<PAGE>
PAINEWEBBER BALANCED FUND
PERFORMANCE RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE TOTAL RETURN/1/
-------------------------- -----------------------------
12 MONTHS 6 MONTHS
02/29/96 08/31/95 02/28/95 ENDED 02/29/96 ENDED 02/29/96
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $10.85 $10.96 $9.80 22.08% 8.32%
- -------------------------------------------------------------------------
Class B Shares 11.00 11.07 9.90 21.20 8.06
- -------------------------------------------------------------------------
Class C Shares* 10.88 10.97 9.82 21.12 7.98
- -------------------------------------------------------------------------
</TABLE>
Performance Summary Class A Shares
<TABLE>
<CAPTION>
NET ASSET VALUE
----------------
PERIOD CAPITAL GAINS
COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID TOTAL RETURN/1/
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/01/91 -
12/31/91 $10.09 $11.02 -- $0.2293 11.53%
- -------------------------------------------------------------------------
1992 11.02 11.24 -- 0.3414 5.18
- -------------------------------------------------------------------------
1993 11.24 11.94 $0.7771 0.2510 15.63
- -------------------------------------------------------------------------
1994 11.94 9.32 1.2011 0.2311 (9.88)
- -------------------------------------------------------------------------
1995 9.32 10.41 0.7468 0.3100 23.16
- -------------------------------------------------------------------------
01/01/96 -
02/29/96 10.41 10.85 -- -- 4.23
- -------------------------------------------------------------------------
Totals: $2.725 $1.3628
- -------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 02/29/96: 56.92%
- -------------------------------------------------------------------------
</TABLE>
Performance Summary Class B Shares
<TABLE>
<CAPTION>
NET ASSET VALUE
----------------
PERIOD CAPITAL GAINS
COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID TOTAL RETURN/1/
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/12/86 -
12/31/86 $10.00 $ 9.76 -- -- (2.40)%
- -------------------------------------------------------------------------
1987 9.76 9.27 $0.1687 $0.4407 1.21
- -------------------------------------------------------------------------
1988 9.27 9.79 -- 0.5225 11.34
- -------------------------------------------------------------------------
1989 9.79 10.03 0.1124 0.6930 10.84
- -------------------------------------------------------------------------
1990 10.03 9.60 0.0021 0.6200 1.94
- -------------------------------------------------------------------------
1991 9.60 11.01 -- 0.3478 18.52
- -------------------------------------------------------------------------
1992 11.01 11.28 -- 0.2146 4.46
- -------------------------------------------------------------------------
1993 11.28 12.02 0.7771 0.1173 14.66
- -------------------------------------------------------------------------
1994 12.02 9.43 1.2011 0.1189 (10.51)
- -------------------------------------------------------------------------
1995 9.43 10.57 0.7468 0.2049 22.27
- -------------------------------------------------------------------------
01/01/96 -
02/29/96 10.57 11.00 -- -- 4.07
- -------------------------------------------------------------------------
Totals: $3.0082 $3.2797
- -------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 02/29/96: 100.88%
- -------------------------------------------------------------------------
</TABLE>
Performance Summary Class C Shares*
<TABLE>
<CAPTION>
NET ASSET VALUE
----------------
PERIOD CAPITAL GAINS
COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID TOTAL RETURN/1/
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/02/92 -
12/31/92 $10.86 $11.25 -- $0.1619 5.08%
- ---------------------------------------------------------------------------------
1993 11.25 11.94 $0.7771 0.1728 14.79
- ---------------------------------------------------------------------------------
1994 11.94 9.35 1.2011 0.1313 (10.48)
- ---------------------------------------------------------------------------------
1995 9.35 10.45 0.7468 0.2188 22.18
- ---------------------------------------------------------------------------------
01/01/96 -
02/29/96 10.45 10.88 -- -- 4.11
- ---------------------------------------------------------------------------------
Totals: $2.7250 $0.6848
- ---------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 02/29/96: 37.35%
- ---------------------------------------------------------------------------------
</TABLE>
* Formerly Class D Shares
/1/ Figures assume reinvestment of all dividends and capital gains distributions
at net asset value on the payable dates, and do not include sales charges;
results would be lower for each Class if sales charges were included.
The data above represents past performance of the Fund's shares, which is no
guarantee of future results. The investment return and principal value of an
investment in the Fund will fluctuate, so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
1
<PAGE>
PAINEWEBBER BALANCED FUND
PORTFOLIO OF INVESTMENTS FEBRUARY 29, 1996
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- ------------
<C> <S> <C>
COMMON STOCKS - 59.48%
Aerospace - 1.53%
16,000 General Dynamics Corporation .......................... $ 954,000
15,000 Lockheed Martin Corporation............................ 1,143,750
12,000 McDonnell Douglas Corporation.......................... 1,059,000
------------
3,156,750
------------
Agriculture, Food - 0.71%
30,000 IBP, Incorporated ..................................... 750,000
7,300 Philip Morris Companies, Incorporated ................. 722,700
------------
1,472,700
------------
Air Transport - 1.09%
30,000 America West Airlines Incorporated*.................... 618,750
15,000 AMR Corporation Delaware*.............................. 1,316,250
20,000 Western Pacific Airlines Incorporated* ................ 305,000
------------
2,240,000
------------
Apparel, Textiles - 0.71%
27,700 Jones Apparel Group Incorporated*...................... 1,146,088
5,000 Nike Incorporated ..................................... 324,375
------------
1,470,463
------------
Banks - 3.30%
25,000 Bank of New York Company Incorporated.................. 1,296,875
30,000 Barnett Banks, Incorporated............................ 1,875,000
6,500 Chase Manhattan Corporation............................ 484,250
14,000 Chemical Banking Corporation........................... 1,002,750
10,000 Citicorp............................................... 780,000
20,000 Corestates Financial Corporation....................... 860,000
6,500 NationsBank Corporation................................ 479,375
------------
6,778,250
------------
Beverages - 0.92%
30,000 Pepsico, Incorporated.................................. 1,897,500
------------
Business Machines - 9.47%
20,000 3Com Corporation* ..................................... 977,500
60,000 Cisco Systems, Incorporated*........................... 2,850,000
70,000 Compaq Computer Corporation*........................... 3,543,750
10,000 Digital Equipment Company ............................. 720,000
50,000 Hewlett-Packard Company................................ 5,037,500
5,000 International Business Machines Corporation............ 613,125
60,000 Seagate Technology, Incorporated*...................... 3,915,000
20,000 Sun Microsystems Incorporated* ........................ 1,050,000
6,000 Xerox Corporation ..................................... 781,500
------------
19,488,375
------------
</TABLE>
2
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- ------------
<C> <S> <C>
COMMON STOCKS - (CONTINUED)
Chemicals - 2.93%
50,000 Allied-Signal Incorporated ............................ $ 2,781,250
10,000 Cabot Corporation ..................................... 605,000
13,000 DuPont EI de Nemours & Company......................... 994,500
40,000 IMC Global Incorporated................................ 1,650,000
------------
6,030,750
------------
Consumer Durables - 0.38%
15,000 Premark International Incorporated..................... 785,625
------------
Containers - 0.30%
15,000 Temple-Inland, Incorporated ........................... 603,750
------------
Domestic Petroleum Reserves - 0.27%
50,000 Forest Oil Corporation*................................ 562,500
------------
Drugs, Medicine - 2.14%
12,000 Bristol-Myers Squibb Company........................... 1,021,500
12,000 Johnson & Johnson...................................... 1,122,000
16,000 Pfizer Incorporated.................................... 1,054,000
5,700 Rhone-Poulenc Rorer Incorporated....................... 364,800
15,000 Schering-Plough Corporation ........................... 841,875
------------
4,404,175
------------
Electric Utilities - 1.25%
35,000 CMS Energy Corporation ................................ 1,063,125
18,000 FPL Group Incorporated................................. 803,250
40,000 Public Service Co. New Mexico.......................... 710,000
------------
2,576,375
------------
Electronics - 2.86%
20,000 Avnet Incorporated..................................... 997,500
30,000 Intel Corporation...................................... 1,764,375
40,000 Kemet Corporation*..................................... 940,000
28,000 Loral Corporation...................................... 1,319,500
15,000 Rockwell International Corporation .................... 855,000
------------
5,876,375
------------
Forest Products - 0.35%
50,800 Shorewood Packaging*................................... 723,900
------------
Gas Utilities - 0.35%
25,000 Panhandle Eastern Corporation.......................... 715,625
------------
</TABLE>
3
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- ------------
<C> <S> <C>
COMMON STOCKS - (CONTINUED)
Health Care (Non-Drug) - 2.82%
20,000 Beckman Instruments Incorporated....................... $ 725,000
14,000 Becton Dickinson & Company ............................ 1,148,000
20,000 HEALTHSOUTH Corporation*............................... 700,000
30,000 Horizon/CMS Healthcare*................................ 712,500
50,000 Humana Incorporated ................................... 1,225,000
50,000 Ornda Healthcorp*...................................... 1,281,250
------------
5,791,750
------------
Hotels/Restaurants - 0.52%
23,000 Mirage Resorts Incorporated*........................... 1,066,625
------------
International Oil - 1.72%
17,000 Chevron Corporation ................................... 945,625
12,000 Exxon Corporation...................................... 954,000
15,000 Mobil Corporation...................................... 1,644,375
------------
3,544,000
------------
Iron & Steel - 0.32%
20,000 USX--U.S. Steel Group, Incorporated.................... 655,000
------------
Leisure/Luxury - 0.24%
15,000 Mattel, Incorporated .................................. 498,750
------------
Life Insurance - 0.70%
30,000 Reliastar Financial Corporation........................ 1,440,000
------------
Miscellaneous Finance - 1.31%
20,000 American Express Company............................... 920,000
15,000 Household International, Incorporated ................. 1,008,750
20,000 UJB Financial Corporation ............................. 760,000
------------
2,688,750
------------
Miscellaneous Metals/Mining - 1.84%
50,000 Belden, Incorporated .................................. 1,475,000
25,000 Freeport-McMoran Copper & Gold Company ................ 815,625
20,000 Potash Corporation Saskatchewan Incorporated, ADR...... 1,485,000
------------
3,775,625
------------
Mortgage Financing - 0.96%
22,500 HGI Realty Incorporated................................ 478,125
22,500 Irvine Apartment Communities Incorporated ............. 452,812
22,500 Oasis Residential Incorporated ........................ 534,375
22,500 Wellsford Residential Corporation ..................... 509,063
------------
1,974,375
------------
Motor Vehicles - 0.30%
11,100 Chrysler Corporation................................... 625,763
------------
</TABLE>
4
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- ------------
<C> <S> <C>
COMMON STOCKS - (CONTINUED)
Oil Refining, Distribution - 2.56%
20,000 Coastal Corporation ................................... $ 735,000
125,000 Repsol, S.A., ADR*..................................... 4,531,250
------------
5,266,250
------------
Oil Service - 0.67%
25,000 Halliburton Company. .................................. 1,371,875
------------
Other Insurance - 5.16%
25,000 Ace Limited............................................ 1,168,750
20,000 AFLAC, Incorporated.................................... 927,500
70,986 Allstate Corporation................................... 3,043,525
11,000 American International Group Incorporated.............. 1,062,875
15,000 Chubb Corporation...................................... 1,456,875
11,200 Cigna Corporation...................................... 1,327,200
15,000 ITT Hartford Group, Incorporated....................... 772,500
15,000 St. Paul Companies, Incorporated....................... 849,375
------------
10,608,600
------------
Paper - 1.07%
12,000 Champion International Corporation..................... 480,000
20,000 International Paper Company............................ 712,500
11,700 Kimberly Clark Corporation*............................ 893,588
4,200 Westvaco Corporation................................... 121,800
------------
2,207,888
------------
Producer Goods - 4.01%
30,000 Deere & Company........................................ 1,173,750
15,000 Dover Corporation...................................... 667,500
25,000 Ingersoll Rand Company................................. 1,021,875
40,000 Kulicke & Soffa Industries, Incorporated*.............. 830,000
10,000 Textron Incorporated................................... 787,500
10,000 TRW Incorporated....................................... 866,250
20,000 United Technologies Corporation........................ 2,150,000
20,000 Varity Corporation*.................................... 755,000
------------
8,251,875
------------
Railroads, Transit - 1.84%
40,000 Burlington Northern Incorporated....................... 3,200,000
8,000 Consolidated Rail Incorporated......................... 577,000
------------
3,777,000
------------
Real Property - 0.84%
22,500 Avalon Properties Incorporated......................... 503,438
16,000 Chelsea GCA Realty Incorporated........................ 476,000
16,000 Equity Residential Properties Trust.................... 508,000
7,000 Starwood Lodging Trust................................. 240,625
------------
1,728,063
------------
Retail/Food - 0.63%
35,000 Kroger Company*........................................ 1,299,375
------------
</TABLE>
5
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- ------------
<C> <S> <C>
COMMON STOCKS - (CONCLUDED)
Retail/All Other - 2.42%
35,000 Consolidated Stores Corporation*....................... $ 910,000
20,000 Eckerd Jack Corporation Delaware*...................... 897,500
60,000 Sears, Roebuck & Company............................... 2,722,500
20,000 Waban Incorporated*.................................... 450,000
------------
4,980,000
------------
Services - 0.99%
23,000 Ceridian Corporation*.................................. 989,000
35,000 ComputerVision Corporation* ........................... 371,873
10,000 Sterling Software Incorporated*........................ 666,250
------------
2,027,123
------------
Total Common Stocks (cost - $102,790,469)......................... 122,361,800
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES
--------- -------- --------
<C> <S> <C> <C> <C>
CORPORATE BONDS - 6.73%
Banking - 1.21%
620 U.S. Bancorp........................ 03/15/03 7.000% 636,274
975 Manufacturers & Traders Bank........ 07/01/05 7.000 971,344
855 Swiss Bank Corporation ............. 07/15/25 7.500 878,513
------------
2,486,131
------------
Credit - 0.36%
700 Commercial Credit................... 03/15/02 7.375 733,250
------------
Finance - 0.44%
910 Santander Financial................. 07/15/05 6.800 905,450
------------
Freight & Shipping - 0.90%
1,600 United Parcel Service............... 04/01/20 8.375 1,854,000
------------
Media - 0.23%
500 Telecommunications Incorporated .... 02/15/26 7.875 479,375
------------
Miscellaneous Finance - 1.35%
Associates Corporation of North
1,300 America............................ 11/01/97 7.750 1,348,242
General Motors Acceptance
1,000 Corporation........................ 10/01/02 6.625 1,002,500
Salomon Brothers Mortgage Security
420 Corporation ....................... 03/20/06 6.780 420,630
------------
2,771,372
------------
</TABLE>
6
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------------- -------------- ------------
<C> <S> <C> <C> <C>
CORPORATE BONDS - (CONCLUDED)
Motor Vehicles - 0.76%
$ 1,600 Ford Motor Credit....... 01/25/01 5.750% $ 1,562,000
------------
Other Insurance - 0.36%
Aetna Commercial
745 Mortgage Trust......... 12/26/30 6.590 737,550
------------
Telephone, Telegraph - 0.50%
1,025 All Tel................. 09/15/05 6.750 1,027,563
------------
Utilities - 0.62%
Public Service Electric
1,300 & Gas.................. 08/01/02 6.125 1,282,125
------------
Total Corporate Bonds (cost -
$13,828,125)..................... 13,838,816
------------
CONVERTIBLE BONDS - 0.76%
Air Transport - 0.28%
500 AMR Corporation......... 11/01/24 6.125 572,500
Business Machines - 0.48%
1,000 Quantum Corporation+.... 03/01/03 5.000 987,500
------------
Total Convertible Bonds (cost -
$1,500,000)...................... 1,560,000
------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS - 22.23%
Federal National
7,275 Mortgage Association++. 01/01/26 to 02/02/26 5.875 to 7.500 7,273,595
4,800 U.S. Treasury Bonds..... 11/15/24 to 08/15/25 6.875 to 7.500 5,109,485
32,455 U.S. Treasury Notes..... 11/30/96 to 02/15/06 5.625 to 7.250 33,335,812
------------
Total U.S. Government & Agency
Obligations (cost - $46,368,637)... 45,718,892
------------
REPURCHASE AGREEMENTS - 10.96%
4,546 Repurchase Agreement
dated 02/29/96 with
Citicorp, Securities,
Inc., collateralized by
$4,120,000 U.S.
Treasury Notes, 9.125%,
due 05/15/99; proceeds:
$4,546,682............. 03/01/96 5.400 4,546,000
9,000 Repurchase Agreement
dated 02/29/96 with
Daiwa America, Inc.,
collateralized by
$7,230,000 U.S.
Treasury Bonds, 8.750%,
due 05/15/20; proceeds:
$9,001,355............. 03/01/96 5.420 9,000,000
9,000 Repurchase Agreement
dated 02/29/96 with
Salomon Brothers, Inc.,
collateralized by
$6,990,000 U.S.
Treasury Bonds, 9.125%,
due 05/15/18; proceeds:
$9,001,345............. 03/01/96 5.380 9,000,000
------------
Total Repurchase Agreements (cost -
$22,546,000)..................... 22,546,000
------------
Total Investments (cost -
$187,033,231) - 100.16%.......... 206,025,508
Liabilities in excess of other
assets - (0.16)%.................. (319,738)
------------
Net Assets - 100.00%............... $205,705,770
============
</TABLE>
- -------
* Non-Income Producing Security
ADR - American Depositary Receipts
+ Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
++ Purchased on a when issued or delayed delivery basis.
See accompanying notes to financial statements
7
<PAGE>
PAINEWEBBER BALANCED FUND
STATEMENT OF ASSETS AND LIABILITIES FEBRUARY 29, 1996
<TABLE>
<S> <C>
Assets
Investments in securities, at value (cost - $187,033,231)......... $206,025,508
Cash.............................................................. 460
Receivable for investments sold .................................. 7,058,846
Dividends and interest receivable................................. 1,062,881
Receivable for fund shares sold................................... 114,402
Other assets...................................................... 73,261
------------
Total assets...................................................... 214,335,358
------------
Liabilities
Payable for investments purchased................................. 7,454,866
Payable for fund shares repurchased............................... 856,302
Payable to affiliates............................................. 191,922
Accrued expenses and other liabilities............................ 126,498
------------
Total liabilities................................................. 8,629,588
------------
Net Assets
Capital stock - $0.001 par value.................................. 177,228,829
Undistributed net investment income............................... 756,211
Accumulated net realized gains from investment transactions....... 8,728,453
Net unrealized appreciation of investments........................ 18,992,277
------------
Net assets........................................................ $205,705,770
============
Class A:
Net assets........................................................ $171,609,034
------------
Shares outstanding................................................ 15,813,740
------------
Net asset value and redemption value per share.................... $10.85
======
Maximum offering price per share (net asset value plus sales
charge of 4.50% of offering price)............................... $11.36
======
Class B:
Net assets........................................................ $ 26,627,298
------------
Shares outstanding................................................ 2,419,862
------------
Net asset value and offering price per share...................... $11.00
======
Class C:
Net assets........................................................ $ 7,469,438
------------
Shares outstanding................................................ 686,761
------------
Net asset value and offering price per share...................... $10.88
======
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
PAINEWEBBER BALANCED FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED FEBRUARY 29, 1996
<TABLE>
<S> <C>
Investment income:
Interest........................................................... $ 6,601,547
Dividends ......................................................... 1,345,597
-----------
7,947,144
-----------
Expenses:
Investment advisory and administration............................. 1,584,083
Service fees--Class A.............................................. 432,449
Service and distribution fees--Class B............................. 307,874
Service and distribution fees--Class C............................. 74,438
Transfer agency and service fees................................... 203,498
Reports and notices to shareholders................................ 133,419
Custody and accounting............................................. 87,076
Legal and audit fees............................................... 84,983
State registration fees............................................ 46,845
Directors' fees.................................................... 13,750
Other expenses..................................................... 40,741
-----------
3,009,156
-----------
Net investment income.............................................. 4,937,988
-----------
Realized and unrealized gains from investment transactions:
Net realized gains from investment transactions.................... 26,983,594
Net change in unrealized appreciation/depreciation of investments.. 10,051,655
-----------
Net realized and unrealized gains from investment transactions..... 37,035,249
-----------
Net increase in net assets resulting from operations............... $41,973,237
===========
</TABLE>
See accompanying notes to financial statements
9
<PAGE>
PAINEWEBBER BALANCED FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
<S> <C> <C>
From operations:
Net investment income.............................. $ 4,937,988 $ 5,651,243
Net realized gains from investment transactions.... 26,983,594 10,999,295
Net change in unrealized appreciation/depreciation
of investments.................................... 10,051,655 (38,246,529)
------------ ------------
Net increase (decrease) in net assets resulting
from operations................................... 41,973,237 (21,595,991)
------------ ------------
Dividends and distributions to shareholders from:
Net investment income--Class A..................... (4,791,490) (3,995,697)
Net investment income--Class B..................... (515,250) (522,731)
Net investment income--Class C..................... (141,969) (116,414)
Net realized gains from investment transactions--
Class A........................................... (11,263,998) (21,142,649)
Net realized gains from investment transactions--
Class B........................................... (1,806,909) (6,016,319)
Net realized gains from investment transactions--
Class C........................................... (473,886) (1,164,682)
------------ ------------
(18,993,502) (32,958,492)
------------ ------------
From capital stock transactions:
Net proceeds from the sale of shares............... 5,261,457 11,684,195
Cost of shares repurchased......................... (60,159,403) (79,584,476)
Proceeds from dividends reinvested................. 17,234,803 30,257,775
------------ ------------
Net decrease in net assets resulting from capital
stock transactions................................ (37,663,143) (37,642,506)
------------ ------------
Net decrease in net assets......................... (14,683,408) (92,196,989)
Net Assets:
Beginning of year.................................. 220,389,178 312,586,167
------------ ------------
End of year (including undistributed net investment
income of $756,211 and $1,315,991, respectively).. $205,705,770 $220,389,178
============ ============
</TABLE>
See accompanying notes to financial statements
10
<PAGE>
PAINEWEBBER NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
PaineWebber Master Series, Inc. ("Master Series") is registered with the
Securities and Exchange Commission under the Investment Company Act of 1940, as
amended, as an open-end, diversified series investment company which currently
offers two series of shares: PaineWebber Balanced Fund (the "Fund") (formerly
PaineWebber Asset Allocation) and PaineWebber Money Market Fund. The financial
statements for PaineWebber Money Market Fund are not included herein.
Currently the Fund offers Class A, Class B and Class C (formerly Class D)
shares. Effective November 10, 1995, the Fund began using industry standardized
nomenclature and Class D shares were renamed Class C 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 transfer agency expenses. In addition,
Class B shares automatically convert to Class A shares approximately six years
after initial issuance. All Classes of shares have equal rights as to voting
privileges, except that each Class has exclusive voting rights with respect to
its 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 - Securities which are listed on stock exchanges are
valued at the last sale price on the day the securities are being valued or,
lacking any sales on such day, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins"), a wholly owned subsidiary of PaineWebber Incorporated
("PaineWebber") and investment adviser, administrator and distributor of Master
Series as the primary market. Securities traded in the over-the-counter ("OTC")
market and listed on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") are valued at the last available sale price, or
last bid price available if no sale occurs, on NASDAQ prior to the time of
valuation. Where market quotations are readily available, debt securities are
valued thereon, provided such quotations adequately reflect, the fair value of
the securities in the judgment of Mitchell Hutchins. When market quotations are
not readily available, securities are valued based upon appraisals derived from
information concerning those securities or similar securities received from
recognized dealers in those securities. All other securities or assets are
valued at fair value as determined in good faith by or
11
<PAGE>
PAINEWEBBER
under the direction of Master Series' Board of Directors. The amortized cost
method of valuation is used to value short-term debt instruments with sixty
days or less remaining to maturity.
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 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.
Discounts are accreted and premiums are amortized on a yield to maturity basis
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.
Dividends and Distributions - The Fund records dividends and distributions to
its shareholders on the ex-date. The amount of dividends and distributions from
net investment income and net realized capital gains 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 reclassifications. Dividends and distributions which exceed net
investment income and net realized capital gains for financial reporting
purposes but not for tax purposes are reported as dividends in excess of net
investment income or distributions in excess of net realized capital gains. To
the extent they exceed net investment income and net realized capital gains for
tax purposes, they are reported as distributions of paid-in-capital.
12
<PAGE>
PAINEWEBBER
CONCENTRATION OF RISK
The ability of the issuers of the debt securities held by the Fund to meet
their obligations may be affected by economic developments, including those
particular to a specific industry, country or region.
INVESTMENT ADVISER AND ADMINISTRATOR
The Board of Directors of Master Series 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, Mitchell Hutchins receives
compensation from the Fund, computed daily and paid monthly, in accordance with
the following schedule:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS
- ------------------------
<S> <C>
Up to $500 million....................................................... 0.750%
In excess of $500 million up to $1.0 billion............................. 0.725
In excess of $1.0 billion up to $1.5 billion............................. 0.700
In excess of $1.5 billion up to $2.0 billion............................. 0.675
Over $2.0 billion........................................................ 0.650
</TABLE>
At February 29, 1996, the Fund owed Mitchell Hutchins $124,159 in investment
advisory and administration fees. For the year ended February 29, 1996 the Fund
paid brokerage commissions to PaineWebber in the amount of $1,350 for
transactions executed on behalf of the Fund.
In compliance with applicable state securities laws, Mitchell Hutchins will
reimburse the Fund if and to the extent that the aggregate operating expenses
in any fiscal year, exclusive of taxes, interest, brokerage fees, distribution
fees and extraordinary expenses, exceed limitations imposed by various state
regulations. Currently, the most restrictive limitation applicable to the Fund
is 2.5% of the first $30 million of average daily net assets, 2.0% of the next
$70 million and 1.5% of any excess over $100 million. For the year ended
February 29, 1996, no reimbursements were required pursuant to the above
limitation.
13
<PAGE>
PAINEWEBBER
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 service/distribution plans pertaining to the Class A, Class B and
Class C (formally Class D) shares, the Fund pays Mitchell Hutchins monthly
service fees at the annual rate of 0.25% of the average daily net assets of
Class A, Class B and Class C shares, and monthly distribution fees at an annual
rate of 0.75% of the average daily net assets of the Class B and Class C
shares. At February 29, 1996, the Fund owed Mitchell Hutchins $61,939 in
service and distribution fees.
Mitchell Hutchins also receives the proceeds of the initial sales charges paid
by the shareholders upon the purchase of Class A shares and the contingent
deferred sales charges paid by the shareholders upon certain redemptions of
Class A, Class B and Class C shares. Mitchell Hutchins has informed the Fund
that for the year ended February 29, 1996, it earned approximately $130,000 in
sales charges.
TRANSFER AGENCY SERVICE FEES
The Fund pays PaineWebber an annual fee of $4.00 per active PaineWebber
shareholder account for certain services not provided by the Funds' transfer
agent. For these services for the year ended February 29, 1996, PaineWebber
earned $77,050 in service fees from the Fund. At February 29, 1996, the Fund
owed PaineWebber $5,824 for shareholder service fees.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at February 29,
1996, was substantially the same as the cost of securities for financial
statement purposes.
At February 29, 1996, the components of net unrealized appreciation of
investments were as follows:
<TABLE>
<S> <C>
Gross appreciation (investments having an excess of value
over cost)........................................................ $21,396,303
Gross depreciation (investments having an excess of cost
over value)....................................................... (2,404,026)
-----------
Net unrealized appreciation of investments......................... $18,992,277
===========
</TABLE>
For the year ended February 29, 1996, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were as follows:
<TABLE>
<S> <C>
Purchases.......................................................... $346,780,160
Sales.............................................................. $413,044,999
</TABLE>
14
<PAGE>
PAINEWEBBER
FEDERAL 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 reclassification arising from permanent "book/tax" differences for
the year ended February 29, 1996, undistributed net investment income was
decreased by $49,059 and accumulated net realized gains was increased by
$49,059.
CAPITAL STOCK
There are 10 billion shares of $0.001 par value common stock authorized for
Master Series, of which 3 billion is allocated to Balanced Fund. Transactions
in shares of common stock were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------ ------------------------ ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED
FEBRUARY 29, 1996:
Shares sold............. 164,606 $ 1,869,379 230,424 $ 2,491,356 83,864 $ 900,722
Shares repurchased...... (4,486,211) (47,606,806) (862,177) (9,218,579) (318,628) (3,334,018)
Dividends reinvested.... 1,404,569 14,605,792 196,757 2,075,499 53,064 553,512
Shares converted from
Class B to Class A..... 900,365 9,482,914 (891,917) (9,482,914) -- --
---------- ------------ ---------- ------------ -------- -----------
Net decrease............ (2,016,671) $(21,648,721) (1,326,913) $(14,134,638) (181,700) $(1,879,784)
========== ============ ========== ============ ======== ===========
YEAR ENDED
FEBRUARY 28, 1995:
Shares sold............. 218,283 $ 2,388,107 617,150 $ 6,673,631 237,335 $ 2,622,457
Shares repurchased...... (5,295,097) (54,334,123) (1,856,614) (19,367,511) (566,186) (5,882,842)
Dividends reinvested.... 2,407,603 23,089,601 613,996 5,978,552 123,401 1,189,622
Shares converted from
Class B to Class A..... 2,514,073 26,115,618 (2,500,444) (26,115,618) -- --
---------- ------------ ---------- ------------ -------- -----------
Net decrease............ (155,138) $ (2,740,797) (3,125,912) $(32,830,946) (205,450) $(2,070,763)
========== ============ ========== ============ ======== ===========
</TABLE>
15
<PAGE>
PAINEWEBBER BALANCED FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT
EACH PERIOD IS PRESENTED BELOW:
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------
FOR THE FOR THE YEARS ENDED FOR THE PERIOD
YEAR ENDED FEBRUARY 28, JULY 1, 1991+ TO
FEBRUARY 29, ------------------------------ FEBRUARY 29,
1996 1995 1994 1993 1992
------------ -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of period......... $ 9.80 $ 12.04 $ 11.54 $ 11.01 $ 10.09
-------- -------- -------- -------- ---------
Net investment income... 0.27++ 0.26 0.22 0.33 0.19
Net realized and
unrealized gains
(losses) from
investment
transactions........... 1.84 (1.07) 1.31 0.54 0.96
-------- -------- -------- -------- ---------
Net increase (decrease)
from investment
operations............. 2.11 (0.81) 1.53 0.87 1.15
-------- -------- -------- -------- ---------
Dividends from net
investment income...... (0.31) (0.23) (0.25) (0.34) (0.23)
Distributions from net
realized gains from
investment
transactions........... (0.75) (1.20) (0.78) -- --
-------- -------- -------- -------- ---------
Total dividends and
distributions.......... (1.06) (1.43) (1.03) (0.34) (0.23)
-------- -------- -------- -------- ---------
Net asset value, end of
period................. $ 10.85 $ 9.80 $ 12.04 $ 11.54 $ 11.01
======== ======== ======== ======== =========
Total investment re-
turn(1)................ 22.08 % (6.02)% 13.57 % 8.09 % 11.43 %
======== ======== ======== ======== =========
Ratios/Supplemental
Data:
Net assets, end of pe-
riod (000's)........... $171,609 $174,761 $216,492 $154,594 $916
Ratio of expenses to av-
erage net assets....... 1.29 % 1.26 % 1.21 % 1.18 % 1.30 %*
Ratio of net investment
income to average net
assets................. 2.55 % 2.41 % 1.74 % 2.52 % 3.43 %*
Portfolio turnover...... 188 % 107 % 69 % 33 % 84 %
- ---------------------
</TABLE>
* Annualized
** Formerly Class D Shares
+ Commencement of issuance of shares
++ Calculated using the monthly average shares outstanding for the year.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the period, reinvestment of all dividends and other
distributions at net asset value on the payable date, and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for each class would be lower if sales
charges were included. Total investment returns for periods of less than
one year have not been annualized.
16
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
CLASS B CLASS C**
- --------------------------------------------------------- ------------------------------------------------
FOR THE
FOR THE FOR THE YEARS ENDED FOR THE FOR THE YEARS ENDED FOR THE PERIOD
YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED FEBRUARY 28, JULY 2, 1992+ TO
FEBRUARY 29, ---------------------------- FEBRUARY 29, FEBRUARY 29, ---------------- FEBRUARY 28,
1996 1995 1994 1993 1992 1996 1995 1994 1993
- ------------ ------- ------- -------- ------------ ------------ ------ ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 9.90 $ 12.10 $ 11.56 $ 10.99 $ 10.21 $ 9.82 $12.03 $ 11.54 $ 10.86
------- ------- ------- -------- -------- ------ ------ ------- -------
0.19++ 0.44 0.26 0.30 0.35 0.19++ 0.19 0.14 0.13
1.86 (1.32) 1.18 0.48 0.78 1.84 (1.07) 1.30 0.71
------- ------- ------- -------- -------- ------ ------ ------- -------
2.05 (0.88) 1.44 0.78 1.13 2.03 (0.88) 1.44 0.84
------- ------- ------- -------- -------- ------ ------ ------- -------
(0.20) (0.12) (0.12) (0.21) (0.35) (0.22) (0.13) (0.17) (0.16)
(0.75) (1.20) (0.78) -- -- (0.75) (1.20) (0.78) --
------- ------- ------- -------- -------- ------ ------ ------- -------
(0.95) (1.32) (0.90) (0.21) (0.35) (0.97) (1.33) (0.95) (0.16)
------- ------- ------- -------- -------- ------ ------ ------- -------
$ 11.00 $ 9.90 $ 12.10 $ 11.56 $ 10.99 $10.88 $ 9.82 $ 12.03 $ 11.54
======= ======= ======= ======== ======== ====== ====== ======= =======
21.20 % (6.68)% 12.62 % 7.25 % 11.24 % 21.12 % (6.69)% 12.75 % 7.78 %
======= ======= ======= ======== ======== ====== ====== ======= =======
$26,627 $37,104 $83,178 $160,115 $346,290 $7,469 $8,525 $12,916 $7,058
2.05 % 1.98 % 2.05 % 1.98 % 2.02 % 2.08 % 2.01 % 1.96 % 1.95 %*
1.81 % 1.60 % 1.00 % 2.02 % 3.25 % 1.77 % 1.62 % 0.97 % 1.91 %*
188 % 107 % 69 % 33 % 84 % 188 % 107 % 69 % 33 %
</TABLE>
17
<PAGE>
PAINEWEBBER BALANCED FUND
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of PaineWebber Master Series, Inc.
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 Balanced Fund (one of
the portfolios constituting PaineWebber Master Series) at February 29, 1996,
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 Funds' 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 February 29, 1996 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas New York, New York 10036
April 15, 1996
18
<PAGE>
PAINEWEBBER BALANCED 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 (February
29, 1996), as to the federal tax status of distributions received by
shareholders during such fiscal year. Accordingly, we are advising you that the
following distributions paid during the fiscal year by the Fund were taxable
and are derived from the following sources:
<TABLE>
<CAPTION>
PER SHARE DATA:
<S> <C>
Net investment income*
Class A.............................................................. $0.3100
Class B.............................................................. 0.2049
Class C.............................................................. 0.2188
Short-term capital gains*+............................................. 0.3565
Long-term capital gains+............................................... 0.3903
Percentage of ordinary income dividends qualifying for the dividends
received deduction available to corporate shareholders................ 14.36
</TABLE>
- -------
* Taxable as ordinary income
+ Amounts apply to all classes
Distributions received by tax-exempt recipients (e.g., IRAs and Keoghs) need
not be reported as taxable income. Some retirement trusts (e.g., corporate,
Keogh and 403(b)(7) plans) may need this information for their annual
information reporting.
Because the Fund's fiscal year is not the calendar year, another notification
will be sent in respect of calendar 1996. The second notification, which will
reflect the amount to be used by calendar year taxpayers on their federal
income tax returns, will be made in conjunction with Form 1099 DIV and will be
mailed in January 1997. Shareholders are advised to consult their own tax
advisers with respect to the tax consequences of their investment in the Fund.
19
