<PAGE>
PaineWebber Small Cap Fund Annual Report
PERFORMANCE AT A GLANCE
- -------------------------------------------------------------------------------
The graph depicts the performance of PaineWebber Small Cap Fund versus the
S&P 600 Index and the Russell 2000 Index. It is important to note PaineWebber
Small Cap Fund is a professionally managed mutual fund while the indices are
not available for investment and are unmanaged. The comparison is shown for
illustrative purposes only.
Class A Class B Class C Russell 2000 S&P 600
2/93 $ 9,551 $10,000 $10,000 $ 9,769 $ 9,715.47
7/93 9,771 10,190 10,190 10,449 10,412
1/94 10,275 10,681 10,677 11,859 11,840
7/94 9,946 10,298 10,304 10,931 10,629
1/95 10,192 10,513 10,508 11,146 10,860
7/95 11,517 11,829 11,825 13,661 13,602
1/96 11,770 12,050 12,045 14,485 14,374
7/96 12,056 12,290 12,286 14,605 14,827
1/97 14,209 14,426 14,424 17,230 17,657
7/97 16,410 16,611 16,597 19,482 20,594
1/98 17,369 17,511 17,496 20,344 21,387
7/98 17,796 17,874 17,860 19,933 21,375
Past performance is no guarantee of future performance.
*The performance of Class Y shares will vary from the performance of the
classes shown because of differences in sales charges and fees paid by
shareholders investing in different classes.
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
One Year Five Years Inception
Ended 7/31/98 Ended 7/31/98 Through 7/31/98****
<S> <C> <C> <C>
Class A* 8.45% 12.74% 11.98%
% Return Without Deducting Class B** 7.60% 11.90% 11.14%
Maximum Sales Charge Class C*** 7.61% 11.88% 11.12%
Class A* 3.58% 11.71% 11.05%
% Return After Deducting Class B** 2.69% 11.64% 11.03%
Maximum Sales Charge Class C*** 6.63% 11.88% 11.12%
</TABLE>
* Maximum sales charge for Class A shares is 4.5% of the public offering price.
Class A shares bear ongoing 12b-1 services fees.
** Maximum contingent deferred sales charge for Class B shares is 5% and is
reduced to 0% after six years. Class B shares bear ongoing 12b-1 service fees.
***Maximum contingent deferred sales charge for Class C shares is 1% and is
reduced to 0% after one year. Class C shares bear ongoing 12b-1 service fees.
****Commencement of issuance was February 1, 1993 for Class A, Class B and
Class C shares.
Note: The Fund offers Class Y shares to certain eligible investors, including
INSIGHT Investment Advisory Program Participants. For the year ended July 31,
1998 and since inception, July 26, 1996 through July 31, 1998, Class Y shares
have had an average annual return of 8.74% and 21.58%, respectively. Class Y
shares do not have initial or contingent deferred sales charges or ongoing
distribution and service fees.
The data above represent past performance, which is no guarantee of future
results. The investment return and the principal value of an investment in the
Fund will fluctuate, so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
1
<PAGE>
PaineWebber Small Cap Fund September 15, 1998
- -------------------------------------------------------------------------------
PaineWebber
Small Cap
Fund
Top five sectors
as percent of net assets,
July 31, 1998*
Consumer Cyclical 29.7%
Technology 17.7%
Financial 16.2%
Healthcare 9.7%
Capital Goods 8.9%
*Allocations subject to change
- -------------------------------------------------------------------------------
Dear Shareholder,
We are pleased to present you with the annual report for the PaineWebber Small
Cap Fund (the "Fund") for the fiscal year ended July 31, 1998.
GENERAL MARKET OVERVIEW
Small-cap stocks endured a tough year. After strong performance in the
summer of 1997, small caps gave back some of their gains when investors reacted
to the Asian crisis by fleeing to large-cap stocks. Small caps made new gains
in early 1998, but investors still showed little interest in them despite their
attractive prices, strong fundamentals and lower vulnerability to the effects
of the Asian crisis.
By July, earnings disappointments among the large-cap companies began to
make investors jittery. The impact on large-cap stocks spread to the rest of
the market, dragging down mid- and small-cap stocks. For the year ended July
31, 1998, the small-cap, S&P 600 Index gained only 3.79% compared to the broad
market, S&P 500 Index, which gained 19.31%.
Note: Since July 31, 1998 (the Fund's fiscal year-end), world financial
markets have experienced significant volatility. The market and Fund
performance cited in this report do not take into account this volatility nor
its impact on the Fund; the next semiannual report, which will cover the six
months ending January 31, 1999, will address this period.
- -------------------------------------------------------------------------------
PaineWebber
Small Cap
Fund
Top ten holdings
as percent of net assets,
July 31, 1998*
Stericycle Inc. 3.4%
SmarTalk TeleServices
Inc. 2.8%
Fresh America Corp. 2.6%
Central Garden &
Pet Co. 2.5%
DVI Inc. 2.2%
First Cash Inc. 2.2%
Paul Harris Stores Inc. 2.0%
Curative Health
Services Inc. 1.9%
Prime Hospitality Corp. 1.8%
Wackenhut Corp.,
Class B 1.8%
*Holdings subject to change
- -------------------------------------------------------------------------------
PORTFOLIO REVIEW
PERFORMANCE
The Fund's total return (the net asset value change with
dividends reinvested) for the fiscal year ended July 31, 1998, without deducting
sales charges, was 8.45% for Class A shares, 7.60% for Class B shares, 7.61% for
Class C shares and 8.74% for Class Y shares.
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 3.58%, Class B shares gained
2.69% and Class C shares gained 6.63%. Class Y shares are not subject to sales
charges.
The Fund managed a respectable return in a difficult market. It handily
outperformed its Lipper peer group median return of 1.94% for the year ended
July 31, 1998.
2
<PAGE>
PaineWebber Small Cap Fund Annual Report
- -------------------------------------------------------------------------------
PaineWebber
Small Cap Fund
FUND PROFILE
Goal:
Long-term capital
appreciation through
small-cap investing
Portfolio Manager:
Donald R. Jones,
Mitchell Hutchins Asset
Management Inc.
Total Net Assets:
$141.6 million as of
July 31, 1998
Dividend Payments:
Annually
- -------------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS
We increased the Fund's consumer cyclicals position to 29.7% as of July 31,
1998, from 21% on March 31, by adding select retail, distribution and service
companies. These additions helped the Fund's return for its fiscal year.
The Fund holds the same weighting in financial services as the S&P 600 Index
(16.2% of net assets on July 31, 1998). We find attractive valuations among
insurance and specialty finance companies; moreover, we think that moderating
economic growth and declining interest rates will benefit financial services
companies.
The Fund remains nearly fully invested in equities. One of our current
favorites is Stericycle (3.4% of net assets on July 31, 1998), a leading
medical waste collection and disposal company. Stericycle uses proprietary
technology to sterilize medical waste rather than incinerate it, as the
company's competitors commonly do. Stericycle's technology avoids the harmful
environmental impacts associated with incineration. Management is focused on
gaining economies of scale by acquiring smaller, independent operators in this
business.
OUTLOOK
We still think the long-term prospects for small-cap stocks look good. They
appear better priced and have stronger-earnings potential than large-cap
stocks. Their recent poor market performance only makes them greater bargains
compared to the large caps, in our view. The price/earnings ratio for the
small-cap, Russell 2000 Index continues to represent a slight discount to the
Russell 1000 Large Cap Index.
While investors' "flight to quality" mind-set has worked against small caps,
smaller companies generally have less exposure to overseas markets and thus
should suffer less damage from weak foreign currencies. Therefore, we believe
that earnings growth for small caps over the next several quarters should
remain stronger than that of large caps. Although this will not ensure
favorable returns, we expect the small-cap indices to outperform the S&P 500
over the next 12 months.
3
<PAGE>
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 PaineWebber Small Cap Fund or another fund in the PaineWebber Family
of Funds,(1) please contact your investment executive.
Sincerely,
/s/ Margo N. Alexander /s/ Mark A. Tincher
MARGO N. ALEXANDER MARK A. TINCHER
President, Managing Director and
Mitchell Hutchins Asset Chief Investment Officer--
Management Inc. Equity Investments,
Mitchell Hutchins Asset Management Inc.
/s/ Donald R. Jones
DONALD R. JONES
Portfolio Manager,
PaineWebber Small Cap Fund
(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.
This letter is intended to assist shareholders in understanding how the Fund
performed during the fiscal year ended July 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.
4
<PAGE>
PAINEWEBBER SMALL CAP FUND
PERFORMANCE RESULTS (unaudited)
<TABLE>
<CAPTION>
Net Asset Value Total Return(1)
---------------------------------------- -----------------------------------
12 Months 6 months
07/31/98 01/31/98 07/31/97 Ended 07/31/98 Ended 07/31/98
-------- -------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Class A Shares $13.34 $13.02 $13.42 8.45% 2.46%
Class B Shares 12.78 12.52 13.00 7.60 2.08
Class C Shares 12.76 12.50 12.98 7.61 2.08
<CAPTION>
Performance Summary
Class A Shares
Net Asset Value
------------------------- Capital Gains Dividends Total
Period Covered Beginning Ending Distributed Paid Return(1)
- -------------- --------- ------ ----------- ---- -------
<C> <C> <C> <C> <C> <C>
02/01/93-12/31/93 $10.00 $10.62 $0.0168 $0.1281 7.68%
1994 10.62 9.97 0.5208 -- (1.20)
1995 9.97 10.81 0.8306 -- 16.81
1996 10.81 11.40 1.1566 -- 17.45
1997 11.40 13.31 1.1735 -- 27.38
01/01/98-07/31/98 13.31 13.34 -- -- 0.23
------- -------
Total: $3.6983 $0.1281
Cumulative Total Return
as of 07/31/98: 86.33%
<CAPTION>
Performance Summary
Class B Shares
Net Asset Value
------------------------ Capital Gains Dividends Total
Period Covered Beginning Ending Distributed Paid Return(1)
- -------------- --------- ------ ----------- ---- -------
<C> <C> <C> <C> <C> <C>
02/01/93-12/31/93 $10.00 $10.61 $0.0168 $0.0631 6.91%
1994 10.61 9.88 0.5208 -- (1.96)
1995 9.88 10.62 0.8306 -- 15.90
1996 10.62 11.08 1.1566 -- 16.50
1997 11.08 12.80 1.1735 -- 26.45
01/01/98-07/31/98 12.80 12.78 -- -- (0.16)
------- -------
Total: $3.6983 $0.0631
Cumulative Total Return
as of 07/31/98: 78.74%
<CAPTION>
Performance Summary
Class C Shares
Net Asset Value
------------------------- Capital Gains Dividends Total
Period Covered Beginning Ending Distributed Paid Return(1)
- -------------- --------- ------ ----------- ---- -------
<C> <C> <C> <C> <C> <C>
02/01/93-12/31/93 $10.00 $10.61 $0.0168 $0.0682 6.97%
1994 10.61 9.88 0.5208 -- (1.96)
1995 9.88 10.61 0.8306 -- 15.84
1996 10.61 11.07 1.1566 -- 16.52
1997 11.07 12.79 1.1735 -- 26.47
01/01/98-07/31/98 12.79 12.76 -- -- (0.23)
------- -------
Total: $3.6983 $0.0682
Cumulative Total Return
as of 07/31/98: 78.60%
</TABLE>
- ---------------------
(1) Figures assume reinvestment of all dividends and 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.
Note: The Fund offers Class Y shares to a limited group of eligible
investors, including the INSIGHT Investment Advisory Program participants. For
the year ended July 31, 1998 and since inception, July 26, 1996 through July
31, 1998, Class Y shares had a cumulative total return of 8.74% and 48.30%,
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 Small Cap Fund
Portfolio of Investments July 31, 1998
Number of
Shares Value
------ -----
COMMON STOCKS--99.26%
Agriculture, Food & Beverage--3.01%
382,000 Creative Bakeries, Inc.*............................. $573,000
188,100 Fresh America Corp.*................................. 3,691,462
---------
4,264,462
---------
Apparel, Retail--2.40%
7,800 Ann Taylor Stores Corp.*............................. 164,287
16,000 Fossil Inc.*......................................... 366,000
3,700 Goodys Family Clothing Inc.*......................... 95,738
269,000 Paul Harris Stores Inc.*............................. 2,774,062
---------
3,400,087
---------
Apparel, Textiles--2.42%
239,200 Florsheim Group Inc.*................................ 2,242,500
122,800 Vans Inc.*........................................... 1,181,950
---------
3,424,450
---------
Banks--2.70%
25,000 BankNorth Group, Inc................................. 873,437
18,000 Cullen Frost Bankers Inc............................. 956,250
46,000 Silicon Valley Bancshares*........................... 1,426,000
19,500 Texas Regional Bankshares Inc........................ 565,500
---------
3,821,187
---------
Computer Hardware--2.35%
63,800 Box Hill Systems Corp.*.............................. 474,512
9,000 Genicom Corporation*................................. 30,938
300,000 Oshap Technologies Ltd.*............................. 2,231,250
100,000 SED International Holdings Inc.*..................... 587,500
---------
3,324,200
---------
Computer Software--2.67%
20,000 Dataworks Corp.*..................................... 131,250
12,000 Engineering Animation Inc.*.......................... 775,500
30,500 Quadramed Corp.*..................................... 892,125
18,000 SPSS Inc.*........................................... 405,000
93,800 Tecnomatix Technologies Ltd.*........................ 1,582,875
---------
3,786,750
---------
Construction--0.26%
15,700 Elcor Corp........................................... 366,006
---------
Consumer Durables--0.97%
80,000 CHS Electronics Inc.*................................ 1,370,000
---------
Defense/Aerospace--0.08%
12,000 Herley Industries Inc.*.............................. 119,250
---------
Diversified Retail--0.93%
45,000 Shopko Stores Inc.................................... 1,316,250
---------
Drugs & Medicine--0.08%
60,000 IVC Industries Inc.*................................. 114,375
---------
Electrical Equipment--5.68%
73,200 Brown & Sharpe Manufacturing Co.*.................... $ 732,000
100,000 Davox Corp.*......................................... 1,250,000
75,000 DII Group Inc.*...................................... 1,218,750
40,000 Genrad Inc.*......................................... 600,000
68,000 IFR Systems Inc...................................... 1,207,000
63,000 Orbotech Ltd.* (1)................................... 2,118,375
24,500 Tadiran Ltd. ADR..................................... 915,687
---------
8,041,812
---------
Electrical Power--3.18%
69,150 AFC Cable Systems Inc.*.............................. 2,204,156
50,000 Hughes Supply Inc.................................... 1,534,375
20,000 Kuhlman Corp......................................... 760,000
---------
4,498,531
---------
Electronic Components--0.71%
50,000 DSP Group Inc.*...................................... 1,006,250
---------
Entertainment--0.30%
20,000 Imax Corp.* (1)...................................... 420,000
---------
Environmental Services--0.49%
163,000 Thermatrix Inc.*..................................... 692,750
---------
Financial Services--6.13%
152,900 DVI Inc.*............................................ 3,144,006
225,300 First Cash Inc.*..................................... 3,069,713
22,000 Imperial Credit Industries Inc.*..................... 456,500
55,600 Litchfield Financial Corp............................ 1,153,700
2,000 Markel Corp.*........................................ 341,500
10,700 Student Loan Corp.................................... 508,250
---------
8,673,669
---------
Forest Products, Paper--2.22%
38,000 Daisytek International Corp.*........................ 902,500
48,000 Greif Brothers Corp.................................. 1,896,000
5,000 United Stationers Inc.*.............................. 339,375
---------
3,137,875
---------
Freight, Air, Sea & Land--1.50%
16,000 Allied Holdings Inc.*................................ 286,000
9,000 Mark VII Inc.*....................................... 155,250
120,000 Smithway Motor Xpress Corp.*......................... 1,087,500
10,400 US Freightways Corp.................................. 260,000
15,000 US Xpress Enterprises Inc.*.......................... 240,938
7,000 USA Truck Inc.*...................................... 99,750
---------
2,129,438
---------
Heavy Machinery--1.65%
10,000 Avondale Industries Inc.*............................ 278,750
17,000 Cascade Corp......................................... 278,375
6,000 Gehl Co.*............................................ 113,625
6,000 Manitowoc Inc........................................ 201,000
105,000 Titan International Inc.............................. 1,470,000
---------
2,341,750
---------
6
<PAGE>
PaineWebber Small Cap Fund
Number of
Shares Value
------ -----
COMMON STOCKS--(continued)
Hotels--1.83%
182,800 Prime Hospitality Corp.*............................. $2,593,475
---------
Household Products--0.23%
43,000 Ultralife Batteries Incorporated*.................... 330,563
---------
Industrial Parts--2.86%
40,500 Chart Industries Inc................................. 465,750
15,000 International Comfort Products*...................... 165,000
158,000 Powell Industries Inc.*.............................. 2,014,500
45,000 Watsco Inc........................................... 1,400,625
---------
4,045,875
---------
Industrial Services/Supplies--3.39%
25,000 Artesyn Technologies Inc.*........................... 417,187
6,000 Childrens Comprehensive Services*.................... 65,250
43,000 Cornell Corrections Inc.*............................ 661,125
21,700 Correctional Services Corp.*......................... 249,550
95,000 FTI Consulting Inc.*................................. 855,000
149,200 Wackenhut Corp., Class B............................. 2,555,050
---------
4,803,162
---------
Information & Computer Services--3.20%
12,000 Barra Inc.*.......................................... 283,500
30,000 Executive Telecard Ltd.*............................. 90,000
50,000 Factset Research Systems Inc.*....................... 1,837,500
75,000 Lanvision Systems Inc.*.............................. 225,000
80,000 Pomeroy Computer Resources*.......................... 1,970,000
13,000 Transition Systems Inc.*............................. 128,375
---------
4,534,375
---------
Leisure--0.90%
21,000 Harman International Industries Inc.................. 828,188
45,000 Meade Instruments Corp.*............................. 450,000
---------
1,278,188
---------
Life Insurance--1.03%
24,000 Reinsurance Group of America, Inc.................... 1,459,500
---------
Long Distance & Phone Companies--1.19%...........................
41,000 Davel Communications Group*.......................... 989,125
25,000 General Communication Inc.*.......................... 115,625
25,000 Norstan Inc.*........................................ 575,000
---------
1,679,750
---------
Manufacturing--High Technology--0.96%
9,000 Asyst Technologies Inc.*............................. 120,938
138,000 En Pointe Technologies Inc.*......................... 1,242,000
---------
1,362,938
---------
Media--0.09%
29,406 Nielsen Media Research Inc.*......................... 121,302
Medical Products--2.19%
72,000 American Science & Engineering Inc.*................. $ 936,000
48,800 Chronimed Inc.*...................................... 591,700
32,000 Conmed Corp.*........................................ 756,000
25,000 ICU Medical Inc.*.................................... 362,500
1,406 IMS Health Inc.*..................................... 88,344
25,000 Young Innovations Inc.*.............................. 368,750
---------
3,103,294
---------
Medical Providers--7.89%
124,500 Counsel Corp.*....................................... 1,003,781
89,000 Curative Health Services Inc.*....................... 2,725,625
125,000 Hooper Holmes Inc.................................... 2,500,000
25,000 Physicians Specialty Corp.*.......................... 151,563
273,500 Stericycle Inc.*..................................... 4,786,250
---------
11,167,219
---------
Mining & Metals--3.78%
30,000 Atchison Casting Corp.*.............................. 466,875
43,600 Texas Industries Inc................................. 1,624,100
80,000 Valmont Industries Inc............................... 1,280,000
120,000 Wyman Gordon Co.* (1)................................ 1,987,500
---------
5,358,475
---------
Motor Vehicles--1.74%
20,000 A.O. Smith Corp...................................... 826,250
60,000 Keystone Automotive Industries Inc.*................. 1,215,000
7,500 SPX Corp.*........................................... 426,094
---------
2,467,344
---------
Oil Refining--0.13%
37,000 Kaneb Services Inc................................... 185,000
---------
Oil Services--1.67%
90,000 Ceanic Corp.*........................................ 1,777,500
50,000 Pride International Inc.*............................ 593,750
---------
2,371,250
---------
Other Insurance--6.33%
47,200 Capital Re Corp...................................... 1,557,600
8,000 Executive Risk Inc................................... 387,500
11,000 Fidelity National Financial Inc...................... 414,563
5,400 First American Financial Corp........................ 143,100
24,000 Landamerica Financial Group Inc.*.................... 1,317,000
10,000 MFC Bancorp Ltd...................................... 97,500
35,000 Medical Assurance Inc.*.............................. 945,000
9,980 Orion Capital Corp................................... 482,782
16,000 Philadelphia Consolidated Holding Corp.*............. 302,000
35,000 RLI Corp............................................. 1,480,937
39,000 Stewart Information Services Corp.................... 1,828,125
---------
8,956,107
---------
7
<PAGE>
PaineWebber Small Cap Fund
Number of
Shares Value
------ -----
COMMON STOCKS--(concluded)
Publishing--0.11%
10,000 CCC Information Services Group, Inc.*................ $ 150,000
---------
Railroads--0.41%
25,000 Greenbrier Companies Inc............................. 404,688
6,000 Motivepower Industries Inc.*......................... 175,875
---------
580,563
---------
Real Property--6.89%
7,000 Beazer Homes USA Inc.*............................... 171,063
69,500 Cameron Ashley Building Products, Inc.*.............. 1,125,031
10,000 Crossmann Community Inc.*............................ 310,000
40,000 Granite Construction Inc............................. 1,420,000
37,600 Griffon Corp.*....................................... 423,000
22,000 M.D.C. Holdings, Inc................................. 452,375
21,600 Monterey Homes Corp.*................................ 382,050
22,000 Newhall Land & Farming Co............................ 638,000
125,250 Nobility Homes Inc.*................................. 2,442,375
40,000 NVR Inc.*............................................ 1,575,000
34,000 Schottenstein Homes Inc.............................. 809,625
---------
9,748,519
---------
Restaurants--0.42%
75,000 Casa Ole Restaurants Inc.*........................... 375,000
14,000 Foodmaker Inc.*...................................... 220,500
---------
595,500
---------
Semiconductor--0.59%
10,000 Aehr Test Systems*................................... 44,375
10,000 Electro Scientific Industries Inc.*.................. 242,500
80,200 Tower SemiConductor Ltd.*............................ 541,350
---------
828,225
---------
Specialty Retail--8.34%
51,500 Bon Ton Stores Inc.*................................. $ 650,187
154,000 Central Garden & Pet Co.*............................ 3,561,250
36,000 DM Management Co.*................................... 661,500
13,000 Elder Beerman Stores Corp.*.......................... 286,000
15,000 Inacom Corp.* (1).................................... 405,938
14,000 K-Swiss Inc.......................................... 334,250
24,200 Micro Whse Inc.*..................................... 564,919
55,000 Movado Group Inc..................................... 1,320,000
6,000 National Vision Associates Ltd.*..................... 33,375
69,000 Piercing Pagoda Inc.*................................ 2,466,750
100,000 West Coast Entertainment Corp.*...................... 153,125
44,000 Zale Corp.*.......................................... 1,364,000
---------
11,801,294
---------
Tobacco--0.61%
16,100 Standard Commercial Corp.*........................... 161,000
20,000 Universal Corp....................................... 696,250
---------
857,250
---------
Wireless Telecommunications--2.75%...............................
235,000 SmarTalk TeleServices Inc.* (1)...................... 3,892,187
---------
Total Common Stocks (cost--$133,805,009)......................... 140,520,447
---------
Number of
Warrants
- --------------
WARRANTS--0.04%
Agriculture, Food & Beverage--0.04%
350,000 Creative Bakery Inc.*, strike
price of $3.00 expiring
December 31, 2000 (2)................................ 17,500
150,000 Creative Bakery Inc.*, strike
price of $2.50 expiring
December 31, 2000 (2)................................ 37,500
---------
Total Warrants (cost--$336,500).................................. 55,000
Principal
Amount Maturity Interest
(000) Date Rate
----- ---- ----
- --------------
REPURCHASE AGREEMENT--0.45%
$ 635 Repurchase Agreement dated
07/31/98 with State Street Bank
& Trust Company, collateralized
by $603,980 U.S. Treasury Bonds, 7.5%
due 11/15/01 (value-- $647,768);
proceeds $635,265 (cost--$635,000)... 08/03/98 5.000% 635,000
-----------
Total Investments (cost--$134,776,509)--
99.75%.................................... 141,210,447
Other assets in excess of liabilities--
0.25%.................................... 359,786
-----------
Net Assets--100.00%.......................... $141,570,233
============
- -----------------------
* Non-Income producing security
ADR American Depositary Receipt
(1) Security, or a portion thereof, was on loan at July 31,1998.
(2) Illiquid security representing 0.04% of net assets.
See accompanying notes to financial statements
8
<PAGE>
<TABLE>
<CAPTION>
PAINEWEBBER SMALL CAP FUND
STATEMENT OF ASSETS AND LIABILITIES JULY 31, 1998
<S> <C>
Assets
Investments, at value (cost--$134,776,509)................................................... $141,210,447
Investments of cash collateral for securities loaned (cost--$7,429,900)...................... 7,429,900
Cash ........................................................................................ 28,393
Receivable for investments sold.............................................................. 1,704,551
Receivable for shares of beneficial interest sold............................................ 209,984
Dividends and interest receivable............................................................ 32,239
-------------
Total assets................................................................................. 150,615,514
-------------
Liabilities
Cash collateral on securities loaned......................................................... 7,429,900
Payable for investments purchased............................................................ 978,759
Payable for shares of beneficial interest repurchased........................................ 172,141
Payable to affiliates........................................................................ 224,989
Accrued expenses and other liabilities....................................................... 239,492
-------------
Total liabilities 9,045,281
-------------
Net Assets
Beneficial interest shares of $0.001 par value outstanding (unlimited amount authorized)..... 121,358,625
Accumulated net realized gains from investments.............................................. 13,777,670
Net unrealized appreciation of investments................................................... 6,433,938
-------------
Net assets................................................................................... $141,570,233
=============
Class A:
Net assets................................................................................... $ 47,589,302
-------------
Shares outstanding........................................................................... 3,566,208
-------------
Net asset and redemption value per share..................................................... $13.34
=============
Maximum offering price per share (net asset value plus sales charge of
4.50% of offering price)..................................................................... $13.97
=============
Class B:
Net assets................................................................................... $ 54,638,574
-------------
Shares outstanding........................................................................... 4,275,797
-------------
Net asset value and offering price per share................................................. $12.78
=============
Class C:
Net assets................................................................................... $ 32,173,760
-------------
Shares outstanding........................................................................... 2,521,019
-------------
Net asset value and offering price per share................................................. $12.76
=============
Class Y:
Net assets................................................................................... $ 7,168,597
-------------
Shares outstanding........................................................................... 534,281
-------------
Net asset value, offering price and redemption value per share............................... $ 13.42
=============
</TABLE>
See accompanying notes to financial statements
9
<PAGE>
PAINEWEBBER SMALL CAP FUND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the
Year Ended
July 31, 1998
-------------
<S> <C>
Investment income:
Dividends (net of foreign withholding taxes of $11,715)...................................... $ 537,714
Interest..................................................................................... 225,899
----------
763,613
----------
Expenses:
Investment advisory and administration fees.................................................. 1,340,576
Services fees--Class A....................................................................... 113,570
Service and distribution fees--Class B....................................................... 541,791
Service and distribution fees--Class C....................................................... 302,004
Transfer agency and service fees............................................................. 130,517
Custody and accounting....................................................................... 82,218
Amortization of organizational expenses...................................................... 69,270
Federal and state registration fees.......................................................... 48,435
Legal and audit.............................................................................. 43,625
Reports and notices to shareholders.......................................................... 36,151
Trustees' fees and expenses.................................................................. 13,500
Other expenses............................................................................... 4,628
----------
2,726,285
----------
Net investment loss.......................................................................... (1,962,672)
----------
Realized and unrealized gains from investment transactions:
Net realized gains from investment transactions.............................................. 17,477,609
Net change in unrealized appreciation/depreciation of investments............................ (9,803,079)
----------
Net realized and unrealized gains from investment transactions............................... 7,674,530
----------
Net increase in net assets resulting from operations......................................... $5,711,858
==========
</TABLE>
10
See accompanying notes to financial statements
<PAGE>
PAINEWEBBER SMALL CAP FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Years
Ended July 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
From operations:
Net investment loss ............................................................. $(1,962,672) $(1,421,696)
Net realized gains from investment transactions ................................. 17,477,609 11,923,735
Net change in unrealized appreciation/depreciation of investments ............... (9,803,079) 16,401,189
------------ ------------
Net increase in net assets resulting from operations ............................ 5,711,858 26,903,228
------------ ------------
Distributions to shareholders from:
Net realized gains from investment transactions-Class A ......................... (3,468,839) (1,065,273)
Net realized gains from investment transactions-Class B ......................... (4,427,192) (1,348,187)
Net realized gains from investment transactions-Class C ......................... (2,421,561) (663,541)
Net realized gains from investment transactions-Class Y ......................... (224,585) (94,831)
------------ ------------
(10,542,177) (3,171,832)
------------ ------------
From beneficial interest transactions:
Net proceeds from the sale of shares ............................................ 93,251,454 21,265,021
Cost of shares repurchased ...................................................... (52,192,558) (41,414,621)
Proceeds from dividends reinvested .............................................. 10,046,028 3,020,513
------------ ------------
Net increase (decrease) in net assets from
beneficial interest transactions ............................................. 51,104,924 (17,129,087)
------------ ------------
Net increase in net assets ...................................................... 46,274,605 6,602,309
Net Assets:
Beginning of period ............................................................. 95,295,628 88,693,319
------------ ------------
End of period (including undistributed net investment
income of $605 at July 31, 1997) ............................................. $141,570,233 $95,295,628
============ ============
</TABLE>
See accompanying notes to financial statements
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Organization and Significant Accounting Policies
PaineWebber Small Cap Fund (the "Fund") is a diversified series of
PaineWebber Securities Trust ("Trust"), which was organized under
Massachusetts law by a Declaration of Trust dated December 3, 1992 and
registered with the Securities and Exchange Commission under the Investment
Company Act of 1940, as amended, as an open-end management investment company.
The Trust currently offers another series of shares, PaineWebber Strategic
Income Fund, whose financial statements are not included herein. The Fund
incurred costs in connection with its organization and the registration of its
shares. Such costs have been deferred and are being amortized using the
straight-line method over a period of benefit of 60 months, beginning with the
commencement of investment operations of the Fund.
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 dividend reinvested shares
automatically convert to Class A shares approximately six years after initial
issuance. All classes of shares have equal voting privileges, except that
Class A, Class B and Class C shares have exclusive voting rights with respect
to their service and/or distribution plan, if any.
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 generally 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 (other than short
term debt securities described below) are valued at the last quoted bid price
in the OTC Market. The amortized cost method of valuation, which approximates
market value, is used to value short-term debt instruments with sixty days or
less remaining to maturity unless the Trust's board of trustees determines
that this does not represent fair value. Securities and assets for which
market quotations are not readily available (including restricted securities
subject to limitations as to their sale) are valued at fair value as
determined in good faith by or under the direction of the Fund's board of
trustees.
Repurchase Agreements--The Fund's custodian takes possession of the
collateral pledged for investments in repurchase agreements. The underlying
collateral is valued daily on a mark-to-market basis to ensure that the value,
including accrued interest, is at least equal to the repurchase price. In the
event of default of the obligation to repurchase, the Fund has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings. The Fund occasionally
participates in joint repurchase agreement transactions with other funds
managed by Mitchell Hutchins.
Investment Transactions and Investment Income--Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions are calculated using the identified cost method. Interest income
is recorded on an accrual basis and dividend income is recorded on the
ex-dividend date.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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.
Dividends and Distributions--Dividends and distributions to shareholders
are recorded on the ex-dividend date. The amount of dividends and
distributions are determined in accordance with federal income tax regulations
which may differ from generally accepted accounting principles. These
"book/tax" differences are either considered temporary or permanent in nature.
To the extent these differences are permanent in nature, such amounts are
reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification.
CONCENTRATION OF RISK
Small cap companies may be more vulnerable than larger companies to adverse
business or economic developments. Small cap companies may also have limited
product lines, markets or financial resources, and may be dependent on a
relatively small management group. Securities of such companies may be less
liquid and more volatile than securities of larger companies or the market
averages in general and therefore may involve greater risk than investing in
larger companies. In addition, small cap companies may not be well-known to
the investing public, may not have institutional ownership and may have only
cyclical, static or moderate growth prospects.
INVESTMENT ADVISER AND ADMINISTRATOR
The Fund has an Investment Advisory and Administration Contract ("Advisory
Contract") with Mitchell Hutchins 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 payable monthly, at the annual
rate of 1.00% of the Fund's average daily net assets. At July 31, 1998, the
Fund owed Mitchell Hutchins $129,173 in investment advisory and administration
fees.
For the year ended July 31, 1998, the Fund paid $3,000 in brokerage
commissions to PaineWebber for transactions executed on behalf of the Fund.
DISTRIBUTION PLANS
Mitchell Hutchins is the distributor of the Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. Under
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 the annual rate of 0.75% of the
average daily net assets of Class B and Class C shares. At July 31, 1998, the
Fund owed Mitchell Hutchins $90,707 in service and distribution fees.
Mitchell Hutchins also receives the proceeds of the initial sales charges
paid by shareholders upon the purchase of Class A shares and the contingent
deferred sales charges paid by the shareholders upon certain redemptions of
Class A, Class B and Class C shares. Mitchell Hutchins has informed the Fund
that for the year ended July 31, 1998, it received $395,106 in sales charges.
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 or U.S. government
securities in an amount at least equal to the market value of the securities
loaned, plus accrued interest and dividends, determined on a daily basis and
adjusted accordingly. The Fund will retain record ownership of loaned
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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 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 $25,267 as compensation from the Fund for
the year ended July 31, 1998. At July 31, 1998, the Fund owed PaineWebber
$5,109 in security lending fees.
At July 31, 1998, the Fund's custodian held cash having an aggregate value
of $7,429,900 as collateral for portfolio securities loaned having a market
value of $6,756,444 which was invested in the following money market funds:
Number of
Shares Value
---------- ----------
6,889,619 Liquid Assets Portfolio ............... $6,889,619
539,901 Prime Portfolio ....................... 539,901
367 TempCash Portfolio .................... 367
13 TempFund Portfolio .................... 13
----------
$7,429,900
==========
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 utilized for
temporary financing until settlement of sales or purchases 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 a commitment fee, pro rata, based on the
relative asset size of the funds in the Facility. Interest is charged to the
fund at rates based on prevailing market rates in effect at the time of
borrowings. For the year ended July 31, 1998, the Fund did not borrow under
the Facility.
TRANSFER AGENCY RELATED SERVICE FEES
PaineWebber provides certain transfer agency related services to the Fund
pursuant to a delegation of authority from PFPC, Inc., the Fund's transfer
agent, and is compensated for these services by PFPC, Inc., not the Fund. For
the year ended July 31, 1998, PaineWebber received approximately 56% of the
total service fees collected by PFPC, Inc.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at July 31,
1998 was substantially the same as the cost of securities for financial
statement purposes.
At July 31, 1998, the components of net unrealized appreciation of
investments were as follows:
Gross appreciation (investments having an excess of
value over cost) ..................................... $24,350,157
Gross depreciation (investments having an excess of
cost over value) ..................................... (17,916,219)
-----------
Net unrealized appreciation of investments ............. $ 6,433,938
===========
For the year ended July 31, 1998, aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $97,549,238 and
$58,275,760, respectively.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FEDERAL INCOME TAX STATUS
The Fund intends to distribute substantially all of its taxable income and
to comply with the other requirements of the Internal Revenue Code applicable
to regulated investment companies. Accordingly, no provision for federal
income taxes is required. In addition, by distributing during each calendar
year substantially all of its net investment income, capital gains and certain
other amounts, if any, the Fund intends not to be subject to a federal excise
tax.
To reflect reclassifications arising from permanent "book/tax" differences
for the year ended July 31, 1998, the Fund's accumulated net realized gains
were reduced by $1,948,586; accumulated net investment loss was reduced by
$1,962,067 and beneficial interest was reduced by $13,481. Permanent book/tax
differences are primarily attributable to net operating losses.
SHARES OF BENEFICIAL INTEREST
There was 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 Class Y
Year Ended ------------------------ ----------------------- ------------------------ -----------------------
July 31, 1998: Shares Amount Shares Amount Shares Amount Shares Amount
---------- ------------ ---------- ----------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold ............. 1,362,532 $ 19,796,327 1,742,368 $24,487,702 3,044,346 $ 42,744,818 428,236 $ 6,222,607
Shares repurchased ...... (723,529) (10,351,967) (716,153) (9,862,362) (2,161,063) (30,292,135) (116,604) (1,686,094)
Shares converted from
Class B to Class A .... 211,961 3,030,032 (220,238) (3,030,032) -- -- -- --
Dividends reinvested .... 259,054 3,341,792 334,318 4,148,894 188,344 2,335,453 16,980 219,889
---------- ------------ ---------- ----------- ---------- ------------ ---------- -----------
Net increase ............ 1,110,018 $ 15,816,184 1,140,295 $15,744,202 1,071,627 $ 14,788,136 328,612 $ 4,756,402
========== ============ ========== =========== ========== ============ ========== ===========
<CAPTION>
Class A Class B Class C Class Y
Year Ended ------------------------ ----------------------- ------------------------ -----------------------
July 31, 1997: Shares Amount Shares Amount Shares Amount Shares Amount
---------- ------------ ---------- ----------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold ............. 899,879 $ 10,405,245 304,294 $ 3,473,458 640,060 $ 7,143,793 21,510 $ 242,525
Shares repurchased ...... (1,607,499) (18,331,478) (885,194) (9,720,897) (1,115,991) (12,256,753) (98,489) (1,105,493)
Shares converted from
Class B to Class A .... 68,557 783,133 (70,514) (783,133) -- -- -- --
Dividends reinvested .... 92,573 1,029,415 117,090 1,265,749 58,505 631,858 8,407 93,491
---------- ------------ ---------- ----------- ---------- ------------ ---------- -----------
Net decrease ............ (546,490) $ (6,113,685) (534,324) $(5,764,823) (417,426) $ (4,481,102) (68,572) $ (769,477)
========== ============ ========== =========== ========== ============ ========== ===========
</TABLE>
15
<PAGE>
PAINEWEBBER SMALL CAP FUND
FINANCIAL HIGHLIGHTS
Selected data for a beneficial interest outstanding throughout each period is
presented below:
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------------
For the For the
For the Years Ended Period Year
July 31, Ended Ended
---------------------------------------- July 31, January 31,
1998 1997 1996# 1995 1994+ 1994
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period .......................... $ 13.42 $ 10.22 $ 11.30 $ 10.27 $ 10.61 $ 10.00
------- ------- ------- ------- ------- -------
Net investment income (loss) .................................. (0.13) (0.14) 0.00@ 0.05 0.02 0.13
Net realized and unrealized gains (losses) from investments ... 1.22 3.75 0.50@ 1.50 (0.36) 0.62
------- ------- ------- ------- ------- -------
Net increase (decrease) from investment operations ............ 1.09 3.61 0.50 1.55 (0.34) 0.75
------- ------- ------- ------- ------- -------
Dividends from net investment income .......................... -- -- -- -- -- (0.12)
Distributions from net realized gains from investments ........ (1.17) (0.41) (1.58) (0.52) -- (0.02)
------- ------- ------- ------- ------- -------
Total dividends and distributions ............................. (1.17) (0.41) (1.58) (0.52) 0.00 (0.14)
------- ------- ------- ------- ------- -------
Net asset value, end of period ................................ $ 13.34 $ 13.42 $ 10.22 $ 11.30 $ 10.27 $ 10.61
======= ======= ======= ======= ======= =======
Total investment return (1) ................................... 8.45% 36.11% 4.69% 15.80% (3.20)% 7.58%
======= ======= ======= ======= ======= =======
Ratios/Supplemental Data:
Net assets, end of period (000s) .............................. $47,589 $32,968 $30,675 $20,494 $22,848 $25,226
Expenses to average net assets ................................ 1.56% 2.00% 2.11% 1.98% 1.91%* 1.75%
Net investment income (loss) to average net assets ............ (0.99)% (1.16)% 0.02% 0.41% 0.41%* 1.41%
Portfolio turnover ............................................ 45% 54% 84% 19% 20% 98%
</TABLE>
- --------------
* Annualized
+ For the period February 1, 1994 to July 31, 1994.
# Effective April 1, 1996, Mitchell Hutchins took over day-to-day
management of the Funds assets.
@ Calculated using the average shares outstanding for the period.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates, and a
sale at net asset value on the last day of each period reported. The
figures do not include sales charges; results for each class would be
lower if sales charges were included. Total investment return for periods
of less than one year has not been annualized.
16
<PAGE>
PAINEWEBBER SMALL CAP FUND
<TABLE>
<CAPTION>
Class B
---------------------------------------------------------------
For the For the
For the Years Ended Period Year
July 31, Ended Ended
---------------------------------------- July 31, January 31,
1998 1997 1996# 1995 1994+ 1994
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period .......................... $ 13.00 $ 9.98 $ 11.15 $ 10.22 $ 10.60 $ 10.00
------- ------- ------- ------- ------- -------
Net investment income (loss) .................................. (0.22) (0.23) (0.09)@ (0.04) (0.02) 0.06
Net realized and unrealized gains (losses) from investments ... 1.17 3.66 0.50 @ 1.49 (0.36) 0.62
------- ------- ------- ------- ------- -------
Net increase (decrease) from investment operations ............ 0.95 3.43 0.41 1.45 (0.38) 0.68
------- ------- ------- ------- ------- -------
Dividends from net investment income .......................... -- -- -- -- -- (0.06)
Distributions from net realized gains from investments ........ (1.17) (0.41) (1.58) (0.52) -- (0.02)
------- ------- ------- ------- ------- -------
Total dividends and distributions ............................. (1.17) (0.41) (1.58) (0.52) 0.00 (0.08)
------- ------- ------- ------- ------- -------
Net asset value, end of period ................................ $ 12.78 $ 13.00 $ 9.98 $ 11.15 $ 10.22 $ 10.60
======= ======= ======= ======= ======= =======
Total investment return (1) ................................... 7.60% 35.16% 3.90% 14.86% (3.58)% 6.81%
======= ======= ======= ======= ======= =======
Ratios/Supplemental Data:
Net assets, end of period (000s) .............................. $54,639 $40,749 $36,612 $46,142 $52,624 $59,993
Expenses to average net assets ................................ 2.33% 2.75% 2.90% 2.74% 2.69%* 2.50%
Net investment income (loss) to average net assets ............ (1.75)% (1.91)% (0.78)% (0.35)% (0.37)%* 0.67)%
Portfolio turnover ............................................ 45% 54% 84% 19% 20% 98%
<CAPTION>
Class C
---------------------------------------------------------------
For the For the
For the Years Ended Period Year
July 31, Ended Ended
---------------------------------------- July 31, January 31,
1998 1997 1996# 1995 1994+ 1994
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period .......................... $ 12.98 $ 9.97 $ 11.14 $ 10.22 $ 10.59 $ 10.00
------- ------- ------- ------- ------- -------
Net investment income (loss) .................................. (0.21) (0.24) (0.08)@ (0.05) (0.02) 0.06
Net realized and unrealized gains (losses) from investments ... 1.16 3.66 0.49 @ 1.49 (0.35) 0.62
------- ------- ------- ------- ------- -------
Net increase (decrease) from investment operations ............ 0.95 3.42 0.41 1.44 (0.37) 0.68
------- ------- ------- ------- ------- -------
Dividends from net investment income .......................... -- -- -- -- -- (0.07)
Distributions from net realized gains from investments ........ (1.17) (0.41) (1.58) (0.52) -- (0.02)
------- ------- ------- ------- ------- -------
Total dividends and distributions ............................. (1.17) (0.41) (1.58) (0.52) 0.00 (0.09)
------- ------- ------- ------- ------- -------
Net asset value, end of period ................................ $ 12.76 $ 12.98 $ 9.97 $ 11.14 $ 10.22 $ 10.59
======= ======= ======= ======= ======= =======
Total investment return (1) ................................... 7.61% 35.09% 3.90% 14.76% (3.49)% 6.77%
======= ======= ======= ======= ======= =======
Ratios/Supplemental Data:
Net assets, end of period (000s) .............................. $32,174 $18,812 $18,606 $13,263 $16,285 $20,941
Expenses to average net assets ................................ 2.32% 2.77% 2.91% 2.73% 2.69%* 2.50%
Net investment income (loss) to average net assets ............ (1.75)% (1.93)% (0.77)% (0.34)% (0.36)%* 0.64%
Portfolio turnover ............................................ 45% 54% 84% 19% 20% 98%
</TABLE>
17
<PAGE>
PAINEWEBBER SMALL CAP FUND
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each
period is presented below:
<TABLE>
<CAPTION>
Class Y
-------------------------------------
For the Years Ended
July 31, For the
----------------------- Period Ended
1998 1997 July 31, 1996+
--------- --------- ---------
<S> <C> <C> <C>
Net asset value, beginning of period ...................................... $ 13.46 $ 10.21 $ 10.23
--------- --------- ---------
Net investment income (loss) .............................................. (0.07) (0.11) 0.00@
Net realized and unrealized gains (losses) from investments ............... 1.20 3.77 (0.02)@
--------- --------- ---------
Net increase (decrease) from investment operations ........................ 1.13 3.66 (0.02)
--------- --------- ---------
Dividends from net investment income ...................................... -- -- --
Distributions from net realized gains from investments .................... (1.17) (0.41) --
--------- --------- ---------
Total dividends and distributions ......................................... (1.17) (0.41) 0.00
--------- --------- ---------
Net asset value, end of period ............................................ $ 13.42 $ 13.46 $ 10.21
========= ========= =========
Total investment return (1) ............................................... 8.74% 36.65% (0.20)%
========= ========= =========
Ratios/Supplemental Data:
Net assets, end of period (000s) .......................................... $ 7,169 $ 2,768 $ 2,801
Expenses to average net assets ............................................ 1.39% 1.72% 1.72%*
Net investment income (loss) to average net assets ........................ (0.83)% (0.88)% 0.07%*
Portfolio turnover ........................................................ 45% 54% 84%
</TABLE>
- --------------
* Annualized
+ For the period July 26,1996 (commencement of offering shares) to July
31,1996.
@ Calculated using the average shares outstanding for the period.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates, and a
sale at net asset value on the last day of each period reported. Total
investment return for period of less than one year has not been
annualized.
18
<PAGE>
PAINEWEBBER SMALL CAP FUND
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of
PaineWebber Small Cap Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of PaineWebber Small
Cap Fund (the "Fund") at July 31, 1998, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in
the period then ended and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Funds management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at July 31, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
September 23, 1998
19
<PAGE>
PAINEWEBBER SMALL CAP FUND
TAX INFORMATION (unaudited)
We are required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Funds fiscal year end (July 31,
1998), as to the federal tax status of distributions received by shareholders
during such fiscal year. Accordingly, we are advising you that the
distributions for Class A, Class B, Class C and Class Y shares made during the
fiscal year were derived from short-term and long-term capital gains in the
amount of $0.4113 per share and $0.7622 per share, respectively. Additionally,
15.39% of the distributions paid qualifies for the dividend received deduction
available to corporate shareholders.
Dividends received by tax-exempt recipients need not be reported as taxable
income. Some retirement trusts (e.g., corporate Keogh and 403(b)(7) plans) may
need this information for their annual reporting.
Because the Funds fiscal year is not the calendar year, another
notification will be sent in respect of calendar year 1998. The second
notification, which reflects the amount to be used by calendar year taxpayers
on their federal income tax returns, is made in conjunction with Form 1099 DIV
and will be mailed in January 1999. Shareholders are advised to consult their
own tax advisers with respect to the tax consequences of their investment in
the Fund.
20
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<PAGE>
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<PAGE>
- ------------------------------------------------------------------------------
TRUSTEES
E. Garrett Bewkes, Jr. Mary C. Farrell
Chairman
Meyer Feldberg
Margo N. Alexander
George W. Gowen
Richard Q. Armstrong
Frederic V. Malek
Richard R. Burt
Carl W. Schafer
PRINCIPAL OFFICERS
Margo N. Alexander Paul H. Schubert
President Vice President and Treasurer
Victoria E. Schonfeld Mark A. Tincher
Vice President Vice President
Dianne E. O'Donnell Donald R. Jones
Vice President and Secretary Vice President
INVESTMENT ADVISER,
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 conjunction with the offering of shares of
the Fund unless accompanied or preceded by an effective prospectus.
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
corresponding 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
(Copyright) 1998 PaineWebber Incorporated
Member SIPC
PaineWebber
SMALL
CAP
FUND
JULY 31, 1998
ANNUAL REPORT
