PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC, 485BPOS, 1999-07-29

PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC
485BPOS, 1999-07-29

Previous: GAINSCO INC, SC 13D/A, 1999-07-29

Next: CAPITAL MEDIA GROUP LTD, PRER14A, 1999-07-29

<PAGE>

As filed with the Securities and Exchange Commission on July 29, 1999
1933 Act Registration No. 33-33231
1940 Act Registration No. 811-4587

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Pre-Effective Amendment No. _____ [_]

Post-Effective Amendment No. 19 [X]

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

Amendment No. 18 [X]

(Check appropriate box or boxes.)

PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
(Exact name of registrant as specified in charter)

1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000

DIANNE E. O'DONNELL, ESQ.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)

Copies to:

ROBERT A. WITTIE, ESQ.
ELINOR W. GAMMON, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.; 2nd Floor
Washington, D.C. 20036-1800
Telephone: (202) 778-9000

Approximate Date of Proposed Public Offering: Effective Date of this Post-
Effective Amendment.

It is proposed that this filing will become effective:
[_] Immediately upon filing pursuant to Rule 485(b)

[X] On August 1, 1999, pursuant to Rule 485(b)
[_] 60 days after filing pursuant to Rule 485(a)(1)
[_] On __________ pursuant to Rule 485(a)(1)
[_] 75 days after filing pursuant to Rule 485(a)(2)
[_] On __________ pursuant to Rule 485(a)(2)

Title of Securities Being Registered: Class A, B, C and Y Shares of Common
Stock.
<PAGE>

PaineWebber
Financial Services Growth Fund Inc.

PaineWebber
Utility Income Fund

---------------------------

PROSPECTUS
August 1, 1999

---------------------------

This prospectus offers shares in two of PaineWebber's stock funds. Each fund
offers four classes of shares, Classes A, B, C and Y. Each class has different
sales charges and ongoing expenses. You can choose the class that is best for
you based on how much you plan to invest and how long you plan to hold your
fund shares. Class Y shares are available only to certain types of investors.

As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved either fund's shares or determined whether this
prospectus is complete or accurate. To state otherwise is a crime.
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Financial Services Growth Fund PaineWebber Utility Income Fund

Contents

The Funds

----------------------------------------------------------------

<TABLE>
<S> <C> <C>
What every investor 3 PaineWebber Financial Services Growth Fund
should know about
the funds 6 PaineWebber Utility Income Fund
9 More About Risks and Investment Strategies

Your Investment

------------------------------------------------------------------------------
Information for 11 Managing Your Fund Account
managing your fund --Flexible Pricing
account --Buying Shares
--Selling Shares
--Exchanging Shares
--Pricing and Valuation

Additional Information

------------------------------------------------------------------------------
Additional important 17 Management
information about
the funds 18 Dividends and Taxes
19 Financial Highlights
------------------------------------------------------------------------------
Where to learn more
about PaineWebber Back Cover
mutual funds
</TABLE>

The funds are not
complete or balanced
investment programs.

-----------
- -------------------------------------------------------------------------------

Prospectus Page
<PAGE>

- --------------------------------------------------------------------------------
-------------------
PaineWebber Financial Services Growth Fund

PaineWebber Financial Services Growth Fund

Investment Objective, Strategies and Risks

- --------------------------------------------------------------------------------

Fund Objective

Long-term capital appreciation.

Principal Investment Strategies

The fund invests primarily in stocks of financial services companies, such as
banks, thrifts, insurance companies, finance companies, securities firms, and
companies that provide specialized services to them. The fund also invests, to
a lesser extent, in stocks of other types of companies and in bonds. Some of
the fund's stocks and bonds may be of foreign issuers and may be denominated in
foreign currencies. The fund may use options, futures contracts and other
derivatives as part of its investment strategy or to help manage portfolio
risks.

The fund's investment adviser, Mitchell Hutchins Asset Management Inc., seeks
to invest in stocks of companies with better-than-average earnings growth that
also represent strong, fundamental investment values. These include companies
that may benefit from changes in the financial services industry, such as
mergers and the growth of financial services other than banking. Mitchell
Hutchins especially looks for companies whose growth characteristics and value
are not yet recognized by the market. Mitchell Hutchins also looks for
companies in growing regions or with niche products, whose earnings growth may
be sustainable throughout the business cycle.

In selecting specific investments for the fund, Mitchell Hutchins assesses a
company's current and anticipated revenues, earnings, cash flow, asset
composition and management practices.

Principal Risks

An investment in the fund is not guaranteed; you may lose money by investing in
the fund.

Common stocks, which are the fund's main type of investment, generally
fluctuate in value more than other investments. Since the fund's stocks are
concentrated in financial services companies, it will be more severely affected
by unfavorable developments in that industry than if it invested in a broad
range of businesses.

More information about these and other risks of an investment in the fund is
provided below in "More on Risks and Investment Strategies." In particular, see
the following headings:

. Equity Risk

. Financial Services Industry Concentration Risk

. Interest Rate Risk

. Credit Risk

. Foreign Securities Risk

. Derivatives Risk

Information on the fund's recent investment strategies and holdings can be
found in its current annual/semi-annual reports (see back cover for information
on ordering those reports).

-----------
- --------------------------------------------------------------------------------

Prospectus Page 3
<PAGE>

- --------------------------------------------------------------------------------
-------------------
PaineWebber Financial Services Growth Fund

Performance

- --------------------------------------------------------------------------------

Risk/Return Bar Chart and Table

The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.

The bar chart shows how the fund's performance has varied from year to year.
The chart shows Class A shares because they have the longest performance
history of any class of fund shares. The chart does not reflect the effect of
sales charges; if it did, the total returns shown would be lower.

The table that follows the chart shows the average annual returns over several
time periods for each class of the fund's shares. That table does reflect fund
sales charges. The table compares fund returns to returns on a broad-based
market index that is unmanaged and that, therefore, does not include any sales
charges or expenses.

The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Total Return on Class A Shares

BAR CHART APPEARS HERE

1989 21.71%
1990 -12.33%
1991 65.37%
1992 38.68%
1993 10.32%
1994 -0.75%
1995 47.46%
1996 28.96%
1997 45.20%
1998 2.31%

Calendar Year

Total return January 1 to June 30, 1999--(0.42)%
Best quarter during years shown: 1st quarter, 1991--22.90%
Worst quarter during years shown: 3rd quarter, 1990--(18.78%)

Average Annual Total Returns
as of December 31, 1998

<TABLE>
<CAPTION>
Class Class A Class B* Class C Class Y S&P 500
(Inception Date) (5/22/86) (7/1/91) (7/2/92) (3/30/98) Index
- ---------------- --------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
One Year......................... (2.28)% (3.44)% 0.55% N/A 28.60%
Five Years....................... 21.77% 21.79% 21.97% N/A 24.05%
Ten Years........................ 21.88% N/A N/A N/A 19.19%
Life of Class.................... 16.21% 24.17% 21.30% (3.59%)** ***
</TABLE>
- -------
* Assumes conversion of Class B shares to Class A after six years.
** Represents return for less than a full year.
*** Average annual total returns for the S&P 500 Index for the life of each
class were as follows: Class A--16.83%; Class B--20.19%; Class C--21.27%;
Class Y--12.87%.

----------
- --------------------------------------------------------------------------------

Prospectus Page 4
<PAGE>

- --------------------------------------------------------------------------------
-------------------
PaineWebber Financial Services Growth Fund

Expenses and Fee Tables

- --------------------------------------------------------------------------------

Fees and Expenses These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.

Shareholder Transaction Expenses (fees paid directly from your investment)

<TABLE>
<CAPTION>
Class A Class B Class C Class Y
------- ------- ------- --------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a % of offering price)................. 4.5% None None None
Maximum Contingent Deferred Sales Charge
(Load) (CDSC)
(as a % of offering price)................. None 5% 1% None
Exchange Fee................................ None None None None

Annual Fund Operating Expenses (expenses that are deducted from fund assets)

<CAPTION>
Class A Class B Class C Class Y
------- ------- ------- --------
<S> <C> <C> <C> <C>
Management Fees............................. 0.70% 0.70% 0.70% 0.70%
Distribution and/or Service (12b-1) Fees.... 0.25 1.00 1.00 0.00
Other Expenses.............................. 0.22 0.24 0.24 0.20
---- ---- ------ ------
Total Annual Fund Operating Expenses........ 1.17% 1.94% 1.94% 0.90%

Example

This example is intended to help you compare the cost of investing in the fund
with the cost of investing other mutual funds.

The example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:

<CAPTION>
1 year 3 years 5 years 10 years
------- ------- ------- --------
<S> <C> <C> <C> <C>
Class A..................................... $564 $805 $1,065 $1,806
Class B (assuming sales of all shares at end
of period)................................. 697 909 1,247 1,881
Class B (assuming no sales of shares)....... 197 609 1,047 1,881
Class C (assuming sales of all shares at end
of period)................................. 297 609 1,047 2,264
Class C (assuming no sales of shares)....... 197 609 1,047 2,264
Class Y..................................... 92 287 498 1,108
</TABLE>

----------
- --------------------------------------------------------------------------------

Prospectus Page 5
<PAGE>

- --------------------------------------------------------------------------------
-------------------
PaineWebber Utility Income Fund

PaineWebber Utility Income Fund

Investment Objective, Strategies and Risks

- --------------------------------------------------------------------------------

Fund Objective

Current income and capital appreciation.

Principal Investment Strategies

The fund invests primarily in income-producing stocks and bonds issued by U.S.
and foreign utility companies. These are companies that own or operate
facilities for generating, transmitting or distributing electricity, gas or
water or telecommunications. The fund also invests, to a lesser extent, in
companies outside the utility industries and in money market instruments. The
fund may use options, futures and other derivatives as part of its investment
strategy or to help manage portfolio risks.

The fund's investment adviser, Mitchell Hutchins Asset Management Inc., seeks
to find companies that should benefit from a changing operating environment.
Long-term changes include a trend toward deregulation in all utility
industries, an increasing ability of telephone companies to enter new
businesses and consolidation among electric utilities. Mitchell Hutchins
allocates the fund's investments between stocks and bonds based on its judgment
of what will achieve the best balance of income and growth under prevailing
economic conditions. Mitchell Hutchins evaluates individual issuers based on
the issuer's business and regulatory environment, its ability to maintain low
production costs and other measures of fundamental value.

Principal Risks

An investment in the fund is not guaranteed; you may lose money by investing in
the fund.

Common stocks generally fluctuate in value more than other investments. Utility
company stocks, like bonds, generally fall in price when interest rates rise.
Since the fund's investments are concentrated in utility companies, it will be
more severely affected by unfavorable developments in the utilities industries
than if it invested in a broad range of businesses.

More information about these and other risks of an investment in the fund is
provided below in "More on Risks and Investment Strategies." In particular, see
the following headings:

.Equity Risk

.Utility Industries Concentration Risk

.Interest Rate Risk

.Credit Risk

.Foreign Securities Risk

.Derivatives Risk

Information on the fund's recent investment strategies and holdings can be
found in its current annual/semi-annual reports (see back cover for information
on ordering those reports).

-----------
- --------------------------------------------------------------------------------

Prospectus Page 6
<PAGE>

- --------------------------------------------------------------------------------
-------------------
PaineWebber Utility Income Fund

Performance

- --------------------------------------------------------------------------------

Risk/Return Bar Chart and Table

The following bar chart and table provide information about the fund's
performance and thus give some indication of the risks of an investment in the
fund.

The bar chart shows how the fund's performance has varied from year to year.
The chart shows Class A shares because they have as long a performance history
as any class of fund shares. The chart does not reflect the effect of sales
charges; if it did, the total returns shown would be lower.
The table that follows the chart shows the average annual returns over several
time periods for each class of the fund's shares. That table does reflect fund
sales charges. The table compares fund returns to returns on a broad-based
market index and to a more narrowly based index that reflects the utility
industries market sector. Both of these indices are unmanaged and, therefore,
do not include any sales charges or expenses.

The fund's past performance does not necessarily indicate how the fund will
perform in the future.

Total Return on Class A Shares

[CHART APPEARS HERE]

1989 0%
1990 0%
1991 0%
1992 0%
1993 0%
1994 -9.71%
1995 28.82%
1996 7.90%
1997 25.75%
1998 12.87%

Calendar Year

Total return January 1 to June 30, 1999--2.53%

Best quarter during years shown: quarter, 1997--10.55%

Worst quarter during years shown: quarter, 1994--(7.33)%

Average Annual Total Returns
as of December 31, 1998

<TABLE>
<CAPTION>
S&P S&P
Class Class A Class B Class C Class Y 500 Utility
(Inception Date) (7/2/93) (7/2/93) (7/2/93) (9/10/98) Index Index
- ---------------- -------- -------- -------- --------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
One Year.................... 7.77% 7.03% 11.00% N/A 28.60% 14.77%
Five Years.................. 11.20% 11.13% 11.37% N/A 24.05% 13.90%
Life of Class............... 9.99% 9.97% 10.07% 14.11%* ** ***
</TABLE>
- -------
*Represents return for less than a full year.
** Average annual total returns for the S&P 500 Index for the life of each
class were as follows: Class A--22.72%; Class B--22.72%; Class C--22.72%;
Class Y--29.05%.
*** Average annual total returns for the S&P Utility Index for the life of each
class were as follows: Class A--12.74%; Class B--12.74%; Class C--12.74%;
Class Y--11.17%.

-----------
- --------------------------------------------------------------------------------

Prospectus Page 7
<PAGE>

- --------------------------------------------------------------------------------
-------------------
PaineWebber Utility Income Fund

Expenses and Fee Tables

- --------------------------------------------------------------------------------

Fees and Expenses These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.

Shareholder Transaction Expenses (fees paid directly from your investment)

<TABLE>
<CAPTION>
Class A Class B Class C Class Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases
(as a % of offering price).................... 4.5% None None None
Maximum Contingent Deferred Sales Charge (Load)
(CDSC)
(as a % of offering price).................... None 5% 1% None
Exchange Fee................................... None None None None
</TABLE>

Annual Fund Operating Expenses (expenses that are deducted from fund assets)

<TABLE>
<CAPTION>
Class A Class B Class C Class Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Management Fees................................ 0.70% 0.70% 0.70% 0.70%
Distribution and/or Service (12b-1) Fees....... 0.25 1.00 1.00 0.00
Other Expenses................................. 0.64 0.65 0.65 0.55
---- ---- ---- ----
Total Annual Fund Operating Expenses........... 1.59% 2.35% 2.35% 1.25%
</TABLE>

Example

This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.

<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A....................................... $604 $ 929 $1,277 $2,254
Class B (assuming sale of all shares at end of
period)...................................... 738 1,033 1,455 2,323
Class B (assuming no sale of shares).......... 238 733 1,255 2,323
Class C (assuming sale of all shares at end of
period)...................................... 338 733 1,255 2,686
Class C (assuming no sale of shares).......... 238 733 1,255 2,686
Class Y....................................... 127 397 686 1,511
</TABLE>

-----------
- --------------------------------------------------------------------------------

Prospectus Page 8
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Financial Services Growth Fund PaineWebber Utility Income Fund

More About Risks and Investment Strategies

- -------------------------------------------------------------------------------

Principal Risks

The main risks of investing in one or both of the funds are described below.
Not all of these risks apply to each fund. You can find a list of the main
risks that apply to a particular fund by looking under the "Investment
Objective, Strategies and Risks" heading for that fund.

Other risks of investing in a fund, along with further detail about some of
the risks described below, are discussed in the funds' Statement of Additional
Information ("SAI"). Information on how you can obtain the SAI is on the back
cover of this prospectus.

Credit Risk. Credit risk is the risk that the issuer of a bond will not make
principal or interest payments when they are due. Even if an issuer does not
default on a payment, a bond's value may decline if the market believes that
the issuer has become less able, or less willing, to make payments on time.
Even high quality bonds are subject to some credit risk. However, credit risk
is higher for lower quality bonds. Bonds that are not investment grade involve
high credit risk and are considered speculative. Lower quality bonds may
fluctuate in value more than higher quality bonds and, during periods of
market volatility, may be more difficult to sell at the time and price a fund
desires.

Derivatives Risk. The value of "derivatives"--so-called because their value
"derives" from the value of an underlying asset, reference rate or index--may
rise or fall more rapidly than other investments. For some derivatives, it is
possible for a fund to lose more than the amount it invested in the
derivative. Options, futures contracts and forward currency contracts are
examples of derivatives. If a fund uses derivatives to adjust or "hedge" the
overall risk of its portfolio, it is possible that the hedge will not succeed.
This may happen for various reasons, including unexpected changes in the value
of the derivatives that are not matched by opposite changes in the value of
the rest of the fund's portfolio.

Equity Risk. The prices of common stocks and other equity securities generally
fluctuate more than those of other investments. They reflect changes in the
issuing company's financial condition and changes in the overall market. A
fund may lose a substantial part, or even all, of its investment in a
company's stock.

Financial Services Industry Concentration Risk. Financial Services Growth Fund
concentrates its investments in financial services companies. Therefore, it
will be more affected by economic, competitive and regulatory developments in
the financial services industry than it would be if it invested in a broad
range of businesses.

Financial services companies may be subject to severe price competition, and
they also are subject to extensive governmental regulation. Regulation limits
their business activities and also may limit the interest rates and fees they
can charge. Proposed federal legislation would reduce the separation between
commercial and investment banking business. Both the industry and the fund may
be significantly affected if that legislation is enacted.

The profitability of financial services companies is largely dependent on the
availability and cost of capital funds. It can fluctuate significantly when
interest rates change. Credit losses resulting from financial difficulties of
customers can negatively affect the industry.

Foreign Securities Risk. Foreign securities involve risks that normally are
not associated with securities of U.S. issuers. These include risks relating
to political, social and economic developments abroad and differences between
U.S. and foreign regulatory requirements and market practices. When securities
are denominated in foreign currencies, they also are subject to the risk that
the value of the foreign currency will fall in relation to the U.S. dollar.

Interest Rate Risk. The value of bonds can be expected to fall when interest
rates rise and to rise when interest rates fall. Interest rate risk is the
risk that interest rates will rise, so that the value of a fund's investments
in bonds will fall. Because interest rate risk

-----------
- -------------------------------------------------------------------------------

Prospectus Page 9
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Financial Services Growth Fund PaineWebber Utility Income Fund

is the primary risk presented by U.S. government and other very high quality
bonds, changes in interest rates may actually have a larger effect on the
value of those bonds than on lower quality bonds.

Utility Industries Concentration Risk. Utility Income Fund concentrates its
investments in the utility industries. Therefore, it will be more affected by
economic, competitive and regulatory developments in those industries than it
would be if it invested in a broad range of businesses.

Interest rate changes may affect the value of the fund's assets. When interest
rates decline, prices of utility stocks and bonds tend to increase. When
interest rates rise, these prices tend to decrease.

The same trend toward deregulation that presents opportunities in the utility
industries also presents special risks. Some companies may be faced with
increased competition and may become less profitable.

Electric utility companies are subject to increases in fuel and other
operating costs, increases in interest costs, compliance costs relating to
environmental, nuclear facility and other safety regulations. Other types of
utilities face similar problems.

Additional Risks

Year 2000 Risk. The funds could be adversely affected by problems relating to
the inability of computer systems used by Mitchell Hutchins and the funds'
other service providers to recognize the year 2000. While year 2000-related
computer problems could have a negative effect on the funds, Mitchell Hutchins
is working to avoid these problems with respect to its own computer systems
and to obtain assurances from service providers that they are taking similar
steps.

Similarly, the companies in which the funds invest and trading systems used by
the funds could be adversely affected by this issue. The ability of a company
or trading system to respond successfully to the issue requires both
technological sophistication and diligence, and there can be no assurance that
any steps taken will be sufficient to avoid an adverse impact on the funds.
This risk may be greater with respect to trading systems in foreign countries.

Additional Investment Strategies

Defensive Positions; Cash Reserves. In order to protect itself from adverse
market conditions, a fund may take a temporary defensive position that is
different from its normal investment strategy. This means that the fund may
temporarily invest a larger-than-normal part, or even all, of its assets in
cash or money market instruments. Since these investments provide relatively
low income, a defensive position may not be consistent with achieving a fund's
investment objective. Each of the funds may invest up to 35% of its total
assets in cash or money market instruments as a cash reserve for liquidity or,
in the case of Utility Income Fund, as part of its ordinary investment
strategy.

Portfolio Turnover. Each fund may engage in frequent trading (high portfolio
turnover) in order to achieve its investment objective.

Frequent trading may increase the portion of a fund's capital gains that are
realized for tax purposes in any given year. This may increase the fund's
taxable dividends in that year. Frequent trading also may increase the portion
of a fund's realized capital gains that are considered "short-term" for tax
purposes. Shareholders will pay higher taxes on dividends that represent
short-term gains than they would pay on dividends that represent long-term
gains. Frequent trading also may result in higher fund expenses due to
transaction costs.

The funds do not restrict the frequency of trading in order to limit expenses
or the tax effect that the fund's dividends may have on shareholders.

-----------
- -------------------------------------------------------------------------------

Prospectus Page 10
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Financial Services Growth Fund PaineWebber Utility Income Fund

Your Investment

Managing Your Fund Account

- -------------------------------------------------------------------------------

Flexible Pricing

The funds offer four classes of shares--Class A, Class B, Class C and Class Y.
Each class has different sales charges and ongoing expenses. You can choose
the class that is best for you, based on how much you plan to invest in the
funds and how long you plan to hold your fund investment. Class Y shares are
only available to certain types of investors.

Each fund has adopted a plan under rule 12b-1 for its Class A, Class B and
Class C shares that allows it to pay service and (for Class B and Class C
shares) distribution fees for the sale of its shares and services provided to
shareholders. Because the 12b-1 distribution fees for Class B and Class C
shares are paid out of a fund's assets on an ongoing basis, over

time they will increase the cost of your investment and may cost you more than
if you paid a front-end sales charge.

Class A Shares

Class A shares have a front-end sales charge that is included in the offering
price of the Class A shares. This sales charge is not invested in the fund.
Class A shares pay an annual 12b-1 service fee of 0.25% of average net assets,
but they pay no 12b-1 distribution fees. The ongoing expenses for Class A
shares are lower than for Class B and Class C shares.

The Class A sales charges for each fund are described in the following table.

Class A Sales Charges

<TABLE>
<CAPTION>
Sales Charge as a Percentage of: Discount to Selected Dealers as
Amount of Investment Offering Price Net Amount Invested Percentage of Offering Price
- -------------------- -------------- ------------------- -------------------------------
<S> <C> <C> <C>
Less than $50,000....... 4.50% 4.71% 4.25%
$50,000 to $99,999...... 4.00 4.17 3.75
$100,000 to $249,999.... 3.50 3.63 3.25
$250,000 to $499,999.... 2.50 2.56 2.25
$500,000 to $999,999.... 1.75 1.78 1.50
$1,000,000 and over(1).. None None 1.00(2)
</TABLE>
- -------

(1) A contingent deferred sales charge of 1% of the shares' offering price or
the net asset value at the time of sale by the shareholder, whichever is
less, is charged on sales of shares made within one year of the purchase
date. Class A shares representing reinvestment of dividends are not
subject to this 1% charge. Withdrawals in the first year after purchase of
up to 12% of the value of the fund account under the funds' Systematic
Withdrawal Plan are not subject to this charge.
(2) Mitchell Hutchins pays 1% to PaineWebber.

-----------
- -------------------------------------------------------------------------------

Prospectus Page 11
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Financial Services Growth Fund PaineWebber Utility Income Fund

Sales Charge Reductions and Waivers. You may qualify for a lower sales charge
if you already own Class A shares of a PaineWebber mutual fund. You can
combine the value of Class A shares that you own in other PaineWebber funds
and the purchase amount of the Class A shares of the PaineWebber fund that you
are buying.

You may also qualify for a lower sales charge if you combine your purchases
with those of:

. your spouse, parents or children under age 21;

. your Individual Retirement Accounts (IRAs);

. certain employee benefit plans, including 401(k) plans;

. a company that you control;

. a trust that you created;

. Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts created
by you or by a group of investors for your children; or

. accounts with the same adviser.

You may qualify for a complete waiver of the sales charge if you:

. Are an employee of PaineWebber or its affiliates or the spouse, parent or
child under age 21 of a PaineWebber employee;

. Buy these shares through a PaineWebber Financial Advisor who was formerly
employed as an investment executive with a competing brokerage firm that was
registered as a broker-dealer with the SEC, and

--you were the Financial Advisor's client at the competing brokerage firm;

--within 90 days of buying shares in a fund, you sell shares of one or more
mutual funds that were principally underwritten by the competing brokerage
firm or its affiliates, and you either paid a sales charge to buy those
shares, pay a contingent deferred sales charge when selling them or held
those shares until the contingent deferred sales charge was waived; and

--you purchase an amount that does not exceed the total amount of money you
received from the sale of the other mutual fund;

. Acquire these shares through the reinvestment of dividends of a PaineWebber
unit investment trust;

. Are a 401(k) or 403(b) qualified employee benefit plan with 50 or more
eligible employees in the plan or at least $1 million in assets; or

. Are a participant in the PaineWebber Members Only sm Program. For
investments made pursuant to this waiver, Mitchell Hutchins may make
payments out of its own resources to PaineWebber and to participating
membership organizations in a total amount not to exceed 1% of the amount
invested.

Note: See the funds' Statement of Additional Information for some other sales
charge waivers. If you think you qualify for any sales charge reductions or
waivers, you will need to provide documentation to PaineWebber or the fund.
For more information, you should contact your PaineWebber Financial Advisor or
correspondent firm or call 1-800-647-1568. If you want information on the
funds' Systematic Withdrawal Plan, see the Statement of Additional Information
or contact your PaineWebber Financial Advisor or correspondent firm.

Class B Shares

Class B shares have a contingent deferred sales charge. When you purchase
Class B shares, we invest 100% of your purchase in fund shares. However, you
may have to pay the deferred sales charge when you sell your fund shares,
depending on how long you own the shares.

Class B shares pay an annual 12b-1 distribution fee of 0.75% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
If you hold your Class B shares for six years, they will automatically convert
to Class A shares, which have lower ongoing expenses.

If you sell Class B shares before the end of six years, you will pay a
deferred sales charge. We calculate the deferred sales charge by multiplying
the lesser of the net asset value of the Class B shares at the time of
purchase or the net asset value at the time of sale by the percentage shown
below:

-----------
- -------------------------------------------------------------------------------

Prospectus Page 12
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Financial Services Growth Fund PaineWebber Utility Income Fund

<TABLE>
<CAPTION>
Percentage by which the
If you sell shares' net asset
shares within: value is multiplied:
- -------------- -----------------------
<S> <C>
1st year since purchase................................. 5%
2nd year since purchase................................. 4
3rd year since purchase................................. 3
4th year since purchase................................. 2
5th year since purchase................................. 2
6th year since purchase................................. 1
7th year since purchase................................. None
</TABLE>

We will not impose the deferred sales charge on Class B shares representing
reinvestment of dividends or on withdrawals in any year of up to 12% of the
value of your Class B shares under the Systematic Withdrawal Plan.

To minimize your deferred sales charge, we will assume that you are selling:

. First, Class B shares representing reinvested dividends, and

. Second, Class B shares that you have owned the longest.

Sales Charge Waivers. You may qualify for a waiver of the deferred sales
charge on a sale of shares if:

. You participate in the Systematic Withdrawal Plan;

. You are older than 59 1/2 and are selling shares to take a distribution from
certain types of retirement plans;

. You receive a tax-free return of an excess IRA contribution;

. You receive a tax-qualified retirement plan distribution following
retirement; or

. The shares are sold within one year of your death and you owned the shares
either (1) as the sole shareholder or (2) with your spouse as a joint tenant
with the right of survivorship.

Note: If you think you qualify for any of these sales charge waivers, you will
need to provide documentation to PaineWebber or the fund. For more
information, you should contact your PaineWebber Financial Advisor or
correspondent firm or call 1-800-647-1568. If you want information on the
Systematic Withdrawal Plan, see the Statement of Additional Information or
contact your PaineWebber Financial Advisor or correspondent firm.

Class C Shares

Class C shares have a level load sales charge in the form of ongoing 12b-1
distribution fees. When you purchase Class C shares, we will invest 100% of
your purchase in fund shares.

Class C shares pay an annual 12b-1 distribution fee of 0.75% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
Class C shares do not convert to another class of shares. This means that you
will pay the 12b-1 fees for as long as you own your shares.

Class C shares also have a contingent deferred sales charge. You may have to
pay the deferred sales charge if you sell your shares within one year of the
date you purchased them. We calculate the deferred sales charge on sales of
Class C shares by multiplying 1.00% by the lesser of the net asset value of
the Class C shares at the time of purchase or the net asset value at the time
of sale. We will not impose the deferred sales charge on Class C shares
representing reinvestment of dividends or on withdrawals in the first year
after purchase, of up to 12% of the value of your Class C shares under the
Systematic Withdrawal Plan.

Note: If you want information on the funds' Systematic Withdrawal Plan, see
the Statement of Additional Information or contact your PaineWebber Financial
Advisor or correspondent firm.

Class Y Shares

Class Y shares have no sales charge. Only specific types of investors can
purchase Class Y shares. You may be eligible to purchase Class Y shares if
you:

. Buy shares through PaineWebber's PACE Multi-Advisor Program;

. Buy $10 million or more of PaineWebber fund shares at any one time;

. Are a qualified retirement plan with 5,000 or more eligible employees or $50
million in assets; or

. Are an investment company advised by PaineWebber or an affiliate of
PaineWebber.

The trustee of PaineWebber's 401(k) Plus Plan for its employees is also
eligible to purchase Class Y shares.

Class Y shares do not pay ongoing distribution or service fees or sales
charges. The ongoing expenses for Class Y shares are the lowest for all the
classes.

-----------
- -------------------------------------------------------------------------------

Prospectus Page 13
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Financial Services Growth Fund PaineWebber Utility Income Fund

Buying Shares

If you are a PaineWebber client, or a client of a PaineWebber correspondent
firm, you can purchase fund shares through your Financial Advisor. Otherwise,
you can invest in the funds through the funds' transfer agent, PFPC Inc. You
can obtain an application by calling 1-800-647-1568. You must complete and
sign the application and mail it, along with a check, to:

PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.

If you wish to invest in other PaineWebber Funds, you can do so by:

. Contacting your Financial Advisor (if you have an account at PaineWebber or
at a PaineWebber correspondent firm);

. Mailing an application with a check; or

. Opening an account by exchanging shares from another PaineWebber fund.

You do not have to complete an application when you make additional
investments in the same fund.

The funds and Mitchell Hutchins reserve the right to reject a purchase order
or suspend the offering of shares.

Minimum Investments

<TABLE>
<S> <C>
To open an account...................................................... $1,000
To add to an account.................................................... $ 100
</TABLE>

Each fund may waive or reduce these amounts for:

. Employees of PaineWebber or its affiliates; or

. Participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the funds' automatic investment plans.

Frequent Trading. The interests of a fund's long-term shareholders and its
ability to manage its investments may be adversely affected when its shares
are repeatedly bought and sold in response to short-term market fluctuations--
also known as "market timing." When large dollar amounts are involved, the
fund may have difficulty implementing long-term investment strategies, because
it cannot predict how much cash it will have to invest. Market timing also may
force the fund to sell portfolio securities at disadvantageous times to raise
the cash needed to buy a market timer's fund shares. These factors may hurt
the fund's performance and its shareholders. When Mitchell Hutchins believes
frequent trading would have a disruptive effect on a fund's ability to manage
its investments, Mitchell Hutchins and the fund may reject purchase orders and
exchanges into the fund by any person, group or account that Mitchell Hutchins
believes to be a market timer. A fund may notify the market timer that a
purchase order or an exchange has been rejected after the day the order is
placed.

Selling Shares

You can sell your fund shares at any time. If you own more than one class of
shares, you should specify which class you want to sell. If you do not, the
fund will assume that you want to sell shares in the following order: Class A,
then Class C, then Class B and last, Class Y.

If you want to sell shares that you purchased recently, the fund may delay
payment until it verifies that it has received good payment. If you purchased
shares by check, this can take up to 15 days.

If you have an account with PaineWebber or a PaineWebber correspondent firm,
you can sell shares by contacting your Financial Advisor.

If you do not have an account at PaineWebber or a correspondent firm, and you
bought your shares through the transfer agent, you can sell your shares by
writing to the fund's transfer agent. Your letter must include:

. Your name and address;

. The fund's name;

. The fund account number;

. The dollar amount or number of shares you want to sell; and

. A guarantee of each registered owner's signature. A signature guarantee may
be obtained from a financial institution, broker, dealer or clearing agency
that is a participant in one of the medallion programs recognized by the
Securities Transfer Agents Association. These are:

Securities Transfer Agents Medallion Program (STAMP), Stock Exchanges
Medallion Program (SEMP) and the New York Stock Exchange

-----------
- -------------------------------------------------------------------------------

Prospectus Page 14
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Financial Services Growth Fund PaineWebber Utility Income Fund

Medallion Signature Program (MSP). The funds will not accept signature
guarantees that are not a part of these programs.

Mail the letter to:

PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.

If you sell Class A shares and then repurchase Class A shares of the same fund
within 365 days of the sale, you can reinstate your account without paying a
sales charge.

It costs each fund money to maintain shareholder accounts. Therefore, the
funds reserve the right to repurchase all shares in any account that has a net
asset value of less than $500. If a fund elects to do this with your account,
it will notify you that you can increase the amount invested to $500 or more
within 60 days. A fund will not repurchase shares in accounts that fall below
$500 solely because of a decrease in the fund's net asset value.

Exchanging Shares

You may exchange Class A, Class B or Class C shares of each fund for shares of
the same class of most other PaineWebber funds. You may not exchange Class Y
shares.

You will not pay either a front-end sales charge or a deferred sales charge
when you exchange shares. However, you may have to pay a deferred sales charge
if you later sell the shares you acquired in the exchange. Each fund will use
the date that you purchased the shares in the first fund to determine whether
you must pay a deferred sales charge when you sell the shares in the acquired
fund.

Other PaineWebber funds may have different minimum investment amounts. You may
not be able to exchange your shares if your exchange is not as large as the
minimum investment amount in that other fund.

You may exchange shares of one fund for shares of another fund only after the
first purchase has settled and the first fund has received your payment.

PaineWebber Clients. If you bought your shares through PaineWebber or a
correspondent firm, you may exchange your shares by placing an order with your
PaineWebber Financial Advisor.

Other Investors. If you are not a PaineWebber client, you may exchange your
shares by writing to the fund's transfer agent. You must include:

. Your name and address;

. The name of the fund whose shares you are selling and the name of the fund
whose shares you want to buy;

. Your account number;

. How much you are exchanging (by dollar amount or by number of shares to be
sold); and

. A guarantee of your signature. (See "Buying Shares" for information on
obtaining a signature guarantee.)

Mail the letter to:

PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.

A fund may modify or terminate the exchange privilege at any time.

Pricing and Valuation

The price at which you may buy, sell or exchange fund shares is based on net
asset value per share. Each fund calculates net asset value on days that the
New York Stock Exchange is open. Each fund calculates net asset value
separately for each class as of the close of regular trading on the NYSE
(generally, 4:00 p.m., Eastern time). The NYSE normally is not open, and the
funds do not price their shares, on national holidays and on Good Friday. If
trading on the NYSE is halted for the day before 4:00 p.m., Eastern time, the
fund's net asset value per share will be calculated as of the time trading was
halted.

Your price for buying, selling or exchanging shares will be based on the net
asset value that is next calculated after the fund accepts your order. If you
place your order through PaineWebber, your PaineWebber Financial Advisor is
responsible for making sure that your order is promptly sent to the fund.

You should keep in mind that a front-end sales charge may be applied to your
purchase if you buy Class A shares. A deferred sales charge may be applied
when you sell Class B or Class C shares.

-----------
- -------------------------------------------------------------------------------
Prospectus Page 15
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Financial Services Growth Fund PaineWebber Utility Income Fund

Each fund calculates its net asset value based on the current market value for
its portfolio securities. The funds normally obtain market values for their
securities from independent pricing services that use reported last sales
prices, current market quotations or valuations from computerized "matrix"
systems that derive values based on comparable securities. If a market value
is not available from an independent pricing source for a particular security,
that security is valued at a fair value determined by or under the direction
of the fund's board. The funds normally use the amortized cost method to value
bonds that will mature in 60 days or less.

Judgment plays a greater role in valuing thinly traded securities, including
many lower-rated bonds, because there is less reliable, objective data
available.

The funds calculate the U.S. dollar value of investments that are denominated
in foreign currencies daily, based on current exchange rates. A fund may own
securities, including some securities that trade primarily in foreign markets,
that trade on weekends or other days on which a fund does not calculate net
asset value. You will not be able to sell your shares on those days. If a fund
concludes that a material change in the value of a foreign security has
occurred after the close of trading in its principal foreign market but before
the close of regular trading on the NYSE, the fund may use fair value methods
to reflect those changes. Any use of fair value methods would be intended to
assure that the fund's net asset value fairly reflects security values as of
the time of pricing.

-----------
- -------------------------------------------------------------------------------

Prospectus Page 16
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Financial Services Growth Fund PaineWebber Utility Income Fund

Management

- -------------------------------------------------------------------------------
Investment Adviser

Mitchell Hutchins Asset Management Inc. is the investment adviser and
administrator of the funds. Mitchell Hutchins is located at 1285 Avenue of the
Americas, New York, New York, 10019, and is a wholly owned asset management
subsidiary of PaineWebber Incorporated, which is wholly owned by Paine Webber
Group Inc., a publicly owned financial services holding company. On June 30,
1999, Mitchell Hutchins was adviser or sub-adviser of 33 investment companies
with 75 separate portfolios and aggregate assets of approximately $47.2
billion.

Portfolio Managers

Financial Services Growth Fund. Mark Tincher and Andrew B. Dinnhaupt are
responsible for the day-to-day management of the fund's portfolio. Mr. Tincher
is a managing director and chief investment officer of equities of Mitchell
Hutchins, responsible for overseeing the management of equity investments. He
assumed his responsibilities for the fund in May 1999. Prior to joining
Mitchell Hutchins in April 1995, Mr. Tincher was a vice president at Chase
Manhattan Private Bank, where he directed the U.S. funds management and equity
research area and oversaw the management of all Chase U.S. equity funds. Mr.
Dinnhaupt is a first vice president of Mitchell Hutchins and a financial
services analyst, and has been a portfolio manager for the fund since October
1998. Prior to joining Mitchell Hutchins in July 1996, Mr. Dinnhaupt worked at
Summit Bank as an investment officer, portfolio manager, credit analyst and
financial services analyst.

Utility Income Fund. Mark Tincher and Christopher T. Solmssen are responsible
for the day-to-day management of the fund's stock portfolio. Mr. Tincher also
is responsible for determining the allocation of fund assets between stocks
and bonds. James F. Keegan and Julieanna Berry are responsible for the day-to-
day management of the fund's bond portfolio.

Mr. Tincher and Mr. Solmssen assumed their responsibilities for the fund in
May 1999. Further information about Mr. Tincher's background may be found
above under "Financial Services Growth Fund." Mr. Solmssen is a vice president
of Mitchell Hutchins and an equity analyst covering utilities,
telecommunications and energy. Prior to joining Mitchell Hutchins in January
1998, Mr. Solmssen worked at Sun America Asset Management as an equity
analyst. Mrs. Berry and Mr. Keegan have held their fund responsibilities since
March and April 1996, respectively. Mrs. Berry is a first vice president of
Mitchell Hutchins, where she has been employed as a portfolio manager since
1989. Mr. Keegan is a senior vice president of Mitchell Hutchins and oversees
all corporate bond investments. Prior to joining Mitchell Hutchins in 1995,
Mr. Keegan was the director of fixed income strategy and research at the
Merrion Group, L.P.

Advisory Fees

The funds paid advisory fees to Mitchell Hutchins for the most recent fiscal
year at the following rate of average daily net assets:

<TABLE>
<S> <C>
Financial Services Growth Fund............................................ 0.70%
Utility Income Fund....................................................... 0.70%
</TABLE>

Other Information

The funds have received an exemptive order from the SEC that permits their
boards to appoint and replace sub-advisers and to amend sub-advisory contracts
without obtaining shareholder approval. A fund's shareholders must approve
this policy before its board may implement it. As of the date of this
prospectus, the funds have not asked their shareholders to do so.

-----------
- -------------------------------------------------------------------------------

Prospectus Page 17
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Financial Services Growth Fund PaineWebber Utility Income Fund

Dividends and Taxes

- -------------------------------------------------------------------------------
Dividends

Financial Services Growth Fund normally declares and pays dividends and
distributes any gains annually. Utility Income Fund normally pays quarterly
dividends and distributes any gains annually.

Classes with higher expenses are expected to have lower dividends. For
example, Class B shares and Class C are expected to have the lowest dividends
of any class of a fund's shares, while Class Y shares are expected to have the
highest.

You will receive dividends in additional shares of the same class unless you
elect to receive them in cash. Contact your Financial Advisor at PaineWebber
or one of its correspondent firms if you prefer to receive dividends in cash.
Taxes

The dividends that you receive from a fund generally are subject to federal
income tax regardless of whether you receive them in additional fund shares or
in cash. If you hold fund shares through a tax-exempt account or plan, such as
an IRA or 401(k) plan, dividends on your shares generally will not be subject
to tax.

When you sell fund shares, you generally will be subject to federal income tax
on any gain you realize. If you exchange any fund's shares for shares of
another PaineWebber mutual fund, the transaction will be treated as a sale of
the first fund's shares, and any gain will be subject to federal income tax.

Financial Services Growth Fund expects that its dividends will be comprised
primarily of capital gain distributions. Utility Income Fund expects that its
dividends will primarily be taxed as ordinary income. The distribution of
capital gains will be taxed at a lower rate than ordinary income if the fund
held the assets that generated the gains for more than 12 months. Your fund
will tell you how you should treat its dividends for tax purposes.

-----------
- -------------------------------------------------------------------------------

Prospectus Page 18
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Financial Services Growth Fund PaineWebber Utility Income Fund

Financial Highlights

- -------------------------------------------------------------------------------

The following financial highlights tables are intended to help you understand
the funds' financial performance for the past 5 years. Shorter periods are
shown for classes of fund shares that have existed for less than 5 years.
Certain information reflects financial results for a single fund share. In the
tables, "total investment return" represents the rate that an investor would
have earned (or lost) on an investment in a fund (assuming reinvestment of all
dividends).

This information in the financial highlights has been audited by Ernst & Young
LLP, independent auditors, whose reports, along with the funds' financial
statements, are included in the funds' Annual Reports to Shareholders. Annual
Reports may be obtained without charge by calling 1-800-647-1568.

-----------
- -------------------------------------------------------------------------------

Prospectus Page 19
<PAGE>

- --------------------------------------------------------------------------------
-------------------
PaineWebber Financial Services Growth Fund

Financial Highlights

- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Financial Services Growth Fund
----------------------------------------------------------------------------------------------
Class A Class B
---------------------------------------------- ----------------------------------------------

For the Years Ended March 31, For the Years Ended March 31,
---------------------------------------------- ----------------------------------------------
1999 1998 1997 1996 1995 1999 1998 1997 1996 1995
-------- -------- ------- ------- ------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 33.56 $ 23.41 $ 21.16 $ 17.11 $ 16.92 $ 32.62 $ 22.87 $ 20.75 $ 16.85 $ 16.71
-------- -------- ------- ------- ------- -------- -------- ------- ------- -------
Net investment income... 0.33@ 0.20 0.18 0.30 0.25 0.09@ 0.09 0.04 0.13 0.11
Net realized and
unrealized gains
(losses) from
investments............ (2.96)@ 11.75 5.69 6.25 1.34 (2.87)@ 11.34 5.53 6.16 1.33
-------- -------- ------- ------- ------- -------- -------- ------- ------- -------
Net increase (decrease)
from investment
operations............. (2.63) 11.95 5.87 6.55 1.59 (2.78) 11.43 5.57 6.29 1.44
-------- -------- ------- ------- ------- -------- -------- ------- ------- -------
Dividends from net
investment income...... (0.28) (0.21) (0.23) (0.29) (0.13) (0.08) (0.09) (0.06) (0.18) (0.03)
Distributions from net
realized gains from
investment
transactions........... (0.41) (1.59) (3.39) (2.21) (1.27) (0.41) (1.59) (3.39) (2.21) (1.27)
-------- -------- ------- ------- ------- -------- -------- ------- ------- -------
Total dividends and
distributions.......... (0.69) (1.80) (3.62) (2.50) (1.40) (0.49) (1.68) (3.45) (2.39) (1.30)
-------- -------- ------- ------- ------- -------- -------- ------- ------- -------
Net asset value, end of
period................. $ 30.24 $ 33.56 $ 23.41 $ 21.16 $ 17.11 $ 29.35 $ 32.62 $ 22.87 $ 20.75 $ 16.85
======== ======== ======= ======= ======= ======== ======== ======= ======= =======
Total investment
return(1).............. (7.81)% 51.92% 28.72% 39.02% 10.22% (8.51)% 50.80% 27.74% 37.97% 9.37%
======== ======== ======= ======= ======= ======== ======== ======= ======= =======
Ratios/Supplemental
Data:
Net assets, end of
period (000's)......... $204,433 $209,818 $85,661 $64,003 $49,295 $195,392 $198,473 $41,579 $28,147 $16,368
Expenses to average net
assets................. 1.17% 1.17% 1.52% 1.37% 1.45% 1.94% 1.92% 2.27% 2.12% 2.22%
Net investment income to
average net assets..... 1.07% 1.12% 0.90% 1.50% 1.40% 0.29% 0.37% 0.15% 0.74% 0.67%
Portfolio turnover
rate................... 59% 23% 40% 53% 14% 59% 23% 40% 53% 14%
</TABLE>
- -------
* Annualized
+ Commencement of issuance of shares
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for each class would be lower if sales
charges were included. Total investment returns for periods of less than
one year have not been annualized.

@ Calculated using the average monthly shares outstanding for the year.

-----------
- --------------------------------------------------------------------------------

Prospectus Page 20
<PAGE>

- --------------------------------------------------------------------------------
-------------------
PaineWebber Financial Services Growth Fund

Financial Highlights
(Continued)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Financial Services Growth Fund
- -----------------------------------------------------------------------
Class C Class Y
- ------------------------------------------ ---------------------------
For the For the Period
For the Years Ended March 31, Years Ended March 30, 1998+
- ------------------------------------------ March 31, to March 31,
1999 1998 1997 1996 1995 1999 1998
- ------- ------- ------- ------ ------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$ 32.56 $ 22.84 $ 20.75 $16.86 $16.71 $33.56 $32.22
- ------- ------- ------- ------ ------ ------ ------
0.08@ 0.12 0.06 0.12 0.11 0.34@ 0.00
(2.86)@ 11.28 5.51 6.16 1.33 (2.89)@ 0.34
- ------- ------- ------- ------ ------ ------ ------
(2.78) 11.40 5.57 6.28 1.44 (2.55) 0.34
- ------- ------- ------- ------ ------ ------ ------
(0.09) (0.09) (0.09) (0.18) (0.02) (0.37) 0.00
(0.41) (1.59) (3.39) (2.21) (1.27) (0.41) 0.00
- ------- ------- ------- ------ ------ ------ ------
(0.50) (1.68) (3.48) (2.39) (1.29) (0.78) 0.00
$ 29.28 $ 32.56 $ 22.84 $20.75 $16.86 $30.23 $33.56
======= ======= ======= ====== ====== ====== ======
(8.50)% 50.76% 27.74% 37.92% 9.34% (7.57) 1.02%
======= ======= ======= ====== ====== ====== ======
$78,670 $63,809 $12,357 $6,989 $4,160 $5,292 $ 2
1.94% 1.92% 2.28% 2.14% 2.23% 0.90% 0.80%*
0.27% 0.36% 0.15% 0.72% 0.61% 1.22% 0.00%*
59% 23% 40% 53% 14% 59% 23%
</TABLE>

-----------
- --------------------------------------------------------------------------------

Prospectus Page 21
<PAGE>

- --------------------------------------------------------------------------------
-------------------
PaineWebber Utility Income Fund

Financial Highlights

- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Utility Income Fund
---------------------------------------------------------------------------------------------------
Class A Class B
---------------------------------------------------------- ---------------------------------------
For the
For the Years Ended Four For the For the For the Years Ended For the Four
March 31, Months Ended Year Ended Year Ended March 31, Months Ended
---------------------- March 31, Nov. 30, Nov. 30, ------------------------- March 31,
1999 1998 1997 1996 1995 1994 1999 1998 1997 1996
------ ------ ------ ------------ ---------- ---------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period......... $13.79 $10.20 $ 9.76 $ 9.77 $ 8.31 $ 9.66 $ 13.79 $ 10.20 $ 9.75 $ 9.77
------ ------ ------ ------ ------- ------- ------- ------- ------- -------
Net investment
income......... 0.39 0.33 0.34 0.15 0.47 0.48 0.29 0.25 0.26 0.12
Net realized and
unrealized
gains (losses)
from
investments.... (0.22) 3.61 0.41 -- 1.44 (1.31) (0.23) 3.60 0.42 (0.01)
------ ------ ------ ------ ------- ------- ------- ------- ------- -------
Net increase
(decrease) from
investment
operations..... 0.17 3.94 0.75 0.15 1.91 (0.83) 0.06 3.85 0.68 0.11
------ ------ ------ ------ ------- ------- ------- ------- ------- -------
Dividends from
net investment
income......... (0.36) (0.35) (0.31) (0.16) (0.45) (0.52) (0.25) (0.26) (0.23) (0.13)
------ ------ ------ ------ ------- ------- ------- ------- ------- -------
Net asset value,
end of period.. $13.60 $13.79 $10.20 $ 9.76 $ 9.77 $ 8.31 $ 13.60 $ 13.79 $ 10.20 $ 9.75
====== ====== ====== ====== ======= ======= ======= ======= ======= =======
Total investment
return(1)...... 1.24% 39.15% 7.83% 1.46% 23.64% (8.76)% 0.49% 38.13% 7.05% 1.10%
====== ====== ====== ====== ======= ======= ======= ======= ======= =======
Ratios/Supplemental
Data:
Net assets, end
of period
(000's)........ $7,308 $7,856 $6,039 $9,416 $10,750 $12,532 $19,484 $21,562 $21,071 $34,765
Expenses to
average net
assets, net of
waivers from
adviser........ 1.59% 1.92% 1.93% 1.09%* 1.49% 1.58% 2.35% 2.68% 2.69% 1.85%*
Expenses to
average net
assets, before
waivers from
adviser, to
average net
assets......... 1.59% 1.92% 2.00% 1.44%* 1.49% 1.58% 2.35% 2.68% 2.76% 2.20%*
Net investment
income, before
waivers from
adviser, to
average net
assets......... 2.90% 2.77% 3.27% 4.26%* 5.13% 5.49% 2.16% 2.05% 2.51% 3.51%*
Net investment
income, before
waivers from
adviser, to
average net
assets......... 2.90% 2.77% 3.20% 3.91%* 5.13% 5.49% 2.16% 2.05% 2.44% 3.16%*
Portfolio
turnover rate.. 21% 10% 41% 21% 30% 92% 21% 10% 41% 21%
<CAPTION>
For the For the
Year Ended Year Ended
Nov. 30, Nov. 30,
1995 1994
---------- -----------
<S> <C> <C>
Net asset value,
beginning of
period......... $ 8.31 $ 9.65
---------- -----------
Net investment
income......... 0.40 0.42
Net realized and
unrealized
gains (losses)
from
investments.... 1.45 (1.31)
---------- -----------
Net increase
(decrease) from
investment
operations..... 1.85 (0.89)
---------- -----------
Dividends from
net investment
income......... (0.39) (0.45)
---------- -----------
Net asset value,
end of period.. $ 9.77 $ 8.31
========== ===========
Total investment
return(1)...... 22.73% (9.35)%
========== ===========
Ratios/Supplemental
Data:
Net assets, end
of period
(000's)........ $37,554 $37,156
Expenses to
average net
assets, net of
waivers from
adviser........ 2.23% 2.33%
Expenses to
average net
assets, before
waivers from
adviser, to
average net
assets......... 2.23% 2.33%
Net investment
income, before
waivers from
adviser, to
average net
assets......... 4.37% 4.72%
Net investment
income, before
waivers from
adviser, to
average net
assets......... 4.37% 4.72%
Portfolio
turnover rate.. 30% 92%
</TABLE>
- -------
* Annualized
+ Commencement of issuance of shares
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for each class would be lower if sales
charges were included. Total investment returns for periods of less than
one year have not been annualized.

-----------
- --------------------------------------------------------------------------------

Prospectus Page 22
<PAGE>

- --------------------------------------------------------------------------------
-------------------
PaineWebber Utility Income Fund

Financial Highlights
(Continued)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Utility Income Fund
- ------------------------------------------------------------------------------
Class C Class Y
- --------------------------------------------------------------- --------------
For the Period
For the Years Ended For the Four For the For the September 10,
March 31, Months Ended Year Ended Year Ended 1998+
- ---------------------- March 31, November 30, November 30, to March 31,
1999 1998 1997 1996 1995 1994 1999
- ------ ------ ------ ------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
$13.78 $10.20 $ 9.75 $ 9.77 $ 8.31 $ 9.65 $12.55
- ------ ------ ------ ------- ------- ------- ------
0.28 0.23 0.25 0.12 0.40 0.42 0.24
(0.22) 3.61 0.43 (0.01) 1.45 (1.31) 1.03
- ------ ------ ------ ------- ------- ------- ------
0.06 3.84 0.68 0.11 1.85 (0.89) 1.27
- ------ ------ ------ ------- ------- ------- ------
(0.26) (0.26) (0.23) (0.13) (0.39) (0.45) (0.27)
- ------ ------ ------ ------- ------- ------- ------
$13.58 $13.78 $10.20 $ 9.75 $ 9.77 $ 8.31 $13.55
====== ====== ====== ======= ======= ======= ======
0.44% 38.09% 7.06% 1.10% 22.71% (9.36)% 10.14%
====== ====== ====== ======= ======= ======= ======
$7,700 $7,736 $6,909 $11,072 $12,222 $13,922 $ 40
2.35% 2.68% 2.70% 1.85%* 2.24% 2.32% 1.25%*
2.35% 2.68% 2.76% 2.20%* 2.24% 2.32% 1.25%*
2.13% 1.99% 2.51% 3.50%* 4.37% 4.69% 2.57%*
2.13% 1.99% 2.44% 3.15%* 4.37% 4.69% 2.57%*
21% 10% 41% 21% 30% 92% 21%
</TABLE>

-----------
- --------------------------------------------------------------------------------

Prospectus Page 23
<PAGE>

- -------------------------------------------------------------------------------
-------------------
PaineWebber Financial Services Growth Fund PaineWebber Utility Income Fund

<TABLE>
<S> <C> <C> <C> <C>
Ticker Symbol: Financial Services Growth Fund Class: A:PREAX.Q Utility Income Fund Class: A:PUTAX.Q
B:PREBX.Q B:PUIBX.Q
C:PFICX.Q C:PUTDX.Q
Y:None Y:None
</TABLE>

If you want more information about the funds, the following documents are
available free upon request:

Annual/Semi-Annual Reports

Additional information about the funds' investments is available in the funds'
annual and semi-annual reports to shareholders. In the funds' annual reports,
you will find a discussion of the market conditions and investment strategies
that significantly affected the funds' performance during the last fiscal
year.

Statement of Additional Information (SAI)

The SAI provides more detailed information about the funds and is incorporated
by reference into this prospectus.

You may discuss your questions about the funds by contacting your PaineWebber
Financial Advisor. You may obtain free copies of annual and semi-annual
reports and the SAI by contacting the funds directly at 1-800-647-1568.

You may review and copy information about the funds, including shareholder
reports and the SAI, at the Public Reference Room of the Securities and
Exchange Commission. You can get text-only copies of reports and other
information about the funds:

. For a fee, by writing to or calling the SEC's Public Reference Room,
Washington, D.C. 20549-6009 Telephone: 1-800-SEC-0330

.Free, from the SEC's Internet website at: http://www.sec.gov

PaineWebber Financial Services Growth Fund Inc.

Investment Company Act File No. 811-4587

PaineWebber Managed Investments Trust

-PaineWebber Utility Income Fund

Investment Company Act File No. 811-4040

-----------
- -------------------------------------------------------------------------------
<PAGE>

PaineWebber Financial Services Growth Fund Inc.
PaineWebber Utility Income Fund
1285 Avenue of the Americas
New York, New York 10019

STATEMENT OF ADDITIONAL INFORMATION

Each of the funds named above is, or is a series of, a diversified,
professionally managed, open-end management investment company. PaineWebber
Financial Services Growth Fund Inc. is a Maryland corporation (the
"Corporation"). PaineWebber Utility Income Fund is a series of PaineWebber
Managed Investments Trust (the "Trust").

The investment adviser, administrator and distributor for each fund is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
asset management 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.

Portions of each fund's Annual Report to Shareholders are incorporated
by reference into this Statement of Additional Information ("SAI"). The Annual
Reports accompany this SAI. You may obtain an additional copy of a fund's
Annual Report by calling toll-free 1-800-647-1568.

This SAI is not a prospectus and should be read only in conjunction
with the funds' current Prospectus, dated August 1, 1999. A copy of the
Prospectus may be obtained by calling any PaineWebber Financial Advisor or
correspondent firm or by calling toll-free 1-800-647-1568. This SAI is dated
August 1, 1999.

TABLE OF CONTENTS
<S> <C>
Page
----
The Funds and Their Investment Policies....................................................................2
The Funds' Investments, Related Risks and Limitations..................................................... 3
Strategies Using Derivative Instruments...................................................................12
Organization; Board Members, Officers and Principal Holders of Securities.................................20
Investment Advisory and Distribution Arrangements.........................................................27
Portfolio Transactions....................................................................................33
Reduced Sales Charges, Additional Exchange and Redemption Information and Other Services..................35
Conversion of Class B Shares..............................................................................40
Valuation of Shares.......................................................................................40
Performance Information...................................................................................41
Taxes.....................................................................................................44
Other Information.........................................................................................47
Financial Statements......................................................................................49
Appendix..................................................................................................A-1
</TABLE>
<PAGE>

THE FUNDS AND THEIR INVESTMENT POLICIES

Neither fund's investment objective may be changed without shareholder
approval. Except where noted, the other investment policies of each fund may be
changed by its board without shareholder approval. As with other mutual funds,
there is no assurance that a fund will achieve its investment objective.

Financial Services Growth Fund's investment objective is long-term
capital appreciation. The fund seeks to achieve this objective by investing
primarily in equity securities of companies in the financial services
industries. These companies include banks, savings and loan institutions
("thrifts"), insurance companies, commercial finance companies, consumer finance
companies, brokerage companies, investment management companies, companies that
provide specialized services closely allied to financial services (such as
transaction processing and financial printing) and their holding companies.

The fund normally invests at least 65% of its total assets in equity
securities of financial services companies. To be considered a financial
services company, the company must: (1) derive at least 50% of either its
revenues or earnings from financial services activities or devote at least 50%
of its assets to these activities; or (2) 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 companies 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 equity securities when, in
the opinion of the investment adviser, 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 securities of any one company
engaged in securities-related businesses. The fund may invest in banks and
thrifts (and their holding companies) only if their deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC"). However, neither the securities
of these companies nor the fund's shares are insured by the FDIC or any other
federal or governmental agency.

The fund may invest up to 10% of its net assets in illiquid securities.
The fund may purchase securities on a when-issued basis and may purchase or sell
securities for delayed delivery. The fund may lend its portfolio securities to
qualified broker-dealers or institutional investors in an amount up to 33-1/3%
of its total assets. The fund may also borrow from banks or through reverse
repurchase agreements for temporary or emergency purposes, but not in excess of
10% of its total assets. The fund also may invest in securities of other
investment companies and may sell securities short "against the box."

Utility Income Fund's investment objective is current income and
capital appreciation. The fund seeks 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
distribution of electricity, telecommunications, gas or water. "Primarily
engaged" means that either: (1) more than 50% of the company's assets are
devoted to the ownership or operation of one or more such facilities; or (2)
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 and convertible securities that are rated lower than investment
grade.

2
<PAGE>

THE FUNDS' INVESTMENTS, RELATED RISKS AND LIMITATIONS

The following supplements the information contained in the Prospectus
and above concerning the funds' investments, related risks and limitations.
Except as otherwise indicated in the Prospectus or this SAI, the funds have
established no policy limitations on their ability to use the investments or
techniques discussed in these documents.

Equity Securities. Equity securities (referred to as "stocks" in the
Prospectus) include common stocks, most preferred stocks and securities that are
convertible into them, including common stock purchase warrants and rights,
equity interests in trusts, partnerships, joint ventures or similar enterprises
and depository receipts. Common stocks, the most familiar type, represent an
equity (ownership) interest in a corporation.

Preferred stock has certain fixed income features, like a bond, but
actually it is equity that is senior to a company's common stock. Convertible
securities may include debentures, notes and preferred equity securities, that
may be converted into or exchanged for a prescribed amount of common stock of
the same or a different issuer within a particular period of time at a specified
price or formula. Depository receipts typically are issued by banks or trust
companies and evidence ownership of underlying equity securities.

While past performance does not guarantee future results, equity
securities historically have provided 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. Common stocks generally represent the riskiest investment
in a company. It is possible that a fund may experience a substantial or
complete loss on an individual equity investment.

Bonds. Bonds are fixed or variable rate debt obligations, including
notes, debentures, and similar instruments and securities and money market
instruments. Mortgage- and asset-backed securities are types of bonds, and
certain types of income-producing, non-convertible preferred stocks may be
treated as bonds for investment purposes. Bonds generally are used by
corporations and governments to borrow money from investors. The issuer pays the
investor a fixed or variable rate of interest and normally must repay the amount
borrowed on or before maturity. Many preferred stocks and some bonds are
"perpetual" in that they have no maturity date.

Bonds are subject to interest rate risk and credit risk. Interest rate
risk is the risk that interest rates will rise and that, as a result, bond
prices will fall, lowering the value of a fund's investments in bonds. In
general, bonds having longer durations are more sensitive to interest rate
changes than are bonds with shorter durations. Credit risk is the risk that an
issuer may be unable or unwilling to pay interest and/or principal on the bond.
Credit risk can be affected by many factors, including adverse changes in the
issuer's own financial condition or in economic conditions.

Convertible Securities. A convertible security is a bond, preferred
stock or other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. A convertible security entitles
the holder to receive interest or dividends until the convertible security
matures or is redeemed, converted or exchanged. Convertible securities have
unique investment characteristics in that they generally (1) have higher yields
than common stocks, but lower yields than comparable non-convertible securities,
(2) are less subject to fluctuation in value than the underlying stock because
they have fixed income characteristics and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases. While
no securities investment is without some risk, investments in convertible
securities generally entail less risk than the issuer's common stock. However,
the extent to which such risk is reduced depends in large measure upon the
degree to which the convertible security sells above its value as a fixed income
security.

Warrants. Warrants are securities permitting, but not obligating,
holders to subscribe for other securities. Warrants do not carry with them the
right to dividends or voting rights with respect to the securities that they
entitle their holder to purchase, and they do not represent any rights in the
assets of the issuer. As a result, warrants may be considered more speculative
than certain other types of investments. In addition, the value of a warrant
does not

3
<PAGE>

necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.

Credit Ratings; Non-Investment Grade Bonds. Moody's Investors Service
("Moody's"), Standard & Poor's ("S&P") and other rating agencies are private
services that provide ratings of the credit quality of debt obligations and
certain other securities. A description of the ratings assigned to corporate
bonds by Moody's and S&P is included in the Appendix to this SAI. The process
by which Moody's and S&P determine ratings for mortgage-backed securities
includes consideration of the likelihood of the receipt by security holders of
all distributions, the nature of the underlying assets, the credit quality of
the guarantor, if any, and the structural, legal and tax aspects associated with
these securities. Not even the highest such ratings represent an assessment of
the likelihood that principal prepayments will be made by obligors on the
underlying assets or the degree to which such prepayments may differ from that
originally anticipated, nor do such ratings address the possibility that
investors may suffer a lower than anticipated yield or that investors in such
securities may fail to recoup fully their initial investment due to
prepayments.

Credit ratings attempt to evaluate the safety of principal and interest
payments, but they do not evaluate the volatility of a debt security's value or
its liquidity and do not guarantee the performance of the issuer. Rating
agencies 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 may
downgrade the rating of a bond. 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.

In addition to ratings assigned to individual bond issues, Mitchell
Hutchins will analyze interest rate trends and developments that may affect
individual issuers, including factors such as liquidity, profitability and asset
quality. The yields on bonds are dependent on a variety of factors, including
general money market conditions, general conditions in the bond market, the
financial condition of the issuer, the size of the offering, the maturity of the
obligation and its rating. There is a wide variation in the quality of bonds,
both within a particular classification and between classifications. An issuer's
obligations under its bonds are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of bond holders or
other creditors of an issuer; litigation or other conditions may also adversely
affect the power or ability of issuers to meet their obligations for the payment
of interest and principal on their bonds.

Investment grade bonds are rated in one of the four highest rating
categories by Moody's or S&P, comparably rated by another rating agency or, if
unrated, determined by Mitchell Hutchins to be of comparable quality. Moody's
considers bonds rated Baa (its lowest investment grade rating) to have
speculative characteristics. This means that changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case for higher rated bonds.

Non-investment grade bonds (commonly known as "junk bonds") are rated
Ba or lower by Moody's, BB or lower by S&P, comparably rated by another rating
agency or determined by Mitchell Hutchins to be of comparable quality. A fund's
investments in non-investment grade bonds entail greater risk than its
investments in higher rated bonds. Non-investment grade bonds, which are
sometimes referred to as "high yield" bonds, are considered predominantly
speculative with respect to the issuer's ability to pay interest and repay
principal and may involve significant risk exposure to adverse conditions.
Non-investment grade bonds generally offer a higher current yield than that
available for investment grade issues; however, they involve higher risks, in
that they are especially sensitive 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 by collateral and will not receive payment until more senior claims
are paid in full.

4
<PAGE>

The market for non-investment grade bonds, especially those of foreign
issuers, has expanded rapidly in recent years, which has been a period of
generally expanding growth and lower inflation. These securities will be
susceptible to greater risk when economic growth slows or reverses and when
inflation increases or deflation occurs. This has been reflected in recent
volatility in emerging market securities, particularly in Asia. In the past,
many lower rated bonds experienced substantial price declines reflecting an
expectation that many issuers of such securities might experience financial
difficulties. As a result, the yields on lower rated bonds 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 restructurings or defaults. There can be no assurance that
such declines will not recur.

The market for non-investment grade bonds generally is thinner and less
active than that for higher quality securities, which may limit a 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
non-investment grade securities, especially in a thinly traded market.

U.S. Government Securities. U.S. government securities include direct
obligations of the U.S. Treasury (such as Treasury bills, notes or bonds) and
obligations issued or guaranteed as to principal and interest (but not as to
market value) by the U.S. government, its agencies or its instrumentalities
(collectively, "U.S. government securities"). U.S. government securities include
mortgage-backed securities issued or guaranteed by government agencies or
government-sponsored enterprises. Other U.S. government securities may be backed
by the full faith and credit of the U.S. government or supported primarily or
solely by the creditworthiness of the government-related issuer or, in the case
of mortgage-backed securities, by pools of assets.

Treasury inflation-protected securities ("TIPS") are Treasury bonds on
which the principal value is adjusted daily in accordance with changes in the
Consumer Price Index. Interest on TIPS is payable semi-annually on the adjusted
principal value. The principal value of TIPS would decline during periods of
deflation, but the principal amount payable at maturity would not be less than
the original par amount. If inflation is lower than expected while a fund holds
TIPS, the fund may earn less on the TIPS than it would on conventional Treasury
bonds.

Investing in Foreign Securities. Investing in foreign securities
involves more risks than investing in the United States. The value of foreign
securities is subject to economic and political developments in the countries
where the companies operate and to changes in foreign currency values.
Investments in foreign securities involve risks relating to political, social
and economic developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign issuers and
markets are subject. These risks may include expropriation, confiscatory
taxation, withholding taxes on interest and/or dividends, limitations on the use
of or transfer of fund assets and political or social instability or diplomatic
developments. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. In those European countries that have begun using
the Euro as a common currency unit, individual national economies may be
adversely affected by the inability of national governments to use monetary
policy to address their own economic or political concerns.

Securities of many foreign companies may be less liquid and their
prices more volatile than securities of comparable U.S. companies. Transactions
in foreign securities may be subject to less efficient settlement practices.
Foreign securities trading practices, including those involving securities
settlement where fund assets may be released prior to receipt of payment, may
expose the funds to increased risk in the event of a failed trade or the
insolvency of a foreign broker-dealer. Legal remedies for defaults and disputes
may have to be pursued in foreign courts, whose procedures differ substantially
from those of U.S. courts. Additionally, 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 expenses.

Securities of foreign issuers may not be registered with the Securities
and Exchange Commission ("SEC"), and the issuers thereof may not 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.

5
<PAGE>

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 depository
receipts, including American Depository Receipts ("ADRs"), European Depository
Receipts ("EDRs") and Global Depository Receipts ("GDRs"), 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. ADRs are receipts typically issued
by a U.S. bank or trust company evidencing ownership of the underlying
securities. They generally are in registered form, are denominated in U.S.
dollars and are designed for use in the U.S. securities markets. EDRs are
European receipts evidencing a similar arrangement, may be denominated in other
currencies and are designed for use in European securities markets. GDRs are
similar to EDRs and are designed for use in several international financial
markets. For purposes of each fund's investment policies, depository receipts
generally are deemed to have the same classification as the underlying
securities they represent. Thus, a depository receipt representing ownership of
common stock will be treated as common stock.

ADRs are publicly traded on exchanges or over-the-counter in the
United States and are issued through "sponsored" or "unsponsored" arrangements.
In a sponsored ADR arrangement, the foreign issuer assumes the obligation to pay
some or all of the depository's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depository's
transaction fees are paid directly by the ADR holders. In addition, less
information is available in the United States about an unsponsored ADR than
about a sponsored ADR.

The funds 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.
However, from time to time foreign securities may be difficult to liquidate
rapidly without significantly depressing the price of such securities. Although
each fund will endeavor to achieve the best net results in effecting its
portfolio transactions, transactions on foreign exchanges are usually subject to
fixed commissions that are generally higher than negotiated commissions on U.S.
transactions. There is generally less government supervision and regulation of
exchanges and brokers in foreign countries than in the United States.

Investment income on certain foreign securities in which the funds 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. In addition, substantial limitations may
exist in certain countries with respect to the funds' ability to repatriate
investment capital or the proceeds of sales of securities.

Foreign Currency Transactions. Currency risk is the risk that changes
in foreign exchange rates may reduce the U.S. dollar value of a fund's foreign
investments. A fund's share value may change significantly when its investments
are denominated in foreign currencies. Generally, currency exchange rates are
determined by supply and demand in the foreign exchange markets and the relative
merits of investments in different countries. Currency exchange rates also can
be affected by the intervention of the U.S. and foreign governments or central
banks, the imposition of currency controls, speculation, devaluation or other
political or economic developments inside and outside the United States.

Each fund values its assets daily in U.S. dollars and does not intend
to convert its holdings of foreign currencies to U.S. dollars on a daily basis.
From time to time a fund's foreign currencies may 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, a fund could suffer a loss of some or all
of the amounts deposited. Each fund may convert foreign currency to U.S. dollars
from time to time.

The value of the assets of a fund as measured in U.S. dollars may be
affected favorably or unfavorably by fluctuations in currency rates and exchange
control regulations. Further, a fund may incur costs in connection with
conversions between various currencies. Currency exchange dealers realize a
profit based on the difference between the prices at which they are buying and
selling various currencies. Thus, a dealer normally will offer to sell a foreign

6
<PAGE>

currency to a fund at one rate, while offering a lesser rate of exchange should
a fund desire immediately to resell that currency to the dealer. Each fund
conducts its currency exchange transactions either on a spot (i.e., cash) basis
at the spot rate prevailing in the foreign currency exchange market, or through
entering into forward, futures or options contracts to purchase or sell foreign
currencies.

Zero Coupon and Other OID Securities. Zero coupon securities are
securities on which no periodic interest payments are made and are sold at a
deep discount from their face value. The buyer of these securities receives a
rate of return by the gradual appreciation of the security, which results from
the fact that it will be paid at face value on a specified maturity date. There
are many types of zero coupon securities. Some are issued in zero coupon form,
including Treasury bills, notes and bonds that have been stripped of (separated
from) their unmatured interest coupons (unmatured interest payments) and
receipts or certificates representing interests in such stripped debt
obligations and coupons. Others are created by brokerage firms that strip the
coupons from interest-paying bonds and sell the principal and the coupons
separately.

The funds may invest in other securities with original issue discount
("OID"), a term that means the securities are issued at a price that is lower
than their value at maturity, even though the securities also may make cash
payments of interest prior to maturity. These OID securities usually trade at a
discount from their face value.

Zero coupon securities are generally more sensitive to changes in
interest rates than debt obligations of comparable maturities that make current
interest payments. This means that when interest rates fall, the value of zero
coupon securities rises more rapidly than securities paying interest on a
current basis. However, when interest rates rise, their value falls more
dramatically. Other OID securities also are subject to greater fluctuations in
market value in response to changing interest rates than bonds of comparable
maturities that make current distributions of interest in cash. Federal tax law
requires that the holder of a zero coupon security or other OID security include
in gross income each year the original issue discount that accrues on the
security for the year, even though the holder receives no interest payment on
the security during the year. Accordingly, to continue to qualify for treatment
as a regulated investment company for federal tax purposes, and to avoid
imposition of federal income and excise taxes, a fund may be required to
distribute as dividends amounts that are greater than the total amount of cash
it actually receives. These distributions must be made from the fund's cash
assets or, if necessary, from the proceeds of sales of portfolio securities. A
fund will not be able to purchase additional securities with cash used to make
such distributions and its current income and the value of its shares may
ultimately be reduced as a result.

Illiquid Securities. The term "illiquid securities" for purposes of the
Prospectus and this SAI 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 options, repurchase agreements maturing in more than
seven days and restricted securities other than those Mitchell Hutchins has
determined are liquid pursuant to guidelines established by each fund's board.
The assets used as cover for over-the-counter options written by the funds will
be considered illiquid unless the over-the-counter options are sold to qualified
dealers who agree that the funds may repurchase any over-the-counter options
they write at a maximum price to be calculated by a formula set forth in the
option agreements. The cover for an over-the-counter 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.
Under current SEC guidelines, interest-only ("IO") and principal-only ("PO")
classes of mortgage-backed securities generally are considered illiquid.
However, IO and PO classes of fixed-rate mortgage-backed securities issued by
the U.S. government or one of its agencies or instrumentalities will not be
considered illiquid if Mitchell Hutchins has determined that they are liquid
pursuant to guidelines established by each fund's board. To the extent a fund
invests in illiquid securities, it may not be able to readily liquidate such
investments and may have to sell other investments if necessary to raise cash to
meet its obligations. The lack of a liquid secondary market for illiquid
securities may make it more difficult for a fund to assign a value to those
securities for purposes of valuing its portfolio and calculating its net asset
value.

Restricted securities are not registered under the Securities Act of
1933 ("1933 Act") and may be sold only in privately negotiated or other exempted
transactions or after a 1933 Act registration statement has become effective.
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

7
<PAGE>

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.

However, not all restricted securities are illiquid. To the extent that
foreign securities are freely tradable in the country in which they are
principally traded, they generally are not considered illiquid, even if they are
restricted in the United States. A large institutional market has developed for
many U.S. and foreign securities that are not registered under the 1933 Act.
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.

Institutional markets for restricted securities also have developed as
a result of Rule 144A, which establishes a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. 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 pursuant to guidelines approved
by the board. Mitchell Hutchins 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 bids are
solicited and the mechanics of transfer). Mitchell Hutchins monitors the
liquidity of restricted securities in each fund's portfolio and reports
periodically on such decisions to the applicable board.

Temporary and Defensive Investments; Money Market Investments. Each
fund may invest in money market investments for temporary or defensive purposes
or as part of its normal investment program. Such investments include, among
other things, (1) securities issued or guaranteed by the U.S. government or one
of its agencies or instrumentalities, (2) debt obligations of banks, savings and
loan institutions, insurance companies and mortgage bankers, (3) commercial
paper and notes, including those with variable and floating rates of interest,
(4) debt obligations of foreign branches of U.S. banks, U.S. branches of foreign
banks and foreign branches of foreign banks, (5) debt obligations issued or
guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities, including obligations of
supranational entities, (6) bonds issued by foreign issuers, (7) repurchase
agreements and (8) other investment companies that invest exclusively in money
market instruments.

Repurchase Agreements. Repurchase agreements are transactions in which
a fund purchases securities or other obligations from a bank or securities
dealer (or its affiliate) and simultaneously commits to resell them to the
counterparty at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest unrelated to the coupon rate or maturity of the
purchased obligations. A fund maintains custody of the underlying obligations
prior to their repurchase, either through its regular custodian or through a
special "tri-party" custodian or sub-custodian that maintains separate accounts
for both the fund and its counterparty. Thus, the obligation of the counterparty
to pay the repurchase price on the date agreed to or upon demand is, in effect,
secured by such obligations. Repurchase agreements carry certain risks not
associated with direct investments in securities, including a possible decline
in the market value of the underlying obligations. If their value becomes less
than the repurchase price, plus any agreed-upon additional amount, the
counterparty 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 obligations and the price that was paid by a fund upon
acquisition is accrued as interest and included in its net investment income.
Repurchase agreements involving

8
<PAGE>

obligations other than U.S. government securities (such as commercial paper and
corporate bonds) may be subject to special risks and may not have the benefit of
certain protections in the event of the counterparty's insolvency. If the seller
or guarantor becomes insolvent, the fund may suffer delays, costs and possible
losses in connection with the disposition of collateral. Each fund intends to
enter into repurchase agreements only with counterparties in transactions
believed by Mitchell Hutchins to present minimum credit risks.

Reverse Repurchase Agreements. Reverse repurchase 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 or upon demand and at a price
reflecting a market rate of interest. Reverse repurchase agreements are subject
to each fund's limitation on borrowings and may be entered into only with banks
and securities dealers or their affiliates. While a reverse repurchase agreement
is outstanding, a fund will maintain, in a segregated account with its
custodian, cash or liquid securities, marked to market daily, in an amount at
least equal to its obligations under the reverse repurchase agreement.

Reverse repurchase agreements involve the risk that the buyer of the
securities sold by a fund might be unable to deliver them when that fund seeks
to repurchase. In the event that the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
trustee or receiver may receive an extension of time to determine whether to
enforce that fund's obligation to repurchase the securities, and the fund's use
of the proceeds of the reverse repurchase agreement may effectively be
restricted pending such decision.

Lending of Portfolio Securities. Each fund is authorized to lend its
portfolio securities to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified. Lending securities enables a fund to earn additional
income, but could result in a loss or delay in recovering these securities. The
borrower of a fund's portfolio securities must maintain acceptable collateral
with that fund's custodian in an amount, marked to market daily, 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. Each fund may reinvest any cash collateral in money market
investments or other short-term liquid investments. 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 of its loans at any
time. Each fund may pay reasonable fees in connection with a loan and may pay
the borrower or placing broker a negotiated portion of the interest earned on
the reinvestment of cash held as collateral. A fund will receive 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, when regaining such
rights is considered to be in the fund's interest.

Pursuant to procedures adopted by the boards governing each fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for each fund. The boards also have authorized the payment of fees
(including fees calculated as a percentage of invested cash collateral) to
PaineWebber for these services. Each board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent.
PaineWebber also has been approved as a borrower under each fund's securities
lending program.

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 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 establishes a margin account with the broker effecting the
short sale and deposits collateral with the broker. In addition, that fund
maintains with its custodian, in a segregated account, the securities that could
be used to cover the short sale. Each fund incurs transaction costs, including
interest expense, in connection with opening, maintaining and closing short
sales against the box. Neither fund currently expects to have obligations
under short sales at any time during the coming year that exceed 5% of its net
assets.

A fund might make a short sale "against the box" to hedge against
market risks when Mitchell Hutchins believes that the price of a security may
decline, thereby causing a decline in the value of a security owned by a fund

9
<PAGE>

or a security convertible into or exchangeable for a security owned by a fund.
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 securities a fund owns,
either directly or indirectly, and in the case where a fund owns convertible
securities, changes in the investment value or conversion premiums of such
securities.

When-Issued and Delayed Delivery Securities. Each fund may purchase
securities on a "when-issued" basis or may purchase or sell securities for
delayed delivery, i.e., for issuance or delivery to or by the fund later than
the normal settlement date for such securities at a stated price and yield. A
fund generally would not pay for such securities or start earning interest on
them until they are received. However, when a fund undertakes a when-issued or
delayed delivery obligation, it immediately assumes the risks of ownership,
including the risks of price fluctuation. Failure of the issuer to deliver a
security purchased by a fund on a when-issued or delayed delivery basis may
result in the fund's incurring or missing an opportunity to make an alternative
investment. Depending on market conditions, a fund's when-issued and delayed
delivery purchase commitments could cause its net asset value per share to be
more volatile, because such securities may increase the amount by which the
fund's total assets, including the value of when-issued and delayed delivery
securities held by that fund, exceeds its net assets.

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 a fund commits to purchase securities
on a when-issued or delayed delivery basis, its custodian segregates assets to
cover the amount of the commitment. See "The Funds' Investments, Related Risks
and Limitations--Segregated Accounts." A fund may sell the right to acquire the
security prior to delivery if Mitchell Hutchins deems it advantageous to do so,
which may result in a gain or loss to the fund.

Segregated Accounts. When a fund enters into certain transactions that
involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis and reverse
repurchase agreements, it will maintain with an approved custodian in a
segregated account cash or liquid 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 "Strategies Using Derivative
Instruments," segregated accounts may also be required in connection with
certain transactions involving options, futures, forward currency contracts
and swaps.

Investment Limitations of the Funds

Fundamental Limitations. The following 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 of the fund 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, later changes 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 following 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

10
<PAGE>

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, as amended ("Investment Company 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.

(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.

Non-Fundamental Limitations. The following investment restrictions are
non-fundamental and may be changed by the vote of the appropriate board without
shareholder approval.

Each fund will not:

(1) invest more than 10% of its net assets in illiquid securities.

(2) 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.

(3) 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.

11
<PAGE>

(4) purchase securities of other investment companies, except to the
extent permitted by the Investment Company 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 (and
except that a fund will not purchase securities of registered open-end
investment companies or registered unit investment trusts in reliance on
Sections 12(d)(1)(F) or 12(d)(1)(G) of the Investment Company Act).

(5) purchase portfolio securities while borrowings in excess of 5% of
its total assets are outstanding.

STRATEGIES USING DERIVATIVE INSTRUMENTS

General Description of Derivative Instruments. Mitchell Hutchins may
use a variety of financial instruments ("Derivative Instruments"), including
certain options, futures contracts (sometimes referred to as "futures"), options
on futures contracts, forward currency contracts and swap transactions to
attempt to hedge each fund's portfolio and also to attempt to enhance income or
return or realize gains and to manage the duration of its bond portfolio. A fund
may enter into transactions involving one or more types of Derivative
Instruments under which the full value of its portfolio is at risk. Under normal
circumstances, however, each fund's use of these instruments will place at risk
a much smaller portion of its assets. The particular Derivative Instruments that
may be used by the funds are described below.

The funds might not use any Derivative Instruments or derivative
strategies, and there can be no assurance that using any strategy will succeed.
If the Mitchell Hutchins is incorrect in its judgment on market values, interest
rates or other economic factors in using a Derivative Instrument or strategy, a
fund may have lower net income and a net loss on the investment.

Options on 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 or at specified
times or at the expiration of the option, depending on the type of option
involved. 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 or at specified times or at the expiration of the option,
depending on the type of option involved. 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 Securities Indices. A securities index assigns relative
values to the securities included in the index and fluctuates with changes in
the market values of those securities. A securities index option operates in the
same way as a more traditional securities option, except that exercise of a
securities index option is effected with cash payment and does not involve
delivery of securities. Thus, upon exercise of a securities index option, the
purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the securities
index.

Securities Index Futures Contracts. A securities 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 securities 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 securities 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 bonds or currency, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery.

12
<PAGE>

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 Strategies Using Derivative Instruments. Hedging
strategies can be broadly categorized as "short hedges" and "long hedges." A
short hedge is a purchase or sale of a Derivative Instrument intended partially
or fully to 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
Derivative 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 transaction 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 Derivative
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 Derivative 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 transaction costs.
Alternatively, a fund might be able to offset the price increase by closing out
an appreciated call option and realizing a gain.

A fund may purchase and write (sell) straddles on securities or indices
of securities. A long straddle is a combination of a call and a put option
purchased on the same security or on the same futures contract, where the
exercise price of the put is equal to the exercise price of the call. A fund
might enter into a long straddle when Mitchell Hutchins believes it likely that
the prices of the securities will be more volatile during the term of the option
than the option pricing implies. A short straddle is a combination of a call and
a put written on the same security where the exercise price of the put is equal
to the exercise price of the call. A fund might enter into a short straddle when
Mitchell Hutchins believes it unlikely that the prices of the securities will be
as volatile during the term of the option as the option pricing implies.

Derivative 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. Derivative Instruments on stock indices, in
contrast, generally are used to hedge against price movements in broad stock
market sectors in which a fund has invested or expects to invest. Derivative
Instruments on bonds may be used to hedge either individual securities or broad
fixed income market sectors.

Income strategies using Derivative Instruments may include the writing
of covered options to obtain the related option premiums. Return or gain
strategies may include using Derivative Instruments to increase or decrease a
fund's exposure to different asset classes without buying or selling the
underlying instruments. A fund also may use derivatives to simulate full
investment by the fund while maintaining a cash balance for fund management
purposes (such as to provide liquidity to meet anticipated shareholder sales of
fund shares and for fund operating expenses).

13
<PAGE>

The use of Derivative Instruments is subject to applicable regulations
of the SEC, the several options and futures exchanges upon which they are traded
and the Commodity Futures Trading Commission ("CFTC"). In addition, a fund's
ability to use Derivative Instruments may be limited by tax considerations. See
"Taxes."

In addition to the products, strategies and risks described below and
in the Prospectus, Mitchell Hutchins may discover additional opportunities in
connection with Derivative Instruments and with hedging, income, return and gain
strategies. These new opportunities may become available as regulatory
authorities broaden the range of permitted transactions and as new Derivative
Instruments and techniques are developed. Mitchell Hutchins may utilize these
opportunities for a fund to the extent that they are consistent with the fund's
investment objective and permitted by its investment limitations and applicable
regulatory authorities. The funds' Prospectus or this SAI 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 Strategies Using Derivative Instruments. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.

(1) Successful use of most Derivative Instruments depends upon the
ability of Mitchell Hutchins to predict movements of the overall securities,
interest rate or currency exchange markets, which requires different skills than
predicting changes in the prices of individual securities. While Mitchell
Hutchins is experienced in the use of Derivative Instruments, there can be no
assurance that any particular strategy adopted will succeed.

(2) There might be imperfect correlation, or even no correlation,
between price movements of a Derivative Instrument and price movements of the
investments that are being hedged. For example, if the value of a Derivative
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 affecting the markets in which Derivative
Instruments are traded, rather than the value of the investments being hedged.
The effectiveness of hedges using Derivative 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 investments. For example, if a fund entered into a short
hedge because Mitchell Hutchins 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 Derivative Instrument. Moreover, if the price of the Derivative
Instrument declined by more than the increase in the price of the security, the
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 Derivative Instruments involving obligations to third parties
(i.e., Derivative Instruments other than purchased options). If the fund was
unable to close out its positions in such Derivative 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 Derivative 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 counterparty 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 Strategies Using Derivative Instruments. Transactions using
Derivative 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,
currencies or other options or futures contracts or (2) cash or liquid
securities with a value sufficient at all times to cover its potential
obligations to

14
<PAGE>

the extent not covered as provided in (1) above. Each fund will comply with SEC
guidelines regarding cover for such transactions and will, if the guidelines so
require, set aside cash or liquid 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 Derivative Instrument is open, unless
they are replaced with similar assets. As a result, committing a large portion
of a fund's assets to cover positions or to 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 securities in which they invest and related
indices and on foreign currencies. The purchase of call options may serve as a
long hedge, and the purchase of put options may serve as a short hedge. A fund
may also use options to attempt to enhance return or realize gains by increasing
or reducing its exposure to an asset class without purchasing or selling the
underlying securities. Writing covered put or call options can enable a fund to
enhance income by reason of the premiums paid by the purchasers of such options.
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
over-the-counter options written by a fund would be considered illiquid to the
extent described under "The Funds' Investments, Related Risks and
Limitations--Illiquid Securities."

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. Generally, over-the-counter options on bonds are
European-style options. This means that the option can only be exercised
immediately prior to its expiration. This is in contract to American-style
options that may be exercised at any time. There are also other types of options
that may be exercised on certain specified dates before expiration. 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
over-the-counter options. Currently, many options on equity securities (stocks)
are exchange-traded. Exchange markets for options on bonds exist but are
relatively new, and these instruments are primarily traded on the
over-the-counter 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, over-the-counter options are contracts between a fund
and its counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when a fund purchases or writes an
over-the-counter option, it relies on the counterparty to make or take delivery
of the underlying investment upon exercise of the option. Failure by the
counterparty 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' 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

15
<PAGE>

time. Closing transactions can be made for over-the-counter options only by
negotiating directly with the counterparty, or by a transaction in the secondary
market if any such market exists. Although the funds will enter into
over-the-counter options only with counterparties 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 over-the-counter
option position at a favorable price prior to expiration. In the event of
insolvency of the counterparty, a fund might be unable to close out an
over-the-counter 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.

A fund may purchase and write put and call options on indices in much
the same manner as the more traditional options discussed above, except the
index options may serve as a hedge against overall fluctuations in a securities
market (or market sector) rather than anticipated increases or decreases in the
value of a particular security.

Limitations on the Use of Options. Each fund's use of options is
governed by the following guidelines, which can be changed by its board without
shareholder vote:

(1) A fund may purchase a put or call option, including any straddle or
spread, only if the value of its premium, when aggregated with the premiums on
all other options held by the fund, does not exceed 5% of its total assets.

(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 its net assets.

(3) The aggregate premiums paid on all options (including options on
securities, foreign currencies and securities indices and options on futures
contracts) purchased by a fund that are held at any time will not exceed 20% of
its net assets.

Futures. The funds may purchase and sell securities index futures
contracts, interest rate future contracts and foreign currency future contracts.
A fund may 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. In addition, a fund may purchase or sell futures contracts or
purchase options thereon to increase or reduce its exposure to an asset class
without purchasing or selling the underlying securities, either as a hedge or to
enhance return or realize gains.

Futures strategies also can be used to manage the average duration of a
fund's bond portfolio. If Mitchell Hutchins wishes to shorten the average
duration of a fund's bond portfolio, the fund may sell a futures contract or a
call option thereon, or purchase a put option on that futures contract. If
Mitchell Hutchins wishes to lengthen the average duration of the fund's bond
portfolio, the fund may buy a futures contract or a call option thereon, or sell
a put option thereon.

A fund may also write put options on futures contracts while at the
same time purchasing call options on the same futures contracts in order
synthetically to create a long futures contract position. Such options would
have the same strike prices and expiration dates. A fund will engage in this
strategy only when it is more advantageous to a fund than is purchasing the
futures contract.

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, obligations of
the United States or obligations fully

16
<PAGE>

guaranteed as to principal and interest by the United States, 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 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. Each fund's use
of futures and related options is governed by the following guidelines, which
can be changed by its 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 its net
assets.

17
<PAGE>

(2) The aggregate premiums paid on all options (including options on
securities, foreign currencies and securities indices and options on futures
contracts) purchased by each fund that are held at any time will not exceed 20%
of its net assets.

(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by each fund will not exceed 5% of its total assets.

Foreign Currency Hedging Strategies--Special Considerations. Each fund
may use options and futures on foreign currencies, as described above, and
forward currency contracts, as described below, to hedge against movements in
the values of the foreign currencies in which the fund's 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.

A fund might seek to hedge against changes in the value of a particular
currency when no Derivative Instruments on that currency are available or such
Derivative Instruments are considered expensive. In such cases, the fund may
hedge against price movements in that currency by entering into transactions
using Derivative 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. In addition, a fund may use forward
currency contracts to shift exposure to foreign currency fluctuations from one
country to another. For example, if a 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 Derivative Instrument will
not correlate or will correlate unfavorably with the foreign currency being
hedged.

The value of Derivative 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 Derivative
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 Derivative Instruments until they reopen.

Settlement of Derivative Instruments 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. A 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, a 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, a 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.

18
<PAGE>

The cost to a 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. When a 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 counterparty to do so would result in the loss
of any expected benefit of the transaction.

As is the case with futures contracts, parties to forward currency
contracts can enter into offsetting closing transactions, similar to closing
transactions on futures, by entering into an instrument identical to the
instrument purchased or sold, but in the opposite direction. 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 a 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, a 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, a 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. A 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 or liquid 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.

Swap Transactions. Each fund may enter into swap transactions, which
include swaps, caps, floors and collars relating to interest rates, currencies,
securities or other instruments. Interest rate swaps 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
contra party 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. Currency swaps, caps, floors and collars are similar to interest rate
swaps, caps, floors and collars, but they are based on currency exchange rates
rather than interest rates. Equity swaps or other swaps relating to securities
or other instruments are also similar, but they are based on changes in the
value of the underlying securities or instruments. For example, an equity swap
might involve an exchange of the value of a particular security or securities
index in a certain notional amount for the value of another security or index or
for the value of interest on that notional amount at a specified fixed or
variable rate.

Each fund may enter into interest rate swap transactions to preserve a
return or spread on a particular investment or portion of its bond portfolio or
to protect against any increase in the price of securities it anticipates
purchasing at a later date. A fund may use interest rate swaps, caps, floors and
collars as a hedge on either an asset-based or liability-based basis, depending
on whether it is hedging its assets or its liabilities. Interest rate swap
transactions are subject to risks comparable to those described above with
respect to other derivatives strategies.

19
<PAGE>

A fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out, with the fund receiving or paying, as the case
may be, only the net amount of the two payments. Since 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 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 swaps that are not entered into on a net basis.

A fund will enter into interest rate swap transactions only with banks
and recognized securities dealers or their respective affiliates believed by
Mitchell Hutchins to present minimal credit risk in accordance with guidelines
established by the fund's board. 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.

ORGANIZATION; BOARD MEMBERS, OFFICERS AND PRINCIPAL HOLDERS OF SECURITIES

The Corporation was organized on February 13, 1986, as a Maryland
corporation and has authority to issue 300 million shares of common stock of
separate series, par value $0.001 per share. The Trust was formed on November
21, 1986, as a business trust under the laws of the Commonwealth of
Massachusetts. The Trust has seven operating series and is authorized to issue
an unlimited number of shares of beneficial interest, par value of $0.001 per
share, of existing or future series.

Each of the Trust and the Corporation is governed by a board of
trustees or directors, which oversees its operations and which is authorized to
establish additional series. The trustees or directors ("board members") and
executive officers of the Trust and the Corporation, their ages, business
addresses and principal occupations during the past five years are:

20
<PAGE>

Name and Address*; Age Position with Business Experience; Other Directorships
---------------------- ------------- ----------------------------------------
Trust/Corporation
-----------------
<S> <C> <C>
Margo N. Alexander**; 52 Trustee/Director and Mrs. Alexander is chairman (since March 1999),
President chief executive officer and a director of
Mitchell Hutchins (since January 1995), and
an executive vice president and a director
of PaineWebber (since March 1984). Mrs.
Alexander is president and a director or
trustee of 32 investment companies for which
Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment
adviser.

Richard Q. Armstrong; 64 Trustee/Director Mr. Armstrong is chairman and principal of
R.Q.A. Enterprises R.Q.A. Enterprises (management consulting firm)
One Old Church Road (since April 1991 and principal occupation
Unit #6 since March 1995). Mr. Armstrong was chairman
Greenwich, CT 06830 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
Consulting Group (management consulting
firm) (December 1992-September 1993). He was
managing director of LVMH U.S. Corporation
(U.S. subsidiary of the French luxury goods
conglomerate, Louis Vuitton Moet Hennessey
Corporation) (1987-1991) and chairman of its
wine and spirits subsidiary, Schieffelin &
Somerset Company (1987-1991). Mr. Armstrong
is a director or trustee of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.

E. Garrett Bewkes, Jr.**; 72 Trustee/Director and Mr. Bewkes is a director of Paine Webber Group
Chairman of the Board of Inc. ("PW Group") (holding company of PaineWebber
Trustees/Directors and Mitchell Hutchins). Prior to December
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 a
director of Interstate Bakeries Corporation.
Mr. Bewkes is a director or trustee of 35
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.

</TABLE>

21
<PAGE>

Name and Address*; Age Position with Business Experience; Other Directorships
---------------------- ------------- ----------------------------------------
Trust/Corporation
-----------------
<S> <C> <C>
Richard R. Burt; 52 Trustee/Director Mr. Burt is chairman of IEP Advisors, Inc.
1275 Pennsylvania Ave., N.W. (international investments and consulting
Washington, DC 20004 firm) (since March 1994) and a partner of
McKinsey & Company (management consulting
firm) (since 1991). He is also a director of
Archer-Daniels-Midland Co. (agricultural
commodities), Hollinger International Co.
(publishing), Homestake Mining Corp.,
Powerhouse Technologies Inc. and Weirton
Steel Corp. He was the chief negotiator in
the Strategic 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 31 investment companies for
which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment
adviser.

Mary C. Farrell**; 49 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 appears as a regular panelist on Wall
$treet 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 31
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.

Meyer Feldberg; 57 Trustee/Director Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of
101 Uris Hall Business, Columbia University. Prior to
New York, NY 10027 1989, he was president of the Illinois
Institute of Technology. Dean Feldberg is
also a director of Primedia, Inc., Federated
Department Stores, Inc. and Revlon, Inc.
Dean Feldberg is a director or trustee of 34
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.

George W. Gowen; 69 Trustee/Director Mr. Gowen is a partner in the law firm of
666 Third Avenue Dunnington, Bartholow & Miller. Prior to May
New York, NY 10017 1994, he was a partner in the law firm of
Fryer, Ross & Gowen. Mr. Gowen is a director
or trustee of 34 investment companies for
which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment
adviser.

</TABLE>

22
<PAGE>

Name and Address*; Age Position with Business Experience; Other Directorships
---------------------- ------------- ----------------------------------------
Trust/Corporation
-----------------
<S> <C> <C>
Frederic V. Malek; 62 Trustee/Director Mr. Malek is chairman of Thayer Capital
1455 Pennsylvania Ave., N.W. Partners (merchant bank). From January 1992
Suite 350 to November 1992, he was campaign manager of
Washington, DC 20004 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
Management Systems, Inc. (management
consulting and computer related services),
Automatic Data Processing, Inc., CB
Commercial Group, Inc. (real estate
services), Choice Hotels International
(hotel and hotel franchising), FPL Group,
Inc. (electric services), Manor Care, Inc.
(health care) and Northwest Airlines Inc.
Mr. Malek is a director or trustee of 31
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.

Carl W. Schafer; 63 Trustee/Director Mr. Schafer is president of the Atlantic
66 Witherspoon Street, #1100 Foundation (charitable foundation supporting
Princeton, NJ 08542 mainly oceanographic exploration and
research). He is a director of Base Ten
Systems, Inc. (software), Roadway Express,
Inc. (trucking), The Guardian Group of
Mutual Funds, the Harding, Loevner Funds,
Evans Systems, Inc. (motor fuels,
convenience store and diversified company),
Electronic Clearing House, Inc. (financial
transactions processing), Frontier Oil
Corporation and Nutraceutix, Inc.
(biotechnology company). Prior to January
1993, he was chairman of the Investment
Advisory Committee of the Howard Hughes
Medical Institute. Mr. Schafer is a director
or trustee of 31 investment companies for
which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment
adviser.

</TABLE>

23
<PAGE>

Name and Address*; Age Position with Business Experience; Other Directorships
---------------------- ------------- ----------------------------------------
Trust/Corporation
-----------------
<S> <C> <C>
Brian M. Storms;** 44 Trustee/Director Mr. Storms is president and chief operating
officer of Mitchell Hutchins (since March
1999). Prior to March 1999, he was president
of Prudential Investments (1996-1999). Prior
to joining Prudential, he was a managing
director at Fidelity Investments. Mr. Storms
is a director or trustee of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.

T. Kirkham Barneby; 53 Vice President Mr. Barneby is a managing director and chief
(Trust only) investment officer--quantitative investments
of Mitchell Hutchins. Prior to September 1994,
he was a senior vice president at Vantage Global
Management. Mr. Barneby is a vice president of
seven investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.

Julieanna Berry; 36 Vice President Ms. Berry is a vice president and a
(Trust only) portfolio manager of Mitchell Hutchins. Ms.
Berry is a vice president of two investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.

James F. Keegan; 38 Vice President Mr. Keegan is a senior vice president and a
portfolio manager of Mitchell Hutchins.
Prior to March 1996, he was director of
fixed income strategy and research of
Merrion Group, L.P. From 1987 to 1994, he
was a vice president of global investment
management of Bankers Trust. Mr. Keegan is a
vice president of three investment companies
for which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as investment
adviser.

John J. Lee; 30 Vice President and Mr. Lee is a vice president and a manager of
Assistant Treasurer the mutual fund finance department of
Mitchell Hutchins. Prior to September 1997,
he was an audit manager in the financial
services practice of Ernst & Young LLP. Mr.
Lee is a vice president and assistant
treasurer of 32 investment companies for
which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as an investment
adviser.

Thomas J. Libassi; 40 Vice President Mr. Libassi is a senior vice president and a
(Trust only) portfolio manager of Mitchell Hutchins,
where he has been employed since 1994. Mr.
Libassi is a vice president of six
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.

</TABLE>

24
<PAGE>

Name and Address*; Age Position with Business Experience; Other Directorships
---------------------- ------------- ----------------------------------------
Trust/Corporation
-----------------
<S> <C> <C>
Kevin J. Mahoney; 33 Vice President and Mr. Mahoney is a first vice president and
Assistant Treasurer senior manager of the mutual fund finance
department of Mitchell Hutchins. From August
1996 through March 1999, he was the manager
of the mutual fund internal control group of
Salomon Smith Barney. Prior to August 1996,
he was an associate and assistant treasurer
for BlackRock Financial Management L.P. Mr.
Mahoney is a vice president and assistant
treasurer of 32 investment companies for
which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment
adviser.

Dennis McCauley; 52 Vice President Mr. McCauley is a managing director and
(Trust only) chief investment officer--fixed 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 22 investment companies for
which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment
adviser.

Ann E. Moran; 42 Vice President and Ms. Moran is a vice president and a manager
Assistant Treasurer of the mutual fund finance department of
Mitchell Hutchins. Ms. Moran is a vice
president and assistant treasurer of 32
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.

Dianne E. O'Donnell; 47 Vice President and Ms. O'Donnell is a senior vice president and
Secretary deputy general counsel of Mitchell Hutchins.
Ms. O'Donnell is a vice president and
secretary of 31 investment companies and a
vice president and assistant secretary of
one investment company for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.

Emil Polito; 38 Vice President Mr. Polito is a senior vice president and
director of operations and control for
Mitchell Hutchins. Mr. Polito is a vice
president of 32 investment companies for
which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment
adviser.

Victoria E. Schonfeld; 48 Vice President Ms. Schonfeld is a managing director and
general counsel of Mitchell Hutchins (since
May 1994) and a senior vice president of
PaineWebber (since July 1995). Ms. Schonfeld
is a vice president of 31 investment
companies and a vice president and secretary
of one investment company for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.

</TABLE>

25
<PAGE>

Name and Address*; Age Position with Business Experience; Other Directorships
---------------------- ------------- ----------------------------------------
Trust/Corporation
-----------------
<S> <C> <C>
Paul H. Schubert; 36 Vice President and Mr. Schubert is a senior vice president and
Treasurer director of the mutual fund finance
department of Mitchell Hutchins. Mr.
Schubert is a vice president and treasurer
of 32 investment companies for which
Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment
adviser.

Nirmal Singh; 43 Vice President Mr. Singh is a senior vice president and a
(Trust only) portfolio manager of Mitchell Hutchins. Mr.
Singh is a vice president of four investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.

Barney A. Taglialatela; 38 Vice President and Mr. Taglialatela is a vice president and a
Assistant Treasurer manager of the mutual fund finance
department of Mitchell Hutchins. Prior to
February 1995, he was a manager of the
mutual fund finance division of Kidder
Peabody Asset Management, Inc. Mr.
Taglialatela is a vice president and
assistant treasurer of 32 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.

Mark A. Tincher; 43 Vice President Mr. Tincher is a managing director and chief
investment officer--equities of Mitchell
Hutchins. Prior to March 1995, he was a vice
president and directed the U.S. funds
management and equity research areas of
Chase Manhattan Private Bank. Mr. Tincher is
a vice president of 13 investment companies
for which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as investment
adviser.

Keith A. Weller; 37 Vice President and Mr. Weller is a first vice president and
Assistant Secretary 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
31 investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates 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 Investment Company Act by virtue of their
positions with Mitchell Hutchins, PaineWebber, and/or PW Group.

The Trust pays trustees who are not "interested persons" of the Trust
("disinterested trustees") $1,000 annually for each series. The Corporation has
only one series and pays directors who are not "interested persons" of the
Corporation $1,500 annually. The Trust and the Corporation each pays such board
members up to $150 per series for each board meeting and each separate meeting
of a board committee. The Trust presently has

26
<PAGE>

seven series and thus pays each such trustee $7,000 annually, plus any
additional annual amounts due for board or committee meetings. The Corporation
pays each such director $1,500 annually, plus any additional amounts due for
board or committee meetings. Each chairman of the audit and contract review
committees of individual funds within the PaineWebber fund complex receives
additional compensation aggregating $15,000 annually from the relevant funds.
All board members are reimbursed for any expenses incurred in attending
meetings. Board members and officers own in the aggregate less than 1% of the
shares of each fund. Because Mitchell Hutchins and PaineWebber perform
substantially all of the services necessary for the operation of the Trust, the
Corporation and each fund, the Trust and the Corporation require no employees.
No officer, director or employee of Mitchell Hutchins or PaineWebber presently
receives any compensation from the Trust or the Corporation for acting as a
trustee or officer.

The table below includes certain information relating to the compensation
of the current board members who held office with the Trust or the Corporation
during the funds' fiscal year ended March 31, 1999, and the compensation of
those board members from all PaineWebber funds during the 1998 calendar year.

COMPENSATION TABLE+

Aggregate
Aggregate Compensation Total Compensation from
Compensation from from the the Trust/Corporation
Name of Person, Position the Trust* Corporation* and the Fund Complex**
------------------------ ---------- ------------ ----------------------
<S> <C> <C> <C>
Richard Q. Armstrong, Trustee/Director $10,860 $2,310 $101,372
Richard R. Burt, Trustee/Director 10,680 2,280 101,372
Meyer Feldberg, Trustee/Director 11,023 2,977 116,222
George W. Gowen, Trustee/Director 12,655 2,160 108,272
Frederic V. Malek, Trustee/Director 10,860 2,310 101,372
Carl W. Schafer, Trustee/Director 10,860 2,310 101,372
</TABLE>

- --------------------
Only independent board members are compensated by the Trust or the
Corporation and identified above; board members who are "interested
persons," as defined by the Investment Company Act, do not receive
compensation.

* Represents fees paid to each board member indicated for the fiscal year
ended March 31, 1999.

** Represents total compensation paid during the calendar year ended December
31, 1998, to each board member by 31 investment companies (33 in the case
of Messrs. Feldberg and Gowen) for which Mitchell Hutchins, PaineWebber or
one of their affiliates served as investment adviser. No fund within the
PaineWebber fund complex has a bonus, pension, profit sharing or
retirement plan.

PRINCIPAL HOLDERS OF SECURITIES

As of June 30, 1999, the funds' records showed no shareholders as owning
5% or more of any class of a fund's shares.

INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS

Investment Advisory Arrangements. Mitchell Hutchins acts as the investment
adviser and administrator pursuant to a separate contract (each an "Advisory
Contract") with each fund. The Advisory Contract for Financial Services Growth
Fund is dated April 1, 1990. The Advisory Contract for Utility Income Fund is
dated April 21, 1988, as supplemented by a separate fee agreement dated May 1,
1992. Under the applicable Advisory Contract,

27
<PAGE>

each fund pays Mitchell Hutchins a fee, computed daily and paid monthly, at the
annual rate of 0.70% of average daily net assets.

During each of the periods indicated, Mitchell Hutchins earned (or
accrued) advisory fees in the amounts set forth below:

Fiscal Years Ended March 31,
----------------------------

1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Financial Services Growth Fund.................. $3,553,490 $1,912,197 $771,491
Utility Income Fund............................. $ 245,628 $ 235,331 $314,323*

</TABLE>

* Of this amount, $30,480 was waived by Mitchell Hutchins.

Under the terms of the applicable Advisory Contract, 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, if any) of securities purchased or sold by the
fund and any losses incurred 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 who are not interested persons of the fund or Mitchell
Hutchins; (6) all expenses incurred in connection with the trustees' 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 fund for violation of any law; (10) legal, accounting and auditing
expenses, including legal fees of special counsel for the independent trustees;
(11) charges of custodians, transfer agents and other agents; (12) costs of
preparing share certificates; (13) expenses of setting in type and printing
prospectuses and supplements thereto, statements of additional information and
supplements thereto, reports and proxy materials for existing shareholders and
costs of mailing such materials to existing 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 and officers; and (18) costs of mailing,
stationery and communications equipment.

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 its assignment and is terminable at any time without penalty
by the board or by vote of the holders of a majority of a fund's outstanding
voting securities, on 60 days' written notice to Mitchell Hutchins or by
Mitchell Hutchins on 60 days' written notice to a fund.

Securities Lending. During the years ended March 31, 1998 and March 31,
1999, the funds paid (or accrued) the following fees to PaineWebber for its
services as securities lending agent:

Fiscal Year Ended Fiscal Year Ended
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Financial Services Growth Fund $14,067 $24,841
Utility Income Fund 2,868 1,817

</TABLE>

Net Assets. The following table shows the approximate net assets as of
June 30, 1999, 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.

28
<PAGE>

Net Assets
Investment Category ($mil)
------------------- ------
<S> <C>
Domestic (excluding Money Market) ... $ 8,339.4
Global .............................. 4,552.9
Equity/Balanced ..................... 7,961.5
Fixed Income (excluding Money Market) 4,930.8
Taxable Fixed Income ............ 3,401.3
Tax-Free Fixed Income ........... 1,529.5
Money Market Funds .................. 34,337.7

</TABLE>

Personal Trading Policies. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to a code 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.

Distribution Arrangements. Mitchell Hutchins acts as the distributor of
each class of shares of each fund under separate distribution contracts with
each fund (collectively, "Distribution Contracts"). Each Distribution Contract
requires Mitchell Hutchins to use its best efforts, consistent with its other
businesses, to sell shares of the applicable fund. Shares of each fund are
offered continuously. Under separate exclusive dealer agreements between
Mitchell Hutchins and PaineWebber relating to each class of shares of the funds
(collectively, "Exclusive Dealer Agreements"), PaineWebber and its correspondent
firms sell each fund's shares.

Under separate plans of distribution pertaining to the Class A, Class B
and Class C shares of each fund adopted by the Trust or the Corporation in the
manner prescribed under Rule 12b-1 under the Investment Company Act (each,
respectively, a "Class A Plan," "Class B Plan" and "Class C Plan," and
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. 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. There is no distribution plan with respect to the funds' Class Y
shares.

Mitchell Hutchins uses the service fees under the Plans for Class A, B and
C shares primarily to pay PaineWebber for shareholder servicing, currently at
the annual rate of 0.25% of the aggregate investment amounts maintained in each
fund by PaineWebber clients. PaineWebber then compensates its Financial Advisors
for shareholder servicing that they perform and offsets its own expenses in
servicing and maintaining shareholder accounts.

Mitchell Hutchins uses the distribution fees under the Class B and Class C
Plans to:

. Offset the commissions it pays to PaineWebber for selling each
fund's Class B and Class C shares, respectively.

. Offset each fund's marketing costs attributable to such classes,
such as preparation, printing and distribution of sales literature,
advertising and prospectuses to prospective investors and related
overhead expenses, such as employee salaries and bonuses.

PaineWebber compensates Financial Advisors when Class B and Class C shares
are bought by investors, as well as on an ongoing basis. Mitchell Hutchins
receives no special compensation from any of the funds or investors at the time
Class B or C shares are bought.

29
<PAGE>

Mitchell Hutchins receives the proceeds of the initial sales charge
paid when Class A shares are bought and of the contingent deferred sales charge
paid upon sales of shares. These proceeds may be used to cover distribution
expenses.

The Plans and the related Distribution Contracts for Class A, Class B
and Class C shares specify that each fund must pay service and distribution fees
to Mitchell Hutchins for its activities, not as reimbursement for specific
expenses incurred. Therefore, even if Mitchell Hutchins' expenses exceed the
service or distribution fees it receives, the funds will not be obligated to pay
more than those fees. On the other hand, if Mitchell Hutchins' expenses are less
than such fees, it will retain its full fees and realize a profit. Expenses in
excess of service and distribution fees received or accrued through the
termination date of any Plan will be Mitchell Hutchins' sole responsibility and
not that of the funds. Annually, the board of each fund reviews the Plans and
Mitchell Hutchins' corresponding expenses for each class separately from the
Plans and expenses of the other classes.

Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the applicable board at least quarterly, and the board members will
review, reports regarding all amounts expended under the Plan and the purposes
for which such expenditures were made, (2) the Plan will continue in effect only
so long as it is approved at least annually, and any material amendment thereto
is approved, by the applicable board, including those board members 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 and (4) while the Plan remains in effect, the selection and
nomination of board members who are not "interested persons" of the funds shall
be committed to the discretion of the board members who are not "interested
persons" of their respective funds.

In reporting amounts expended under the Plans to the board members,
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.

The funds paid (or accrued) the following service and/or distribution
fees to Mitchell Hutchins under the Class A, Class B and Class C Plans during
the fiscal year ended March 31, 1999:

Financial Services Growth Fund Utility Income Fund
------------------------------ -------------------
<S> <C> <C>
Class A ............. $ 534,765 $ 18,972
Class B ............. 2,106,616 198,885
Class C ............. 798,910 75,985

</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, 1999:

Financial Services Growth Fund Utility Income Fund
------------------------------ -------------------
<S> <C> <C>
Class A
Marketing and advertising .................. $611,932 $ 25,455
Amortization of commissions ................ 0 0
Printing of prospectuses and statements of
additional information ..................... 6,575 286
Branch network costs allocated and
interest expense ........................... 308,192 25,958
Service fees paid to PaineWebber Financial
Advisors ................................... 203,211 7,209

</TABLE>

30
<PAGE>

Financial Services Growth Fund Utility Income Fund
------------------------------ -------------------
<S> <C> <C>
Class B
Marketing and advertising .......................................... 602,727 66,712
Amortization of commissions ........................................ 698,740 65,998
Printing of prospectuses and statements of additional information .. 6,477 762
Branch network costs allocated and interest expense ................ 438,129 72,010
Service fees paid to PaineWebber Financial Advisors ................ 200,129 18,893

Class C
Marketing and advertising .......................................... 228,831 25,484
Amortization of commissions ........................................ 227,689 21,655
Printing of prospectuses and statements of additional information .. 2,458 301
Branch network costs allocated and interest expense ................ 118,370 26,297
Service fees paid to PaineWebber Financial Advisors ................ 75,895 7,218

</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 each fund's overall Flexible Pricing/SM/ system of
distribution, the applicable 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 the fund and attracting
new investors and assets to the fund to the benefit of the fund and its
shareholders, (2) facilitate distribution of the fund's shares and (3) maintain
the competitive position of the fund in relation to other funds that have
implemented or are seeking to implement similar distribution arrangements.

In approving the Class A Plan, each board 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 Financial Advisors 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 board 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 Financial Advisors 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
Financial Advisors and correspondent firms, resulting in greater growth of the
fund than might otherwise be the case, (4) the advantages to

31
<PAGE>

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 board members also recognized that Mitchell Hutchins' willingness to
compensate PaineWebber and its Financial Advisors, 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, each board considered all the features
of the distribution system, including (1) 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, (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 Financial Advisors 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 Financial Advisors 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 board members also recognized
that Mitchell Hutchins' willingness to compensate PaineWebber and its Financial
Advisors, without the concomitant receipt by Mitchell Hutchins of initial sales
charges or contingent deferred sales charges upon redemption after one year
following purchase was conditioned upon its expectation of being compensated
under the Class C Plan.

With respect to each Plan, the boards 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 boards also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that Mitchell
Hutchins would receive service, distribution and advisory fees that are
calculated based upon a percentage of the average net assets of each fund, which
fees would increase if the Plan were successful and the fund attained and
maintained significant asset levels.

Under the Distribution Contract between each fund and Mitchell Hutchins
for the Class A shares for the fiscal years (or periods) 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.

Fiscal Year Ended March 31,

1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Financial Services Growth Fund
Earned ......................................... $1,505,641 $2,006,218 $ 318,111
Retained ....................................... 103,282 $ 143,106 $ 21,364
Utility Income Fund
Earned ......................................... 2,950 $ 21,396 $ 5,958
Retained ....................................... 320 $ 1,402 $ 340

</TABLE>

32
<PAGE>

Mitchell Hutchins earned and retained the following contingent deferred
sales charges paid upon certain redemptions of shares for the fiscal year ended
March 31, 1999:

Financial Services Growth Fund Utility Income Fund
------------------------------ -------------------
<S> <C> <C>
Class A ............ $ 0 $ 0
Class B ............ 1,090,580 19,147
Class C ............ 81,065 416

</TABLE>

PORTFOLIO TRANSACTIONS

Subject to policies established by each board, Mitchell Hutchins is
responsible for the execution of each fund's portfolio transactions and the
allocation of brokerage transactions. In executing portfolio transactions,
Mitchell Hutchins 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 generally seeks
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 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 over-the-counter 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. During the fiscal years
indicated, the funds paid the brokerage commissions set forth below:

Fiscal Year Ended March 31
---------------------------------------------------------------

1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Financial Services Growth Fund ............. $791,116 $317,283 $80,638
Utility Income Fund ........................ 24,534 15,213 72,018

</TABLE>

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 Mitchell Hutchins or its affiliates,
including PaineWebber. Each board has adopted procedures in conformity with Rule
17e-1 under the Investment Company Act to ensure that all brokerage commissions
paid to PaineWebber are reasonable and fair. Specific provisions in the Advisory
Contracts authorize Mitchell Hutchins and any of its affiliates that is a member
of a national securities exchange 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 last three years, Utility Income Fund paid no brokerage
commissions to PaineWebber. For the fiscal year ended March 31, 1997,
Financial Services Growth Fund paid no brokerage commissions to PaineWebber. For
the fiscal years ended March 31, 1998 and March 31, 1999, Financial Services
Growth Fund paid $17,496 and $66,432, respectively, in brokerage commissions
to PaineWebber, which represented 5.48% and 8.40%, respectively, of the total
commissions paid by that fund and 4.14% and 5.79%, respectively, of the
aggregate dollar amount of the fund's transactions involving commission
payments.

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 transactions
in futures contracts, including procedures permitting the use of Mitchell
Hutchins and its affiliates, are similar to those in effect with respect to
brokerage transactions in securities.

33
<PAGE>

Consistent with the interests of the funds and subject to the review of
each board, Mitchell Hutchins may cause a fund to purchase and sell portfolio
securities 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 determines in good faith that such commission is reasonable in
terms either of that particular transaction or of the overall responsibility of
Mitchell Hutchins 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. During the fiscal year ended March 31, 1999, the
funds directed the portfolio transactions indicated below to brokers chosen
because they provide research and analysis, for which the funds paid the
brokerage commissions indicated below:

Amount of Portfolio Brokerage
Transactions Commissions Paid
------------ ----------------
<S> <C> <C>
Financial Services Growth Fund ............ $36,145,240 $ 37,211
Utility Income Fund ....................... 2,205,500 3,780

</TABLE>

For purchases or sales with broker-dealer firms that act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with these transactions,
Mitchell Hutchins 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 will not enter into any explicit soft dollar arrangements relating to
principal transactions and will not receive in principal transactions the types
of services that could be purchased for hard dollars. Mitchell Hutchins may
engage in agency transactions in over-the-counter 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 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 in advising other funds or accounts and, conversely,
research services furnished to Mitchell Hutchins 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 Contracts.

Investment decisions for a fund and for other investment accounts
managed by Mitchell Hutchins 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.

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 board pursuant to Rule
10f-3 under the Investment Company 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 fund.

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

34
<PAGE>

calculated by dividing the lesser of a 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 fiscal years
shown were:

Fiscal Years Ended March 31,
1999 1998
---- ----
<S> <C> <C>
Financial Services Growth Fund ............ 59% 23%
Utility Income Fund ....................... 21% 10%

</TABLE>

REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES

Waivers of Sales Charges/Contingent Deferred Sales Charges -- Class A
Shares. The following additional sales charge waivers are available for Class A
shares if you:

. Purchase shares through a variable annuity offered only to
qualified plans. For investments made pursuant to this waiver,
Mitchell Hutchins may make payments out of its own resources to
PaineWebber and to the variable annuity's sponsor, adviser or
distributor in a total amount not to exceed l% of the amount
invested;

. Acquire shares through an investment program that is not sponsored
by PaineWebber or its affiliates and that charges participants a
fee for program services, provided that the program sponsor has
entered into a written agreement with PaineWebber permitting the
sale of shares at net asset value to that program. For investments
made pursuant to this waiver, Mitchell Hutchins may make a payment
to PaineWebber out of its own resources in an amount not to exceed
1% of the amount invested. For subsequent investments or exchanges
made to implement a rebalancing feature of such an investment
program, the minimum subsequent investment requirement is also
waived;

. Acquire shares in connection with a reorganization pursuant to
which a fund acquires substantially all of the assets and
liabilities of another fund in exchange solely for shares of the
acquiring fund; or

. Acquire shares in connection with the disposition of proceeds from
the sale of shares of Managed High Yield Plus Fund Inc. that were
acquired during that fund's initial public offering of shares and
that meet certain other conditions described in its prospectus

In addition, reduced sales charges on Class A shares are available
through the combined purchase plan or through rights of accumulation described
below. Class A share purchases of $1 million or more are not subject to an
initial sales charge; however, if a shareholder sells these shares within one
year after purchase, a contingent deferred sales charge of 1% of the offering
price or the net asset value of the shares at the time of sale by the
shareholder, whichever is less, is imposed.

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 tables 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.

35
<PAGE>

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 the individual(s);

(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 Accumulation -- 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.

Reinstatement Privilege -- Class A Shares. Shareholders who have redeemed
Class A shares of a fund may reinstate their account without a sales charge 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, although a loss arising out of a
redemption might not be deductible under certain circumstances. See "Taxes"
below.

Waivers of Contingent Deferred Sales Charges -- Class B Shares. The
maximum 5% contingent deferred sales charge applies to sales of shares during
the first year after purchase. The charge generally declines by 1% annually,
reaching zero after six years. 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 sole 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.

Purchases of Class Y Shares Through the PACE Multi Advisor Program. An
investor who participates in the PACE Multi Advisor Program is eligible to
purchase Class Y shares. The PACE Multi Advisor Program is an advisory program
sponsored by PaineWebber that provides comprehensive investment services,
including investor

36
<PAGE>

profiling, a personalized asset allocation strategy using an appropriate
combination of funds, and a quarterly investment performance review.
Participation in the PACE Multi Advisor Program is subject to payment of an
advisory fee at the effective maximum annual rate of 1.5% of assets. Employees
of PaineWebber and its affiliates are entitled to a waiver of this fee. Please
contact your PaineWebber Financial Advisor or PaineWebber's correspondent firms
for more information concerning mutual funds that are available through the PACE
Multi Advisor Program.

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. Class Y shares are
not eligible for exchange. Shareholders will receive at least 60 days' notice of
any termination or material modification of the exchange offer, except 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.

If conditions exist that make cash payments undesirable, each fund
reserves the right to honor any request for redemption by making payment in
whole or in part in securities chosen by the fund and valued in the same way as
they would be valued for purposes of computing the fund's net asset value. Any
such redemption in kind will be made with readily marketable securities, to the
extent available. 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 Investment Company Act,
under which it is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of its net asset value 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 New York Stock Exchange is closed or
trading on the New York Stock Exchange 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.

Service Organizations. A fund may authorize service organizations, and
their agents, to accept on its behalf purchase and redemption orders that are in
"good form." A fund will be deemed to have received these purchase and
redemption orders when a service organization or its agent accepts them. Like
all customer orders, these orders will be priced based on the fund's net asset
value next computed after receipt of the order by the service organizations or
their agents. Service organizations may include retirement plan service
providers who aggregate purchase and redemption instructions received from
numerous retirement plans or plan participants.

Automatic Investment Plan. PaineWebber offers an automatic investment plan
with a minimum initial investment of $1,000 through which a fund will deduct $50
or more on a monthly, quarterly, semi-annual or annual basis from the investor's
bank account to invest directly in the fund. Participation in the automatic
investment plan enables an investor to use the technique of "dollar cost
averaging." When an investor invests the same dollar amount each month under the
plan, the investor will purchase more shares when a fund's net asset value per
share is low and fewer shares when the net asset value per share is high. Using
this technique, an investor's average purchase price per share over any given
period will be lower than if the investor purchased a fixed number of shares on
a monthly basis during the period. Of course, investing through the automatic
investment plan does not assure a profit or protect against loss in declining
markets. Additionally, because the automatic investment plan involves continuous
investing regardless of price levels, an investor should consider his or her
financial ability to continue purchases through periods of both low and high
price levels.

Systematic Withdrawal Plan. The systematic withdrawal plan allows
investors to set up monthly, quarterly (March, June, September and December),
semi-annual (June and December) or annual (December) withdrawals from their
PaineWebber Mutual Fund accounts. Minimum balances and withdrawals vary
according to the class of shares:

37
<PAGE>

. Class A and Class C shares. Minimum value of fund shares is $5,000;
minimum withdrawals of $100.

. Class B shares. Minimum value of fund shares is $20,000; minimum
monthly, quarterly, and semi-annual and annual withdrawals of $200,
$400, $600 and $800, respectively.

Withdrawals under the systematic withdrawal plan will not be subject to a
contingent deferred sales charge if the investor withdraws no more than 12% of
the value of the fund account when the investor signed up for the Plan (for
Class B shares, annually; for Class A and Class C shares, during the first year
under the Plan). Shareholders who elect to receive dividends or other
distributions in cash may not participate in this plan.

An investor's participation in the systematic withdrawal plan will
terminate automatically if the "Initial Account Balance" (a term that means the
value of the fund account at the time the investor elects to participate in the
systematic withdrawal plan), less aggregate redemptions made other than pursuant
to the systematic withdrawal plan, is less than the minimum values specified
above. Purchases of additional shares of a fund concurrent with withdrawals are
ordinarily disadvantageous to shareholders because of tax liabilities and, for
Class A shares, initial sales charges. On or about the 20th of a month for
monthly, quarterly, semi-annual and annual plans, PaineWebber will arrange for
redemption by the funds of sufficient fund shares to provide the withdrawal
payments specified by participants in the funds' systematic withdrawal plan. The
payments generally are mailed approximately five Business Days (defined under
"Valuation of Shares") after the redemption date. Withdrawal payments should not
be considered dividends, but redemption proceeds. If periodic withdrawals
continually exceed reinvested dividends and other distributions, 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. 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 PFPC. Shareholders may request the
forms needed to establish a systematic withdrawal plan from their PaineWebber
Financial Advisors, correspondent firms or PFPC at 1-800-647-1568.

Individual Retirement Accounts. Self-directed IRAs are available through
PaineWebber in which purchases of PaineWebber mutual funds and other investments
may be made. Investors considering establishing an IRA should review applicable
tax laws and should consult their tax advisers.

Transfer of Accounts. If investors holding shares of a fund in a
PaineWebber brokerage account transfer their brokerage accounts to another firm,
the fund shares will be moved to an account with PFPC. However, if the other
firm has entered into a selected dealer agreement with Mitchell Hutchins
relating to the fund, the shareholder may be able to hold fund shares in an
account with the other firm.

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 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.

38
<PAGE>

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 both low
and high 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(Registered) transactions during the period, and
provide unrealized and realized gain and loss estimates for most
securities held in the account;

. comprehensive year-end summary statements that provide information
on account activity for use in tax planning and tax return
preparation;

. automatic "sweep" of uninvested cash into the RMA accountholder's
choice of one of the six RMA money market funds - RMA Money Market
Portfolio, RMA U.S. Government Portfolio, RMA Tax-Free Fund, RMA
California Municipal Money Fund, RMA New Jersey Municipal Money Fund
and RMA New York Municipal Money Fund. An investment in a money
market fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although a
money market fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in a
money market fund.

. 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;

. unlimited electronic funds transfers and bill payment service for an
additional fee

39
<PAGE>

. expanded account protection for the net equity securities balance
in the event of the liquidation of PaineWebber. This protection does
not apply to shares of funds that are held at PFPC 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 a fund will automatically convert to Class A shares of
that fund, 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 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. For
purposes of conversion to Class A shares, 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 shares, a pro rata portion of the Class B shares in the sub-account
will also convert to Class A shares. The portion will be determined by the ratio
that the shareholder's Class B shares converting to Class A shares bears to the
shareholder's total Class B shares not acquired through dividends and other
distributions.

The conversion feature is subject to the continuing availability of an
opinion of counsel to the effect that the dividends and other distributions paid
on Class A and Class B shares will not result in "preferential dividends" under
the Internal Revenue Code and that the conversion of shares does not constitute
a taxable event. If the conversion feature ceased to be available, the Class B
shares 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 this condition will
not continue to be met.

VALUATION OF SHARES

Each fund determines its net asset value per share separately for each
class of shares, normally as of the close of regular trading (usually 4:00 p.m.,
Eastern time) on the New York Stock Exchange on each Business Day, which is
defined as each Monday through Friday when the New York Stock Exchange is open.
Prices will be calculated earlier when the New York Stock Exchange closes early
because trading has been halted for the day. Currently the New York Stock
Exchange is closed on the observance of the following holidays: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

Securities that are listed on exchanges normally are valued at the last
sale price on the day the securities are valued or, lacking any sales on such
day, at the last available bid price. In cases where securities are traded on
more than one exchange, the securities are generally valued on the exchange
considered by Mitchell Hutchins as the primary market. Securities traded in the
over-the-counter market and listed on the Nasdaq Stock Market ("Nasdaq")
normally are valued at the last available sale price on Nasdaq prior to
valuation; other over-the-counter securities are valued at the last bid price
available prior to valuation. Where market quotations are readily available,
portfolio securities are valued based upon market quotations, provided those
quotations adequately reflect, in the judgment of Mitchell Hutchins, the fair
value of the security. Where those market quotations are not readily available,
securities are valued based upon appraisals received from a pricing service
using a computerized matrix system or based upon appraisals derived from
information concerning the security or similar securities received from
recognized dealers in those securities. All other securities and other assets
are valued at fair value as determined in good faith by or under the direction
of the applicable board. It should be recognized that judgment often plays a
greater role in valuing thinly traded securities, including many lower rated
bonds, than is the case with respect to securities for which a

40
<PAGE>

broader range of dealer quotations and last-sale information is available. The
amortized cost method of valuation generally is used to value debt obligations
with 60 days or less remaining until maturity, unless the applicable board
determines that this does not represent fair value.

PERFORMANCE INFORMATION

The funds' performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are 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.

Total Return Calculations. Average annual total return quotes
("Standardized Return") used in each fund's Performance Advertisements are
calculated according to the following formula:

P(1 + T)/n/= ERV
where: P = a hypothetical initial payment of $1,000 to purchase
shares of a 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.

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 tables show performance information for each class of the
funds' shares outstanding for the periods indicated. All returns for periods of
more than one year are expressed as an average annual return.

41
<PAGE>

FINANCIAL SERVICES GROWTH FUND INC.

Class Class A Class B Class C Class Y
(Inception Date) (5/22/86) (7/1/91) (7/2/92) (3/30/98)
- ---------------- --------- -------- -------- ---------
<S> <C> <C> <C> <C>
Year ended March 31, 1999:
Standardized Return* ................... (11.95)% (13.01)% (9.40)% (7.57)%
Non-Standardized Return ................ (7.81)% (8.51)% (8.50)% (7.57)%
Five Years ended March 31, 1999:
Standardized Return* ................... 21.41% 21.42% 21.59% N/A
Non-Standardized Return ................ 22.53% 21.61% 21.59% N/A
Ten Years ended March 31, 1999:
Standardized Return .................... 20.56% N/A N/A N/A
Non-Standardized Return ................ 21.11% N/A N/A N/A
Inception to March 31, 1999:
Standardized Return* ................... 15.59% 22.80% 19.84% (6.59)%
Non-Standardized Return ................ 16.00% 22.80% 19.84% (6.59)%

</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 charge imposed on a redemption of shares held for the period.
Class Y shares do not impose an initial or contingent deferred sales charge;
therefore, the performance information is the same for both standardized
return and non-standardized return for the periods indicated.

UTILITY INCOME FUND

Class Class A Class B Class C Class Y
(Inception Date) (7/2/93) (7/2/93) (7/2/93) (9/10/98)
- ---------------- -------- -------- -------- ---------
<S> <C> <C> <C> <C>
Year ended March 31, 1999:
Standardized Return* ................... (3.31)% (4.45)% (0.55)% N/A
Non-Standardized Return ................ 1.24% 0.49% 0.44% N/A
Five Years ended March 31, 1999
Standardized Return* ................... 8.85% 8.79% 8.89% N/A
Non-Standardized Return ................ 13.13% 12.26% 12.24% N/A
Inception to March 31,1999:
Standardized Return* ................... 8.85% 8.79% 8.89% 10.14%
Non-Standardized Return ................ 9.72% 8.90% 8.89% 10.14%

</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.
[Class Y shares do not

42
<PAGE>

impose an initial or contingent deferred sales charge; therefore, the
performance information is the same for both standardized return and
non-standardized return for the periods indicated.

Other Information. In Performance Advertisements, the funds may compare
their Standardized Return and/or their Non-Standardized Return with data
published by Lipper Inc. ("Lipper") for U.S. government funds, corporate bond
(BBB) funds and high yield funds, CDA Investment Technologies, Inc. ("CDA"),
Wiesenberger Investment Companies Service ("Wiesenberger"), Investment Company
Data, Inc. ("ICD") or Morningstar Mutual Funds ("Morningstar"), or with the
performance of recognized stock, bond and other indices, including the Municipal
Bond Buyers Indices, Lehman Bond Index, the Standard & Poor's 500 Composite
Stock Price Index ("S&P 500"), the Dow Jones Industrial Average, Merrill Lynch
Municipal Bond Indices, the Morgan Stanley Capital International World Index,
the Lehman Brothers Treasury Bond Index, Lehman Brothers Government/Corporate
Bond Index, the Salomon Brothers World Government Bond Index and changes in the
Consumer Price Index as published by the U.S. Department of Commerce. Each fund
also may refer in these 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 THE WALL STREET JOURNAL, MONEY
Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW
YORK 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 values will fluctuate. The debt securities
held by the funds generally have longer maturities than most CDs and may reflect
interest rate fluctuations for longer term debt securities. An investment in any
fund involves greater risks than an investment in either a money market fund or
a CD.

The funds may also compare their performance to general trends in the
stock and bond markets, as illustrated by the following graph prepared by
Ibbotson Associates, Chicago.

Chart showing performance of S&P 500, long term U.S. government bonds,
Treasury Bills and inflation from 1928 thorough 1998

YEAR Common Stocks Long-Term Gov't Bonds Inflation/CPI Treasury Bills
- ---- ------------- --------------------- ------------- --------------
<S> <C> <C> <C> <C>
1928 $22,039 $11,751 $9,553 $11,028
1929 $20,184 $12,153 $9,572 $11,552
1930 $15,158 $12,719 $8,994 $11,831
1931 $8,588 $12,044 $8,138 $11,957
1932 $7,885 $14,072 $7,300 $12,072
1933 $12,142 $14,062 $7,337 $12,108
1934 $11,967 $15,473 $7,486 $12,128
1935 $17,672 $16,243 $7,710 $12,148
1936 $23,667 $17,465 $7,803 $12,170
1937 $15,376 $17,505 $8,045 $12,208
1938 $20,161 $18,473 $7,822 $12,205
1939 $20,079 $19,570 $7,784 $12,208
1940 $18,115 $20,762 $7,859 $12,208
1941 $16,015 $20,955 $8,623 $12,215
1942 $19,273 $21,630 $9,424 $12,248
1943 $24,265 $22,080 $9,721 $12,291
1944 $29,057 $22,700 $9,926 $12,331
1945 $39,645 $25,136 $10,150 $12,372
1946 $36,446 $25,111 $11,993 $12,415
1947 $38,527 $24,453 $13,074 $12,478
1948 $40,646 $25,284 $13,428 $12,579
1949 $48,283 $26,915 $13,186 $12,717
1950 $63,594 $26,931 $13,950 $12,870
1951 $78,869 $25,873 $14,769 $13,061
1952 $93,357 $26,173 $14,899 $13,278
1953 $92,433 $27,126 $14,991 $13,520
1954 $141,071 $29,076 $14,916 $13,636
1955 $185,594 $28,701 $14,971 $13,850
1956 $197,768 $27,097 $15,399 $14,191
1957 $176,449 $29,118 $15,864 $14,636
1958 $252,957 $27,345 $16,144 $14,862
1959 $283,211 $26,727 $16,386 $15,300
1960 $284,542 $30,410 $16,628 $15,707
1961 $361,055 $30,705 $16,740 $16,042
1962 $329,535 $32,820 $16,944 $16,480
1963 $404,669 $33,217 $17,223 $16,994
1964 $471,359 $34,383 $17,428 $17,596
1965 $530,043 $34,627 $17,763 $18,287
1966 $476,721 $35,891 $18,358 $19,158
1967 $591,038 $32,597 $18,916 $19,964
1968 $656,407 $32,512 $19,809 $21,004
1969 $600,613 $30,863 $21,019 $22,386
1970 $624,697 $34,601 $22,173 $23,846
1971 $714,091 $39,179 $22,918 $24,893
1972 $849,626 $41,408 $23,700 $25,849
1973 $725,071 $40,948 $25,785 $27,640
1974 $533,144 $42,730 $28,931 $29,851
1975 $731,474 $46,661 $30,956 $31,582
1976 $905,565 $54,500 $32,442 $33,193
1977 $840,364 $54,118 $34,648 $34,886
1978 $895,828 $53,469 $37,767 $37,398
1979 $1,060,661 $52,827 $42,790 $41,287
1980 $1,404,315 $50,767 $48,096 $45,911
1981 $1,335,504 $51,732 $52,376 $52,660
1982 $1,621,301 $72,631 $54,419 $58,190
1983 $1,986,094 $73,139 $56,487 $63,310
1984 $2,111,218 $84,476 $58,746 $69,515
1985 $2,791,030 $110,664 $60,979 $74,867
1986 $3,307,371 $137,776 $61,649 $79,509
1987 $3,479,354 $134,056 $64,362 $83,882
1988 $4,063,885 $147,060 $67,194 $89,167
1989 $5,344,009 $173,678 $70,285 $96,657
1990 $5,173,001 $184,446 $74,572 $104,196
1991 $6,750,766 $220,044 $76,884 $110,031
1992 $7,270,575 $237,867 $79,114 $113,882
1993 $7,996,906 $281,159 $81,250 $117,185
1994 $8,101,665 $259,229 $83,443 $121,755
1995 $10,507,050 $313,511 $85,404 $126,856
1996 13,710,736 337,286 88,451 135,380
1997 18,274,382 363,828 90,067 142,494
1998 23,495,420 441,777 91,513 149,416

</TABLE>

The chart is shown for illustrative purposes only and does not represent either
fund's performance. These returns consist of income and capital appreciation (or
depreciation) and should not be considered an indication or guarantee of future
investment 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, an unmanaged weighted index
comprising 500 widely held common stocks and varying in composition. Unlike
investors in bonds and U.S. 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

43
<PAGE>

bonds are based on U.S. 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 1999 Yearbook(TM) Ibbotson Assoc.,
Chi. (annual updates work by Roger G. Ibbotson & Rex A. Sinquefield).

Over time, although subject to greater risks and higher volatility, stocks
have outperformed all other investments by a wide margin, offering a solid hedge
against inflation. From 1926 to 1998, stocks beat all other traditional asset
classes. A $10,000 investment in the stocks comprising the S&P 500 grew to
$23,495,420, significantly more than any other investment.

TAXES

Backup Withholding. Each fund is required to withhold 31% of all
dividends, capital gain distributions and redemption proceeds payable to
individuals and certain other non-corporate shareholders who do not provide the
fund or PaineWebber with a correct taxpayer identification number. Withholding
at that rate also is required from dividends and capital gain distributions
payable to those shareholders who otherwise are subject to backup withholding.

Sale or Exchange of Fund Shares. A shareholder's sale (redemption) of
shares may result in a taxable gain or loss, depending on whether the
shareholder receives more or less than his or her adjusted basis for the shares
(which normally includes any initial sales charge paid on Class A shares). An
exchange of either fund's shares for shares of another PaineWebber mutual fund
generally will have similar tax consequences. In addition, if a fund's shares
are bought within 30 days before or after selling other shares of the fund
(regardless of class) at a loss, all or a portion of that loss will not be
deductible and will increase the basis of the newly purchased shares.

Special Rule for Class A Shareholders. A special tax rule applies when a
shareholder sells or exchanges Class A shares within 90 days of purchase and
subsequently acquires Class A shares of the same or another PaineWebber mutual
fund without paying a sales charge due to the 365-day reinstatement privilege or
the exchange privilege. In these cases, any gain on the sale or exchange of the
original Class A shares would be increased, or any loss would be decreased, by
the amount of the sales charge paid when those shares were bought, and that
amount would increase the basis of the PaineWebber mutual fund shares
subsequently acquired.

Conversion of Class B Shares. A shareholder will recognize no gain or loss
as a result of a conversion from Class B shares to Class A shares.

Qualification as a Regulated Investment Company. 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. These additional requirements include 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 foreign
currency contracts) derived with respect to its business of investing in
securities or those currencies ("Income Requirement"); (2) 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 that are limited, in respect of
any one issuer, to an amount that does not exceed 5% of the value of the fund's
total assets and that does not represent more than 10% of the issuer's
outstanding voting securities; and (3) 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. If a fund failed to qualify for treatment as a
RIC for any taxable year, (a) it would be taxed as an ordinary corporation on
its taxable income for that year

44
<PAGE>

without being able to deduct the distributions it makes to its shareholders and
(b) the shareholders would treat all those distributions, including
distributions of net capital gain (the excess of net long-term capital gain over
net short-term capital loss), as dividends (that is, ordinary income) to the
extent of the fund's earnings and profits. In addition, the fund could be
required to recognize unrealized gains, pay substantial taxes and interest, and
make substantial distributions before requalifying for RIC treatment.

Other Information. 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.

A portion of the dividends from each fund's investment company taxable
income (whether paid in cash or in additional shares) may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion may
not exceed the aggregate dividends received by a 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
federal alternative minimum tax.

If fund shares 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 thereon. Investors also
should be aware that if shares are purchased shortly before the record date for
a capital gain distribution, the shareholder will pay full price for the shares
and receive some portion of the price back as a taxable distribution.

Dividends and interest received, and gains realized, by a fund on
foreign securities may be subject to income, withholding or other taxes imposed
by foreign countries and U.S. possessions (collectively "foreign taxes") that
would reduce the return on its securities. Tax conventions between certain
countries and the United States, however, may reduce or eliminate foreign taxes,
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 taxes
paid by it. Pursuant to the election, the fund would treat those taxes as
dividends paid to its shareholders and each shareholder (1) would be required to
include in gross income, and treat as paid by him or her, his or her
proportionate share of those taxes, (2) would be required to 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) could either deduct the foreign 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 foreign taxes paid to, and the income from
sources within, foreign countries and U.S. possessions if it makes this
election. Individuals who have no more than $300 ($600 for married persons
filing jointly) of creditable foreign taxes included on Forms 1099 and all of
whose foreign source income is "qualified passive income" may elect each year to
be exempt from the extremely complicated foreign tax credit limitation, in which
event they would be able to claim a foreign tax credit without having to file
the detailed Form 1116 that otherwise is required. Neither fund expects to be
able to make this election during the coming year.

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 the calendar year and capital
gain net income for the one-year period ending on October 31 of that year, plus
certain other amounts.

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 determine for income tax purposes the amount,
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 respect
to its business of investing in securities or foreign currencies, qualify as
permissible income under the Income Requirement.

45
<PAGE>

Each fund may invest in the stock of "passive foreign investment
companies" ("PFICs") if that stock is a permissible investment. A PFIC is a
foreign corporation (with certain exceptions) 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 it distributes that income
to its shareholders.

If a fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), 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 QEF's annual ordinary earnings and net capital gain
(which it may have to distribute to satisfy the Distribution Requirement and
avoid imposition of the Excise Tax) even if the QEF does not distribute those
earnings and gain to the fund. In most instances it will be very difficult, if
not impossible, to make this election because of certain of its
requirements.

Each fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
a fund's adjusted basis therein as of the end of that year. Pursuant to the
election, a fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included by the fund for
prior taxable years under the election (and under regulations proposed in 1992
that provided a similar election with respect to the stock of certain PFICs). A
fund's adjusted basis in each PFIC's stock with respect to which it has made
this election will be adjusted to reflect the amounts of income included and
deductions taken thereunder.

Certain futures and foreign currency contracts in which a fund may
invest may be subject to section 1256 of the Code ("section 1256 contracts").
Any section 1256 contracts a fund holds at the end of each taxable year
generally must be "marked-to-market" (that is, treated as having been sold at
that time for their fair market value) for federal income tax purposes, with the
result that unrealized gains or losses will be treated as though they were
realized. Sixty percent of any net gain or loss recognized on these deemed
sales, and 60% of any net realized gain or loss from any actual sales of section
1256 contracts, will be treated as long-term capital gain or loss, and the
balance will be treated as short-term capital gain or loss. These rules may
operate to increase the amount that a fund must distribute to satisfy the
Distribution Requirement (i.e., with respect to the portion treated as
short-term capital gain), which will be taxable to the shareholders as ordinary
income, and to increase the net capital gain a fund recognizes, without in
either case increasing the cash available to the fund. A fund may elect not to
have the foregoing rules apply to any "mixed straddle" (that is, a straddle,
clearly identified by the fund in accordance with the regulations, at least one
(but not all) of the positions of which are section 1256 contracts), although
doing so may have the effect of increasing the relative proportion of net
short-term capital gain (taxable as ordinary income) and thus increasing the
amount of dividends that must be distributed.

Gains or losses (1) from the disposition of foreign currencies ,
including forward currency contracts, (2) on the disposition of each
foreign-currency-denominated debt security that are attributable to fluctuations
in the value of the foreign currency between the dates of acquisition and
disposition of the security and (3) that are attributable to exchange rate
fluctuations between the time a fund accrues interest, dividends or other
receivables, or expenses or other liabilities, denominated in a foreign currency
and the time the fund actually collects the receivables or pays the liabilities,
generally are treated as ordinary income or loss. These gains, referred to under
the Code as "section 988" gains or losses, increase or decrease the amount of a
fund's investment company taxable income available to be distributed to its
shareholders as ordinary income, rather than increasing or decreasing the amount
of its net capital gain. If section 988 losses exceed other investment company
taxable income during a taxable year, a fund would not be able to distribute any
dividends, and any distributions made during that year before the losses were
realized would be recharacterized as a return of

46
<PAGE>

capital to shareholders, rather than as a dividend, thereby reducing each
shareholder's basis in his or her fund shares.

Offsetting positions in any actively traded security, option, futures
or forward contract entered into or held by a fund may constitute a "straddle"
for federal income tax purposes. Straddles are subject to certain rules that may
affect the amount, character and timing of a fund's gains and losses with
respect to positions of the straddle by requiring, among other things, that (1)
loss realized on disposition of one position of a straddle be deferred to the
extent of any unrealized gain in an offsetting position until the latter
position is disposed of, (2) the fund's holding period in certain straddle
positions not begin until the straddle is terminated (possibly resulting in gain
being treated as short-term rather than long-term capital gain) and (3) losses
recognized with respect to certain straddle positions, that otherwise would
constitute short-term capital losses, be treated as long-term capital losses.
Applicable regulations also provide certain "wash sale" rules, which apply to
transactions where a position is sold at a loss and a new offsetting position is
acquired within a prescribed period, and "short sale" rules applicable to
straddles. Different elections are available to the funds, which may mitigate
the effects of the straddle rules, particularly with respect to "mixed
straddles" (i.e., a straddle of which at least one, but not all, positions are
section 1256 contracts).

When a covered call option written (sold) by a fund expires, it
realizes a short-term capital gain equal to the amount of the premium it
received for writing the option. When a fund terminates its obligations under
such an option by entering into a closing transaction, it realizes a short-term
capital gain (or loss), depending on whether the cost of the closing transaction
is less (or more) than the premium it received when it wrote the option. When a
covered call option written by a fund is exercised, the fund is treated as
having sold the underlying security, producing long-term or short-term capital
gain or loss, depending on the holding period of the underlying security and
whether the sum of the option price received on the exercise plus the premium
received when it wrote the option is more or less than the basis of the
underlying security.

If a fund has an "appreciated financial position"-- generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis--and enters into a "constructive sale" of the position, the
fund will be treated as having made an actual sale thereof, with the result that
gain will be recognized at that time. A constructive sale generally consists of
a short sale, an offsetting notional principal contract or a futures or forward
currency contract entered into by a fund or a related person with respect to the
same or substantially identical property. In addition, if the appreciated
financial position is itself a short sale or such a contract, acquisition of the
underlying property or substantially identical property will be deemed a
constructive sale. The foregoing will not apply, however, to a fund's
transaction during any taxable year that otherwise would be treated as a
constructive sale if the transaction is closed within 30 days after the end of
that year and the fund holds the appreciated financial position unhedged for 60
days after that closing (i.e., at no time during that 60-day period is the
fund's risk of loss regarding that position reduced by reason of certain
specified transactions with respect to substantially identical or related
property, such as having an option to sell, being contractually obligated to
sell, making a short sale or granting an option to buy substantially identical
stock or securities).

A fund may acquire zero coupon or other securities issued with original
issue discount ("OID") and/or Treasury inflation-protected securities ("TIPS"),
on which principal is adjusted based on changes in the Consumer Price Index. A
fund must include in its gross income the OID that accrues on those securities,
and the amount of any principal increases on TIPS, during the taxable year, even
if the fund receives no corresponding payment on them during the year.
Similarly, a fund that invests in payment-in-kind ("PIK") securities must
include in its gross income securities it receives as "interest" on those
securities. Each fund has elected similar treatment with respect to securities
purchased at a discount from their face value ("market discount"). Because a
fund annually must distribute substantially all of its investment company
taxable income, including any accrued OID, market discount and other non-cash
income, to satisfy the Distribution Requirement and avoid imposition of the
Excise Tax, it may be required in a particular year to distribute as a dividend
an amount that is greater than the total amount of cash it actually receives.
Those distributions would have to be made from the fund's cash assets or from
the proceeds of sales of portfolio securities, if necessary. The fund might
realize capital gains or losses from those sales, which would increase or
decrease its investment company taxable income and/or net capital gain.

47
<PAGE>

The foregoing is only a general summary of some of the important
federal tax considerations generally affecting the funds and their
shareholders. No attempt is made to present a complete explanation of the
federal tax treatment of the funds' activities, and this discussion is not
intended as a substitute for careful tax planning. Accordingly, potential
investors are urged to consult their own tax advisers for more detailed
information and for information regarding any state, local or foreign taxes
applicable to the funds and to dividends and other distributions therefrom.

OTHER INFORMATION

Massachusetts Business Trusts. The Trust is an entity of the type
commonly known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of Utility Income Fund could, under certain circumstances, be held
personally liable for the obligations of the fund or its Trust. 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 board members or by any officers or officer by or on
behalf of the Trust or the fund, the board members 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
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 is 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 would be
entitled to reimbursement from the general assets of the fund. The board members
intend to conduct each fund's operations in such a way as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the fund.

Classes of Shares. A share of each class of a fund represents an
identical interest in that fund's investment portfolio and has the same rights,
privileges and preferences. However, each class may differ with respect 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 different 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 and liquidation proceeds on Class A, B, C and Y shares
will differ.

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 cumulative 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 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, such as the terms of a Rule
12b-1 Plan as it relates to the class. The shares of each series of the Trust
will be voted separately, except when an aggregate vote of all the series of the
Trust is required by law.

The funds do not 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 declaration 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 member at the written request
of holders of 10% of the outstanding shares of the Trust or fund, as applicable.

Class-Specific Expenses. Each fund may determine to allocate certain of
its expenses (in addition to service and distribution fees) to the specific
classes of its shares to which those expenses are attributable. For example,
Class B and Class C shares bear higher transfer agency fees per shareholder
account than those borne by Class A or Class Y 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. 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

48
<PAGE>

will be affected by the number of shareholder accounts in each class and the
relative amounts of net assets in each class.

Prior Names. Prior to December 14, 1995, Financial Services Growth Fund
was known as "PaineWebber Regional Financial Growth Fund Inc." Prior to November
10, 1995, each fund's Class C shares were known as "Class D" shares.

Custodian and Recordkeeping Agent; Transfer and Dividend Agent. State
Street Bank and Trust Company, located at One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian and recordkeeping agent for each fund.
PFPC Inc., a subsidiary of PNC Bank, N.A., serves as each fund's transfer and
dividend disbursing agent. It is located at 400 Bellevue Parkway, Wilmington, DE
19809.

Combined Prospectus. Although each fund is offering only its own shares,
it is possible that a fund might become liable for a misstatement in the
Prospectus about another fund. The board of each fund has considered this factor
in approving the use of a single, combined Prospectus.

Counsel. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the funds.
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 its last fiscal year ended March
31, 1999 is a separate document supplied with this SAI, and the financial
statements, accompanying notes and report of independent auditors or independent
accountants appearing therein are incorporated herein by this reference.
<PAGE>

APPENDIX

RATINGS INFORMATION

Description of 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 "gilt edged." 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 risk 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 payment 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 applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category, the modifier
2 indicates a mid-range ranking, and the modifier 3 indicates a ranking in the
lower end of that generic rating category.

Description of S&P Corporate Debt Ratings

AAA. An obligation rated AAA has the highest rating assigned by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong; A. An obligation rated A is
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than obligations in higher rated categories. However, the
obligor's capacity to meet its financial commitment on the obligation is still
strong; BBB. An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation; BB, B, CCC, CC, C. Obligations rated BB, B, CCC, CC and C are
regarded as having significant speculative characteristics. BB indicates the
least degree of speculation and C the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions; BB. An
obligation rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing certainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation; B. An
obligation rated B is more vulnerable to nonpayment than obligations rated BB,
but the obligor currently has the capacity to meet its financial commitment on
the obligation., Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation; CCC. An obligation rated CCC is currently

A-1
<PAGE>

vulnerable to nonpayment and is dependent upon favorable business, financial and
economic conditions for the obligor to meet its financial commitment on the
obligation. In the event of adverse business, financial, or economic conditions,
the obligor is not likely to have the capacity to meet its financial commitment
on the obligation; CC. An obligation rated CC is currently highly vulnerable to
nonpayment; C. The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are not being continued; D. An obligation rated D is in payment
default. The D rating category is used when payments on an obligation are not
made on the date due even if the applicable grace period has not expired, unless
S&P believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on a obligation are jeopardized.

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.

r. This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk-such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.

A-2
<PAGE>

You should rely only on the information contained or referred to in the
Prospectus and this Statement of Additional Information. The funds and their
distributor have not authorized anyone to provide you with information that is
different. The Prospectus and this Statement of Additional Information are not
an offer to sell shares of the funds in any jurisdiction where the funds or
their distributor may not lawfully sell those shares.

------------

PaineWebber
Financial Services Growth Fund

PaineWebber
Utility Income Fund

------------------------------------------

Statement of Additional Information
August 1, 1999

------------------------------------------

PaineWebber

PART C. OTHER INFORMATION
--------------------------

Item 23. Exhibits
--------

(1) Restated Articles of Incorporation 1/
-
(2) Restated By-Laws 1/
-
(3) Instruments defining the rights of holders of Registrant's shares
of common stock 2/
-
(4) Investment Advisory and Administration Contract 1/
-
(5) (a) Distribution Contract with respect to Class A shares 1/
-
(b) Distribution Contract with respect to Class B shares 1/
-
(c) Distribution Contract with respect to Class C shares 3/
-
(d) Distribution Contract with respect to Class Y shares 4/
-
(e) Exclusive Dealer Agreement with respect to Class A shares 1/
-
(f) Exclusive Dealer Agreement with respect to Class B shares 1/
-
(g) Exclusive Dealer Agreement with respect to Class C shares 3/
-
(h) Exclusive Dealer Agreement with respect to Class Y shares 4/
-
(6) Bonus, profit sharing or pension plans - none

(7) Custodian Agreement 1/

(8) Transfer Agency Agreement 1/
-
(9) Opinion and consent of counsel (filed herewith)

(10) Other opinions, appraisals, rulings and consents: Auditors'
consent (filed herewith)

(11) Financial statements omitted from prospectus-none

(12) Letter of investment intent 1/
-
(13) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class A shares (filed herewith)

(b) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class B shares (filed herewith)

(14) and

(27) Financial Data Schedule (not applicable)

(15) Plan pursuant to Rule 18f-3 3/
-

__________________

1/ Incorporated by reference from Post-Effective Amendment No. 17 to the
- -
registration statement, SEC File No. 33-33231, filed July 31, 1998.

2/ Incorporated by reference from Articles Sixth, Seventh, Eighth, Eleventh
- -
and Twelfth of the Registrant's Restated Articles of Incorporation and from
Articles II, VIII, X, XI, and XII of the Registrant's Restated By-Laws.

C-1
<PAGE>

3/ Incorporated by reference from Post-Effective Amendment No. 12 to the
- -
registration statement, SEC File No. 33-33231, filed December 11, 1995.

4/ Incorporated by reference from Post-Effective Amendment No. 15 to the
- -
registration statement, SEC File No. 33-33231, filed July 31, 1996.

Item 24. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------

None

Item 25. Indemnification
---------------

Section 10.1 of ARTICLE TENTH of the Articles of Incorporation provides
that to the maximum extent permitted by the law, no director or officer of the
Registrant shall be liable to the Registrant or its stockholders for money
damages.

Section 10.2 of ARTICLE TENTH further provides that to the maximum extent
permitted by law, the Registrant shall indemnify and advance expenses as
provided in the By-Laws to its present and past directors, officers, employees
and agents, and persons who are serving or have served at the request of the
Registrant as a director, officer, employee or agent in similar capacities for
other entities.

Section 10.3 of ARTICLE TENTH further provides that the Registrant may
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Registrant, or is or was serving at
the request of the Registrant as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him or her and incurred by him or her in
any such capacity or arising out of his or her status as such, whether or not
the Registrant would have the power to indemnify him or her against such
liability.

Additionally, Section 10.4 of ARTICLE TENTH provides that any repeal or
modification of ARTICLE TENTH or adoption or modification of any other provision
of the Articles or By-Laws inconsistent with ARTICLE TENTH shall be prospective
only, to the extent that such repeal or modification would, if applied
retroactively, adversely affect any limitation of liability of any director or
officer of the Registrant or indemnification to any person covered by ARTICLE
TENTH with respect to any act or omission which occurred prior to such repeal,
modification or adoption.

Section 9.01 of the By-Laws sets forth the procedures by which the
Registrant will indemnify its directors, officers, employees and agents.
Section 9.02 of Article IX of the By-Laws further provides that the Registrant
may purchase and maintain insurance or other sources of reimbursement to the
extent permitted by law on behalf of any person who is or was a director,
officer, employee or agent of the Registrant, or is or was serving at the
request of the Registrant as a director, officer, employee, or agent of a
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him or her and incurred by him or her in or arising
out of his or her position.

Section 9 of the Investment Advisory and Administration Contract between
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") and the Registrant
provides that Mitchell Hutchins shall not be liable for any error of judgment or
mistake of law or for any loss suffered by any series or the Registrant in
connection with the matters to which the Contract relates, except for a loss
resulting from the willful misfeasance, bad faith, or gross negligence of
Mitchell Hutchins in the performance of its duties or from its reckless
disregard of its obligations and duties under the Contract. Section 9 further
provides that any person, even though also an officer, director, employee or
agent of Mitchell Hutchins, who may be or become an officer, director or
employee of the Registrant shall be deemed, when rendering services to any
series or the Registrant or acting with respect to any business of such series
or the Registrant, to be rendering such service to or acting solely for any
series or the Registrant and not as an officer, director, employee, or agent or
one under the control or direction of Mitchell Hutchins even though paid by it.

C-2
<PAGE>

Section 9 of each Distribution Contract provides that the Registrant will
indemnify Mitchell Hutchins and its officers, directors and controlling persons
against all liabilities arising from any alleged untrue statement of material
fact in the Registration Statement or from any alleged omission to state in the
Registration Statement a material fact required to be stated in it or necessary
to make the statements in it, in light of the circumstances under which they
were made, not misleading, except insofar as liability arises from untrue
statements or omissions made in reliance upon and in conformity with information
furnished by Mitchell Hutchins to the Registrant for use in the Registration
Statement; and provided that this indemnity agreement shall not protect any such
persons against liabilities arising by reason of their bad faith, gross
negligence or willful misfeasance; and shall not inure to the benefit of any
such persons unless a court of competent jurisdiction or controlling precedent
determines that such result is not against public policy as expressed in the
Securities Act of 1933. Section 9 of each Distribution Contract also provides
that Mitchell Hutchins agrees to indemnify, defend and hold the Registrant, its
officers and directors free and harmless of any claims arising out of any
alleged untrue statement or any alleged omission of material fact contained in
information furnished by Mitchell Hutchins for use in the Registration Statement
or arising out of an agreement between Mitchell Hutchins and any retail dealer,
or arising out of supplementary literature or advertising used by Mitchell
Hutchins in connection with each Distribution Contract.

Section 9 of each Exclusive Dealer Agreement contains provisions similar to
Section 9 of each Distribution Contract, with respect to PaineWebber
Incorporated ("PaineWebber").

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be provided to directors, officers and controlling
persons of the Registrant, pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding or payment pursuant to any insurance policy) is
asserted against the Registrant by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

Item 26. Business and Other Connections of Investment Adviser
----------------------------------------------------

Mitchell Hutchins, a Delaware corporation, is a registered investment
adviser and is a wholly owned subsidiary of PaineWebber which is, in turn, a
wholly owned subsidiary of Paine Webber Group Inc. Mitchell Hutchins is
primarily engaged in the investment advisory business. Information as to the
officers and directors of Mitchell Hutchins is included in its Form ADV, as
filed with the Securities and Exchange Commission (registration number 801-
13219), and is incorporated herein by reference.

Item 27. Principal Underwriters
----------------------

a) Mitchell Hutchins serves as principal underwriter and/or investment
adviser for the following investment companies:

ALL AMERICAN TERM TRUST INC.
GLOBAL HIGH INCOME DOLLAR FUND INC.
GLOBAL SMALL CAP FUND INC.
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
MANAGED HIGH YIELD FUND, INC.
MANAGED HIGH YIELD PLUS FUND INC.
MITCHELL HUTCHINS INSTITUTIONAL SERIES
MITCHELL HUTCHINS PORTFOLIOS
MITCHELL HUTCHINS SERIES TRUST

C-3
<PAGE>

PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INDEX TRUST
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER MASTER SERIES, INC.
PAINEWEBBER MUNICIPAL SERIES
PAINEWEBBER MUTUAL FUND TRUST
PAINEWEBBER OLYMPUS FUND
PAINEWEBBER SECURITIES TRUST
STRATEGIC GLOBAL INCOME FUND, INC.
2002 TARGET TERM TRUST INC.

b) Mitchell Hutchins is the principal underwriter for the Registrant.
PaineWebber acts as exclusive dealer for the shares of the Registrant. The
directors and officers of Mitchell Hutchins, their principal business addresses,
and their positions and offices with Mitchell Hutchins are identified in its
Form ADV, as filed with the Securities and Exchange Commission (registration
number 801-13219). The directors and officers of PaineWebber, their principal
business addresses, and their positions and offices with PaineWebber are
identified in its Form ADV, as filed with the Securities and Exchange Commission
(registration number 801-7163). The foregoing information is hereby
incorporated herein by reference. The information set forth below is furnished
for those directors and officers of Mitchell Hutchins or PaineWebber who also
serve as directors or officers of the Registrant. Unless otherwise indicated,
the principal business address of each person named in 1285 Avenue of the
Americas, New York, New York 10019.

<TABLE>
<CAPTION>
Positions and Offices With
Name Positions With Registrant Underwriter or Exclusive Dealer
- ------------------------------------ --------------------------------- --------------------------------
<S> <C> <C>
Margo N. Alexander Director and President Chairman, Chief Executive Officer and
Director of Mitchell Hutchins and
Executive Vice President and a Director
of PaineWebber

Mary C. Farrell Director Managing Director, Senior Investment
Strategist and member of the Investment
Policy Committee of PaineWebber

Brian M. Storms Director President and Chief Operating Officer of
Mitchell Hutchins

John J. Lee Vice President and Assistant Vice President and a Manager of the
Treasurer Mutual Fund Finance Department of
Mitchell Hutchins
Kevin J. Mahoney Vice President and Assistant First Vice President and a Senior Manager
Treasurer of the Mutual Fund Finance Department of
Mitchell Hutchins

Ann E. Moran Vice President and Assistant Vice President and a Manager of the
Treasurer Mutual Fund Finance Department of
Mitchell Hutchins

Dianne E. O'Donnell Vice President and Secretary Senior Vice President and Deputy General
Counsel of Mitchell Hutchins
</TABLE>

C-4
<PAGE>

<TABLE>
<CAPTION>
Positions and Offices With
Name Positions With Registrant Underwriter or Exclusive Dealer
- ------------------------------------ --------------------------------- --------------------------------
<S> <C> <C>
Emil Polito Vice President Senior Vice President and Director of
Operations and Control for Mitchell
Hutchins

Victoria E. Schonfeld Vice President Managing Director and General Counsel of
Mitchell Hutchins and a Senior Vice
President of PaineWebber

Paul H. Schubert Vice President and Treasurer Senior Vice President and Director of the
Mutual Fund Finance Department of
Mitchell Hutchins

Barney A. Taglialatela Vice President and Assistant Vice President and a Manager of the
Treasurer Mutual Fund Finance Department of
Mitchell Hutchins

Mark A. Tincher Vice President Managing Director and Chief Investment
Officer - Equities of Mitchell Hutchins

Keith A. Weller Vice President and Assistant First Vice President and Associate
Secretary General Counsel of Mitchell Hutchins
</TABLE>

Item 28. Location of Accounts and Records
--------------------------------

The books and other documents required by paragraphs (b)(4), (c) and (d) of
Rule 31a-1 under the Investment Company Act of 1940 are maintained in the
physical possession of Mitchell Hutchins, 1285 Avenue of the Americas, New York,
New York 10019. All other accounts, books and documents required by Rule 31a-1
are maintained in the physical possession of Registrant's transfer agent and
custodian.

Item 29. Management Services
-------------------

Not applicable.

Item 30. Undertakings
------------

None.

C-5
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York and State of
New York, on the 29th day of July, 1999.

PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.

By: /s/ Dianne E. O'Donnell
-----------------------
Dianne E. O'Donnell
Vice President and Secretary

Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Margo N. Alexander President and Director July 29, 1999
- ------------------------------- (Chief Executive Officer)
Margo N. Alexander*

/s/ E. Garrett Bewkes, Jr. Director and Chairman July 29, 1999
- ------------------------------- of the Board of Directors
E. Garrett Bewkes, Jr.*

/s/ Richard Q. Armstrong Director July 29, 1999
- -------------------------------
Richard Q. Armstrong*

/s/ Richard R. Burt Director July 29, 1999
- -------------------------------
Richard R. Burt*

/s/ Mary C. Farrell Director July 29, 1999
- -------------------------------
Mary C. Farrell*

/s/ Meyer Feldberg Director July 29, 1999
- -------------------------------
Meyer Feldberg*

/s/ George W. Gowen Director July 29, 1999
- -------------------------------
George W. Gowen*

/s/ Frederic V. Malek Director July 29, 1999
- -------------------------------
Frederic V. Malek*

/s/ Carl W. Schafer Director July 29, 1999
- -------------------------------
Carl W. Schafer*

/s/ Brian M. Storms Director July 29, 1999
- -------------------------------
Brian M. Storms**

/s/ Paul H. Schubert Vice President and Treasurer (Chief July 29, 1999
- ------------------------------- Financial and Accounting Officer)
Paul H. Schubert
</TABLE>
<PAGE>

SIGNATURES (Continued)

* Signature affixed by Elinor W. Gammon pursuant to powers of attorney dated
May 21, 1996 and incorporated by reference from Post-Effective Amendment
No. 25 to the registration statement of PaineWebber RMA Tax-Free Fund,
Inc., SEC File 2-78310, filed June 27, 1996.

** Signature affixed by Elinor W. Gammon pursuant to power of attorney dated
May 14, 1999 and filed herewith as Exhibit 16.
<PAGE>

PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.

EXHIBIT INDEX
-------------

Exhibit
Number
- ------

(1) Restated Articles of Incorporation 1/
-
(2) Restated By-Laws 1/
-
(3) Instruments defining the rights of holders of Registrant's shares of
common stock 2/
-
(4) Investment Advisory and Administration Contract 1/
-
(5) (a) Distribution Contract with respect to Class A shares 1/
-
(b) Distribution Contract with respect to Class B shares 1/
-
(c) Distribution Contract with respect to Class C shares 3/
-
(d) Distribution Contract with respect to Class Y shares 4/
-
(e) Exclusive Dealer Agreement with respect to Class A shares 1/
-
(f) Exclusive Dealer Agreement with respect to Class B shares 1/
-
(g) Exclusive Dealer Agreement with respect to Class C shares 3/
-
(h) Exclusive Dealer Agreement with respect to Class Y shares 4/
-
(6) Bonus, profit sharing or pension plans - none

(7) Custodian Agreement 1/
-
(8) Transfer Agency Agreement 1/
-
(9) Opinion and consent of counsel (filed herewith)

(10) Other opinions, appraisals, rulings and consents: Auditors' consent
(filed herewith)

(11) Financial statements omitted from prospectus-none

(12) Letter of investment intent 1/
-
(13) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to Class A
shares (filed herewith)

(b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class B
shares (filed herewith)

(14) and

(27) Financial Data Schedule (not applicable)

(15) Plan pursuant to Rule 18f-3 3/
-
__________________

1/ Incorporated by reference from Post-Effective Amendment No. 17 to the
- -
registration statement, SEC File No. 33-33231, filed July 31, 1998.
<PAGE>

3/ Incorporated by reference from Post-Effective Amendment No. 12 to the
- -
registration statement, SEC File No. 33-33231, filed December 11, 1995.

4/ Incorporated by reference from Post-Effective Amendment No. 15 to the
- -
registration statement, SEC File No. 33-33231, filed July 31, 1996.

<PAGE>

Exhibit No. 9

Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.w.
2/nd/ Floor
Washington, D.C. 20036-1800
Telephone 202-778-9000

July 29, 1999

PaineWebber Financial Services Growth Fund Inc.
1285 Avenue of the Americas
New York, New York 10019

Ladies and Gentlemen:

You have requested our opinion, as counsel to PaineWebber Financial
Services Growth Fund Inc. ("Fund"), as to certain matters regarding the issuance
of certain Shares of the Fund. As used in this letter, the term "Shares" means
the Class A, Class B, Class C and Class Y shares of common stock of the Fund
that may be issued during the time that Post-Effective Amendment No. 19 to the
Fund's Registration Statement on Form N-1A ("PEA") is effective and has not been
superseded by another post-effective amendment.

As such counsel, we have examined certified or other copies, believed by us
to be genuine, of the Fund's Articles of Incorporation and by-laws and such
resolutions and minutes of meetings of the Fund's Board of Directors as we have
deemed relevant to our opinion, as set forth herein. Our opinion is limited to
the laws and facts in existence on the date hereof, and it is further limited to
the laws (other than the conflict of law rules) of the State of Maryland that in
our experience are normally applicable to the issuance of shares by registered
investment companies organized as corporations under the laws of that State and
to the Securities Act of 1933 ("1933 Act"), the Investment Company Act of 1940
("1940 Act") and the regulations of the Securities and Exchange Commission
("SEC") thereunder.

Based on the foregoing, we are of the opinion that the issuance of the
Shares has been duly authorized by the Fund and that, when sold, the Shares will
have been validly issued, fully paid and non-assessable, provided that (1) the
Shares are sold in accordance with the terms contemplated by the PEA, including
receipt by the Fund of full payment for the Shares and compliance with the 1933
Act and the 1940 Act, and (2) the aggregate number of Shares issued, when
combined with all other then-outstanding shares, does not exceed the number of
shares that the Fund is authorized to issue.

We hereby consent to this opinion accompanying the PEA when it is filed
with the SEC and to the reference to our firm in the statement of additional
information that is being filed as part of the PEA.

Very truly yours,

/s/ Kirkpatrick & Lockhart LLP

KIRKPATRICK & LOCKHART LLP

<PAGE>
Exhibit No. 10

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Auditors" in the Statement of Additional
Information and to the incorporation by reference of our report dated May 14,
1999 in this Registration Statement (Form N-1A No. 33-33231) of PaineWebber
Financial Services Growth Fund Inc.

/s/ Ernst & Young LLP

ERNST & YOUNG LLP

New York, New York
July 26, 1999

<PAGE>

Exhibit No. 13(a)

PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC. -- CLASS A SHARES

PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
UNDER THE INVESTMENT COMPANY ACT OF 1940

WHEREAS, PaineWebber Financial Services Growth Fund Inc. ("Fund") is
registered under the Investment Company Act of 1940, as amended ("1940 Act"), as
an open-end management investment company, and has one distinct series of shares
of common stock ("Series"), which corresponds to a distinct portfolio and is the
Fund's initial Series; and

WHEREAS, the Fund has adopted a Plan of Distribution pursuant to Rule 12b-1
under the 1940 Act with respect to the above-referenced Series and desires to
replace it with this amended Plan of Distribution ("Plan") with respect to the
Class A shares of the above-referenced Series and of such other Series as may
hereafter be designated by the Fund's board of directors ("Board") and have
Class A shares established; and

WHEREAS, the Fund has entered into a Distribution Contract ("Contract") with
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") pursuant to which
Mitchell Hutchins has agreed to serve as Distributor of the Class A shares of
each such Series;

NOW, THEREFORE, the Fund hereby adopts this Plan with respect to the Class A
shares of each Series in accordance with Rule 12b-1 under the 1940 Act.

1. A. Each Series is authorized to pay to Mitchell Hutchins, as compensation
for Mitchell Hutchins' services as Distributor of the Series' Class A shares, a
service fee at the rate of 0.25% on an annualized basis of the average daily net
assets of the Series' Class A shares. Such fee shall be calculated and accrued
daily and paid monthly or at such other intervals as the Board shall determine.

B. Any Series may pay a service fee to Mitchell Hutchins at a lesser rate
than the fee specified in Paragraph 1A of this Plan, as agreed upon by the Board
and Mitchell Hutchins and as approved in the manner specified in Paragraph 4 of
this Plan.

2. As Distributor of the Class A shares of each Series, Mitchell Hutchins may
spend such amounts as it deems appropriate on any activities or expenses
primarily intended to result in the sale of the Class A shares of the Series or
the servicing and maintenance of shareholder accounts, including, but not
limited to, compensation to employees of Mitchell Hutchins; compensation to and
expenses, including overhead and telephone and other communication expenses, of
Mitchell Hutchins, PaineWebber Incorporated ("PaineWebber") and other selected
dealers who engage in or support the distribution of shares or who service
shareholder accounts; the printing of prospectuses, statements of additional
information, and reports for other than existing shareholders; and the
preparation, printing and distribution of sales literature and advertising
materials.
<PAGE>

3. If adopted with respect to Class A shares of a Series after any public
offering of those shares, this Plan shall not take effect with respect to those
shares unless it has first been approved by a vote of a majority of the voting
securities of the Class A shares of that Series. This provision does not apply
to adoption as an amended Plan of Distribution where the prior Plan of
Distribution either was approved by a vote of a majority of the voting
securities of the Class A shares of the applicable Series or such approval was
not required under Rule 12b-1.

4. This Plan shall not take effect with respect to the Class A shares of any
Series unless it first has been approved, together with any related agreements,
by votes of a majority of both (a) the Board and (b) those Board members of the
Fund who are not "interested persons" of the Fund and have no direct or indirect
financial interest in the operation of this Plan or any agreements related
thereto ("Independent Board Members"), cast in person at a meeting (or meetings)
called for the purpose of voting on such approval; and until the Board members
who approve the Plan's taking effect with respect to such Series' Class A shares
have reached the conclusion required by Rule 12b-1(e) under the 1940 Act.

5. After approval as set forth in Paragraph 3 (if applicable) and Paragraph
4, this Plan shall take effect and continue in full force and effect for so long
as such continuance is specifically approved at least annually in the manner
provided for approval of this Plan in Paragraph 4.

6. Mitchell Hutchins shall provide to the Board and the Board shall review,
at least quarterly, a written report of the amounts expended with respect to the
Class A shares of each Series by Mitchell Hutchins under this Plan and the
Contract and the purposes for which such expenditures were made. Mitchell
Hutchins shall submit only information regarding amounts expended for "service
activities," as defined in this Paragraph 6, to the Board in support of the
service fee payable hereunder.

For purposes of this Plan, "service activities" shall mean activities in
connection with the provision by Mitchell Hutchins or PaineWebber of personal,
continuing services to investors in the Class A shares of the Series; provided,
however, that if the National Association of Securities Dealers, Inc. ("NASD")
adopts a definition of "service fee" for purposes of Section 2830(b)(9) of the
NASD Conduct Rules that differs from the definition of "service activities"
hereunder, or if the NASD adopts a related definition intended to define the
same concept, the definition of "service activities" in this Paragraph shall be
automatically amended, without further action of the parties, to conform to such
NASD definition. Overhead and other expenses of Mitchell Hutchins and
PaineWebber related to their "distribution activities" or "service activities,"
including telephone and other communications expenses, may be included in the
information regarding amounts expended for such activities.

7. This Plan may be terminated with respect to the Class A shares of any
Series at any time by vote of the Board, by vote of a majority of the
Independent Board Members, or by vote of a majority of the outstanding voting
securities of the Class A shares of that Series.

8. This Plan may not be amended to increase materially the amount of service
fees provided for in Paragraph 1A hereof unless such amendment is approved by a
majority of the

2
<PAGE>

outstanding voting securities of the Class A shares of the affected Series and
no material amendment to the Plan shall be made unless approved in the manner
provided for initial approval in Paragraph 4 hereof.

9. The amount of the service fees payable by the Series to Mitchell Hutchins
under Paragraph 1A hereof and the Contract is not related directly to expenses
incurred by Mitchell Hutchins on behalf of such Series in serving as Distributor
of the Class A shares, and Paragraph 2 hereof and the Contract do not obligate
the Series to reimburse Mitchell Hutchins for such expenses. The service fees
set forth in Paragraph 1A hereof will be paid by the Series to Mitchell Hutchins
until either the Plan or the Contract is terminated or not renewed. If either
the Plan or the Contract is terminated or not renewed with respect to the Class
A shares of any Series, any service-related expenses incurred by Mitchell
Hutchins on behalf of the Class A shares of the Series in excess of payments of
the service fees specified in Paragraph 1A hereof and the Contract which
Mitchell Hutchins has received or accrued through the termination date are the
sole responsibility and liability of Mitchell Hutchins, and are not obligations
of the Series.

10. While this Plan is in effect, the selection and nomination of the Board
members who are not interested persons of the Fund shall be committed to the
discretion of the Board members who are not interested persons of the Fund.

11. As used in this Plan, the terms "majority of the outstanding voting
securities" and "interested person" shall have the same meaning as those terms
have in the 1940 Act.

12. The Fund shall preserve copies of this Plan (including any amendments
thereto) and any related agreements and all reports made pursuant to Paragraph 6
hereof for a period of not less than six years from the date of this Plan, the
first two years in an easily accessible place.

IN WITNESS WHEREOF, the Fund has executed this Amended Plan of Distribution on
the day and year set forth below in New York, New York.

Date: September 10, 1998

ATTEST: PAINEWEBBER FINANCIAL SERVICES
GROWTH FUND INC.

/s/ Cristina Paradiso By: /s/ Dianne E. O'Donnell
- ------------------------- --------------------------

<PAGE>

Exhibit No. 13(b)

PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC. -- CLASS B SHARES

PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
UNDER THE INVESTMENT COMPANY ACT OF 1940

WHEREAS, the Fund has adopted a Plan of Distribution pursuant to Rule 12b-1
under the 1940 Act with respect to the above-referenced Series and desires to
replace it with this amended Plan of Distribution ("Plan") with respect to the
Class B shares of the above-referenced Series and of such other Series as may
hereafter be designated by the Fund's board of directors ("Board") and have
Class B shares established; and

WHEREAS, the Fund has entered into a Distribution Contract ("Contract")
with Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") pursuant to
which Mitchell Hutchins has agreed to serve as Distributor of the Class B shares
of each such Series;

NOW, THEREFORE, the Fund hereby adopts this Plan with respect to the Class
B shares of each Series in accordance with Rule 12b-1 under the 1940 Act.

1. A. Each Series, other than PaineWebber Money Market Fund, is
authorized to pay to Mitchell Hutchins, as compensation for Mitchell Hutchins'
services as Distributor of the Series' Class B shares, distribution fees at the
rate of 0.75%, on an annualized basis, of the average daily net assets of the
Series' Class B shares. PaineWebber Money Market Fund is authorized to pay
Mitchell Hutchins as compensation for Mitchell Hutchins' services as Distributor
of its Class B shares, distribution fees at the rate of 0.50%, on an annualized
basis, of its average daily net assets. Such fees shall be calculated and
accrued daily and paid monthly or at such other intervals as the Board shall
determine:

B. Each Series is authorized to pay to Mitchell Hutchins, as
compensation for Mitchell Hutchins' services as Distributor of the Series' Class
B shares, a service fee at the rate of 0.25%, on an annualized basis, of the
average daily net assets of the Series Class B shares. Such fee shall be
calculated and accrued daily and paid monthly or at such other intervals as the
Board shall determine.

C. Any Series may pay a distribution or service fee to Mitchell
Hutchins at a lesser rate than the fees specified above, as agreed upon by the
Board and Mitchell Hutchins and as approved in the manner specified in Paragraph
4 of this Plan.

2. As Distributor of the Class B shares of each Series, Mitchell Hutchins
may spend such amounts as it deems appropriate on any activities or expenses
primarily intended to result in
<PAGE>

the sale of the Class B shares of the Series or the servicing and maintenance of
shareholder accounts, including, but not limited to, compensation to employees
of Mitchell Hutchins; compensation to and expenses, including overhead and
telephone and other communication expenses, of Mitchell Hutchins, PaineWebber
Incorporated ("PaineWebber") and other selected dealers who engage in or support
the distribution of shares or who service shareholder accounts; the printing of
prospectuses, statements of additional information, and reports for other than
existing shareholders; and the preparation, printing and distribution of sales
literature and advertising materials.

3. If adopted with respect to Class B shares of a Series after any public
offering of those shares, this Plan shall not take effect with respect to those
shares unless it has first been approved by a majority of the voting securities
of the Class B shares of that Series. This provision does not apply to adoption
as an amended Plan of Distribution where the prior Plan of Distribution either
was approved by a vote of a majority of the voting securities of the Class B
shares of the applicable Series or such approval was not required under Rule
12b-1.

4. This Plan shall not take effect with respect to the Class B shares of
any Series unless it first has been approved, together with any related
agreements, by votes of a majority of both (a) the Board and (b) those Board
members of the Fund who are not "interested persons" of the Fund and have no
direct or indirect financial interest in the operation of this Plan or any
agreements related thereto ("Independent Board Members"), cast in person at a
meeting (or meetings) called for the purpose of voting on such approval; and
until the Board members who approve the Plan's taking effect with respect to
such Series' Class B shares have reached the conclusion required by Rule 12b-
1(e) under the 1940 Act.

5. After approval as set forth in Paragraph 3 (if applicable) and
Paragraph 4, this Plan shall take effect and continue in full force and effect
for so long as such continuance is specifically approved at least annually in
the manner provided for approval of this Plan in Paragraph 4.

6. Mitchell Hutchins shall provide to the Board and the Board shall
review, at least quarterly, a written report of the amounts expended with
respect to the Class B shares of each Series by Mitchell Hutchins under this
Plan and the Contract and the purposes for which such expenditures were made.
Mitchell Hutchins shall submit only information regarding amounts expended for
"distribution activities," as defined in this Paragraph 6, to the Board in
support of the distribution fee payable hereunder and shall submit only
information regarding amounts expended for "service activities," as defined in
this Paragraph 6, to the Board in support of the service fee payable hereunder.

2
<PAGE>

2830(b)(9) of the NASD Conduct Rules that differs from the definition of
"service activities" hereunder, or if the NASD adopts a related definition
intended to define the same concept, the definition of "service activities" in
this Paragraph shall be automatically amended, without further action of the
parties, to conform to such NASD definition. Overhead and other expenses of
Mitchell Hutchins and PaineWebber related to their "distribution activities" or
"service activities," including telephone and other communications expenses, may
be included in the information regarding amounts expended for such activities.

7. This Plan may be terminated with respect to the Class B shares of any
Series at any time by vote of the Board, by vote of a majority of the
Independent Board Members, or by vote of a majority of the outstanding voting
securities of the Class B shares of that Series.

8. This Plan may not be amended to increase materially the amount of
distribution fees provided for in Paragraph 1A or the amount of service fees
provided for in Paragraph 1B hereof unless such amendment is approved by a
majority of the outstanding voting securities of the Class B shares of the
affected Series and no material amendment to the Plan shall be made unless
approved in the manner provided for initial approval in Paragraph 4 hereof.

9. The amount of the distribution and service fees payable by the Series
to Mitchell Hutchins under Paragraphs 1A and 1B hereof and the Contract is not
related directly to expenses incurred by Mitchell Hutchins on behalf of such
Series in serving as Distributor of the Class B shares, and Paragraph 2 hereof
and the Contract do not obligate the Series to reimburse Mitchell Hutchins for
such expenses. The distribution and service fees set forth in Paragraphs 1A and
1B hereof will be paid by the Series to Mitchell Hutchins until either the Plan
or the Contract is terminated or not renewed. If either the Plan or the Contract
is terminated or not renewed with respect to the Class B shares of any Series,
any distribution expenses incurred by Mitchell Hutchins on behalf of the Class B
shares of the Series in excess of payments of the distribution and service fees
specified in Paragraphs 1A and 1B hereof and the Contract which Mitchell
Hutchins has received or accrued through the termination date are the sole
responsibility and liability of Mitchell Hutchins, and are not obligations of
the Series.

10. While this Plan is in effect, the selection and nomination of the
Board members who are not interested persons of the Fund shall be committed to
the discretion of the Board members who are not interested persons of the Fund.

11. As used in this Plan, the terms "majority of the outstanding voting
securities" and "interested person" shall have the same meaning as those terms
have in the 1940 Act.

13. The Board members of the Fund and the shareholders of each Series
shall not be liable for any obligations of the Fund or any Series under this
Plan, and Mitchell Hutchins or any other person, in asserting any rights or
claims under this Plan, shall look only to the assets and

3
<PAGE>

property of the Fund or such Series in settlement of such right or claim, and
not to such Board members or shareholders.

IN WITNESS WHEREOF, the Fund has executed this Amended Plan of Distribution
on the day and year set forth below in New York, New York.

Date: September 10, 1998

ATTEST: PAINEWEBBER FINANCIAL SERVICES GROWTH FUND
INC.

/s/ Cristina Paradiso By: /s/ Dianne E. O'Donnell
- ----------------------- -----------------------

<PAGE>

EXHIBIT No. 13(C)

PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC. -- CLASS C SHARES

PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
UNDER THE INVESTMENT COMPANY ACT OF 1940

WHEREAS, the Fund has adopted a Plan of Distribution pursuant to Rule 12b-1
under the 1940 Act with respect to the above-referenced Series and desires to
replace it with this amended Plan of Distribution ("Plan") with respect to the
Class C shares of the above-referenced Series and of such other Series as may
hereafter be designated by the Fund's board of directors ("Board") and have
Class C shares established; and

WHEREAS, the Fund has entered into a Distribution Contract ("Contract")
with Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") pursuant to
which Mitchell Hutchins has agreed to serve as Distributor of the Class C shares
of each such Series;

NOW, THEREFORE, the Fund hereby adopts this Plan with respect to the Class
C shares of each Series in accordance with Rule 12b-1 under the 1940 Act.

1. A. Each Series listed below is authorized to pay to Mitchell
Hutchins, as compensation for Mitchell Hutchins' services as Distributor of the
Series' Class C shares, distribution fees at the rates (on an annualized basis)
set forth below of the average daily net assets of the Series' Class C shares.
Such fees shall be calculated and accrued daily and paid monthly or at such
other intervals as the Board shall determine:

Initial Series 0.50%

B. Any Series hereafter established is authorized to pay to Mitchell
Hutchins, as compensation for Mitchell Hutchins' services as Distributor of the
Series Class C shares, a distribution fee in the amount to be agreed upon in a
written distribution fee addendum to this Plan ("Distribution Fee Addendum")
executed by the Fund on behalf of such Series. All such Distribution Fee Addenda
shall provide that they are subject to all terms and conditions of this Plan.

C. Each Series is authorized to pay to Mitchell Hutchins, as compensation
for Mitchell Hutchins' services as Distributor of the Series' Class C shares, a
service fee at the rate of 0.25% on an annualized basis of the average daily net
assets of the Series Class C shares. Such fee shall be calculated and accrued
daily and paid monthly or at such other intervals as the Board shall determine.
<PAGE>

D. Any Series may pay a distribution or service fee to Mitchell
Hutchins at a lesser rate than the fees specified above, as agreed upon by the
Board and Mitchell Hutchins and as approved in the manner specified in Paragraph
4 of this Plan.

2. As Distributor of the Class C shares of each Series, Mitchell Hutchins
may spend such amounts as it deems appropriate on any activities or expenses
primarily intended to result in the sale of the Class C shares of the Series or
the servicing and maintenance of shareholder accounts, including, but not
limited to, compensation to employees of Mitchell Hutchins; compensation to and
expenses, including overhead and telephone and other communication expenses, of
Mitchell Hutchins, PaineWebber Incorporated ("PaineWebber") and other selected
dealers who engage in or support the distribution of shares or who service
shareholder accounts; the printing of prospectuses, statements of additional
information, and reports for other than existing shareholders; and the
preparation, printing and distribution of sales literature and advertising
materials.

3. If adopted with respect to Class C shares of a Series after any public
offering of those shares, this Plan shall not take effect with respect to those
shares unless it has first been approved by a majority of the voting securities
of the Class C shares of that Series. This provision does not apply to adoption
as an amended Plan of Distribution where the prior Plan of Distribution either
was approved by a vote of a majority of the voting securities of the Class C
shares of the applicable Series or such approval was not required under Rule
12b-1.

4. This Plan shall not take effect with respect to the Class C shares of
any Series unless it first has been approved, together with any related
agreements, by votes of a majority of both (a) the Board and (b) those Board
members of the Fund who are not "interested persons" of the Fund and have no
direct or indirect financial interest in the operation of this Plan or any
agreements related thereto ("Independent Board Members"), cast in person at a
meeting (or meetings) called for the purpose of voting on such approval; and
until the Board members who approve the Plan's taking effect with respect to
such Series' Class C shares have reached the conclusion required by Rule 12b-
1(e) under the 1940 Act.

5. After approval as set forth in Paragraph 3 (if applicable) and
Paragraph 4, this Plan shall take effect and continue in full force and effect
for so long as such continuance is specifically approved at least annually in
the manner provided for approval of this Plan in Paragraph 4.

6. Mitchell Hutchins shall provide to the Board and the Board shall
review, at least quarterly, a written report of the amounts expended with
respect to the Class C shares of each Series by Mitchell Hutchins under this
Plan and the Contract and the purposes for which such expenditures were made.
Mitchell Hutchins shall submit only information regarding amounts expended for
"distribution activities," as defined in this Paragraph 6, to the Board in
support of the distribution fee payable hereunder and shall submit only
information regarding amounts expended for "service activities," as defined in
this Paragraph 6, to the Board in support of the service fee payable hereunder.

2
<PAGE>

For purposes of this Plan, "distribution activities" shall mean any
activities in connection with Mitchell Hutchins' performance of its obligations
under this Plan or the Contract that are not deemed "service activities."
"Service activities" shall mean activities in connection with the provision by
Mitchell Hutchins or PaineWebber of personal, continuing services to investors
in the Class C shares of the Series; provided, however, that if the National
Association of Securities Dealers, Inc. ("NASD") adopts a definition of "service
fee" for purposes of Section 2830(b)(9) of the NASD Conduct Rules that differs
from the definition of "service activities" hereunder, or if the NASD adopts a
related definition intended to define the same concept, the definition of
"service activities" in this Paragraph shall be automatically amended, without
further action of the parties, to conform to such NASD definition. Overhead and
other expenses of Mitchell Hutchins and PaineWebber related to their
"distribution activities" or "service activities," including telephone and other
communications expenses, may be included in the information regarding amounts
expended for such activities.

7. This Plan may be terminated with respect to the Class C shares of any
Series at any time by vote of the Board, by vote of a majority of the
Independent Board Members, or by vote of a majority of the outstanding voting
securities of the Class C shares of that Series.

8. This Plan may not be amended to increase materially the amount of
distribution fees provided for in Paragraph 1A or Paragraph 1B hereof or the
amount of service fees provided for in Paragraph 1C hereof unless such amendment
is approved by a majority of the outstanding voting securities of the Class C
shares of the affected Series and no material amendment to the Plan shall be
made unless approved in the manner provided for initial approval in Paragraph 4
hereof.

9. The amount of the distribution and service fees payable by the Series
to Mitchell Hutchins under Paragraphs 1A, 1B and 1C hereof and the Contract is
not related directly to expenses incurred by Mitchell Hutchins on behalf of such
Series in serving as Distributor of the Class C shares, and Paragraph 2 hereof
and the Contract do not obligate the Series to reimburse Mitchell Hutchins for
such expenses. The distribution and service fees set forth in Paragraphs 1A, 1B
and 1C hereof will be paid by the Series to Mitchell Hutchins until either the
Plan or the Contract is terminated or not renewed. If either the Plan or the
Contract is terminated or not renewed with respect to the Class C shares of any
Series, any distribution expenses incurred by Mitchell Hutchins on behalf of the
Class C shares of the Series in excess of payments of the distribution and
service fees specified in Paragraphs 1A, 1B and 1B hereof and the Contract which
Mitchell Hutchins has received or accrued through the termination date are the
sole responsibility and liability of Mitchell Hutchins, and are not obligations
of the Series.

10. While this Plan is in effect, the selection and nomination of the
Board members who are not interested persons of the Fund shall be committed to
the discretion of the Board members who are not interested persons of the Fund.

11. As used in this Plan, the terms "majority of the outstanding voting
securities" and "interested person" shall have the same meaning as those terms
have in the 1940 Act.

3
<PAGE>

IN WITNESS WHEREOF, the Fund has executed this Amended Plan of Distribution
on the day and year set forth below in New York, New York.

Date: September 10, 1998

ATTEST: PAINEWEBBER FINANCIAL SERVICES GROWTH
FUND INC.

/s/ Cristina Paradiso By: /s/ Dianne E. O'Donnell
- --------------------- ------------------------