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                     PAINEWEBBER CAPITAL APPRECIATION FUND
 
                PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
 
                        PAINEWEBBER UTILITY INCOME FUND
 
                          1285 AVENUE OF THE AMERICAS
                           NEW YORK, NEW YORK 10019
 
                      STATEMENT OF ADDITIONAL INFORMATION
 
  The three funds named above (each a "Fund" and, collectively, "Funds") are,
or are series of, open-end management investment companies. PaineWebber
Capital Appreciation Fund ("Capital Appreciation Fund") is a diversified
series of PaineWebber Managed Assets Trust ("Managed Assets Trust" or
"Trust"), a professionally managed, open-end management investment company
organized as a Massachusetts business trust. Capital Appreciation Fund seeks
long-term capital appreciation; it invests primarily in equity securities of
medium-sized companies. PaineWebber Financial Services Growth Fund Inc.
("Financial Services Growth Fund" or "Corporation") is a diversified,
professionally managed mutual fund incorporated in Maryland. Financial
Services Growth Fund seeks long-term capital appreciation by investing
primarily in equity securities of financial services companies. PaineWebber
Utility Income Fund ("Utility Income Fund") is a diversified series of
PaineWebber Managed Investments Trust ("Managed Investments Trust" or
"Trust"), a professionally managed open-end investment company organized as a
Massachusetts business trust. Utility Income Fund seeks to provide current
income and capital appreciation and invests primarily in income-producing
equity securities and debt instruments of domestic and foreign companies in
the utility industries.
 
  The investment adviser, administrator and distributor for each Fund is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
subsidiary of PaineWebber Incorporated ("PaineWebber"). As distributor for the
Funds, Mitchell Hutchins has appointed PaineWebber to serve as the exclusive
dealer for the sale of Fund shares. Denver Investment Advisors, LLC ("Sub-
Adviser") serves as investment sub-adviser for the Capital Appreciation Fund.
 
  This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Funds' current Prospectus, dated April 1,
1996. A copy of the Prospectus may be obtained by calling any PaineWebber
investment executive or correspondent firm or by calling toll-free 1-800-647-
1568. This Statement of Additional Information is dated April 1, 1996, as
revised May 3, 1996.
 
                     INVESTMENT POLICIES AND RESTRICTIONS
 
  The following supplements the information contained in the Prospectus
concerning the Funds' investment policies and limitations.
 
  YIELD FACTORS AND RATINGS. Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's, a division of The McGraw Hill Companies, Inc. ("S&P") and
other nationally recognized statistical rating organizations ("NRSROs") are
private services that provide ratings of the credit quality of debt
obligations. A description of the ratings assigned to corporate debt
obligations by Moody's and S&P is included in the Appendix to this Statement
of Additional Information. The Funds may use these ratings in determining
whether to purchase, sell or hold a security. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, securities with the same maturity, interest rate and rating may
have different market prices.
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  Utility Income Fund is authorized to invest up to 5% of its net assets in
non-investment grade debt securities, including convertible debt securities--
that is, debt securities that are not rated at the time of purchase within one
of the four highest grades assigned by S&P or Moody's, comparably rated by
another NRSRO or determined by Mitchell Hutchins to be of comparable quality.
Lower rated debt securities generally offer a higher current yield than that
available for investment grade issues; however, they involve higher risks in
that they are especially subject to adverse changes in general economic
conditions and in the industries in which the issuers are engaged, to changes
in the financial condition of the issuers and to price fluctuations in
response to changes in interest rates. During periods of economic downturn or
rising interest rates, highly leveraged issuers may experience financial
stress which could adversely affect their ability to make payments of interest
and principal and increase the possibility of default. In addition, such
issuers may not have more traditional methods of financing available to them
and may be unable to repay debt at maturity by refinancing. The risk of loss
due to default by such issuers is significantly greater because such
securities frequently are unsecured and subordinated to the prior payment of
senior indebtedness.
 
  The market for lower rated debt securities has expanded rapidly in recent
years, and its growth paralleled a long economic expansion. In the past, the
prices of many lower rated debt securities declined substantially, reflecting
an expectation that many issuers of such securities might experience financial
difficulties. As a result, the yields on lower rated debt securities rose
dramatically. However, such higher yields did not reflect the value of the
income stream that holders of such securities expected, but rather the risk
that holders of such securities could lose a substantial portion of their
value as a result of the issuers' financial restructuring or default. There
can be no assurance that such declines will not recur. The market for lower-
rated debt issues generally is thinner and less active than that for higher
quality securities, which may limit the Fund's ability to sell such securities
at fair value in response to changes in the economy or financial markets.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of lower rate
securities, especially in a thinly traded market.
 
  RISK CONSIDERATIONS RELATING TO FOREIGN SECURITIES. To the extent that the
Funds hold securities of foreign issuers, these securities may not be
registered with the Securities and Exchange Commission ("SEC"), nor may the
issuers thereof be subject to its reporting requirements. Accordingly, there
may be less publicly available information concerning foreign issuers of
securities held by the Funds than is available concerning U.S. companies.
Foreign companies are not generally subject to uniform accounting, auditing
and financial reporting standards or to other regulatory requirements
comparable to those applicable to U.S. companies.
 
  The Funds may invest in foreign securities by purchasing American Depository
Receipts ("ADRs"). Financial Services Growth Fund and Utility Income Fund also
may purchase securities of foreign issuers in foreign markets and purchase
European Depository Receipts ("EDRs") or other securities convertible into
securities of issuers based in foreign countries. These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. Generally, ADRs, in registered form, are denominated in
U.S. dollars and are designed for use in the U.S. securities markets, while
EDRs, in bearer form, may be denominated in other currencies and are designed
for use in European securities markets. ADRs are receipts typically issued by
a U.S. bank or trust company evidencing ownership of the underlying
securities. EDRs are European receipts evidencing a similar arrangement. For
purposes of each Fund's investment policies, ADRs and EDRs are deemed to have
the same classification as the underlying securities they represent. Thus, an
ADR or EDR representing ownership of common stock will be treated as common
stock.
 
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  Financial Services Growth Fund and Utility Income Fund anticipate that their
brokerage transactions involving foreign securities of companies headquartered
in countries other than the United States will be conducted primarily on the
principal exchanges of such countries. Transactions on foreign exchanges are
usually subject to fixed commissions that are generally higher than negotiated
commissions on U.S. transactions, although each Fund will endeavor to achieve
the best net results in effecting its portfolio transactions. There is
generally less government supervision and regulation of exchanges and brokers
in foreign countries than in the United States.
 
  Investments in foreign government debt securities involve special risks. The
issuer of the debt or the governmental authorities that control the repayment
of the debt may be unable or unwilling to pay interest or repay principal when
due in accordance with the terms of such debt, and the Funds may have limited
legal recourse in the event of default. Foreign government debt securities
differ from debt obligations issued by private entities in that, generally,
remedies for defaults must be pursued in the courts of the defaulting party.
Legal recourse is therefore somewhat limited. Political conditions, especially
a sovereign entity's willingness to meet the terms of its debt obligations,
are of considerable significance. Also there can be no assurance that the
holders of commercial bank loans to the same sovereign entity may not contest
payments to the holders of foreign government debt securities in the event of
default under commercial bank loan agreements.
 
  Investment income on certain foreign securities in which Financial Services
Growth Fund and Utility Income Fund may invest may be subject to foreign
withholding or other taxes that could reduce the return on these securities.
Tax treaties between the United States and foreign countries, however, may
reduce or eliminate the amount of foreign taxes to which the Funds would be
subject.
 
  FOREIGN CURRENCY TRANSACTIONS. Although Financial Services Growth Fund and
Utility Income Fund value their assets daily in U.S. dollars, they do not
intend to convert their holdings of foreign currencies to U.S. dollars on a
daily basis. The Funds' foreign currencies generally will be held as "foreign
currency call accounts" at foreign branches of foreign or domestic banks.
These accounts bear interest at negotiated rates and are payable upon
relatively short demand periods. If a bank became insolvent, the Funds could
suffer a loss of some or all of the amounts deposited. The Funds may convert
foreign currency to U.S. dollars from time to time. Although foreign exchange
dealers generally do not charge a stated commission or fee for conversion, the
prices posted generally include a "spread," which is the difference between
the prices at which the dealers are buying and selling foreign currencies.
 
  ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which a Fund has valued the
securities and includes, among other things, purchased over-the-counter
("OTC") options, repurchase agreements maturing in more than seven days and
restricted securities other than those Mitchell Hutchins or the Sub-Adviser,
as applicable, has determined are liquid pursuant to guidelines established by
each Fund's board of trustees or board of directors (each sometimes referred
to as a "board"). The assets used as cover for OTC options written by the
Funds will be considered illiquid unless the OTC options are sold to qualified
dealers who agree that the Funds may repurchase any OTC option it writes at a
maximum price to be calculated by a formula set forth in the option agreement.
The cover for an OTC option written subject to this procedure would be
considered illiquid only to the extent that the maximum repurchase price under
the formula exceeds the intrinsic value of the option.
 
  Illiquid restricted securities may be sold only in privately negotiated
transactions or in public offerings with respect to which a registration
statement is in effect under the Securities Act of 1933 ("1933 Act").
 
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However, for Financial Services Growth Fund and Utility Income Fund, to the
extent that securities are freely tradeable in the country in which they are
principally traded, they are not considered illiquid securities for purposes
of the 10% net asset limitation, even if they are not freely tradeable in the
United States. Where registration is required, a Fund may be obligated to pay
all or part of the registration expenses and a considerable period may elapse
between the time of the decision to sell and the time a Fund may be permitted
to sell a security under an effective registration statement. If, during such
a period, adverse market conditions were to develop, a Fund might obtain a
less favorable price than prevailed when it decided to sell.
 
  Not all restricted securities are illiquid. In recent years a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and
notes. These instruments are often restricted securities because the
securities are sold in transactions not requiring registration. Institutional
investors generally will not seek to sell these instruments to the general
public, but instead will often depend either on an efficient institutional
market in which such unregistered securities can be readily resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that
there are contractual or legal restrictions on resale to the general public or
certain institutions is not dispositive of the liquidity of such investments.
 
  Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted
securities have developed as a result of Rule 144A, providing both readily
ascertainable values for restricted securities and the ability to liquidate an
investment to satisfy share redemption orders. Such markets include automated
systems for the trading, clearance and settlement of unregistered securities
of domestic and foreign issuers, such as the PORTAL System sponsored by the
National Association of Securities Dealers, Inc. An insufficient number of
qualified institutional buyers interested in purchasing Rule 144A-eligible
restricted securities held by a Fund, however, could affect adversely the
marketability of such portfolio securities and the Fund might be unable to
dispose of such securities promptly or at favorable prices.
 
  Each board has delegated the function of making day-to-day determinations of
liquidity to Mitchell Hutchins or the Sub-Adviser, as applicable, pursuant to
guidelines approved by the board. Mitchell Hutchins or the Sub-Adviser takes
into account a number of factors in reaching liquidity decisions, including
(1) the frequency of trades for the security, (2) the number of dealers that
make quotes for the security, (3) the number of dealers that have undertaken
to make a market in the security, (4) the number of other potential purchasers
and (5) the nature of the security and how trading is effected (e.g., the time
needed to sell the security, how offers are solicited and the mechanics of
transfer). Mitchell Hutchins or the Sub-Adviser monitors the liquidity of
restricted securities in each Fund's portfolio and reports periodically on
such decisions to the applicable board.
 
  REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Fund purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to
the coupon rate or maturity of the purchased securities. The Fund maintains
custody of the underlying securities prior to their repurchase; thus, the
obligation of the bank or dealer to pay the repurchase price on the date
agreed to is, in effect, secured by such securities. If the value of these
securities is less than the repurchase price, plus any agreed-upon additional
amount, the other party to the agreement must provide additional collateral so
that at all times the collateral is at least equal to the repurchase price,
plus any agreed-upon additional amount. The difference between the total
amount to be received upon repurchase of the securities
 
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and the price that was paid by a Fund upon acquisition is accrued as interest
and included in its net investment income. Repurchase agreements carry certain
risks not associated with direct investments in securities, including possible
declines in the market value of the underlying securities and delays and costs
to a Fund if the other party to a repurchase agreement becomes insolvent.
 
  The Funds intend to enter into repurchase agreements only with banks and
dealers in transactions believed by Mitchell Hutchins or the Sub-Adviser to
present minimal credit risks in accordance with guidelines established by each
board. Mitchell Hutchins or the Sub-Adviser reviews and monitors the
creditworthiness of those institutions under each board's general supervision.
 
  REVERSE REPURCHASE AGREEMENTS. Each Fund may enter into reverse repurchase
agreements with banks and securities dealers up to an aggregate value of not
more than 5% of the Fund's net assets. Such agreements involve the sale of
securities held by a Fund subject to that Fund's agreement to repurchase the
securities at an agreed-upon date and price reflecting a market rate of
interest. Such agreements are considered to be borrowings and may be entered
into only for temporary or emergency purposes. While a reverse repurchase
agreement is outstanding, the Fund's custodian segregates assets to cover the
Fund's obligations under the reverse repurchase agreement. See "Investment
Policies and Restrictions--Segregated Accounts."
 
  LENDING OF PORTFOLIO SECURITIES. Each Fund is authorized to lend portfolio
securities up to 33 1/3% of its total assets taken at market value to broker-
dealers or institutional investors that Mitchell Hutchins deems qualified, but
only when the borrower maintains with that Fund's custodian bank acceptable
collateral, marked to market daily, in an amount at least equal to the market
value of the securities loaned, plus accrued interest and dividends.
Acceptable collateral is limited to cash, U.S. government securities and
irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. In determining whether to lend securities to a particular
broker-dealer or institutional investor, Mitchell Hutchins will consider, and
during the period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. Each Fund will
retain authority to terminate any loans at any time. Each Fund may pay
reasonable administrative and custodial fees in connection with a loan and may
pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. Each Fund
will receive reasonable interest on the loan or a flat fee from the borrower
and amounts equivalent to any dividends, interest or other distributions on
the securities loaned. Each Fund will regain record ownership of loaned
securities to exercise beneficial rights, such as voting and subscription
rights and rights to dividends, interest or other distributions, when
regaining such rights is considered to be in the Fund's interest.
 
  SHORT SALES "AGAINST THE BOX". Each Fund may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales "against the
box") to defer realization of gains or losses for tax or other purposes. To
make delivery to the purchaser in a short sale, the executing broker borrows
the securities being sold short on behalf of a Fund, and that Fund is
obligated to replace the securities borrowed at a date in the future. When a
Fund sells short, it will establish a margin account with the broker effecting
the short sale, and will deposit collateral with the broker. In addition, that
Fund will maintain with its custodian, in a segregated account, the securities
that could be used to cover the short sale. Each Fund will incur transaction
costs, including interest expense, in connection with opening, maintaining and
closing short sales against the box. No Fund currently expects to have
obligations under short sales at any time during the coming year that exceed
5% of that Fund's net assets.
 
  The Funds might make a short sale "against the box" in order to hedge
against market risks when Mitchell Hutchins or the Sub-Adviser believes that
the price of a security may decline, thereby causing a
 
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decline in the value of a security owned by a Fund or a security convertible
into or exchangeable for a security owned by a Fund, or when Mitchell Hutchins
or the Sub-Adviser wants to sell a security that a Fund owns at a current
price, but also wishes to defer recognition of gain or loss for federal income
tax purposes. In such case, any loss in a Fund's long position after the short
sale should be reduced by a gain in the short position. Conversely, any gain
in the long position should be reduced by a loss in the short position. The
extent to which gains or losses in the long position are reduced will depend
upon the amount of the securities sold short relative to the amount of the
securities a Fund owns, either directly or indirectly, and in the case where a
Fund owns convertible securities, changes in the investment values or
conversion premiums of such securities.
 
  SEGREGATED ACCOUNTS. When a Fund enters into certain transactions to make
future payments to third parties, it will maintain with an approved custodian
in a segregated account cash, U.S. government securities or other liquid high-
grade debt securities, marked to market daily, in an amount at least equal to
the Fund's obligation or commitment under such transactions. As described
below under "Hedging Strategies," segregated accounts may also be required in
connection with certain transactions involving options or futures contracts
(and, for Utility Income Fund, certain interest rate protection transactions
or forward currency contracts.)
 
  WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. As stated in the Prospectus,
each Fund may purchase securities on a "when-issued" or delayed delivery
basis. A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in
market value, generally based upon changes in the level of interest rates.
Thus, fluctuation in the value of the security from the time of the commitment
date will affect a Fund's net asset value. When the Fund agrees to purchase
securities on a when-issued or delayed delivery basis, its custodian
segregates assets to cover the amount of the commitment. See "Investment
Policies and Restrictions--Segregated Accounts." The Fund purchases when-
issued securities only with the intention of taking delivery, but may sell the
right to acquire the security prior to delivery if Mitchell Hutchins or the
Sub-Adviser deems it advantageous to do so, which may result in a gain or loss
to the Fund.
 
  SPECIAL CONSIDERATIONS CONCERNING PAINEWEBBER UTILITY INCOME FUND--UTILITY
INDUSTRIES. Utility companies in the United States and in foreign countries
are generally subject to regulation. In the United States, most utility
companies are regulated by state and/or federal authorities. Such regulation
is intended to ensure appropriate standards of service and adequate capacity
to meet public demand. Prices are also regulated, with the intention of
protecting the public while ensuring that the rate of return earned by utility
companies is sufficient to allow them to attract capital in order to grow and
continue to provide appropriate services. There can be no assurance that such
pricing policies or rates of return will continue in the future.
 
  The nature of regulation of utility industries is evolving both in the
United States and in foreign countries. Changes in regulation in the United
States increasingly allow utility companies to provide services and products
outside their traditional geographic areas and lines of business, creating new
areas of competition within the industries. Although certain companies may
develop more profitable opportunities, others may be forced to defend their
core businesses and may be less profitable.
 
  The regulation of foreign utility companies may or may not be comparable to
that in the United States. Foreign regulatory systems vary from country to
country, and may evolve in ways different from regulation in the United
States.
 
  Utility Income Fund's investment policies seek to enable it to capitalize on
evolving investment opportunities throughout the world. For example, the rapid
growth of certain foreign economies will
 
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necessitate expansion of capacity in the utility industries in those
countries. Although many foreign utility companies currently are government-
owned, thereby limiting current investment opportunities for the Fund,
Mitchell Hutchins believes that, in order to attract significant capital for
growth, foreign governments may seek global investors through the
privatization of their utility industries. Privatization, which refers to the
trend toward investor ownership of assets rather than government ownership, is
expected to occur in newer, faster-growing economies and also in more mature
economies. In addition, the economic unification of European markets may
improve economic growth, reduce costs and increase competition in Europe,
which will result in opportunities for investment by the Fund in European
utility industries. Of course, there is no assurance that such favorable
developments will occur or that investment opportunities in foreign markets
for the Fund will increase.
 
  The revenues of domestic and foreign utility companies generally reflect the
economic growth and developments in the geographic areas in which they do
business. Mitchell Hutchins takes into account anticipated economic growth
rates and other economic developments when selecting securities of utility
companies. Further descriptions of specific segments within the global utility
industries are set forth below.
 
  Electric. The electric utility industry consists of companies that are
engaged principally in the generation, transmission and sale of electric
energy, although many also provide other energy-related services. Domestic
electric utility companies in general recently have been favorably affected by
lower fuel and financing costs and the full or near completion of major
construction programs. In addition, many of these companies recently have
generated cash flows in excess of current operating expenses and construction
expenditures, permitting some degree of diversification into unregulated
businesses. Some electric utilities have also taken advantage of the right to
sell power outside of their traditional geographic areas. Electric utility
companies have historically been subject to the risks associated with
increases in fuel and other operating costs, high interest costs on borrowings
needed for capital construction programs, costs associated with compliance
with environmental, nuclear facility and other safety regulations and changes
in the regulatory climate. For example, in the United States, the construction
and operation of nuclear power facilities is subject to increased scrutiny by,
and evolving regulations of, the Nuclear Regulatory Commission. Increased
scrutiny might result in higher operating costs and higher capital
expenditures, with the risk that regulators may disallow inclusion of these
costs in rate authorizations.
 
  Telecommunications. The telephone communications industry is a distinct
utility industry segment that is subject to different risks and opportunities.
Companies that provide telephone services and access to the telephone networks
comprise the largest portion of this segment. The telephone industry is large
and highly concentrated. Telephone companies in the United States are still
experiencing the effects of the break-up of American Telephone & Telegraph
Company, which occurred in 1984. Since that date the number of local and long-
distance companies and the competition among such companies has increased. In
addition, since 1984, companies engaged in telephone communication services
have expanded their nonregulated activities into other businesses, including
cellular telephone services, data processing, equipment retailing and software
services. This expansion has provided significant opportunities for certain
telephone companies to increase their earnings and dividends at faster rates
than have been allowed in traditional regulated businesses. Increasing
competition and other structural changes, however, could adversely affect the
profitability of such utilities.
 
  Gas. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the United States, interstate transmission
companies are regulated by the Federal Energy Regulatory Commission, which is
reducing its regulation of the industry. Many companies have diversified into
oil and gas exploration and development, making returns more sensitive to
energy prices. In the recent
 
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decade, gas utility companies have been adversely affected by disruption in
the oil industry and have also been affected by increased concentration and
competition.
 
  Water. Water supply utilities are companies that collect, purify, distribute
and sell water. In the United States and around the world, the industry is
highly fragmented, because most of the supplies are owned by local
authorities. Companies in this industry are generally mature and are
experiencing little or no per capita volume growth. Mitchell Hutchins believes
that favorable investment opportunities may result from consolidation within
this industry.
 
  There can be no assurance that the positive developments noted above,
including those relating to business growth and changing regulation, will
occur or that risk factors other than those noted above will not develop in
the future.
 
  INVESTMENT LIMITATIONS. Each Fund will not:
 
  (1) purchase securities of any one issuer if, as a result, more than 5% of
the Fund's total assets would be invested in securities of that issuer or the
Fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 25% of the Fund's total assets may be invested
without regard to this limitation, and except that this limitation does not
apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment companies.
 
  The following interpretation applies to, but is not a part of, this
fundamental restriction: Mortgage- and asset-backed securities will not be
considered to have been issued by the same issuer by reason of the securities
having the same sponsor, and mortgage- and asset-backed securities issued by a
finance or other special purpose subsidiary that are not guaranteed by the
parent company will be considered to be issued by a separate issuer from the
parent company.
 
  (2) purchase any security if, as a result of that purchase, 25% or more of
the Fund's total assets would be invested in securities of issuers having
their principal business activities in the same industry, except that this
limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or to municipal securities and
except that (a) Financial Services Growth Fund, under normal circumstances,
will invest 25% or more of its total assets in the related group of industries
consisting of the financial services industries and (b) Utility Income Fund,
under normal circumstances, will invest 25% or more of its total assets in the
utility industries as a group. For this purpose, utility industries consist of
companies primarily engaged in the ownership or operation of facilities used
in the generation, transmission or distribution of electricity,
telecommunications, gas, or water.
 
  (3) issue senior securities or borrow money, except as permitted under the
Investment Company Act of 1940 ("1940 Act") and then not in excess of 33 1/3%
of the Fund's total assets (including the amount of the senior securities
issued but reduced by any liabilities not constituting senior securities) at
the time of the issuance or borrowing, except that the Fund may borrow up to
an additional 5% of its total assets (not including the amount borrowed) for
temporary or emergency purposes.
 
  (4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances
or similar instruments will not be considered the making of a loan.
 
 
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  (5) engage in the business of underwriting securities of other issuers,
except to the extent that the Fund might be considered an underwriter under
the federal securities laws in connection with its disposition of portfolio
securities.
 
  (6) purchase or sell real estate, except that investments in securities of
issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by
interests in real estate are not subject to this limitation, and except that
the Fund may exercise rights under agreements relating to such securities,
including the right to enforce security interests and to hold real estate
acquired by reason of such enforcement until that real estate can be
liquidated in an orderly manner.
 
  (7) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the Fund may purchase, sell or
enter into financial options and futures, forward and spot currency contracts,
swap transactions and other financial contracts or derivative instruments.
 
  The foregoing fundamental investment limitations cannot be changed for a
Fund without the affirmative vote of the lesser of (a) more than 50% of the
outstanding shares of the Fund or (b) 67% or more of the shares present at a
shareholders' meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy. If a percentage restriction
is adhered to at the time of an investment or transaction, a later increase or
decrease in percentage resulting from a change in values of portfolio
securities or amount of total assets will not be considered a violation of any
of the foregoing limitations.
 
  The following investment restrictions, which apply to each Fund, are non-
fundamental and may be changed by the vote of the Fund's board without
shareholder approval.
 
  The Fund will not:
 
  (1) purchase or retain the securities of any issuer if the officers and
trustees of the Trust or Corporation and the officers and directors of
Mitchell Hutchins (and, for Capital Appreciation Fund, the Sub-Adviser) each
owning beneficially more than 0.5% of the outstanding securities of the issuer
own in the aggregate more than 5% of the securities of the issuer.
 
  (2) invest more than 10% of its net assets in illiquid securities, a term
which means securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which the Fund has
valued the securities and includes, among other things, repurchase agreements
maturing in more than seven days.
 
  (3) purchase any security if as a result the Fund would have more than 5% of
its total assets invested in securities of companies which together with any
predecessors have been in continuous operation for less than three years.
 
  (4) make an investment in warrants, valued at the lower of cost or market,
that exceeds 5% of the value of its net assets, which amount may include
warrants that are not listed on the New York Stock Exchange Inc. ("NYSE") or
the American Stock Exchange, Inc., provided that such warrants, valued at the
lower of cost or market, do not exceed 2% of the Fund's net assets, and
further provided that this restriction does not apply to warrants attached to,
or sold as a unit with, other securities. For purposes of this restriction,
the term "warrants" does not include options on debt securities, bond indices,
foreign currencies or futures contracts.
 
  (5) change its investment policies to permit the Fund to invest more than
35% of its total assets in debt securities rated Ba or lower by Moody's or BB
or lower by S&P, comparably rated by another NRSRO or
 
                                       9
<PAGE>
 
determined by Mitchell Hutchins to be of comparable quality, without giving at
least 30 days' advance notice to shareholders.
 
  (6) invest in real estate limited partnerships.
 
  (7) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the Fund may make
margin deposits in connection with its use of financial options and futures,
forward and spot currency contracts, swap transactions and other financial
contracts or derivative instruments.
 
  (8) engage in short sales of securities or maintain a short position, except
that the Fund may (a) sell short "against the box" and (b) maintain short
positions in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts
or derivative instruments.
 
  (9) invest in oil, gas or mineral exploration or development programs or
leases, except that investments in securities of issuers that invest in such
programs or leases and investments in asset-backed securities supported by
receivables generated from such programs or leases are not subject to this
prohibition.
 
  (10) purchase securities of other investment companies, except to the extent
permitted by the 1940 Act and except that this limitation does not apply to
securities received or acquired as dividends, through offers of exchange, or
as a result of reorganization, consolidation, or merger.
 
                              HEDGING STRATEGIES
 
  HEDGING INSTRUMENTS. Mitchell Hutchins (or, in the case of Capital
Appreciation Fund, the Sub-Adviser) may use a variety of financial instruments
("Hedging Instruments"), including certain options, futures contracts
(sometimes referred to as "futures") and options on futures contracts, to
attempt to hedge each Fund's portfolio. In particular, each Fund may use the
hedging instruments described below (except that only Financial Services
Growth Fund and Utility Income Fund may enter into hedging transactions
relating to foreign currencies and only Utility Income Fund may use forward
currency contracts). Utility Income Fund may use these strategies to attempt
to enhance income and also may enter into certain interest rate protection
transactions.
 
  OPTIONS ON EQUITY AND DEBT SECURITIES AND FOREIGN CURRENCIES--A call option
is a short-term contract pursuant to which the purchaser of the option, in
return for a premium, has the right to buy the security or currency underlying
the option at a specified price at any time during the term of the option. The
writer of the call option, who receives the premium, has the obligation, upon
exercise of the option during the option term, to deliver the underlying
security or currency against payment of the exercise price. A put option is a
similar contract that gives its purchaser, in return for a premium, the right
to sell the underlying security or currency at a specified price during the
option term. The writer of the put option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to buy the
underlying security or currency at the exercise price.
 
  OPTIONS ON STOCK INDEXES--A stock index assigns relative values to the
stocks included in the index and fluctuates with changes in the market values
of those stocks. A stock index option operates in the same way as a more
traditional stock option, except that exercise of a stock index option is
effected with cash payment and does not involve delivery of securities. Thus,
upon exercise of a stock index option, the purchaser
 
                                      10
<PAGE>
 
will realize, and the writer will pay, an amount based on the difference
between the exercise price and the closing price of the stock index.
 
  STOCK INDEX FUTURES CONTRACTS--A stock index futures contract is a bilateral
agreement pursuant to which one party agrees to accept, and the other party
agrees to make, delivery of an amount of cash equal to a specified dollar
amount times the difference between the stock index value at the close of
trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the stocks comprising the index is
made. Generally, contracts are closed out prior to the expiration date of the
contract.
 
  INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS--Interest rate and
foreign currency futures contracts are bilateral agreements pursuant to which
one party agrees to make, and the other party agrees to accept, delivery of a
specified type of debt security or currency at a specified future time and at
a specified price. Although such futures contracts by their terms call for
actual delivery or acceptance of debt securities or currency, in most cases
the contracts are closed out before the settlement date without the making or
taking of delivery.
 
  OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to
options on securities or currency, except that an option on a futures contract
gives the purchaser the right, in return for the premium, to assume a position
in a futures contract (a long position if the option is a call and a short
position if the option is a put), rather than to purchase or sell a security
or currency, at a specified price at any time during the option term. Upon
exercise of the option, the delivery of the futures position to the holder of
the option will be accompanied by delivery of the accumulated balance that
represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the future. The writer of an option, upon
exercise, will assume a short position in the case of a call and a long
position in the case of a put.
 
  FORWARD CURRENCY CONTRACTS--A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by
the parties, at a price set at the time the contract is entered into.
 
  GENERAL DESCRIPTION OF HEDGING STRATEGIES. Hedging strategies can be broadly
categorized as "short hedges" and "long hedges." A short hedge is a purchase
or sale of a Hedging Instrument intended to partially or fully offset
potential declines in the value of one or more investments held in a Fund's
portfolio. Thus, in a short hedge a Fund takes a position in a Hedging
Instrument whose price is expected to move in the opposite direction of the
price of the investment being hedged. For example, a Fund might purchase a put
option on a security to hedge against a potential decline in the value of that
security. If the price of the security declined below the exercise price of
the put, a Fund could exercise the put and thus limit its loss below the
exercise price to the premium paid plus transactions costs. In the
alternative, because the value of the put option can be expected to increase
as the value of the underlying security declines, a Fund might be able to
close out the put option and realize a gain to offset the decline in the value
of the security.
 
  Conversely, a long hedge is a purchase or sale of a Hedging Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that a Fund intends to acquire. Thus, in a
long hedge, a Fund takes a position in a Hedging Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, a Fund might purchase a call option on a
security it intends to purchase in order to hedge against an increase in the
cost of the security. If the price of the security increased above the
exercise price of the call, a Fund could exercise the call and thus limit its
acquisition cost to the exercise price plus the premium paid and transactions
costs.
 
                                      11
<PAGE>
 
Alternatively, a Fund might be able to offset the price increase by closing
out an appreciated call option and realizing a gain.
 
  Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that a Fund owns or
intends to acquire. Hedging Instruments on stock indices, in contrast,
generally are used to hedge against price movements in broad equity market
sectors in which a Fund has invested or expects to invest. Hedging Instruments
on debt securities may be used to hedge either individual securities or broad
fixed income market sectors.
 
  The use of Hedging Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded, the
Commodity Futures Trading Commission ("CFTC") and various state regulatory
authorities. In addition, a Fund's ability to use Hedging Instruments will be
limited by tax considerations. See "Taxes."
 
  In addition to the products, strategies and risks described below and in the
Prospectus, Mitchell Hutchins and the Sub-Adviser expect to discover
additional opportunities in connection with options, futures contracts and
other hedging techniques. These new opportunities may become available as
Mitchell Hutchins or the Sub-Adviser develops new techniques, as regulatory
authorities broaden the range of permitted transactions and as new options,
futures contracts, foreign currency contracts or other techniques are
developed. Mitchell Hutchins or the Sub-Adviser, as applicable, may utilize
these opportunities to the extent that they are consistent with each Fund's
investment objective and permitted by each Fund's investment limitations and
applicable regulatory authorities. The Funds' Prospectus or Statement of
Additional Information will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or in
the Prospectus.
 
  SPECIAL RISKS OF HEDGING STRATEGIES. The use of Hedging Instruments involves
special considerations and risks, as described below. Risks pertaining to
particular Hedging Instruments are described in the sections that follow.
 
  (1) Successful use of most Hedging Instruments depends upon the ability of
Mitchell Hutchins or the Sub-Adviser, as applicable, to predict movements of
the overall securities and interest rate markets, which requires different
skills than predicting changes in the prices of individual securities. While
Mitchell Hutchins and the Sub-Adviser are experienced in the use of Hedging
Instruments, there can be no assurance that any particular hedging strategy
adopted will succeed.
 
  (2) There might be imperfect correlation, or even no correlation, between
price movements of a Hedging Instrument and price movements of the investments
being hedged. For example, if the value of a Hedging Instrument used in a
short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other pressures on the
markets in which Hedging Instruments are traded.
 
  The effectiveness of hedges using Hedging Instruments on indices will depend
on the degree of correlation between price movements in the index and price
movements in the securities being hedged.
 
  (3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged
 
                                      12
<PAGE>
 
investments. For example, if a Fund entered into a short hedge because
Mitchell Hutchins or the Sub-Adviser projected a decline in the price of a
security in that Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Hedging Instrument. Moreover, if the price of the
Hedging Instrument declined by more than the increase in the price of the
security, that Fund could suffer a loss. In either such case, the Fund would
have been in a better position had it not hedged at all.
 
  (4) As described below, a Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If the Fund was unable to
close out its positions in such Hedging Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
positions expired or matured. These requirements might impair a Fund's ability
to sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. A Fund's ability to close out a position
in a Hedging Instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a market,
the ability and willingness of a contra party to enter into a transaction
closing out the position. Therefore, there is no assurance that any hedging
position can be closed out at a time and price that is favorable to a Fund.
 
  COVER FOR HEDGING STRATEGIES. Transactions using Hedging Instruments, other
than purchased options, expose the Funds to an obligation to another party. A
Fund will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities, other options or futures
contracts or (2) cash and short-term liquid debt securities, with a value
sufficient at all times to cover its potential obligations to the extent not
covered as provided in (1) above. Each Fund will comply with SEC guidelines
regarding cover for hedging transactions and will, if the guidelines so
require, set aside cash, U.S. government securities or other liquid, high-
grade debt securities in a segregated account with its custodian in the
prescribed amount.
 
  Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Hedging Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion
of a Fund's assets to cover or segregated accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
 
  OPTIONS. The Funds may purchase put and call options, and write (sell)
covered put or call options, on equity and debt securities and stock indices
and, in the case of Financial Services Growth Fund and Utility Income Fund, on
foreign currencies. The purchase of call options serves as a long hedge, and
the purchase of put options serves as a short hedge. Writing covered call
options serves as a limited short hedge, because declines in the value of the
hedged investment would be offset to the extent of the premium received for
writing the option. However, if the security appreciates to a price higher
than the exercise price of the call option, it can be expected that the option
will be exercised and the affected Fund will be obligated to sell the security
at less than its market value. Writing covered put options serves as a limited
long hedge because increases in the value of the hedged investment would be
offset to the extent of the premium received for writing the option. However,
if the security depreciates to a price lower than the exercise price of the
put option, it can be expected that the put option will be exercised and the
Fund will be obligated to purchase the security at more than its market value.
The securities or other assets used as cover for OTC options written by a Fund
would be considered illiquid to the extent described under "Investment
Policies and Restrictions-Illiquid Securities."
 
 
                                      13
<PAGE>
 
  The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration
dates of up to nine months. Options that expire unexercised have no value.
 
  A Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a
closing sale transaction. Closing transactions permit a Fund to realize
profits or limit losses on an option position prior to its exercise or
expiration.
 
  The Funds may purchase and write both exchange-traded and OTC options.
Exchange markets for options on debt securities and foreign currencies exist
but are relatively new, and these instruments are primarily traded on the OTC
market. Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction.
In contrast, OTC options are contracts between a Fund and its contra party
(usually a securities dealer or a bank) with no clearing organization
guarantee. Thus, when a Fund purchases or writes an OTC option, it relies on
the contra party to make or take delivery of the underlying investment upon
exercise of the option. Failure by the contra party to do so would result in
the loss of any premium paid by the Fund as well as the loss of any expected
benefit of the transaction. The Funds will enter into OTC option transactions
only with contra parties that have a net worth of at least $20 million.
 
  Generally, the OTC debt options or foreign currency options used by the
Funds are European-style options. This means that the option is only
exercisable immediately prior to its expiration. This is in contrast to
American-style options, which are exercisable at any time prior to the
expiration date of the option.
 
  The Funds' ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Funds intend to
purchase or write only those exchange-traded options for which there appears
to be a liquid secondary market. However, there can be no assurance that such
a market will exist at any particular time. Closing transactions can be made
for OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the
Funds will enter into OTC options only with contra parties that are expected
to be capable of entering into closing transactions with the Funds, there is
no assurance that a Fund will in fact be able to close out an OTC option
position at a favorable price prior to expiration. In the event of insolvency
of the contra party, a Fund might be unable to close out an OTC option
position at any time prior to its expiration.
 
  If a Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered put or
call option written by the Fund could cause material losses because the Fund
would be unable to sell the investment used as cover for the written option
until the option expires or is exercised.
 
  LIMITATIONS ON THE USE OF OPTIONS. The use of options is governed by the
following guidelines, which can be changed by each Fund's board without
shareholder vote:
 
  (1) Each Fund may purchase a put or call option, including any straddles or
spreads, only if the value of its premium, when aggregated with the premiums
on all other options held by that Fund, does not exceed 5% of its total
assets.
 
                                      14
<PAGE>
 
  (2) The aggregate value of securities underlying put options written by a
Fund determined as of the date the put options are written will not exceed 50%
of a Fund's net assets.
 
  (3) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock and bond indices and options on
futures contracts) purchased by each Fund that are held at any time will not
exceed 20% of that Fund's net assets.
 
  FUTURES. The Funds may purchase and sell stock index futures contracts and
interest rate futures contracts and, in the case of Financial Services Growth
Fund and Utility Income Fund, foreign currency futures contracts. A Fund may
also purchase put and call options, and write covered put and call options, on
futures in which it is allowed to invest. The purchase of futures or call
options thereon can serve as a long hedge, and the sale of futures or the
purchase of put options thereon can serve as a short hedge. Writing covered
call options on futures contracts can serve as a limited short hedge, and
writing covered put options on futures contracts can serve as a limited long
hedge, using a strategy similar to that used for writing covered options on
securities or indices.
 
  No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash, U.S. government
securities or other liquid, high-grade debt securities, in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call option on a futures contract, in accordance with applicable
exchange rules. Unlike margin in securities transactions, initial margin on
futures contracts does not represent a borrowing, but rather is in the nature
of a performance bond or good-faith deposit that is returned to a Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
Fund may be required by an exchange to increase the level of its initial
margin payment, and initial margin requirements might be increased generally
in the future by regulatory action.
 
  Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of each Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Fund purchases
or sells a futures contract or writes a call option thereon, it is subject to
daily variation margin calls that could be substantial in the event of adverse
price movements. If a Fund has insufficient cash to meet daily variation
margin requirements, it might need to sell securities at a time when such
sales are disadvantageous.
 
  Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to
the instrument held or written. Positions in futures and options on futures
may be closed only on an exchange or board of trade that provides a secondary
market. The Funds intend to enter into futures transactions only on exchanges
or boards of trade where there appears to be a liquid secondary market.
However, there can be no assurance that such a market will exist for a
particular contract at a particular time.
 
  Under certain circumstances, futures exchanges may establish daily limits on
the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because
 
                                      15
<PAGE>
 
prices could move to the daily limit for several consecutive days with little
or no trading, thereby preventing liquidation of unfavorable positions.
 
  If a Fund were unable to liquidate a futures or related options position due
to the absence of a liquid secondary market or the imposition of price limits,
it could incur substantial losses. A Fund would continue to be subject to
market risk with respect to the position. In addition, except in the case of
purchased options, a Fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to maintain cash or securities in a
segregated account.
 
  Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options
markets are subject to daily variation margin calls and might be compelled to
liquidate futures or related options positions whose prices are moving
unfavorably to avoid being subject to further calls. These liquidations could
increase price volatility of the instruments and distort the normal price
relationship between the futures or options and the investments being hedged.
Also, because initial margin deposit requirements in the futures market are
less onerous than margin requirements in the securities markets, there might
be increased participation by speculators in the futures markets. This
participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.
 
  LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. The use of futures
and related options is governed by the following guidelines, which can be
changed by each Fund's board without shareholder vote:
 
  (1) To the extent a Fund enters into futures contracts and options on
futures positions that are not for bona fide hedging purposes (as defined by
the CFTC), the aggregate initial margin and premiums on those positions
(excluding the amount by which options are "in-the-money") may not exceed 5%
of that Fund's net assets.
 
  (2) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock or bond indices and options on
futures contracts) purchased by a Fund that are held at any time will not
exceed 20% of that Fund's net assets.
 
  (3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by a Fund will not exceed 5% of its total assets.
 
  FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. Financial
Services Growth Fund and Utility Income Fund may use options and futures on
foreign currencies, as described above, and forward currency forward
contracts, as described below, to hedge against movements in the values of the
foreign currencies in which the Funds' securities are denominated. Such
currency hedges can protect against price movements in a security a Fund owns
or intends to acquire that are attributable to changes in the value of the
currency in which it is denominated. Such hedges do not, however, protect
against price movements in the securities that are attributable to other
causes.
 
  The Funds might seek to hedge against changes in the value of a particular
currency when no Hedging Instruments on that currency are available or such
Hedging Instruments are more expensive than certain other Hedging Instruments.
In such cases, the Funds may hedge against price movements in that currency by
 
                                      16
<PAGE>
 
entering into transactions using Hedging Instruments on another currency or a
basket of currencies, the value of which Mitchell Hutchins believes will have
a positive correlation to the value of the currency being hedged. The risk
that movements in the price of the Hedging Instrument will not correlate
perfectly with movements in the price of the currency being hedged is
magnified when this strategy is used.
 
  The value of Hedging Instruments on foreign currencies depends on the value
of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Hedging
Instruments, a Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
 
  There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Quotation information generally is representative of very large transactions
in the interbank market and thus might not reflect odd-lot transactions where
rates might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain
open, significant price and rate movements might take place in the underlying
markets that cannot be reflected in the markets for the Hedging Instruments
until they reopen.
 
  Settlement of hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency.
Thus, the Funds might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
 
  FORWARD CURRENCY CONTRACTS. Utility Income Fund may enter into forward
currency contracts to purchase or sell foreign currencies for a fixed amount
of U.S. dollars or another foreign currency. Such transactions may serve as
long hedges--for example, the Fund may purchase a forward currency contract to
lock in the U.S. dollar price of a security denominated in a foreign currency
that the Fund intends to acquire. Forward currency contract transactions may
also serve as short hedges--for example, the Fund may sell a forward currency
contract to lock in the U.S. dollar equivalent of the proceeds from the
anticipated sale of a security denominated in a foreign currency.
 
  As noted above, Utility Income Fund also may seek to hedge against changes
in the value of a particular currency by using forward contracts on another
foreign currency or a basket of currencies, the value of which Mitchell
Hutchins believes will have a positive correlation to the values of the
currency being hedged. In addition, the Fund may use forward currency
contracts to shift its exposure to foreign currency fluctuations from one
country to another. For example, if the Fund owned securities denominated in a
foreign currency and Mitchell Hutchins believed that currency would decline
relative to another currency, it might enter into a forward contract to sell
an appropriate amount of the first foreign currency, with payment to be made
in the second foreign currency. Transactions that use two foreign currencies
are sometimes referred to as "cross hedging." Use of a different foreign
currency magnifies the risk that movements in the price of the Hedging
Instrument will not correlate or will correlate unfavorably with the foreign
currency being hedged.
 
  The cost to Utility Income Fund of engaging in forward currency contracts
varies with factors such as the currency involved, the length of the contract
period and the market conditions then prevailing. Because forward currency
contracts are usually entered into on a principal basis, no fees or
commissions are involved.
 
                                      17
<PAGE>
 
When the Fund enters into a forward currency contract, it relies on the contra
party to make or take delivery of the underlying currency at the maturity of
the contract. Failure by the contra party to do so would result in the loss of
any expected benefit of the transaction.
 
  As is the case with futures contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the contra party. Thus, there can be no assurance
that Utility Income Fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the contra party, the Fund might be unable to close out a
forward currency contract at any time prior to maturity. In either event, the
Fund would continue to be subject to market risk with respect to the position,
and would continue to be required to maintain a position in the securities or
currencies that are the subject of the hedge or to maintain cash or securities
in a segregated account.
 
  The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the
foreign currency contract has been established. Thus, Utility Income Fund
might need to purchase or sell foreign currencies in the spot (cash) market to
the extent such foreign currencies are not covered by forward contracts. The
projection of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
 
  LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS. Utility Income Fund
may enter into forward currency contracts or maintain a net exposure to such
contracts only if (1) the consummation of the contracts would not obligate the
Fund to deliver an amount of foreign currency in excess of the value of the
position being hedged by such contracts or (2) the Fund segregates with its
custodian cash, U.S. government securities or other liquid, high-grade debt
securities in an amount not less than the value of its total assets committed
to the consummation of the contract and not covered as provided in (1) above,
as marked to market daily.
 
  INTEREST RATE PROTECTION TRANSACTIONS. Utility Income Fund may enter into
interest rate protection transactions, including interest rate swaps and
interest rate caps, collars and floors. Interest rate swap transactions
involve an agreement between two parties to exchange payments that are based,
for example, on variable and fixed rates of interest and that are calculated
on the basis of a specified amount of principal (the "notional principal
amount") for a specified period of time. Interest rate cap and floor
transactions involve an agreement between two parties in which the first party
agrees to make payments to the counterparty when a designated market interest
rate goes above (in the case of a cap) or below (in the case of a floor) a
designated level on predetermined dates or during a specified time period.
Interest rate collar transactions involve an agreement between two parties in
which payments are made when a designated market interest rate either goes
above a designated ceiling level or goes below a designated floor level on
predetermined dates or during a specified time period. The Fund intends to use
these transactions as a hedge and not as a speculative investment. Interest
rate protection transactions are subject to risks comparable to those
described above with respect to other hedging strategies.
 
  Utility Income Fund may enter into interest rate swaps, caps, collars and
floors on either an asset-based or liability-based basis, depending on whether
it is hedging its assets or its liabilities, and will usually enter into
interest rate swaps on a net basis, i.e., the two payment streams are netted
out, with the Fund receiving
 
                                      18
<PAGE>
 
or paying, as the case may be, only the net amount of the two payments.
Inasmuch as these interest rate protection transactions are entered into for
good faith hedging purposes, and inasmuch as segregated accounts will be
established with respect to such transactions, Mitchell Hutchins believes such
obligations do not constitute senior securities and, accordingly, will not
treat them as being subject to the Fund's borrowing restrictions. The net
amount of the excess, if any, of the Fund's obligations over its entitlements
with respect to each interest rate swap will be accrued on a daily basis and
appropriate Fund assets having an aggregate net asset value at least equal to
the accrued excess will be maintained in a segregated account as described
above in "Investment Policies and Restrictions--Segregated Accounts." The Fund
also will establish and maintain such segregated accounts with respect to its
total obligations under any interest rate swaps that are not entered into on a
net basis and with respect to any interest rate caps, collars and floors that
are written by the Fund.
 
  Utility Income Fund will enter into interest rate protection transactions
only with banks and recognized securities dealers believed by Mitchell
Hutchins to present minimal credit risk in accordance with guidelines
established by the Trust's board of trustees. If there is a default by the
other party to such a transaction, the Fund will have to rely on its
contractual remedies (which may be limited by bankruptcy, insolvency or
similar laws) pursuant to the agreements related to the transaction.
 
  The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. Caps, collars and floors are more
recent innovations for which documentation is less standardized, and
accordingly, they are less liquid than swaps.
 
                                      19
<PAGE>
 
                             TRUSTEES AND OFFICERS
 
  The trustees or directors and executive officers of each Trust and the
Corporation, their ages, business addresses and principal occupations during
the past five years are:
 
<TABLE>
<CAPTION>
                             POSITION WITH THE             BUSINESS EXPERIENCE;
  NAME AND ADDRESS*; AGE     TRUST/CORPORATION              OTHER DIRECTORSHIPS
  ----------------------     -----------------             --------------------
 <C>                      <C>                      <S>
 Margo N. Alexander**; 49   Trustee/Director and   Mrs. Alexander is president, chief
                                 President          executive officer and a director of
                                                    Mitchell Hutchins (since January
                                                    1995) and also an executive vice
                                                    president and a director of
                                                    PaineWebber. Mrs. Alexander is
                                                    president and a director or trustee
                                                    of 30 investment companies for
                                                    which Mitchell Hutchins or
                                                    PaineWebber serves as investment
                                                    adviser.
 Richard Q. Armstrong; 60     Trustee/Director     Mr. Armstrong is chairman and prin-
 78 West Brother Drive                              cipal of RQA Enterprises (manage-
 Greenwich, CT 06830                                ment consulting firm) (since April
                                                    1991 and principal occupation since
                                                    March 1995). Mr. Armstrong is also
                                                    a director of Hi Lo Automotive,
                                                    Inc. He was chairman of the board,
                                                    chief executive officer and co-
                                                    owner of Adirondack Beverages
                                                    (producer and distributor of soft
                                                    drinks and sparkling/still waters)
                                                    (October 1993-March 1995). He was a
                                                    partner of the New England Con-
                                                    sulting Group (management consult-
                                                    ing firm) (December 1992-September
                                                    1993). He was managing director of
                                                    LMVH U.S. Corporation (U.S. sub-
                                                    sidiary of the French luxury goods
                                                    conglomerate, Luis Vuitton Moet
                                                    Hennessey Corporation) (1987-1991)
                                                    and chairman of its wine and spir-
                                                    its subsidiary, Schieffelin & Som-
                                                    erset Company (1987-1991). Mr.
                                                    Armstrong is a director or trustee
                                                    of 29 investment companies for
                                                    which Mitchell Hutchins or
                                                    PaineWebber serves as investment
                                                    adviser.
</TABLE>
 
                                       20
<PAGE>
 
<TABLE>
<CAPTION>
                                  POSITION WITH THE             BUSINESS EXPERIENCE;
    NAME AND ADDRESS*; AGE        TRUST/CORPORATION              OTHER DIRECTORSHIPS
    ----------------------        -----------------             --------------------
 <C>                           <C>                      <S>
 E. Garrett Bewkes, Jr.**; 69    Trustee/Director and   Mr. Bewkes is a director of Paine
                                   Chairman of the       Webber Group Inc. ("PW Group")
                                       Board of          (holding company of PaineWebber and
                                  Trustees/Directors     Mitchell Hutchins). Prior to De-
                                                         cember 1995, he was a consultant to
                                                         PW Group. Prior to 1988, he was
                                                         chairman of the board, president
                                                         and chief executive officer of
                                                         American Bakeries Company. Mr.
                                                         Bewkes is also a director of In-
                                                         terstate Bakeries Corporation and
                                                         NaPro BioTherapeutics, Inc. and is
                                                         a director or trustee of 30 in-
                                                         vestment companies for which
                                                         Mitchell Hutchins or PaineWebber
                                                         serves as investment adviser.
 Richard R. Burt; 49               Trustee/Director     Mr. Burt is chairman of Interna-
 1101 Connecticut Avenue, N.W.                           tional Equity Partners (interna-
 Washington, D.C. 20036                                  tional investments and consulting
                                                         firm) (since March 1994) and a
                                                         partner of McKinsey & Company
                                                         (management consulting firm) (since
                                                         1991). He is also a director of
                                                         American Publishing Company. He was
                                                         the chief negotiator in the Stra-
                                                         tegic Arms Reduction Talks with the
                                                         former Soviet Union (1989-1991) and
                                                         the U.S. Ambassador to the Federal
                                                         Republic of Germany (1985-1989).
                                                         Mr. Burt is a director or trustee
                                                         of 29 investment companies for
                                                         which Mitchell Hutchins or
                                                         PaineWebber serves as investment
                                                         adviser.
</TABLE>
 
                                       21
<PAGE>
 
<TABLE>
<CAPTION>
                             POSITION WITH THE             BUSINESS EXPERIENCE;
  NAME AND ADDRESS*; AGE     TRUST/CORPORATION              OTHER DIRECTORSHIPS
  ----------------------     -----------------             --------------------
 <C>                      <C>                      <S>
 Mary C. Farrell**; 46        Trustee/Director     Ms. Farrell is a managing director,
                                                    senior investment strategist and
                                                    member of the Investment Policy
                                                    Committee of PaineWebber. Ms.
                                                    Farrell joined PaineWebber in 1982.
                                                    She is a member of the Financial
                                                    Women's Association and Women's
                                                    Economic Roundtable and is employed
                                                    as a regular panelist on Wall
                                                    Street Week with Louis Rukeyser.
                                                    She also serves on the Board of
                                                    Overseers of New York University's
                                                    Stern School of Business. Ms.
                                                    Farrell is a director or trustee of
                                                    29 investment companies for which
                                                    Mitchell Hutchins or PaineWebber
                                                    serves as an investment adviser.
 Meyer Feldberg; 54           Trustee/Director     Mr. Feldberg is Dean and Professor
 Columbia University                                of Management of the Graduate
 101 Uris Hall                                      School of Business, Columbia Uni-
 New York, New York 10027                           versity. Prior to 1989, he was
                                                    president of the Illinois Institute
                                                    of Technology. Dean Feldberg is
                                                    also a director of AMSCO Interna-
                                                    tional Inc., Federated Department
                                                    Stores, Inc. and New World Commu-
                                                    nications Group Incorporated and is
                                                    a director or trustee of 29 in-
                                                    vestment companies for which
                                                    Mitchell Hutchins or PaineWebber
                                                    serves as investment adviser.
 George W. Gowen; 66          Trustee/Director     Mr. Gowen is a partner in the law
 666 Third Avenue                                   firm of Dunnington, Bartholow &
 New York, New York 10017                           Miller. Prior to May 1994, he was a
                                                    partner in the law firm of Fryer,
                                                    Ross & Gowen. Mr. Gowen is also a
                                                    director of Columbia Real Estate
                                                    Investments, Inc. Mr. Gowen is a
                                                    director or trustee of 29 invest-
                                                    ment companies for which Mitchell
                                                    Hutchins or PaineWebber serves as
                                                    investment adviser.
</TABLE>
 
                                       22
<PAGE>
 
<TABLE>
<CAPTION>
                           POSITION WITH THE             BUSINESS EXPERIENCE;
 NAME AND ADDRESS*; AGE    TRUST/CORPORATION              OTHER DIRECTORSHIPS
 ----------------------    -----------------             --------------------
 <C>                    <C>                      <S>
 Frederic V. Malek; 59      Trustee/Director     Mr. Malek is chairman of Thayer
 901 15th Street, N.W.                            Capital Partners (investment bank)
 Suite 300                                        and a co-chairman and director of
 Washington, D.C. 20005                           CB Commercial Group Inc. (real es-
                                                  tate). From January 1992 to Novem-
                                                  ber 1992, he was campaign manager
                                                  of Bush-Quayle '92. From 1990 to
                                                  1992, he was vice chairman and,
                                                  from 1989 to 1990, he was president
                                                  of Northwest Airlines Inc., NWA
                                                  Inc. (holding company of Northwest
                                                  Airlines Inc.) and Wings Holdings
                                                  Inc. (holding company of NWA Inc.).
                                                  Prior to 1989, he was employed by
                                                  the Marriott Corporation (hotels,
                                                  restaurants, airline catering and
                                                  contract feeding), where he most
                                                  recently was an executive vice
                                                  president and president of Marriott
                                                  Hotels and Resorts. Mr. Malek is
                                                  also a director of American Man-
                                                  agement Systems, Inc. Automatic
                                                  Data Processing, Inc., Avis, Inc.,
                                                  FPL Group, Inc., ICF International,
                                                  Manor Care, Inc. and National Edu-
                                                  cation Corporation. Mr. Malek is a
                                                  director or trustee of 29 invest-
                                                  ment companies for which Mitchell
                                                  Hutchins or PaineWebber serves as
                                                  investment adviser.
</TABLE>
 
                                       23
<PAGE>
 
<TABLE>
<CAPTION>
                             POSITION WITH THE             BUSINESS EXPERIENCE;
  NAME AND ADDRESS*; AGE     TRUST/CORPORATION              OTHER DIRECTORSHIPS
  ----------------------     -----------------             --------------------
 <C>                      <C>                      <S>
 Carl W. Schafer; 60          Trustee/Director     Mr. Schafer is president of the At-
 P.O. Box 1164                                      lantic Foundation (charitable
 Princeton, NJ 08542                                foundation supporting mainly
                                                    oceanographic exploration and re-
                                                    search). He also is a director of
                                                    Roadway Express, Inc. (trucking),
                                                    The Guardian Group of Mutual Funds,
                                                    Evans Systems, Inc. (a motor fuels,
                                                    convenience store and diversified
                                                    company), Hidden Lake Gold Mines
                                                    Ltd., ) gold mining), Electronic
                                                    Clearing House, Inc., (financial
                                                    transactions processing), Wainoco
                                                    Oil Corporation and Nutraceutix,
                                                    Inc. (biotechnology). Prior to
                                                    January 1993, he was chairman of
                                                    the Investment Advisory Committee
                                                    of the Howard Hughes Medical In-
                                                    stitute. Mr. Schafer is a director
                                                    or trustee of 29 investment compa-
                                                    nies for which Mitchell Hutchins or
                                                    PaineWebber serves as an investment
                                                    adviser.
 John R. Torrell, III; 58     Trustee/Director     Mr. Torell is chairman of Torell
 767 Fifth Avenue                                   Management, Inc. (financial advi-
 Suite 4605                                         sory firm), chairman of Telesphere
 New York, NY 10153                                 Corporation (electronic provider of
                                                    financial information) and a part-
                                                    ner of Zilkha & Company (merchant
                                                    bank and private investment compa-
                                                    ny). He is the former chairman and
                                                    chief executive officer of Fortune
                                                    Bancorp (1990-1991 and 1990-1994,
                                                    respectively), the former chairman,
                                                    president and chief executive of-
                                                    ficer of CalFed, Inc. (savings as-
                                                    sociation) (1988 to 1989) and the
                                                    former president of Manufacturers
                                                    Hanover Corp. (bank) (prior to
                                                    1988). Mr. Torell is also a direc-
                                                    tor of American Home Products
                                                    Corp., New Colt Inc. (armament
                                                    manufacturer) and Volt Information
                                                    Sciences Inc. Mr. Torell is a di-
                                                    rector or trustee of 29 investment
                                                    companies for which Mitchell
                                                    Hutchins or PaineWebber serves as
                                                    investment adviser.
</TABLE>
 
                                       24
<PAGE>
 
<TABLE>
<CAPTION>
 NAME AND ADDRESS*;     POSITION WITH THE             BUSINESS EXPERIENCE;
         AGE            TRUST/CORPORATION              OTHER DIRECTORSHIPS
 ------------------     -----------------             --------------------
 <C>                 <C>                      <S>
 Julieanna Berry; 32      Vice President      Ms. Berry is a vice president and a
                       (Managed Investments    portfolio manager of Mitchell
                           Trust only)         Hutchins. Ms. Berry is a vice
                                               president of two investment compa-
                                               nies for which Mitchell Hutchins or
                                               PaineWebber serves as investment
                                               adviser.
 Teresa M. Boyle; 37      Vice President      Ms. Boyle is a first vice president
                                               and manager--advisory administra-
                                               tion of Mitchell Hutchins. Prior to
                                               November 1993, she was compliance
                                               manager of Hyperion Capital Man-
                                               agement, Inc., an investment advi-
                                               sory firm. Prior to April 1993, Ms.
                                               Boyle was a vice president
                                               and manager--legal administration
                                               of Mitchell Hutchins. Ms. Boyle is
                                               a vice president of 30 investment
                                               companies for which Mitchell
                                               Hutchins or PaineWebber serves as
                                               investment adviser.
 Karen L. Finkel; 38      Vice President      Mrs. Finkel is a first vice presi-
                       (Financial Services     dent and a portfolio manager of
                     Growth Fund and Managed   Mitchell Hutchins. Mrs. Finkel is a
                     Investments Trust only)   vice president of two investment
                                               company for which Mitchell Hutchins
                                               serves as investment adviser.
 Ellen R. Harris; 49      Vice President      Ms. Harris is a managing director
                       (Managed Investments    and a portfolio manager of Mitchell
                           Trust only)         Hutchins. Ms. Harris is a vice
                                               president of three investment com-
                                               panies for which Mitchell Hutchins
                                               or PaineWebber serves as investment
                                               adviser.
 James F. Keegan; 35      Vice President      Mr. Keegan is a senior vice presi-
                       (Managed Investments    dent and a portfolio manager of
                           Trust only)         Mitchell Hutchins. Prior to March
                                               1996, he was director of fixed in-
                                               come strategy and research of
                                               Merrion Group, L.P. From 1987 to
                                               1994, he was a vice president of
                                               global investment management of
                                               Bankers Trust Company. Mr. Keegan
                                               is a vice president of two invest-
                                               ment companies for which Mitchell
                                               Hutchins or PaineWebber serves as
                                               investment adviser.
</TABLE>
 
                                       25
<PAGE>
 
<TABLE>
<CAPTION>
                            POSITION WITH THE             BUSINESS EXPERIENCE;
 NAME AND ADDRESS*; AGE     TRUST/CORPORATION              OTHER DIRECTORSHIPS
 ----------------------     -----------------             --------------------
 <C>                     <C>                      <S>
 Thomas J. Libassi; 37        Vice President      Mr. Libassi is a senior vice presi-
                           (Managed Investments    dent and a portfolio manager of
                               Trust only)         Mitchell Hutchins. Prior to May
                                                   1994, he was a vice president of
                                                   Keystone Custodian Funds Inc. with
                                                   portfolio management responsibili-
                                                   ty. Mr. Libassi is a vice president
                                                   of four investment companies for
                                                   which Mitchell Hutchins serves as
                                                   investment adviser.
 C. William Maher; 34       Vice President and    Mr. Maher is a first vice president
                           Assistant Treasurer     and a senior manager of the mutual
                                                   fund finance division of Mitchell
                                                   Hutchins. Mr. Maher is a vice
                                                   president and assistant treasurer
                                                   of 30 investment companies
                                                   for which Mitchell Hutchins or
                                                   PaineWebber serves as investment
                                                   adviser.
 Dennis McCauley; 49          Vice President      Mr. McCauley is a managing director
                           (Managed Investments    and chief investment officer--fixed
                               Trust only)         income of Mitchell Hutchins. Prior
                                                   to December 1994, he was director
                                                   of fixed income investments of IBM
                                                   Corporation. Mr. McCauley is a vice
                                                   president of 19 investment compa-
                                                   nies for which Mitchell Hutchins or
                                                   PaineWebber serves as investment
                                                   adviser.
 Ann E. Moran; 38           Vice President and    Ms. Moran is a vice president of
                           Assistant Treasurer     Mitchell Hutchins. Ms. Moran is a
                                                   vice president and assistant trea-
                                                   surer of 30 investment companies
                                                   for which Mitchell Hutchins or
                                                   PaineWebber serves as investment
                                                   adviser.
 Dianne E. O'Donnell; 44    Vice President and    Ms. O'Donnell is a senior vice
                                Secretary          president and deputy general coun-
                                                   sel of Mitchell Hutchins. Ms.
                                                   O'Donnell is a vice president and
                                                   secretary of 30 investment compa-
                                                   nies for which Mitchell Hutchins or
                                                   PaineWebber serves as investment
                                                   adviser.
</TABLE>
 
                                       26
<PAGE>
 
<TABLE>
<CAPTION>
                              POSITION WITH THE             BUSINESS EXPERIENCE;
  NAME AND ADDRESS*; AGE      TRUST/CORPORATION              OTHER DIRECTORSHIPS
  ----------------------      -----------------             --------------------
 <C>                       <C>                      <S>
 Victoria E. Schonfeld; 45      Vice President      Ms. Schonfeld is a managing director
                                                     and general counsel of Mitchell
                                                     Hutchins. Prior to May 1994, she
                                                     was a partner in the law firm of
                                                     Arnold & Porter. Ms. Schonfeld is a
                                                     vice president of 30 investment
                                                     companies for which Mitchell
                                                     Hutchins or PaineWebber serves as
                                                     investment adviser.
 Paul H. Schubert; 33         Vice President and    Mr. Schubert is a first vice presi-
                             Assistant Treasurer     dent and a senior manager of the
                                                     mutual fund finance division of
                                                     Mitchell Hutchins. From August 1992
                                                     to August 1994, he was a vice
                                                     president at Black-Rock Financial
                                                     Management, L.P. Prior to August
                                                     1992, he was an audit manager with
                                                     Ernst & Young LLP. Mr. Schubert is
                                                     a vice president and assistant
                                                     treasurer of 30 investment compa-
                                                     nies for which Mitchell Hutchins or
                                                     PaineWebber serves as investment
                                                     adviser.
 Nirmal Singh; 39          Vice President (Managed  Mr. Singh is a first vice president
                           Investments Trust only)   and a portfolio manager of Mitchell
                                                     Hutchins. Prior to September 1993,
                                                     he was a member of the portfolio
                                                     management team at Merrill Lynch
                                                     Asset Management, Inc. Mr. Singh is
                                                     a vice president of five investment
                                                     companies for which Mitchell
                                                     Hutchins or PaineWebber serves as
                                                     investment adviser.
 Julian F. Sluyters; 35       Vice President and    Mr. Sluyters is a senior vice pres-
                                  Treasurer          ident and the director of the mu-
                                                     tual fund finance division of
                                                     Mitchell Hutchins. Prior to 1991,
                                                     he was an audit senior manager with
                                                     Ernst & Young LLP. Mr. Sluyters is
                                                     a vice president and treasurer of
                                                     30 investment companies for which
                                                     Mitchell Hutchins or PaineWebber
                                                     serves as investment adviser.
</TABLE>
 
                                       27
<PAGE>
 
<TABLE>
<CAPTION>
                           POSITION WITH THE             BUSINESS EXPERIENCE;
 NAME AND ADDRESS*; AGE    TRUST/CORPORATION              OTHER DIRECTORSHIPS
 ----------------------    -----------------             --------------------
 <C>                    <C>                      <S>
 Mark A. Tincher; 40         Vice President      Mr. Tincher is a managing director
                                                  and chief investment officer--U.S.
                                                  equity investments of Mitchell
                                                  Hutchins. Prior to March 1995, he
                                                  was a vice president and directed
                                                  the U.S. funds management and eq-
                                                  uity research areas of Chase Man-
                                                  hattan Private Bank. Mr. Tincher is
                                                  a vice president of 14 investment
                                                  companies for which Mitchell
                                                  Hutchins or PaineWebber serves as
                                                  investment adviser.
 Craig M. Varrelman; 37 Vice President (Managed  Mr. Varrelman is a first vice pres-
                        Investments Trust only)   ident and a portfolio manager of
                                                  Mitchell Hutchins. Mr. Varrelman is
                                                  a vice president of five investment
                                                  companies for which Mitchell
                                                  Hutchins or PaineWebber serves as
                                                  investment adviser.
 Keith A. Weller; 34       Vice President and    Mr. Weller is a first vice president
                          Assistant Secretary     and associate general counsel of
                                                  Mitchell Hutchins. Prior to May
                                                  1995, he was an attorney in private
                                                  practice. Mr. Weller is a vice
                                                  president and assistant secretary
                                                  of 29 investment companies for
                                                  which Mitchell Hutchins or
                                                  PaineWebber serves as investment
                                                  adviser.
</TABLE>
- --------
* Unless otherwise indicated, the business address of each listed person is
  1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of each
   Fund as defined in the 1940 Act by virtue of their positions with Mitchell
   Hutchins, PaineWebber, and/or PW Group.
 
  Each Trust and the Corporation pays trustees/directors who are not
"interested persons" of the Trust or Corporation $1,000 annually for each
series and $150 for each board meeting and each separate meeting of a board
committee. Managed Investments Trust presently has five series and thus pays
each such trustee $5,000 annually, plus any additional amounts due for board
or committee meetings. Managed Assets Trust and Financial Services Growth Fund
have only one series and thus pay each such trustee or director $1,000
annually, plus any additional amounts due for board or committee meetings.
Certain committee chairs receive additional compensation aggregating $15,000
annually from all the funds within the PaineWebber fund complex. All
trustees/directors are reimbursed for any expenses incurred in attending
meetings. Trustees/directors own in the aggregate less than 1% of the
outstanding shares of each Fund. Because PaineWebber and Mitchell Hutchins
perform substantially all the services necessary for the operation of the
Trusts, the Corporation and each Fund, the Trusts and Corporation require no
employees. No officer, director or employee of Mitchell Hutchins or
PaineWebber presently receives any compensation from the Trusts or Corporation
for acting as a trustee/director or officer.
 
                                      28
<PAGE>
 
  The table below includes certain information relating to the compensation of
the current trustees/directors who held office with the Trusts and Corporation
or with other PaineWebber funds during the fiscal years indicated.
 
                              COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                          AGGREGATE
                                         COMPENSATION  AGGREGATE      TOTAL
                             AGGREGATE     FROM PW    COMPENSATION COMPENSATION
                           COMPENSATION   FINANCIAL       FROM       FROM THE
                             FROM  PW      SERVICES     MANAGED     TRUST AND
                              MANAGED       GROWTH    INVESTMENTS    THE FUND
NAME OF PERSON, POSITION   ASSETS TRUST* FUND, INC.*    TRUST**     COMPLEX***
- ------------------------   ------------- ------------ ------------ ------------
<S>                        <C>           <C>          <C>          <C>
Richard Q. Armstrong,
 Trustee/Director.........       --            --          --        $ 9,000
Richard R. Burt,
 Trustee/Director.........       --            --          --          7,750
Meyer Feldberg,
 Trustee/Director.........    $4,875        $3,000       7,250       106,375
George W. Gowen,
 Trustee/Director.........     4,625         2,750       7,250        99,750
Frederic V. Malek,
 Trustee/Director.........     4,875         3,000       7,250        99,750
Carl W. Schafer,
 Trustee/Director.........       --            --          --        118,175
John R. Torell, III,
 Trustee/Director.........       --            --          --         28,125
</TABLE>
- --------
  Only independent members of the board are compensated by the Trusts or the
Corporation and identified above; trustees/directors who are "interested
persons," as defined by the 1940 Act, do not receive compensation.
 
*  Represents fees paid to each trustee/director during the fiscal year ended
   March 31, 1995.
** Represents fees paid to each trustee during the fiscal year ended November
   30, 1995.
*** Represents total compensation paid to each trustee/director during the
    calendar year ended December 31, 1995.
 
               INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
 
  INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator to each Fund pursuant to separate contracts (each an
"Advisory Contract") with each Trust and Corporation. Under the Advisory
Contracts, each Fund pays Mitchell Hutchins a fee, computed daily and paid
monthly, at the annual rate specified in the Prospectus. Furthermore, under a
service agreement ("Service Agreement") with each Fund that is reviewed by
each board annually, PaineWebber provides certain services to the Funds not
otherwise provided by the Funds' transfer agent.
 
  Under the terms of the Advisory Contracts, each Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. Expenses borne by each Fund include the following: (1) the cost
(including brokerage commissions) of securities purchased or sold by the Fund
and any losses incurred
 
                                      29
<PAGE>
 
in connection therewith; (2) fees payable to and expenses incurred on behalf
of the Fund by Mitchell Hutchins; (3) organizational expenses; (4) filing fees
and expenses relating to the registration and qualification of the Fund's
shares under federal and state securities laws and maintenance of such
registrations and qualifications; (5) fees and salaries payable to
trustees/directors and officers who are not interested persons (as defined in
the 1940 Act) of the Trust/Corporation or Mitchell Hutchins; (6) all expenses
incurred in connection with the trustees'/directors' services, including
travel expenses; (7) taxes (including any income or franchise taxes) and
governmental fees; (8) costs of any liability, uncollectible items of deposit
and other insurance or fidelity bonds; (9) any costs, expenses or losses
arising out of a liability of or claim for damages or other relief asserted
against the Trust/Corporation or Fund for violation of any law; (10) legal,
accounting and auditing expenses, including legal fees of special counsel for
the independent trustees/directors; (11) charges of custodians, transfer
agents and other agents; (12) costs of preparing share certificates; (13)
expenses of setting in type and printing prospectuses, statements of
additional information and supplements thereto, reports and proxy materials
for existing shareholders, and costs of mailing such materials to
shareholders; (14) any extraordinary expenses (including fees and
disbursements of counsel) incurred by the Fund; (15) fees, voluntary
assessments and other expenses incurred in connection with membership in
investment company organizations; (16) costs of mailing and tabulating proxies
and costs of meetings of shareholders, the board and any committees thereof;
(17) the cost of investment company literature and other publications provided
to trustees/directors and officers; and (18) costs of mailing, stationery and
communications equipment.
 
  As required by state regulation, Mitchell Hutchins will reimburse a Fund if
and to the extent the aggregate operating expenses of the Fund in any fiscal
year exceed applicable limits. Currently, the most restrictive such limit
applicable to the Fund is 2.5% of the first $30 million of the Fund's average
daily net assets, 2.0% of the next $70 million of its average daily net assets
and 1.5% of its average daily net assets in excess of $100 million. Certain
expenses, such as brokerage commissions, taxes, interest, distribution fees,
certain expenses attributable to investing outside the United States and
extraordinary items, are excluded from this limitation. For the last three
fiscal years, no reimbursements were made pursuant to such limitation to any
Fund.
 
  Under each Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. Each Advisory Contract
terminates automatically upon assignment and is terminable at any time without
penalty by the Fund's board of trustees/directors or by vote of the holders of
a majority of the Fund's outstanding voting securities on 60 days' written
notice to Mitchell Hutchins, or by Mitchell Hutchins on 60 days' written
notice to the Fund.
 
  CAPITAL APPRECIATION FUND. Mitchell Hutchins acts as the investment adviser
and administrator of Capital Appreciation Fund pursuant to an Advisory
Contract dated March 20, 1992 with the Trust. Under the Advisory Contract, the
Fund pays Mitchell Hutchins a fee, computed daily and paid monthly, at the
annual rate of 1.00% of the Fund's average daily net assets. For the fiscal
years ended March 31, 1995 and March 31, 1994 and the period from April 7,
1992 (commencement of operations) to March 31, 1993, the Fund paid (or
accrued) to Mitchell Hutchins investment advisory and administration fees of
$2,168,097, $2,018,477 and $1,109,234, respectively.
 
  Pursuant to the Service Agreement, for the fiscal years ended March 31, 1995
and March 31, 1994 and the period from April 7, 1992 (commencement of
operations) to March 31, 1993, Capital Appreciation Fund paid (or accrued) to
PaineWebber service fees of $98,260, $88,794 and $55,713, respectively.
 
                                      30
<PAGE>
 
  The Advisory Contract authorizes Mitchell Hutchins to retain one or more
sub-advisers, but does not require Mitchell Hutchins to do so. Mitchell
Hutchins has entered into a separate contract with the Sub-Adviser, dated
March 21, 1995 ("Sub-Advisory Contract"), pursuant to which the Sub-Adviser
determines what securities will be purchased, sold or held by Capital
Appreciation Fund. Under the Sub-Advisory Contract, Mitchell Hutchins (not the
Fund) pays the Sub-Adviser a monthly fee of 50% of the fee paid by the Fund to
Mitchell Hutchins under the Advisory Contract. The Sub-Adviser bears all
expenses incurred by it in connection with its services under the Sub-Advisory
Contract. Under the Sub-Advisory Contract and a prior substantially identical
contract for the fiscal years ended March 31, 1995 and March 31, 1994 and the
period from April 7, 1992 (commencement of operations) to March 31, 1993,
Mitchell Hutchins paid (or accrued) to the Sub-Adviser sub-advisory fees of
$1,084,049, $1,009,239 and $554,617, respectively.
 
  Under the Sub-Advisory Contract, the Sub-Adviser will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Trust,
Capital Appreciation Fund, its shareholders or Mitchell Hutchins in connection
with the Sub-Advisory Contract, except any liability to the Trust, the Fund,
its shareholders or Mitchell Hutchins to which the Sub-Adviser would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence on
its part in the performance of its duties or from reckless disregard by it of
its obligations and duties under the Sub-Advisory Contract.
 
  The Sub-Advisory Contract terminates automatically upon its assignment or
the termination of the Advisory Contract and is terminable at any time without
penalty by the board of trustees or by vote of the holders of a majority of
Capital Appreciation Fund's outstanding voting securities on 60 days' notice
to the Sub-Adviser, or by the Sub-Adviser on 120 days' written notice to
Mitchell Hutchins. The Sub-Advisory Contract may also be terminated by
Mitchell Hutchins (1) upon material breach by the Sub-Adviser of its
representations and warranties, which breach shall not have been cured within
a 20-day period after notice of such breach; (2) if the Sub-Adviser becomes
unable to discharge its duties and obligations under the Sub-Advisory Contract
or (3) on 120 days' notice to the Sub-Adviser.
 
  FINANCIAL SERVICES GROWTH FUND. Mitchell Hutchins acts as the investment
adviser and administrator of Financial Services Growth Fund pursuant to an
Advisory Contract with the Fund dated April 1, 1990. Under the Advisory
Contract, the Fund pays Mitchell Hutchins a fee, computed daily and paid
monthly, at the annual rate of 0.70% of the Fund's average daily net assets.
For the fiscal years ended March 31, 1995, March 31, 1994 and March 31, 1993,
the Fund paid (or accrued) to Mitchell Hutchins investment advisory and
administration fees totalling $480,025, $513,461 and $376,258, respectively.
 
  Pursuant to the Service Agreement, for the fiscal years ended March 31,
1995, March 31, 1994 and March 31, 1993, Financial Services Growth Fund paid
(or accrued) to PaineWebber $22,723, $22,270 and $14,702, respectively.
 
  UTILITY INCOME FUND. Mitchell Hutchins acts as the investment adviser and
administrator of Utility Income Fund pursuant to an Advisory Contract with the
Trust dated April 21, 1988, as supplemented by a separate Fee Agreement dated
May 1, 1992. Under the Advisory Contract, the Trust pays Mitchell Hutchins an
annual fee of 0.70% of the Fund's average net assets, computed daily and paid
monthly. For the fiscal years ended November 30, 1995 and November 30, 1994
and the period July 2, 1993 (commencement of operations) to November 30, 1993,
the Trust paid (or accrued) to Mitchell Hutchins investment advisory and
administration fees of $436,613, $515,462 and $190,913, respectively.
 
 
                                      31
<PAGE>
 
  Pursuant to the Service Agreement, for the fiscal years ended November 30,
1995 and November 30, 1994 and the period July 2, 1993, (commencement of
operations) to November 30, 1993, Utility Income Fund paid (or accrued) to
PaineWebber $24,449, $28,223 and $10,021, respectively.
 
  NET ASSETS. The following table shows the approximate net assets as of
February 29, 1996, sorted by category of investment objective, of the
investment companies as to which Mitchell Hutchins serves as adviser or sub-
adviser. An investment company may fall into more than one of the categories
below.
 
<TABLE>
<CAPTION>
                                                                      NET ASSETS
                                                                       ($ MIL)
      INVESTMENT CATEGORY                                             ----------
      <S>                                                             <C>
      Domestic (excluding Money Market).............................. $ 5,653.6
      Global.........................................................   2,836.8
      Equity/Balanced................................................   2,922.3
      Fixed Income (excluding Money Market)..........................   5,568.1
        Taxable Fixed Income.........................................   3,854.2
        Tax-Free Fixed Income........................................   1,713.9
      Money Market Funds.............................................  22,732.0
</TABLE>
 
  PERSONNEL TRADING POLICIES. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to codes of ethics that describes
the fiduciary duty owed to shareholders of PaineWebber mutual funds and other
Mitchell Hutchins advisory accounts by all Mitchell Hutchins' directors,
officers and employees, establishes procedures for personal investing and
restricts certain transactions. For example, employee accounts generally must
be maintained at PaineWebber, personal trades in most securities require pre-
clearance and short-term trading and participation in initial public offerings
generally are prohibited. In addition, the code of ethics puts restrictions on
the timing of personal investing in relation to trades by PaineWebber Funds
and other Mitchell Hutchins advisory clients. Sub-Adviser personnel may also
invest in securities for their own accounts pursuant to a comparable code of
ethics.
 
  DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
Funds' Class A, Class B and Class C shares of each Fund under separate
distribution contracts with each Fund dated July 7, 1993 or November 10, 1995
(collectively, "Distribution Contracts") that require Mitchell Hutchins to use
its best efforts, consistent with its other businesses, to sell shares of each
Fund. Shares of each of the Funds are offered continuously. Under separate
exclusive dealer agreements between Mitchell Hutchins and PaineWebber dated
July 7, 1993 or November 10, 1995 relating to the Class A, Class B and Class C
shares (collectively, "Exclusive Dealer Agreements"), PaineWebber and its
correspondent firms sell the Funds' shares.
 
  Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares adopted by each Trust or Corporation in the manner prescribed
under Rule 12b-1 under the 1940 Act ("Class A Plan," "Class B Plan" and "Class
C Plan," collectively, "Plans"), each Fund pays Mitchell Hutchins a service
fee, accrued daily and payable monthly, at the annual rate of 0.25% of the
average daily net assets of each Class of shares for each respective Fund.
Under the Class B Plan and the Class C Plan, each Fund pays Mitchell Hutchins
a distribution fee, accrued daily and payable monthly, at the annual rate of
0.75% of the average daily net assets of the Class B shares and Class C shares
of each respective Fund.
 
  Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to each Fund's board of trustees or board of directors at least
quarterly, and the trustees or directors will review, reports regarding all
amounts expended under the Plan and the purposes for which such expenditures
were made, (2) the Plan will
 
                                      32
<PAGE>
 
continue in effect only so long as it is approved at least annually, and any
material amendment thereto is approved, by each board of trustees or board of
directors, including those trustees or directors who are not "interested
persons" of their respective Funds and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to
the Plan, acting in person at a meeting called for that purpose, (3) payments
by a Fund under the Plan shall not be materially increased without the
affirmative vote of the holders of a majority of the outstanding shares of the
relevant class of the respective Fund and (4) while the Plan remains in
effect, the selection and nomination of trustees or directors who are not
"interested persons" of the Funds shall be committed to the discretion of the
trustees or directors who are not "interested persons" of their respective
Funds.
 
  In reporting amounts expended under the Plans to the trustees or directors,
Mitchell Hutchins allocates expenses attributable to the sale of each Class of
each Fund's shares to such Class based on the ratio of sales of shares of such
Class to the sales of all three Classes of shares. The fees paid by one Class
of a Fund's shares will not be used to subsidize the sale of any other Class
of Fund shares.
 
  For the fiscal year ended March 31, 1995 (for Capital Appreciation Fund and
Financial Services Growth Fund) and November 30, 1995 (for Utility Income
Fund), the Funds paid (or accrued) the following respective fees to Mitchell
Hutchins under the Plans:
 
<TABLE>
<CAPTION>
                                                              FINANCIAL
                                                   CAPITAL     SERVICE  UTILITY
                                                 APPRECIATION  GROWTH    INCOME
                                                     FUND       FUND      FUND
                                                 ------------ --------- --------
   <S>                                           <C>          <C>       <C>
   Class A......................................  $  146,951  $124,319  $ 28,100
   Class B......................................  $1,322,393  $142,332  $380,824
   Class C......................................  $  257,893  $ 46,135  $130,503
</TABLE>
 
  Mitchell Hutchins estimates that it and its parent corporation, PaineWebber,
incurred the following shareholder service-related and distribution-related
expenses with respect to each Fund during the fiscal year ended March 31, 1995
(for Capital Appreciation Fund and Financial Services Growth Fund) and
November 30, 1995 (for Utility Income Fund):
 
<TABLE>
<CAPTION>
                                                        FINANCIAL
                                             CAPITAL    SERVICES  UTILITY
                                           APPRECIATION  GROWTH    INCOME
                                               FUND       FUND      FUND
                                           ------------ --------- --------
<S>                                        <C>          <C>       <C>
                                 CLASS A
Marketing and advertising................    $ 25,350   $ 14,403  $ 33,365
Printing of prospectuses and statement of
 additional information..................    $  1,834   $  4,851  $     93
Branch network costs allocated and inter-
 est expense.............................    $279,694   $ 63,628  $ 31,627
Service fees paid to PaineWebber Invest-
 ment Executives.........................    $ 66,128   $ 55,944  $ 12,645
 
                                    CLASS B
Marketing and advertising................    $ 57,431   $ 18,082  $159,959
Amortization of commissions..............    $568,533   $ 67,011  $189,121
Printing of prospectuses and statement of
 additional information..................    $  4,068   $  1,611  $    447
Branch network costs allocated and inter-
 est expense.............................    $703,288   $117,529  $191,113
Service fees paid to PaineWebber invest-
 ment executives.........................    $148,770   $ 16,012  $ 42,843
</TABLE>
 
                                      33
<PAGE>
 
<TABLE>
<CAPTION>
                                                        FINANCIAL
                                             CAPITAL    SERVICES  UTILITY
                                           APPRECIATION  GROWTH   INCOME
                                               FUND       FUND     FUND
                                           ------------ --------- -------
                                    CLASS C
<S>                                        <C>          <C>       <C>
Marketing and advertising.................   $ 29,735   $ 25,515  $41,770
Amortization of commissions...............   $ 36,119   $ 19,875  $28,994
Printing of prospectuses and statement of
 additional information...................   $  2,074   $    409  $   117
Branch network costs allocated and inter-
 est expense..............................   $344,927   $195,843  $42,551
Service fees paid to PaineWebber invest-
 ment executives..........................   $ 29,013   $  5,190  $14,682
</TABLE>
 
  "Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing the Funds' shares. These
internal costs encompass office rent, salaries and other overhead expenses of
various departments and areas of operations of Mitchell Hutchins. "Branch
network costs allocated and interest expense" consist of an allocated portion
of the expenses of various PaineWebber departments involved in the
distribution of the Funds' shares, including the PaineWebber retail branch
system.
 
  In approving the Funds' overall Flexible PricingSM system of distribution,
each Trust's or Corporation's board considered several factors, including that
implementation of Flexible Pricing would (1) enable investors to choose the
purchasing option best suited to their individual situation, thereby
encouraging current shareholders to make additional investments in each
respective Fund and attracting new investors and assets to the Fund to the
benefit of the Fund and its shareholders, (2) facilitate distribution of the
Funds' shares and (3) maintain the competitive position of the Funds in
relation to other funds that have implemented or are seeking to implement
similar distribution arrangements.
 
  In approving the Class A Plan, the trustees or directors of each Fund
considered all the features of the distribution system, including (1) the
conditions under which initial sales charges would be imposed and the amount
of such charges, (2) Mitchell Hutchins' belief that the initial sales charge
combined with a service fee would be attractive to PaineWebber investment
executives and correspondent firms, resulting in greater growth of the Fund
than might otherwise be the case, (3) the advantages to the shareholders of
economies of scale resulting from growth in the Fund's assets and potential
continued growth, (4) the services provided to the Fund and its shareholders
by Mitchell Hutchins, (5) the services provided by PaineWebber pursuant to its
Exclusive Dealer Agreement with Mitchell Hutchins and (6) Mitchell Hutchins'
shareholder service-related expenses and costs.
 
  In approving the Class B Plan, the trustees or directors of each Fund
considered all the features of the distribution system, including (1) the
conditions under which contingent deferred sales charges would be imposed and
the amount of such charges, (2) the advantage to investors in having no
initial sales charges deducted from Fund purchase payments and instead having
the entire amount of their purchase payments immediately invested in Fund
shares, (3) Mitchell Hutchins' belief that the ability of PaineWebber
investment executives and correspondent firms to receive sales commissions
when Class B shares are sold and continuing service fees thereafter while
their customers invest their entire purchase payments immediately in Class B
shares would prove attractive to the investment executives and correspondent
firms, resulting in greater growth of the Fund than might otherwise be the
case, (4) the advantages to the shareholders of economies of scale resulting
from growth in the Fund's assets and potential continued growth, (5) the
services provided to the Fund and its shareholders by Mitchell Hutchins, (6)
the services provided by PaineWebber pursuant to its Exclusive Dealer
Agreement with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder
service and distribution-related expenses and costs. The trustees and
directors also recognized that Mitchell Hutchins'
 
                                      34
<PAGE>
 
willingness to compensate PaineWebber and its investment executives, without
the concomitant receipt by Mitchell Hutchins of initial sales charges, was
conditioned upon its expectation of being compensated under the Class B Plan.
 
  In approving the Class C Plan, the trustees or directors of each Fund
considered all the features of the distribution system, including (1) the
advantage to investors in having no initial sales charges deducted from the
Fund purchase payments and instead having the entire amount of their purchase
payments immediately invested in Fund shares, (2) the advantage to investors
in being free from contingent deferred sales charges upon redemption for
shares held more than one year and paying for distribution on an ongoing
basis, (3) Mitchell Hutchins' belief that the ability of PaineWebber
investment executives and correspondent firms to receive sales compensation
for their sales of Class C shares on an ongoing basis, along with continuing
service fees, while their customers invest their entire purchase payments
immediately in Class C shares and generally do not face contingent deferred
sales charges, would prove attractive to the investment executives and
correspondent firms, resulting in greater growth to the Fund than might
otherwise be the case, (4) the advantages to the shareholders of economies of
scale resulting from growth in the Fund's assets and potential continued
growth, (5) the services provided to the Fund and its shareholders by Mitchell
Hutchins, (6) the services provided by PaineWebber pursuant to its Exclusive
Dealer Agreement with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder
service- and distribution-related expenses and costs. The trustees and
directors also recognized that Mitchell Hutchins' willingness to compensate
PaineWebber and its investment executives without the concomitant receipt by
Mitchell Hutchins of initial sales charges or contingent deferred sales
charges upon redemption, was conditioned upon its expectation of being
compensated under the Class C Plan.
 
  With respect to each Plan, the trustees or directors considered all
compensation that Mitchell Hutchins would receive under the Plan and the
Distribution Contract, including service fees and, as applicable, initial
sales charges, distribution fees and contingent deferred sales charges. The
trustees and directors also considered the benefits that would accrue to
Mitchell Hutchins under each Plan in that Mitchell Hutchins would receive
service, distribution and advisory fees which are calculated based upon a
percentage of the average net assets of each Fund, which would increase if the
Plan were successful and the Fund attained and maintained significant asset
levels.
 
  Under the Distribution Contracts, for the Class A shares and similar prior
distribution contracts, for the fiscal years set forth below, Mitchell
Hutchins earned the following approximate amounts of sales charges and
retained the following approximate amounts, net of concessions to PaineWebber
as exclusive dealer.
 
<TABLE>
<CAPTION>
                                                         FISCAL YEAR END
                                                   ----------------------------
                                                     1995     1994      1993
                                                   -------- -------- ----------
<S>                                                <C>      <C>      <C>
CAPITAL APPRECIATION FUND
Earned............................................ $118,445 $286,632 $1,566,801
Retained.......................................... $  7,400 $ 16,609 $   93,862
FINANCIAL SERVICES GROWTH FUND
Earned............................................ $ 65,516 $130,214 $  104,620
Retained.......................................... $ 37,931 $ 85,205 $   15,815
UTILITY INCOME FUND
Earned............................................ $ 12,015 $ 74,565 $  650,971
Retained.......................................... $    608 $  4,440 $   72,315
</TABLE>
 
 
                                      35
<PAGE>
 
  For the fiscal year ended August 31, 1995 (for Capital Appreciation Fund and
Financial Services Growth Fund) and November 30, 1995 (for Utility Income
Fund), Mitchell Hutchins earned and retained $574,248, $81,254, and $276,058,
respectively, in contingent deferred sales charges paid upon certain
redemptions of Class B shares.
 
                            PORTFOLIO TRANSACTIONS
 
  Subject to policies established by each Fund's board, Mitchell Hutchins or
the Sub-Adviser, as applicable, is responsible for the execution of each
Fund's portfolio transactions and the allocation of brokerage transactions. In
executing portfolio transactions, Mitchell Hutchins or the Sub-Adviser seeks
to obtain the best net results for a Fund, taking into account such factors as
the price (including the applicable brokerage commission or dealer spread),
size of order, difficulty of execution and operational facilities of the firm
involved. While Mitchell Hutchins and the Sub-Adviser generally seek
reasonably competitive commission rates, payment of the lowest commission is
not necessarily consistent with obtaining the best net results. Prices paid to
dealers in principal transactions, through which most debt securities and some
equity securities are traded, generally include a "spread," which is the
difference between the prices at which the dealer is willing to purchase and
sell a specific security at the time. The Funds may invest in securities
traded in the OTC market and will engage primarily in transactions directly
with the dealers who make markets in such securities, unless a better price or
execution could be obtained by using a broker. For the fiscal years ended
March 31, 1995, and March 31, 1994 and the period from April 7, 1992
(commencement of operations) to March 31, 1993, Capital Appreciation Fund paid
$322,307, $421,737 and $577,885, respectively, in brokerage commissions. For
the fiscal years ended March 31, 1995, March 31, 1994 and March 31, 1993,
Financial Services Growth Fund paid $20,088, $28,924 and $49,552,
respectively, in brokerage commissions. For the fiscal years ended November
30, 1995, and November 30, 1994 and the period July 2, 1993 (commencement of
operations) to November 30, 1993, Utility Income Fund paid $74,250, $185,420
and $107,760, respectively, in brokerage commissions.
 
  The Funds have no obligation to deal with any broker or group of brokers in
the execution of portfolio transactions. The Funds contemplate that,
consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through PaineWebber. Each Fund's board of
trustees or board of directors has adopted procedures in conformity with Rule
17e-1 under the 1940 Act to ensure that all brokerage commissions paid to
PaineWebber are reasonable and fair. Specific provisions in the Advisory
Contracts authorize PaineWebber to effect portfolio transactions for the Funds
on such exchange and to retain compensation in connection with such
transactions. Any such transactions will be effected and related compensation
paid only in accordance with applicable SEC regulations. For the fiscal years
ended March 31, 1995 and (for Utility Income Fund) November 30, 1995, no Fund
paid any brokerage commissions to PaineWebber or any other Mitchell Hutchins
affiliate. For the fiscal year ended March 31, 1994 and the period April 7,
1992 (commencement of operations) to March 31, 1993, Capital Appreciation Fund
paid $2,730 and $0, respectively in brokerage commissions to PaineWebber. For
the fiscal years ended March 31, 1994 and March 31, 1993, Financial Services
Growth Fund paid $0 and $4200, respectively, in brokerage commissions to
PaineWebber. For the fiscal years ended November 30, 1994 and the period July
2, 1993 (commencement of operations) to November 30, 1993, Utility Income Fund
paid no brokerage commissions to PaineWebber or any other affiliate of
Mitchell Hutchins.
 
  Transactions in futures contracts are executed through futures commission
merchants ("FCMs"), who receive brokerage commissions for their services. The
Funds' procedures in selecting FCMs to execute their
 
                                      36
<PAGE>
 
transactions in futures contracts, including procedures permitting the use of
PaineWebber are similar to those in effect with respect to brokerage
transactions in securities.
 
  Consistent with the interests of the Funds and subject to the review of each
Fund's board of trustees or board of directors, Mitchell Hutchins or the Sub-
Adviser may cause a Fund to purchase and sell portfolio securities from and to
dealers or through brokers who provide that Fund with research, analysis,
advice and similar services. In return for such services, the Funds may pay to
those brokers a higher commission than may be charged by other brokers,
provided that Mitchell Hutchins or the Sub-Adviser determines in good faith
that such commission is reasonable in terms either of that particular
transaction or of the overall responsibility of Mitchell Hutchins or the Sub-
Adviser, as applicable, to that Fund and its other clients and that the total
commissions paid by the Fund will be reasonable in relation to the benefits to
the Fund over the long term. For the fiscal year ended March 31, 1995 (for
Capital Appreciation Fund and Financial Services Growth Fund) and November 30,
1995 (for Utility Income Fund), Mitchell Hutchins or the Sub-Adviser directed
$45,882,954, $743,887 and $7,084,068, respectively, in portfolio transactions
to brokers chosen because they provided research services, for which the Funds
paid $75,512, $1,400 and $10,010, respectively, in commissions.
 
  For purchases or sales with broker-dealer firms which act as principal,
Mitchell Hutchins or the Sub-Adviser seeks best execution. Although Mitchell
Hutchins and the Sub-Adviser may receive certain research or execution
services in connection with these transactions, Mitchell Hutchins and the Sub-
Adviser will not purchase securities at a higher price or sell securities at a
lower price than would otherwise be paid if no weight was attributed to the
services provided by the executing dealer. Moreover, Mitchell Hutchins and the
Sub-Adviser will not enter into any explicit soft dollar arrangements relating
to principal transactions and will not receive in principal transactions the
types of services which could be purchased for hard dollars. Mitchell Hutchins
or the Sub-Adviser may engage in agency transactions in OTC equity and debt
securities in return for research and execution services. These transactions
are entered into only in compliance with procedures ensuring that the
transaction (including commissions) is at least as favorable as it would have
been if effected directly with a market-maker that did not provide research or
execution services. These procedures include Mitchell Hutchins or the Sub-
Adviser receiving multiple quotes from dealers before executing the
transactions on an agency basis.
 
  Information and research services furnished by brokers or dealers through
which or with which the Funds effect securities transactions may be used by
Mitchell Hutchins or the Sub-Adviser in advising other funds or accounts and,
conversely, research services furnished to Mitchell Hutchins or the Sub-
Adviser by brokers or dealers in connection with other funds or accounts that
either of them advises may be used in advising the Funds. Information and
research received from brokers or dealers will be in addition to, and not in
lieu of, the services required to be performed by Mitchell Hutchins under the
Advisory Contract or the Sub-Adviser under the Sub-Advisory Contract.
 
  Investment decisions for a Fund and for other investment accounts managed by
Mitchell Hutchins or by the Sub-Adviser are made independently of each other
in light of differing considerations for the various accounts. However, the
same investment decision may occasionally be made for a Fund and one or more
of such accounts. In such cases, simultaneous transactions are inevitable.
Purchases or sales are then averaged as to price and allocated between that
Fund and such other account(s) as to amount according to a formula deemed
equitable to the Fund and such account(s). While in some cases this practice
could have a detrimental effect upon the price or value of the security as far
as the Funds are concerned, or upon their ability to complete their entire
order, in other cases it is believed that coordination and the ability to
participate in volume transactions will be beneficial to the Funds.
 
                                      37
<PAGE>
 
  The Funds will not purchase securities that are offered in underwritings in
which PaineWebber is a member of the underwriting or selling group, except
pursuant to procedures adopted by each Fund's board of trustees or board of
directors pursuant to Rule 10f-3 under the 1940 Act. Among other things, these
procedures require that the spread or commission paid in connection with such
a purchase be reasonable and fair, the purchase be at not more than the public
offering price prior to the end of the first business day after the date of
the public offering and that PaineWebber or any affiliate thereof not
participate in or benefit from the sale to the Funds.
 
  PORTFOLIO TURNOVER. The Funds' annual portfolio turnover rates may vary
greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate is
calculated by dividing the lesser of each Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of securities in the portfolio during the year.
 
  The Funds' respective portfolio turnover rates for the preceding two fiscal
years were:
 
<TABLE>
<S>                                                                          <C>
CAPITAL APPRECIATION FUND
Fiscal Year ended March 31, 1995............................................ 42%
Fiscal Year ended March 31, 1994............................................ 60%
FINANCIAL SERVICES GROWTH FUND
Fiscal Year ended March 31, 1995............................................ 14%
Fiscal Year ended March 31, 1994............................................ 22%
UTILITY INCOME FUND
Fiscal Year ended November 30, 1995......................................... 30%
Fiscal Year ended November 30, 1994......................................... 92%
</TABLE>
 
           REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
                        INFORMATION AND OTHER SERVICES
 
  COMBINED PURCHASE PRIVILEGE-CLASS A SHARES. Investors and eligible groups of
related Fund investors may combine purchases of Class A shares of the Funds
with concurrent purchases of Class A shares of any other PaineWebber mutual
fund and thus take advantage of the reduced sales charges indicated in the
table of sales charges for Class A shares in the Prospectus. The sales charge
payable on the purchase of Class A shares of the Funds and Class A shares of
such other funds will be at the rates applicable to the total amount of the
combined concurrent purchases.
 
  An "eligible group of related Fund investors" can consist of any combination
of the following:
 
    (a) an individual, that individual's spouse, parents and children;
 
    (b) an individual and his or her Individual Retirement Account ("IRA");
 
    (c) an individual (or eligible group of individuals) and any company
  controlled by the individual(s) (a person, entity or group that holds 25%
  or more of the outstanding voting securities of a corporation will be
  deemed to control the corporation, and a partnership will be deemed to be
  controlled by each of its general partners);
 
    (d) an individual (or eligible group of individuals) and one or more
  employee benefit plans of a company controlled by individual(s);
 
 
                                      38
<PAGE>
 
    (e) an individual (or eligible group of individuals) and a trust created
  by the individual(s), the beneficiaries of which are the individual and/or
  the individual's spouse, parents or children;
 
    (f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers to
  Minors Act account created by the individual or the individual's spouse;
 
    (g) an employer (or group of related employers) and one or more qualified
  retirement plans of such employer or employers (an employer controlling,
  controlled by or under common control with another employer is deemed
  related to that other employer); or
 
    (h) individual accounts related together under one registered investment
  adviser having full discretion and control over the accounts. The
  registered investment adviser must communicate at least quarterly through a
  newsletter or investment update establishing a relationship with all of the
  accounts.
 
  RIGHTS OF ACCUMULATIONS-CLASS A SHARES. Reduced sales charges are available
through a right of accumulation, under which investors and eligible groups of
related Fund investors (as defined above) are permitted to purchase Class A
shares of the Funds among related accounts at the offering price applicable to
the total of (1) the dollar amount then being purchased plus (2) an amount
equal to the then-current net asset value of the purchaser's combined holdings
of Class A Fund shares and Class A shares of any other PaineWebber mutual
fund. The purchaser must provide sufficient information to permit confirmation
of his or her holdings, and the acceptance of the purchase order is subject to
such confirmation. The right of accumulation may be amended or terminated at
any time.
 
  WAIVERS OF SALES CHARGES-CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where
the decedent is either the individual shareholder or owns the shares with his
or her spouse as a joint tenant with right of survivorship. This waiver
applies only to redemption of shares held at the time of death.
 
  Certain PaineWebber mutual funds offered shares subject to contingent
deferred sales charges before the implementation of the Flexible Pricing
System on July 1, 1991 ("CDSC Funds"). The contingent deferred sales charge is
waived with respect to redemptions of Class B shares of CDSC Funds purchased
prior to July 1, 1991 by officers, directors (trustees) or employees of the
CDSC Funds, Mitchell Hutchins or their affiliates (or their spouses and
children under age 21). In addition, the contingent deferred sales charge will
be reduced by 50% with respect to redemptions of Class B shares of CDSC Funds
purchased prior to July 1, 1991 with a net asset value at the time of purchase
of at least $1 million. If Class B shares of a CDSC Fund purchased prior to
July 1, 1991 are exchanged for Class B shares of the Funds, any waiver or
reduction of the contingent deferred sales charge that applied to the Class B
Shares of the CDSC Fund will apply to the Class B shares of the Funds acquired
through the exchange.
 
  ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of the Funds may be exchanged for shares of the
corresponding Class of most other PaineWebber mutual funds. This exchange
privilege is available only in those jurisdictions where the sale of
PaineWebber fund shares to be acquired through such exchange may be legally
made. Shareholders will receive at least 60 days' notice of any termination or
material modification of the exchange offer, except no notice need be given of
an amendment whose only material effect is to reduce the exchange fee and no
notice need be given if, under extraordinary circumstances, either redemptions
are suspended under the circumstances described below or a Fund temporarily
delays or ceases the sales of its shares because it is unable to invest
amounts effectively in accordance with the Fund's investment objective,
policies and restrictions.
 
 
                                      39
<PAGE>
 
  If conditions exist that make cash payments undesirable, the Funds reserve
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Funds and valued in the same way as they
would be valued for purposes of computing the Funds' net asset value. If
payment is made in securities, a shareholder may incur brokerage expenses in
converting these securities into cash. Each Fund has elected, however, to be
governed by Rule 18f-1 under the 1940 Act, under which the Funds are obligated
to redeem shares solely in cash up to the lesser of $250,000 or 1% of the net
asset value of the Funds during any 90-day period for one shareholder. This
election is irrevocable unless the SEC permits its withdrawal.
 
  The Funds may suspend redemption privileges or postpone the date of payment
during any period (1) when the NYSE is closed or trading on the NYSE is
restricted as determined by the SEC, (2) when an emergency exists, as defined
by the SEC, that makes it not reasonably practicable for a Fund to dispose of
securities owned by it or fairly to determine the value of its assets or (3)
as the SEC may otherwise permit. The redemption price may be more or less than
the shareholder's cost, depending on the market value of a Fund's portfolio at
the time.
 
  SYSTEMATIC WITHDRAWAL PLAN. On or about the 15th of each month for monthly
plans and on or about the 15th of the months selected for quarterly or semi-
annual plans, PaineWebber will arrange for redemption by the Funds of
sufficient Fund shares to provide the withdrawal payment specified by
participants in the Funds' systematic withdrawal plan. The payment generally
is mailed approximately five business days after the redemption date.
Withdrawal payments should not be considered dividends, but redemption
proceeds, with the tax consequences described under "Dividends and Taxes" in
the Prospectus. If periodic withdrawals continually exceed reinvested
dividends, a shareholder's investment may be correspondingly reduced. A
shareholder may change the amount of the systematic withdrawal or terminate
participation in the systematic withdrawal plan at any time without charge or
penalty by written instructions with signatures guaranteed to PaineWebber or
PFPC Inc. ("Transfer Agent"). Instructions to participate in the plan, change
the withdrawal amount or terminate participation in the plan will not be
effective until five days after written instructions with signatures
guaranteed are received by the Transfer Agent. Shareholders may request the
forms needed to establish a systematic withdrawal plan from their PaineWebber
investment executives, correspondent firms or the Transfer Agent at 1-800-647-
1568.
 
  REINSTATEMENT PRIVILEGE-CLASS A SHARES. As described in the Prospectus,
shareholders who have redeemed their Class A shares may reinstate their
account in the Funds without a sales charge. Shareholders may exercise the
reinstatement privilege by notifying the Transfer Agent of such desire and
forwarding a check for the amount to be purchased within 365 days after the
date of redemption. The reinstatement will be made at the net asset value per
share next computed after the notice of reinstatement and check are received.
The amount of a purchase under this reinstatement privilege cannot exceed the
amount of the redemption proceeds. Gain on a redemption is taxable regardless
of whether the reinstatement privilege is exercised; however, a loss arising
out of a redemption will not be deductible to the extent the reinstatement
privilege is exercised within 30 days after redemption, and an adjustment will
be made to the shareholder's tax basis for shares acquired pursuant to the
reinstatement privilege. Gain or loss on a redemption also will be adjusted
for federal income tax purposes by the amount of any sales charge paid on
Class A shares, under the circumstances and to the extent described in
"Dividends and Taxes" in the Prospectus.
 
PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN/SM/
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(R) (RMA)/(R)/
 
  Shares of PaineWebber mutual funds (each a "PW Fund" and, collectively, the
"PW Funds") are available for purchase through the RMA Resource Accumulation
Plan ("Plan") by customers of PaineWebber
 
                                      40
<PAGE>
 
and its correspondent firms who maintain Resource Management Accounts ("RMA
accountholders"). The Plan allows an RMA accountholder to continually invest
in one or more of the PW Funds at regular intervals, with payment for shares
purchased automatically deducted from the client's RMA account. The client may
elect to invest at monthly or quarterly intervals and may elect either to
invest a fixed dollar amount (minimum $100 per period) or to purchase a fixed
number of shares. A client can elect to have Plan purchases executed on the
first or fifteenth day of the month. Settlement occurs three Business Days
(defined under "Valuation of Shares") after the trade date, and the purchase
price of the shares is withdrawn from the investor's RMA account on the
settlement date from the following sources and in the following order:
uninvested cash balances, balances in RMA money market funds, or margin
borrowing power, if applicable to the account.
 
  To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client
Agreement and Instruction Form available from PaineWebber. The investor must
have received a current prospectus for each PW Fund selected prior to
enrolling in the Plan. Information about mutual fund positions and outstanding
instructions under the Plan are noted on the RMA accountholder's account
statement. Instructions under the Plan may be changed at any time, but may
take up to two weeks to become effective.
 
  The terms of the Plan, or an RMA accountholder's participation in the Plan,
may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds
may be offered through the Plan.
 
PERIODIC INVESTING AND DOLLAR COST AVERAGING.
 
  Periodic investing in the PW Funds or other mutual funds, whether through
the Plan or otherwise, helps investors establish and maintain a disciplined
approach to accumulating assets over time, de-emphasizing the importance of
timing the market's highs and lows. Periodic investing also permits an
investor to take advantage of "dollar cost averaging." By investing a fixed
amount in mutual fund shares at established intervals, an investor purchases
more shares when the price is lower and fewer shares when the price is higher,
thereby increasing his or her earning potential. Of course, dollar cost
averaging does not guarantee a profit or protect against a loss in a declining
market, and an investor should consider his or her financial ability to
continue investing through periods of low share prices. However, over time,
dollar cost averaging generally results in a lower average original investment
cost than if an investor invested a larger dollar amount in a mutual fund at
one time.
 
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT.
 
  In order to enroll in the Plan, an investor must have opened an RMA account
with PaineWebber or one of its correspondent firms. The RMA account is
PaineWebber's comprehensive asset management account and offers investors a
number of features, including the following:
 
  . monthly Premier account statements that itemize all account activity,
    including investment transactions, checking activity and Gold MasterCard
    (R) transactions during the period, and provide unrealized and realized
    gain and loss estimates for most securities held in the account;
 
  . comprehensive preliminary 9-month and year-end summary statements that
    provide information on account activity for use in tax planning and tax
    return preparation;
 
 
                                      41
<PAGE>
 
  . automatic "sweep" of uninvested cash into the RMA accountholder's choice
    of one of the seven RMA money market funds-RMA Money Market Portfolio,
    RMA U.S. Government Portfolio, RMA Tax-Free Fund, RMA California
    Municipal Money Fund, RMA Connecticut Municipal Money Fund, RMA New
    Jersey Municipal Money Fund and RMA New York Municipal Money Fund. Each
    money market fund attempts to maintain a stable price per share of $1.00,
    although there can be no assurance that it will be able to do so.
    Investments in the money market funds are not insured or guaranteed by
    the U.S. government;
 
  . check writing, with no per-check usage charge, no minimum amount on
    checks and no maximum number of checks that can be written. RMA
    accountholders can code their checks to classify expenditures. All
    canceled checks are returned each month;
 
  . Gold MasterCard, with or without a line of credit, which provides RMA
    accountholders with direct access to their accounts and can be used with
    automatic teller machines worldwide. Purchases on the Gold MasterCard are
    debited to the RMA account once monthly, permitting accountholders to
    remain invested for a longer period of time;
 
  . 24-hour access to account information through toll-free numbers, and more
    detailed personal assistance during business hours from the RMA Service
    Center;
 
  . expanded account protection to $25 million in the event of the
    liquidation of PaineWebber. This protection does not apply to shares of
    the RMA money market funds or the PW Funds because those shares are held
    at the transfer agent and not through PaineWebber; and
 
  . automatic direct deposit of checks into your RMA account and automatic
    withdrawals from the account.
 
  The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
 
                         CONVERSION OF CLASS B SHARES
 
  Class B shares of the Funds will automatically convert to Class A shares,
based on the relative net asset values per share of the two Classes, as of the
close of business on the first Business Day (as defined under "Valuation of
Shares") of the month in which the sixth anniversary of the initial issuance
of such Class B shares of each Fund occurs. For the purpose of calculating the
holding period required for conversion of Class B shares, the date of initial
issuance shall mean (i) the date on which such Class B shares were issued, or
(ii) for Class B shares obtained through an exchange, or a series of
exchanges, the date on which the original Class B shares were issued. If the
shareholder acquired Class B shares of each Fund through an exchange of Class
B shares of a CDSC Fund that were acquired prior to July 1, 1991, the
shareholder's holding period for purposes of conversion will be determined
based on the date the CDSC Fund shares were initially issued. For purposes of
conversion into Class A, Class B shares purchased through the reinvestment of
dividends and other distributions paid in respect of Class B shares will be
held in a separate sub-account. Each time any Class B shares in the
shareholder's regular account (other than those in the sub-account) convert to
Class A, a pro rata portion of the Class B shares in the sub-account will also
convert to Class A. The portion will be determined by the ratio that the
shareholder's Class B shares converting to Class A bears to the shareholder's
total Class B shares not acquired through dividends and other distributions.
 
  The availability of the conversion feature is subject to (1) the continuing
applicability of a ruling of the Internal Revenue Service that the dividends
and other distributions paid on Class A and Class B shares will
 
                                      42
<PAGE>
 
not result in "preferential dividends" under the Internal Revenue Code and (2)
the continuing availability of an opinion of counsel to the effect that the
conversion of shares does not constitute a taxable event. If the conversion
feature ceased to be available, the Class B shares of the Funds would not be
converted and would continue to be subject to the higher ongoing expenses of
the Class B shares beyond six years from the date of purchase. Mitchell
Hutchins has no reason to believe that these conditions for the availability
of the conversion feature will not continue to be met.
 
                              VALUATION OF SHARES
 
  The Funds determine their net asset values per share separately for each
Class of shares as of the close of regular trading (currently 4:00 p.m.,
Eastern time) on the NYSE on each Business Day, which is defined as each
Monday through Friday when the NYSE is open. Currently the NYSE is closed on
the observance of the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
 
  Securities that are listed on U.S. and foreign stock exchanges 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 generally valued on the
exchange considered by Mitchell Hutchins or the Sub-Adviser as the primary
market. Securities traded in the OTC market and listed on Nasdaq are valued at
the last trade price on Nasdaq at 4:00 p.m., Eastern time; other OTC
securities are valued at the last bid price available prior to valuation.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of each Fund's board of trustees or board of directors. In valuing lower rated
corporate debt securities it should be recognized that judgment often plays a
greater role than is the case with respect to securities for which a broader
range of dealer quotations and last-sale information is available. All
investments of Financial Services Growth Fund and Utility Income Fund quoted
in foreign currency will be valued daily in U.S. dollars on the basis of the
foreign currency exchange rate prevailing at the time such valuation is
determined by the Funds' custodian.
 
  Foreign currency exchange rates are generally determined prior to the close
of trading on the NYSE. Occasionally events affecting the value of foreign
investments and such exchange rates occur between the time at which they are
determined and the close of trading on the NYSE, which events would not be
reflected in a computation of the Funds' net asset value on that day. If
events materially affecting the value of such investments or currency exchange
rates occur during such time period, the investments will be valued at their
fair value as determined in good faith by or under the direction of each
Fund's board of trustees or board of directors. The foreign currency exchange
transactions of the Funds conducted on a spot (that is, cash) basis are valued
at the spot rate for purchasing or selling currency prevailing on the foreign
exchange market. This rate under normal market conditions differs from the
prevailing exchange rate in an amount generally less than one-tenth of one
percent due to the costs of converting from one currency to another.
 
                            PERFORMANCE INFORMATION
 
  The Funds' performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represents past performance and is
not intended to indicate future performance. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
 
                                      43
<PAGE>
 
  TOTAL RETURN CALCULATIONS. Average annual total return quotes ("Standardized
Return") used in each Fund's Performance Advertisements are calculated
according to the following formula:
 
<TABLE>
<S>     <C> <C> <C>
 P(1 + T)n    = ERV
                a hypothetical initial payment of $1,000 to purchase shares of a
where:    P   = specified Class
          T   = average annual total return of shares of that Class
          n   = number of years
        ERV   = ending redeemable value of a hypothetical $1,000 payment at the
                beginning of that period.
</TABLE>
 
  Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over
the period. In calculating the ending redeemable value, for Class A shares,
the maximum 4.5% sales charge is deducted from the initial $1,000 payment and,
for Class B and Class C shares, the applicable contingent deferred sales
charge imposed on a redemption of Class B or Class C shares held for the
period is deducted. All dividends and other distributions are assumed to have
been reinvested at net asset value.
 
  The Funds also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The Funds calculate Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in Fund
shares and assuming the reinvestment of all dividends and other distributions.
The rate of return is determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the initial
value. Neither initial nor contingent deferred sales charges are taken into
account in calculating Non-Standardized Return; the inclusion of those charges
would reduce the return.
 
  Both Standardized Return and Non-Standardized Return for Class B shares for
periods of over six years reflect conversion of the Class B shares to Class A
shares at the end of the sixth year.
 
  The following table shows performance information for the Class A, Class B
and Class C (formerly Class D) shares of the Funds for the periods indicated.
All returns for periods of more than one year are expressed as an average
return.
 
                           CAPITAL APPRECIATION FUND
 
<TABLE>
<CAPTION>
                                                         CLASS A CLASS B CLASS C
                                                         ------- ------- -------
<S>                                                      <C>     <C>     <C>
Fiscal year ended March 31, 1995:
  Standardized Return*..................................   5.38%  4.46%    8.45%
  Non-Standardized Return...............................  10.36%  9.46%    9.45%
Inception** to March 31, 1995:
  Standardized Return*..................................   8.80%  8.80%   13.49%
  Non-Standardized Return...............................  10.49%  9.64%   13.49%
</TABLE>
- --------
* All Standardized Return figures for Class A shares reflect deduction of the
  current maximum sales charge of 4.5%. All Standardized Return figures for
  Class B and Class C shares reflect deduction of the applicable contingent
  deferred sales charges imposed on a redemption of shares held for the
  period.
** The inception date for each Class of shares is as follows: Class A--April
   7, 1992, and Class C--July 2, 1992.
 
                                      44
<PAGE>
 
                        FINANCIAL SERVICES GROWTH FUND
 
<TABLE>
<CAPTION>
                                                         CLASS A CLASS B CLASS C
                                                         ------- ------- -------
<S>                                                      <C>     <C>     <C>
Fiscal year ended March 31, 1995:
  Standardized Return*..................................   5.24%   4.37%   8.34%
  Non-Standardized Return...............................  10.22%   9.37%   9.34%
Five years ended March 31, 1995:
  Standardized Return*..................................  19.25%     NA      NA
  Non-Standardized Return...............................  20.36%     NA      NA
Inception** to March 31, 1995:
  Standardized Return*..................................  11.25%  19.91%  12.91%
  Non-Standardized Return...............................  11.84%  20.24%  12.91%
</TABLE>
- --------
* All Standardized Return figures for Class A shares reflect deduction of the
  current maximum sales charge of 4.5%. All Standardized Return figures for
  Class B and Class C shares reflect deduction of the applicable contingent
  deferred sales charges imposed on a redemption of shares held for the
  period.
** The inception date for each Class of shares is as follows: Class A--May 22,
   1986, and Class B--July 1, 1991, and Class C--July 2, 1992.
 
                              UTILITY INCOME FUND
 
<TABLE>
<CAPTION>
                                                         CLASS A CLASS B CLASS C
                                                         ------- ------- -------
<S>                                                      <C>     <C>     <C>
Fiscal year ended November 30, 1995:
  Standardized Return*..................................  18.09%  17.73%  21.71%
  Non-Standardized Return...............................  23.64%  22.73%  22.71%
Inception** to November 30, 1995:
  Standardized Return*..................................   5.64%   5.71%   8.69%
  Non-Standardized Return...............................  10.61%   8.71%   8.69%
</TABLE>
- --------
* All Standardized Return figures for Class A shares reflect deduction of the
  current maximum sales charge of 4.5%. All Standardized Return figures for
  Class B and Class C shares reflect deduction of the applicable contingent
  deferred sales charges imposed on a redemption of shares held for the
  period.
** The inception date for each Classes of shares is follows: Class A--July 2,
   1993, Class B--July 2, 1993, and Class C--July 2, 1993.
 
  OTHER INFORMATION. In Performance Advertisements, the Funds may compare
their Standardized Return and/or their Non-Standardized Return with data
published by Lipper Analytical Services, Inc. ("Lipper"), CDA Investment
Technologies, Inc. ("CDA"), Wiesenberger Investment Companies Service
("Wiesenberger"), Investment Company Data, Inc. ("ICD") or Morningstar Mutual
Funds ("Morningstar"), with the performance of recognized stock and other
indices, including (but not limited to) the Standard & Poor's 500 Composite
Stock Price Index ("S&P 500"), the Dow Jones Industrial Average, the Nasdaq
Composite Index, the Russell 2000 Index, the Wilshire 5000 Index, the Lehman
Bond Index, 30-year and 10-year U.S. Treasury bonds, the Morgan Stanley
Capital International World Index and changes in the Consumer Price Index as
published by the U.S. Department of Commerce. The Funds also may refer in such
materials to mutual fund performance rankings and other data, such as
comparative asset, expense and fee levels, published by Lipper, CDA,
Wiesenberger, ICD or Morningstar. Performance Advertisements also may refer to
discussions of the Funds and comparative mutual fund data and ratings reported
in independent periodicals, including (but not limited to) THE WALL STREET
JOURNAL, MONEY MAGAZINE, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S,
FORTUNE, THE NEW YORK
 
                                      45
<PAGE>
 
TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST AND THE KIPLINGER LETTERS.
Comparisons in Performance Advertisements may be in graphic form.
 
  The Funds may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on a Fund investment are reinvested
in additional Fund shares, any future income or capital appreciation of a Fund
would increase the value, not only of the original Fund investment, but also
of the additional Fund shares received through reinvestment. As a result, the
value of a Fund investment would increase more quickly than if dividends or
other distributions had been paid in cash.
 
  The Funds may also compare their performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Certificate of Deposit
Index, the Bank Rate Monitor National Index and the averages of yields of CDs
of major banks published by Banxquote(R) Money Markets. In comparing the
Funds' performance to CD performance, investors should keep in mind that bank
CDs are insured in whole or in part by an agency of the U.S. government and
offer fixed principal and fixed or variable rates of interest, and that bank
CD yields may vary depending on the financial institution offering the CD and
prevailing interest rates. Shares of the Funds are not insured or guaranteed
by the U.S. government and returns and net asset value will fluctuate. The
securities held by the Funds generally have longer maturities than most CDs
and may reflect interest rate fluctuations for longer term securities. An
investment in any of the Funds involves greater risks than an investment in
either a money market fund or a CD.
 
 
                                      46
<PAGE>
 
  The Funds may also compare its performance to general trends in the stock
and bond markets, as illustrated by the following graph prepared by Ibbotson
Associates, Chicago.
 
 
                             [GRAPH APPEARS HERE]
 
 
The chart is shown for illustrative purposes only and does not represent any
fund's performance. These returns consist of income, capital appreciation (or
depreciation), and should not be considered an indication or guarantee of
future investments results. Year-to-year fluctuations in certain markets have
been significant and negative returns have been experienced in certain markets
from time to time. Stocks are measured by the S&P 500 Index, an unmanaged
weighted index comprising 500 widely held common stock and varying in
composition. Unlike investors in bonds and Treasury bills, common stock
investors do not receive fixed income payments and are not entitled to
repayment of principal. These differences contribute to investment risk.
Returns shown for long-term government bonds are based on Treasury bonds with
20-year maturities. Inflation is measured by the Consumer Price Index. The
indexes are unmanaged and are not available for investment.
- --------
Source: Stocks, Bonds, Bills and Inflation 1996 YearbookTM Ibbotson Assoc.,
Chi., (annual updates work by Roger G. Ibbotson & Rex A. Sinquefield).
 
                                      47
<PAGE>
 
  Over time, stocks have outperformed all other investments by a wide margin,
offering a solid hedge against inflation. From 1926 to 1994, stocks beat all
other traditional asset classes. A $10 investment in the S&P 500 grew to
$8,101, significantly more than any other investment.
 
                                     TAXES
 
  In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code, each Fund must distribute to
its shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income net short-term
capital gain and net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements.
Among these requirements are the following: (1) the Fund must derive at least
90% of its gross income each taxable year from dividends, interest, payments
with respect to securities loans and gains from the sale or other disposition
of securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in securities or those currencies ("Income Requirement"); (2) the
Fund must derive less than 30% of its gross income each taxable year from the
sale or other disposition of securities, or any of the following, that were
held for less than three months--options, futures or forward contracts (other
than those on foreign currencies), or foreign currencies (or options, futures
or forward contracts thereon) that are not directly related to the Fund's
principal business of investing in securities (or options and futures with
respect to securities) ("Short-Short Limitation"); (3) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities,
securities of other RICs and other securities, with these other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of that Fund's total assets and that does not represent more than
10% of the issuer's outstanding voting securities; and (4) at the close of
each quarter of the Fund's taxable year, not more than 25% of the value of its
total assets may be invested in securities (other than U.S. government
securities or the securities of other RICs) of any one issuer.
 
  Dividends and other distributions declared by a Fund in October, November or
December of any year and payable to shareholders of record on a date in any of
those months will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
 
  A portion of the dividends from each Fund's investment company taxable
income (whether paid in cash or reinvested in additional Fund shares) may be
eligible for the dividends-received deduction allowed to corporations. The
eligible portion may not exceed the aggregate dividends received by each Fund
from U.S. corporations. However, dividends received by a corporate shareholder
and deducted by it pursuant to the dividends-received deduction are subject
indirectly to the alternative minimum tax.
 
  If shares of a Fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital
loss to the extent of any capital gain distributions received on those shares.
 
  Investors also should be aware that if shares are purchased shortly before
the record date for any dividend or capital gain distribution, the shareholder
will pay full price for the shares and receive some portion of the price back
as a taxable distribution.
 
                                      48
<PAGE>
 
  Dividends and interest received by a Fund may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors. If more than 50% of the value of
a Fund's total assets at the close of its taxable year consists of securities
of foreign corporations, it will be eligible to, and may, file an election
with the Internal Revenue Service that will enable its shareholders, in
effect, to receive the benefit of the foreign tax credit with respect to any
foreign and U.S. possessions income taxes paid by it. Pursuant to the
election, the Fund would treat those taxes as dividends paid to its
shareholders and each shareholder would be required to (1) include in gross
income, and treat as paid by him or her, his or her proportionate share of
those taxes; (2) treat his or her share of those taxes and of any dividend
paid by the Fund that represents income from foreign or U.S. possessions
sources as his or her own income from those sources; and (3) either deduct the
taxes deemed paid by him or her in computing his or her taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against his or her federal income tax. A Fund will report to its
shareholders shortly after each taxable year their respective shares of the
income from sources within, and taxes paid to, foreign countries and U.S.
possessions if it makes this election.
 
  Each Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
 
  Each Fund may invest in the stock of "passive foreign investment companies"
("PFICs") if such stock is a permissible investment. A PFIC is a foreign
corporation that, in general, meets either of the following tests: (1) at
least 75% of its gross income is passive or (2) an average of at least 50% of
its assets produce, or are held for the production of, passive income. Under
certain circumstances, a Fund will be subject to federal income tax on a
portion of any "excess distribution" received on the stock of a PFIC or of any
gain from disposition of such stock (collectively "PFIC income"), plus
interest thereon, even if the Fund distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included
in the Fund's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders. If
a Fund invests in a PFIC and elects to treat the PFIC as a "qualified electing
fund," then in lieu of the foregoing tax and interest obligation, the Fund
will be required to include in income each year its pro rata share of the
qualified electing fund's annual ordinary earnings and net capital gain (the
excess of net long-term capital gain over net short-term capital loss)--which
would have to be distributed to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax--even if those earnings and gain are not
distributed to the Fund. In most instances it will be very difficult, if not
impossible, to make this election because of certain requirements thereof.
 
  Pursuant to proposed regulations, open-end RICs, such as the Funds, would be
entitled to elect to "mark-to-market" their stock in certain PFICs. "Marking-
to-market," in this context, means recognizing as gain for each taxable year
the excess, as of the end of that year, of the fair market value of each such
PFIC's stock over the owner's adjusted basis in that stock (including mark-to-
market gain for each prior year for which an election was in effect).
 
  The use of hedging strategies, such as writing ("selling") and purchasing
options and futures contracts, and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the
character and timing of recognition of the gains and losses a Fund realizes in
connection therewith. Gains from the disposition of foreign currencies (except
certain gains that may be excluded by future regulations), and gains from
options, futures and forward currency contracts derived by a Fund with
 
                                      49
<PAGE>
 
respect to its business of investing in securities or foreign currencies, will
qualify as permissible income under the Income Requirement. However, income
from the disposition of options and futures contracts (other than those on
foreign currencies) will be subject to the Short-Short Limitation if they are
held for less than three months. Income from the disposition of foreign
currencies, and options, futures and forward contracts on foreign currencies,
that are not directly related to a Fund's principal business of investing in
securities (or options and futures with respect to securities) also will be
subject to the Short-Short Limitation if they are held for less than three
months.
 
  If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease
in value (whether realized or not) of the offsetting hedging position during
the period of the hedge for purposes of determining whether the Fund satisfies
the Short-Short Limitation. Thus, only the net gain (if any) from the
designated hedge will be included in gross income for purposes of that
limitation. Each Fund will consider whether it should seek to qualify for this
treatment for its hedging transactions. To the extent a Fund does not qualify
for this treatment, it may be forced to defer the closing out of certain
options, futures and forward currency contracts beyond the time when it
otherwise would be advantageous to do so, in order for the Fund to continue to
qualify as a RIC.
 
                               OTHER INFORMATION
 
CAPITAL APPRECIATION FUND AND UTILITY INCOME FUND
 
  PaineWebber Managed Assets Trust and PaineWebber Managed Investments Trust
each is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of a Fund could, under certain
circumstances, be held personally liable for the obligations of the Trust or
Fund. However, the Trust's Declaration of Trust disclaims shareholder
liability for acts or obligations of the Trust or the Fund and requires that
notice of such disclaimer be given in each note, bond, contract, instrument,
certificate or undertaking made or issued by the trustees or by any officers
or officer by or on behalf of the Trust or the Fund, the trustees or any of
them in connection with the Trust. The Declaration of Trust provides for
indemnification from the Fund's property for all losses and expenses of any
shareholder held personally liable for the obligations of the Fund. Thus, the
risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the fund itself would be unable
to meet its obligations, a possibility that Mitchell Hutchins believes it
remote and not material. Upon payment of any liability incurred by a
shareholder solely by reason of being or having been a shareholder, the
shareholder paying such liability will be entitled to reimbursement from the
general assets of the Fund. The trustees intend to conduct the Fund's
operations in such a way as to avoid, as far as possible, ultimate liability
of the shareholders for liabilities of the Fund.
 
  Prior to February 26, 1992, PaineWebber Managed Investments Trust was known
as "PaineWebber Fixed Income Portfolios."
 
FINANCIAL SERVICES GROWTH FUND
 
  PaineWebber Financial Services Growth Fund is incorporated in the State of
Maryland. Prior to December 14, 1995, the Fund's name was "PaineWebber
Regional Financial Growth Fund," and prior to July 1, 1991, the Fund's name
was "PaineWebber Classic Regional Financial Fund Inc." Prior to April 1, 1990,
the Fund operated as a closed-end investment company under the name of
"Regional Financial Shares Investment Fund Inc."
 
                                      50
<PAGE>
 
  OTHER CLASSES. Each Fund is authorized to issue Class Y shares in addition
to Class A, Class B and Class C shares. Class Y shares, if issued, would bear
no service or distribution fees, would be sold with no initial sales charge
and would be redeemable at net asset value without the imposition of a
contingent deferred sales charge.
 
  Prior to November 10, 1995, each Fund's Class C shares were known as "Class
D" shares.
 
  CLASS-SPECIFIC EXPENSES. Each Fund may determine to allocate certain of its
expenses (in addition to distribution fees) to the specific Classes of the
Fund's shares to which those expenses are attributable. For example, Class B
shares bear higher transfer agency fees per shareholder account than those
borne by Class A or Class C shares. The higher fee is imposed due to the
higher costs incurred by the transfer agent in tracking shares subject to a
contingent deferred sales charge because, upon redemption, the duration of the
shareholder's investment must be determined in order to determine the
applicable charge. Moreover, the tracking and calculations required by the
automatic conversion feature of the Class B shares will cause the transfer
agent to incur additional costs. Although the transfer agency fee will differ
on a per account basis as stated above, the specific extent to which the
transfer agency fees will differ between the Classes as a percentage of net
assets is not certain, because the fee as a percentage of net assets will be
affected by the number of shareholder accounts in each Class and the relative
amounts of net assets in each Class.
 
  COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, counsel to the Funds, has passed
upon the legality of the shares offered by the Funds' Prospectus. Kirkpatrick
& Lockhart LLP also acts as counsel to PaineWebber and Mitchell Hutchins in
connection with other matters.
 
  AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for the Funds.
 
                             FINANCIAL STATEMENTS
 
  Each Fund's Annual Report to Shareholders for the last fiscal year is a
separate document supplied with this Statement of Additional Information and
the financial statements, accompanying notes and reports of independent
auditors appearing therein are incorporated herein by this reference. The
Semi-Annual Report to Shareholders for Capital Appreciation Fund and Financial
Services Growth Fund each is a separate document supplied with this Statement
of Additional Information and the financial statements and accompanying notes
appearing therein are incorporated herein by reference.
 
                                      51
<PAGE>
 
                                   APPENDIX
 
DESCRIPTION OF MOODY'S INVESTORS SERVICES, INC. ("MOODY'S") CORPORATE BOND
RATINGS
 
  AAA. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
a "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues;
AA. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities; A. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future; BAA. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well; BA. Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class; B. Bonds which are rated B
generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small; CAA. Bonds which are rated
Caa are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest; CA. Bonds
which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings; C.
Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
 
  Note: Moody's apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category, the modifier 2 indicates a mid-range ranking, and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
 
DECRIPTION OF STANDARD & POOR'S ("S&P") CORPORATE DEBT RATINGS
 
  AAA Debt ated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong; AA. Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the
higher rated issues only in small degree; A. Debt rated A has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories; BBB. Debt rated BBB is
regarded as having an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than in
higher rated categories; BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the
 
                                      52
<PAGE>
 
terms of the obligation. BB indicates the lowest degree of speculation and C
the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions; C1. The rating C1
is reserved for income bonds on which no interest is being paid; D. Debt rated
D is in default, and payment of interest and/or repayment of principal is in
arrears.
 
  Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
 
                                      53
<PAGE>
 
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR THEIR DISTRIBUTOR. THE
PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN
OFFERING BY THE FUNDS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
 
                                  ----------
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
Investment Policies and Restrictions.....................................    1
Hedging Strategies.......................................................   10
Trustees and Officers....................................................   20
Investment Advisory and Distribution Arrangements........................   29
Portfolio Transactions...................................................   36
Reduced Sales Charges, Additional Exchange and Redemption Information and
 Other Services..........................................................   38
Conversion of Class B Shares.............................................   42
Valuation of Shares......................................................   43
Performance Information..................................................   43
Taxes....................................................................   48
Other Information........................................................   50
Financial Statements.....................................................   51
Appendix.................................................................   52
</TABLE>
 
(C)1996 PaineWebber Incorporated
                                                                    PaineWebber
                                                       Capital Appreciation Fund
 
                                                                    PaineWebber
                                                  Financial Services Growth Fund
 
                                                                    PaineWebber
                                                             Utility Income Fund
 
 
- --------------------------------------------------------------------------------
                                             Statement of Additional Information
 
                                           April 1, 1996, as revised May 3, 1996
 
- --------------------------------------------------------------------------------
 

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