<PAGE>
[LOGO]PaineWebber
==========================================================================
BALANCED
FUND
ANNUAL REPORT
AUGUST 31, 2000
<PAGE>
PAINEWEBBER BALANCED FUND ANNUAL REPORT
PERFORMANCE AT A GLANCE
================================================================================
Comparison of the change of a $10,000 investment in PaineWebber Balanced Fund
(Class B), the S&P 500 Index, the Lehman Brothers Intermediate-Term
Government/Corporate Bond Index, and the 90-Day U.S. Treasury Bill Index from
August 31, 1990 through August 31, 2000.
[The following table was depicted as a line chart in the printed material.]
Lehman Brothers
PaineWebber S&P 500 Intermediate-Term 90-Day U.S.
Balanced Fund (B) Index Government Bond Index T-Bill
8/31/90 10,000.00 10,000.00 10,000.00 10,000.00
9/30/90 9,843.90 9,097.00 9,959.00 10,062.00
10/31/90 9,895.90 8,654.89 10,035.68 10,123.38
11/30/90 10,208.10 8,618.54 10,152.10 10,184.12
12/31/90 10,407.60 9,174.43 10,306.41 10,244.20
1/31/91 10,678.60 9,429.48 10,447.61 10,301.57
2/28/91 11,068.90 9,838.72 10,553.13 10,355.14
3/31/91 11,177.30 10,541.20 10,637.55 10,405.88
4/30/91 11,188.10 10,796.30 10,709.89 10,456.87
5/31/91 11,383.30 10,822.21 10,826.63 10,506.02
6/30/91 11,111.60 11,287.57 10,892.67 10,553.29
7/31/91 11,331.80 10,770.60 10,900.29 10,601.84
8/31/91 11,563.10 11,272.51 11,021.29 10,650.61
9/30/91 11,441.90 11,538.54 11,231.79 10,697.47
10/31/91 11,464.00 11,345.84 11,424.98 10,743.47
11/30/91 11,287.80 11,497.88 11,555.23 10,788.59
12/31/91 12,335.30 11,035.66 11,688.11 10,829.59
1/31/92 12,212.10 12,295.94 11,973.30 10,866.41
2/29/92 12,312.90 12,067.23 11,864.34 10,901.18
3/31/92 12,055.20 12,222.90 11,910.61 10,936.07
4/30/92 12,234.50 11,985.78 11,864.16 10,973.25
5/31/92 12,346.50 12,336.96 11,968.57 11,007.27
6/30/92 12,156.90 12,397.41 12,154.08 11,040.29
7/31/92 12,597.90 12,212.69 12,333.96 11,073.41
8/31/92 12,439.60 12,710.97 12,579.41 11,103.31
9/30/92 12,620.50 12,451.66 12,705.20 11,132.17
10/31/92 12,609.20 12,598.59 12,877.99 11,158.89
11/30/92 12,790.20 12,641.43 12,710.58 11,185.67
12/31/92 12,840.70 13,071.24 12,666.09 11,214.76
1/31/93 13,024.00 13,232.01 12,832.02 11,245.04
2/28/93 13,230.30 13,343.16 13,082.24 11,273.15
3/31/93 13,402.30 13,524.63 13,288.94 11,300.20
4/30/93 13,046.90 13,810.00 13,342.10 11,328.45
5/31/93 13,218.90 13,475.80 13,448.83 11,355.64
6/30/93 13,551.40 13,835.60 13,419.25 11,384.03
7/31/93 13,690.40 13,875.72 13,629.93 11,413.63
8/31/93 14,037.90 13,820.22 13,662.64 11,442.16
9/30/93 14,107.40 14,344.01 13,879.88 11,470.77
10/31/93 14,397.00 14,233.56 13,938.17 11,499.45
11/30/93 14,362.20 14,528.19 13,975.80 11,528.20
12/31/93 14,900.60 14,390.17 13,897.54 11,558.17
1/31/94 15,362.30 14,564.29 13,961.47 11,587.06
2/28/94 15,025.40 15,059.48 14,116.44 11,616.03
3/31/94 14,189.30 14,651.37 13,907.52 11,647.39
4/30/94 13,877.30 14,014.03 13,678.04 11,681.17
5/31/94 13,702.60 14,193.41 13,585.03 11,717.38
6/30/94 13,369.20 14,424.77 13,594.54 11,757.22
7/31/94 13,670.90 14,071.36 13,595.90 11,797.20
8/31/94 14,090.80 14,532.90 13,791.68 11,839.67
9/30/94 13,736.50 15,127.30 13,834.44 11,883.47
10/31/94 13,605.30 14,758.19 13,707.16 11,928.63
11/30/94 13,342.90 15,088.77 13,705.79 11,977.54
12/31/94 13,428.60 14,539.54 13,644.11 12,030.24
1/31/95 13,760.00 14,754.73 13,691.87 12,086.78
2/28/95 14,120.30 15,136.87 13,923.26 12,144.80
3/31/95 14,350.80 15,725.70 14,211.47 12,203.09
4/30/95 14,624.50 16,189.61 14,292.48 12,261.67
5/31/95 15,042.40 16,665.58 14,468.27 12,319.30
6/30/95 15,419.70 17,330.54 14,905.22 12,377.20
7/31/95 15,782.70 17,732.61 15,005.08 12,434.13
8/31/95 15,913.40 18,319.56 15,006.58 12,490.09
9/30/95 16,029.50 18,365.36 15,143.14 12,546.29
10/31/95 16,102.10 19,140.37 15,252.17 12,601.50
11/30/95 16,508.70 19,071.47 15,421.47 12,656.94
12/31/95 16,534.50 19,906.80 15,623.49 12,713.90
1/31/96 17,058.70 20,291.00 15,787.54 12,768.57
2/29/96 17,233.40 20,980.89 15,923.31 12,822.20
3/31/96 17,106.30 21,176.02 15,737.01 12,873.49
4/30/96 17,265.20 21,379.31 15,656.75 12,926.27
5/31/96 17,392.20 21,693.58 15,601.95 12,979.27
6/30/96 17,372.70 22,251.11 15,589.47 13,033.78
7/31/96 16,852.30 22,335.66 15,754.72 13,088.52
8/31/96 17,238.40 21,348.42 15,801.98 13,144.80
9/30/96 17,809.10 21,798.88 15,814.62 13,200.01
10/31/96 18,295.90 23,023.97 16,034.45 13,255.45
11/30/96 19,135.10 23,659.43 16,318.26 13,309.80
12/31/96 18,972.30 25,445.72 16,533.66 13,365.70
1/31/97 19,580.20 24,941.90 16,427.84 13,420.50
2/28/97 19,526.60 26,498.27 16,491.91 13,476.86
3/31/97 19,097.40 26,707.61 16,523.25 13,533.47
4/30/97 19,651.80 25,612.60 16,409.24 13,591.66
5/31/97 20,617.40 27,139.11 16,601.22 13,650.10
6/30/97 21,354.20 28,797.31 16,739.01 13,707.43
7/31/97 23,012.00 30,078.79 16,891.34 13,763.63
8/31/97 22,525.50 32,470.05 17,234.23 13,821.44
9/30/97 23,678.80 30,651.73 17,148.06 13,880.87
10/31/97 23,102.10 32,328.38 17,346.98 13,937.79
11/30/97 23,246.30 31,248.61 17,539.53 13,994.93
12/31/97 23,633.00 32,695.42 17,578.12 14,056.51
1/31/98 23,840.70 33,257.78 17,718.74 14,116.95
2/28/98 25,232.10 33,623.61 17,950.86 14,176.24
3/31/98 26,042.00 36,047.88 17,936.50 14,235.78
4/30/98 26,249.70 37,893.53 17,993.89 14,295.57
5/31/98 26,000.50 38,280.04 18,083.86 14,354.18
6/30/98 26,511.00 37,621.63 18,215.88 14,414.47
7/31/98 25,967.00 39,149.06 18,332.46 14,475.01
8/31/98 23,581.60 38,734.08 18,396.62 14,534.36
9/30/98 24,376.80 33,137.01 18,685.45 14,593.95
10/31/98 25,506.70 35,261.09 19,154.45 14,649.41
11/30/98 26,573.80 38,124.29 19,135.30 14,697.75
12/31/98 28,111.80 40,434.62 19,133.39 14,752.13
1/31/99 28,135.20 42,763.66 19,209.92 14,806.72
2/28/99 27,104.40 44,551.18 19,315.57 14,860.02
3/31/99 27,268.40 43,165.64 19,031.63 14,915.00
4/30/99 27,549.50 44,892.26 19,174.37 14,970.19
5/31/99 27,338.70 46,629.59 19,233.81 15,024.08
6/30/99 28,062.30 45,529.13 19,085.71 15,079.67
7/31/99 27,778.90 48,056.00 19,099.07 15,136.97
8/31/99 27,400.90 46,556.65 19,081.88 15,194.49
9/30/99 26,952.10 46,323.87 19,097.15 15,253.75
10/31/99 27,589.90 45,054.60 19,274.75 15,313.24
11/30/99 27,755.20 47,906.55 19,324.87 15,374.49
12/31/99 28,792.00 48,879.06 19,348.06 15,439.07
1/31/00 27,540.20 51,753.14 19,284.21 15,505.46
2/29/00 27,696.70 49,155.14 19,212.86 15,573.68
3/31/00 29,339.70 48,226.10 19,370.40 15,645.32
4/30/00 28,635.50 52,942.62 19,571.85 15,718.85
5/31/00 28,035.70 51,349.05 19,526.84 15,792.73
6/30/00 28,219.60 50,296.39 19,558.08 15,868.53
7/31/00 28,140.70 51,533.68 19,902.30 15,943.12
8/31/00 29,666.00 50,729.76 20,053.56 16,024.43
The graph depicts the performance of PaineWebber Balanced Fund (Class B) versus
the S&P 500 Index, the Lehman Brothers Intermediate-Term Government/ Corporate
Bond Index, and the 90-Day U.S. Treasury Bill Index. It is important to note
PaineWebber Balanced Fund is a professionally managed mutual fund while the
Index is not available for investment and is unmanaged. The comparison is shown
for illustrative purposes only.
Past performance is no guarantee 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.
<TABLE>
<CAPTION>
---------------------------------------------------
AVERAGE ANNUAL % TOTAL RETURN, PERIOD ENDED 8/31/00
------------------------------------------------------------------------------------------------------
6 Months 1 Year 5 Years 10 Years Inception(0)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A* 7.11% 8.27% 13.27% N/A 11.43%
Before Deducting Class B** 6.70 7.44 12.44 11.49% 9.65
Maximum Sales Charge Class C+ 6.71 7.46 12.43 N/A 10.64
Class Y++ 7.11 8.54 N/A N/A 5.70
------------------------------------------------------------------------------------------------------
Class A* 2.29 3.37 12.22 N/A 10.87
After Deducting Class B** 1.70 2.56 12.19 11.49 9.65
Maximum Sales Charge Class C+ 5.71 6.49 12.43 N/A 10.64
------------------------------------------------------------------------------------------------------
S&P 500 Index 11.72 16.31 24.03 19.47 17.38
------------------------------------------------------------------------------------------------------
Lehman Brothers Intermediate-Term 4.76 6.27 6.04 7.38 7.37
Gov't/Corporate Bond Index
------------------------------------------------------------------------------------------------------
90-Day U.S. T-Bill Index 2.96 5.62 5.13 4.82 5.46
------------------------------------------------------------------------------------------------------
Lipper Balanced Funds Median 8.59 12.00 13.35 12.72 9.20
</TABLE>
Past performance is no guarantee of future performance. The investment return
and 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. Six-month and one-year returns are cumulative.
(0) Inception: since commencement of issuance on July 1, 1991 for Class A,
December 12, 1986 for Class B, July 2, 1992 for Class C shares and March
26, 1998 for Class Y shares. Index and Lipper Median inception returns are
as of oldest share class inception.
* 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.
++ 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 that may invest in PaineWebber mutual funds, as well as
the trustee of the PaineWebber 401(k) Plus Plan. Class Y shares do not
bear initial or contingent deferred sales charges or ongoing 12b-1
distribution and service fees.
1
<PAGE>
ANNUAL REPORT
PAINEWEBBER
BALANCED FUND
Investment Goal:
High total return with
low volatility
Portfolio Managers:
Kirk Barneby and
Joe Baggett,*
Asset Allocators
Kirk Barneby* and
Frank Vallario,*
Stock Sector
Heidi Kirmaier,*
Bond Sector
Susan Ryan,
Money Market Sector
Mitchell Hutchins
Asset Management
Inc.
Commencement:
July 1, 1991 (Class A);
December 12, 1986
(Class B); July 2, 1992
(Class C); March 26,
1998 (Class Y)
Dividend Payments:
Semiannually
* Effective October 10, 2000.
October 16, 2000
Dear Shareholder,
We are pleased to present you with the annual report for PaineWebber Balanced
Fund (the "Fund") for the fiscal year ended August 31, 2000.
MARKET REVIEW
================================================================================
There was a great deal of volatility in the capital markets during the year, in
part because of the ongoing tug of war between interest rate expectations and
the outlook for corporate profits. Technology stocks led the equity markets
during the first half of the fiscal year. By spring the air came out of the
dot-com balloon due to valuation concerns. An ever-smaller number of stocks
accounted for most of the market's gains, while day-to-day price fluctuations
became more volatile. Daily price swings of one or two percent of value became
the norm in the latter part of the period.
The NASDAQ Composite Index, buffeted by shifting values among dot-com
enterprises, nonetheless ended the fiscal year up 53.55%. The Dow Jones
Industrial Average (the "Dow") was up 5.17% and the S&P 500 Index was up 16.31%.
Despite ongoing turbulence in the markets, all three indexes rebounded from
negative returns in the first half of the fiscal year.
OUTLOOK
================================================================================
Interest rate hikes in the U.S. may have finally cooled the economy as we now
forecast growth (real domestic gross product) to slow to 3.5% for the year. With
lower growth, inflation fears should also be eased, although another bump in
gasoline prices or the tight labor market could accelerate inflation concerns
again. The Federal Reserve Board may also not be finished raising the Fed Fund
rate, but we believe any hike in the near term may end the upward trend for a
while.
2
<PAGE>
PAINEWEBBER BALANCED FUND ANNUAL REPORT
PORTFOLIO REVIEW
================================================================================
PORTFOLIO HIGHLIGHTS
Due to consideration of value as part of the investment style, in a year when
investors concentrated on momentum-oriented stocks, the Fund underperformed its
benchmarks and its Lipper median for the fiscal year. In addition, our search
for value led us to somewhat smaller capitalization stocks, which lagged during
the period as market leadership came from the very largest stocks.
We continue to underweight many of the traditionally defensive stocks, including
consumer staples and electric utilities, due to concern about near-term interest
rates and their effect on earnings. Financials have been underweighted as well,
but we believe that the financial sector may represent an opportunity if, as
expected, the Federal Reserve Board is near the end of its interest-rate
tightening cycle. We are looking toward the energy, technology and healthcare
sectors to provide strong earnings relative to the market.
The Fund's performance standard over time is a portfolio that is allocated 60%
to stocks, 35% to bonds and 5% to cash. The Fund began the year with 59.2% in
equities and ended the year, after minor fluctuations, at its "neutral"
weighting of 60% in equities. The bond allocation started the fiscal year at
35.1% and ended at 32.1%. Cash equivalents, meanwhile, started at 13.0% and,
after fluctuating somewhat throughout the year, ended at 13.1%. Future
allocation shifts will be driven, as always, by the results obtained from
running the Fund's model - see "How the Fund Works," below.
HOW THE FUND WORKS
The Fund employs a disciplined, model-based approach to calculate the expected
returns for U.S. stocks, U.S. bonds and short-term securities (cash
equivalents). Based on fundamental valuation techniques as well as an assessment
of key economic variables such as interest rates, economic growth and inflation,
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 (U.S. Treasury bills). Fund assets are allocated according to
the model, with a minimum of 25% of net assets in bonds or cash at all times.
Assets are shifted between asset classes once a month, based on the calculations
produced when the model is run on the first business day following release of
the Federal government's monthly employment data.
NEW PORTFOLIO MANAGERS AND PROPOSED MERGER
================================================================================
On October 6, 2000, the board of trustees unanimously approved the merger of the
Balanced Fund into the PaineWebber Tactical Allocation Fund. The proposed merger
will be submitted to shareholders at meetings expected to be held in February
2001. If approved by the PaineWebber fund's shareholders, the merger is expected
to become effective in February or March 2001.
More information about the proposed merger as well as portfolio management and
investment strategy changes is set out in the October 10, 2000 supplement to the
prospectus dated December 10, 1999 and additional information will be provided
to shareholders in proxy solicitation materials that are expected to be mailed
in December 2000.
3
<PAGE>
ANNUAL FUND
<TABLE>
<CAPTION>
Characteristics* 8/31/00 2/29/00
---------------------------------------------------------------------------------------
<S> <C> <C>
Net Assets ($mm) $233.9 $216.2
Number of Securities 136 147
Dividend Yield 1.1% 2.99%
Stocks 60.1% 59.3%
Bonds 32.1% 35.0%
Cash & Equivalents 13.1% 12.0%
Liabilities in Excess of Other Assets -5.3% -6.3%
---------------------------------------------------------------------------------------
<CAPTION>
Top Five Equity Sectors* 8/31/00 2/29/00
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial Services 14.6% Technology 18.0%
Technology 12.9 Consumer Cyclicals 11.4
Utilities 9.9 Financial Services 8.8
Energy 8.1 Healthcare 5.2
Capital Goods 7.0 Utilities 5.0
---------------------------------------------------------------------------------------
Total 52.5 Total 48.4
<CAPTION>
Top Ten Equity Holdings* 8/31/00 2/29/00
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cisco Systems 3.7% Cisco Systems 3.7%
Citigroup 3.5 JDS Uniphase 3.2
Boeing 2.9 Citigroup 2.3
WorldCom 2.1 WorldCom 2.2
Morgan Stanley Dean Witter 2.1 Applied Materials 2.0
United Technologies 1.7 Boeing 1.8
Tosco 1.6 Chase Manhattan 1.6
Chase Manhattan 1.6 Tosco 1.5
JDS Uniphase 1.5 Morgan Stanley Dean Witter 1.4
El Paso Energy 1.3 United Technologies 1.4
---------------------------------------------------------------------------------------
Total 22.0 Total 21.1
</TABLE>
* Weightings represent percentages of portfolio assets as of the dates
indicated. The Fund's portfolio is actively managed and its composition
will vary over time.
4
<PAGE>
PAINEWEBBER BALANCED FUND ANNUAL REPORT
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 Review on Paine Webber
Balanced Fund or another fund in the Paine Webber Family of Funds(1), please
contact your Financial Advisor.
Sincerely,
/s/ Margo Alexander
MARGO ALEXANDER
Chairman
Mitchell Hutchins Asset Management Inc.
/s/ T. Kirkham Barneby
T. KIRKHAM BARNEBY
Managing Director and
Chief Investment Officer -
Quantitative Investments
Mitchell Hutchins Asset Management Inc.
/s/ Brian M. Storms
BRIAN M. STORMS
Chief Executive Officer and President
Mitchell Hutchins Asset Management Inc.
/s/ Susan P. Ryan
SUSAN P. RYAN
Senior Vice President
Mitchell Hutchins Asset Management Inc.
(1) 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, 2000 and reflects
our views at the time of its writing. Of course, these views may change in
response to changing circumstances. We encourage you to consult your
Financial Advisor regarding your personal investment program.
5
<PAGE>
PAINEWEBBER BALANCED FUND ANNUAL REPORT
PERFORMANCE RESULTS (unaudited)
<TABLE>
<CAPTION>
Net Asset Value Total Return(1)
----------------------------------------------- ---------------------------------------
12 Months 6 months
08/31/00 02/29/00 08/31/99 Ended 08/31/00 Ended 08/31/00
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $11.28 $10.62 $11.60 8.27% 7.11%
---------------------------------------------------------------------------------------------------------------------------------
Class B Shares 11.56 10.88 11.84 7.44 6.70
---------------------------------------------------------------------------------------------------------------------------------
Class C Shares 11.29 10.63 11.60 7.46 6.71
---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Performance Summary Class A Shares
Net Asset Value
--------------------------- Capital Gains Dividends Total
Period Covered Beginning Ending Distributed Paid Return(1)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/01/91-12/31/91 $10.09 $11.02 -- $0.2293 11.53%
---------------------------------------------------------------------------------------------------------------------------------
1992 11.02 11.24 -- 0.3414 5.18
---------------------------------------------------------------------------------------------------------------------------------
1993 11.24 11.94 $0.7771 0.2510 15.63
---------------------------------------------------------------------------------------------------------------------------------
1994 11.94 9.32 1.2011 0.2311 (9.88)
---------------------------------------------------------------------------------------------------------------------------------
1995 9.32 10.41 0.7468 0.3100 23.13
---------------------------------------------------------------------------------------------------------------------------------
1996 10.41 10.61 1.0303 0.2516 14.74
---------------------------------------------------------------------------------------------------------------------------------
1997 10.61 11.38 1.5503 0.2205 24.57
---------------------------------------------------------------------------------------------------------------------------------
1998 11.38 12.00 1.2252 0.2196 18.95
---------------------------------------------------------------------------------------------------------------------------------
1999 12.00 11.04 0.9723 0.2366 2.42
---------------------------------------------------------------------------------------------------------------------------------
01/01/00-08/31/00 11.04 11.28 -- 0.0905 3.04
---------------------------------------------------------------------------------------------------------------------------------
Totals: $7.5031 $2.3816
---------------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 08/31/00: 170.06%
---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Performance Summary Class B Shares
Net Asset Value
--------------------------- Capital Gains Dividends Total
Period Covered Beginning Ending Distributed Paid Return(1)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/12/86-12/31/86 $10.00 $ 9.76 -- -- (2.40)%
---------------------------------------------------------------------------------------------------------------------------------
1987 9.76 9.27 $0.1687 $0.4407 1.21
---------------------------------------------------------------------------------------------------------------------------------
1988 9.27 9.79 -- 0.5225 11.34
---------------------------------------------------------------------------------------------------------------------------------
1989 9.79 10.03 0.1286 0.6768 10.84
---------------------------------------------------------------------------------------------------------------------------------
1990 10.03 9.60 0.0021 0.6200 1.95
---------------------------------------------------------------------------------------------------------------------------------
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
---------------------------------------------------------------------------------------------------------------------------------
1998 11.61 12.26 1.2252 0.1331 18.02
---------------------------------------------------------------------------------------------------------------------------------
1999 12.26 11.32 0.9723 0.1349 1.66
---------------------------------------------------------------------------------------------------------------------------------
01/01/00-08/31/00 11.32 11.56 -- 0.0467 2.55
---------------------------------------------------------------------------------------------------------------------------------
Totals: $7.8025 $3.8627
---------------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 08/31/00: 254.25%
---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Performance Summary Class C Shares
Net Asset Value
--------------------------- Capital Gains Dividends Total
Period Covered Beginning Ending Distributed Paid Return(1)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
07/02/92-12/31/92 $10.86 $11.25 -- $0.1619 5.08%
---------------------------------------------------------------------------------------------------------------------------------
1993 11.25 11.94 $0.7771 0.1728 14.79
---------------------------------------------------------------------------------------------------------------------------------
1994 11.94 9.35 1.2011 0.1313 (10.48)
---------------------------------------------------------------------------------------------------------------------------------
1995 9.35 10.45 0.7468 0.2188 22.15
---------------------------------------------------------------------------------------------------------------------------------
1996 10.45 10.65 1.0303 0.1708 13.86
---------------------------------------------------------------------------------------------------------------------------------
1997 10.65 11.42 1.5503 0.1343 23.61
---------------------------------------------------------------------------------------------------------------------------------
1998 11.42 12.02 1.2252 0.1496 18.04
---------------------------------------------------------------------------------------------------------------------------------
1999 12.02 11.07 0.9723 0.1506 1.76
---------------------------------------------------------------------------------------------------------------------------------
01/01/00-08/31/00 11.07 11.29 -- 0.0506 2.47
---------------------------------------------------------------------------------------------------------------------------------
Totals: $7.5031 $1.3407
---------------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return as of 08/31/00: 128.47%
---------------------------------------------------------------------------------------------------------------------------------
</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. For the year ended
August 31, 2000 and since inception, March 26, 1998 through August 31, 2000,
Class Y shares had a total return of 8.54% and 14.48%, respectively. 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.
6
<PAGE>
PAINEWEBBER BALANCED FUND
PORTFOLIO OF INVESTMENTS AUGUST 31, 2000
Number of
Shares Value
--------- ----------
COMMON STOCKS -- 60.09%
Airlines -- 1.03%
28,500 AMR Corp.* ......................................... $ 935,156
29,700 Delta Air Lines, Inc. .............................. 1,470,150
-----------
2,405,306
-----------
Banks -- 2.39%
67,800 Chase Manhattan Corp. .............................. 3,788,325
42,400 FleetBoston Financial Corp. ........................ 1,809,950
-----------
5,598,275
-----------
Chemicals -- 0.54%
48,600 Dow Chemical Co. ................................... 1,272,713
-----------
Computer Hardware -- 4.22%
127,400 Cisco Systems, Inc.* ............................... 8,742,825
25,700 Dell Computer Corp.* ............................... 1,121,162
-----------
9,863,987
-----------
Computer Software -- 2.08%
20,581 International Business Machines Corp. .............. 2,716,692
30,700 Microsoft Corp.* ................................... 2,143,244
-----------
4,859,936
-----------
Defense & Aerospace -- 3.47%
127,863 Boeing Co. ......................................... 6,856,653
12,200 Honeywell International Inc. ....................... 470,463
17,200 TRW Inc. ........................................... 785,825
-----------
8,112,941
-----------
Diversified Retail -- 1.56%
43,600 Federated Department Stores, Inc.* ................. 1,204,450
105,200 Target Corp. ....................................... 2,445,900
-----------
3,650,350
-----------
Drugs & Medicine -- 2.50%
40,800 American Home Products Corp. ....................... 2,210,850
32,450 Pfizer, Inc. ....................................... 1,403,463
55,402 Schering-Plough Corp. .............................. 2,223,005
-----------
5,837,318
-----------
Electric Utilities -- 3.37%
30,000 Calpine Corp. ...................................... 2,970,000
20,000 Constellation Energy Group, Inc.(1) ................ 765,000
26,200 Duke Energy Corp. .................................. 1,960,087
75,200 Energy East Corp.(1) ............................... 1,706,100
10,000 PECO Energy Co. .................................... 481,875
-----------
7,883,062
-----------
Electrical Equipment -- 2.22%
11,900 Johnson Controls Inc.(1) ........................... 635,906
10,000 Level 3 Communications Inc.* ....................... 872,344
65,175 Motorola, Inc. ..................................... 2,350,373
25,939 Qwest Communications International Inc.* ........... 1,339,101
-----------
5,197,724
-----------
Electrical Power -- 0.39%
13,800 Emerson Electric Co. ............................... 913,388
-----------
Energy Reserves & Production -- 5.63%
30,458 Chevron Corp. ...................................... 2,573,701
37,028 Exxon Mobil Corp. .................................. 3,022,411
22,400 Phillips Petroleum Co. ............................. 1,386,000
38,700 Royal Dutch Petroleum Co., ADR ..................... 2,367,956
125,200 Tosco Corp. ........................................ 3,818,600
-----------
13,168,668
-----------
Financial Services -- 5.03%
138,553 CitiGroup, Inc. .................................... 8,088,051
28,900 Federal Home Loan Mortgage Corp. ................... 1,217,412
32,500 MBNA Corp. ......................................... 1,147,656
11,300 Providian Financial Corp. .......................... 1,298,794
-----------
11,751,913
-----------
Forest Products, Paper -- 0.91%
16,300 International Paper Co. ............................ 519,562
34,700 Weyerhaeuser Co. ................................... 1,607,044
-----------
2,126,606
-----------
Gas Utility -- 1.32%
53,145 El Paso Energy Corp.(1) ............................ 3,095,696
-----------
Industrial Parts -- 2.43%
19,000 Ingersoll Rand Co. ................................. 865,688
20,200 Mettler-Toledo International Inc., ADR* ............ 955,712
62,000 United Technologies Corp. .......................... 3,871,125
-----------
5,692,525
-----------
Industrial Services & Supplies -- 0.96%
39,508 Tyco International Ltd., ADR ....................... 2,251,956
-----------
Information & Computer Services -- 0.49%
19,345 America Online Inc.* ............................... 1,134,101
-----------
Long Distance & Phone Companies -- 0.76%
22,000 BellSouth Corp. .................................... 820,875
23,160 SBC Communications, Inc. ........................... 966,930
-----------
1,787,805
-----------
Media -- 0.62%
15,300 Comcast Corp., Class A* ............................ 569,925
20,000 Univision Communications Inc.*(1) .................. 882,500
-----------
1,452,425
-----------
7
<PAGE>
PAINEWEBBER BALANCED FUND
Number of
Shares Value
--------- ----------
COMMON STOCKS -- (concluded)
Medical Products -- 0.66%
18,400 Baxter International, Inc. ......................... $ 1,531,800
-----------
Metals and Mining -- 0.72%
50,636 Alcoa, Inc. ........................................ 1,683,647
-----------
Motor Vehicles -- 0.29%
13,200 Borg Warner Automotive, Inc. ....................... 453,750
13,367 Delphi Automotive Systems Corp. .................... 219,720
-----------
673,470
-----------
Oil Refining -- 1.02%
22,300 Conoco, Inc., Class B .............................. 582,588
40,000 Dynegy Inc. ........................................ 1,800,000
-----------
2,382,588
-----------
Oil Services -- 1.40%
45,969 Halliburton Co. .................................... 2,436,357
14,000 Transocean Sedco Forex, Inc. ....................... 836,500
-----------
3,272,857
-----------
Other Insurance -- 1.03%
37,300 AMBAC Financial Group Inc. ......................... 2,410,512
-----------
Publishing -- 1.24%
40,100 Knight Ridder, Inc. ................................ 2,190,462
17,800 New York Times Co., Class A ........................ 697,538
-----------
2,888,000
-----------
Securities & Asset Management -- 3.01%
43,045 AXA Financial Inc. ................................. 2,227,579
44,700 Morgan Stanley Dean Witter & Co. ................... 4,808,044
-----------
7,035,623
-----------
Semiconductor -- 4.88%
35,800 Applied Materials, Inc.* ........................... 3,089,987
32,600 Intel Corp. ........................................ 2,440,925
28,100 JDS Uniphase Corp.* ................................ 3,498,011
35,700 Texas Instruments, Inc. ............................ 2,389,669
-----------
11,418,592
-----------
Specialty Retail -- 0.93%
24,300 Circuit City Stores, Inc. .......................... 630,281
32,348 Home Depot, Inc. ................................... 1,554,726
-----------
2,185,007
-----------
Wireless Telecommunications -- 2.99%
48,200 Verizon Communications ............................. 2,102,725
133,776 Worldcom Inc. ...................................... 4,882,824
-----------
6,985,549
-----------
Total Common Stocks (cost -- $109,092,082) ........................ 140,524,340
-----------
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
------------ -------- -------- -----------
<S> <C> <C> <C>
CORPORATE BONDS -- 13.59%
Airlines -- 0.75%
$ 1,315 Continental Airlines Inc.++++ 05/01/10 7.918% $ 1,348,270
390 Northwest Airlines++++ ....... 10/01/19 8.072 403,018
-----------
1,751,288
-----------
Banks -- 1.04%
785 Bank One Corp. ............... 08/01/10 7.875 789,813
1,700 Providian National Bank ...... 02/01/04 6.650 1,642,967
-----------
2,432,780
-----------
Cable -- 0.60%
1,350 Tele-Communications Inc. ..... 05/01/03 to 03/31/27 6.375 to 9.650 1,396,800
-----------
Financial Services -- 1.77%
705 CIT Group Inc. ............... 03/15/03 7.375 705,732
1,615 Ford Motor Credit Co. ........ 01/14/03 to 01/12/09 5.800 to 6.000 1,553,729
1,850 Heller Financial Inc. ........ 06/15/05 8.000 1,874,675
-----------
4,134,136
-----------
</TABLE>
8
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
------------ -------- -------- -----------
<S> <C> <C> <C>
CORPORATE BONDS -- (concluded)
Forest Products, Paper -- 0.13%
$ 300 Abitibi Consolidated Inc. 08/01/05 8.300% $ 304,727
-----------
Media -- 0.92%
1,030 News America Holdings Inc. ........................ 12/01/95 to 10/17/96 7.900 to 8.250 942,843
1,180 Time Warner Inc. .................................. 06/15/05 7.750 1,200,950
-----------
2,143,793
Other Insurance -- 1.66%
1,325 American Re Corp. ................................. 12/15/26 7.450 1,282,595
700 Hartford Financial Services Group Inc. ............ 11/01/08 6.375 652,190
800 Loews Corp. ....................................... 12/15/06 6.750 748,597
1,350 Lumbermen's Mutual Casualty Co. ................... 07/01/26 9.150 1,211,846
-----------
3,895,228
-----------
Real Estate -- 0.16%
375 EOP Operating LP .................................. 03/15/06 8.375 383,180
-----------
Securities & Asset Management -- 2.09%
1,315 FMR Corp. ......................................... 06/15/29 7.570 1,274,431
1,350 Lehman Brothers Holdings Inc. ..................... 04/01/04 6.625 1,312,845
2,335 Morgan Stanley Dean Witter & Co. .................. 01/20/04 to 06/15/05 5.625 to 7.750 2,299,173
-----------
4,886,449
-----------
Telecommunications -- 1.34%
2,345 US West Capital Funding Inc. ...................... 07/15/08 6.375 2,136,602
970 Worldcom Inc. ..................................... 05/15/06 8.000 993,660
-----------
3,130,262
-----------
Tobacco -- 0.56%
1,400 Philip Morris Companies Inc. ...................... 07/01/08 to 01/15/27 7.650 to 7.750 1,321,533
-----------
Yankee -- 2.57%
693 Abbey National Capital ............................ 06/30/30++ 8.963 697,295
2,000 Household International Netherlands BV ............ 12/01/03 6.200 1,920,700
675 HSBC Capital Funding .............................. 06/30/30++ 10.176 744,884
1,400 Imperial Tobacco Overseas BV ...................... 04/01/09 7.125 1,255,608
385 Republic of Trinidad & Tobago ..................... 10/01/09 9.875 401,362
1,000 Sony Corp. ........................................ 03/04/03 6.125 981,052
-----------
6,000,901
-----------
Total Corporate Bonds (cost -- $33,006,496) 31,781,077
-----------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 10.11%
45 Federal Home Loan Mortgage Corporation ............ 03/18/08 6.220 42,548
5,450 Federal National Mortgage Association ............. 08/15/04 to 01/15/09 5.250 to 6.500 5,000,278
2,570 International Bank for Reconstruction & Development 03/17/03 5.625 2,505,588
9,150 U.S. Treasury Bonds ............................... 08/15/13 to 02/15/29 5.250 to 12.000 11,868,039
3,894 U.S. Treasury Inflation Index Notes ............... 07/15/02 3.625 3,879,179
348 U.S. Treasury Notes ............................... 05/15/08 5.625 341,149
-----------
Total U.S. Government and Agency Obligations (cost -- $24,085,469) 23,636,781
-----------
</TABLE>
9
<PAGE>
PAINEWEBBER BALANCED FUND
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
------------ -------- -------- ------------
<S> <C> <C> <C>
MORTGAGE BACKED SECURITIES -- 8.38%
Collateralized Mortgage Obligation -- 1.36%
$ 194 CS First Boston Mortgage Securities Corp., Series 1997-2,
Class A + ................................................. 06/01/20 7.500% $ 192,886
138 FDIC REMIC Trust, Series 1996-C1, Class 1A ................ 05/25/26 6.750 137,210
1,400 LB Commercial Conduit Mortgage Trust, Series 1998-C4,
Class A1-B ................................................ 10/15/08 6.210 1,310,988
25 Morgan Stanley Capital I Inc., Series 1997-C1, Class A1-A . 02/15/20 6.850 24,709
456 Morgan Stanley Capital I Inc., Series 1997-WF1, Class A1+ . 10/15/06 6.830 452,672
1,050 Standard Credit Card Master Trust I, Series 1994-4, Class A 11/07/03 8.250 1,066,548
------------
3,185,013
------------
Federal Home Loan Mortgage Corporation -- 1.21%
1,780 FHLMC TBA ................................................. TBA 6.500 1,701,013
1,139 FHLMC TBA ................................................. TBA 7.000 1,110,880
------------
2,811,893
------------
Federal National Mortgage Association -- 5.01%
502 FNMA ...................................................... 09/01/28 6.500 480,336
698 FNMA ...................................................... 01/01/26 to 02/01/26 7.500 696,681
7,475 FNMA TBA .................................................. TBA 6.000 6,944,739
995 FNMA TBA .................................................. TBA 6.500 949,915
2,720 FNMA 15 YR TBA ............................................ TBA 6.500 2,649,448
------------
11,721,119
------------
Government National Mortgage Association -- 0.80%
1,819 GNMA ...................................................... 11/15/17 8.500 1,874,952
------------
Total Mortgage Backed Securities (cost -- $19,710,710) ................... 19,592,977
------------
SHORT TERM GOVERNMENT AGENCY OBLIGATIONS -- 10.67%
25,000 Federal Home Loan Mortgage Discount Notes+++
(cost -- $24,968,792) ..................................... 09/08/00 6.420@ 24,968,792
------------
REPURCHASE AGREEMENT -- 2.48%
5,812 Repurchase Agreement dated 08/31/00 with SG Cowen & Co.,
collateralized by $6,192,000 U.S. Treasury Notes,
4.25% due 11/15/03 (value -- $5,928,840); proceeds:
$5,813,066 (cost -- $5,812,000) ........................ 09/01/00 6.600 5,812,000
------------
Total Investments (cost -- $216,675,549) -- 105.32% ...................... 246,315,967
Liabilities in excess of other assets -- (5.32)% ......................... (12,452,358)
------------
Net Assets -- 100.00% .................................................... $233,863,609
============
</TABLE>
----------
* Non-Income producing security.
+ Security exempt from registration under 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
++ Maturity date shown is the callable date for perpetual rewriting
securities.
+++ Entire or partial amount pledged as collateral for futures transactions.
@ Interest rate shown is the discount rate at date of purchase.
++++ Enhanced equipment trust certificates.
ADR American Depositary Receipt.
TBA To Be Assigned - Securities are purchased on a forward commitment with an
approximated principal amount (generally +/-1.0%) and no defined 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 a portion thereof, was on loan at August 31, 2000.
See accompanying notes to financial statements
10
<PAGE>
PAINEWEBBER BALANCED FUND
FUTURES CONTRACTS
<TABLE>
<CAPTION>
Unrealized
Number of In Expiration Appreciation
Contracts Exchange For Dates (Depreciation)
--------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
64 Contracts to receive--S&P 500 Index ......................... $23,732,250 Sept 2000 $ 606,951
150 Contracts to deliver--U.S. 5 Year Treasury Notes ............ 14,966,016 Dec 2000 (43,359)
18 Contracts to deliver--U.S. 10 Year Treasury Notes ........... 1,805,063 Dec 2000 3,656
71 Contracts to receive--U.S. 30 Year Treasury Bond ............ 7,077,258 Dec 2000 53,805
----------
$ 621,053
==========
</TABLE>
See accompanying notes to financial statements
11
<PAGE>
PAINEWEBBER BALANCED FUND
STATEMENT OF ASSETS AND LIABILITIES AUGUST 31, 2000
Assets
Investments in securities, at value (cost -- $216,675,549) ...... $246,315,967
Investment of cash collateral for securities loaned
(cost -- $6,206,400) ............................................ 6,206,400
Cash ............................................................ 247
Receivable for investments sold ................................. 473,187
Receivable for fund shares sold ................................. 6,546
Dividends and interest receivable ............................... 1,025,105
Receivable for variation margin ................................. 268,507
Other assets .................................................... 61,799
------------
Total assets .................................................... 254,357,758
------------
Liabilities
Payable for investments purchased ............................... 13,311,670
Collateral for securities loaned ................................ 6,206,400
Payable for fund shares repurchased ............................. 436,915
Payable to affiliates ........................................... 222,750
Accrued expenses and other liabilities .......................... 316,414
------------
Total liabilities ............................................... 20,494,149
------------
Net Assets
Capital Stock -- $0.001 par value ............................... 190,899,125
Undistributed net investment income ............................. 120,853
Accumulated net realized gains from investment transactions ..... 12,582,160
Net unrealized appreciation of investments ...................... 30,261,471
------------
Net assets ...................................................... $233,863,609
============
Class A:
Net assets ...................................................... $190,695,147
------------
Shares outstanding .............................................. 16,907,474
------------
Net asset value and redemption value per share .................. $11.28
======
Maximum offering price per share (net asset value plus sales
charge of 4.50% of offering price) .............................. $11.81
======
Class B:
Net assets ...................................................... $ 22,196,530
------------
Shares outstanding .............................................. 1,920,921
------------
Net asset value and offering price per share .................... $11.56
======
Class C:
Net assets ...................................................... $ 20,370,584
------------
Shares outstanding .............................................. 1,803,986
------------
Net asset value and offering price per share .................... $11.29
======
Class Y:
Net assets ...................................................... $ 601,348
------------
Shares outstanding .............................................. 53,346
------------
Net asset value and offering price per share .................... $11.27
======
See accompanying notes to financial statements
12
<PAGE>
PAINEWEBBER BALANCED FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 2000
<TABLE>
<S> <C>
Investment income:
Interest ......................................................... $ 6,063,154
Dividends ........................................................ 1,364,849
------------
7,428,003
------------
Expenses:
Investment advisory and administration ........................... 1,697,170
Service fees--Class A ............................................ 461,035
Service and distribution fees--Class B ........................... 233,944
Service and distribution fees--Class C ........................... 179,819
Transfer agency and service ...................................... 185,762
Custody and accounting ........................................... 139,343
Legal and audit .................................................. 108,123
Reports and notices to shareholders .............................. 75,631
State registration ............................................... 50,125
Directors fees and expenses ...................................... 13,500
Other expenses ................................................... 1,389
------------
3,145,841
Less: Fee waivers and reimbursements from investment advisor ..... (5,078)
------------
Net expenses ..................................................... 3,140,763
------------
Net investment income ............................................ 4,287,240
------------
Realized and unrealized gains (losses) from investment activities:
Net realized gains (losses) from:
Investment transactions ........................................ 14,200,581
Futures transactions ........................................... (1,467,089)
Net change in unrealized appreciation of:
Investments .................................................... 543,140
Futures ........................................................ 621,053
------------
Net realized and unrealized gains from investment activities ..... 13,897,685
------------
Net increase in net assets resulting from operations ............. $ 18,184,925
============
</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,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
From operations:
Net investment income ....................................................................... $ 4,287,240 $ 4,184,069
Net realized gains from investment, option and futures transactions ......................... 12,733,492 18,273,326
Net change in unrealized appreciation/depreciation of investments, options and futures ...... 1,164,193 13,576,016
------------- -------------
Net increase in net assets resulting from operations ........................................ 18,184,925 36,033,411
-------------
Dividends and distributions to shareholders from:
Net investment income--Class A .............................................................. (3,654,201) (3,728,464)
Net investment income--Class B .............................................................. (244,929) (327,440)
Net investment income--Class C .............................................................. (211,878) (237,032)
Net investment income--Class Y .............................................................. (10,463) (7,148)
Net realized gains from investment transactions--Class A .................................... (15,640,408) (19,640,106)
Net realized gains from investment transactions--Class B .................................... (2,099,141) (2,933,076)
Net realized gains from investment transactions--Class C .................................... (1,613,410) (1,816,995)
Net realized gains from investment transactions--Class Y .................................... (37,624) (24,554)
------------- -------------
Total dividends and distributions to shareholders ........................................... (23,512,054) (28,714,815)
------------- -------------
From capital stock transactions:
Net proceeds from sale of shares ............................................................ 15,220,070 36,103,042
Shares issued in connection with the reorganization involving PaineWebber Utility Income Fund 26,705,372 --
Cost of shares repurchased .................................................................. (70,044,941) (47,257,223)
Proceeds from dividends reinvested .......................................................... 21,494,472 26,107,944
------------- -------------
Net increase (decrease) in net assets from capital stock transactions ....................... (6,625,027) 14,953,763
------------- -------------
Net increase (decrease) in net assets ....................................................... (11,952,156) 22,272,359
Net assets:
Beginning of year ........................................................................... 245,815,765 223,543,406
------------- -------------
End of year (including undistributed net investment income
of $1,171,918 and $1,006,149, respectively) ............................................... $ 233,863,609 $ 245,815,765
============= =============
</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 currently offers Class A, Class B, Class C and Class Y shares.
Each class represents interests in the same assets of the Fund, and the classes
are identical except for differences in their sales charge structures, ongoing
service and distribution charges and 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--The Fund calculates net asset value based on the
current market value for its portfolio securities. The Fund normally obtains
market values for its securities from independent pricing sources. Independent
pricing sources may use reported last sale prices, current market quotations or
valuations from computerized "matrix" systems that derive values based on
comparable securities. Securities traded in the over-the-counter ("OTC") market
and listed on the Nasdaq Stock Market, Inc. ("Nasdaq") normally are valued at
the last sale price on Nasdaq prior to valuation. Other OTC securities are
valued at the last bid price available prior to valuation. Securities which are
listed on U.S. and foreign stock exchanges normally are valued at the last sale
price on the day the securities are 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 as the
primary market by Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"),
the investment adviser and administrator of the Fund. Mitchell Hutchins is a
wholly owned asset management subsidiary of PaineWebber Incorporated
("PaineWebber"), a wholly owned subisidiary of Paine Webber Group Inc. ("PW
Group"). If a market value is not available from an independent pricing source
for a particular security, that security is valued at fair market value as
determined in good faith by or under the direction of the Master Series board of
directors (the "board"). The amortized cost method of valuation, which
approximates market value, generally is used to value short-term debt
instruments with sixty days or less remaining to maturity, unless the board
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
REORGANIZATION INVOLVING PAINEWEBBER UTILITY INCOME FUND
Effective as of the close of business on June 23, 2000 (the
"Reorganization Date"), the Fund acquired all of the assets and assumed all of
the liabilities of PaineWebber Utility Income Fund ("Utility Income Fund"). The
acquisition was accomplished by a tax-free exchange of 1,576,546; 364,749;
526,713; and 10,991 Class A, B, C and Y shares, respectively, of the Fund for
1,242,356; 294,930; 417,324 and 8,680 Class A, B, C and Y shares, respectively,
of Utility Income Fund outstanding on the Reorganization Date. Utility Income
Fund's net assets of that date, valued $26,705,372 including net unrealized
appreciation of investments of $7,733,404 were combined with those of the Fund.
All shares were exchanged at net asset value. Accordingly, no shareholder had
any gain or loss as a result of the exchange. The Fund's statement of operations
and financial highlights do not include the operations of Utility Income Fund
prior to the Reorganization Date.
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, 2000, the Fund owed Mitchell Hutchins $146,742 in investment
advisory and administration fees. Mitchell Hutchins waived a portion of its
investment advisory and administration fees in connection with the Fund's
investment of cash collateral from security lending in the Mitchell Hutchins
Private Money Market Fund LLC. For the year ended August 31, 2000, Mitchell
Hutchins waived $5,078.
For the year ended August 31, 2000, the Fund paid $10,324 in brokerage
commissions to PaineWebber for transactions executed on behalf of the Fund.
On July 12, 2000, PW Group and UBS AG ("UBS") announced that they had
entered into an agreement and plan of merger under which PW Group will merge
into a wholly owned subsidiary of UBS. If all required approvals are obtained
and the required conditions are satisfied, PW Group and UBS expect to complete
the transaction in the fourth quarter of 2000. UBS, with headquarters in Zurich,
Switzerland, is an internationally diversified organization with operations in
many areas of the financial services industry.
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, 2000, the Fund owed Mitchell
Hutchins $75,697 in service and distribution fees.
Mitchell Hutchins also receives the proceeds of the initial sales charges
paid by shareholders upon the purchase of
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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, 2000, it
received $87,187 in sales charges.
SECURITY LENDING
The Fund may lend securities up to 33 1/3% of its total assets to
qualified institutions. The loans are secured at all times by cash or U.S.
government securities in an amount at least equal to the market value of the
securities loaned, plus accrued interest 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 $12,738 as compensation from the Fund for the year ended August 31,
2000. At August 31, 2000, the Fund owed PaineWebber $311 in security lending
fees. For the year ended August 31, 2000 the Fund earned $34,585 as compensation
from securities lending transactions net of fees, rebates and expenses.
At August 31, 2000, the Fund had securities on loan having a market value
of $5,962,238. The Fund's custodian held cash having an aggregate value of
$6,206,400 as collateral for portfolio securities loaned which was invested as
follows:
Number of
Shares Value
--------- ----------
1,781,659 AIM Liquid Assets Portfolio ............................ $1,781,659
63,101 AIM Prime Portfolio .................................... 63,101
2,151,420 Mitchell Hutchins Private Money Market Fund LLC ........ 2,151,420
2,062,500 Provident Temporary Cash Fund .......................... 2,062,500
147,720 Scudder Institutional Fund ............................. 147,720
----------
Total investments of cash collateral for securities
loaned (cost--$6,206,400) ............................ $6,206,400
==========
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, 2000, 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, 2000, PaineWebber received approximately 49% 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, 2000 was substantially the same as the cost of securities for financial
statement purposes.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
At August 31, 2000, the components of net unrealized appreciation of
investments were as follows:
<TABLE>
<S> <C>
Gross appreciation (investments having an excess of value over cost) ....... $ 37,373,597
Gross depreciation (investments having an excess of cost over value) ....... (7,733,179)
------------
Net unrealized appreciation of investments ................................. $ 29,640,418
============
</TABLE>
For the year ended August 31, 2000, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $314,394,498 and
$353,203,114, respectively.
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, 2000, undistributed net
investment income was decreased by $1,051,065, capital stock was decreased by
$30,000 and accumulated net realized gains from investment transactions were
increased by $1,081,065.
CAPITAL STOCK
There are 10 billion shares of $0.001 par value common stock authorized
for Master Series, of which 4 billion is allocated to Balanced Fund.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
For the Year Ended ------------------------- ----------------------- ------------------------- ------------------
August 31, 2000: Shares Amount Shares Amount Shares Amount Shares Amount
---------- ------------ -------- ------------ ---------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold .............. 473,098 $ 5,231,098 154,605 $ 1,750,473 712,663 $ 7,891,464 31,448 $ 347,035
Shares issued in
connection with the
reorganization involving
Paine Webber Utility
Income Fund ............ 1,576,546 16,911,399 364,749 4,013,763 526,713 5,662,443 10,991 117,767
Shares repurchased ....... (4,098,925) (45,377,077) (882,227) (9,946,377) (1,304,519) (14,292,209) (38,089) (429,278)
Dividends reinvested ..... 1,661,473 17,734,088 188,666 2,066,213 154,111 1,649,292 4,208 44,879
Shares converted from
Class B to Class A ..... 338,546 3,767,125 (331,073) (3,767,125) -- -- -- --
---------- ------------ -------- ------------ ---------- ------------ ------- ---------
Net increase (decrease) .. (49,262) $ (1,733,367) (505,280) $ (5,883,053) 88,968 $ 910,990 8,558 $ 80,403
========== ============ ======== ============ ========== ============ ======= =========
<CAPTION>
Class A Class B Class C Class Y
For the Year Ended ------------------------- ----------------------- ------------------------- ------------------
August 31, 1999: Shares Amount Shares Amount Shares Amount Shares Amount
---------- ------------ -------- ------------ ---------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold .............. 1,363,897 $ 16,172,983 937,633 $ 11,281,236 688,213 $ 8,183,147 39,441 $ 465,676
Shares repurchased ....... (2,932,983) (34,741,366) (608,260) (7,358,696) (428,296) (5,003,022) (12,955) (154,139)
Dividends reinvested ..... 1,886,980 21,391,988 245,010 2,837,840 162,571 1,846,494 2,785 31,622
Shares converted from
Class B to Class A ..... 459,550 5,425,191 (450,660) (5,425,191) -- -- -- --
---------- ------------ -------- ------------ ---------- ------------ ------- ---------
Net increase ............. 777,444 $ 8,248,796 123,723 $ 1,335,189 422,488 $ 5,026,619 29,271 $ 343,159
========== ============ ======== ============ ========== ============ ======= =========
</TABLE>
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NEW PORTFOLIO MANAGERS AND PROPOSED MERGER
On October 6, 2000, the board of directors unanimously approved the merger
of the Balanced Fund into the PaineWebber Tactical Allocation Fund. The proposed
merger will be submitted to shareholders at a meeting expected to be held in
February 2001. If approved by the Fund's shareholders, the merger is expected to
become effective in February or March 2001.
More information about the proposed merger as well as portfolio management
and investment strategy changes is set out in the October 10, 2000 supplement to
the prospectus dated December 10, 1999 and additional information will be
provided to shareholders in proxy solicitation materials that are expected to be
mailed in December 2000.
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
Months Year
For the Years Ended August 31, Ended Ended
-------------------------------------------------- August 31, February 29,
2000 1999 1998 1997 1996(2) 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ............ $ 11.60 $ 11.27 $ 12.50 $ 10.27 $ 10.85 $ 9.80
-------- -------- -------- -------- -------- --------
Net investment income ........................... 0.22++ 0.22++ 0.23++ 0.23++ 0.12++ 0.27++
Net realized and unrealized gains (losses) from
investments, futures and options .............. 0.66++ 1.56++ 0.31++ 2.79++ (0.12)++ 1.84++
-------- -------- -------- -------- -------- --------
Net increase from investment operations ......... 0.88 1.78 0.54 3.02 0.00 2.11
-------- -------- -------- -------- -------- --------
Dividends from net investment income ............ (0.23) (0.22) (0.22) (0.24) (0.10) (0.31)
Distributions from net realized gains from
investment transactions ....................... (0.97) (1.23) (1.55) (0.55) (0.48) (0.75)
-------- -------- -------- -------- -------- --------
Total dividends and distributions to shareholders (1.20) (1.45) (1.77) (0.79) (0.58) (1.06)
-------- -------- -------- -------- -------- --------
Net asset value, end of period .................. $ 11.28 $ 11.60 $ 11.27 $ 12.50 $ 10.27 $ 10.85
======== ======== ======== ======== ======== ========
Total investment return (1) ..................... 8.27% 16.20% 4.69% 30.67% 0.03% 22.08%
======== ======== ======== ======== ======== ========
Ratios/supplemental data:
Net assets, end of period (000's) ............... $190,695 $196,684 $182,362 $176,403 $157,525 $171,609
Expenses to average net assets,
net of waivers from adviser (3) ............... 1.25% 1.22% 1.26% 1.46% 1.34%* 1.29%
Net investment income to average net assets,
net of waivers from adviser (3) ............... 2.03% 1.81% 1.88% 2.02% 2.19%* 2.55%
Portfolio turnover rate ......................... 151% 234% 190% 188% 103% 188%
</TABLE>
----------
* Annualized.
++ Calculated using the average shares outstanding for the period.
(1) Total investment return is calculated assuming a $10,000 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 any applicable sales charges; results would be lower if they were
included. Total investment return for periods less than one year has not
been annualized.
(2) Fiscal year changed to August 31.
(3) During the years ended August 31, 2000 and August 31, 1999 Mitchell
Hutchins waived a portion of its advisory and administration fees. The
ratios excluding the waiver would be the same since the fee waiver
represents less than 0.005%.
21
<PAGE>
PAINEWEBBER BALANCED FUND
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each period is
presented below:
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------------------------------
For the
Six For the
Months Year
For the Years Ended August 31, Ended Ended
-------------------------------------------------- August 31, February 29,
2000 1999 1998 1997 1996(2) 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ............. $ 11.84 $ 11.48 $ 12.70 $ 10.42 $ 11.00 $ 9.90
-------- -------- -------- -------- -------- --------
Net investment income ............................ 0.14++ 0.13++ 0.14++ 0.14++ 0.08++ 0.19++
Net realized and unrealized gains (losses) from
investments, futures and options ............... 0.67++ 1.59++ 0.31++ 2.84++ (0.11)++ 1.86++
-------- -------- -------- -------- -------- --------
Net increase (decrease) from investment operations 0.81 1.72 0.45 2.98 (0.03) 2.05
-------- -------- -------- -------- -------- --------
Dividends from net investment income ............. (0.12) (0.13) (0.12) (0.15) (0.07) (0.20)
Distributions from net realized gains from
investment transactions ........................ (0.97) (1.23) (1.55) (0.55) (0.48) (0.75)
-------- -------- -------- -------- -------- --------
Total dividends and distributions to shareholders (1.09) (1.36) (1.67) (0.70) (0.55) (0.95)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ................... $ 11.56 $ 11.84 $ 11.48 $ 12.70 $ 10.42 $ 11.00
======== ======== ======== ======== ======== ========
Total investment return (1) ...................... 7.44% 15.28% 3.87% 29.70% (0.30)% 21.20%
======== ======== ======== ======== ======== ========
Ratios/supplemental data:
Net assets, end of period (000's) ................ $ 22,197 $ 28,719 $ 26,425 $ 22,768 $ 22,307 $ 26,627
Expenses to average net assets,
net of waivers from adviser (3) ................ 2.04% 1.98% 2.03% 2.22% 2.09%* 2.05%
Net investment income to average net assets,
net of waivers from adviser (3) ................ 1.22% 1.04% 1.13% 1.27% 1.43%* 1.81%
Portfolio turnover rate .......................... 151% 234% 190% 188% 103% 188%
</TABLE>
----------
* Annualized.
++ Calculated using the average shares outstanding for the period.
(1) Total investment return is calculated assuming a $10,000 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 any applicable sales charges; results would be lower if they were
included. Total investment return for periods less than one year has not
been annualized.
(2) Fiscal year changed to August 31.
(3) During the years ended August 31, 2000 and August 31, 1999 Mitchell
Hutchins waived a portion of its advisory and administration fees. The
ratios excluding the waiver would be the same since the fee waiver
represents less than 0.005%.
22
<PAGE>
PAINEWEBBER BALANCED FUND
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each period is
presented below:
<TABLE>
<CAPTION>
Class C
--------------------------------------------------------------------------------
For the
Six For the
Months Year
For the Years Ended August 31, Ended Ended
-------------------------------------------------- August 31, February 29,
2000 1999 1998 1997 1996(2) 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ............ $ 11.60 $ 11.28 $ 12.52 $ 10.29 $ 10.88 $ 9.82
-------- -------- -------- -------- -------- --------
Net investment income ............ 0.14++ 0.14++ 0.14++ 0.14++ 0.08++ 0.19++
Net realized and unrealized
gains (losses) from investments,
futures and options ............ 0.66++ 1.56++ 0.31++ 2.80++ (0.12)++ 1.84++
-------- -------- -------- -------- -------- --------
Net increase (decrease)
from investment operations ..... 0.80 1.70 0.45 2.94 (0.04) 2.03
-------- -------- -------- -------- -------- --------
Dividends from net
investment income .............. (0.14) (0.15) (0.14) (0.16) (0.07) (0.22)
Distributions from net
realized gains from
investment transactions ........ (0.97) (1.23) (1.55) (0.55) (0.48) (0.75)
-------- -------- -------- -------- -------- --------
Total dividends and
distributions to shareholders .. (1.11) (1.38) (1.69) (0.71) (0.55) (0.97)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ... $ 11.29 $ 11.60 $ 11.28 $ 12.52 $ 10.29 $ 10.88
======== ======== ======== ======== ======== ========
Total investment return (1) ...... 7.46% 15.34% 3.89% 29.70% (0.38)% 21.12%
======== ======== ======== ======== ======== ========
Ratios/supplemental data:
Net assets, end of period (000's) $ 20,371 $ 19,894 $ 14,581 $ 8,736 $ 6,979 $ 7,469
Expenses to average
net assets, net of waivers
from adviser (3) ............... 2.00% 1.95% 2.00% 2.21% 2.09%* 2.08%
Net investment income to
average net assets, net of
waivers from adviser (3) ....... 1.29% 1.08% 1.18% 1.27% 1.44%* 1.77%
Portfolio turnover rate .......... 151% 234% 190% 188% 103% 188%
<CAPTION>
Class Y
---------------------------------------
For the
Period
For the Year Ended March 26, 1998+
August 31, through
---------------------- August 31,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net asset value,
beginning of period ............ $ 11.59 $ 11.27 $ 12.55
-------- -------- --------
Net investment income ............ 0.25++ 0.26++ 0.11++
Net realized and unrealized
gains (losses) from investments,
futures and options ............ 0.66++ 1.55++ (1.28)++
-------- -------- --------
Net increase (decrease)
from investment operations ..... 0.91 1.81 (1.17)
-------- -------- --------
Dividends from net
investment income .............. (0.26) (0.26) (0.11)
Distributions from net
realized gains from
investment transactions ........ (0.97) (1.23) --
-------- -------- --------
Total dividends and
distributions to shareholders .. (1.23) (1.49) (0.11)
-------- -------- --------
Net asset value, end of period ... $ 11.27 $ 11.59 $ 11.27
======== ======== ========
Total investment return (1) ...... 8.54% 16.42% (9.41)%
======== ======== ========
Ratios/supplemental data:
Net assets, end of period (000's) $ 601 $ 519 $ 175
Expenses to average
net assets, net of waivers
from adviser (3) ............... 1.03% 0.96% 0.89%*
Net investment income to
average net assets, net of
waivers from adviser (3) ....... 2.28% 2.11% 2.48%*
Portfolio turnover rate .......... 151% 234% 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 $10,000 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 or program fees; results would be lower if sales
charges or program fees were included. Total investment return for periods
less than one year has not been annualized.
(2) Fiscal year changed to August 31.
(3) During the years ended August 31, 2000 and August 31, 1999 Mitchell
Hutchins waived a portion of its advisory and administration fees. The
ratios excluding the waiver would be the same since the fee waiver
represents less than 0.005%.
23
<PAGE>
PAINEWEBBER BALANCED FUND
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors 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, 2000, 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 accounting principles generally accepted in the United States of
America. 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 auditing standards generally accepted in the United States of
America, 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, 2000 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
As described in the notes to the financial statements, on October 6, 2000 the
Board of Directors approved a merger, subject to shareholder approval, whereby
the Fund would be merged into PaineWebber Tactical Allocation Fund.
PricewaterhouseCoopers LLP
New York, New York
October 25, 2000
24
<PAGE>
This Page Intentionally Left Blank.
<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,
2000), 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* ............................................. $0.2287 $0.1230 $0.1371 $0.2569
Short-term capital gains* .......................................... 0.0542 0.0542 0.0542 0.0542
Long-term capital gains ............................................ 0.9181 0.9181 0.9181 0.9181
Percentage of ordinary income dividends qualifying for the dividends
received deduction available to corporate shareholders .......... 30.05% 30.05% 30.05% 30.05%
</TABLE>
----------
* Taxable as ordinary income.
Dividends received by tax-exempt recipients (e.g., IRAs and Keoghs) need
not be reported as taxable income. Some retirement trusts (e.g., corporate,
Keogh and 403(b)(7) plans) may need this information for their annual
information reporting.
Because the Fund's fiscal year is not the calendar year, another
notification will be sent in respect of calendar year 2000. 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 2001. Shareholders are advised to
consult their own tax advisers with respect to the tax consequences of their
investment in the Fund.
26
<PAGE>
================================================================================
BOARD OF TRUSTEES
E. Garrett Bewkes, Jr.
Chairman
Margo N. Alexander
Richard Q. Armstrong
Richard R. Burt
Meyer Feldberg
George W. Gowen
Frederic V. Malek
Carl W. Schafer
Brian M. Storms
PRINCIPAL OFFICERS
Margo N. Alexander
President
Amy R. Doberman
Vice President
Dianne E. O'Donnell
Vice President and Secretary
Paul H. Schubert
Vice President and Treasurer
Susan P. Ryan
Vice President
T. Kirkham Barneby
Vice President
INVESTMENT ADVISER,
ADMINISTRATOR AND DISTRIBUTOR
Mitchell Hutchins Asset Management Inc.
51 West 52nd Street
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 Financial Advisor or
corresponding firm. Read the prospectus carefully before investing.
<PAGE>
PaineWebber offers a family of 26 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 Enhanced S&P 500 Fund
o Enhanced Nasdaq-100 Fund
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 Strategy Fund
o Tax-Managed Equity 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
PAINEWEBBER MONEY MARKET FUND
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(C)2000 PaineWebber Incorporated
All Rights Reserved
