<PAGE>
PAINEWEBBER BALANCED FUND ANNUAL REPORT
PERFORMANCE AT A GLANCE
- ------------------------------------------------------------------------------
Comparison of the change of a $10,000 investment in PaineWebber Balanced Fund
(B), the S&P 500 Index and the Lehman Brothers Intermediate Treasury Bond
Index.
The 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.
[CHART]
PaineWebber Lehman Brothers S&P 500
Balanced Fund (B) Treasury Bond Index Index
---------------- ------------------- -------
12/12/86 976 1002 974
2/28/87 1040 1016 1149
984 994 1182
8/31/87 988 1005 1353
963 1028 953
2/29/88 1084 1075 1118
1037 1064 1105
8/31/88 1056 1079 1112
1092 1104 1175
2/28/89 1114 1111 1251
1160 1161 1400
8/31/89 1206 1198 1548
1215 1241 1536
2/28/90 1198 1242 1486
1231 1266 1633
8/31/90 1194 1295 1470
1219 1345 1483
2/28/91 1321 1386 1704
1359 1416 1825
8/31/91 1380 1460 1865
1347 1519 1784
2/29/92 1470 1546 1976
1474 1577 2004
8/31/92 1485 1647 2013
1527 1643 2113
2/28/93 1568 1720 2186
1567 1735 2237
8/31/93 1664 1790 2319
1703 1793 2326
2/28/94 1781 1793 2368
1624 1757 2332
8/31/94 1670 1785 2445
1582 1763 2350
2/28/95 1674 1832 2542
1783 1916 2802
8/31/95 1886 1945 2969
1957 2004 3219
2/29/96 2043 2019 3424
2062 2003 3598
8/31/96 2044 2032 3525
2258 2117 4115
2/28/97 2315 2118 4319
2444 2146 4657
8/31/97 2671 2196 4957
2756 2250 5288
2/28/98 2991 2296 5830
3082 2330 6085
8/31/98 2796 2399 5360
Past performance is not predictive of future performance.
The performance of the other classes will vary from the performance of the
class shown because of differences in sales charges and fees paid by
shareholders investing in different classes.
AVERAGE ANNUAL TOTAL RETURN
Five Ten Commencement
One Year Years Years of Operations
Ended Ended Ended Through
8/31/98 8/31/98 8/31/98 8/31/98+
% Return Without Deducting Class A* 4.69% 10.93% NA 11.23%
Maximum Sales Charge Class B** 3.87% 10.12% 10.22% 9.16%
Class C*** 3.89% 10.11% NA 10.42%
% Return After Deducting Class A* -0.03% 9.92% NA 10.52%
Maximum Sales Charge Class B** -0.64% 9.86% 10.22% 9.16%
Class C*** 2.99% 10.11% NA 10.42%
* Maximum sales charge for Class A shares is 4.5% of the public offering
price. Class A shares bear ongoing 12b-1 service fees.
** Maximum contingent deferred sales charge for Class B shares is 5% and is
reduced to 0% after six years. Class B shares bear ongoing 12b-1
distribution and service fees.
*** Maximum contingent deferred sales charge for Class C shares is 1% and is
reduced to 0% after one year. Class C shares bear ongoing 12b-1
distribution and service fees.
+ Commencement of operations dates are 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 certain eligible investors, including
participants in certain investment programs sponsored by PaineWebber that may
invest in PaineWebber mutual funds. Since inception on March 26, 1998 to
August 31, 1998, Class Y shares have lost 9.41%. Class Y shares do not have
initial or contingent deferred sales charges or ongoing distribution and
service fees.
The data above represent 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
October 19, 1998
Dear Shareholder,
We are pleased to present you with the annual report for the PaineWebber
Balanced Fund (the "Fund") for the fiscal year ended August 31, 1998.
GENERAL MARKET OVERVIEW
- ------------------------------------------------------------------------------
The Fund's fiscal year ended on a tumultuous note as investors reacted to
global uncertainty by pulling money out of the stock market. Concerns about
exposure to over-leveraged hedge funds and emerging markets caused a sell-off
in financial stocks as investors backed away from credit-quality and liquidity
problems. Weakness in global markets also hurt economically sensitive
companies in the United States as concern spread about a potential pullback of
consumer spending. Larger-capitalization stocks held up better than mid- or
small-caps, though some of the larger stocks were affected as well. As stocks
became more volatile, investors shifted some of their assets into bonds,
causing yields to fall and prices to rise.
PORTFOLIO REVIEW
- ------------------------------------------------------------------------------
PERFORMANCE
The Fund's total return (the net asset value change with dividends reinvested)
for the fiscal year ended August 31, 1998, without deducting sales charges,
was 4.69% for Class A shares, 3.87% for Class B shares and 3.89% for Class C
shares. From their inception on March 26, 1998 through August 31, 1998, Class
Y shares lost 9.41%.
The Fund's total return may be lower for shareowners that purchased or
redeemed Fund shares during the period. After deducting the maximum applicable
sales charges, Class A shares lost 0.03%, Class B shares lost 0.64% and Class
C shares gained 2.99%. Class Y shares are not subject to sales charges.
PORTFOLIO HIGHLIGHTS
The Fund employs a disciplined, model-based approach to calculate expected
returns for U.S. stocks, bonds and cash. Based on consensus expectations for
key economic variables such as interest rates, profit growth and inflation, as
well as fundamental valuation techniques, the Fund seeks to determine whether
the expected return from stocks is sufficient to offset the additional risk
when compared to bonds and "risk-free" cash investments (the one-year U.S.
Treasury bill). Fund assets are allocated according to the model, with a
minimum of 25% of net assets in bonds or cash at all times.
The Fund began the fiscal year at its normal allocation
1 All weightings in this letter represent percentages of Fund portfolio
assets. The Fund is actively managed and all weightings are subject to
change.
- --------------------------------------------------------------------------------
PAINEWEBBER
BALANCED
FUND
Asset Allocations
February 28, 1998(1)
[PIE CHART]
Stocks 67.7%
Bonds 25.1%
Cash 7.2%
August 31, 1998(1)
[PIE CHART]
Stocks 48.7%
Bonds 42.6%
Cash 8.7%
2
<PAGE>
PAINEWEBBER BALANCED FUND ANNUAL REPORT
of 60% stocks, 35% bonds and 5% cash. This reflected our view that both stocks
and bonds had moved closer to fair value, and that the excess returns over
cash were in line with historical norms. When the outlook for stocks improved
in November, we shifted the Fund to 70% stocks, 25% bonds and 5% cash.
Expected returns for stocks declined in April, and we accordingly reduced the
Fund's stock allocation to 55% and increased bonds to 40%. Expectations for
stocks continued to fall in May, prompting another reduction in the stock
allocation to 50% and another increase in bonds to 45%.
At the end of August, our monthly survey indicated an improvement in the
outlook for stocks and a decline in the outlook for bonds. This improvement
prompted us to switch portfolio allocations for September -- to increase
stocks to 65% of net assets, to decrease bonds to 35% and to eliminate the
cash position.
The Fund's holdings in financial services stocks made the most positive
contribution over the first six months but lost ground in July and August.
Consumer cyclical stocks turned in the best performance over the last six
months of the fiscal year. The Fund's holdings included Maytag (0.8%),(1) a
beneficiary of the surge in mortgage refinancing, and specialty retailer
Office Depot Inc. (0.5%). The largest holding was Quaker Oats (1.2%), a
defensive investment in the consumer nondurables sector.
TOP FIVE EQUITY SECTORS(1)
2/28/98 8/31/98
- ------------------------------------------------------------------------------
Financial Services 16.8% 12.0%
Consumer Cyclical 13.7 11.1
Technology 8.4 4.8
Capital Goods 6.3 --
Healthcare 5.9 4.8
Utilities -- 3.5
- ------------------------------------------------------------------------------
Total 51.1% 36.2%
Within the Fund's bond component, the corporate weighting increased the most
significantly since the last report (see table below).
BOND ALLOCATIONS(1)
2/28/98 8/31/98
- ------------------------------------------------------------------------------
U.S. Gov't & Agency 11.5% 20.9%
Corporate 6.6 13.1
Mortgage Backed 5.8 7.8
Convertible 1.2 0.8
- ------------------------------------------------------------------------------
Total 25.1% 42.6%
- --------------------------------------------------------------------------------
PAINEWEBBER
BALANCED
FUND
Top 10 Stock Holdings
August 31, 1998(1)
Quaker Oats Co. 1.2%
The Chase Manahattan Corp. 1.1%
Federal Mogul Financing Trust 0.9%
Tyco International Ltd. 0.9%
Cisco Systems, Inc. 0.8%
American General Corp. 0.8%
Schering-Plough Corp. 0.8%
TJX Companies, Inc. 0.8%
American Home Products Corp. 0.8%
Maytag Corp. 0.8%
3
<PAGE>
ANNUAL REPORT
OUTLOOK
- ------------------------------------------------------------------------------
[ARROW] As we enter the next reporting period, key economic indicators are
showing declines -- GDP growth, inflation, corporate profits and long- and
short-term interest rates. The outlook for interest rates now clearly shows a
consensus expectation for easier monetary policy down the road. In addition, the
level of expected earnings-per-share for the S&P 500 over the next four quarters
has fallen. As yet, these declines are not sufficient to warrant a reduction in
our equity allocation.
Looking ahead to the next six months, consumer cyclicals and technology remain
the Fund's largest stock weightings, though both have been reduced. We have
increased the Fund's stock weightings in utilities and foods -- two of the
more defensive categories -- to help preserve value in a turbulent market.
Despite these more defensive allocations, we do not believe a recession is
imminent. Rather, our view is that current economic conditions -- slow growth,
low inflation and low interest rates -- will continue into 1999. It is
difficult to predict what will happen to stock prices given their current
volatility, but we look for slower, steadier growth after the markets
stabilize.
Our ultimate objective in managing your investments is to help you
successfully meet your financial goals. We thank you for your continued
support and welcome any comments or questions you may have.
For a quarterly Fund Profile on PaineWebber Balanced Fund or another fund
in the PaineWebber Family of Funds(2), please contact your investment executive.
Sincerely,
/s/ MARGO ALEXANDER /s/ MARK A. TINCHER
MARGO ALEXANDER MARK A. TINCHER
President, Managing Director and
Mitchell Hutchins Asset Chief Investment Officer--
Management Inc. Equities
Mitchell Hutchins Asset
Management Inc.
/s/ T. KIRKHAM BARNEBY /s/ DENNIS L. McCAULEY
T. KIRKHAM BARNEBY DENNIS L. McCAULEY
Managing Director and Managing Director and
Chief Investment Officer-- Chief Investment Officer--
Quantitative Investments Fixed Income
Mitchell Hutchins Asset Mitchell Hutchins Asset
Management Inc. Management Inc.
/s/ SUSAN P. RYAN
SUSAN P. RYAN
Senior Vice President
Mitchell Hutchins Asset
Management Inc.
2 Mutual Funds are sold by prospectus only. The prospectuses for the funds
contain more complete information regarding risks, charges and expenses,
and should be read carefully before investing.
This letter is intended to assist shareholders in understanding how the
Fund performed during the fiscal year ended August 31, 1998, and reflects
our views at the time of 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.
- --------------------------------------------------------------------------------
PAINEWEBBER
BALANCED FUND
PROFILE
[ARROW] Goal:
High total return with
low volatility
[ARROW] Portfolio Managers:
Kirk Barneby,
Asset Allocator
Dennis McCauley,
Fixed Income Sector
Mark Tincher,
Equity Sector
Susan Ryan,
Money Market Sector
Mitchell Hutchins Asset
Management Inc.
[ARROW] Total Net Assets:
$223.5 million as of
August 31, 1998
[ARROW] Dividend Payments:
Semiannually
4
<PAGE>
PAINEWEBBER BALANCED FUND
PERFORMANCE RESULTS (unaudited)
<TABLE>
<CAPTION>
Net Asset Value Total Return(1)
----------------------------------------- ----------------------------------
12 Months 6 months
08/31/98 02/28/98 08/31/97 Ended 08/31/98 Ended 08/31/98
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $11.27 $12.15 $12.50 4.69% (6.54)%
- --------------------------------------------------------------------------------------------------------------
Class B Shares 11.48 12.39 12.70 3.87 (6.91)
- --------------------------------------------------------------------------------------------------------------
Class C Shares 11.28 12.18 12.52 3.89 (6.90)
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
Performance Summary Class A Shares
Net Asset Value
------------------------ Capital Gains Dividends Total
Period Covered Beginning Ending Distributed Paid Return(1)
- --------------------------------------------------------------------------------------------------------------
<C> <C> <C>
07/01/91-12/31/91 $10.09 $11.02 -- $0.2293 11.53%
- --------------------------------------------------------------------------------------------------------------
1992 11.02 11.24 -- 0.3414 5.18
- --------------------------------------------------------------------------------------------------------------
1993 11.24 11.94 $0.7771 0.2510 15.63
- --------------------------------------------------------------------------------------------------------------
1994 11.94 9.32 1.2011 0.2311 (9.88)
- --------------------------------------------------------------------------------------------------------------
1995 9.32 10.41 0.7468 0.3100 23.13
- --------------------------------------------------------------------------------------------------------------
1996 10.41 10.61 1.0303 0.2516 14.74
- --------------------------------------------------------------------------------------------------------------
1997 10.61 11.38 1.5503 0.2205 24.57
- --------------------------------------------------------------------------------------------------------------
01/01/98-08/31/98 11.38 11.27 -- 0.0935 (0.22)
- --------------------------------------------------------------------------------------------------------------
Totals: $5.3056 $1.9284
- --------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 08/31/98: 114.68%
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
Performance Summary Class B Shares
Net Asset Value
------------------------ Capital Gains Dividends Total
Period Covered Beginning Ending Distributed Paid Return(1)
- --------------------------------------------------------------------------------------------------------------
<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
- --------------------------------------------------------------------------------------------------------------
1997 10.79 11.61 1.5503 0.1213 23.63
- --------------------------------------------------------------------------------------------------------------
01/01/98-08/31/98 11.61 11.48 -- 0.0591 (0.66)
- --------------------------------------------------------------------------------------------------------------
Totals: $5.6050 $3.6071
- --------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 08/31/98: 179.61%
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
Performance Summary Class C Shares
Net Asset Value
------------------------ Capital Gains Dividends Total
Period Covered Beginning Ending Distributed Paid Return(1)
- --------------------------------------------------------------------------------------------------------------
<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
- --------------------------------------------------------------------------------------------------------------
1997 10.65 11.42 1.5503 0.1343 23.61
- --------------------------------------------------------------------------------------------------------------
01/01/98-08/31/98 11.42 11.28 -- 0.0653 (0.71)
- --------------------------------------------------------------------------------------------------------------
Totals: $5.3056 $1.0552
- --------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 08/31/98: 84.33%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Figures assume reinvestment of all dividends and other distributions at net
asset value on the payable dates and do not include sales charges; results
for each class would be lower if sales charges were included.
Note: The Fund offers Class Y shares to a limited group of eligible investors,
including participants in certain investment programs that are sponsored by
PaineWebber and may invest in PaineWebber mutual funds. Since inception, March
26, 1998 through August 31, 1998, Class Y shares had a cumulative total return
of (9.41)%. Class Y shares do not have initial or contingent deferred sales
charges or ongoing distribution and service fees.
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.
5
<PAGE>
PAINEWEBBER BALANCED FUND
PORTFOLIO OF INVESTMENTS AUGUST 31, 1998
Number of
Shares Value
------ -----
COMMON STOCKS--48.32%
Agriculture, Food & Beverage--1.27%
53,600 Quaker Oats Co. .............. $2,847,500
----------
Airlines--1.66%
11,400 Alaska Air Group Inc.* ....... 443,887
24,200 AMR Corp.* ................... 1,318,900
11,600 UAL Corp.* ................... 699,625
21,400 US Airways Group, Inc.* ...... 1,246,550
----------
3,708,962
----------
Apparel, Retail--0.83%
83,000 TJX Companies, Inc. .......... 1,851,937
----------
Apparel, Textiles--0.32%
24,400 Westpoint Stevens Inc.* ...... 722,850
----------
Banks--2.03%
19,900 BankAmerica Corp. ............ 1,274,844
30,600 BB & T Corp. ................. 862,537
45,200 The Chase Manhattan Corp. .... 2,395,600
----------
4,532,981
----------
Computer Hardware--1.90%
23,500 Cisco Systems, Inc.* ......... 1,924,063
49,500 Compaq Computer Corp. ........ 1,382,906
9,500 Dell Computer Corp.* ......... 950,000
----------
4,256,969
----------
Computer Software--1.67%
9,300 BMC Software Inc.* ........... 393,506
47,800 Cadence Design Systems Inc.* . 1,009,775
9,300 Compuware Corp.* ............. 422,569
20,600 Networks Associates Inc.* .... 664,350
16,000 Peoplesoft Inc.* ............. 450,000
38,400 Sterling Software Inc.* ...... 789,600
----------
3,729,800
----------
Construction--0.98%
9,600 Chelsea GCA Realty Inc. ...... 331,200
21,800 Crescent Real Estate
Equities ................... 501,400
20,200 Equity Residential
Properties Trust ........... 806,737
19,500 Lafarge Corp. ................ 556,969
----------
2,196,306
----------
Consumer Durables--1.42%
29,200 Furniture Brands
International Inc.* ........ $ 653,350
13,600 Hon Industries, Inc. ......... 292,400
34,800 Interface, Inc. .............. 426,300
42,000 Maytag Corp. ................. 1,811,250
----------
$3,183,300
----------
Defense/Aerospace--1.53%
22,700 Allied-Signal, Inc. .......... 778,894
13,100 Boeing Co. ................... 405,281
28,700 Cordant Technologies Inc. .... 1,022,438
9,200 Lockheed Martin Corp. ........ 804,425
10,700 Precision Castparts Corp. .... 403,256
----------
3,414,294
----------
Diversified Retail--2.08%
34,300 Dayton Hudson Corp. .......... 1,234,800
20,000 Family Dollar Stores Inc. .... 253,750
29,300 Federated Department
Stores, Inc.* ............. 1,276,381
35,000 Fred Meyer Inc.*(1) .......... 1,375,938
20,300 Proffitts Inc.* .............. 517,650
----------
4,658,519
----------
Drugs & Medicine--3.34%
36,300 American Home Products Corp. . 1,819,537
17,450 Amerisource Health Corp.* .... 821,241
20,100 Biogen Inc.* ................. 929,625
21,700 Schering-Plough Corp. ........ 1,866,200
11,500 Warner Lambert Co. ........... 750,375
28,500 Watson Pharmaceuticals Inc.* . 1,284,281
----------
7,471,259
----------
Electric Utilities--1.20%
16,000 AES Corp.* ................... 436,000
14,300 Consolidated Edison Co. of
New York Inc. .............. 676,569
20,100 Energy East Corp. ............ 904,500
19,200 Utilicorp United Inc. ........ 661,200
----------
2,678,269
----------
Electrical Equipment--0.51%
10,700 Honeywell Inc. ............... 668,750
20,700 SCI Systems Inc.* ............ 474,806
----------
1,143,556
----------
6
<PAGE>
PAINEWEBBER BALANCED FUND
Number of
Shares Value
------ -----
COMMON STOCKS--(continued)
Energy Reserves & Production--0.66%
16,000 Amoco Corp. .................. $ 725,000
10,200 British Petroleum, plc, ADR .. 745,875
----------
1,470,875
----------
Environmental Services--0.34%
17,300 Waste Management Inc. ........ 763,363
----------
Financial Services--2.08%
16,300 American Express Co. ......... 1,271,400
29,100 American General Corp. ....... 1,869,675
13,900 C.I.T. Group Inc.* ........... 357,056
19,800 Morgan Stanley Dean
Witter & Co. ............... 1,149,638
----------
4,647,769
----------
Forest Products, Paper--0.64%
30,900 Fort James Corp. ............. 899,962
9,000 United Stationers Inc.* ...... 533,250
----------
1,433,212
----------
Food Retail--0.27%
15,300 Safeway Inc.* ................ 602,438
----------
Freight, Air, Sea & Land--0.24%
27,700 Airbourne Freight Corp. ...... 540,150
----------
Gas Utility--0.30%
13,350 Columbia Energy Group ........ 664,163
----------
Household Products--0.23%
25,000 Viad Corp. ................... 518,750
----------
Industrial Parts--2.46%
11,000 American Standard Companies
Inc.* ...................... 430,375
20,700 Black & Decker Corp. ......... 861,638
17,000 Crane Co. .................... 684,250
34,500 Ingersoll Rand Co. ........... 1,371,375
18,800 Parker-Hannifin Corp. ........ 545,200
22,100 United Technologies Corp. .... 1,603,631
----------
5,496,469
----------
Industrial Services/Supplies--0.87%
35,100 Tyco International Ltd. ...... 1,948,050
----------
Information & Computer Services--0.24%
17,900 Valassis Communications
Inc.* ...................... 533,644
----------
Life Insurance--1.36%
24,000 Conseco Inc. ................. $ 663,000
27,300 Protective Life Corp. ........ 842,888
32,300 Reliastar Financial Corp. .... 1,267,775
4,300 SunAmerica Inc. .............. 266,331
----------
3,039,994
----------
Long Distance & Phone Companies--2.07%
25,200 Bell Atlantic Corp. .......... 1,111,950
25,000 Bell South Corp. ............. 1,714,062
20,000 GTE Corp. .................... 1,000,000
19,300 WorldCom Inc.* ............... 790,094
----------
4,616,106
----------
Manufacturing--General--0.60%
10,900 LucasVarity plc* ............. 382,862
57,200 Mettler Toledo International
Inc.* ...................... 965,250
----------
1,348,112
----------
Manufacturing--High Technology--0.38%
20,000 Johnson Controls Inc. ........ 856,250
----------
Media--0.04%
2,900 Young & Rubicam Inc.* ........ 88,631
----------
Medical Providers--1.59%
52,200 HEALTHSOUTH Corp.* ........... 988,537
23,000 Lincare Holdings Inc.* ....... 780,563
33,600 Tenet Healthcare Corp.* ...... 867,300
17,000 Wellpoint Health Networks
Inc. ....................... 907,375
----------
3,543,775
----------
Mining & Metals--0.76%
22,100 Martin Marietta Inc. ......... 942,012
53,500 Wyman Gordon Co.* ............ 749,000
----------
1,691,012
----------
Motor Vehicles--1.69%
16,200 Borg Warner Automotive Inc. .. 656,100
33,000 Chrysler Corp. ............... 1,472,625
14,600 Lear Corp.* .................. 592,212
21,000 SPX Corp.(1) ................. 1,044,750
----------
3,765,687
----------
Oil Refining--0.36%
31,200 Coastal Corp. ................ 811,200
----------
7
<PAGE>
PAINEWEBBER BALANCED FUND
Number of
Shares Value
------ -----
COMMON STOCKS--(concluded)
Oil Services--0.43%
9,800 Ensco International Inc. ..... $ 102,900
11,700 EVI Weatherford Inc. ......... 178,425
1,400 Halliburton Co. .............. 37,188
14,500 Schlumberger Ltd. ............ 635,281
----------
953,794
----------
Other Insurance--3.74%
45,800 ACE Ltd. ..................... 1,328,200
32,600 Allstate Corp. ............... 1,222,500
13,900 Ambac Inc. ................... 655,906
13,125 American International Group
Inc. ...................... 1,014,727
5,200 CIGNA Corp. .................. 302,575
19,400 Everest Reinsurance Holdings
Inc. ...................... 679,000
13,700 Exel Ltd. .................... 915,331
13,000 Fremont General Corp. ........ 555,750
8,600 Loews Corp. .................. 725,625
32,550 Old Republic International
Corp. ..................... 726,272
6,555 Orion Capital Corp. .......... 244,174
----------
8,370,060
----------
Publishing--0.70%
19,500 Meredith Corp. ............... 654,469
31,200 New York Times Co., Class A .. 904,800
----------
1,559,269
----------
Railroads--0.31%
23,200 Trinity Industries Inc. ...... 701,800
----------
Securities & Asset Management--0.28%
14,199 Travelers Group Inc. ......... 630,081
----------
Semiconductor--0.76%
43,000 Applied Materials, Inc.* ..... 1,056,187
16,000 Uniphase Corp.* .............. 639,000
----------
1,695,187
----------
Specialty Retail--2.69%
17,100 99 Cents Only Stores ......... $ 600,637
37,000 Claire's Stores Inc. ......... 555,000
43,225 Dollar General Corp.(1) ...... 1,161,672
45,100 Office Depot Inc.*(1) ........ 1,150,050
34,600 Staples, Inc.*(1) ............ 938,525
42,500 Williams Sonoma Inc. ......... 1,083,750
22,500 Zale Corp.* .................. 517,500
----------
6,007,134
----------
Thrift--1.21%
33,475 Ahmanson, H F & Co. .......... 1,784,636
24,000 Dime Bancorp Inc. ............ 456,000
18,400 Greenpoint Financial Corp. ... 463,450
----------
2,704,086
----------
Tobacco--0.28%
15,100 Phillip Morris Companies
Inc. ...................... 627,594
----------
Total Common Stocks
(cost--$103,088,847) .................... 108,025,157
-----------
PREFERRED STOCK--1.58%
Industrial Parts--0.94%
34,000 Federal Mogul Financing
Trust+ .................... 2,095,250
----------
Thrift--0.64%
11,500 Tosco Financing Trust+ ....... 516,063
22,500 TXI Capital Trust I .......... 911,250
----------
1,427,313
----------
Total Preferred Stock (cost--$3,400,000)... 3,522,563
----------
8
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- --------- -------- ------ ----------
<S> <C> <C> <C>
CORPORATE BONDS--13.40%
Broker/Dealer--1.64%
$ 1,100 Lehman Brothers Holdings Inc. ........................ 09/15/03 7.125% $1,144,144
2,500 Merrill Lynch & Company Inc. ......................... 02/12/03 6.000 2,521,400
----------
3,665,544
----------
Cable--1.14%
2,500 TCI Communications Inc. .............................. 05/01/03 6.375 2,541,030
----------
Electronics--1.05%
2,300 Sony Corp. ........................................... 03/04/03 6.125 2,339,866
----------
Financial Services--1.07%
2,400 General Motors Acceptance Corp. ...................... 01/22/03 5.875 2,402,597
----------
Industrial Services/Supplies--1.68%
1,930 Tyco International Group S A ......................... 06/15/01 6.125 1,941,279
1,800 Waste Management Inc. ................................ 07/15/01 6.125 1,814,150
----------
3,755,429
----------
Insurance--2.48%
1,200 American Re Corp. .................................... 12/15/26 7.450 1,341,425
425 Berkley (W.R.) Capital Trust ......................... 12/15/45 8.197 448,759
700 Equitable Life Assurance Society, USA+ ............... 12/01/05 6.950 730,067
1,300 Loews Corp. .......................................... 12/15/06 6.750 1,346,846
1,000 Lumbermans Mutual Casualty Co.+ ...................... 07/01/26 9.150 1,214,616
425 Provident Companies, Inc. ............................ 03/15/38 7.405 441,503
----------
5,523,216
----------
Leisure--0.36%
770 Royal Caribbean Cruises Ltd. ......................... 10/15/27 7.500 814,504
----------
Media--1.09%
2,200 News America Holdings Inc. ........................... 10/17/96 8.250 2,437,387
----------
Oil Services--0.45%
1,000 Occidental Petroleum Corp. ........................... 04/01/03 6.400 1,018,142
----------
Telephone--0.72%
1,600 US West Capital Funding Inc. ......................... 07/15/08 6.375 1,613,024
----------
Tobacco--0.41%
850 Phillip Morris Companies Inc. ........................ 01/15/27 7.750 922,268
----------
Yankee Bonds--1.31%
1,370 ABN Amro Bank ........................................ 12/01/26 7.300 1,409,022
1,495 Canadian Imperial Bank Commerce ...................... 08/01/00 6.200 1,510,951
----------
2,919,973
----------
Total Corporate Bonds (cost--$29,024,435)......................... 29,952,980
----------
</TABLE>
9
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- --------- -------- ------ ----------
<S> <C> <C> <C>
CONVERTIBLE BONDS--0.86%
Medical Providers--0.47%
$ 1,000 Omnicare Inc.+ .................................. 12/01/07 5.000% $1,057,500
----------
Specialty Retail--0.39%
500 Home Depot Inc. ................................. 10/01/01 3.250 869,375
----------
Total Convertible Bonds (cost--$1,500,000) .................. 1,926,875
----------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS--21.39%
1,145 Federal Home Loan Mortgage Corp. ................ 03/18/08 6.220 1,162,735
9,905 Federal National Mortgage Association MTN ....... 07/07/00 to 11/21/07 5.700 to 6.550 9,998,600
2570 International Bank for Reconstruction
& Development ................................ 03/17/03 5.625 2,599,252
11,056 U.S. Treasury Bonds ............................. 02/15/21 7.875 14,473,001
18,036 U.S. Treasury Notes(1)++ ........................ 02/29/00 to 08/15/07 5.500 to 7.875 19,575,771
----------
Total U.S. Government and Agency Obligations
(cost--$46,703,494) ......................................... 47,809,359
----------
MORTGAGE BACKED SECURITIES--8.01%
Collateralized Mortgage Obligation--2.34%
645 Amresco Commercial Mortgage
Funding I Corp., Series 1997-C1, Class A1 ....... 06/17/29 6.730 667,480
4 CS First Boston Mortgage
Securities Corp., Series 1995-WF1, Class A1 ..... 12/21/27 6.452 4,134
383 CS First Boston Mortgage
Securities Corp., Series 1997-2, Class A+ ....... 06/01/20 7.500 396,532
398 DLJ Mortgage Acceptance Corp.,
Series 1997-CF1, Class A1A+ ..................... 05/15/06 7.440 428,592
401 FDIC REMIC, Series 1994-C1, Class 2A2 ........... 09/25/25 7.850 405,709
385 FDIC REMIC, Series 1996-C1, Class 1A ............ 05/25/26 6.750 394,771
553 FNMA, Series 1996-M4, Class A ................... 03/17/17 7.750 572,116
313 FNMA REMIC, Series 1996-M6, Class E ............. 09/17/19 7.750 324,274
563 GMAC Commercial Mortgage Security,
Series 1996-C1, Class A2A ...................... 09/01/98 6.790 580,868
590 Merrill Lynch Mortgage Investments Inc.,
Series 1996-C1, Class A1 ........................ 04/25/28 7.150 613,862
239 Morgan Stanley Capital I Inc.,
Series 1997-C1, Class A1A ....................... 02/15/20 6.850 241,719
586 Morgan Stanley Capital I Inc.,
Series 1997-WF1, Class A1+ ...................... 10/15/06 6.830 610,525
----------
Total Collateralized Mortgage Obligation
(cost--$5,081,829) .......................................... 5,240,582
----------
</TABLE>
10
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- --------- -------- ------ ----------
<S> <C> <C> <C>
MORTGAGED BACKED SECURITIES--(concluded)
Federal National Mortgage Association--4.10%
$ 1,319 FNMA ............................................. 01/01/26 to 02/01/26 7.500% $1,354,866
7,795 FNMA TBA ......................................... TBA 6.500 7,819,359
------------
Total Federal National Mortgage Association
(cost--$9,120,000) ........................................... 9,174,225
------------
Government National Mortgage Association--1.57%
3,281 GNMA (cost--$3,458,442) .......................... 11/15/17 8.500 3,500,242
------------
Total Mortgage Backed Securities (cost--$17,660,271) ......... 17,915,049
------------
<CAPTION>
Number of Expiration
Contracts Dates
--------- ----------
OPTIONS--0.02%
<S> <C> <C>
50 U.S. Treasury Bond Futures Calls, 130
strike price* ................................. 11/21/98 53,125
25 U.S. Treasury Bond Futures Puts, 116
strike price* ................................. 11/21/98 1,172
------------
Total Options (cost--$23,888) ................................ 54,297
------------
<CAPTION>
Principal
Amount Maturity
(000) Dates
- --------- --------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS--8.92%
$ 9,929 Repurchase Agreement dated 8/31/98 with
Dresdner Kleinwort Benson NA LLC,
collateralized by $7,621,000 U.S. Treasury
Bonds, 10.75% due 08/15/05
(value--$10,128,309); proceeds: $9,930,578
(cost--$9,929,000) ............................ 09/01/98 5.72 9,929,000
10,000 Repurchase Agreement dated 8/31/98 with Salomon
Smith Barney Inc., collateralized by $9,736,000
U.S. Treasury Notes, 6.625% due 7/31/01
(value--$10,205,080); proceeds: $10,001,583
(cost--$10,000,000) ........................... 09/01/98 5.70 10,000,000
------------
Total Repurchase Agreements (cost--$19,929,000) .............. 19,929,000
------------
Total Investments (cost--$221,329,935)--102.50% .............. 229,135,280
------------
Liabilities in excess of other assets--(2.50)% ............... (5,591,874)
------------
Net Assets--100.00% .......................................... $223,543,406
============
<CAPTION>
Number of Expiration Unrealized
Contracts Strike Price Date (Depreciation)
--------- ------------ ---- --------------
<S> <C> <C> <C>
WRITTEN OPTIONS
50 U.S. Treasury Bond Futures Calls ............... 132 December 1998 $ (17,487)
============
</TABLE>
- --------
* 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
++ Security, or portion thereof, was pledged as collateral for written
options transactions
ADR American Depository Receipt
MTN Medium Term Note
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, 1998
See accompanying notes to financial statements
11
<PAGE>
PAINEWEBBER BALANCED FUND
STATEMENT OF ASSETS AND LIABILITIES AUGUST 31, 1998
<TABLE>
<S> <C>
Assets
Investments in securities, at value (cost--$221,329,935) ....................................... $229,135,280
Investment of cash collateral for securities loaned (cost--$14,144,000) ........................ 14,144,000
Cash ........................................................................................... 55,483
Receivable for investments sold ................................................................ 1,414,536
Dividends and interest receivable .............................................................. 1,102,257
Receivable for fund shares sold ................................................................ 358,621
Other assets ................................................................................... 24,147
------------
Total assets ................................................................................... 246,234,324
------------
Liabilities
Collateral for securities loaned ............................................................... 14,144,000
Payable for investments purchased .............................................................. 7,876,571
Payable for fund shares repurchased ............................................................ 200,849
Payable to affiliate ........................................................................... 233,591
Written options, at value (premium received--$12,982) .......................................... 30,469
Accrued expenses and other liabilities ......................................................... 205,438
------------
Total liabilities .............................................................................. 22,690,918
------------
Net Assets
Capital Stock--$0.001 par value ................................................................ 187,574,393
Undistributed net investment income ............................................................ 1,143,945
Accumulated net realized gains from investment transactions .................................... 27,037,210
Net unrealized appreciation of investments and options ......................................... 7,787,858
------------
Net assets ..................................................................................... $223,543,406
============
Class A:
Net assets ..................................................................................... $182,362,380
------------
Shares outstanding ............................................................................. 16,179,292
------------
Net asset value and redemption value per share ................................................. $11.27
======
Maximum offering price per share (net asset value plus sales
charge of 4.50% of offering price) ........................................................... $11.80
======
Class B:
Net assets ..................................................................................... $26,424,907
------------
Shares outstanding ............................................................................. 2,302,478
------------
Net asset value and offering price per share ................................................... $11.48
======
Class C:
Net assets ..................................................................................... $14,581,262
------------
Shares outstanding ............................................................................. 1,292,530
------------
Net asset value and offering price per share ................................................... $11.28
======
Class Y:
Net assets ..................................................................................... $ 174,857
------------
Shares outstanding ............................................................................. 15,517
------------
Net asset value and offering price per share ................................................... $11.27
======
</TABLE>
See accompanying notes to financial statements
12
<PAGE>
PAINEWEBBER BALANCED FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 1998
<TABLE>
<S> <C>
Investment income:
Interest ........................................................................................ $5,509,232
Dividends ....................................................................................... 1,640,686
-----------
................................................................................................ 7,149,918
-----------
Expenses:
Investment advisory and administration .......................................................... 1,709,264
Service fees--Class A ........................................................................... 480,384
Service and distribution fees--Class B .......................................................... 244,383
Service and distribution fees--Class C .......................................................... 112,695
Transfer agency and service ..................................................................... 160,083
Custody and accounting .......................................................................... 138,882
Legal and audit ................................................................................. 97,554
State registration .............................................................................. 79,900
Reports and notices to shareholders ............................................................. 77,500
Directors fees and expenses ..................................................................... 13,500
Other expenses .................................................................................. 32,181
-----------
3,146,326
-----------
Net investment income ........................................................................... 4,003,592
-----------
Realized and unrealized gains (losses) from investment activities:
Net realized gains from:
Investment transactions ....................................................................... 33,195,644
Options and futures transactions .............................................................. 49,831
Net change in unrealized appreciation/depreciation of:
Investments ................................................................................... (29,063,888)
Options ....................................................................................... (17,487)
-----------
Net realized and unrealized gains from investment activities .................................... 4,164,100
-----------
Net increase in net assets resulting from operations ............................................ $8,167,692
===========
</TABLE>
See accompanying notes to financial statements
13
<PAGE>
PAINEWEBBER BALANCED FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Years Ended August 31,
------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
From operations:
Net investment income ............................................................... $ 4,003,592 $ 3,699,369
Net realized gains from investment, option and futures transactions ................. 33,245,475 20,411,884
Net change in unrealized appreciation/depreciation of investments and options ....... (29,081,375) 27,967,582
------------ ------------
Net increase in net assets resulting from operations ................................ 8,167,692 52,078,835
------------ ------------
Dividends and distributions to shareholders from:
Net investment income--Class A ...................................................... (3,302,099) (3,518,807)
Net investment income--Class B ...................................................... (237,412) (292,933)
Net investment income--Class C ...................................................... (126,665) (111,333)
Net investment income--Class Y ...................................................... (803) --
Net realized gains from investment transactions--Class A ............................ (21,634,316) (7,951,554)
Net realized gains from investment transactions--Class B ............................ (2,516,998) (1,065,949)
Net realized gains from investment transactions--Class C ............................ (1,124,576) (367,562)
------------ ------------
Total dividends and distributions to shareholders ................................... (28,942,869) (13,308,138)
------------ ------------
From capital stock transactions:
Net proceeds from sale of shares .................................................... 44,392,815 6,471,174
Cost of shares repurchased .......................................................... (34,290,423) (36,403,282)
Proceeds from dividends reinvested .................................................. 26,308,838 12,258,447
------------ ------------
Net increase (decrease) in net assets from capital stock transactions ............... 36,411,230 (17,673,661)
------------ ------------
Net increase in net assets .......................................................... 15,636,053 21,097,036
Net assets:
Beginning of year ................................................................... 207,907,353 186,810,317
------------ ------------
End of year (including undistributed net investment income
of $1,143,945 and $823,995, respectively) ......................................... $223,543,406 $207,907,353
============ ============
</TABLE>
See accompanying notes to financial statements
14
<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 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.
The Fund offers Class A, Class B, Class C and Class Yshares. 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 service and/or distribution plan.
The preparation of financial statements in accordance with generally
accepted accounting principles requires Fund management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. The following is
a summary of significant accounting policies:
Valuation of Investments--Securities which are listed on stock exchanges
are valued at the last sale price on the day the securities are being valued
or, lacking any sales on such day, at the last available bid price. In cases
where securities are traded on more than one exchange, the securities are
valued on the exchange designated by Mitchell Hutchins Asset Management Inc.
("Mitchell Hutchins"), a wholly owned 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, securites 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.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Investment Transactions and Investment Income--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. 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.
Futures Contracts--Upon entering into a financial futures contract, the
Fund is required to pledge to a broker an amount of cash and/or U.S.
Government securities equal to a certain percentage of the contract amount.
This amount is known as the "initial margin." Subsequent payments, known as
"variation margin," are made or received by the Fund each day, depending on
the daily fluctuations in the value of the underlying financial futures
contracts. Such variation margin is recorded for financial statement purposes
on a daily basis as unrealized gain or loss until the financial futures
contract is closed, at which time the net gain or loss is reclassified to
realized.
Using financial futures contracts involves various market risks. The
maximum amount at risk from the purchase of a futures contract is the contract
value. The Fund primarily uses financial futures contracts for hedging or to
manage the average duration of the Fund's portfolio. However, imperfect
correlations between futures contracts and the portfolio securities being
hedged, or market disruptions, do not normally permit full control of these
risks at all times.
Option Writing--When the Fund writes a call or a put option, an amount
equal to the premium received by the Fund is included in the Fund's Statement
of Assets and Liabilities as an asset and as an equivalent liability. The
amount of the liability is subsequently marked-to-market to reflect the
current market value of the option written. If an option which the Fund has
written either expires on its stipulated expiration date or the Fund enters
into a closing purchase transaction, the Fund realizes a gain (or loss if the
cost of a closing purchase transaction exceeds the premium received when the
option was written) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is extinguished.
If a call option which the Fund has written is exercised, the Fund realizes a
capital gain or loss (long-term or short-term, depending on the holding period
of the underlying security) from the sale of the underlying security and the
proceeds from the sale are increased by the premium originally received. If a
put option which a Fund has written is exercised, the amount of the premium
originally received reduces the cost of the security which the Fund purchases
upon exercise of the option.
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.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
WRITTEN OPTION ACTIVITY
Transactions in options written for the year ended August 31, 1998 were as
follows:
<TABLE>
<CAPTION>
Number of
Options Premiums
------- --------
<S> <C> <C>
Options outstanding at August 31, 1997 ............................... 0 $ 0
Options written ...................................................... 765 $ 261,425
Options terminated in closing purchase transactions .................. (520) $(102,358)
Options expired ...................................................... (195) $(146,085)
--- ---------
Options outstanding at August 31, 1998 ............................... 50 $ 12,982
=== =========
</TABLE>
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, 1998, the Fund owed Mitchell Hutchins $152,951 in investment
advisory and administration fees.
For the year ended August 31, 1998, the Fund paid $1,038 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 Class A, Class B
and Class C shares, the Fund pays Mitchell Hutchins monthly service fees at an
annual rate of 0.25% of the average daily net assets of Class A, Class B and
Class C shares and monthly distribution fees at the annual rate of 0.75% 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, 1998, the Fund owed
Mitchell Hutchins $78,425 in service and distribution fees.
Mitchell Hutchins also receives the proceeds of the initial sales charges
paid by shareholders upon the purchase of Class A shares and the contingent
deferred sales charges paid by shareholders upon certain redemptions of Class
A, Class B and Class C shares. Mitchell Hutchins has informed the Fund that
for the year ended August 31, 1998, it received $399,026 in sales charges.
SECURITY LENDING
The Fund may lend securities up to 331/3% of its total assets to qualified
institutions. The loans are secured at all times by cash or U.S. government
securities in an amount at least equal to the market value of the securities
loaned, plus accrued
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
interest and dividends, 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 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, who received $28,144 as
compensation from the Fund for the year ended August 31, 1998. At August 31,
1998, the Fund owed PaineWebber $2,215 in security lending fees.
At August 31, 1998, the Fund's custodian held cash having an aggregate
value of $14,144,000 as collateral for portfolio securities loaned having a
market value of $13,551,917 which was invested as follows:
Number of
Shares/Par Value
---------- ------------
3,898,045 Liquid Assets Portfolio ............................ $ 3,898,045
745 Prime Portfolio .................................... 745
245,210 TempFund Portfolio ................................. 245,210
$10,000,000 Repurchase Agreement with SG Cowen Securities
Corp dated 08/31/98, 5.75% due 09/01/98
(collateralized by $6,211,000 U.S. Treasury
Bonds, 11.25% due 02/15/15, value $10,201,568) .... 10,000,000
-----------
Total Investments of Cash Collateral for
Securities Loaned (cost -- $14,144,000) ............ $14,144,000
===========
BANK LINE OF CREDIT
The Fund may participate with other funds managed by Mitchell Hutchins in a
$200 million committed credit facility ("Facility") to be utilized for
temporary financing until settlement of sales or purchases of portfolio
securities, the repurchase or redemption of shares of the fund at the request
of the shareholders and other temporary or emergency purposes. In connection
therewith, the Fund has agreed to pay a commitment fee, pro rata, based on the
relative asset size of the funds in the Facility. Interest is charged to the
fund at rates based on prevailing market rates in effect at the time of
borrowings. For the year ended August 31, 1998, the Fund did not borrow under
the Facility.
TRANSFER AGENCY RELATED SERVICE FEES
PaineWebber provides certain transfer agency related services to the Fund
pursuant to a delegation of authority from PFPC, Inc., the Fund's transfer
agent, and is compensated for these services by PFPC, Inc., not the Fund. For
the year ended August 31, 1998, PaineWebber received approximately 58% of the
total service fees collected by PFPC, Inc.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at August 31,
1998 was substantially the same as the cost of securities for financial
statement purposes.
At August 31, 1998, the components of net unrealized appreciation of
investments were as follows:
<TABLE>
<S> <C>
Gross appreciation (investments having an excess of value over cost) $ 18,403,936
Gross depreciation (investments having an excess of cost over value) (10,598,591)
------------
Net unrealized appreciation of investments $ 7,805,345
============
</TABLE>
For the year ended August 31, 1998, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $416,579,718 and
$408,688,316, respectively.
18
<PAGE>
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, 1998, undistributed net investment
income was decreased by $16,663, accumulated net realized gains from investment
transactions were increased by $17,953 and capital stock was decreased by
$1,290.
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>
For the Year Ended Class A Class B Class C Class Y
August 31, 1998: ------------------------- -------------------------- -------------------------- ----------------------
Shares Amount Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold .............. 1,263,207 $15,579,179 1,298,840 $16,390,056 980,331 $12,228,828 15,473 $194,752
Shares repurchased ....... (1,907,300) (23,733,561) (354,528) (4,507,312) (486,939) (6,049,297) (21) (253)
Dividends reinvested ..... 2,052,585 22,750,251 215,129 2,429,905 101,409 1,127,879 65 803
Shares converted from
Class B to Class A ..... 661,504 8,252,506 (650,161) (8,252,506) -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- --------- ---------
Net increase ............. 2,069,996 $22,848,375 509,280 $6,060,143 594,801 $7,307,410 15,517 $195,302
=========== =========== =========== =========== =========== =========== ========= =========
<CAPTION>
For the Year Ended
August 31, 1997: Class A Class B Class C
------------------------- -------------------------- --------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
<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 to Class 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
=========== =========== =========== =========== =========== ===========
</TABLE>
19
<PAGE>
This Page Intentionally Left Blank.
20
<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
Six For the
For the Years Months Year For the Years Ended
Ended August 31, Ended Ended February 28,
----------------------- August 31, February 29, -------------------
1998 1997 1996 (2) 1996 1995 1994
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period .............. $ 12.50 $ 10.27 $ 10.85 $ 9.80 $ 12.04 $ 11.54
-------- -------- -------- -------- -------- -------
Net investment income ............................. 0.23++ 0.23++ 0.12 ++ 0.27 ++ 0.26 0.22
Net realized and unrealized gains (losses) from
investments, futures and options ................ 0.31++ 2.79++ (0.12)++ 1.84 ++ (1.07) 1.31
-------- -------- -------- -------- -------- -------
Net increase (decrease) from investment
operations ...................................... 0.54 3.02 0.00 2.11 (0.81) 1.53
-------- -------- -------- -------- -------- -------
Dividends from net investment income .............. (0.22) (0.24) (0.10) (0.31) (0.23) (0.25)
Distributions from net realized gains from
investment transactions ......................... (1.55) (0.55) (0.48) (0.75) (1.20) (0.78)
-------- -------- -------- -------- -------- -------
Total dividends and distributions to shareholders . (1.77) (0.79) (0.58) (1.06) (1.43) (1.03)
-------- -------- -------- -------- -------- -------
Net asset value, end of period .................... $ 11.27 $ 12.50 $ 10.27 $ 10.85 $ 9.80 $ 12.04
======== ======== ======== ======== ======== =======
Total investment return (1) ....................... 4.69% 30.67% 0.03% 22.08% (6.02)% 13.57%
======== ======== ======== ======== ======== =======
Ratios/supplemental data:
Net assets, end of period (000's) ................. $182,362 $176,403 $157,525 $171,609 $174,761 $216,492
Expenses to average net assets .................... 1.26% 1.46% 1.34%* 1.29% 1.26% 1.21%
Net investment income to average net assets ....... 1.88% 2.02% 2.19%* 2.55% 2.41% 1.74%
Portfolio turnover rate ........................... 190% 188% 103% 188% 107% 69%
</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) Fiscal year changed to August 31.
21
<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
Six For the
For the Years Months Year For the Years Ended
Ended August 31, Ended Ended February 28,
----------------------- August 31, February 29, -------------------
1998 1997 1996 (2) 1996 1995 1994
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period .............. $ 12.70 $ 10.42 $ 11.00 $ 9.90 $ 12.10 $ 11.56
-------- -------- -------- -------- -------- -------
Net investment income ............................. 0.14++ 0.14 ++ 0.08 ++ 0.19 ++ 0.44 0.26
Net realized and unrealized gains (losses) from
investments, futures and options ................ 0.31++ 2.84 ++ (0.11)++ 1.86 ++ (1.32) 1.18
-------- -------- -------- -------- -------- -------
Net increase (decrease) from investment
operations ...................................... 0.45 2.98 (0.03) 2.05 (0.88) 1.44
-------- -------- -------- -------- -------- -------
Dividends from net investment income .............. (0.12) (0.15) (0.07) (0.20) (0.12) (0.12)
Distributions from net realized gains from
investment transactions ......................... (1.55) (0.55) (0.48) (0.75) (1.20) (0.78)
-------- -------- -------- -------- -------- -------
Total dividends and distributions to shareholders . (1.67) (0.70) (0.55) (0.95) (1.32) (0.90)
-------- -------- -------- -------- -------- -------
Net asset value, end of period .................... $ 11.48 $ 12.70 $ 10.42 $ 11.00 $ 9.90 $ 12.10
======== ======== ======== ======== ======== =======
Total investment return (1) ....................... 3.87% 29.70% (0.30)% 21.20% (6.68)% 12.62%
======== ======== ======== ======== ======== =======
Ratios/supplemental data:
Net assets, end of period (000's) ................. $ 26,425 $ 22,768 $ 22,307 $ 26,627 $ 37,104 $ 83,178
Expenses to average net assets .................... 2.03% 2.22% 2.09%* 2.05% 1.98% 2.05%
Net investment income to average net assets ....... 1.13% 1.27% 1.43%* 1.81% 1.60% 1.00%
Portfolio turnover rate ........................... 190% 188% 103% 188% 107% 69%
</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) Fiscal year changed to August 31.
22
<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 Class Y
------------------------------------------------------------------ ----------
For the
For the Period
Six For the For the March 26,
For the Years Months Year Years Ended 1998+
Ended August 31, Ended Ended February 28, through
-------------------- August 31, February ------------------- August 31,
1998 1997 1996 (2) 29, 1996 1995 1994 1998
-------- -------- ---------- -------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ............ $ 12.52 $ 10.29 $ 10.88 $ 9.82 $ 12.03 $ 11.54 $ 12.55
-------- -------- -------- -------- -------- ------- -------
Net investment income ........................... 0.14++ 0.14++ 0.08++ 0.19++ 0.19 0.14 0.11++
Net realized and unrealized gains (losses)
from investments, futures and options ......... 0.31++ 2.80++ (0.12)++ 1.84++ (1.07) 1.30 (1.28)++
-------- -------- -------- -------- -------- ------- -------
Net increase (decrease) from investment
operations .................................... 0.45 2.94 (0.04) 2.03 (0.88) 1.44 (1.17)
-------- -------- -------- -------- -------- ------- -------
Dividends from net investment income ............ (0.14) (0.16) (0.07) (0.22) (0.13) (0.17) (0.11)
Distributions from net realized gains from
investment transactions ....................... (1.55) (0.55) (0.48) (0.75) (1.20) (0.78) --
-------- -------- -------- -------- -------- ------- -------
Total dividends and distributions to
shareholders .................................. (1.69) (0.71) (0.55) (0.97) (1.33) (0.95) (0.11)
-------- -------- -------- -------- -------- ------- -------
Net asset value, end of period .................. $ 11.28 $ 12.52 $ 10.29 $ 10.88 $ 9.82 $ 12.03 $ 11.27
======== ======== ======== ======== ======== ======= =======
Total investment return (1) ..................... 3.89% 29.70% (0.38)% 21.12% (6.69)% 12.75% (9.41)%
======== ======== ======== ======== ======== ======= =======
Ratios/supplemental data:
Net assets, end of period (000's) ............... $ 14,581 $ 8,736 $ 6,979 $ 7,469 $ 8,525 $12,916 $ 175
Expenses to average net assets .................. 2.00% 2.21% 2.09%* 2.08% 2.01% 1.96% 0.89%*
Net investment income to average net assets ..... 1.18% 1.27% 1.44%* 1.77% 1.62% 0.97% 2.48%*
Portfolio turnover rate ......................... 190% 188% 103% 188% 107% 69% 190%
</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) Fiscal year changed to August 31.
23
<PAGE>
PAINEWEBBER BALANCED FUND
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of
PaineWebber Balanced Fund
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 (the "Fund") at August 31, 1998, 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 August 31, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
October 26, 1998
24
<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, 1998), as to the federal tax status of distributions received by
shareholders during such fiscal year. Accordingly, we are advising you that
the distributions paid during the fiscal year by the Fund were taxable and are
derived from the following sources:
<TABLE>
<CAPTION>
Per Share Data: Class A Class B Class C Class Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net investment income* ................................................... $0.2214 $0.1248 $0.1405 $0.1092
Short-term capital gains* ................................................ 0.5276 0.5276 0.5276 -
Long-term capital gains** ................................................ 1.0227 1.0227 1.0227 -
Percentage of ordinary income dividends qualifying for the dividends
received deduction available to corporate shareholders ................ 12.38% 12.38% 12.38% 12.38%
</TABLE>
- ----------
* Taxable as ordinary income
** The amount of long-term capital gains distributions taxed at a 28% rate is
$0.6034 per share
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 year 1998. 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 1999. Shareholders are
advised to consult their own tax advisers with respect to the tax consequences
of their investment in the Fund.
25
<PAGE>
This Page Intentionally Left Blank.
26
<PAGE>
- --------------------------------------------------------------------------------
BOARD OF 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,
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 conjunction 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
corresponding firm. Read the prospectus carefully before investing.
<PAGE>
- -----
PaineWebber offers a family of 27 funds which encompass a diversified range of
investment goals.
BOND FUNDS
o High Income Fund
o Investment Grade Income Fund
o Low Duration U.S. Government Income Fund
o Strategic Income Fund
o U.S. Government Income Fund
TAX-FREE BOND FUNDS
o California Tax-Free Income Fund
o Municipal High Income Fund
o National Tax-Free Income Fund
o New York Tax-Free Income Fund
STOCK FUNDS
o Financial Services Growth Fund
o Growth Fund
o Growth and Income Fund
o Mid Cap Fund
o Small Cap Fund
o S&P 500 Index Fund
o Tax-Managed Equity Fund
o Utility Income Fund
ASSET ALLOCATION FUNDS
o Balanced Fund
o Tactical Allocation Fund
GLOBAL FUNDS
o Asia Pacific Growth Fund
o Emerging Markets Equity Fund
o Global Equity Fund
o Global Income Fund
MITCHELL HUTCHINS PORTFOLIOS
o Aggressive Portfolio
o Moderate Portfolio
o Conservative Portfolio
PAINEWEBBER MONEY MARKET FUND
PaineWebber
(Copyright) PaineWebber Incorporated
Member SIPC
PaineWebber
BALANCED
FUND
ANNUAL REPORT
AUGUST 31, 1998