<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 (A, B, C), the Lehman Aggregate Bond Index, the Salomon World
Government Bond Index and the Merrill Lynch High Yield Master Index from
February 28,1994 to November 30, 1998
[PERFORMANCE GRAPH]
The graph depicts the performance of PaineWebber Strategic Income Fund versus
the Lehman Aggregate Bond Index, the Salomon World Government Bond Index and the
Merrill Lynch High Yield Master Index for the period from 2/28/94 to 11/30/98.
It is important to note PaineWebber Strategic Income Fund is a professionally
managed mutual fund while the indices are not available for investment and are
unmanaged. The comparisons are shown for illustrative purposes only.
Past performance is no guarantee of future performance.
The performance of the classes varies based on the different sales charges and
fees paid by shareholders in different classes.
AVERAGE ANNUAL TOTAL RETURN
Periods Ended 11/30/98
One Year Life****
-------- --------
Class A* 1.65% 6.00%
Before Deducting Class B** 0.87% 5.21%
Maximum Sales Charge
Class C*** 1.14% 5.47%
Class A* -2.41% 5.10%
After Deducting Class B** -3.85% 4.90%
Maximum Sales Charge
Class C*** 0.43% 5.47%
* 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 six 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 one year. Class C Shares bear ongoing 12b-1
distribution and service fees.
**** Life: since commencement of issuance on February 7, 1994 for Class A,
Class B and Class C shares.
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 that may invest in PaineWebber mutual funds. Since inception on
February 17, 1998 to November 30, 1998, Class Y shares lost 1.04%. Class Y
shares do not bear initial or contingent deferred sales charges or ongoing
distribution and service fees.
The investment return and the principal value of an investment in the Fund will
fluctuate, so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
1
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND ANNUAL REPORT
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:
$111.9 million as of November 30, 1998
Dividend Payments:
Monthly
January 15, 1999
Dear Shareholder,
We are pleased to present you with the annual report for the PaineWebber
Strategic Income Fund ("the Fund") for the fiscal year ended November 30,
1998.
MARKET REVIEW
- --------------------------------------------------------------------------------
"Flight to quality" remained the dominant theme in the bond markets during
the fiscal year ended November 30, 1998, as investors sought the safety and
liquidity of U.S. Treasury securities, especially short- to intermediate-term
debt.
Turmoil hit the global capital markets in August when Russia devalued its
currency and effectively defaulted on its internal debt. The ensuing sell-off in
the global equity and emerging debt markets spurred the flight to U.S. Treasurys
to an even higher pitch. All sectors of the bond market suffered as risk
premiums soared. Emerging market debt fared the worst, with the high yield
sector following a distant second. U.S. corporate bonds were hard hit, and
corporations suffered from a market-induced credit crunch.
The global sell-off continued to disrupt the financial markets in September.
Initial public offerings of stocks and the entire high-yield debt market ground
to a virtual halt. With market conditions so fragile, the Federal Reserve
lowered the Fed Funds rate (the rate for overnight loans) from 5.50% to 5.25%.
Barely two weeks into October, the Fed again lowered the Fed Funds rate and also
lowered the discount rate (the rate commercial banks pay to borrow from the
Federal Reserve). The market took this action as a sign of the Fed's resolve to
keep the economy growing in its effort to avoid a recession. Investors reacted
positively--the stock market rose and shorter-maturity Treasurys rallied.
Corporate bonds continued to lose ground as they lagged the rally in Treasury
yields.
The Fed lowered both rates again in November, and several European central
banks followed suit in preparation for the January 1, 1999 debut of the euro
currency. The third rate reduction in as many months boosted corporate bonds and
mortgage-backed securities as market psychology and liquidity improved.
PORTFOLIO REVIEW
- --------------------------------------------------------------------------------
PERFORMANCE
The Fund's total return consists of the change in net asset value with
dividends reinvested. For the fiscal year ended November 30, 1998, without
deducting sales charges, Class A shares gained 1.65%, Class B shares gained
0.87% and Class C shares gained 1.14%. Class Y shares commenced issuance on
February 17, 1998; from commencement through November 30, 1998, Class Y shares
lost 1.04%.
The Fund's total return may be lower for shareowners who purchased or
redeemed Fund shares during the period. After deducting the maximum applicable
sales charges, Class A shares lost 2.41%, Class B shares lost 3.85% and Class C
shares gained 0.43%. Class Y shares are not subject to sales charges.
2
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND ANNUAL REPORT
PORTFOLIO 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.
Throughout the fiscal year, the Fund held positions consistent with our
long-term view that interest rates would continue to fall. The Fund began the
fiscal year with 47% of its portfolio in U.S. government and investment-grade
corporate bonds, 37% in high-yield bonds, 11% in foreign and emerging market
debt and 5% in cash. During the first half of the fiscal year these weightings
benefited the Fund as "flight-to-quality" buying drove up prices of U.S.
Treasurys and demand spread to the corporate and high-yield sectors.
After the high-yield market weakened in April, we increased the Fund's
allocation to high-yield bonds in the belief that prices would rebound. Instead,
high-yield bonds suffered along with the rest of the bond market in the wake of
the Russian crisis. The Fund's high-yield and non-U.S. positions hurt returns.
From July to October, we gradually decreased exposure to high-yield bonds and
non-U.S. bonds while raising cash to defend the portfolio. As signs of recovery
appeared in November we reinvested in those sectors.
High-Yield Sector--The Fund's overweighting in smaller U.S. issues hurt
performance as those issues lagged the overall high-yield market. Historically,
smaller issues (less than $200 million) generally have been less volatile than
larger issues. We think the higher volatility of smaller issues during the last
fiscal year may reflect a structural change in the market, with institutional
investors, who tend to buy larger issues, exerting greater influence. We have
begun redeploying assets into larger issues, and expect to continue this
redeployment going forward.
U.S. Government and Investment Grade Sector--The Fund began the latter half
of its fiscal year overweighted in mortgage-backed and government agency
securities, as we maintained our focus on adding portfolio value by enhancing
yield. At the same time, we emphasized call protection in an environment of
heightened prepayment risk. We kept the Fund's exposure to the sector about the
same through the period.
We believe mortgage spreads to Treasurys are extremely attractive despite
high prepayment risks. We think investors have become more credit-risk averse in
reaction to events in international markets, and we believe the high credit
quality of mortgage securities and their historically low prices will attract
investors to the sector.
Global Sector--Our de-emphasis of non-U.S. exposure during the first half of
the fiscal year helped protect the Fund in the second half, though exposure to
anything besides U.S. Treasurys lowered returns. The Fund remained underweighted
in Europe, concentrating its holdings in the intermediate maturities of Germany,
Holland and the United Kingdom. Within the emerging markets allocation we
shifted exposure away from Latin America in favor of Europe and Asia.
PAINEWEBBER
STRATEGIC
INCOME FUND
[BELOW IS REPRESENTATION OF A PIE CHART]
Sector Allocation(1)
[plot points needed]
U.S. high yield ..............................
U.S. gov't/investment-grade corp. ............
Foreign/emerging markets .....................
Cash/cash equivalents ........................
(1) All weightings represent net assets as of November 30, 1998, unless noted
otherwise. The portfolio is actively managed and all holdings are subject
to change.
3
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND ANNUAL REPORT
OUTLOOK
- --------------------------------------------------------------------------------
While the U.S. manufacturing sector has been losing jobs and industrial
production has been flat since Asia began unraveling in late 1997, the larger
economy has proven resilient. As of this writing, gross domestic product for
1998 is likely to have reached 3.8%, the same rate as 1996 and 1997. Ironically,
the same forces that weakened manufacturing stimulated demand--by deflating
import prices. This immunity to weakening U.S. exports is likely to be further
tested, as widespread weakness in commodity prices underscores a global economy
at risk of recession.
Consumer spending continues to drive the U.S. economy; the savings rate
recently fell into negative territory. This may be an indication of just how
dependent the U.S. economy is on the strength of the stock market, since the
"wealth effect" of stock gains strongly affects consumers' perceptions of how
much they can afford to spend. If the corporate earnings outlook does not
improve, the wealth effect could dissipate.
Bond market liquidity has improved, but may worsen again if any of a number
of potential problems arises: a further deterioration of Brazil's financial
condition, weakness in the U.S. stock market or further spread of the Asian
crisis. We expect the economy to grow more slowly in 1999, with inflation
remaining benign, and do not believe a recession is likely. In this economic
environment we foresee the 30-year Treasury bond trading within a 4.75-5.75%
range.
Based on our outlook we believe the high-yield and U.S.
government/investment-grade sectors are poised to recover, and have weighted the
Fund toward these sectors (see allocation graph on page 3).
4
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND ANNUAL 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 the PaineWebber Strategic Income Fund or another
fund in the PaineWebber Family of Funds,(2) please contact your Investment
Executive.
Sincerely,
/s/ MARGO ALEXANDER
- -----------------------------------------
MARGO ALEXANDER
President
Mitchell Hutchins Asset
Management Inc.
/s/ THOMAS J. LIBASSI
- -----------------------------------------
THOMAS J. LIBASSI
Manager, High Yield Sector
PaineWebber Strategic Income Fund
/s/ STUART WAUGH
- -----------------------------------------
STUART WAUGH
Manager, Foreign and
Emerging Markets Sector
PaineWebber Strategic Income Fund
/s/ DENNIS L. MCCAULEY
- -----------------------------------------
DENNIS L. MCCAULEY
Chief Investment Officer--Fixed Income
Mitchell Hutchins Asset Management Inc.
Allocation Manager
PaineWebber Strategic Income Fund
/s/ NIRMAL SINGH
- -----------------------------------------
NIRMAL SINGH
Manager, U.S. Government and
Investment Grade Sector
PaineWebber Strategic Income Fund
/s/ CRAIG M. VARRELMAN
- -----------------------------------------
CRAIG M. VARRELMAN
Portfolio Manager, U.S. Government and
Investment Grade Sector
PaineWebber Strategic Income Fund
/s/ JAMES F. KEEGAN
- -----------------------------------------
JAMES F. KEEGAN
Portfolio Manager, U.S. Government and
Investment Grade Sector
PaineWebber Strategic Income Fund
This letter is intended to assist shareholders in understanding how the Fund
performed during the fiscal year ended November 30, 1998, and reflects our views
at the time of 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.
(2) 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.
5
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
PERFORMANCE RESULTS (unaudited)
<TABLE>
<CAPTION>
Total Return(1)
Net Asset Value -----------------------------------
------------------------------------ 12 Months 6 Months
11/30/98 05/31/98 11/30/97 Ended 11/30/98 Ended 11/30/98
-------- -------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Class A Shares $9.06 $9.64 $9.60 1.65% (2.59)%
Class B Shares 9.05 9.62 9.59 0.87 (2.88)
Class C Shares 9.05 9.63 9.59 1.14 (2.84)
<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
01/01/98-11/30/98 9.56 9.06 -- 0.6102 1.10
Totals: $0.0000 $3.4754
Cumulative Total Return as of 11/30/98: 32.40%
<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
01/01/98-11/30/98 9.55 9.05 -- 0.5428 0.38
Totals: $0.0000 $3.1516
Cumulative Total Return as of 11/30/98: 27.72%
<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
01/01/98-11/30/98 9.56 9.05 -- 0.5663 0.52
Totals: $0.0000 $3.2610
Cumulative Total Return as of 11/30/98: 29.22%
</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 eligible
investors, including participants in certain investment programs that are
sponsored by PaineWebber and may invest in PaineWebber mutual funds. Since
inception, February 17, 1998 through November 30, 1998, Class Y shares had a
total return of (1.04)%. Class Y shares do not have initial or contingent
deferred sales charges or ongoing distribution and service fees.
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, 1998
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- --------- -------- -------- -----
<S> <C> <C> <C>
U.S. GOVERNMENT AND INVESTMENT GRADE OBLIGATIONS--37.00%
U.S. Government Obligations--3.11%
$ 3,000 U.S. Treasury Bonds (cost -- $3,082,322)............................. 08/15/27 6.375% $ 3,479,064
-----------
Government National Mortgage Association Certificates--4.86%
5,172 GNMA (cost -- $5,459,593)........................................... 06/15/17 to 11/15/17 8.000 5,443,328
-----------
Federal National Mortgage Association Certificates--13.66%
6,000 FNMA................................................................. 05/15/08 6.000 6,352,164
9,000 FNMA 30 year TBA..................................................... TBA 6.000 to 6.500 8,938,128
-----------
Total Federal National Mortgage Association Certificates (cost -- $15,364,836)... 15,290,292
-----------
Collateralized Mortgage Obligations--15.37%
4,000 CS First Boston Mortgage Securities Corp. Series 1997-C2, Class A2... 07/17/07 6.520 4,169,000
1,000 DLJ Commercial Mortgage Corporation, Series 1998-CGI, Class A1B...... 05/10/08 6.410 1,033,530
6,810 First Union Lehman Brothers Mortgage Trust Series 1997-C2, Class A3.. 12/18/07 6.650 6,976,913
5,000 FNMA REMIC Series 1993-87 Class J.................................... 04/25/22 6.250 5,015,284
-----------
Total Collateralized Mortgage Obligations (cost -- $16,767,083).................. 17,194,727
-----------
Total U.S. Government and Investment Grade Obligations (cost -- $40,673,834)..... 41,407,411
-----------
GLOBAL DEBT SECURITIES--13.89%
Brazil--1.52%
2,591 Federal Republic of Brazil, C........................................ 04/15/14 8.000 1,703,427
-----------
Germany--2.99%
5,000* Federal Republic of Germany.......................................... 01/04/07 6.000 3,349,937
-----------
Greece--1.86%
580,000* Hellenic Republic.................................................... 03/21/02 to 03/26/08 8.600 to 9.200 2,078,595
-----------
Mexico--0.96%
1,342 United Mexican States, DISC(1)....................................... 12/31/19 6.116++ 1,076,955
-----------
New Zealand--2.02%
3,750* Government of New Zealand............................................ 03/15/02 10.000 2,257,292
-----------
Poland--1.96%
3,310 Republic of Poland, PAR.............................................. 10/27/24 3.000(b) 2,197,012
-----------
South Korea--0.48%
550 Republic of Korea.................................................... 04/15/08 8.875 539,000
-----------
United Kingdom--2.10%
1,121* United Kingdom Gilt.................................................. 07/14/00 to 12/07/15 8.000 to 13.000 2,343,043
-----------
Total Global Debt Securities (cost -- $15,416,537)............................... 15,545,261
-----------
HIGH YIELD SECURITIES--46.98%
Corporate Bonds--43.96%
Airlines--0.71%
750 Airplane Pass Through Trust.......................................... 03/15/19 10.875 793,125
-----------
</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)
Cable--3.84%
$ 1,000 21st Century Telecommunications Group Incorporated.............. 02/15/08 12.250%+ $ 420,000
1,500 @ Entertainment Incorporated.................................... 07/15/08 14.500+ 660,000
2,000 Knology Holdings Incorporated................................... 10/15/07 11.875+ 980,000
1,000 NTL Incorporated**.............................................. 10/01/08 11.500 1,116,250
1,000 RCN Corporation................................................. 10/15/07 11.125+ 575,000
1,000 UIH Australia Pacific Incorporated.............................. 05/15/06 14.000+ 540,000
-----------
4,291,250
-----------
Communications--11.66%
750 Allegiance Telecom, Incorporated................................ 05/15/08 12.875 750,000
1,000 Barak ITC....................................................... 11/15/07 12.500+ 515,000
1,000 COLT Telecom Group PLC.......................................... 12/15/06 12.000+ 840,000
625 GST Equipment Funding Incorporated.............................. 05/01/07 13.250 643,750
1,000# ICO Global Communications....................................... 08/01/05 15.000 780,000
1,000 Metromedia Fiber Network Incorporated**......................... 11/15/08 10.000 1,040,000
2,500 Nextel Communications Incorporated.............................. 02/15/08 9.950+ 1,550,000
1,500 Nextel International Incorporated............................... 04/15/08 12.125+ 705,000
750 Northeast Optic Network......................................... 08/15/08 12.750 735,000
1,000 Orange PLC...................................................... 08/01/08 8.000 1,015,000
750 Pathnet Incorporated............................................ 04/15/08 12.250 573,750
1,100 PSI Net Incorporated............................................ 02/15/05 10.000 1,100,000
1,000 Qwest Communications International Incorporated**............... 11/01/08 7.500 1,027,500
500 Verio Incorporated.............................................. 06/15/04 and 04/01/05 10.375 and 13.500 536,250
500 Verio Incorporated**............................................ 12/01/08 11.250 520,000
1,250 Viatel Incorporated............................................. 04/15/08 12.500+ 721,875
-----------
13,053,125
-----------
Consumer Manufacturing--2.58%
500 Apparel Ventures Incorporated................................... 12/31/00 12.250 455,000
1,000 Decora Industries Incorporated.................................. 05/01/05 11.000 900,000
500 EKCO Group Incorporated......................................... 04/01/06 9.250 500,000
1,000 Westpoint Stevens Incorporated.................................. 06/15/08 7.875 1,031,250
-----------
2,886,250
-----------
Energy--1.59%
1,000 Grant Geophysical Incorporated.................................. 02/15/08 9.750 750,000
1,000 Northern Offshore ASA**......................................... 05/15/05 10.000 640,000
625 TransAmerican Energy Corporation................................ 06/15/02 13.000+ 218,750
500# TransAmerican Refining Corporation**............................ 06/30/03 16.000 175,000
-----------
1,783,750
-----------
Entertainment--0.40%
625 Discovery Zone Incorporated..................................... 08/01/02 13.500 300,000
148# Discovery Zone Incorporated**................................... 05/01/02 13.500 148,000
-----------
448,000
-----------
Finance--0.80%
500 Olympic Financial Limited....................................... 03/15/07 11.500 380,000
625 Signet Capital Trust I.......................................... 08/15/27 9.500 512,500
-----------
892,500
-----------
</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 (continued)
Food & Beverage--1.65%
$ 1,000 Iowa Select Farms L. P.**........................................... 12/01/05 10.750% $ 850,000
1,000 Packaged Ice Incorporated........................................... 02/01/05 9.750 1,000,000
-----------
1,850,000
-----------
General Industrial--3.95%
500 Aqua Chemical Incorporated**........................................ 07/01/08 11.250 470,000
1,000 Coltec Industries Incorporated...................................... 04/15/08 7.500 1,045,000
1,000 Goss Graphic Systems Incorporated................................... 10/15/06 12.000 950,000
1,000 Jordan Telecommunication Products................................... 08/01/07 9.875 1,000,000
1,000 J.B. Poindexter & Company Incorporated.............................. 05/15/04 12.500 950,000
-----------
4,415,000
-----------
Healthcare--0.92%
1,000 Tenet Healthcare Corporation**...................................... 12/01/08 8.125 1,032,500
-----------
Hotels & Lodging--0.48%
625 Silverleaf Resorts Incorporated..................................... 04/01/08 10.500 531,250
-----------
Media--0.78%
500 Impac Group Incorporated............................................ 03/15/08 10.125 492,500
500 Source Media Incorporated........................................... 11/01/04 12.000 385,000
-----------
877,500
-----------
Metals & Mining--0.98%
1,000 Metal Management Incorporated....................................... 05/15/08 10.000 580,000
500 WCI Steel Incorporated.............................................. 12/01/04 10.000 511,250
-----------
1,091,250
-----------
Packaging--1.08%
750 Bear Island LLC..................................................... 12/01/07 10.000 759,375
500 Vicap, S.A. de C.V. ................................................ 05/15/07 11.375 450,000
-----------
1,209,375
-----------
Real Estate and Buildings--1.15%
625 American Architectural Products..................................... 12/01/07 11.750 531,250
750 Forest City Enterprises Incorporated................................ 03/15/08 8.500 753,750
-----------
1,285,000
-----------
Restaurants--0.80%
1,000 American Restaurant Group Incorporated.............................. 02/15/03 11.500 900,000
-----------
Retail--3.08%
1,000 Advance Holding Corporation**....................................... 04/15/09 12.875+ 590,000
500 Big 5 Corporation................................................... 11/15/07 10.875 515,000
750 Jafra Cosmetics International Incorporated**........................ 05/01/08 11.750 682,500
750 Mrs. Fields Original Cookies Incorporated........................... 12/01/04 10.125 690,000
1,000 Tuesday Morning Corporation......................................... 12/15/07 11.000 970,000
-----------
3,447,500
-----------
Technology--2.24%
500 Ampex Corporation (c)............................................... 03/15/03 12.000 500,000
2,000 Electronic Retailing Systems International.......................... 02/01/04 13.250+ 720,000
1,750 InterAct Systems Incorporated....................................... 08/01/03 14.000+ 717,500
625 Samsung Electronics America Incorporated**.......................... 05/01/03 9.750 571,875
-----------
2,509,375
-----------
</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)
Corporate Bonds (concluded)
Transportation Non-air--4.66%
$ 1,000 American Reefer Company Limited........................ 03/01/08 10.250% $ 760,000
750 Atlantic Express Transportation Corporation............ 02/01/04 10.750 759,375
1,000 Equimar Shipholdings Limited........................... 07/01/07 9.875 810,000
1,000 Millenium Seacarriers Incorporated..................... 07/15/05 12.000 825,000
750 Navigator Gas Transport PLC**.......................... 06/30/07 10.500 690,000
1,000 Stena AB............................................... 06/15/07 8.750 957,500
750 TFM, S.A. de C.V. ..................................... 06/15/09 11.750+ 410,625
-----------
5,212,500
-----------
Utilities--0.61%
624 Panda Funding Corporation.............................. 08/20/12 11.625 686,094
-----------
Total Corporate Bonds (cost -- $55,069,377) 49,195,344
-----------
Convertible Bonds--1.52%
Communications--0.07%
110 GST Telecommunciations Incorporated.................... 12/15/05 13.875+ 79,200
-----------
General Industrial--1.45%
750 Corporate Express Incorporated......................... 07/01/00 4.500 667,500
1,000 Waste Systems International Incorporated**............. 05/13/05 7.000 960,000
-----------
1,627,500
-----------
Total Convertible Bonds (cost -- $1,783,643) 1,706,700
-----------
<CAPTION>
Number of
Shares
- ----------
<S> <C>
Common Stocks(a)--1.37%
Communications--1.10%
7,800 COLT Telecom Group PLC, ADR.......................................................... 409,500
5,282 Verio Incorporated................................................................... 100,358
48,133 Viatel Incorporated.................................................................. 715,978
-----------
1,225,836
-----------
Gaming--0.05%
12,963 JCC Holding Company.................................................................. 51,852
-----------
Media--0.22%
2,000 Affiliated Newspaper Investments Incorporated........................................ 250,000
-----------
Total Common Stocks (cost -- $415,401) 1,527,688
Preferred Stock(a)--0.06%
Communications--0.06%
629 Viatel Incorporated (cost -- $0)..................................................... 72,335
-----------
<CAPTION>
Number of
Warrants
- ---------
<S> <C>
Warrants(a)--0.07%
Cable--0.01%
6,000 @ Entertainment Incorporated......................................................... 6,000
2,000 Knology Holdings Incorporated........................................................ 5,000
1,000 UIH Australia Pacific Incorporated................................................... 5,000
-----------
16,000
-----------
</TABLE>
10
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
Number of
Warrants Value
- --------- -----
<S> <C>
HIGH YIELD SECURITIES (CONCLUDED)
Warrants(a) (concluded)
Communications--0.02%
1,000 Allegiance Telecom Incorporated...................................................... $ 9,750
750 Pathnet Incorporated................................................................. 7,500
-----------
17,250
-----------
Consumer Manufacturing--0.01%
1,044 AVI Holdings Incorporated............................................................ 5,221
-----------
Entertainment--0.00%
625 Discovery Zone Incorporated.......................................................... 6
-----------
Finance--0.00%
500 Olympic Financial Limited............................................................ 2,500
-----------
Technology--0.03%
17,000 Ampex Corporation.................................................................... 12,750
2,000 Electronic Retailing Systems International........................................... 10,000
1,750 InterAct Systems Incorporated........................................................ 8,750
-----------
31,500
-----------
Transportation Non-air--0.00%
1,000 Millenium Seacarriers Incorporated................................................... 625
-----------
Total Warrants (cost -- $51,201)................................................................. 73,102
-----------
Total High Yield Securities (cost -- $57,319,622)................................................ 52,575,169
-----------
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates
- --------- -------- --------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS--11.15%
$ 5,100 Repurchase Agreement dated 11/30/98 with
Bear Stearns & Company, Inc. collateralized
by $5,115,000 U.S. Treasury Notes, 7.00%
due 04/15/99 (value -- $5,205,024);
proceeds: $5,100,744.................................. 12/01/98 5.250% 5,100,000
------------
5,144 Repurchase Agreement dated 11/30/98 with
State Street Bank & Trust Company collateralized
by $3,860,000 U.S. Treasury Bonds, 8.125%
due 08/15/19 (value -- $5,249,600);
proceeds: $5,144,733.................................. 12/01/98 5.130 5,144,000
------------
2,235 Repurchase Agreement dated 11/30/98 with
State Street Bank & Trust Company collateralized
by $1,207,972 U.S. Treasury Bill, 6.75%
due 05/31/99 (value -- $1,220,052) and $1,027,028
U.S. Treasury Notes, 7.25% due 05/15/04
(value -- $1,151,555); proceeds: $2,235,248............ 12/01/98 4.000 2,235,000
------------
Total Repurchase Agreements (cost -- $12,479,000)................. 12,479,000
------------
Total Investments (cost -- $125,888,993) -- 109.02%............... 122,006,841
Liabilities in excess of other assets -- (9.02%).................. (10,099,453)
------------
Net Assets--100.00%............................................... $111,907,388
------------
------------
</TABLE>
11
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
- ------------------
* Stated in local currency.
** Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
# Security represents a unit which is composed of the stated bond with
attached warrants or common stock.
+ Denotes a step-up bond or a zero coupon bond that converts to the noted
fixed rated at a designated future date.
++ Variable rate security, interest rate noted is current rate at
November 30, 1998.
C Capitalization Bond
(a) Non-income producing
(b) Reflects rate at November 30, 1998, on step coupon rate instruments.
(c) Illiquid security representing 0.45% of net assets.
(1) With an additional 2,067,000 recoverable rights attached maturing on
06/30/03 with no market value.
ADR American Depository Receipt
DISC Discount Bonds
PAR Par Bond
REMIC Real Estate Mortgage Investment Conduit
TBA (To Be Assigned) Securities are purchased on a forward commitment
basis with approximately (generally +/-1.0%) principal amount and
generally stated maturity date. The actual principal amount and
maturity date will be determined upon settlement when the specific
mortgage pools are assigned.
FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Unrealized
Contract to Maturity Appreciation
Deliver In Exchange for Date (Depreciation)
----------- --------------- -------- --------------
<S> <C> <C> <C> <C>
British Pounds............................... 315,000 US$ 521,136 12/16/98 $ 1,882
British Pounds............................... 1,360,000 US$ 2,259,436 12/02/98 to 01/04/99 20,528
Deutsche Marks............................... 1,812,500 US$ 1,086,924 12/21/98 17,234
Deutsche Marks............................... 6,812,500 US$ 4,042,021 12/21/98 to 02/12/99 19,083
New Zealand Dollars.......................... 3,800,000 US$ 1,910,260 07/06/99 (98,497)
New Zealand Dollars.......................... 2,349,000 US$ 1,261,671 12/14/98 24,223
U.S. Dollars................................. 1,865,800 NZD 3,800,000 07/06/99 142,957
U.S. Dollars................................. 1,269,869 NZD 2,349,000 12/14/98 (32,421)
U.S. Dollars................................. 83,287 DEM 139,500 02/12/99 (774)
U.S. Dollars................................. 1,121,728 GBP 680,000 12/02/98 (189)
--------
$ 94,026
--------
--------
</TABLE>
- ---------------------------
Currency Type Abbreviation:
NZD--New Zealand Dollars
DEM--Deutsche Marks
GBP--British Pounds
See accompanying notes to financial statements
12
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES NOVEMBER 30, 1998
<TABLE>
<CAPTION>
<S> <C>
Assets
Investments in securities, at value (cost -- $113,409,993) .................................... $ 109,527,841
Repurchase Agreements (cost - $12,479,000) .................................................... 12,479,000
Investments of cash collateral for securities loaned, at value (cost -- $1,081,250) ........... 1,081,250
Interest receivable ........................................................................... 1,830,240
Receivable for investments sold ............................................................... 1,065,534
Receivable for shares of beneficial interest sold ............................................. 230,030
Unrealized appreciation on forward foreign currency contracts ................................. 225,907
Deferred organization costs ................................................................... 10,660
Other assets .................................................................................. 10,803
-------------
Total assets .................................................................................. 126,461,265
-------------
Liabilities
Payable for cash collateral on securities loaned .............................................. 1,081,250
Payable for investments purchased ............................................................. 12,045,920
Payable to custodian .......................................................................... 1,056,848
Unrealized depreciation on forward foreign currency contracts ................................. 131,881
Payable to affiliates ......................................................................... 131,316
Payable for shares of beneficial interest repurchased ......................................... 40,256
Accrued expenses and other liabilities ........................................................ 66,406
-------------
Total liabilities.............................................................................. 14,553,877
-------------
Net Assets
Beneficial interest--$0.001 par value (unlimited amount authorized)............................ 123,719,106
Undistributed net investment income............................................................ 243,848
Accumulated net realized losses from investment, futures and options transactions.............. (8,272,790)
Net unrealized depreciation of investments, futures, options, other assets, liabilities
and forward contracts denominated in foreign currencies ..................................... (3,782,776)
-------------
Net assets .................................................................................... $ 111,907,388
-------------
-------------
Class A:
Net assets .................................................................................... $ 35,778,088
-------------
Shares outstanding ............................................................................ 3,949,724
-------------
Net asset and redemption value per share ...................................................... $ 9.06
-------------
-------------
Maximum offering price per share (net asset value plus sales charge
of 4.00% of offering price)................................................................ $ 9.44
-------------
-------------
Class B:
Net assets .................................................................................... $ 45,216,559
-------------
Shares outstanding ............................................................................ 4,997,598
-------------
Net asset value and offering price per share .................................................. $ 9.05
-------------
-------------
Class C:
Net assets .................................................................................... $ 30,133,342
-------------
Shares outstanding ............................................................................ 3,328,959
-------------
Net asset value and offering price per share .................................................. $ 9.05
-------------
-------------
Class Y:
Net assets .................................................................................... $ 779,399
-------------
Shares outstanding ............................................................................ 86,084
-------------
Net asset value, offering price and redemption value per share ................................ $ 9.05
-------------
</TABLE>
See accompanying notes to financial statements
13
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year
Ended
November 30, 1998
-----------------
<S> <C>
Investment income:
Interest ........................................................................... $ 8,484,073
-----------
Expenses:
Investment advisory and administration ............................................. 779,494
Service fees--Class A .............................................................. 79,357
Service and distribution fees--Class B ............................................. 446,509
Service and distribution fees--Class C ............................................. 204,078
State registration fees ............................................................ 70,899
Transfer agency and service fees ................................................... 63,586
Amortization of organizational expenses ............................................ 60,214
Legal and audit .................................................................... 59,245
Custody and accounting ............................................................. 52,174
Reports and notices to shareholders ................................................ 46,770
Trustees' fees ..................................................................... 10,500
Other expenses ..................................................................... 7,244
-----------
1,880,070
-----------
Net investment income .............................................................. 6,604,003
-----------
Realized and unrealized gains (losses) from investment activities:
Net realized gains (losses) from:
Investment and purchased options transactions ................................... (277,596)
Foreign currency transactions ................................................... 296,940
Futures contracts ............................................................... (121,415)
Written options ................................................................. 49,840
Net change in unrealized appreciation/depreciation of:
Investments ..................................................................... (5,996,644)
Other assets, liabilities and forward contracts denominated
in foreign currencies.......................................................... 95,345
-----------
Net realized and unrealized losses from investment activities ...................... (5,953,530)
-----------
Net increase in net assets resulting from operations ............................... $ 650,473
-----------
-----------
</TABLE>
See accompanying notes to financial statements
14
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Years Ended
November 30,
------------------------------
1998 1997
--------------- -------------
<S> <C> <C>
From operations:
Net investment income ............................................ $ 6,604,003 $ 4,717,532
Net realized gains (losses) from investment and purchased options
transactions, foreign currency transactions, futures contracts,
and written options ............................................. (52,231) 1,725,159
Net change in unrealized appreciation/depreciation of investments,
other assets, liabilities and forward contracts denominated in
foreign currencies .............................................. (5,901,299) (261,318)
------------- -------------
Net increase in net assets resulting from operations ............. 650,473 6,181,373
------------- -------------
Dividends to shareholders from:
Net investment income--Class A ................................... (2,333,211) (1,027,714)
Net investment income--Class B ................................... (2,962,496) (2,331,023)
Net investment income--Class C ................................... (1,873,596) (1,211,577)
Net investment income--Class Y ................................... (25,077) --
------------- -------------
Total dividends to shareholders .................................. (7,194,380) (4,570,314)
------------- -------------
From beneficial interest transactions:
Net proceeds from the sale of shares ............................. 53,589,392 37,659,276
Cost of shares repurchased ....................................... (24,924,283) (20,186,322)
Proceeds from dividends reinvested ............................... 4,110,250 2,297,795
------------- -------------
Net increase in net assets from beneficial interest
transactions .................................................... 32,775,359 19,770,749
------------- -------------
Net increase in net assets ....................................... 26,231,452 21,381,808
Net assets:
Beginning of year ................................................ 85,675,936 64,294,128
------------- -------------
End of year (including undistributed net investment income
of $243,848 and $476,119, respectively) ......................... $ 111,907,388 $ 85,675,936
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements
15
<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. 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 are being amortized using the straight-line method over a period
not to exceed sixty months from the commencement of operations.
Currently, the Fund offers Class A, Class B, Class C and Class Y shares.
Each class represents interests in the same assets of the Fund, and the
classes are identical except for differences in their sales charge structures,
ongoing service and distribution charges and certain transfer agency expenses.
In addition, Class B shares and all corresponding reinvested dividend shares
automatically convert to Class A shares approximately six years after
issuance. All classes of shares have equal voting privileges, except that each
class has exclusive voting rights with respect to its service and/or
distribution plan. Class Y shares have no service or distribution plan.
The preparation of financial statements in accordance with generally
accepted accounting principles requires Fund management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. The following is
a summary of significant accounting policies:
Valuation of Investments -- Securities may be valued by outside pricing
services approved by a management committee under the direction of the Board
of Trustees. The pricing service may utilize a matrix system incorporating
security quality, maturity and coupon as the evaluation model parameters,
and/or research and evaluations by its staff, including review of
broker-dealer market price quotations, if available, in determining what it
believes is the valuation of the portfolio securities valued by such pricing
service. Securities traded in the over-the-counter ("OTC") market and listed
on The Nasdaq Stock Market, Inc.("Nasdaq") are valued at the last trade price
on Nasdaq prior to the time of valuation. Other OTC securities are valued at
the last bid price available in the OTC market prior to the time of valuation.
The amortized cost method of valuation is used to value short-term debt
instruments with sixty days or less remaining to maturity. Securities 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 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.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Foreign currency exchange rates are generally determined prior to the close
of the New York Stock Exchange ("NYSE"). Occasionally, events affecting the
value of foreign investments and such exchange rates occur between the time at
which they are determined and the close of the NYSE, which will not be
reflected in the computation of the Fund's net asset value. If events
materially affecting the value of such securities or currency exchange rates
occur during such time period, the securities will be valued at their fair
value as determined in good faith by or under the direction of the Trust's
board of trustees.
Repurchase Agreements--The Fund's custodian takes possession of the
collateral pledged for investments in repurchase agreements. The underlying
collateral is valued daily on a mark-to-market basis to ensure that the value,
including accrued interest, is at least equal to the repurchase price. In the
event of default of the obligation to repurchase, the Fund has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings. The Fund occasionally
participates in joint repurchase agreement transactions with other funds
managed by Mitchell Hutchins.
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
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.
Option Writing--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
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 year ended November 30, 1998 were
as follows:
Number of
Options Premiums
--------- --------
Options outstanding at November 30, 1997 .......... 0 $ 0
Options written ................................... 7,310 277,755
Options terminated in closing purchase
transactions..................................... (5,930) (227,630)
Options expired ................................... (1,380) (50,125)
------ ---------
Options outstanding at November 30, 1998 .......... 0 $ 0
------ ---------
------ ---------
INVESTMENT ADVISER AND ADMINISTRATOR
The Trust's board of trustees has approved an Investment Advisory and
Administration Contract ("Advisory Contract") with Mitchell Hutchins, under
which Mitchell Hutchins serves as investment adviser and administrator of the
Fund. In accordance with the Advisory Contract, the Fund pays Mitchell
Hutchins an investment advisory and administration fee, which is accrued daily
and paid monthly, at the annual rate of 0.75% of the Fund's average daily net
assets. At November 30, 1998, the Fund owed Mitchell Hutchins $67,801 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 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, 1998, the Fund owed Mitchell Hutchins $61,951 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 year ended November 30, 1998, it earned $257,467 in sales
charges.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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 year ended November 30,1998, the Fund
earned $25,721 for lending its securities and PaineWebber earned $8,573 as the
Fund's lending agent. At November 30, 1998, the Fund owed PaineWebber $1,564
for security lending fees.
As of November 30, 1998, the Fund's custodian received cash and/or cash
equivalents having an aggregate value of $1,081,250 as collateral for
portfolio securities loaned which was invested in the following money market
funds:
Number of
Shares Value
--------- ----------
1,073,750 TempFund Portfolio.......................... $1,073,750
7,500 Liquid Assets Portfolio..................... 7,500
----------
$1,081,250
----------
----------
The security out on loan was sold on November 30, 1998, and therefore is
not included in the Fund's portfolio of investments.
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 year ended November
30, 1998, the Fund did not borrow under the Facility.
TRANSFER AGENCY AND RELATED SERVICES FEES
PaineWebber provides transfer agency related services to each Fund pursuant
to a delegation of authority from PFPC Inc., the Funds' transfer agent, and is
compensated for these services by PFPC Inc., not the Funds. For the year ended
November 30, 1998, PaineWebber received from PFPC, Inc., approximately 48% of
the total transfer agency and related services fees collected by PFPC.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at November
30, 1998, was substantially the same as the cost of securities for financial
statement purposes.
At November 30, 1998, the components of the net unrealized depreciation of
investments were as follows:
Gross appreciation (investments having an excess
of value over cost) ................................ $ 3,567,276
Gross depreciation (investments having an excess
of cost over value) ................................ (7,449,428)
-----------
Net unrealized depreciation of investments........ $(3,882,152)
-----------
-----------
For the year ended November 30, 1998, total aggregate purchases and sales
of portfolio securities, excluding short-term securities, were as follows:
Purchases ........................................ $222,401,096
Sales ............................................ $187,414,518
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.
To reflect reclassifications arising from permanent "book/tax" differences
for the year ended November 30, 1998, undistributed net investment income was
increased by $358,106, accumulated net realized gains/losses was decreased by
$355,303, and beneficial interest was decreased by $2,803. Permanent book/tax
differences are primarily attributable to foreign currency gains/losses.
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS
SHARES OF BENEFICIAL INTEREST
There is an unlimited aount 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 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
---------- ------------ ---------- ------------
---------- ------------ ---------- ------------
For the year ended November 30, 1997:
Shares sold ......................... 1,323,471 $ 12,562,022 1,645,373 $ 15,619,132
Shares repurchased .................. (533,352) (5,055,445) (1,111,544) (10,459,216)
Shares converted from Class B to
Class A ........................... 269,574 2,559,838 (269,858) (2,559,838)
Dividends reinvested ................ 58,112 550,801 101,851 961,303
---------- ------------ ---------- ------------
Net increase ........................ 1,117,805 $ 10,617,216 365,822 $ 3,561,381
---------- ------------ ---------- ------------
---------- ------------ ---------- ------------
<CAPTION>
Class C Class Y
------------------------- -------------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
For the 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
---------- ------------ ---------- ------------
---------- ------------ ---------- ------------
For the year ended November 30, 1997:
Shares sold ......................... 997,764 $ 9,478,122 -- --
Shares repurchased .................. (496,197) (4,671,661) -- --
Shares converted from Class B to
Class A ........................... -- -- -- --
Dividends reinvested ................ 83,102 785,691 -- --
---------- ------------ ---------- ------------
Net increase ........................ 584,669 $ 5,592,152 -- --
---------- ------------ ---------- ------------
---------- ------------ ---------- ------------
</TABLE>
22
<PAGE>
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<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 Years Ended February 1, 1996 For the February 7, 1994+
November 30, through Year Ended through
---------------------- November 30, January 31, January 31,
1998 1997 1996 1996 1995
-------- -------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .............. $ 9.60 $ 9.37 $ 8.99 $ 8.60 $ 10.00
-------- -------- -------- -------- ---------
Net investment income ............................. 0.64 0.74 0.57 0.67 0.74
Net realized and unrealized gains (losses)
from investments and purchased options,
foreign currency, futures contracts and
written options .............................. (0.48) 0.17 0.39 0.59 (1.49)
-------- -------- -------- -------- ---------
Net increase (decrease) from
investment operations ........................ 0.16 0.91 0.96 1.26 (0.75)
-------- -------- -------- -------- ---------
Dividends from net investment income .............. (0.70) (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 . (0.70) (0.68) (0.58) (0.87) (0.65)
-------- -------- -------- -------- ---------
Net asset value, end of period .................... $ 9.06 $ 9.60 $ 9.37 $ 8.99 $ 8.60
-------- -------- -------- -------- ---------
Total investment return(1) ........................ 1.65% 10.04% 11.14% 15.27% (7.61)%
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Ratios/Supplemental data:
Net assets, end of period(000's) .................. $ 35,778 $ 20,909 $ 9,944 $ 9,841 $ 11,148
Expenses to average net assets(2) ................. 1.34% 1.65% 1.89%* 1.74% 1.49%*
Net investment income to average net assets ....... 6.97% 7.35% 7.69%* 8.52% 8.06%*
Portfolio turnover rate ........................... 192% 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 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.
24
<PAGE>
<TABLE>
<CAPTION>
Class B
-----------------------------------------------------------------------
For the Period For the Period
For the Years Ended February 1, 1996 For the February 7, 1994+
November 30, through Year Ended through
---------------------- November 30, January 31, January 31,
1998 1997 1996 1996 1995
-------- -------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .............. $ 9.59 $ 9.36 $ 8.98 $ 8.60 $ 10.00
------- ------- ------- ------- -------
Net investment income ............................. 0.56 0.67 0.51 0.60 0.66
Net realized and unrealized gains (losses)
from investments and purchased options,
foreign currency, futures contracts and
written options .............................. (0.47) 0.16 0.39 0.59 (1.47)
------- ------- ------- ------- -------
Net increase (decrease) from
investment operations ........................ 0.09 0.83 0.90 1.19 (0.81)
------- ------- ------- ------- -------
Dividends from net investment income .............. (0.63) (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 . (0.63) (0.60) (0.52) (0.81) (0.59)
------- ------- ------- ------- -------
Net asset value, end of period .................... $ 9.05 $ 9.59 $ 9.36 $ 8.98 $ 8.60
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Total investment return(1) ........................ 0.87% 9.20% 10.46% 14.37% (8.22)%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Ratios/Supplemental data:
Net assets, end of period(000's) .................. $ 45,217 $41,650 $37,249 $40,653 $40,710
Expenses to average net assets(2) ................. 2.12% 2.43% 2.63%* 2.49% 2.24%*
Net investment income to average net assets ....... 5.98% 6.56% 6.93%* 7.77% 7.46%*
Portfolio turnover rate ........................... 192% 140% 101% 91% 117%
<CAPTION>
Class C
-----------------------------------------------------------------------
For the Period For the Period
For the Years Ended February 1, 1996 For the February 7, 1994+
November 30, through Year Ended through
---------------------- November 30, January 31, January 31,
1998 1997 1996 1996 1995
-------- -------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .............. $ 9.59 $ 9.37 $ 8.98 $ 8.60 $ 10.00
------- ------- ------- ------- -------
Net investment income ............................. 0.59 0.70 0.53 0.62 0.69
Net realized and unrealized gains (losses)
from investments and purchased options,
foreign currency, futures contracts and
written options .............................. (0.48) 0.15 0.40 0.59 (1.48)
------- ------- ------- ------- -------
Net increase (decrease) from
investment operations ........................ 0.11 0.85 0.93 1.21 (0.79)
------- ------- ------- ------- -------
Dividends from net investment income .............. (0.65) (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 . (0.65) (0.63) (0.54) (0.83) (0.61)
------- ------- ------- ------- -------
Net asset value, end of period .................... $ 9.05 $ 9.59 $ 9.37 $ 8.98 $ 8.60
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Total investment return(1) ........................ 1.14% 9.37% 10.80% 14.63% (8.02)%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Ratios/Supplemental data:
Net assets, end of period(000's) .................. $30,133 $23,117 $17,101 $19,232 $21,208
Expenses to average net assets(2) ................. 1.86% 2.17% 2.38%* 2.24% 1.98%*
Net investment income to average net assets ....... 6.24% 6.82% 7.19%* 8.03% 7.62%*
Portfolio turnover rate ........................... 192% 140% 101% 91% 117%
<CAPTION>
Class Y
-----------------
For the Period
February 17, 1998+
through
November 30,
1998
-----------------
<S> <C>
Net asset value, beginning of period .............. $ 9.72
-------
Net investment income ............................. 0.56
Net realized and unrealized gains (losses)
from investments and purchased options,
foreign currency, futures contracts and
written options .............................. (0.66)
-------
Net increase (decrease) from
investment operations ........................ (0.10)
-------
Dividends from net investment income .............. (0.57)
Distributions from net realized gains
from foreign currency transactions ........... --
-------
Total dividends and distributions to shareholders . (0.57)
-------
Net asset value, end of period .................... $ 9.05
-------
-------
Total investment return(1) ........................ (1.04)%
-------
-------
Ratios/Supplemental data:
Net assets, end of period(000's) .................. $ 779
Expenses to average net assets(2) ................. 1.07%*
Net investment income to average net assets ....... 7.26%*
Portfolio turnover rate ........................... 192%
</TABLE>
25
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
REPORT OF PRICEWATERHOUSECOOPERS LLP
INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
PaineWebber Strategic Income Fund
In our opinion, the accompanying statement of assets and liablilities, 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, 1998, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
November 30, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
January 22, 1999
26
<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, 1998), 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 1998. 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 1999. Shareholders are advised to consult their
own tax advisors with respect to the tax consequences of their investment in the
Fund.
27
<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
- -------------------------------------------------------------------------------
TRUSTEES
E. Garrett Bewkes, Jr.
Chairman
Margo N. Alexander
Richard Q. Armstrong
Richard R. Burt
Mary C. Farrell
Meyer Feldberg
George W. Gowen
Frederic V. Malek
Carl W. Schafer
OFFICERS
Margo N. Alexander
President
Victoria E. Schonfeld
Vice President
Dianne E. O'Donnell
Vice President and Secretary
Paul H. Schubert
Vice President and Treasurer
Dennis L. McCauley
Vice President
Thomas J. Libassi
Vice President
Craig M. Varrelman
Vice President
Nirmal Singh
Vice President
Stuart Waugh
Vice President
INVESTMENT ADVISOR,
ADMINISTRATOR AND DISTRIBUTOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
This report is not to be used in connection with the offering of shares of the
Fund unless accompanied or preceded by an effective prospectus.
A prospectus containing more complete information for any of the Funds listed
on the back cover can be obtained from a PaineWebber investment executive or
corresponding firm. Read the prospectus carefully before investing.
<PAGE>
PaineWebber offers a family of 27 funds which encompass a diversified range of
investment goals.
BOND FUNDS
o High Income Fund
o Investment Grade Income Fund
o Low Duration U.S. Government Income Fund
o Strategic Income Fund
o U.S. Government Income Fund
TAX-FREE BOND FUNDS
o California Tax-Free Income Fund
o Municipal High Income Fund
o National Tax-Free Income Fund
o New York Tax-Free Income Fund
STOCK FUNDS
o Financial Services Growth Fund
o Growth Fund
o Growth and Income Fund
o Mid Cap Fund
o Small Cap Fund
o S&P 500 Index Fund
o 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
[LOGO] PAINEWEBBER
(Copyright)1999 PaineWebber Incorporated
Member SIPC
ANNUAL REPORT
[LOGO] PAINEWEBBER
- -------------------------------------------------------------------------------
STRATEGIC
INCOME FUND
NOVEMBER 30, 1998
