<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PERFORMANCE RESULTS
(UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE TOTAL RETURN/1/
-------------------------------- -----------------------------
03/31/97 09/30/96 03/31/96 12 MONTHS 6 MONTHS
ENDED 03/31/97 ENDED 03/31/97
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $ 23.41 $ 23.82 $ 21.16 28.72% 14.34%
Class B Shares 22.87 23.27 20.75 27.74 13.91
Class C Shares 22.84 23.27 20.75 27.74 13.90
- ---------------------------------------------------------------------------------
PERFORMANCE SUMMARY CLASS A SHARES
<CAPTION>
NET ASSET VALUE
------------------ CAPITAL GAINS DIVIDENDS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED 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
- ---------------------------------------------------------------------------------
1996 20.57 22.80 3.3870 0.2300 28.96
- ---------------------------------------------------------------------------------
01/01/97-03/31/97 22.80 23.41 -- -- 2.68
- ---------------------------------------------------------------------------------
Totals: $ 8.9319 $ 2.1102
- ---------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 03/31/97: 382.34%
- ---------------------------------------------------------------------------------
PERFORMANCE SUMMARY CLASS B SHARES
<CAPTION>
NET ASSET VALUE
------------------ CAPITAL GAINS DIVIDENDS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED 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
- ---------------------------------------------------------------------------------
1996 20.21 22.32 3.3870 0.0592 28.00
- ---------------------------------------------------------------------------------
01/01/97-03/31/97 22.32 22.87 -- -- 2.46
- ---------------------------------------------------------------------------------
Totals: $ 8.7054 $ 0.3913
- ---------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 03/31/97: 251.97%
- ---------------------------------------------------------------------------------
</TABLE>
/1/FIGURES ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
AT NET ASSET VALUE ON THE PAYABLE DATES AND DO NOT INCLUDE SALES CHARGES;
RESULTS 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.
5
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
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 $ 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
- ----------------------------------------------------------------------
1996 20.21 22.29 3.3870 0.0861 27.99
- ----------------------------------------------------------------------
01/01/97-03/31/97 22.29 22.84 -- -- 2.47
- ----------------------------------------------------------------------
Totals: $ 8.7054 $ 0.3939
- ----------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 03/31/97: 145.92%
- ----------------------------------------------------------------------
</TABLE>
/1/FIGURES ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
AT NET ASSET VALUE ON THE PAYABLE DATES AND DO NOT INCLUDE SALES CHARGES;
RESULTS 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.
6
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PORTFOLIO OF INVESTMENTS MARCH 31, 1997
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- ------------
<C> <S> <C>
COMMON STOCKS -- 83.75%
BUSINESS SERVICES -- 0.62%
29,926 Sterling Commerce Incorporated*....................... $ 867,854
------------
FINANCIAL SERVICES -- 10.26%
65,000 CCC Information Services Group, Incorporated *........ 812,500
60,000 Ceridian Corporation*................................. 2,152,500
52,000 Federal Home Loan Mortgage Corporation................ 1,417,000
33,500 Federal National Mortgage Association................. 1,210,187
35,000 Finova Group Incorporated............................. 2,366,875
57,500 First Data Corporation................................ 1,947,813
90,000 Homeside Incorporated*................................ 1,327,500
82,500 Moneygram Payment Systems Incorporated*............... 680,625
15,000 Morgan Stanley Group, Incorporated.................... 881,250
16,000 Student Loan Marketing Association.................... 1,524,000
------------
14,320,250
------------
INSURANCE -- 19.88%
25,000 ACE Limited........................................... 1,600,000
22,500 Allstate Corporation.................................. 1,338,750
27,500 Ambac Incorporated.................................... 1,773,750
40,000 Amerin Corporation*................................... 805,000
60,000 AmerUs Life Holdings Incorporated*.................... 1,335,000
25,000 Chubb Corporation..................................... 1,346,875
46,500 Enhance Financial Services Group Incorporated......... 1,836,750
25,000 Equitable of Iowa Companies........................... 1,250,000
60,000 Everest Reinsurance Holdings Incorporated............. 1,762,500
46,500 Frontier Insurance Group Incorporated................. 2,022,750
22,500 ITT Hartford Group, Incorporated...................... 1,622,813
50,000 Nationwide Financial Services Incorporated*........... 1,287,500
50,000 PennCorp Financial Group, Incorporated(1)............. 1,600,000
40,000 Reinsurance Group of America, Incorporated............ 1,940,000
30,000 ReliaStar Financial Corporation....................... 1,773,750
20,000 SunAmerica Incorporated............................... 752,500
50,000 Travelers Aetna Property & Casualty Corporation....... 1,587,500
15,000 Travelers Group Incorporated.......................... 718,125
60,000 Western National Corporation.......................... 1,402,500
------------
27,756,063
------------
MONEY CENTER BANKS -- 3.35%
12,000 Citicorp.............................................. 1,299,000
21,250 Republic New York Corporation......................... 1,872,656
16,000 The Chase Manhattan Corporation....................... 1,498,000
------------
4,669,656
------------
REAL ESTATE -- 3.80%
31,000 Arden Realty Incorporated............................. 844,750
60,000 CB Commercial Real Estate Services Group*............. 1,425,000
43,800 Excel Realty Trust Incorporated....................... 1,105,950
19,500 Spieker Properties Incorporated....................... 760,500
30,000 Starwood Lodging Trust................................ 1,170,000
------------
5,306,200
------------
</TABLE>
7
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- ------------
COMMON STOCKS
(CONCLUDED)
<C> <S> <C>
REGIONAL BANKS -- 38.13%
100,000 Atlantic Bancorp*..................................... $ 1,260,000
35,000 Bancorp Hawaii Incorporated........................... 1,500,625
10,000 BankAmerica Corporation............................... 1,007,500
18,000 BankBoston Corporation................................ 1,201,500
32,800 BankNorth Group, Incorporated......................... 1,328,400
30,000 Barnett Banks, Incorporated(1)........................ 1,395,000
30,000 CCB Financial Corporation............................. 1,927,500
46,875 Chittenden Corporation................................ 1,265,625
24,500 Comerica Incorporated................................. 1,381,188
32,500 Corestates Financial Corporation...................... 1,543,750
50,000 Crestar Financial Corporation......................... 1,731,250
50,000 Cullen Frost Bankers Incorporated..................... 1,781,250
35,000 First American Corporation of Tennessee............... 2,226,875
6,500 First Empire State Corporation........................ 2,080,000
30,000 First Hawaiian Incorporated........................... 933,750
51,446 First Michigan Bank Corporation....................... 1,556,241
35,000 First Security Corporation............................ 1,124,375
5,000 First Union Corporation............................... 405,625
39,375 First Western Bancorp, Incorporated................... 1,240,313
25,000 Fleet Financial Group, Incorporated................... 1,431,250
66,650 HUBCO, Incorporated................................... 1,516,288
50,000 Marshall and Ilsley Corporation....................... 1,825,000
60,000 Northern Trust Corporation............................ 2,250,000
42,000 Norwest Corporation(1)................................ 1,942,500
27,562 Old Kent Financial Corporation........................ 1,298,859
35,000 Seacoast Banking Corporation of Florida............... 988,750
25,000 Southern National Corporation......................... 931,250
47,500 SouthTrust Corporation................................ 1,715,937
42,500 Summit Bancorp, Incorporated.......................... 1,859,375
45,000 Synovus Financial Corporation......................... 1,327,500
20,000 Texas Regional Bankshares Incorporated................ 650,000
40,000 Trans Financial Bancorp, Incorporated................. 900,000
33,750 US Bancorp of Oregon.................................. 1,805,625
30,000 Westamerica Bancorporation............................ 1,905,000
45,000 Wilmington Trust Corporation.......................... 1,912,500
17,500 Zions Bancorporation.................................. 2,078,125
------------
53,228,726
------------
THRIFT INSTITUTIONS -- 7.71%
50,000 Bank United Corporation............................... 1,475,000
35,437 Charter One Financial, Incorporated................... 1,554,798
45,000 Coast Savings Financial, Incorporated*................ 1,783,125
50,000 Commonwealth Bancorp Incorporated..................... 756,250
50,000 Dime Community Bancorp Incorporated*.................. 937,500
30,000 First Palm Beach Bancorp Incorporated................. 832,500
50,000 Glendale Federal Bank FSB*............................ 1,150,000
20,000 Great Western Financial Corporation................... 807,500
26,666 Queens County Bancorp Incorporated.................... 1,463,297
------------
10,759,970
------------
Total Common Stocks (cost -- $74,946,839)........................ 116,908,719
------------
</TABLE>
8
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------- -------- ------------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS -- 4.29%
$6,000 U.S. Treasury Bills (cost --
$5,992,650)(1)................. 4/10/97 4.900%@ $ 5,992,650
------------
REPURCHASE AGREEMENTS -- 13.95%
6,500 Repurchase agreement dated
03/31/97 with Dresdner
Securities (USA), Inc.,
collateralized by $6,363,000
U.S. Treasury Notes, 7.75% due
01/31/00; proceeds: $6,501,138.. 04/01/97 6.300 6,500,000
6,500 Repurchase agreement dated
03/31/97 with Salomon Brothers,
Inc, collateralized by
$6,566,000 U.S. Treasury Notes,
5.875% due 07/31/97; proceeds:
$6,501,147...................... 04/01/97 6.350 6,500,000
6,477 Repurchase agreement dated
03/31/97 with State Street Bank
and Trust Company,
collateralized by $6,140,000
U.S. Treasury Bonds, 7.875%, due
11/15/07; proceeds: $6,478,080.. 04/01/97 6.000 6,477,000
------------
Total Repurchase Agreements (cost --
$19,477,000)............................... 19,477,000
------------
INVESTMENTS OF CASH COLLATERAL FOR
SECURITIES LOANED -- 7.82%
REPURCHASE AGREEMENTS -- 2.87%
4,000 Repurchase agreement dated
03/31/97 with Dresdner
Securities (USA), Inc.,
collateralized by $4,032,000
U.S. Treasury Notes, 6.625% due
06/30/01; proceeds: $4,000,702.. 04/01/97 6.320 4,000,000
------------
<CAPTION>
NUMBER
OF SHARES
(000)
---------
<C> <S> <C> <C> <C>
MONEY MARKET FUNDS -- 4.95%
6,852 Liquid Assets Portfolio.......... 6,851,810
60 TempFund Portfolio............... 60,390
------------
6,912,200
------------
Total Investments of Cash Collateral for 10,912,200
Securities Loaned (cost -- $10,912,200).....
------------
Total Investments (cost -- $111,328,689) -- 153,290,569
109.81%....................................
Liabilities in excess of other assets -- (13,693,380)
(9.81)%....................................
------------
Net Assets (100.00%)........................ $139,597,189
============
</TABLE>
- -------
*NON-INCOME PRODUCING
@YIELD TO MATURITY AT DATE OF PURCHASE
(1)SECURITY, OR PORTION THEREOF, WAS ON LOAN AT MARCH 31, 1997
See accompanying notes to financial statements
9
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1997
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost -- $87,851,689)......... $129,813,569
Investments in repurchase agreements, at value (cost --
$23,477,000).................................................... 23,477,000
Receivable for investments sold................................... 4,000,000
Receivable for fund shares sold................................... 727,173
Dividends and interest receivable................................. 222,008
Other assets...................................................... 75,910
------------
Total assets...................................................... 158,315,660
------------
LIABILITIES
Collateral for securities loaned.................................. 10,912,200
Payable for investments purchased................................. 7,285,160
Payable for fund shares repurchased............................... 162,560
Payable to affiliates............................................. 154,231
Accrued expenses and other liabilities............................ 204,320
------------
Total liabilities................................................. 18,718,471
------------
NET ASSETS
Capital stock -- $0.001 par value (300,000,000 shares authorized). 90,231,492
Undistributed net investment income............................... 441,078
Accumulated net realized gains from investment transactions....... 6,962,739
Net unrealized appreciation of investments........................ 41,961,880
------------
Net assets........................................................ $139,597,189
============
CLASS A:
Net assets........................................................ $ 85,661,470
------------
Shares outstanding................................................ 3,659,619
------------
Net asset value and redemption value per share.................... $23.41
======
Maximum offering price per share (net asset value plus sales
charge of 4.50% of offering price)............................... $24.51
======
CLASS B:
Net assets........................................................ $ 41,578,973
------------
Shares outstanding................................................ 1,818,156
------------
Net asset value and offering price per share...................... $22.87
======
CLASS C:
Net assets........................................................ $ 12,356,746
------------
Shares outstanding................................................ 541,034
------------
Net asset value and offering price per share...................... $22.84
======
</TABLE>
See accompanying notes to financial statements
10
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends.......................................................... $ 1,994,583
Interest........................................................... 670,454
-----------
2,665,037
-----------
EXPENSES:
Investment advisory and administration............................. 771,491
Service fees--Class A.............................................. 179,046
Service and distribution fees--Class B............................. 304,147
Service and distribution fees--Class C............................. 81,806
Reports and notices to shareholders................................ 146,468
Transfer agency and service fees................................... 134,407
Legal and audit.................................................... 130,170
Federal and state registration..................................... 90,969
Custody and accounting............................................. 74,756
Directors' fees.................................................... 15,750
Other expenses..................................................... 34,307
-----------
1,963,317
-----------
Net investment income.............................................. 701,720
-----------
REALIZED AND UNREALIZED GAINS FROM INVESTMENT ACTIVITIES:
Net realized gains from investment transactions.................... 15,834,386
Net change in unrealized appreciation/depreciation of investments.. 9,457,066
-----------
NET REALIZED AND UNREALIZED GAINS FROM INVESTMENT ACTIVITIES....... 25,291,452
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............... $25,993,172
===========
</TABLE>
See accompanying notes to financial statements
11
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED MARCH 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income.............................. $ 701,720 $ 1,104,736
Net realized gains from investment transactions.... 15,834,386 13,255,578
Net change in unrealized appreciation/depreciation
of investments.................................... 9,457,066 13,498,803
------------ ------------
Net increase in net assets resulting from
operations........................................ 25,993,172 27,859,117
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income--Class A..................... (672,645) (835,012)
Net investment income--Class B..................... (73,321) (213,796)
Net investment income--Class C..................... (31,544) (62,458)
Net realized gains from investment transactions--
Class A........................................... (9,905,437) (6,272,236)
Net realized gains from investment transactions--
Class B........................................... (4,194,912) (2,675,354)
Net realized gains from investment transactions--
Class C........................................... (1,240,890) (758,806)
------------ ------------
Total dividends and distributions to shareholders.. (16,118,749) (10,817,662)
------------ ------------
FROM CAPITAL STOCK TRANSACTIONS:
Net proceeds from the sale of shares............... 72,986,530 26,551,641
Cost of shares repurchased......................... (55,705,343) (23,163,766)
Proceeds from dividends reinvested................. 13,302,440 8,886,411
------------ ------------
Net increase in net assets from capital stock
transactions...................................... 30,583,627 12,274,286
------------ ------------
Net increase in net assets......................... 40,458,050 29,315,741
NET ASSETS:
Beginning of year.................................. 99,139,139 69,823,398
------------ ------------
End of year (including undistributed net investment
income of
$441,078 and $516,868, respectively).............. $139,597,189 $ 99,139,139
============ ============
</TABLE>
See accompanying notes to financial statements
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
PaineWebber Financial Services Growth Fund Inc. (the "Fund") was incorporated
in the state of Maryland on February 13, 1986 and is registered with the Secu-
rities 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, Class C, and Class Y shares (no
Class Y shares were outstanding during the period). Each class represents in-
terests in the same assets of the Fund, and the classes are identical except
for differences in their sales charge structure, ongoing service and distribu-
tion charges and certain transfer agency expenses. In addition, Class B shares
and all corresponding dividend reinvested 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 and/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--Securities which are listed on stock exchanges are
valued at the last sales price on the day the securities are being 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 Asset Man-
agement Inc. ("Mitchell Hutchins"), a wholly owned subsidiary of PaineWebber
Incorporated ("PaineWebber") and investment adviser, administrator and distrib-
utor of the Fund. Securities traded in the over-the-counter ("OTC") market and
listed on the Nasdaq Stock Market ("Nasdaq") are valued at the last available
sales price, or last bid price available if no sales occur on Nasdaq prior to
the time of valuation; other OTC securities are valued at the last bid price
available in the OTC market prior to the time of valuation. The amortized cost
method of valuation is used to value short-term debt instruments with sixty
days or less remaining to maturity. Securities for which market quotations are
not readily available including restricted securities subject to limitations as
to their sale are valued at fair value as determined in good faith by, or under
the direction of, the Fund's Board of Directors.
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 ac-
crued interest, is at least equal to the repurchase price. In the event of de-
fault of the obligation to repurchase, the 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. The Fund occasionally participates in joint repurchase
agreement transactions with other funds managed by Mitchell Hutchins.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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 on an accrual basis. Dividend income is recorded on the ex-dividend
date. Premiums are amortized and discounts are accreted as adjustments to in-
terest 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.
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 differ-
ences are permanent in nature, such amounts are reclassified within the capital
accounts based on their federal tax-basis treatment; temporary differences do
not require reclassifications.
CONCENTRATION OF RISK
The Fund follows an investment policy of investing primarily in equity securi-
ties of financial services companies. Economic, legislative and regulatory de-
velopments 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 Adminis-
trative 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, 1997, the Fund owed Mitchell Hutchins $85,778 in investment advisory
and administration fees.
For the year ended March 31, 1997, the Fund paid $2,880 in brokerage commis-
sions to PaineWebber for transactions 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 sepa-
rate 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 an-
nual 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, 1997, the
Fund owed Mitchell Hutchins $65,621 in service and distribution fees.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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, 1997, it earned approximately $404,219 in sales charges.
SECURITY LENDING
The Fund may lend up to 33 1/3% of its total assets to qualified institutions.
The loans are secured at all times by cash or U.S. government securities in an
amount at least equal to the market value of the securities loaned, plus ac-
crued interest, determined on a daily basis and adjusted accordingly. The Fund
will regain record ownership of loaned securities to exercise certain benefi-
cial 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 finan-
cially. The Fund receives compensation, which is included in interest income,
for lending its securities from interest earned on the cash or U.S. government
securities held as collateral, net of fee rebates paid to the borrower plus
reasonable administrative and custody fees. The Fund's lending agent is
PaineWebber, who received no compensation in that capacity from the Fund for
the year ended March 31, 1997.
As of March 31, 1997, the Fund's custodian held cash and cash equivalents hav-
ing an aggregate value of $10,912,000 as collateral for portfolio securities
loaned having a market value of $10,436,400.
TRANSFER AGENCY SERVICE FEES
The Fund pays PaineWebber an annual fee of $4.00 per active PaineWebber share-
holder account for certain services not provided by the Fund's transfer agent.
For these services for the year ended March 31, 1997, PaineWebber earned
$26,881. At March 31, 1997, the Fund owed PaineWebber $2,832 for transfer
agency service fees.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at March 31,
1997, was substantially the same as the cost of securities for financial state-
ment purposes.
At March 31, 1997, the components of net unrealized appreciation of invest-
ments were as follows:
<TABLE>
<S> <C>
Gross appreciation (investments having an excess of value over
cost)............................................................ $43,463,857
Gross depreciation (investments having an excess of cost over
value)........................................................... (1,501,977)
-----------
Net unrealized appreciation of investments........................ $41,961,880
===========
</TABLE>
For the year ended March 31, 1997, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $42,133,385 and
$39,170,612, respectively.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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 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, 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,
1997:
Shares sold............. 1,113,912 $ 26,533,887 776,675 $18,827,973 1,174,919 $ 27,624,670
Shares repurchased...... (946,302) (22,225,854) (398,605) (9,493,411) (1,023,207) (23,986,078)
Shares converted from
Class B to Class A..... 92,207 2,144,531 (94,299) (2,144,531) -- --
Dividends and
distributions
reinvested............. 375,301 8,305,421 178,094 3,859,299 52,575 1,137,720
--------- ------------ -------- ----------- ---------- ------------
Net increase............ 635,118 $ 14,757,985 461,865 $11,049,330 204,287 $ 4,776,312
========= ============ ======== =========== ========== ============
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
========= ============ ======== =========== ========== ============
</TABLE>
16
<PAGE>
[This Page Intentionally Left Blank]
17
<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,
-------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $21.16 $17.11 $16.92 $19.45 $13.36
------ ------ ------ ------ ------
Net investment income
(loss)....................... 0.18 0.30 0.25 0.15 0.10
Net realized and unrealized
gains (losses) from
investments................. 5.69 6.25 1.34 (0.76) 6.01
------ ------ ------ ------ ------
Net increase (decrease) from
investment operations........ 5.87 6.55 1.59 (0.61) 6.11
------ ------ ------ ------ ------
Dividends from net investment
income....................... (0.23) (0.29) (0.13) (0.08) (0.02)
Distributions from net
realized gains from
investment transactions..... (3.39) (2.21) (1.27) (1.84) --
------ ------ ------ ------ ------
Total dividends and
distributions to
shareholders................. (3.62) (2.50) (1.40) (1.92) (0.02)
------ ------ ------ ------ ------
Net asset value, end of
period....................... $23.41 $21.16 $17.11 $16.92 $19.45
====== ====== ====== ====== ======
Total investment
return(/1/).................. 28.72% 39.02% 10.22% (3.14)% 46.79%
====== ====== ====== ====== ======
Ratios/supplemental data:
Net assets, end of period
(000's)...................... $85,661 $64,003 $49,295 $48,032 $61,645
Expenses to average net
assets....................... 1.52% 1.37% 1.45% 1.44% 1.87%
Net investment income (loss)
to average net assets........ 0.90% 1.50% 1.40% 0.76% 0.60%
Portfolio turnover rate...... 40% 53% 14% 22% 28%
Average commission rate
paid(/2/)................... $0.0600 -- -- -- --
</TABLE>
- -------
+COMMENCMENT 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 and distributions at
net asset value on the payable dates and a sale at net asset value on the last
day of each period reported. The figures do not include sales charges; results
would be lower if sales charges were included. Total investment return for
periods less than one year has not been annualized.
(/2/)Effective for fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose the average commission rate paid per share of
common stock investments purchased or sold.
18
<PAGE>
<TABLE>
<CAPTION>
CLASS B CLASS C
- --------------------------------------------- -----------------------------------------------------
FOR THE YEARS ENDED MARCH 31, FOR THE YEARS ENDED MARCH 31, FOR THE PERIOD
- -------------------------------------------- ---------------------------------- JULY 2, 1992+ TO
1997 1996 1995 1994 1993 1997 1996 1995 1994 MARCH 31, 1993
- -------- ------- ------- ------- ------- ------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$20.75 $16.85 $16.71 $19.34 $13.36 $20.75 $16.86 $16.71 $19.34 $14.61
- -------- ------- ------- ------- ------- ------- ------- ------- ------- -------
0.04 0.13 0.11 0.02 (0.01) 0.06 0.12 0.11 0.01 --
5.53 6.16 1.33 (0.75) 5.99 5.51 6.16 1.33 (0.73) 4.77
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
5.57 6.29 1.44 (0.73) 5.98 5.57 6.28 1.44 (0.72) 4.77
------ ------ ------ ------ ------ ----- ----- ------ ------ ------
(0.06) (0.18) (0.03) (0.06) -- (0.09) (0.18) (0.02) (0.07) (0.04)
(3.39) (2.21) (1.27) (1.84) -- (3.39) (2.21) (1.27) (1.84) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(3.45) (2.39) (1.30) (1.90) -- (3.48) (2.39) (1.29) (1.91) (0.04)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$22.87 $20.75 $16.85 $16.71 $19.34 $22.84 $20.75 $16.86 $16.71 $19.34
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
27.74% 37.97% 9.37% (3.83)% 44.76% 27.74% 37.92% 9.34% (3.76)% 32.66%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
$ 41,579 $28,147 $16,368 $11,517 $10,364 $12,357 $ 6,989 $ 4,160 $ 4,370 $ 4,636
2.27% 2.12% 2.22% 2.16% 2.45% 2.28% 2.14% 2.23% 2.17% 2.36%*
0.15% 0.74% 0.67% 0.05% (0.03)% 0.15% 0.72% 0.61% 0.03% 0.01%*
40% 53% 14% 22% 28% 40% 53% 14% 22% 28%
$ 0.0600 -- -- -- -- $0.0600 -- -- -- --
</TABLE>
19
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
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 in-
vestments, as of March 31, 1997, 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 pe-
riods indicated therein. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to ex-
press 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 high-
lights 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
securities owned as of March 31, 1997, 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 fi-
nancial 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. as of March 31, 1997, the re-
sults 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 13, 1997
20
<PAGE>
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
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 the Fund's fiscal year end (March 31,
1997) as to federal tax status of distributions received by shareholders during
such fiscal year. Accordingly, we are advising you that the following distribu-
tions 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*............................. $0.2300 $0.0592 $0.0861
Short-term capital gains*.......................... 0.4112 0.4112 0.4112
Long-term capital gains............................ 2.9758 2.9758 2.9758
Percentage of ordinary income dividends qualifying
for the dividends received deduction available to
corporate shareholders............................ 66.08% 66.08% 66.08%
</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 re-
porting.
Since the Fund's fiscal year is not the calendar year, another notification
will be sent in respect of calendar year 1997. 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 1998. Shareholders are advised to consult their own tax ad-
visers with respect to the tax consequences of their investment in the Fund.
21
