PaineWebber
=====================
MONEY MARKET
FUND
ANNUAL REPORT
FEBRUARY 28, 1997
<PAGE>
PaineWebber MONEY MARKET FUND ANNUAL REPORT
April 14, 1997
Dear Shareholder,
We are pleased to present you with the annual report for PaineWebber Money
Market Fund (the "Fund") for the year ended February 28, 1997.
GENERAL MARKET OVERVIEW
================================================================================
[GRAPHIC] Overall, the volatile nature of the Treasury market over the
12-month period ended February 28, 1997 made for a
sentiment-driven market. Mid-period, signs of strength in
employment and housing, coupled with healthy retail and capital
spending, created concern that the Federal Reserve Board (the
"Fed") would raise rates. However, tempered inflation persisted
and ultimately kept the Fed on hold during the period. As the 12
months drew to a close, moderating growth in the economy
prevailed, and the risk of inflationary pressures persisted in
the marketplace.
PORTFOLIO REVIEW
================================================================================
[GRAPHIC] The Fund's current yields for Class A, B and C shares for the
seven-day period ended February 28, 1997 were 4.24%, 3.74% and
3.66%, respectively. The Fund maintained a weighted average
maturity of 50 days as of February 28, 1997.
The Fund invests in high quality, short-term money market instruments such as
commercial paper, medium-term notes, U.S. Treasuries, U.S. government agencies,
banker acceptances and certificates of deposit. Investment decisions in the Fund
during the period continued to be dominated by credit quality and liquidity.
Although we were interested in maintaining higher yields, we did not do so by
sacrificing the Fund's emphasis on security, quality and liquidity.
1
<PAGE>
ANNUAL REPORT
OUTLOOK
================================================================================
[GRAPHIC] The Fed's decision to raise short-term interest rates in late
March spurred significant market volatility. We expect that this
volatility will continue, and view any declines that occur as
opportunities to purchase securities. In general, however, we
plan to maintain the Fund's neutral weighted average maturity as
short-term rates find stability.
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/ Dennis L. McCauley
- ------------------------- ----------------------------------------
MARGO N. ALEXANDER DENNIS L. McCAULEY
President, Managing Director and Chief Investment,
Mitchell Hutchins Asset Officer--Fixed Income Investments,
Management Inc. Mitchell Hutchins Asset Management Inc.
/s/ Susan P. Ryan /s/ Peter Yurn
- ------------------------- ----------------------------------------
SUSAN P. RYAN PETER YUEN
Senior Vice President Portfolio Manager,
Mitchell Hutchins Asset PaineWebber Money Market Fund
Management Inc.
2
<PAGE>
PaineWebber
<TABLE>
<CAPTION>
MONEY MARKET FUND
STATEMENT OF NET ASSETS FEBRUARY 28, 1997
Principal
Amount Maturity Interest
(000) Dates Rates Value
- -------- ------------------- ----------------- ---------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS - 5.32%
$ 900 Federal Home Loan Bank ................... 10/16/97 to 12/26/97 5.625 to 5.900% $ 900,000
1,000 Federal National Mortgage Association .... 03/04/97 5.320* 1,000,000
----------
Total U.S. Government Agency Obligations
(cost - $1,900,000) .............................. 1,900,000
----------
BANK NOTES - 8.83%
DOMESTIC - 7.15%
800 BankAmerica Corporation .................. 07/15/97 6.000 799,857
1,000 Comerica Bank Detroit .................... 03/04/97 5.440* 999,995
750 FCC National Bank ........................ 04/17/97 5.640 749,898
----------
2,549,750
----------
YANKEE - 1.68%
600 ABN-AMRO Bank N.V. ....................... 12/04/97 5.500 599,912
----------
Total Bank Notes (cost - $3,149,662) ............... 3,149,662
----------
CERTIFICATES OF DEPOSIT - 6.30%
YANKEE - 6.30%
1,000 Commerzbank AG ........................... 03/21/97 5.280 1,000,000
1,250 Societe Generale ......................... 05/08/97 to 01/06/98 5.720 to 5.850 1,249,703
----------
Total Certificates of Deposit (cost - $2,249,703) .. 2,249,703
----------
COMMERCIAL PAPER@ - 75.01%
ASSET-BACKED - 11.57%
1,500 Delaware Funding Corporation ............. 04/21/97 5.280 1,488,780
1,500 Enterprise Funding Corporation ........... 03/26/97 5.300 1,494,479
1,148 Triple-A One Funding Corporation ......... 03/12/97 5.340 1,146,127
----------
4,129,386
----------
AUTO & TRUCK - 6.26%
740 Ford Motor Credit Company ................ 03/26/97 5.300 737,276
1,500 General Motors Acceptance Corporation .... 03/06/97 5.360 1,498,883
----------
2,236,159
----------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PaineWebber
MONEY MARKET FUND
Principal
Amount Maturity Interest
(000) Dates Rates Value
- -------- ------------------- ----------------- ---------
<S> <C> <C> <C>
COMMERCIAL PAPER@ - (CONTINUED)
BANKING - 8.38%
$1,000 ABN-AMRO North America Finance
Incorporated ............................. 03/06/97 5.350% $ 999,257
1,000 BCI Funding Corporation .................... 03/18/97 5.340 997,478
1,000 Nordbanken North America Incorporated ...... 04/16/97 5.350 993,164
----------
2,989,899
----------
BROKER/DEALER - 2.77%
1,000 Morgan Stanley Group Incorporated .......... 05/05/97 5.270 990,485
----------
BUSINESS SERVICES - 4.48%
1,600 Block Financial Corporation ................ 03/03/97 5.270 1,599,532
----------
CHEMICALS - 3.91%
1,400 Great Lakes Chemical Corporation ........... 03/21/97 to 03/28/97 5.250 to 5.330 1,394,878
----------
DRUGS & HEALTHCARE - 6.97%
1,000 Bayer Corporation .......................... 03/25/97 5.350 996,433
1,500 Novartis Finance Corporation ............... 04/02/97 5.320 1,492,907
----------
2,489,340
----------
FINANCE - CONDUIT - 6.93%
1,000 ANZ (Delaware) Incorporated ................ 08/19/97 5.270 974,967
1,500 Toronto-Dominion Holdings USA Incorporated . 03/04/97 5.320 1,499,335
----------
2,474,302
----------
FINANCE - CREDIT UNION - 2.79%
1,000 U.S. Central Credit Union .................. 03/21/97 5.240 997,089
----------
FINANCE - DIVERSIFIED - 2.80%
1,000 Associates Corporation of North America .... 03/06/97 5.350 999,257
----------
FINANCE - SUBSIDIARY - 6.98%
1,500 Dresdner U.S. Finance ...................... 03/03/97 5.300 1,499,559
1,000 National Australia Funding (Delaware)
Incorporated ............................. 04/14/97 5.340 993,473
----------
2,493,032
----------
FOOD, BEVERAGE & TOBACCO - 2.79%
1,000 American Brands, Incorporated .............. 04/02/97 5.300 995,289
----------
INSURANCE - PROPERTY/CASUALTY - 4.19%
1,500 John Hancock Capital Corporation ........... 03/21/97 5.250 1,495,625
----------
4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PaineWebber
MONEY MARKET FUND
Principal
Amount Maturity Interest
(000) Dates Rates Value
- -------- ------------------- ----------------- ---------
<C> <C> <C> <C>
COMMERCIAL PAPER@ - (CONCLUDED)
UTILITY - TELEPHONE - 4.19%
$1,500 Bell Atlantic Financial Services Incorporated .... 03/24/97 5.260% $ 1,494,959
-----------
Total Commercial Paper (cost - $26,779,232) 26,779,232
-----------
SHORT-TERM CORPORATE OBLIGATIONS - 9.28%
BROKER/DEALER - 2.24%
500 Bear Stearns Companies Incorporated .............. 08/12/97 5.820 500,000
300 Bear Stearns Companies Incorporated .............. 03/04/97 5.470* 300,000
-----------
800,000
-----------
FINANCE - CONSUMER - 2.80%
1,000 American General Finance Corporation ............. 04/01/97 5.800 1,000,171
-----------
FOOD, BEVERAGE & TOBACCO - 1.44%
500 Philip Morris Companies Incorporated ............ 12/01/97 9.250 512,921
-----------
MISCELLANEOUS - 2.80%
1,000 Beta Finance Incorporated ........................ 03/04/97 5.420* 1,000,000
-----------
Total Short-Term Corporate Obligations (cost - $3,313,092) . 3,313,092
-----------
REPURCHASE AGREEMENT - 1.35%
482 Repurchase Agreement dated 02/28/97 with Daiwa
Securities America Incorporated, collateralized
by $418,000 U.S. Treasury Bonds, 8.500% due
02/15/20; proceeds: $482,215 (cost - $482,000) . 03/03/97 5.350 482,000
-----------
Total Investments (cost - $37,873,689 which approximates
cost for federal income tax purposes) - 106.09% .......... 37,873,689
Liabilities in excess of other assets - (6.09)% ........... (2,173,369)
-----------
Net Assets (applicable to 11,806,930; 18,398,658; and
5,505,749 shares of Class A, Class B, and Class C,
respectively, each equivalent to
$1.00 per share) - 100.00% . ......................... $35,700,320
===========
</TABLE>
- ----------------------
* Variable rate security-maturity date reflects earlier of reset date or
maturity date. The interest rates shown are the current rates as of February
28, 1997 and reset periodically.
@ Interest rates shown are discount rates at date of purchase.
Weighted average maturity (unaudited) - 50 days
See accompanying notes to financial statements
5
<PAGE>
PaineWebber
MONEY MARKET FUND
STATEMENT OF OPERATIONS For the Year Ended February 28, 1997
INVESTMENT INCOME:
Interest ...................................................... $2,364,488
---------
EXPENSES:
Investment advisory and administration ......................... 215,423
Service fees--Class A .......................................... 38,451
Service and distribution fees--Class B ......................... 169,463
Service and distribution fees--Class C ......................... 38,313
Legal and audit ................................................ 78,165
State registration fees ........................................ 76,297
Transfer agency and service fees ............................... 50,531
Reports and notices to shareholders ............................ 45,276
Custody and accounting ......................................... 12,346
Directors' fees ................................................ 12,250
Other expenses ................................................. 14,196
---------
750,711
---------
NET INVESTMENT INCOME .......................................... 1,613,777
NET REALIZED GAINS FROM INVESTMENT TRANSACTIONS ................ 7,764
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........... $1,621,541
=========
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED
------------------------------------
FEBRUARY 28, 1997 FEBRUARY 29, 1996
----------------- -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income ................................................. $ 1,613,777 $ 2,705,342
Net realized gains from investment transactions ....................... 7,764 2,889
----------- -----------
Net increase in net assets resulting from operations .................. 1,621,541 2,708,231
----------- -----------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income--Class A ........................................ (631,332) (832,449)
Net investment income--Class B ........................................ (804,674) (1,417,388)
Net investment income--Class C ........................................ (177,771) (455,505)
----------- -----------
(1,613,777) (2,705,342)
----------- -----------
NET DECREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS ............ (20,388,584) (20,224,020)
----------- -----------
Net decrease in net assets ............................................ (20,380,820) (20,221,131)
NET ASSETS:
Beginning of year ..................................................... 56,081,140 76,302,271
----------- -----------
End of year ........................................................... $35,700,320 $56,081,140
=========== ===========
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
PaineWebber
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
PaineWebber Master Series, Inc. ("Master Series") was
incorporated in Maryland on October 29, 1985 and is registered
with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended, as an open-end,
diversified series investment company which currently offers
two series of shares: PaineWebber Money Market Fund ("Fund")
and PaineWebber Balanced Fund. The financial statements for
PaineWebber Balanced Fund are not included herein.
The Fund offers Class A, Class B and Class C shares. Each
class represents interest in the same assets of the Fund and
the classes are identical except for differences in their
sales charge structure, ongoing service and distribution
charges and certain transfer agency expenses. In addition,
Class B shares automatically convert to Class A shares
approximately six years after initial issuance. All classes of
shares have equal voting privileges, except that each class
has exclusive voting rights with respect to its service and/or
distribution plan. All classes of shares may be obtained only
through an exchange of shares of the corresponding class of
other PaineWebber mutual funds.
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 AND ACCOUNTING FOR INVESTMENTS--Investments are
valued at amortized cost which approximates market value.
Investment transactions are recorded on the trade date.
Realized gains and losses from investment transactions are
calculated using the identified cost method. Interest income
is recorded on an accrual basis. Premiums are amortized and
discounts are accreted as adjustments to interest income and
the identified cost of investments.
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
may participate in joint repurchase agreement transactions
with other funds managed by Mitchell Hutchins Asset Management
Inc. ("Mitchell Hutchins"), a wholly owned subsidiary of
PaineWebber and investment adviser and administrator of the
Fund.
NET INVESTMENT INCOME AND INVESTMENT TRANSACTIONS--Income and
expenses (excluding class-specific expenses) are allocated
proportionately to each class of shares based upon the
relative net asset value of dividend-eligible shares of each
class at the beginning of the day (after adjusting for current
capital share activity of the respective classes). Realized
and unrealized gains and losses are allocated proportionately
to each class of shares based upon the relative value of
shares outstanding 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.
7
<PAGE>
PaineWebber
DIVIDENDS AND DISTRIBUTIONS--Dividends and distributions to
shareholders are recorded on the ex-dividend date. 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
developments, including those particular to a specific
industry 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, at the annual
rate of 0.50% of the Fund's average daily net assets. At
February 28, 1997, the Fund owed Mitchell Hutchins $13,509 for
investment advisory and administration fees.
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 the annual rate of 0.25% of the average daily net assets of
each class of shares and monthly distribution fees at an
annual rate of 0.50% of the average daily net assets of Class
B and Class C shares. At February 28, 1997, the Fund owed
Mitchell Hutchins $15,693 in service and distribution fees.
Mitchell Hutchins also receives the proceeds of the contingent
deferred sales charges paid upon certain redemptions of Class
A, Class B and Class C shares. Mitchell Hutchins has informed
the Fund that for the year ended February 28, 1997, it earned
$224,328 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 Fund's transfer agent. For these services for
the year ended February 28, 1997, PaineWebber earned $13,300
in service fees. At February 28, 1997, the Fund owed
PaineWebber $1,022 for such fees.
8
<PAGE>
PaineWebber
OTHER LIABILITIES
At February 28, 1997, the amounts payable for Fund shares
repurchased and dividends payable aggregated $2,176,771 and
$82,368, respectively.
CAPITAL STOCK
There are 10 billion shares of $0.001 par value common stock
authorized for Master Series, of which 1 billion were
allocated to the Fund. Transactions in shares of common stock,
at $1.00 per share, were as follows:
<TABLE>
<CAPTION>
Class A Class B Class C
------------------------- -------------------------- ---------------------------
For the Years Ended For the Years Ended For the Years Ended
------------------------- -------------------------- ---------------------------
February 28, February 29, February 28, February 29, February 28, February 29,
1997 1996 1997 1996 1997 1996
------------ ------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold ............... 125,631,344 68,390,061 19,555,704 47,337,869 76,050,153 57,291,344
Shares repurchased ........ (139,742,746) (67,443,035) (26,762,760) (60,008,482) (76,435,11) (68,064,126)
Shares converted from
Class B to Class A ...... 1,679,739 1,031,503 (1,679,739) (1,031,503) -- --
Dividends reinvested ...... 503,194 713,442 678,507 1,169,924 133,138 388,983
----------- ---------- ---------- ----------- ---------- -----------
Net increase (decrease)
in shares outstanding .. (11,928,469) 2,691,971 (8,208,288) (12,532,192) (251,827) (10,383,799)
=========== ========== ========== =========== ========== ===========
</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.
At February 28, 1997, the Fund had capital loss carryforwards
of $11,016 available as a reduction, to the extent provided in
the regulations, of future net realized gains, which will
expire between February 28, 1999 and February 28, 2003. To the
extent that such losses are used to offset future capital
gains, it is probable that the gains so offset will not be
distributed.
9
<PAGE>
PaineWebber
MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding
throughout each period is presented below:
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------
For the Years Ended
-----------------------------------------------------------
February 28, February 29, February 28,
---------------------------------
1997 1996 1995 1994 1993
---------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ..... $1.00 $1.00 $1.00 $1.00 $1.00
Net investment income .................... 0.040 0.046 0.037 0.016 0.022
Dividends from net investment income ..... (0.040) (0.046) (0.037) (0.016) (0.022)
------ ------ ------- ------- -------
Net asset value, end of period ........... $1.00 $1.00 $1.00 $1.00 $1.00
====== ====== ======= ======= =======
Total investment return(1) ............... 4.11% 4.69% 3.95% 1.64% 2.25%
====== ====== ======= ======= =======
Ratios/Supplemental data:
Net assets, end of period (000's) ...... $11,808 $23,735 $21,042 $14,204 $11,716
Expenses to average net assets ......... 1.42% 1.31% 1.06% 1.72% 1.74%
Net investment income to
average net assets ................... 4.09% 4.68% 3.85% 1.70% 2.18%
</TABLE>
- ---------------
*Annualized
+Commencement of issuance of shares
(1)Total investment return is calculated assuming a $1,000 investment in Fund
shares on the first day of each period reported, reinvestment of all
dividends and capital gain 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 return for periods of
less than one year has not been annualized.
10
<PAGE>
PaineWebber
<TABLE>
<CAPTION>
Class B
------------------------------------------------------
For the Years Ended
------------------------------------------------------
February 28, February 29, February 28,
----------------------------
1997 1996 1995 1994 1993
--------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ..... $1.00 $1.00 $1.00 $1.00 $1.00
Net investment income .................... 0.035 0.041 0.032 0.011 0.016
Dividends from net investment income ..... (0.035) (0.041) (0.032) (0.011) (0.016)
------- ------- ------- ------- -------
Net asset value, end of period ........... $1.00 $1.00 $1.00 $1.00 $1.00
======= ======= ======= ======= =======
Total investment return(1) ............... 3.60% 4.18% 3.41% 1.12% 1.73%
======= ======= ======= ======= =======
Ratios/Supplemental data:
Net assets, end of period (000's) ...... $18,389 $26,592 $39,123 $9,819 $15,280
Expenses to average net assets ......... 1.90% 1.79% 1.55% 2.25% 2.28%
Net investment income to
average net assets ................... 3.55% 4.17% 3.46% 1.16% 1.69%
</TABLE>
<TABLE>
<CAPTION>
Class C
--------------------------------------------------------
For the Years Ended For the Period
----------------------------------------- July 14, 1992+
February 28, February 29, February 28, to
----------------- February 28,
1997 1996 1995 1994 1993
-------- --------- ------ ------ ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ..... $1.00 $1.00 $1.00 $1.00 $1.00
Net investment income .................... 0.034 0.041 0.033 0.012 0.009
Dividends from net investment income ..... (0.034) (0.041) (0.033) (0.012) (0.009)
------- ------- ------ ------ ------
Net asset value, end of period ........... $1.00 $1.00 $1.00 $1.00 $1.00
======= ======= ====== ====== ======
Total investment return(1) ............... 3.50% 4.14% 3.44% 1.19% 0.81%
======= ======= ====== ====== ======
Ratios/Supplemental data:
Net assets, end of period (000's) ...... $5,504 $5,754 $16,137 $9,430 $2,220
Expenses to average net assets ......... 1.99% 1.79% 1.55% 2.14% 2.14%*
Net investment income to
average net assets ................... 3.47% 4.27% 3.35% 1.36% 1.67%*
</TABLE>
11
<PAGE>
PaineWebber
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
PaineWebber Money Market Fund
In our opinion, the accompanying statement of net assets 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 Money
Market Fund (the "Fund", one of the portfolios constituting
PaineWebber Master Series, Inc.) at February 28, 1997, the
results of its operations for the year then ended, the changes
in its net assets for each of the two years in the period then
ended and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting
principles. These financial statements and financial
highlights (hereafter referred to as "financial statements")
are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of
these financial statements in accordance with generally
accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits,
which included confirmation of securities at February 28, 1997
by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
April 11, 1997
12
<PAGE>
PaineWebber
TAX INFORMATION
We are required by Subchapter M of the Internal Revenue Code
of 1986, as amended, to advise you within 60 days of the
Fund's fiscal year end (February 28, 1997) as to the federal
tax status of distributions received by shareholders during
such fiscal year. Accordingly, we are advising you that all
distributions paid during the fiscal year were derived from
net investment income and are taxable as ordinary income. No
portion of these distributions qualifies for the corporate
dividend received deduction available to corporate
shareholders.
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 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 DIVand
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.
13
<PAGE>
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<PAGE>
================================================================================
DIRECTORS
E. Garrett Bewkes, Jr. Mary C. Farrell
Chairman
Meyer Feldberg
Margo N. Alexander
George W. Gowen
Richard Q. Armstrong
Frederic V. Malek
Richard Burt
Carl W. Schafer
PRINCIPAL OFFICERS
Margo N. Alexander Julian F. Sluyters
President Vice President and Treasurer
Victoria E. Schonfeld Dennis McCauley
Vice President Vice President
Dianne E. O'Donnell Susan P. Ryan
Vice President and Secretary Vice President
INVESTMENT ADVISER,
ADMINISTRATOR AND DISTRIBUTOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
THIS REPORT IS NOT TO BE USED IN CONNECTION WITH THE OFFERING OF SHARES OF A
FUND UNLESS ACCOMPANIED OR PRECEDED BY AN EFFECTIVE PROSPECTUS.
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PaineWebber
(C)1997 PaineWebber Incorporated
Member SIPC
