable.................................. 188,715
Receivable for investments sold.................................... 87,587
Receivable for fund shares sold.................................... 27,450
Other assets....................................................... 75,360
-----------
Total assets....................................................... 100,158,760
-----------
Liabilities
Payable for investments purchased.................................. 695,250
Payable for fund shares repurchased................................ 115,870
Payable to affiliate............................................... 104,571
Accrued expenses and other liabilities............................. 103,930
-----------
Total liabilities.................................................. 1,019,621
-----------
Net Assets
Capital stock--$0.001 par value (300,000,000 shares authorized).... 59,647,865
Undistributed net investment income................................ 516,868
Accumulated net realized gains from investment transactions........ 6,469,592
Net unrealized appreciation of investments......................... 32,504,814
-----------
Net assets......................................................... $99,139,139
===========
Class A:
Net assets......................................................... $64,003,354
-----------
Shares outstanding................................................. 3,024,501
-----------
Net asset value and redemption value per share..................... $21.16
======
Maximum offering price per share (net asset value plus sales charge
of 4.50% of offering price)....................................... $22.16
======
Class B:
Net assets......................................................... $28,147,094
-----------
Shares outstanding................................................. 1,356,291
-----------
Net asset value and offering price per share....................... $20.75
======
Class C:
Net assets......................................................... $ 6,988,691
-----------
Shares outstanding................................................. 336,747
-----------
Net asset value and offering price per share....................... $20.75
======
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1996
<TABLE>
<S> <C>
Investment Income:
Dividends.......................................................... $ 1,687,028
Interest........................................................... 861,227
-----------
2,548,255
-----------
Expenses:
Investment advisory and administration............................. 625,307
Service fees--Class A.............................................. 147,952
Service and distribution fees--Class B............................. 234,679
Service and distribution fees--Class C............................. 62,551
Transfer agency and service fees................................... 87,215
Reports and notices to shareholders................................ 75,611
Custody and accounting............................................. 65,442
Legal and audit.................................................... 61,665
Federal and state registration..................................... 50,741
Directors' fees.................................................... 13,000
Other expenses..................................................... 19,356
-----------
1,443,519
-----------
Net investment income.............................................. 1,104,736
-----------
Realized and unrealized gains from investment activities:
Net realized gains from investment transactions.................... 13,255,578
Net change in unrealized appreciation/depreciation of investments.. 13,498,803
-----------
Net realized and unrealized gains from investment activities....... 26,754,381
-----------
Net increase in net assets resulting from operations............... $27,859,117
===========
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED MARCH 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
From operations:
Net investment income.............................. $ 1,104,736 $ 820,652
Net realized gains from investment transactions.... 13,255,578 5,705,424
Net change in unrealized appreciation/depreciation
of investments.................................... 13,498,803 (603,893)
------------ ------------
Net increase in net assets resulting from
operations........................................ 27,859,117 5,922,183
------------ ------------
Dividends and distributions to shareholders from:
Net investment income--Class A..................... (835,012) (370,765)
Net investment income--Class B..................... (213,796) (28,954)
Net investment income--Class C..................... (62,458) (6,039)
Net realized gains from investment transactions--
Class A........................................... (6,272,236) (3,489,874)
Net realized gains from investment transactions--
Class B........................................... (2,675,354) (1,065,578)
Net realized gains from investment transactions--
Class C........................................... (758,806) (365,811)
------------ ------------
Total dividends and distributions to shareholders.. (10,817,662) (5,327,021)
------------ ------------
From capital stock transactions:
Net proceeds from the sale of shares............... 26,551,641 38,743,085
Cost of shares repurchased......................... (23,163,766) (37,610,660)
Proceeds from dividends reinvested................. 8,886,411 4,176,675
------------ ------------
Net increase in net assets from capital stock
transactions...................................... 12,274,286 5,309,100
------------ ------------
Net increase in net assets......................... 29,315,741 5,904,262
Net Assets:
Beginning of year.................................. 69,823,398 63,919,136
------------ ------------
End of year (including undistributed net investment
income of
$516,868 and $523,398, respectively).............. $ 99,139,139 $ 69,823,398
============ ============
</TABLE>
See accompanying notes to financial statements
7
<PAGE>
PAINEWEBBER NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
PaineWebber Financial Services Growth Fund Inc. (formerly Regional Financial
Growth Fund Inc.) (the "Fund") was incorporated in the state of Maryland on
February 13, 1986 and is registered with the Securities and Exchange Commission
under the Investment Company Act of 1940, as amended, as an open-end,
diversified management investment company.
Currently, the Fund offers Class A, Class B and Class C (formerly Class D)
shares. Effective November 10, 1995, the Fund began using industry standardized
nomenclature and Class D shares were renamed Class C shares. Each class
represents interests in the same assets of the Fund and the classes are
identical except for differences in their sales charge structure, ongoing
service/distribution charges and certain transfer agency expenses. In addition,
Class B shares automatically convert to Class A shares approximately six years
after initial issuance. All classes of shares have equal rights as to voting
privileges, except that each class has exclusive voting rights with respect to
its service/distribution plan.
The preparation of financial statements in accordance with generally accepted
accounting principles requires Fund management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. Following is a
summary of significant accounting policies:
Valuation of Investments - Where market quotations are readily available,
portfolio securities are valued thereon, provided such quotations adequately
reflect the fair value of the securities in the judgment of Mitchell Hutchins
Asset Management Inc. ("Mitchell Hutchins"), an affiliate and a wholly owned
subsidiary of PaineWebber Incorporated ("PaineWebber") and investment adviser
and administrator of the Fund. When market quotations are not readily
available, securities are valued based upon appraisals derived from information
concerning those securities or similar securities received from recognized
dealers in those securities. All other securities are valued at fair value as
determined in good faith by, or under the direction of, the Fund's board of
directors. The amortized cost method of valuation, which approximates market
value, is used to value debt obligations with 60 days or less remaining to
maturity, unless the Fund's board of directors 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,
8
<PAGE>
PAINEWEBBER
realization and/or retention of the collateral may be subject to legal
proceedings. The Fund occasionally participates in joint repurchase agreement
transactions with other funds managed by Mitchell Hutchins.
Investment Transactions and Investment Income - Investment transactions are
recorded on trade date. Realized gains and losses from investment transactions
are calculated on the identified cost method. Interest income is recorded on an
accrual basis and dividend income is recorded on the ex-dividend date. Premiums
are amortized and discounts are accreted as adjustments to interest income and
the identified cost of securities.
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.
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 generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification.
CONCENTRATION OF RISK
The Fund follows an investment policy of investing primarily in equity
securities of financial services companies. Economic, legislative and
regulatory developments impacting that industry may affect the market value of
the Fund's investments.
INVESTMENT ADVISER AND ADMINISTRATOR
The Fund's board of directors has approved an Investment Advisory and
Administrative 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 the annual rate of 0.70% of the Fund's average daily net assets. At
March 31, 1996, the Fund owed Mitchell Hutchins $58,784 in investment advisory
and administration fees.
For the year ended March 31, 1996, the Fund paid $600 in brokerage commissions
to PaineWebber for transactions executed on behalf of the Fund.
9
<PAGE>
PAINEWEBBER
In compliance with applicable state securities laws, Mitchell Hutchins will
reimburse the Fund if and to the extent that the aggregate operating expenses
in any fiscal year exclusive of taxes, distribution fees, interest, brokerage
fees and extraordinary expenses, exceed limitations imposed by various state
regulations. Currently, the most restrictive limitation applicable to the Fund
is 2.5% of the first $30 million of average daily net assets, 2.0% of the next
$70 million and 1.5% of any excess over $100 million. For the year ended March
31, 1996, no reimbursements were required pursuant to the above limitations.
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/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. At March 31, 1996, the Fund
owed Mitchell Hutchins $43,568 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 year
ended March 31, 1996, it earned $133,883 in sales charges.
TRANSFER AGENCY SERVICE FEES
The Fund pays PaineWebber an annual fee of $4.00 per active PaineWebber
shareholder account for certain services not provided by the Fund's transfer
agent. For these services for the year ended March 31, 1996, PaineWebber earned
$25,258. At March 31, 1996, the Fund owed PaineWebber $2,219 for transfer
agency service fees.
10
<PAGE>
PAINEWEBBER
INVESTMENT IN SECURITIES
For federal income tax purposes, the cost of securities owned at
March 31, 1996, was substantially the same as the cost of
securities for financial statement purposes.
At March 31, 1996, the components of net unrealized appreciation of
investments were as follows:
<TABLE>
<CAPTION>
<S> <C>
Gross appreciation (investments having an excess of value
over cost)............................................... $32,752,189
Gross depreciation (investments having an excess of cost
over value).............................................. (247,375)
-----------
Net unrealized appreciation of investments................ $32,504,814
===========
</TABLE>
For the year ended March 31, 1996, total aggregate purchases and
sales of portfolio securities, excluding short-term securities,
were $39,926,070 and $36,158,154, respectively.
FEDERAL TAX STATUS
The Fund intends to distribute all of its taxable income and to
comply with the other requirements of the Internal Revenue Code
applicable to regulated investment companies. Accordingly, no
provision for federal income taxes is required. In addition, by
distributing during each calendar year substantially all of its net
investment income, capital gains and certain other amounts, if any,
the Fund intends not to be subject to a federal excise tax.
CAPITAL STOCK
There are 300 million shares of $0.001 par value common stock
authorized. Transactions in common stock were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---------------------- --------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ------------ -------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED MARCH 31,
1996:
Shares sold............. 442,357 $ 8,961,983 677,102 $13,511,924 202,522 $ 4,077,734
Shares repurchased...... (600,457) (12,204,953) (394,042) (7,888,316) (152,237) (3,070,497)
Shares converted from
Class B to Class A..... 29,539 603,210 (30,078) (603,210) -- --
Dividends and
distributions
reinvested............. 271,927 5,487,484 131,753 2,612,655 39,651 786,272
-------- ------------ -------- ----------- ---------- ------------
Net increase............ 143,366 $ 2,847,724 384,735 $ 7,633,053 89,936 $ 1,793,509
======== ============ ======== =========== ========== ============
YEAR ENDED MARCH 31,
1995:
Shares sold............. 508,824 $ 9,068,374 709,241 $12,410,410 1,002,718 $ 17,264,301
Shares repurchased...... (682,798) (11,909,882) (459,550) (7,887,316) (1,037,124) (17,813,462)
Shares converted from
Class B to Class A..... 31,172 533,063 (31,586) (533,063) -- --
Dividends and
distributions
reinvested............. 185,598 2,889,768 64,096 985,110 19,623 301,797
-------- ------------ -------- ----------- ---------- ------------
Net increase (decrease). 42,796 $ 581,323 282,201 $ 4,975,141 (14,783) $ (247,364)
======== ============ ======== =========== ========== ============
</TABLE>
11
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD IS PRESENTED BELOW:
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------
FOR THE YEARS ENDED MARCH 31,
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................... $17.11 $16.92 $19.45 $13.36 $ 9.50
------ ------ ------ ------ ------
Net investment income (loss)..... 0.30 0.25 0.15 0.10 0.15
Net realized and unrealized gains
(losses) from investment
transactions.................... 6.25 1.34 (0.76) 6.01 3.92
------ ------ ------ ------ ------
Net increase (decrease) from
investment operations............ 6.55 1.59 (0.61) 6.11 4.07
------ ------ ------ ------ ------
Dividends from net investment
income........................... (0.29) (0.13) (0.08) (0.02) (0.21)
Distributions from net realized
gains from investment
transactions.................... (2.21) (1.27) (1.84) -- --
------ ------ ------ ------ ------
Total dividends and distributions
to shareholders.................. (2.50) (1.40) (1.92) (0.02) (0.21)
------ ------ ------ ------ ------
Net asset value, end of period... $21.16 $17.11 $16.92 $19.45 $13.36
====== ====== ====== ====== ======
Total investment return(1)....... 39.02% 10.22% (3.14)% 46.79% 42.23%
====== ====== ====== ====== ======
Ratios and supplemental data:
Net assets, end of period
(000's).......................... $64,003 $49,295 $48,032 $61,645 $44,867
Ratio of expenses to average net
assets........................... 1.37% 1.45% 1.44% 1.87% 1.72%
Ratio of net investment income
(loss) to average net assets..... 1.50% 1.40% 0.76% 0.60% 1.32%
Portfolio turnover rate.......... 53% 14% 22% 28% 31%
- ---------------------
</TABLE>
+ Commencment of issuance of shares
* Annualized
** Formerly Class D 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; results for each
class would be lower if sales charges were included. Total investment
returns for periods less than one year have not been annualized.
12
<PAGE>
PAINEWEBBER
<TABLE>
<CAPTION>
CLASS B CLASS C**
- ------------------------------------------------------ -----------------------------------------
FOR THE YEARS FOR THE YEARS
ENDED MARCH 31, FOR THE PERIOD ENDED MARCH 31, FOR THE PERIOD
---------------------------------- JULY 1, 1991+ TO ---------------------- JULY 2, 1992+ TO
1996 1995 1994 1993 MARCH 31, 1992 1996 1995 1994 MARCH 31, 1993
------ ------- ------- ------- ---------------- ------ ------ ------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$16.85 $16.71 $19.34 $13.36 $10.24 $16.86 $16.71 $19.34 $14.61
------ ------ ------ ------ ------ ------ ------ ------ ------
0.13 0.11 0.02 (0.01) -- 0.12 0.11 0.01 --
6.16 1.33 (0.75) 5.99 3.18 6.16 1.33 (0.73) 4.77
------ ------ ------ ------ ------ ------ ------ ------ ------
6.29 1.44 (0.73) 5.98 3.18 6.28 1.44 (0.72) 4.77
------ ------ ------ ------ ------ ----- ------ ------ ------
(0.18) (0.03) (0.06) -- (0.06) (0.18) (0.02) (0.07) (0.04)
(2.21) (1.27) (1.84) -- -- (2.21) (1.27) (1.84) --
------ ------ ------ ------ ------ ------ ------ ------ ------
(2.39) (1.30) (1.90) -- (0.06) (2.39) (1.29) (1.91) (0.04)
------ ------ ------ ------ ------ ------ ------ ------ ------
$20.75 $16.85 $16.71 $19.34 $13.36 $20.75 $16.86 $16.71 $19.34
====== ====== ====== ====== ====== ====== ====== ====== ======
37.97% 9.37% (3.83)% 44.76% 31.16% 37.92% 9.34% (3.76)% 32.66%
====== ====== ====== ====== ====== ====== ====== ====== ======
$28,147 $16,368 $11,517 $10,364 $ 765 $6,989 $4,160 $4,370 $4,636
2.12% 2.22% 2.16% 2.45% 2.72%* 2.14% 2.23% 2.17% 2.36%*
0.74% 0.67% 0.05% (0.03)% 0.14%* 0.72% 0.61% 0.03% 0.01%*
53% 14% 22% 28% 31% 53% 14% 22% 28%
</TABLE>
13
<PAGE>
PAINEWEBBER
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
The Board of Directors and Shareholders
PaineWebber Financial Services Growth Fund Inc.
We have audited the accompanying statement of assets and
liabilities of PaineWebber Financial Services Growth Fund Inc.,
including the portfolio of investments, as of March 31, 1996, and
the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in
the period then ended and the financial highlights for each of the
periods indicated therein. These financial statements and
financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We have conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities
owned at March 31, 1996, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of PaineWebber Financial Services Growth Fund
Inc. at March 31, 1996, the results of its operations for the year
ended, the changes in its 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
May 14, 1996
14
<PAGE>
PAINEWEBBER
TAX INFORMATION
We are required by Subchapter M of the Internal Revenue Code of
1986, as amended, to advise you within 60 days of the Fund's
fiscal year end (March 31, 1996) as to federal tax status of
distributions received by shareholders during such fiscal year.
Accordingly, we are advising you that the following distributions
paid during the fiscal year by the fund are taxable and are
derived from the following sources:
<TABLE>
<CAPTION>
PER SHARE DATA: CLASS A CLASS B CLASS C
--------------- ------- ------- -------
<S> <C> <C> <C>
Net investment income*..................... $0.2942 $0.1766 $0.1819
Short-term capital gains*.................. 0.2069 0.2069 0.2069
Long-term capital gains.................... 2.0030 2.0030 2.0030
Percentage of ordinary income dividends
qualifying for the dividends received de-
duction available to corporate sharehold-
ers....................................... 74.27% 74.27% 74.27%
</TABLE>
-------
* Taxable as ordinary income
Dividends received by tax-exempt recipients (e.g., IRAs and
Keoghs) need not be reported as taxable income. Some retirement
trusts (e.g., corporate, Keogh and 403(b)(7) plans) may need this
information for their annual information reporting.
Since the Fund's fiscal year is not the calendar year, another
notification will be sent in respect of calendar year 1996. The
second notification, which will reflect the amount to be used by
calendar year taxpayers on their federal income tax returns, will
be made in conjunction with Form 1099 DIV and will be mailed in
January 1997. Shareholders are advised to consult their own tax
advisers with respect to the tax consequences of their investment
in the Fund.
15
<PAGE>
PAINEWEBBER
SHAREHOLDER INFORMATION
A special meeting of shareholders of the Fund was held on December
14, 1995. At the meeting the following changes were approved for
the Fund:
1) A change in the Fund's concentration policy of investing, under
normal circumstances, at least 65% of its total assets in the
equity securities of regional commercial banks, thrifts and
their holding companies to one under which it would invest,
under normal circumstances, at least 65% of its total assets in
the equity securities of financial services companies and a
corresponding change in the Fund's investment limitation
governing its ability to concentrate 25% or more of its total
assets in any one industry.
The votes were as follows:
<TABLE>
<CAPTION>
SHARES SHARES
SHARES VOTED WITHHOLD
VOTED FOR AGAINST AUTHORITY
--------- ------- ---------
<S> <C> <C> <C>
1,949,598 212,595 149,153
</TABLE>
2) The elimination of the Fund's fundamental investment policy of
investing only in banks and thrifts with deposits insured by
the Federal Deposit Insurance Corporation and the holding
companies of such banks and thrifts.
The votes were as follows:
<TABLE>
<CAPTION>
SHARES SHARES
SHARES VOTED WITHHOLD
VOTED FOR AGAINST AUTHORITY
--------- ------- ---------
<S> <C> <C> <C>
1,849,130 317,494 144,722
</TABLE>
Broker non-votes and abstentions are included within the
"Shares Withhold Authority" totals.
16
