<PAGE>
PAINEWEBBER BALANCED FUND
PERFORMANCE RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE TOTAL RETURN/1/
-------------------------------- -----------------------------
12 MONTHS 6 MONTHS
08/31/96 02/29/96 08/31/95 ENDED 08/31/96 ENDED 08/31/96
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $10.27 $10.85 $10.96 8.33% 0.03%
- ------------------------------------------------------------------------------
Class B Shares 10.42 11.00 11.07 7.70 (0.30)
- ------------------------------------------------------------------------------
Class C Shares 10.29 10.88 10.97 7.54 (0.38)
- ------------------------------------------------------------------------------
Performance Summary Class A Shares
<CAPTION>
NET ASSET VALUE
------------------ CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID 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-
08/31/96 10.41 10.27 0.4832 0.1005 4.26
- ------------------------------------------------------------------------------
Totals: $3.2082 $1.4633
- ------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 08/31/96 : 56.93%
- ------------------------------------------------------------------------------
Performance Summary Class B Shares
<CAPTION>
NET ASSET VALUE
------------------ CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID 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 0.1286 0.6768 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-
08/31/96 10.57 10.42 0.4832 0.0651 3.76
- ------------------------------------------------------------------------------
Totals: $3.5076 $3.3286
- ------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 08/31/96 : 104.40%
- ------------------------------------------------------------------------------
Performance Summary Class C Shares
<CAPTION>
NET ASSET VALUE
------------------ CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID 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 22.15
- ------------------------------------------------------------------------------
01/01/96-
08/31/96 10.45 10.29 0.4832 0.0662 3.72
- ------------------------------------------------------------------------------
Totals: $3.2082 $0.7510
- ------------------------------------------------------------------------------
</TABLE>
CUMULATIVE TOTAL RETURN AS OF 08/31/96 : 36.79%
- --------------------------------------------------------------------------------
/1Figures/assume reinvestment of all dividends and capital gains distributions
at net asset value on the payable date, 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 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 AUGUST 31, 1996
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- ------------
<C> <S> <C>
COMMON STOCKS - 52.87%
Agriculture, Food & Beverage - 0.73%
30,000 IBP, Incorporated...................................... $ 701,250
7,300 Phillip Morris Companies Incorporated.................. 655,175
------------
1,356,425
------------
Airlines - 1.38%
30,000 America West Airlines Incorporated*.................... 401,250
21,329 AMR Corporation*....................................... 1,748,978
9,000 UAL Corporation*....................................... 432,000
------------
2,582,228
------------
Apparel, Retail - 0.43%
25,000 TJX Companies, Incorporated............................ 800,000
------------
Apparel, Textiles - 0.29%
5,000 Nike Incorporated ..................................... 540,000
------------
Banks - 4.83%
50,000 Bank of New York Company Incorporated.................. 1,393,750
15,000 BankAmerica Corporation................................ 1,162,500
30,000 Barnett Banks Incorporated............................. 1,968,750
17,000 CCB Financial Corporation.............................. 905,250
29,600 Chase Manhattan Corporation............................ 2,201,500
10,000 Citicorp............................................... 832,500
6,500 NationsBank Corporation................................ 553,313
------------
9,017,563
------------
Chemicals - 2.68%
25,000 Allied-Signal, Incorporated............................ 1,543,750
11,000 Dow Chemical Company................................... 877,250
40,000 IMC Global Incorporated................................ 1,720,000
11,000 Olin Corporation....................................... 871,750
------------
5,012,750
------------
Computer Hardware - 3.46%
10,000 3Com Corporation*...................................... 467,500
20,000 Cisco Systems, Incorporated*........................... 1,055,000
35,000 Compaq Computer Corporation*........................... 1,981,875
20,000 Sun Microsystems Incorporated*......................... 1,087,500
25,000 Western Digital Corporation*........................... 878,125
18,000 Xerox Corporation...................................... 987,750
------------
6,457,750
------------
Computer Software - 1.44%
7,500 Cadence Design Systems Incorporated*................... 222,187
22,500 Computer Associates International Incorporated......... 1,181,250
4,000 Microsoft Corporation*................................. 490,000
4,000 Sterling Commerce Incorporated*........................ 124,000
10,000 Sterling Software Incorporated*........................ 678,750
------------
2,696,187
------------
</TABLE>
2
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- ------------
<C> <S> <C>
COMMON STOCKS - (CONTINUED)
Defense/Aerospace - 4.71%
16,000 General Dynamics Corporation........................... $ 1,026,000
20,000 ITT Industries Incorporated............................ 457,500
15,000 Lockheed Martin Corporation............................ 1,261,875
28,000 Loral Space Communications Corporation*................ 392,000
24,000 McDonnell Douglas Corporation.......................... 1,203,000
19,000 Raytheon Company....................................... 978,500
15,000 Rockwell International Corporation..................... 780,000
24,000 United Technologies Corporation........................ 2,706,000
------------
8,804,875
------------
Diversified Retail - 1.99%
82,500 Dayton Hudson Corporation.............................. 2,846,250
25,000 Federated Department Stores, Incorporated*............. 865,625
------------
3,711,875
------------
Drugs & Medicine - 2.98%
12,000 Bristol-Myers Squibb Company........................... 1,053,000
10,000 Cardinal Health Incorporated........................... 733,750
16,000 Pfizer, Incorporated................................... 1,136,000
10,000 Rhone-Poulenc Rorer Incorporated....................... 703,750
15,000 Schering-Plough Corporation............................ 838,125
19,000 Smithkline Beecham, plc ADS............................ 1,106,750
------------
5,571,375
------------
Electric Utilities - 1.77%
35,000 CMS Energy Corporation................................. 1,045,625
18,000 FPL Group, Incorporated................................ 796,500
40,000 Public Service Company of New Mexico................... 780,000
30,000 Unicom Corporation..................................... 690,000
------------
3,312,125
------------
Energy Reserves & Production - 1.81%
15,000 Louisiana Land & Exploration Company................... 853,125
15,000 Mobil Corporation...................................... 1,691,250
25,000 PanEnergy Corporation.................................. 828,125
------------
3,372,500
------------
Financial Services - 1.95%
20,000 American Express Company............................... 875,000
15,000 Household International, Incorporated.................. 1,188,750
22,500 Irvine Apartment Communities Incorporated.............. 506,250
22,500 Oasis Residential Incorporated......................... 492,188
6,700 Textron Incorporated................................... 572,012
------------
3,634,200
------------
Forest Products, Paper - 1.17%
12,000 Champion International Corporation..................... 516,000
20,000 International Paper Company............................ 800,000
50,800 Shorewood Packaging Corporation........................ 863,600
------------
2,179,600
------------
Food Retail - 0.49%
25,000 Safeway Incorporated*.................................. 906,250
------------
</TABLE>
3
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- ------------
<C> <S> <C>
COMMON STOCKS - (CONTINUED)
Hotels - 0.64%
24,000 Bally Entertainment Group*............................. $ 654,000
10,000 Marriott International, Incorporated................... 548,750
------------
1,202,750
------------
Household Products - 0.39%
28,000 Dial Corporation....................................... 322,000
28,000 Viad Corporation....................................... 399,000
------------
721,000
------------
Industrial Service & Supply - 0.53%
50,000 ADT Limited*........................................... 981,250
------------
Information & Computer Services - 0.17%
28,800 Computervision Corporation*............................ 201,600
2,500 Omnicom Group.......................................... 113,438
------------
315,038
------------
Leisure - 0.26%
18,750 Mattel Incorporated.................................... 494,531
------------
Life Insurance - 1.67%
30,000 Reliastar Financial Corporation........................ 1,323,750
13,500 SunAmerica Incorporated................................ 919,688
20,000 Travelers Group Incorporated........................... 867,500
------------
3,110,938
------------
Long Distance & Phone Companies - 0.43%
20,000 Sprint Corporation..................................... 812,500
------------
Manufacturing-General - 1.34%
35,000 Ingersoll Rand Company................................. 1,496,250
20,000 Varity Corporation*.................................... 1,005,000
------------
2,501,250
------------
Manufacturing-High Technology - 0.47%
16,900 United States Robotic Corporation*..................... 887,250
------------
Medical Products - 0.46%
12,000 Johnson & Johnson...................................... 591,000
7,500 U.S. Surgical Corporation.............................. 273,750
------------
864,750
------------
Medical Providers - 1.54%
20,000 HEALTHSOUTH Corporation*............................... 647,500
50,000 Humana Incorporated*................................... 937,500
50,000 Ornda Healthcorp*...................................... 1,287,500
------------
2,872,500
------------
Mining & Metals - 0.69%
25,000 Freeport-McMoran Copper & Gold, Incorporated........... 734,375
20,000 USX-U.S. Steel Group, Incorporated..................... 550,000
------------
1,284,375
------------
</TABLE>
4
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- ------------
<C> <S> <C>
COMMON STOCKS - (CONCLUDED)
Motor Vehicles - 1.67%
20,000 Borg Warner Automotive Incorporated.................... $ 750,000
25,600 Breed Technologies Incorporated........................ 681,600
20,000 Lear Corporation*...................................... 767,500
10,000 TRW, Incorporated...................................... 925,000
------------
3,124,100
------------
Oil Refining - 3.02%
20,000 Coastal Corporation ................................... 792,500
13,000 DuPont (E.I.) deNemours & Company...................... 1,067,625
100,000 Repsol S.A., ADR*...................................... 3,262,500
15,000 Tejas Gas Corporation*................................. 521,250
------------
5,643,875
------------
Oil Services - 2.31%
15,000 Diamond Offshore Drilling Incorporated*................ 765,000
50,000 Forest Oil Corporation*................................ 706,250
40,000 Halliburton Company.................................... 2,105,000
50,000 Nabors Industries Incorporated*........................ 743,750
------------
4,320,000
------------
Other Insurance - 2.02%
25,000 Ace Limited............................................ 1,165,625
35,000 Allstate Corporation................................... 1,561,875
11,000 American International Group Incorporated.............. 1,045,000
------------
3,772,500
------------
Publishing - 0.33%
20,000 New York Times Company, Class A........................ 625,000
------------
Railroads - 0.15%
4,000 Consolidated Rail, Incorporated........................ 272,500
------------
Real Property - 1.23%
22,500 Avalon Properties Incorporated......................... 514,687
16,000 Chelsea GCA Realty Incorporated ....................... 466,000
16,000 Equity Residential Properties Trust.................... 566,000
7,000 Starwood Lodging Trust................................. 266,000
22,500 Wellsford Residential Property......................... 486,563
------------
2,299,250
------------
Specialty Retail - 1.44%
13,500 Consolidated Stores Corporation*....................... 513,000
24,125 Dollar General Corporation............................. 778,031
40,000 Eckerd Jack Corporation Delaware*...................... 980,000
20,000 Waban Incorporated*.................................... 425,000
------------
2,696,031
------------
Total Common Stocks (cost - $88,155,351).......................... 98,757,091
------------
</TABLE>
5
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- ------------
<C> <S> <C>
PREFERRED STOCK - 1.47%
Apparel, Retail - 0.21%
2,200 TJX Companies, Incorporated............................ $ 400,400
------------
Miscellaneous - 0.54%
20,000 BCP International Limited.............................. 995,000
------------
Financial Services - 0.39%
15,000 Devon Financing Trust+................................. 735,000
------------
Precious Metals - 0.33%
36,000 Coeur d'Alene Mines Corporation........................ 621,000
------------
Total Preferred Stock (cost - $2,891,948)......................... 2,751,400
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES
--------- ------------------- --------------
<C> <S> <C> <C> <C>
CORPORATE BONDS - 7.71%
Banks - 0.87%
Bankers Trust N.Y.
$ 1,100 Corporation............ 05/01/05 8.250% 1,138,532
510 First Union Corporation. 08/01/05 7.050 491,850
------------
1,630,382
------------
Financial Services - 3.66%
Associates Corporation
1,300 of North America....... 11/01/97 7.750 1,320,476
Commercial Credit Group
700 Incorporated........... 03/15/02 7.375 702,954
Ford Motor Credit
1,600 Company................ 01/25/01 5.750 1,516,824
General Motors
1,000 Acceptance Corporation. 10/01/02 6.625 963,144
Santander Finance
1,610 Issuances.............. 07/15/05 6.800 1,518,154
855 Swiss Bank Corporation.. 07/15/25 7.500 815,490
------------
6,837,042
------------
Freight, Air, Sea, Land - 0.93%
United Parcel Service of
1,600 America, Incorporated.. 04/01/20 8.375 1,731,915
------------
Life Insurance - 1.16%
Equitable Life Assurance
1,400 Society, USA+.......... 12/01/05 6.950 1,322,695
Prudential Insurance
870 Company of America+.... 07/01/25 8.300 841,260
------------
2,163,955
------------
Long Distance & Phone Companies -
0.52%
1,025 ALLTEL Corporation...... 09/15/05 6.750 978,388
------------
Securities & Asset Management -
0.57%
Lehman Brothers Holdings
1,100 Incorporated........... 09/15/03 7.125 1,062,034
------------
Total Corporate Bonds (cost -
$14,942,795)..................... 14,403,716
------------
</TABLE>
6
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- -------------------- -------------- ------------
<C> <S> <C> <C> <C>
CONVERTIBLE BONDS - 0.74%
Computer Hardware - 0.50%
$ 1,000 Quantum Corporation+.... 03/01/03 5.000% $ 930,000
------------
Drugs & Medicine - 0.08%
North American Vaccine
150 Incorporated+.......... 05/01/03 6.500 155,625
------------
Environmental Services - 0.16%
Molten Metal Technology
300 Incorporated+.......... 05/01/06 5.500 297,000
------------
Total Convertible Bonds (cost -
$1,453,629)...................... 1,382,625
------------
MORTGAGE BACKED SECURITIES - 7.27%
Federal Home Loan
476 Mortgage Corporation... 05/01/19 7.655 487,200
Federal National
1,949 Mortgage Association... 01/01/26 to 02/01/26 7.500 1,907,277
Federal National
Mortgage Association
9,900 TBA.................... TBA 7.000 to 7.500 9,581,903
FNMA REMIC, Trust 1996-
899 M-4, Class A**......... 03/17/17 7.750 903,470
Morgan Stanley Capital 1
738 Incorporated+.......... 10/15/10 6.476 709,538
------------
Total Mortgage Backed Securities
(cost - $13,861,325)............... 13,589,388
------------
U.S. GOVERNMENT OBLIGATIONS -
23.78%
United States Treasury
5,000 Bills.................. 09/12/96 4.910 to 4.960 4,992,453
United States Treasury
33,614 Notes.................. 11/30/96 to 02/15/05 5.250 to 7.750 34,313,979
United States Treasury
5,260 Bonds.................. 02/15/25 to 08/15/25 6.875 to 7.625 5,114,805
------------
Total U.S. Government Obligations
(cost - $45,098,758)............... 44,421,237
------------
REPURCHASE AGREEMENTS - 9.63%
8,991 Repurchase agreement
dated 08/30/96 with
Salomon Brothers, Inc.,
collateralized by
$6,604,000 U.S.
Treasury Bonds,
12.000%, due 08/15/13;
proceeds: $8,996,195... 09/03/96 5.200 8,991,000
9,000 Repurchase agreement
dated 08/30/96 with
State Street Bank &
Trust Co.,
collateralized by
$8,975,000 U.S.
Treasury Notes, 6.125%,
due 03/31/98; proceeds:
$9,005,210............. 09/03/96 5.210 9,000,000
------------
Total Repurchase Agreements (cost -
$17,991,000)..................... 17,991,000
------------
Total Investments (cost -
$184,394,806) - 103.47%.......... 193,296,457
Liabilities in excess of other
assets - (3.47)%.................. (6,486,140)
------------
Net Assets - 100.00%............... $186,810,317
============
</TABLE>
- -------
* Non-Income Producing Security
** Stripped Collateralized Mortgage Obligation
+ 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.
ADR - American Depositary Receipts
ADS - American Depositary Shares
TBA - (To Be Assigned) Securities are purchased on a forward commitment basis
with an approximate (generally +/-1.0%) principal amount and generally
stated maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
REMIC - Real Estate Mortgage Investment Conduit
See accompanying notes to financial statements
7
<PAGE>
PAINEWEBBER BALANCED FUND
STATEMENT OF ASSETS AND LIABILITIES AUGUST 31, 1996
<TABLE>
<S> <C>
Assets
Investments in securities, at value (cost -- $184,394,806)........ $193,296,457
Receivable for investments sold................................... 6,252,399
Dividends and interest receivable................................. 974,984
Receivable for fund shares sold................................... 2,874
Other assets...................................................... 126,928
------------
Total assets...................................................... 200,653,642
------------
Liabilities
Payable for investments purchased................................. 13,218,787
Payable for fund shares repurchased............................... 331,174
Payable to affiliates............................................. 184,621
Accrued expenses and other liabilities............................ 108,743
------------
Total liabilities................................................. 13,843,325
------------
Net Assets
Capital stock -- $0.001 par value................................. 168,822,265
Undistributed net investment income............................... 1,078,091
Accumulated net realized gains from investment transactions....... 8,008,310
Net unrealized appreciation of investments........................ 8,901,651
------------
Net assets........................................................ $186,810,317
============
Class A:
Net assets........................................................ $157,524,592
------------
Shares outstanding................................................ 15,331,017
------------
Net asset and redemption value per share.......................... $10.27
======
Maximum offering price per share (net asset value plus sales
charge of 4.50% of offering price.).............................. $10.75
======
Class B:
Net assets........................................................ $ 22,307,081
------------
Shares outstanding................................................ 2,140,581
------------
Net asset value and offering price per share...................... $10.42
======
Class C:
Net assets........................................................ $ 6,978,644
------------
Shares outstanding................................................ 677,967
------------
Net asset value and offering price per share...................... $10.29
======
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
PAINEWEBBER BALANCED FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD MARCH 1, 1996 THROUGH AUGUST 31, 1996
<TABLE>
<S> <C>
Investment income:
Interest......................................................... $ 2,366,560
Dividends........................................................ 1,107,325
------------
3,473,885
------------
Expenses:
Investment advisory and administration fees...................... 739,209
Service fees--Class A............................................ 207,179
Service and distribution fees--Class B........................... 120,625
Service and distribution fees--Class C........................... 36,269
Transfer agency and service fees................................. 85,562
Legal and audit.................................................. 58,658
Reports and notices to shareholders.............................. 50,265
Custody and accounting........................................... 45,829
State registration............................................... 40,634
Directors fees................................................... 15,750
Other expenses................................................... 34,949
------------
1,434,929
------------
Net investment income............................................ 2,038,956
------------
Realized and unrealized gains (losses) from investment
activities:
Net realized gains from investment transactions.................. 8,010,343
Net change in unrealized appreciation/depreciation of
investments..................................................... (10,090,626)
------------
Net realized and unrealized loss from investment activities...... (2,080,283)
------------
Net decrease in net assets resulting from operations............. $ (41,327)
============
</TABLE>
See accompanying notes to financial statements
9
<PAGE>
PAINEWEBBER BALANCED FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE
PERIOD MARCH 1, FOR THE
1996 THROUGH YEAR ENDED
AUGUST 31, FEBRUARY 29,
1996 1996
--------------- ------------
<S> <C> <C>
From operations:
Net investment income............................ $ 2,038,956 $ 4,937,988
Net realized gains from investment transactions.. 8,010,343 26,983,594
Net change in unrealized
appreciation/depreciation of investments........ (10,090,626) 10,051,655
------------ ------------
Net increase (decrease) in net assets from
operations...................................... (41,327) 41,973,237
------------ ------------
Dividends and distributions to shareholders from:
Net investment income--Class A................... (1,533,387) (4,791,490)
Net investment income--Class B................... (139,866) (515,250)
Net investment income--Class C................... (43,823) (141,969)
Net realized gains from investment transactions--
Class A......................................... (7,372,463) (11,263,998)
Net realized gains from investment transactions--
Class B......................................... (1,038,147) (1,806,909)
Net realized gains from investment transactions--
Class C......................................... (319,876) (473,886)
------------ ------------
(10,447,562) (18,993,502)
------------ ------------
From capital stock transactions:
Net proceeds from the sale of shares............. 2,049,022 5,261,457
Cost of shares repurchased....................... (20,078,399) (60,159,403)
Proceeds from dividends reinvested............... 9,622,813 17,234,803
------------ ------------
Net decrease in net assets from capital stock
transactions.................................... (8,406,564) (37,663,143)
------------ ------------
Net decrease in net assets....................... (18,895,453) (14,683,408)
Net assets:
Beginning of period.............................. 205,705,770 220,389,178
------------ ------------
End of period (including undistributed net
investment income of $1,078,091 and $756,211,
respectively)................................... $186,810,317 $205,705,770
============ ============
</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 management investment company which
currently offers two series of shares: PaineWebber Balanced Fund (the "Fund")
and PaineWebber Money Market Fund. The financial statements for PaineWebber
Money Market Fund are not included herein. At a meeting on November 29, 1995
the Board of Directors elected to change the Fund's fiscal year end from
February 28 to August 31.
Currently the Fund offers Class A, Class B, Class C and Class Y shares (no
Class Y shares were outstanding during the period). 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
and all corresponding reinvested dividend shares automatically convert to Class
A shares approximately six years after 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 Nasdaq Stock Market ("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 are valued at fair value as determined in good
faith by a management committee 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, unless the
Board of Directors determines that this does not represent fair value.
11
<PAGE>
PAINEWEBBER
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 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 of each class at the
beginning of the day (after adjusting for current capital share activity of the
respective classes). Class-specific expenses are charged directly to the
applicable class of shares.
Dividends and Distributions -- Dividends and distributions to shareholders are
recorded on the ex-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 reclassifications.
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 and political developments
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
12
<PAGE>
PAINEWEBBER
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>
Annual
Average Daily Net Assets Rate
------------------------ ------
<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 August 31, 1996, the Fund owed Mitchell Hutchins $120,277 in investment
advisory and administration fees. For the period March 1, 1996 through August
31, 1996 the Fund paid brokerage commissions to PaineWebber in the amount of
$2,220 for transactions executed on behalf of the Fund.
DISTRIBUTION PLANS
Mitchell Hutchins is the distributor of the Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. Under
separate plans of distribution pertaining to the Class A, Class B and Class C
shares, the Fund pays Mitchell Hutchins monthly service fees at an annual rate
of 0.25% of the average daily net assets of Class A, Class B and Class C
shares, and monthly distribution fees at an annual rate of 0.75% of the average
daily net assets of the Class B and Class C shares. At August 31, 1996, the
Fund owed Mitchell Hutchins $59,028 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 period March 1, 1996 through August 31, 1996, it earned $33,520 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 period March 1, 1996 through August 31, 1996,
PaineWebber earned $32,992 in service fees from the Fund. At August 31, 1996,
the Fund owed PaineWebber $5,316 for shareholder service fees.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at August 31,
1996, was substantially the same as the cost of securities for financial
statement purposes.
13
<PAGE>
PAINEWEBBER
At August 31, 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)........................................................ $12,735,081
Gross depreciation (investments having an excess of cost
over value)....................................................... (3,833,430)
-----------
Net unrealized appreciation of investments......................... $ 8,901,651
===========
</TABLE>
For the period ended August 31, 1996, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were as follows:
<TABLE>
<S> <C>
Purchases.......................................................... $184,301,851
Sales.............................................................. $195,037,537
</TABLE>
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.
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>
FOR THE PERIOD ENDED
AUGUST 31, 1996:
Shares sold............. 56,574 $ 604,881 89,994 $ 961,478 45,033 $ 482,663
Shares repurchased...... (1,544,512) (16,273,895) (269,075) (2,886,820) (85,653) (917,684)
Dividends reinvested.... 799,422 8,218,331 102,843 1,076,033 31,826 328,449
Shares converted from
Class B to Class A..... 205,793 2,216,806 (203,043) (2,216,806) -- --
---------- ------------ ---------- ------------ -------- -----------
Net decrease............ (482,723) $ (5,233,877) (279,281) $ (3,066,115) (8,794) $ (106,572)
========== ============ ========== ============ ======== ===========
FOR THE 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)
========== ============ ========== ============ ======== ===========
</TABLE>
14
<PAGE>
[This Page Intentionally Left Blank]
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
PERIOD FOR THE
MARCH 1, FOR THE PERIOD
1996 YEAR FOR THE YEARS ENDED JULY 1, 1991+
THROUGH ENDED FEBRUARY 28, THROUGH
AUGUST 31, FEBRUARY 29, ------------------------------ FEBRUARY 29,
1996 1996 1995 1994 1993 1992
---------- ------------ -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $10.85 $ 9.80 $ 12.04 $ 11.54 $ 11.01 $ 10.09
-------- -------- -------- -------- -------- ---------
Net investment income... 0.12++ 0.27++ 0.26 0.22 0.33 0.19
Net realized and
unrealized gains
(losses) from
investment
transactions........... (0.12) 1.84 (1.07) 1.31 0.54 0.96
-------- -------- -------- -------- -------- ---------
Net increase (decrease)
from investment
operations............. 0.00 2.11 (0.81) 1.53 0.87 1.15
-------- -------- -------- -------- -------- ---------
Dividends from net
investment income...... (0.10) (0.31) (0.23) (0.25) (0.34) (0.23)
Distributions from net
realized gains from
investment
transactions........... (0.48) (0.75) (1.20) (0.78) -- --
-------- -------- -------- -------- -------- ---------
Total dividends and
distributions.......... (0.58) (1.06) (1.43) (1.03) (0.34) (0.23)
-------- -------- -------- -------- -------- ---------
Net asset value, end of
period................. $ 10.27 $ 10.85 $ 9.80 $ 12.04 $ 11.54 $ 11.01
======== ======== ======== ======== ======== =========
Total investment re-
turn(1)................ 0.03 % 22.08 % (6.02)% 13.57 % 8.09 % 11.43 %
======== ======== ======== ======== ======== =========
Ratios/Supplemental
Data:
Net assets, end of pe-
riod (000's)........... $157,525 $171,609 $174,761 $216,492 $154,594 $916
Ratio of expenses to
average net assets..... 1.34 %* 1.29 % 1.26 % 1.21 % 1.18 % 1.30 %*
Ratio of net investment
income to average net
assets................. 2.19 %* 2.55 % 2.41 % 1.74 % 2.52 % 3.43 %*
Portfolio turnover...... 103 % 188 % 107 % 69 % 33 % 84 %
Average commission rate
paid per share on com-
mon stock invest-
ments purchased/sold(2). $ 0.0600 -- -- -- -- --
- ---------------------
</TABLE>
* Annualized
+ 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 dates, 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.
(2) Disclosure effective for fiscal years beginning on or after September 1,
1995.
16
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
CLASS B CLASS C
- --------------------------------------------------------------------- ----------------------------------------------------------
FOR THE FOR THE
PERIOD PERIOD FOR THE
MARCH 1, FOR THE FOR THE MARCH 1, FOR THE FOR THE PERIOD
1996 YEAR FOR THE YEARS ENDED YEAR 1996 YEAR YEARS ENDED JULY 2, 1992+
THROUGH ENDED FEBRUARY 28, ENDED THROUGH ENDED FEBRUARY 28, THROUGH
AUGUST 31, FEBRUARY 29, ---------------------------- FEBRUARY 29, AUGUST 31, FEBRUARY 29, ---------------- FEBRUARY 28,
1996 1996 1995 1994 1993 1992 1996 1996 1995 1994 1993
- ---------- ------------ ------- ------- -------- ------------ ---------- ------------ ------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 11.00 $ 9.90 $ 12.10 $ 11.56 $ 10.99 $ 10.21 $ 10.88 $ 9.82 $12.03 $ 11.54 $ 10.86
------- ------- ------- ------- -------- -------- ------- ------ ------ ------- -------
0.08++ 0.19++ 0.44 0.26 0.30 0.35 0.08++ 0.19++ 0.19 0.14 0.13
(0.11) 1.86 (1.32) 1.18 0.48 0.78 (0.12) 1.84 (1.07) 1.30 0.71
------- ------- ------- ------- -------- -------- ------- ------ ------ ------- -------
(0.03) 2.05 (0.88) 1.44 0.78 1.13 (0.04) 2.03 (0.88) 1.44 0.84
------- ------- ------- ------- -------- -------- ------- ------ ------ ------- -------
(0.07) (0.20) (0.12) (0.12) (0.21) (0.35) (0.07) (0.22) (0.13) (0.17) (0.16)
(0.48) (0.75) (1.20) (0.78) -- -- (0.48) (0.75) (1.20) (0.78) --
------- ------- ------- ------- -------- -------- ------- ------ ------ ------- -------
(0.55) (0.95) (1.32) (0.90) (0.21) (0.35) (0.55) (0.97) (1.33) (0.95) (0.16)
------- ------- ------- ------- -------- -------- ------- ------ ------ ------- -------
$ 10.42 $ 11.00 $ 9.90 $ 12.10 $ 11.56 $ 10.99 $ 10.29 $10.88 $ 9.82 $ 12.03 $ 11.54
======= ======= ======= ======= ======== ======== ======= ====== ====== ======= =======
(0.30)% 21.20 % (6.68)% 12.62 % 7.25 % 11.24 % (0.38)% 21.12 % (6.69)% 12.75 % 7.78 %
======= ======= ======= ======= ======== ======== ======= ====== ====== ======= =======
$22,307 $26,627 $37,104 $83,178 $160,115 $346,290 $ 6,979 $7,469 $8,525 $12,916 $7,058
2.09 %* 2.05 % 1.98 % 2.05 % 1.98 % 2.02 % 2.09 %* 2.08 % 2.01 % 1.96 % 1.95 %*
1.43 %* 1.81 % 1.60 % 1.00 % 2.02 % 3.25 % 1.44 %* 1.77 % 1.62 % 0.97 % 1.91 %*
103 % 188 % 107 % 69 % 33 % 84 % 103 % 188 % 107 % 69 % 33 %
$0.0600 -- -- -- -- -- $0.0600 -- -- -- --
</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, hereafter referred to as
the "Fund") at August 31, 1996, the results of its operations for the period
March 1, 1996 through August 31, 1996, the changes in its net assets for the
period March 1, 1996 through August 31, 1996 and for the year ended February
29, 1996 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 August 31, 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
October 28, 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 (August 31,
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.............................................................. $0.1005
Class B.............................................................. 0.0651
Class C.............................................................. 0.0662
Short-term capital gains*+............................................. 0.2064
Long-term capital gains+............................................... 0.2768
Percentage of ordinary income dividends qualifying for the dividends
received deduction available to corporate shareholders................ 35.30
</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
<PAGE>
PAINEWEBBER BALANCED FUND
SHAREHOLDER INFORMATION
A Special Meeting of Shareholders was held on April 15, 1996. At
the meeting the following proposals were approved. (Shareholders
of the Trust, comprised of the Fund and another series, voted
together as a single class with respect to the election of board
members, other matters noted below were approved by shareholders
of the Fund.)
PROPOSAL 1
<TABLE>
<CAPTION>
SHARES VOTED SHARES
FOR WITHHOLD AUTHORITY
------------ ------------------
<S> <C> <C>
To elect ten members of
its Board of Directors:
Margo N. Alexander...... 30,108,980 3,571,102
Richard Q. Armstrong.... 30,110,878 3,569,204
E. Garrett Bewkes,
Jr. ................... 30,110,878 3,569,204
Richard Burt............ 30,015,121 3,664,961
Mary C. Farrell......... 30,108,980 3,571,102
Meyer Feldberg.......... 30,027,076 3,653,006
George W. Gowen......... 30,110,878 3,569,204
Frederic V. Malek....... 30,015,121 3,664,961
Carl W. Schafer......... 30,110,878 3,569,204
John R. Torell III...... 30,095,791 3,584,291
</TABLE>
PROPOSAL 2
To vote for or against the ratification of the selection of Price Waterhouse
LLP as the independent auditors for the Fund's current fiscal year ending
August 31, 1996:
<TABLE>
<CAPTION>
SHARES VOTED SHARES SHARES
FOR AGAINST ABSTAIN
------------ ------- -------
<S> <C> <C>
8,838,617 58,235 725,315
</TABLE>
PROPOSAL 3
To vote for or against the following changes to the Fund's fundamental
investment restrictions and policies.
For each of the following proposals, the votes were as follows:
<TABLE>
<CAPTION>
SHARES VOTED SHARES SHARES
FOR AGAINST ABSTAIN
------------ ------- -------
<S> <C> <C> <C>
Modification of fundamental restriction on portfo-
lio diversification for diversified funds........ 8,648,607 160,215 813,345
Modification of fundamental restriction on concen-
tration.......................................... 8,648,607 160,215 813,345
Modification of fundamental restriction on senior
securities and borrowing......................... 8,648,607 160,215 813,345
Modification of fundamental restriction on making
loans............................................ 8,648,607 160,215 813,345
Modification of fundamental restriction on under-
writing securities............................... 8,648,607 160,215 813,345
Modification of fundamental restriction on real
estate investments............................... 8,648,607 160,215 813,345
Modification of fundamental restriction on invest-
ing in commodities............................... 8,648,607 160,215 813,345
Elimination of fundamental restriction on margin
transactions..................................... 8,648,607 160,215 813,345
Elimination of fundamental restriction on short
sales............................................ 8,648,607 160,215 813,345
Elimination of fundamental restriction on invest-
ments in oil, gas,
and mineral leases and programs.................. 8,648,607 160,215 813,345
Elimination of fundamental restriction on invest-
ments in other investment companies.............. 8,648,607 160,215 813,345
Elimination of fundamental restriction relating to
purchases of
securities not permitted under investment objec-
tive............................................. 8,648,607 160,215 813,345
</TABLE>
- -------
(Broker non-votes and abstentions are included within the "Shares Withhold
Authority" and "Shares Abstain" totals.)
20
