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PaineWebber Capital Appreciation Fund
PaineWebber Financial Services Growth Fund Inc.
PaineWebber Utility Income Fund
Class Y Shares
1285 Avenue of the Americas, New York, NY 10019
Prospectus -- August 1, 1996
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PaineWebber Stock Funds are designed for investors generally seeking capital
appreciation by investing principally in equity securities. PaineWebber Capital
Appreciation Fund seeks long-term capital appreciation by investing primarily
in equity securities of medium-sized companies. PaineWebber Financial Services
Growth Fund focuses on long-term capital appreciation by investing primarily in
equity securities of companies in the financial services industries.
PaineWebber Utility Income Fund seeks to provide current income and capital ap-
preciation by investing primarily in equity securities and debt instruments of
companies in the utility industries.
This Prospectus concisely sets forth information that a prospective investor
should know about the Funds before investing. Please read it carefully and re-
tain a copy of this Prospectus for future reference.
A Statement of Additional Information dated August 1, 1996 has been filed with
the Securities and Exchange Commission and is legally part of this Prospectus.
The Statement of Additional Information can be obtained without charge, and
further inquiries can be made, by contacting an individual Fund, your invest-
ment executive at PaineWebber or one of its correspondent firms or by calling
toll-free 1-800-647-1568.
The Class Y shares described in this Prospectus are offered for sale only to
limited groups of investors. See "How to Buy Shares."
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY
THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR THEIR DISTRIBUTOR.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUNDS OR THEIR DISTRIBU-
TOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Prospectus Page 1
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PaineWebber Capital Appreciation Fund Financial Services Growth Fund
Inc. Utility Income Fund
Table of Contents
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<TABLE>
<CAPTION>
Page
----
<S> <C>
The Funds at a Glance...................................................... 3
Expense Table.............................................................. 5
Investment Objective and Policies.......................................... 7
Investment Philosophy & Process............................................ 8
Performance................................................................ 9
The Funds' Investments..................................................... 10
How to Buy Shares.......................................................... 13
How to Sell Shares......................................................... 14
Management................................................................. 14
Determining the Shares' Net Asset Value.................................... 16
Dividends & Taxes.......................................................... 16
General Information........................................................ 17
</TABLE>
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Prospectus Page 2
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PaineWebber Capital Appreciation Fund Financial Services Growth Fund
Inc. Utility Income Fund
The Funds at a Glance
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The Funds offered by this Prospectus are not intended to provide a complete or
balanced investment program, but one or more of them may be appropriate as a
component of an investor's overall portfolio. Some common reasons to invest in
these Funds are to finance college educations, plan for retirement or diver-
sify a portfolio. When selling shares, investors should be aware that they may
get more or less for their shares than they originally paid for them. As with
any mutual fund, there is no assurance that the Funds will achieve their
goals.
CAPITAL APPRECIATION FUND
GOAL: To increase the value of your investment by investing principally in the
common stock of medium-sized domestic companies and some foreign companies se-
lected primarily on the basis of earnings growth.
INVESTMENT OBJECTIVE: Long-term capital appreciation.
RISKS: Equity securities historically have shown greater growth potential than
other types of securities, but they have also shown greater volatility. Be-
cause the Fund invests primarily in equity securities, its price will rise and
fall. Medium-sized companies may have higher earnings growth rates than larger
companies, offering the potential for greater returns. However, the greater
potential of these companies may entail greater market volatility and risks of
adverse financial developments. The Fund may invest in U.S. dollar-denominated
securities of foreign companies, which involve more risk than the securities
of U.S. companies. The Fund may use derivatives, such as options and futures,
in its hedging activities, which may involve additional risks. Investors may
lose money by investing in the Fund; the investment is not guaranteed.
SIZE: On June 30, 1996, the Fund had over $275.4 million in assets.
FINANCIAL SERVICES GROWTH FUND
GOAL: To increase the value of your investment by investing primarily in the
equity securities of domestic and foreign financial services companies.
INVESTMENT OBJECTIVE: Long-term capital appreciation.
RISKS: Equity securities historically have shown greater growth potential than
other types of securities, but they have also shown greater volatility. Be-
cause the Fund invests primarily in equity securities, its price will rise and
fall. The Fund's concentration in the banking, thrift, insurance and other fi-
nancial services industries makes it subject to greater risk and volatility
than equity funds that are more diversified, and the value of the Fund's
shares will be affected by economic, competitive and regulatory developments
affecting the financial services industries. The Fund may invest in the secu-
rities of foreign companies, which involve more risk than the securities of
U.S. companies. The Fund may use derivatives, such as options, futures and
foreign currency contracts, in its hedging activities, which may involve addi-
tional risks. Investors may lose money by investing in the Fund; the invest-
ment is not guaranteed.
SIZE: On June 30, 1996, the Fund had over $97.5 million in assets.
UTILITY INCOME FUND
GOAL: To increase the value of your investment and provide current income by
investing primarily in income-producing equity securities and bonds of domes-
tic and foreign companies engaged in the ownership or operation of facilities
used in the generation, transmission or distribution of electricity, telecom-
munications, gas or water.
INVESTMENT OBJECTIVE: Current income and capital appreciation.
RISKS: Equity securities historically have shown greater growth potential than
other types of securities, but they have also shown greater volatility. Be-
cause the Fund invests primarily in equity securities, its price will rise and
fall. The Fund's concentration in the utility industries makes it subject to
greater risk and volatility than funds that are more diversified, and the
value of the Fund's shares will be affected by economic, competitive and regu-
latory developments in those
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Prospectus Page 3
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PaineWebber Capital Appreciation Fund Financial Services Growth Fund
Inc. Utility Income Fund
The Funds at a Glance
(Continued)
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industries. The Fund may invest in the securities of foreign companies, which
involve more risk than the securities of U.S. companies. The Fund may use de-
rivatives, such as options, futures and foreign currency contracts, in its
hedging activities, which may involve additional risks. Investors may lose
money by investing in the Fund; the investment is not guaranteed.
SIZE: On June 30, 1996, the Fund had over $49.5 million in assets.
MANAGEMENT
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), an asset man-
agement subsidiary of PaineWebber Incorporated ("PaineWebber"), is the invest-
ment adviser and administrator of Capital Appreciation Fund, Financial Serv-
ices Growth Fund and Utility Income Fund (each a "Fund" and, collectively, the
"Funds"). Mitchell Hutchins has appointed Denver Investment Advisors, LLC
("Denver Investments") as the investment sub-adviser for Capital Appreciation
Fund.
WHO SHOULD INVEST
CAPITAL APPRECIATION FUND is for investors who want long-term capital appreci-
ation. The Fund seeks to achieve this through investment primarily in the
common stock of medium-sized domestic companies and foreign companies that are
traded in the United States. Equity securities of small- and medium-sized com-
panies offer investors the potential for greater returns than larger companies
but are typically more volatile. Accordingly, Capital Appreciation Fund is de-
signed for investors seeking long-term growth who are able to bear the risks
that come with investments in the equity securities of such companies.
FINANCIAL SERVICES GROWTH FUND is for investors who want long-term capital ap-
preciation. The Fund seeks to achieve this through investment primarily in the
equity securities of domestic and foreign financial services companies, in-
cluding banks, thrift institutions ("thrifts"), insurance companies, commer-
cial finance companies, consumer finance companies, brokerage companies, in-
vestment management companies and their holding companies. Accordingly,
Financial Services Growth Fund is designed for investors who are seeking long-
term growth for a portion of their investments and who can assume the risks of
greater fluctuation of market value resulting from a portfolio concentrated in
the financial services industries.
UTILITY INCOME FUND is for investors who are seeking both current income and
capital appreciation. The Fund seeks to achieve this through investments in
equity securities and bonds in domestic and foreign electric, telecommunica-
tions, gas and water industries. Accordingly, Utility Income Fund is designed
for conservative investors who are seeking income as well as capital growth
through utility stocks and bonds, which are traditionally viewed as conserva-
tive investments.
HOW TO PURCHASE CLASS Y SHARES OF THE FUNDS
Eligible investors may purchase Class Y shares of the Funds as follows:
The price is the net asset value next calculated after PaineWebber's New York
City headquarters or the Funds' transfer agent ("Transfer Agent") receive the
purchase order.
Investors do not pay an initial sales charge when they buy Class Y shares.
100% of their purchase is immediately invested. Investors also do not pay a
redemption fee or contingent deferred sales charge when they sell Class Y
shares.
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Prospectus Page 4
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PaineWebber Capital Appreciation Fund Financial Services Growth Fund
Inc. Utility Income Fund
Expense Table
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The following tables are intended to assist investors in understanding the ex-
penses associated with investing in the Class Y shares of the Funds.
<TABLE>
<CAPTION>
CLASS Y
SHAREHOLDER TRANSACTION EXPENSES -------
<S> <C>
Maximum Sales Charge on Purchases of Shares............................. None
Sales Charge on Reinvested Dividends.................................... None
Maximum Contingent Deferred Sales Charge................................ None
ANNUAL FUND OPERATING EXPENSES(1) (as a % of average net assets)
CAPITAL APPRECIATION FUND
Management Fees......................................................... 1.00%
12b-1 Fees.............................................................. 0.00
Other Expenses(2)....................................................... 0.33
----
Total Operating Expenses................................................ 1.33%
====
FINANCIAL SERVICES GROWTH FUND
Management Fees......................................................... 0.70%
12b-1 Fees.............................................................. 0.00
Other Expenses(2)....................................................... 0.42
----
Total Operating Expenses................................................ 1.12%
====
UTILITY INCOME FUND(3)
Management Fees......................................................... 0.70%
12b-1 Fees.............................................................. 0.00
Other Expenses(2)....................................................... 0.49
----
Total Operating Expenses................................................ 1.19%
====
</TABLE>
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(1) Class Y shares may be purchased by participants in the INSIGHT Investment
Advisory Program ("INSIGHT") sponsored by PaineWebber, when purchased
through that program. Participation in INSIGHT is subject to payment of an
advisory fee at the maximum annual rate of 1.50% of assets held through
INSIGHT (generally charged quarterly in advance), which may be charged to
the INSIGHT participant's PaineWebber account. This account charge is not
included in the table because non-INSIGHT participants are permitted to
purchase Class Y shares of the Funds.
(2) "Other Expenses" are estimated based on the expenses incurred by each
Fund's Class A shares for the fiscal year or period (annualized) ended
March 31, 1996.
(3) All expenses for Utility Income Fund are those that would have been expe-
rienced by the Fund for the four months ended March 31, 1996 (annualized)
had Mitchell Hutchins and PaineWebber not voluntarily waived a portion of
their fees.
The management fee payable to Mitchell Hutchins by Capital Appreciation Fund
is greater than those paid by most funds.
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Prospectus Page 5
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PaineWebber Capital Appreciation Fund Financial Services Growth Fund
Inc. Utility Income Fund
Expense Table
(Continued)
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EXAMPLES OF EFFECT OF FUND EXPENSES
The following examples should assist investors in understanding various costs
and expenses they would incur as shareholders of a Fund. The assumed 5% annual
return shown in the examples is required by regulations of the Securities and
Exchange Commission ("SEC") applicable to all mutual funds. THESE EXAMPLES
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES OF A FUND MAY BE MORE OR LESS THAN THOSE SHOWN.
An investor would, directly or indirectly, pay the following expenses on a
$1,000 investment in each Fund, assuming (1) a 5% annual return, (2) reinvest-
ment of all dividends and distributions and (3) percentage amounts listed un-
der "Annual Fund Operating Expenses" remain the same for years shown:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
CAPITAL APPRECIATION FUND....................... $14 $42 $73 $160
FINANCIAL SERVICES GROWTH FUND.................. $11 $36 $62 $136
UTILITY INCOME FUND............................. $12 $38 $65 $144
</TABLE>
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Prospectus Page 6
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PaineWebber Capital Appreciation Fund Financial Services Growth Fund
Inc. Utility Income Fund
Investment Objective and Policies
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The Funds' investment objectives may not be changed without shareholder ap-
proval. Their other investment policies, except where noted, are not fundamen-
tal and may be changed by the Funds' boards.
CAPITAL APPRECIATION FUND
Capital Appreciation Fund's investment objective is long-term capital appreci-
ation. The Fund seeks to achieve this objective by investing at least 65% of
its total assets in common stocks of medium-sized (or mid cap) companies. Den-
ver Investments defines mid cap companies as public companies:
. that have market capitalizations (referring to a company's size or the value
of the equity securities it has issued) of at least $100 million and, gener-
ally, no more than $10 billion at the time of purchase; and
. that are not included in either of the largest 100 companies ranked by reve-
nues or by market capitalization in Fortune magazine's "Fortune 500."
While mid cap stocks represent potentially higher returns for investors, they
may present investors with greater risks than larger companies. Mid cap compa-
nies may be more vulnerable than larger companies to adverse business or eco-
nomic developments. While not required to do so, the Fund considers selling
equity securities of companies that cease to be "medium-sized."
The Fund can invest up to 35% of its total assets in U.S. dollar-denominated
equity securities of foreign companies that trade on recognized U.S. stock ex-
changes or on the U.S. over-the-counter ("OTC") market. When Denver Invest-
ments believes it is consistent with the Fund's investment objective of long-
term capital appreciation, the Fund may invest up to 35% of its total assets
in common stocks of companies that are larger or smaller than those of mid cap
companies as defined above, as well as in bonds and money market instruments.
FINANCIAL SERVICES GROWTH FUND
Financial Services Growth Fund's investment objective is long-term capital ap-
preciation. The Fund seeks to achieve this objective by primarily investing in
equity securities of companies in the financial services industries. These
companies include banks, thrifts, insurance companies, commercial finance com-
panies, consumer finance companies, brokerage companies, investment management
companies and their holding companies.
The Fund seeks to invest in companies that are benefiting from the ongoing
changes in the financial services industries, including consolidation of banks
and thrifts and the growth of the non-bank portion of the financial services
industry. However, this concentration subjects the Fund to more volatility
than would be experienced by a fund whose portfolio is more diversified.
The Fund normally invests at least 65% of its total assets in equity securi-
ties of financial services companies. To be considered a financial services
company, a company must:
. derive at least 50% of either its revenues or earnings from financial serv-
ices activities or devote at least 50% of its assets to these activities; or
. be engaged in "securities-related businesses," meaning it derives more than
15% of its gross revenues from securities brokerage or investment management
activities.
The Fund may invest up to 35% of its total assets in equity securities of com-
panies outside the financial services industries and in bonds of all issuers.
The Fund may also invest up to 20% of its total assets in equity securities
and bonds of foreign issuers. The Fund may invest in securities other than eq-
uity securities when, in the opinion of Mitchell Hutchins, their potential for
capital appreciation is equal to or greater than that of equity securities or
when such holdings might reduce volatility in the Fund.
The Fund may not invest more than 5% of its total assets in the equity securi-
ties of any one company engaged in securities-related businesses. The Fund may
invest in banks and thrifts (and their holding companies) only if their depos-
its are insured by the Federal Deposit Insurance Corporation ("FDIC"). Howev-
er,
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Prospectus Page 7
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PaineWebber Capital Appreciation Fund Financial Services Growth Fund
Inc. Utility Income Fund
neither the securities of these companies nor the Fund's shares are insured by
the FDIC or any other federal or governmental agency.
UTILITY INCOME FUND
Utility Income Fund's investment objective is current income and capital ap-
preciation. The Fund attempts to achieve its objective by investing at least
65% of its total assets in income-producing equity securities and bonds issued
by domestic and foreign companies that are primarily engaged in the ownership
or operation of facilities used in the generation, transmission or distribu-
tion of electricity, telecommunications, gas or water.
"Primarily engaged" means that:
. more than 50% of the company's assets are devoted to the ownership or opera-
tion of one or more such facilities; or
. more than 50% of the company's operating revenues are derived from such
businesses.
The Fund may invest in the equity securities and bonds of foreign companies.
The Fund may invest up to 35% of its total assets in equity securities and
bonds of companies that are outside the utility industries and in high quality
money market instruments. The Fund may invest up to 5% of its net assets in
bonds (including convertible securities) that are rated lower than investment
grade.
The Fund seeks to invest in companies that should benefit from a dramatically
changing operating environment, spurred by a long-term, secular trend toward
deregulation. Some of these changes include:
. local telecommunications providers' shift from rate of return to price cap
regulation;
. more liberal legislation, which is gradually eliminating entry barriers that
historically prohibited telephone companies from entering new businesses;
and
. a more open market in the electric utility industry, which should lead to
consolidation within the industry.
However, the Fund's concentration in these industries subjects it to more vol-
atility than would be experienced by a fund whose portfolio is more diversi-
fied.
* * * *
As with any mutual fund, there is no assurance that any of these Funds will
achieve its investment objective. Each Fund's net asset value fluctuates based
upon changes in the value of its portfolio securities.
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Investment Philosophy & Process
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CAPITAL APPRECIATION FUND
In selecting equity securities that demonstrate earnings growth potential for
the Fund, Denver Investments relies on the expertise of its team of analysts
and portfolio managers. The Team employs a "bottom-up" approach to stock se-
lection; that is, emphasis is placed on fundamental analysis of individual
companies rather than on broad economic or technical market analysis.
Instead of relying on information developed by other analysts and research
firms, the Team thoroughly researches the companies through analysis of their
balance sheets, income statements, products, services and management. Addi-
tionally, their valuation techniques emphasize earnings growth. The Team
strives to identify product innovations, modifications in the marketplace,
shifts in management, attractive stocks for purchase and undesirable stocks at
an early stage. The Team's goal is to discover unrecognized stocks and capi-
talize on market inefficiencies to add incremental value. The Fund generally
owns equity securities of at least 100 companies, ensuring portfolio diversi-
fication.
FINANCIAL SERVICES GROWTH FUND
In seeking long-term capital appreciation, the Fund invests in equity securi-
ties of institutions considered to represent strong fundamental investment
value. Mitchell Hutchins bases the stock selection process on issuer-specific
factors affecting the potential for capital appreciation. These factors in-
clude the issuer's current and anticipated revenues, earnings, cash flow and
assets. Mitchell Hutchins also considers general market conditions in the fi-
nancial services industries.
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Prospectus Page 8
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PaineWebber Capital Appreciation Fund Financial Services Growth Fund
Inc. Utility Income Fund
Mitchell Hutchins places much emphasis on:
. searching for companies with better-than-average earnings growth that are
not yet recognized by the market;
. analyzing the practices of company management; and
. finding companies with niche products.
The Mitchell Hutchins Equity Team meets with most of the executives at the
companies in which the Fund invests. Mitchell Hutchins prefers to invest in
companies that are headquartered or doing business in growing regions and that
obtain their earnings growth in a secular, sustainable way, as opposed to com-
panies that generate their earnings through cyclical factors.
UTILITY INCOME FUND
Utilities represent a relatively conservative way to realize dividend income
and long-term capital appreciation opportunities. In determining the ratio of
the Fund's equity holdings to its bond holdings, Mitchell Hutchins considers
which proportions would best meet the Fund's investment objective of income
and growth. This will vary from time to time based primarily on the overall
economic environment.
Once Mitchell Hutchins determines the weighting that would best achieve a bal-
ance between income and capital appreciation, it evaluates individual issuers.
Factors considered include the issuer's business and regulatory environment,
its ability to maintain low production costs, management, financial condition,
anticipated earnings and dividends, economic health of the area it serves and
other related measures of value.
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Performance
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The Funds perform a standardized computation of annualized total return and
may show this return in advertisements or promotional materials. Standardized
return shows the change in value of an investment in a Fund as a steady com-
pound annual rate of return. Actual year-by-year returns fluctuate and may be
higher or lower than standardized return. One-, five- and ten-year periods
will be shown, unless the Fund or class has been in existence for a shorter
period. If so, returns will be shown for the period since inception. Total re-
turn calculations assume reinvestment of dividends and other distributions.
The Funds may use other total return presentations in conjunction with stan-
dardized return. These may cover the same or different periods as those used
for standardized return and may include cumulative returns, average annual
rates, actual year-by-year rates or any combination thereof.
Total return information reflects past performance and does not necessarily
indicate future results. The investment return and principal value of shares
of the Funds will fluctuate. The amount investors receive when selling shares
may be more or less than what they paid. Further information about each Fund's
performance is contained in its Annual Report to Shareholders, which may be
obtained without charge by contacting the Fund, your PaineWebber investment
executive or PaineWebber's correspondent firms or by calling toll-free
1-800-647-1568.
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Prospectus Page 9
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PaineWebber Capital Appreciation Fund Financial Services Growth Fund
Inc. Utility Income Fund
The Funds' Investments
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EQUITY SECURITIES include common stocks, preferred stocks and securities that
are convertible into them, including convertible debentures and notes and com-
mon stock purchase warrants and rights. Common stocks, the most familiar type,
represent an equity (ownership) interest in a corporation. While past perfor-
mance does not guarantee future results, common stocks historically have pro-
vided the greatest long-term growth potential in a company. However, their
prices generally fluctuate more than other securities, and reflect changes in
a company's financial condition and in overall market and economic conditions.
Preferred stock has certain fixed-income features, like a bond, but is actu-
ally equity in a company, like common stock. Convertible securities may in-
clude debentures, notes and preferred equity securities, which are convertible
into common stock.
BONDS (including notes and debentures) are used by corporations and govern-
ments to borrow money from investors. The issuer pays the investor a fixed or
variable rate of interest and must repay the amount borrowed at maturity.
Bonds have varying degrees of investment risk and varying levels of sensitiv-
ity to changes in interest rates.
RISKS
Under normal circumstances, each Fund invests primarily in equity securities.
Following is a discussion of these and other risks that are common to each
Fund:
EQUITY SECURITIES. Equity securities historically have shown greater growth
potential than other types of securities. Common stocks generally represent
the riskiest investment in a company. It is possible that investors may lose
their entire investment.
FOREIGN SECURITIES. Each Fund may invest a portion of its assets in the secu-
rities of foreign companies. Investing in the securities of foreign companies
involves more risks than investing in securities of U.S. companies. Their
value is subject to economic and political developments in the countries where
the companies operate and to changes in foreign currency values. Values may
also be affected by foreign tax laws, changes in foreign economic or monetary
policies, exchange control regulations and regulations involving prohibitions
on the repatriation of foreign currencies.
In general, less information may be available about foreign companies than
about U.S. companies, and foreign companies are generally not subject to the
same accounting, auditing and financial reporting standards as are U.S. compa-
nies. Foreign securities markets may be less liquid and subject to less regu-
lation than the U.S. securities markets. The costs of investing outside the
United States frequently are higher than those in the United States. These
costs include relatively higher brokerage commissions and foreign custody ex-
penses.
INVESTING IN DEVELOPING COUNTRIES. Investing in securities issued by companies
located in developing countries involves additional risks. These countries
typically have economic and political systems that are relatively less mature,
and can be expected to be less stable, than those of developed countries. De-
veloping countries may have policies that restrict investment by foreigners in
those countries, and there is a risk of government expropriation or national-
ization of private property. The possibility of low or nonexistent trading
volume in the securities of companies in developing countries may also result
in a lack of liquidity and in price volatility.
DEBT SECURITIES. Investment grade bonds are those rated within the four high-
est categories by Standard & Poor's, a division of The McGraw Hill Companies,
Inc. ("S&P"), or Moody's Investors Service, Inc. ("Moody's"). Moody's fourth
highest category (Baa) includes securities which, in its opinion, have specu-
lative features. For example, changes in economic conditions or other circum-
stances are more likely to lead to a weakened capacity to make principal and
interest payments than is the case for higher-rated debt instruments. The
bonds and convertible securities in which Capital Appreciation Fund and Finan-
cial Services Growth Fund invest must be rated investment grade. Utility In-
come Fund may invest up to 5% of its net assets in bonds (including convert-
ible securities) rated lower than investment grade, that is, rated lower than
BBB by S&P or Baa by Moody's or comparable unrated bonds. Such bonds are con-
sidered predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal and may involve
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Prospectus Page 10
<PAGE>
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PaineWebber Capital Appreciation Fund Financial Services Growth Fund
Inc. Utility Income Fund
major risk exposure to adverse conditions. The Funds may also invest in secu-
rities that are comparably rated by another rating agency and in unrated secu-
rities if they are deemed to be of comparable quality.
Credit ratings attempt to evaluate the safety of principal and interest pay-
ments and do not evaluate the volatility of the bond's value or its liquidity
and do not guarantee the performance of the issuer. The rating agencies also
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than the rating indicates. There is a risk that rating agencies will downgrade
bonds.
INTEREST RATE AND CREDIT RISKS. Interest rate risk is the risk that interest
rates will rise and bond prices will fall, lowering the value of a Fund's bond
investments. Long-term bonds are generally more sensitive to interest rate
changes than short-term bonds. Adverse changes in economic conditions can af-
fect an issuer's ability to pay principal and interest.
In addition to these general risks, investments in each Fund are subject to
special risk considerations:
CAPITAL APPRECIATION FUND
INVESTMENTS IN MEDIUM-SIZED AND SMALLER COMPANIES. Common stocks of medium-
sized companies may offer potentially higher returns for investors. While most
medium-sized companies in which the Fund will invest are relatively well-es-
tablished, they may be more vulnerable than larger companies to adverse busi-
ness or economic developments. Such companies are typically less closely fol-
lowed by investment experts. In addition, Capital Appreciation Fund may invest
up to 35% of its total assets in stocks of companies that are smaller or
larger than medium-sized companies. Smaller companies may have limited product
lines, markets or financial resources, and may be dependent on a relatively
small management group. Securities of such companies may be less liquid and
more volatile than securities of medium-sized or larger companies or the mar-
ket averages in general and, therefore, may involve greater risk than invest-
ing in larger companies.
FINANCIAL SERVICES GROWTH FUND
INVESTMENTS IN FINANCIAL SERVICES INDUSTRIES. Because investments made by Fi-
nancial Services Growth Fund are concentrated in the financial services indus-
tries, its shares are subject to greater risk than the shares of a fund whose
portfolio is not so concentrated, and it will be particularly affected by eco-
nomic, competitive and regulatory developments affecting those industries.
Financial services companies are subject to extensive governmental regulation.
This regulation may limit both the amounts and types of loans and other finan-
cial commitments these companies can make, as well as the interest rates and
fees they can charge. Profitability of these companies is largely dependent on
the availability and cost of capital funds, and can fluctuate significantly
when interest rates change. Credit losses resulting from financial difficul-
ties of borrowers can negatively impact the industry. Companies in the finan-
cial services industries may be subject to severe price competition. Also, the
industry and the Fund may be significantly impacted if the legislation that is
currently being considered, to reduce the separation between commercial and
investment banking businesses, is enacted.
UTILITY INCOME FUND
INVESTMENTS IN UTILITY INDUSTRIES. Because investments made by Utility Income
Fund are concentrated in the utility industries, its shares will be particu-
larly affected by economic and regulatory developments in or related to those
industries and are subject to greater risk than the shares of a Fund whose
portfolio is not so concentrated. Interest rate changes may affect the value
of the Fund's assets. When interest rates decline, prices of utility equity
securities and bonds tend to increase. When interest rates rise, these prices
tend to decrease.
The regulation of utility industries is evolving in the United States and in
foreign countries. As a result, certain companies may be forced to defend
their core businesses against outside companies and may become less profit-
able. Electric utility companies have historically been subject to the risks
associated with increases in fuel and other operating costs, high interest
costs on borrowing, costs associated with compliance in regard to environmen-
tal, nuclear facility and other safety regulations, and changes in the regula-
tory climate. Increasing competition due to past regulatory changes in the
telephone communications industry continues and, although certain companies
have benefitted, many companies may be adversely affected in the future.
Gas transmission companies and gas distribution companies continue to undergo
significant changes as well. Water supply utilities are in an industry that is
highly
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Prospectus Page 11
<PAGE>
- ------------------------------==================--------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund
Inc. Utility Income Fund
fragmented due to local ownership and generally the companies are more mature
and are experiencing little or no per capita volume growth. There is no assur-
ance that utility industries, as a whole, will experience favorable develop-
ments or that business opportunities will continue to undergo significant
changes or growth.
INVESTMENT TECHNIQUES AND STRATEGIES
HEDGING STRATEGIES. Each Fund may use certain strategies designed to adjust
the overall risk of its investment portfolio. These "hedging" strategies in-
volve derivative contracts, including options (on securities, futures and
stock indexes) and futures contracts (on stock indexes and interest rates).
Financial Services Growth Fund and Utility Income Fund also may use derivative
contracts involving foreign currencies, including options and futures con-
tracts on foreign currencies and (for Utility Income Fund) forward currency
contracts. In addition, Utility Income Fund may use these strategies to at-
tempt to enhance income; the use of such strategies solely to enhance income
may be considered a form of speculation. Utility Income Fund may also enter
into certain interest rate protection transactions to preserve a return or
spread on a particular investment or portion of its portfolio or to protect
against an increase in the price of securities the Fund anticipates purchasing
at a later date. New financial products and risk management techniques con-
tinue to be developed and may be used if consistent with the Funds' investment
objectives and policies. The Statement of Additional Information for the Funds
contains further information on these strategies.
The Funds might not use any hedging strategies, and there can be no assurance
that any strategy used will succeed. If Mitchell Hutchins or Denver Invest-
ments, as applicable, is incorrect in its judgment on market values, interest
rates or other economic factors in using a hedging strategy, a Fund may have
lower net income and a net loss on the investment. Each of these strategies
involves certain risks, which include:
. the fact that the skills needed to use hedging instruments are different
from those needed to select securities for the Funds;
. the possibility of imperfect correlation, or even no correlation, between
price movements of hedging instruments and price movements of the securities
or currencies being hedged;
. possible constraints placed on a Fund's ability to purchase or sell portfo-
lio investments at advantageous times due to the need for the Fund to main-
tain "cover" or to segregate securities; and
. the possibility that a Fund is unable to close out or liquidate its hedged
position.
LENDING PORTFOLIO SECURITIES. Each Fund may lend its securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of that
Fund's total assets taken at market value. Lending securities enables a Fund
to earn additional income, but could result in a loss or delay in recovering
these securities.
DEFENSIVE POSITIONS. When Mitchell Hutchins or Denver Investments, as applica-
ble, believes that unusual circumstances warrant a defensive posture, each
Fund may temporarily commit all or any portion of its assets to cash or money
market instruments, including repurchase agreements. In a typical repurchase
agreement, a Fund buys a security and simultaneously agrees to sell it back at
an agreed-upon price and time, usually no more than seven days after purchase.
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in il-
liquid securities, including certain cover for OTC options and securities
whose disposition is restricted under the federal securities laws. The Funds
do not consider securities that are eligible for resale pursuant to SEC Rule
144A to be illiquid securities if Mitchell Hutchins or Denver Investments, as
applicable, has determined such securities to be liquid, based upon the trad-
ing markets for the securities under procedures approved by the Funds' boards.
OTHER INFORMATION. Each Fund may also purchase securities on a when-issued ba-
sis or may purchase or sell securities for delayed delivery. A Fund generally
would not pay for such securities or start earning interest on them until they
are delivered, but it would immediately assume the risks of ownership, includ-
ing the risk of price fluctuation. Each Fund may borrow money for temporary or
emergency purposes, but not in excess of 10% of its total assets, including
reverse repurchase agreements involving up to 5% of its net assets. Each Fund
may sell securities short "against the box" to defer realization of gains or
losses for tax or other purposes. When a security is sold against the box, the
seller owns the security. For liquidity purposes, such as clearance of portfo-
lio transactions, the payment of dividends and expenses and payments to sell-
ing shareholders, or pending investment, each Fund may commit up to 35% of its
total assets to cash or money market instruments, including repurchase
agreements.
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Prospectus Page 12
<PAGE>
- ------------------------------===================-------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund
Inc. Utility Income Fund
How to Buy Shares
- -------------------------------------------------------------------------------
Class Y shares are sold to eligible investors at the net asset value next de-
termined after the purchase order is received at PaineWebber's New York City
offices. No initial or contingent deferred sales charge is imposed, nor are
Class Y shares subject to rule 12b-1 distribution or service fees. The Funds
and Mitchell Hutchins reserve the right to reject any purchase order and to
suspend the offering of Class Y shares for a period of time. Mitchell
Hutchins, the distributor for each Fund's Class Y shares, has appointed
PaineWebber to serve as the exclusive dealer for each Fund's Class Y shares.
The following investors are eligible to buy Class Y shares:
. a participant in INSIGHT when Class Y shares are purchased through that pro-
gram;
. an investor who buys $10 million or more at any one time in any combination
of PaineWebber mutual funds in the Flexible PricingSM System;
. an employee benefit plan qualified under section 401 (including a salary re-
duction plan qualified under section 401(k)) or 403(b) of the Internal Reve-
nue Code that has either
5,000 or more eligible employees or
$50 million or more in assets; and
. an investment company advised by PaineWebber or an affiliate of PaineWebber.
INSIGHT
An investor who purchases $50,000 or more of shares of the mutual funds that
are available to INSIGHT participants (which include the PaineWebber mutual
funds in the Flexible Pricing System and certain other specified mutual funds)
may take part in INSIGHT, a total portfolio asset allocation program sponsored
by PaineWebber, and thus become eligible to purchase Class Y shares. INSIGHT
offers comprehensive investment services, including a personalized asset allo-
cation investment strategy using an appropriate combination of funds, monitor-
ing of investment performance and comprehensive quarterly reports that cover
market trends, portfolio summaries and personalized account information.
Participating in INSIGHT is subject to payment of an advisory fee to
PaineWebber at the maximum annual rate of 1.50% of assets held through the
program (generally charged quarterly in advance), which covers all INSIGHT in-
vestment advisory services and program administration fees. Employees of
PaineWebber and its affiliates are entitled to a 50% reduction in the fee oth-
erwise payable for participation in INSIGHT. INSIGHT clients may elect to have
their INSIGHT fees charged to their PaineWebber accounts (by the automatic re-
demption of money market fund shares) or, if a qualified plan, invoiced.
Please contact your PaineWebber investment executive or PaineWebber correspon-
dent firm for more information concerning mutual funds that are available to
INSIGHT participants or for other INSIGHT program information.
ACQUISITION OF CLASS Y SHARES BY OTHERS
Each Fund is authorized to offer Class Y shares to employee benefit and re-
tirement plans of Paine Webber Group Inc. and its affiliates and certain other
investment programs that are sponsored by PaineWebber and that may invest in
PaineWebber mutual funds. At present, however, INSIGHT participants are the
only purchasers in these two categories.
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Prospectus Page 13
<PAGE>
- ------------------------------===================-------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund
Inc. Utility Income Fund
How to Sell Shares
- -------------------------------------------------------------------------------
Investors can sell (redeem) shares at any time. Shares will be sold at the
share price as next calculated after the order is received and accepted. Share
prices are normally calculated at the close of regular trading on the New York
Stock Exchange (currently 4:00 p.m., Eastern time).
Investors who have an account with PaineWebber or one of PaineWebber's corre-
spondent firms can sell their shares by contacting their investment executive.
Investors who do not have an account and have bought their shares through PFPC
Inc., the Funds' Transfer Agent, may sell shares by writing a "letter of in-
struction." The letter of instruction must include:
. the investor's name and address;
. the Fund's name;
. the Fund account number;
. the dollar amount or number of shares to be sold; and
. a guarantee of each registered owner's signature by an eligible institution,
such as a commercial bank, trust company or stock exchange member.
The letter of instruction must be mailed to PFPC Inc., Attn: PaineWebber Mu-
tual Funds, P.O. Box 8950, Wilmington, DE 19899.
If a shareholder wants to sell shares that were purchased recently, the Fund
may delay payment until it verifies that good payment was received. In the
case of purchases by check, this can take up to 15 days.
Because each Fund incurs fixed costs in maintaining shareholder accounts, each
Fund reserves the right to purchase back all Fund shares in any shareholder
account having a net asset value of less than $500. If the Fund elects to do
so, it will notify the shareholder of the opportunity to increase the amount
invested to $500 or more within 60 days of the notice. A Fund will not pur-
chase back accounts that fall below $500 solely due to reduction in net asset
value per share.
- -------------------------------------------------------------------------------
Management
- -------------------------------------------------------------------------------
CAPITAL APPRECIATION FUND
The Fund is governed by a board of trustees, which oversees the Fund's opera-
tions. It has appointed Mitchell Hutchins as investment adviser and adminis-
trator responsible for the Fund's operations (subject to the authority of the
board). Mitchell Hutchins has appointed the investment sub-adviser, Denver In-
vestments, to be responsible for day-to-day management of the Fund's invest-
ments.
In managing assets for its clients, Denver Investments strives to implement a
"team approach" rather than rely on one or two key individuals. Todger Ander-
son, President and a Director of Portfolio Management of Denver Investments,
is responsible for the day-to-day management of the Fund's portfolio. He has
managed the Fund since its inception and has concentrated on mid cap investing
since 1975. Prior to joining Denver Investments in 1975, Mr. Anderson had
portfolio management responsibilities with Financial Programs and at the
United Bank of Denver. Directly assisting are Larry Luchini and the Denver In-
vestments Equity Research Team. Mr. Luchini joined Denver Investments in 1978
as vice president and portfolio manager. Prior to joining Denver Investments,
Mr. Luchini served as vice president and portfolio manager at the National
City Bank of Cleveland from 1968 to 1978.
FINANCIAL SERVICES GROWTH FUND
The Fund is governed by a board of directors, which oversees the Fund's opera-
tions. It has appointed Mitchell Hutchins as investment adviser and adminis-
trator responsible for the Fund's operations (subject to the authority of the
board). Karen L. Finkel is primarily
- ---------------------------------==========-------------------------------------
Prospectus Page 14
<PAGE>
- -----------------------------===================--------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund
Inc. Utility Income Fund
responsible for the day-to-day portfolio management of the Fund. Mrs. Finkel
is a first vice president of Mitchell Hutchins. She has held her Fund respon-
sibilities since January 1988 and has been employed by Mitchell Hutchins as a
portfolio manager for the last eight years.
UTILITY INCOME FUND
The Fund is governed by a board of trustees, which oversees the Fund's opera-
tions. It has appointed Mitchell Hutchins as investment adviser and adminis-
trator responsible for the Fund's operations (subject to the authority of the
board of trustees). Karen L. Finkel is primarily responsible for the day-to-
day management of the Fund's stock portfolio and determines the allocation of
Fund assets between stocks and bonds. James F. Keegan and Julieanna Berry are
primarily responsible for day-to-day management of the Fund's bond portfolio.
Mrs. Finkel is a first vice president of Mitchell Hutchins and has been a
portfolio manager of the Fund since February 1995. She has been employed by
Mitchell Hutchins as a portfolio manager for the last eight years. Mrs. Berry
has held her Fund responsibilities since March 1996 and was joined by Mr.
Keegan in April 1996. Mrs. Berry is a vice president of Mitchell Hutchins and
has been employed by Mitchell Hutchins as a portfolio manager since 1989. Mr.
Keegan is a senior vice president of Mitchell Hutchins and oversees all corpo-
rate bond investments. Prior to joining Mitchell Hutchins, Mr. Keegan was the
director of fixed income strategy and research at the Merrion Group, L.P. from
1994 to 1995. From 1987 to 1994, he was vice president of global investment
management of Bankers Trust Company.
* * * *
Each board has determined that brokerage transactions for the Fund may be con-
ducted through PaineWebber or its affiliates in accordance with procedures
adopted by the board.
Mitchell Hutchins and Denver Investments personnel may engage in securities
transactions for their own accounts pursuant to each firm's code of ethics
that establishes procedures for personal investing and restricts certain
transactions.
ABOUT THE INVESTMENT ADVISER
Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, is the asset management subsidiary of PaineWebber, which is wholly
owned by Paine Webber Group Inc., a publicly owned financial services holding
company. On June 30, 1996, Mitchell Hutchins was adviser or sub-adviser of 31
investment companies with 65 separate portfolios and aggregate assets of over
$30 billion.
ABOUT THE INVESTMENT SUB-ADVISER
The investment sub-adviser, Denver Investment Advisors, LLC, is located at
1225 17th Street, 26th Floor, P.O. Box 17487, Denver, Colorado 80217. Denver
Investments has managed client accounts investing primarily in stocks of medi-
um-sized companies since 1958 and has been managing the Fund since its incep-
tion in April 1992. As of June 30, 1996, Denver Investments managed approxi-
mately $10.2 billion of assets of various clients.
MANAGEMENT FEES & OTHER EXPENSES
Each Fund pays Mitchell Hutchins a monthly fee for its services. For the fis-
cal year ended March 31, 1996, Financial Services Growth Fund paid advisory
fees to Mitchell Hutchins at the annual rate of 0.70% of its average daily net
assets. For the fiscal period ended March 31, 1996, Utility Income Fund paid
advisory fees to Mitchell Hutchins at the effective annual rate of 0.35% of
its average daily net assets (after voluntary fee waiver); in the absence of
the waiver, Utility Income Fund would have paid advisory fees to Mitchell
Hutchins at the annual rate of 0.70%. For the fiscal year ended March 31,
1996, Capital Appreciation Fund paid advisory fees to Mitchell Hutchins at the
annual rate of 1.00% of its average daily net assets.
Each Fund pays PaineWebber an annual fee of $4.00 per active shareholder ac-
count held at PaineWebber for services not provided by the Transfer Agent.
With respect to Capital Appreciation Fund, Mitchell Hutchins (not the Fund)
pays Denver Investments a fee for investment sub-advisory services in an
amount equal to 50% of the fee it receives from the Fund for advisory and ad-
ministrative services.
- ---------------------------------==========-------------------------------------
Prospectus Page 15
<PAGE>
- ------------------------------===================-------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund
Inc. Utility Income Fund
Determining the Shares' Net Asset Value
- --------------------------------------------------------------------------------
The net asset value of each Fund's shares fluctuates and is determined sepa-
rately for each class as of the close of regular trading on the New York Stock
Exchange (currently 4:00 p.m., Eastern time) each Business Day. A "Business
Day" is any day, Monday through Friday, on which the New York Stock Exchange is
open for business. Each Fund's net asset value per share is determined by di-
viding the value of the securities held by the Fund, plus any cash or other as-
sets, minus all liabilities, by the total number of Fund shares outstanding.
Each Fund values its assets based on their current market value when market
quotations are readily available. If that value is not readily available, as-
sets are valued at fair value as determined in good faith by or under the di-
rection of its board. The amortized cost method of valuation generally is used
to value debt obligations with 60 days or less remaining to maturity, unless
the board determines that this does not represent fair value. Investments de-
nominated in foreign currencies are valued daily in U.S. dollars based on the
then-prevailing exchange rates.
- --------------------------------------------------------------------------------
Dividends & Taxes
- --------------------------------------------------------------------------------
DIVIDENDS
Capital Appreciation Fund and Financial Services Growth Fund each pays an an-
nual dividend from its net investment income and net short-term capital gain,
if any. Utility Income Fund pays monthly dividends from its net investment in-
come; after the monthly dividend is paid in September 1996, Utility Income Fund
will pay dividends on a quarterly basis. Financial Services Growth Fund and
Utility Income Fund each distributes any net realized gains from foreign cur-
rency transactions with its dividends. Each Fund also distributes annually sub-
stantially all of its net capital gain (the excess of net long-term capital
gain over net short-term capital loss), if any. The Funds may make additional
distributions, if necessary, to avoid a 4% excise tax on certain undistributed
income and capital gain.
Dividends and other distributions paid on Class Y shares of each Fund are cal-
culated at the same time and in the same manner as dividends and other distri-
butions on other classes of its shares.
Each Fund's dividends and other distributions are paid in additional Class Y
shares, unless the shareholder has requested cash payments. Shareholders who
wish to receive dividends and other distributions in cash, either mailed to the
shareholder by check or credited to the shareholder's PaineWebber account,
should contact their investment executive at PaineWebber or one of its corre-
spondent firms.
TAXES
Each Fund intends to continue to qualify for treatment as a regulated invest-
ment company under the Internal Revenue Code so that it will not have to pay
federal income tax on the part of its investment company taxable income (gener-
ally consisting of net investment income, net short-term capital gain and net
gains from certain foreign currency transactions) and the net capital gain that
it distributes to its shareholders.
Dividends from each Fund's investment company taxable income (whether paid in
cash or additional shares) are generally taxable to its shareholders as ordi-
nary income. Distributions of each Fund's net capital gain (whether paid in
cash or additional shares) are taxable to its shareholders as a long-term capi-
tal gain, regardless of how long they have held their Fund shares. Shareholders
who are not subject to tax on their income generally will not be required to
pay tax on distributions from the Funds.
YEAR-END TAX REPORTING
Following the end of each calendar year, each Fund notifies its shareholders of
the dividends and capital
- ----------------------------------==========------------------------------------
Prospectus Page 16
<PAGE>
- ------------------------------===================-------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund
Inc. Utility Income Fund
gain distributions paid (or deemed paid), their share of any foreign taxes
paid by the Fund that year and any portion of those dividends that qualifies
for special treatment.
BACKUP WITHHOLDING
Each Fund is required to withhold 31% of all dividends, capital gain distribu-
tions and redemption proceeds payable to individuals and certain other non-
corporate shareholders who do not provide the Fund with a correct taxpayer
identification number. Withholding at that rate also is required from divi-
dends and capital gain distributions payable to shareholders who otherwise are
subject to backup withholding.
TAX ON THE SALE OF FUND SHARES
A shareholder's sale (redemption) of shares may result in a taxable gain or
loss. This depends on whether the shareholder receives more or less than the
adjusted basis for the shares. In addition, if a Fund's shares are bought
within 30 days before or after selling other shares of the Fund at a loss, all
or a portion of that loss will not be deductible and will increase the basis
of the newly purchased shares.
* * * *
Because the foregoing only summarizes some of the important tax considerations
affecting the Funds and their shareholders, prospective shareholders are urged
to consult their tax advisers.
- -------------------------------------------------------------------------------
General Information
- -------------------------------------------------------------------------------
ORGANIZATION
CAPITAL APPRECIATION FUND
Capital Appreciation Fund is a diversified series of PaineWebber Managed As-
sets Trust, an open-end management investment company that was formed on Au-
gust 9, 1991, as a business trust under the laws of the Commonwealth of Massa-
chusetts. The trustees have authority to issue an unlimited number of shares
of beneficial interest of separate series, par value $0.001 per share.
FINANCIAL SERVICES GROWTH FUND
Financial Services Growth Fund is a diversified, open-end management invest-
ment company that was incorporated in Maryland on February 13, 1986. The Fund
has authority to issue 300 million shares of common stock of separate series,
par value $0.001 per share.
UTILITY INCOME FUND
Utility Income Fund is a diversified series of PaineWebber Managed Investments
Trust ("Trust"), an open-end management investment company that was formed on
November 21, 1986, as a business trust under the laws of the Commonwealth of
Massachusetts. The trustees have authority to issue an unlimited number of
shares of beneficial interest of separate series, a par value $0.001 per
share. Shares of four other series have been authorized.
SHARES
The shares of each Fund are divided into four classes, designated Class A,
Class B, Class C and Class Y shares. A share of each class represents an iden-
tical interest in the respective Fund's investment portfolio and has the same
rights, privileges and preferences. However, each class may differ with re-
spect to sales charges, if any, distribution and/or service fees, if any,
other expenses allocable exclusively to each class, voting rights on matters
exclusively affecting that class, and its exchange privilege, if any. The dif-
ferent sales charges and other expenses applicable to the different classes of
shares of the Funds will affect the performance of those classes.
Each share of a Fund is entitled to participate equally in dividends, other
distributions and the proceeds of any liquidation of that Fund. However, due
to the differing expenses of the classes, dividends on the other classes are
likely to be lower than for Class Y shares.
More information concerning Class A, Class B and Class C shares of the Funds
may be obtained from a PaineWebber investment executive or correspondent firm
or by calling 1-800-647-1568.
Although each Fund is offering only its own shares, it is possible that a Fund
could become liable for misstatements in the Prospectus about another Fund.
The board of each Fund has considered this factor in approving the use of a
single, combined Prospectus.
- ---------------------------------==========-------------------------------------
Prospectus Page 17
<PAGE>
- ------------------------------===================-------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund
Inc. Utility Income Fund
VOTING RIGHTS
Shareholders of each Fund are entitled to one vote for each full share held
and fractional votes for fractional shares held. Voting rights are not cumula-
tive and, as a result, the holders of more than 50% of all the shares of a
Fund (or the Trust, which has more than one series) may elect all of the board
members of that Fund or Trust. The shares of the different classes of a Fund
will be voted together, except that only the shareholders of a particular
class of a Fund may vote on matters affecting only that class. The shares of
all series of the Trust will be voted separately, except when an aggregate
vote of all the series is required by law.
SHAREHOLDER MEETINGS
The Funds do not intend to hold annual meetings.
Shareholders of record of no less than two-thirds of the outstanding shares of
the Trust or Fund (as applicable) may remove a board member through a declara-
tion in writing or by vote cast in person or by proxy at a meeting called for
that purpose. A meeting will be called to vote on the removal of a board mem-
ber at the written request of holders of 10% of the outstanding shares of the
Trust or Fund, as applicable.
REPORTS TO SHAREHOLDERS
Each Fund sends its shareholders audited annual and unaudited semi-annual re-
ports, each of which includes a list of the investment securities held by the
Fund as of the end of the period covered by the report. The Statement of Addi-
tional Information is available to shareholders upon request.
CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND AGENT
State Street Bank and Trust Company, located at One Heritage Drive, North
Quincy, Massachusetts 02171, serves as each Fund's custodian and recordkeeping
agent and employs foreign sub-custodians to provide custody of any foreign as-
sets of Financial Services Growth Fund and Utility Income Fund. PFPC Inc., a
subsidiary of PNC Bank, N.A., serves as each Fund's transfer and dividend dis-
bursing agent. It is located at 400 Bellevue Parkway, Wilmington, DE 19809.
- ----------------------------------==========------------------------------------
Prospectus Page 18
<PAGE>
- -----------------------------===================--------------------------------
PaineWebber Capital Appreciation Fund PaineWebber Financial Services Growth
Fund Inc.PaineWebber Utility Income Fund Class Y Shares
Prospectus -- August 1, 1996
- --------------------------------------------------------------------------------
. PAINEWEBBER BOND FUNDS . PAINEWEBBER STOCK FUNDS
High Income Fund Capital Appreciation Fund
Investment Grade Income Growth Fund
Fund Growth and Income Fund
Low Duration U.S. Financial Services Growth Fund
Government Income Fund Small Cap Fund
Strategic Income Fund Utility Income Fund
U.S. Government Income
Fund
. PAINEWEBBER TAX-FREE BOND . PAINEWEBBER GLOBAL FUNDS
FUNDS
Emerging Markets Equity Fund
California Tax-Free Global Equity Fund
Income Fund Global Income Fund
Municipal High Income
Fund
National Tax-Free
Income Fund
New York Tax-Free
Income Fund
. PAINEWEBBER MONEY MARKET
FUND
. PAINEWEBBER ASSET
ALLOCATION FUNDS
Balanced Fund
Tactical Allocation
Fund
A prospectus containing more complete information for any of these funds,
including charges and expenses, can be obtained from a PaineWebber invest-
ment executive or correspondent firm. Please read it carefully before in-
vesting. It is important you have all the information you need to make a
sound investment decision.
(C) 1996 PaineWebber Incorporated
- --------------------------------============------------------------------------
