<PAGE>
PAINEWEBBER SMALL CAP FUND
PERFORMANCE RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE TOTAL RETURN/1/
-------------------------- -----------------------------
12 MONTHS 6 MONTHS
07/31/96 01/31/96 07/31/95 ENDED 07/31/96 ENDED 07/31/96
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $10.22 $10.72 $11.30 4.69% 2.43%
- ---------------------------------------------------------------------------
Class B Shares 9.98 10.53 11.15 3.90 1.99
- ---------------------------------------------------------------------------
Class C Shares/2/ 9.97 10.52 11.14 3.90 2.00
- ---------------------------------------------------------------------------
Class Y Shares/3/ 10.21 -- -- -- --
- ---------------------------------------------------------------------------
</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>
02/01/93 - 12/31/93 $10.00 $10.62 $0.0168 $0.1281 7.68%
- -----------------------------------------------------------------------------
1994 10.62 9.97 0.5208 -- (1.20)
- -----------------------------------------------------------------------------
1995 9.97 10.81 0.8306 -- 16.81
- -----------------------------------------------------------------------------
01/01/96 - 07/31/96 10.81 10.22 0.7500 -- 1.58
- -----------------------------------------------------------------------------
Total: $2.1182 $0.1281
- -----------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF
07/31/96: 26.23%
- -----------------------------------------------------------------------------
</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>
02/01/93 - 12/31/93 $10.00 $10.61 $0.0168 $0.0631 6.91%
- -----------------------------------------------------------------------------
1994 10.61 9.88 0.5208 -- (1.96)
- -----------------------------------------------------------------------------
1995 9.88 10.62 0.8306 -- 15.90
- -----------------------------------------------------------------------------
01/01/96 - 07/31/96 10.62 9.98 0.7500 -- 1.13
- -----------------------------------------------------------------------------
Total: $2.1182 $0.0631
- -----------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF
07/31/96: 22.90%
- -----------------------------------------------------------------------------
</TABLE>
Performance Summary Class C Shares/2/
<TABLE>
<CAPTION>
NET ASSET VALUE
---------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID RETURN/1/
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
02/01/93 - 12/31/93 $10.00 $10.61 $0.0168 $0.0682 6.97%
- -----------------------------------------------------------------------------
1994 10.61 9.88 0.5208 -- (1.96)
- -----------------------------------------------------------------------------
1995 9.88 10.61 0.8306 -- 15.84
- -----------------------------------------------------------------------------
01/01/96 - 07/31/96 10.61 9.97 0.7500 -- 1.13
- -----------------------------------------------------------------------------
Total: $2.1182 $0.0682
- -----------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF
07/31/96: 22.86%
- -----------------------------------------------------------------------------
</TABLE>
/1Figures/assume reinvestment of all dividends and capital gains distributions,
if any, at net asset value on the payable dates and do not include sales
charges; results for each Class would be lower if sales charges were
included.
/2/Formerly Class D shares
/3/Commencement of offering of shares was July 26, 1996.
1
<PAGE>
PAINEWEBBER SMALL CAP FUND
PERFORMANCE RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- -----------
COMMON STOCKS - 98.82%
<C> <S> <C>
Agriculture, Food & Beverage - 1.02%
6,500 Farmer Brothers Company................................ $ 884,000
7,500 William Greenberg Desserts & Cafes *................... 20,625
-----------
904,625
-----------
Apparel, Textiles - 1.83%
10,000 Designer Holdings Limited *............................ 183,750
5,000 Donnkenny Incorporated *............................... 90,000
15,000 Quiksilver Incorporated *.............................. 413,438
65,000 Vans Incorporated *.................................... 934,375
-----------
1,621,563
-----------
Banks - 8.08%
28,800 Banknorth Group Incorporated........................... 943,200
19,800 CCB Financial Corporation.............................. 1,024,650
42,200 Cullen Frost Bankers Incorporated...................... 1,149,950
44,870 Provident Bankshares Corporation....................... 1,435,840
42,600 Silicon Valley Bancshares *............................ 1,022,400
20,000 Texas Regional Bancshares Incorporated................. 532,500
21,200 Westamerica Bank Corporation........................... 1,054,700
-----------
7,163,240
-----------
Chemicals - 2.13%
37,500 Cambrex Corporation.................................... 1,153,125
15,000 Learonal Incorporated.................................. 330,000
7,500 NCH Corporation........................................ 408,750
-----------
1,891,875
-----------
Computer Hardware - 0.59%
140,000 Oshap Technologies Limited *........................... 525,000
-----------
Computer Software - 1.18%
60,200 Comshare Incorporated *................................ 1,045,975
-----------
Consumer Durables - 1.16%
20,000 Ethan Allen Interiors Incorporated..................... 437,500
35,000 Pier 1 Imports Incorporated............................ 590,625
-----------
1,028,125
-----------
Diversified Retail - 0.50%
30,000 Shopko Stores Incorporated............................. 442,500
-----------
Drugs & Medicine - 1.39%
68,000 Alpharma, Incorporated................................. 1,232,500
-----------
Electric Utilities - 2.30%
52,400 Public Service Company of New Mexico................... 1,041,450
39,800 Sierra Pacific Resources............................... 999,975
-----------
2,041,425
-----------
</TABLE>
2
<PAGE>
PAINEWEBBER SMALL CAP FUND
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- -----------
COMMON STOCKS - (CONTINUED)
<C> <S> <C>
Electrical Power - 1.07%
15,000 Hughes Supply Incorporated............................ $ 489,375
30,000 Kuhlman Corporation................................... 461,250
-----------
950,625
-----------
Energy Reserves & Production - 2.53%
25,000 Benton Oil & Gas Company *............................ 493,750
15,000 Howell Corporation.................................... 210,000
19,500 Parker & Parsley Petroleum Company.................... 443,625
10,000 Rutherford Moran Oil Corporation *.................... 265,000
48,000 Santa Fe Energy Resources Incorporated *.............. 546,000
15,000 Swift Energy Company *................................ 285,000
-----------
2,243,375
-----------
Environmental Services - 1.65%
10,000 Newpark Resources Incorporated *...................... 328,750
20,000 Tetra Technologies Incorporated *..................... 372,500
85,000 Thermatrix Incorporated *............................. 765,000
-----------
1,466,250
-----------
Financial Services - 2.07%
10,000 Arbatax International Incorporated *.................. 46,880
85,000 Cash America International Incorporated............... 595,000
115,000 First Cash Incorporated *............................. 546,250
12,000 Olympic Financial Limited *........................... 192,000
13,500 Student Loan Corporation.............................. 457,313
-----------
1,837,443
-----------
Forest Products, Paper - 2.54%
30,600 Greif Brothers Corporation............................ 948,600
20,000 Mercer International Incorporated *................... 237,500
39,999 Mosinee Paper Corporation............................. 1,069,972
-----------
2,256,072
-----------
Freight: Air, Sea & Land - 1.47%
20,000 Air Express International Corporation................. 525,000
100,000 Smithway Motor Express Corporation *.................. 775,000
-----------
1,300,000
-----------
Gas Utilities - 0.36%
15,000 Belden & Blake Corporation *.......................... 322,500
-----------
Heavy Machinery - 2.78%
82,000 Cascade Corporation................................... 1,060,875
100,000 Titan Wheel International Incorporated................ 1,400,000
-----------
2,460,875
-----------
Hotels - 1.55%
77,600 Prime Hospitality Corporation *....................... 1,377,400
-----------
</TABLE>
3
<PAGE>
PAINEWEBBER SMALL CAP FUND
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- -----------
COMMON STOCKS - (CONTINUED)
<C> <S> <C>
Industrial Services & Supplies - 3.38%
40,000 GTS Duratek Incorporated *............................ $ 562,500
69,000 Union Corporation *................................... 1,526,625
29,500 Wackenhut Corporation, Class A........................ 586,312
20,000 Wackenhut Corporation, Class B........................ 322,500
-----------
2,997,937
-----------
Information & Computer Services - 5.28%
55,150 Comdisco Incorporated................................. 1,309,812
118,800 Computervision Corporation New *...................... 876,150
78,000 Control Data Systems Incorporated *................... 1,394,250
20,200 National Data Corporation............................. 802,950
30,000 Physicians Computer Network Incorporated *............ 303,750
-----------
4,686,912
-----------
Leisure - 2.58%
58,000 Galoob Lewis Toys Incorporated *...................... 1,471,750
18,100 Harman International Industries Incorporated.......... 812,238
-----------
2,283,988
-----------
Life Insurance - 1.18%
27,400 Reinsurance Group America Incorporated................ 1,044,625
-----------
Long Distance & Phone Companies - 0.81%
25,000 American Portable Telecom Incorporated *.............. 228,125
15,000 Norstan Incorporated *................................ 487,500
-----------
715,625
-----------
Manufacturing-General - 4.79%
25,000 BW/IP Incorporated.................................... 421,875
10,000 Kaydon Corporation.................................... 451,250
5,000 Measurex Corporation.................................. 138,125
105,000 Powell Industries Incorporated *...................... 1,050,000
19,000 Robbins & Myers Incorporated.......................... 950,000
15,000 Tadiran Limited ADR................................... 320,625
56,400 Watsco Incorporated................................... 916,500
-----------
4,248,375
-----------
Manufacturing-High Technology - 5.24%
34,200 DII Group Incorporated *.............................. 812,250
44,000 EIS International Incorporated *...................... 891,000
129,000 Jabil Circuit Incorporated *.......................... 1,531,875
43,000 Kemet Corporation *................................... 768,625
40,000 Tencor Instruments *.................................. 640,000
-----------
4,643,750
-----------
Media - 1.26%
28,200 Heritage Media Corporation *.......................... 1,117,425
-----------
</TABLE>
4
<PAGE>
PAINEWEBBER SMALL CAP FUND
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- -----------
COMMON STOCKS - (CONTINUED)
<C> <S> <C>
Medical Products - 1.44%
48,400 Conmed Corporation *.................................. $ 834,900
23,000 Haemonetics Corporation *............................. 442,750
-----------
1,277,650
-----------
Medical Providers - 3.89%
120,000 Counsel Corporation *................................. 971,250
20,000 Horizon CMS Healthcare Corporation *.................. 195,000
75,000 Lanvision Systems Incorporated *...................... 712,500
7,000 Lincare Holdings Incorporated *....................... 273,000
45,400 Sierra Health Services Incorporated *................. 1,191,750
13,000 Walsh International Incorporated *.................... 105,625
-----------
3,449,125
-----------
Mining & Metals - 2.13%
20,600 AK Steel Holding Corporation.......................... 754,475
38,500 Valmont Industries Incorporated....................... 1,135,750
-----------
1,890,225
-----------
Motor Vehicles - 1.25%
50,000 Breed Technologies, Incorporated...................... 993,750
10,000 Keystone Automotive Industries Incorporated *......... 118,750
-----------
1,112,500
-----------
Oil Refining - 1.53%
40,400 Smith International Incorporated *.................... 1,353,400
-----------
Oil Services - 2.49%
15,000 Camco International Incorporated...................... 485,625
20,000 Cliffs Drilling Company *............................. 557,500
5,000 Geoscience Corporation *.............................. 50,938
23,100 Oceaneering International Incorporated *.............. 369,600
60,000 Pride Petroleum Services Incorporated *............... 742,500
-----------
2,206,163
-----------
Other Insurance - 11.70%
28,400 American Bankers Insurance Group Incorporated......... 1,136,000
7,500 CMAC Investment Corporation........................... 430,313
27,600 Capital Re Corporation................................ 931,500
27,000 Fremont General Corporation .......................... 675,000
34,540 Frontier Insurance Group Incorporated................. 1,170,042
110,000 Gainsco Incorporated.................................. 1,100,000
15,000 Leucadia National Corporation......................... 352,500
26,806 Orion Capital Corporation............................. 1,313,494
18,000 RLI Corporation....................................... 427,500
58,000 Terra Nova Bermuda Holdings Limited................... 971,500
15,000 Trenwick Group Incorporated........................... 731,250
34,000 Vesta Insurance Group Incorporated.................... 1,139,000
-----------
10,378,099
-----------
</TABLE>
5
<PAGE>
PAINEWEBBER SMALL CAP FUND
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- -----------
COMMON STOCKS - (CONCLUDED)
<C> <S> <C>
Publishing - 0.79%
35,200 Factset Research Systems Incorporated *................ $ 704,000
-----------
Railroads - 0.40%
30,000 Greenbrier Companies Incorporated...................... 356,250
-----------
Real Property - 4.93%
15,000 BMC West Corporation *................................. 217,500
100,008 D.R. Horton Incorporated *............................. 962,577
51,000 Granite Construction Incorporated...................... 1,077,375
52,100 Newhall Land & Farming Company......................... 840,112
30,000 Nobility Homes Incorporated *.......................... 570,000
37,000 Pacific Greystone Corporation *........................ 397,750
15,000 Redman Industries *.................................... 311,250
-----------
4,376,564
-----------
Restaurants - 1.45%
80,000 Casa Ole Restaurants Incorporated *.................... 1,080,000
20,000 Fine Host Corporation *................................ 210,000
-----------
1,290,000
-----------
Securities & Asset Management - 1.09%
34,000 Quick & Reilly Group Incorporated...................... 964,750
-----------
Semiconductor - 0.65%
18,000 Electro Scientific Industries Incorporated *........... 297,000
22,000 Electroglas Incorporated *............................. 277,750
-----------
574,750
-----------
Specialty Retail - 2.79%
41,600 Orchard Supply Hardware *.............................. 1,180,400
37,000 Waban Incorporated *................................... 703,000
60,000 West Coast Entertainment Corporation *................. 592,500
-----------
2,475,900
-----------
Thrift - 0.12%
6,000 Coastal Bancorp Incorporated........................... 105,000
-----------
Tobacco - 1.45%
46,400 Universal Corporation.................................. 1,287,600
-----------
Total Common Stocks (cost - $87,816,153).......................... 87,651,981
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATE RATE
--------- -------- --------
REPURCHASE AGREEMENT - 1.64%
<C> <S> <C> <C> <C>
$1,453 Repurchase Agreement dated 07/31/96
with Salomon Brothers Incorporated,
collateralized by $1,520,000 U.S.
Treasury Bills, 5.390%, due
01/02/97; proceeds: $1,453,224
(cost - $1,453,000)................ 08/01/96 5.550% 1,453,000
-----------
Total Investments (cost - $89,269,153) -
100.46%....................................... 89,104,981
Liabilities in excess of other assets -
(0.46)%....................................... (411,662)
-----------
Net Assets - 100.00%........................... $88,693,319
===========
</TABLE>
- -------
*Non-income producing security
ADRAmerican Depositary Receipts
See accompanying notes to financial statements
6
<PAGE>
PAINEWEBBER SMALL CAP FUND
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<S> <C>
Assets
Investments, at value (cost - $89,269,153)........................ $89,104,981
Cash.............................................................. 200,750
Receivable for investments sold................................... 786,799
Dividends and interest receivable................................. 73,202
Receivable for shares of beneficial interest sold................. 29,059
Deferred organizational expenses.................................. 163,785
Other assets...................................................... 96,478
-----------
Total assets..................................................... 90,455,054
-----------
Liabilities
Payable for investments purchased................................. 1,068,182
Payable for shares of beneficial interest repurchased............. 218,653
Payable to affiliates............................................. 134,686
Accrued expenses and other liabilities............................ 340,214
-----------
Total liabilities................................................ 1,761,735
-----------
Net Assets
Beneficial interest shares of $0.001 par value outstanding (unlim-
ited amount authorized).......................................... 87,408,965
Accumulated net realized gains from investments................... 1,448,526
Net unrealized depreciation of investments........................ (164,172)
-----------
Net Assets....................................................... $88,693,319
===========
Class A:
Net Assets........................................................ $30,674,795
-----------
Shares outstanding................................................ 3,002,680
-----------
Net asset and redemption value per share.......................... $10.22
======
Maximum offering price per share (net asset value plus sales
charge of 4.50% of offering price)............................... $10.70
======
Class B:
Net Assets........................................................ $36,612,323
-----------
Shares outstanding................................................ 3,669,826
-----------
Net asset value and offering price per share...................... $9.98
=====
Class C:
Net Assets........................................................ $18,605,576
-----------
Shares outstanding................................................ 1,866,818
-----------
Net asset value, offering price and redemption value per share.... $9.97
=====
Class Y:
Net Assets........................................................ $ 2,800,625
-----------
Shares outstanding................................................ 274,241
-----------
Net asset value, offering price and redemption value per share.... $10.21
======
</TABLE>
See accompanying notes to financial statements
7
<PAGE>
PAINEWEBBER SMALL CAP FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<S> <C>
Investment income:
Dividends (net of foreign withholding taxes of $7,218)........... $ 1,264,109
Interest......................................................... 287,454
-----------
1,551,563
-----------
Expenses:
Investment advisory and administration fees...................... 731,472
Services fees--Class A........................................... 49,238
Service and distribution fees--Class B........................... 415,522
Service and distribution fees--Class C........................... 115,747
Reports and notices to shareholders.............................. 112,255
Reorganization expenses.......................................... 110,456
Transfer agency and service fees................................. 101,188
Legal and audit.................................................. 94,452
Federal and state registration fees.............................. 85,897
Custody and accounting........................................... 79,787
Amortization of organizational expenses.......................... 51,800
Trustees' fees and expenses...................................... 10,000
Other expenses................................................... 2,400
-----------
1,960,214
-----------
NET INVESTMENT LOSS.............................................. (408,651)
-----------
Realized and unrealized gains (losses) from investment transac-
tions:
Net realized gains from investment transactions.................. 7,823,052
Net change in unrealized appreciation/depreciation of invest-
ments........................................................... (4,208,066)
-----------
NET REALIZED AND UNREALIZED GAINS FROM INVESTMENT TRANSACTIONS... 3,614,986
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............. $ 3,206,335
===========
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
PAINEWEBBER SMALL CAP FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED JULY 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
From operations:
Net investment loss.................................. $ (408,651) $ (127,657)
Net realized gains from investment transactions...... 7,823,052 4,379,410
Net change in unrealized appreciation/depreciation of
investments......................................... (4,208,066) 7,078,454
----------- -----------
Net increase in net assets resulting from operations. 3,206,335 11,330,207
----------- -----------
Distributions to shareholders from:
Net realized gains from investment transactions--
Class A............................................. (2,580,753) (1,099,875)
Net realized gains from investment transactions--
Class B............................................. (5,623,020) (2,545,115)
Net realized gains from investment transactions--
Class C............................................. (1,514,097) (770,850)
----------- -----------
(9,717,870) (4,415,840)
----------- -----------
From beneficial interest transactions:
Net proceeds from the sale of shares................. 6,234,900 8,287,256
Shares issued in connection with the acquisition of
PaineWebber Small Cap Growth Fund................... 27,156,461 --
Cost of shares repurchased........................... (27,176,983) (31,154,154)
Proceeds from dividends reinvested................... 9,091,388 4,095,250
----------- -----------
Net increase (decrease) in net assets derived from
beneficial interest transactions.................... 15,305,766 (18,771,648)
----------- -----------
Net increase (decrease) in net assets................ 8,794,231 (11,857,281)
Net Assets:
Beginning of period.................................. 79,899,088 91,756,369
----------- -----------
End of period........................................ $88,693,319 $79,899,088
=========== ===========
</TABLE>
See accompanying notes to financial statements
9
<PAGE>
PAINEWEBBER NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
PaineWebber Small Cap Fund (the "Fund") is a diversified series
of PaineWebber Securities Trust ("Trust"), which was organized
under Massachusetts law by a Declaration of Trust dated December
3, 1992 and registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended,
as an open-end management investment company. The Trust
currently offers another series of shares, PaineWebber Strategic
Income Fund, whose financial statements are not included herein.
The Fund incurred costs in connection with its organization and
the registration of its shares. Such costs have been deferred
and are being amortized using the straight-line method over a
period of benefit of 60 months, beginning with the commencement
of investment operations of the Fund.
At the close of business on July 26, 1996, the former
PaineWebber Small Cap Value Fund was renamed the PaineWebber
Small Cap Fund.
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 distribution charges
and certain transfer agency and other expenses. In addition,
Class B shares and all corresponding reinvested dividend shares
automatically convert to Class A shares approximately six years
after initial issuance. All classes of shares have equal voting
privileges, except that each class has exclusive voting rights
with respect to its service and/or distribution plan.
Acquisition of PaineWebber Small Cap Growth Fund--Effective as
of the close of business on July 26, 1996 (the "Acquisition
Date"), the Fund acquired all of the assets and assumed all of
the liabilities of PaineWebber Small Cap Growth Fund ("Small Cap
Growth Fund"). The acquisitions were accomplished by tax-free
exchanges of 1,404,733 Class A, 63,270 Class B, 936,155 Class C
and 274,241 Class Y shares of the Fund for 1,450,092 Class A,
65,772 Class B, 969,172 Class C and 280,828 Class Y shares of
Small Cap Growth Fund outstanding on the Acquisition Date. Small
Cap Growth Fund's net assets at that date, valued at
$27,156,461, including accumulated net realized losses of $3,287
and net unrealized depreciation of investments of $1,297,019,
were combined with those of the Fund. All shares were exchanged
at net asset value. Accordingly, no shareholder had any gain or
loss as a result of the exchange. The Fund's statement of
operations and financial highlights do not include the
operations of Small Cap Growth Fund prior to the Acquisition
Date.
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
10
<PAGE>
PAINEWEBBER
statements. Actual results could differ from those estimates.
The following is a summary of significant accounting policies:
Valuation of Investments - Securities which are listed on U.S.
and foreign 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 generally valued on the exchange designated by Mitchell
Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly
owned subsidiary of PaineWebber Incorporated, and investment
adviser and administrator of the Fund as the primary market.
Securities traded in the over-the-counter ("OTC") market and
listed on The Nasdaq Stock Market, Inc. ("Nasdaq") are valued at
the last trade price on Nasdaq prior to the time of valuation;
other OTC securities are valued at the last bid price available
prior to valuation. The amortized cost method of valuation,
which approximates market value, is used to value short-term
debt instruments with sixty days or less remaining to maturity
unless the Fund's board of trustees determines that this does
not represent fair value. Securities and assets 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 trustees.
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 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 and dividend income is recorded on the ex-dividend
date.
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.
11
<PAGE>
PAINEWEBBER
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. Dividends and distributions which
exceed net investment income and net realized capital gains for
financial reporting purposes but not for tax purposes are
reported as dividends in excess of net investment income or
distributions in excess of net realized capital gains. To the
extent they exceed net investment income and net realized
capital gains for tax purposes, they are reported as
distributions of paid-in-capital.
CONCENTRATION OF RISK
Small cap companies may be more vulnerable than larger companies
to adverse business or economic developments. Small cap
companies may also have limited product lines, markets or
financial resources, and may be dependent on a relatively small
management group. Securities of such companies may be less
liquid and more volatile than securities of larger companies or
the market averages in general and therefore may involve greater
risk than investing in larger companies. In addition, small cap
companies may not be well-known to the investing public, may not
have institutional ownership and may have only cyclical, static
or moderate growth prospects.
INVESTMENT ADVISER AND ADMINISTRATOR
The Fund has an Investment Advisory and Administration Contract
("Advisory Contract") with Mitchell Hutchins. In accordance with
the Advisory Contract the Fund pays Mitchell Hutchins an
investment advisory and administration fee, which is accrued
daily and payable monthly, at the annual rate of 1.00% of the
Fund's average daily net assets. At July 31, 1996, the Fund owed
Mitchell Hutchins $76,801 in investment advisory and
administration fees.
Under a separate contract ("Sub-Advisory Contract") with Quest
Advisory Corp. (the "Sub-Adviser"), Mitchell Hutchins (not the
Fund) was paying the Sub-Adviser a monthly fee in an amount
equal to 50% of the fee paid to Mitchell Hutchins under the
Advisory Contract. Effective April 1, 1996, the Fund terminated
the Sub-Advisory Contract with the Sub-Adviser, and Mitchell
Hutchins took over the responsibility for the day-to-day
management of the Fund's assets.
For the year ended July 31, 1996, Small Cap Fund paid $3,066 in
brokerage commissions to PaineWebber for transactions executed
on behalf of the Fund.
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.
12
<PAGE>
PAINEWEBBER
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 of
$100 million. For the year ended July 31, 1996, no
reimbursements were required pursuant to the above limitation.
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 distribution pertaining
to Class A, Class B and Class C (formerly Class D) shares, the
Fund pays Mitchell Hutchins monthly service fees at an 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 July 31, 1996, the Fund owed Mitchell
Hutchins $54,595 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 the
shareholders upon certain redemptions of Class A, Class B and
Class C shares. Mitchell Hutchins has informed the Fund that for
the year ended July 31, 1996, it received $200,224 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 July 31, 1996, PaineWebber earned $36,944 from
the Fund. At July 31, 1996, the Fund owed PaineWebber $3,290 for
shareholder service fees.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at
July 31, 1996 was substantially the same as the cost of
securities for financial statement purposes.
At July 31, 1996, the components of net unrealized depreciation
of investments were as follows:
<TABLE>
<S> <C>
Gross depreciation (investments having an excess
of cost over value)............................... $(8,126,790)
Gross appreciation (investments having an excess
of value over cost)............................... 7,962,618
-----------
Net unrealized depreciation of investments........ $ (164,172)
===========
</TABLE>
For the year ended July 31, 1996, aggregate purchases and sales
of portfolio securities, excluding short-term securities, were
$58,747,226 and $73,494,035, respectively.
13
<PAGE>
PAINEWEBBER
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.
To reflect reclassifications arising from permanent "book/tax"
differences for the year ended July 31, 1996, the Fund's
accumulated net realized gains were reduced by $326,744;
accumulated net investment loss was reduced by $408,651 and
beneficial interest was reduced by $81,907. Permanent book/tax
differences are primarily attributable to net operating losses and
nondeductible reorganization expenses for the current year.
SHARES OF BENEFICIAL INTEREST
There is an unlimited amount of $0.001 par value shares of
beneficial interest authorized. Of the 8,813,565 shares
outstanding at July 31, 1996, Mitchell Hutchins owned 10,003
shares of Class A, one share of Class B and one share of Class C.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
---------------------- ------------------------ ---------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- ---------- ------------ -------- ------------ ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED
JULY 31, 1996:
Shares sold............. 162,734 $ 1,784,341 246,297 $ 2,708,345 158,976 $ 1,742,214 -- --
Shares issued in
connection with the
acquisition of
PaineWebber Small Cap
Growth Fund............ 1,404,733 14,374,663 63,270 632,216 936,155 9,344,754 274,241 $2,804,828
Shares repurchased...... (729,600) (8,163,423) (1,173,417) (12,903,027) (554,588) (6,110,533) -- --
Shares converted from
Class B to Class A..... 114,185 1,313,683 (115,951) (1,313,683) -- -- -- --
Dividends reinvested.... 236,526 2,470,300 511,372 5,228,853 136,084 1,392,235 -- --
--------- ----------- ---------- ------------ -------- ------------ ------- ----------
Net increase (decrease). 1,188,578 $11,779,564 (468,429) $ (5,647,296) 676,627 $ 6,368,670 274,241 $2,804,828
========= =========== ========== ============ ======== ============ ======= ==========
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
--------------------- ------------------------ --------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ----------- ---------- ------------ -------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED
JULY 31, 1995:
Shares sold............. 189,244 $ 1,961,312 400,320 $ 4,097,889 219,759 $ 2,228,055 -- --
Shares repurchased...... (700,760) (7,226,007) (1,650,145) (16,841,037) (694,404) (7,087,110) -- --
Dividends reinvested.... 101,765 1,017,208 239,421 2,375,883 70,815 702,159 -- --
-------- ----------- ---------- ------------ -------- ----------- --------- ---------
Net decrease............ (409,751) $(4,247,487) (1,010,404) $(10,367,265) (403,830) $(4,156,896) -- --
======== =========== ========== ============ ======== =========== ========= =========
</TABLE>
14
<PAGE>
[This Page Intentionally Left Blank]
15
<PAGE>
PAINEWEBBER SMALL CAP FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD IS PRESENTED BELOW:
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------
FOR THE YEARS FOR THE
ENDED PERIOD FOR THE YEAR
JULY 31, ENDED ENDED
---------------- JULY 31, JANUARY 31,
1996# 1995 1994+ 1994
------- ------- -------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $11.30 $10.27 $10.61 $10.00
------- ------- ------- -------
Net investment income (loss).. 0.00@ 0.05 0.02 0.13
Net realized and unrealized
gains (losses) from
investment transactions...... 0.50@ 1.50 (0.36) 0.62
------- ------- ------- -------
Net increase (decrease) from
investment operations........ 0.50 1.55 (0.34) 0.75
------- ------- ------- -------
Dividends from net investment
income....................... -- -- -- (0.12)
Distributions from net
realized gains............... (1.58) (0.52) -- (0.02)
------- ------- ------- -------
Total dividends and
distributions................ (1.58) (0.52) 0.00 (0.14)
------- ------- ------- -------
Net asset value, end of
period....................... $10.22 $11.30 $10.27 $10.61
======= ======= ======= =======
Total investment return (1)... 4.69% 15.80% (3.20)% 7.58%
======= ======= ======= =======
Ratios/Supplemental Data:
Net assets, end of period
(000's)...................... $30,675 $20,494 $22,848 $25,226
Expenses to average net
assets....................... 2.11% 1.98% 1.91%* 1.75%
Net investment income (loss)
to average net assets........ 0.02% 0.41% 0.41%* 1.41%
Portfolio turnover............ 84% 19% 20% 98%
- ---------------------
</TABLE>
* Annualized
** Formerly Class D shares
+ For the period February 1, 1994 to July 31, 1994.
++ For the period July 26, 1996 (commencement of offering of shares) to July
31, 1996.
# Effective April 1, 1996, Mitchell Hutchins took over day-to-day management
of the Fund's assets.
@ Calculated using the average shares outstanding for the year.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions, if any, 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 of less than
one year have not been annualized.
16
<PAGE>
<TABLE>
<CAPTION>
CLASS B CLASS C** CLASS Y
- ------------------------------------------- ------------------------------------------- --------
FOR THE YEARS FOR THE FOR THE FOR THE YEARS FOR THE FOR THE FOR THE
ENDED PERIOD YEAR ENDED PERIOD YEAR PERIOD
JULY 31, ENDED ENDED JULY 31, ENDED ENDED ENDED
- ----------------- JULY 31, JANUARY 31, ----------------- JULY 31, JANUARY 31, JULY 31,
1996# 1995 1994+ 1994 1996# 1995 1994+ 1994 1996#+
- ------- ------- -------- ----------- ------- ------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$11.15 $10.22 $10.60 $10.00 $11.14 $10.22 $10.59 $10.00 $10.23
- ------- ------- ------- ------- ------- ------- ------- ------- ------
(0.09)@ (0.04) (0.02) 0.06 (0.08)@ (0.05) (0.02) 0.06 0.00 @
0.50 @ 1.49 (0.36) 0.62 0.49 @ 1.49 (0.35) 0.62 (0.02)@
- ------- ------- ------- ------- ------- ------- ------- ------- ------
0.41 1.45 (0.38) 0.68 0.41 1.44 (0.37) 0.68 (0.02)
- ------- ------- ------- ------- ------- ------- ------- ------- ------
-- -- -- (0.06) -- -- -- (0.07) --
(1.58) (0.52) -- (0.02) (1.58) (0.52) -- (0.02) --
- ------- ------- ------- ------- ------- ------- ------- ------- ------
(1.58) (0.52) 0.00 (0.08) (1.58) (0.52) 0.00 (0.09) 0.00
- ------- ------- ------- ------- ------- ------- ------- ------- ------
$9.98 $11.15 $10.22 $10.60 $9.97 $11.14 $10.22 $10.59 $10.21
======= ======= ======= ======= ======= ======= ======= ======= ======
3.90% 14.86 % (3.58)% 6.81% 3.90% 14.76 % (3.49)% 6.77% (0.20)%
======= ======= ======= ======= ======= ======= ======= ======= ======
$36,612 $46,142 $52,624 $59,993 $18,606 $13,263 $16,285 $20,941 $2,801
2.90% 2.74 % 2.69 %* 2.50% 2.91% 2.73 % 2.69 %* 2.50% 1.72%*
(0.78)% (0.35)% (0.37)%* 0.67% (0.77)% (0.34)% (0.36)%* 0.64% 0.07%*
84% 19 % 20 % 98% 84% 19 % 20 % 98% 84%
</TABLE>
17
<PAGE>
PAINEWEBBER SMALL CAP FUND
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of
PaineWebber Small Cap Fund
In our opinion, the accompanying statement of assets and
liabilities, including the portfolio of investments, and the
related statements of operations and of changes in net assets and
the financial highlights present fairly, in all material respects,
the financial position of PaineWebber Small Cap Fund (the "Fund")
at July 31, 1996, the results of its operations for the year then
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
periods indicated, in conformity with generally accepted
accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is
to express an opinion on these financial statements based on our
audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits, which included confirmation of securities at July 31, 1996
by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
September 19, 1996
18
<PAGE>
PAINEWEBBER SMALL CAP FUND
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 (July 31, 1996), as to the federal tax status of
distributions received by shareholders during such fiscal year.
Accordingly, we are advising you that the distributions for
Class A, Class B and Class C shares made during the fiscal year
were derived from short-term and long-term capital gains in the
amount of $0.4252 per share and $1.1554 per share, respectively.
Additionally, 57.96% of the distributions paid qualifies for the
dividend received deduction available to corporate shareholders.
Dividends received by tax-exempt recipients need not be reported
as taxable income. Some retirement trusts (e.g., corporate Keogh
and 403(b)(7) plans) may need this information for their annual
reporting.
Because 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 reflects the amount to be used by
calendar year taxpayers on their federal income tax returns, is
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.
19
<PAGE>
PAINEWEBBER SMALL CAP FUND
SHAREHOLDER INFORMATION (UNAUDITED)
A special meeting of shareholders of the Fund was held on April
10, 1996. At the meeting the following proposals were approved:
1. To elect ten members of its Board of Trustees:
<TABLE>
<CAPTION>
SHARES
SHARES WITHHOLD
VOTED FOR AUTHORITY
--------- ---------
<S> <C> <C>
Margo N. Alexander................................. 3,109,714 344,395
Richard Q. Armstrong............................... 3,109,714 344,395
E. Garrett Bewkes, Jr. ............................ 3,105,843 348,265
Richard R. Burt.................................... 3,109,714 344,395
Mary C. Farrell.................................... 3,109,714 344,395
Meyer Feldberg..................................... 3,108,409 345,700
George W. Gowen.................................... 3,105,843 348,266
Frederic V. Malek.................................. 3,107,206 346,903
Carl W. Schafer.................................... 3,108,688 345,421
John R. Torell III................................. 3,109,714 344,395
</TABLE>
2. Ratification of the selection of Price Waterhouse LLP as the
independent auditors for its current fiscal year:
<TABLE>
SHARES SHARES SHARES
VOTED FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C>
3,107,036 10,170 336,903
</TABLE>
3. Approval of the proposed changes to the Fund's fundamental
investment restrictions and policies:
<TABLE>
<CAPTION>
SHARES SHARES SHARES
VOTED FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C> <C>
Modification of Fundamental Restriction on
Portfolio Diversification for Diversified
Funds...................................... 3,036,593 32,468 385,048
Modification of Fundamental Restriction on
Concentration.............................. 3,036,593 32,468 385,048
Modification of Fundamental Restriction on
Senior Securities and Borrowing............ 3,036,593 32,468 385,048
Modification of Fundamental Restriction on
Making Loans............................... 3,036,593 32,468 385,048
Modification of Fundamental Restriction on
Underwriting Securities.................... 3,036,593 32,468 385,048
Modification of Fundamental Restriction on
Real Estate Investments.................... 3,036,593 32,468 385,048
Modification of Fundamental Restriction on
Investing in Commodities................... 3,036,593 32,468 385,048
Elimination of Fundamental Restriction on
Margin Transactions........................ 3,036,593 32,468 385,048
Elimination of Fundamental Restriction on
Short Sales................................ 3,036,593 32,468 385,048
Elimination of Fundamental Restriction on
Investments in Oil, Gas and Mineral Leases
and Programs............................... 3,036,593 32,468 385,048
Elimination of Fundamental Restriction on
Investments in Other Investment Companies.. 3,036,593 32,468 385,048
</TABLE>
(Broker non-votes and abstentions are included within the "Shares
Withhold Authority" and "Shares Abstain" totals.)
20
