PAINEWEBBER STRATEGIC INCOME FUND
SEMIANNUAL REPORT
================================================================================
PAINEWEBBER
STRATEGIC INCOME FUND
INVESTMENT GOALS:
Primarily, high level of current income; secondarily, capital appreciation
ALLOCATION MANAGER:
Dennis L. McCauley,
Mitchell Hutchins Asset Management Inc.
COMMENCEMENT:
February 7, 1994
(Classes A, B and C),
February 17, 1998 (Class Y)
DIVIDEND PAYMENTS:
Monthly
================================================================================
July 15, 2000
Dear Shareholder,
This letter and the accompanying financial statements represent the semiannual
report for PaineWebber Strategic Income Fund (the "Fund") for the six-month
period ended May 31, 2000.
MARKET REVIEW
================================================================================
[GRAPHIC OMITTED] During the six-month period ended May 31, 2000, the Federal
Reserve (the "Fed") raised the federal funds rate one percent in response to a
strong economy, falling unemployment and a booming stock market. Rising interest
rates created difficult conditions for all sectors of the fixed income market.
U.S. Treasurys fared the best, gaining 2.46% as measured by the Lehman Brothers
Government Bond Index. The broad market, as measured by the Lehman Brothers
Aggregate Bond Index, achieved a slight gain of 1.38% for the period. Corporate
bonds, mortgage-backed securities and high yield bonds all lost ground. The
high-yield sector fared the worst, losing 2.34% as measured by the Merrill Lynch
High Yield Master Index.
In mid-January the U.S. Treasury announced final plans to buy back Treasury debt
in response to a current fiscal year surplus of about $200 billion. The size of
the buyback--about $30 billion in calendar year 2000--surprised market
participants. Moreover, remarks by Treasury officials indicated that they
intended to reduce the supply of 30-year bonds and make the 10-year Treasury
note the new long-maturity bellwether. The resulting surge in demand for 30-year
Treasurys caused a drastic yield curve inversion, in which 10-year notes yielded
more than 30-year Treasurys.
The market illiquidity engendered by January's yield-curve inversion plagued the
spread sectors. Trading volume remained low. Investors sought to shed
spread-sector overweights, and displayed a marked preference for higher credit
quality. (Spread sectors include high-yield bonds, investment-grade corporate
bonds and mortgage-backed securities, the yields of which are gauged by their
relationship, or spread, to U.S. Treasurys.) Treasury Undersecretary Gary
Gensler compounded the negative sentiment in the market when he challenged the
market's assumption of an implied Government guarantee for agency debt. Credit
quality became the pervasive theme for the period, and higher-rated debt
generally outperformed lower-rated debt.
Bearish market sentiment began to lift toward the end of the period, as evidence
mounted that the economy may be slowing. Market participants saw this as a sign
that the Federal Reserve might be approaching the end of its cycle of
interest-rate increases.
1
<PAGE>
SEMIANNUAL REPORT PAINEWEBBER STRATEGIC INCOME FUND
PORTFOLIO REVIEW
================================================================================
[GRAPHIC OMITTED] AVERAGE ANNUAL TOTAL RETURNS, PERIODS ENDED 5/31/00
6 MONTHS 1 YEAR 5 YEARS INCEPTION(o)
--------------------------------------------------------------------------------
Before Deducting Class A* -3.36% -3.38% 5.50% 4.23%
Maximum Sales Charge Class B** -3.80 -4.21 4.70 3.44
Class C+ -3.62 -3.90 4.95 3.70
Class Y++ -3.28 -3.09 N/A -1.08
--------------------------------------------------------------------------------
After Deducting Class A* -7.27 -7.27 4.65 3.56
Maximum Sales Charge Class B** -8.46 -8.71 4.40 3.33
Class C+ -4.32 -4.58 4.95 3.70
Class Y++ -3.28 -3.09 N/A -1.08
--------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index 1.38 2.11 5.97 5.65
Salomon Smith Barney World Government
Bond Index -2.58 -1.05 2.79 4.89
Merrill Lynch High Yield Master Index -2.34 -3.21 6.55 6.46
Lipper Multi-Sector Income Funds Median -0.76 -0.32 5.72 4.22
--------------------------------------------------------------------------------
Past performance is no guarantee of future performance. 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. Returns for periods of one year or less are cumulative. The performance
data quoted assumes reinvestment of all dividends and capital gains. Lipper peer
group data calculated by Lipper Inc.; used with permission. The Lipper Median is
the return of the fund that places in the middle of the peer group.
(o) Inception: since commencement of issuance on February 7, 1994 for Classes
A, B and C shares and February 17, 1998 for Class Y shares. Index
performance is shown as of inception of oldest share class.
* 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.
++ 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. Class Y shares
do not bear initial or contingent deferred sales charges or ongoing
distribution and service fees.
PORTFOLIO HIGHLIGHTS
The Fund trailed its peer group median and its benchmarks for the six-month
period ended May 31, 2000. This underperformance was due to the Fund's high
exposure to spread sectors in the United States, and within its global
allocation, to the euro. We had weighted the Fund heavily toward high-yield
bonds early in the reporting period in anticipation of a first-quarter rally--a
generally predictable occurrence. The rally did not occur this year, and the
Fund's high-yield exposure detracted from performance.
The Fund's exposure to the euro hurt absolute performance over the semiannual
period. Prospects for euro appreciation looked good to us last fall. We believed
the euro would appreciate based on an outlook for accelerating cyclical growth
in Europe, a deteriorating U.S. current-account deficit and increasing
volatility in the U.S. equity markets. Although each of these trends did develop
in the first quarter, the euro weakened nevertheless.
We expect pressures on the euro to abate. Cyclically, Europe is recovering--its
economy doesn't appear vulnerable to financial shocks nor does it have a
current-account deficit. Based on many traditional measures, the euro is
undervalued and we believe it will recover.
2
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND SEMIANNUAL REPORT
OUTLOOK
================================================================================
[GRAPHIC OMITTED] Although the Fed did not raise rates at its meeting on June
28, it did note that inflation remained a concern. The economy appears to be
slowing, although it is unclear whether the slowdown will be sufficient to
prevent another rate increase. However, we believe that any further Fed actions
will impact the equities more seriously than bonds. While we think the economy
will slow, we do not expect it to slip into recession. In such an environment we
think the spread sectors stand a good chance to recover-- particularly the
mortgage- backed sector, and to a lesser extent, the corporate sector.
The spread sectors have had to cope with a triple whammy of reduced Treasury
supply, equity-market volatility and rising interest rates. We believe current
valuations are extremely attractive, and these sectors are now displaying signs
of stability. We remain hopeful that spreads can narrow in the periods ahead,
which could benefit the Fund's holdings.
Looking to 2000 and beyond, we believe the next big opportunity for the Fund may
be in the global markets, where we expect rates to rise and become more
attractive relative to rates in the U.S. If this occurs, we anticipate
increasing our global allocation. We believe that over time the euro will
strengthen against the dollar. For now, we are keeping the Fund's exposure to
the euro about the same.
PORTFOLIO STATISTICS
SECTOR ALLOCATION* 5/31/00 11/30/99
--------------------------------------------------------------------------------
U.S. High Yield 39.1% 38.6%
U.S. Gov't/Investment-Grade Corporates 34.9 42.9
Foreign/Emerging Markets 17.0 15.2
Cash & Equivalents 9.0 3.3
--------------------------------------------------------------------------------
Total 100.0 100.0
* Weightings represent percentages of net assets as of the dates indicated. The
Fund's portfolio is actively managed and its composition will vary over time.
CHARACTERISTICS 5/31/00 11/30/99
--------------------------------------------------------------------------------
Weighted Average Duration 5.2 yrs 5.1 yrs
Weighted Average Maturity 8.4 yrs 8.5 yrs
Net Assets ($mm) $90.3 $107.1
--------------------------------------------------------------------------------
3
<PAGE>
SEMIANNUAL REPORT PAINEWEBBER STRATEGIC INCOME FUND
Our ultimate objective in managing your investments is to help you successfully
meet your financial goals. We thank you for your continued support and welcome
any comments or questions you may have. For a QUARTERLY REVIEW on PaineWebber
Strategic Income Fund or another fund in the PaineWebber Family of Funds,(1)
please contact your Financial Advisor.
Sincerely,
/s/ Margo Alexander /s/ Brian M. Storms
MARGO ALEXANDER BRIAN M. STORMS
Chairman and Chief Executive Officer President and Chief Operating Officer
Mitchell Hutchins Asset Management Inc. Mitchell Hutchins Asset Management Inc.
/s/ Dennis L. Mccauley /s/ James F. Keegan
DENNIS L. MCCAULEY JAMES F. KEEGAN
Chief Investment Officer-Fixed Income Portfolio Manager, High-Yield Sector
Mitchell Hutchins Asset Management Inc.
Allocation Manager, PaineWebber
Strategic Income Fund
/s/ Nirmal Singh /s/ Stuart Waugh
NIRMAL SINGH STUART WAUGH
Portfolio Manager, U.S. Government and Portfolio Manager, Foreign and Emerging
Investment Grade Sector Markets Sector
/s/ Julieanna M. Berry
JULIEANNA M. BERRY
Portfolio Manager,
U.S. Government and
Investment Grade Sector
This letter is intended to assist shareholders in understanding how the Fund
performed during the six-month period ended May 31, 2000, and reflects our views
at the time of its writing. Of course, these views may change in response to
changing circumstances. We encourage you to consult your Financial Advisor
regarding your personal investment program.
(1) Mutual funds are sold by prospectus only. The prospectuses for the funds
contain more complete information regarding risks, charges and expenses, and
should be read carefully before investing.
4
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
PERFORMANCE RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL RETURN(1)
NET ASSET VALUE -----------------------------------
------------------------------------ 12 MONTHS 6 MONTHS
05/31/00 11/30/99 05/31/99 ENDED 05/31/00 ENDED 05/31/00
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $7.95 $8.53 $8.84 (3.38)% (3.36)%
----------------------------------------------------------------------------------------------------------------
Class B Shares 7.94 8.52 8.83 (4.21) (3.80)
----------------------------------------------------------------------------------------------------------------
Class C Shares 7.94 8.52 8.83 (3.90) (3.62)
----------------------------------------------------------------------------------------------------------------
PERFORMANCE SUMMARY CLASS A SHARES
<CAPTION>
NET ASSET VALUE
-------------------------- CAPITAL GAINS PAID FROM TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID(2) CAPITAL RETURN(1)
----------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
02/07/94-12/31/94 $10.00 $8.56 -- $0.5792 -- (8.76)%
----------------------------------------------------------------------------------------------------------------------------
1995 8.56 8.79 -- 0.9392 -- 14.12
----------------------------------------------------------------------------------------------------------------------------
1996 8.79 9.34 -- 0.6352 -- 14.00
----------------------------------------------------------------------------------------------------------------------------
1997 9.34 9.56 -- 0.7116 -- 10.32
----------------------------------------------------------------------------------------------------------------------------
1998 9.56 8.95 -- 0.7073 -- 0.96
----------------------------------------------------------------------------------------------------------------------------
1999 8.95 8.67 -- 0.5688 $0.0536 3.98
----------------------------------------------------------------------------------------------------------------------------
01/01/00-05/31/00 8.67 7.95 -- 0.2528 -- (5.48)
----------------------------------------------------------------------------------------------------------------------------
Total: $0.0000 $4.3941 $0.0536
----------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 05/31/00: 29.95%
----------------------------------------------------------------------------------------------------------------------------
PERFORMANCE SUMMARY CLASS B SHARES
NET ASSET VALUE
-------------------------- CAPITAL GAINS PAID FROM TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID(2) CAPITAL RETURN(1)
----------------------------------------------------------------------------------------------------------------------------
02/07/94-12/31/94 $10.00 $8.55 -- $0.5242 -- (9.41)%
----------------------------------------------------------------------------------------------------------------------------
1995 8.55 8.78 -- 0.8733 -- 13.29
----------------------------------------------------------------------------------------------------------------------------
1996 8.78 9.33 -- 0.5727 -- 13.23
----------------------------------------------------------------------------------------------------------------------------
1997 9.33 9.55 -- 0.6386 -- 9.48
----------------------------------------------------------------------------------------------------------------------------
1998 9.55 8.94 -- 0.6343 -- 0.18
----------------------------------------------------------------------------------------------------------------------------
1999 8.94 8.66 -- 0.5047 $0.0476 3.16
----------------------------------------------------------------------------------------------------------------------------
01/01/00-05/31/00 8.66 7.94 -- 0.2211 -- (5.84)
----------------------------------------------------------------------------------------------------------------------------
Total: $0.0000 $3.9689 $0.0476
----------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 05/31/00: 23.81%
----------------------------------------------------------------------------------------------------------------------------
PERFORMANCE SUMMARY CLASS C SHARES
NET ASSET VALUE
-------------------------- CAPITAL GAINS PAID FROM TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID(2) CAPITAL RETURN(1)
----------------------------------------------------------------------------------------------------------------------------
2/07/94-12/31/94 $10.00 $8.56 -- $0.5424 -- (9.13)%
----------------------------------------------------------------------------------------------------------------------------
1995 8.56 8.79 -- 0.8951 -- 13.56
----------------------------------------------------------------------------------------------------------------------------
1996 8.79 9.33 -- 0.5934 -- 13.36
----------------------------------------------------------------------------------------------------------------------------
1997 9.33 9.56 -- 0.6638 -- 9.89
----------------------------------------------------------------------------------------------------------------------------
1998 9.56 8.94 -- 0.6597 -- 0.34
----------------------------------------------------------------------------------------------------------------------------
1999 8.94 8.66 -- 0.5263 $0.0496 3.43
----------------------------------------------------------------------------------------------------------------------------
01/01/00-05/31/00 8.66 7.94 -- 0.2347 -- (5.69)
----------------------------------------------------------------------------------------------------------------------------
Total: $0.0000 $4.1154 $0.0496
----------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 05/31/00: 25.83%
----------------------------------------------------------------------------------------------------------------------------
</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
for each class would be lower if sales charges were included. Total
investment return for periods less than one year has not been annualized.
(2) Includes foreign exchange gain distributions, if any. The above data
represents past performance of the Fund's shares, which is no guarantee of
future results. The principal value of an investment in the Fund will
fluctuate, so that an investor's shares, when redeemed, may be worth more
or less than their original cost.
5
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
PERFORMANCE RESULTS (UNAUDITED) (CONCLUDED)
AVERAGE ANNUAL TOTAL RETURN(1)
<TABLE>
<CAPTION>
% RETURN WITHOUT DEDUCTING % RETURN AFTER DEDUCTING
MAXIMUM SALES CHARGE MAXIMUM SALES CHARGE
-------------------------------------------- -----------------------------------
CLASS A* B** C*** A* B** C***
----------------------------------------------------------------------------------------------------------------
Twelve Months Ended 06/30/00 (1.44)% (2.28)% (2.08)% (5.42)% (6.87)% (2.77)%
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Five Years Ended 06/30/00 5.81 5.01 5.29 4.96 4.71 5.29
----------------------------------------------------------------------------------------------------------------
Commencement of Operations
Through 06/30/00 4.52 3.73 3.99 3.85 3.62 3.99
</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 for each class would be lower if sales charges were included.
Total investment return for periods less than one year has not been
annualized.
* 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 5 years. Class B shares bear ongoing 12b-1
distribution and service fees.
*** Maximum contingent deferred sales charge for Class C shares is 0.75% and
is reduced to 0% after 1 year. Class C shares bear ongoing 12b-1
distribution and service fees.
+ Commencement of issuance date is February 7, 1994 for Class A, Class B and
Class C shares.
Note: The Fund offers Class Y shares to a limited group of eligible investors,
including participants in certain investment programs that are sponsored
by PaineWebber and may invest in PaineWebber mutual funds. For the six
months ended May 31, 2000 and since inception, February 17, 1998 through
May 31, 2000, Class Y shares had a total return of (3.28)% and (2.45)%,
respectively. For the twelve months ended June 30, 2000 and since
inception through June 30, 2000, Class Y shares had an average annual
total return of (1.37)% and (0.19)%, respectively.
The data above represents past performance of the Fund's shares, which is
no guarantee of future results. The principal value of an investment in
the Fund will fluctuate, so that an investor's shares, when redeemed, may
be worth more or less than their original cost.
6
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
PORTFOLIO OF INVESTMENTSMAY 31, 2000 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
-------- --------- --------- -----------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND INVESTMENT GRADE OBLIGATIONS--34.90%
U.S. GOVERNMENT OBLIGATIONS--2.01%
$ 1,800 U.S. Treasury Bonds (cost--$1,848,395) ............................ 08/15/27 6.375% $ 1,819,688
-----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES--3.93%
3,516 GNMA (cost--$3,711,690) ........................................... 06/15/17 to 11/15/17 8.000 3,548,714
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION CERTIFICATES--8.84%
3,800 FNMA 15 year TBA .................................................. TBA 6.500 3,606,436
4,740 FNMA 30 year TBA .................................................. TBA 6.000 to 7.000 4,371,721
-----------
Total Federal National Mortgage Association Certificates (cost--$7,919,331) ... 7,978,157
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS--12.21%
4,000 CS First Boston Mortgage Securities Corporation, Series 1997-C2,
Class A2 .......................................................... 07/17/07 6.520 3,776,333
1,000 DLJ Commercial Mortgage Corporation, Series 1998-CG1, Class A1B ... 05/10/08 6.410 914,481
6,810 First Union Lehman Brothers Mortgage Trust, Series 1997-C2,
Class A3 .......................................................... 12/18/07 6.650 6,332,235
-----------
Total Collateralized Mortgage Obligations (cost--$11,851,930) ................. 11,023,049
-----------
CORPORATE OBLIGATIONS--7.91%
INSURANCE--2.18%
2,000 Principal Financial Group** ....................................... 08/15/09 8.200 1,967,800
-----------
TELECOMMUNICATIONS--2.16%
2,000 Centaur Funding** ................................................. 04/21/20 9.080 1,949,376
-----------
YANKEE--3.57%
2,300 FUJI JGB Investment LLC** ......................................... 06/30/08^ 9.870 2,208,407
1,000 HSBCCapital Funding LP** .......................................... 06/30/30^ 10.176 1,006,603
-----------
3,215,010
-----------
Total Corporate Obligations (cost--$7,004,710) ................................ 7,132,186
-----------
Total U.S. Government and Investment Grade Obligations (cost--$32,336,056) 31,501,794
-----------
GLOBAL DEBT SECURITIES--17.04%
BRAZIL--1.06%
1,270 Federal Republic of Brazil ........................................ 05/15/27 10.125 955,675
-----------
CANADA--3.38%
4,385* Government of Canada .............................................. 12/01/06 7.000 3,055,068
-----------
GERMANY--1.64%
1,500* Federal Republic of Germany ....................................... 07/15/04 6.750 1,481,151
-----------
KOREA--0.28%
255 Republic of Korea ................................................. 04/15/08 8.875 255,638
-----------
MALAYSIA--0.95%
1,030 Petroliam Nasional Berhad ......................................... 10/15/26 7.625 859,432
-----------
MEXICO--4.40%
850 United Mexican States ............................................. 05/15/26 11.500 952,850
3,082 United Mexican States DISC (1) .................................... 12/31/19 6.875 to 6.933a 3,014,581
-----------
3,967,431
-----------
PANAMA--0.62%
613 Republic of Panama ................................................ 04/01/29 9.375 559,975
-----------
POLAND--0.88%
4,140* Republic of Poland ................................................ 06/12/04 10.000 791,263
-----------
TRINIDAD AND TOBAGO--1.12%
1,000 Republic of Trinidad & Tobago ..................................... 10/01/09 9.875 1,010,000
-----------
TURKEY--0.58%
512 Republic of Turkey ................................................ 11/05/04 11.875 525,440
-----------
UNITED KINGDOM--2.13%
1,265* United Kingdom Gilt ............................................... 12/07/03 6.500 1,920,591
-----------
Total Global Debt Securities (cost--$16,135,780) .............................. 15,381,664
-----------
</TABLE>
7
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
-------- --------- --------- -----------
<S> <C> <C> <C> <C>
HIGH YIELD SECURITIES--39.11%
CORPORATE BONDS--38.20%
AUTOMOTIVE--0.76%
$ 750 Lear Corporation .................................................. 05/15/05 7.960% $ 690,403
-----------
CABLE--4.23%
1,750 Knology Holdings Incorporated ..................................... 10/15/07 11.875+ 1,085,000
1,000 NTL Communications Corporation .................................... 10/01/08 11.500 1,005,000
1,000 UIH Australia Pacific Incorporated ................................ 05/15/06 14.000+ 860,000
950 United Pan-Europe Communications N.V .............................. 08/01/09 12.500+ 441,750
1,000 United Pan-Europe Communications N.V.** ........................... 11/01/09 13.375+ 430,000
-----------
3,821,750
-----------
CHEMICALS--2.02%
500 Avecia Group PLC .................................................. 07/01/09 11.000 492,500
375 Huntsman ICI Chemicals LLC ........................................ 07/01/09 10.125 365,625
1,000 Lyondell Chemical Company ......................................... 05/01/07 9.875 to 10.875 965,000
to 05/01/09 -----------
1,823,125
-----------
COMMUNICATIONS--FIXED--11.11%
750 Alestra S.A ....................................................... 05/15/06 12.125 667,500
750 Allegiance Telecom Incorporated ................................... 05/15/08 12.875 810,000
700 Barak ITC ......................................................... 11/15/07 12.500+ 350,000
620 Esprit Telecom Group PLC .......................................... 06/15/08 10.875 483,600
1,000 Flag Telecom Holdings Limited** ................................... 03/30/10 11.625 920,000
1,000 Global Crossing Holding Limited** ................................. 11/15/09 9.500 940,000
500 GlobeNet Communications Group ..................................... 07/15/07 13.000 498,750
1,000 Hyperion Telecommunications Incorporated .......................... 11/01/07 12.000 952,500
1,000 Metromedia Fiber Network Incorporated ............................. 11/15/08 10.000 952,500
650 NEXTLINK Communications Incorporated .............................. 06/01/09 10.750 624,000
750 Northeast Optic Network Incorporated .............................. 08/15/08 12.750 705,000
750 Pathnet Incorporated .............................................. 04/15/08 12.250 442,500
500 Tele1 Europe BV ................................................... 05/15/09 13.000 490,000
500 Verio Incorporated ................................................ 12/01/08 11.250 556,250
1,250 Viatel Incorporated ............................................... 04/15/08 12.500+ 637,500
-----------
10,030,100
-----------
COMMUNICATIONS--MOBILE--2.44%
1,000 Nextel Communications Incorporated ................................ 02/15/08 9.950+ 690,000
700 Nextel International Incorporated ................................. 04/15/08 12.125+ 434,000
2,000 Spectrasite Holdings Incorporated ................................. 04/15/09 11.250+ 1,080,000
-----------
2,204,000
-----------
CONSUMER MANUFACTURING--0.45%
1,000 Decora Industries Incorporated .................................... 05/01/05 11.000 410,000
-----------
ENERGY--2.71%
250 Chesapeake Energy Corporation ..................................... 05/01/05 9.625 238,750
500 Key Energy Services Incorporated .................................. 01/15/09 14.000 540,000
300 Orion Refining Corporation**(b) ................................... 11/15/04 10.000+ 150,013
500 Pioneer Natural Resources Company ................................. 04/01/10 9.625 511,875
1,000 R&B Falcon Corporation ............................................ 12/15/08 9.500 1,000,000
-----------
2,440,638
-----------
</TABLE>
8
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
-------- --------- --------- -----------
<S> <C> <C> <C> <C>
HIGH YIELD SECURITIES (continued)
CORPORATE BONDS (CONTINUED)
FINANCIAL SERVICES--0.66%
$ 741 Airplanes Pass-Through Trust ...................................... 03/15/19 10.875% $ 600,028
-----------
FOOD & BEVERAGE--1.09%
343 Packaged Ice Incorporated ......................................... 02/01/05 9.750 284,690
750 Pantry Incorporated ............................................... 10/15/07 10.250 697,500
-----------
982,190
-----------
GAMING--0.82%
750 MGM Grand Incorporated ............................................ 06/01/07 9.750 742,500
-----------
GENERAL INDUSTRIAL--1.26%
500 Aqua Chemical Incorporated ........................................ 07/01/08 11.250 290,000
275 J.B.Poindexter & Company Incorporated ............................. 05/15/04 12.500 253,000
750 SabreLiner Corporation** .......................................... 06/15/08 11.000 596,250
-----------
1,139,250
-----------
HEALTHCARE--0.75%
750 Tenet Healthcare Corporation ...................................... 12/01/08 8.125 673,125
-----------
MEDIA--0.24%
936 Inter Act Systems Incorporated**(b)(2) ............................ 08/01/03 14.000 215,337
-----------
METALS & MINING--1.56%
1,000 Metal Management Incorporated ..................................... 05/15/08 10.000 700,000
750 National Steel Corporation ........................................ 03/01/09 9.875 705,000
-----------
1,405,000
-----------
PAPER & PACKAGING--1.58%
500 Packaging Corporation of America .................................. 04/01/09 9.625 488,750
1,000 Tembec Industry Incorporated ...................................... 06/30/09 8.625 937,500
-----------
1,426,250
-----------
RETAIL--1.32%
550 Advance Holding Corporation ....................................... 04/15/09 12.875+ 209,000
500 Advance Stores Company Incorporated ............................... 04/15/08 10.250 390,000
750 Ames Department Stores Incorporated ............................... 04/15/06 10.000 592,500
-----------
1,191,500
-----------
SERVICE--1.59%
1,000 Allied Waste North America Incorporated ........................... 08/01/09 10.000 790,000
750 Atlantic Express Transportation Corporation ....................... 02/01/04 10.750 645,000
-----------
1,435,000
-----------
TECHNOLOGY--1.21%
500 ChipPac International Limited** ................................... 08/01/09 12.750 525,000
1,000 Earthwatch Incorporated**(b)# ..................................... 07/15/07 13.000+ 570,000
-----------
1,095,000
-----------
TRANSPORTATION--1.58%
1,000 Equimar Shipholdings Limited ...................................... 07/01/07 9.875 360,000
700 Stena AB .......................................................... 06/15/07 8.750 602,000
750 TFM, S.A. de C.V .................................................. 06/15/09 11.750+ 465,000
-----------
1,427,000
-----------
</TABLE>
9
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
-------- --------- --------- -----------
<S> <C> <C> <C> <C>
HIGH YIELD SECURITIES (CONTINUED)
CORPORATE BONDS (CONCLUDED)
UTILITIES--0.82%
$ 500 AES Corporation ................................................... 06/01/09 9.500% $ 481,270
271 Panda Funding Corporation ......................................... 08/20/12 11.625 257,564
-----------
738,834
-----------
Total Corporate Bonds (cost--$40,173,715) ..................................... 34,491,030
-----------
NUMBER OF
SHARES
--------
COMMON STOCKS(a)--0.38%
COMMUNICATIONS--FIXED--0.31%
8,806 Tele1 Europe BV .................................................................................... 101,269
7,400 Viatel Incorporated ................................................................................ 184,537
-----------
285,806
-----------
SERVICE--0.07%
37,075 Waste Systems International Incorporated(b) ........................................................ 60,247
-----------
Total Common Stocks (cost--$185,952) ........................................................................... 346,053
-----------
PREFERRED STOCK--0.45%
ENERGY--0.01%
164 Orion Refining Corporation(a)(b) ................................................................... 6,671
-----------
MEDIA--0.19%
1,750 Inter Act Systems Incorporated**(a)(b) ............................................................. 175,000
-----------
SERVICE--0.25%
804 Waste Systems International Incorporated(a)(b) ..................................................... 221,100
-----------
Total Preferred Stock (cost--$1,441,820) ....................................................................... 402,771
-----------
NUMBER OF
WARRANTS
---------
WARRANTS(a)--0.08%
CABLE--0.03%
2,000 Knology Holdings Incorporated ...................................................................... 9,000
1,000 UIH Australia Pacific Incorporated ................................................................. 15,000
-----------
24,000
-----------
Communications--Fixed--0.01%
750 Pathnet Incorporated ............................................................................... 7,500
-----------
Energy--0.03%
500 Key Energy Services Incorporated ................................................................... 27,500
-----------
Financial Services--0.00%
500 Olympic Financial Limited .......................................................................... 0
-----------
</TABLE>
10
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
NUMBER OF
WARRANTS VALUE
-------- ---------
HIGH YIELD SECURITIES (CONCLUDED)
WARRANTS (CONCLUDED)
MEDIA--0.01%
<S> <C> <C>
1,750 Inter Act Electronic Marketing Incorporated(b) ..................................................... $ 18
1,750 Inter Act Systems Incorporated(b) .................................................................. 8,750
-----------
8,768
-----------
TECHNOLOGY--0.00%
2,000 Electronic Retailing Systems International Incorporated ............................................ 2,000
-----------
Total Warrants (cost--$50,741) ................................................................................. 69,768
Total High Yield Securities (cost--$41,852,228) ................................................................ 35,309,622
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES
-------- --------- ---------
SHORT-TERM INVESTMENTS--14.38%
<C> <C> <C> <C>
$ 13,000 Federal Home Loan Bank Discount Notes (cost--$12,981,944) ......... 06/09/00 6.250%@ 12,981,944
-----------
REPURCHASE AGREEMENT--2.75%
2,478 Repurchase Agreement dated 05/31/00 with SG Warburg collateralized
by $2,330,000 U.S. Treasury Bonds, 7.250% due 05/15/16
(value--$2,528,050); proceeds:$2,478,437 (cost--$2,478,000) 06/01/00 6.350 2,478,000
-----------
Total Investments (cost--$105,784,008)--108.18% ............................... 97,653,024
Liabilities in excess of other assets--(8.18)% ................................ (7,381,204)
-----------
Net Assets--100.00% ........................................................... $90,271,820
===========
</TABLE>
-------
* Stated in local currency.
** Security exempt from registration under 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
# Security represents a unit which is composed of the stated bond with
attached warrants or common stock.
+ Denotes a step-up bond or a zero coupon bond that converts to the noted
fixed rated at a designated future date.
++ Floating rate securities, the interest rates shown are the current rates
as of May 31, 2000.
^ Maturity date shown is the callable date for perpetual rewriting
securities.
@ Interest rates shown are discount rates at date of purchase.
(a) Non-income producing
(b) Illiquid securities representing 1.56% of net assets.
(1) With additional 4,745,000 recoverable rights attached maturing on June 30,
2003 with no market value.
(2) Bond interest in default.
DISC Discount Bonds.
TBA (To Be Assigned) Securities are purchased on a forward commitment with
approximate principal amount (generally +/- 1.0%) and generally stated
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
11
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
FORWARD FOREIGN CURRENCY CONTRACTS
UNREALIZED
CONTRACT TO MATURITY APPRECIATION
DELIVER IN EXCHANGE FOR DATES (DEPRECIATION)
--------- --------------- -------- --------------
British Pounds ... 990,000 US$ 1,467,734 08/30/00 $ (16,859)
Euro ............. 2,440,000 US$ 2,276,764 06/01/00 212
Polish Zloties ... 3,100,000 US$ 671,926 06/08/00 (31,655)
U.S. Dollars ..... 3,154,467 EUR 3,170,000 06/14/00 (194,208)
U.S.Dollars ...... 7,556,785 EUR 8,155,000 08/01/00 82,572
U.S. Dollars ..... 563,550 GBP 375,000 08/30/00 (1,204)
--------
$(161,142)
========
----------
Currency Type Abbreviation:
EUR--Euro
GBP--British Pounds
US$--United States Dollars
See accompanying notes to financial statements
12
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES MAY 31, 2000 (UNAUDITED)
ASSETS
Investments in securities, at value (cost--$105,784,008) ........ $97,653,024
Cash ............................................................ 773
Interest receivable ............................................. 1,417,927
Receivable for shares of beneficial interest sold ............... 19,682
Unrealized appreciation on forward foreign currency contracts ... 82,784
Other assets .................................................... 97,843
-----------
Total assets .................................................... 99,272,033
-----------
LIABILITIES
Payable for investments purchased ............................... 7,919,331
Payable for shares of beneficial interest repurchased ........... 637,438
Unrealized depreciation on forward foreign currency contracts ... 243,926
Payable to affiliates ........................................... 100,912
Accrued expenses and other liabilities .......................... 98,606
-----------
Total liabilities ............................................... 9,000,213
-----------
NET ASSETS
Beneficial interest--$0.001 par value
(unlimited amount authorized) ................................. 114,979,746
Undistributed net investment income ............................. 498,238
Accumulated net realized losses from investments
and futures transactions ...................................... (16,957,143)
Net unrealized depreciation of investments,
other assets, liabilities and forward contracts
denominated in foreign currencies ............................. (8,249,021
-----------
Net assets ...................................................... $90,271,820
===========
CLASS A:
Net assets ...................................................... $45,981,684
-----------
Shares outstanding .............................................. 5,786,740
-----------
Net asset and redemption value per share ........................ $7.95
=====
Maximum offering price per share (net asset value
plus sales charge of 4.00% of offering price) ................. $8.28
=====
CLASS B:
Net assets ...................................................... $21,562,953
-----------
Shares outstanding .............................................. 2,715,665
-----------
Net asset value and offering price per share .................... $7.94
=====
CLASS C:
Net assets ...................................................... $21,812,926
-----------
Shares outstanding .............................................. 2,746,840
-----------
Net asset value and offering price per share .................... $7.94
=====
CLASS Y:
Net assets ...................................................... $ 914,257
-----------
Shares outstanding .............................................. 115,066
-----------
Net asset value, offering price and redemption value per share .. $7.95
=====
See accompanying notes to financial statements
13
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
STATEMENT OF OPERATIONS
FOR THE SIX
MONTHS ENDED
MAY 31, 2000
(UNAUDITED)
-----------
INVESTMENT INCOME:
Interest ........................................................ $ 4,485,452
Dividends ....................................................... 136,200
-----------
4,621,652
-----------
EXPENSES:
Investment advisory and administration .......................... 377,219
Service fees--Class A ........................................... 58,187
Service and distribution fees--Class B .......................... 139,908
Service and distribution fees--Class C .......................... 93,853
Legal and audit ................................................. 39,987
Transfer agency and service fees ................................ 38,793
Reports and notices to shareholders ............................. 35,326
Custody and accounting .......................................... 30,148
State registration .............................................. 26,564
Trustees' fees .................................................. 5,250
Other expenses .................................................. 17,703
-----------
862,938
Less: Fee waivers from adviser .................................. (2,020)
-----------
Net expenses .................................................... 860,918
-----------
NET INVESTMENT INCOME ........................................... 3,760,734
-----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT ACTIVITIES:
Net realized gains (losses) from:
Investment transactions ....................................... (5,657,934)
Foreign currency transactions ................................. (1,479,872)
Futures contracts ............................................. 227,077
Net change in unrealized appreciation/depreciation of:
Investments ................................................... (252,588)
Futures ....................................................... (12,187)
Other assets, liabilities and forward contracts
denominated in foreign currencies ........................... 54,081
-----------
NET REALIZED AND UNREALIZED LOSSES FROM INVESTMENT ACTIVITIES ... (7,121,423)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ............ $(3,360,689)
===========
See accompanying notes to financial statements
14
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
MAY 31, 2000 NOVEMBER 30,
(UNAUDITED) 1999
------------ ------------
FROM OPERATIONS:
Net investment income .......................... $ 3,760,734 $ 7,864,639
Net realized losses from investment,
purchased options, foreign currency,
future contracts and written
options transactions ......................... (6,910,729) (2,355,907)
Net change in unrealized appreciation/
depreciation of investments, other assets,
liabilities and forward contracts
denominated in foreign currencies ............ (210,694) (4,255,551)
------------ ------------
Net increase (decrease) in net assets
resulting from operations .................... (3,360,689) 1,253,181
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
From net investment Income--Class A ............ (1,685,820) (2,522,970)
From net investment Income--Class B ............ (874,064) (2,467,340)
From net investment Income--Class C ............ (834,971) (1,761,471)
From net investment Income--Class Y ............ (37,767) (65,569)
From paid in capital--Class A .................. -- (240,120)
From paid in capital--Class B .................. -- (230,780)
From paid in capital--Class C .................. -- (165,360)
From paid in capital--Class Y .................. -- (6,270)
From foreign currency transactions--Class A .... -- (168,623)
From foreign currency transactions--Class B .... -- (220,118)
From foreign currency transactions--Class C .... -- (145,985)
From foreign currency transactions--Class Y .... -- (4,002)
------------ ------------
Total dividends and distributions
to shareholders .............................. (3,432,622) (7,998,608)
------------ ------------
FROM BENEFICIAL INTEREST TRANSACTIONS:
Net proceeds from the sale of shares ........... 8,548,466 33,578,632
Cost of shares repurchased ..................... (20,713,899) (36,518,754)
Proceeds from dividends reinvested ............. 2,115,582 4,893,143
------------ ------------
Net increase (decrease) in net assets from
beneficial interest transactions ............. (10,049,851) 1,953,021
------------ ------------
Net decrease in net assets ..................... (16,843,162) (4,792,406)
NET ASSETS:
Beginning of period ............................ 107,114,982 111,907,388
------------ ------------
End of period (including undistributed net
investment income $498,238 and $170,126,
respectively) ................................ $ 90,271,820 $107,114,982
============ ============
See accompanying notes to financial statements
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
PaineWebber Strategic Income Fund (the "Fund") is a series of PaineWebber
Securities Trust ("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 Fund seeks high levels of current
income and, secondarily, capital appreciation by allocating its investments
among three bond market categories: U.S. government and investment grade
corporate bonds; U.S. high yield, high risk corporate bonds; and foreign and
emerging market bonds. Costs incurred by the Fund in connection with its
organization have been deferred and amortized using the straight-line method
over a sixty month period from the commencement of operations. The Trust
currently offers another series of shares, PaineWebber Small Cap Fund, whose
financial statements are not included herein.
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 their service and/or distribution plan.
Class Y shares have no service or distribution plan.
The preparation of financial statements in accordance with generally
accepted accounting principles requires Fund management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. The following is a
summary of significant accounting policies:
VALUATION OF INVESTMENTS--The Fund calculates its net asset value based on
the current market value for its portfolio securities. The Fund normally obtains
market value 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. All investments quoted in foreign currencies will be valued daily in
U.S. dollars on the basis of the foreign currency exchange rates prevailing at
the time such valuation is determined by the Fund's custodian.
Foreign currency exchange rates are generally determined prior to the close
of the New York Stock Exchange ("NYSE"). Occasionally, events affecting the
value of foreign investments and such exchange rates occur between the time at
which they are determined and the close of the NYSE, which will not be reflected
in the computation of the Fund's net asset value.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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
Fund's board.
REPURCHASE AGREEMENTS--The Fund's custodian takes possession of the
collateral pledged for investments in repurchase agreements. The underlying
collateral is valued daily on a mark-to-market basis to ensure that the value,
including accrued interest, is at least equal to the repurchase price. In the
event of default of the obligation to repurchase, the Fund has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings. The Fund occasionally
participates in joint repurchase agreement transactions with other funds managed
by Mitchell Hutchins.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions and foreign exchange transactions are calculated using the
identified cost method. Interest income is recorded on an accrual basis.
Discounts are accreted and premiums are amortized as adjustments to interest
income and the identified cost of investments.
Income, expenses (excluding class-specific expenses) and
realized/unrealized gains/losses are allocated proportionately to each class of
shares based upon the relative net asset value of outstanding shares (or the
value of dividend-eligible shares, as appropriate) of each class at the
beginning of the day (after adjusting for current capital share activity of the
respective classes). Class-specific expenses are charged directly to the
applicable class of shares.
FOREIGN CURRENCY TRANSLATION--The book 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; and (2) purchases and sales of investment securities, income and
expenses--at the rates of exchange prevailing on the respective dates of such
transactions.
Although the Fund's net assets including the market values of the Fund's
investments are presented at the foreign exchange rates at the close of the
period, the Fund does not generally isolate the effect of fluctuations in
foreign exchange rates from the effect of the changes in market prices of
securities. However, the Fund does isolate the effect of fluctuations in foreign
exchange rates when determining the gain or loss upon the sale or maturity of
foreign currency-denominated debt obligations pursuant to federal income tax
regulations.
FORWARD FOREIGN CURRENCY CONTRACTS--The Fund may enter into forward foreign
currency exchange contracts ("forward contracts") in connection with planned
purchases or sales of securities or to hedge the U.S. dollar value of portfolio
securities denominated in a particular currency.
The Fund has no specific limitation on the percentage of assets which may
be committed to such contracts. The Fund may enter into forward contracts or
maintain a net exposure to forward contracts only if (1) the consummation of the
contracts would not obligate the Fund to deliver an amount of foreign currency
in excess of the value of the position being hedged by such contacts 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 as unrealized
gains or losses by the Fund. Realized gains and losses included net gains and
losses recognized by the Fund on contracts which have matured.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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 contact 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 portfolio securities being hedged or, market
disruptions, do not normally permit full control of these risks at all times.
WRITTEN OPTIONS--When a Fund writes a call or a put option, an amount equal
to the premium received by the Fund is included in the Fund's Statement of
Assets and Liabilities as an asset and as an equivalent liability. The amount of
the liability is subsequently marked-to-market to reflect the current market
value of the option written. If an option which the Fund has written either
expires on its stipulated expiration date or the Fund enters into a closing
purchase transaction, the Fund realizes a gain (or loss if the cost of a closing
purchase transaction exceeds the premium received when the option was written)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is extinguished. If a call option which the
Fund has written is exercised, the Fund realizes a capital gain or loss
(long-term or short-term, depending on the holding period of the underlying
security) from the sale of the underlying security and the proceeds from the
sale are increased by the premium originally received. If a put option which the
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. For the six months ended May 31, 2000, the Fund did not have any written
option activity.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS--Dividends and distributions to
shareholders are recorded on the ex-dividend date. The amount of dividends and
distributions are determined in accordance with federal income tax regulations
which may differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification.
CONCENTRATION OF RISK
The ability of the issuers of debt securities held by the Fund to meet
their obligations may be affected by economic and political developments
particular to a specific industry, country or region. 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.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
INVESTMENT ADVISER AND ADMINISTRATOR
The board 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 an annual
rate of 0.75% of the Fund's average daily net assets. At May 31, 2000 the Fund
owed Mitchell Hutchins $58,234 in investment advisory and administration fees.
For the six months ended May 31, 2000, Mitchell Hutchins voluntarily waived
$2,020 in investment advisory and administration fees from the Fund.
DISTRIBUTION PLANS
Mitchell Hutchins is the distributor of the Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. Under separate
plans of distribution pertaining to Class A, Class B and Class C shares, the
Fund pays Mitchell Hutchins monthly service fees at an annual rate of 0.25% of
the average daily net assets of Class A, Class B and Class C shares and monthly
distribution fees at the annual rate of 0.75% and 0.50% of the average daily net
assets of Class B shares and Class C shares, respectively. At May 31, 2000, the
Fund owed Mitchell Hutchins $42,678 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 B and Class C shares. Mitchell Hutchins has informed the Fund that for the
six months ended May 31, 2000, it earned $89,561 in sales charges.
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 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 regain record ownership of loaned
securities to exercise certain beneficial rights; however, the Fund may bear the
risk of delay in recovery of, or even loss of rights in, the securities loaned
should the borrower fail financially. The Fund receives compensation, which is
included in interest income, for lending its securities from interest earned on
the cash or U.S. government securities held as collateral, net of fee rebates
paid to the borrower plus reasonable administrative and custody fees. For the
six months ended May 31, 2000, the Fund earned $23 for lending its securities
and PaineWebber earned $8 as the Fund's lending agent. There were no securities
out on loan on May 31, 2000.
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 six months ended May 31, 2000, the Fund did not borrow under the Facility.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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 six months ended May 31, 2000, PaineWebber received from PFPC, Inc.,
approximately 46% of the total transfer agency and related services fees
collected by PFPC.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at May 31,
2000 was substantially the same as the cost of securities for financial
statement purposes.
At May 31, 2000, the components of net unrealized depreciation of
investments were as follows:
Gross appreciation (investments having an excess
of value over cost) ................................ $ 1,191,304
Gross depreciation (investments having an
excess of cost over value) ......................... (9,322,288)
-----------
Net unrealized depreciation of investments ........... $(8,130,984)
===========
For the six months ended May 31, 2000, total aggregate purchases and sales
of portfolio securities, excluding short-term securities, were as follows:
Purchases ............................................ $80,848,131
Sales ................................................ $96,310,366
FEDERAL INCOME 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, 1999, the Fund had a net capital loss carryforward of
$10,029,452 that will expire between November 30, 2002 and November 30, 2007.
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.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
SHARES OF BENEFICIAL INTEREST
There was an unlimited amount of $0.001 par value shares of beneficial
interest authorized. Transactions in shares of beneficial interest were as
follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------------------------ ------------------------- ---------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- ----------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED
MAY 31, 2000:
Shares sold .................. 695,910 $ 5,899,128 203,083 $ 1,713,584 94,993 $ 805,873 15,207 $ 129,881
Shares repurchased ........... (1,014,378) (8,546,325) (795,388) (6,701,988) (613,876) (5,152,962) (36,678) (312,624)
Shares converted from
Class B to Class A ......... 1,207,709 10,366,178 (1,209,088) (10,366,178) -- -- -- --
Dividends reinvested ......... 127,795 1,067,472 50,204 421,329 70,669 591,025 4,275 35,756
---------- ----------- ---------- ------------ -------- ---------- ------- --------
Net increase (decrease) ...... 1,017,036 $ 8,786,453 (1,751,189) $(14,933,253) (448,214) $(3,756,064) (17,196) $(146,987)
========== =========== ========== ============ ======== ========== ======= ========
CLASS A CLASS B CLASS C CLASS Y
------------------------ ------------------------- ---------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- ----------- -------- ---------- ------- --------
FOR THE YEAR ENDED
NOVEMBER 30, 1999:
Shares sold .................. 1,996,860 $17,702,363 986,007 $ 8,732,830 683,008 $ 6,042,996 123,407 $1,100,443
Shares repurchased ........... (1,687,473) (14,905,284) (1,388,164) (12,199,690) (983,441) (8,649,572) (85,432) (764,208)
Shares converted from
Class B to Class A ......... 297,656 2,622,068 (298,015) (2,622,068) -- -- -- --
Dividends reinvested ......... 212,937 1,868,492 169,428 1,488,996 166,528 1,463,623 8,203 72,032
---------- ----------- ---------- ------------ -------- ---------- ------- --------
Net increase (decrease) ...... 819,980 $ 7,287,639 (530,744) $ (4,599,932) (133,905) $(1,142,953) 46,178 $ 408,267
========== =========== ========== ============ ======== ========== ======= ========
</TABLE>
21
<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
FEBRUARY 1,
FOR THE SIX FOR THE YEARS ENDED 1996 FOR THE
MONTHS ENDED NOVEMBER 30, THROUGH YEAR ENDED
MAY 31, 2000 ----------------------------- NOVEMBER 30, JANUARY 31,
(UNAUDITED) 1999 1998 1997 1996 1996
------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period .......................... $ 8.53 $ 9.06 $ 9.60 $ 9.37 $ 8.99 $ 8.60
------- ------- ------- ------- ------- -------
Net investment income@ ........................................ 0.34 0.61 0.64 0.74 0.57 0.67
Net realized and unrealized gains (losses)
from investments, foreign currency,
futures contracts and written options@ ..................... (0.62) (0.48) (0.48) 0.17 0.39 0.59
------- ------- ------- ------- ------- -------
Net increase (decrease) from investment operations ............ (0.28) 0.13 0.16 0.91 0.96 1.26
------- ------- ------- ------- ------- -------
Dividends from net investment income .......................... (0.30) (0.57) (0.70) (0.68) (0.58) (0.77)
Distributions from paid in capital ............................ -- (0.05) -- -- -- --
Distributions from foreign currency transactions .............. -- (0.04) -- -- -- (0.10)
------- ------- ------- ------- ------- -------
Total dividend and distributions to shareholders .............. (0.30) (0.66) (0.70) (0.68) (0.58) (0.87)
------- ------- ------- ------- -------
Net asset value, end of period ................................ $ 7.95 $ 8.53 $ 9.06 $ 9.60 $ 9.37 $ 8.99
------- ------- ------- ------- ------- -------
Total investment return(1) .................................... (3.36)% 1.56% 1.65% 10.04% 11.14% 15.27%
------- ------- ------- ------- ------- -------
Ratios/Supplemental data:
Net assets, end of period (000's) ............................. $45,982 $40,688 $35,778 $20,909 $ 9,944 $ 9,841
Expenses to average net assets after waivers
from adviser(2) ............................................ 1.38%* 1.30% 1.34% 1.65% 1.89%* 1.74%
Net investment income to average net assets
after waivers from adviser(2) ............................... 7.86%* 7.45% 6.97% 7.35% 7.69%* 8.52%
Portfolio turnover ............................................ 86% 226% 192% 140% 101% 91%
</TABLE>
----------
* Annualized.
@ 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, 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 any applicable sales charges; results would be lower if they were
included. Total investment return for periods less than one year has not
been annualized.
(2) During the year ended November 30, 1997 Mitchell Hutchins waived a portion
of its advisory and administration fees. If such waivers had not been made
the annualized ratios of expenses to average net assets would have been
1.66% for Class A, and 2.45% for Class B. During the six months ended May
31, 2000, and the year ended November 30, 1999, Mitchell Hutchins waived a
portion of its advisory and administration fees. The ratios excluding the
waivers are the same since the waiver represents less than 0.005%.
22
<PAGE>
CLASS B
----------------------------------------------------------------------------
FOR THE PERIOD
FEBRUARY 1,
FOR THE SIX FOR THE YEARS ENDED 1996 FOR THE
MONTHS ENDED NOVEMBER 30, THROUGH YEAR ENDED
MAY 31, 2000 ----------------------------- NOVEMBER 30, JANUARY 31,
(UNAUDITED) 1999 1998 1997 1996 1996
------------ ------- ------- ------- ------- -------
$ 8.52 $ 9.05 $ 9.59 $ 9.36 $ 8.98 $ 8.60
------- ------- ------- ------- ------- -------
0.28 0.54 0.56 0.67 0.51 0.60
(0.59) (0.47) (0.47) 0.16 0.39 0.59
------- ------- ------- ------- ------- -------
(0.31) 0.07 0.09 0.83 0.90 1.19
------- ------- ------- ------- ------- -------
(0.27) (0.51) (0.63) (0.60) (0.52) (0.71)
-- -- (0.05) -- -- --
-- (0.04) -- -- -- (0.10)
------- ------- ------- ------- ------- -------
(0.27) (0.60) (0.63) (0.60) (0.52) (0.81)
------- ------- ------- ------- ------- -------
$ 7.94 $ 8.52 $ 9.05 $ 9.59 $ 9.36 $ 8.98
======= ======= ======= ======= ======= =======
(3.80)% 0.76% 0.87% 9.20% 10.46% 14.37%
======= ======= ======= ======= ======= =======
$21,563 $38,062 $45,217 $41,650 $37,249 $40,653
2.15%* 2.08% 2.12% 2.43% 2.63%* 2.49%
6.96%* 6.66% 5.98% 6.56% 6.93%* 7.77%
86% 226% 192% 140% 101% 91%
23
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each
period is presented below:
<TABLE>
<CAPTION>
CLASS C CLASS Y
------------------------------------------------ --------------------------------------
FOR THE
FOR THE PERIOD
PERIOD FOR FEBRU-
FEBRUARY 1, THE FOR THE FOR THE ARY 17
1996 YEAR SIX MONTHS YEAR 1998+
FOR THE SIX FOR THE YEARS THROUGH ENDED ENDED ENDED THROUGH
MONTHS ENDED ENDED NOVEMBER 30, NOVEM- JANU- MAY 31, NOVEM- NOVEM-
MAY 31, 2000 -------------------------- BER 30, ARY 31, 2000 BER 30, BER 30,
(UNAUDITED) 1999 1998 1997 1996 1996 (UNAUDITED) 1999 1998
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ............................ $ 8.52 $ 9.05 $ 9.59 $ 9.37 $ 8.98 $ 8.60 $ 8.53 $ 9.05 $ 9.72
------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income@ .............. 0.31 0.57 0.59 0.70 0.53 0.62 0.34 0.63 0.56
Net realized and unrealized
gains (losses) from investments,
foreign currency, futures
contracts and written options@ .... (0.61) (0.48) (0.48) 0.15 0.40 0.59 (0.61) (0.46) (0.66)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net increase (decrease) from
investment operations ............. (0.30) 0.09 0.11 0.85 0.93 1.21 (0.27) 0.17 (0.10)
------- ------- ------- ------- ------- ------- ------- ------- -------
Dividends from net investment
income ............................ (0.28) (0.53) (0.65) (0.63) (0.54) (0.73) (0.31) (0.59) (0.57)
Distribution from paid in capital ... -- (0.05) -- -- -- -- -- (0.06) --
Distributions from foreign
currency transactions ............. -- (0.04) -- -- -- (0.10) -- (0.04) --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total dividend and distributions
to shareholders ................... (0.28) (0.62) (0.65) (0.63) (0.54) (0.83) (0.31) (0.69) (0.57)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of period ...... $ 7.94 $ 8.52 $ 9.05 $ 9.59 $ 9.37 $ 8.98 $ 7.95 $ 8.53 $ 9.05
======= ======= ======= ======= ======= ======= ======= ======= =======
Total investment return(1) .......... (3.62)% 1.03% 1.14% 9.37% 10.80% 14.63% (3.28)% 1.91% (1.04)%
======= ======= ======= ======= ======= ======= ======= ======= =======
Ratios/Supplemental data:
Net assets, end of period (000's) ... $21,813 $27,237 $30,133 $23,117 $17,101 $19,232 $ 914 $ 1,128 $ 779
Expenses to average net assets
after waiver from adviser(2) ...... 1.87%* 1.82% 1.86% 2.17% 2.38%* 2.24% 1.12%* 1.05% 1.07%*
Net investment income to average
net assets after waiver from
adviser(2) ........................ 7.31%* 6.92% 6.24% 6.82% 7.19%* 8.03% 8.07%* 7.67% 7.26%*
Portfolio turnover rate ............. 86% 226% 192% 140% 101% 91% 86% 226% 192%
</TABLE>
----------
+ Commencement of operations.
* Annualized.
@ 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 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 any applicable sales charges or program fees; results would be
lower if they were included. Total investment return for periods less than
one year has not been annualized.
(2) During the year ended November 30, 1997 Mitchell Hutchins waived a portion
of its advisory and administration fees. If such waivers had not been made
the annualized ratios of expenses to average net assets would have been
2.18% for Class C shares. During the six months ended May 31, 2000 and the
year ended November 30, 1999, Mitchell Hutchins waived a portion of its
advisory and administration fees. The ratios excluding the waivers are the
same since the waiver represents less than 0.005%.
24
<PAGE>
[This Page Intentionally Left Blank]
25
<PAGE>
[This Page Intentionally Left Blank]
26
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
PAINEWEBBER STRATEGIC INCOME 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 Nirmal Singh
PRESIDENT VICE PRESIDENT
Dianne E. O'Donnell Stuart Waugh
VICE PRESIDENT AND SECRETARY VICE PRESIDENT
Paul H. Schubert James F. Keegan
VICE PRESIDENT AND TREASURER VICE PRESIDENT
Dennis L. McCauley Julieanna M. Berry
VICE PRESIDENT VICE PRESIDENT
INVESTMENT ADVISER,
ADMINISTRATOR AND DISTRIBUTOR
Mitchell Hutchins Asset Management Inc.
51 West 52nd Street
New York, New York 10019
THIS REPORT IS NOT TO BE USED IN CONNECTION WITH THE OFFERING OF SHARES OF THE
FUND UNLESS ACCOMPANIED OR PRECEDED BY AN EFFECTIVE PROSPECTUS.
THE FINANCIAL INFORMATION INCLUDED HEREIN IS TAKEN FROM THE RECORDS OF THE FUND
WITHOUT EXAMINATION BY INDEPENDENT AUDITORS WHO DO NOT EXPRESS AN OPINION
THEREOF.
A PROSPECTUS CONTAINING MORE COMPLETE INFORMATION FOR ANY OF THE FUNDS LISTED ON
THE BACK COVER CAN BE OBTAINED FROM A PAINEWEBBER FINANCIAL ADVISOR OR
CORRESPONDING FIRM. READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
<PAGE>
PaineWebber offers a family of 26 funds which encompass a diversified range of
investment goals.
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o High Income Fund
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TAX-FREE BOND FUNDS
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o National Tax-Free Income Fund
o New York Tax-Free Income Fund
STOCK FUNDS
o Enhanced S&P 500 Fund
o Enhanced Nasdaq-100 Fund
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 Strategy Fund
o Tax-Managed Equity Fund
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o Balanced Fund
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PAINEWEBBER MONEY MARKET FUND
PaineWebber
================================================================================
STRATEGIC
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FUND
SEMIANNUAL REPORT
MAY 31, 2000
[PAINWEBBER LOGO]
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All Rights Reserved
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