<PAGE>
PaineWebber Strategic Income Fund Semiannual Report
July 15, 1999
Dear Shareholder,
We are pleased to present you with the semiannual report for the PaineWebber
Strategic Income Fund (the "Fund") for the six-month period ended May 31, 1999.
MARKET REVIEW
- --------------------------------------------------------------------------------
The bond markets went through a two-phase sell-off during the six-month period
ended May 31, 1999. In January, Brazil was forced to devalue its currency. This
devaluation, while bad news for Brazil, did not cause worldwide problems, as did
Russia's devaluation in August 1998. The highly leveraged investments that
destabilized the markets last August were gone by January 1999 and the sell-off
was confined largely to Brazil. The contained response suggested that other
countries' economies and financial markets had bottomed and might start to
recover. At the same time, the consensus forecast of 1999 U.S. economic growth
rose significantly, from 2% at year-end 1998 to 3.5% in January 1999, a portent
of higher interest rates. Taking these events together, investors became bearish
on bonds, leading to phase one of the sell-off in February.
Phase two came in late April, when the markets began operating in post-crisis
mode. Oil prices filtered through the consumer price index to remind investors
that global economic improvement could have inflationary consequences for
commodities. The commodity deflation and U.S. dollar strength that resulted from
the Asian crisis had moderated wage increases in the United States, even though
labor was in short supply. Investors had come to fear that low unemployment
without the offsetting commodity deflation would result in higher wage
increases.
The dominant theme driving bond yields changed from deflation contagion to a
reassessment of inflation risk. The Federal Reserve announced a bias toward
raising short-term interest rates, citing the rapid growth of domestic demand,
reduced global risk and few apparent offsets to inflation. Investors took this
to mean that the Federal Reserve might raise rates at its June 29-30 Open Market
Committee Meeting, and bond yields rose in response. The yield on the 30-year
U.S. Treasury bond rose from 5.07% at the beginning of the period to 5.82% at
period-end. The Federal Reserve did in fact raise interest rates by a
quarter-point on June 30, 1999 and adopted a neutral stance on short-term
interest rates. Investors reacted positively, as they interpreted this
announcement to mean the Fed was not planning to raise rates at its meeting in
August.
As the period commenced, yield premiums to Treasurys stood historically high
among the "spread sectors"--corporate, asset-backed and mortgage-backed
securities that pay higher yields to compensate for their higher risk. The
spread sectors rebounded strongly in the period despite near-record levels of
issuance. Toward the end of the period spreads widened again in response to:
o Profit-taking in the corporate and mortgage sectors.
o Heavy net issuance of corporates, asset-backed securities, commercial
mortgage-backed securities and high-yield bonds.
o Fears that an aggressive Fed rate increase would disrupt the stock market
and cause a "hard landing" of the economy.
PAINEWEBBER STRATEGIC
INCOME FUND
FUND PROFILE
Goal:
High current income,
secondarily capital
appreciation
Allocation Manager:
Dennis L. McCauley,
Mitchell Hutchins
Asset Management Inc.
Total Net Assets:
$114.8 million as
of May 31, 1999
Dividend Payments:
Monthly
1
<PAGE>
PaineWebber Strategic Income Fund Semiannual Report
OUTLOOK
- --------------------------------------------------------------------------------
Most countries except the United States must solve structural economic problems
before they can hit their full stride. Until the countries solve their problems,
the global economy is likely to improve but grow below trend. That said, global
growth and rising commodity prices represent risks to the bond markets. If
inflation rises, then current historically low inflation-risk premiums also
could rise. Productivity growth in the U.S. has reduced inflation for the last
few years, but may not be able to counter rising wage pressures in the future.
In light of our view, we expect the following over the next six months:
o Market rates to stay in a trading range, with the long bond yielding
5.75-6.25%.
o The Federal Reserve to raise the short-term interest rate by 50 basis points
(a basis point equals 1/100th of one percent), an increase that appears to
be discounted in the market already.
o Corporate bond spreads to tighten, based on the strong economy and improved
corporate profits.
o Spread sectors to outperform Treasurys in a range-bound interest-rate
environment.
Portfolio Review
- --------------------------------------------------------------------------------
PERFORMANCE--TOTAL RETURNS FOR SIX MONTHS ENDED 5/31/99
Before Sales Charges After Maximum Sales Charges
- --------------------------------------------------------------------------------
Class A Shares 1.59% -2.50%
Class B Shares 1.20% -3.68%
Class C Shares 1.33% 0.60%
Class Y Shares 1.72% 1.72%
- --------------------------------------------------------------------------------
The Fund's total return consists of the change in net asset value with any
dividends reinvested. For shareowners who purchased or redeemed Fund shares
during the period, the Fund's total return may be lower because of applicable
sales charges. Class Y shares are not subject to sale charges.
HIGHLIGHTS
The Fund allocates assets among three main sectors of the global bond market
- -- U.S. government/investment grade bonds, U.S. high-yield bonds and non-U.S.
bonds -- and shifts emphasis among them as conditions warrant.
During the six-month period ended May 31, 1999, the Fund benefited from its
exposure to high-yield bonds. Beginning at 47.2% of the portfolio on November
30, 1998, the high-yield allocation rose to 48.2% in January 1999 as the sector
showed signs of recovery. We gradually trimmed the Fund's exposure through
April. High-yield bonds accounted for 45.1% of the portfolio at period-end.*
The Fund's other allocations, however, hurt returns for the
- ----------------
*Weightings represent percentages of net assets as of May 31, 1999. The Fund's
portfolio is actively managed and its composition will vary over time.
PAINEWEBBER
STRATEGIC
INCOME FUND
Sector Allocation*
[PIE CHART APPEARS HERE]
U.S. High Yield 47.0%
U.S. Gov't/Investment-Grade Corp. 34.7%
Foreign/Emerging Markets 5.5%
Cash/Cash Equivalents 12.8%
PAINEWEBBER
STRATEGIC
INCOME FUND
Fund Characteristics*
- -----------------------------------------
Weighted Avg Maturity 8.7 years
Weighted Avg Duration 5.2 years
- -----------------------------------------
2
<PAGE>
PaineWebber Strategic Income Fund Semiannual Report
- --------------------------------------------------------------------------------
period, offsetting some of the gains achieved in the high-yield sector. The U.S.
government/investment-grade corporate sector suffered as the "flight to quality"
faded. Non-U.S. bonds lifted performance during March and April but lost ground
for the six-month period.
High-Yield Sector--The Fund's largest sector weighting remains
communications (12.0%),* where we are emphasizing international long distance
companies with extensive fiber optic networks. While we still find competitive
local exchange carriers attractive, we are opting to take profits given their
significant price appreciation. In cable, the second largest sector weighting
(4.9%), we favor new entrants that offer integrated voice data and video.
High-yield spreads are still well above the 15-year average of 491 basis
points and new issuance continues at a rate below the 1998 level despite the
increase in April and May. We expect the high-yield sector to outperform against
a backdrop of range-bound interest rates. Solid fundamentals and slowly
improving technicals also should help support the market. Credit analysis of
individual companies remains critical, however, since quality and price vary so
greatly in the high-yield market.
U.S. Government and Investment Grade Sector--The sector posted losses for
the period as market yields rose and hurt the entire bond market. We trimmed the
Fund's Treasury holdings (1.6%) and increased exposure to mortgage-backed
securities (33.1%). These moves reduced, but did not completely eliminate, the
negative impact that the sector had on the Fund's performance. We are
comfortable with the Fund's current exposure based on our belief that, after a
moderate rate hike from the Federal Reserve, the economy will most likely land
softly. Also, mortgage spreads to Treasurys still are wider than average and
seem likely to narrow.
Non-U.S. Sector--The Fund eliminated its position in Brazilian debt in early
April due to uncertainties regarding Brazil's political and fiscal
circumstances. The emerging market bond sector would benefit generally from a
firming of world growth and a broader recovery of commodity prices (other than
oil), as these trends would improve the balance of payments for most emerging
market countries.
- -----------------
*Weightings represent percentages of net assets as of May 31, 1999. The Fund's
portfolio is actively managed and its composition will vary over time.
3
<PAGE>
PaineWebber Strategic Income Fund Semiannual Report
- --------------------------------------------------------------------------------
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 Review on
PaineWebber Strategic Income Fund or another fund in the PaineWebber Family of
Funds,(1) please contact your Financial Advisor.
Sincerely,
/s/ Margo Alexander /s/ Brian M. Storms
MARGO ALEXANDER BRIAN M. STORMS
Chairman and Chief Executive Officer President and Chief Operating Officer
Mitchell Hutchins Asset Management Inc. Mitchell Hutchins Asset Management Inc.
/s/ Dennis L. McCauley /s/ Nirmal Singh
DENNIS L. MCCAULEY NIRMAL SINGH
Chief Investment Officer - Fixed Income Manager, U.S. Government and
Mitchell Hutchins Asset Management Inc. Investment Grade Sector
Allocation Manager PaineWebber Strategic Income Fund
PaineWebber Strategic Income Fund
/s/ James F. Keegan
/s/ Thomas J. Libassi JAMES F. KEEGAN
THOMAS J. LIBASSI Portfolio Manager, U.S. Government and
Manager, High Yield Sector Investment Grade Sector
PaineWebber Strategic Income Fund PaineWebber Strategic Income Fund
/s/ Stuart Waugh
STUART WAUGH
Manager, Foreign and
Emerging Markets Sector
PaineWebber Strategic Income Fund
This letter is intended to assist shareholders in understanding how the Fund
performed during the six-month period ended May 31, 1999, and reflects our views
at the time of its writing. Of course, these views may change in response to
changing circumstances. We encourage you to consult your Financial Advisor
regarding your personal investment program.
(1)Mutual funds are sold by prospectus only. The prospectuses for the funds
contain more complete information regarding risks, charges and expenses, and
should be read carefully before investing.
4
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
PERFORMANCE RESULTS (unaudited)
<TABLE>
<CAPTION>
Total Return(1)
Net Asset Value -----------------------------------
------------------------------------- 12 Months 6 Months
05/31/99 11/30/98 05/31/98 Ended 05/31/99 Ended 05/31/99
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $8.84 $9.06 $9.64 (1.04)% 1.59%
Class B Shares 8.83 9.05 9.62 (1.71) 1.20
Class C Shares 8.83 9.05 9.63 (1.55) 1.33
<CAPTION>
Performance Summary Class A Shares
Net Asset Value
---------------------- Capital Gains Total
Period Covered Beginning Ending Distributed Dividends Paid(2) Return(1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
02/07/94-12/31/94 $10.00 $8.56 - $0.5792 (8.76)%
1995 8.56 8.79 - 0.9392 14.12
1996 8.79 9.34 - 0.6352 14.00
1997 9.34 9.56 - 0.7116 10.32
1998 9.56 8.95 - 0.7073 0.96
01/01/99-05/31/99 8.95 8.84 - 0.2646 1.73
- ---------------------------------------------------------------------------------------------------------------
Totals: $0.0000 $3.8371
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 05/31/99: 34.50%
<CAPTION>
Performance Summary Class B Shares
Net Asset Value
---------------------- Capital Gains Total
Period Covered Beginning Ending Distributed Dividends Paid(2) Return(1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
02/07/94-12/31/94 $10.00 $8.55 - $0.5242 (9.41)%
1995 8.55 8.78 - 0.8733 13.29
1996 8.78 9.33 - 0.5727 13.23
1997 9.33 9.55 - 0.6386 9.48
1998 9.55 8.94 - 0.6343 0.18
01/01/99-05/31/99 8.94 8.83 - 0.2354 1.40
- ---------------------------------------------------------------------------------------------------------------
Totals: $0.0000 $3.4785
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 05/31/99: 29.25%
<CAPTION>
Performance Summary Class C Shares
Net Asset Value
---------------------- Capital Gains Total
Period Covered Beginning Ending Distributed Dividends Paid(2) Return(1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
02/07/94-12/31/94 $10.00 $8.56 - $0.5424 (9.13)%
1995 8.56 8.79 - 0.8951 13.56
1996 8.79 9.33 - 0.5934 13.36
1997 9.33 9.56 - 0.6638 9.89
1998 9.56 8.94 - 0.6597 0.34
01/01/99-05/31/99 8.94 8.83 - 0.2452 1.51
- ---------------------------------------------------------------------------------------------------------------
Totals: $0.0000 $3.5996
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 05/31/99: 30.94%
</TABLE>
(1) Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable dates and do not include
sales charges; results for each class would be lower if sales charges were
included. Total return for periods of less than one year has not been
annualized.
(2) Includes foreign exchange gain distributions, if any.
The above data represents past performance of the Fund's shares, which is
no guarantee of future results. The principal value of an investment in the
Fund will fluctuate, so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
5
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
PERFORMANCE RESULTS (unaudited) (concluded)
AVERAGE ANNUAL TOTAL RETURN(1)
<TABLE>
<CAPTION>
% Return Without Deducting % Return After Deducting
Maximum Sales Charge Maximum Sales Charge
------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A* B** C*** A* B** C***
Twelve Months Ended 06/30/99 (1.07)% (1.85)% (1.58)% (5.03)% (6.43)% (2.26)%
Five Years Ended 06/30/99 7.48 6.68 6.97 6.61 6.39 6.97
Commencement of Operations
Through 06/30/99 5.67 4.88 5.16 4.87 4.75 5.16
</TABLE>
(1) Figures assume reinvestment of all dividends and other distributions at net
asset value on the payable dates.
* Maximum sales charge for Class A shares is 4% of the public offering price.
Class A shares bear ongoing 12b-1 service fees.
** Maximum contingent deferred sales charge for Class B shares is 5% and is
reduced to 0% after 1 year. Class B shares bear ongoing 12b-1 distribution
and service fees.
*** Maximum contingent deferred sales charge for Class C shares is 0.75% and is
reduced to 0% after 1 year. Class C shares bear ongoing 12b-1 distribution
and service fees.
+ Commencement of issuance date is February 7, 1994 for Class A, Class B and
Class C shares.
Note: The Fund offers Class Y shares to a limited group of eligible investors,
including participants in certain investment programs that are sponsored
by PaineWebber and may invest in PaineWebber mutual funds. For the six
months ended May 31,1999 and since inception, February 17, 1998 through
May 31, 1999, Class Y shares had a total return of 1.72%, and 0.66%,
respectively.
For the twelve months ended June 30, 1999 and since inception through
June 30, 1999, Class Y shares had an average annual total return of
(0.82)% and 0.68%, respectively.
The data above represents past performance of the Fund's shares, which is no
guarantee of future results. The principal value of an investment in the
Fund will fluctuate, so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
6
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
PORTFOLIO OF INVESTMENTS MAY 31, 1999 (unaudited)
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- --------- -------------------- --------------- -------------
<S> <C> <C> <C>
U.S. Government and Investment Grade Obligations--34.71%
U.S. Government Obligations--1.63%
$ 1,800 U.S. Treasury Bonds (cost--$1,849,071)................ 08/15/27 6.375% $1,874,813
----------
Government National Mortgage Association Certificates--3.94%
4,291 GNMA (cost--$4,529,160)............................... 06/15/17 to 11/15/17 8.000 4,516,696
----------
Federal National Mortgage Association Certificates--14.75%
NZD 4,200 FNMA.................................................. 06/20/02 7.250 2,322,819
6,000 FNMA 15 year TBA...................................... TBA 6.500 5,971,872
9,000 FNMA 30 year TBA...................................... TBA 6.000 to 6.500 8,636,253
----------
Total Federal National Mortgage Association
Certificates (cost--$17,081,315).......................... 16,930,944
----------
Collateralized Mortgage Obligations--14.39%
4,000 CS First Boston Mortgage Securities Corporation,
Series 1997-C2, Class A2.............................. 07/17/07 6.520 3,947,080
1,000 DLJ Commercial Mortgage Corporation,
Series 1998-CG1, Class A1B............................ 05/10/08 6.410 977,620
6,810 First Union Lehman Brothers Mortgage Trust,
Series 1997-C2, Class A3.............................. 12/18/07 6.650 6,746,190
5,000 FNMA REMIC, Series 1993-87, Class J................... 04/25/22 6.250 4,835,578
----------
Total Collateralized Mortgage Obligations (cost--$16,767,737)..... 16,506,468
----------
Total U.S. Government and Investment Grade
Obligations (cost--$40,227,283).......................... 39,828,921
----------
GLOBAL DEBT SECURITIES--12.76%
Canada--2.84%
4,385* Government of Canada.................................. 12/01/06 7.000 3,259,538
----------
Korea--0.23%
255 Republic of Korea..................................... 04/15/08 8.875 267,113
----------
Mexico--2.86%
3,952 United Mexican States Series B, DISC(1)............... 12/31/19 5.875++ 3,280,160
----------
Panama--1.00%
1,599 Republic of Panama, PDI(2)............................ 07/17/16 5.938++ 1,150,995
----------
Philippines--0.93%
1,100 Republic of Philippines............................... 04/15/08 8.875 1,070,190
----------
Poland--1.70%
4,140* Republic of Poland.................................... 06/12/04 10.000 1,018,109
1,510 Republic of Poland, PAR............................... 10/27/24 3.000(b) 924,875
----------
1,942,984
----------
United Kingdom--3.20%
1,995* United Kingdom Gilt................................... 09/08/03 to 12/07/15 6.500 to 10.000 3,669,676
----------
Total Global Debt Securities (cost--$14,861,798).................. 14,640,656
----------
HIGH YIELD SECURITIES--47.01%
Corporate Bonds--42.18%
Cable--4.90%
1,000 21st Century Telecommunications Group Incorporated.... 02/15/08 12.250+ 460,000
1,500 @Entertainment Incorporated........................... 07/15/08 14.500+ 720,000
750 EchoStar DBS Corporation**............................ 02/01/09 9.375 763,125
2,000 Knology Holdings Incorporated......................... 10/15/07 11.875+ 1,200,000
1,000 NTL Incorporated**.................................... 10/01/08 11.500 1,110,000
1,000 RCN Corporation....................................... 10/15/07 11.125+ 660,000
1,000 UIH Australia Pacific Incorporated.................... 05/15/06 14.000+ 710,000
----------
5,623,125
----------
</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)
Chemicals--0.61%
$ 700 Lyondell Chemical Company** ....................... 05/01/07 9.875% $ 703,500
----------
Communications--Fixed--7.87%
1,000 Alestra S.A.** .................................... 05/15/06 12.125 955,000
750 Allegiance Telecom Incorporated ................... 05/15/08 12.875 810,000
1,000 Barak ITC ......................................... 11/15/07 12.500+ 575,000
750 Esprit Telecom Group PLC .......................... 06/15/08 10.875 789,375
625 GST Equipment Funding Incorporated ................ 05/01/07 13.250 675,000
1,000 Hyperion Telecommunications Incorporated** ........ 11/01/07 12.000 1,020,000
1,000 Metromedia Fiber Network Incorporated ............. 11/15/08 10.000 1,042,500
650 Nextlink Communications Incorporated .............. 06/01/09 10.750 650,000
750 Northeast Optic Network Incorporated .............. 08/15/08 12.750 772,500
750 Pathnet Incorporated .............................. 04/15/08 12.250 420,000
500# Tele1 Europe BV** ................................. 05/15/09 13.000 505,000
1,250 Viatel Incorporated ............................... 04/15/08 12.500+ 815,625
----------
9,030,000
----------
Communications-Mobile--3.21%
1,000# ICO Global Communication Limited .................. 08/01/05 15.000 520,000
2,500 Nextel Communications Incorporated ................ 02/15/08 9.950+ 1,662,500
1,500 Nextel International Incorporated ................. 04/15/08 12.125+ 765,000
750 Orange PLC ........................................ 08/01/08 8.000 735,000
----------
3,682,500
----------
Consumer Manufacturing--2.35%
500 Apparel Ventures Incorporated (a) ................. 12/31/00 12.250 100,000
1,000 Decora Industries Incorporated .................... 05/01/05 11.000 961,250
750 Jafra Cosmetics International Incorporated ........ 05/01/08 11.750 645,000
1,000 Westpoint Stevens Incorporated .................... 06/15/08 7.875 987,500
----------
2,693,750
----------
Energy--2.34%
1,000 Grant Geophysical Incorporated .................... 02/15/08 9.750 530,000
500# Key Energy Services Incorporated** ................ 01/15/09 14.000 511,250
1,000 Northern Offshore ASA ............................. 05/15/05 10.000 510,000
1,000 R&B Falcon Corporation** .......................... 12/15/08 9.500 890,000
250 Transcontinental Refining Corporation** ........... 12/01/03 15.000 247,500
----------
2,688,750
----------
Financial Services--1.39%
750 Airplane Pass Through Trust ....................... 03/15/19 10.875 735,000
500 Olympic Financial Limited ......................... 03/15/07 11.500 425,000
625 Signet Capital Trust I ............................ 08/15/27 9.500 437,500
----------
1,597,500
----------
Food & Beverage--2.21%
1,000 Iowa Select Farms L. P.** ......................... 12/01/05 10.750 835,000
750 Mrs. Fields Original Cookies Incorporated ......... 12/01/04 10.125 705,000
1,000 Packaged Ice Incorporated ......................... 02/01/05 9.750 990,000
----------
2,530,000
----------
</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)
General Industrial--3.22%
$ 500 Aqua Chemical Incorporated ........................ 07/01/08 11.250% $ 385,000
1,000 Coltec Industries Incorporated .................... 04/15/08 7.500 990,000
750 J.B.Poindexter & Company Incorporated ............. 05/15/04 12.500 712,500
600 Jordan Telecommunication Products ................. 08/01/07 9.875 603,000
400 Jordan Telecommunication Products ................. 08/01/07 11.750+ 340,000
750 SabreLiner Corporation** .......................... 06/15/08 11.000 663,750
----------
3,694,250
----------
Healthcare--0.84%
1,000 Tenet Healthcare Corporation** .................... 12/01/08 8.125 965,000
----------
Hotels & Lodging--0.45%
625 Silverleaf Resorts Incorporated ................... 04/01/08 10.500 518,750
----------
Media--0.64%
1,750 Inter Act Systems Incorporated .................... 08/01/03 14.000+ 735,000
----------
Metals & Mining--0.69%
1,000 Metal Management Incorporated ..................... 05/15/08 10.000 795,000
----------
Real Estate--1.08%
625 American Architectural Products Corporation ....... 12/01/07 11.750 487,500
750 Forest City Enterprise Incorporated ............... 03/15/08 8.500 750,000
----------
1,237,500
----------
Restaurants--0.79%
1,000 American Restaurant Group Incorporated ............ 02/15/03 11.500 902,500
----------
Retail--2.11%
1,000 Advance Holding Corporation ....................... 04/15/09 12.875+ 597,500
750 Ames Department Stores Incorporated** ............. 04/15/06 10.000 738,750
350 Big 5 Corporation ................................. 11/15/07 10.875 364,875
690 Tuesday Morning Corporation ....................... 12/15/07 11.000 717,600
----------
2,418,725
----------
Services--1.29%
750 Atlantic Express Transportation Corporation ....... 02/01/04 10.750 759,375
750 Protection One Incorporated** ..................... 01/15/09 8.125 723,750
----------
1,483,125
----------
Technology--2.36%
500 Ampex Corporation (c) ............................. 03/15/03 12.000 520,000
2,000 Electronic Retailing Systems International
Incorporated..................................... 02/01/04 13.250+ 640,000
625 Samsung Electronics America Incorporated** ........ 05/01/03 9.750 637,500
500 Source Media Incorporated ......................... 11/01/04 12.000 380,000
500 Verio Incorporated** .............................. 12/01/08 11.250 527,500
----------
2,705,000
----------
Transportation--3.28%
1,000 American Reefer Company Limited ................... 03/01/08 10.250 630,000
1,000 Equimar Shipholdings Limited ...................... 07/01/07 9.875 680,000
1,000 Millenium Seacarriers Incorporated ................ 07/15/05 12.000 620,000
750 Navigator Gas Transport PLC** ..................... 06/30/07 10.500 457,500
1,000 Stena AB .......................................... 06/15/07 8.750 930,000
750 TFM, S.A. de C.V. ................................. 06/15/09 11.750+ 446,250
----------
3,763,750
----------
Utilities--0.55%
624 Panda Funding Corporation ......................... 08/20/12 11.625 636,196
----------
Total Corporate Bonds (cost--$55,101,655) ..................... 48,403,921
----------
</TABLE>
9
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- --------- ---------------- -------------- -------------
<S> <C> <C> <C>
HIGH YIELD SECURITIES (CONTINUED)
Convertible Bonds--1.32%
Communications--0.13%
$ 110 GST Telecommunications Incorporated ............... 12/15/05 13.875%+ $ 147,400
----------
Services--1.19%
750 Corporate Express Incorporated .................... 07/01/00 4.500 670,313
797 Waste Systems International Incorporated** ........ 05/13/05 7.000 701,461
----------
1,371,774
----------
Total Convertible Bonds (cost--$1,600,268) .................... 1,519,174
----------
<CAPTION>
Number of
Shares
- ---------
<S> <C>
Common Stocks(a)--1.57%
Communications--Fixed--0.82%
20,984 Viatel Incorporated ............................................................. 944,293
----------
Media--0.26%
2,000 Affiliated Newspaper Investments Incorporated .................................. 300,000
----------
Services--0.26%
43,575 Waste Systems International Incorporated ........................................ 296,855
----------
Technology--0.23%
17,000 Ampex Corporation ............................................................... 75,437
3,432 Verio Incorporated .............................................................. 186,186
----------
261,623
----------
Total Common Stocks (cost--$382,370) ........................................................ 1,802,771
----------
Preferred Stocks(a)--1.90%
Energy--1.90%
2,000 Centaur Funding ................................................................. 2,166,250
10,373 Orion ........................................................................... 7,085
42,409 TCR Holdings .................................................................... 2,521
----------
Total Preferred Stocks (cost--$2,002,521) 2,175,856
----------
<CAPTION>
Number of
Warrants
- ---------
<S> <C>
Warrants(a)--0.04%
Cable--0.02%
6,000 @Entertainment Incorporated ..................................................... 18,000
2,000 Knology Holdings Incorporated ................................................... 5,000
1,000 UIH Australia Pacific Incorporated .............................................. 1,000
----------
24,000
----------
Communications--Fixed--0.00%
750 Pathnet Incorporated ............................................................ 7,500
----------
Consumer Manufacturing--0.00%
1,044 AVI Holdings Incorporated ....................................................... 10
----------
Financial Services--0.00%
500 Olympic Financial Limited ....................................................... 500
----------
</TABLE>
10
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
Number of
Warrants Value
- --------- ------------
<S> <C>
HIGH YIELD SECURITIES (CONCLUDED)
Warrants(a) (concluded)
Media--0.01%
1,750 Inter Act Systems Incorporated .................................................. $ 10,500
------------
Technology--0.01%
2,000 Electronic Retailing Systems International ...................................... 10,000
------------
Transportation--0.00%
1,000 Millenium Seacarriers Incorporated .............................................. 125
------------
Total Warrants (cost-- $51,201) ............................................................. 52,635
------------
Total High Yield Securities (cost-- $59,138,015) ............................................ 53,954,357
------------
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates
- ----------- ------------- -------------
<S> <C> <C> <C>
Short-Term Investment--5.22%
$ 6,000 Federal Home Loan Mortgage Discount Notes (cost-- $5,988,250) ....... 06/16/99 4.700% 5,988,250
------------
REPURCHASE AGREEMENTS--12.37%
7,000 Repurchase Agreement dated 05/28/99 with Morgan Guaranty Trust Company
collateralized by $6,983,000 U.S. Treasury Notes, 5.375% due 06/30/00
(value-- $7,139,978); proceeds: $7,003,726 ........................... 06/01/99 4.790 7,000,000
7,198 Repurchase Agreement dated 05/28/99 with Dresdner Bank collateralized
by $7,368,000 U.S. Treasury Notes, 4.500% due 09/30/00
(value--$7,342,801); proceeds: $7,201,839 ........................... 06/01/99 4.800 7,198,000
------------
<CAPTION>
<S> <C>
Total Repurchase Agreements (cost-- $14,198,000) .............................................. 14,198,000
------------
Total Investments (cost-- $134,413,346)-- 112.07% ............................................. 128,610,184
Liabilities in excess of other assets-- (12.07%) .............................................. (13,853,101)
------------
Net Assets-- 100.00% .......................................................................... $114,757,083
============
</TABLE>
- --------------------
* Stated in local currency.
** Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
# Security represents a unit which is composed of the stated bond with
attached warrants or common stock.
+ Denotes a step-up bond or a zero coupon bond that converts to the noted
fixed rated at a designated future date.
++ Floating rate securities, the interest rates shown are the current rates as
of May 31, 1999.
(a) Non-income producing.
(b) Reflects rate at May 31, 1999, on step coupon rate instruments.
(c) Illiquid security representing 0.45% of net assets.
(1) With an additional 6,080,000 recoverable rights attached maturing on June
30, 2003 with no market value.
(2) Interest may be capitalized.
DISC Discount Bonds.
NZD New Zealand Dollars.
PDI Past Due Interest Bond.
PAR Par Bond.
REMIC Real Estate Mortgage Investment Conduit.
TBA (To Be Assigned) Securities are purchased on a forward commitment basis
with an approximate principal amount (generally +/-1.0%) and generally
stated maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
11
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Unrealized
Contract to Maturity Appreciation
Deliver In Exchange for Dates (Depreciation)
----------- ---------------- -------- --------------
<S> <C> <C> <C> <C>
British Pounds ........................ 1,915,000 US$ 3,077,405 07/13/99 $ 10,107
Canada Dollars ........................ 2,587,000 US$ 1,781,680 06/07/99 25,243
Greek Drachma ......................... 588,968,000 US$ 1,961,788 06/28/99 80,282
New Zealand Dollars ................... 3,800,000 US$ 1,910,260 07/06/99 (127,239)
U.S. Dollars .......................... 1,926,432 GRD 588,968,000 06/28/99 (44,925)
U.S. Dollars .......................... 1,865,800 NZD 3,800,000 07/06/99 171,699
---------
$ 115,167
=========
</TABLE>
- -------------------------
Currency Type Abbreviation:
GRD--Greek Drachma
NZD--New Zealand Dollars
US$--United States Dollars
See accompanying notes to financial statements
12
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES MAY 31, 1999 (unaudited)
Assets
<S> <C>
Investments in securities, at value (cost--$120,215,346) ..................................................... $ 114,412,184
Repurchase Agreements (cost--$14,198,000) .................................................................... 14,198,000
Interest receivable .......................................................................................... 1,713,264
Unrealized appreciation on forward foreign currency contracts ................................................ 287,331
Receivable for shares of beneficial interest sold ............................................................ 200,556
Other assets ................................................................................................. 10,975
------
Total assets ................................................................................................. 130,822,310
-----------
Liabilities
Payable for investments purchased ............................................................................ 15,380,000
Payable for shares of beneficial interest repurchased ........................................................ 287,293
Unrealized depreciation on forward foreign currency contracts ................................................ 172,164
Payable to affiliates ........................................................................................ 139,672
Due to custodian ............................................................................................. 31,709
Accrued expenses and other liabilities ....................................................................... 54,389
------
Total liabilities ............................................................................................ 16,065,227
----------
Net Assets
Beneficial interest--$0.001 par value (unlimited amount authorized) .......................................... 129,358,888
Distribution in excess of net investment income .............................................................. (203,730)
Accumulated net realized losses from investment, futures and options transactions ............................ (8,708,395)
Net unrealized depreciation of investments, other assets, liabilities and forward
contracts denominated in foreign currencies ................................................................ (5,689,680)
----------
Net assets ................................................................................................... $ 114,757,083
=============
Class A:
Net assets ................................................................................................... $ 39,915,438
-------------
Shares outstanding ........................................................................................... 4,515,999
---------
Net asset and redemption value per share ..................................................................... $8.84
=====
Maximum offering price per share (net asset value plus sales charge of 4.00% of offering price) .............. $9.21
=====
Class B:
Net assets ................................................................................................... $ 44,087,834
-------------
Shares outstanding ........................................................................................... 4,994,147
---------
Net asset value and offering price per share ................................................................. $8.83
=====
Class C:
Net assets ................................................................................................... $ 29,789,296
-------------
Shares outstanding ........................................................................................... 3,372,775
---------
Net asset value and offering price per share ................................................................. $8.83
=====
Class Y:
Net assets ................................................................................................... $ 964,515
-------------
Shares outstanding ........................................................................................... 109,177
-------
Net asset value, offering price and redemption value per share ............................................... $8.83
=====
</TABLE>
See accompanying notes to financial statements
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Six
Months Ended
May 31, 1999
(unaudited)
-------------
<S> <C>
Investment income:
Interest ......................................................................................... $4,843,250
----------
Expenses:
Investment advisory and administration ........................................................... 422,376
Service fees--Class A ............................................................................ 46,152
Service and distribution fees--Class B ........................................................... 224,438
Service and distribution fees--Class C ........................................................... 112,203
Transfer agency and service fees ................................................................. 34,286
Reports and notices to shareholders .............................................................. 33,050
Custody and accounting ........................................................................... 28,158
Legal and audit .................................................................................. 28,106
State registration ............................................................................... 28,029
Amortization of organizational expenses .......................................................... 10,660
Trustees' fees ................................................................................... 5,250
Other expenses ................................................................................... 15,948
----------
988,656
----------
Net investment income ............................................................................ 3,854,594
----------
Realized and unrealized gains (losses) from investment activities:
Net realized gains (losses) from:
Investment transactions ....................................................................... 141,978
Foreign currency transactions ................................................................. (472,813)
Futures contracts ............................................................................. (93,153)
Written options transactions .................................................................. (11,617)
Net change in unrealized appreciation/depreciation of:
Investments ................................................................................... (1,921,010)
Other assets, liabilities and forward contracts denominated in foreign currencies ............. 14,106
----------
Net realized and unrealized losses from investment activities .................................... (2,342,509)
----------
Net increase in net assets resulting from operations ............................................. $1,512,085
==========
</TABLE>
See accompanying notes to financial statements
14
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Six
Months Ended For the Year
May 31, 1999 Ended
(unaudited) November 30,1998
----------- ----------------
<S> <C> <C>
From operations:
Net investment income .................................................................... $ 3,854,594 $ 6,604,003
Net realized losses from investment, purchased options, foreign currency,
futures contracts and written options transactions ................................... (435,605) (52,231)
Net change in unrealized appreciation/depreciation of investments, other
assets, liabilities and forward contracts denominated in foreign currencies .......... (1,906,904) (5,901,299)
------------ ------------
Net increase in net assets resulting from operations ..................................... 1,512,085 650,473
------------ ------------
Dividends to shareholders from:
Net investment income--Class A ........................................................... (1,487,159) (2,333,211)
Net investment income--Class B ........................................................... (1,642,083) (2,962,496)
Net investment income--Class C ........................................................... (1,133,483) (1,873,596)
Net investment income--Class Y ........................................................... (39,447) (25,077)
------------ ------------
Total dividends to shareholders .......................................................... (4,302,172) (7,194,380)
------------ ------------
From beneficial interest transactions:
Net proceeds from the sale of shares ..................................................... 21,365,628 53,589,392
Cost of shares repurchased ............................................................... (18,324,133) (24,924,283)
Proceeds from dividends reinvested ....................................................... 2,598,287 4,110,250
------------ ------------
Net increase in net assets from beneficial interest transactions ......................... 5,639,782 32,775,359
------------ ------------
Net increase in net assets ............................................................... 2,849,695 26,231,452
Net assets:
Beginning of period ...................................................................... 111,907,388 85,675,936
------------ ------------
End of period (including undistributed net investment income
of $243,848 at November 30, 1998) .................................................... $114,757,083 $111,907,388
============ ============
</TABLE>
See accompanying notes to financial statements
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
PaineWebber Strategic Income Fund (the "Fund") is a series of PaineWebber
Securities Trust (the "Trust") which was organized under Massachusetts law by a
Declaration of Trust dated December 3, 1992 and is registered with the
Securities and Exchange Commission under the Investment Company Act of 1940, as
amended, as an open-end, diversified investment company. The Fund seeks high
level of current income and, secondarily, capital appreciation by allocating its
investments among three bond market categories: U.S. government and investment
grade corporate bonds; U.S.high yield, high risk corporate bonds; and foreign
and emerging market bonds. Costs incurred by the Fund in connection with its
organization have been deferred and amortized using the straight-line method
over a period not to exceed sixty months from the commencement of operations.
Currently, the Fund offers Class A, Class B, Class C and Class Y shares. Each
class represents interests in the same assets of the Fund, and the classes are
identical except for differences in their sales charge structures, ongoing
service and distribution charges and certain transfer agency expenses. In
addition, Class B shares and all corresponding reinvested dividend shares
automatically convert to Class A shares approximately six years after issuance.
All classes of shares have equal voting privileges, except that each class has
exclusive voting rights with respect to its service and/or distribution plan.
Class Y shares have no service or distribution plan.
The preparation of financial statements in accordance with generally accepted
accounting principles requires Fund management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates. The following is a summary of
significant accounting policies:
Valuation of Investments-- The Fund calculates its net asset value based on
the current market value for its portfolio securities. The Fund normally obtains
market quotations for its securities from independent pricing services and
broker-dealers. Independent pricing services use reported last sale prices,
current market quotations or valuations from computerized "matrix" systems that
derive values based on comparable securities. A matrix system incorporates
parameters such as security quality, maturity and coupon, and/or research and
evaluations by its staff, including review of broker-dealer market price
quotations, if available, in determining the valuation of the portfolio
securities. Securities traded in the over-the-counter ("OTC") market and listed
on The Nasdaq Stock Market, Inc.("Nasdaq") normally are valued at the last sale
price on Nasdaq prior to valuation. Other OTC securities are valued at the last
bid price available prior to valuation. The amortized cost method of valuation
is used to value short-term debt instruments with sixty days or less remaining
to maturity. Securities which are listed on U.S. and foreign stock exchanges
normally are valued at the last sale price on the day the securities are 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 and assets for which market quotations
are not readily available, are valued at fair value as determined in good faith
by or under the direction of the Trust's board of trustees (the "board"). 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.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
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.
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.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
The Fund has no specific limitation on the percentage of assets which may be
committed to such contracts. The Fund may enter into forward contracts or
maintain a net exposure to forward contracts only if (1) the consummation of the
contracts would not obligate the Fund to deliver an amount of foreign currency
in excess of the value of the position being hedged by such contracts or (2) the
Fund maintains cash, U.S. government securities or liquid debt securities in a
segregated account in an amount not less than the value of its total assets
committed to the consummation of the forward contracts and not covered as
provided in (1) above, as marked-to-market daily.
Risks may arise upon entering into forward contracts from the potential
inability of counterparties to meet the terms of their forward contracts and
from unanticipated movements in the value of foreign currencies relative to the
U.S. dollar.
Fluctuations in the value of forward contracts are recorded for book purposes
as unrealized gains or losses by the Fund. Realized gains and losses include net
gains and losses recognized by the Fund on contracts which have matured.
Futures Contracts--Upon entering into a financial futures contract, the Fund
is required to pledge to a broker an amount of cash and/or U.S. government
securities equal to a certain percentage of the contract amount. This amount is
known as the "initial margin." Subsequent payments, known as "variation margin,"
are made or received by the Fund each day, depending on the daily fluctuations
in the value of the underlying financial futures contracts. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss until the financial futures contract is closed, at which
time the net gain or loss is reclassified to realized gain or loss.
Using financial futures contracts involves various market risks. The maximum
amount at risk from the purchase of a futures contract is the contract value.
The Fund primarily uses financial futures contracts to manage duration or for
hedging purposes and not for leverage. However, imperfect correlations between
futures contracts and the portfolio securities being hedged or, market
disruptions, do not normally permit full control of these risks at all times.
Written Options--When a Fund writes a call or a put option, an amount equal
to the premium received by the Fund is included in the Fund's Statement of
Assets and Liabilities as an asset and as an equivalent liability. The amount of
the liability is subsequently marked-to-market to reflect the current market
value of the option written. If an option which the Fund has written either
expires on its stipulated expiration date or the Fund enters into a closing
purchase transaction, the Fund realizes a gain (or loss if the cost of a closing
purchase transaction exceeds the premium received when the option was written)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is extinguished. If a call option which the
Fund has written is exercised, the Fund realizes a capital gain or loss
(long-term or short-term, depending on the holding period of the underlying
security) from the sale of the underlying security and the proceeds from the
sale are increased by the premium originally received. If a put option which a
Fund has written is exercised, the amount of the premium originally received
reduces the cost of the security which the Fund purchases upon exercise of the
option.
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.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
CONCENTRATION OF RISK
The ability of the issuers of debt securities held by the Fund to meet their
obligations may be affected by economic and political developments particular to
a specific industry, country or region. Mortgage securities may decrease in
value as a result of increases in interest rates and may benefit less than other
fixed-income securities from declining interest rates because of risk of
prepayments. Investing in securities of foreign issuers and currency
transactions may involve certain considerations and risks not typically
associated with investments in the United States. These risks include
revaluation of currencies, adverse fluctuations in foreign currency values and
possible adverse political, social and economic developments, including those
particular to a specific industry, country or region, which could cause the
securities and their markets to be less liquid and prices more volatile than
those of comparable U.S. companies and U.S. government securities. These risks
are greater with respect to securities of issuers located in emerging market
countries in which the Fund is authorized to invest.
WRITTEN OPTION ACTIVITY
Transactions in options written for the six months ended May 31, 1999 were as
follows:
<TABLE>
<CAPTION>
Number of
Options Premiums
---------- ----------
<S> <C> <C>
Options outstanding at November 30, 1998 .......................... 0 $ 0
Options written .................................................... 300 147,731
Options terminated in closing purchase transactions ................ (300) (147,731)
Options expired .................................................... 0 0
---------- ----------
Options outstanding at May 31, 1999 ................................ 0 $ 0
========== ==========
</TABLE>
INVESTMENT ADVISER AND ADMINISTRATOR
The Trust's board of trustees has approved an Investment Advisory and
Administration Contract ("Advisory Contract") with Mitchell Hutchins, under
which Mitchell Hutchins serves as investment adviser and administrator of the
Fund. In accordance with the Advisory Contract, the Fund pays Mitchell Hutchins
an investment advisory and administration fee, which is accrued daily and paid
monthly, at the annual rate of 0.75% of the Fund's average daily net assets. At
May 31, 1999 the Fund owed Mitchell Hutchins $73,891 in investment advisory and
administration fees.
DISTRIBUTION PLANS
Mitchell Hutchins is the distributor of the Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. Under separate
plans of distribution pertaining to Class A, Class B and Class C shares, the
Fund pays Mitchell Hutchins monthly service fees at an annual rate of 0.25% of
the average daily net assets of Class A, Class B and Class C shares and monthly
distribution fees at an annual rate of 0.75% and 0.50% of the average daily net
assets of Class B shares and Class C shares, respectively. At May 31, 1999, the
Fund owed Mitchell Hutchins $65,751 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 B and Class C shares. Mitchell Hutchins has informed the Fund that for the
six months ended May 31, 1999, it earned $91,093 in sales charges.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
SECURITY LENDING
The Fund may lend securities up to 33 1/3% of its total assets to qualified
institutions. The loans are secured at all times by cash, U.S. government
securities or irrevocable letters of credit that meet certain guidelines
established by Mitchell Hutchins, in an amount at least equal to the market
value of the securities loaned, plus accrued interest, determined on a daily
basis and adjusted accordingly. The Fund will 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. For the
six months ended May 31, 1999, the Fund earned $826 for lending its securities
and PaineWebber earned $221 as the Fund's lending agent. At May 31, 1999, the
Fund owed PaineWebber $30 for security lending fees. There were no security out
on loan on May 31, 1999.
BANK LINE OF CREDIT
The Fund may participate with other funds managed by Mitchell Hutchins in a
$200 million committed credit facility ("Facility") to be used for temporary
financing until the settlement of sale or purchase of portfolio securities, the
repurchase or redemption of shares of the Fund at the request of the
shareholders and other temporary or emergency purposes. In connection therewith,
the Fund has agreed to pay commitment fees on its pro rata portion of the
Facility. Interest is charged to the Fund at rates based on prevailing market
rates in effect at the time of borrowings. For the six months ended May 31,
1999, the Fund did not borrow under the Facility.
Transfer Agency and Related Services Fees
PaineWebber provides transfer agency related services to each Fund pursuant
to a delegation of authority from PFPC Inc., the Funds' transfer agent, and is
compensated for these services by PFPC Inc., not the Funds. For the six months
ended May 31, 1999, PaineWebber received from PFPC, Inc., approximately 49% of
the total transfer agency and related services fees collected by PFPC.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at May 31,
1999, was substantially the same as the cost of securities for financial
statement purposes.
At May 31, 1999, the components of the net unrealized depreciation of
investments were as follows:
<TABLE>
<CAPTION>
<S> <C>
Gross appreciation (investments having an excess of value over cost) ......................... $ 2,529,547
Gross depreciation (investments having an excess of cost over value) ......................... (8,332,709)
------------
Net unrealized depreciation of investments ................................................... $ (5,803,162)
============
For the six months ended May 31, 1999, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were as follows:
Purchases .................................................................................... $120,507,864
Sales ........................................................................................ $119,022,864
</TABLE>
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
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, 1998, the Fund had a net capital loss carryforward of
$8,272,790 that will expire between November 30, 2002 and November 30, 2006.
This loss carryforward is available as a reduction, to the extent provided in
the regulations, of future net realized capital gains. To the extent that such
losses are used to offset future net realized capital gains, it is probable
these gains will not be distributed.
SHARES OF BENEFICIAL INTEREST
There is an unlimited amount of $0.001 par value shares of beneficial
interest authorized. Transactions in shares of beneficial interest were as
follows:
<TABLE>
<CAPTION>
Class A Class B
------------------------ ------------------------
Shares Amount Shares Amount
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
For the six months ended May 31, 1999:
Shares sold ............................................ 1,222,072 $10,982,103 670,139 $5,997,364
Shares repurchased ..................................... (902,200) (8,105,916) (624,170) (5,586,682)
Shares converted from Class B to Class A ............... 142,877 1,277,567 (143,058) (1,277,567)
Dividends reinvested ................................... 103,526 924,764 93,638 835,386
---------- ---------- --------- ----------
Net increase (decrease) ................................ 566,275 $ 5,078,518 (3,451) $ (31,499)
========== ========== ========= ==========
<CAPTION>
Class C Class Y
------------------------ ------------------------
Shares Amount Shares Amount
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
For the six months ended May 31, 1999:
Shares sold ............................................ 400,874 $3,588,263 88,248 $797,898
Shares repurchased ..................................... (446,753) (4,006,825) (69,352) (624,710)
Shares converted from Class B to Class A ............... -- -- -- --
Dividends reinvested ................................... 89,695 800,633 4,197 37,504
---------- ---------- --------- ----------
Net increase (decrease) ................................ 43,816 $ 382,071 23,093 $210,692
========== ========== ========= ==========
<CAPTION>
Class A Class B
------------------------- --------------------------
Shares Amount Shares Amount
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
For the year ended November 30, 1998:
Shares sold ............................................ 2,240,724 $21,438,510 1,981,199 $18,796,882
Shares repurchased ..................................... (1,065,267) (10,047,449) (1,030,221) (9,736,522)
Shares converted from Class B to Class A ............... 442,232 4,202,593 (442,802) (4,202,593)
Dividends reinvested ................................... 153,189 1,439,464 144,447 1,358,408
---------- ----------- --------- -----------
Net increase ........................................... 1,770,878 $17,033,118 652,623 $ 6,216,175
========== =========== ========= ===========
<CAPTION>
Class C Class Y+
------------------------ --------------------------
Shares Amount Shares Amount
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
For the year ended November 30, 1998:
Shares sold ............................................ 1,311,569 $12,448,834 95,482 $ 905,166
Shares repurchased ..................................... (529,973) (5,029,905) (11,995) (110,407)
Shares converted from Class B to Class A ............... -- -- -- --
Dividends reinvested ................................... 137,074 1,288,391 2,597 23,987
---------- ----------- --------- ----------
Net increase ........................................... 918,670 $8,707,320 86,084 $ 818,746
========== =========== ========= ==========
</TABLE>
- ----------
+ For the Period February 17, 1998 through November 30, 1998
21
<PAGE>
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22
<PAGE>
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23
<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 Six For the Years Ended February 1, 1996
Months Ended November 30, through
May 31, 1999 ------------------- November 30,
(unaudited) 1998 1997 1996
----------- -------- ------- ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ............... $ 9.06 $ 9.60 $ 9.37 $ 8.99
------- ------- ------- ------
Net investment income .............................. 0.33 0.64 0.74 0.57
Net realized and unrealized gains (losses)
from investments, foreign currency,
futures contracts and written options ......... (0.19) (0.48) 0.17 0.39
------- ------- ------- ------
Net increase (decrease) from
investment operations ......................... 0.14 0.16 0.91 0.96
------- ------- ------- ------
Dividends from net investment income ............... (0.36) (0.70) (0.68) (0.58)
Distributions from net realized gains
from foreign currency transactions ............ -- -- -- --
------- ------- ------- ------
Total dividends and distributions to shareholders .. (0.36) (0.70) (0.68) (0.58)
------- ------- ------- ------
Net asset value, end of period ..................... $ 8.84 $ 9.06 $ 9.60 $ 9.37
======= ======= ======= ======
Total investment return (1) ........................ 1.59% 1.65% 10.04% 11.14%
======= ======= ======= ======
Ratios/Supplemental data:
Net assets, end of period (000's) .................. $39,915 $35,778 $20,909 $9,944
Expenses to average net assets (2) ................. 1.31%* 1.34% 1.65% 1.89%*
Net investment income to average net assets ........ 7.28%* 6.97% 7.35% 7.69%*
Portfolio turnover rate ............................ 110% 192% 140% 101%
<CAPTION>
Class A
---------------------------------------------------------------
For the Period
For the February 7, 1994+
Year Ended through
January 31, January 31,
1996 1995
----------- -----------------
<S> <C> <C>
Net asset value, beginning of period ............... $ 8.60 $ 10.00
------- -------
Net investment income .............................. 0.67 0.74
Net realized and unrealized gains (losses)
from investments, foreign currency,
futures contracts and written options ......... 0.59 (1.49)
------- -------
Net increase (decrease) from
investment operations ......................... 1.26 (0.75)
------- -------
Dividends from net investment income ............... (0.77) (0.65)
Distributions from net realized gains
from foreign currency transactions ............ (0.10) --
------- -------
Total dividends and distributions to shareholders .. (0.87) (0.65)
------- -------
Net asset value, end of period ..................... $ 8.99 $ 8.60
======= =======
Total investment return (1) ........................ 15.27% (7.61)%
======= =======
Ratios/Supplemental data:
Net assets, end of period (000's) .................. $ 9,841 $11,148
Expenses to average net assets (2) ................. 1.74% 1.49%*
Net investment income to average net assets ........ 8.52% 8.06%*
Portfolio turnover rate ............................ 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 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, and 2.45% for Class B.
24
<PAGE>
<TABLE>
<CAPTION>
Class B
---------------------------------------------------------------
For the Period
For the Six For the Years Ended February 1, 1996
Months Ended November 30, through
May 31, 1999 ------------------- November 30,
(unaudited) 1998 1997 1996
----------- -------- ------- ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ............... $ 9.05 $ 9.59 $ 9.36 $ 8.98
------- ------- ------- -------
Net investment income .............................. 0.29 0.56 0.67 0.51
Net realized and unrealized gains (losses)
from investments, foreign currency,
futures contracts and written options ......... (0.18) (0.47) 0.16 0.39
------- ------- ------- -------
Net increase (decrease) from
investment operations ......................... 0.11 0.09 0.83 0.90
------- ------- ------- -------
Dividends from net investment income ............... (0.33) (0.63) (0.60) (0.52)
Distributions from net realized gains
from foreign currency transactions ............ -- -- -- --
------- ------- ------- -------
Total dividends and distributions to shareholders .. (0.33) (0.63) (0.60) (0.52)
------- ------- ------- -------
Net asset value, end of period ..................... $ 8.83 $ 9.05 $ 9.59 $ 9.36
======= ======= ======= =======
Total investment return (1) ........................ 1.20% 0.87% 9.20% 10.46%
======= ======= ======= =======
Ratios/Supplemental data:
Net assets, end of period (000's) .................. $44,088 $45,217 $41,650 $37,249
Expenses to average net assets (2) ................. 2.09%* 2.12% 2.43% 2.63%*
Net investment income to average net assets ........ 6.52%* 5.98% 6.56% 6.93%*
Portfolio turnover rate ............................ 110% 192% 140% 101%
<CAPTION>
Class B
---------------------------------------------------------------
For the Period
For the February 7, 1994+
Year Ended through
January 31, January 31,
1996 1995
----------- -----------------
<S> <C> <C>
Net asset value, beginning of period ............... $ 8.60 $ 10.00
------- -------
Net investment income .............................. 0.60 0.66
Net realized and unrealized gains (losses)
from investments, foreign currency,
futures contracts and written options ......... 0.59 (1.47)
------- -------
Net increase (decrease) from
investment operations ......................... 1.19 (0.81)
------- -------
Dividends from net investment income ............... (0.71) (0.59)
Distributions from net realized gains
from foreign currency transactions ............ (0.10) --
------- -------
Total dividends and distributions to shareholders .. (0.81) (0.59)
------- -------
Net asset value, end of period ..................... $ 8.98 $ 8.60
======= =======
Total investment return (1) ........................ 14.37% (8.22)%
======= =======
Ratios/Supplemental data:
Net assets, end of period (000's) .................. $40,653 $40,710
Expenses to average net assets (2) ................. 2.49% 2.24%*
Net investment income to average net assets ........ 7.77% 7.46%*
Portfolio turnover rate ............................ 91% 117%
</TABLE>
25
<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 C
-----------------------------------------------------------------
For the Period
For the Six For the Years Ended February 1, 1996
Months Ended November 30, through
May 31, 1999 --------------------- November 30,
(unaudited) 1998 1997 1996
----------- -------- ------- ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ................... $ 9.05 $ 9.59 $ 9.37 $ 8.98
------- ------- ------- ------
Net investment income .................................. 0.30 0.59 0.70 0.53
Net realized and unrealized gains (losses)
from investments, foreign currency,
futures contracts and written options ............. (0.18) (0.48) 0.15 0.40
------- ------- ------- ------
Net increase (decrease) from
investment operations ............................. 0.12 0.11 0.85 0.93
------- ------- ------- ------
Dividends from net investment income ................... (0.34) (0.65) (0.63) (0.54)
Distributions from net realized gains
from foreign currency transactions ................ -- -- -- --
------- ------- ------- ------
Total dividends and distributions to shareholders ...... (0.34) (0.65) (0.63) (0.54)
------- ------- ------- ------
Net asset value, end of period ......................... $ 8.83 $ 9.05 $ 9.59 $ $ 9.37
======= ======= ======= ======
Total investment return (1) ............................ 1.33% 1.14% 9.37% 10.80%
======= ======= ======= ======
Ratios/Supplemental data:
Net assets, end of period (000's) ...................... $29,789 $30,133 $23,117 $17,101
Expenses to average net assets (2) ..................... 1.82%* 1.86% 2.17% 2.38%*
Net investment income to average net assets ............ 6.78%* 6.24% 6.82% 7.19%*
Portfolio turnover rate ................................ 110% 192% 140% 101%
<CAPTION>
Class C Class Y
-------------------------------- --------------------------------
For the Period For the Period
For the February 7, 1994+ For the Six February 17, 1998+
Year Ended through Months Ended through
January 31, January 31, May 31, 1999 November 30,
1996 1995 (unaudited) 1998
----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ................... $ 8.60 $ 10.00 $ 9.05 $ 9.72
------- ------- ------ ------
Net investment income .................................. 0.62 0.69 0.32 0.56
Net realized and unrealized gains (losses)
from investments, foreign currency,
futures contracts and written options ............. 0.59 (1.48) (0.17) (0.66)
------- ------- ------ ------
Net increase (decrease) from
investment operations ............................. 1.21 (0.79) 0.15 (0.10)
------- ------- ------ ------
Dividends from net investment income ................... (0.73) (0.61) (0.37) (0.57)
Distributions from net realized gains
from foreign currency transactions ................ (0.10) -- -- --
------- ------- ------ ------
Total dividends and distributions to shareholders ...... (0.83) (0.61) (0.37) (0.57)
------- ------- ------ ------
Net asset value, end of period ......................... $ 8.98 $ 8.60 $ 8.83 $ 9.05
======= ======= ====== ======
Total investment return (1) ............................ 14.63% (8.02)% 1.72% (1.04)%
======= ======= ====== ======
Ratios/Supplemental data:
Net assets, end of period (000's) ...................... $19,232 $21,208 $ 965 $ 779
Expenses to average net assets (2) ..................... 2.24% 1.98%* 1.06%* 1.07%*
Net investment income to average net assets ............ 8.03% 7.62%* 7.50%* 7.26%*
Portfolio turnover rate 91% 117% 110% 192%
</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 or program fees; results would be lower if sales
charges or program fees 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
2.18% for Class C shares.
26
<PAGE>
================================================================================
TRUSTEES
E. Garrett Bewkes, Jr. Meyer Feldberg
Chairman George W. Gowen
Margo N. Alexander Frederic V. Malek
Richard Q. Armstrong Carl W. Schafer
Mary C. Farrell Brian M. Storms
OFFICERS
Margo N. Alexander Thomas J. Libassi
President Vice President
Victoria E. Schonfeld Dennis L. McCauley
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
INVESTMENT ADVISOR,
ADMINISTRATOR AND DISTRIBUTOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
This report is not to be used in connection with the offering of shares of the
Fund unless accompanied or preceded by an effective prospectus.
The financial information included herein is taken from the records of the Fund
without examination by independent accountants who do not express an opinion
thereof.
A prospectus containing more complete information for any of the Funds listed on
the back cover can be obtained from a PaineWebber Financial Advisor or
corresponding firm. Read the prospectus carefully before investing.
<PAGE>
PaineWebber offers a family of 27 funds which encompass a diversified range of
investment goals.
BONDS 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 Tax-Managed Equity 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)1999 PaineWebber Incorporated
Member SIPC
PaineWebber
- ----------------------------------
STRATEGIC
INCOME FUND
MAY 31, 1999
SEMIANNUAL REPORT
