PAINEWEBBER MANAGED ASSETS TRUST, 485BPOS, 1997-07-31

PAINEWEBBER MANAGED ASSETS TRUST
485BPOS, 1997-07-31

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<PAGE>

As filed with the Securities and Exchange Commission on July 31, 1996

1933 Act Registration No. 33-42160
1940 Act Registration No. 811-6376

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]

Pre-Effective Amendment No. _____ [ ]

Post-Effective Amendment No. 10 [X]
--

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]

Amendment No. 12 [X]
-----
(Check appropriate box or boxes.)

PAINEWEBBER MANAGED ASSETS TRUST
(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:
ELINOR W. GAMMON, Esq.

BENJAMIN J. HASKIN, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W., 2nd Floor
Washington, D.C. 20036-1800
Telephone: (202) 778-9000

It is proposed that this filing will become effective:

[ ] Immediately upon filing pursuant to Rule 485(b)

[X] On August 1, 1997 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] On ______________ pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] On ______________ pursuant to Rule 485(a)(ii)

Registrant has filed a declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940 and filed the notice required by such Rule for
its most recent fiscal year on May 23, 1997.
<PAGE>

PaineWebber Managed Assets Trust

Contents of Registration Statement

This Registration Statement consists of the following papers and documents:

Cover Sheet

Contents of Registration Statement

Cross Reference Sheet

PaineWebber Capital Appreciation Fund
-------------------------------------

Part A - Prospectus

Part B - Statement of Additional Information

Part C - Other Information

Signature Page

Exhibits
<PAGE>

PaineWebber Managed Assets Trust

Form N-1A Cross Reference Sheet

Part A Item No.and Caption Prospectus Caption
- --------------------------- ------------------
<S> <C>
1. Cover Page Cover Page

2. Synopsis The Funds at a Glance; Expense Table

3. Condensed Financial Information Financial Highlights; Performance

4. General Description of Registrant The Funds at a Glance; Investment Objective &
Policies; Investment Philosophy & Process; The
Funds' Investments; General Information

5. Management of the Fund Management; General Information

5A. Management's Discussion of Fund Performance Financial Highlights

6. Capital Stock and Other Securities Cover Page; Flexible Pricing /(SM)/;
Dividends & Taxes; General Information

7. Purchase of Securities Being Offered Flexible Pricing; How to Buy Shares; Other
Services; Determining the Shares' Net Asset Value

8. Redemption or Repurchase How to Sell Shares; Other Services

9. Pending Legal Proceedings Not Applicable

<CAPTION>
Part B Item No. and Caption Statement of Additional Information Caption
- --------------------------- -------------------------------------------
<S> <C>
10. Cover page Cover Page

11. Table of Contents Table of Contents

12. General Information and History Other Information

13. Investment Objective and Policies Investment Policies and Restrictions;
Hedging and Other Strategies Using
Derivative Contracts; Portfolio
Transactions

14. Management of the Fund Trustees, Directors and Officers; Principal
Holders of Securities

15. Control Persons and Principal Holders Trustees, Directors and Officers; Principal
of Securities Holders of Securities

16. Investment Advisory and Other Services Investment Advisory and Distribution Arrangements;

17. Brokerage Allocation Portfolio Transactions

18. Capital Stock and Other Securities Conversion of Class B Shares; Other Information
</TABLE>
<PAGE>

<TABLE>

Part B Item No.and Caption Statement of Additional Information Caption
- --------------------------- -------------------------------------------
<S> <C>
19. Purchase, Redemption and Pricing of Reduced Sales Charges, Additional Exchange and
Securities Being Offered Redemption Information and Other Services;
Valuation of Shares

20. Tax Status Taxes

21. Underwriters Investment Advisory and Distribution Arrangements

22. Calculation of Performance Data Performance Information

23. Financial Statements Financial Statements

</TABLE>

Part C
------

Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.

<PAGE>

- -------------------------------=================--------------------------------

PaineWebber Capital Appreciation Fund
PaineWebber Financial Services Growth Fund Inc.
PaineWebber Utility Income Fund

1285 Avenue of the Americas, New York, NY 10019

Prospectus -- August 1, 1997
- --------------------------------------------------------------------------------

PaineWebber Stock Funds are designed for investors generally seeking capital
appreciation by investing principally in equity securities. Capital
Appreciation Fund invests primarily in common stock of medium-sized companies.
Financial Services Growth Fund invests primarily in equity securities of
companies in the financial services industries. Utility Income Fund also seeks
to provide current income and invests primarily in income-producing equity
securities and bonds of companies in the utility industries.

This Prospectus concisely sets forth information that a prospective investor
should know about the Funds before investing. Please read it carefully and
retain a copy of this Prospectus for future reference.

A Statement of Additional Information dated August 1, 1997 has been filed with
the Securities and Exchange Commission and is legally part of this Prospectus.
The Statement of Additional Information can be obtained without charge, and
further inquiries can be made, by contacting an individual Fund, your
investment executive at PaineWebber or one of its correspondent firms or by
calling toll-free 1-800-647-1568.
- --------------------------------------------------------------------------------
THE PAINEWEBBER FAMILY OF MUTUAL FUNDS

The PaineWebber Family of Mutual Funds consists of six broad categories, which
are presented here. Generally, investors seeking to maximize return must assume
greater risk. The Funds in this Prospectus are all in the STOCK category.

. Money Market Fund for income and stability by investing in high-quality,
short-term investments.

. Bond Funds for income by investing mainly in bonds.

. Tax-Free Bond Funds for income exempt from federal income tax and, in some
cases, state and local income taxes, by investing in municipal bonds.

. Asset Allocation Funds for high total return by investing in stocks and bonds.

. Stock Funds for long-term growth by investing mainly in equity securities.

. Global Funds for long-term growth by investing mainly in foreign stocks or
high current income by investing mainly in global debt instruments.

A complete listing of the PaineWebber Family of Mutual Funds is found on the
back cover of this Prospectus.
- --------------------------------------------------------------------------------

INVESTORS SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERRED TO IN THIS
PROSPECTUS. THE FUNDS AND THEIR DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE TO PRO-
VIDE INVESTORS WITH INFORMATION THAT IS DIFFERENT. THE PROSPECTUS IS NOT AN OF-
FER TO SELL SHARES OF THE FUNDS IN ANY JURISDICTION WHERE THE FUND OR ITS DIS-
TRIBUTOR MAY NOT LAWFULLY SELL THOSE SHARES.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

- -------------------------------=================--------------------------------
Prospectus Page 1
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

Table of Contents

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

<TABLE>
<CAPTION>
Page
----
<S> <C>
The Funds at a Glance...................................................... 3
Expense Table.............................................................. 5
Financial Highlights....................................................... 8
Investment Objectives & Policies........................................... 14
Investment Philosophy & Process............................................ 15
Performance Information.................................................... 19
The Funds' Investments..................................................... 20
Flexible Pricing(SM)....................................................... 23
How to Buy Shares.......................................................... 27
How to Sell Shares......................................................... 28
Other Services............................................................. 28
Management................................................................. 29
Determining the Shares' Net Asset Value.................................... 31
Dividends & Taxes.......................................................... 32
General Information........................................................ 33
</TABLE>

- ------------------------------=================---------------------------------
Prospectus Page 2
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

The Funds at a Glance
- -------------------------------------------------------------------------------

The Funds offered by this Prospectus are not intended to provide a complete or
balanced investment program, but one or more of them may be appropriate as a
component of an investor's overall portfolio. Some common reasons to invest in
these Funds are to finance college educations, plan for retirement or
diversify a portfolio. When selling shares, investors should be aware that
they may get more or less for their shares than they originally paid for them.
As with any mutual fund, there is no assurance that the Funds will achieve
their goals.

CAPITAL APPRECIATION FUND

GOAL: To increase the value of your investment by investing principally in the
common stock of medium-sized domestic companies and some foreign companies
selected primarily on the basis of earnings growth.

INVESTMENT OBJECTIVE: Long-term capital appreciation.

RISKS: Equity securities historically have shown greater growth potential than
other types of securities, but they have also shown greater volatility.
Because the Fund invests primarily in common stocks, its price will rise and
fall. Medium-sized companies may have higher earnings growth rates than larger
companies, offering the potential for greater returns. However, the greater
potential of these companies may entail greater market volatility and risks of
adverse financial developments. The Fund may invest in U.S. dollar-denominated
securities of foreign companies, which may involve more risk than the
securities of U.S. companies. The Fund may use derivatives, such as options
and futures, in its hedging activities, which may involve additional risks.
Investors may lose money by investing in the Fund; the investment is not
guaranteed.

SIZE: On June 30, 1997, the Fund had over $269 million in assets.

FINANCIAL SERVICES GROWTH FUND

GOAL: To increase the value of your investment by investing primarily in the
equity securities of domestic and foreign financial services companies.

INVESTMENT OBJECTIVE: Long-term capital appreciation.

RISKS: Equity securities historically have shown greater growth potential than
other types of securities, but they have also shown greater volatility.
Because the Fund invests primarily in equity securities, its price will rise
and fall. The Fund's concentration in the banking, thrift, insurance and other
financial services industries makes it subject to greater risk and volatility
than equity funds that are more diversified, and the value of the Fund's
shares will be affected by economic, competitive and regulatory developments
affecting the financial services industries. The Fund may invest in the
securities of foreign companies, which may involve more risk than the
securities of U.S. companies. The Fund may use derivatives, such as options,
futures and foreign currency contracts, in its hedging activities, which may
involve additional risks. Investors may lose money by investing in the Fund;
the investment is not guaranteed.

SIZE: On June 30, 1997, the Fund had over $195.0 million in assets.

UTILITY INCOME FUND

GOAL: To increase the value of your investment and provide current income by
investing primarily in income-producing equity securities and bonds of
domestic and foreign companies engaged in the ownership or operation of
facilities used in the generation, transmission or distribution of
electricity, telecommunications, gas or water.

INVESTMENT OBJECTIVE: Current income and capital appreciation.

RISKS: Equity securities historically have shown greater growth potential than
other types of securities, but they have also shown greater volatility.
Because the Fund invests primarily in equity securities, its price will rise
and fall. The Fund's concentration in the utility industries makes it subject
to greater risk and volatility than funds that are more diversified, and the
value of the Fund's shares will be affected by economic, competitive and
regulatory developments in the utility industries. The Fund may invest in the
securities of foreign companies, which may involve more risk than the
securities of U.S. companies. The Fund may use derivatives, such as options,
futures and foreign currency contracts, in its hedging activities, which may
involve additional risks. Investors may lose money by investing in the Fund;
the investment is not guaranteed.

SIZE: On June 30, 1997, the Fund had over $32.6 million in assets.

- ------------------------------=================---------------------------------
Prospectus Page 3
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

The Funds at a Glance
(Continued)
- -------------------------------------------------------------------------------

MANAGEMENT

Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), an asset
management subsidiary of PaineWebber Incorporated ("PaineWebber"), is the
investment adviser and administrator of Capital Appreciation Fund, Financial
Services Growth Fund and Utility Income Fund (each a "Fund" and, collectively,
the "Funds"). Mitchell Hutchins has appointed Denver Investment Advisors, LLC
as the investment sub-adviser for Capital Appreciation Fund.

MINIMUM INVESTMENT

To open an account, investors need $1,000; to add to an account, investors
need only $100.

WHO SHOULD INVEST

CAPITAL APPRECIATION FUND is for investors who want long-term capital
appreciation. The Fund seeks to achieve this through investment primarily in
the common stock of medium-sized domestic companies and foreign companies that
are traded in the United States. Equity securities of small- and medium-sized
companies offer investors the potential for greater returns than larger
companies but are typically more volatile. Accordingly, Capital Appreciation
Fund is designed for investors seeking long-term growth who are able to bear
the risks that come with investments in the equity securities of such
companies.

FINANCIAL SERVICES GROWTH FUND is for investors who want long-term capital
appreciation. The Fund seeks to achieve this through investment primarily in
the equity securities of domestic and foreign financial services companies,
including banks, thrift institutions ("thrifts"), insurance companies,
commercial finance companies, consumer finance companies, brokerage companies,
investment management companies and their holding companies. Accordingly,
Financial Services Growth Fund is designed for investors who are seeking long-
term growth for a portion of their investments and who can assume the risks of
greater fluctuation of market value resulting from a portfolio concentrated in
the financial services industries.

UTILITY INCOME FUND is for investors who are seeking both current income and
capital appreciation. The Fund seeks to achieve this through investments in
equity securities and bonds in domestic and foreign electric,
telecommunications, gas and water industries. Accordingly, Utility Income Fund
is designed for conservative investors who are seeking income as well as
capital growth through utility stocks and bonds, which are traditionally
viewed as conservative investments.

HOW TO PURCHASE SHARES OF THE FUNDS

Investors may select among these classes of shares:

CLASS A SHARES

The price is the net asset value plus the initial sales charge (the maximum is
4.5% of the public offering price). Although investors pay an initial sales
charge when they buy Class A shares, the ongoing expenses for this Class are
lower than the ongoing expenses of Class B and Class C shares.

CLASS B SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class B shares. As a result, 100% of their purchase is
immediately invested. However, Class B shares have higher ongoing expenses
than Class A shares. Depending upon how long they own the shares, investors
may have to pay a sales charge when they sell Class B shares. This sales
charge is called a "contingent deferred sales charge" and applies when
investors sell their Class B shares within six years after purchase. After six
years, Class B shares convert to Class A shares, which have lower ongoing
expenses and no contingent deferred sales charge.

CLASS C SHARES

The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class C shares. As a result, 100% of their purchase is
immediately invested. However, Class C shares have higher ongoing expenses
than Class A shares. A contingent deferred sales charge of 1% is charged on
shares sold within one year of purchase. Class C shares never convert to any
other class of shares.

CLASS Y SHARES

Class Y shares are offered for sale only to limited groups of investors. The
price is the net asset value. Investors do not pay an initial sales charge
when they buy Class Y shares. As a result, 100% of their purchase is
immediately invested. Investors also do not pay a contingent deferred sales
share when they sell Class Y shares. Class Y shares have lower ongoing
expenses than any other Class of shares.

- ------------------------------=================---------------------------------
Prospectus Page 4
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

Expense Table
- -------------------------------------------------------------------------------

The following tables are intended to assist investors in understanding the
expenses associated with investing in each class of the Funds. Expenses shown
below represent those incurred for the most recent fiscal year, except that
"Other Expenses" and "Total Operating Expenses" for Class Y shares have been
estimated based on the expenses incurred by each Fund's Class A shares because
no Class Y shares were outstanding. All expenses for Utility Income Fund are
those that would have been experienced by that Fund had Mitchell Hutchins and
PaineWebber not voluntarily waived a portion of their fees.

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
SHAREHOLDER TRANSACTION EXPENSES ------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge on Purchases of Shares
(as a % of offering price)................... 4.50% None None None
Sales Charge on Reinvested Dividends (as a %
of offering price)........................... None None None None
Maximum Contingent Deferred Sales Charge (as a
% of net asset value at the time of purchase
or sale, whichever is less) ................. None 5% 1% None
Exchange Fee.................................. None None None None
ANNUAL FUND OPERATING EXPENSES (as a % of
average net assets)
CAPITAL APPRECIATION FUND
Management Fees............................... 1.00% 1.00% 1.00% 1.00%
12b-1 Fees.................................... 0.25 1.00 1.00 None
Other Expenses ............................... 0.35 0.36 0.37 0.35%
---- ---- ---- ----
Total Operating Expenses...................... 1.60% 2.36% 2.37% 1.35%
==== ==== ==== ====
FINANCIAL SERVICES GROWTH FUND
Management Fees............................... 0.70% 0.70% 0.70% 0.70%
12b-1 Fees.................................... 0.25 1.00 1.00 None
Other Expenses ............................... 0.57 0.57 0.58 0.57%
---- ---- ---- ----
Total Operating Expenses...................... 1.52% 2.27% 2.28% 1.27%
==== ==== ==== ====
UTILITY INCOME FUND
Management Fees............................... 0.70% 0.70% 0.70% 0.70%
12b-1 Fees.................................... 0.25 1.00 1.00 None
Other Expenses ............................... 1.05 1.06 1.06 1.05%
---- ---- ---- ----
Total Operating Expenses...................... 2.00% 2.76% 2.76% 1.76%
==== ==== ==== ====
</TABLE>

CLASS A SHARES: Sales charge waivers and a reduced sales charge purchase
plan are available. Purchases of $1 million or more are not subject to
an initial sales charge. However, if an investor 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.

CLASS B SHARES: Sales charge waivers are available. 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.

CLASS C SHARES: If an investor sells these shares within one year after
purchase, a contingent deferred sales charge of 1% is imposed on the net
asset value of the shares at the time of purchase or sale, whichever is
less.

CLASS Y SHARES: No initial or contingent deferred sales charge is
imposed, nor are Class Y shares subject to 12b-1 distribution or service
fees. Class Y shares may be purchased by participants in the INSIGHT
Investment Advisory Program ("INSIGHT") sponsored by PaineWebber, when
purchased through that program. Participation in INSIGHT is subject to
payment of an advisory fee at the maximum annual rate of 1.50% of assets
held through INSIGHT (generally charged quarterly in advance), which may
be charged to the INSIGHT participant's PaineWebber account. This
account charge is not included in the table because non-INSIGHT
participants are permitted to purchase Class Y shares of the Funds.

- ------------------------------=================---------------------------------
Prospectus Page 5
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

Expense Table
(Continued)
- -------------------------------------------------------------------------------

12b-1 distribution fees are asset-based sales charges. Long-term Class B and
Class C shareholders may pay more in direct and indirect sales charges
(including 12b-1 distribution fees) than the economic equivalent of the
maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc. 12b-1 fees have two components, as follows:

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
12b-1 service fees.............................. 0.25% 0.25% 0.25% 0.00%
12b-1 distribution fees......................... 0.00 0.75 0.75 0.00
</TABLE>

For more information, see "Management" and "Flexible Pricing SM."

EXAMPLES OF EFFECT OF FUND EXPENSES

The following examples should assist investors in understanding various costs
and expenses they would incur as shareholders of a Fund. The assumed 5% annual
return shown in the examples is required by regulations of the Securities and
Exchange Commission ("SEC") applicable to all mutual funds. THESE EXAMPLES
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES OF A FUND MAY BE MORE OR LESS THAN THOSE SHOWN.

An investor would pay the following expenses, directly or indirectly, on a
$1,000 investment in each Fund, assuming a 5% annual return:

CAPITAL APPRECIATION FUND
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A........................................ $61 $ 93 $128 $226
Class B (Assuming sale of all shares at end of
period)....................................... $74 $104 $146 $233
Class B (Assuming no sale of shares)........... $24 $ 74 $126 $233
Class C (Assuming sale of all shares at end of
period)....................................... $34 $ 74 $127 $271
Class C (Assuming no sale of shares)........... $24 $ 74 $127 $271
Class Y........................................ $14 $ 43 $ 74 $162

FINANCIAL SERVICES GROWTH FUND
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A........................................ $60 $91 $124 $218
Class B (Assuming sale of all shares at end of
period)....................................... $73 $101 $142 $224
Class B (Assuming no sale of shares)........... $23 $71 $122 $224
Class C (Assuming sale of all shares at end of
period)....................................... $33 $71 $122 $262
Class C (Assuming no sale of shares)........... $23 $71 $122 $262
Class Y........................................ $13 $40 $ 70 $153

UTILITY INCOME FUND
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A........................................ $64 $105 $148 $267
Class B (Assuming sale of all shares at end of
period)....................................... $78 $116 $166 $274
Class B (Assuming no sale of shares)........... $28 $86 $146 $274
Class C (Assuming sale of all shares at end of
period)....................................... $38 $86 $146 $309
Class C (Assuming no sale of shares)........... $28 $86 $146 $309
Class Y........................................ $18 $55 $ 95 $207
</TABLE>

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Prospectus Page 6
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund
- --------------------------------------------------------------------------------
ASSUMPTIONS MADE IN THE EXAMPLES

. ALL CLASSES: Reinvestment of all dividends and other distributions;
percentage amounts listed under "Annual Fund Operating Expenses" re-
main the same for years shown.
. CLASS A SHARES: Deduction of the maximum 4.5% initial sales charge at
the time of purchase.
. CLASS B SHARES: Deduction of the maximum applicable contingent de-
ferred sales charge at the time of sale, which declines over a period
of six years. Ten-year figures assume that Class B shares convert to
Class A shares at the end of the sixth year.
. CLASS C SHARES: Deduction of a 1% contingent deferred sales charge for
sales of shares within one year of purchase.
- --------------------------------------------------------------------------------

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Prospectus Page 7
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

Financial Highlights
- -------------------------------------------------------------------------------
CAPITAL APPRECIATION FUND

<TABLE>
<CAPTION>
CAPITAL APPRECIATION FUND
-------------------------------------------------
CLASS A
-------------------------------------------------
FOR THE
PERIOD
APRIL 7,
FOR THE YEARS ENDED MARCH 31, 1992 TO
------------------------------------- MARCH 31,
1997 1996 1995 1994 1993
------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................. $ 15.61 $ 12.81 $ 11.65 $ 10.53 $ 9.55
------- ------- ------- ------- -------
Net investment loss........ (0.17) (0.16) (0.09) (0.09) (0.06)
Net realized and unrealized
gains from
investment transactions... 0.32 3.71 1.29 1.21 1.04
------- ------- ------- ------- -------
Net increase from
investment operations from
investment transactions... 0.15 3.55 1.20 1.12 0.98
------- ------- ------- ------- -------
Distributions from net
realized gains from
investments............... (2.32) (0.75) (0.04) -- --
------- ------- ------- ------- -------
Net asset value, end of pe-
riod...................... $ 13.44 $ 15.61 $ 12.81 $ 11.65 $ 10.53
======= ======= ======= ======= =======
Total investment return
(1)....................... (0.21)% 28.16 % 10.36 % 10.64 % 10.26 %
======= ======= ======= ======= =======
Ratios/Supplemental Data:
Net assets, end of period
(000's).................. $76,909 $76,558 $62,673 $58,523 $48,582
Expenses to average net
assets................... 1.60 % 1.58 % 1.58 % 1.54 % 1.72 %*
Net investment loss to av-
erage net assets......... (1.20)% (1.11)% (0.79)% (0.84)% (0.78)%*
Portfolio turnover........ 56 % 57 % 42 % 60 % 51 %
Average commission rate
paid(2).................. $0.0475 -- -- -- --
</TABLE>
- -------
+ Commencement of operations.

# Commencement of offering of shares.
* Annualized.

(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.

(2) Effective for fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose the average commission rate paid per share of
common stock investment purchased or sold.

- ------------------------------=================---------------------------------
Prospectus Page 8
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

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

<TABLE>
<CAPTION>
CAPITAL APPRECIATION FUND
- ------------------------------------------------------------------------------------------------------------
CLASS B CLASS C
- ---------------------------------------------------------- -------------------------------------------------
FOR THE
PERIOD
FOR THE PERIOD JULY 2,
FOR THE YEARS ENDED MARCH 31, APRIL 7, 1992+ FOR THE YEARS ENDED MARCH 31, 1992# TO
- ----------------------------------------- TO MARCH 31, ------------------------------------- MARCH 31,
1997 1996 1995 1994 1993 1997 1996 1995 1994 1993
- -------- -------- -------- -------- -------------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 15.88 $ 13.11 $ 12.02 $ 10.94 $ 10.00 $ 15.14 $ 12.54 $ 11.50 $ 10.47 $ 8.89
- -------- -------- -------- -------- -------- ------- ------- ------- ------- -------
(0.31) (0.29) (0.20) (0.17) (0.11) (0.29) (0.27) (0.19) (0.10) (0.05)
0.34 3.81 1.33 1.25 1.05 0.34 3.62 1.27 1.13 1.63
- -------- -------- -------- -------- -------- ------- ------- ------- ------- -------
0.03 3.52 1.13 1.08 0.94 0.05 3.35 1.08 1.03 1.58
- -------- -------- -------- -------- -------- ------- ------- ------- ------- -------
(2.32) (0.75) (0.04) -- -- (2.32) (0.75) (0.04) -- --
- -------- -------- -------- -------- -------- ------- ------- ------- ------- -------
$ 13.59 $ 15.88 $ 13.11 $ 12.02 $ 10.94 $ 12.87 $ 15.14 $ 12.54 $ 11.50 $ 10.47
======== ======== ======== ======== ======== ======= ======= ======= ======= =======
(0.99)% 27.28 % 9.46 % 9.87 % 9.40 % (0.91)% 27.16 % 9.45 % 9.84 % 17.77 %
======== ======== ======== ======== ======== ======= ======= ======= ======= =======
$134,495 $157,021 $139,302 $133,828 $105,490 $24,810 $27,601 $24,993 $29,884 $13,806
2.36 % 2.34 % 2.34 % 2.30 % 2.49 %* 2.37 % 2.36 % 2.35 % 2.28 % 2.31 %*
(1.95)% (1.87)% (1.56)% (1.60)% (1.55)%* (1.97)% (1.89)% (1.57)% (1.58)% (1.53)%*
56 % 57 % 42 % 60 % 51 % 56 % 57 % 42 % 60 % 51 %
$ 0.0475 -- -- -- -- $0.0475 -- -- -- --
</TABLE>

- ------------------------------=================---------------------------------
Prospectus Page 9
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

Financial Highlights
(Continued)
- -------------------------------------------------------------------------------
FINANCIAL SERVICES GROWTH FUND

The following tables provide investors with data and ratios for one Class A,
Class B and Class C share for each of the periods shown. This information is
supplemented by the financial statements, accompanying notes and the report of
Ernst & Young LLP, independent auditors, which appear in the Fund's Annual Re-
port to Shareholders for the fiscal year ended March 31, 1997 and are incorpo-
rated by reference into the Statement of Additional Information. The financial
statements and notes, as well as the financial information in the table below
relating to each of the five years in the period ended March 31, 1997, have
been audited by Ernst & Young LLP. Further information about the Fund's per-
formance is also included in the Annual Report to Shareholders, which may be
obtained without charge by calling 1-800-647-1568. Information shown below for
periods prior to the year ended March 31, 1993, has also been audited by Ernst
& Young LLP, whose reports thereon were unqualified. The Fund had no Class Y
shares outstanding during the periods shown.
<TABLE>
<CAPTION>
FINANCIAL SERVICES GROWTH FUND
-----------------------------------------------------------------------------------------
CLASS A
-----------------------------------------------------------------------------------------
FOR THE YEARS ENDED MARCH 31,
-----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 21.16 $ 17.11 $ 16.92 $ 19.45 $ 13.36 $ 9.50 $ 8.63 $ 8.31 $ 7.53 $ 9.36
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income
(loss)................. 0.18 0.30 0.25 0.15 0.10 0.15 0.25 0.24 0.25 0.21
Net realized and
unrealized gains
(losses) from
investment
transactions........... 5.69 6.25 1.34 (0.76) 6.01 3.92 0.86 0.37 0.77 (1.45)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net increase (decrease)
from investment
operations............. 5.87 6.55 1.59 (0.61) 6.11 4.07 1.11 0.61 1.02 (1.24)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Dividends from net
investment income...... (0.23) (0.29) (0.13) (0.08) (0.02) (0.21) (0.24) (0.29) (0.24) (0.39)
Distributions from net
realized gains from
investment
transactions........... (3.39) (2.21) (1.27) (1.84) -- -- -- -- -- (0.20)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total dividends and
other distributions to
shareholders........... (3.62) (2.50) (1.40) (1.92) (0.02) (0.21) (0.24) (0.29) (0.24) (0.59)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period................. $ 23.41 $ 21.16 $ 17.11 $ 16.92 $ 19.45 $ 13.36 $ 9.50 $ 8.63 $ 8.31 $ 7.53
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total investment return
(1).................... 28.72% 39.02% 10.22% (3.14)% 46.79% 42.23% 13.33% 7.16% 13.76% (13.57)%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Ratios/Supplemental
Data:
Net assets, end of
period (000's)......... $85,661 $64,003 $49,295 $48,032 $61,645 $44,867 $43,131 $95,081 $90,322 $85,130
Expenses to average net
assets................. 1.52% 1.37% 1.45% 1.44% 1.87% 1.72% 1.67% 1.33% 1.16% 1.04%
Net investment income
(loss) to average net
assets................. 0.90% 1.50% 1.40% 0.76% 0.60% 1.32% 2.56% 2.60% 3.20% 2.64%
Portfolio turnover...... 40% 53% 14% 22% 28% 31% 19% 29% 55% 42%
Average Commission Rate
Paid (2)............... $0.0600 -- -- -- -- -- -- -- -- --
</TABLE>
- -------

++ Commencement offering of shares.
* Annualized.

(2) Effective for fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose the average commission rate paid per share of
common stock investments purchased or sold.

- ------------------------------==================--------------------------------
Prospectus Page 10
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

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

<TABLE>
<CAPTION>
FINANCIAL SERVICES GROWTH FUND
- -----------------------------------------------------------------------------------------------------
CLASS B CLASS C
- -------------------------------------------------------- -------------------------------------------
FOR THE FOR THE
PERIOD PERIOD
JULY 1, FOR THE YEARS JULY 2,
FOR THE YEARS ENDED MARCH 31, 1991++ TO ENDED MARCH 31, 1992++ TO
- -------------------------------------------- MARCH 31, ------------------------------- MARCH 31,
1997 1996 1995 1994 1993 1992 1997 1996 1995 1994 1993
- ------- ------- ------- ------- ------- --------- ------- ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 20.75 $ 16.85 $ 16.71 $ 19.34 $ 13.36 $10.24 $ 20.75 $16.86 $16.71 $19.34 $14.61
- ------- ------- ------- ------- ------- ------ ------- ------ ------ ------ ------
0.04 0.13 0.11 0.02 (0.01) -- 0.06 0.12 0.11 0.01 --
5.53 6.16 1.33 (0.75) 5.99 3.18 5.51 6.16 1.33 (0.73) 4.77
- ------- ------- ------- ------- ------- ------ ------- ------ ------ ------ ------
5.57 6.29 1.44 (0.73) 5.98 3.18 5.57 6.28 1.44 (0.72) 4.77
- ------- ------- ------- ------- ------- ------ ------- ------ ------ ------ ------
(0.06) (0.18) (0.03) (0.06) -- (0.06) (0.09) (0.18) (0.02) (0.07) (0.04)
(3.39) (2.21) (1.27) (1.84) -- -- (3.39) (2.21) (1.27) (1.84) --
- ------- ------- ------- ------- ------- ------ ------- ------ ------ ------ ------
(3.45) (2.39) (1.30) (1.90) -- (0.06) (3.48) (2.39) (1.29) (1.91) (0.04)
- ------- ------- ------- ------- ------- ------ ------- ------ ------ ------ ------
$ 22.87 $ 20.75 $ 16.85 $ 16.71 $ 19.34 $13.36 $ 22.84 $20.75 $16.86 $16.71 $19.34
======= ======= ======= ======= ======= ====== ======= ====== ====== ====== ======
27.74% 37.97% 9.37% (3.83)% 44.76% 31.16% 27.74% 37.92% 9.34% (3.76)% 32.66%
======= ======= ======= ======= ======= ====== ======= ====== ====== ====== ======
$41,579 $28,147 $16,368 $11,517 $10,364 $ 765 $12,357 $6,989 $4,160 $4,370 $4,636
2.27% 2.12% 2.22% 2.16% 2.45% 2.72%* 2.28% 2.14% 2.23% 2.17% 2.36%*
0.15% 0.74% 0.67% 0.05% (0.03)% 0.14%* 0.15% 0.72% 0.61% 0.03% 0.01%*
40% 53% 14% 22% 28% 31% 40% 53% 14% 22% 28%
$0.0600 -- -- -- -- -- $0.0600 -- -- -- --
</TABLE>

- ------------------------------==================--------------------------------
Prospectus Page 11
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

Financial Highlights
(Continued)
- -------------------------------------------------------------------------------
UTILITY INCOME FUND

The following tables provide investors with data and ratios for one Class A,
Class B and Class C share for each of the periods shown. This information is
supplemented by the financial statements, accompanying notes and the report of
Ernst & Young LLP, independent auditors, which appear in the Fund's Annual Re-
port to Shareholders for the fiscal year ended March 31, 1997 and are incorpo-
rated by reference into the Statement of Additional Information. The financial
statements and notes, as well as the financial information in the table below,
have been audited by Ernst & Young LLP. Further information about the Fund's
performance is also included in the Annual Report to Shareholders, which may
be obtained without charge by calling 1-800-647-1568. The Fund had no Class Y
shares outstanding during the period.
<TABLE>
<CAPTION>
UTILITY INCOME FUND
----------------------------------------------------
CLASS A
----------------------------------------------------
FOR THE FOR THE
FOR THE FOUR FOR THE YEARS PERIOD
YEAR MONTHS ENDED JULY 2,
ENDED ENDED NOVEMBER 30, 1993+ TO
MARCH 31, MARCH 31, ---------------- NOVEMBER 30,
1997 1996 1995 1994 1993
--------- --------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................ $ 9.76 $ 9.77 $ 8.31 $ 9.66 $ 10.00
------- ------- ------- ------- -------
Net investment income..... 0.34 0.15 0.47 0.48 0.20
Net realized and
unrealized gains (losses)
from investment
transactions............. 0.41 -- 1.44 (1.31) (0.39)
------- ------- ------- ------- -------
Net increase (decrease)
from investment
operations............... 0.75 0.15 1.91 (0.83) (0.19)
------- ------- ------- ------- -------
Dividends from net
investment income........ (0.31) (0.16) (0.45) (0.52) (0.15)
------- ------- ------- ------- -------
Net asset value, end of
period................... $ 10.20 $ 9.76 $ 9.77 $ 8.31 $ 9.66
======= ======= ======= ======= =======
Total investment return
(1)...................... 7.83% 1.46% 23.64% (8.76)% (1.95)%
======= ======= ======= ======= =======
Ratios/Supplemental Data:
Net assets, end of period
(000's).................. $ 6,039 $ 9,416 $10,750 $12,532 $16,224
Expenses, net of waivers
from adviser, to average
net assets............... 1.93% 1.09%* 1.49% 1.58% 1.55%*
Expenses, before waivers
from adviser, to average
net assets............... 2.00% 1.44%* 1.49% 1.58% 1.55%*
Net investment income, net
of waivers from adviser,
to average net assets.... 3.27% 4.26%* 5.13% 5.49% 5.38%*
Net investment income,
before waivers from
adviser, to average net
assets................... 3.20% 3.91%* 5.13% 5.49% 5.38%*
Portfolio turnover........ 41% 21% 30% 92% 13%
Average commission rate
paid per share of common
stock investments
purchased/sold (2)....... $0.0600 $0.0600 -- -- --
</TABLE>
- -------
* Annualized.

+ Commencement of operations.

(2) Effective for fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose the average commission rate paid per share of
common stock investments purchased or sold.

- ------------------------------==================--------------------------------
Prospectus Page 12
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

Financial Highlights
(Concluded)
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
UTILITY INCOME FUND
- --------------------------------------------------------------------------------------------------------------
CLASS B CLASS C
- ----------------------------------------------------- --------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
FOR THE FOUR FOR THE YEARS PERIOD FOR THE FOUR PERIOD
YEAR MONTHS ENDED JULY 2, YEAR MONTHS FOR THE YEARS ENDED JULY 2,
ENDED ENDED NOVEMBER 30, 1993+ TO ENDED ENDED NOVEMBER 30, 1993+ TO
MARCH 31, MARCH 31, ---------------- NOVEMBER 30, MARCH 31, MARCH 31, -------------------- NOVEMBER 30,
1997 1996 1995 1994 1993 1997 1996 1995 1994 1993
- --------- --------- ------- ------- ------------ --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 9.75 $ 9.77 $ 8.31 $ 9.65 $ 10.00 $ 9.75 $ 9.77 $ 8.31 $ 9.65 $ 10.00
------- ------- ------- ------- ------- ------- ------- --------- --------- -------
0.26 0.12 0.40 0.42 0.17 0.25 0.12 0.40 0.42 0.16
0.42 (0.01) 1.45 (1.31) (0.39) 0.43 (0.01) 1.45 (1.31) (0.38)
------- ------- ------- ------- ------- ------- ------- --------- --------- -------
0.68 0.11 1.85 (0.89) (0.22) 0.68 0.11 1.85 (0.89) (0.22)
------- ------- ------- ------- ------- ------- ------- --------- --------- -------
(0.23) (0.13) (0.39) (0.45) (0.13) (0.23) (0.13) (0.39) (0.45) (0.13)
------- ------- ------- ------- ------- ------- ------- --------- --------- -------
$ 10.20 $ 9.75 $ 9.77 $ 8.31 $ 9.65 $ 10.20 $ 9.75 $ 9.77 $ 8.31 $ 9.65
======= ======= ======= ======= ======= ======= ======= ========= ========= =======
7.05% 1.10% 22.73% (9.35)% (2.29)% 7.06% 1.10% 22.71% (9.36)% (2.28)%
======= ======= ======= ======= ======= ======= ======= ========= ========= =======
$21,071 $34,765 $37,554 $37,156 $45,382 $ 6,909 $11,072 $ 12,222 $ 13,922 $17,866
2.69% 1.85%* 2.23% 2.33% 2.29%* 2.70% 1.85%* 2.24% 2.32% 2.29%*
2.76% 2.20%* 2.23% 2.33% 2.29%* 2.76% 2.20%* 2.24% 2.32% 2.29%*
2.51% 3.51%* 4.37% 4.72% 4.67%* 2.51% 3.50%* 4.37% 4.69% 4.67%*
2.44% 3.16%* 4.37% 4.72% 4.67%* 2.44% 3.15%* 4.37% 4.69% 4.67%*
41% 21% 30% 92% 13% 41% 21% 30% 92% 13%
$0.0600 $0.0600 -- -- -- $0.0600 $0.0600 -- -- --
</TABLE>

- ------------------------------==================--------------------------------
Prospectus Page 13
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

Investment Objectives & Policies
- -------------------------------------------------------------------------------

The Funds' investment objectives may not be changed without shareholder
approval. Their other investment policies, except where noted, are not
fundamental and may be changed by the Funds' boards.

CAPITAL APPRECIATION FUND

Capital Appreciation Fund's investment objective is long-term capital
appreciation. The Fund seeks to achieve this objective by investing at least
65% of its total assets in common stocks of medium-sized (or mid cap)
companies. Denver Investment Advisors defines mid cap companies as public
companies:

. that have market capitalizations (referring to a company's size or the value
of the equity securities it has issued) of at least $100 million and,
generally, no more than $10 billion at the time of purchase; and

. that are not included in the largest 100 companies ranked either by revenues
or by market capitalization in Fortune magazine's "Fortune 500."

While mid cap stocks represent potentially higher returns for investors, they
may present investors with greater risks than larger companies. Mid cap
companies may be more vulnerable than larger companies to adverse business or
economic developments. While not required to do so, the Fund considers selling
equity securities of companies that cease to be "medium-sized."

The Fund can invest up to 35% of its total assets in U.S. dollar-denominated
equity securities of foreign companies that trade on recognized U.S. stock
exchanges or on the U.S. over-the-counter ("OTC") market. When Denver
Investment Advisors believes it is consistent with the Fund's investment
objective of long-term capital appreciation, the Fund may invest up to 35% of
its total assets in common stocks of companies that are larger or smaller than
those of mid cap companies as defined above, as well as in bonds and money
market instruments.

FINANCIAL SERVICES GROWTH FUND

Financial Services Growth Fund's investment objective is long-term capital
appreciation. The Fund seeks to achieve this objective by primarily investing
in equity securities of companies in the financial services industries. These
companies include banks, thrifts, insurance companies, commercial finance
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 seeks to invest in companies that are benefiting from the ongoing
changes in the financial services industries, including consolidation of banks
and thrifts and the growth of the non-bank portion of the financial services
industry. However, this concentration subjects the Fund to more volatility
than would be experienced by a fund whose portfolio is more diversified.

The Fund normally invests at least 65% of its total assets in equity
securities of financial services companies. To be considered a financial
services company, a company must:

. derive at least 50% of either its revenues or earnings from financial
services activities or devote at least 50% of its assets to these
activities; or

. be engaged in "securities-related businesses," meaning it derives more than
15% of its gross revenues from securities brokerage or investment management
activities.

The Fund may invest up to 35% of its total assets in equity securities of
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 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

- ------------------------------==================--------------------------------
Prospectus Page 14
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

the Fund's shares are insured by the FDIC or any other federal or governmental
agency.

UTILITY INCOME FUND

Utility Income Fund's investment objective is current income and capital
appreciation. The Fund attempts to achieve its objective by investing at least
65% of its total assets in income-producing equity securities and bonds issued
by domestic and foreign companies that are primarily engaged in the ownership
or operation of facilities used in the generation, transmission or
distribution of electricity, telecommunications, gas or water.

"Primarily engaged" means that:

. more than 50% of the company's assets are devoted to the ownership or
operation of one or more such facilities; or

. more than 50% of the company's operating revenues are derived from such
businesses.

The Fund may invest in the equity securities and bonds of foreign companies.
The Fund may invest up to 35% of its total assets in equity securities and
bonds of companies that are outside the utility industries and in high quality
money market instruments. The Fund may invest up to 5% of its net assets in
bonds (including convertible securities) that are rated lower than investment
grade.

The Fund seeks to invest in companies that should benefit from a dramatically
changing operating environment, spurred by a long-term, secular trend toward
deregulation. Some of these changes include:

. local telecommunications providers' shift from rate of return to price cap
regulation;

. more liberal legislation, which is gradually eliminating entry barriers that
historically prohibited telephone companies from entering new businesses;
and

. a more open market in the electric utility industry, which should lead to
consolidation within the industry.

However, the Fund's concentration in these industries subjects it to more
volatility than would be experienced by a fund whose portfolio is more
diversified.

* * * *

As with any mutual fund, there is no assurance that any Fund will achieve its
investment objective. Each Fund's net asset value fluctuates based upon
changes in the value of its portfolio securities.

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

Investment Philosophy & Process

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

CAPITAL APPRECIATION FUND

In selecting equity securities that demonstrate earnings growth potential for
the Fund, Denver Investment Advisors relies on the expertise of its team of
analysts and portfolio managers ("Team"). The Team employs a "bottom-up"
approach to stock selection; that is, emphasis is placed on fundamental
analysis of individual companies rather than on broad economic or technical
market analysis.

Instead of relying on information developed by other analysts and research
firms, the Team thoroughly researches the companies through analysis of their
balance sheets, income statements, products, services and management.
Additionally, their valuation techniques emphasize earnings growth. The Team
strives to identify product innovations, modifications in the marketplace,
shifts in management, attractive stocks for purchase and undesirable stocks at
an early stage. The Team's goal is to discover unrecognized stocks and
capitalize on market inefficiencies to add incremental value. The Fund
generally owns equity securities of at least 100 companies, ensuring portfolio
diversification.

FINANCIAL SERVICES GROWTH FUND

In seeking long-term capital appreciation, the Fund invests in equity
securities of institutions considered to represent strong fundamental
investment value. Mitchell Hutchins bases the stock selection process on
issuer-specific factors affecting the potential for capital appreciation.
These factors include the issuer's current and anticipated revenues, earnings,
cash flow and assets. Mitchell Hutchins also considers general market
conditions in the financial services industries.

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

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

Mitchell Hutchins places much emphasis on:

. searching for companies with better-than-average earnings growth that are
not yet recognized by the market;

. analyzing the practices of company management; and

. finding companies with niche products.

The Mitchell Hutchins Equity Team meets with most of the executives at the
companies in which the Fund invests. Mitchell Hutchins prefers to invest in
companies that are headquartered or doing business in growing regions and that
obtain their earnings growth in a secular, sustainable way, as opposed to
companies that generate their earnings through cyclical factors.

UTILITY INCOME FUND

Utilities represent a relatively conservative way to realize dividend income
and long-term capital appreciation opportunities. In determining the ratio of
the Fund's equity holdings to its bond holdings, Mitchell Hutchins considers
which proportions would best meet the Fund's investment objective of income
and growth. This will vary from time to time based primarily on the overall
economic environment.

Once Mitchell Hutchins determines the weighting that would best achieve a
balance between income and capital appreciation, it evaluates individual
issuers. Factors considered include the issuer's business and regulatory
environment, its ability to maintain low production costs, management,
financial condition, anticipated earnings and dividends, economic health of
the area it serves and other related measures of value.

- ------------------------------==================--------------------------------
Prospectus Page 16
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

Performance
- -------------------------------------------------------------------------------

These charts show the total returns for the Funds; 1996 returns represent the
calendar year ended December 31, 1996. Sales charges have not been deducted
from total returns for Class A, B, and C shares. Returns would be lower if
sales charges were deducted. Past results are not a guarantee of future
results.

Total returns both before and after deducting the maximum sales charges are
shown below in the tables that follow the performance charts.

CAPITAL APPRECIATION FUND

[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>

Date Class A Class B Class C
<S> <C> <C> <C>
4/7/92-12/31/92 9.95% 9.30% 17.66%
1993 16.10% 15.19% 15.20%
1994 -1.36% -2.03% -2.13%
1995 28.79% 27.73% 27.82%
1996 17.87% 17.01% 16.98%
</TABLE>

The 1992 returns for each class represent the period from its commencement of
operations to December 31, 1992. Class A and B shares commenced operations on
April 7, 1992. Class C shares commenced operations on July 2, 1992.

AVERAGE ANNUAL RETURNS

As of March 31, 1997
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Inception Date....................................... 4/7/92 4/7/92 7/2/92
ONE YEAR
Before deducting maximum sales charges.............. (0.21)% (0.99)% (0.91)%
After deducting maximum sales charges............... (4.73)% (5.99)% (1.91)%
LIFE OF CLASS
Before deducting maximum sales charges.............. 11.52 % 10.68 % 12.96 %
After deducting maximum sales charges............... 10.49 % 10.41 % 12.96 %
</TABLE>

- ------------------------------==================--------------------------------
Prospectus Page 17
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

FINANCIAL SERVICES GROWTH FUND

[BAR GRAPH APPEARS HERE]

Date Class A Class B Class C
<S> <C> <C> <C>
1987 -11.05% -- --
1988 15.39% -- --
1989 21.71% -- --
1990 -12.33% -- --
1991 65.37% 23.30% --
1992 38.68% 37.82% 18.80%
1993 10.32% 9.57% 9.52%
1994 -0.75% -1.53% -1.50%
1995 47.46% 46.36% 46.30%
1996 28.96% 28.00% 27.99%
</TABLE>

The 1991 returns for Class B represent the period from its commencement of
operations on July 1, 1991 to December 31, 1991. The 1992 returns for Class C
represent the period from its commencement of operations on July 2, 1992 to
December 31, 1992.

AVERAGE ANNUAL TOTAL RETURNS

As of March 31, 1997
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Inception Date...................................... 5/22/86 7/1/91 7/2/92
ONE YEAR
Before deducting maximum sales charges............. 28.72% 27.74% 27.74%
After deducting maximum sales charges.............. 22.91% 22.74% 26.74%
FIVE YEARS
Before deducting maximum sales charges............. 22.72% 21.81% N/A
After deducting maximum sales charges.............. 21.60% 21.63% N/A
TEN YEARS
Before deducting maximum sales charges............. 16.89% N/A N/A
After deducting maximum sales charges.............. 16.35% N/A N/A
LIFE
Before deducting maximum sales charges............. 15.58% 24.44% 20.85%
After deducting maximum sales charges.............. 15.09% 24.37% 20.85%
</TABLE>

- ------------------------------==================--------------------------------
Prospectus Page 18
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

UTILITY INCOME FUND

[BAR GRAPH APPEARS HERE]

Date Class A Class B Class C
<S> <C> <C> <C>
7/2/93-12/31-93 -0.70% -1.02% -1.01%
1994 -9.71% -10.40% -10.41%
1995 28.82% 27.87% 27.86%
1996 7.90% 7.06% 7.07%
</TABLE>

The 1993 returns represent the period from the Fund's commencement of
operations on July 2, 1993 to December 31, 1993.

AVERAGE ANNUAL TOTAL RETURNS

As of March 31, 1997
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Inception Date....................................... 7/2/93 7/2/93 7/2/93
ONE YEAR
Before deducting maximum sales charges.............. 7.83% 7.05% 7.06%
After deducting maximum sales charges............... 2.98% 2.05% 6.06%
LIFE
Before deducting maximum sales charges.............. 5.22% 4.43% 4.43%
After deducting maximum sales charges............... 3.94% 3.96% 4.43%
</TABLE>

PERFORMANCE INFORMATION

The Funds perform a standardized computation of annualized total return and
may show this return in advertisements or promotional materials. Standardized
return shows the change in value of an investment in a Fund as a steady
compound annual rate of return. Actual year-by-year returns fluctuate and may
be higher or lower than standardized return. Standardized return for Class A
shares of the Funds reflects deduction of the Funds' maximum initial sales
charge of 4.5% at the time of purchase, and standardized return for the Class
B and Class C shares of the Funds reflects deduction of the applicable
contingent deferred sales charge imposed on the sale of shares held for the
period. One-, five- and ten-year periods will be shown, unless the Fund or
class has been in existence for a shorter period. If so, returns will be shown
for the period since inception, known as "Life". Total return calculations
assume reinvestment of dividends and other distributions.

The Funds may use other total return presentations in conjunction with
standardized return. These may cover the same or different periods as those
used for standardized return and may include cumulative returns, average
annual rates, actual year-by-year rates or any combination thereof. Non-
standardized return does not reflect initial or contingent deferred sales
charges and would be lower if such charges were deducted.

Total return information reflects past performance and does not indicate
future results. The investment return and principal value of shares of the
Funds will fluctuate. The amount investors receive when selling shares may be
more or less than what they paid. Further information about each Fund's
performance is contained in its Annual Report to Shareholders, which may be
obtained without charge by contacting the Fund, your PaineWebber investment
executive or PaineWebber's correspondent firms or by calling toll-free
1-800-647-1568.

- ------------------------------==================--------------------------------
Prospectus Page 19
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

The Funds' Investments
- -------------------------------------------------------------------------------

EQUITY SECURITIES include common stocks, preferred stocks and securities that
are convertible into them, including convertible debentures and notes and
common stock purchase warrants and rights. 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 is
actually equity in a company, like common stock. Convertible securities may
include debentures, notes and preferred equity securities, which are
convertible into common stock.

BONDS (including notes and debentures) are used by corporations and
governments to borrow money from investors. The issuer pays the investor a
fixed or variable rate of interest and must repay the amount borrowed at
maturity. Bonds have varying degrees of investment risk and varying levels of
sensitivity to changes in interest rates.

RISKS

Under normal circumstances, each Fund invests primarily in equity securities.
Following is a discussion of these and other risks that are common to each
Fund:

EQUITY SECURITIES. 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.

FOREIGN SECURITIES. Each Fund may invest a portion of its assets in the
securities of foreign companies. Investing in the securities of foreign
companies involves more risks than investing in securities of U.S. companies.
Their value is subject to economic and political developments in the countries
where the companies operate and to changes in foreign currency values. Values
may also be affected by foreign tax laws, changes in foreign economic or
monetary policies, exchange control regulations and regulations involving
prohibitions on the repatriation of foreign currencies.

In general, less information may be available about foreign companies than
about U.S. companies, and foreign companies are generally not subject to the
same accounting, auditing and financial reporting standards as are U.S.
companies. Foreign securities markets may be less liquid and subject to less
regulation than the U.S. securities markets. The costs of investing outside
the United States frequently are higher than those in the United States. These
costs include relatively higher brokerage commissions and foreign custody
expenses.

INVESTING IN DEVELOPING COUNTRIES. Investing in securities issued by companies
located in developing countries involves additional risks. These countries
typically have economic and political systems that are relatively less mature,
and can be expected to be less stable, than those of developed countries.
Developing countries may have policies that restrict investment by foreigners
in those countries, and there is a risk of government expropriation or
nationalization of private property. The possibility of low or nonexistent
trading volume in the securities of companies in developing countries may also
result in a lack of liquidity and in price volatility.

DEBT SECURITIES. Investment grade bonds are those rated within the four
highest categories by Standard & Poor's, a division of The McGraw-Hill
Companies, Inc. ("S&P"), or Moody's Investors Service, Inc. ("Moody's").
Moody's fourth highest category (Baa) includes securities which, in its
opinion, have speculative features. For example, 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 debt instruments. The bonds and convertible securities in which Capital
Appreciation Fund and Financial Services Growth Fund invest must be rated
investment grade. Utility Income Fund may invest up to 5% of its net assets in
bonds (including convertible securities) rated lower than investment grade,
that is, rated lower

- ------------------------------==================--------------------------------
Prospectus Page 20
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

than BBB by S&P or Baa by Moody's or comparable unrated bonds. Such bonds are
considered predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal and may involve major risk exposure to
adverse conditions. The Funds may also invest in securities that are
comparably rated by another nationally recognized rating agency and in unrated
securities if they are deemed to be of comparable quality.

Credit ratings attempt to evaluate the safety of principal and interest
payments and do not evaluate the volatility of the bond's value or its
liquidity and do not guarantee the performance of the issuer. The rating
agencies also may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial condition may be
better or worse than the rating indicates. There is a risk that rating
agencies will downgrade bonds.

INTEREST RATE AND CREDIT RISKS. Interest rate risk is the risk that interest
rates will rise and bond prices will fall, lowering the value of a Fund's bond
investments. Long-term bonds are generally more sensitive to interest rate
changes than short-term bonds. Adverse changes in economic conditions can
affect an issuer's ability to pay principal and interest.

Credit Risk is the risk that the issuer or a guarantor may be unable to pay
interest or repay principal on the bond. This can be affected by many factors,
including adverse changes in the issuer's own financial condition or in
economic conditions.

DERIVATIVES. Some of the instruments in which the funds may invest may be
referred to as "derivatives" because their value depends on (or "derives"
from) the value of an underlying asset, reference rate or index. These
instruments include options, futures contracts, forward currency contracts,
swaps and similar instruments that may be used in hedging and related
strategies. There is only limited consensus as to what constitutes a
"derivative" security. The market value of derivative instruments and
securities sometimes is more volatile than that of other investments, and each
type of derivative instrument may pose its own special risks. Mitchell
Hutchins (or Denver Investments for Capital Appreciation Fund) take these
risks into account in its management of the Funds.

COUNTERPARTIES. The Funds may be exposed to the risk of financial failure or
insolvency of another party with which a Fund enters into a transaction, such
as a repurchase agreement or a derivative contract. Subject to board
supervision, Mitchell Hutchins (or Denver Investments for Capital Appreciation
Fund), monitors and evaluates the creditworthiness of these counterparties to
help minimize those risks.

* * *

In addition to these general risks, investments in each Fund are subject to
special risk considerations:

CAPITAL APPRECIATION FUND

INVESTMENTS IN MEDIUM-SIZED AND SMALLER COMPANIES. Common stocks of medium-
sized companies may offer potentially higher returns for investors. While most
medium-sized companies in which the Fund will invest are relatively well-
established, they may be more vulnerable than larger companies to adverse
business or economic developments. Such companies are typically less closely
followed by investment experts. In addition, Capital Appreciation Fund may
invest up to 35% of its total assets in stocks of companies that are smaller
or larger than medium-sized companies. Smaller companies may have limited
product lines, markets or financial resources, and may be dependent on a
relatively small management group. Securities of such companies may be less
liquid and more volatile than securities of medium-sized or larger companies
or the market averages in general and, therefore, may involve greater risk
than investing in larger companies.

FINANCIAL SERVICES GROWTH FUND

INVESTMENTS IN FINANCIAL SERVICES INDUSTRIES. Because investments made by
Financial Services Growth Fund are concentrated in the financial services
industries, its shares are subject to greater risk than the shares of a fund
whose portfolio is not so concentrated, and it will be particularly affected
by economic, competitive and regulatory developments affecting those
industries.

Financial services companies are subject to extensive governmental regulation.
This regulation may limit both the amounts and types of loans and other
financial commitments these companies can make, as well as the interest rates
and fees they can charge. Profitability of these companies is largely
dependent on the availability and cost of capital funds, and can fluctuate
significantly when interest rates change. Credit losses resulting from
financial difficulties of borrowers can negatively impact the industry.
Companies in the financial services industries may be

- ------------------------------==================--------------------------------
Prospectus Page 21
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

subject to severe price competition. Also, the industry and the Fund may be
significantly impacted if the legislation that is currently being considered,
to reduce the separation between commercial and investment banking businesses,
is enacted.

UTILITY INCOME FUND

INVESTMENTS IN UTILITY INDUSTRIES. Because investments made by Utility Income
Fund are concentrated in the utility industries, its shares will be
particularly affected by economic and regulatory developments in or related to
those industries and are subject to greater risk than the shares of a Fund
whose portfolio is not so concentrated. Interest rate changes may affect the
value of the Fund's assets. When interest rates decline, prices of utility
equity securities and bonds tend to increase. When interest rates rise, these
prices tend to decrease.

The regulation of utility industries is evolving in the United States and in
foreign countries. As a result, certain companies may be forced to defend
their core businesses against outside companies and may become less
profitable. Electric utility companies have historically been subject to the
risks associated with increases in fuel and other operating costs, high
interest costs on borrowing, costs associated with compliance in regard to
environmental, nuclear facility and other safety regulations, and changes in
the regulatory climate. Increasing competition due to past regulatory changes
in the telephone communications industry continues and, although certain
companies have benefitted, many companies may be adversely affected in the
future.

Gas transmission companies and gas distribution companies continue to undergo
significant changes as well. Water supply utilities are in an industry that is
highly fragmented due to local ownership and generally the companies are more
mature and are experiencing little or no per capita volume growth. There is no
assurance that utility industries, as a whole, will experience favorable
developments or that business opportunities will continue to undergo
significant changes or growth.

INVESTMENT TECHNIQUES AND STRATEGIES

HEDGING STRATEGIES USING DERIVATIVE CONTRACTS. Each Fund may use certain
investments and strategies designed to adjust the overall risk of its
investment portfolio. These "hedging" strategies involve derivative contracts,
including options (on securities, futures and stock indexes) and futures
contracts (on stock indexes and interest rates). Financial Services Growth
Fund and Utility Income Fund also may use derivative contracts involving
foreign currencies, including options and futures contracts on foreign
currencies and (for Utility Income Fund) forward currency contracts. In
addition, Utility Income Fund may use these strategies to attempt to enhance
income; the use of such strategies solely to enhance income may be considered
a form of speculation. Utility Income Fund may also enter into certain
interest rate protection transactions to preserve a return or spread on a
particular investment or portion of its portfolio or to protect against an
increase in the price of securities the Fund anticipates purchasing at a later
date. New financial products and risk management techniques continue to be
developed and may be used if consistent with the Funds' investment objectives
and policies. The Statement of Additional Information for the Funds contains
further information on these derivative contracts and related hedging
strategies.

The Funds might not use any derivative contract or related strategy, and there
can be no assurance that any related strategy will succeed. If Mitchell
Hutchins or Denver Investment Advisors, as applicable, is incorrect in its
judgment on market values, interest rates or other economic factors in using a
hedging strategy, a Fund may have lower net income and a net loss on the
investment. Each strategies involves certain risks, which include:

. the fact that the skills needed to implement a strategy using derivative
instruments are different from those needed to select securities for the
Funds;

. the possibility of imperfect correlation, or even no correlation, between
price movements of derivative instruments used in hedging strategies and
price movements of the securities or currencies being hedged;

. possible constraints placed on a Fund's ability to purchase or sell
portfolio investments at advantageous times due to the need for the Fund to
maintain "cover" or to segregate securities; and

. the possibility that a Fund is unable to close out or liquidate its hedged
position.

LENDING PORTFOLIO SECURITIES. Each Fund may lend its securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of that
Fund's total assets taken at market value. Lending securities enables a Fund
to earn additional income, but could result in a loss or delay in recovering
these securities.

- ------------------------------==================--------------------------------
Prospectus Page 22
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

TEMPORARY AND DEFENSIVE POSITIONS. When Mitchell Hutchins or Denver Investment
Advisors, as applicable, believes that unusual circumstances warrant a
defensive posture, each Fund may temporarily commit all or any portion of its
assets to cash or investment grade money market instruments, including
repurchase agreements. In a typical repurchase agreement, a Fund buys a
security and simultaneously agrees to sell it back at an agreed-upon price and
time, usually no more than seven days after purchase. Each Fund may commit up
to 35% of its total assets to cash or investment grade money market
instruments for liquidity purposes or pending investment in other securities.

ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities, these include certain cover for OTC options and
securities whose disposition is restricted under the federal securities laws.
The Funds do not consider securities that are eligible for resale pursuant to
SEC Rule 144A to be illiquid securities if Mitchell Hutchins or Denver
Investment Advisors, as applicable, has determined such securities to be
liquid, based upon the trading markets for the securities under procedures
approved by the Funds' boards.

OTHER INFORMATION. Each Fund may also purchase securities on a when-issued
basis or may purchase or sell securities for delayed delivery. A Fund
generally would not pay for such securities or start earning interest on them
until they are delivered, but it would immediately assume the risks of
ownership, including the risk of price fluctuation. Each Fund may borrow money
for temporary or emergency purposes, but not in excess of 10% of its total
assets, including reverse repurchase agreements involving up to 5% of its net
assets. Each Fund may sell securities short "against the box" to defer
realization of gains or losses for tax or other purposes. When a security is
sold against the box, the seller owns the security.
- -------------------------------------------------------------------------------

Flexible PricingSM
- -------------------------------------------------------------------------------

Each Fund offers four classes of shares that differ in terms of sales charges
and expenses. An investor can select from among Classes A, B and C the class
that is best suited to his or her investment needs, based upon the holding
period and the amount of investment. Certain eligible investors may select
Class Y. The Funds and Mitchell Hutchins reserve the right to reject any
purchase order and to suspend the offering of any class of shares for a period
of time.

CLASS A SHARES

HOW PRICE IS CALCULATED: The price is the net asset value plus the initial
sales charge (the maximum is 4.5% of the public offering price) next
calculated after PaineWebber's New York City headquarters or PFPC Inc., the
Funds' Transfer Agent ("Transfer Agent"), receives the purchase order.
Although investors pay an initial sales charge when they buy Class A shares,
the ongoing expenses for this class are lower than the ongoing expenses of
Class B and Class C shares. Class A shares sales charges are calculated as
follows:

<TABLE>
<CAPTION>
DISCOUNT TO SELECTED
SALES CHARGE AS A PERCENTAGE OF: DEALERS AS PERCENTAGE
AMOUNT OF INVESTMENT OFFERING PRICE NET AMOUNT INVESTED 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
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 any dividends or other
distributions are not subject to the 1% charge. Withdrawals under the
Systematic Withdrawal Plan are not subject to this charge. However,
investors may not withdraw annually more than 12% of the value of the Fund
account under the Plan in the first year after purchase.
/(2)/ Mitchell Hutchins pays 1% to PaineWebber.

- ------------------------------==================--------------------------------
Prospectus Page 23
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

SALES CHARGE REDUCTIONS AND WAIVERS

Investors who are purchasing Class A shares in more than one PaineWebber
mutual fund may combine those purchases to get a reduced sales charge.
Investors who already own Class A shares in one or more PaineWebber mutual
funds may combine the amount they are currently purchasing with the value of
such previously owned shares to qualify for a reduced sales charge. To
determine the sales charge reduction in either case, please refer to the chart
above.

Investors may also qualify for a lower sales charge when they combine their
purchases with those of:

. their spouses, parents or children under age 21;

. their Individual Retirement Accounts (IRAs);

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

. any company controlled by the investor;

. trusts created by the investor;

. Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts created
by the investor or group of individuals for the benefit of the investors'
children; or

. accounts with the same adviser.

Employers who own Class A shares for one or more of their qualified retirement
plans may also qualify for the reduced sales charge.

The sales charge will not apply when the investor:

. is an employee, director, trustee or officer of PaineWebber, its affiliates
or any PaineWebber mutual fund;

. is the spouse, parent or child of any of the above;

. buys these shares through a PaineWebber investment executive who was
formerly employed as a broker with a competing brokerage firm that was
registered as a broker-dealer with the SEC; and

. the investor was the investment executive's client at the competing
brokerage firm;

. within 90 days of buying Class A shares in a Fund, the investor sells
shares of one or more mutual funds that (a) were principally underwritten
by the competing brokerage firm or its affiliates and (b) the investor
either paid a sales charge to buy those shares, paid a contingent deferred
sales charge when selling them or held those shares until the contingent
deferred sales charge was waived; and

. the amount that the investor purchases does not exceed the total amount of
money the investor received from the sale of the other mutual fund;

. is a certificate holder of unit investment trusts sponsored by PaineWebber
and has elected to have dividends and other distributions from that
investment automatically invested in Class A shares;

. is an employer establishing an employee benefit plan qualified under section
401, including a salary reduction plan qualified under section 401(k), or
section 403(b) of the Internal Revenue Code ("Code") (each a "qualified
plan"). (This waiver is subject to minimum requirements, with respect to the
number of employees and amount of plan assets, established by Mitchell
Hutchins. Currently, a plan must have 50 or more eligible employees and at
least $1 million in plan assets.) 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;

. is a participant in the PaineWebber Members Only Program(TM). 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;

. is a variable annuity offered only to qualified pension 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 1%
of the amount invested;

. acquires Class A 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 Class A 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 waived; or

. acquires Class A shares in connection with a reorganization pursuant to
which a Fund acquires

- ------------------------------==================--------------------------------
Prospectus Page 24
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

substantially all of the assets and liabilities of another investment company
in exchange solely for shares of the Fund.

For more information on how to get any reduced sales charge, investors should
contact their investment executive at PaineWebber or one of its correspondent
firms or call 1-800-647-1568. Investors must provide satisfactory information
to PaineWebber or the Fund if they seek any of these sales charge reductions
or waivers.

CLASS B SHARES

HOW PRICE IS CALCULATED: The price is the net asset value next calculated
after PaineWebber's New York City headquarters or the Transfer Agent receives
the purchase order. The ongoing expenses investors pay for Class B shares are
higher than those of Class A shares. Because investors do not pay an initial
sales charge when they buy Class B shares, 100% of their purchase is
immediately invested.

Depending on how long they own their Fund investment, investors may have to
pay a sales charge when they sell their Fund shares. This sales charge is
called a "contingent deferred sales charge." The amount of the charge depends
on how long the investor has owned the shares. The sales charge is calculated
by multiplying the net asset value of the shares at the time of sale or
purchase, whichever is less, by the percentage shown on the following table.
Investors who own shares for more than six years do not have to pay a sales
charge when selling those shares.

<TABLE>
<CAPTION>
IF THE INVESTOR PERCENTAGE BY WHICH THE SHARES'
SELLS SHARES WITHIN: NET ASSET 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>

CONVERSION OF CLASS B SHARES

Class B shares automatically convert to the appropriate number of Class A
shares of equal dollar value after the investor has owned them for six years.
Dividends and other distributions paid to the investor by the Fund in the form
of additional Class B shares will also convert to Class A shares on a pro-rata
basis. This benefits shareholders because Class A shares have lower ongoing
expenses than Class B shares. If the investor has exchanged Class B shares
between PaineWebber funds, the Fund uses the purchase date at which the
initial investment was made to determine the conversion date.

MINIMIZING THE CONTINGENT DEFERRED SALES CHARGE

When investors sell Class B shares they have owned for less than six years,
the Fund automatically will minimize the sales charge by assuming the
investors are selling:

. First, Class B shares owned through reinvested dividends and capital gain
distributions; and

. Second, Class B shares held in the portfolio the longest.

WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGE

The contingent deferred sales charge will not apply to:
. sales of shares under the Fund's "Systematic Withdrawal Plan" (investors may
not withdraw annually more than 12% of the value of the Fund account under
the Plan);

. a distribution from an IRA, a self-employed individual retirement plan
("Keogh Plan") or a custodial account under section 403(b) of the Code after
the investor reaches age 59 1/2;
. a tax-free return of an excess IRA contribution;
. a tax-qualified retirement plan distribution following retirement; or
. Class B shares sold within one year of an investor's death if the investor
owned the shares at the time of death either as the sole shareholder or with
his or her spouse as a joint tenant with the right of survivorship.

An investor must provide satisfactory information to PaineWebber or the Fund
if the investor seeks any of these waivers.

CLASS C SHARES

HOW PRICE IS CALCULATED: The price of Class C shares is the net asset value
next calculated after PaineWebber's New York City headquarters or the Transfer
Agent receives the purchase order. Investors do not pay an initial sales
charge when they buy Class C shares, but the ongoing expenses of Class C
shares are higher than those of Class A shares. Class C shares never convert
to any other class of shares.

- ------------------------------==================--------------------------------
Prospectus Page 25
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

A contingent deferred sales charge of 1% of the net asset value of the shares
at the time of purchase or sale, whichever is less, is charged on sales of
shares made within one year of the purchase date. Other PaineWebber mutual
funds may impose a different contingent deferred sales charge on Class C
shares sold within one year of the purchase date. A sale of Class C shares
acquired through an exchange and held less than one year will be subject to
the same contingent deferred sales charge that would have been imposed on
Class C shares of the PaineWebber mutual fund originally purchased. Class C
shares representing reinvestment of any dividends or capital gain
distributions will not be subject to the 1% charge. Withdrawals under the
Systematic Withdrawal Plan also will not be subject to this charge. However,
investors may not withdraw more than 12% of the value of the Fund account
under the plan in the first year after purchase.

CLASS Y SHARES

HOW PRICE IS CALCULATED

Class Y shares are sold to eligible investors at the net asset value next
calculated after the purchase order is received at PaineWebber's New York City
headquarters or at the Transfer Agent. Because investors do not pay an initial
sales charge when they buy Class Y shares, 100% of their purchase is
immediately invested. No contingent deferred sales charge is imposed on Class
Y shares, and the ongoing expenses for Class Y shares are lower than for the
other classes because Class Y shares are not subject to rule 12b-1
distribution fees or service fees.

LIMITED GROUPS OF INVESTORS. Only initial or contingent deferred sales charge
is imposed, nor are Class Y shares subject to 12b-1 distribution or service
fees. The Funds and Mitchell Hutchins reserve the right to reject any purchase
order and to suspend the offering of Class Y shares for a period of time.
Mitchell Hutchins, the distributor for each Fund's Class Y shares, has
appointed PaineWebber to serve as the exclusive dealer for each Fund's Class Y
shares.

The following investors are eligible to buy Class Y shares:

. a participant in INSIGHT when Class Y shares are purchased through that
program;

. an investor who buys $10 million or more at any one time in any combination
of PaineWebber mutual funds in the Flexible Pricing SM System;

. an employee benefit plan qualified under section 401 (including a salary
reduction plan qualified under section 401(k)) or 403(b) of the Code that
has either

5,000 or more eligible employees or

$50 million or more in assets; and

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

INSIGHT

An investor who purchases $50,000 or more of shares of the mutual funds that
are available to INSIGHT participants (which include the PaineWebber mutual
funds in the Flexible Pricing System and certain other specified mutual funds)
may take part in INSIGHT, a total portfolio asset allocation program sponsored
by PaineWebber, and thus become eligible to purchase Class Y shares. INSIGHT
offers comprehensive investment services, including a personalized asset
allocation investment strategy using an appropriate combination of funds,
monitoring of investment performance and comprehensive quarterly reports that
cover market trends, portfolio summaries and personalized account information.

Participating in INSIGHT is subject to payment of an advisory fee to
PaineWebber at the maximum annual rate of 1.50% of assets held through the
program (generally charged quarterly in advance), which covers all INSIGHT
investment advisory services and program administration fees. Employees of
PaineWebber and its affiliates are entitled to a 50% reduction in the fee
otherwise payable for participation in INSIGHT. INSIGHT clients may elect to
have their INSIGHT fees charged to their PaineWebber accounts (by the
automatic redemption of money market fund shares) or, if a qualified plan,
invoiced.

Please contact your PaineWebber investment executive or PaineWebber
correspondent firm for more information concerning mutual funds that are
available to INSIGHT participants or for other INSIGHT program information.

ACQUISITION OF CLASS Y SHARES BY OTHERS

Each Fund is authorized to offer Class Y shares to employee benefit and
retirement plans of Paine Webber Group Inc. and its affiliates and certain
other investment programs that are sponsored by PaineWebber and that may
invest in PaineWebber mutual funds. At present, however, INSIGHT participants
are the only purchasers in these two categories.

- ------------------------------==================--------------------------------
Prospectus Page 26
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

How to Buy Shares
- -------------------------------------------------------------------------------

Prices are calculated for each class of a Fund's shares once each Business
Day, at the close of regular trading on the New York Stock Exchange (currently
4:00 p.m., Eastern time). A "Business Day" is any day, Monday through Friday,
on which the New York Stock Exchange is open for business. The Funds and
Mitchell Hutchins reserve the right to reject any purchase order and to
suspend the offering of Fund shares for a period of time.

When placing an order to buy shares, investors should specify which class of
shares they want to buy. If investors fail to specify the class, they will
automatically receive Class A shares, which include an initial sales charge.
Investors in Class Y shares must provide satisfactory information to
PaineWebber or the Funds that they are eligible to purchase Class Y shares.

PAINEWEBBER CLIENTS

Investors who are PaineWebber clients may buy shares through PaineWebber
investment executives or its correspondent firms. Investors may buy shares in
person, by mail, by telephone or by wire (the minimum wire purchase is $1
million). PaineWebber investment executives and correspondent firms are
responsible for promptly sending investors' purchase orders to PaineWebber's
New York City headquarters. Investors may pay for their purchases with checks
drawn on U.S. banks or with funds they have in their brokerage accounts at
PaineWebber or its correspondent firms.

OTHER INVESTORS

Investors who are not PaineWebber clients may purchase Fund shares and set up
an account through the Transfer Agent (PFPC Inc.) by completing an account
application, which you may obtain by calling 1-800-647-1568. The application
and check must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O.
Box 8950, Wilmington, DE 19899.

Investors who already have money invested in a PaineWebber mutual fund, and
want to invest in another PaineWebber mutual fund, can:

. mail an application with a check; or

. open an account by exchanging from another PaineWebber mutual fund.

Investors do not have to send an application when making additional
investments in the Fund.

MINIMUM INVESTMENTS

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

A Fund may waive or reduce these minimums for:

. employees of PaineWebber or its affiliates; or

. participants in certain pension plans, retirement accounts or the Fund's
automatic investment plan; or

. transactions in Class A and Class Y shares made in certain investment
programs.

HOW TO EXCHANGE SHARES

As shareholders, investors have the privilege of exchanging Class A, B and C
shares for the same class of shares of other PaineWebber mutual funds. For
classes of shares where no initial sales charge is imposed, a contingent
deferred sales charge may apply if the investor sells the shares acquired
through the exchange. Class Y shares are not exchangeable.

Exchanges may be subject to minimum investment requirements of the fund into
which exchanges are made.

. Investors who purchased their shares through an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
contacting their investment executive in person or by telephone, mail or
wire.

. Investors who do not have an account with an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
writing a "letter of instruction" to the Transfer Agent. The letter of
instruction must include:

. the investor's name and address;

. the Fund's name;

. the Fund account number;

- ------------------------------==================--------------------------------
Prospectus Page 27
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

. the dollar amount or number of shares to be sold; and

. a guarantee of each registered owner's signature by an eligible
institution, such as a commercial bank, trust company or stock exchange
member.

The letter must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O.
Box 8950, Wilmington, DE 19899.

No contingent deferred sales charge is imposed when shares are exchanged for
the corresponding class of shares of other PaineWebber mutual funds. A Fund
will use the purchase date of the initial investment to determine any
contingent deferred sales charge due when the shares are sold. Fund shares may
be exchanged only after the settlement date has passed and payment for the
shares has been made. The exchange privilege is available only in those
jurisdictions where the sale of the Fund shares to be acquired is authorized.
This exchange privilege may be modified or terminated at any time and, when
required by SEC rules, upon 60 days' notice. See the back cover of this
Prospectus for a listing of other PaineWebber mutual funds.
- --------------------------------------------------------------------------------

How to Sell Shares

- -------------------------------------------------------------------------------
Investors can sell (redeem) shares at any time. Shares will be sold at the
share price for that class as next calculated after the order is received and
accepted (less any applicable contingent deferred sales charge). Share prices
are normally calculated at the close of regular trading on the New York Stock
Exchange (currently 4:00 p.m., Eastern time).

Investors who own more than one class of shares should specify which class
they are selling. If they do not, the Fund will assume they are first selling
their Class A shares, then Class C, then Class B and last, Class Y.

If a shareholder wants to sell shares that were purchased recently, the Fund
may delay payment until it verifies that good payment was received. In the
case of purchases by check, this can take up to 15 days.

Investors who have an account with PaineWebber or one of PaineWebber's
correspondent firms can sell their shares by contacting their investment
executive. Investors who do not have an account and have bought their shares
through PFPC Inc., the Fund's Transfer Agent, may sell shares by writing a
"letter of instruction," as detailed in "How to Exchange Shares."

Because the Funds incur certain fixed costs in maintaining shareholder
accounts, each Fund reserves the right to purchase back all Fund shares in any
shareholder account with a net asset value of less than $500. If the Fund
elects to do so, it will notify the shareholder of the opportunity to increase
the amount invested to $500 or more within 60 days of the notice. The Fund
will not purchase back accounts that fall below $500 solely due to a reduction
in net asset value per share.

REINSTATEMENT PRIVILEGE
Shareholders who sell their Class A shares may reinstate their Fund account
without a sales charge up to the dollar amount sold by purchasing the Fund's
Class A shares within 365 days after the sale. To take advantage of this
reinstatement privilege, shareholders must notify their investment executive
at PaineWebber or one of its correspondent firms at the time of purchase.
- -------------------------------------------------------------------------------

Other Services

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

Investors should consult their investment executives at PaineWebber or one of
its correspondent firms to learn more about the following services available
with respect to the Fund's Class A, B and C shares.

AUTOMATIC INVESTMENT PLAN

Investing on a regular basis helps investors meet their financial goals.
PaineWebber offers an Automatic Investment Plan with a minimum initial
investment of

- ------------------------------==================--------------------------------
Prospectus Page 28
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

$1,000 through which a Fund will deduct $50 or more monthly, quarterly, semi-
annually or annually from the investor's bank account to invest directly in
the Fund. In addition to providing a convenient and disciplined manner of
investing, participation in the Automatic Investment Plan enables the investor
to use the technique of "dollar cost averaging."

SYSTEMATIC WITHDRAWAL PLAN

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

. 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, semiannual 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. Investors may not withdraw more than 12% of
the value of the Fund account when the investor signed up for the Plan
(annually for Class B shares; during the first year under the Plan for Class A
and C shares). Shareholders who elect to receive dividends or other
distributions in cash may not participate in the Plan.

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 the Transfer Agent. 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.
- --------------------------------------------------------------------------------

Management

- -------------------------------------------------------------------------------
CAPITAL APPRECIATION FUND

The Fund is governed by a board of trustees, which oversees the Fund's
operations. It has appointed Mitchell Hutchins as investment adviser and
administrator responsible for the Fund's operations (subject to the authority
of the board). Mitchell Hutchins has appointed the investment sub-adviser,
Denver Investment Advisors to be responsible for day-to-day management of the
Fund's investments.

In managing assets for its clients, Denver Investment Advisors strives to
implement a "team approach" rather than rely on one or two key individuals.
Todger Anderson, President and a Director of Portfolio Management of Denver
Investment Advisors is responsible for the day-to-day management of the Fund's
portfolio. He has managed the Fund since its inception and has concentrated on
mid cap investing since 1975. Prior to joining Denver Investment Advisors in
1975, Mr. Anderson had portfolio management responsibilities with Financial
Programs and at the United Bank of Denver. Directly assisting are Larry
Luchini and the Denver Investment Advisors Equity Research Team. Mr. Luchini
joined Denver Investment Advisors in 1978 as vice president and portfolio
manager. Prior to joining Denver Investment Advisors Mr. Luchini served as
vice president and portfolio manager at the National City Bank of Cleveland
from 1968 to 1978.

FINANCIAL SERVICES GROWTH FUND

The Fund is governed by a board of directors, which oversees the Fund's
operations. It has appointed Mitchell Hutchins as investment adviser and
administrator responsible for the Fund's operations (subject to the authority
of the board). Karen L. Finkel is primarily responsible for the day-to-day
portfolio management of the Fund. Mrs. Finkel is a senior vice president of
Mitchell Hutchins. She has held her Fund responsibilities since January 1988
and has been

- ------------------------------==================--------------------------------
Prospectus Page 29
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

employed by Mitchell Hutchins as a portfolio manager for the last nine years.

UTILITY INCOME FUND

The Fund is governed by a board of trustees, which oversees the Fund's
operations. It has appointed Mitchell Hutchins as investment adviser and
administrator responsible for the Fund's operations (subject to the authority
of the board). Karen L. Finkel is primarily responsible for the day-to-day
management of the Fund's stock portfolio and determines the allocation of Fund
assets between stocks and bonds. James F. Keegan and Julieanna Berry are
primarily responsible for day-to-day management of the Fund's bond portfolio.
Mrs. Finkel is a senior vice president of Mitchell Hutchins and has been a
portfolio manager of the Fund since February 1995. She has been employed by
Mitchell Hutchins as a portfolio manager for the last eight years. Mrs. Berry
has held her Fund responsibilities since March 1996 and was joined by Mr.
Keegan in April 1996. Mrs. Berry is a first vice president of Mitchell
Hutchins and has been employed by Mitchell Hutchins as a portfolio manager
since 1989. Mr. Keegan is a senior vice president of Mitchell Hutchins and
oversees all corporate bond investments. Prior to joining Mitchell Hutchins,
Mr. Keegan was the director of fixed income strategy and research at the
Merrion Group, L.P. from 1994 to 1995. From 1987 to 1994, he was vice
president of global investment management of Bankers Trust Company.

* * * *

In accordance with procedures adopted by the boards, brokerage transactions
for the Funds may be conducted through PaineWebber or its affiliates and the
Funds may pay fees to PaineWebber for its services as lending agent in their
portfolio securities lending programs.

Mitchell Hutchins and Denver Investment Advisors personnel may engage in
securities transactions for their own accounts pursuant to each firm's code of
ethics that establishes procedures for personal investing and restricts
certain transactions.

ABOUT THE INVESTMENT ADVISER

Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, is an asset management subsidiary of PaineWebber, which is wholly owned
by Paine Webber Group Inc., a publicly owned financial services holding
company. On June 30, 1997, Mitchell Hutchins was adviser or sub-adviser of 29
investment companies with 64 separate portfolios and aggregate assets of over
$33.3 billion.

ABOUT THE INVESTMENT SUB-ADVISER

The investment sub-adviser, Denver Investment Advisors, LLC, is located at
1225 17th Street, 26th Floor, P.O. Box 17487, Denver, Colorado 80217. Denver
Investment Advisors has managed client accounts investing primarily in stocks
of medium-sized companies since 1958 and has been managing the Fund since its
inception in April 1992. As of June 30, 1997, Denver Investment Advisors
managed approximately $10.4 billion of assets of various clients.

MANAGEMENT FEES & OTHER EXPENSES

Each Fund pays Mitchell Hutchins a monthly fee for its services. For the
fiscal year ended March 31, 1997, Financial Services Growth Fund paid advisory
fees to Mitchell Hutchins at the annual rate of 0.70% of its average daily net
assets. For the fiscal year ended March 31, 1997, Utility Income Fund paid
advisory fees to Mitchell Hutchins at the annual rate of 0.70% of its average
daily net assets. For the fiscal year ended March 31, 1997, Capital
Appreciation Fund paid advisory fees to Mitchell Hutchins at the annual rate
of 1.00% of its average daily net assets.

Each Fund pays PaineWebber an annual fee of $4.00 per active shareholder
account held at PaineWebber for services not provided by the Transfer Agent.

With respect to Capital Appreciation Fund, Mitchell Hutchins (not the Fund)
pays Denver Investments a fee for investment sub-advisory services in an
amount equal to 50% of the fee it receives from the Fund for advisory and
administrative services.

DISTRIBUTION ARRANGEMENTS

Mitchell Hutchins is the distributor of each Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. There is no
distribution plan with respect to the Funds' Class Y shares. Under
distribution plans for Class A, Class B and Class C shares ("Class A Plan,"
"Class B Plan" and "Class C Plan," collectively, "Plans"), each Fund pays
Mitchell Hutchins:

. Monthly service fees at the annual rate of 0.25% of the average daily net
assets of each class of shares.

- ------------------------------==================--------------------------------
Prospectus Page 30
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

. Monthly distribution fees at the annual rate of 0.75% of the average daily
net assets of Class B and Class C shares.

Under the Plans, Mitchell Hutchins primarily uses the service fees for Class
A, B and C shares 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 investment
executives 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 investment executives 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 sold.

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 each class of shares
("Distribution Contracts") 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.
- -------------------------------------------------------------------------------

Determining the Shares' Net Asset Value

- -------------------------------------------------------------------------------
The net asset value of each Fund's shares fluctuates and is determined
separately for each class as of the close of regular trading on the New York
Stock Exchange (currently 4:00 p.m., Eastern time) each Business Day. Each
Fund's net asset value per share is determined by dividing the value of the
securities held by the Fund, plus any cash or other assets, minus all
liabilities, by the total number of Fund shares outstanding.

Each Fund values its assets based on their current market value when market
quotations are readily available. If that value is not readily available,
assets are valued at fair value as determined in good faith by or under the
direction of its board. The amortized cost method of valuation generally is
used to value debt obligations with 60 days or less remaining to maturity,
unless the board determines that this does not represent fair value.
Investments denominated in foreign currencies are valued daily in U.S. dollars
based on the then-prevailing exchange rates.

- ------------------------------==================--------------------------------
Prospectus Page 31
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

Dividends & Taxes
- -------------------------------------------------------------------------------
DIVIDENDS

Capital Appreciation Fund and Financial Services Growth Fund each pays an
annual dividend from its net investment income and net short-term capital
gain, if any. Utility Income Fund pays quarterly dividends from its net
investment income distributes any net short-term capital gain with its
dividends. Financial Services Growth Fund and Utility Income Fund each
distributes any net realized gains from foreign currency transactions annually
with its dividends. Each Fund also distributes annually substantially all of
its net capital gain (the excess of net long-term capital gain over net short-
term capital loss), if any. The Funds may make additional distributions, if
necessary, to avoid a 4% excise tax on certain undistributed income and
capital gain.

Dividends and other distributions paid on each class of shares of each Fund
are calculated at the same time and in the same manner. Dividends on Class A,
B and C shares of a Fund are expected to be lower than those on its Class Y
shares because the other shares have higher expenses resulting from their
distribution and service fees and, in the case of Class B and Class C shares,
their distribution fees. Dividends on Class B and Class C shares of a Fund are
expected to be lower than those on its Class A shares because Class B and
Class C shares have higher expenses resulting from their distribution fees.
Dividends on each class also might be affected differently by the allocation
of other class-specific expenses. See "General Information."

Each Fund's dividends and other distributions are paid in additional Fund
shares of the same class at net asset value, unless the shareholder has
requested cash payments. Shareholders who wish to receive dividends and other
distributions in cash, either mailed to the shareholder by check or credited
to the shareholder's PaineWebber account, should contact their investment
executives at PaineWebber or one of its correspondent firms or complete the
appropriate section of the account application.

TAXES

Each Fund intends to continue to qualify for treatment as a regulated
investment company under the Code so that it will not have to pay federal
income tax on the part of its investment company taxable income (generally
consisting of net investment income, net short-term capital gain and net gains
from certain foreign currency transactions) and the net capital gain that it
distributes to its shareholders.

Dividends from each Fund's investment company taxable income (whether paid in
cash or additional shares) are generally taxable to its shareholders as
ordinary income. Distributions of each Fund's net capital gain (whether paid
in cash or additional shares) are taxable to its shareholders as long-term
capital gain, regardless of how long they have held their Fund shares.
Shareholders who are not subject to tax on their income generally will not be
required to pay tax on distributions from the Funds.

YEAR-END TAX REPORTING

Following the end of each calendar year, each Fund notifies its shareholders
of the dividends and capital gain distributions paid (or deemed paid), their
share of any foreign taxes paid by the Fund that year and any portion of those
dividends that qualifies for special treatment.

BACKUP WITHHOLDING

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

TAX ON THE SALE OR EXCHANGE OF FUND SHARES

A shareholder's sale (redemption) of shares may result in a taxable gain or
loss. This depends on whether the shareholder receives more or less than the
adjusted basis for the shares (which normally includes any initial sales
charge paid on Class A shares). An exchange of any Fund's shares for shares of
another

- ------------------------------==================--------------------------------
Prospectus Page 32
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

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 TAX RULES FOR CLASS A SHAREHOLDERS

Special tax rules apply 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 will increase the basis of
the PaineWebber mutual fund shares subsequently acquired.

* * * *

The foregoing only summarizes some of the important tax considerations
affecting the Funds and their shareholders. Please see the further discussion
in the SAI. Prospective shareholders are urged to consult their tax advisers.

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

General Information

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

ORGANIZATION

CAPITAL APPRECIATION FUND

Capital Appreciation Fund is a diversified series of PaineWebber Managed
Assets Trust, an open-end management investment company that was formed on
August 9, 1991, as a business trust under the laws of the Commonwealth of
Massachusetts. The trustees have authority to issue an unlimited number of
shares of beneficial interest of separate series, par value $0.001 per share.

FINANCIAL SERVICES GROWTH FUND

Financial Services Growth Fund is a diversified, open-end management
investment company that was incorporated in Maryland on February 13, 1986. The
Fund has authority to issue 300 million shares of common stock of separate
series, par value $0.001 per share.

UTILITY INCOME FUND

Utility Income Fund is a diversified series of PaineWebber Managed Investments
Trust ("Trust"), an open-end management investment company that was formed on
November 21, 1986, as a business trust under the laws of the Commonwealth of
Massachusetts. The trustees have authority to issue an unlimited number of
shares of beneficial interest of separate series, par value $0.001 per share.
Shares of four other series have been authorized.

The shares of each Fund are divided into four classes, designated Class A,
Class B, Class C and Class Y shares. Each class of shares 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 on a Fund's Class A, B, C
and Y shares will differ.

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

VOTING RIGHTS

Shareholders of each Fund are entitled to one vote for each full share held
and fractional votes for fractional

- ------------------------------==================--------------------------------
Prospectus Page 33
<PAGE>

- ------------------------------=================---------------------------------
PaineWebber Capital Appreciation Fund Financial Services Growth Fund Inc.
Utility Income Fund

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 Plan as it relates to a class. The shares of all series of
the Trust will be voted separately, except when an aggregate vote of all the
series is required by law.

SHAREHOLDER MEETINGS

The Funds do not intend to hold annual meetings.

Shareholders of record of no less than two-thirds of the outstanding shares of
the Trust or Fund (as applicable) may remove a board member through a
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.

REPORTS TO SHAREHOLDERS

Each Fund sends its shareholders audited annual and unaudited semiannual
reports, each of which includes a list of the investment securities held by
the Fund as of the end of the period covered by the report. The Statement of
Additional Information is available to shareholders upon request.

CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND AGENT

State Street Bank and Trust Company, located at One Heritage Drive, North
Quincy, Massachusetts 02171, serves as each Fund's custodian and recordkeeping
agent and employs foreign sub-custodians to provide custody of any foreign
assets of Financial Services Growth Fund and Utility Income Fund. PFPC Inc., a
subsidiary of PNC Bank, N.A., serves as each Fund's transfer and dividend
disbursing agent. It is located at 400 Bellevue Parkway, Wilmington, DE 19809.

- ------------------------------==================--------------------------------
Prospectus Page 34
<PAGE>

[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

- ---------------------------------==================-----------------------------

PaineWebber Capital Appreciation Fund
PaineWebber Financial Services Growth Fund Inc.
PaineWebber Utility Income Fund

Prospectus -- August 1, 1997

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

. PAINEWEBBER BOND FUNDS . PAINEWEBBER STOCK FUNDS

High Income Fund Capital Appreciation Fund
Investment Grade Income Fund Growth Fund
Low Duration U.S. Government Growth and Income Fund
Income Fund Financial Services Growth Fund
Strategic Income Fund Small Cap Value Fund
U.S. Government Income Fund Utility Income Fund

. PAINEWEBBER TAX-FREE BOND . PAINEWEBBER GLOBAL FUNDS
FUNDS

California Tax-Free Income Fund Asia Pacific Growth Fund
Municipal High Income Fund Emerging Markets Equity Fund
National Tax-Free Income Fund Global Equity Fund
New York Tax-Free Income Fund Global Income Fund

. PAINEWEBBER ASSET ALLOCATION . PAINEWEBBER MONEY MARKET
FUNDS FUND

Balanced Fund
Tactical Allocation Fund

A prospectus containing more complete information for any of these funds,
including charges and expenses, can be obtained from a PaineWebber invest-
ment executive or correspondent firm. Please read it carefully before in-
vesting. It is important you have all the information you need to make a
sound investment decision.

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

PAINEWEBBER CAPITAL APPRECIATION FUND

PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.

PAINEWEBBER UTILITY INCOME FUND

1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019

STATEMENT OF ADDITIONAL INFORMATION

The three funds named above (each a "Fund" and, collectively, "Funds") are,
or are series of, professionally managed, open-end management investment
companies, each organized as a Maryland corporation or a Massachusetts
business trust. The Funds are designed for investors generally seeking capital
appreciation by investing principally in equity securities. PaineWebber
Capital Appreciation Fund ("Capital Appreciation Fund"), a diversified series
of PaineWebber Managed Assets Trust ("Managed Assets Trust" or "Trust")
invests primarily in common stock of medium-sized companies. PaineWebber
Financial Services Growth Fund Inc. ("Financial Services Growth Fund" or
"Corporation") invests primarily in equity securities of companies in the
financial services industries. PaineWebber Utility Income Fund ("Utility
Income Fund"), a diversified series of PaineWebber Managed Investments Trust
("Managed Investments Trust" or "Trust"), also seeks to provide current income
and invests primarily in equity securities and debt instruments of companies
in the utility industries.

The investment adviser, administrator and distributor for each Fund is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
subsidiary of PaineWebber Incorporated ("PaineWebber"). As distributor for the
Funds, Mitchell Hutchins has appointed PaineWebber to serve as the exclusive
dealer for the sale of Fund shares. Denver Investment Advisors, LLC ("Sub-
Adviser") serves as investment sub-adviser for Capital Appreciation Fund.

This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Funds' current Prospectus, dated August 1,
1997. A copy of the Prospectus may be obtained by calling any PaineWebber
investment executive or correspondent firm or by calling toll-free 1-800-647-
1568. This Statement of Additional Information is dated August 1, 1997.

INVESTMENT POLICIES AND RESTRICTIONS

The following supplements the information contained in the Prospectus
concerning the Funds' investment policies and limitations. Except as otherwise
indicated in the Prospectus or Statement of Additional Information, there are
no policy limitations on a Fund's ability to use the investments or techniques
discussed in these documents.

YIELD FACTORS AND RATINGS. Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), and
other nationally recognized statistical rating organizations ("NRSROs") are
private services that provide ratings of the credit quality of debt
obligations. A description of the ratings assigned to corporate debt
obligations by Moody's and S&P is included in the Appendix to this Statement
of Additional Information. The Funds may use these ratings in determining
<PAGE>

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.

Utility Income Fund is authorized to invest up to 5% of its net assets in
non-investment grade debt securities, including convertible debt securities--
"non-investment grade" means that the debt securities are not rated at the
time of purchase within one of the four highest grades assigned by S&P or
Moody's, comparably rated by another NRSRO or determined by Mitchell Hutchins
to be of comparable quality. These securities are also commonly referred to as
"junk bonds." Lower rated debt securities generally offer a higher current
yield than that available for investment grade issues; however, they involve
higher risks. Lower rated securities may be less sensitive to interest rate
changes than higher rated investments, but are more sensitive to adverse
market conditions. During an economic downturn or period of rising interest
rates, their issuers may experience financial stress that adversely affects
their ability to pay interest and repay principal and may 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. Lower rated bonds are frequently unsecured by
collateral and will not receive payment until more senior claims are paid in
full. The prices for lower rated bonds often are more volatile than those of
higher rated securities in response to market conditions. The market for these
bonds is thinner and less active, which may limit the Fund's ability to sell
them at fair value in response to changes in the economy or financial markets.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of lower
rated securities, especially in a thinly traded market.

The market for lower rated debt securities has expanded rapidly in recent
years, and its growth paralleled a long economic expansion. In the past, the
prices of many lower rated debt securities declined substantially, reflecting
an expectation that many issuers of such securities might experience financial
difficulties. As a result, the yields on lower rated debt securities rose
dramatically. However, such higher yields did not reflect the value of the
income stream that holders of such securities expected, but rather the risk
that holders of such securities could lose a substantial portion of their
value as a result of the issuers' financial restructuring or default. There
can be no assurance that such declines will not recur.

RISK CONSIDERATIONS RELATING TO FOREIGN SECURITIES. The Funds may hold
securities of foreign issuers that are not registered with the Securities and
Exchange Commission ("SEC"), and foreign issuers may not be subject to SEC
reporting requirements. Accordingly, there may be less publicly available
information concerning foreign issuers of securities held by the Funds than is
available concerning U.S. companies. Foreign companies are not generally
subject to uniform accounting, auditing and financial reporting standards or
to other regulatory requirements comparable to those applicable to U.S.
companies.

The Funds may invest in foreign securities by purchasing American Depository
Receipts ("ADRs"). Financial Services Growth Fund and Utility Income Fund also
may purchase securities of foreign issuers in foreign markets and purchase
European Depository Receipts ("EDRs"), 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. Generally, ADRs,
in registered form, are denominated in U.S. dollars and are designed for use
in the U.S. securities markets, EDRs are similar to ADRs but generally are in
bearer form, 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 markets. ADRs are receipts typically issued by a
U.S. bank or trust

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<PAGE>

company evidencing ownership of the underlying securities. For purposes of
each Fund's investment policies, ADRs, EDRs and GDRs are deemed to have the
same classification as the underlying securities they represent. Thus, an ADR,
EDR or GDR representing ownership of common stock will be treated as common
stock.

Financial Services Growth Fund and Utility Income Fund anticipate that their
brokerage transactions involving foreign securities of companies headquartered
in countries other than the United States will be conducted primarily on the
principal exchanges of such countries. Transactions on foreign exchanges are
usually subject to fixed commissions that are generally higher than negotiated
commissions on U.S. transactions, although each Fund will endeavor to achieve
the best net results in effecting its portfolio transactions. There is
generally less government supervision and regulation of exchanges and brokers
in foreign countries than in the United States.

Investments in foreign government debt securities involve special risks. The
issuer of the debt or the governmental authorities that control the repayment
of the debt may be unable or unwilling to pay interest or repay principal when
due in accordance with the terms of such debt, and the Funds may have limited
legal recourse in the event of default. Foreign government debt securities
differ from debt obligations issued by private entities in that, generally,
remedies for defaults must be pursued in the courts of the defaulting party.
Legal recourse is, therefore, somewhat limited. Political conditions,
especially a sovereign entity's willingness to meet the terms of its debt
obligations, are of considerable significance. Also, there can be no assurance
that the holders of commercial bank loans to the same sovereign entity may not
contest payments to the holders of foreign government debt securities in the
event of default under commercial bank loan agreements.

Investment income on certain foreign securities in which Financial Services
Growth Fund and Utility Income Fund may invest may be subject to foreign
withholding or other taxes that could reduce the return on these securities.
Tax treaties between the United States and foreign countries, however, may
reduce or eliminate the amount of foreign taxes to which these Funds would be
subject.

FOREIGN CURRENCY TRANSACTIONS. Although Financial Services Growth Fund and
Utility Income Fund value their assets daily in U.S. dollars, they do not
intend to convert their holdings of foreign currencies to U.S. dollars on a
daily basis. The Funds' foreign currencies generally will be held as "foreign
currency call accounts" at foreign branches of foreign or domestic banks.
These accounts bear interest at negotiated rates and are payable upon
relatively short demand periods. If a bank became insolvent, the Funds could
suffer a loss of some or all of the amounts deposited. The Funds may convert
foreign currency to U.S. dollars from time to time. Although foreign exchange
dealers generally do not charge a stated commission or fee for conversion, the
prices posted generally include a "spread," which is the difference between
the prices at which the dealers are buying and selling foreign currencies.

ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which a Fund has valued the
securities and includes, among other things, purchased over-the-counter
("OTC") options, repurchase agreements maturing in more than seven days and
restricted securities other than those Mitchell Hutchins or the Sub-Adviser,
as applicable, has determined are liquid pursuant to guidelines established by
each Fund's board of trustees or board of directors (each sometimes referred
to as a "board"). The assets used as cover for OTC options written by the
Funds will be considered illiquid unless the OTC options are sold to qualified
dealers who agree that the Funds may repurchase any OTC options they write at
a maximum price to be calculated by a formula set

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<PAGE>

forth in the option agreements. The cover for an OTC option written subject to
this procedure would be considered illiquid only to the extent that the
maximum repurchase price under the formula exceeds the intrinsic value of the
option.

Illiquid restricted securities may be sold only in privately negotiated
transactions or in public offerings with respect to which a registration
statement is in effect under the Securities Act of 1933 ("1933 Act"). However,
for Financial Services Growth Fund and Utility Income Fund, to the extent that
securities are freely tradeable in the country in which they are principally
traded, they are not considered illiquid securities for purposes of the 10%
net asset limitation, even if they are not freely tradeable in the United
States. Where registration is required, a Fund may be obligated to pay all or
part of the registration expenses and a considerable period may elapse between
the time of the decision to sell and the time a Fund may be permitted to sell
a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, a Fund might obtain a less
favorable price than prevailed when it decided to sell.

Not all restricted securities are illiquid. In recent years a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and
notes. These instruments are often restricted securities because the
securities are sold in transactions not requiring registration. Institutional
investors generally will not seek to sell these instruments to the general
public, but instead will often depend either on an efficient institutional
market in which such unregistered securities can be readily resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that
there are contractual or legal restrictions on resale to the general public or
certain institutions is not dispositive of the liquidity of such investments.

Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted
securities have developed as a result of Rule 144A, providing both readily
ascertainable values for restricted securities and the ability to liquidate an
investment to satisfy share redemption orders. Such markets include automated
systems for the trading, clearance and settlement of unregistered securities
of domestic and foreign issuers, such as the PORTAL System sponsored by the
National Association of Securities Dealers, Inc. An insufficient number of
qualified institutional buyers interested in purchasing Rule 144A-eligible
restricted securities held by a Fund, however, could affect adversely the
marketability of such portfolio securities and the Fund might be unable to
dispose of such securities promptly or at favorable prices.

Each board has delegated the function of making day-to-day determinations of
liquidity to Mitchell Hutchins or the Sub-Adviser, as applicable, pursuant to
guidelines approved by the board. Mitchell Hutchins or the Sub-Adviser takes
into account a number of factors in reaching liquidity decisions, including
(1) the frequency of trades for the security, (2) the number of dealers that
make quotes for the security, (3) the number of dealers that have undertaken
to make a market in the security, (4) the number of other potential purchasers
and (5) the nature of the security and how trading is effected (e.g., the time
needed to sell the security, how offers are solicited and the mechanics of
transfer). Mitchell Hutchins or the Sub-Adviser monitors the liquidity of
restricted securities in each Fund's portfolio and reports periodically on
such decisions to the applicable board.

REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Fund purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to

4
<PAGE>

the bank or dealer 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 securities. The Fund maintains custody of the underlying
securities prior to their repurchase; thus, the obligation of the bank or
dealer to pay the repurchase price on the date agreed to is, in effect,
secured by such securities. If the value of these securities is less than the
repurchase price, plus any agreed-upon additional amount, the other party to
the agreement must provide additional collateral so that at all times the
collateral is at least equal to the repurchase price, plus any agreed-upon
additional amount. The difference between the total amount to be received upon
repurchase of the securities and the price that was paid by a Fund upon
acquisition is accrued as interest and included in its net investment income.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to a Fund if the other party to
a repurchase agreement becomes insolvent.

The Funds intend to enter into repurchase agreements only with banks and
dealers in transactions believed by Mitchell Hutchins or the Sub-Adviser to
present minimal credit risks in accordance with guidelines established by each
board. Mitchell Hutchins reviews and monitors the creditworthiness of those
institutions under each board's general supervision.

REVERSE REPURCHASE AGREEMENTS. Each Fund may enter into reverse repurchase
agreements with banks and securities dealers up to an aggregate value of not
more than 5% of the Fund's net assets. Such agreements involve the sale of
securities held by a Fund subject to that Fund's agreement to repurchase the
securities at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest. Such agreements are considered to be borrowings and
may be entered into only for temporary or emergency purposes. While a reverse
repurchase agreement is outstanding, the Fund's custodian segregates assets to
cover the Fund's obligations under the reverse repurchase agreement. See
"Investment Policies and Restrictions--Segregated Accounts."

LENDING OF PORTFOLIO SECURITIES. Each Fund is authorized to lend portfolio
securities up to 33 1/3% of its total assets to broker-dealers or
institutional investors that Mitchell Hutchins deems qualified, but only when
the borrower maintains with that Fund's custodian bank acceptable collateral,
marked to market daily, in an amount at least equal to the market value of the
securities loaned, plus accrued interest and dividends. Acceptable collateral
is limited to cash, U.S. government securities and irrevocable letters of
credit that meet certain guidelines established by Mitchell Hutchins. In
determining whether to lend securities to a particular broker-dealer or
institutional investor, Mitchell Hutchins will consider, and during the period
of the loan will monitor, all relevant facts and circumstances, including the
creditworthiness of the borrower. Each Fund will retain authority to terminate
any loans at any time. Each Fund may pay reasonable fees in connection with a
loan and may pay a negotiated portion of the interest earned on the cash or
money market instruments held as collateral to the borrower or placing broker.
Each Fund will receive reasonable interest on the loan or a flat fee from the
borrower and amounts equivalent to any dividends, interest or other
distributions on the securities loaned. Each Fund will regain record ownership
of loaned securities to exercise beneficial rights, such as voting and
subscription rights and rights to dividends, interest or other distributions,
when regaining such rights is considered to be in the Fund's interest.

Pursuant to procedures adopted by the appropriate board governing each
Fund's securities lending program, the board has approved retention of
PaineWebber to serve as lending agent for each Fund. The board also has
authorized the payment of fees (including fees calculated as a percentage of
invested cash

5
<PAGE>

collateral) to PaineWebber for these services. Each board periodically reviews
all portfolio securities loan transactions for which PaineWebber acted as
lending agent.

SHORT SALES "AGAINST THE BOX". Each Fund may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales "against the
box") to defer realization of gains or losses for tax or other purposes. To
make delivery to the purchaser in a short sale, the executing broker borrows
the securities being sold short on behalf of a Fund, and that Fund is
obligated to replace the securities borrowed at a date in the future. When a
Fund sells short, it 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. No Fund currently expects to have
obligations under short sales at any time during the coming year that exceed
5% of its net assets.

The Funds might make a short sale "against the box" in order to hedge
against market risks when Mitchell Hutchins or the Sub-Adviser believes that
the price of a security may decline, thereby causing a decline in the value of
a security owned by a Fund or a security convertible into or exchangeable for
a security owned by a Fund, or when Mitchell Hutchins or the Sub-Adviser wants
to sell a security that a Fund owns at a current price, but also wishes to
defer recognition of gain or loss for federal income tax purposes. In such
case, any loss in a Fund's long position after the short sale should be
reduced by a gain in the short position. Conversely, any gain in the long
position should be reduced by a loss in the short position. The extent to
which gains or losses in the long position are reduced will depend upon the
amount of the securities sold short relative to the amount of the securities a
Fund owns, either directly or indirectly, and in the case where a Fund owns
convertible securities, changes in the investment values or conversion
premiums of such securities.

SEGREGATED ACCOUNTS. When a Fund enters into certain transactions to make
future payments to third parties, it will maintain with an approved custodian
in a segregated account cash 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 "Hedging and Related Strategies Using
Derivative Contracts," segregated accounts may also be required in connection
with certain transactions involving options or futures contracts (and, for
Utility Income Fund, certain interest rate protection transactions or forward
currency contracts.)

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. As stated in the Prospectus,
each Fund may purchase securities on a "when-issued" or delayed delivery
basis. A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in
market value, generally based upon changes in the level of interest rates.
Thus, fluctuation in the value of the security from the time of the commitment
date will affect a Fund's net asset value. When the Fund agrees to purchase
securities on a when-issued or delayed delivery basis, its custodian
segregates assets to cover the amount of the commitment. See "Investment
Policies and Restrictions--Segregated Accounts." The Fund purchases when-
issued securities only with the intention of taking delivery, but may sell the
right to acquire the security prior to delivery if Mitchell Hutchins or the
Sub-Adviser deems it advantageous to do so, which may result in a gain or loss
to the Fund.

SPECIAL CONSIDERATIONS CONCERNING UTILITY INCOME FUND--UTILITY
INDUSTRIES. Utility companies in the United States and in foreign countries
are generally subject to regulation. In the United States, most utility
companies are regulated by state and/or federal authorities. Such regulation
is intended to ensure appropriate standards of service and adequate capacity
to meet public demand. Prices are also regulated, with the

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<PAGE>

intention of protecting the public while ensuring that the rate of return
earned by utility companies is sufficient to allow them to attract capital in
order to grow and continue to provide appropriate services. There can be no
assurance that such pricing policies or rates of return will continue in the
future.

The nature of regulation of utility industries is evolving both in the
United States and in foreign countries. Changes in regulation in the United
States increasingly allow utility companies to provide services and products
outside their traditional geographic areas and lines of business, creating new
areas of competition within the industries. Although certain companies may
develop more profitable opportunities, others may be forced to defend their
core businesses and may be less profitable.

The regulation of foreign utility companies may or may not be comparable to
that in the United States. Foreign regulatory systems vary from country to
country, and may evolve in ways different from regulation in the United
States.

Utility Income Fund's investment policies seek to enable it to capitalize on
evolving investment opportunities throughout the world. For example, the rapid
growth of certain foreign economies will necessitate expansion of capacity in
the utility industries in those countries. Although many foreign utility
companies currently are government-owned, thereby limiting current investment
opportunities for the Fund, Mitchell Hutchins believes that, in order to
attract significant capital for growth, foreign governments may seek global
investors through the privatization of their utility industries.
Privatization, which refers to the trend toward investor ownership of assets
rather than government ownership, is expected to occur in newer, faster-
growing economies and also in more mature economies. In addition, the economic
unification of European markets may improve economic growth, reduce costs and
increase competition in Europe, which will result in opportunities for
investment by the Fund in European utility industries. Of course, there is no
assurance that such favorable developments will occur or that investment
opportunities in foreign markets for the Fund will increase.

The revenues of domestic and foreign utility companies generally reflect the
economic growth and developments in the geographic areas in which they do
business. Mitchell Hutchins takes into account anticipated economic growth
rates and other economic developments when selecting securities of utility
companies. Further descriptions of specific segments within the global utility
industries are set forth below.

Electric. The electric utility industry consists of companies that are
engaged principally in the generation, transmission and sale of electric
energy, although many also provide other energy-related services. Domestic
electric utility companies in general recently have been favorably affected by
lower fuel and financing costs and the full or near completion of major
construction programs. In addition, many of these companies recently have
generated cash flows in excess of current operating expenses and construction
expenditures, permitting some degree of diversification into unregulated
businesses. Some electric utilities have also taken advantage of the right to
sell power outside of their traditional geographic areas. Electric utility
companies have historically been subject to the risks associated with
increases in fuel and other operating costs, high interest costs on borrowings
needed for capital construction programs, costs associated with compliance
with environmental, nuclear facility and other safety regulations and changes
in the regulatory climate. For example, in the United States, the construction
and operation of nuclear power facilities is subject to increased scrutiny by,
and evolving regulations of, the Nuclear Regulatory Commission. Increased
scrutiny might result in higher operating costs and higher capital
expenditures, with the risk that regulators may disallow inclusion of these
costs in rate authorizations.

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<PAGE>

Telecommunications. The telephone communications industry is a distinct
utility industry segment that is subject to different risks and opportunities.
Companies that provide telephone services and access to the telephone networks
comprise the largest portion of this segment. The telephone industry is large
and highly concentrated. Telephone companies in the United States are still
experiencing the effects of the break-up of American Telephone & Telegraph
Company, which occurred in 1984. Since that date the number of local and long-
distance companies and the competition among such companies has increased. In
addition, since 1984, companies engaged in telephone communication services
have expanded their nonregulated activities into other businesses, including
cellular telephone services, data processing, equipment retailing and software
services. This expansion has provided significant opportunities for certain
telephone companies to increase their earnings and dividends at faster rates
than have been allowed in traditional regulated businesses. Increasing
competition and other structural changes, however, could adversely affect the
profitability of such utilities.

Gas. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the United States, interstate transmission
companies are regulated by the Federal Energy Regulatory Commission, which is
reducing its regulation of the industry. Many companies have diversified into
oil and gas exploration and development, making returns more sensitive to
energy prices. In the recent decade, gas utility companies have been adversely
affected by disruption in the oil industry and have also been affected by
increased concentration and competition.

Water. Water supply utilities are companies that collect, purify, distribute
and sell water. In the United States and around the world, the industry is
highly fragmented, because most of the supplies are owned by local
authorities. Companies in this industry are generally mature and are
experiencing little or no per capita volume growth. Mitchell Hutchins believes
that favorable investment opportunities may result from consolidation within
this industry.

There can be no assurance that the positive developments noted above,
including those relating to business growth and changing regulation, will
occur or that risk factors other than those noted above will not develop in
the future.

INVESTMENT LIMITATIONS OF THE FUNDS

FUNDAMENTAL LIMITATIONS. The following investment limitations cannot be
changed for a Fund without the affirmative vote of the lesser of (1) more than
50% of the outstanding shares of the Fund or (2) 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 the 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

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<PAGE>

securities having the same sponsor, and mortgage- and asset-backed securities
issued by a finance or other special purpose subsidiary that are not
guaranteed by the parent company will be considered to be issued by a separate
issuer from the parent company.

(2) purchase any security if, as a result of that purchase, 25% or more of
the Fund's total assets would be invested in securities of issuers having
their principal business activities in the same industry, except that this
limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or to municipal securities and
except that (a) Financial Services Growth Fund, under normal circumstances,
will invest 25% or more of its total assets in the related group of industries
consisting of the financial services industries and (b) Utility Income Fund,
under normal circumstances, will invest 25% or more of its total assets in the
utility industries as a group. For this purpose, utility industries consist of
companies primarily engaged in the ownership or operation of facilities used
in the generation, transmission or distribution of electricity,
telecommunications, gas, or water.

(3) issue senior securities or borrow money, except as permitted under the
Investment Company Act of 1940 ("1940 Act") and then not in excess of 33 1/3%
of the Fund's total assets (including the amount of the senior securities
issued but reduced by any liabilities not constituting senior securities) at
the time of the issuance or borrowing, except that the Fund may borrow up to
an additional 5% of its total assets (not including the amount borrowed) for
temporary or emergency purposes.

(4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances
or similar instruments will not be considered the making of a loan.

(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, may be
changed by each board without shareholder approval.

Each Fund will not:

(1) invest more than 10% of its net assets in illiquid securities, a term
which means securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which the Fund has
valued the securities and includes, among other things, repurchase agreements
maturing in more than seven days.

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<PAGE>

(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.

(4) purchase securities of other investment companies, except to the extent
permitted by the 1940 Act and except that this limitation does not apply to
securities received or acquired as dividends, through offers of exchange, or
as a result of reorganization, consolidation, or merger.

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

HEDGING AND OTHER STRATEGIES USING DERIVATIVE CONTRACTS

GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. Mitchell Hutchins (or, in the
case of Capital Appreciation Fund, the Sub-Adviser) may use a variety of
financial instruments ("Derivative Instruments"), including certain options,
futures contracts (sometimes referred to as "futures") and options on futures
contracts, to attempt to hedge a Fund's portfolio. In particular, each Fund
may use the Derivative Instruments described below, except that only Financial
Services Growth Fund and Utility Income Fund may enter into hedging
transactions relating to foreign currencies and only Utility Income Fund may
use forward currency contracts. Utility Income Fund may use these strategies
to attempt to enhance income and also may enter into certain interest rate
protection transactions. A Fund may enter into transactions using one or more
types of Derivative Instruments under which the full value of its portfolio is
at risk. Under normal circumstances, however, a Fund's use of these
instruments will place at risk a much smaller portion of its assets. The
particular Derivative Instruments used by the Funds are described below.

OPTIONS ON EQUITY AND DEBT SECURITIES AND FOREIGN CURRENCIES--A call option
is a short-term contract pursuant to which the purchaser of the option, in
return for a premium, has the right to buy the security or currency underlying
the option at a specified price at any time during the term of the option. The
writer of the call option, who receives the premium, has the obligation, upon
exercise of the option during the option term, to deliver the underlying
security or currency against payment of the exercise price. A put option is a
similar contract that gives its purchaser, in return for a premium, the right
to sell the underlying security or currency at a specified price during the
option term. The writer of the put option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to buy the
underlying security or currency at the exercise price.

OPTIONS ON STOCK INDEXES--A stock index assigns relative values to the
stocks included in the index and fluctuates with changes in the market values
of those stocks. A stock index option operates in the same way as a more
traditional stock option, except that exercise of a stock index option is
effected with cash payment and does not involve delivery of securities. Thus,
upon exercise of a stock index option, the purchaser will realize, and the
writer will pay, an amount based on the difference between the exercise price
and the closing price of the stock index.

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STOCK INDEX FUTURES CONTRACTS--A stock index futures contract is a bilateral
agreement pursuant to which one party agrees to accept, and the other party
agrees to make, delivery of an amount of cash equal to a specified dollar
amount times the difference between the stock index value at the close of
trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the stocks comprising the index is
made. Generally, contracts are closed out prior to the expiration date of the
contract.

INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS--Interest rate and
foreign currency futures contracts are bilateral agreements pursuant to which
one party agrees to make, and the other party agrees to accept, delivery of a
specified type of debt security or currency at a specified future time and at
a specified price. Although such futures contracts by their terms call for
actual delivery or acceptance of debt securities or currency, in most cases
the contracts are closed out before the settlement date without the making or
taking of delivery.

OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to
options on securities or currency, except that an option on a futures contract
gives the purchaser the right, in return for the premium, to assume a position
in a futures contract (a long position if the option is a call and a short
position if the option is a put), rather than to purchase or sell a security
or currency, at a specified price at any time during the option term. Upon
exercise of the option, the delivery of the futures position to the holder of
the option will be accompanied by delivery of the accumulated balance that
represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the future. The writer of an option, upon
exercise, will assume a short position in the case of a call and a long
position in the case of a put.

FORWARD CURRENCY CONTRACTS--A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by
the parties, at a price set at the time the contract is entered into.

GENERAL DESCRIPTION OF HEDGING STRATEGIES. Hedging strategies can be broadly
categorized as "short hedges" and "long hedges." A short hedge is a purchase
or sale of a 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.

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Each Fund may purchase and write (sell) covered 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 or the Sub-
Adviser 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 or
the Sub-Adviser 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 equity
market sectors in which a Fund has invested or expects to invest. Derivative
Instruments on debt securities may be used to hedge either individual
securities or broad fixed income market sectors.

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 Commodity Futures Trading Commission ("CFTC"). In addition, a Fund's
ability to use Derivative Instruments will be limited by tax considerations.
See "Taxes."

In addition to the products, strategies and risks described below and in the
Prospectus, Mitchell Hutchins and the Sub-Adviser expect to discover
additional opportunities in connection with options, futures contracts and
other hedging techniques. These new opportunities may become available as
Mitchell Hutchins or the Sub-Adviser develops new techniques, as regulatory
authorities broaden the range of permitted transactions and as new options,
futures contracts, foreign currency contracts or other techniques are
developed. Mitchell Hutchins or the Sub-Adviser, as applicable, may utilize
these opportunities to the extent that they are consistent with each Fund's
investment objective and permitted by each Fund's investment limitations and
applicable regulatory authorities. The Funds' Prospectus or Statement of
Additional Information will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or in
the Prospectus.

SPECIAL RISKS OF 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 or the Sub-Adviser, as applicable, to predict movements
of the overall securities and interest rate markets, which requires different
skills than predicting changes in the prices of individual securities. While
Mitchell Hutchins and the Sub-Adviser are experienced in the use of Derivative
Instruments, there can be no assurance that any particular hedging strategy
adopted will succeed.

(2) There might be imperfect correlation, or even no correlation, between
price movements of a Derivative Instrument and price movements of the
investments 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 unrelated to the value of the
investments being hedged, such as speculative or other pressures on the
markets in which Derivative Instruments are traded.

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<PAGE>

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 or the Sub-Adviser projected a decline
in the price of a security in that Fund's portfolio, and the price of that
security increased instead, the gain from that increase might be wholly or
partially offset by a decline in the price of the Derivative Instrument.
Moreover, if the price of the Derivative Instrument declined by more than the
increase in the price of the security, that Fund could suffer a loss. In
either such case, the Fund would have been in a better position had it not
hedged at all.

(4) As described below, a Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in 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 contra party to enter into a
transaction closing out the position. Therefore, there is no assurance that
any hedging position can be closed out at a time and price that is favorable
to a Fund.

COVER FOR STRATEGIES USING DERIVATIVE CONTRACTS. Transactions using Hedging
Instruments, other than purchased options, expose the Funds to an obligation
to another party. A Fund will not enter into any such transactions unless it
owns either (1) an offsetting ("covered") position in securities, other
options or futures contracts or (2) cash and liquid securities, with a value
sufficient at all times to cover its potential obligations to the extent not
covered as provided in (1) above. Each Fund will comply with SEC guidelines
regarding cover for hedging transactions and will, if the guidelines so
require, set aside cash 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, the commitment of a large
portion of a Fund's assets to cover or segregated accounts could impede
portfolio management or the Fund's ability to meet redemption requests or
other current obligations.

OPTIONS. The Funds may purchase put and call options, and write (sell)
covered put or call options, on equity and debt securities and stock indices
and, in the case of Financial Services Growth Fund and Utility Income Fund, on
foreign currencies. The purchase of call options serves as a long hedge, and
the purchase of put options serves as a short hedge. Writing covered call
options serves as a limited short hedge, because declines in the value of the
hedged investment would be offset to the extent of the premium received for
writing the option. However, if the security appreciates to a price higher
than the exercise price of the call option, it can be expected that the option
will be exercised and the affected Fund will be obligated to sell the security
at less than its market value. Writing covered put options serves as a limited
long hedge because increases in the value of the hedged investment would be
offset to the extent of the premium received for

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<PAGE>

writing the option. However, if the security depreciates to a price lower than
the exercise price of the put option, it can be expected that the put option
will be exercised and the Fund will be obligated to purchase the security at
more than its market value. The securities or other assets used as cover for
OTC options written by a Fund would be considered illiquid to the extent
described under "Investment Policies and Restrictions-Illiquid Securities."

The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration
dates of up to nine months. Options that expire unexercised have no value.

A Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a
closing sale transaction. Closing transactions permit a Fund to realize
profits or limit losses on an option position prior to its exercise or
expiration.

The Funds may purchase and write both exchange-traded and OTC options.
Exchange markets for options on debt securities and foreign currencies exist
but are relatively new, and these instruments are primarily traded on the OTC
market. Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction.
In contrast, OTC options are contracts between a Fund and its contra party
(usually a securities dealer or a bank) with no clearing organization
guarantee. Thus, when a Fund purchases or writes an OTC option, it relies on
the contra party to make or take delivery of the underlying investment upon
exercise of the option. Failure by the contra party to do so would result in
the loss of any premium paid by the Fund as well as the loss of any expected
benefit of the transaction. The Funds will enter into OTC option transactions
only with contra parties that have a net worth of at least $20 million.

Generally, the OTC debt options or foreign currency options used by the
Funds are European-style options. This means that the option is only
exercisable immediately prior to its expiration. This is in contrast to
American-style options, which are exercisable at any time prior to the
expiration date of the option.

The Funds' ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Funds intend to
purchase or write only those exchange-traded options for which there appears
to be a liquid secondary market. However, there can be no assurance that such
a market will exist at any particular time. Closing transactions can be made
for OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the
Funds will enter into OTC options only with contra parties that are expected
to be capable of entering into closing transactions with the Funds, there is
no assurance that a Fund will in fact be able to close out an OTC option
position at a favorable price prior to expiration. In the event of insolvency
of the contra party, a Fund might be unable to close out an OTC option
position at any time prior to its expiration.

If a Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered put or
call option written by the Fund could cause material losses because the Fund
would be unable to sell the investment used as cover for the written option
until the option expires or is exercised.

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<PAGE>

A Fund may purchase and write put and call options on stock 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 the equity
securities market (or market sectors) rather than anticipated increases or
decreases in the value of a particular security.

LIMITATIONS ON THE USE OF OPTIONS. A Fund's use of options is governed by
the following guidelines, which can be changed by its board without
shareholder vote:

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

(2) The aggregate value of securities underlying put options written by a
Fund determined as of the date the put options are written will not exceed 50%
of a Fund's net assets.

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

FUTURES. The Funds may purchase and sell stock index futures contracts and
interest rate futures contracts and, in the case of Financial Services Growth
Fund and Utility Income Fund, foreign currency futures contracts. A Fund may
also purchase put and call options, and write covered put and call options, on
futures in which it is allowed to invest. The purchase of futures or call
options thereon can serve as a long hedge, and the sale of futures or the
purchase of put options thereon can serve as a short hedge. Writing covered
call options on futures contracts can serve as a limited short hedge, and
writing covered put options on futures contracts can serve as a limited long
hedge, using a strategy similar to that used for writing covered options on
securities or indices.

No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash, obligations of
the U.S. government or obligations fully 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.

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<PAGE>

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. The use of futures
and related options is governed by the following guidelines, which can be
changed by each Fund's board without shareholder vote:

(1) If 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.

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

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

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FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. Financial
Services Growth Fund and Utility Income Fund may use options and futures on
foreign currencies, as described above, and forward currency contracts, as
described below, to hedge against movements in the values of the foreign
currencies in which their securities are denominated. Such currency hedges can
protect against price movements in a security a Fund owns or intends to
acquire that are attributable to changes in the value of the currency in which
it is denominated. Such hedges do not, however, protect against price
movements in the securities that are attributable to other causes.

The Funds might seek to hedge against changes in the value of a particular
currency when no Derivative Instruments on that currency are available or such
Derivative Instruments are more expensive than certain other Hedging
Instruments. In such cases, the Funds 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. The risk that movements in the price of the Derivative
Instrument will not correlate perfectly with movements in the price of the
currency being hedged is magnified when this strategy is used.

The value of 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 hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency.
Thus, the Funds might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.

FORWARD CURRENCY CONTRACTS. Utility Income Fund may enter into forward
currency contracts to purchase or sell foreign currencies for a fixed amount
of U.S. dollars or another foreign currency. Such transactions may serve as
long hedges--for example, the Fund may purchase a forward currency contract to
lock in the U.S. dollar price of a security denominated in a foreign currency
that the Fund intends to acquire. Forward currency contract transactions may
also serve as short hedges--for example, the Fund may sell a forward currency
contract to lock in the U.S. dollar equivalent of the proceeds from the
anticipated sale of a security denominated in a foreign currency.

As noted above, Utility Income Fund also may seek to hedge against changes
in the value of a particular currency by using forward contracts on another
foreign currency or a basket of currencies, the value of which Mitchell
Hutchins believes will have a positive correlation to the values of the
currency being hedged. In addition, the Fund may use forward currency
contracts to shift its exposure to foreign currency fluctuations

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<PAGE>

from one country to another. For example, if the Fund owned securities
denominated in a foreign currency and Mitchell Hutchins believed that currency
would decline relative to another currency, it might enter into a forward
contract to sell an appropriate amount of the first foreign currency, with
payment to be made in the second foreign currency. Transactions that use two
foreign currencies are sometimes referred to as "cross hedging." Use of a
different foreign currency magnifies the risk that movements in the price of
the Hedging Instrument will not correlate or will correlate unfavorably with
the foreign currency being hedged.

The cost to Utility Income Fund of engaging in forward currency contracts
varies with factors such as the currency involved, the length of the contract
period and the market conditions then prevailing. Because forward currency
contracts are usually entered into on a principal basis, no fees or
commissions are involved. When the Fund enters into a forward currency
contract, it relies on the contra party to make or take delivery of the
underlying currency at the maturity of the contract. Failure by the contra
party to do so would result in the loss of any expected benefit of the
transaction.

As is the case with futures contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the contra party. Thus, there can be no assurance
that Utility Income Fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the contra party, the Fund might be unable to close out a
forward currency contract at any time prior to maturity. In either event, the
Fund would continue to be subject to market risk with respect to the position
and would continue to be required to maintain a position in the securities or
currencies that are the subject of the hedge or to maintain cash or securities
in a segregated account.

The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the
foreign currency contract has been established. Thus, Utility Income Fund
might need to purchase or sell foreign currencies in the spot (cash) market to
the extent such foreign currencies are not covered by forward contracts. The
projection of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.

LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS. Utility Income Fund
may enter into forward currency contracts or maintain a net exposure to such
contracts only if (1) the consummation of the contracts would not obligate the
Fund to deliver an amount of foreign currency in excess of the value of the
position being hedged by such contracts or (2) the Fund segregates with its
custodian cash 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.

INTEREST RATE PROTECTION TRANSACTIONS. Utility Income Fund may enter into
interest rate protection transactions, including interest rate swaps and
interest rate caps, floors and collars. Interest rate swap transactions
involve an agreement between two parties to exchange payments that are based,
for example, on variable and fixed rates of interest and that are calculated
on the basis of a specified amount of principal (the "notional principal
amount") for a specified period of time. Interest rate cap and floor
transactions involve an agreement between two parties in which the first party
agrees to make payments to the counterparty when a designated market interest
rate goes above (in the case of a cap) or below (in the case of a floor) a
designated level on predetermined dates or during a specified time period.
Interest rate collar transactions involve an

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<PAGE>

agreement between two parties in which payments are made when a designated
market interest rate either goes above a designated ceiling level or goes
below a designated floor level on predetermined dates or during a specified
time period. The Fund intends to use these transactions as a hedge and not as
a speculative investment. Interest rate protection transactions are subject to
risks comparable to those described above with respect to other hedging
strategies.

Utility Income Fund may enter into interest rate swaps, caps, floors and
collars on either an asset-based or liability-based basis, depending on
whether it is hedging its assets or its liabilities, and will usually enter
into interest rate swaps on a net basis, i.e., the two payment streams are
netted out, with the Fund receiving or paying, as the case may be, only the
net amount of the two payments. Inasmuch as these interest rate protection
transactions are entered into for good faith hedging purposes, and inasmuch as
segregated accounts will be established with respect to such transactions,
Mitchell Hutchins believes such obligations do not constitute senior
securities and, accordingly, will not treat them as being subject to the
Fund's borrowing restrictions. The net amount of the excess, if any, of the
Fund's obligations over its entitlements with respect to each interest rate
swap will be accrued on a daily basis and appropriate Fund assets having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account as described above in "Investment Policies
and Restrictions--Segregated Accounts." The Fund also will establish and
maintain such segregated accounts with respect to its total obligations under
any interest rate swaps that are not entered into on a net basis and with
respect to any interest rate caps, floors and collars that are written by the
Fund.

Utility Income Fund will enter into interest rate protection transactions
only with banks and recognized securities dealers believed by Mitchell
Hutchins to present minimal credit risk in accordance with guidelines
established by its 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.

The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. Caps, collars and floors are more
recent innovations for which documentation is less standardized, and
accordingly, they are less liquid than swaps.

TRUSTEES, DIRECTORS AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES

The trustees or directors and executive officers of the Trusts and the
Corporation, their ages, business addresses and principal occupations during
the past five years are:

<TABLE>
<CAPTION>
POSITION WITH EACH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST/CORPORATION OTHER DIRECTORSHIPS
---------------------- ------------------ --------------------
<C> <C> <S>
Margo N. Alexander**; 50 Trustee/Director and Mrs. Alexander is president, chief
President executive officer and a director of
Mitchell Hutchins (since January
1995) and also an executive vice
president and a director of
PaineWebber. Mrs. Alexander is
president and a director or trustee
of 28 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>

19
<PAGE>

<TABLE>
<CAPTION>
POSITION WITH EACH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST/CORPORATION OTHER DIRECTORSHIPS
---------------------- ------------------ --------------------
<C> <C> <S>
Richard Q. Armstrong; 61 Trustee/Director Mr. Armstrong is chairman and prin-
78 West Brother Drive cipal of RQA Enterprises (manage-
Greenwich, CT 06830 ment consulting firm) (since April
1991 and principal occupation since
March 1995). Mr. Armstrong is also
a director of Hi Lo Automotive,
Inc. He was chairman of the board,
chief executive officer and co-
owner of Adirondack Beverages
(producer and distributor of soft
drinks and sparkling/still waters)
(October 1993-March 1995). Mr.
Armstrong was a partner of the New
England Consulting Group (manage-
ment consulting firm) (December
1992-September 1993). He was man-
aging director of LVMH U.S. Corpo-
ration (U.S. subsidiary of the
French luxury goods conglomerate,
Luis Vuitton Moet Hennessey Corpo-
ration) (1987-1991) and chairman of
its wine and spirits subsidiary,
Schieffelin & Somerset Company
(1987-1991). Mr. Armstrong is a
director or trustee of 27 invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
E. Garrett Bewkes, Jr.**; 70 Trustee/Director and Mr. Bewkes is a director of Paine
Chairman of the Webber Group Inc. ("PW Group")
Board of (holding company of PaineWebber and
Trustees/Directors Mitchell Hutchins). Prior to De-
cember 1995, he was a consultant to
PW Group. Prior to 1988, he was
chairman of the board, president
and chief executive officer of
American Bakeries Company. Mr.
Bewkes is a director of Interstate
Bakeries Corporation and NaPro
BioTherapeutics, Inc. Mr. Bewkes is
a director or trustee of 28 in-
vestment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>

20
<PAGE>

<TABLE>
<CAPTION>
POSITION WITH EACH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST/CORPORATION OTHER DIRECTORSHIPS
---------------------- ------------------ --------------------
<C> <C> <S>
Richard R. Burt; 50 Trustee/Director Mr. Burt is chairman of Interna-
1101 Connecticut Avenue, N.W. tional Equity Partners (interna-
Washington, D.C. 20036 tional investments and consulting
firm) (since March 1994) and a
partner of McKinsey & Company
(management consulting firm) (since
1991). He is also a director of
American Publishing Company and
Archer-Daniels-Midland Co. (agri-
cultural commodities). He was the
chief negotiator in the Strategic
Arms Reduction Talks with the for-
mer 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 27 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Mary C. Farrell**; 47 Trustee/Director Ms. Farrell is a managing director,
senior investment strategist and
member of the Investment Policy
Committee of PaineWebber. Ms.
Farrell joined PaineWebber in 1982.
She is a member of the Financial
Women's Association and Women's
Economic Roundtable, and is em-
ployed 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 Busi-
ness. Ms. Farrell is a director
or trustee of 27 investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Meyer Feldberg; 55 Trustee/Director Mr. Feldberg is Dean and Professor
Columbia University of Management of the Graduate
101 Uris Hall School of Business, Columbia Uni-
New York, New York 10027 versity. Prior to 1989, he was
president of the Illinois Institute
of Technology. Dean Feldberg is
also a director of AMSCO Interna-
tional Inc. (medical instruments
and supplies), Federated Department
Stores, Inc. and New World Commu-
nications Group Incorporated. Dean
Feldberg is a director or trustee
of 27 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>

21
<PAGE>

<TABLE>
<CAPTION>
POSITION WITH EACH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST/CORPORATION OTHER DIRECTORSHIPS
---------------------- ------------------ --------------------
<C> <C> <S>
George W. Gowen; 67 Trustee/Director Mr. Gowen is a partner in the law
666 Third Avenue firm of Dunnington, Bartholow &
New York, New York 10017 Miller. Prior to May 1994, he was a
partner in the law firm of Fryer,
Ross & Gowen. Mr. Gowen is a di-
rector of Columbia Real Estate In-
vestments, Inc. Mr. Gowen is a di-
rector or trustee of 27 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Frederic V. Malek; 60 Trustee/Director Mr. Malek is chairman of Thayer
1455 Pennsylvania Avenue, N.W. Capital Partners (merchant bank)
Suite 350 and a co-chairman and director of
Washington, D.C. 20004 CB Commercial Group Inc. (real es-
tate). From January 1992 to Novem-
ber 1992, he was campaign manager
of Bush-Quayle '92. From 1990 to
1992, he was vice chairman and,
from 1989 to 1990, he was president
of Northwest Airlines Inc., NWA
Inc. (holding company of Northwest
Airlines Inc.) and Wings Holdings
Inc. (holding company of NWA Inc.).
Prior to 1989, he was employed by
the Marriott Corporation (hotels,
restaurants, airline catering and
contract feeding), where he most
recently was an executive vice
president and president of Marriott
Hotels and Resorts. Mr. Malek is
also a director of American Man-
agement Systems, Inc. (management
consulting and computer-related
services), Automatic Data Process-
ing Inc., CB Commercial Group, Inc.
(real estate services), Choice Ho-
tels International (hotel and hotel
franchising), FPL Group, Inc.
(electric services), Integra, Inc.
(bio-medical), Manor Care, Inc.
(health care), National Education
Corporation and Northwest Airlines
Inc. Mr. Malek is a director or
trustee of 27 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>

22
<PAGE>

<TABLE>
<CAPTION>
NAME AND ADDRESS*; POSITION WITH EACH BUSINESS EXPERIENCE;
AGE TRUST/CORPORATION OTHER DIRECTORSHIPS
------------------ ------------------ --------------------
<C> <C> <S>
Carl W. Schafer; 61 Trustee/Director Mr. Schafer is president of the At-
P.O. Box 1164 lantic Foundation (charitable
Princeton, NJ 08542 foundation supporting mainly
oceanographic exploration and re-
search). He also is a director of
Roadway Express, Inc. (trucking),
The Guardian Group of Mutual Funds,
Evans Systems, Inc. (a motor fuels,
convenience store and diversified
company), Electronic Clearing
House, Inc. (financial transactions
processing), Wainoco Oil Corpora-
tion and Nutraceutix, Inc. (bio-
technology). Prior to January 1993,
Mr. Schafer was chairman of the
Investment Advisory Committee of
the Howard Hughes Medical Insti-
tute. Mr. Schafer is a director or
trustee of 27 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Julieanna Berry; 33 Vice President Ms. Berry is a first vice president
(Managed Investments and a portfolio manager of Mitchell
Trust only) Hutchins. Ms. Berry is a vice
president of two investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Karen L. Finkel; 39 Vice President Mrs. Finkel is a senior vice presi-
(Financial Services dent and a portfolio manager of
Growth Fund and Managed Mitchell Hutchins. Mrs. Finkel is a
Investments Trust only) vice president of two investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
James F. Keegan; 36 Vice President Mr. Keegan is a senior vice presi-
(Managed Investments dent and a portfolio manager of
Trust only) Mitchell Hutchins. Prior to March
1996, he was director of fixed in-
come strategy and research of
Merrion Group, L.P. From 1987 to
1994, he was a vice president of
global investment management of
Bankers Trust Company. Mr. Keegan
is a vice president of three in-
vestment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>

23
<PAGE>

<TABLE>
<CAPTION>
POSITION WITH EACH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST/CORPORATION OTHER DIRECTORSHIPS
---------------------- ------------------ --------------------
<C> <C> <S>
Thomas J. Libassi; 38 Vice President Mr. Libassi is a senior vice presi-
(Managed Investments dent and a portfolio manager of
Trust only) Mitchell Hutchins. Prior to May
1994, he was a vice president of
Keystone Custodian Funds Inc. with
portfolio management responsibili-
ty. Mr. Libassi is a vice president
of four investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Dennis McCauley; 50 Vice President Mr. McCauley is a managing director
(Managed Investments and chief investment officer--fixed
Trust only) income of Mitchell Hutchins. Prior
to December 1994, he was director
of fixed income investments of IBM
Corporation. Mr. McCauley is a vice
president of 18 investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Ann E. Moran; 39 Vice President and Ms. Moran is a vice president and
Assistant Treasurer manager of the mutual fund finance
division of Mitchell Hutchins. Ms.
Moran is a vice president and as-
sistant treasurer of 29 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Dianne E. O'Donnell; 44 Vice President and Ms. O'Donnell is a senior vice
Secretary president and deputy general coun-
sel of Mitchell Hutchins. Ms.
O'Donnell is a vice president and
secretary of 27 investment compa-
nies and vice president and assis-
tant secretary for one investment
company for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
Emil Polito; 36 Vice President Mr. Polito is a senior vice presi-
dent and director of operations and
control for Mitchell Hutchins. From
March 1991 to September 1993 he was
director of the Mutual Funds Sales
Support and Service Center for
Mitchell Hutchins and Paine-Webber.
Mr. Polito is vice president of 28
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>

24
<PAGE>

<TABLE>
<CAPTION>
POSITION WITH EACH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST/CORPORATION OTHER DIRECTORSHIPS
---------------------- ------------------ --------------------
<C> <C> <S>
Victoria E. Schonfeld; 46 Vice President Ms. Schonfeld is a managing director
and general counsel of Mitchell
Hutchins. Prior to May 1994, she
was a partner in the law firm of
Arnold & Porter. Ms. Schonfeld is a
vice president of 27 investment
companies and vice president and
secretary of one investment company
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Paul H. Schubert; 34 Vice President and Mr. Schubert is a first vice presi-
Treasurer dent and a senior manager of the
mutual fund finance division of
Mitchell Hutchins. From August 1992
to August 1994, he was a vice
president of BlackRock Financial
Management Inc. Prior to August
1992, he was an audit manager with
Ernst & Young LLP. Mr. Schubert is
a vice president and treasurer of
28 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Nirmal Singh; 41 Vice President Mr. Singh is a senior vice president
(Managed Investments and a portfolio manager of Mitchell
Trust only) Hutchins. Prior to September 1993,
he was a member of the portfolio
management team at Merrill Lynch
Asset Management, Inc. Mr. Singh is
a vice president of four investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Barney A. Taglialatela; 36 Vice President and Mr. Taglialatela is a vice president
Assistant Treasurer and a manager of the mutual fund
finance division of Mitchell
Hutchins. Prior to February 1995,
he was a manager of the mutual fund
finance division of Kidder Peabody
Asset Management, Inc. Mr.
Taglialetela is a vice president
and assistant treasurer of 28 in-
vestment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>

25
<PAGE>

<TABLE>
<CAPTION>
POSITION WITH EACH BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE TRUST/CORPORATION OTHER DIRECTORSHIPS
---------------------- ------------------ --------------------
<C> <C> <S>
Mark A. Tincher; 41 Vice President Mr. Tincher is a managing director
and chief investment officer--U.S.
equity investments of Mitchell
Hutchins. Prior to March 1995, he
was a vice president and directed
the U.S. funds management and eq-
uity research areas of Chase Man-
hattan Private Bank. Mr. Tincher is
a vice president of 13 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Ian W. Williams; 40 Vice President and Mr. Williams is a vice president and
Assistant Treasurer a manager of the mutual fund fi-
nance division of Mitchell
Hutchins. Prior to June 1992, he
was an audit senior accountant with
Price Waterhouse LLP. Mr. Williams
is a vice president and assistant
treasurer of 28 investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Craig M. Varrelman; 38 Vice President Mr. Varrelman is a senior vice
(Managed Investments president and a portfolio manager
Trust only) of Mitchell Hutchins. Mr. Varrelman
is a vice president of four in-
vestment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Keith A. Weller; 35 Vice President and Mr. Weller is a first vice president
Assistant Secretary and associate general counsel of
Mitchell Hutchins. Prior to May
1995, he was an attorney in private
practice. Mr. Weller is a vice
president and assistant secretary
of 27 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>
- --------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of each
Fund as defined in the 1940 Act by virtue of their positions with PW Group,
PaineWebber and/or Mitchell Hutchins.

26
<PAGE>

Each Trust and the Corporation pays board members who are not "interested
persons" of the Trust or Corporation ("disinterested members") $1,000 annually
for each series and $150 for each board meeting and each meeting of a board
committee (other than committee meetings held on the same day as a board
meeting). Managed Investments Trust presently has six series and thus pays
each such trustee $6,000 annually, plus any additional amounts due for board
or committee meetings. Managed Assets Trust and Financial Services Growth Fund
each has only one series and thus pays each such board member $1,000 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. All board members are reimbursed for any expenses incurred in
attending meetings. Board members and officers of the Trusts and Corporation
own in the aggregate less than 1% of the outstanding shares of each Fund.
Because PaineWebber and Mitchell Hutchins perform substantially all the
services necessary for the operation of the Trusts, the Corporation and each
Fund, the Trusts and Corporation require no employees. No officer, director or
employee of Mitchell Hutchins or PaineWebber presently receives any
compensation from the Trusts or Corporation for acting as a board member or
officer.

The table below includes certain information relating to the compensation of
the current board members who held office with the Trusts and the Corporation
or with other PaineWebber funds during the years indicated.

COMPENSATION TABLE

<TABLE>
<CAPTION>
AGGREGATE TOTAL
COMPENSATION AGGREGATE COMPENSATION
AGGREGATE FROM PW COMPENSATION FROM THE
COMPENSATION FINANCIAL FROM TRUSTS/CORPORATION
FROM PW SERVICES UTILITY AND
MANAGED GROWTH INCOME THE FUND
NAME OF PERSON, POSITION ASSETS TRUST* FUND, INC.* FUND* COMPLEX**
- ------------------------ ------------- ------------ ------------ ------------------
<S> <C> <C> <C> <C>
Richard Q. Armstrong,
Trustee/Director....... $6,139 $1,688 $1,228 $59,873
Richard R. Burt,
Trustee/Director....... 5,389 1,538 1,078 51,173
Meyer Feldberg,
Trustee/Director....... 9,000 2,850 1,800 96,181
George W. Gowen,
Trustee/Director....... 9,000 2,850 1,800 92,431
Frederic V. Malek,
Trustee/Director....... 9,000 2,850 1,800 92,431
Carl W. Schafer,
Trustee/Director....... 6,139 1,688 1,228 62,307
</TABLE>
- --------
Only independent members of the board are compensated by the Trusts or the
Corporation and identified above; board members who are "interested persons,"
as defined by the 1940 Act, do not receive compensation.

* Represents fees paid to each board member during the year ended March 31,
1997.

** Represents total compensation paid to each board member during the calendar
year ended December 31, 1996; no fund within the fund complex has a pension
or retirement plan.

PRINCIPAL HOLDERS OF SECURITIES

As of July 1, 1997, the records of the Trusts and Corporation indicate that
no shareholder owned 5% or more of a Fund's shares. The Trusts and Corporation
are not aware of any shareholder who is the beneficial owner of 5% or more of
a Fund's shares.

27
<PAGE>

INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS

INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator to each Fund pursuant to separate contracts (each an
"Advisory Contract") with each Trust and the Corporation. Under the Advisory
Contracts, each Fund pays Mitchell Hutchins a fee, computed daily and paid
monthly, at the annual rate specified in the Prospectus. Furthermore, under a
service agreement ("Service Agreement") with each Trust and the Corporation
that is reviewed by the applicable boards annually, PaineWebber provides
certain services to the Funds not otherwise provided by the Funds' transfer
agent.

Under the terms of the Advisory Contracts, each Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. Expenses borne by each Fund include the following: (1) the cost
(including brokerage commissions) of securities purchased or sold by the Fund
and any losses incurred 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 board members and officers who are not
"interested persons" (as defined in the 1940 Act) of the Trust/Corporation or
Mitchell Hutchins; (6) all expenses incurred in connection with the board
members' services, including travel expenses; (7) taxes (including any income
or franchise taxes) and governmental fees; (8) costs of any liability,
uncollectible items of deposit and other insurance or fidelity bonds; (9) any
costs, expenses or losses arising out of a liability of or claim for damages
or other relief asserted against the Trust/Corporation or Fund for violation
of any law; (10) legal, accounting and auditing expenses, including legal fees
of special counsel for the independent board members; (11) charges of
custodians, transfer agents and other agents; (12) costs of preparing share
certificates; (13) expenses of setting in type and printing prospectuses,
statements of additional information and supplements thereto, reports and
proxy materials for existing shareholders, and costs of mailing such materials
to shareholders; (14) any extraordinary expenses (including fees and
disbursements of counsel) incurred by the Fund; (15) fees, voluntary
assessments and other expenses incurred in connection with membership in
investment company organizations; (16) costs of mailing and tabulating proxies
and costs of meetings of shareholders, the board and any committees thereof;
(17) the cost of investment company literature and other publications provided
to board members 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 assignment and is terminable at any time without
penalty by the Fund's board or by vote of the holders of a majority of the
Fund's outstanding voting securities on 60 days' written notice to Mitchell
Hutchins, or by Mitchell Hutchins on 60 days' written notice to the Fund.

CAPITAL APPRECIATION FUND. Mitchell Hutchins acts as the investment adviser
and administrator of Capital Appreciation Fund pursuant to an Advisory
Contract dated March 20, 1992 with Managed Assets Trust. Under the Advisory
Contract, the Fund pays Mitchell Hutchins a fee, computed daily and paid
monthly, at the annual rate of 1.00% of the Fund's average daily net assets.
For the fiscal years ended March 31, 1997, March 31, 1996 and March 31, 1995,
the Fund paid (or accrued) to Mitchell Hutchins investment advisory and
administration fees of $2,684,390, $2,443,715, and $2,168,097 respectively.

28
<PAGE>

Pursuant to the Service Agreement, for the fiscal years ended March 31,
1997, March 31, 1996 and March 31, 1995, Capital Appreciation Fund paid (or
accrued) to PaineWebber service fees of $89,240, $93,745, and $98,260,
respectively.

The Advisory Contract authorizes Mitchell Hutchins to retain one or more
sub-advisers, but does not require Mitchell Hutchins to do so. Mitchell
Hutchins has entered into a separate contract with the Sub-Adviser, dated
March 21, 1995 ("Sub-Advisory Contract"), pursuant to which the Sub-Adviser
determines what securities will be purchased, sold or held by Capital
Appreciation Fund. Under the Sub-Advisory Contract, Mitchell Hutchins (not the
Fund) pays the Sub-Adviser a monthly fee of 50% of the fee paid by the Fund to
Mitchell Hutchins under the Advisory Contract. The Sub-Adviser bears all
expenses incurred by it in connection with its services under the Sub-Advisory
Contract. Under the Sub-Advisory Contract and a prior substantially identical
contract, for the fiscal years ended March 31, 1997, March 31, 1996, and March
31, 1995, Mitchell Hutchins paid (or accrued) to the Sub-Adviser sub-advisory
fees of $1,342,195, $1,221,858, and $1,084,049, respectively.

Under the Sub-Advisory Contract, the Sub-Adviser will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Trust,
Capital Appreciation Fund, its shareholders or Mitchell Hutchins in connection
with the Sub-Advisory Contract, except any liability to the Trust, the Fund,
its shareholders or Mitchell Hutchins to which the Sub-Adviser would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence on
its part in the performance of its duties or from reckless disregard by it of
its obligations and duties under the Sub-Advisory Contract.

The Sub-Advisory Contract terminates automatically upon its assignment or
the termination of the Advisory Contract and is terminable at any time without
penalty by the board or by vote of the holders of a majority of Capital
Appreciation Fund's outstanding voting securities on 60 days' notice to the
Sub-Adviser, or by the Sub-Adviser on 120 days' written notice to Mitchell
Hutchins. The Sub-Advisory Contract may also be terminated by Mitchell
Hutchins (1) upon material breach by the Sub-Adviser of its representations
and warranties, which breach shall not have been cured within a 20-day period
after notice of such breach; (2) if the Sub-Adviser becomes unable to
discharge its duties and obligations under the Sub-Advisory Contract or (3) on
120 days' notice to the Sub-Adviser.

FINANCIAL SERVICES GROWTH FUND. Mitchell Hutchins acts as the investment
adviser and administrator of Financial Services Growth Fund pursuant to an
Advisory Contract with the Fund dated April 1, 1990. Under the Advisory
Contract, the Fund pays Mitchell Hutchins a fee, computed daily and paid
monthly, at the annual rate of 0.70% of the Fund's average daily net assets.
For the fiscal years ended March 31, 1997, March 31, 1996, and March 31, 1995,
the Fund paid (or accrued) to Mitchell Hutchins investment advisory and
administration fees totalling $771,491, $625,307, and $480,025, respectively.

Pursuant to the Service Agreement, for the fiscal years ended March 31,
1997, March 31, 1996, and March 31, 1995, Financial Services Growth Fund paid
(or accrued) to PaineWebber $26,881, $25,258, and $22,723, respectively.

UTILITY INCOME FUND. Mitchell Hutchins acts as the investment adviser and
administrator of Utility Income Fund pursuant to an Advisory Contract with
Managed Investments Trust dated April 21, 1988, as supplemented by a separate
Fee Agreement dated May 1, 1992. Under the Advisory Contract, the Trust pays
Mitchell Hutchins an annual fee of 0.70% of the Fund's average net assets,
computed daily and paid monthly.

29
<PAGE>

For the fiscal year ended March 31, 1997, during the four months ended March
31, 1996 and for the fiscal years ended November 30, 1995 and November 30,
1994, the Trust paid (or accrued) to Mitchell Hutchins investment advisory and
administration fees of $314,323 (of which $30,480 was waived), $139,394 (of
which $69,697 was waived), $436,613, and $515,462 respectively.

Pursuant to the Service Agreement for the fiscal year ended March 31, 1997,
during the four months ended March 31, 1996 and for the fiscal years ended
November 30, 1995 and November 30, 1994, Utility Income Fund paid (or accrued)
to PaineWebber $17,118, $7,119, $24,449, and $28,223 respectively.

NET ASSETS. The following table shows the approximate net assets as of June
30, 1997, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.

<TABLE>
<CAPTION>
NET ASSETS
($ MIL)
INVESTMENT CATEGORY ----------
<S> <C>
Domestic (excluding Money Market).............................. $ 5,864.6
Global......................................................... 3,208.3
Equity/Balanced................................................ 4,195.0
Fixed Income (excluding Money Market).......................... 4,877.9
Taxable Fixed Income......................................... 3,328.9
Tax-Free Fixed Income........................................ 1,549.0
Money Market Funds............................................. 24,227.8
</TABLE>

PERSONNEL 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. Sub-Adviser personnel may also
invest in securities for their own accounts pursuant to a comparable code of
ethics.

DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
Funds' Class A, Class B, Class C and Class Y shares 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 each
Fund. Shares of each Fund are offered continuously. Under separate exclusive
dealer agreements between Mitchell Hutchins and PaineWebber relating to the
Class A, Class B, Class C and Class Y shares (collectively, "Exclusive Dealer
Agreements"), PaineWebber and its correspondent firms sell the Funds' shares.

Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares adopted by each Trust or Corporation in the manner prescribed
under Rule 12b-1 under the 1940 Act ("Class A Plan," "Class B Plan" and "Class
C Plan," collectively, "Plans"), each Fund pays Mitchell Hutchins a service
fee, accrued daily and payable monthly, at the annual rate of 0.25% of the
average daily net assets of each Class of shares for each respective Fund.
Under the Class B Plan and the Class C Plan, each Fund pays Mitchell

30
<PAGE>

Hutchins a distribution fee, accrued daily and payable monthly, at the annual
rate of 0.75% of the average daily net assets of the Class B shares and Class
C shares of each respective Fund. There is no distribution plan with respect
to any Fund's Class Y shares.

Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the 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 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 of the respective Fund 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 fees to Mitchell Hutchins under
the Class A, Class B and Class C Plans during the fiscal year ended March 31,
1992:

<TABLE>
<CAPTION>
FINANCIAL
CAPITAL SERVICES UTILITY
APPRECIATION GROWTH INCOME
FUND FUND FUND
------------ --------- --------
<S> <C> <C> <C>
Class A...................................... $ 207,015 $179,046 $ 18,987
Class B...................................... $1,570,953 $304,147 $282,135
Class C...................................... $ 285,378 $ 81,806 $ 91,072
</TABLE>

31
<PAGE>

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,
1997:

<TABLE>
<CAPTION>
FINANCIAL
CAPITAL SERVICES UTILITY
APPRECIATION GROWTH INCOME
FUND FUND FUND
------------ --------- --------
<S> <C> <C> <C>
CLASS A
Marketing and advertising..................... $ 37,144 $ 39,375 $ 9,431
Printing of prospectuses and statement of
additional information....................... $ 366 $ 262 $ 38
Branch network costs allocated and interest
expense...................................... $123,343 $ 62,381 $ 12,345
Service fees paid to PaineWebber investment
executives................................... $ 76,595 $ 66,766 $ 7,067
CLASS B
Marketing and advertising..................... $ 30,688 $ 16,725 $ 35,039
Amortization of commissions................... $509,243 $107,575 $113,449
Printing of prospectuses and statement of
additional information....................... $ 641 $ 111 $ 140
Branch network costs allocated and interest
expense...................................... $149,346 $ 26,496 $ 45,859
Service fees paid to PaineWebber investment
executives................................... $145,313 $ 28,364 $ 26,246
CLASS C
Marketing and advertising..................... $ 15,043 $ 4,497 $11,306
Amortization of commissions................... $ 79,192 $ 24,147 $ 25,901
Printing of prospectuses and statement of
additional information....................... $ 118 $ 30 $ 45
Branch network costs allocated and interest
expense...................................... $ 50,333 $ 7,123 $ 14,796
Service fees paid to PaineWebber investment
executives................................... $ 26,397 $ 7,636 $ 8,473
</TABLE>

"Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing the Funds' shares. These
internal costs encompass office rent, salaries and other overhead expenses of
various departments and areas of operations of Mitchell Hutchins. "Branch
network costs allocated and interest expense" consist of an allocated portion
of the expenses of various PaineWebber departments involved in the
distribution of the Funds' shares, including the PaineWebber retail branch
system.

In approving the Funds' overall Flexible PricingSM system of distribution,
each board considered several factors, including that implementation of
Flexible Pricing would (1) enable investors to choose the purchasing option
best suited to their individual situation, thereby encouraging current
shareholders to make additional investments in each respective Fund and
attracting new investors and assets to the Fund to the benefit of the Fund and
its shareholders, (2) facilitate distribution of the Funds' shares and (3)
maintain the competitive position of the Funds in relation to other funds that
have implemented or are seeking to implement similar distribution
arrangements.

In approving the Class A Plan, 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

32
<PAGE>

PaineWebber investment executives and correspondent firms, resulting in
greater growth of the Fund than might otherwise be the case, (3) the
advantages to the shareholders of economies of scale resulting from growth in
the Fund's assets and potential continued growth, (4) the services provided to
the Fund and its shareholders by Mitchell Hutchins, (5) the services provided
by PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell
Hutchins and (6) Mitchell Hutchins' shareholder service-related expenses and
costs.

In approving the Class B Plan, each board considered all the features of the
distribution system, including (1) the conditions under which contingent
deferred sales charges would be imposed and the amount of such charges, (2)
the advantage to investors in having no initial sales charges deducted from
Fund purchase payments and instead having the entire amount of their purchase
payments immediately invested in Fund shares, (3) Mitchell Hutchins' belief
that the ability of PaineWebber investment executives and correspondent firms
to receive sales commissions when Class B shares are sold and continuing
service fees thereafter while their customers invest their entire purchase
payments immediately in Class B shares would prove attractive to the
investment executives and correspondent firms, resulting in greater growth of
the Fund than might otherwise be the case, (4) the advantages to the
shareholders of economies of scale resulting from growth in the Fund's assets
and potential continued growth, (5) the services provided to the Fund and its
shareholders by Mitchell Hutchins, (6) the services provided by PaineWebber
pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins and (7)
Mitchell Hutchins' shareholder service and distribution-related expenses and
costs. The board members also recognized that Mitchell Hutchins' willingness
to compensate PaineWebber and its investment executives, without the
concomitant receipt by Mitchell Hutchins of initial sales charges, was
conditioned upon its expectation of being compensated under the Class B Plan.

In approving the Class C Plan, each board considered all the features of the
distribution system, including (1) the advantage to investors in having no
initial sales charges deducted from the Fund purchase payments and instead
having the entire amount of their purchase payments immediately invested in
Fund shares, (2) the advantage to investors in being free from contingent
deferred sales charges upon redemption for shares held more than one year and
paying for distribution on an ongoing basis, (3) Mitchell Hutchins' belief
that the ability of PaineWebber investment executives and correspondent firms
to receive sales compensation for their sales of Class C shares on an ongoing
basis, along with continuing service fees, while their customers invest their
entire purchase payments immediately in Class C shares and generally do not
face contingent deferred sales charges, would prove attractive to the
investment executives and correspondent firms, resulting in greater growth to
the Fund than might otherwise be the case, (4) the advantages to the
shareholders of economies of scale resulting from growth in the Fund's assets
and potential continued growth, (5) the services provided to the Fund and its
shareholders by Mitchell Hutchins, (6) the services provided by PaineWebber
pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins and (7)
Mitchell Hutchins' shareholder service- and distribution-related expenses and
costs. The board members also recognized that Mitchell Hutchins' willingness
to compensate PaineWebber and its investment executives without the
concomitant receipt by Mitchell Hutchins of initial sales charges or
contingent deferred sales charges upon redemption, was conditioned upon its
expectation of being compensated under the Class C Plan.

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

33
<PAGE>

Under the Distribution Contracts for Class A shares and similar prior
distribution contracts, for the fiscal years set forth below, Mitchell
Hutchins earned the following approximate amounts of sales charges and
retained the following approximate amounts, net of concessions to PaineWebber
as exclusive dealer.

<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MARCH 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
CAPITAL APPRECIATION FUND
Earned........................................ $124,319 $ 112,032 $ 118,445
Retained...................................... $ 7,597 $ 6,149 $ 7,400
FINANCIAL SERVICES GROWTH FUND
Earned........................................ $318,111 $ 61,563 $ 65,516
Retained...................................... $ 21,364 $ 7,084 $ 7,210
</TABLE>

<TABLE>
<CAPTION>
FOR FISCAL FOR FOUR FOR FISCAL FOR FISCAL
YEAR ENDED MONTHS ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, NOVEMBER 30, NOVEMBER 30,
1997 1996 1995 1994
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
UTILITY INCOME FUND
Earned........................ $5,958 $3,054 $12,015 $74,565
Retained...................... $ 340 $ 174 $ 608 $ 4,440
</TABLE>

Mitchell Hutchins earned and retained the following contingent deferred
sales charges paid upon certain redemptions of Class A, Class B and Class C
shares for the fiscal year ended March 31, 1997.

<TABLE>
<CAPTION>
CAPITAL FINANCIAL
APPRECIATION SERVICES
FUND GROWTH FUND UTILITY INCOME FUND
------------ ----------- -------------------
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
1997 1997 1997
------------ ----------- -------------------
<S> <C> <C> <C>
Class A............................ $ 0 $ 0 $ 0
Class B............................ $250,193 $84,381 $161,905
Class C............................ $ 0 $ 1,727 $ 2,431
</TABLE>

PORTFOLIO TRANSACTIONS

Subject to policies established by each board, Mitchell Hutchins or the Sub-
Adviser, as applicable, is responsible for the execution of each Fund's
portfolio transactions and the allocation of brokerage transactions. In
executing portfolio transactions, Mitchell Hutchins or the Sub-Adviser seeks
to obtain the best net results for a Fund, taking into account such factors as
the price (including the applicable brokerage commission or dealer spread),
size of order, difficulty of execution and operational facilities of the firm
involved. While Mitchell Hutchins and the Sub-Adviser generally seek
reasonably competitive commission rates, payment of the lowest commission is
not necessarily consistent with obtaining the best net results. Prices paid to
dealers in principal transactions, through which most debt securities and some
equity securities are traded, generally include a "spread," which is the
difference between the prices at which the dealer is willing to purchase and
sell a specific security at the time. The Funds may invest in securities
traded in the OTC market and will engage primarily in transactions directly
with the dealers who make markets in such securities,

34
<PAGE>

unless a better price or execution could be obtained by using a broker. During
the fiscal periods indicated, the Funds paid the brokerage commissions set
forth below:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Capital Appreciation Fund........................... $330,810 $329,556 $322,307
Financial Services Growth Fund...................... $ 80,638 $ 56,121 $ 20,088
</TABLE>

<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
FISCAL YEAR FOUR MONTHS ENDED ENDED
ENDED MARCH ENDED MARCH NOVEMBER 30, NOVEMBER 30,
31, 1997 31, 1996 1995 1994
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Utility Income Fund........... $72,018 $26,304 $74,250 $185,420
</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 1940 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 fiscal periods indicated, the Funds paid the brokerage commissions
shown below to PaineWebber. The brokerage commissions paid by Capital
Appreciation Fund to PaineWebber for the fiscal year ended March 31, 1997
represented 0.11% of the total brokerage commissions paid by that Fund and %
of the aggregate dollar amount of transactions involving brokerage
commissions.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Capital Appreciation Fund......................... $350 $0 $0
Financial Services Growth Fund.................... $0 $0 $0
</TABLE>

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.

Consistent with the interests of the Funds and subject to the review of each
board, Mitchell Hutchins or the Sub-Adviser 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 or the Sub-Adviser determines in good
faith that such commission is reasonable in terms either of that particular
transaction or of the overall responsibility of Mitchell Hutchins or the Sub-
Adviser, as applicable, to that Fund and its other clients and that the total
commissions paid by the Fund will be reasonable in relation to the benefits to
the Fund over the long term.

<TABLE>
<CAPTION>
AMOUNT OF PORTFOLIO BROKERAGE COMMISSIONS
TRANSACTIONS PAID
------------------- ---------------------
<S> <C> <C>
Capital Appreciation Fund............ $116,470.35 $466,356.07
Financial Services Growth Fund....... 5,148.00 74,290.00
Utility Income Fund.................. 22,170.00 49,698.00
</TABLE>

35
<PAGE>

For purchases or sales with broker-dealer firms that act as principal,
Mitchell Hutchins or the Sub-Adviser seeks best execution. Although Mitchell
Hutchins and the Sub-Adviser may receive certain research or execution
services in connection with these transactions, Mitchell Hutchins and the Sub-
Adviser will not purchase securities at a higher price or sell securities at a
lower price than would otherwise be paid if no weight was attributed to the
services provided by the executing dealer. Moreover, Mitchell Hutchins and the
Sub-Adviser will not enter into any explicit soft dollar arrangements relating
to principal transactions and will not receive in principal transactions the
types of services that could be purchased for hard dollars. Mitchell Hutchins
or the Sub-Adviser may engage in agency transactions in OTC equity and debt
securities in return for research and execution services. These transactions
are entered into only in compliance with procedures ensuring that the
transaction (including commissions) is at least as favorable as it would have
been if effected directly with a market-maker that did not provide research or
execution services. These procedures include Mitchell Hutchins or the Sub-
Adviser receiving multiple quotes from dealers before executing the
transactions on an agency basis.

Information and research services furnished by brokers or dealers through
which or with which the Funds effect securities transactions may be used by
Mitchell Hutchins or the Sub-Adviser in advising other funds or accounts and,
conversely, research services furnished to Mitchell Hutchins or the Sub-
Adviser by brokers or dealers in connection with other funds or accounts that
either of them advises may be used in advising the Funds. Information and
research received from brokers or dealers will be in addition to, and not in
lieu of, the services required to be performed by Mitchell Hutchins under the
Advisory Contract or the Sub-Adviser under the Sub-Advisory Contract.

Investment decisions for a Fund and for other investment accounts managed by
Mitchell Hutchins or by the Sub-Adviser are made independently of each other
in light of differing considerations for the various accounts. However, the
same investment decision may occasionally be made for a Fund and one or more
of such accounts. In such cases, simultaneous transactions are inevitable.
Purchases or sales are then averaged as to price and allocated between that
Fund and such other account(s) as to amount according to a formula deemed
equitable to the Fund and such account(s). While in some cases this practice
could have a detrimental effect upon the price or value of the security as far
as the Funds are concerned, or upon their ability to complete their entire
order, in other cases it is believed that coordination and the ability to
participate in volume transactions will be beneficial to the Funds.

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
1940 Act. Among other things, these procedures require that the spread or
commission paid in connection with such a purchase be reasonable and fair, the
purchase be at not more than the public offering price prior to the end of the
first business day after the date of the public offering and that PaineWebber
or any affiliate thereof not participate in or benefit from the sale to the
Funds.

PORTFOLIO TURNOVER. The Funds' annual portfolio turnover rates may vary
greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate is
calculated by dividing the lesser of each Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of securities in the portfolio during the year.

36
<PAGE>

The Funds' respective portfolio turnover rates for the fiscal periods shown
were:

<TABLE>
<S> <C>
CAPITAL APPRECIATION FUND
Fiscal year ended March 31, 1997............................................ 56%
Fiscal year ended March 31, 1996............................................ 57%
FINANCIAL SERVICES GROWTH FUND
Fiscal year ended March 31, 1997............................................ 40%
Fiscal year ended March 31, 1996............................................ 53%
UTILITY INCOME FUND
Fiscal year ended March 31, 1997............................................ 41%
Four months ended March 31, 1996............................................ 21%
Fiscal year ended November 30, 1995......................................... 30%
</TABLE>

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

COMBINED PURCHASE PRIVILEGE-CLASS A SHARES. Investors and eligible groups of
related Fund investors may combine purchases of Class A shares of the Funds
with concurrent purchases of Class A shares of any other PaineWebber mutual
fund and thus take advantage of the reduced sales charges indicated in the
table of sales charges for Class A shares in the Prospectus. The sales charge
payable on the purchase of Class A shares of the Funds and Class A shares of
such other funds will be at the rates applicable to the total amount of the
combined concurrent purchases.

An "eligible group of related Fund investors" can consist of any combination
of the following:

(a) an individual, that individual's spouse, parents and children;

(b) an individual and his or her Individual Retirement Account ("IRA");

(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25%
or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);

(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by individual(s);

(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.

37
<PAGE>

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.

WAIVERS OF SALES CHARGES-CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where
the decedent is either the individual shareholder or owns the shares with his
or her spouse as a joint tenant with right of survivorship. This waiver
applies only to redemption of shares held at the time of death.

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. Shareholders will
receive at least 60 days' notice of any termination or material modification
of the exchange offer, except no notice need be given of an amendment whose
only material effect is to reduce the exchange fee and no notice need be given
if, under extraordinary circumstances, either redemptions are suspended under
the circumstances described below or a Fund temporarily delays or ceases the
sales of its shares because it is unable to invest amounts effectively in
accordance with the Fund's investment objective, policies and restrictions.

If conditions exist that make cash payments undesirable, the Funds reserve
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Funds and valued in the same way as they
would be valued for purposes of computing the Funds' net asset value. 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 1940 Act, under which
the Funds are obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Funds during any 90-day period
for one shareholder. This election is irrevocable unless the SEC permits its
withdrawal.

The Funds may suspend redemption privileges or postpone the date of payment
during any period (1) when the New York Stock Exchange ("NYSE") is closed or
trading on the NYSE is restricted as determined by the SEC, (2) when an
emergency exists, as defined by the SEC, that makes it not reasonably
practicable for a Fund to dispose of securities owned by it or fairly to
determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of a Fund's portfolio at the time.

AUTOMATIC INVESTMENT PLAN. Participation in the Automatic Investment Plan
enables an investor to use the technique of "dollar cost averaging." When the
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
low price levels.

38
<PAGE>

SYSTEMATIC WITHDRAWAL 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 $5,000 for Class A and Class C shareholders or $20,000 for Class B
shareholders. 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 each 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 payment specified by participants in the Funds'
systematic withdrawal plan. The payment generally is mailed approximately five
Business Days (defined under "Valuation of Shares") after the redemption date.
Withdrawal payments should not be considered dividends, but redemption
proceeds, with the tax consequences described under "Dividends & Taxes" in the
Prospectus. 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. ("Transfer Agent"). Instructions to participate in
the plan, change the withdrawal amount or terminate participation in the plan
will not be effective until five days after written instructions with
signatures guaranteed are received by the Transfer Agent. Shareholders may
request the forms needed to establish a systematic withdrawal plan from their
PaineWebber investment executives, correspondent firms or the Transfer Agent
at 1-800-647-1568.

REINSTATEMENT PRIVILEGE-CLASS A SHARES. As described in the Prospectus,
shareholders who have redeemed their Class A shares may reinstate their
account in the Funds without a sales charge. Shareholders may exercise the
reinstatement privilege by notifying the Transfer Agent of such desire and
forwarding a check for the amount to be purchased within 365 days after the
date of redemption. The reinstatement will be made at the net asset value per
share next computed after the notice of reinstatement and check are received.
The amount of a purchase under this reinstatement privilege cannot exceed the
amount of the redemption proceeds. Gain on a redemption is taxable regardless
of whether the reinstatement privilege is exercised; however, a loss arising
out of a redemption will not be deductible to the extent the reinstatement
privilege is exercised within 30 days after redemption, and an adjustment will
be made to the shareholder's tax basis for shares acquired pursuant to the
reinstatement privilege. Gain or loss on a redemption also will be adjusted
for federal income tax purposes by the amount of any sales charge paid on
Class A shares, under the circumstances and to the extent described in
"Dividends & Taxes" in the Prospectus.

PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN(SM);

PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(R) (RMA(R))

Shares of PaineWebber mutual funds (each a "PW Fund" and, collectively, the
"PW Funds") are available for purchase through the RMA Resource Accumulation
Plan ("Plan") by customers of PaineWebber 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.

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<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 low share prices. However, over time,
dollar cost averaging generally results in a lower average original investment
cost than if an investor invested a larger dollar amount in a mutual fund at
one time.

PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT.

In order to enroll in the Plan, an investor must have opened an RMA account
with PaineWebber or one of its correspondent firms. The RMA account is
PaineWebber's comprehensive asset management account and offers investors a
number of features, including the following:

. monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold
MasterCard(R) transactions during the period, and provide unrealized and
realized gain and loss estimates for most securities held in the account;

. comprehensive preliminary 9-month and year-end summary statements that
provide information on account activity for use in tax planning and tax
return preparation;

. 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. Each money market fund attempts to maintain a
stable price per share of $1.00, although there can be no assurance that
it will be able to do so. Investments in the money market funds are not
insured or guaranteed by the U.S. government;

. check writing, with no per-check usage charge, no minimum amount on
checks and no maximum number of checks that can be written. RMA
accountholders can code their checks to classify expenditures. All
canceled checks are returned each month;

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<PAGE>

. Gold MasterCard, with or without a line of credit, which provides RMA
accountholders with direct access to their accounts and can be used with
automatic teller machines worldwide. Purchases on the Gold MasterCard are
debited to the RMA account once monthly, permitting accountholders to
remain invested for a longer period of time;

. 24-hour access to account information through toll-free numbers, and more
detailed personal assistance during business hours from the RMA Service
Center;

. expanded account protection to $25 million in the event of the
liquidation of PaineWebber. This protection does not apply to shares of
the RMA money market funds or the PW Funds because those shares are held
at the transfer agent and not through PaineWebber; and

. automatic direct deposit of checks into your RMA account and automatic
withdrawals from the account.

The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.

CONVERSION OF CLASS B SHARES

Class B shares of 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 into 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 availability of 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 the conversion of
shares does not constitute a taxable event. If the conversion feature ceased
to be available, the Class B shares of the Funds would not be converted and
would continue to be subject to the higher ongoing expenses of the Class B
shares beyond six years from the date of purchase. Mitchell Hutchins has no
reason to believe that these conditions for the availability of the conversion
feature will not continue to be met.

VALUATION OF SHARES

Each Fund determines the net asset values per share separately for each
class of shares as of the close of regular trading (currently 4:00 p.m.,
Eastern time) on the NYSE on each Business Day, which is defined as each
Monday through Friday when the NYSE is open. Currently the NYSE is closed on
the observance of the following holidays: New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.

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<PAGE>

Securities that are listed on U.S. and foreign stock exchanges are valued at
the last sale price on the day the securities are valued or, lacking any sales
on such day, at the last available bid price. In cases where securities are
traded on more than one exchange, the securities are generally valued on the
exchange considered by Mitchell Hutchins or the Sub-Adviser as the primary
market. Securities traded in the OTC market and listed on The Nasdaq Stock
Market ("Nasdaq") are valued at the last trade price on Nasdaq at 4:00 p.m.,
Eastern time; other OTC securities are valued at the last bid price available
prior to valuation. Securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of each board. In valuing lower rated corporate debt
securities it should be recognized that judgment often plays a greater role
than is the case with respect to securities for which a broader range of
dealer quotations and last-sale information is available. All investments of
Financial Services Growth Fund and Utility Income Fund quoted in foreign
currency will be valued daily in U.S. dollars on the basis of the foreign
currency exchange rate prevailing at the time such valuation is determined by
the Funds' custodian.

Foreign currency exchange rates are generally determined prior to the close
of trading on the NYSE. Occasionally events affecting the value of foreign
investments and such exchange rates occur between the time at which they are
determined and the close of trading on the NYSE, which events would not be
reflected in a computation of the Funds' net asset value on that day. If
events materially affecting the value of such investments or currency exchange
rates occur during such time period, the investments will be valued at their
fair value as determined in good faith by or under the direction of each
board. The foreign currency exchange transactions of the Funds conducted on a
spot (that is, cash) basis are valued at the spot rate for purchasing or
selling currency prevailing on the foreign exchange market. This rate under
normal market conditions differs from the prevailing exchange rate in an
amount generally less than one-tenth of one percent due to the costs of
converting from one currency to another.

PERFORMANCE INFORMATION

The Funds' performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represents past performance and is
not intended to indicate future performance. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.

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
a hypothetical initial payment of $1,000 to purchase shares of a
where: P = specified Class
T = average annual total return of shares of that Class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment at the
beginning of that period.

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

42
<PAGE>

payment and, for Class B and Class C shares, the applicable contingent
deferred sales charge imposed on a redemption of Class B or Class C shares
held for the period is deducted. All dividends and other distributions are
assumed to have been reinvested at net asset value.

The Funds also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The Funds calculate Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in Fund
shares and assuming the reinvestment of all dividends and other distributions.
The rate of return is determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the initial
value. Neither initial nor contingent deferred sales charges are taken into
account in calculating Non-Standardized Return; the inclusion of those charges
would reduce the return.

Both Standardized Return and Non-Standardized Return for Class B shares for
periods of over six years reflect conversion of the Class B shares to Class A
shares at the end of the sixth year.

The following table shows performance information for the Class A, Class B
and Class C (formerly Class D) shares of the Funds for the periods indicated.
No Class Y shares were outstanding for any of the Funds during the periods
indicated. All returns for periods of more than one year are expressed as an
average return.

CAPITAL APPRECIATION FUND

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Fiscal year ended March 31, 1997:
Standardized Return*............................... (4.73)% (5.99)% (1.91)%
Non-Standardized Return............................ (0.21)% (0.99)% (0.91)%
Five years ended March 31, 1997:
Standardized Return*............................... NA NA NA
Non-Standardized Return............................ NA NA NA
Inception** to March 31, 1997:
Standardized Return*............................... 10.49% 10.41% 12.96%
Non-Standardized Return............................ 11.52% 10.68% 12.96%
</TABLE>
- --------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charges imposed on a redemption of shares held for the
period.
** The inception date for each class of shares is as follows: Class A and
Class B--April 7, 1992 and Class C--July 2, 1992.

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<PAGE>

FINANCIAL SERVICES GROWTH FUND

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Fiscal year ended March 31, 1997:
Standardized Return*.................................. 22.91% 22.74% 26.74%
Non-Standardized Return............................... 28.72% 27.74% 27.74%
Five years ended March 31, 1997:
Standardized Return*.................................. 21.60% 21.63% NA
Non-Standardized Return............................... 22.72% 21.81% NA
Inception** to March 31, 1997:
Standardized Return*.................................. 15.09% 24.37% 20.85%
Non-Standardized Return............................... 15.58% 24.44% 20.85%
</TABLE>
- --------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charges imposed on a redemption of shares held for the
period.
** The inception date for each Class of shares is as follows: Class A--May 22,
1986, Class B--July 1, 1991 and Class C--July 2, 1992.

UTILITY INCOME FUND

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Fiscal year ended March 31, 1997:
Standardized Return*.................................. 2.98% 2.05% 6.06%
Non-Standardized Return............................... 7.83% 7.05% 7.06%
Inception** to March 31, 1997:
Standardized Return*.................................. 3.94% 3.96% 4.43%
Non-Standardized Return............................... 5.22% 4.43% 4.43%
</TABLE>
- --------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charges imposed on a redemption of shares held for the
period.
** The inception date for each class of shares is July 2, 1993.

OTHER INFORMATION. In Performance Advertisements, the Funds may compare
their Standardized Return and/or their Non-Standardized Return with data
published by Lipper Analytical Services, Inc. ("Lipper"), CDA Investment
Technologies, Inc. ("CDA"), Wiesenberger Investment Companies Service
("Wiesenberger"), Investment Company Data, Inc. ("ICD") or Morningstar Mutual
Funds ("Morningstar"), with the performance of recognized stock and other
indices, including the Standard & Poor's 500 Composite Stock Price Index ("S&P
500"), the Dow Jones Industrial Average, the Nasdaq Composite Index, the
Russell 2000 Index, the Wilshire 5000 Index, the Lehman Bond Index, CBOE Real
Estate Investment Trust Index, Bloomberg REIT Index, Keefe Bruyette and Woods
Bank Index, Standard & Poor's Bank Composite, Standard & Poor's Insurance
Composite, Standard & Poor's Small Cap Financials Index, Standard & Poor's Mid
Cap Financials Index, Standard & Poor's Super Composite Financials Index,
Standard & Poor's Financials Index, Dow Jones Utilities Average, NYSE
Utilities Index, Standard & Poor's Utilities, Philadelphia Utility Index,
Standard & Poor's Small Utilities, ValueLine Utilities, Moody's Utility
Stocks, 30-year and 10-year U.S. Treasury bonds, the Morgan Stanley Capital
International World Index and changes in the

44
<PAGE>

Consumer Price Index as published by the U.S. Department of Commerce. The
Funds also may refer in such materials to mutual fund performance rankings and
other data, such as comparative asset, expense and fee levels, published by
Lipper, CDA, Wiesenberger, ICD or Morningstar. Performance Advertisements also
may refer to discussions of the Funds and comparative mutual fund data and
ratings reported in independent periodicals, including 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 value will fluctuate. The
securities held by the Funds generally have longer maturities than most CDs
and may reflect interest rate fluctuations for longer term securities. An
investment in any of the Funds involves greater risks than an investment in
either a money market fund or a CD.

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<PAGE>

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.

[LINE GRAPH APPEARS HERE]

COMMON STOCKS $10,507
LONG-TERM GOV'T BONDS $314
TREASURY BILLS $127
INFLATION/CPI $85

The chart is shown for illustrative purposes only and does not represent any
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 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 1996 YearbookTM Ibbotson Assoc.,
Chi., (annual updates work by Roger G. Ibbotson & Rex A. Sinquefield).

Over time, stocks have outperformed all other investments by a wide margin,
offering a solid hedge against inflation. From 1926 to 1995, stocks beat all
other traditional asset classes. A $10 investment in the stocks comprising the
S&P 500 grew to $10,507, significantly more than any other investment.

TAXES

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.
For each Fund these 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

46
<PAGE>

(including gains from options, futures or forward currency contracts) derived
with respect to its business of investing in securities or those currencies
("Income Requirement"); (2) the Fund must derive less than 30% of its gross
income each taxable year from the sale or other disposition of securities, or
any of the following, that were held for less than three months--options,
futures or forward contracts (other than those on foreign currencies), or
foreign currencies (or options, futures or forward contracts thereon) that are
not directly related to the Fund's principal business of investing in
securities (or options and futures with respect to securities) ("Short-Short
Limitation"); (3) at the close of each quarter of the Fund's taxable year, at
least 50% of the value of its total assets must be represented by cash and
cash items, U.S. government securities, securities of other RICs and other
securities, with these other securities limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets
and that does not represent more than 10% of the issuer's outstanding voting
securities; and (4) at the close of each quarter of the Fund's taxable year,
not more than 25% of the value of its total assets may be invested in
securities (other than U.S. government securities or the securities of other
RICs) of any one issuer.

Dividends and other distributions declared by a Fund in October, November or
December of any year and payable to shareholders of record on a date in any of
those months will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.

A portion of the dividends from each Fund's investment company taxable
income (whether paid in cash or 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
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 on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any dividend or capital gain distribution, the shareholder
will pay full price for the shares and receive some portion of the price back
as a taxable distribution.

Dividends and interest received by a Fund may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors. If more than 50% of the value of
a Fund's total assets at the close of its taxable year consists of securities
of foreign corporations, it will be eligible to, and may, file an election
with the Internal Revenue Service that will enable its shareholders, in
effect, to receive the benefit of the foreign tax credit with respect to any
foreign and U.S. possessions income taxes paid by it. Pursuant to the
election, the Fund would treat those taxes as dividends paid to its
shareholders and each shareholder would be required to (1) include in gross
income, and treat as paid by him or her, his or her proportionate share of
those taxes; (2) treat his or her share of those taxes and of any dividend
paid by the Fund that represents income from foreign or U.S. possessions
sources as his or her own income from those sources; and (3) either deduct the
taxes deemed paid by him or her in computing his or her taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against his or her federal income tax. A Fund will report to its
shareholders shortly after each taxable year their respective shares of the
income from sources within, and taxes paid to, foreign countries and U.S.
possessions if it makes this election. Neither Capital Appreciation Fund nor
Financial Services Growth Fund is expected to be eligible to make this
election.

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<PAGE>

Each Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.

Each Fund may invest in the stock of "passive foreign investment companies"
("PFICs") if such stock is a permissible investment. A PFIC is a foreign
corporation that, in general, meets either of the following tests: (1) at
least 75% of its gross income is passive or (2) an average of at least 50% of
its assets produce, or are held for the production of, passive income. Under
certain circumstances, a Fund will be subject to federal income tax on a
portion of any "excess distribution" received on the stock of a PFIC or of any
gain from disposition of that stock (collectively "PFIC income"), plus
interest thereon, even if the Fund distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included
in the Fund's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders. If
a Fund invests in a PFIC and elects to treat the PFIC as a "qualified electing
fund" ("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 (the excess of net long-
term capital gain over net short-term capital loss)--which may have to be
distributed by the Fund to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax--even if those earnings and gain are not
distributed to the Fund by the QEF. In most instances it will be very
difficult, if not impossible, to make this election because of certain
requirements thereof.

Pursuant to proposed regulations, open-end RICs, such as the Funds, would be
entitled to elect to "mark-to-market" their stock in certain PFICs. "Marking-
to-market," in this context, means recognizing as gain for each taxable year
the excess, as of the end of that year, of the fair market value of each such
PFIC's stock over the owner's adjusted basis in that stock (including mark-to-
market gain for each prior year for which an election was in effect).

The use of hedging strategies, such as writing ("selling") and purchasing
options and futures contracts and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the
character and timing of recognition of the gains and losses a Fund realizes in
connection therewith. Gains from the disposition of foreign currencies (except
certain gains that may be excluded by future regulations), and gains from
options, futures and forward currency contracts derived by a Fund with respect
to its business of investing in securities or foreign currencies, will qualify
as permissible income under the Income Requirement. However, income from the
disposition of options and futures contracts (other than those on foreign
currencies) will be subject to the Short-Short Limitation if they are held for
less than three months. Income from the disposition of foreign currencies, and
options, futures and forward contracts on foreign currencies, also will be
subject to the Short-Short Limitation if they are held for less than three
months and are not directly related to a Fund's principal business of
investing in securities (or options and futures with respect to securities).

If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease
in value (whether realized or not) of the offsetting hedging position during
the period of the hedge for purposes of determining whether the Fund satisfies
the Short-Short Limitation. Thus, only the net gain (if any) from the
designated hedge will be included in gross income for purposes of that
limitation. Each Fund will consider whether it should seek to qualify for this
treatment for its hedging transactions. To the extent a Fund does not so
qualify, it may be forced to defer the closing out of certain options,
futures, forward currency contracts and/or foreign currency positions beyond
the time when it otherwise would be advantageous to do so, in order for the
Fund to continue to qualify as a RIC.

48
<PAGE>

OTHER INFORMATION

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.

Managed Assets Trust and Managed Investments Trust each is an entity of the
type commonly known as a "Massachusetts business trust." Under Massachusetts
law, shareholders of Capital Appreciation Fund or Utility Income Fund could,
under certain circumstances, be held personally liable for the obligations of
the applicable Trust or Fund. However, each Trust's Declaration of Trust
disclaims shareholder liability for acts or obligations of the Trust or the
Fund and requires that notice of such disclaimer be given in each note, bond,
contract, instrument, certificate or undertaking made or issued by the
trustees or by any officers or officer by or on behalf of the Trust or the
Fund, the trustees or any of them in connection with the Trust. Each
Declaration of Trust provides for indemnification from a Fund's property for
all losses and expenses of any shareholder held personally liable for the
obligations of the Fund. Thus, the risk of a shareholder's incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Fund itself would be unable to meet its obligations, a possibility that
Mitchell Hutchins believes is remote and not material. Upon payment of any
liability incurred by a shareholder solely by reason of being or having been a
shareholder of a Fund, the shareholder paying such liability will be entitled
to reimbursement from the general assets of the Fund. The trustees 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.

CLASS-SPECIFIC EXPENSES. Each Fund may determine to allocate certain of its
expenses (in addition to distribution fees) to the specific classes of the
Fund's shares to which those expenses are attributable. For example, a Fund's
Class B shares bear higher transfer agency fees per shareholder account than
those borne by Class A, Class C 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. Moreover, the tracking and calculations
required by the automatic conversion feature of the Class B shares will cause
the transfer agent to incur additional costs. Although the transfer agency fee
will differ on a per account basis as stated above, the specific extent to
which the transfer agency fees will differ between the classes as a percentage
of net assets is not certain, because the fee as a percentage of net assets
will be affected by the number of shareholder accounts in each class and the
relative amounts of net assets in each class.

COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, 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 the fiscal year ended March
31, 1997 is a separate document supplied with this Statement of Additional
Information and the financial statements, accompanying notes and reports of
independent auditors appearing therein are incorporated herein by this
reference.

49
<PAGE>

APPENDIX

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
a "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 risks appear somewhat larger than in Aaa
securities; A. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future; BAA. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well; BA. Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class; B. Bonds which are rated B
generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small; CAA. Bonds which are rated
Caa are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest; CA. Bonds
which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings; C.
Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

Note: Moody's apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category, the modifier 2 indicates a mid-range ranking, and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.

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 pay interest and repay principal is extremely strong;
AA. An obligation rated AA differs from the highest rated issues 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 debt 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 to meet its financial commitment on the obligation; BB,
B, CCC, CC,

50
<PAGE>

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 risk exposures to adverse conditions.

"BB" An obligation rated "BB" is less vulnerable to nonpayment that other
speculative issues. However, it faces major ongoing uncertainties 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 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 the
obligation are 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 over the
applicable grace period has not expired unless Standard & Poor's 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 an 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.

51
<PAGE>

[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR THEIR DISTRIBUTOR. THE
PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN
OFFERING BY THE FUNDS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.

----------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions..................................... 1
Hedging and Other Strategies Using Derivative Contracts.................. 10
Trustees, Directors and Officers; Principal Holders of Securities........ 19
Investment Advisory and Distribution Arrangements........................ 28
Portfolio Transactions................................................... 34
Reduced Sales Charges, Additional Exchange and Redemption Information and
Other Services.......................................................... 37
Conversion of Class B Shares............................................. 41
Valuation of Shares...................................................... 41
Performance Information.................................................. 42
Taxes.................................................................... 46
Other Information........................................................ 49
Financial Statements..................................................... 49
Appendix................................................................. 50
</TABLE>

PaineWebber
Financial Services Growth Fund

PaineWebber
Utility Income Fund

- --------------------------------------------------------------------------------
Statement of Additional Information

August 1, 1997

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

[LOGO OF PAINEWEBBER APPEARS HERE]
<PAGE>

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

Item 24. Financial Statements and Exhibits
---------------------------------

(a) Financial Statements: (filed herewith)

Included in Part A of this Registration Statement:

Financial Highlights for one Class A and one Class B share for each of
the four years in the period ended March 31, 1997 and for the period
April 7, 1992 (commencement of operations) to March 31, 1993.

Financial Highlights for one Class C share for each of the four years
in the period ended March 31, 1997 and for the period July 2, 1992
(commencement of offering) to March 31, 1993.

Included in part B of this Registration Statement through incorporation by
reference from the Annual Report to Shareholders (previously filed with the
Securities and Exchange Commission through EDGAR on May 28, 1997, Accession
No. 0000878089-97-000001)

Portfolio of Investments at March 31, 1997

Statement of Assets and Liabilities at March 31, 1997

Statement of Operations for year ended March 31, 1997

Statement of Changes in Net Assets for the two years in the period
ended March 31, 1997

Notes to Financial Statements

Financial Highlights for one Class C share for each of the four years
in the period ended March 31, 1997 and for the period July 2, 1992
(commencement of offering) to March 31, 1993

Report of Ernst & Young LLP, Independent Auditors,
dated May 13, 1997.

(b) Exhibits:

(1) (a) Declaration of Trust 1/
-
(b) Amendment effective January 23, 1992 to Declaration of
Trust 2/
-
(c) Amendment effective June 30, 1992 to Declaration of Trust 5/
-
(d) Amendment effective November 10, 1995 to Declaration of
Trust 10/
--
(2) (a) By-Laws 1/
-
(b) Certificate of Amendment dated September 28, 1994 to
By-Law 9/
-
(3) Voting trust agreement - none

(4) Instruments defining the rights of holders of Registrant's shares
of beneficial interest 7/
-
C-1
<PAGE>

(5) (a) Investment Advisory and Administration Contract 2/
-
(b) Sub-Advisory Contract 2/
-
(6) (a) Distribution Contract with respect to Class A Shares 8/
-
(b) Distribution Contract with respect to Class B Shares 8/
-
(c) Distribution Contract with respect to Class C Shares 10/
--
(d) Distribution Contract with respect to Class Y Shares 11/
--
(e) Exclusive Dealer Agreement with respect to Class A Shares 8/
-
(f) Exclusive Dealer Agreement with respect to Class B Shares 8/
-
(g) Exclusive Dealer Agreement with respect to Class C Shares 10/
--
(h) Exclusive Dealer Agreement with respect to Class Y Shares 11/
--
(7) Bonus, profit sharing or pension plans - none

(8) Custodian Agreement 3/
-
(9) Transfer Agency Agreement 5/
-
(10) (a) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to
the Registrant, with respect to Class A and B Shares 2/
-
(b) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to
the Registrant, with respect to Class C Shares 3/
-
(c) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to
the Registrant, with respect to Class Y Shares 11/
--

(11) Other opinions, appraisals, rulings and consents:

Auditors' Consent (filed herewith)

(12) Financial Statements omitted from Part B - none

(13) Letter of investment intent 3/
-
(14) Prototype Retirement Plan 4/
-
(15) (a) Plan of Distribution pursuant to Rule 12b-1 with respect
to Class A Shares 3/
-
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class B Shares 3/
-
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class C Shares 6/
-
(16) Schedule for Computation of Performance Quotations for Class A, Class
B and Class C Shares 6/
-
(17) and (27) Financial Data Schedule (filed herewith)

(18) Plan pursuant to Rule 18f-3 12/
--

C-2
<PAGE>

1/ Incorporated by reference from the initial registration statement,
-
SEC File No. 33-42160, filed August 9, 1991.

2/ Incorporated by reference from Pre-Effective Amendment No. 3 to the
-
registration statement, SEC File No. 33-42160, filed March 27, 1992.

3/ Incorporated by reference from Post-Effective Amendment No. 1 to the
-
registration statement, SEC File No. 33-42160, filed April 29, 1992.

4/ Incorporated by reference from Post-Effective Amendment No. 20 to
-
the registration statement of PaineWebber Managed Investments Trust,
SEC File No. 2-91362, filed April 1, 1992.

5/ Incorporated by reference from Post-Effective Amendment No. 2 to the
-
registration statement, SEC File No. 33-42160, filed September 30,
1992.

6/ Incorporated by reference from Post-Effective Amendment No. 3 to the
-
registration statement, SEC File No. 33-42160, filed July 29, 1993.

7/ Incorporated by reference from Articles III, VIII, IX, X and XI of
-
Registrant's Declaration of Trust, as amended January 23, 1992, June
30, 1992, and November 10, 1995 and from Articles II, VII and X of
Registrant's By-Laws, as amended September 28, 1994.

8/ Incorporated by reference from Post-Effective Amendment No. 4 to the
-
registration statement, SEC File No. 33-42160, filed July 29, 1994.

9/ Incorporated by reference from Post-Effective Amendment No. 5 to the
-
registration statement, SEC File No. 33-42160, filed July 28, 1995.

10/ Incorporated by reference from Post-Effective Amendment No. 6 to
--
the registration statement, SEC File No. 33-42160, filed February 7,
1996.

11/ Incorporated by reference from Post-Effective Amendment No. 8 to
--
the registration statement, SEC File No. 33-42160, filed May 30, 1996.

12/ Incorporated by reference from Post-Effective Amendment No. 9 to
--
the registration statement, SEC File No.33-42160, filed July 31,
1996.

Item 25. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------

None

Item 26. Number of Holders of Securities
-------------------------------

Title of Class Number of Record Holders
----------------- as of June 30 , 1997
------------------------
<S> <C>
Shares of beneficial interest
($.001 par value)
PaineWebber Capital Appreciation Fund

Class A Shares 6,763
Class B Shares 11,891
Class C Shares 2,432
Class Y Shares 0
</TABLE>

C-3
<PAGE>

Item 27. Indemnification
---------------

Section 3 of Article X of the Declaration of Trust, "Indemnification,"
provides that the appropriate series of the Registrant will indemnify the
trustees and officers of the Registrant to the fullest extent permitted by law
against claims and expenses asserted against or incurred by them by virtue of
being or having been a trustee or officer; provided that no such person shall be
indemnified where there has been an adjudication or other determination, as
described in Article X, that such person is liable to the Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office or
did not act in good faith in the reasonable belief that his action was in the
best interest of the Registrant. Section 3 of Article X also provides that the
Registrant may maintain insurance policies covering such rights of
indemnification.

Additionally, "Limitation of Liability" in Article X of the
Declaration of Trust provides that the trustees or officers of the Registrant
shall not be personally liable to any person extending credit to, contracting
with or having a claim against the Registrant or a particular series; and that,
provided they have exercised reasonable care and have acted under the reasonable
belief that their actions are in the best interest of the Registrant, the
trustees and officers shall not be liable for neglect or wrongdoing by them or
any officer, agent, employee or investment adviser of the Registrant.

Section 2 of Article XI of the Declaration of Trust additionally
provides that, subject to the provisions of Section 1 of Article XI and to
Article X, trustees shall not be liable for errors of judgement or mistakes of
fact or law, for any act or omission in accordance with advice of counsel or
other experts, or for failing to follow such advice, with respect to the meaning
and operation of the Declaration of Trust.

Article IX of the By-Laws provides that the Registrant may purchase
and maintain insurance on behalf of any person who is or was a trustee, officer
or employee of the Registrant, or is or was serving at the request of the
Registrant as a trustee, officer or employee of a corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity or arising out of his status as
such, whether or not the Registrant would have the power to indemnify him
against such liability to the Registrant or its shareholders, provided that the
Registrant may not purchase or maintain insurance that protects any such person
against any liability to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.

Section 9 of the Investment Advisory and Administration Contract with
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") 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 of 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 10 of the Contract provides that the Trustees
shall not be liable for any obligations of the Trust or any series under the
Contract and that Mitchell Hutchins shall look only to the assets and property
of the Registrant in settlement of such right or claim and not to the assets and
property of the Trustees.

Section 8 of the Sub-Advisory Agreement with Denver Investment
Advisors, LLC ("DIA") provides that DIA shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Registrant, its
shareholders or Mitchell Hutchins in connection with the matters to which the
Contract relates; provided that the Contract shall not be deemed to indemnify or
purport to protect DIA against any liability to the Registrant, its shareholders
or Mitchell Hutchins resulting from DIA's willful misfeasance, bad faith or
gross negligence in the performance of its duties or from reckless disregard by
it of its obligations and duties under the Contract.

Section 9 of each Distribution Contract provides that the Trust 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 Trust for use in the Registration
Statement; and

C-4
<PAGE>

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 Trust, its officers and
Trustees 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 the Contract. Section 10 of each Distribution Contract contains
provisions similar to Section 10 of the Investment Advisory and Administration
Contract, with respect to Mitchell Hutchins and PaineWebber, as appropriate.

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 trustees, 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 trustee, 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 trustee, 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 28. 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.

DIA, a Colorado limited liability company, is a registered investment
adviser. DIA is primarily engaged in the investment advisory business.
Information as to the officers and directors of DIA is included in its Form ADV,
as filed with the Securities and Exchange Commission (registration Number 801-
47933), and is incorporated herein by reference.

Item 29. 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.
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER INVESTMENT TRUST

C-5
<PAGE>

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
PAINEWEBBER SERIES 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 is 1285 Avenue of
the Americas, New York, NY 10019.
<TABLE>
<CAPTION>
Position With Position and Offices With Underwriter
Name Registrant or Exclusive Dealer
- ---- ------------- -----------------------------
<S> <C> <C>
Margo N. Alexander President and Trustee President, Chief Executive Officer and
a Director of Mitchell Hutchins and
Executive Vice President and
Director of PaineWebber
Mary C. Farrell Trustee Managing Director, Senior Investment
Strategist and Member of Investment
Policy Committee of PaineWebber
Ann E. Moran Vice President Vice President of Mitchell Hutchins
and Assistant Treasurer
Emil Polito Vice President Senior Vice President and Director of
Operations and Control of Mitchell
Hutchins
Dianne E. O'Donnell Vice President Senior Vice President and Deputy
and Secretary General Counsel of Mitchell Hutchins
Victoria E. Schonfeld Vice President Managing Director and General Counsel
of Mitchell Hutchins

Paul H. Schubert Vice President First Vice President and Director of the
and Assistant Mutual Fund Finance Division of
Treasurer Mitchell Hutchins
Barney A. Taglialatela Vice President and Vice President and
Assistant Treasurer Manager of the Mutual
Fund Finance Division
of Mitchell Hutchins
</TABLE>

C-6
<PAGE>

<TABLE>
<CAPTION>
Position With Position and Offices With Underwriter
Name Registrant or Exclusive Dealer
- ---- ------------- -----------------------------
<S> <C> <C>
Mark Tincher Vice President Managing Director and Chief
Investment Officer -- U.S. Equity
Investments of Mitchell Hutchins
Keith A. Weller Vice President and First Vice President and Associate
Assistant Secretary General Counsel of Mitchell Hutchins
Ian W. Williams Vice President and Vice President and Manager of the
Assistant Treasurer Mutual Fund Finance Division
of Mitchell Hutchins
</TABLE>

C) None

Item 30. 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 31. Management Services
-------------------

Not applicable.

Item 32. Undertakings
------------

Registrant hereby undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders
upon request and without charge.

C-7
<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, 1997.

PAINEWEBBER MANAGED ASSETS TRUST

By: /s/ Dianne 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:

Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Margo N. Alexander President and Trustee July 29, 1997
- --------------------------- (Chief Executive Officer)
Margo N. Alexander*

/s/ E. Garrett Bewkes, Jr. Trustee and Chairman July 29, 1997
- --------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr.*

/s/ Richard Q. Armstrong Trustee July 29, 1997
- ---------------------------
Richard Q. Armstrong*

/s/ Richard R. Burt Trustee July 29, 1997
- ---------------------------
Richard R. Burt*

/s/ Mary C. Farrell Trustee July 29, 1997
- ---------------------------
Mary C. Farrell*

/s/ Meyer Feldberg Trustee July 29, 1997
- ---------------------------
Meyer Feldberg*

/s/ George W. Gowen Trustee July 29, 1997
- ---------------------------
George W. Gowen*

/s/ Frederic V. Malek Trustee July 29, 1997
- ---------------------------
Frederic V. Malek*

/s/ Carl W. Schafer Trustee July 29, 1997
- ---------------------------
Carl W. Schafer*

/s/ Paul H. Schubert Vice President and Treasurer (Chief July 29, 1997
- --------------------------- 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. 30 to the registration statement of PaineWebber Managed Municipal
Trust, SEC File 2-89016, filed June 27, 1996.
<PAGE>

PAINEWEBBER MANAGED ASSETS TRUST

EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit
Number
- ------
<C> <S>
(1) (a) Declaration of Trust 1/
-

(b) Amendment effective January 23, 1992 to Declaration of
Trust 2/
-

(d) Amendment effective November 10, 1995 to Declaration of
Trust 10/
--

(2) (a) By-Laws 1/
-

(b) Certificate of Amendment dated September 28, 1994 to By-Law 9/
-
(3) Voting trust agreement - none

(4) Instruments defining the rights of holders of Registrant's
shares of beneficial interest 7/
-

(5) (a) Investment Advisory and Administration Contract 2/
-

(b) Sub-Advisory Contract 2/
-

(6) (a) Distribution Contract with respect to Class A Shares 8/
-

(b) Distribution Contract with respect to Class B Shares 8/
-

(d) Distribution Contract with respect to Class Y Shares 11/
--

(e) Exclusive Dealer Agreement with respect to Class A Shares 8/
-

(f) Exclusive Dealer Agreement with respect to Class B Shares 8/
-

(g) Exclusive Dealer Agreement with respect to Class C Shares 10/
--

(h) Exclusive Dealer Agreement with respect to Class Y Shares 11/
--
(7) Bonus, profit sharing or pension plans - none

(8) Custodian Agreement 3/
-

(9) Transfer Agency Agreement 5/
-

(10) (a) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, with respect to Class A and B Shares 2/
-

(b) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, with respect to Class C Shares 3/
-

(c) Opinion and consent of Kirkpatrick & Lockhart LLP, counsel to the
Registrant, with respect to Class Y Shares 11/
--
(11) Other opinions, appraisals, rulings and consents:

Auditors' Consent (filed herewith)

(12) Financial Statements omitted from Part B - none

(13) Letter of investment intent 3/
-
</TABLE>
<PAGE>

<TABLE>

<C> <S>
(14) Prototype Retirement Plan 4/
-

(15) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to Class A
Shares 3/
-

(b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class B
Shares 3/
-

(16) Schedule for Computation of Performance Quotations for Class A, Class B and
Class C Shares 6/
-

(17) and (27) Financial Data Schedule (filed herewith)

(18) Plan pursuant to Rule 18f-3 12/
--
</TABLE>
________________
1/ Incorporated by reference from the initial registration statement, SEC File
No. 33-42160, filed August 9, 1991.

2/ Incorporated by reference from Pre-Effective Amendment No. 3 to the
- -
registration statement, SEC File No. 33-42160, filed March 27, 1992.

3/ Incorporated by reference from Post-Effective Amendment No. 1 to the
- -
registration statement, SEC File No. 33-42160, filed April 29, 1992.

4/ Incorporated by reference from Post-Effective Amendment No. 20 to the
- -
registration statement of PaineWebber Managed Investments Trust, SEC File
No. 2-91362, filed April 1, 1992.

5/ Incorporated by reference from Post-Effective Amendment No. 2 to the
- -
registration statement, SEC File No. 33-42160, filed September 30, 1992.

6/ Incorporated by reference from Post-Effective Amendment No. 3 to the
- -
registration statement, SEC File No. 33-42160, filed July 29, 1993.

7/ Incorporated by reference from Articles III, VIII, IX, X and XI of
- -
Registrant's Declaration of Trust, as amended January 23, 1992, June 30, 1992,
and November 10, 1995 and from Articles II, VII and X of Registrant's By-Laws,
as amended September 28, 1994.

8/ Incorporated by reference from Post-Effective Amendment No. 4 to the
- -
registration statement, SEC File No. 33-42160, filed July 29, 1994.

9/ Incorporated by reference from Post-Effective Amendment No. 5 to the
- -
registration statement, SEC File No. 33-42160, filed July 28, 1995.

10/ Incorporated by reference from Post-Effective Amendment No. 6 to the
- --
registration statement, SEC File No. 33-42160, filed February 7, 1996.

11/ Incorporated by reference from Post-Effective Amendment No. 8 to the
- --
registration statement, SEC File No. 33-42160, filed May 30, 1996.

12/ Incorporated by reference from Post-Effective Amendment No. 9 to the
- --
registration statement, SEC File No.33-42160, filed July 31, 1996.

<PAGE>

Exhibit 11

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Auditors" in Statement of Additional
Information and to the incorporation by reference of our report dated May 13,
1997 on PaineWebber Capital Appreciation Fund, in this Registration Statement
(Form N-1A No. 33-42160) of PaineWebber Managed Assets Trust.

/s/ Ernst & Young LLP

ERNST & YOUNG LLP

New York, New York
July 28, 1997

<PAGE>

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