ANNUAL REPORT
PAINEWEBBER SMALL CAP FUND
PERFORMANCE AT A GLANCE
================================================================================
Comparison of the change of a $10,000 investment in PaineWebber Small Cap
Fund (A, B, C), the S&P 600 Index and the Russell 2000 Index, from
February 1, 1993 through July 31, 1999
The graph depicts the performance of PaineWebber Small Cap Fund (A, B, C) versus
the S&P 600 Index and the Russell 2000 Index. It is important to note
PaineWebber Small Cap Fund is a professionally managed mutual fund while the
Index is not available for investment and is unmanaged. The comparison is shown
for illustrative purposes only.
[The following table represents a chart in the printed material]
Russell S & P 600
Class A Class B Class C 2000 Index Index
Jan-93 10000 10000 10000 10000 10000
Feb-93 9589 10040 10040 9769 9715
Mar-93 9685 10130 10130 10086 10086
Apr-93 9570 10010 10010 9809 9719
May-93 9723 10150 10150 10243 10241
Jun-93 9761 10180 10180 10306 10305
Jul-93 9771 10190 10190 10448 10412
Aug-93 9981 10400 10400 10900 10961
Sep-93 9981 10400 10400 11207 11359
Oct-93 10076 10490 10490 11495 11577
Nov-93 9981 10380 10380 11117 11163
Dec-93 10284 10691 10697 11497 11567
Jan-94 10275 10681 10677 11858 11840
Feb-94 10323 10722 10727 11816 11806
Mar-94 10062 10450 10445 11192 10958
Apr-94 9946 10319 10324 11258 11122
May-94 9916 10278 10273 11132 10902
Jun-94 9839 10198 10193 10753 10498
Jul-94 9946 10298 10304 10930 10629
Aug-94 10333 10681 10687 11538 11353
Sep-94 10188 10530 10535 11500 11294
Oct-94 10190 10523 10528 11455 11181
Nov-94 9948 10270 10265 10993 10754
Dec-94 10161 10482 10487 11288 11014
Jan-95 10192 10513 10508 11146 10858
Feb-95 10518 10842 10838 11610 11306
Mar-95 10579 10895 10891 11809 11534
Apr-95 10834 11150 11156 12072 11791
May-95 10946 11256 11251 12279 11977
Jun-95 11262 11585 11581 12917 12633
Jul-95 11517 11829 11825 13660 13599
Aug-95 11649 11956 11952 13943 13894
Sep-95 11863 12179 12175 14193 14249
Oct-95 11364 11649 11644 13558 13546
Nov-95 11670 11956 11952 14128 14081
Dec-95 11869 12153 12149 14501 14314
Jan-96 11770 12050 12046 14485 14344
Feb-96 12045 12324 12321 14937 14814
Mar-96 12199 12473 12469 15242 15131
Apr-96 12682 12954 12950 16057 16000
May-96 13220 13492 13488 16690 16568
Jun-96 12967 13229 13225 16004 15918
Jul-96 12056 12290 12286 14607 14823
Aug-96 12599 12832 12828 15455 15739
Sep-96 13130 13374 13370 16059 16430
Oct-96 12918 13152 13149 15812 16317
Nov-96 13496 13719 13716 16464 17164
Dec-96 13940 14158 14155 16895 17364
Jan-97 14209 14426 14424 17233 17653
Feb-97 13952 14158 14155 16816 17287
Mar-97 13280 13468 13465 16022 16400
Apr-97 13096 13276 13273 16067 16602
May-97 14515 14707 14692 17854 18553
Jun-97 15505 15691 15690 18620 19373
Jul-97 16410 16611 16597 19485 20592
Aug-97 16973 17161 17147 19932 21110
Sep-97 18844 19039 19027 21391 22506
Oct-97 18098 18285 18273 20452 21534
Nov-97 17780 17940 17927 20319 21376
Dec-97 17756 17902 17902 20674 21808
Jan-98 17369 17511 17496 20348 21383
Feb-98 18984 19119 19120 21851 23331
Mar-98 19851 19986 19974 22751 24222
Apr-98 20104 20224 20212 22877 24365
May-98 18970 19063 19050 21644 23074
Jun-98 19197 19287 19274 21689 23138
Jul-98 17796 17874 17860 19932 21371
Aug-98 13674 13720 13717 16061 17246
Sep-98 14074 14098 14095 17319 18301
Oct-98 14781 14811 14795 18026 19151
Nov-98 15902 15930 15915 18970 20229
Dec-98 16558 16561 16562 20144 21519
Jan-99 16160 16156 16157 20412 21250
Feb-99 14682 14662 14661 18759 19336
Mar-99 13708 13689 13695 19052 19585
Apr-99 14609 14588 14568 20759 20880
May-99 15347 15326 15300 21062 21387
Jun-99 15805 15783 15736 22014 22604
Jul-99 16204 16181 16141 21410 22405
Past performance is no guarantee of future performance. The performance of the
other classes will vary from the performance of the class shown because of
differences in sales charges and fees paid by shareholders investing in
different classes.
AVERAGE ANNUAL % TOTAL RETURN, PERIODS ENDED 7/31/99
1 Year 5 Years Inception(0)
CLASS A* -8.95 10.26 8.47
Before Deducting CLASS B** -9.79 9.46 7.69
Maximum Sales Charge CLASS C+ -9.63 9.39 7.65
CLASS Y++ -8.73 N/A 10.56
After Deducting CLASS A* -13.05 9.25 7.71
Maximum Sales Charge CLASS B** -13.84 9.18 7.69
CLASS C+ -10.44 9.39 7.65
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.
(0) Inception: since commencement of issuance on February 1, 1993 for Class A,
Class B and Class C shares and on July 26, 1996 for Class Y shares.
* Maximum sales charge for Class A shares is 4.5% 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 1% and is
reduced to 0% after one year. Class C shares bear ongoing 12b-1
distribution and service fees.
++ 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, as well as the
trustee of the Painewebber 401(k) Plus Plan (formerly known as PaineWebber
Savings Investment Plan). Class Y shares do not bear initial or contingent
deferred sales charges or ongoing distribution and service fees.
1
<PAGE>
ANNUAL REPORT
PAINEWEBBER
SMALL CAP FUND
FUND PROFILE
as of July 31, 1999
INVESTMENT GOAL:
long-term capital appreciation
through small-cap investing
PORTFOLIO MANAGER:
Donald R. Jones, Mitchell
Hutchins Asset Management Inc.
COMMENCEMENT:
February 1, 1993
DIVIDEND PAYMENTS:
annually, if any
TOTAL NET ASSETS:
$89.0 million
STOCKS: 99.2%*
CASH EQUIVALENTS: 0.8%*
September 15, 1999
Dear Shareholder,
We are pleased to present you with the annual report for the PaineWebber
Small Cap Fund (the "Fund") for the fiscal year ended July 31, 1999.
MARKET REVIEW
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
The S&P 500 Index advanced an impressive 20.20% for the fiscal year ended
July 31, 1999, notwithstanding a year marked by considerable market volatility.
In August 1998, Russia devalued the ruble and effectively defaulted on its
Soviet-era debt, and investors scurried for the exits. Financial markets around
the globe contracted as investors sought the safety of U.S. Treasury securities.
Highly leveraged hedge funds were forced to sell assets at depressed prices to
cover losses. In an attempt to forestall the spreading crisis, the Federal
Reserve cut interest rates in September, October and November, from 5.50% to
4.75%. The cuts reassured investors, and the markets began to rally towards the
end of 1998.
January 1999 saw renewed volatility, however, as U.S. interest rates began to
rise and Brazil was forced to devalue its currency. As conditions began to
stabilize in the spring, investor interest broadened beyond the small group of
stocks that led performance over the past two years. We attribute this
broadening to the improving global economic outlook, particularly in the regions
of Asia and Latin America, which eased concerns about market liquidity. On the
other hand, economic recovery raised the prospect of renewed inflation pressure,
which led the Federal Reserve to raise interest rates in June and August.
Against this backdrop, small-cap stocks, as measured by the S&P 600 Index,
managed a gain of 4.85% for the 12 months ended July 31, 1999.
* Weightings represent percentages of portfolio assets as of July 31, 1999.
The Fund is actively managed and its composition will vary over time.
2
<PAGE>
ANNUAL REPORT
PORTFOLIO REVIEW
================================================================================
[GRAPHIC OMITTED]
Small capitalization stocks underperformed large caps for the fiscal year, and
the market lag hurt the Fund. Conditions within the small cap stock market
mirrored those in the broad market: bigger was better and growth outperformed
value. Thus, the Fund's investment discipline--which focuses on smaller,
value-oriented stocks--hurt performance relative to the Fund's small-cap peers.
Under such conditions, the Fund's focus on the smallest companies had become
a disadvantage. The Fund's average market capitalization had previously ranged
from 60-65% of the average market cap of its benchmark, the S&P 600 Index (the
"Index"). The Fund's maximum market cap for individual stocks was $1.0 billion.
As of May 1, 1999, we adjusted the Fund's investment process to allow it to
purchase companies with a maximum market cap of up to $1.5 billion. The Fund's
average market cap increased to 91% of the Index as of July 31, 1999 (see
portfolio characteristics table below).
PAINEWEBBER SMALL CAP FUND
Portfolio Characteristics vs. S&P 600 Index Fund Index
- --------------------------------------------------------------------------------
Approximate No. of Securities 110 600
Average Market Cap. ($MM) 533 583
Price/Earnings Ratio (next fiscal year EPS) 14.4x 15.6x
Price/Book Ratio 3.6x 3.0x
Dividend Yield 0.2% 0.9%
Long-Term Projected EPS Growth1 22.2% 17.8%
Beta (historical, rel. to S&P 500) 1.10 1.03
As we adjusted the Fund to a higher market cap we also began to reduce the
number of holdings. At the start of 1999 the Fund held around 150 stocks; by
July 31, 1999 we had cut holdings down to about 110 stocks.
During latter half of the year we increased the Fund's weighting in
technology stocks, from 25.9% at the start to 31.1% at the end. Among the
wireless communications companies we added DSP Communications, Inc. (1.1%) and
Alpha Industries, Inc. (0.65%), makers of semiconductor chips for cellular
phones.2 Shares of software developer Oshap Technologies Ltd.--a Fund holding as
of January 31, 1999--benefited as Oshap was acquired by Sun Guard Data Systems
(2.9%).
1 Sources: I/B/E/S and Mitchell Hutchins. I/B/E/S determines the mean values of
brokerage analysts' earnings-per-share estimates and projected three- to
five-year earnings-per-share growth rates. The investment advisor calculates
the Fund's projected earnings per share growth by taking the simple average
of the I/B/E/S means for the Fund's holdings.
2 Weightings represent percentages of portfolio assets as of July 31, 1999. The
Fund is actively managed and its composition will vary over time.
3
<PAGE>
ANNUAL REPORT
PAINEWEBBER SMALL CAP FUND
Top Five Sectors Fund % Fund %
as of 7/31/99 as of 1/31/99
- --------------------------------------------------------------------------------
Consumer Cyclical 31.7 32.1
Technology 31.1 25.9
Healthcare 8.6 9.7
Financial Services 8.1 8.4
Capital Goods 6.7 8.6
- --------------------------------------------------------------------------------
Total 86.2 84.7
The Fund's weighting in consumer cyclical companies remained about the same
over the period. We reduced exposure to financial services to about half the
weighting of the S&P 600 Index. The Fund's weightings in healthcare and capital
goods declined as we sold specific stocks for fundamental reasons--our views of
these sectors did not change.
OUTLOOK
================================================================================
[GRAPHIC OMITTED]
We expect second-half 1999 economic growth (real gross domestic product) to
slow to 2.5-3.0% from about 4% in the first half, inflation to remain modest
between 2.0-2.5% and corporate earnings to grow about 9-10%. We remain
optimistic that more stocks in the U.S. market will benefit from investors'
willingness to look beyond the top 20 large caps.
PAINEWEBBER SMALL CAP FUND
Top Ten Stocks Portfolio % Portfolio %
as of 7/31/99 as of 1/31/99
- --------------------------------------------------------------------------------
First Cash Financial Services, Inc. 4.0 3.0
Quadramed Corp. 3.5 2.3
Wackenhut Corp., Class B 3.4 2.6
Piercing Pagoda, Inc. 3.0 1.8
Sun Guard Data Systems3 2.9 N/A
J. Jill Group, Inc. 2.7 N/A
DSP Group, Inc. 2.5 0.7
Cornell Corrections, Inc. 2.3 2.4
Fresh America Corp. 2.2 3.1
Orbotech Ltd. 2.1 2.1
- --------------------------------------------------------------------------------
3 New position resulting from Sun Guard Data Systems' acquisition of Oshap
Technologies Ltd.
4
<PAGE>
ANNUAL REPORT
We believe the Fund could benefit from its positions in technology and
consumer cyclical stocks. Small cap stocks still seem undervalued and present
opportunity to investors looking to diversify away from expensive, large-cap
stocks. More investors seem to be interested in small caps now, including
corporate insiders and companies stepping up share buyback programs. We think
the low valuations of these companies will spur greater interest in mergers and
acquisitions among them, which would benefit the small cap market in general.
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 Small Cap Fund or another fund in the
PaineWebber Family of Funds,4 please contact your Financial Advisor.
Sincerely,
<TABLE>
<CAPTION>
<S> <C>
/s/MARGO N. ALEXANDER /s/MARK A. TINCHER
- --------------------- ------------------
MARGO N. ALEXANDER MARK A. TINCHER
Chairman and Chief Executive Officer Managing Director and Chief Investment Officer -
Mitchell Hutchins Asset Management Inc. Equity Investments,
Mitchell Hutchins Asset Management Inc.
/s/BRIAN M. STORMS /s/DONALD R. JONES
- ------------------ ------------------
BRIAN M. STORMS DONALD R. JONES
President and Chief Operating Officer Portfolio Manager
Mitchell Hutchins Asset Management Inc. PaineWebber Small Cap Fund
Mitchell Hutchins Asset Management Inc.
</TABLE>
This letter is intended to assist shareholders in understanding how the Fund
performed during the fiscal year ended July 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.
4 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 SMALL CAP FUND
<TABLE>
<CAPTION>
PERFORMANCE RESULTS (unaudited)
NET ASSET VALUE TOTAL RETURN1
-------------------------------------------- -----------------------------------
12 MONTHS 6 MONTHS
07/31/99 01/31/99 07/31/98 ENDED 07/31/99 ENDED 07/31/99
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $10.97 $10.94 $13.34 (8.95)% 0.27%
- ----------------------------------------------------------------------------------------------------------------------------
Class B Shares 10.36 10.38 12.78 (9.79) (0.19)
- ----------------------------------------------------------------------------------------------------------------------------
Class C Shares 10.36 10.37 12.76 (9.63) (0.10)
- ----------------------------------------------------------------------------------------------------------------------------
PERFORMANCE SUMMARY CLASS A SHARES
NET ASSET VALUE
------------------------
CAPITAL GAINS DIVIDENDS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED PAID RETURN1
- ----------------------------------------------------------------------------------------------------------------------------
02/01/93-12/31/93 $10.00 $10.62 $0.0168 $0.1281 7.68%
- ----------------------------------------------------------------------------------------------------------------------------
1994 10.62 9.97 0.5208 -- (1.20)
- ----------------------------------------------------------------------------------------------------------------------------
1995 9.97 10.81 0.8306 -- 16.81
- ----------------------------------------------------------------------------------------------------------------------------
1996 10.81 11.40 1.1566 -- 17.45
- ----------------------------------------------------------------------------------------------------------------------------
1997 11.40 13.31 1.1735 -- 27.38
- ----------------------------------------------------------------------------------------------------------------------------
1998 13.31 11.21 1.1141 -- (6.75)
- ----------------------------------------------------------------------------------------------------------------------------
01/01/99-07/31/99 11.21 10.97 -- -- (2.14)
- ----------------------------------------------------------------------------------------------------------------------------
Totals: $4.8124 $0.1281
- ----------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 07/31/99: 69.65%
- ----------------------------------------------------------------------------------------------------------------------------
PERFORMANCE SUMMARY CLASS B SHARES
NET ASSET VALUE
------------------------
CAPITAL GAINS DIVIDENDS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED PAID RETURN1
- ----------------------------------------------------------------------------------------------------------------------------
02/01/93-12/31/93 $10.00 $10.61 $0.0168 $0.0631 6.91%
- ----------------------------------------------------------------------------------------------------------------------------
1994 10.61 9.88 0.5208 -- (1.96)
- ----------------------------------------------------------------------------------------------------------------------------
1995 9.88 10.62 0.8306 -- 15.90
- --------------------------------------------------------------------------------------------------------------------------
1996 10.62 11.08 1.1566 -- 16.50
- ----------------------------------------------------------------------------------------------------------------------------
1997 11.08 12.80 1.1735 -- 26.45
- ----------------------------------------------------------------------------------------------------------------------------
1998 12.80 10.64 1.1141 -- (7.49)
- ----------------------------------------------------------------------------------------------------------------------------
01/01/99-07/31/99 10.64 10.36 -- -- (2.63)
- ----------------------------------------------------------------------------------------------------------------------------
Totals: $4.8124 $0.0631
- ----------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 07/31/99: 61.81%
- ----------------------------------------------------------------------------------------------------------------------------
PERFORMANCE SUMMARY CLASS C SHARES
NET ASSET VALUE
------------------------
CAPITAL GAINS DIVIDENDS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED PAID RETURN1
- ----------------------------------------------------------------------------------------------------------------------------
02/01/93-12/31/93 $10.00 $10.61 $0.0168 $0.0682 6.97%
- ----------------------------------------------------------------------------------------------------------------------------
1994 10.61 9.88 0.5208 -- (1.96)
- ----------------------------------------------------------------------------------------------------------------------------
1995 9.88 10.61 0.8306 -- 15.84
- ----------------------------------------------------------------------------------------------------------------------------
1996 10.61 11.07 1.1566 -- 16.52
- ----------------------------------------------------------------------------------------------------------------------------
1997 11.07 12.79 1.1735 -- 26.47
- ----------------------------------------------------------------------------------------------------------------------------
1998 12.79 10.63 1.1141 -- (7.49)
- ----------------------------------------------------------------------------------------------------------------------------
01/01/99-07/31/99 10.63 10.36 -- -- (2.54)
- ----------------------------------------------------------------------------------------------------------------------------
Totals: $4.8124 $0.0682
- ----------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 07/31/99: 61.41%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 Figures assume reinvestment of all dividends and distributions at net asset
value on the payable dates and do not include sales charges; results would be
lower if sales charges were included. Total investment return for periods of
less than one year has not been annualized.
Note: The Fund offers Class Y shares to a limited group of investors, including
participants in certain investment programs that are sponsored by PaineWebber
and that may invest in PaineWebber mutual funds. For the year ended July 31,
1999 and since inception, July 26, 1996 through July 31, 1999, Class Y shares
had a total return of (8.73)% and 35.36%, respectively. Class Y shares do not
have initial or contingent deferred sales charges or ongoing distribution and
service fees.
The data above represents past performance of the Fund's shares, which is no
guarantee of future results. The principal value of an investment in the Fund
will fluctuate, so that an investor's shares, when redeemed, may be worth more
or less than their original cost.
6
<PAGE>
PAINEWEBBER SMALL CAP FUND
PORTFOLIO OF INVESTMENTS JULY 31, 1999
NUMBER OF
SHARES VALUE
-------- --------
COMMON STOCKS--98.87%
AGRICULTURE, FOOD & BEVERAGE--2.56%
532,000 Creative Bakeries, Inc.* ..................... $ 332,500
143,500 Fresh America Corp.* ......................... 1,946,219
----------
2,278,719
----------
APPAREL, RETAIL--2.04%
9,750 Pacific Sunwear of California, Inc.* ......... 243,750
254,700 Paul Harris Stores, Inc.* .................... 1,575,956
----------
1,819,706
----------
COMPUTER-BUSINESS SERVICES--0.63%
30,000 SMART Modular Technologies, Inc.* ............ 558,750
----------
COMPUTER HARDWARE--0.34%
21,200 Computer Network Technology* ................. 306,075
----------
COMPUTER SOFTWARE--6.25%
18,500 AVT Corp.* ................................... 572,344
12,000 Clarify, Inc.* ............................... 395,250
15,000 Pinnacle Systems, Inc.* ...................... 436,875
300,417 Quadramed Corp.*(1) .......................... 3,116,826
54,926 Tecnomatix Technologies Ltd.*(1) ............. 1,043,594
----------
5,564,889
----------
CONSTRUCTION--0.79%
17,100 Elcor Corp. .................................. 703,238
----------
DIVERSIFIED RETAIL--1.72%
40,000 Shopko Stores, Inc.* ......................... 1,532,500
----------
DRUGS & MEDICINE--0.68%
21,600 Amerisource Health Corp., Class A* ........... 604,800
----------
ELECTRICAL EQUIPMENT--8.09%
60,089 Brown & Sharpe Manufacturing Co.* ............ 225,334
4,200 CTS Corp. .................................... 344,925
50,000 DII Group, Inc.* ............................. 1,853,125
41,800 DSP Communications, Inc.* .................... 979,687
35,000 Orbotech Ltd.* ............................... 1,863,750
3,500 Plantronics, Inc.* ........................... 247,625
17,900 Polycom, Inc.* ............................... 599,650
54,000 Thermo Ecotek Corp.* ......................... 482,625
18,800 Xircom, Inc.* ................................ 600,425
----------
7,197,146
----------
ELECTRICAL POWER--3.47%
29,150 AFC Cable Systems, Inc.* ..................... 1,109,522
16,100 Calpine Corp.* ............................... 1,210,519
26,800 Hughes Supply, Inc. .......................... 763,800
----------
3,083,841
----------
ELECTRONIC COMPONENTS--2.51%
56,300 DSP Group, Inc.* ............................. 2,234,406
----------
ENTERTAINMENT--0.71%
35,800 Funco, Inc.* ................................. 635,450
----------
ENVIRONMENTAL SERVICES--2.50%
117,150 Stericycle, Inc.* ............................ 1,691,353
143,000 Thermatrix, Inc.* ............................ 536,250
----------
2,227,603
----------
FINANCIAL SERVICES--5.68%
24,000 Americredit Corp.* ........................... 361,500
279,200 First Cash Financial Services, Inc.* ......... 3,524,900
3,968 Imperial Credit Industries, Inc.* ............ 25,544
50,600 Litchfield Financial Corp. ................... 967,725
4,500 Metris Co., Inc. ............................. 176,906
----------
5,056,575
----------
FOOD RETAIL--0.38%
12,600 Performance Food Group Co.* .................. 338,625
----------
FOREST PRODUCTS, PAPER--1.79%
28,000 Daisytek International Corp.* ................ 402,500
48,000 Greif Brothers Corp., Class A ................ 1,188,000
----------
1,590,500
----------
FREIGHT, AIR, SEA & LAND--1.33%
120,000 Smithway Motor Xpress Corp.,
Class A* ..................................... 1,185,000
----------
HOUSEHOLD PRODUCTS--1.95%
52,500 Watsco, Inc. ................................. 764,531
18,000 Zomax Optical Media, Inc.* ................... 969,750
----------
1,734,281
----------
HUMAN RESOURCES--0.33%
11,500 AHL Services, Inc.* .......................... 293,250
----------
INDUSTRIAL PARTS--1.28%
106,369 Powell Industries, Inc.* ..................... 930,729
7,000 Veeco Industries, Inc.* ...................... 204,312
----------
1,135,041
----------
INDUSTRIAL SERVICES/SUPPLIES--5.99%
138,700 Cornell Corrections, Inc. * .................. 2,045,825
31,700 Correctional Services Corp.* ................. 251,619
138,882 Wackenhut Corp., Class B ..................... 3,029,363
----------
5,326,807
----------
7
<PAGE>
NUMBER OF
SHARES VALUE
-------- --------
COMMON STOCKS--(CONTINUED)
INFORMATION & COMPUTER SERVICES--10.53%
12,000 Barra, Inc.* ................................ $ 284,250
99,067 Caere Corp.* ................................ 990,670
10,200 Complete Business Solutions, Inc.* .......... 193,800
42,700 Cotelligent, Inc.* .......................... 250,862
4,100 Factset Research Systems, Inc. .............. 204,488
46,700 4Front Software International, Inc.* ........ 490,350
70,000 Health Management Systems, Inc.* ............ 420,000
11,250 Kronos, Inc.* ............................... 544,219
75,000 Lanvision Systems, Inc.* .................... 75,000
32,100 Maximus, Inc.* .............................. 1,135,537
75,900 Pomeroy Computer Resources* ................. 1,095,806
15,000 Right Management Consultants, Inc.* ......... 214,688
88,461 Sun Guard Data Systems* ..................... 2,532,199
34,700 Superior Consultant, Inc.* .................. 936,900
------------
9,368,769
------------
LEISURE--0.65%
15,000 Activision, Inc.* ........................... 205,313
19,800 Meade Instruments Corp.* .................... 368,775
------------
574,088
------------
MANUFACTURING-HIGH TECHNOLOGY--0.82%
13,900 Gilat Satellite Networks Ltd.* .............. 733,225
------------
MEDICAL PRODUCTS--5.89%
84,000 American Science & Engineering, Inc.* ....... 666,750
5,700 Biomatrix, Inc.*(1) ......................... 116,850
120,800 Chronimed, Inc.*(1) ......................... 1,079,650
22,950 ICU Medical, Inc.* .......................... 421,706
21,800 Pharmaceutical Product
Development, Inc.*(1) ...................... 570,888
74,300 Polymedica Corp.* ........................... 1,235,237
5,500 Techne Corp.* ............................... 165,000
59,000 Theragenics Corp.* .......................... 634,250
25,000 Young Innovations, Inc.* .................... 350,000
------------
5,240,331
------------
MEDICAL PROVIDERS--4.69%
238,700 Counsel Corp.* .............................. 1,014,475
52,562 Curative Health Services, Inc.* ............. 308,802
91,500 Hooper Holmes, Inc. ......................... 1,807,125
73,600 Physicians Specialty Corp.* ................. 703,800
15,000 Renal Care Group Inc.* ...................... 336,562
------------
4,170,764
------------
MINING & METALS--0.93%
23,400 Texas Industries, Inc. ...................... 824,850
------------
MOTOR VEHICLES--1.05%
4,800 Borg Warner Automotive, Inc. ................ 243,900
40,000 Keystone Automotive Industries, Inc.* ....... 687,500
------------
931,400
------------
OIL REFINING--0.83%
164,100 Kaneb Services, Inc.* ....................... 738,450
------------
OTHER INSURANCE--1.23%
23,500 Medical Assurance, Inc.* .................... 705,000
3,579 Philadelphia Consolidated
Holding Corp.* ............................. 76,949
14,200 Stewart Information Services Corp. .......... 315,062
------------
1,097,011
------------
RAILROADS--0.26%
13,100 Motivepower Industries, Inc.* ............... 231,706
------------
REAL PROPERTY--2.68%
54,500 Cameron Ashley Building
Products, Inc.* ............................ 671,031
137,775 Nobility Homes, Inc.* ....................... 1,162,477
4,000 NVR, Inc.* .................................. 225,000
17,000 Schottenstein Homes, Inc. ................... 323,000
------------
2,381,508
------------
RESTAURANTS--0.90%
14,200 Applebees International, Inc. ............... 449,075
26,850 NPC International, Inc.* .................... 355,763
------------
804,838
------------
SECURITIES & ASSET MANAGEMENT--1.15%
4,000 National Discount Brokers Group* ............ 152,750
40,700 Raymond James Financial, Inc. ............... 872,506
------------
1,025,256
------------
SEMICONDUCTOR--0.64%
11,233 Alpha Industries, Inc.* ..................... 572,883
------------
SPECIALTY RETAIL--14.03%
243,500 Florsheim Group, Inc.*(1) ................... 1,339,250
15,900 Insight Enterprises, Inc.* .................. 461,100
61,600 Intertan, Inc.* ............................. 1,212,750
120,243 J. Jill Group, Inc.* ........................ 2,374,800
14,800 K-Swiss, Inc., Class A ...................... 480,075
30,000 Movado Group, Inc. .......................... 727,500
100,100 Musicland Stores, Inc.*(1) .................. 1,051,050
157,800 Piercing Pagoda, Inc.* ...................... 2,643,150
71,200 Trans World Entertainment Corp.*(1) ......... 885,550
78,600 West Coast Entertainment Corp.* ............. 41,756
8
<PAGE>
PAINEWEBBER SMALL CAP FUND
NUMBER OF
SHARES VALUE
-------- --------
COMMON STOCKS--(CONCLUDED)
SPECIALTY RETAIL--(CONCLUDED)
41,100 Whitehall Jewellers, Inc.* .................. $ 1,006,950
6,600 Zale Corp.* ................................. 264,000
------------
12,487,931
------------
WATER--1.39%
15,000 Aquarion Co. ................................ 525,000
15,000 E'Town Corp. ................................ 710,625
------------
1,235,625
------------
WIRELESS TELECOMMUNICATIONS--0.18%
36,000 Davel Communications, Inc.* ................. 162,000
------------
Total Common Stocks (cost--$86,059,889) ..... 87,987,837
------------
NUMBER OF
WARRANTS VALUE
-------- --------
WARRANTS--0.02%
AGRICULTURE, FOOD & BEVERAGE--0.02%
350,000 Creative Bakeries, Inc.*,
strike price of $3.00
expiring December 31, 2000 (2)
(cost--$171,500) ............................ $ 17,500
------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) MATURITY DATE INTEREST RATE VALUE
-------- ------------ ------------- -------
REPURCHASE AGREEMENT--0.80%
<S> <C> <C> <C>
$ 715 Repurchase Agreement dated 07/30/99 with
State Street Bank & Trust Company, collateralized
by $694,163 U.S. Treasury Notes, 7.000% due
07/15/06 (value-$729,739); proceeds:
$715,253 (cost-$715,000) ............................ 08/02/99 4.250% 715,000
-----------
Total Investments (cost--$86,946,389)--99.69% ............................................................ 88,720,337
Other assets in excess of liabilities--0.31% ............................................................. 277,522
-----------
Net Assets--100.00% ...................................................................................... $88,997,859
===========
</TABLE>
- ----------
* Non-Income producing security.
(1) Security, or a portion thereof, was on loan at July 31, 1999.
(2) Illiquid security that is fair valued by a management committee under the
direction of the board of trustees, represents 0.02% of net assets.
See accompanying notes to financial statements
9
<PAGE>
<TABLE>
<CAPTION>
PAINEWEBBER SMALL CAP FUND
STATEMENT OF ASSETS AND LIABILITIES JULY 31, 1999
ASSETS
<S> <C>
Investments, at value (cost--$86,946,389) ..................................................................... $ 88,720,337
Investments of cash collateral for securities loaned, at value (cost--$4,998,700) ............................. 4,998,700
Cash .......................................................................................................... 4,621
Receivable for investments sold ............................................................................... 859,004
Dividends and interest receivable ............................................................................. 30,413
Receivable for shares of beneficial interest sold ............................................................. 13,099
Other assets .................................................................................................. 20,316
------------
Total assets .................................................................................................. 94,646,490
------------
LIABILITIES
Cash collateral for securities loaned ......................................................................... 4,998,700
Payable for shares of beneficial interest repurchased ......................................................... 276,747
Payable to affiliates ......................................................................................... 122,133
Payable for investments purchased ............................................................................. 18,900
Accrued expenses and other liabilities ........................................................................ 232,151
------------
Total liabilities ............................................................................................. 5,648,631
------------
NET ASSETS
Beneficial interest shares of $0.001 par value outstanding (unlimited amount authorized) ...................... 96,954,862
Accumulated net realized losses from investments .............................................................. (9,730,951)
Net unrealized appreciation of investments .................................................................... 1,773,948
------------
Net assets .................................................................................................... $ 88,997,859
============
CLASS A:
Net assets .................................................................................................... $ 46,680,217
------------
Shares outstanding ............................................................................................ 4,254,287
------------
Net asset value and redemption value per share ................................................................ $ 10.97
============
Maximum offering price per share (net asset value plus sales charge of 4.50% of offering price) ............... $ 11.49
============
CLASS B:
Net assets .................................................................................................... $ 18,361,224
------------
Shares outstanding ............................................................................................ 1,771,865
------------
Net asset value and offering price per share .................................................................. $ 10.36
============
CLASS C:
Net assets .................................................................................................... $ 18,912,878
------------
Shares outstanding ............................................................................................ 1,826,407
------------
Net asset value and offering price per share .................................................................. $ 10.36
============
CLASS Y:
Net assets .................................................................................................... $ 5,043,540
------------
Shares outstanding ............................................................................................ 455,721
------------
Net asset value, offering price and redemption value per share ................................................ $11.07
======
</TABLE>
See accompanying notes to financial statements
10
<PAGE>
PAINEWEBBER SMALL CAP FUND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
JULY 31, 1999
------------
INVESTMENT INCOME:
<S> <C>
Dividends (net of foreign withholding taxes of $36,546) ................................................ $ 717,653
Interest ............................................................................................... 120,678
------------
838,331
------------
EXPENSES:
Investment advisory and administration fees ............................................................ 1,035,125
Service fees--Class A .................................................................................. 106,092
Service and distribution fees--Class B ................................................................. 319,616
Service and distribution fees--Class C ................................................................. 230,517
Transfer agency and service fees ....................................................................... 131,498
Custody and accounting ................................................................................. 63,893
Legal and audit ........................................................................................ 63,686
Reports and notices to shareholders .................................................................... 63,355
Federal and state registration fees .................................................................... 45,008
Trustees' fees and expenses ............................................................................ 13,500
Other expenses ......................................................................................... 10,459
------------
2,082,749
Less: Fee waivers from adviser ......................................................................... (1,035)
------------
Net expenses ........................................................................................... 2,081,714
------------
Net investment loss .................................................................................... (1,243,383)
------------
REALIZED AND UNREALIZED LOSSES FROM INVESTMENT TRANSACTIONS:
Net realized loss from investment transactions ......................................................... (9,769,687)
Net change in unrealized appreciation/depreciation of investments ...................................... (4,659,990)
------------
NET REALIZED AND UNREALIZED LOSS FROM INVESTMENT TRANSACTIONS .......................................... (14,429,677)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ................................................... $(15,673,060)
============
</TABLE>
See accompanying notes to financial statements
11
<PAGE>
PAINEWEBBER SMALL CAP FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED JULY 31,
------------------------------------
1999 1998
-------------- ---------------
FROM OPERATIONS:
<S> <C> <C>
Net investment loss ...................................................................... $ (1,243,383) $ (1,962,672)
Net realized gain/loss from investment transactions ...................................... (9,769,687) 17,477,609
Net change in unrealized appreciation/depreciation of investments ........................ (4,659,990) (9,803,079)
------------- -------------
Net increase (decrease) in net assets resulting from operations .......................... (15,673,060) 5,711,858
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gain from investment transactions--Class A .................................. (3,700,009) (3,468,839)
Net realized gain from investment transactions--Class B .................................. (4,415,748) (4,427,192)
Net realized gain from investment transactions--Class C .................................. (2,637,230) (2,421,561)
Net realized gain from investment transactions--Class Y .................................. (637,228) (224,585)
------------- -------------
Total distributions to shareholders ...................................................... (11,390,215) (10,542,177)
------------- -------------
FROM BENEFICIAL INTEREST TRANSACTIONS:
Net proceeds from the sale of shares ..................................................... 25,989,556 93,251,454
Cost of shares repurchased ............................................................... (62,296,548) (52,192,558)
Proceeds from dividends reinvested ....................................................... 10,797,893 10,046,028
------------- -------------
Net increase (decrease) in net assets from beneficial interest transactions .............. (25,509,099) 51,104,924
------------- -------------
Net increase (decrease) in net assets .................................................... (52,572,374) 46,274,605
NET ASSETS:
Beginning of year ........................................................................ 141,570,233 95,295,628
------------- -------------
End of year .............................................................................. $ 88,997,859 $ 141,570,233
============= =============
</TABLE>
See accompanying notes to financial statements
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
PaineWebber Small Cap Fund (the "Fund") is a diversified series of
PaineWebber Securities Trust ("Trust), which was organized under Massachusetts
law by a Declaration of Trust dated December 3, 1992 and registered with the
Securities and Exchange Commission under the Investment Company Act of 1940, as
amended, as an open-end management investment company. The Trust currently
offers another series of shares, PaineWebber Strategic Income Fund, whose
financial statements are not included herein.
The Fund currently offers Class A, Class B, Class C and Class Y shares.
Each class represents interests in the same assets of the Fund, and the classes
are identical except for differences in their sales charge structures, ongoing
service and distribution charges and certain transfer agency expenses. In
addition, Class B shares and all corresponding dividend reinvested shares
automatically convert to Class A shares approximately six years after initial
issuance. All classes of shares have equal voting privileges, except that Class
A, Class B and Class C shares have exclusive voting rights with respect to their
service and/or distribution plan.
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 values for its securities from independent pricing sources. Independent
pricing sources may use reported last sale prices, current market quotations or
valuations from computerized "matrix" systems that derive values based on
comparable 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. 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. If a
market value is not available from an independent pricing source for a
particular security, that security is valued at fair value as determined in good
faith by or under the direction of the Fund's board of trustees (the "board").
The amortized cost method of valuation, which approximates market value,
generally is used to value short-term debt instruments with sixty days or less
remaining to maturity, unless the board determines that this does not represent
fair value.
REPURCHASE AGREEMENTS--The Fund's custodian takes possession of the
collateral pledged for investments in repurchase agreements. The underlying
collateral is valued daily on a mark-to-market basis to ensure that the value,
including accrued interest, is at least equal to the repurchase price. In the
event of default of the obligation to repurchase, the Fund has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings. The Fund occasionally
participates in joint repurchase agreement transactions with other funds managed
by Mitchell Hutchins.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions are calculated using the identified cost method. Interest income is
recorded on an accrual basis and dividend income is recorded on the ex-dividend
date.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Income, expenses (excluding class-specific expenses) and
realized/unrealized gains/losses are allocated proportionately to each class of
shares based upon the relative net asset value of outstanding shares (or the
value of dividend-eligible shares, as appropriate) of each class at the
beginning of the day (after adjusting for current capital share activity of the
respective classes). Class-specific expenses are charged directly to the
applicable class of shares.
DIVIDENDS AND DISTRIBUTIONS--Dividends and distributions to shareholders
are recorded on the ex-dividend date. The amount of dividends and distributions
are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification.
CONCENTRATION OF RISK
Small cap companies may be more vulnerable than larger companies to adverse
business or economic developments. Small cap companies may also have limited
product lines, markets or financial resources, and may be dependent on a
relatively small management group. Securities of such companies may be less
liquid and more volatile than securities of larger companies or the market
averages in general and therefore may involve greater risk than investing in
larger companies. In addition, small cap companies may not be well-known to the
investing public, may not have institutional ownership and may have only
cyclical, static or moderate growth prospects.
INVESTMENT ADVISER AND ADMINISTRATOR
The Fund has an Investment Advisory and Administration Contract ("Advisory
Contract") with Mitchell Hutchins under which Mitchell Hutchins serves as
investment adviser and administrator of the Fund. In accordance with the
Advisory Contract the Fund pays Mitchell Hutchins an investment advisory and
administration fee, which is accrued daily and payable monthly, at the annual
rate of 1.00% of the Fund's average daily net assets. At July 31, 1999, the Fund
owed Mitchell Hutchins $77,276 in investment advisory and administration fees.
Mitchell Hutchins waived a portion of its investment advisory and administration
fees in connection with the Fund's investment of cash collateral from security
lending in the Mitchell Hutchins Private Money Market Fund LLC. For the year
ended July 31, 1999, Mitchell Hutchins waived $1,035.
For the year ended July 31, 1999, the Fund paid $600 in brokerage
commissions to PaineWebber for transactions executed on behalf of the Fund.
DISTRIBUTION PLANS
Mitchell Hutchins is the distributor of the Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. Under separate
plans of distribution pertaining to Class A, Class B and Class C shares, the
Fund pays Mitchell Hutchins monthly service fees at an annual rate of 0.25% of
the average daily net assets of Class A, Class B and Class C shares and monthly
distribution fees at the annual rate of 0.75% of the average daily net assets of
Class B and Class C shares. At July 31, 1999, the Fund owed Mitchell Hutchins
$42,727 in service and distribution fees.
Mitchell Hutchins also receives the proceeds of the initial sales charges
paid by shareholders upon the purchase of Class A shares and the contingent
deferred sales charges paid by the shareholders upon certain redemptions of
Class A, Class B and Class C shares. Mitchell Hutchins has informed the Fund
that for the year ended July 31, 1999, it received $166,612 in sales charges.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
SERVICING AGREEMENT
The Fund's board has approved a Servicing Agreement ("Servicing Agreement")
with Mitchell Hutchins and the Mitchell Hutchins Portfolios (comprising,
respectively, the Aggressive Portfolio, Moderate Portfolio and the Conservative
Portfolio) (each a "Portfolio") pursuant to an exemptive order from the
Securities and Exchange Commission that permits the Fund to reimburse each
Portfolio for certain expenses to the extent the Fund realizes estimated savings
from each Portfolio. The estimated savings to the Fund result from the
elimination of separate shareholder accounts for each Portfolio's investors, who
otherwise might invest directly in the Fund. For the year ended July 31, 1999,
the Fund incurred $5,604 under the Servicing Agreement which is included in
other expenses on the Statement of Operations. At July 31, 1999, the Fund owed
the Portfolios $1,236 under the Servicing Agreement.
SECURITY LENDING
The Fund may lend securities up to 331/3% of its total assets to qualified
institutions. The loans are secured at all times by cash or U.S. government
securities in an amount at least equal to the market value of the securities
loaned, plus accrued interest and dividends, determined on a daily basis and
adjusted accordingly. The Fund will retain record ownership of loaned securities
to exercise certain beneficial rights; however, the Fund may bear the risk of
delay in recovery of, or even loss of rights in, the securities loaned should
the borrower fail financially. The Fund receives compensation for lending its
securities from interest earned on the cash or U.S. government securities held
as collateral, net of fee rebates paid to the borrower plus reasonable
administrative and custody fees. For the year ended July 31, 1999, the Fund
earned $70,542 for lending its securities and PaineWebber earned $23,627 as the
Fund's lending agent. At July 31, 1999, the Fund owed PaineWebber $894 in
security lending fees.
At July 31, 1999, the Fund's custodian held cash having an aggregate value
of $4,998,700 as collateral for portfolio securities loaned having a market
value of $4,806,081 which was invested in the following money market funds:
NUMBER OF
SHARES VALUE
---------- ----------
1,443,475 Liquid Assets Portfolio ...................... $1,443,475
492,550 Janus Money Market Fund ...................... 492,550
3,062,675 Mitchell Hutchins Private
Money Market Fund LLC ...................... 3,062,675
----------
Total investments of cash collateral for
securities loaned (cost -- $4,998,700) ..... $4,998,700
==========
BANK LINE OF CREDIT
The Fund may participate with other funds managed by Mitchell Hutchins in a
$200 million committed credit facility ("Facility") to be utilized for temporary
financing until settlement of sales or purchases of portfolio securities, the
repurchase or redemption of shares of the fund at the request of the
shareholders and other temporary or emergency purposes. In connection therewith,
the Fund has agreed to pay a commitment fee, pro rata, based on the relative
asset size of the funds in the Facility. Interest is charged to the fund at
rates based on prevailing market rates in effect at the time of borrowings. For
the year ended July 31, 1999, the Fund did not borrow under the Facility.
TRANSFER AGENCY RELATED SERVICE FEES
PaineWebber provides certain transfer agency related services to the Fund
pursuant to a delegation of authority from PFPC, Inc., the Fund's transfer
agent, and is compensated for these services by PFPC, Inc., not the Fund. For
the year ended July 31, 1999, PaineWebber received approximately 55% of the
total fees collected by PFPC, Inc.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at July 31,
1999 was substantially the same as the cost of securities for financial
statement purposes.
At July 31, 1999, the components of net unrealized appreciation of
investments were as follows:
Gross appreciation (investments having
an excess of value over cost) ................... $17,430,305
Gross depreciation (investments having
an excess of cost over value) ................... (15,656,357)
------------
Net unrealized appreciation of investments ......... $ 1,773,948
============
For the year ended July 31, 1999, aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $63,717,161 and
$102,019,372, respectively.
FEDERAL INCOME TAX STATUS
The Fund intends to distribute substantially all of its taxable income and
to comply with the other requirements of the Internal Revenue Code applicable to
regulated investment companies. Accordingly, no provision for federal income
taxes is required. In addition, by distributing during each calendar year
substantially all of its net investment income, capital gains and certain other
amounts, if any, the Fund intends not to be subject to a federal excise tax.
To reflect reclassifications arising from permanent "book/tax" differences
for the year ended July 31, 1999, the Fund's accumulated net realized losses
were increased by $2,348,719, accumulated net investment loss was reduced by
$1,243,383 and beneficial interest was increased by $1,105,336. Permanent
book/tax differences are primarily attributable to net operating losses.
At July 31, 1999, Small Cap Fund had a net capital loss carryforward of
$392,122 which will expire by July 31, 2007. To the extent such losses are used,
as provided in the regulations, to offset future net realized capital gains, it
is probable these gains will not be distributed.
In accordance with U.S. Treasury regulations, the Fund has elected to defer
$9,177,062 of net realized capital losses arising after October 31, 1998. Such
losses are treated for tax purposes as arising on August 1, 1999.
SHARES OF BENEFICIAL INTEREST
There was an unlimited amount of $0.001 par value shares of beneficial
interest authorized. Transactions in shares of beneficial interest were as
follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
YEAR ENDED ---------------------------------- ------------------------------------
JULY 31, 1999: SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold ............................ 464,017 $ 4,930,773 444,517 $ 4,538,969
Shares repurchased ..................... (1,944,337) (20,168,102) (1,440,167) (14,391,448)
Shares converted from
Class B to Class A ................... 1,825,991 19,603,262 (1,924,449) (19,603,262)
Dividends reinvested ................... 342,408 3,557,623 416,167 4,107,567
------------ ------------ ------------ ------------
Net increase (decrease) ................ 688,079 $ 7,923,556 (2,503,932) $(25,348,174)
============ ============ ============ ============
CLASS C CLASS Y
---------------------------------- ------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
Shares sold ............................ 1,209,782 $ 12,273,496 404,894 $ 4,246,318
Shares repurchased ..................... (2,158,699) (21,775,911) (543,473) (5,961,087)
Shares converted from
Class B to Class A ................... -- -- -- --
Dividends reinvested ................... 254,305 2,504,908 60,019 627,795
------------ ------------ ------------ ------------
Net increase (decrease) ................ (694,612) $ (6,997,507) (78,560) $ (1,086,974)
============ ============ ============ ============
CLASS A CLASS B
YEAR ENDED ---------------------------------- ------------------------------------
JULY 31, 1998: SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
Shares sold ............................ 1,362,532 $ 19,796,327 1,742,368 $ 24,487,702
Shares repurchased ..................... (723,529) (10,351,967) (716,153) (9,862,362)
Shares converted from
Class B to Class A ................... 211,961 3,030,032 (220,238) (3,030,032)
Dividends reinvested ................... 259,054 3,341,792 334,318 4,148,894
------------ ------------ ------------ ------------
Net increase ........................... 1,110,018 $ 15,816,184 1,140,295 $ 15,744,202
============ ============ ============ ============
CLASS C CLASS Y
---------------------------------- ------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
Shares sold ............................ 3,044,346 $ 42,744,818 428,236 $ 6,222,607
Shares repurchased ..................... (2,161,063) (30,292,135) (116,604) (1,686,094)
Shares converted from
Class B to Class A ................... -- -- -- --
Dividends reinvested ................... 188,344 2,335,453 16,980 219,889
------------ ------------ ------------ ------------
Net increase ........................... 1,071,627 $ 14,788,136 328,612 $ 4,756,402
============ ============ ============ ============
</TABLE>
16
<PAGE>
[This Page Intentionally Left Blank]
17
<PAGE>
PAINEWEBBER SMALL CAP FUND
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each
year is presented below:
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------
FOR THE YEARS ENDED JULY 31,
----------------------------------------------------------------------------
1999 1998 1997 1996# 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ............ $13.34 $13.42 $10.22 $11.30 $10.27
Net investment income (loss) .................. (0.08) (0.13) (0.14) 0.00@ 0.05
Net realized and unrealized gains
(losses) from investments ................... (1.18) 1.22 3.75 0.50@ 1.50
------- ------- ------- ------- -------
Net increase (decrease)
from investment operations .................. (1.26) 1.09 3.61 0.50 1.55
------- ------- ------- ------- -------
Distributions from net realized
gains from investments ...................... (1.11) (1.17) (0.41) (1.58) (0.52)
------- ------- ------- ------- -------
Net asset value, end of year .................. $10.97 $13.34 $13.42 $10.22 $11.30
======= ======= ======= ======= =======
Total investment return(1) .................... (8.95)% 8.45% 36.11% 4.69% 15.80%
======= ======= ======= ======= =======
Ratios/Supplemental Data:
Net assets, end of year (000's) ............... $46,680 $47,589 $32,968 $30,675 $20,494
Expenses to average net assets,
net of waivers from adviser(2) .............. 1.59% 1.56% 2.00% 2.11% 1.98%
Net investment income (loss)
to average net assets, net of
waivers from adviser(2) ..................... (0.77)% (0.99)% (1.16)% 0.02% 0.41%
Portfolio turnover rate ....................... 61% 45% 54% 84% 19%
18
<PAGE>
CLASS B
----------------------------------------------------------------------------
FOR THE YEARS ENDED JULY 31,
----------------------------------------------------------------------------
1999 1998 1997 1996# 1995
------- ------- ------- ------- -------
Net asset value, beginning of year ............ $12.78 $13.00 $9.98 $11.15 $10.22
------- ------- ------- ------- -------
Net investment income (loss) .................. (0.29) (0.22) (0.23) (0.09)@ (0.04)
Net realized and unrealized gains
(losses) from investments ................... (1.02) 1.17 3.66 0.50@ 1.49
------- ------- ------- ------- -------
Net increase (decrease)
from investment operations .................. (1.31) 0.95 3.43 0.41 1.45
------- ------- ------- ------- -------
Distributions from net realized
gains from investments ...................... (1.11) (1.17) (0.41) (1.58) (0.52)
------- ------- ------- ------- -------
Net asset value, end of year .................. $10.36 $12.78 $13.00 $9.98 $11.15
======= ======= ======= ======= =======
Total investment return(1) .................... (9.79)% 7.60% 35.16% 3.90% 14.86%
======= ======= ======= ======= =======
Ratios/Supplemental Data:
Net assets, end of year (000's) ............... $18,361 $54,639 $40,749 $36,612 $46,142
Expenses to average net assets,
net of waivers from adviser(2) .............. 2.43% 2.33% 2.75% 2.90% 2.74%
Net investment income (loss)
to average net assets, net of
waivers from adviser(2) ..................... (1.62)% (1.75)% (1.91)% (0.78)% (0.35)%
Portfolio turnover rate ....................... 61% 45% 54% 84% 19%
CLASS C
----------------------------------------------------------------------------
FOR THE YEARS ENDED JULY 31,
----------------------------------------------------------------------------
1999 1998 1997 1996# 1995
------- ------- ------- ------- -------
Net asset value, beginning of year ............ $12.76 $12.98 $9.97 $11.14 $10.22
------- ------- ------- ------- -------
Net investment income (loss) .................. (0.20) (0.21) (0.24) (0.08)@ (0.05)
Net realized and unrealized gains
(losses) from investments ................... (1.09) 1.16 3.66 0.49@ 1.49
------- ------- ------- ------- -------
Net increase (decrease)
from investment operations .................. (1.29) 0.95 3.42 0.41 1.44
------- ------- ------- ------- -------
Distributions from net realized
gains from investments ...................... (1.11) (1.17) (0.41) (1.58) (0.52)
------- ------- ------- ------- -------
Net asset value, end of year .................. $10.36 $12.76 $12.98 $9.97 $11.14
======= ======= ======= ======= =======
Total investment return(1) .................... (9.63)% 7.61% 35.09% 3.90% 14.76%
======= ======= ======= ======= =======
Ratios/Supplemental Data:
Net assets, end of year (000's) ............... $18,913 $32,174 $18,812 $18,606 $13,263
Expenses to average net assets,
net of waivers from adviser(2) .............. 2.39% 2.32% 2.77% 2.91% 2.73%
Net investment income (loss)
to average net assets, net of
waivers from adviser(2) ..................... (1.59)% (1.75)% (1.93)% (0.77)% (0.34)%
Portfolio turnover rate ....................... 61% 45% 54% 84% 19%
</TABLE>
- ----------
# Effective April 1, 1996, Mitchell Hutchins took over day-to-day management
of the Fund's assets.
@ Calculated using the average monthly shares outstanding for the period.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each year reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates and a sale
at net asset value on the last day of each year reported. The figures do
not include sales charges; results would be lower if sales charges were
included.
(2) During the year ended July 31, 1999 Mitchell Hutchins waived a portion of
its advisory and administration fees. The ratios excluding the waiver would
be the same since the fee waiver represents less than 0.005%.
19
<PAGE>
PAINEWEBBER SMALL CAP FUND
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each
period is presented below:
<TABLE>
<CAPTION>
CLASS Y
-----------------------------------------------------------------
FOR THE YEARS ENDED JULY 31, FOR THE
--------------------------------------------- PERIOD ENDED
1999 1998 1997 JULY 31, 1996+
--------- --------- --------- --------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ...................... $ 13.42 $ 13.46 $ 10.21 $ 10.23
--------- --------- --------- ---------
Net investment income (loss) .............................. (0.07) (0.07) (0.11) 0.00@
Net realized and unrealized gains
(losses) from investments ............................... (1.17) 1.20 3.77 (0.02)@
--------- --------- --------- ---------
Net increase (decrease) from
investment operations ................................... (1.24) 1.13 3.66 (0.02)
--------- --------- --------- ---------
Distributions from net realized
gains from investments .................................. (1.11) (1.17) (0.41) --
--------- --------- --------- ---------
Net asset value, end of period ............................ $ 11.07 $ 13.42 $ 13.46 $ 10.21
========= ========= ========= =========
Total investment return(1) ................................ (8.73)% 8.74% 36.65% (0.20)%
========= ========= ========= =========
Ratios/Supplemental Data:
Net assets, end of period (000's) ......................... $ 5,044 $ 7,169 $ 2,768 $ 2,801
Expenses to average net assets,
net of waivers from adviser(2) .......................... 1.31% 1.39% 1.72% 1.72%*
Net investment income (loss) to average
net assets, net of waivers from adviser(2) .............. (0.50)% (0.83)% (0.88)% 0.07%*
Portfolio turnover rate ................................... 61% 45% 54% 84%
</TABLE>
- ----------
* Annualized.
+ For the period July 26, 1996 (commencement of offering shares) to July 31,
1996.
@ Calculated using the average monthly shares outstanding for the period.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates and a sale
at net asset value on the last day of each period reported. The figures do
not include sales charges 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 July 31, 1999 Mitchell Hutchins waived a portion of
its advisory and administration fees. The ratios excluding the waiver would
be the same since the fee waiver represents less than 0.005%.
20
<PAGE>
PAINEWEBBER SMALL CAP FUND
REPORT OF PRICEWATERHOUSECOOPERS LLP
INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
PaineWebber Small Cap Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of PaineWebber Small Cap Fund (the
"Fund") at July 31, 1999, 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 July 31, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
September 13, 1999
21
<PAGE>
PAINEWEBBER SMALL CAP FUND
TAX INFORMATION (unaudited)
We are required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Fund's fiscal year end (July 31,
1999), as to the federal tax status of distributions received by shareholders
during such fiscal year. Accordingly, we are advising you that the distributions
for Class A, Class B, Class C and Class Y shares made during the fiscal year
were derived from short-term (taxable as ordinary income) and long-term capital
gains in the amount of $0.1092 per share and $1.0049 per share, respectively.
Additionally, 40.66% of the distributions paid qualifies for the dividend
received deduction available to corporate shareholders.
Dividends received by tax-exempt recipients need not be reported as taxable
income. Some retirement trusts (e.g., corporate Keogh and 403(b)(7) plans) may
need this information for their annual reporting.
Because the Fund's fiscal year is not the calendar year, another
notification will be sent in respect of calendar year 1999. The second
notification, which reflects the amount to be used by calendar year taxpayers on
their federal income tax returns, is made in conjunction with Form 1099 DIV and
will be mailed in January 2000. Shareholders are advised to consult their own
tax advisers with respect to the tax consequences of their investment in the
Fund.
22
<PAGE>
PAINEWEBBER SMALL CAP FUND
PAINEWEBBER SMALL CAP FUND
TRUSTEES
E. Garrett Bewkes, Jr. Meyer Feldberg
CHAIRMAN George W. Gowen
Margo N. Alexander Frederic V. Malek
Richard Q. Armstrong Carl W. Schafer
Richard R. Burt Brian M. Storms
Mary C. Farrell
OFFICERS
Margo N. Alexander Paul H. Schubert
PRESIDENT VICE PRESIDENT AND TREASURER
Victoria E. Schonfeld Mark A. Tincher
VICE PRESIDENT VICE PRESIDENT
Dianne E. O'Donnell Donald R. Jones
VICE PRESIDENT AND SECRETARY VICE PRESIDENT
INVESTMENT ADVISER,
ADMINISTRATOR AND DISTRIBUTOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
THIS REPORT IS NOT TO BE USED IN 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 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.
BOND FUNDS
|_| High Income Fund
|_| Investment Grade Income Fund
|_| Low Duration U.S. Government Income Fund
|_| Strategic Income Fund
|_| U.S. Government Income Fund
TAX-FREE BOND FUNDS
|_| California Tax-Free Income Fund
|_| Municipal High Income Fund
|_| National Tax-Free Income Fund
|_| New York Tax-Free Income Fund
STOCK FUNDS
|_| Financial Services Growth Fund
|_| Growth Fund
|_| Growth and Income Fund
|_| Mid Cap Fund
|_| Small Cap Fund
|_| S&P 500 Index Fund
|_| Tax-Managed Equity Fund
|_| Utility Income Fund
ASSET ALLOCATION FUNDS
|_| Balanced Fund
|_| Tactical Allocation Fund
GLOBAL FUNDS
|_| Asia Pacific Growth Fund
|_| Emerging Markets Equity Fund
|_| Global Equity Fund
|_| Global Income Fund
MITCHELL HUTCHINS PORTFOLIOS
|_| Aggressive Portfolio
|_| Moderate Portfolio
|_| Conservative Portfolio
PAINEWEBBER MONEY MARKET FUND
PaineWebber
(C)1999 PaineWebber Incorporated
Member SIPC
PaineWebber
SMALL
CAP
FUND
ANNUAL REPORT
JULY 31, 1999
