<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND ANNUAL REPORT
PERFORMANCE AT A GLANCE
- --------------------------------------------------------------------------------
Comparison of the change of a $10,000 investment in PaineWebber Strategic Income
Fund, the Lehman Brothers Aggregate Bond Index, the Merrill Lynch High Yield
Master Index, and the Salomon Brothers World Government Bond Index for the
period 2/28/94 to 11/30/97.
<TABLE>
<CAPTION>
Lehman Salomon Merrill Lynch
Class A Class B Class C Aggregate Bd World Bond HY Master
------- ------- ------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
2/94 9,600.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00
5/94 9,153.16 9,508.96 9,514.07 9,674.22 9,909.00 9,678.00
8/94 9,005.44 9,337.35 9,348.43 9,856.79 10,097.00 9,849.00
11/94 8,855.68 9,164.97 9,181.09 9,681.51 10,191.00 9,772.00
2/95 9,191.07 9,505.23 9,527.40 10,177.60 10,701.00 10,163.00
5/95 9,604.15 9,903.62 9,943.91 10,784.90 11,871.00 10,875.00
8/95 9,865.41 10,154.50 10,190.70 10,970.60 11,558.00 11,160.00
11/95 9,891.13 10,172.90 10,215.40 11,389.50 12,039.00 11,469.00
2/96 10,243.50 10,510.40 10,570.40 11,423.90 11,953.00 11,855.00
5/96 10,460.40 10,713.30 10,768.70 11,257.80 11,892.00 11,913.00
8/96 10,830.90 11,072.00 11,136.10 11,421.00 12,263.00 12,191.00
11/96 11,436.80 11,669.90 11,757.30 12,080.90 12,708.00 12,843.00
2/97 11,735.00 11,950.60 12,048.10 12,035.10 12,177.00 13,249.00
5/97 11,860.20 12,055.80 12,148.90 12,194.10 12,304.00 13,493.00
8/97 12,252.40 12,430.90 12,535.40 12,563.50 12,346.00 13,996.00
11/97 12,586.30 12,745.70 12,861.40 12,993.30 12,673.00 14,465.00
</TABLE>
Past performance is not predictive of future performance.
The performance of the classes vary based on the difference in sales charges and
fees paid by shareholders in different classes.
The graph depicts the performance of PaineWebber Strategic Income Fund versus
the Lehman Brothers Aggregate Bond Index, the Merrill Lynch High Yield Master
Index, and the Salomon Brothers World Government Bond Index for the period
2/28/94 to 11/30/97. It is important to note the PaineWebber Strategic Income
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.
AVERAGE ANNUAL RETURN
Commencement of
Twelve Months Operations
Ended 11/30/97 Through 11/30/97
Class A* 10.0% 7.2%
% Return Without Deducting
Maximum Sales Change Class B** 9.2% 6.4%
Class C*** 9.4% 6.6%
Class A* 5.6% 6.0%
% Return After Deducting
Maximum Sales Charge Class B** 4.2% 5.9%
Class C*** 8.6% 6.6%
* Maximum sales charge for Class A shares is 4.0% of the public offering
price. Class A shares bear ongoing 12b-1 service fees.
** Maximum contingent deferred sales charge for Class B shares is 5.0%
and is reduced to 0% after 6 years. Class B shares bear ongoing 12b-1
distribution and service fees.
*** Maximum contingent deferred sales charge for Class C shares is 0.75%
and is reduced to 0% after 1 year. Class C shares bear ongoing 12b-1
distribution and service fees.
+ Commencement of operations was February 7, 1994 for Class A, Class B and
Class C shares.
The investment return and principal value of an investment in the Fund will
fluctuate, so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
1
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND ANNUAL REPORT
January 23, 1998
Dear Shareholder,
We are pleased to present you with the annual report for the
PaineWebber Strategic Income Fund for the year ended November 30, 1997.
GENERAL MARKET OVERVIEW
- --------------------------------------------------------------------------------
1997 was a particularly good year for bond investors. Defying the
experts who worried about the economy's high utilization rates and its possible
effect on inflation, economic growth rose at a robust 3.5% rate, unemployment
fell to 4.7%, wages rose only slightly and the annual inflation rate closed out
1997 at 1.7%. Fixed income investors shrugged off inflation warnings and bought
bonds; the Lehman Brothers Aggregate Bond Index returned 7.6% in the year ended
November 30, 1997. The benchmark 30-year Treasury bonds yield fell from over
6.4% to just over 6.0% during the same timeframe.
While stable inflation created market conditions ripe for a bond rally,
several technical factors also helped support prices. U.S. stock investors
experienced the first stall in a two and a half year bull run that started in
1995--money began trickling back into bond funds last year at about three times
the rate of the year before. And, overshadowing all these events, the economic
crisis in Asia prompted many individuals to buy Treasury bonds.
Most of the bond market advances were in longer-term bonds. Due to
expectations for Asia-related interest rate volatility, short-term rates did not
fall to the same degree as long-term rates (the yield curve flattened, in market
parlance).
PORTFOLIO REVIEW
- --------------------------------------------------------------------------------
The PaineWebber Strategic Income Funds total return (the net asset
value change with dividends reinvested) for the year ended November 30, 1997
without deducting sales charges, was 10.0%, 9.2% and 9.4% for Class A, B and C
shares, respectively. Comparable funds, measured by the Lipper Multi-Sector
Income Funds Average, were up 8.1% over the same period. During this reporting
period, shareholders who purchased or redeemed Fund shares may have received a
lower total return. For example, after deducting the maximum applicable sales
charges, the Funds total return was 5.6%, 4.2% and 8.6% for Class A, B and C
shares, respectively.
The PaineWebber Strategic Income Fund invests in three main bond
markets, with the flexibility to shift assets among sectors as market conditions
change. On November 30, 1997, the Fund had 37% of net assets in U.S.
high-yield/high-risk securities, 47% in U.S. government and investment grade
corporate bonds, and 11% in foreign and emerging market debt securities. This
allocation reflected our expectation for a late-year rally in U.S. interest
rates.
2
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND ANNUAL REPORT
High Yield Sector
Our high-yield, high-risk holdings hovered at about 50% of portfolio
assets for much of the year, but we sold some of these bonds in the fourth
quarter, to shift assets into U.S. government bonds. This allowed us to avoid
seasonal dips in high-yield bond prices that usually accompany heavy end-of-year
issuance calendars, and to take advantage of an expected Treasury rally. The
strategy paid off as, at this writing, the long-term Treasury bond is back near
historical lows, under 6%.
While high-yield, high-risk bonds tend to track both the bond and stock
markets, the Treasury markets movements dominated returns in 1997. In this
positive economic environment, our investment strategy was dominated by a search
for fundamental value within companies and industries on a global basis. We
measure value based on a company's interest coverage and debt-to-cash flow
ratios. Then, we analyze the security's potential for total return, yield or
spread to a comparable Treasury security, depending on the individual issue.
Our emphasis on communications companies, especially European telecom
providers that should benefit from industry deregulation in 1998, helped boost
the Funds returns in 1997. We believe companies like the U.K.'s Colt Telecom
Group PLC (0.9% of net assets on 11/30/97) are poised to take advantage of new
freedom to expand their operations into other European countries.
Another company we like is Nextel Communications Incorporated (2.1% of
net assets on 11/30/97), a cellular phone manufacturer. Nextel has a unique
product and nationwide coverage, but we feel the price is still very low
compared to that of similar competitors--we expect it to catch up in coming
months.
We are expecting short-term volatility in the bond market as investors
assimilate daily reports from Asia, and as we begin to see how much the U.S.
economy is affected by the crisis across the Pacific. Long-term, however, we
believe the U.S. economy will not be dramatically affected and high-yield bonds
should continue to produce respectable returns. We positioned the portfolio
aggressively to take advantage of a rally by selling some BB-rated credits to
buy B-rated bonds. These lower-quality securities typically profit the most from
high-yield bond market rallies.
U.S. Government Sector
Our emphasis on mortgage-backed securities (34% of net assets on
11/30/97) last year paid off as investors flocked to mortgages to benefit from
3
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND ANNUAL REPORT
their income advantage compared to Treasury securities. Towards the end of the
year, as interest rates began to fall precipitously, we shifted some assets out
of fixed-rate mortgages into low-coupon adjustable-rate and commercial
mortgage-backed securities. These bonds tend to perform well when interest rates
are falling because they don't suffer as much from prepayment risk as generic
fixed-rate securities.
While the economy remains on a solid domestic footing, the export sector's
drag on economic growth, coupled with the strong dollar's impact on imports (and
the consequent dampening influence on inflation), may point to lower rates, at
least in the early part of 1998. We expect to continue to avoid U.S. Treasury
securities, because higher-yielding agency and mortgage bonds should continue to
add value to the portfolio's performance. As we expect some volatility and
higher prepayment risk, however, we will be very selective about the individual
bonds purchased for the portfolio.
GLOBAL SECTOR
Global bonds can be divided into two sectors--developed market bonds and
sovereign emerging market debt--each of which has different risk/return
characteristics. For most of the year, we maintained roughly one-fourth of the
Fund's assets in global bonds and varied the allocation between the two groups
substantially.
Returns of global bonds denominated in most foreign currencies suffered from
the stronger dollar. We took little currency exposure during the year.
We did invest on an unhedged basis in U.K. Gilts (2.5% of net assets on
11/30/97); however, the British pound did not depreciate against the dollar over
the year. Despite the strong U.K. economy, Gilts performed well over the year,
as investors perceived the economic policies of the newly elected Labour party
favorably. These policies included steps to make the Bank of England more
independent from the government.
We cut the Fund's sovereign emerging market debt exposure during October. We
switched Brazilian Brady bonds into Mexican Brady bonds (Brady bonds are
sovereign foreign debt that is backed by a U.S. repayment guarantee), which have
outperformed most other emerging market debt since October's Asian crisis began.
We also have a position in Polish Brady bonds, which have remained relatively
stable as other emerging market bonds sold off.
4
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND ANNUAL REPORT
OUTLOOK
- --------------------------------------------------------------------------------
In general, we are still bullish on bonds, although the markets may be
volatile in the beginning of 1998. Foreign interest in U.S. bonds remains
strong, domestic buying should pick up if the stock market turns in a few more
lackluster quarters, and the supply of government bonds should continue to
contract as the U.S. budget deficit dwindles. Nonetheless, years of borrowing
have left the U.S. with over $5 trillion in debt. How the government spends its
newfound surpluses may be key to the bond market's health going into the new
millennium.
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.
Sincerely,
/s/ MARGO N. ALEXANDER /s/ DENNIS L. MCCAULEY
- ---------------------- ----------------------
MARGO N. 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 Sector U.S. Government and Investment Grade Sector
PaineWebber Strategic Income Fund PaineWebber Strategic Income Fund
/s/ STUART WAUGH /s/ CRAIG M. VARRELMAN
- ---------------- ----------------------
STUART WAUGH CRAIG M. VARRELMAN
Sector Manager Portfolio Manager
Foreign and Emerging Market Sector U.S. Government and Investment Grade Sector
PaineWebber Strategic Income Fund PaineWebber Strategic Income Fund
This letter is intended to help shareowners understand how the Fund performed
during the past year, 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.
5
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
PERFORMANCE RESULTS (unaudited)
<TABLE>
<CAPTION>
Total Return(1)
Net Asset Value ------------------------------------
--------------------------------- 12 Months Six Months
11/30/97 05/31/97 11/30/96 Ended 11/30/97 Ended 11/30/97
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Class A Shares $9.60 $9.37 $9.37 10.04% 6.11%
- -----------------------------------------------------------------------------------------------
Class B Shares 9.59 9.36 9.36 9.20 5.71
- -----------------------------------------------------------------------------------------------
Class C Shares 9.59 9.36 9.37 9.37 5.86
- -----------------------------------------------------------------------------------------------
</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
- -----------------------------------------------------------------------------------------
01/01/97-11/30/97 9.34 9.60 -- 0.6191 9.72
- -----------------------------------------------------------------------------------------
Totals: $0.0000 $2.7727
- -----------------------------------------------------------------------------------------
Cumulative Total Return as of 11/30/97: 30.24%
- -----------------------------------------------------------------------------------------
</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
- ----------------------------------------------------------------------------------------
01/01/97-11/30/97 9.33 9.59 -- 0.5520 8.95
- ----------------------------------------------------------------------------------------
Totals: $0.0000 $2.5222
- ----------------------------------------------------------------------------------------
Cumulative Total Return as of 11/30/97: 26.62%
- ----------------------------------------------------------------------------------------
</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
- ----------------------------------------------------------------------------------------
01/01/96-11/30/97 9.33 9.59 -- 0.5752 9.22
- ----------------------------------------------------------------------------------------
Totals: $0.0000 $2.6061
- ----------------------------------------------------------------------------------------
Cumulative Total Return as of 11/30/97: 27.77%
- ----------------------------------------------------------------------------------------
</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.
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. No Class Y
shares have been issued to date.
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.
6
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1997
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- --------- -------------------- -------- ----------
<S> <C> <C> <C>
U.S. Government and Investment Grade Obligations--47.39%
U. S. Government Obligations--13.31%
$4,000 United States Treasury Bonds (1) ................................ 08/15/27 6.375% $ 4,151,252
3,000 United States Treasury Notes (1) ................................ 10/31/02 5.750 2,985,000
4,190 United States Treasury Notes .................................... 08/15/07 6.125 4,265,944
-----------
Total U. S. Government Obligations (cost--$11,389,635) ......................... 11,402,196
-----------
Government National Mortgage Association Certificates--7.06%
5,963 GNMA (cost--$6,070,328) ......................................... 01/15/27 to 10/15/27 7.500 6,043,606
-----------
Federal National Mortgage Association Certificates--19.07%
11,127 FNMA ............................................................ 03/01/26 to 12/01/26 7.000 11,144,829
5,097 FNMA ............................................................ 01/02/26 to 12/01/26 7.500 5,196,893
-----------
Total Federal National Mortgage Association Certificates (cost--$15,761,666) ... 16,341,722
-----------
Collateralized Mortgage Obligation--7.95%
6,810 First Union Lehman Brothers Mortgage Trust (cost--$6,843,859) ... 11/18/29 6.650 6,814,256
-----------
Total U.S. Government and Investment Grade Obligations (cost--$40,065,488) ..... 40,601,780
-----------
Global Debt Securities--11.03%
Italy--2.19%
3,100,000* Republic of Italy ............................................... 02/01/99 9.500 1,876,085
-----------
Mexico--1.43%
1,342 United Mexican States, DISC(2) .................................. 12/31/19 6.693+++ 1,222,898
-----------
New Zealand--3.01%
3,750* Government of New Zealand ....................................... 03/15/02 10.000 2,582,352
-----------
Poland--1.94%
1,960 Republic of Poland, PDI ......................................... 10/27/14 4.000(b) 1,661,100
-----------
United Kingdom--2.46%
1,080* United Kingdom Gilt ............................................. 07/14/00 to 12/07/15 8.000 to 13.000 2,106,555
-----------
Total Global Debt Securities (cost--$9,283,432) ................................ 9,448,990
-----------
High Yield Securities--36.57%
Corporate Bonds--34.18%
Airlines--0.66%
500 Airplane Pass Through Trust ..................................... 03/15/19 10.875 562,500
-----------
Cable--2.40%
775 Telewest PLC .................................................... 10/01/06 9.625 802,125
675 Tevecap S.A. de C.V ............................................. 11/26/04 12.625 607,500
1,000 UIH Australia Pacific Incorporated .............................. 05/15/06 14.000+ 650,000
-----------
2,059,625
-----------
</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 (continued)
Communications--6.71%
$1,000# Colt Telecom Group PLC .......................................... 12/15/06 12.000%+ $760,000
500 Globalstar L.P. ................................................. 02/15/04 11.375 503,750
625 GST Equipment Funding Incorporated .............................. 05/01/07 13.250 718,750
250 ITC Deltacom Incorporated ....................................... 06/01/07 11.000 268,125
2,000 Nextel Communications Incorporated .............................. 08/15/04 9.750+ 1,725,000
375# Verio Incorporated** ............................................ 06/15/04 13.500 442,500
1,750 Viatel Incorporated ............................................. 01/15/05 15.000+ 1,330,000
-----------
5,748,125
-----------
Consumer Manufacturing--2.48%
900 Apparel Ventures Incorporated ................................... 12/31/00 12.250 873,000
653 Chattem Incorporated ............................................ 06/15/04 12.750 734,625
500 EKCO Group Incorporated ......................................... 04/01/06 9.250 517,500
-----------
2,125,125
-----------
Energy--0.59%
625 Transamerican Energy Corporation** .............................. 06/15/02 13.000+ 507,812
-----------
Entertainment--1.33%
625 Discovery Zone Incorporated** ................................... 08/01/02 13.500 650,000
487 United Artists Theatre Circuit .................................. 07/01/15 9.300 487,064
-----------
1,137,064
-----------
Finance--0.57%
500 Olympic Financial Limited ....................................... 03/15/07 11.500 490,000
-----------
General Industrial--3.55%
1,000 Jordan Telecommunication Products** ............................. 08/01/07 9.875 1,015,000
1,000 Poindexter J.B. Incorporated .................................... 05/15/04 12.500 1,007,500
500 Polysindo International Finance Company B.V ..................... 06/15/06 11.375 501,250
500 W.R. Carpenter North America Incorporated** ..................... 06/15/07 10.625 517,500
-----------
3,041,250
-----------
Media--3.59%
1,000 Grupo Televisa S.A. de C.V ...................................... 05/15/08 13.250+ 745,000
500 Source Media Incorporated** ..................................... 11/01/04 12.000 490,000
750 Sun Media Corporation ........................................... 05/15/07 9.500 798,750
1,000 T.V. Azteca S.A. de C. V.** ..................................... 02/15/07 10.500 1,040,000
-----------
3,073,750
-----------
Metals & Mining--0.60%
500 WCI Steel Incorporated .......................................... 12/01/04 10.000 517,500
-----------
Packaging--3.13%
750 FSW International Finance Company B.V. .......................... 11/01/06 12.500 675,000
750 Indah Kiat International Finance Company B.V .................... 06/15/06 12.500 781,875
750 Tjiwi Kimia Finance Mauritius Limited** ......................... 08/01/04 10.000 682,500
500 Vicap, S.A. de C.V.** ........................................... 05/15/07 11.375 542,500
-----------
2,681,875
-----------
</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)
Corporate Bonds (concluded)
Real Estate and Buildings--0.89%
$750 US Home Corporation ............................................. 08/15/07 8.880% $761,250
-----------
Retail--2.11%
750 Chief Auto Parts Incorporated ................................... 05/15/05 10.500 735,000
1,000 CSK Auto Incorporated ........................................... 11/01/06 11.000 1,070,000
-----------
1,805,000
-----------
Technology--2.41%
2,000 Electronic Retailing Systems International ...................... 02/01/04 13.250+ 1,380,000
1,750 InterAct Systems Incorporated ................................... 08/01/03 14.000+ 682,500
-----------
2,062,500
-----------
Transportation Non-Air--2.39%
750 Atlantic Express Transportation Corporation** ................... 02/01/04 10.750 787,500
750 Navigator Gas Transport PLC** ................................... 06/30/07 10.500 795,000
750 TFM, S.A. de C.V ................................................ 06/15/09 11.750+ 466,875
-----------
2,049,375
-----------
Utilities--0.77%
624 Panda Funding Corporation ....................................... 08/20/12 11.625 664,264
-----------
Total Corporate Bonds (cost--$28,686,084) ...................................... 29,287,015
-----------
Convertible Bonds--0.12%
Communications--0.12%
110 GST Telecommunications Incorporated (cost--$72,113) ............. 12/15/05 13.875+ 99,000
-----------
</TABLE>
<TABLE>
<CAPTION>
Number of
Shares
---------
<S> <C>
Common Stock(a)--1.52%
Communications--0.43%
1,549 Nextel Communications Incorporated ................................................................. 39,112
2,625 PageMart Nationwide Incorporated ................................................................... 26,250
48,133 Viatel Incorporated ................................................................................ 300,832
-----------
366,194
-----------
Gaming--0.86%
58,152 Casino America Incorporated ........................................................................ 167,187
102,958 Colorado Gaming & Entertainment Company ............................................................ 566,269
-----------
733,456
-----------
Media--0.23%
2,000 Affiliated Newspaper Investments ................................................................... 200,000
-----------
Total Common Stock (cost--$1,048,545) ............................................................................. 1,299,650
-----------
</TABLE>
9
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
Number of
Warrants Value
- ----------- ----------
<S> <C>
High Yield Securities (concluded)
Warrants(a)--0.75%
Communications--0.21%
1,250 RSL Communications Limited ......................................................................... $118,750
500 Globalstar Telecommunications ...................................................................... 60,000
-----------
178,750
-----------
Consumer Manufacturing--0.36%
1,000 AVI Holdings Incorporated .......................................................................... 5,000
1,280 Chattem Incorporated ............................................................................... 53,760
2,000 IFA Capital Incorporated ........................................................................... 250,000
-----------
308,760
-----------
Finance--0.01%
500 Olympic Financial Limited .......................................................................... 10,000
-----------
Gaming--0.02%
10,294 Casino America Incorporated ........................................................................ 18,529
-----------
Technology--0.15%
2,000 Electronic Retailing Systems International ......................................................... 120,000
1,750 InterAct Systems Incorporated ...................................................................... 4,375
-----------
124,375
-----------
Total Warrants (cost--$106,695) ................................................................................... 640,414
-----------
Total High Yield Securities (cost--$29,913,437) ................................................................... 31,326,079
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Date Rate Value
- --------- -------------------- -------- ----------
<S> <C> <C> <C>
Repurchase Agreement--0.89%
$765 Repurchase Agreement dated 11/28/97 with State Street Bank
and Trust Company, collateralized by $571,234 U.S. Treasury
Bonds, 9.250% due 02/15/16 (value--$781,162);
proceeds: $765,319 (cost--$765,000)......................... 12/01/97 5.000% 765,000
-----------
</TABLE>
<TABLE>
<CAPTION>
Number of
Shares
---------
<S> <C>
Money Market Fund--0.01%
9 TempCash Portfolio (cost--$9,015) .................................................................. 9,015
-----------
Investments of Cash Collateral for Securities Loaned--8.61%
Money Market Funds--8.61%
3,743 Liquid Assets Portfolio ............................................................................ 3,742,657
3,641 TempCash Portfolio ................................................................................. 3,632,130
1 TempFund Portfolio ................................................................................. 1,463
-----------
Total Investments of Cash Collateral for Securities Loaned (cost--$7,376,250) ..................................... 7,376,250
-----------
Total Investments (cost--$87,412,622)--104.50% .................................................................... 89,527,114
Liabilities in excess of other assets--(4.50)% .................................................................... (3,851,178)
-----------
Net Assets--100.00% ............................................................................................... $85,675,936
===========
</TABLE>
Note: The Global debt section of the portfolio of investments is listed by the
issuers country of origin.
* Stated in local currency
** Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
# Security represents a unit which is composed of the stated bond with
attached warrants or common stock.
+ Denotes a step-up bond or a zero coupon bond that converts to the noted
fixed rated at a designated future date.
+++ Variable rate security, interest rate noted is current rate at November
30, 1997.
(a) Non-income producing
(b) Reflects rate at November 30, 1997, on step coupon rate instruments
(1) Security was on loan at November 30, 1997
(2) With an additional 2,067,000 recoverable rights attached maturing on
06/30/03 with no market value.
DISC Discount Bonds
PDI Past Due Interest
10
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Unrealized
Contract to Maturity Appreciation
Deliver In Exchange for Date (Depreciation)
------------- --------------- -------------------- --------------
<S> <C> <C> <C> <C>
British Pounds 2,325,000 US$ 3,760,780 01/05/98 to 01/12/98 $(158,878)
Czech Korunas 44,561,088 US$ 1,276,834 04/29/98 42,500
Italian Lira 2,995,000,000 US$ 1,691,412 02/27/98 (41,595)
New Zealand Dollars 4,045,000 US$ 2,560,000 12/19/97 66,122
U.S. Dollars 3,241,808 GBP 2,010,000 01/05/98 146,965
U.S. Dollars 1,287,013 CZK 44,561,088 04/29/98 (52,679)
---------
$2,435
=========
</TABLE>
- ---------------
Currency Type Abbreviation:
GBP--British Pounds
CZK--Czech Korunas
See accompanying notes to financial statements
11
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES NOVEMBER 30, 1997
<TABLE>
<CAPTION>
Assets
<S> <C>
Investments in securities, at value (cost--$87,412,622) ........................ $89,527,114
Cash ........................................................................... 4,888
Cash denominated in foreign currencies (cost--$362,005) ........................ 361,988
Receivable for investments sold ................................................ 2,504,191
Interest receivable ............................................................ 1,098,175
Receivable for shares of beneficial interest sold .............................. 561,866
Unrealized appreciation on forward foreign currency contracts .................. 255,587
Deferred organizational costs .................................................. 70,874
Other assets ................................................................... 76,649
-----------
Total assets ................................................................... 94,461,332
-----------
Liabilities
Payable for cash collateral on securities loaned ............................... 7,376,250
Payable for shares of beneficial interest repurchased .......................... 518,184
Payable for investments purchased .............................................. 357,537
Unrealized depreciation on forward currency contracts .......................... 253,152
Payable to affiliates .......................................................... 103,586
Accrued expenses and other liabilities ......................................... 176,687
-----------
Total liabilities .............................................................. 8,785,396
-----------
Net Assets
Beneficial interest--$0.001 par value (unlimited amount authorized) ............ 90,946,550
Undistributed net investment income ............................................ 476,119
Accumulated net realized losses from investment and futures transactions ....... (7,865,256)
Net unrealized appreciation of investments, other assets, liabilities
and forward contracts denominated in foreign currencies ........................ 2,118,523
-----------
Net assets ..................................................................... $85,675,936
===========
Class A:
Net assets ..................................................................... $20,908,507
-----------
Shares outstanding ............................................................. 2,178,846
-----------
Net asset and redemption value per share ....................................... $9.60
=====
Maximum offering price per share (net asset value plus sales charge of
4.00% of offering price) ....................................................... $10.00
======
Class B:
Net assets ..................................................................... $41,650,499
-----------
Shares outstanding ............................................................. 4,344,975
-----------
Net asset value and offering price per share ................................... $9.59
=====
Class C:
Net assets ..................................................................... $23,116,930
-----------
Shares outstanding ............................................................. 2,410,289
-----------
Net asset value and offering price per share ................................... $9.59
=====
</TABLE>
See accompanying notes to financial statements
12
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year
Ended
November 30, 1997
-----------------
<S> <C>
Investment income:
Interest (net of foreign withholding taxes) .................................... $6,242,969
----------
Expenses:
Investment advisory and administration ......................................... 520,540
Service fees--Class A .......................................................... 36,175
Service and distribution fees--Class B ......................................... 366,208
Service and distribution fees--Class C ......................................... 137,360
Legal and audit ................................................................ 108,002
State registration fees ........................................................ 93,034
Reports and notices to shareholders ............................................ 86,780
Transfer agency and service fees ............................................... 61,513
Amortization of organizational expenses ........................................ 60,000
Custody and accounting ......................................................... 32,947
Trustees' fees .................................................................. 10,500
Other expenses ................................................................. 25,584
----------
1,538,643
Less: Fee waivers from adviser ................................................. (13,206)
----------
Net expenses ................................................................... 1,525,437
----------
Net investment income .......................................................... 4,717,532
----------
Realized and unrealized gains (losses) from investment activities:
Net realized gains (losses) from:
Investment transactions ...................................................... 1,441,648
Foreign currency transactions ................................................ 403,175
Futures contracts ............................................................ (119,664)
Net change in unrealized appreciation/depreciation of:
Investments .................................................................. (281,272)
Other assets, liabilities and forward contracts denominated in
foreign currencies ........................................................... 19,954
----------
Net realized and unrealized gain from investment activities .................... 1,463,841
----------
Net increase in net assets resulting from operations ........................... $6,181,373
==========
</TABLE>
See accompanying notes to financial statements
13
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Period
For the Year Ended February 1, 1996
November 30, through
1997 November 30, 1996
------------------ -----------------
<S> <C> <C>
From operations:
Net investment income ...................................................................... $4,717,532 $3,862,593
Net realized gains (losses) from investment transactions ................................... 1,441,648 (480,825)
Net realized gains from foreign currency transactions ...................................... 403,175 212,221
Net realized losses from futures contracts ................................................. (119,664) -
Net change in unrealized appreciation/depreciation of investments .......................... (281,272) 3,207,717
Net change in unrealized appreciation/depreciation of other assets, liabilities
and forward contracts denominated in foreign currencies ............................... 19,954 (261,752)
------------ ------------
Net increase in net assets resulting from operations ....................................... 6,181,373 6,539,954
------------ ------------
Dividends to shareholders from:
Net investment income--Class A ............................................................. (1,027,714) (610,827)
Net investment income--Class B ............................................................. (2,331,023) (2,231,468)
Net investment income--Class C ............................................................. (1,211,577) (1,065,791)
------------ ------------
Total dividends to shareholders ............................................................ (4,570,314) (3,908,086)
------------ ------------
From beneficial interest transactions:
Net proceeds from the sale of shares ....................................................... 37,659,276 6,348,425
Cost of shares repurchased ................................................................. (20,186,322) (16,393,834)
Proceeds from dividends reinvested ......................................................... 2,297,795 1,981,768
------------ ------------
Net increase (decrease) in net assets from beneficial interest transactions ................ 19,770,749 (8,063,641)
------------ ------------
Net increase (decrease) in net assets ...................................................... 21,381,808 (5,431,773)
Net assets:
Beginning of year .......................................................................... 64,294,128 69,725,901
------------ ------------
End of year (including undistributed net investment income of $476,119 at November 30, 1997) $85,675,936 $64,294,128
============ ============
</TABLE>
See accompanying notes to financial statements
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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
(no Class Y shares were outstanding during the period). 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 ("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.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Repurchase Agreements--The Fund's custodian takes possession of the
collateral pledged for investments in repurchase agreements. The underlying
collateral is valued daily on a mark-to-market basis to ensure that the value,
including accrued interest, is at least equal to the repurchase price. In the
event of default of the obligation to repurchase, the Fund has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings. The Fund occasionally
participates in joint repurchase agreement transactions with other funds managed
by Mitchell Hutchins.
Investment Transactions and Investment Income--Investment transactions
are recorded on the trade date. Realized gains and losses from investment
transactions and foreign exchange transactions are calculated using the
identified cost method. Interest income is recorded on an accrual basis.
Discounts are accreted and premiums are amortized as adjustments to interest
income and the identified cost of investments.
Income, expenses (excluding class-specific expenses) and
realized/unrealized gains/losses are allocated proportionately to each class of
shares based upon the relative net asset value of outstanding shares (or the
value of dividend-eligible shares, as appropriate) of each class at the
beginning of the day (after adjusting for current capital share activity of the
respective classes). Class-specific expenses are charged directly to the
applicable class of shares.
Foreign Currency Translation--The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(1) market value of investment securities, other assets and
liabilities--at the exchange rates prevailing at the end of the period.
(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.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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.
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 used financial futures contracts 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. 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.
BANK LINE OF CREDIT
The Fund may participate with other funds managed by Mitchell Hutchins
in a $200 million secured credit facility ("Facility") to be used for repayment
by the Fund of loans outstanding under this agreement, 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 the year ended November 30, 1997, the Fund did not borrow under
the Facility.
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
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
accrued daily and paid monthly, at the annual rate of 0.75% of the Fund's
average daily net assets. At November 30, 1997, the Fund owed Mitchell Hutchins
$51,891 in investment advisory and administration fees. For the year ended
November 30, 1997, Mitchell Hutchins voluntarily waived $13,206 in investment
advisory and administration fees from the Fund.
DISTRIBUTION PLANS
Mitchell Hutchins is the distributor of the Fund's shares and has
appointed PaineWebber as the exclusive dealer for the sale of those shares.
Under separate plans of distribution pertaining to Class A, Class B and Class C
shares, the Fund pays Mitchell Hutchins monthly service fees at an annual rate
of 0.25% of the average daily net assets of Class A, Class B and Class C shares
and monthly distribution fees at an annual rate of 0.75% and 0.50% of the
average daily net assets of Class B shares and Class C shares, respectively. At
November 30, 1997, the Fund owed Mitchell Hutchins $51,695 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 the year ended November 30, 1997, it earned $260,296
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, determined on a daily basis and
adjusted accordingly. The Fund will retain record ownership of loaned securities
to exercise certain beneficial rights, however, the Fund may bear the risk of
delay in recovery of, or even loss of rights in, the securities loaned should
the borrower fail financially. The Fund receives compensation, which is included
in interest income, for lending its securities from interest earned on the cash
or U.S. government securities held as collateral, net of fee rebates paid to the
borrower plus reasonable administrative and custody fees. The Fund's lending
agent is PaineWebber, who received $4,254 from the Fund for the year ended
November 30, 1997.
As of November 30, 1997, the Fund's custodian held cash and/or cash
equivalents having an aggregate value of $7,376,250 as collateral for portfolio
securities loaned having a market value of $7,136,252.
TRANSFER AGENCY SERVICE FEES
Prior to August 1, 1997 the Fund paid PaineWebber an annual fee of
$4.00 per active PaineWebber shareholder account for certain services not
provided by the Fund's transfer agent through July 31, 1997. For these services
for the period ended July 31, 1997, PaineWebber earned $10,503 in transfer
agency service fees from the Fund.
Subsequent to August 1, 1997, PaineWebber provides 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.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at
November 30, 1997, was substantially the same as the cost of securities for
financial statement purposes.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
At November 30, 1997, the components of the net unrealized appreciation of
investments were as follows:
Gross appreciation (investments having an excess of
value over cost) ........................................... $ 3,420,807
Gross depreciation (investments having an excess of
cost over value) ........................................... (1,306,315)
-----------
Net unrealized appreciation of investments ................... $ 2,114,492
===========
For the year ended November 30, 1997, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were as follows:
Purchases .................................................... $111,847,753
Sales ........................................................ $ 92,320,255
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.
To reflect reclassifications arising from permanent "book/tax"
differences for the year ended November 30, 1997, undistributed/distributions in
excess of net investment income was increased by $414,891, accumulated net
realized gains/losses was decreased by $403,175. and beneficial interest was
decreased by $11,716. Permanent book/tax differences are primarily attributable
to foreign currency gains/losses.
SHARES OF BENEFICIAL INTEREST
There is an unlimited amount of $0.001 par value shares of beneficial
interest authorized. Transactions in shares of beneficial interest were as
follows:
<TABLE>
<CAPTION>
Class A Class B Class C
-------------------------- -------------------------- -----------------------
Shares Amount Shares Amount Shares Amount
---------- ------------ ---------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
For the year ended November 30, 1997:
Shares sold ............................ 1,323,471 $12,562,022 1,645,373 $15,619,132 997,764 $9,478,122
Shares repurchased ..................... (533,352) (5,055,445) (1,111,544) (10,459,216) (496,197) (4,671,661)
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 83,102 785,691
---------- ------------ ---------- ------------ -------- -----------
Net increase ........................... 1,117,805 $10,617,216 365,822 $3,561,381 584,669 $5,592,152
========== ============ ========== ============ ======== ===========
For the period February 1, 1996 through
November 30, 1996:
Shares sold ............................ 149,291 $1,348,065 434,010 $3,888,650 123,465 $1,111,710
Shares repurchased ..................... (299,165) (2,692,557) (1,012,635) (9,087,640) (514,689) (4,613,637)
Shares converted from Class B to Class A 80,606 726,982 (80,695) (726,982) -- --
Dividends reinvested ................... 35,352 317,151 109,948 984,803 75,838 679,814
---------- ------------ ---------- ------------ -------- -----------
Net decrease ........................... (33,916) $(300,359) (549,372) $(4,941,169) (315,386) $(2,822,113)
========== ============ ========== ============ ======== ===========
</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 February 1, 1996 For the February 7, 1994+
Year Ended through Year Ended through
November 30, 1997 November 30, 1996 January 31, 1996 January 31, 1995
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $ 9.37 $ 8.99 $ 8.60 $ 10.00
---------- --------- --------- ----------
Net investment income ...................................... 0.74 0.57 0.67 0.74
Net realized and unrealized gains (losses) from investments,
foreign currency and futures .......................... 0.17 0.39 0.59 (1.49)
---------- --------- --------- ----------
Net increase (decrease) from investment operations ......... 0.91 0.96 1.26 (0.75)
---------- --------- --------- ----------
Dividends from net investment income ....................... (0.68) (0.58) (0.77) (0.65)
Distributions from net realized gains from foreign currency
transactions .......................................... -- -- (0.10) --
---------- --------- --------- ----------
Total dividends and distributions to shareholders .......... (0.68) (0.58) (0.87) (0.65)
---------- --------- --------- ----------
Net asset value, end of period ............................. $ 9.60 $ 9.37 $ 8.99 $ 8.60
========== ========= ========= ==========
Total investment return (1) ................................ 10.04% 11.14% 15.27% (7.61)%
========== ========= ========= ==========
Ratios/Supplemental data:
Net assets, end of period (000's) .......................... $ 20,909 $ 9,944 $ 9,841 $ 11,148
Expenses to average net assets (2) ......................... 1.65% 1.89%* 1.74% 1.49%*
Net investment income to average net assets ................ 7.35% 7.69%* 8.52% 8.06%*
Portfolio turnover rate .................................... 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 each class 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 February 1, 1996 For the February 7, 1994+
Year Ended through Year Ended through
November 30, 1997 November 30, 1996 January 31, 1996 January 31, 1995
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $ 9.36 $ 8.98 $ 8.60 $ 10.00
---------- --------- --------- ----------
Net investment income ...................................... 0.67 0.51 0.60 0.66
Net realized and unrealized gains (losses) from investments,
foreign currency and futures .......................... 0.16 0.39 0.59 (1.47)
---------- --------- --------- ----------
Net increase (decrease) from investment operations ......... 0.83 0.90 1.19 (0.81)
---------- --------- --------- ----------
Dividends from net investment income ....................... (0.60) (0.52) (0.71) (0.59)
Distributions from net realized gains from foreign currency
transactions .......................................... -- -- (0.10) --
---------- --------- --------- ----------
Total dividends and distributions to shareholders .......... (0.60) (0.52) (0.81) (0.59)
---------- --------- --------- ----------
Net asset value, end of period ............................. $ 9.59 $ 9.36 $ 8.98 $ 8.60
========== ========= ========= ==========
Total investment return (1) ................................ 9.20% 10.46% 14.37% (8.22)%
========== ========= ========= ==========
Ratios/Supplemental data:
Net assets, end of period (000's) .......................... $ 41,650 $ 37,249 $ 40,653 $ 40,710
Expenses to average net assets (2) ......................... 2.43% 2.63%* 2.49% 2.24%*
Net investment income to average net assets ................ 6.56% 6.93%* 7.77% 7.46%*
Portfolio turnover rate .................................... 140% 101% 91% 117%
</TABLE>
<TABLE>
<CAPTION>
Class C
------------------------------------------------------------------------
For the Period For the Period
For the February 1, 1996 For the February 7, 1994+
Year Ended through Year Ended through
November 30, 1997 November 30, 1996 January 31, 1996 January 31, 1995
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $ 9.37 $ 8.98 $ 8.60 $ 10.00
---------- --------- --------- ----------
Net investment income ...................................... 0.70 0.53 0.62 0.69
Net realized and unrealized gains (losses) from investments,
foreign currency and futures .......................... 0.15 0.40 0.59 (1.48)
---------- --------- --------- ----------
Net increase (decrease) from investment operations ......... 0.85 0.93 1.21 (0.79)
---------- --------- --------- ----------
Dividends from net investment income ....................... (0.63) (0.54) (0.73) (0.61)
---------- --------- --------- ----------
Distributions from net realized gains from foreign currency
transactions .......................................... -- -- (0.10) --
---------- --------- --------- ----------
Total dividends and distributions to shareholders .......... (0.63) (0.54) (0.83) (0.61)
---------- --------- --------- ----------
Net asset value, end of period ............................. $ 9.59 $ 9.37 $ 8.98 $ 8.60
========== ========= ========= ==========
Total investment return (1) ................................ 9.37% 10.80% 14.63% (8.02)%
========== ========= ========= ==========
Ratios/Supplemental data:
Net assets, end of period (000's) .......................... $ 23,117 $ 17,101 $ 19,232 $ 21,208
Expenses to average net assets (2) ......................... 2.17% 2.38%* 2.24% 1.98%*
Net investment income to average net assets ................ 6.82% 7.19%* 8.03% 7.62%*
Portfolio turnover rate .................................... 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 each class 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.
21
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
PaineWebber Strategic Income Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of PaineWebber Strategic Income Fund
(the "Fund") at November 30, 1997, the results of its operations for the year
ended November 30, 1997, the changes in its net assets for the year ended
November 30, 1997 and the period February 1, 1996 through November 30, 1996, and
the financial highlights for each of the periods indicated, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion of these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at November 30, 1997 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
January 23, 1998
22
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
TAX INFORMATION
We are required by Subchapter M of the Internal Revenue Code of 1986,
as amended, to advise you within 60 days of the Fund's fiscal period end
(November 30, 1997), as to the federal tax status of distributions received by
shareholders during such fiscal year. Accordingly, we are advising you that all
of the distributions paid by the Fund during the period were derived from net
investment income and are taxable as ordinary income.
Dividends received by tax-exempt recipients (e.g., IRAs and Keoghs)
need not be reported as taxable income. Some retirement trusts (e.g., corporate,
Keogh and 403(b)(7) plans) may need this information for their annual reporting.
Because the Fund's fiscal year is not the calendar year, another
notification will be sent in respect of calendar year 1997. The second
notification, which reflects the amount to be used by calendar year taxpayers on
their federal income tax returns, will be made in conjunction with Form 1099 DIV
and will be mailed in January 1998. Shareholders are advised to consult their
own tax advisers with respect to the tax consequences of their investment in the
Fund.
23
<PAGE>
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<PAGE>
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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
OFFICERS
Margo N. Alexander Thomas J. Libassi
President Vice President
Victoria E. Schonfeld Craig M. Varrelman
Vice President Vice President
Dianne E. O'Donnell Nirmal Singh
Vice President and Secretary Vice President
Paul H. Schubert Stuart Waugh
Vice President and Treasurer Vice President
Dennis L. McCauley
Vice President
INVESTMENT ADVISOR,
ADMINISTRATOR AND DISTRIBUTOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
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.
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.
<PAGE>
PaineWebber offers a family of 22 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 Capital Appreciation Fund
o Financial Services Growth Fund
o Growth Fund
o Growth and Income Fund
o Small Cap 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
PAINEWEBBER MONEY MARKET FUND
PaineWebber
(Copyright) 1998 PaineWebber Incorporated
Member SIPC
[PHOTO OF MONEY]
PaineWebber
- ----------------
STRATEGIC
INCOME FUND
ANNUAL REPORT
NOVEMBER 30, 1997
