<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND SEMIANNUAL REPORT
| PaineWebber Strategic |
| Income Fund |
| FUND PROFILE |
| |
| o Goal: |
| High current income, |
| secondarily capital |
| appreciation |
| |
| o Allocation Manager: |
| Dennis L. McCauley, |
| Mitchell Hutchins |
| Asset Management Inc. |
| |
| o Total Net Assets: |
| $108.3 million as |
| of May 31, 1998 |
| |
| o Dividend Payments: |
| Monthly |
July 15, 1998
Dear Shareholder,
We are pleased to present you with the semiannual report for the
PaineWebber Strategic Income Fund ("the Fund") for the six-month period ended
May 31, 1998.
GENERAL MARKET OVERVIEW
- ------------------------------------------------------------------------------
[GRAPHIC] Through most of last year--as above-trend economic growth
persisted--the Federal Reserve ("the Fed") monitored the economy
with a "tightening bias," i.e., a predisposition to raise interest rates if
the risk of inflation appeared to increase. In December the Fed adopted a
neutral stance, a sign that it did not consider inflation an imminent threat.
The Fed perceived that the Asian crisis would slow the U.S. eonomy by
reducing demand for U.S. exports. During the spring of 1998, strong domestic
demand persisted despite the slowing effect of the Asian crisis, and in March
the Fed reverted to its tightening bias.
Aided by low inflation, a budget surplus and a strong dollar, interest
rates fell across the yield curve through the six-month period ended May 31,
1998. The main themes affecting the market were slight inflationary pressure
despite a strong domestic economy, and the Asian crisis, which continued to
drive "flight-to-quality" demand for U.S. Treasury debt.
U.S. Treasurys outperformed foreign markets, though in terms of their own
currencies all developed government bond markets produced positive returns.
Returns in these markets benefited from the "flight to quality" as well as
perceived deflationary effects from Asian currency devaluations.
PORTFOLIO REVIEW
- -------------------------------------------------------------------------------
[GRAPHIC] PERFORMANCE
The Fund's total return (the net asset value change with dividends
reinvested) for the six-month period ended May 31, 1998, without deducting
sales charges, was 4.36% for Class A shares, 3.86% for Class B shares, 4.10%
for Class C shares and 1.67% for Class Y shares (inception date for Class Y
was February 17, 1998).
For shareowners who purchased or redeemed Fund shares during the period the
Fund's total return may be lower; for example, after deducting the maximum
applicable sales charges, Class A shares gained 0.18%, Class B shares lost
1.14% and Class C shares gained 3.35%. Class Y shares are not subject to sales
charges.
The Fund invests in three main bond markets--the U.S. government/investment
grade, U.S. high-yield and global sectors--shifting assets among them as
conditions warrant. The Fund began the six-month period with 47% of its
portfolio in U.S. government and investment-grade corporate bonds, 37% in
high-yield bonds, 11% in foreign and emerging market debt and 5% in cash.
Through the period, we maintained positions in the
1
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND SEMIANNUAL REPORT
PAINEWEBBER
STRATEGIC
INCOME FUND
Sector Allocation
as percent of portfolio assets,
May 31, 1998*
[PIE CHART]
U.S. high yield 47.1%
U.S. gov't/investment grade corp. 32.4%
Foreign/emerging markets 14.5%
Cash/cash equivalents 6.0%
* Allocations are subject to change.
Fund consistent with our long-term bullish view that interest rates will
continue to fall. In such an environment high income is likely to be
important. After prices of high-yield bonds fell toward the end of the period,
we increased the Fund's allocation to them in the belief that prices should
rebound.
By the end of the period we had shifted the Fund's portfolio mix to 47.1%
high-yield, 32.4% U.S. government/investment grade, 14.5% global and 6.0%
cash. Most of our current U.S. holdings consist of mortgage securities. If
interest rates continue to fall, we think the quest for income will drive
mortgage prices higher.
HIGH-YIELD SECTOR
The high-yield sector outperformed the rest of the market from the
beginning of the six-month period until mid-April. The high selling prices
spurred more than 170 new issuers to enter the market during April and May, an
average of four per day. The resulting supply bulge dragged down prices and
transformed the high-yield sector from a seller's to a buyer's market. Bond
prices fell so low that bank loans became cost competitive with debt issuance
as a way to raise capital.
As opportunistic issuers drop out of the market, the supply bulge is likely
to subside and yield spreads to Treasurys should tighten again. We currently
do not plan to change our portfolio strategy over the next six months, though
we may take advantage of tactical opportunities to enhance yield by increasing
the Fund's holdings of B-rated securities.
U.S. GOVERNMENT
AND INVESTMENT GRADE SECTOR
During the six-month period, the Fund benefited from its positions in
mortgage-backed securities and U.S. government agency obligations. These
securities performed fairly well compared to Treasurys, especially considering
the high rate of mortgage prepayments. Our emphasis on lower-coupon mortgages
and commercial mortgage-backed securities, which are less sensitive to
prepayment risk, was appropriate in such an environment.
We are maintaining the Fund's weightings in this sector, although our
security selections now emphasize convexity to protect the portfolio from
prepayment risk. While the current, high rate of mortgage prepayments is
likely to peak, risks of further acceleration will haunt the market as long as
interest rates remain low. For the present, we believe call protections and
convexity are the keys to better performance.
GLOBAL SECTOR
We have de-emphasized global exposure over the past several months.
Interest rates in the more developed markets are lower than U.S. rates and the
dollar remains strong, so we have underweighted markets such as Europe. As of
May 31, 1998 the Fund held 5.2% of net assets in Germany and 2.0% in the U.K.
The Fund also held a 2.1% position in New Zealand.
We have taken a conservative posture on emerging-market debt, with exposure
only to Mexico (2.2% of net assets on May 31, 1998), Poland (2.0%) and Greece
(1.5%). Poland was one of the top-performing emerging markets for the period.
2
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND SEMIANNUAL REPORT
GENERAL OUTLOOK
- ------------------------------------------------------------------------------
[GRAPHIC] We remain bullish on bonds despite recent volatility in the
marketplace. The overall outlook for the developed markets is
positive, and demand for their debt should remain high as the "flight to
quality" continues. Growth and inflation should remain moderate in the U.S.
and Europe. We expect growth in Asia to remain anemic over the next 12 months.
We continue to avoid Asia and will for the foreseeable future.
As the business cycle ages and earnings comparisons become tougher, careful
security selection and opportunistic investing take on added significance. Our
investment approach and philosophy emphasize proactive, fundamental credit
research combined with bottom-up security selection in stable-to-improving
sectors. We think our approach will serve the Fund well in the current market
environment.
Our ultimate objective in managing your investments is to help you
successfully meet your financial goals. We thank you for your continued
support and welcome any comments or questions you may have.
For a quarterly Fund Profile on the PaineWebber Strategic Income Fund or
another fund in the PaineWebber Family of Funds,(1) please contact your
investment executive.
Sincerely,
<TABLE>
<S> <C>
/s/ MARGO ALEXANDER /s/ DENNIS L. MCCAULEY
MARGO ALEXANDER DENNIS L. MCCAULEY
President, Chief Investment Officer--Fixed Income
Mitchell Hutchins Mitchell Hutchins
Asset Management Inc. Asset Management Inc.
Allocation Manager
PaineWebber Strategic Income Fund
/s/ THOMAS J. LIBASSI /s/ NIRMAL SINGH
THOMAS J. LIBASSI NIRMAL SINGH
Sector Manager Sector Manager
High Yield U.S. Government and Investment Grade
PaineWebber Strategic Income Fund PaineWebber Strategic Income Fund
</TABLE>
<TABLE>
<S> <C> <C>
/s/ STUART WAUGH /s/ CRAIG M. VARRELMAN /s/ JAMES F. KEEGAN
STUART WAUGH CRAIG M. VARRELMAN JAMES F. KEEGAN
Sector Manager Portfolio Manager Portfolio Manager
Foreign and Emerging Market Sector U.S. Government and U.S. Government and
PaineWebber Strategic Income Fund Investment Grade Sector Investment Grade Sector
PaineWebber Strategic Income Fund PaineWebber Strategic
Income Fund
</TABLE>
This letter is intended to assist shareholders in understanding how the Fund
performed during the six-month period ended May 31, 1998, and reflects our
views at the time we are writing this report. Of course, these views may
change in response to changing circumstances. We encourage you to consult your
investment executive regarding your personal investment program.
(1) Mutual funds are sold by prospectus only. The prospectuses for the funds
contain more complete information regarding risks, charges and expenses, and
should be read carefully before investing.
3
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
PERFORMANCE RESULTS (unaudited)
<TABLE>
<CAPTION>
Total Return(1)
Net Asset Value -----------------------------------------------------
----------------------------------------------- 12 Months 6 Months
05/31/98 11/30/97 05/31/97 Ended 05/31/98 Ended 05/31/98
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $9.64 $9.60 $9.37 10.73% 4.36%
- ---------------------------------------------------------------------------------------------------------------------------
Class B Shares 9.62 9.59 9.36 9.79 3.86
- ---------------------------------------------------------------------------------------------------------------------------
Class C Shares 9.63 9.59 9.36 10.19 4.10
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Performance Summary Class A Shares
<TABLE>
<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
- ---------------------------------------------------------------------------------------------------------------------------
1996 8.79 9.34 -- 0.6352 14.00
- ---------------------------------------------------------------------------------------------------------------------------
1997 9.34 9.56 -- 0.7116 10.32
- ---------------------------------------------------------------------------------------------------------------------------
01/01/98-05/31/98 9.56 9.64 -- 0.2791 3.79
- ---------------------------------------------------------------------------------------------------------------------------
Totals: $0.0000 $3.1443
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 05/31/98: 35.92%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Performance Summary Class B Shares
<TABLE>
<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
- ---------------------------------------------------------------------------------------------------------------------------
1996 8.78 9.33 -- 0.5727 13.23
- ---------------------------------------------------------------------------------------------------------------------------
1997 9.33 9.55 -- 0.6386 9.48
- ---------------------------------------------------------------------------------------------------------------------------
01/01/98-05/31/98 9.55 9.62 -- 0.2482 3.35
- ---------------------------------------------------------------------------------------------------------------------------
Totals: $0.0000 $2.8570
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 05/31/98: 31.50%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Performance Summary Class C Shares
<TABLE>
<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
- ---------------------------------------------------------------------------------------------------------------------------
1996 8.79 9.33 -- 0.5934 13.36
- ---------------------------------------------------------------------------------------------------------------------------
1997 9.33 9.56 -- 0.6638 9.89
- ---------------------------------------------------------------------------------------------------------------------------
01/01/98-05/31/98 9.56 9.63 -- 0.2587 3.46
- ---------------------------------------------------------------------------------------------------------------------------
Totals: $0.0000 $2.9534
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 05/31/98: 33.00%
- ---------------------------------------------------------------------------------------------------------------------------
</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
would be lower if sales charges were included.
(2) Includes foreign exchange gain distributions, if any.
The above data 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.
4
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
PERFORMANCE RESULTS (unaudited)
AVERAGE ANNUAL TOTAL RETURN(1)
<TABLE>
<CAPTION>
% Return Without Deducting % Return After Deducting
Maximum Sales Charge Maximum Sales Charge
------------------------------------- --------------------------------------------
Class A* B** C*** A* B** C***
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Twelve Months Ended 06/30/98 9.21% 8.39% 8.67% 4.89% 3.39% 7.92%
- ---------------------------------------------------------------------------------------------------------------------
Three Years Ended 06/30/98 10.81 10.00 10.31 9.33 9.17 10.31
- ---------------------------------------------------------------------------------------------------------------------
Commencement of Operations
Through 06/30/98+ 7.27 6.48 6.76 6.27 6.12 6.76
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Figures assume reinvestment of all dividends and other distributions at net
asset value on the payable dates.
* Maximum sales charge for Class A shares is 4% 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% and is
reduced to 0% after 1 year. 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 B shares bear ongoing 12b-1 distribution
and service fees.
+ Commencement of issuance dates are February 7, 1994 for Class A, Class B and
Class C shares.
Note: The Fund offers Class Y shares to a limited group of investors,
including participants in certain programs that are sponsored by PaineWebber
and that may invest in PaineWebber mutual funds. Since inception, February 17,
1998 through May 31, 1998 and since inception through June 30, 1998, Class Y
shares had a total return of 1.67% and 1.97%, respectively. Class Y shares do
not have initial or contingent deferred sales charges or ongoing distribution
and service fees.
The data above represents past performance of the Fund's shares, which is no
guarantee of future results. The principal value of an investment in the Fund
will fluctuate, so that an investor's shares, when redeemed, may be worth more
or less than their original cost.
5
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
PORTFOLIO OF INVESTMENTS MAY 31, 1998 (unaudited)
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- ---------- -------- -------- -----
<S> <C> <C> <C>
U.S. GOVERNMENT AND INVESTMENT GRADE OBLIGATIONS--33.23%
U.S. Government Obligations--4.91%
$ 4,000 U.S. Treasury Bonds (1)............................................. 08/15/27 6.375% $4,288,752
1,000 U.S. Treasury Notes................................................. 06/30/01 6.625 1,028,750
----------
Total U.S. Government Obligations (cost--$5,145,691)............................ 5,317,502
----------
Government National Mortgage Association Certificates--5.78%
5,939 GNMA (cost--$6,269,724)............................................. 06/15/17 to 11/15/17 8.000 6,257,162
----------
Federal National Mortgage Association Certificates--7.81%
4,040 FNMA................................................................ 08/01/27 to 03/01/28 7.000 4,098,880
4,500 FNMA 30 year TBA.................................................... TBA 6.000 4,366,409
----------
Total Federal National Mortgage Association Certificates (cost--$8,421,116)..... 8,465,289
----------
Collateralized Mortgage Obligations--14.73%
6,810 First Union Lehman Brothers Mortgage Trust Series 1997-C2 Class A3.. 12/18/07 6.650 6,949,877
5,000 FNMA REMIC Series 1993-87 Class J................................... 04/25/22 6.250 4,934,048
4,000 CS First Boston Mortgage Securities Corp. Series 1997-C2, Class A2.. 07/17/07 6.520 4,075,960
----------
Total Collateralized Mortgage Obligations (cost--$15,756,769)................... 15,959,885
----------
Total U.S. Government and Investment Grade Obligations (cost--$35,593,300)...... 35,999,838
----------
GLOBAL DEBT SECURITIES--14.91%
Germany--5.22%
9,350* Federal Republic of Germany......................................... 01/04/07 6.000 5,656,377
----------
Greece--1.47%
489,000* Republic of Hellenic................................................ 03/21/00 to 03/21/02 9.200 to 9.800 1,592,804
----------
Mexico--2.18%
1,000 United Mexican States (1)........................................... 09/15/16 11.375 1,140,630
1,342 United Mexico States, DISC (2)...................................... 12/31/19 6.693++ 1,222,065
----------
2,365,695
----------
New Zealand--2.05%
3,750* Government of New Zealand........................................... 03/15/02 10.000 2,215,487
----------
Poland--1.96%
1,080 Republic of Poland, PAR............................................. 10/27/24 3.000(b) 702,000
1,580 Republic of Poland, PDI............................................. 10/27/14 4.000(b) 1,429,900
----------
2,131,900
----------
United Kingdom--2.03%
1,121* United Kingdom Gilt................................................. 07/14/00 to 12/07/15 8.000 to 13.000 2,195,564
----------
Total Global Debt Securities (cost--$16,085,312)............................... 16,154,827
----------
HIGH YIELD SECURITIES--48.32%
Corporate Bonds--44.01%
Airlines--0.77%
750 Airplane Pass Through Trust......................................... 03/15/19 10.875 836,250
----------
Cable--2.85%
1,000 21St Century Telecom Group Incorporated**........................... 02/15/08 12.250+ 572,500
2,000 Knology Holdings Incorporated**..................................... 10/15/07 11.875+ 1,180,000
1,000 NTL Incorporated**.................................................. 04/01/08 9.750+ 648,750
1,000 UIH Australia Pacific Incorporated.................................. 05/15/06 14.000+ 690,000
----------
3,091,250
----------
</TABLE>
6
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- ---------- -------- -------- -----
<S> <C> <C> <C>
HIGH YIELD SECURITIES (CONTINUED)
Corporate Bonds (continued)
Communications--6.62%
$ 1,000 Barak ITC..................................................... 11/15/07 12.500% $ 600,000
1,000# Colt Telecom Group PLC........................................ 12/15/06 12.000+ 790,000
625 GST Equipment Funding Incorporated............................ 05/01/07 13.250 718,750
100 ITC Deltacom Incorporated..................................... 03/01/08 8.875 102,500
2,500 Nextel Communications Incorporated**.......................... 02/15/08 9.950+ 1,578,125
1,500 Nextel International Incorporated**........................... 04/15/08 9.950+ 896,250
750# Pathnet Incorporated**........................................ 04/15/08 12.250 817,500
350 PSI Net Incorporated**........................................ 02/15/05 10.000 355,250
500 Verio Incorporated**.......................................... 06/15/04 and 04/01/05 10.375 and 13.500 565,000
1,250# Viatel Incorporated........................................... 04/15/08 12.500+ 743,750
---------
7,167,125
---------
Consumer Manufacturing--2.40%
500 Apparel Ventures Incorporated................................. 12/31/00 12.250 495,000
1,000 Decora Inds Incorporated**.................................... 05/01/05 11.000 976,250
500 EKCO Group Incorporated....................................... 04/01/06 9.250 525,000
2,000 Sunbeam Corporation**......................................... 03/25/03++ 5.000*** 602,500
---------
2,598,750
---------
Energy--3.69%
1,000 Grant Geophysical Incorporated**.............................. 02/15/08 9.750 995,000
1,000 Hvide Marine Incorporated..................................... 02/15/08 8.375 972,500
1,000 Northern Offshore ASA**....................................... 05/15/05 10.000 990,000
625 Transamerican Energy Corporation.............................. 06/15/02 13.000+ 518,750
500# Transamerican Refining Corporation**.......................... 06/30/03 16.000 525,000
---------
4,001,250
---------
Entertainment--0.97%
625 Discovery Zone Incorporated................................... 08/01/02 13.500 562,500
482 United Artists Theatre Circuit................................ 07/01/15 9.300 489,580
---------
1,052,080
---------
Finance--0.59%
500 Olympic Financial Limited..................................... 03/15/07 11.500 497,500
175 Emergent Group Incorporated**................................. 09/15/04 10.750 147,000
---------
644,500
---------
Food & Beverage--1.86%
1,000 Iowa Select Farms L.P.**...................................... 12/01/05 10.750 1,000,000
1,000 Packaged Ice Incorporated**................................... 02/01/05 9.750 1,010,000
---------
2,010,000
---------
General Industrial--2.89%
1,000 Icon Health & Fitness......................................... 11/15/04 15.000+ 810,000
1,000 Jordan Telecommunication Products............................. 08/01/07 9.875 1,025,000
1,000 Poindexter J.B. Incorporated.................................. 05/15/04 12.500 1,025,000
250 W. R. Carpenter North America Incorporated.................... 06/15/07 10.625 265,625
---------
3,125,625
---------
Hotels & Lodging--0.57%
625 Silverleaf Resorts Incorporated............................... 04/01/08 10.500 612,500
---------
</TABLE>
7
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- ---------- -------- -------- -----
<S> <C> <C> <C>
HIGH YIELD SECURITIES (CONTINUED)
Corporate Bonds (concluded)
Media--0.93%
$ 500 Impac Group Incorporated**.......................................... 03/15/08 10.125% $ 500,000
500 Source Media Incorporated........................................... 11/01/04 12.000 505,000
---------
1,005,000
---------
Metals & Mining--1.91%
600 Mastec Incorporated**............................................... 02/01/08 7.750 567,000
1,000 Metal Management Incorporated**..................................... 05/15/08 10.000 992,500
500 WCI Steel Incorporated.............................................. 12/01/04 10.000 512,500
---------
2,072,000
---------
Packaging--1.21%
750 Bear Island Paper Company LLC....................................... 12/01/07 10.000 774,375
500 Vicap, S.A. de C.V.**............................................... 05/15/07 11.375 535,000
---------
1,309,375
---------
Real Estate and Buildings--3.86%
625 American Architectural Products**................................... 12/01/07 11.750 657,813
750 Forest City Enterprises Incorporated................................ 03/15/08 8.500 750,000
2,000 Socgen Real Estate Company LLC...................................... 12/29/49 7.640 2,006,274
750 U.S. Home Corporation............................................... 08/15/07 8.880 765,000
---------
4,179,087
---------
Restaurants--0.92%
1,000 American Restaurant Group Incorporated**............................ 2/15/03 11.500 1,000,000
---------
Retail--4.47%
1,000 Advance Holding Corporation**....................................... 04/15/09 12.875 580,000
500 Big 5 Corporation................................................... 11/15/07 10.875 520,000
750 Chief Auto Parts Incorporated....................................... 05/15/05 10.500 848,438
750 Jafra Cosmetics International Incorporated**........................ 05/01/08 11.750 750,000
750 Mrs. Fields Original**.............................................. 12/01/04 10.125 736,875
625 Musicland Group Incorporated**...................................... 03/15/08 9.875 625,000
750 Tuesday Morning Corporation**....................................... 12/15/07 11.000 783,750
---------
4,844,063
---------
Technology--2.70%
500 Ampex Corporation**(c).............................................. 03/15/03 12.000 525,000
2,000 Electronic Retailing Systems International.......................... 02/01/04 13.250+ 1,020,000
1,750 InterAct Systems Incorporated**..................................... 08/01/03 14.000+ 787,500
625 Samsung Electronics America Incorporated**.......................... 05/01/03 9.750 592,188
---------
2,924,688
---------
Transportation Non-air--4.17%
750 Atlantic Express Transportation Corporation......................... 02/01/04 10.750 798,750
1,000 Equimar Shipholdings Limited........................................ 07/01/07 9.875 925,000
750 Navigator Gas Transport PLC......................................... 06/30/07 10.500 787,500
1,000 Navistar International Corporation**................................ 02/01/08 8.000 1,002,500
500 Stena AB............................................................ 06/15/07 8.750 510,000
750 TFM, S.A. de C.V.................................................... 06/15/09 11.750+ 493,125
---------
4,516,875
---------
Utilities--0.63%
624 Panda Funding Corporation........................................... 08/20/12 11.625 679,857
---------
Total Corporate Bonds (cost--$47,914,463)...................................... 47,670,275
---------
</TABLE>
8
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- ---------- -------- -------- -----
<S> <C> <C> <C>
HIGH YIELD SECURITIES (CONTINUED)
Convertible Bonds--2.23%
Communications--0.65%
$ 110 GST Telecommunications Incorporated................................. 12/15/05 13.875% $ 148,500
1,000 Allegiance Telecom Incorporated..................................... 02/15/08 11.750 555,000
---------
703,500
---------
General Industrial--1.58%
750 Corporate Express Incorporated...................................... 07/01/00 4.500 686,250
1,000 Waste Systems International Incorporated**.......................... 05/13/05 7.000 1,025,000
---------
1,711,250
---------
Total Convertible Bonds (cost--2,348,796)...................................... 2,414,750
---------
Number of
Shares
- ---------
Common Stocks(a)--1.37%
Communications--0.38%
1,549 Nextel Communications Incorporated.................................. 36,498
48,133 Viatel Incorporated................................................. 373,031
---------
409,529
---------
Gaming--0.76%
58,152 Casino America Incorporated......................................... 232,608
102,958 Colorado Gaming & Entertainment Company............................. 592,009
---------
824,617
---------
Media--0.23%
2,000 Affiliated Newspaper Investments.................................... 250,000
---------
Total Common Stocks (cost--$1,045,920).......................................... 1,484,146
---------
Number of
Warrants
- ---------
Warrants(a)--0.71%
Cable--0.01%
1,000 UIH Australia Pacific Incorporated.................................. 5,000
---------
Communications--0.39%
1,000 Colt Telecom Group PLC.............................................. 215,000
500 Globalstar Telecommunications....................................... 70,000
3,000 Verio Incorporated.................................................. 142,500
---------
427,500
---------
Consumer Manufacturing--0.19%
1,000 AVI Holdings Incorporated........................................... 5,000
2,000 IFA Capital Incorporated............................................ 200,000
---------
205,000
---------
Entertainment--0.03%
625 Discovery Zone Incorporated**....................................... 37,500
---------
</TABLE>
9
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
Number of
Warrants Value
- ---------- -------
<S> <C>
HIGH YIELD SECURITIES (CONCLUDED)
Warrants(a)--(concluded)
Finance--0.01%
500 Olympic Financial Limited........................................... $ 5,000
-----------
Gaming--0.01%
10,294 Casino America Incorporated......................................... 10,294
-----------
Technology--0.07%
17,000 Ampex Corporation................................................... 29,750
2,000 Electronic Retailing Systems International.......................... 40,000
1,750 InterAct Systems Incorporated....................................... 4,375
-----------
74,125
-----------
Total Warrants (cost--$100,633)................................................. 764,419
-----------
Total High Yield Securities (cost--$51,409,812)................................. 52,333,590
-----------
<CAPTION>
Principal
Amount Maturity Interest
(000) Date Rate
- ---------- -------- --------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS--2.76%
$3,000 U.S. Treasury Bills (1) (cost--$2,991,000).......................... 06/25/98 4.500%@ 2,991,000
-----------
REPURCHASE AGREEMENT--3.39%
3,670 Repurchase Agreement dated 05/29/98 with Salomon Smith
Barney collateralized by $2,723,000 U.S. Treasury Bonds,
8.75% due 08/15/20 (value--$3,745,759); proceeds:
$3,671,691 (cost--$3,670,000)...................................... 06/01/98 5.530 3,670,000
-----------
Total Investments (cost--$109,749,424)--102.61%................................. 111,149,255
Liabilities in excess of other assets--(2.61%).................................. (2,825,766)
-----------
Net Assets--100.00%............................................................. 108,323,489
-----------
</TABLE>
- ------------
* 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.
*** Yield to put date on zero coupon bond.
# Security represents a unit which is composed of the stated bond with
attached warrants or common stock.
+ Denotes a step-up bond or a zero coupon bond that converts to the noted
fixed rated at a designated future date.
++ Maturity date reflects earliest date bonds can be put back to issuer.
++++ Variable rate security, interest rate noted is current rate at May 31,
1998.
(a) Non-income producing
(b) Reflects rate at May 31, 1998, on step coupon rate instruments
(c) Illiquid Security representing 0.47% of portfolio assets.
(1) Security, or a portion thereof, was on loan at May 31, 1998
(2) With an additional 2,067,000 recoverable rights attached maturing on
06/30/03 with no market value.
DISC Discount Bonds
PDI Past Due Interest Bond
PAR Par Bond
REMIC Real Estate Mortgage Investment Conduit.
TBA (To Be Assigned) Securities are purchased on a forward commitment basis
with approximately (generally +/-1.0%) principal amount and generally
stated maturity date. The actual principal amount and maturity date will
be determined upon settlement when the specific mortgage pools are
assigned.
@ Yield to maturity for discounted securities.
10
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Unrealized
Contract to Maturity Appreciation
Deliver In Exchange for Date (Depreciation)
------------ --------------- --------- --------------
<S> <C> <C> <C> <C>
British Pounds.............................. 680,000 US $1,130,500 07/01/98 $ 21,574
British Pounds.............................. 315,000 US $513,765 07/13/98 392
Deutsche Marks.............................. 11,674,657 US $6,454,981 06/22/98 to 10/02/98 (100,745)
New Zealand Dollars......................... 4,045,000 US $2,350,145 06/22/98 186,962
U.S. Dollars................................ 1,092,524 DEM 1,924,657 06/30/98 to 10/02/98 (8,995)
---------
$ 99,188
</TABLE>
- ----------------------------
Currency Type Abbreviation:
DEM--Deutsche Marks
See accompanying notes to financial statements
11
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES MAY 31, 1998 (unaudited)
<TABLE>
<S> <C>
Assets
Investments in securities, at value (cost--$109,749,424) ............................................. $ 111,149,255
Investments of cash collateral for securities loaned, at value ....................................... 8,738,270
Receivable for investments sold ...................................................................... 442,625
Interest receivable .................................................................................. 1,627,732
Receivable for shares of beneficial interest sold .................................................... 245,362
Unrealized appreciation on forward foreign currency contracts ........................................ 208,928
Deferred organizational costs ........................................................................ 40,849
Other assets ......................................................................................... 51,508
-------------
Total assets ......................................................................................... 122,504,529
-------------
Liabilities
Payable for cash collateral on securities loaned ..................................................... 8,738,270
Payable for shares of beneficial interest repurchased ................................................ 701,614
Payable for investments purchased .................................................................... 4,331,250
Unrealized depreciation on forward currency contracts ................................................ 109,740
Payable to affiliates ................................................................................ 133,152
Accrued expenses and other liabilities ............................................................... 167,014
-------------
Total liabilities .................................................................................... 14,181,040
-------------
Net Assets
Beneficial interest--$0.001 par value (unlimited amount authorized) .................................. 113,294,208
Undistributed net investment income .................................................................. 8,965
Accumulated net realized losses from investment and futures transactions ............................. (6,479,178)
Net unrealized appreciation of investments, other assets, liabilities and forward contracts
denominated in foreign currencies .................................................................. 1,499,494
-------------
Net assets ........................................................................................... $ 108,323,489
=============
Class A:
Net assets ........................................................................................... $ 33,899,918
-------------
Shares outstanding ................................................................................... 3,518,152
-------------
Net asset value and redemption price per share ....................................................... $ 9.64
=============
Maximum offering price per share (net asset value plus sales charge of 4.00% of offering price)....... $ 10.04
=============
Class B:
Net assets ........................................................................................... $ 46,355,096
-------------
Shares outstanding ................................................................................... 4,816,456
-------------
Net asset value and offering price per share ......................................................... $ 9.62
=============
Class C:
Net assets ........................................................................................... $ 27,874,427
-------------
Shares outstanding ................................................................................... 2,894,500
-------------
Net asset value and offering price per share ......................................................... $ 9.63
=============
Class Y:
Net assets ........................................................................................... $ 194,048
-------------
Shares outstanding ................................................................................... 20,145
-------------
Net asset value, offering price and redemption value per share ....................................... $ 9.63
=============
</TABLE>
See accompanying notes to financial statements
12
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Six
Months Ended
May 31, 1998
(unaudited)
----------
<S> <C>
Investment income:
Interest...................................................................................... $3,935,295
----------
Expenses:
Investment advisory and administration........................................................ 364,862
Service fees--Class A......................................................................... 34,847
Service and distribution fees--Class B........................................................ 219,414
Service and distribution fees--Class C........................................................ 95,496
State registration fees....................................................................... 37,149
Legal and audit............................................................................... 30,922
Amortization of organizational expenses....................................................... 30,025
Transfer agency and service fees.............................................................. 29,718
Reports and notices to shareholders........................................................... 24,549
Custody and accounting........................................................................ 23,894
Trustees' fees................................................................................ 5,250
Other expenses................................................................................ 6,992
----------
903,118
----------
Net investment income......................................................................... 3,032,177
----------
Realized and unrealized gains (losses) from investment activities:
Net realized gains (losses) from:
Investment transactions.................................................................... 1,316,122
Foreign currency transactions.............................................................. 121,940
Futures contracts (51,984)
Net change in unrealized appreciation/depreciation of:
Investments................................................................................ (714,661)
Other assets, liabilities and forward contracts denominated in foreign currencies.......... 95,632
----------
Net realized and unrealized gain from investment activities................................... 767,049
----------
Net increase in net assets resulting from operations.......................................... $3,799,226
==========
</TABLE>
See accompanying notes to financial statements
13
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Six
Months Ended For the Year Ended
May 31, 1998 November 30,
(unaudited) 1997
------------- -------------
<S> <C> <C>
From operations:
Net investment income ........................................................... $ 3,032,177 $ 4,717,532
Net realized gains from investment transactions ................................. 1,316,122 1,441,648
Net realized gains from foreign currency transactions ........................... 121,940 403,175
Net realized losses from futures contracts ...................................... (51,984) (119,664)
Net change in unrealized appreciation/depreciation of investments ............... (714,661) (281,272)
Net change in unrealized appreciation/depreciation of other assets,
liabilities and forward contracts denominated in foreign currencies .......... 95,632 19,954
------------- -------------
Net increase in net assets resulting from operations ............................ 3,799,226 6,181,373
------------- -------------
Dividends and distribution to shareholders from:
Net investment income--Class A .................................................. (980,305) (1,027,714)
Net investment income--Class B .................................................. (1,361,842) (2,331,023)
Net investment income--Class C .................................................. (822,659) (1,211,577)
Net investment income--Class Y .................................................. (2,649) --
Net realized gains from foreign currency transactions--Class A .................. (82,573) --
Net realized gains from foreign currency transactions--Class B .................. (159,683) --
Net realized gains from foreign currency transactions--Class C .................. (89,620) --
Net realized gains from foreign currency transactions--Class Y .................. -- --
------------- -------------
Total dividends and distribution to shareholders ................................ (3,499,331) (4,570,314)
------------- -------------
From beneficial interest transactions:
Net proceeds from the sale of shares ............................................ 34,279,398 37,659,276
Cost of shares repurchased ...................................................... (13,854,172) (20,186,322)
Proceeds from dividends reinvested .............................................. 1,922,432 2,297,795
------------- -------------
Net increase in net assets from beneficial interest transactions ................ 22,347,658 19,770,749
------------- -------------
Net increase in net assets ...................................................... 22,647,553 21,381,808
Net assets:
Beginning of period ............................................................. 85,675,936 64,294,128
------------- -------------
End of period (including undistributed net investment
income of $8,965 and $476,119, respectively) ................................. $ 108,323,489 $ 85,675,936
============= =============
</TABLE>
See accompanying notes to financial statements
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
PaineWebber Strategic Income Fund (the "Fund") is a series of PaineWebber
Securities Trust (the "Trust") which 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.
Costs incurred by the Fund in connection with its organization have been
deferred and are being amortized using the straight-line method over a period
not to exceed sixty months from the commencement of operations.
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 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. Class Y shares have no service 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 as the primary market by
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
asset management subsidiary of PaineWebber Incorporated ("PaineWebber") and
investment adviser and administrator of the Fund. 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
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 to limitations
as to their sale) are valued at fair value as determined in good faith 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
occur 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.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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.
(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 Fund's net assets including the market values of the Fund's
investments 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.
Futures Contracts--Upon entering into a financial futures contract, the
Fund is required to pledge to a broker an amount of cash and/or U.S.
Government securities equal to a certain percentage of the contract amount.
This amount is known as the "initial margin." Subsequent payments, known as
"variation margin," are made or received by the Fund each day, depending on
the daily fluctuations in the value of the underlying financial futures
contracts. Such variation margin is recorded for financial statement purposes
on a daily basis as unrealized gain or loss until the financial futures
contract is closed, at which time the net gain or loss is reclassified to
realized gain or loss.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Using financial futures contracts involves various market risks. The
maximum amount at risk from the purchase of a futures contract is the contract
value. The Fund primarily uses financial futures contracts to manage duration
or for hedging purposes and not for leverage. However, imperfect correlations
between futures contracts and the portfolio securities being hedged or, market
disruptions, do not normally permit full control of these risks at all times.
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
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. Mortgage securities may
decrease in value as a result of increases in interest rates and may benefit
less than other fixed-income securities from declining interest rates because
of risk of prepayments. 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.
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, 1998, the Fund owed Mitchell Hutchins $68,606 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 May 31, 1998, the Fund owed Mitchell Hutchins $64,133 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 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 six months ended May 31, 1988, it earned $122,187
in sales charges.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SECURITY LENDING
The Fund may lend securities up to 33 1/3% of its total assets to qualified
institutions. The loans are secured at all times by cash, U.S. government
securities or irrevocable letters of credit that meet certain guidelines
established by Mitchell Hutchins, 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 regain 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. For the six months ended May 31, 1998,
PaineWebber earned $6,750 as the Fund's lending agent. At May 31, 1998, the
Fund owed PaineWebber $413 for security lending fees.
As of May 31, 1998, the Fund's custodian held cash and/or cash equivalents
having an aggregate value of $8,738,270 as collateral for portfolio securities
loaned having a market value of $8,420,382, which was invested in the
following money market funds:
Number of
Shares Value
---------- ----------
4,742,589 Liquid Assets Portfolio ........................ $4,742,589
3,264,152 Prime Portfolio ................................ 3,264,152
731,523 TempCash Portfolio ............................. 731,523
6 TempFund Portfolio ............................. 6
----------
$8,738,270
==========
BANK LINE OF CREDIT
The Fund may participate with other funds managed by Mitchell Hutchins in a
$200 million committed credit facility ("Facility") to be used for temporary
financing until the settlement of sale or purchase of portfolio securities,
the repurchase or redemption of shares of the Fund at the request of the
shareholders and other temporary or emergency purposes. In connection
therewith, the Fund has agreed to pay commitment fees on its pro rata portion
of the Facility. Interest is charged to the Fund at rates based on prevailing
market rates in effect at the time of borrowings. For six months ended May 31,
1998, the Fund did not borrow under the Facility.
TRANSFER AGENCY AND RELATED SERVICES FEES
PaineWebber provides transfer agency related services to each Fund pursuant
to a delegation of authority from PFPC Inc., the Funds' transfer agent, and is
compensated for these services by PFPC Inc., not the Funds. For the six months
ended May 31, 1998, PaineWebber received from PFPC, Inc., approximately 51% of
the total transfer agency and related services fees collected by PFPC.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at May 31,
1998, was substantially the same as the cost of securities for financial
statement purposes.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
At May 31, 1998, 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) ..................... $ 3,643,332
Gross depreciation (investments having an excess of cost over value) ..................... (2,243,501)
-----------
Net unrealized appreciation of investments ............................................... $ 1,399,831
===========
</TABLE>
For the six months ended May 31, 1998, total aggregate purchases and sales
of portfolio securities, excluding short-term securities, were as follows:
<TABLE>
<S> <C>
Purchases ................................................................................ $ 114,900,066
Sales .................................................................................... $92,079,716
</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, 1997, the Fund had a net capital loss carryforward of
$6,682,965 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.
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
---------------------------- ----------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
For the six months ended May 31, 1998:
Shares sold ................................... 1,465,680 $ 14,155,018 1,158,987 $ 11,176,468
Shares repurchased ............................ (425,858) (4,111,310) (523,387) (5,042,515)
Shares converted from Class B to Class A ...... 233,651 2,253,046 (233,894) (2,253,046)
Dividends reinvested .......................... 65,834 634,213 69,775 671,131
------------ ------------ ------------ ------------
Net increase .................................. 1,339,307 $ 12,930,967 471,481 $ 4,552,038
============ ============ ============ ============
For the year ended November 30, 1997:
Shares sold ................................... 1,323,471 $ 12,562,022 1,645,373 $ 15,619,132
Shares repurchased ............................ (533,352) (5,055,445) (1,111,544) (10,459,216)
Shares converted from Class B to Class A ...... 269,574 2,559,838 (269,858) (2,559,838)
Dividends reinvested .......................... 58,112 550,801 101,851 961,303
------------ ------------ ------------ ------------
Net increase .................................. 1,117,805 $ 10,617,216 365,822 $ 3,561,381
============ ============ ============ ============
<CAPTION>
Class C Class Y
---------------------------- ----------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
For the six months ended May 31, 1998:
Shares sold ................................... 6,672,233 $ 6,483,212 21,857 $ 211,654
Shares repurchased ............................ (251,860) (2,428,067) (1,987) (19,234)
Shares converted from Class B to Class A ...... -- -- -- --
Dividends reinvested .......................... 63,838 614,440 274 2,648
------------ ------------ ------------ ------------
Net increase .................................. 484,211 $ 4,666,881 20,144 $ 195,068
============ ============ ============ ============
For the year ended November 30, 1997:
Shares sold ................................... 997,764 $ 9,478,122 -- --
Shares repurchased ............................ (496,197) (4,671,661) -- --
Shares converted from Class B to Class A ...... -- -- -- --
Dividends reinvested .......................... 83,102 785,691 -- --
------------ ------------ ------------ ------------
Net increase .................................. 584,669 $ 5,592,152 -- --
============ ============ ============ ============
</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
For the Six For the February 1, 1996 For the February 7, 1994+
Months Ended Year Ended through Year Ended through
May 31, 1998 November 30, November 30, January 31, January 31,
(unaudited) 1997 1996 1996 1995
---------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .................... $ 9.60 $ 9.37 $ 8.99 $ 8.60 $ 10.00
---------- ---------- --------- --------- ----------
Net investment income ................................... 0.31 0.74 0.57 0.67 0.74
Net realized and unrealized gains (losses)
from investments, foreign currency and futures ..... 0.11 0.17 0.39 0.59 (1.49)
---------- ---------- --------- --------- ----------
Net increase (decrease) from
investment operations .............................. 0.42 0.91 0.96 1.26 (0.75)
---------- ---------- --------- --------- ----------
Dividends from net investment income .................... (0.34) (0.68) (0.58) (0.77) (0.65)
Distributions from net realized gains
from foreign currency transactions ................. (0.04) -- -- (0.10) --
---------- ---------- --------- --------- ----------
Total dividends and distributions to shareholders ....... (0.38) (0.68) (0.58) (0.87) (0.65)
---------- ---------- --------- --------- ----------
Net asset value, end of period .......................... $ 9.64 $ 9.60 $ 9.37 $ 8.99 $ 8.60
========== ========== ========= ========= ==========
Total investment return (1) ............................. 4.36% 10.04% 11.14% 15.27% (7.61)%
========== ========== ========= ========= ==========
Ratios/Supplemental data:
Net assets, end of period (000's) ....................... $ 33,900 $ 20,909 $ 9,944 $ 9,841 $ 11,148
Expenses to average net assets (2) ...................... 1.37%* 1.65% 1.89%* 1.74% 1.49%*
Net investment income to average net assets ............. 7.44%* 7.35% 7.69%* 8.52% 8.06%*
Portfolio turnover rate ................................. 100% 140% 101% 91% 117%
</TABLE>
- -----------------
+ Commencement of operations
* Annualized
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, 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 Class A, B and C would be lower if
sales charges were included. Total investment return for periods of less
than one year has not been annualized.
(2) During the year ended November 30, 1997 Mitchell Hutchins waived a portion
of its advisory and administration fees. If such waivers had not been made
the annualized ratios of expenses to average net assets would have been
1.66% for Class A, 2.45% for Class B and 2.18% for Class C shares.
20
<PAGE>
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------------------------
For the Period For the Period
For the Six For the February 1, 1996 For the February 7, 1994+
Months Ended Year Ended through Year Ended through
May 31, 1998 November 30, November 30, January 31, January 31,
(unaudited) 1997 1996 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ................. $ 9.59 $ 9.36 $ 8.98 $ 8.60 $ 10.00
---------- ---------- ---------- ---------- ----------
Net investment income ................................ 0.27 0.67 0.51 0.60 0.66
Net realized and unrealized gains (losses)
from investments, foreign currency and futures... 0.10 0.16 0.39 0.59 (1.47)
---------- ---------- ---------- ---------- ----------
Net increase (decrease) from
investment operations ........................... 0.37 0.83 0.90 1.19 (0.81)
---------- ---------- ---------- ---------- ----------
Dividends from net investment income ................. (0.30) (0.60) (0.52) (0.71) (0.59)
Distributions from net realized gains
from foreign currency transactions .............. (0.04) -- -- (0.10) --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions to shareholders .... (0.34) (0.60) (0.52) (0.81) (0.59)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period ....................... $ 9.62 $ 9.59 $ 9.36 $ 8.98 $ 8.60
========== ========== ========== ========== ==========
Total investment return (1) .......................... 3.86% 9.20% 10.46% 14.37% (8.22)%
========== ========== ========== ========== ==========
Ratios/Supplemental data:
Net assets, end of period (000's) .................... $ 46,355 $ 41,650 $ 37,249 $ 40,653 $ 40,710
Expenses to average net assets (2) ................... 2.15%* 2.43% 2.63%* 2.49% 2.24%*
Net investment income to average net assets .......... 6.29%* 6.56% 6.93%* 7.77% 7.46%*
Portfolio turnover rate .............................. 100% 140% 101% 91% 117%
<CAPTION>
Class C
---------------------------------------------------------------------------
For the Period For the Period
For the Six For the February 1, 1996 For the February 7, 1994+
Months Ended Year Ended through Year Ended through
May 31, 1998 November 30, November 30, January 31, January 31,
(unaudited) 1997 1996 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ................. $ 9.59 $ 9.37 $ 8.98 $ 8.60 $ 10.00
---------- ---------- ---------- ---------- ----------
Net investment income ................................ 0.28 0.70 0.53 0.62 0.69
Net realized and unrealized gains (losses)
from investments, foreign currency and futures... 0.11 0.15 0.40 0.59 (1.48)
---------- ---------- ---------- ---------- ----------
Net increase (decrease) from
investment operations ........................... 0.39 0.85 0.93 1.21 (0.79)
---------- ---------- ---------- ---------- ----------
Dividends from net investment income ................. (0.31) (0.63) (0.54) (0.73) (0.61)
Distributions from net realized gains
from foreign currency transactions .............. (0.04) -- -- (0.10) --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions to shareholders .... (0.35) (0.63) (0.54) (0.83) (0.61)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period ....................... $ 9.63 $ 9.59 $ 9.37 $ 8.98 $ 8.60
========== ========== ========== ========== ==========
Total investment return (1) .......................... 4.10% 9.37% 10.80% 14.63% (8.02)%
========== ========== ========== ========== ==========
Ratios/Supplemental data:
Net assets, end of period (000's) .................... $ 27,874 $ 23,117 $ 17,101 $ 19,232 $ 21,208
Expenses to average net assets (2) ................... 1.89%* 2.17% 2.38%* 2.24% 1.98%*
Net investment income to average net assets .......... 6.52%* 6.82% 7.19%* 8.03% 7.62%*
Portfolio turnover rate .............................. 100% 140% 101% 91% 117%
<CAPTION>
Class Y
--------------
For the Period
February 17,
1998+ through
May 31, 1998
(unaudited)
--------------
<S> <C>
Net asset value, beginning of period .................. $ 9.72
-------
Net investment income ................................. 0.22
Net realized and unrealized gains (losses)
from investments, foreign currency and futures.... (0.08)
-------
Net increase (decrease) from
investment operations ............................ 0.14
-------
Dividends from net investment income .................. (0.23)
Distributions from net realized gains
from foreign currency transactions ............... --
-------
Total dividends and distributions to shareholders ..... (0.23)
-------
Net asset value, end of period ........................ $ 9.63
=======
Total investment return (1) ........................... 1.67%
=======
Ratios/Supplemental data:
Net assets, end of period (000's) ..................... $ 194
Expenses to average net assets (2) .................... 1.10%*
Net investment income to average net assets ........... 7.26%*
Portfolio turnover rate ............................... 100%
</TABLE>
21
<PAGE>
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<PAGE>
TRUSTEES
E. Garrett Bewkes, Jr.
Chairman
Margo N. Alexander
Richard Q. Armstrong
Richard R. Burt
Mary C. Farrell
Meyer Feldberg
George W. Gowen
Frederic V. Malek
Carl W. Schafer
OFFICERS
Margo N. Alexander
President
Victoria E. Schonfeld
Vice President
Dianne E. O'Donnell
Vice President and Secretary
Paul H. Schubert
Vice President and Treasurer
Dennis L. McCauley
Vice President
Thomas J. Libassi
Vice President
Craig M. Varrelman
Vice President
Nirmal Singh
Vice President
Stuart Waugh
Vice President
INVESTMENT ADVISOR,
ADMINISTRATOR AND DISTRIBUTOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
This report is not to be used in connection with the offering of shares of the
Fund unless accompanied or preceded by an effective prospectus.
The financial information included herein is taken from the records of the
Fund without examination by independent accountants who do not express an
opinion thereof.
A prospectus containing more complete information for any of the Funds listed
on the back cover can be obtained from a PaineWebber investment executive or
correspondent firm. Read the prospectus carefully before investing.
<PAGE>
PaineWebber offers a family of 26 funds which
encompass a diversified range of investment goals.
BOND FUNDS
o High Income Fund
o Investment Grade Income Fund
o Low Duration U.S. Government Income Fund
o Strategic Income Fund
o U.S. Government Income Fund
TAX-FREE BOND FUNDS
o California Tax-Free Income Fund
o Municipal High Income Fund
o National Tax-Free Income Fund
o New York Tax-Free Income Fund
STOCK FUNDS
o Financial Services Growth Fund
o Growth Fund
o Growth and Income Fund
o Mid Cap Fund
o Small Cap Fund
o S&P 500 Index Fund
o Utility Income Fund
ASSET ALLOCATION FUNDS
o Balanced Fund
o Tactical Allocation Fund
GLOBAL FUNDS
o Asia Pacific Growth Fund
o Emerging Markets Equity Fund
o Global Equity Fund
o Global Income Fund
MITCHELL HUTCHINS PORTFOLIOS
o Aggressive Portfolio
o Moderate Portfolio
o Conservative Portfolio
PAINEWEBBER MONEY MARKET FUND
PaineWebber
(C) 1998 PainWebber Incorporated
Member SIPC
PaineWebber
STRATEGIC
INCOME FUND
MAY 31, 1998
SEMIANNUAL REPORT
