<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
PERFORMANCE RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE TOTAL RETURN/1/
-------------------------------- --------------------------------
12 MONTHS 4 MONTHS
05/31/96 01/31/96 05/31/95 ENDED 05/31/96 ENDED 05/31/96
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A
Shares $ 8.90 $ 8.99 $8.98 8.90% 1.67%
- ---------------------------------------------------------------------------------
Class B
Shares 8.89 8.98 8.97 8.17 1.42
- ---------------------------------------------------------------------------------
Class C
Shares/3/ 8.89 8.98 8.98 8.28 1.50
- ---------------------------------------------------------------------------------
PERFORMANCE SUMMARY CLASS A SHARES
<CAPTION>
NET ASSET VALUE
------------------ CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID/2/ RETURN/1/
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
02/07/94 -
12/31/94 $10.00 $ 8.56 $-- $0.5792 (8.76)%
- ---------------------------------------------------------------------------------
1995 8.56 8.79 -- 0.9392 14.12
- ---------------------------------------------------------------------------------
01/01/96 -
05/31/96 8.79 8.90 -- 0.2370 3.98
- ---------------------------------------------------------------------------------
Total: $0.0000 $1.7554
- ---------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 05/31/96 : 8.27%
- ---------------------------------------------------------------------------------
PERFORMANCE SUMMARY CLASS B SHARES
<CAPTION>
NET ASSET VALUE
------------------ CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID/2/ RETURN/1/
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
02/07/94 -
12/31/94 $10.00 $ 8.55 $-- $0.5242 (9.41)%
- ---------------------------------------------------------------------------------
1995 8.55 8.78 -- 0.8733 13.29
- ---------------------------------------------------------------------------------
01/01/96 -
05/31/96 8.78 8.89 -- 0.2149 3.73
- ---------------------------------------------------------------------------------
Total: $0.0000 $1.6124
- ---------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 05/31/96 : 6.46%
- ---------------------------------------------------------------------------------
PERFORMANCE SUMMARY CLASS C SHARES/3/
<CAPTION>
NET ASSET VALUE
------------------ CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID/2/ RETURN/1/
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
02/07/94 -
12/31/94 $10.00 $ 8.56 $-- $0.5424 (9.13)%
- ---------------------------------------------------------------------------------
1995 8.56 8.79 -- 0.8951 13.56
- ---------------------------------------------------------------------------------
01/01/96 -
05/31/96 8.79 8.89 -- 0.2221 3.69
- ---------------------------------------------------------------------------------
Total: $0.0000 $1.6596
- ---------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 05/31/96 : 7.01%
- ---------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL RETURN
<TABLE>
<CAPTION>
% RETURN WITHOUT % RETURN AFTER DEDUCTING
SALES CHARGE MAXIMUM SALES CHARGE
-------------------- ----------------------------
CLASS CLASS
-------------------- ----------------------------
A* B** C*** A* B** C***
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Twelve Months Ended 06/30/96 9.28% 8.54% 8.77% 4.95% 3.54% 8.02%
- -------------------------------------------------------------------------------
Commencement of Operations
Through 06/30/96+ 3.80 3.04 3.27 2.03 1.42 3.27
- -------------------------------------------------------------------------------
</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.
/2/ Includes foreign exchange gain distributions, if any.
/3/ Formerly Class D shares.
* Maximum sales charge for Class A shares is 4.0% of the public offering
price. Class A shares bear ongoing 12b-1 service fees.
** Maximum contingent deferred sales charge for Class B shares is 5.0% and is
reduced to 0% after 6 years. Class B shares bear ongoing 12b-1 distribution
and service fees.
*** Maximum contingent deferred sales charge for Class C shares is 0.75% and is
reduced to 0% after 1 year. Class C shares bear ongoing 12b-1 distribution
and service fees.
+ Commencement of issuance for all three classes of shares was February 7,
1994.
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 STRATEGIC INCOME FUND
PORTFOLIO OF INVESTMENTS MAY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000)* DATES RATES VALUE
--------- -------------- ----------- -----------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS -
17.01%
FEDERAL NATIONAL MORTGAGE
ASSOCIATION CERTIFICATES - 9.36%
$ 6,400 FNMA TBA................ TBA 7.000% $ 6,100,000
SHORT-TERM U.S. GOVERNMENT
OBLIGATIONS - 7.65%
5,000 United States Treasury 4.820 to
Bills.................. 06/27/96 4.900@ 4,982,479
-----------
Total U.S. Government Obligations
(cost - $11,078,479).............. 11,082,479
-----------
GLOBAL DEBT SECURITIES - 43.71%
LONG-TERM GLOBAL DEBT SECURITIES -
42.60%
Australia - 4.41%
3,800 Commonwealth of
Australia.............. 04/15/00 7.000 2,875,553
-----------
Brazil - 5.03%
US$ 3,000 Federal Republic of
Brazil PAR............. 04/15/24 5.000(b) 1,582,500
US$ 2,600 Federal Republic of
Brazil DCB............. 04/15/12 6.563++++ 1,696,500
-----------
3,279,000
-----------
Canada - 2.24%
1,936 Government of Canada.... 09/01/99 7.750 1,456,735
-----------
Denmark - 3.03%
11,250 Government of Denmark... 03/15/06 8.000 1,976,029
-----------
Germany - 5.21%
5,105 Federal Republic of 01/03/05 to 6.250 to
Germany................ 01/04/24 7.375 3,394,926
-----------
Italy - 3.83%
4,025,000 Republic of Italy....... 04/01/04 8.500 2,497,781
-----------
Mexico - 4.82%
US$ 4,000 United Mexican States,
DISC(1)................ 12/31/19 6.352 to
6.391++++ 3,140,000
-----------
Poland - 4.59%
US$ 4,000 Republic of Poland PDI.. 10/27/14 3.750(b) 2,987,480
-----------
Spain - 4.89%
374,900 Government of Spain..... 08/30/98 to 11.450 to
03/25/00 12.250 3,185,859
-----------
United Kingdom - 4.55%
1,650 United Kingdom Gilt..... 07/14/00 to 10.000 to
09/08/03 13.000 2,966,498
-----------
Total Long-Term Global Debt
Securities (cost - $26,284,524)... 27,759,861
-----------
SHORT-TERM GLOBAL DEBT SECURITIES -
1.11%
Italy - 1.11%
1,109,850 Swiss Bank Corporation
Time Deposit
(cost - $701,992)...... 08/22/96 10.000 721,016
-----------
Total Global Debt Securities
(cost - $26,986,516).............. 28,480,877
-----------
HIGH YIELD SECURITIES - 42.72%
CORPORATE BONDS - 40.49%
Airlines - 0.80%
500 Airplane Pass Through
Trust.................. 03/15/19 10.875 523,750
750# USAfrica Airways,
Inc.++................. 05/31/99 12.000(a) 0
-----------
523,750
-----------
</TABLE>
2
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------- ----------- -----------
<C> <S> <C> <C> <C>
Cable - 4.67%
$ 1,500# Australis Media Ltd. ... 05/15/03 14.000%+ $ 937,500
1,250 Echostar Communications. 03/15/04 13.125+ 831,250
1,250 Telewest PLC............ 10/01/07 11.000+ 743,750
1,000 UIH Australia Pacific**. 05/15/06 14.000+ 530,000
-----------
3,042,500
-----------
Communications - 4.46%
110(2) GST
Telecommunications**... 12/15/05 13.875+ 621,500
150 Intelcom Group USA,
Inc. .................. 09/15/05 13.500+ 91,500
500 IXC Communications
Inc.**................. 10/01/05 13.000 527,500
750 Shared Technologies**... 03/01/06 12.250+ 566,250
2,000 Viatel Inc. ............ 01/15/05 15.000+ 1,100,000
-----------
2,906,750
-----------
Consumer Manufacturing - 4.60%
900 Apparel Ventures, Inc. . 12/31/00 12.250 684,000
653 Chattem Inc. ........... 06/15/04 12.750 653,000
2,000 Decorative Home Accents. 06/30/02 13.000 1,660,000
-----------
2,997,000
-----------
Energy - 1.28%
850 TransTexas Gas Corp. ... 06/15/02 11.500 833,000
-----------
Entertainment - 1.08%
250 Alamo Rent A Car Inc. .. 01/31/06 11.750 255,000
500 United Artists Theatre
Circuit**.............. 07/01/15 9.300 450,000
-----------
705,000
-----------
Financial Service - 1.43%
1,000 Imperial Credit
Industries............. 01/15/04 9.750 930,000
-----------
Food & Beverage - 3.94%
500 Flagstar Corp. ......... 12/01/02 10.875 447,500
3,000 Iowa Select Farms++..... 02/15/04 17.250+ 1,601,400
500 Specialty Equipment
Companies Inc. ........ 12/01/03 11.375 521,250
-----------
2,570,150
-----------
Gaming - 3.07%
500 Fitzgeralds Gaming
Corp. ................. 12/31/02 13.000 440,000
1,106# Grand Palais Casino,
Inc.++................. 11/01/97 18.250(a) 0
3,469# Hemmeter Enterprises**.. 12/15/00 12.000(a) 256,673
1,000 PRT Funding Inc. ....... 04/15/04 11.625 860,000
1,063 Sam Houston Race Park
Ltd. .................. 09/01/01 11.000 441,332
-----------
1,998,005
-----------
General Industrial - 4.69%
1,000 Alpine Group............ 07/15/03 12.250 1,000,000
1,000 Jordan Industries....... 08/01/05 11.750+ 695,000
500 Kindercare Learning
Centers................ 06/01/01 10.375 517,500
1,000 Poindexter JB Inc. ..... 05/15/04 12.500 845,000
-----------
3,057,500
-----------
Media - 3.61%
500 Affiliated Newspapers... 07/01/06 13.250+ 337,500
1,000 Grupo Televisa S.A.**... 05/15/08 13.250+ 537,500
500 KIII Communications
Corp. ................. 02/01/06 8.500 465,000
1,000 NeoData Services Inc. .. 05/01/03 12.000 1,012,500
-----------
2,352,500
-----------
</TABLE>
3
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------- ----------- -----------
<C> <S> <C> <C> <C>
Retail - 2.65%
$ 1,000 Petro PSC Properties
L.P. ................... 06/01/02 12.500% $ 960,000
1,000 Wickes Lumber Co. ....... 12/15/03 11.625 765,000
-----------
1,725,000
-----------
Supermarkets & Drugstores - 1.01%
700 Di Giorgio Corp. ........ 02/15/03 12.000 658,000
-----------
Transport Non-Air - 3.20%
1,000 Gearbulk Holding Ltd. ... 12/01/04 11.250 1,045,000
1,000 TNT Transport Europe PLC. 04/15/04 11.500 1,040,000
-----------
2,085,000
-----------
Total Corporate Bonds (cost -
$28,775,125)...................... 26,384,155
-----------
<CAPTION>
NUMBER
OF
SHARES
------
<C> <S> <C>
COMMON STOCK (A) - 1.42%
Communications - 0.42%
72,200 Viatel Inc. ........................................... 274,360
-----------
Gaming - 0.78%
46,329 Casino America Inc. ................................... 434,339
299 SHRP Equity Inc. ...................................... 68,770
-----------
503,109
-----------
Packaging - 0.22%
11,298 Data Documents Inc. ................................... 144,050
-----------
Total Common Stock (cost - $1,769,048)........................... 921,519
-----------
<CAPTION>
NUMBER
OF
WARRANTS
--------
<C> <S> <C>
WARRANTS (A) - 0.81%
Communications - 0.04%
2,625 PageMart Nationwide Inc. .............................. 25,594
-----------
Consumer Manufacturing - 0.40%
1,280 Chattem Inc. .......................................... 7,360
2,000 Decorative Home Accents................................ 14,000
2,000 Icon Health & Fitness.................................. 240,000
-----------
261,360
-----------
Food & Beverage - 0.07%
30,000 Iowa Select Farms++.................................... 45,000
-----------
Gaming - 0.08%
10,295 Casino America Inc. ................................... 49,414
-----------
Homebuilding - 0.02%
7,900 Capital Pacific Holdings Inc. ......................... 11,850
-----------
Media - 0.10%
2,000 Affiliated Newspapers.................................. 60,000
1,000 AVI Holdings Inc. ..................................... 5,000
-----------
65,000
-----------
Retail - 0.10%
2,000 Petro PSC Properties L.P. ............................. 66,000
-----------
Total Warrants (cost - $591,587)................................. 524,218
-----------
Total High Yield Securities (cost - $31,135,760)................. 27,829,892
-----------
</TABLE>
4
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATE RATE VALUE
- --------- -------------- ----------- -----------
<C> <S> <C> <C> <C>
REPURCHASE AGREEMENT - 1.92%
$ 1,252 Repurchase Agreement
dated 05/31/96, with
State Street Bank and
Trust Company,
collateralized by
$1,255,000 U.S.
Treasury Notes, 7.375%
due 11/15/97;
proceeds: $1,252,549
(cost - $1,252,000). 06/03/96 5.260% $ 1,252,000
-----------
Total Investments (cost -
$70,452,755)--105.36%........... 68,645,248
Liabilities in excess of other
assets--(5.36)%.................. (3,489,367)
-----------
Net Assets - 100.00%.............. $65,155,881
===========
</TABLE>
- -------
Note: The Global debt section of the portfolio of investments is listed by the
issuer's country of origin.
* Global debt securities are in local currency unless otherwise indicated.
** Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
# Security represents a unit which is composed of the stated bond with
attached warrants or common stock
@ Yield to maturity for discounted securities
+ Denotes a step-up bond or a zero coupon bond that converts to the noted
fixed rate at a designated future date
++ Illiquid securities representing 2.4% of portfolio assets
+++ Variable+rate security, interest rate noted is current rate at May 31, 1996.
(a) Non-income producing
(b) Reflects rate at May 31, 1996 on step coupon rate instruments
(1) With an additional 6,154,000 recoverable rights attached maturing on
06/30/03 with no market value
(2) Represents 110 units. Each unit consists of eight senior discount notes and
one convertible senior subordinated discount note.
DISC - Discount Bonds
DCB - Debt Conversion Bond
PAR - Par Bonds
PDI - Past Due Interest
TBA - (To Be Assigned) Securities are purchased on a forward committment basis
with approximated (generally +/ - 2.5%) principal amount and generally
stated maturity date. The actual principal amount and specific maturity
date will be determined upon settlement when mortgage pools are assigned.
FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
NET
UNREALIZED
CONTRACT TO APPRECIATION
DELIVER IN EXCHANGE FOR MATURITY DATE (DEPRECIATION)
----------- --------------- -------------------- --------------
<S> <C> <C> <C> <C>
Belgian Francs.......... 114,436,137 US$ 3,901,165 06/04/96 to 09/30/96 $232,031
Belgian Francs.......... 20,547,446 US$ 680,717 06/27/96 24,375
British Pounds.......... 650,000 US$ 988,650 06/28/96 (18,148)
Finnish Markka.......... 13,481,668 US$ 2,849,868 06/28/96 (15,666)
German Deutschemarks.... 1,365,000 US$ 896,256 08/14/96 (2,177)
German Deutschemarks.... 2,295,000 US$ 1,495,065 08/23/96 (16,321)
New Zealand Dollars..... 1,550,000 US$ 1,063,300 06/10/96 10,909
New Zealand Dollars..... 1,085,000 US$ 735,521 06/25/96 149
Spanish Pesetas......... 150,000,000 US$ 1,200,788 06/04/96 35,258
Spanish Pesetas......... 80,000,000 US$ 628,338 08/09/96 9,071
Spanish Pesetas......... 205,000,000 US$ 1,604,571 08/13/96 18,027
U.S. Dollars............ 1,216,558 BFR 36,625,939 06/04/96 (48,356)
U.S. Dollars............ 1,197,050 ESP 150,000,000 06/04/96 (31,520)
U.S. Dollars............ 1,871,831 FIM 8,883,038 06/28/96 16,262
U.S. Dollars............ 1,056,635 NZD 1,550,000 06/10/96 (4,244)
U.S. Dollars............ 738,885 NZD 1,085,000 06/25/96 (3,513)
--------
$206,137
========
</TABLE>
- -------
CURRENCY TYPE ABBREVIATIONS:
BFR - Belgian Francs
ESP - Spanish Pesetas
FIM - Finnish Markka
NZD - New Zealand Dollars
See accompanying notes to financial statements
5
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES MAY 31, 1996 (UNAUDITED)
<TABLE>
<S> <C>
Assets
Investments in securities, at value (cost - $70,452,755)......... $68,645,248
Cash denominated in foreign currencies (cost - $139,999)......... 140,000
Interest receivable.............................................. 1,384,442
Receivable for investments sold.................................. 904,313
Receivable for shares of beneficial interest sold................ 44,386
Deferred organization costs...................................... 160,874
Unrealized appreciation on forward foreign currency contracts.... 346,082
Other assets..................................................... 77,386
-----------
Total assets..................................................... 71,702,731
-----------
Liabilities
Payable for investments purchased................................ 6,096,000
Unrealized depreciation on forward foreign currency contracts.... 139,945
Payable to affiliates............................................ 88,855
Payable for shares of beneficial interest repurchased............ 84,108
Accrued expenses and other liabilities........................... 137,942
-----------
Total liabilities................................................ 6,546,850
-----------
Net Assets
Beneficial interest-$0.001 par value (unlimited amount
authorized)..................................................... 75,382,964
Distributions in excess of net investment income................. (302,327)
Accumulated net realized losses from investment and foreign
currency transactions........................................... (8,315,415)
Net unrealized depreciation of investments, other assets,
liabilities and forward contracts denominated in foreign
currencies...................................................... (1,609,341)
-----------
Net assets....................................................... $65,155,881
===========
Class A:
Net assets....................................................... $ 9,256,509
-----------
Shares outstanding............................................... 1,040,259
-----------
Net asset and redemption value per share......................... $8.90
=====
Maximum offering price per share (net asset value plus sales
charge of 4.00% of offering price).............................. $9.27
=====
Class B:
Net assets....................................................... $38,377,748
-----------
Shares outstanding............................................... 4,318,043
-----------
Net asset value and offering price per share..................... $8.89
=====
Class C:
Net assets....................................................... $17,521,624
-----------
Shares outstanding............................................... 1,970,155
-----------
Net asset value and offering price per share..................... $8.89
=====
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
FOR THE FOUR MONTHS ENDED
STATEMENT OF OPERATIONS MAY 31, 1996 (UNAUDITED)
<TABLE>
<S> <C>
Investment Income:
Interest............................................................ $2,182,126
----------
Expenses:
Investment advisory and administration.............................. 166,394
Service fees - Class A.............................................. 7,782
Service and distribution fees - Class B............................. 129,720
Service and distribution fees - Class C............................. 45,762
Reports and notices to shareholders................................. 56,331
Legal and audit..................................................... 48,581
Custody and accounting.............................................. 33,565
State registration.................................................. 25,756
Transfer agency and service fees.................................... 21,985
Amortization of organizational expenses............................. 20,000
Trustees' fees...................................................... 1,100
Other expenses...................................................... 8,758
----------
565,734
----------
Net investment income............................................... 1,616,392
----------
Realized and unrealized gains (losses) from investment activities:
Net realized gains from:
Investment transactions............................................ 183,618
Foreign currency transactions...................................... 207,382
Net change in unrealized appreciation/depreciation of:
Investments........................................................ (995,554)
Other assets, liabilities and forward contracts denominated in
foreign currencies................................................ (47,663)
----------
Net realized and unrealized losses from investment activities....... (652,217)
----------
Net increase in net assets resulting from operations................ $ 964,175
==========
</TABLE>
See accompanying notes to financial statements
7
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE FOUR
MONTHS ENDED FOR THE YEAR
MAY 31, 1996 ENDED
(UNAUDITED) JANUARY 31, 1996
------------ ----------------
<S> <C> <C>
From operations:
Net investment income........................... $ 1,616,392 $ 5,789,252
Net realized gains (losses) from investment
transactions................................... 183,618 (2,123,711)
Net realized gains from foreign currency
transactions................................... 207,382 542,636
Net change in unrealized
appreciation/depreciation of investments....... (995,554) 5,491,298
Net change in unrealized
appreciation/depreciation of other assets,
liabilities and forward contracts denominated
in foreign currencies.......................... (47,663) 199,054
----------- ------------
Net increase in net assets resulting from
operations..................................... 964,175 9,898,529
----------- ------------
Dividends and distributions to shareholders
from:
Net investment income - Class A................. (251,348) (904,512)
Net investment income - Class B................. (951,459) (3,321,067)
Net investment income - Class C................. (463,194) (1,724,956)
Net realized gains from foreign currency
transactions - Class A......................... -- (106,596)
Net realized gains from foreign currency
transactions - Class B......................... -- (456,125)
Net realized gains from foreign currency
transactions - Class C......................... -- (216,547)
----------- ------------
(1,666,001) (6,729,803)
----------- ------------
From beneficial interest transactions:
Net proceeds from the sale of shares............ 2,586,603 18,385,013
Cost of shares repurchased...................... (7,304,912) (28,444,356)
Proceeds from dividends reinvested.............. 850,115 3,549,276
----------- ------------
Net decrease in net assets from beneficial
interest transactions.......................... (3,868,194) (6,510,067)
----------- ------------
Net decrease in net assets...................... (4,570,020) (3,341,341)
Net assets:
Beginning of period............................. 69,725,901 73,067,242
----------- ------------
End of period................................... $65,155,881 $ 69,725,901
=========== ============
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
PAINEWEBBER NOTES TO FINANCIAL STATEMENTS--(UNAUDITED)
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
PaineWebber Securities Trust ("Trust") was organized under Massachusetts law by
a Declaration of Trust dated December 3, 1992 and is registered with the
Securities and Exchange Commission under the Investment Company Act of 1940, as
amended, as an open-end, diversified investment company. The Trust is a series
mutual fund with two funds: PaineWebber Strategic Income Fund (the "Fund") and
PaineWebber Small Cap Value Fund. The financial statements of PaineWebber Small
Cap Value Fund are not included herein. At a meeting the Board of Trustees
elected to change the Fund's fiscal year end from January 31 to November 30.
Costs incurred by the Fund in connection with its organization and the
registration of its shares have been deferred and are being amortized using the
straight-line method over a period not to exceed 60 months from the
commencement of operations.
Currently, the Fund offers Class A, Class B and 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 structures, distribution
charges and certain transfer agency expenses. In addition, Class B shares and
all corresponding reinvested dividend shares automatically convert to Class A
shares approximately six years after issuance. All classes of shares have equal
voting privileges except that each class has exclusive voting rights with
respect to its 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. 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 sale 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 by Mitchell Hutchins Asset
Management Inc. ("Mitchell Hutchins"), a wholly owned subsidiary of PaineWebber
Incorporated ("PaineWebber") 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 ("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 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 and
assets for which market quotations are not readily available (including
restricted securities subject
9
<PAGE>
PAINEWEBBER
to limitations as to their sale) are valued at fair value as determined in good
faith by or under the direction of the Trust's board of trustees. All
investments quoted in foreign currencies will be valued daily in U.S. dollars
on the basis of the foreign currency exchange rates prevailing at the time such
valuation is determined by the Fund's custodian.
Foreign currency exchange rates are generally determined prior to the close of
the New York Stock Exchange ("NYSE"). Occasionally, events affecting the value
of foreign investments and such exchange rates occur between the time at which
they are determined and the close of the NYSE, which will not be reflected in
the computation of the Fund's net asset value. If events materially affecting
the value of such securities or currency exchange rates occurred during such
time period, the securities will be valued at their fair value as determined in
good faith by or under the direction of the Trust'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 and foreign exchange transactions are calculated using the
identified cost method. Interest income is recorded on an accrual basis.
Discounts are accreted and premiums are amortized as adjustments to interest
income and the identified cost of investments.
Income, expenses (excluding class-specific expenses) and realized/unrealized
gains/losses are allocated proportionately to each class of shares based upon
the relative net asset value of outstanding shares (or the value of dividend-
eligible shares, as appropriate) of each class at the beginning of the day
(after adjusting for current capital share activity of the respective classes).
Class-specific expenses are charged directly to the applicable class of shares.
Foreign Currency Translation - The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(1) market value of investment securities, other assets and liabilities -
at the exchange rates prevailing at the end of the period.
10
<PAGE>
PAINEWEBBER
(2) purchases and sales of investment securities, income and expenses - at
the rates of exchange prevailing on the respective dates of such
transactions.
Although the net assets and the market values of the Fund are presented at the
foreign exchange rates at the close of the period, the Fund does not generally
isolate the effect of fluctuations in foreign exchange rates from the effect of
the changes in market prices of securities. However, the Fund does isolate the
effect of fluctuations in foreign exchange rates when determining the gain or
loss upon the sale or maturity of foreign currency-denominated debt obligations
pursuant to federal income tax regulations.
Forward Foreign Currency Contracts - The Fund may enter into forward foreign
currency exchange contracts ("forward contracts") in connection with planned
purchases or sales of securities or to hedge the U.S. dollar value of portfolio
securities denominated in a particular currency.
The Fund has no specific limitation on the percentage of assets which may be
committed to such contracts. The Fund may enter into forward contracts or
maintain a net exposure to forward contracts only if (1) the consummation of
the contracts would not obligate the Fund to deliver an amount of foreign
currency in excess of the value of the position being hedged by such contracts
or (2) the Fund maintains cash, U.S. government securities or liquid, high-
grade debt securities in a segregated account in an amount not less than the
value of its total assets committed to the consummation of the forward
contracts and not covered as provided in (1) above, as marked-to-market daily.
Risks may arise upon entering into forward contracts from the potential
inability of counterparties to meet the terms of their forward contracts and
from unanticipated movements in the value of foreign currencies relative to the
U.S. dollar.
Fluctuations in the value of forward contracts are recorded for book purposes
as unrealized gains or losses by the Fund. Realized gains and losses include
net gains and losses recognized by the Fund on contracts which have matured.
Dividends and Distributions to Shareholders - 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
Investing in securities of foreign issuers and currency transactions may
involve certain considerations and risks not typically associated with
investments in the
11
<PAGE>
PAINEWEBBER
United States. These risks include revaluation of currencies, adverse
fluctuations in foreign currency values and possible adverse political, social
and economic developments, including those particular to a specific industry,
country or region, which could cause the securities and their markets to be
less liquid and prices more volatile than those of comparable U.S. companies
and U.S. government securities. These risks are greater with respect to
securities of issuers located in emerging market countries in which the Fund is
authorized to invest. The ability of the issuers of debt securities held by the
Fund to meet their obligations may be affected by economic and political
developments particular to a specific industry, country or region.
INVESTMENT ADVISER AND ADMINISTRATOR
The Trust's board of trustees has approved an Investment Advisory and
Administration Contract ("Advisory Contract") with Mitchell Hutchins, under
which Mitchell Hutchins serves as investment adviser and administrator of the
Fund. In accordance with the Advisory Contract, the Fund pays Mitchell Hutchins
an investment advisory and administration fee, which is accrued daily and paid
monthly, at the annual rate of 0.75% of the Fund's average daily net assets. At
May 31, 1996, the Fund owed Mitchell Hutchins $41,584 in investment advisory
and administration fees.
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 four months ended
May 31, 1996, no reimbursements were required pursuant to the above limitation
for the Fund.
DISTRIBUTION PLANS
Mitchell Hutchins is the distributor of the Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. Under
separate plans of distribution pertaining to Class A, Class B and Class C
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 an annual rate of 0.75% and 0.50% of the
average daily net assets of Class B shares and Class C shares, respectively. At
May 31, 1996, the Fund owed Mitchell Hutchins $45,824 in service and
distribution fees.
Mitchell Hutchins also receives the proceeds of the initial sales charges paid
by the shareholders upon the purchase of Class A shares and the contingent
deferred
12
<PAGE>
PAINEWEBBER
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 four months ended May 31, 1996, it earned $65,960 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 four months ended May 31, 1996, PaineWebber
earned $5,926 in transfer agency service fees from the Fund. At May 31, 1996,
the Fund owed PaineWebber $1,447 for transfer agency service fees.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at May 31, 1996
was substantially the same as the cost of securities for financial statement
purposes.
At May 31, 1996, the components of the net unrealized depreciation of
investments were as follows:
<TABLE>
<S> <C>
Gross depreciation (investments having an excess of cost over val-
ue).............................................................. $(5,221,223)
Gross appreciation (investments having an excess of value over
cost)............................................................ 3,413,716
-----------
Net unrealized depreciation of investments........................ $(1,807,507)
===========
</TABLE>
For the four months ended May 31, 1996, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were as follows:
<TABLE>
<S> <C>
Purchases......................................................... $31,689,242
Sales............................................................. $34,647,335
</TABLE>
FEDERAL INCOME 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.
At January 31, 1996, the Fund had a capital loss carryforward of $7,661,389 of
which $5,396,301 will expire by January 31, 2003 and $2,265,088 will expire by
January 31, 2004. This loss carryforward is available as a reduction, to the
extent provided in the regulations, of future net realized capital gains. To
the extent that such losses are used to offset future net realized capital
gains, it is probable these gains will not be distributed.
13
<PAGE>
PAINEWEBBER
In accordance with Treasury Regulations, the Fund has elected to defer realized
foreign currency losses of $154,749 and capital losses of $1,045,027 arising
after October 31, 1995. Such losses have been treated for tax purposes as
arising on February 1, 1996.
SHARES OF BENEFICIAL INTEREST
There is an unlimited amount of $0.001 par value shares of beneficial interest
authorized. Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------------- ------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ----------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
FOR THE FOUR MONTHS
ENDED MAY 31, 1996:
Shares sold............. 51,271 $ 457,308 201,204 $ 1,789,463 38,167 $ 339,832
Shares repurchased...... (132,884) (1,184,507) (447,424) (3,971,146) (242,137) (2,149,259)
Shares converted from
Class B to Class A..... 12,214 108,943 (12,227) (108,943) -- --
Dividends reinvested.... 14,701 130,527 47,965 425,533 33,119 294,055
-------- ----------- ---------- ------------ ---------- -----------
Net decrease............ (54,698) $ (487,729) (210,482) $ (1,865,093) (170,851) $(1,515,372)
======== =========== ========== ============ ========== ===========
FOR THE YEAR ENDED
JANUARY 31, 1996:
Shares sold............. 256,146 $ 2,287,348 1,219,370 $ 10,908,042 580,404 $ 5,189,623
Shares repurchased...... (566,713) (5,056,417) (1,574,328) (14,041,862) (1,046,861) (9,346,077)
Shares converted from
Class B to Class A..... 53,359 481,701 (53,416) (481,701) -- --
Dividends reinvested.... 56,384 500,385 201,919 1,791,441 141,690 1,257,450
-------- ----------- ---------- ------------ ---------- -----------
Net decrease............ (200,824) $(1,786,983) (206,455) $ (1,824,080) (324,767) $(2,899,004)
======== =========== ========== ============ ========== ===========
</TABLE>
14
<PAGE>
[This page intentionally left blank]
15
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD IS PRESENTED BELOW:
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------
For the
Four Months For the Period
Ended For the February 7, 1994+
May 31, 1996 Year Ended through
(unaudited) January 31, 1996 January 31, 1995
------------ ---------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of
period........................ $8.99 $8.60 $10.00
------ ------ -------
Net investment income.......... 0.23 0.60 0.74
Net realized and unrealized
gains (losses) from investment
and foreign currency
transactions.................. (0.08) 0.66 (1.49)
------ ------ -------
Net increase (decrease) from
investment operations......... 0.15 1.26 (0.75)
------ ------ -------
Dividends from net investment
income........................ (0.24) (0.77) (0.65)
Distributions from net realized
gains from foreign currency
transactions.................. -- (0.10) --
------ ------ -------
Total dividends and
distributions to shareholders. (0.24) (0.87) (0.65)
------ ------ -------
Net asset value, end of period. $8.90 $8.99 $8.60
====== ====== =======
Total investment return (1).... 1.67% 15.27% (7.61)%
====== ====== =======
Ratios/Supplemental Data:
Net assets, end of period
(000's)....................... $9,257 $9,841 $11,148
Expenses to average net assets. 1.98%* 1.74% 1.49%*
Net investment income to
average net assets............ 7.86%* 8.52% 8.06%*
Portfolio turnover rate........ 50% 91% 117%
- ---------------------
</TABLE>
+ Commencement of issuance of shares
* Annualized
** Formerly Class D
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the period, reinvestment of all dividends and other
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 for each class would be lower if sales
charges were included. Total investment return for periods of less than one
year has not been annualized.
16
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
CLASS B CLASS C**
- ------------------------------------------------ -----------------------------------------------
For the For the
Four Months For the Period Four Months For the Period
Ended For the February 7, 1994+ Ended For the February 7, 1994+
May 31, 1996 Year Ended through May 31, 1996 Year Ended through
(unaudited) January 31, 1996 January 31, 1995 (unaudited) January 31, 1996 January 31, 1995
- ------------ ---------------- ----------------- ------------ ---------------- -----------------
<S> <C> <C> <C> <C> <C>
$8.98 $8.60 $10.00 $8.98 $8.60 $10.00
------- ------- ------- ------- ------- -------
0.21 0.54 0.66 0.21 0.55 0.69
(0.09) 0.65 (1.47) (0.08) 0.66 (1.48)
------- ------- ------- ------- ------- -------
0.12 1.19 (0.81) 0.13 1.21 (0.79)
------- ------- ------- ------- ------- -------
(0.21) (0.71) (0.59) (0.22) (0.73) (0.61)
-- (0.10) -- -- (0.10) --
------- ------- ------- ------- ------- -------
(0.21) (0.81) (0.59) (0.22) (0.83) (0.61)
------- ------- ------- ------- ------- -------
$8.89 $8.98 $8.60 $8.89 $8.98 $8.60
======= ======= ======= ======= ======= =======
1.42% 14.37% (8.22)% 1.50% 14.63% (8.02)%
======= ======= ======= ======= ======= =======
$38,378 $40,653 $40,710 $17,522 $19,232 $21,208
2.72%* 2.49% 2.24%* 2.47%* 2.24% 1.98%*
7.11%* 7.77% 7.46%* 7.36%* 8.03% 7.62%*
50% 91% 117% 50% 91% 117%
</TABLE>
17
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
SHAREHOLDER INFORMATION
A Special Meeting of Shareholders was held on April 15, 1996, at
which the following proposals were approved for the Fund:
PROPOSAL 1
- ----------
<TABLE>
<CAPTION>
SHARES FOR AS
SHARES VOTED A % OF TOTAL SHARES
To vote for or against the FOR SHARES VOTED WITHHOLD AUTHORITY
election of Trustees: ------------ ------------- ------------------
<S> <C> <C> <C>
Margo N. Alexander.............. 3,924,799 92.41% 322,369
Richard Q. Armstrong............ 3,924,799 92.41% 322,369
E. Garrett Bewkes, Jr. ......... 3,924,799 92.41% 322,369
Richard Burt.................... 3,924,799 92.41% 322,369
Mary C. Farrell................. 3,924,799 92.41% 322,369
Meyer Feldberg.................. 3,924,799 92.41% 322,369
George W. Gowen................. 3,924,799 92.41% 322,369
Frederic V. Malek............... 3,924,799 92.41% 322,369
Carl W. Schafer................. 3,924,799 92.41% 322,369
John R. Torell III.............. 3,924,799 92.41% 322,369
</TABLE>
PROPOSAL 2
- ----------
To vote for or against the ratification of the selection of Price Waterhouse
LLP as the Fund's independent accountants for the fiscal year ending November
30, 1996:
<TABLE>
<CAPTION>
SHARES FOR AS SHARES
SHARES VOTED A % OF TOTAL VOTED SHARES
FOR SHARES VOTED AGAINST ABSTAIN
------------ ------------- ------- -------
<S> <C> <C> <C>
3,907,085 91.99% 1,870 338,213
</TABLE>
PROPOSAL 3
- ----------
To vote for or against the following changes to the Fund's fundamental
investment restrictions and policies:
<TABLE>
<CAPTION>
SHARES FOR AS SHARES
SHARES VOTED A % OF TOTAL VOTED SHARES
FOR SHARES VOTED AGAINST ABSTAIN
------------ ------------- ------- -------
<S> <C> <C> <C> <C>
Modification of fundamental
restriction on concentration........ 3,808,497 89.67% 63,898 374,773
Modification of fundamental
restriction on senior securities and
Borrowing........................... 3,808,497 89.67% 63,898 374,773
Modification of fundamental
restriction on making loans......... 3,808,497 89.67% 63,898 374,773
Modification of fundamental
restriction on underwriting
securities.......................... 3,808,497 89.67% 63,898 374,773
Modification of fundamental
restriction on real estate
investments......................... 3,808,497 89.67% 63,898 374,773
Modification of fundamental
restriction on investing in
commodities......................... 3,808,497 89.67% 63,898 374,773
Elimination of fundamental
restriction on margin transactions.. 3,808,497 89.67% 63,898 374,773
Elimination of fundamental
restriction on short sales.......... 3,808,497 89.67% 63,898 374,773
Elimination of fundamental
restriction on investments in oil,
gas and mineral leases and programs. 3,808,497 89.67% 63,898 374,773
- ---------------------
</TABLE>
(Broker non-votes and abstentions are included within the "Shares Withhold
Authority" and "Shares Abstain" totals.)
18
