<PAGE>
STRATEGIC INCOME FUND
PAINEWEBBER
PERFORMANCE RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE TOTAL RETURN/1/
-------------------------------- --------------------------------
12 MONTHS 6 MONTHS
11/30/96 05/31/96 11/30/95 ENDED 11/30/96 ENDED 11/30/96
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A
Shares $ 9.37 $ 8.90 $ 8.85 15.60% 9.32%
- ---------------------------------------------------------------------------------
Class B
Shares 9.36 8.89 8.85 14.69 8.92
- ---------------------------------------------------------------------------------
Class C
Shares 9.37 8.89 8.85 15.07 9.17
- ---------------------------------------------------------------------------------
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 -
11/30/96 8.79 9.37 -- 0.5782 13.67
- ---------------------------------------------------------------------------------
Total: $0.0000 $2.0966
- ---------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 11/30/96 : 18.36%
- ---------------------------------------------------------------------------------
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 -
11/30/96 8.78 9.36 -- 0.5218 12.98
- ---------------------------------------------------------------------------------
Total: $0.0000 $1.9193
- ---------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 11/30/96 : 15.95%
- ---------------------------------------------------------------------------------
PERFORMANCE SUMMARY CLASS C 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 $ -- $0.5424 (9.13)%
- ---------------------------------------------------------------------------------
1995 8.56 8.79 -- 0.8951 13.56
- ---------------------------------------------------------------------------------
01/01/96 -
11/30/96 8.79 9.37 -- 0.5404 13.20
- ---------------------------------------------------------------------------------
Total: $0.0000 $1.9779
- ---------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 11/30/96 : 16.82%
- ---------------------------------------------------------------------------------
</TABLE>
/1/Figures assume reinvestment of all dividends and other 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.
The data above represents past performance of the Fund's shares, which is no
guarantee of future results. The principal value of an investment in the
Fund will fluctuate, so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
6
<PAGE>
PAINEWEBBER
STRATEGIC INCOME FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------------- ------------------ -----------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY
OBLIGATIONS - 26.87%
FEDERAL NATIONAL MORTGAGE ASSOCIATION CERTIFICATES -
25.32%
$ 12,374 FNMA.................... 03/01/26 to 11/01/26 7.000% $12,280,712
3,953 FNMA.................... 01/01/26 to 10/01/26 7.500 3,998,232
-----------
Total Federal National Mortgage
Association Certificates
(cost - $15,812,451).............. 16,278,944
-----------
SHORT-TERM U.S. GOVERNMENT
OBLIGATION - 1.55%
1,000 United States Treasury
Bills (cost -
$997,435)............. 12/19/96 5.130@ 997,435
-----------
Total U.S. Government and Agency
Obligations
(cost - $16,809,886).............. 17,276,379
-----------
GLOBAL DEBT SECURITIES - 22.01%
Brazil - 4.84%
2,325 Federal Republic of
Brazil DCB............. 04/15/12 6.563++++ 1,720,500
2,200 Federal Republic of
Brazil PAR............. 04/15/24 4.250(b) 1,394,250
-----------
3,114,750
-----------
Mexico - 4.66%
3,540 United Mexican States,
DISC(1)................ 12/31/19 6.375 to 6.391++++ 2,995,725
-----------
Poland - 4.84%
3,610 Republic of Poland, PDI. 10/27/14 4.000(b) 3,113,625
-----------
Spain - 2.57%
181,060* Government of Spain..... 03/25/00 12.250 1,651,540
-----------
United Kingdom - 5.10%
1,730* United Kingdom Gilt..... 07/14/00 to 12/07/15 8.000 to 13.000 3,275,888
-----------
Total Global Debt Securities
(cost - $11,570,722).............. 14,151,528
-----------
HIGH YIELD SECURITIES - 45.10%
CORPORATE BONDS - 42.21%
Airlines - 0.87%
500 Airplane Pass Through
Trust.................. 03/15/19 10.875 557,500
750# USAfrica Airways
Incorporated++......... 05/31/99 12.000(a) 0
-----------
557,500
-----------
Cable - 2.13%
1,250 Telewest PLC............ 10/01/07 11.000+ 846,875
1,000 UIH Australia Pacific
Incorporated........... 05/15/06 14.000+ 525,000
-----------
1,371,875
-----------
Communications - 6.82%
880 GST Telecommunications
Incorporated........... 12/15/05 13.875+ 514,800
150 Intelcom Group USA
Incorporated**......... 09/15/05 13.500+ 103,500
1,000 Paging Network
Incorporated........... 10/15/08 10.000 1,000,000
1,250 RSL Communications
Limited**.............. 11/15/06 12.250 1,250,000
375 Shared Technologies
Fairchild**............ 03/01/06 12.250+ 308,438
2,000 Viatel Incorporated..... 01/15/05 15.000+ 1,210,000
-----------
4,386,738
-----------
Consumer Manufacturing - 3.18%
900 Apparel Ventures
Incorporated........... 12/31/00 12.250 684,000
653 Chattem Incorporated.... 06/15/04 12.750 688,915
1,000 Decorative Home Accents. 06/30/02 13.000 670,000
-----------
2,042,915
-----------
</TABLE>
7
<PAGE>
PAINEWEBBER
STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------- ----------- -----------
<C> <S> <C> <C> <C>
CORPORATE BONDS - (CONCLUDED)
Energy - 2.24%
$ 500 Parker Drilling Company.. 11/15/06 9.750% $ 517,500
850 TransTexas Gas
Corporation............. 06/15/02 11.500 922,250
-----------
1,439,750
-----------
Entertainment - 0.71%
496 United Artists Theatre
Circuit................. 07/01/15 9.300 456,212
-----------
Finance - 1.53%
1,000 Imperial Credit
Industries.............. 01/15/04 9.750 985,000
-----------
Food & Beverage - 2.94%
3,000 Iowa Select Farms++...... 02/15/04 17.250+ 1,893,000
-----------
Gaming - 1.81%
1,106# Grand Palais Casino
Incorporated++.......... 11/01/97 18.250(a) 0
850 PRT Funding Incorporated. 04/15/04 11.625 697,000
1,122 Sam Houston Race Park
Limited................. 09/01/01 11.000 465,605
-----------
1,162,605
-----------
General Industrial - 6.01%
997 Alpine Group............. 07/15/03 12.250 1,086,730
500 EKCO Group Incorporated.. 04/01/06 9.250 485,000
1,000 Jordan Industries........ 08/01/05 11.750+ 770,000
1,000 Poindexter JB
Incorporated............ 05/15/04 12.500 980,000
500 Polysindo International
Finance Company B.V..... 06/15/06 11.375 537,500
-----------
3,859,230
-----------
Media - 4.82%
500 Affiliated Newspapers.... 07/01/06 13.250+ 402,500
1,000 Grupo Televisa S.A.**.... 05/15/08 13.250+ 657,500
750 Inter Act Systems
Incorporated**.......... 08/01/03 14.000+ 510,000
500 KIII Communications
Corporation............. 02/01/06 8.500 488,750
1,000 NeoData Services
Incorporated............ 05/01/03 12.000 1,040,000
-----------
3,098,750
-----------
Packaging - 1.21%
750 FSW International Finance
Company B.V.**(2)....... 11/01/06 12.500 778,125
-----------
Retail - 2.56%
1,000 Brown Group Incorporated. 10/15/06 9.500 1,002,500
625 CSK Auto Incorporated**.. 11/01/06 11.000 643,750
-----------
1,646,250
-----------
Supermarkets & Drugstores - 1.10%
700 Di Giorgio Corporation... 02/15/03 12.000 707,000
-----------
Transport Non-Air - 3.27%
1,000 Gearbulk Holding Limited. 12/01/04 11.250 1,090,000
1,000 Petro PSC Properties
L.P..................... 06/01/02 12.500 1,010,000
-----------
2,100,000
-----------
Utilities - 1.01%
625 Panda Funding
Corporation**........... 08/20/12 11.625 653,125
-----------
Total Corporate Bonds (cost -
$28,098,678)...................... 27,138,075
-----------
</TABLE>
8
<PAGE>
PAINEWEBBER
STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------- ----------- -----------
<C> <S> <C> <C> <C>
CONVERTIBLE BONDS - 0.16%
Communications - 0.16%
$ 110 GST Telecommunciations
Incorporated
(cost - $63,723)....... 12/15/05 13.875+% $ 99,000
-----------
<CAPTION>
NUMBER
OF
SHARES
------
<C> <S> <C> <C> <C>
COMMON STOCK (A) - 1.89%
Communications - 0.76%
72,200 Viatel Incorporated................................... 487,350
-----------
Gaming - 1.13%
58,152 Casino America Incorporated........................... 196,263
102,958 Colorado Gaming & Entertainment Company............... 463,311
299 SHRP Equity Incorporated.............................. 68,770
-----------
728,344
-----------
Total Common Stock (cost - $1,049,097).......................... 1,215,694
-----------
<CAPTION>
NUMBER
OF
WARRANTS
--------
<C> <S> <C> <C> <C>
WARRANTS (A) - 0.84%
Communications - 0.03%
2,625 PageMart Nationwide Incorporated...................... 18,703
-----------
Consumer Manufacturing - 0.43%
1,000 AVI Holdings Incorporated............................. 5,000
1,280 Chattem Incorporated.................................. 15,680
1,000 Decorative Home Accents............................... 6,000
2,000 Icon Health & Fitness................................. 250,000
-----------
276,680
-----------
Food & Beverage - 0.07%
30,000 Iowa Select Farms++................................... 45,000
-----------
Gaming - 0.04%
10,295 Casino America Incorporated........................... 28,825
-----------
Homebuilding - 0.02%
7,900 Capital Pacific Holdings Incorporated................. 10,665
-----------
Media - 0.09%
2,000 Affiliated Newspapers................................. 60,000
-----------
Transport Non-Air - 0.16%
2,000 Petro PSC Properties L.P.............................. 100,000
-----------
Total Warrants (cost - $432,679)................................ 539,873
-----------
Total High Yield Securities (cost - $29,644,177)................ 28,992,642
-----------
</TABLE>
9
<PAGE>
PAINEWEBBER
STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------- ----------- -----------
<C> <S> <C> <C> <C>
REPURCHASE AGREEMENTS - 5.09%
$ 3,000 Repurchase Agreement
dated 11/29/96, with
Citibank Corporation,
collateralized by
$3,045,000 U.S.
Treasury Notes, 5.625%
due 10/31/97; proceeds:
$3,001,418............. 12/02/96 5.670% $ 3,000,000
275 Repurchase Agreement
dated 11/29/96, with
State Street Bank and
Trust Company,
collateralized by
$275,042 U.S. Treasury
Notes, 5.250% due
12/31/97; proceeds:
$274,609............... 12/02/96 4.750 274,500
-----------
Total Repurchase Agreements (cost -
$3,274,500)...................... 3,274,500
-----------
INVESTMENTS OF CASH COLLATERAL FOR SECURITIES
LOANED - 1.11%
716 Repurchase Agreement
dated 11/29/96, with
State Street Bank and
Trust Company,
collateralized by
$716,911 U.S. Treasury
Notes, 5.250% due
12/31/97; proceeds:
$715,783 (cost -
$715,500)............. 12/02/96 4.750 715,500
-----------
Total Investments (cost - $62,014,785)--100.18%................. 64,410,549
Liabilities in excess of other assets--(0.18)%.................. (116,421)
-----------
Net Assets - 100.00%............................................ $64,294,128
===========
</TABLE>
- --------
Note: The Global debt section of the portfolio of investments is listed by the
issuer's country of origin.
* Stated in local currency.
** Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
# Security represents a unit which is composed of the stated bond with attached
warrants or common stock
@ Yield to maturity for discounted securities
+ Denotes a step-up bond or a zero coupon bond that converts to the noted fixed
rate at a designated future date
++Illiquid securities representing 3.0% of portfolio assets
+++Variable+rate security, interest rate noted is current rate at November 30,
1996.
(a) Non-income producing
(b) Reflects rate at November 30, 1996, on step coupon rate instruments
(1) With an additional 5,447,000 recoverable rights attached maturing on
06/30/03 with no market value
(2) A portion of security was on loan at November 30, 1996
DISC - Discount Bonds
DCB - Debt Conversion Bond
PAR - Par Bonds
PDI - Past Due Interest
FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
UNREALIZED
CONTRACT TO IN EXCHANGE MATURITY APPRECIATION
DELIVER FOR DATE (DEPRECIATION)
----------- ------------- -------- --------------
<S> <C> <C> <C> <C>
British Pounds................ 456,580 US$ 762,489 12/31/96 $ (4,719)
Finnish Markka................ 4,598,631 US$ 1,006,265 02/24/97 8,038
Spanish Pesetas............... 205,000,000 US$ 1,580,327 10/15/97 5,254
U.S. Dollars.................. 1,027,007 FIM 4,598,631 02/24/97 (28,781)
--------
$(20,208)
========
</TABLE>
- --------
CURRENCY TYPE ABBREVIATION:
FIM - Finnish Markka
See accompanying notes to financial statements
10
<PAGE>
PAINEWEBBER
STRATEGIC INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES NOVEMBER 30, 1996
<TABLE>
<S> <C>
Assets
Investments in securities, at value (cost - $62,014,785)......... $64,410,549
Cash............................................................. 54,305
Interest receivable.............................................. 962,845
Deferred organization costs...................................... 130,874
Receivable for shares of beneficial interest sold................ 17,180
Unrealized appreciation on forward foreign currency contracts.... 13,292
Other assets..................................................... 26,599
-----------
Total assets..................................................... 65,615,644
-----------
Liabilities
Collateral for securities loaned................................. 715,500
Payable for shares of beneficial interest repurchased............ 376,635
Payable to affiliates............................................ 84,094
Unrealized depreciation on forward foreign currency contracts.... 33,500
Accrued expenses and other liabilities........................... 111,787
-----------
Total liabilities................................................ 1,321,516
-----------
Net Assets
Beneficial interest - $0.001 par value (unlimited amount
authorized)..................................................... 71,187,517
Distributions in excess of net investment income................. (85,990)
Accumulated net realized losses from investment transactions..... (9,187,240)
Net unrealized appreciation of investments, other assets,
liabilities and forward contracts denominated in foreign
currencies...................................................... 2,379,841
-----------
Net assets....................................................... $64,294,128
===========
Class A:
Net assets....................................................... $ 9,943,946
-----------
Shares outstanding............................................... 1,061,041
-----------
Net asset and redemption value per share......................... $9.37
=====
Maximum offering price per share (net asset value plus sales
charge of 4.00% of offering price).............................. $9.76
=====
Class B:
Net assets....................................................... $37,249,016
-----------
Shares outstanding............................................... 3,979,153
-----------
Net asset value and offering price per share..................... $9.36
=====
Class C:
Net assets....................................................... $17,101,166
-----------
Shares outstanding............................................... 1,825,620
-----------
Net asset value and offering price per share..................... $9.37
=====
</TABLE>
See accompanying notes to financial statements
11
<PAGE>
PAINEWEBBER
STRATEGIC INCOME FUND
STATEMENT OF OPERATIONS FOR THE PERIOD FEBRUARY 1, 1996
THROUGH NOVEMBER 30,
1996
<TABLE>
<S> <C>
Investment Income:
Interest (net of foreign withholding taxes)......................... $5,197,583
----------
Expenses:
Investment advisory and administration.............................. 407,534
Service fees - Class A.............................................. 19,708
Service and distribution fees - Class B............................. 317,852
Service and distribution fees - Class C............................. 110,029
Legal and audit..................................................... 117,475
Reports and notices to shareholders................................. 113,470
State registration.................................................. 74,311
Transfer agency and service fees.................................... 52,733
Amortization of organizational expenses............................. 50,000
Custody and accounting.............................................. 42,944
Trustees' fees...................................................... 12,250
Other expenses...................................................... 16,684
----------
1,334,990
----------
Net investment income............................................... 3,862,593
----------
Realized and unrealized gains (losses) from investment activities:
Net realized gains (losses) from:
Investment transactions............................................ (480,825)
Foreign currency transactions...................................... 212,221
Net change in unrealized appreciation/depreciation of:
Investments........................................................ 3,207,717
Other assets, liabilities and forward contracts denominated in
foreign currencies................................................ (261,752)
----------
Net realized and unrealized gains from investment activities........ 2,677,361
----------
Net increase in net assets resulting from operations................ $6,539,954
==========
</TABLE>
See accompanying notes to financial statements
12
<PAGE>
PAINEWEBBER
STRATEGIC INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
FEBRUARY 1, 1996 FOR THE YEAR
THROUGH ENDED
NOVEMBER 30, 1996 JANUARY 31, 1996
----------------- ----------------
<S> <C> <C>
From operations:
Net investment income...................... $ 3,862,593 $ 5,789,252
Net realized losses from investment
transactions.............................. (480,825) (2,123,711)
Net realized gains from foreign currency
transactions.............................. 212,221 542,636
Net change in unrealized
appreciation/depreciation of investments.. 3,207,717 5,491,298
Net change in unrealized
appreciation/depreciation of other assets,
liabilities and forward contracts
denominated in foreign currencies......... (261,752) 199,054
------------ ------------
Net increase in net assets resulting from
operations................................ 6,539,954 9,898,529
------------ ------------
Dividends and distributions to shareholders
from:
Net investment income - Class A............ (610,827) (904,512)
Net investment income - Class B............ (2,231,468) (3,321,067)
Net investment income - Class C............ (1,065,791) (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)
------------ ------------
(3,908,086) (6,729,803)
------------ ------------
From beneficial interest transactions:
Net proceeds from the sale of shares....... 6,348,425 18,385,013
Cost of shares repurchased................. (16,393,834) (28,444,356)
Proceeds from dividends reinvested......... 1,981,768 3,549,276
------------ ------------
Net decrease in net assets from beneficial
interest transactions..................... (8,063,641) (6,510,067)
------------ ------------
Net decrease in net assets................. (5,431,773) (3,341,341)
Net assets:
Beginning of period........................ 69,725,901 73,067,242
------------ ------------
End of period.............................. $ 64,294,128 $ 69,725,901
============ ============
</TABLE>
See accompanying notes to financial statements
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
PAINEWEBBER
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 Fund. The financial statements of PaineWebber Small Cap
Fund are not included herein. At a meeting held on July 24, 1996, 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, Class C and Class Y (no Class Y
shares were outstanding during the period) shares. Each class represents
interests in the same assets of the Fund, and the classes are identical except
for differences in their sales charge structures, ongoing service and
distribution charges and certain transfer agency expenses. In addition, Class B
shares and all corresponding reinvested dividend shares automatically convert
to Class A shares approximately six years after issuance. All classes of shares
have equal voting privileges, except that each class has exclusive voting
rights with respect to its service and/or distribution plan.
The preparation of financial statements in accordance with generally accepted
accounting principles requires Fund management to make estimates and
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
14
<PAGE>
PAINEWEBBER
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 to limitations as to their sale) are valued at fair value as determined
in good faith by a management committee 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.
15
<PAGE>
PAINEWEBBER
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.
(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 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"
16
<PAGE>
PAINEWEBBER
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 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
November 30, 1996, the Fund owed Mitchell Hutchins $39,583 in investment
advisory and administration fees.
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
November 30, 1996, the Fund owed Mitchell Hutchins $43,171 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
17
<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 period February 1, 1996 through November 30, 1996, it earned $138,939 in
sales charges.
SECURITY LENDING
The Fund may lend up to 33 1/3% of its total assets to qualified institutions.
The loans are secured at all times by cash or U.S. government securities in an
amount at least equal to the market value of the securities loaned, plus
accrued interest, determined on a daily basis and adjusted accordingly. The
Fund will retain record ownership of loaned securities to exercise certain
beneficial rights, however, the Fund may bear the risk of delay in recovery of,
or even loss of rights in, the securities loaned should the borrower fail
financially. The Fund receives compensation, which is included in interest
income, for lending its securities from interest earned on the cash or U.S.
government securities held as collateral, net of fee rebates paid to the
borrower plus reasonable administrative and custody fees. The Fund's lending
agent is PaineWebber, who received no compensation from the Fund for the period
February 1, 1996 through November 30, 1996.
As of November 30, 1996, the Fund's custodian held cash and cash equivalents
having an aggregate value of $715,500 as collateral for portfolio securities
loaned having a market value of $708,047.
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 period February 1, 1996 through November 30,
1996, PaineWebber earned $14,226 in transfer agency service fees from the Fund.
At November 30, 1996, the Fund owed PaineWebber $1,340 for transfer agency
service fees.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at November 30,
1996, was substantially the same as the cost of securities for financial
statement purposes.
At November 30, 1996, the components of the net unrealized appreciation of
investments were as follows:
<TABLE>
<S> <C>
Gross appreciation (investments having an excess of value over
cost)............................................................ $ 5,469,997
Gross depreciation (investments having an excess of cost over val-
ue).............................................................. (3,074,233)
-----------
Net unrealized appreciation of investments........................ $ 2,395,764
===========
</TABLE>
18
<PAGE>
PAINEWEBBER
For the period February 1, 1996 through November 30, 1996, total aggregate
purchases and sales of portfolio securities, excluding short-term securities,
were as follows:
<TABLE>
<S> <C>
Purchases........................................................... $61,792,332
Sales............................................................... $71,070,090
</TABLE>
FEDERAL TAX STATUS
The Fund intends to distribute all of its taxable income and to comply with the
other requirements of the Internal Revenue Code applicable to regulated
investment companies. Accordingly, no provision for federal income taxes is
required. In addition, by distributing during each calendar year substantially
all of its net investment income, capital gains and certain other amounts, if
any, the Fund intends not to be subject to a federal excise tax.
At November 30, 1996, the Fund had a net capital loss carryforward of
$9,187,240 that will expire between November 30, 2002 and November 30, 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.
To reflect reclassifications arising from permanent "book/tax" differences for
the period February 1, 1996 through November 30, 1996,
undistributed/distributions in excess of net investment income was increased by
$212,221 and accumulated net realized gains/losses was decreased by $212,221.
Permanent book/tax differences are attributable to foreign currency
gains/losses.
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 PERIOD FEBRUARY
1, 1996 THROUGH
NOVEMBER 30, 1996:
Shares sold............. 149,291 $ 1,348,065 434,010 $ 3,888,650 123,465 $ 1,111,710
Shares repurchased...... (299,165) (2,692,557) (1,012,635) (9,087,640) (514,689) (4,613,637)
Shares converted from
Class B to Class A..... 80,606 726,982 (80,695) (726,982) -- --
Dividends reinvested.... 35,352 317,151 109,948 984,803 75,838 679,814
-------- ----------- ---------- ------------ ---------- -----------
Net decrease............ (33,916) $ (300,359) (549,372) $ (4,941,169) (315,386) $(2,822,113)
======== =========== ========== ============ ========== ===========
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>
19
<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 Period For the Period
February 1, 1996 For the February 7, 1994+
through Year Ended through
November 30, 1996 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... 0.57 0.67 0.74
Net realized and
unrealized gains
(losses) from
investment and foreign
currency............... 0.39 0.59 (1.49)
------ ------ -------
Net increase (decrease)
from investment
operations............. 0.96 1.26 (0.75)
------ ------ -------
Dividends from net
investment income...... (0.58) (0.77) (0.65)
Distributions from net
realized gains from
foreign currency
transactions........... -- (0.10) --
------ ------ -------
Total dividends and
distributions to
shareholders........... (0.58) (0.87) (0.65)
------ ------ -------
Net asset value, end of
period................. $9.37 $8.99 $8.60
====== ====== =======
Total investment
return (1).............. 11.14% 15.27% (7.61)%
====== ====== =======
Ratios/Supplemental
Data:
Net assets, end of
period (000's)......... $9,944 $9,841 $11,148
Expenses to average net
assets................. 1.89%* 1.74% 1.49%*
Net investment income to
average net assets..... 7.69%* 8.52% 8.06%*
Portfolio turnover rate. 101% 91% 117%
- ------------------------
</TABLE>
+ Commencement of issuance of shares
* Annualized
(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.
** Amounts for net investment income and net realized and unrealized gains
(losses) from investments and foreign currency have been restated to conform
to the November 30, 1996, presentation.
20
<PAGE>
PAINEWEBBER
STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
CLASS B CLASS C
- ----------------------------------------------------- ----------------------------------------------------
For the Period For the Period For the Period For the Period
February 1, 1996 For the February 7, 1994+ February 1, 1996 For the February 7, 1994+
through Year Ended through through Year Ended through
November 30, 1996 January 31, 1996 January 31, 1995 November 30, 1996 January 31, 1996 January 31, 1995
- ----------------- ---------------- ----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
$8.98 $8.60 $10.00 $8.98 $8.60 $10.00
------- ------- ------- ------- ------- -------
0.51 0.60 0.66 0.53 0.62 0.69
0.39 0.59 (1.47) 0.40 0.59 (1.48)
------- ------- ------- ------- ------- -------
0.90 1.19 (0.81) 0.93 1.21 (0.79)
------- ------- ------- ------- ------- -------
(0.52) (0.71) (0.59) (0.54) (0.73) (0.61)
-- (0.10) -- -- (0.10) --
------- ------- ------- ------- ------- -------
(0.52) (0.81) (0.59) (0.54) (0.83) (0.61)
------- ------- ------- ------- ------- -------
$9.36 $8.98 $8.60 $9.37 $8.98 $8.60
======= ======= ======= ======= ======= =======
10.46% 14.37% (8.22)% 10.80% 14.63% (8.02)%
======= ======= ======= ======= ======= =======
$37,249 $40,653 $40,710 $17,101 $19,232 $21,208
2.63%* 2.49% 2.24%* 2.38%* 2.24% 1.98%*
6.93%* 7.77% 7.46%* 7.19%* 8.03% 7.62%*
101% 91% 117% 101% 91% 117%
</TABLE>
21
<PAGE>
STRATEGIC INCOME FUND
PAINEWEBBER
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of PaineWebber Strategic Income 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 Strategic Income Fund
(the "Fund") at November 30, 1996, the results of its operations for the period
February 1, 1996 through November 30, 1996, the changes in its net assets for
the period February 1, 1996 through November 30, 1996 and for the year ended
January 31, 1996 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 of 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 November 30, 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
January 27, 1997
22
<PAGE>
STRATEGIC INCOME FUND
PAINEWEBBER
TAX INFORMATION
We are required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Fund's fiscal period end (November
30, 1996), as to the federal tax status of distributions received by
shareholders during such fiscal year. Accordingly, we are advising you that all
of the distributions paid by the Fund during the period were derived from net
investment income and are taxable as ordinary income.
Dividends received by tax-exempt recipients (e.g., IRAs and Keoghs) need not be
reported as taxable income. Some retirement trusts (e.g., corporate, Keogh and
403(b)(7) plans) may need this information for their annual 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, will be made in conjunction with Form 1099 DIV and will be
mailed in January 1997. Shareholders are advised to consult their own tax
advisers with respect to the tax consequences of their investment in the Fund.
23
