PAINEWEBBER BALANCED FUND
PERFORMANCE AT A GLANCE
================================================================================
Comparison of the change of a $10,000 investment in PaineWebber Balanced
Fund (B) versus the S&P 500 Index and the Lehman Brothers Intermediate
Treasury Bond Index
[The following information represents a line chart in the printed piece]
The following graph depicts the performance of PaineWebber Balanced Fund (B)
versus the S&P 500 Index and the Lehman Brothers Intermediate Treasury Bond
Index. It is important to note PaineWebber Balanced Fund is a professionally
managed mutual fund, while the indices are not available for investment and are
unmanaged. The comparison is shown for illustrative purposes only.
++ For the period August 31, 1996 through August 31, 1997. Lipper ranked the
Fund's class A shares #18 of 327 balanced funds. For the five-year and life
(July 1, 1991 through August 31, 1997) periods, the Fund ranked in the third
quartile (#51 of 90 funds and #42 of 72 funds, respectively). Class B shares:
for the period from August 31, 1996 through August 31, 1997, the Fund ranked in
the first quartile (#28 of 327 funds). For the five- and ten-year periods ended
August 31, 1997, the Fund ranked in the third quartile (#67 of 90 funds and
#27 of 42 funds, respectively). Rankings do not account for sales charges; if
included, rankings may differ.
Date PaineWebber S&P 500 Lehman Bros. Int. Tsy
Balanced Fund Index Bond Index
Class B
12/86 10000 10000 10000
8/87 10127 13890 10055
8/88 10844 11418 10782
8/89 12381 15892 11967
8/90 12255 15099 12927
8/91 14169 19151 14557
8/92 15256 20667 16434
8/93 17112 23808 17873
8/94 17032 25108 17820
8/95 19076 30482 19412
8/96 20565 36181 20275
8/97 26709 50875 21888
Past performance is not predictive of future performance.
The performance of the other classes will vary from the performance of the class
shown based on the difference in sales charges and fees paid by shareholders
investing in different classes.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
Commencement of
Twelve Months Five Years Ten Years Operations
Ended 8/31/97 Ended 8/31/97 Ended 8/31/97 Through 8/31/97+
<S> <C> <C> <C> <C>
% Return Without Deducting Class A * 30.67% 12.64% NA 12.34%
Maximum Sales Charge Class B ** 29.70% 11.81% 10.44% 9.59%
Class C *** 29.70% 11.82% NA 11.73%
% Return After Deducting Class A * 24.84% 11.60% NA 11.50%
Maximum Sales Charge Class B ** 24.70% 11.56% 10.44% 9.59%
Class C *** 28.70% 11.82% NA 11.73%
</TABLE>
* Maximum sales charge for Class A shares if 4.5% of the public offering
price. Class A shares bear ongoing 12b-1 services fees.
** Maximum contingent deferred sales charge for Class B shares is 5% and is
reduced to 0% after six years. Class B shares bear ongoing 12b-1
distribution and service fees.
*** Maximum contingent deferred sales charges for Class C shares is 1% and is
reduced to 0% after one year. Class C shares bear ongoing 12b-1 distribution
and service fees.
+ Commencement of operations was July 1, 1991, December 12, 1986 and July 2,
1992 for Class A, Class B and Class C shares, respectively.
Note: The Fund offers Class Y shares to INSIGHT Investment Advisory Program
participants. For the year ended August 31, 1997, there were no Class Y shares
outstanding.
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>
ANNUAL REPORT
PAINEWEBBER
BALANCED FUND
PORTFOLIO BREAKDOWN
(as a % of net assets as of
August 31, 1997)
[The following information represents a pie chart in the printed piece]
Common Stocks ...................... 61.01%
Preferred Stocks ................... 1.48%
Corporate Bonds .................... 10.09%
Convertible Bonds .................. 0.65%
U.S. Government Obligations ........ 10.86%
Mortgage-Backed Securities ......... 10.80%
Cash & Cash Equivalents ............ 5.11%
October 15, 1997
Dear Shareholder,
We are pleased to present the annual report for PaineWebber Balanced Fund
for the year ended August 31, 1997.
GENERAL MARKET OVERVIEW
================================================================================
STOCKS--The stock market reached historical highs over the fiscal year, as
the bull market continued its record run. However, the heights achieved by the
stock market were accompanied by volatility. In fact, for a brief period of time
early in the summer of 1996, disappointing earnings announcements contributed to
the first meaningful overall stock market correction since 1994. By the end of
August, growing investor confidence returned money to the market, propelling the
Standard & Poor's 500 Index, a commonly used measure of stock market
performance, to record highs. Early winter 1997, too, was characterized by
significant gains in the stock market, but persistent above-trend economic
growth prompted the Federal Reserve to raise interest rates by 25 basis points
in March. Despite this preemptive strike against inflation and the volatile and
difficult financial markets that ensued, stocks once again rallied on signs that
economic growth was decelerating and that the Fed would not move again on
interest rates.
BONDS--By mid-summer 1996, a moderating economy bolstered bonds--a fleeting
situation as fears of an overheating economy again emerged. This on/off pattern
repeated itself through the fall. 1997 began on a resoundingly bad note, as the
Fed's decision to raise short-term interest rates in March and expectations of
further Fed tightening contributed to negative returns in virtually every bond
sector over the first quarter of the year. Good news, however, came on April
28th, when the report of the Employment Cost Index--considered the most
comprehensive wage-inflation indicator, and critical to Federal Reserve
policy--presented a still benign inflation outlook. This information, combined
with other factors, turned market sentiment extremely bullish. Bonds entered a
prolonged rally that, fueled by additional favorable inflation data, continued
into early August.
2
<PAGE>
ANNUAL REPORT
PORTFOLIO REVIEW
================================================================================
PERFORMANCE--PaineWebber Balanced Fund's total return (the net asset value
change with dividends reinvested) for the year ended August 31, 1997, without
deducting sales charges, was 30.67% for Class A shares, 29.70% for Class B
shares and 29.70% for Class C shares. For shareowners who purchased or redeemed
Fund shares during the period the Fund's total return may have been lower; for
example, after deducting the maximum applicable sales charges, the Fund's total
return for the period was 24.84% for Class A shares, 24.70% for Class B shares
and 28.70% for Class C shares.
Over the period, the Fund's Class A shares easily outperformed the 23.87%
return of its Lipper Balanced Fund Peer Group Average, which ranks the Fund in
the first quartile within its peer group of 327 funds.++
PORTFOLIO POSITIONING--Mitchell Hutchins develops consensus expectations
for key economic variables such as interest rates, profit growth and inflation,
and then applies fundamental valuation techniques to this data. Based on this
analysis, there were no indicators that warranted a deviation from the Fund's
existing allocation throughout the fiscal year. Therefore, as of August 31,
1997, 61.0% of the Fund's assets were invested in common stocks, 1.5% in
preferred stocks, 32.4% in U.S. Government obligations, corporate bonds and
mortgage obligations, and 5.1% in cash and cash equivalents.
PORTFOLIO HIGHLIGHTS--EQUITY SECTOR: During the fiscal year, several of the
industries in which the Fund was overweighted especially benefited Fund
performance. These included the financial, energy and technology industries.
The buoying effects of industry consolidation and the increasing number of
baby boomers who are turning to financial services companies helped contribute
to the financial sector's (13.3% of net assets as of August 31, 1997) strong
showing during the period. Of our positions in this industry, one deserves
specific mention. Travelers Group Incorporated (at 1.5% of net assets, the
Fund's largest equity holding) is well-poised to benefit from a number of recent
strategic acquisitions. In particular, the company's purchase of Salomon
Brothers should be positive for earnings as it increases Travelers' investment
banking capabilities, fixed income trading operations and presence in the global
market.
Recovery from depressed conditions, especially in oil services, contributed
to positive performance in the energy sector (8.6% of net assets as of August
31, 1997). Overbuilding throughout the early 1980s had plunged the energy
industry into a depressed state from which it is only recently emerging. In
particular, oil services companies, perhaps the hardest-hit, are operating more
efficiently. Therefore, we invested in companies such as Halliburton Company
(1.4%), which is directly benefiting from an increasing demand for oil services
equipment to rebuild reserve bases.
Another sector of note was technology (9.6% of net assets as of August 31,
1997). Volatility brought about by forecasts of overall earnings disappointments
created an unfavorable environment for technology companies early in the period.
Toward the end
PAINEWEBBER
BALANCED FUND
PROFILE
GOAL:
High total return with low volatility.
PORTFOLIO MANAGERS:
T. Kirkham Barneby,
Asset Allocator;
Mark Tincher,
Equity Sector;
Dennis McCauley,
Fixed Income Sector;
Susan Ryan,
Money Market Sector,
MH Asset Management Inc.
TOTAL NET ASSETS:
$207.9 million as of
August 31, 1997
DIVIDEND PAYMENTS:
Semiannually
3
<PAGE>
of the Fund's fiscal year, however, the industry began to recover. Our position
in Compaq Computer Corporation (1.3%), one of the top-performing technology
companies, proved particularly advantageous as cost cutting, new product
development and expanded distribution resulted in growing market share that
increased the company's earning estimates.
PORTFOLIO HIGHLIGHTS--FIXED INCOME SECTOR: A continuation of strong
economic growth and our concern that the Fed would continue to tighten monetary
policy led us to maintain a largely defensive portfolio over the year.
Additionally, in keeping with our emphasis on value addition via portfolio
yield, we increased the portfolio's allocation to a mixture of Treasury
debentures (10.9% of net assets as of August 31, 1997), mortgage-backed
securities (MBS) (10.8%) and corporate bonds (10.7%). We believed that an
environment of low volatility and robust corporate profits argued well for the
outperformance of the corporate and MBS sectors versus Treasuries.
OUTLOOK
================================================================================
As of this writing, the stock market has experienced a significant change in
market cap leadership. The more cyclical small- and mid-cap markets outpaced the
more defensive, large-cap-oriented S&P 500 Index by over eight percentage points
in the third quarter, due to better-than-expected reported earnings. As a
result, the three markets, small-, mid- and large-cap, as measured by their
respective indices, the S&P 600, the S&P 400 and the S&P 500, have all generated
returns of approximately 30% year-to-date. Still, we expect S&P 500 earnings
growth of 10% by the end of 1997, based on our forecast that the large-cap
market is fairly valued and that a low inflationary, moderate growth economy
will continue. Furthermore, we believe small-caps have more room to grow
relative to large-caps. In light of these prospects, we will maintain a
percentage of net assets in small- and mid-cap companies. Longer term, for as
long as the market's four primary drivers--interest rates, corporate earnings,
savings rates and the budget deficit--continue to perform as they have, stock
prices are likely to rise. However, if any of these drivers is upset, we expect
stocks to become increasingly more volatile and susceptible to correction.
We believe the fixed income market will remain in a trading range between
6.25% and 7.25%, given that we see little risk of a recession and expect the Fed
to retain a tightening bias. We also anticipate that the demand for spread
products--both corporate bonds and MBS--will remain strong. The current economic
backdrop of strong economic growth, healthy corporate profitability and good
cash flow growth provides favorable fundamental support to the corporate bond
asset class, while low volatility and limited net issuance should continue to
support MBS valuations.
While the expected excess returns for both stocks and bonds are a bit below
historical norms, they are not low enough to warrant a change in the way the
Fund's assets are currently allocated. As a result, we expect to maintain our
portfolio allocations of approximately 60% stocks, 35% bonds and 5% cash.
4
<PAGE>
Our ultimate objective in managing your investments is to help you
successfully meet your financial goals. We thank you for your continued support,
and welcome any comments or questions you may have.
Sincerely,
/s/Margo Alexander /s/T. Kirkham Barneby
- ------------------------ ------------------------------
MARGO N. ALEXANDER T. KIRKHAM BARNEBY
President, Managing Director and Chief
Mitchell Hutchins Investment Officer--
Asset Management Inc. Quantitative Investments,
Mitchell Hutchins
Asset Management Inc.
/s/Dennis L. McCauley /s/Mark A. Tincher
- ------------------------------ ------------------------------
DENNIS L. MCCAULEY MARK A. TINCHER
Managing Director and Managing Director and
Chief Investment Officer-- Chief Investment Officer--
Fixed Income, Mitchell Hutchins Equities, Mitchell Hutchins
Asset Management Inc. Asset Management Inc.
/s/Susan P. Ryan
- -------------------
SUSAN P. RYAN
Senior Vice President,
Mitchell Hutchins Asset Management Inc.
This letter is intended to assist shareholders in understanding how the Fund
performed during the fiscal year ended August 31, 1997 and reflects our views at
the time we are writing this report. Of course, these views may change in
response to changing circumstances. We encourage you to consult your investment
executive regarding your personal investment program.
++Please refer to page 1 for additional performance information.
5
<PAGE>
PAINEWEBBER BALANCED FUND
PERFORMANCE RESULTS (unaudited)
<TABLE>
<CAPTION>
NET ASSET VALUE TOTAL RETURN1
-------------------------------------------- -------------------------------------
12 MONTHS 6 MONTHS
8/31/97 2/28/97 8/31/96 ENDED 08/31/97 ENDED 08/31/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $12.50 $10.92 $10.27 30.67% 15.36%
- ------------------------------------------------------------------------------------------------------------------------------------
Class B Shares 12.70 11.09 10.42 29.70 15.04
- ------------------------------------------------------------------------------------------------------------------------------------
Class C Shares 12.52 10.95 10.29 29.70 14.90
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PERFORMANCE SUMMARY
CLASS A SHARES
NET ASSET VALUE
---------------------------------- CAPITAL GAINS DIVIDENDS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED PAID RETURN1
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/1/91-12/31/91 $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 23.13
- ------------------------------------------------------------------------------------------------------------------------------------
1996 10.41 10.61 1.0303 0.2516 14.74
- ------------------------------------------------------------------------------------------------------------------------------------
01/01/97-08/31/97 10.61 12.50 -- 0.0926 18.73
- ------------------------------------------------------------------------------------------------------------------------------------
Totals: $3.7553 $1.7070
- ------------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 08/31/97: 105.06%
- ------------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE SUMMARY
CLASS B SHARES
NET ASSET VALUE
---------------------------------- CAPITAL GAINS DIVIDENDS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED PAID RETURN1
- ------------------------------------------------------------------------------------------------------------------------------------
<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 1.95
- ------------------------------------------------------------------------------------------------------------------------------------
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 22.23
- ------------------------------------------------------------------------------------------------------------------------------------
1996 10.57 10.79 1.0303 0.1632 13.81
- ------------------------------------------------------------------------------------------------------------------------------------
01/01/97-08/31/97 10.79 12.70 -- 0.0556 18.24
- ------------------------------------------------------------------------------------------------------------------------------------
Totals: $4.0547 $3.4823
- ------------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 08/31/97: 167.09%
- ------------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE SUMMARY
CLASS C SHARES
NET ASSET VALUE
---------------------------------- CAPITAL GAINS DIVIDENDS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED PAID RETURN1
- ------------------------------------------------------------------------------------------------------------------------------------
<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
- ------------------------------------------------------------------------------------------------------------------------------------
1996 10.45 10.65 1.0303 0.1708 13.86
- ------------------------------------------------------------------------------------------------------------------------------------
01/01/97-08/31/97 10.65 12.52 -- 0.0591 18.14
- ------------------------------------------------------------------------------------------------------------------------------------
Totals: $3.7553 $0.9147
- ------------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 08/31/97: 77.42%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1Figures assume reinvestment of all dividends and other distributions at net
asset value on the payable dates and do not include sales charges; results for
each class would be lower if sales charges were included.
Note: The Fund offers Class Y shares to INSIGHT Investment Advisory Program
participants. For the year ended August 31, 1997, there were no Class Y shares
outstanding.
1The data above represents past performance of the Fund's shares, which is no
guarantee of future results. The principal value of an investment in the Fund
will fluctuate, so that an investor's shares, when redeemed, may be worth more
or less than their original cost.
6
<PAGE>
PAINEWEBBER BALANCED FUND
PORTFOLIO OF INVESTMENTS AUGUST 31, 1997
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
-------- --------
COMMON STOCKS--61.01%
AGRICULTURE, FOOD & BEVERAGE--0.24%
<S> <C> <C>
14,200 RJR Nabisco Holdings Corporation ................................... $ 494,338
---------
AIRLINES--1.44%
31,800 AAR Corporation .................................................... 1,067,287
12,600 AMR Corporation* ................................................... 1,269,450
8,500 UAL Corporation* ................................................... 647,594
---------
2,984,331
---------
APPAREL, RETAIL--1.01%
47,300 TJX Companies, Incorporated ........................................ 1,300,750
35,900 Woolworth Corporation* ............................................. 803,263
---------
2,104,013
---------
APPAREL, TEXTILES--0.68%
18,900 Nine West Group, Incorporated* ..................................... 798,525
15,500 Westpoint Stevens Incorporated* .................................... 620,000
---------
1,418,525
---------
BANKS--3.83%
25,500 BankAmerica Corporation ............................................ 1,678,219
18,900 BB & T Corporation ................................................. 978,075
25,500 Charter One Financial, Incorporated ................................ 1,386,562
22,700 First Union Corporation ............................................ 1,091,019
12,300 NationsBank Corporation ............................................ 730,312
18,900 The Chase Manhattan Corporation .................................... 2,101,444
---------
7,965,631
---------
CHEMICALS--1.19%
31,200 DuPont (E.I.) de Nemours & Company ................................. 1,944,150
8,500 Kerr-Mcgee Corporation ............................................. 528,063
---------
2,472,213
---------
COMPUTER HARDWARE--3.17%
23,600 Cisco Systems, Incorporated* ....................................... 1,778,850
41,975 Compaq Computer Corporation* ....................................... 2,749,362
10,600 Dell Computer Corporation* ......................................... 869,862
5,700 International Business Machines Corporation ........................ 574,988
9,000 Seagate Technology, Incorporated* .................................. 343,688
5,600 Sun Microsystems Incorporated* ..................................... 268,800
---------
6,585,550
---------
COMPUTER SOFTWARE--1.60%
27,400 Cadence Design Systems Incorporated* ............................... 1,303,213
18,000 Computer Associates International Incorporated ..................... 1,203,750
23,600 Sterling Software Incorporated* .................................... 809,775
---------
3,316,738
---------
7
</TABLE>
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
-------- --------
COMMON STOCKS--(continued)
Construction, Real Property--1.73%
<S> <C> <C>
15,100 Chelsea GCA Realty Incorporated .................................... $ 567,194
3,000 Crescent Operating Incorporated* ................................... 48,375
28,400 Crescent Real Estate Equities ...................................... 898,150
28,462 Equity Residential Properties Trust ................................ 1,385,744
15,000 Starwood Lodging Corporation ....................................... 692,812
---------
3,592,275
---------
Consumer Durables--0.23%
23,300 Furniture Brands International Incorporated* ....................... 410,663
2,700 Interface, Incorporated ............................................ 75,600
---------
486,263
---------
Defense/Aerospace--3.62%
34,500 Allied-Signal, Incorporated ........................................ 2,848,406
31,155 Boeing Company ..................................................... 1,696,000
11,300 Lockheed Martin Corporation ........................................ 1,171,669
26,500 Loral Space Communications Corporation* ............................ 463,750
14,200 Precision Castparts Corporation .................................... 917,675
14,200 Tracor Incorporated* ............................................... 427,775
---------
7,525,275
---------
Diversified Retail--1.42%
26,625 Dayton Hudson Corporation .......................................... 1,517,625
23,600 Federated Department Stores, Incorporated* ......................... 991,200
8,500 Fred Meyer Incorporated* ........................................... 442,000
---------
2,950,825
---------
Drugs & Medicine--2.55%
10,450 Amerisource Health Corporation ..................................... 523,153
24,100 Bergen Brunswig Corporation ........................................ 1,012,200
11,300 Bristol-Myers Squibb Company ....................................... 858,800
11,900 Pfizer, Incorporated ............................................... 658,963
28,400 Schering-Plough Corporation ........................................ 1,363,200
17,000 Watson Pharmaceuticals, Incorporated* .............................. 893,562
---------
5,309,878
---------
Electrical Equipment--0.96%
26,400 SCI Systems Incorporated* .......................................... 1,037,850
16,800 Ultratech Stepper, Incorporated* ................................... 483,000
14,200 Waters Corporation* ................................................ 473,038
---------
1,993,888
---------
Electrical Power--0.32%
25,500 Westinghouse Electric Corporation .................................. 656,625
---------
</TABLE>
8
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
-------- --------
COMMON STOCKS--(continued)
ENERGY RESERVES & PRODUCTION--2.78%
<S> <C> <C>
12,300 Amoco Corporation .................................................. $1,163,119
12,600 British Petroleum, plc, ADR ........................................ 1,066,275
14,200 Mobil Corporation .................................................. 1,033,050
18,900 Royal Dutch Petroleum Company ...................................... 959,175
13,450 Texaco, Incorporated ............................................... 1,550,112
---------
5,771,731
---------
FINANCIAL SERVICES--2.03%
18,900 American Express Company ........................................... 1,469,475
18,000 Countrywide Credit Industries, Incorporated ........................ 606,375
29,900 Morgan Stanley, Dean Witter, Discover & Company .................... 1,438,937
5,200 SLM Holding Corporation ............................................ 704,600
---------
4,219,387
---------
FOREST PRODUCTS, PAPER--0.36%
18,000 Fort James Corporation(1) .......................................... 756,000
---------
FOOD RETAIL--0.56%
22,700 Safeway Incorporated* .............................................. 1,156,281
---------
GAS UTILITY--0.71%
11,800 Columbia Gas System, Incorporated .................................. 778,800
22,700 MCN Corporation .................................................... 696,606
---------
1,475,406
---------
HEAVY MACHINERY--1.15%
22,700 Agco Corporation ................................................... 737,750
28,400 Caterpillar, Incorporated .......................................... 1,648,975
---------
2,386,725
---------
HOTELS--0.85%
23,600 Hilton Hotels Corporation .......................................... 724,225
9,500 Marriott International, Incorporated ............................... 632,344
21,600 Prime Hospitality Corporation* ..................................... 410,400
---------
1,766,969
---------
INDUSTRIAL PARTS--2.13%
7,100 American Standard Companies Incorporated* .......................... 333,700
21,300 Crane Company ...................................................... 939,863
33,100 Ingersoll Rand Company ............................................. 1,990,137
15,100 United Technologies Corporation .................................... 1,178,744
---------
4,442,444
---------
INFORMATION & COMPUTER SERVICES--0.34%
23,400 Valassis Communications Incorporated ............................... 710,775
---------
LEISURE--0.49%
14,200 Philips Electronics N. V ........................................... 1,017,075
---------
</TABLE>
9
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
-------- --------
COMMON STOCKS--(continued)
LIFE INSURANCE--1.70%
<S> <C> <C>
26,000 Conseco Incorporated ............................................... $1,118,000
18,900 Reliastar Financial Corporation .................................... 1,412,775
18,900 SunAmerica Incorporated ............................................ 1,018,238
---------
3,549,013
---------
LONG DISTANCE & PHONE COMPANIES--0.55%
15,900 Bell Atlantic Corporation .......................................... 1,150,763
---------
MANUFACTURING--GENERAL--0.20%
13,100 Lucasvarity plc* ................................................... 415,106
---------
MANUFACTURING--HIGH TECHNOLOGY--1.28%
24,100 Johnson Controls, Incorporated ..................................... 1,149,269
21,300 KLA-Tencor Corporation* ............................................ 1,509,637
---------
2,658,906
---------
MEDICAL PRODUCTS--1.62%
7,600 Johnson & Johnson .................................................. 430,825
37,509 Tyco International Limited(1) ...................................... 2,942,112
---------
3,372,937
---------
MEDICAL PROVIDERS--1.39%
18,900 HEALTHSOUTH Corporation* ........................................... 471,319
14,200 Lincare Holdings Incorporated*(1) .................................. 677,162
63,800 Tenet Healthcare Corporation* ...................................... 1,738,550
---------
2,887,031
---------
MINING & METALS--1.60%
23,600 Freeport-McMoran Copper & Gold, Incorporated ....................... 660,800
29,600 Ispat International N. V.* ......................................... 793,650
14,200 Phelps Dodge Corporation ........................................... 1,142,212
20,000 Steel Dynamics, Incorporated* ...................................... 505,000
8,400 Wyman Gordon Company* .............................................. 229,425
---------
3,331,087
---------
MOTOR VEHICLES AND PARTS--0.86%
26,000 Chrysler Corporation ............................................... 913,250
18,900 Lear Corporation* .................................................. 865,856
---------
1,779,106
---------
OIL REFINING--2.87%
18,900 Coastal Corporation ................................................ 1,091,475
37,800 Repsol S.A., ADR ................................................... 1,488,375
28,400 Tejas Gas Corporation* ............................................. 1,349,000
36,400 Unocal Corporation ................................................. 1,421,875
18,900 USX-Marathon Group ................................................. 615,431
---------
5,966,156
---------
</TABLE>
10
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
-------- --------
COMMON STOCKS--(concluded)
OIL SERVICES--2.93%
<S> <C> <C>
11,300 Camco International Incorporated ................................... $ 778,287
19,000 Diamond Offshore Drilling Incorporated* ............................ 1,037,875
17,000 Ensco International Incorporated* .................................. 1,079,500
12,900 Global Marine Incorporated* ........................................ 366,844
59,100 Halliburton Company ................................................ 2,822,025
------------
6,084,531
------------
OTHER INSURANCE--3.78%
23,600 ACE Limited ........................................................ 1,961,750
18,900 Allstate Corporation ............................................... 1,380,881
10,650 American International Group Incorporated .......................... 1,005,094
8,500 CIGNA Corporation .................................................. 1,558,687
10,800 Loews Corporation .................................................. 1,100,925
21,300 Travelers Property Casualty Corporation ............................ 857,325
------------
7,864,662
------------
PUBLISHING--0.79%
25,000 Meredith Corporation ............................................... 750,000
18,900 New York Times Company, Class A .................................... 893,025
------------
1,643,025
------------
RAILROADS--1.11%
17,750 Canadian Pacific Limited ........................................... 518,078
44,900 Trinity Industries Incorporated .................................... 1,784,775
------------
2,302,853
------------
SECURITIES & ASSET MANAGEMENT--1.46%
47,733 Travelers Group Incorporated ....................................... 3,031,045
------------
SEMICONDUCTOR--1.57%
16,600 Applied Materials, Incorporated* ................................... 1,566,625
8,400 Integrated Process Equipment Corporation ........................... 277,200
8,000 Intel Corporation .................................................. 737,000
19,900 National Semiconductor Corporation* ................................ 681,575
------------
3,262,400
------------
SPECIALTY RETAIL--1.04%
40,356 Dollar General Corporation ......................................... 1,672,252
18,000 General Nutrition Companies, Incorporated* ......................... 499,500
------------
2,171,752
------------
THRIFT--0.44%
18,000 Ahmanson, H F & Company ............................................ 913,500
------------
TOBACCO--0.43%
20,700 Phillip Morris Companies Incorporated .............................. 903,038
------------
Total Common Stocks (cost--$91,877,981) ............................................. 126,846,072
------------
</TABLE>
11
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
-------- --------
PREFERRED STOCKS--1.48%
FINANCIAL SERVICES--0.57%
<S> <C> <C>
15,000 Devon Financing Trust+ .............................................................. $1,175,625
----------
OTHER INSURANCE--0.58%
15,000 Frontier Financing Trust+ ........................................................... 1,211,250
----------
THRIFT--0.33%
11,500 Tosco Financing Trust+ .............................................................. 688,562
----------
Total Preferred Stocks (cost--$2,075,000) 3,075,437
----------
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES
-------- ------- -------
CORPORATE BONDS--10.09%
BANKS--1.36%
$1,370 ABN Amro Bank ............................... 12/01/26 7.300% 1,318,603
1,495 Banc One Corporation Medium Term Note ....... 03/24/00 6.700 1,508,143
----------
2,826,746
----------
CABLE--0.67%
1,300 Continental Cablevision Incorporated ........ 05/15/06 8.300 1,394,734
----------
FINANCIAL SERVICES--3.94%
1,300 Bear Stearns Companies Incorporated ......... 03/01/07 7.000 1,289,788
1,950 BT Institutional Capital Trust A+ ........... 12/01/26 8.090 1,938,789
700 First Industrial, LP ........................ 05/15/27 7.150 699,038
1,600 Ford Motor Credit Company ................... 01/25/01 5.750 1,564,402
1,100 Lehman Brothers Holdings Incorporated ....... 09/15/03 7.125 1,105,784
1,610 Santander Finance Issuances ................. 07/15/05 6.800 1,588,558
----------
8,186,359
----------
LIFE INSURANCE--0.33%
700 Equitable Life Assurance Society, USA+ ...... 12/01/05 6.950 695,248
----------
OIL SERVICES--0.64%
1,300 Occidental Petroleum Corporation
Medium Term Note ............................ 09/15/04 8.500 1,340,729
----------
OTHER INSURANCE--2.28%
1,200 American Re Corporation ..................... 12/15/26 7.450 1,217,059
1,300 Loews Corporation ........................... 12/15/06 6.750 1,271,162
2,000 Lumbermans Mutual Casualty Company+ ......... 07/01/26 9.150 2,247,244
----------
4,735,465
----------
TOBACCO--0.87%
1,800 Phillip Morris Companies Incorporated ....... 01/15/27 7.750 1,803,683
----------
Total Corporate Bonds (cost--$20,609,230) 20,982,964
----------
12
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
-------- ------- ------- --------
CONVERTIBLE BONDS--0.65%
INDUSTRIAL PARTS--0.09%
<S> <C> <C> <C>
$ 175 Tecnomatix Technologies Limited+ ............ 08/15/04 5.250% $ 185,500
----------
SPECIALTY RETAIL--0.56%
1,000 Home Depot Incorporated ..................... 10/01/01 3.250 1,162,500
----------
Total Convertible Bonds (cost--$1,175,000) 1,348,000
----------
U.S. GOVERNMENT OBLIGATIONS--10.86%
8,770 U.S. Treasury Bonds ......................... 02/15/21 7.875 9,978,611
12,249 U.S. Treasury Notes ......................... 04/30/99 to 07/15/06 6.375 to 7.750 12,589,153
----------
Total U.S. Government Obligations (cost--$22,271,985) ...... 22,567,764
----------
MORTGAGE BACKED SECURITIES--10.80%
FEDERAL NATIONAL MORTGAGE ASSOCIATION--5.22%
3,670 FNMA ........................................ 06/12/00 6.640 3,686,379
1,782 FNMA ........................................ 01/01/26 to 02/01/26 7.500 1,803,725
5,435 FNMA TBA ARM ................................ TBA 6.089 5,380,650
----------
Total Federal National Mortgage Association (cost--$10,878,476) 10,870,754
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--2.18%
4,276 GNMA (cost--$4,507,145) .................... 11/15/17 8.500 4,528,115
----------
COLLATERALIZED MORTGAGE OBLIGATIONS--3.40%
675 Amresco Commercial Mortgage Funding I
Corporation, Series 1997-C1, Class A1 ....... 06/17/29 6.730 677,490
290 CS First Boston Mortgage Securities
Corporation, Series 1995-WF1, Class A1 ...... 12/21/27 6.452 287,599
462 CS First Boston Mortgage Securities
Corporation, Series 1997-2, Class A + ....... 06/25/20 7.500 464,689
424 DLJ Mortgage Acceptance Corporation,
Series 1997-CF1, Class A1A + ................ 05/15/06 7.400 436,878
728 FDIC REMIC, Series 1994-C1, Class 2A2 ....... 09/25/25 7.850 733,683
577 FDIC REMIC, Series 1996-C1, Class 1A ........ 05/25/26 6.750 577,709
673 FNMA REMIC, Series 1996-M6, Class E ......... 09/17/19 7.750 687,422
844 FNMA REMIC, Series 1996-M4, Class A ......... 03/17/17 7.750 860,520
590 GMAC Commercial Mortgage Security,
Series 1996-C1, Class A2A ................... 09/15/03 6.790 592,792
644 Merrill Lynch Mortgage Investments
Incorporated, Series 1996-C1, Class A1 ...... 04/25/28 7.150 654,183
400 Morgan Stanley Capital I Incorporated,
Series 1997-C1, Class A1A ................... 02/15/20 6.850 411,445
678 Morgan Stanley Capital I Incorporated,
Series 1997-WF1, Class A1 + ................. 10/15/06 6.830 680,324
----------
Total Collateralized Mortgage Obligations (cost--$7,019,790) 7,064,734
----------
Total Mortgage Backed Securities (cost--$22,405,411) ....... 22,463,603
----------
13
</TABLE>
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
-------- ------- ------- --------
REPURCHASE AGREEMENTS--7.97%
<S> <C> <C> <C>
$8,000 Repurchase agreement dated 08/29/97 with First
Chicago National Bank Inc., collateralized by
$7,855,000 U.S. Treasury Notes, 5.875% to 7.500%,
due 10/31/98 to 11/05/01; proceeds $8,004,933 ....... 09/02/97 5.550% $ 8,000,000
8,562 Repurchase agreement dated 08/29/97 with
Salomon Brothers, Inc., collateralized by
$8,276,000 U.S.Treasury Notes, 7.750%,
due 11/30/99; proceeds $8,567,251 ................... 09/02/97 5.520 8,562,000
----------
Total Repurchase Agreements (cost--$16,562,000) .................... 16,562,000
----------
</TABLE>
NUMBER OF
SHARES
----------
INVESTMENTS OF CASH COLLATERAL FOR SECURITIES LOANED--1.65%
MONEY MARKET FUNDS--1.65%
3,310,286 Liquid Assets Portfolio ....................... 3,310,286
98,531 Prime Portfolio ............................... 98,531
28,483 TempCash Portfolio ............................ 28,483
------------
Total Investments of Cash Collateral for Securities Loaned
(cost--$3,437,300) ........................................ 3,437,300
------------
Total Investments (cost--$180,413,907)-104.51% ............... 217,283,140
Liabilities in excess of other assets--(4.51)% ............... (9,375,787)
------------
Net Assets - 100.00% ......................................... $207,907,353
============
- -------------------
* Non-Income producing security
+ 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 Receipt
ARM Adjustable Rate Mortgage Security; the interest rate shown is the
current rate at August 31, 1997
TBA (To Be Assigned) Securities are purchased on a forward commitment basis
with an approximated (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
(1) Security, or portion thereof, was on loan at August 31, 1997
See accompanying notes to financial statements
14
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES AUGUST 31, 1997
ASSETS
Investments in securities, at value (cost--$180,413,907) ....... $217,283,140
Dividends and interest receivable .............................. 980,890
Receivable for investments sold ................................ 285,177
Receivable for fund shares sold ................................ 96,925
Other assets ................................................... 72,914
------------
Total assets ................................................... 218,719,046
------------
LIABILITIES
Payable for investments purchased .............................. 5,966,728
Collateral for securities loaned ............................... 3,437,300
Payable for fund shares repurchased ............................ 946,369
Payable to affiliate ........................................... 198,931
Due to custodian ............................................... 27,273
Accrued expenses and other liabilities ......................... 235,092
------------
Total liabilities .............................................. 10,811,693
------------
NET ASSETS
Capital Stock--$0.001 par value ................................ 151,164,453
Undistributed net investment income ............................ 823,995
Accumulated net realized gains from investment transactions .... 19,049,672
Net unrealized appreciation of investments ..................... 36,869,233
------------
Net assets ..................................................... $207,907,353
============
CLASS A:
Net assets ..................................................... $176,402,596
------------
Shares outstanding ............................................. 14,109,296
------------
Net asset value and redemption value per share ................. $ 12.50
============
Maximum offering price per share (net asset value plus
sales charge of 4.50% of offering price) ..................... $ 13.09
============
CLASS B:
Net assets ..................................................... $ 22,768,471
------------
Shares outstanding ............................................. 1,793,198
------------
Net asset value and offering price per share ................... $ 12.70
============
CLASS C:
Net assets ..................................................... $ 8,736,286
------------
Shares outstanding ............................................. 697,729
------------
Net asset value and offering price per share ................... $ 12.52
============
See accompanying notes to financial statements
15
<PAGE>
STATEMENT OF OPERATIONS
For the Year
Ended
August 31,
1997
------------
INVESTMENT INCOME:
Interest .................................................. $4,923,579
Dividends ................................................. 1,858,060
----------
6,781,639
----------
EXPENSES:
Investment advisory and administration .................... 1,465,166
Service fees--Class A ..................................... 413,824
Service and distribution fees--Class B .................... 220,684
Service and distribution fees--Class C .................... 77,568
Transfer agency and service ............................... 198,458
Reports and notices to shareholders ....................... 185,840
State registration ........................................ 159,050
Legal and audit ........................................... 143,799
Custody and accounting .................................... 132,193
Directors fees ............................................ 15,750
Other expenses ............................................ 69,938
-----------
3,082,270
-----------
NET INVESTMENT INCOME ..................................... 3,699,369
-----------
Realized and unrealized gains from
investment activities:
Net realized gains from investment
transactions ........................................... 20,411,884
Net change in unrealized appreciation/
depreciation of investments ............................ 27,967,582
-----------
NET REALIZED AND UNREALIZED GAINS
FROM INVESTMENT ACTIVITIES ............................. 48,379,466
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .............................. $52,078,835
===========
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the
For the Period March 1,
Year Ended 1996 through
August 31, August 31,
1997 1996
------------- ------------
FROM OPERATIONS:
<S> <C> <C>
Net investment income ............................................................ $ 3,699,369 $ 2,038,956
Net realized gains from investment transactions .................................. 20,411,884 8,010,343
Net change in unrealized appreciation/depreciation of investments ................ 27,967,582 (10,090,626)
------------ ------------
Net increase (decrease) in net assets resulting from operations .................. 52,078,835 (41,327)
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income--Class A ................................................... (3,518,807) (1,533,387)
Net investment income--Class B ................................................... (292,933) (139,866)
Net investment income--Class C ................................................... (111,333) (43,823)
Net realized gains from investment transactions--Class A ......................... (7,951,554) (7,372,463)
Net realized gains from investment transactions--Class B ......................... (1,065,949) (1,038,147)
Net realized gains from investment transactions--Class C ......................... (367,562) (319,876)
------------ ------------
Total dividends and distributions to shareholders ................................ (13,308,138) (10,447,562)
------------ ------------
FROM CAPITAL STOCK TRANSACTIONS:
Net proceeds from sale of shares ................................................. 6,471,174 2,049,022
Cost of shares repurchased ....................................................... (36,403,282) (20,078,399)
Proceeds from dividends reinvested ............................................... 12,258,447 9,622,813
------------ ------------
Net decrease in net assets from capital stock transactions ....................... (17,673,661) (8,406,564)
------------ ------------
Net increase (decrease) in net assets ............................................ 21,097,036 (18,895,453)
NET ASSETS:
Beginning of period .............................................................. 186,810,317 205,705,770
------------ ------------
End of period (including undistributed net investment income
of $823,995 and $1,078,091, respectively) ...................................... $207,907,353 $186,810,317
============ ============
</TABLE>
17
<PAGE>
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 certain transfer agency expenses. In addition, Class B
shares and all corresponding reinvested dividend shares automatically convert to
Class A shares approximately six years after issuance. All classes of shares
have equal voting privileges except that Class A, Class B and Class C each have
exclusive voting rights with respect to their respective service and/or
distribution plans. Class Y shares have no service or distribution plan.
The preparation of financial statements in accordance with generally
accepted accounting principles requires Fund management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. The following is a
summary of significant accounting policies:
VALUATION OF INVESTMENTS--Securities 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 asset management subsidiary of PaineWebber
Incorporated ("PaineWebber") and investment adviser, administrator and
distributor of the Fund as the primary market. Securities traded in the
over-the-counter ("OTC") market and listed on the Nasdaq Stock Market, Inc.
("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, or under the direction of, the 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.
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
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
accrual basis. Dividend income is recorded on the ex-dividend date. Discounts
are accreted and premiums are amortized as adjustments to interest income and
the identified cost of investments.
Income, expenses (excluding class-specific expenses) and realized/
unrealized gains/losses are allocated proportionately to each class of shares
based upon the relative net asset value of outstanding shares (or the value of
dividend-eligible shares, as appropriate) of each class at the beginning of the
day (after adjusting for current capital share activity of the respective
classes). Class-specific expenses are charged directly to the applicable class
of shares.
DIVIDENDS AND DISTRIBUTIONS--Dividends and distributions to shareholders
are recorded on the ex-dividend date. The amount of dividends and distributions
are determined in accordance with federal income tax regulations, which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification.
CONCENTRATION OF RISK
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 Mitchell Hutchins serves as investment adviser and administrator of the
Fund. In accordance with the Advisory Contract, the Fund pays Mitchell Hutchins
an investment advisory and administration fee, which is accrued daily and paid
monthly, in accordance with the following schedule:
ANNUAL
AVERAGE DAILY NET ASSETS RATE
- -------------------- -------
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
At August 31, 1997, the Fund owed Mitchell Hutchins $133,966 in investment
advisory and administration fees.
For the year ended August 31, 1997, the Fund paid $15,564 in brokerage
commissions to PaineWebber for transactions executed on behalf of the Fund.
DISTRIBUTION PLANS
Mitchell Hutchins is the distributor of the Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. Under separate
plans of service and/or 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 Class B and Class C shares (Class Y shares have no
service or distribution plan). At August 31, 1997, the Fund owed Mitchell
Hutchins $64,965 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 shareholders upon certain redemptions of Class A,
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Class B and Class C shares. Mitchell Hutchins has informed the Fund that for the
year ended August 31, 1997, it earned $89,845 in sales charges.
SECURITY LENDING
The Fund may lend up to 33-1/3% of its total assets to qualified
institutions. The loans are secured at all times by cash or U.S. government
securities in an amount at least equal to the market value of the securities
loaned, plus accrued interest, determined on a daily basis and adjusted
accordingly. The Fund will regain record ownership of loaned securities to
exercise certain beneficial rights; however, the Fund may bear the risk of delay
in recovery of, or even loss of rights in, the securities loaned should the
borrower fail financially. The Fund receives compensation, which is included in
interest income, for lending its securities from interest earned on the cash or
U.S. government securities held as collateral, net of fee rebates paid to the
borrower plus reasonable administrative and custody fees. The Fund's lending
agent is PaineWebber, which received $2,585 in compensation in that capacity
from the Fund for the year ended August 31, 1997.
As of August 31, 1997, the Fund held cash and/or cash equivalents having an
aggregate value of $3,437,300 as collateral for portfolio securities loaned
having a market value of $3,401,356.
BANK LINE OF CREDIT
The Fund may participate with other funds managed by Mitchell Hutchins in a
$200 million committed credit facility ("Facility") to be utilized for temporary
financing until the settlement of sale or purchase of portfolio securities, the
repurchase or redemption of shares of the Fund at the request of the
shareholders and other temporary or emergency purposes. In connection therewith,
the Fund has agreed to pay a commitment fee, pro rata, based on the relative
asset size of the Funds in the Facility. Interest is charged to the Fund at
rates based on prevailing market rates in effect at the time of borrowings. For
the year ended August 31, 1997, the fund did not borrow under the Facility.
TRANSFER AGENCY SERVICE FEES
Prior to August 1, 1997, the Fund paid 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 August 31,
1997, PaineWebber earned $54,420 in service fees from the Fund. Subsequent to
August 1, 1997, PaineWebber provides transfer agency related services to the
Fund pursuant to a delegation of authority from PFPC, Inc., the Fund's transfer
agent. For the period August 1, 1997 to August 31, 1997, PFPC, Inc., paid
PaineWebber $7,474 for these services.
INVESTMENT IN SECURITIES
For federal income tax purposes, the cost of securities owned at August 31,
1997 was substantially the same as the cost of securities for financial
statement purposes.
At August 31, 1997, the components of net unrealized appreciation of
investments were as follows:
Gross appreciation (investments having an
excess of value over cost) ............................ $ 37,706,080
Gross depreciation (investments having an
excess of cost over value) ............................ (836,847)
------------
Net unrealized appreciation of investments ................ $ 36,869,233
============
For the year ended August 31, 1997, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were as follows:
Purchases ................................................. $341,817,558
Sales ..................................................... $361,490,861
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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 reclassifications for the Fund arising from permanent "book/tax"
differences for the year ended August 31, 1997, undistributed net investment
income was decreased by $30,392, accumulated net realized gains from investment
transactions were increased by $14,543 and capital stock was increased by
$15,849.
CAPITAL STOCK
There are 10 billion shares of $0.001 par value common stock authorized for
Master Series, of which 4 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
-------- --------- ------- --------- ------- ---------
FOR THE YEAR ENDED
AUGUST 31, 1997:
<S> <C> <C> <C> <C> <C> <C>
Shares sold ........................ 211,758 $ 2,447,467 223,601 $ 2,588,152 125,122 $1,435,555
Shares repurchased ................. (2,662,267) (29,771,297) (436,949) (4,978,057) (145,940) (1,653,928)
Dividends reinvested ............... 978,372 10,584,456 112,620 1,234,648 40,580 439,343
Shares converted from
Class B toClass A ............... 250, 416 2,755,806 (246,655) (2,755,806) -- --
---------- ------------ -------- ----------- ------ ---------
Net increase (decrease) ............ (1,221,721) $(13,983,568) (347,383) $(3,911,063) 19,762 $ 220,970
========== ============ ======== =========== ====== =========
FOR THE PERIOD MARCH 1, 1996
THROUGH 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 toClass 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)
========== ============ ======== =========== ====== =========
</TABLE>
22
<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 SIX FOR THE
YEAR MONTHS YEAR FOR THE YEARS ENDED
ENDED ENDED ENDED FEBRUARY 28,
AUGUST 31, AUGUST 31, FEBRUARY 29, -------------------------------
1997 1996 (3) 1996 1995 1994 1993
--------- --------- ---------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ..................... $ 10.27 $ 10.85 $ 9.80 $ 12.04 $ 11.54 $ 11.01
-------- -------- -------- -------- -------- --------
Net investment income ..................... 0.23++ 0.12++ 0.27++ 0.26 0.22 0.33
Net realized and unrealized gains
(losses) from investments ............... 2.79++ (0.12)++ 1.84++ (1.07) 1.31 0.54
-------- -------- -------- -------- -------- --------
Net increase (decrease) from
investment operations ................... 3.02 0.00 2.11 (0.81) 1.53 0.87
-------- -------- -------- -------- -------- --------
Dividends from net investment
income .................................. (0.24) (0.10) (0.31) (0.23) (0.25) (0.34
Distributions from net realized
gains from investment
transactions ............................ (0.55) (0.48) (0.75) (1.20) (0.78) --
-------- -------- -------- -------- -------- --------
Total dividends and distributions
to shareholders ......................... (0.79) (0.58) (1.06) (1.43) (1.03) (0.34)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ............ $ 12.50 $ 10.27 $ 10.85 $ 9.80 $ 12.04 $ 11.54
======== ======== ======== ======== ======== ========
Total investment return(1) ................ 30.67% 0.03% 22.08% (6.02)% 13.57% 8.09%
======== ======== ======== ======== ======== ========
Ratios/supplemental data:
Net assets, end of period (000's) ......... $176,403 $157,525 $171,609 $174,761 $216,492 $154,594
Expenses to average net assets ............ 1.46% 1.34%* 1.29% 1.26% 1.21% 1.18%
Net investment income to average
net assets .............................. 2.02% 2.19%* 2.55% 2.41% 1.74% 2.52%
Portfolio turnover rate ................... 188% 103% 188% 107% 69% 33%
Average commission rate paid(2) ........... $0.0600 $0.0600 -- -- -- --
</TABLE>
- -------------
* Annualized
++ Calculated using the average shares outstanding for the period
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results would be lower if sales charges were
included. Total investment return for periods of less than one year has not
been annualized.
(2) Effective for fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose the average commission rate paid per share of
common stock investments purchased or sold.
(3) Fiscal year changed to August 31.
<PAGE>
PAINEWEBBER BALANCED FUND
FINANCIAL HIGHLIGHTS (continued)
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD IS
PRESENTED BELOW:
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------------------------------
FOR THE
FOR THE SIX FOR THE
YEAR MONTHS YEAR FOR THE YEARS ENDED
ENDED ENDED ENDED FEBRUARY 28,
AUGUST 31, AUGUST 31, FEBRUARY 29, -------------------------------
1997 1996 (3) 1996 1995 1994 1993
--------- --------- ---------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ..................... $ 10.42 $ 11.00 $ 9.90 $ 12.10 $ 11.56 $ 10.99
------- ------- ------- ------- ------- --------
Net investment income ..................... 0.14++ 0.08++ 0.19++ 0.44 0.26 0.30
Net realized and unrealized gains
(losses) from investments ............... 2.84++ (0.11)++ 1.86++ (1.32) 1.18 0.48
------- ------- ------- ------- ------- --------
Net increase (decrease) from
investment operations ................... 2.98 (0.03) 2.05 (0.88) 1.44 0.78
------- ------- ------- ------- ------- --------
Dividends from net investment
income .................................. (0.15) (0.07) (0.20) (0.12) (0.12) (0.21)
Distributions from net realized
gains from investment
transactions ............................ (0.55) (0.48) (0.75) (1.20) (0.78) --
------- ------- ------- ------- ------- --------
Total dividends and distributions
to shareholders ......................... (0.70) (0.55) (0.95) (1.32) (0.90) (0.21)
------- ------- ------- ------- ------- --------
Net asset value, end of period ............ $ 12.70 $ 10.42 $ 11.00 $ 9.90 $ 12.10 $ 11.56
------- ------- ------- ------- ------- --------
Total investment return(1) ................ 29.70% (0.30)% 21.20% (6.68)% 12.62% 7.25%
======= ======= ======= ======= ======= ========
Ratios/supplemental data:
Net assets, end of period (000's) ......... $22,768 $22,307 $26,627 $37,104 $83,178 $160,115
Expenses to average net assets ............ 2.22% 2.09%* 2.05% 1.98% 2.05% 1.98%
Net investment income to average
net assets .............................. 1.27% 1.43%* 1.81% 1.60% 1.00% 2.02%
Portfolio turnover rate ................... 188% 103% 188% 107% 69% 33%
Average commission rate paid(2) ........... $0.0600 $0.0600 -- -- -- --
</TABLE>
- -------------
* Annualized
++ Calculated using the average shares outstanding for the period
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results would be lower if sales charges were
included. Total investment return for periods of less than one year has not
been annualized.
(2) Effective for fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose the average commission rate paid per share of
common stock investments purchased or sold.
(3) Fiscal year changed to August 31.
<PAGE>
PAINEWEBBER BALANCED FUND
FINANCIAL HIGHLIGHTS (concluded)
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD IS
PRESENTED BELOW:
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------------------------------------
FOR THE FOR THE
FOR THE SIX FOR THE PERIOD
YEAR MONTHS YEAR FOR THE YEARS ENDED JULY 2, 1992+
ENDED ENDED ENDED FEBRUARY 28, THROUGH
AUGUST 31, AUGUST 31, FEBRUARY 29, -------------------- FEBRUARY 28,
1997 1996 (3) 1996 1995 1994 1993
--------- --------- ---------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ................ $10.29 $10.88 $ 9.82 $12.03 $ 11.54 $10.86
------ ------ ------ ------ ------- ------
Net investment income ................ 0.14++ 0.08++ 0.19++ 0.19 0.14 0.13
Net realized and unrealized gains
(losses) from investments .......... 2.80++ (0.12)++ 1.84++ (1.07) 1.30 0.71
------ ------ ------ ------ ------- ------
Net increase (decrease) from
investment operations .............. 2.94 (0.04) 2.03 (0.88) 1.44 0.84
------ ------ ------ ------ ------- ------
Dividends from net investment
income ............................. (0.16) (0.07) (0.22) (0.13) (0.17) (0.16)
Distributions from net realized
gains from investment
transactions ....................... (0.55) (0.48) (0.75) (1.20) (0.78) --
------ ------ ------ ------ ------- ------
Total dividends and distributions
to shareholders .................... (0.71) (0.55) (0.97) (1.33) (0.95) (0.16)
------ ------ ------ ------ ------- ------
Net asset value, end of period ....... $12.52 $10.29 $10.88 $9.82 $ 12.03 $11.54
====== ====== ====== ====== ======= ======
Total investment return(1) ........... 29.70% (0.38)% 21.12% (6.69)% 12.75% 7.78%
====== ====== ====== ====== ======= ======
Ratios/supplemental data:
Net assets, end of period (000's) .... $8,736 $6,979 $7,469 $8,525 $12,916 $7,058
Expenses to average net assets ....... 2.21% 2.09%* 2.08% 2.01% 1.96% 1.95%*
Net investment income to average
net assets ......................... 1.27% 1.44%* 1.77% 1.62% 0.97% 1.91%*
Portfolio turnover rate .............. 188% 103% 188% 107% 69% 33%
Average commission rate paid(2) ...... $ 0.0600 $ 0.0600 -- -- -- --
</TABLE>
- ----------------
* Annualized
+ Commencement of issuance of shares
++ Calculated using the average shares outstanding for the period (1)Total
investment return is calculated assuming a $1,000 investment on the first
day of each period reported, reinvestment of all dividends and distributions
at net asset value on the payable dates and a sale at net asset value on the
last day of each period reported. The figures do not include sales charges;
results would be lower if sales charges were included. Total investment
return for periods of less than one year has not been annualized.
(2) Effective for fiscal years beginning on or after September 1, 1995, the Fund
is required to disclose the average commission rate paid per share of common
stock investments purchased or sold.
(3) Fiscal year changed to August 31.
24
<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, 1997, the results of its operations for the year then
ended, the changes in its net assets for the year ended August 31, 1997 and for
the period March 1, 1996 through August 31, 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
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at August 31, 1997, 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 20, 1997
25
<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,
1997), 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:
PER SHARE DATA: CLASS A CLASS B CLASS C
------ ------ ------
Net investment income* .............. $0.2437 $0.1537 $0.1637
Short-term capital gains* ........... 0.1094 0.1094 0.1094
Long-term capital gains ............. 0.4377 0.4377 0.4377
Percentage of ordinary income
dividends qualifying for the
dividends received deduction
available to corporate
shareholders ...................... 19.75% 19.75% 19.75%
- --------------
* Taxable as ordinary income
Dividends received by tax-exempt recipients (e.g., IRAs and Keoghs) need not
be reported as taxable income. Some retirement trusts (e.g., corporate, Keogh
and 403(b)(7) plans) may need this information for their annual information
reporting.
Because the Fund's fiscal year is not the calendar year, another
notification will be sent in respect of calendar 1997. 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 1998. Shareholders are advised to consult their own
tax advisers with respect to the tax consequences of their investment in the
Fund.
26
<PAGE>
PAINEWEBBER BALANCED FUND
TRUSTEES
E. Garrett Bewkes, Jr. Mary C. Farrell
CHAIRMAN Meyer Feldberg
Margo N. Alexander George W. Gowen
Richard Q. Armstrong Frederic V. Malek
Richard R. Burt Carl W. Schafer
PRINCIPAL OFFICERS
Margo N. Alexander Mark A. Tincher
PRESIDENT VICE PRESIDENT
Victoria E. Schonfeld Dennis L. McCauley
VICE PRESIDENT VICE PRESIDENT
Dianne E. O'Donnell Susan P. Ryan
VICE PRESIDENT AND SECRETARY VICE PRESIDENT
Paul H. Schubert T. Kirkham Barneby
VICE PRESIDENT AND TREASURER VICE PRESIDENT
INVESTMENT ADVISER
AND ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
THIS REPORT IS NOT TO BE USED IN CONNECTION WITH THE OFFERING OF SHARES OF THE
FUND UNLESS ACCOMPANIED OR PRECEDED BY AN EFFECTIVE PROSPECTUS.
A PROSPECTUS CONTAINING MORE COMPLETE INFORMATION FOR ANY OF THE FUNDS LISTED ON
THE BACK COVER CAN BE OBTAINED FROM A PAINEWEBBER INVESTMENT EXECUTIVE OR
CORRESPONDENT FIRM.
READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
27
<PAGE>
=============
PaineWebber offers a family of 22 funds which encompass a diversified range of
investment goals.
BOND FUNDS
/b/ High Income Fund
/b/ Investment Grade Income Fund
/b/ Low Duration U.S. Government Income Fund
/b/ Strategic Income Fund
/b/ U.S. Government Income Fund
TAX-FREE BOND FUNDS
/b/ California Tax-Free Income Fund
/b/ Municipal High Income Fund
/b/ National Tax-Free Income Fund
/b/ New York Tax-Free Income Fund
STOCK FUNDS
/b/ Capital Appreciation Fund
/b/ Financial Services Growth Fund
/b/ Growth Fund
/b/ Growth and Income Fund
/b/ Small Cap Fund
/b/ Utility Income Fund
ASSET ALLOCATION FUNDS
/b/ Balanced Fund
/b/ Tactical Allocation Fund
GLOBAL FUNDS
/b/ Asia Pacific Growth Fund
/b/ Emerging Markets Equity Fund
/b/ Global Equity Fund
/b/ Global Income Fund
PAINEWEBBER MONEY MARKET FUND
{LOGO]
PaineWebber
(C)1997 PaineWebber Incorporated
Member SIPC
[LOGO]
PaineWebber
=================
BALANCED
FUND
ANNUAL REPORT
AUGUST 31, 1997
