(File Nos. 33-33231 and 811-4587)
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange
Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
November 30, 2000
Dear Shareholder,
The enclosed proxy materials relate to a special meeting of the
shareholders of PaineWebber Financial Services Growth Fund Inc. ("Fund") to be
held on January 11, 2001. The Board of Directors ("Board") has called this
meeting to request shareholder approval of the following proposals that relate
to the management and operation of the Fund:
1. New investment advisory arrangements for the Fund that consist of
a) a new investment advisory and administration contract between the
Fund and Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins") and
b) a sub-advisory contract under which DSI International Management,
Inc. ("DSI") would manage the Fund's investment portfolio.
2. Amendment of the Fund's fundamental investment limitations to change its
status from diversified to non-diversified to provide the Fund with
increased investment flexibility.
3. A policy that would permit Mitchell Hutchins and the Board, in the
future, to appoint and replace unaffiliated sub-advisers and amend their
sub-advisory contracts without seeking additional shareholder approval.
YOUR VOTE IS VERY IMPORTANT. The enclosed proxy statement describes each
proposal more fully. Please read this document carefully and sign your proxy
card and return it today in the enclosed postage-paid return envelope. Or you
may vote your shares by telephone or the Internet. Voting your shares early will
avoid costly folow-up mail and telephone solicitation.
THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THESE PROPOSALS.
Thank you for your attention to this matter and for your continuing
investment in the Fund.
Very truly yours,
Brian M. Storms
President
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PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC. Preliminary
51 West 52nd Street Proxy Materials
New York, New York 10019-6114 Filed Under
------------------------- Rule 14a-6(a)
of 1934 Act
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
JANUARY 11, 2001
-------------------------
To the Shareholders:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders ("Meeting")
of PaineWebber Financial Services Growth Fund Inc. ("Fund") will be held on
January 11, 2001, at 1285 Avenue of the Americas, 14th Floor, New York, New
York, 10019-6028, at 10:00 a.m., Eastern time, for the following purposes:
1(a) To approve or disapprove a new investment advisory and administration
contract between the Fund and Mitchell Hutchins Asset Management Inc.
("Mitchell Hutchins");
1(b) To approve or disapprove a sub-advisory contract between Mitchell
Hutchins and DSI International Management, Inc.;
2 To approve or disapprove amendment of the Fund's fundamental
investment limitations to change its status from diversified to
non-diversified; and
3 To approve or disapprove a policy to permit Mitchell Hutchins and the
Fund's Board of Directors to appoint and replace sub-advisers and to
enter into and amend sub-advisory contracts without further
shareholder approval.
Shareholders of record as of the close of business on October 31, 2000, are
entitled to notice of, and to vote at, the Meeting or any adjournment thereof.
Please execute and return promptly in the enclosed envelope the
accompanying proxy, which is being solicited by the Fund's Board of Directors,
or vote your shares by telephone or through the internet. Returning your proxy
promptly is important to ensure a quorum at the Meeting. You may revoke your
proxy at any time before it is exercised by the subsequent execution and
submission of a revised proxy, by giving written notice of revocation to the
Fund at any time before the proxy is exercised or by voting in person at the
Meeting.
By Order of the Board of Directors,
Dianne E. O'Donnell
Secretary
November 30, 2000
51 West 52nd Street
New York, New York 10019-6114
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YOUR VOTE IS IMPORTANT
NO MATTER HOW MANY SHARES YOU OWN.
Please indicate your voting instructions on the enclosed proxy card,
sign and date the card and return it in the envelope provided. IF YOU SIGN, DATE
AND RETURN THE PROXY CARD BUT GIVE NO VOTING INSTRUCTIONS, YOUR SHARES WILL BE
VOTED "FOR" THE PROPOSALS DESCRIBED ABOVE. In order to avoid the additional
expense of further solicitation, we ask your cooperation in mailing your proxy
card promptly. As an alternative to using the paper proxy card to vote, you may
vote shares that are registered in your name, as well as shares held in "street
name" through a broker, via the Internet or telephone. To vote in this manner,
you will need the 14-digit "control" number(s) that appear on your proxy
card(s).
To vote via the Internet, please access [insert web address] on the
World Wide Web and follow the on-screen instructions.
You may also call [___________] and vote by telephone.
If we do not receive your completed proxy cards after several weeks,
our proxy solicitor, Shareholder Communications Corporation, may contact you.
Our proxy solicitor will remind you to vote your shares or will record your vote
over the phone if you choose to vote in that manner.
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INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may be of
assistance to you and avoid the time and expense to the Fund involved in
validating your vote if you fail to sign your proxy card properly.
1. Individual Accounts: Sign your name exactly as it appears in
the registration on the proxy card.
2. Joint Accounts: Either party may sign, but the name of the
party signing should conform exactly to the name shown in the
registration on the proxy card.
3. All Other Accounts: The capacity of the individual signing the
proxy card should be indicated unless it is reflected in the form of
registration. For example:
REGISTRATION VALID SIGNATURE
------------ ---------------
Corporate Accounts
(1) ABC Corp.................................. ABC Corp.
John Doe, Treasurer
(2) ABC Corp.................................. John Doe, Treasurer
(3) ABC Corp. c/o John Doe, Treasurer......... John Doe
(4) ABC Corp. Profit Sharing Plan............. John Doe, Trustee
Partnership Accounts
(1) The XYZ Partnership....................... Jane B. Smith, Partner
(2) Smith and Jones, Limited Partnership...... Jane B. Smith, General
Partner
Trust Accounts
(1) ABC Trust Account......................... Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee u/t/d 12/28/78 Jane B. Doe
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Custodial or Estate Accounts
(1) John B. Smith, Cust. f/b/o
John B. Smith, Jr.,
UGMA/UTMA................................. John B. Smith
(2) Estate of John B. Smith................... John B. Smith, Jr.,
Executor
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PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
1-800-647-1568
PROXY STATEMENT
Dated: November 30, 2000
This Proxy Statement is being furnished to the shareholders of
PaineWebber Financial Services Growth Fund, Inc. ("Fund") in connection with the
solicitation of proxies made by, and on behalf of, the Fund's Board of Directors
("Board") to be used at the Special Meeting of Shareholders to be held on
January 11, 2001, at 1285 Avenue of the Americas, 14th Floor, New York, New
York, 10019-6028, at 10:00 a.m., Eastern time (such meeting and any adjournments
thereof are referred to collectively as the "Meeting"). This Proxy Statement and
the accompanying proxy card are first being mailed to shareholders on or about
November 30, 2000.
The presence, in person or by proxy, of one third of the shares of the
common stock of the Fund ("Shares") outstanding on October 31, 2000 ("Record
Date") will constitute a quorum for the transaction of business at the Meeting.
In the absence of a quorum or in the event that a quorum is present at the
Meeting, but votes sufficient to approve the proposals are not received, the
persons named as proxies may propose one or more adjournments of the Meeting to
permit further solicitation of proxies. Any such adjournment will require the
affirmative vote of a majority of those Shares represented at the Meeting in
person or by proxy. The persons named as proxies will vote those proxies that
they are entitled to vote "FOR" the proposals in favor of such an adjournment
and will vote those proxies required to be voted "AGAINST" the proposals against
such adjournment. A shareholder vote may be taken on one or more of the
proposals in this Proxy Statement prior to any such adjournment if sufficient
votes have been received and it is otherwise appropriate.
Broker non-votes are Shares held in "street name" for which the broker
indicates that instructions have not been received from the beneficial owners or
other persons entitled to vote and for which the broker does not have
discretionary voting authority. Abstentions and broker non-votes will be counted
as Shares present at the Meeting for quorum purposes but will not be (1)
considered votes cast at the Meeting or (2) voted for or against any adjournment
or proposal. Abstentions and broker non-votes are effectively votes against the
proposals.
All properly executed and unrevoked proxies received in time for the
Meeting will be voted as instructed by shareholders. Approval of each proposal
requires the affirmative vote of the lesser of (1) 67% or more of the Shares
present at the Meeting, if more than 50% of the outstanding Shares are
represented at the Meeting in person or by proxy, or (2) more than 50% of the
outstanding Shares entitled to vote at the Meeting. If you execute your proxy
but give no voting instructions, your shares that are represented by proxies
will be voted "FOR" the proposals described in this Proxy Statement. Any person
giving a proxy has the power to revoke it at any time prior to its exercise by
executing a superseding proxy or by submitting a written notice of revocation to
the Secretary of the Fund ("Secretary"). To be effective, such revocation must
be received by the Secretary prior to the Meeting. In addition, although mere
attendance at the Meeting will not revoke a proxy, a shareholder present at the
Meeting may withdraw his or her proxy by voting in person.
Shareholders of record as of the close of business on October 31, 2000
("Record Date"), are entitled to vote at the Meeting. On the Record Date, the
Fund had 8,525,102 shares issued and outstanding, consisting of 4,230,282 Class
A shares, 2,925,700 Class B shares, 1,279,209 Class C shares, and 89,912 Class Y
shares. Shareholders are entitled to one vote for each full share held and a
fractional vote for each fractional share held. Except as set forth in Appendix
A, as of the Record Date, Mitchell Hutchins, the investment adviser or
investment manager, administrator and distributor of the Fund, does not know of
any person who owns beneficially 5% or more of any class of shares of the Fund.
As of that same date, the Directors and officers, as a group, owned less than 1%
of any class of the Fund's outstanding shares.
The costs of the Meeting, including the solicitation of proxies, will
be borne by the Fund. The Fund has engaged the services of Shareholder
Communications Corporation ("SCC") to assist it in the solicitation of proxies
for the Meeting. The Fund expects to solicit proxies by mail, telephone and via
the Internet. The Fund's officers and employees of Mitchell Hutchins who assist
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in the proxy solicitation will not receive any additional or special
compensation for any such efforts. SCC will be paid approximately $36,000 for
proxy solicitation services. The Fund will request broker/dealer firms,
custodians, nominees and fiduciaries to forward proxy materials to the
beneficial owners of the Shares held of record by such persons. The Fund may
reimburse such broker/dealer firms, custodians, nominees and fiduciaries for
their reasonable expenses incurred in connection with such proxy solicitation.
Copies of the Fund's most recent annual and semi-annual reports,
including financial statements, have previously been delivered to shareholders.
Shareholders may request copies of the Fund's annual and semi-annual reports by
writing the Fund at 51 West 52nd Street, New York, New York 10019-6114, or by
calling 1-800-647-1568.
INTRODUCTION
The Board has approved proposals by Mitchell Hutchins Asset Management
Inc. ("Mitchell Hutchins"), the Fund's investment adviser and administrator, to
restructure the manner in which the Fund's assets are managed. Under the
proposal, DSI International Management, Inc. ("DSI"), an affiliate of Mitchell
Hutchins, would manage the Fund's assets as its investment sub-adviser. Mitchell
Hutchins would supervise DSI's activity as sub-adviser and evaluate its
performance. Mitchell Hutchins would continue to provide administrative services
to the Fund. The Board is asking the Fund's shareholders to approve a new
investment advisory and administration contract with Mitchell Hutchins and at
the same time to incorporate updated language about Mitchell Hutchins' ability
to appoint sub-advisers, as further described below. In addition, the Board is
asking the Fund's shareholders to approve a change in the Fund's investment
limitations to change its status from a diversified fund to a non-diversified
fund and to approve a policy that permits Mitchell Hutchins and the Board to
appoint and replace sub-advisers, enter into sub-advisory contracts and amend
sub-advisory contracts without further shareholder approval.
PROPOSAL 1(a): TO APPROVE OR DISAPPROVE A NEW INVESTMENT ADVISORY AND
ADMINISTRATION CONTRACT BETWEEN MITCHELL HUTCHINS AND THE FUND.
Mitchell Hutchins proposed to the Board and the Board approved at its
meeting on September 11, 2000, a new Investment Advisory and Administration
Contract ("New Contract") between the Fund and Mitchell Hutchins. The New
Contract is substantially similar to the Fund's current Investment Advisory and
Administration Agreement ("Old Contract"). Under the New Contract, Mitchell
Hutchins will have the same duties and responsibilities and will receive the
same compensation as under the Old Contract. A form of the New Contract is
attached as Appendix B.
COMPARISON OF THE OLD AND NEW CONTRACTS
Under both the Old and New Contracts, Mitchell Hutchins will provide a
continuous investment program for the Fund, including investment research and
management with respect to all securities, investments and cash equivalents in
the Fund, and will determine from time to time what securities and other
investments will be purchased, retained or sold by the Fund. Both the Old and
New Contracts permit Mitchell Hutchins to delegate to a sub-adviser, in whole or
in part, Mitchell Hutchins' duty to provide a continuous investment management
program. Mitchell Hutchins also will supervise all aspects of the operations of
the Fund, including oversight of the transfer agency, custodial and accounting
services, except that nothing in the Old or New Contracts shall be deemed to
relieve or deprive the Board of its responsibility for and control of the
conduct of the Fund.
In the proposed New Contract, paragraphs 2(a) and 5 have been amended
explicitly to permit Mitchell Hutchins to delegate to a sub-adviser or
sub-advisers, in whole or in part, Mitchell Hutchins' duty to provide a
continuous investment management program with respect to the Fund, including the
provision of investment management services with respect to a portion of its
assets and to allocate the Fund's assets among different sub-advisers. Further,
paragraph 5 has been amended to acknowledge that Mitchell Hutchins could engage
a sub-adviser thereunder subject only to approval of the sub-advisory contract
by the Board and to any requirements of the securities laws pertaining thereto.
As described in Proposal 3, Mitchell Hutchins and the Fund have received an
order from the SEC permitting the engagement of a sub-adviser by the Board
acting alone and without the need for approval by Fund shareholders. See
Proposal 3 for more information.
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As administrator, under both the Old and New Contracts, Mitchell
Hutchins will manage the affairs of the Fund, subject to the supervision of the
Board. Mitchell Hutchins will provide the Fund with such corporate,
administrative and clerical personnel (including officers of the Fund) and
services as are deemed reasonably necessary or advisable by the Board, including
the maintenance of certain books and records of the Fund. Mitchell Hutchins will
arrange, but not pay, for the periodic preparation, updating, filing and
dissemination (as applicable) of reports to the Fund's shareholders and the SEC
and other appropriate federal or state regulatory authorities. Mitchell Hutchins
will provide the Fund with, or obtain for it, adequate office space and all
necessary office equipment and services, including telephone service, heat,
utilities, stationery supplies and similar items. Mitchell Hutchins will also
provide the Board on a regular basis with economic and investment analyses and
reports and make available to the Board, upon request, any economic, statistical
and investment services normally available to institutional or other customers
of Mitchell Hutchins.
Under the New Contract, for both the services provided and the expenses
assumed, with respect to the Fund, the Fund will pay to Mitchell Hutchins a fee,
computed daily and paid monthly, at an annual rate of 0.70% of the average daily
net assets of the Fund. This fee is identical to the fee payable to Mitchell
Hutchins in the Old Contract.
Under both the Old and New Contracts, Mitchell Hutchins will not be
liable for any error in judgment or mistake of law or for any loss suffered by
the Fund or its shareholders in connection with the matters to which the
Contract relates, 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 by it of its obligations and duties under the
Contract. Both the Old and New Contracts terminate automatically upon assignment
and are terminable at any time without penalty by the 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.
If approved by the Fund's shareholders, the New Contract will become
effective on the date of approval and will remain in effect for an initial
two-year term. Thereafter, the New Contract will continue in effect if it is
approved at least annually by a vote of the Fund's shareholders or by the Board,
provided that, in either event, continuance is approved by the vote of a
majority of those Directors who are not "interested persons," as defined by the
Investment Company Act of 1940 ("1940 Act"), of the Fund or Mitchell Hutchins
("Independent Directors"), which vote must be cast in person at a meeting called
for the purpose of voting on such approval.
The Old Contract is dated April 1, 1990 and was last submitted to a
vote of shareholders of the Fund on August 24, 1989 in connection with the
Fund's conversion from a closed-end investment company to an open-end investment
company. Continuance of the Old Contract was last approved by the Board,
including a majority of the Independent Directors, at a meeting held on May 11,
2000. Under the Old Contract, the Fund paid (or accrued) investment advisory and
administrative fees to Mitchell Hutchins in the amount of $2,541,366 during the
fiscal year ended March 31, 2000. During that fiscal year, the Fund also paid
$13,851 to PaineWebber Incorporated ("PaineWebber") for its services as
securities lending agent.
Further information about Mitchell Hutchins is set forth in Appendix C.
EVALUATION BY THE BOARD
Prior to approving the New Contract, the Fund's Board, including a
majority of the Independent Directors, determined that the scope and quality of
services to be provided to the Fund by Mitchell Hutchins thereunder would be at
least equivalent to the scope and quality of services provided under the Old
Contract. Additional information considered by the Board included, among other
things, the following: (1) Mitchell Hutchins' investment performance; (2) the
fact that the compensation to be received by Mitchell Hutchins under the New
Contract is the same as its compensation under the Old Contract, which the Board
previously has determined to be fair and reasonable; (3) alternative
arrangements for providing investment advisory services to the Fund; and (4) the
mutual fund-related revenues and expenses of Mitchell Hutchins. In addition, the
Board considered Mitchell Hutchins' proposal to appoint DSI as sub-adviser,
which is discussed under Proposal 1(b).
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After full consideration of these and other factors, the Board,
including a majority of the Independent Directors, approved the New Contract and
recommended that the New Contract be submitted to the Fund's shareholders for
approval.
REQUIRED VOTE
Approval of Proposal 1(a) requires the affirmative vote of the lesser
of (1) 67% or more of the shares of the Fund present at the Meeting, if more
than 50% of the outstanding shares are represented at the Meeting in person or
by proxy, or (2) more than 50% of the outstanding shares entitled to vote at the
Meeting.
If the Fund's shareholders do not approve the proposed New Contract,
the Old Contract will remain in effect.
THE BOARD RECOMMENDS THAT SHAREHOLDERS
VOTE "FOR" PROPOSAL 1(a).
----------------------------
PROPOSAL 1(b): TO APPROVE OR DISAPPROVE A SUB-ADVISORY CONTRACT BETWEEN
MITCHELL HUTCHINS AND DSI INTERNATIONAL MANAGEMENT, INC. ("DSI")
INTRODUCTION
The Board and Mitchell Hutchins propose that DSI be appointed
sub-adviser of the Fund. At a meeting on September 11, 2000, the Board approved
a sub-advisory contract between Mitchell Hutchins and DSI ("Sub-Advisory
Contract"). A form of the Sub-Advisory Contract is attached as Appendix D.
DSI and Mitchell Hutchins are affiliates because both companies are
wholly owned subsidiaries of PaineWebber Incorporated ("PaineWebber").
PaineWebber is a wholly owned indirect subsidiary of UBS AG, an internationally
diversified organization with headquarters in Zurich, Switzerland and operations
in many areas of the financial services industry.
Founded in 1987, DSI was acquired in December 1999 by PaineWebber
because of DSI's experience in quantitative modeling and enhanced indexing
strategies. As of September 30, 2000, DSI had more than $6.6 billion in assets
under management and its clients included large institutional, corporate and
not-for-profit organizations. In addition, DSI has served since April 2000 as
sub-adviser to two other PaineWebber open-end funds. Since August 3, 2000, three
senior employees of DSI have also served as employees of Mitchell Hutchins,
where they have been part of the Mitchell Hutchins team responsible for the
day-to-day management of the Fund's investments and have, in particular, been
responsible for developing and operating a quantitative multi-factor model that
is used in a systematic, disciplined manner to determine which securities to buy
or sell for the Fund.
If DSI is approved as sub-adviser, DSI will be responsible for managing
the Fund's investments, subject to oversight and monitoring by Mitchell Hutchins
and the Board. DSI also expects to use a team approach in managing the Fund's
portfolio, and the three senior employees of DSI who currently serve as part of
the Mitchell Hutchins' team responsible for the day-to-day management of the
Fund's investments will serve on the DSI team in the same capacities. While the
overall approach to determining which securities to buy or sell for the Fund is
not expected to change if DSI becomes the Fund's sub-adviser, Mitchell Hutchins
and the Board believe that its implementation would be enhanced by having the
entire team consist of DSI employees.
The DSI team would continue to use the quantitative multi-factor model
to determine which securities to buy or sell for the Fund and the relative
weightings of the securities in the Fund's portfolio. DSI expects to apply the
model to a universe of companies that are either defined as financial services
companies or as companies that provide services to the financial services
industry by a recognized index. While many of these companies may be included in
the financial services sector portion of the Standard & Poor's 500 Stock Price
Index, the Fund also may invest in securities of companies that are not included
in that index.
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Further information about DSI is set forth in Appendix E.
PROPOSED SUB-ADVISORY CONTRACT
Under the proposed Sub-Advisory Contract, DSI would be responsible,
subject to the supervision of the Board and Mitchell Hutchins, for the actual
investment management of the Fund's assets, including placing purchase and sell
orders for investments and for other related transactions. DSI agrees to provide
a continuous investment program for the Fund's assets, including investment
research and management. The Sub-Advisory Contract recognizes that DSI may,
under certain circumstances, pay higher brokerage commissions than otherwise
available by executing portfolio transactions with brokers that provide DSI with
research, analysis, advice or similar services. The Sub-Advisory Contract also
provides that DSI will (1) maintain all books and records required to be
maintained by it pursuant to the 1940 Act and the rules and regulations
promulgated thereunder with respect to transactions the sub-adviser effects on
behalf of the Fund, and will furnish the Board and Mitchell Hutchins with such
periodic and special reports as the Board or Mitchell Hutchins may reasonably
request; (2) provide the Board or Mitchell Hutchins with economic and investment
analyses and reports, as well as quarterly reports, setting forth the Fund's
performance with respect to its investments and make available to the Board and
Mitchell Hutchins any economic, statistical and investment services that DSI
normally makes available to its institutional investors or other customers; and
(3) provide assistance in the fair valuation of, and use reasonable efforts to
arrange for the provision of a price or prices from one or more parties
independent of DSI for, each portfolio security for which the custodian does not
obtain prices in the ordinary course of business from an automated pricing
service.
The Sub-Advisory Contract provides that DSI will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund, its
shareholders or Mitchell Hutchins in connection with the matters to which the
Contract relates, except a loss resulting from willful misfeasance, bad faith or
gross negligence on the part of DSI in the performance of its duties or from
reckless disregard by it of its obligations and duties under the Contract.
The Sub-Advisory Contract provides that the Fund may terminate the
Contract on 60 days' written notice to DSI and also permits Mitchell Hutchins to
terminate the Contract (1) on 120 days' written notice to DSI; (2) upon material
breach by DSI of the representations and warranties contained in the Contract,
if such breach has not been cured within a 20 day period after notice of such
breach; or (3) immediately, if, in the reasonable judgment of Mitchell Hutchins,
DSI becomes unable to discharge its duties and obligations under the Contract or
other circumstances that could adversely affect the Fund. In addition, DSI may
terminate the Contract, without payment of any penalty, on 120 days' written
notice to Mitchell Hutchins.
Under the proposed Sub-Advisory Contract, DSI would receive a
sub-advisory fee paid by Mitchell Hutchins (not the Fund) computed daily and
paid monthly, at an annual rate of 0.35% of the Fund's average daily net
assets.
If approved by the Fund's shareholders, the Sub-Advisory Contract will
become effective on the date of approval and will remain in effect for an
initial two-year term. Thereafter, the Sub-Advisory Contract will continue in
effect if it is approved at least annually by a vote of the Fund's shareholders
or by the Board, provided that, in either event, continuance is approved by the
vote of a majority of the Independent Directors, which vote must be cast in
person at a meeting called for the purpose of voting on such approval.
EVALUATION BY BOARD
At a meeting on September 12, 2000, the Board determined that it would
be in the best interest of the Fund and its shareholders to retain DSI as the
Fund's sub-adviser. In making this decision, the Board analyzed the factors it
deemed relevant, including the following: (1) the past performance of other
accounts managed by DSI and its overall capabilities to perform the services
under the Sub-Advisory Contract; (2) the sub-advisory fees that would be payable
to DSI; (3) the services provided by DSI to its other investment company
clients; (4) the ability of DSI to provide sub-advisory services to the Fund,
including the quality of its personnel, operations and financial condition; and
(5) other factors that would affect positively or negatively the provision of
those services. Moreover, the Board took note that the three senior employees of
DSI, who currently serve as part of the Mitchell Hutchins' team responsible for
the day-to-day management of the Fund's investments, would serve on the DSI team
in the same capacities. The Board believes that the continuance of these three
individuals on the DSI team will promote stability in portfolio management.
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After full consideration of these and other factors, the Board, including a
majority of the Independent Directors, approved the proposed Sub-Advisory
Contract and recommended that it be submitted to the shareholders for approval.
REQUIRED VOTE
Approval of Proposal 1(b) requires the affirmative vote of the lesser
of (1) 67% or more of the shares of the Fund present at the Meeting, if more
than 50% of the outstanding shares are represented at the Meeting in person or
by proxy, or (2) more than 50% of the outstanding shares entitled to vote at the
Meeting.
If the Fund's shareholders do not approve the proposed Sub-Advisory
Contract, Mitchell Hutchins will continue to provide investment advisory
services to the Fund.
THE BOARD RECOMMENDS THAT SHAREHOLDERS
VOTE "FOR" PROPOSAL 1(b).
----------------------------
PROPOSAL 2: TO APPROVE OR DISAPPROVE AMENDMENT OF THE FUND'S
FUNDAMENTAL INVESTMENT LIMITATIONS TO CHANGE ITS STATUS FROM
DIVERSIFIED TO NONDIVERSIFIED.
The Fund is considered a diversified mutual fund under the 1940 Act.
This means that as a matter of fundamental policy the Fund will not purchase
securities of any one issuer if, as a result, with respect to 75% of its total
assets, more than 5% of the Fund's total assets would be invested in securities
of that issuer or more than 10% of the outstanding voting securities of that
issuer would be held by the Fund. The Board recommends elimination of the Fund's
fundamental investment limitation regarding diversification and amendment of
this fundamental policy to change the Fund to non-diversified. A non-diversified
fund can invest a greater portion of its assets in, and own a greater amount of
the voting securities of, a single company than a diversified fund. As a result,
the Fund could become somewhat riskier because it would have the ability to hold
larger positions in a fewer number of securities.
Importantly, the Fund is not seeking this change in order to invest the
portfolio in a significantly fewer number of issuers. However, the financial
services industry has been in the process of consolidation for a period of
years, and a smaller number of companies now represent a larger portion of the
industry. If it is non-diversified, the Fund would have greater freedom to
overweight its holdings of some securities in its portfolio when the
multi-factor model used by Mitchell Hutchins (and DSI if it is approved as the
Fund's sub-adviser) indicates that would be appropriate. Therefore, to provide
the Fund with sufficient investment flexibility to pursue its investment
program, the Board believes it would be appropriate to remove the
diversification restriction to which the Fund is now subject.
If the proposal is approved, the Fund's fundamental investment
limitation regarding diversification will be eliminated, but the Fund will still
be subject to the diversification rules of the Internal Revenue Code. These
rules provide that the Fund will not purchase a security if, as a result, with
respect to 50% (instead of 75%) of its total assets, more than 5% of the Fund's
total assets would be invested in securities of a single issuer or more than 10%
of the outstanding voting securities of the issuer would be held by the Fund.
REQUIRED VOTE
Approval of Proposal 2 requires the affirmative vote of the lesser of
(1) 67% or more of the shares of the Fund present at the Meeting, if more than
50% of the outstanding shares are represented at the Meeting in person or by
proxy, or (2) more than 50% of the outstanding shares entitled to vote at the
Meeting.
If the Fund's shareholders do not approve the proposed change to the
Fund's investment limitations, the Fund will continue to operate as a
diversified fund.
6
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THE BOARD RECOMMENDS THAT SHAREHOLDERS
VOTE "FOR" PROPOSAL 2.
----------------------------
PROPOSAL 3: TO APPROVE A POLICY TO PERMIT MITCHELL HUTCHINS AND THE
BOARD TO APPOINT AND REPLACE SUB-ADVISERS AND TO ENTER INTO AND AMEND
SUB-ADVISORY CONTRACTS WITHOUT FURTHER SHAREHOLDER APPROVAL.
SUMMARY
At its meeting on November 8, 2000, the Board approved, and recommended
that the shareholders of the Fund also be asked to approve, a policy to permit
Mitchell Hutchins, subject to the approval of the Board, to appoint and replace
sub-advisers and to enter into and amend sub-advisory contracts without further
shareholder approval ("Sub-Adviser Approval Policy"). Shareholders are being
asked to approve this policy at the Meeting to permit Mitchell Hutchins to make
changes in the sub-advisory arrangements for the Fund in the future without
having to incur the expense of another shareholder meeting. The policy, if
approved by the Fund's shareholders, would apply only to sub-advisers that are
not affiliated with Mitchell Hutchins, and thus would not permit Mitchell
Hutchins and the Board to appoint any Mitchell Hutchins affiliate to serve as
sub-adviser to the Fund without shareholder approval.
THE EXEMPTIVE ORDER
On January 19, 1999, the Fund and Mitchell Hutchins received an
exemptive order from the SEC that permits Mitchell Hutchins and the Board,
without obtaining shareholder approval, to appoint and replace sub-advisers that
are not affiliated with Mitchell Hutchins and to enter into and amend
sub-advisory contracts with these sub-advisers. The Fund's shareholders must
approve the Sub-Adviser Approval Policy before Mitchell Hutchins and the Board
may implement it. Without the exemptive order, the provisions of the 1940 Act
require that the Fund's shareholders approve all new sub-advisory contracts as
well as material amendments to any existing sub-advisory contract. If
shareholders approve this proposal, Mitchell Hutchins will be authorized,
subject to approval by the Board, including a majority of the Independent
Directors, to evaluate, select and retain unaffiliated sub-advisers for the Fund
and to modify the sub-advisory contracts whenever Mitchell Hutchins and the
Board believe these actions will benefit the Fund and its shareholders. The
Sub-Adviser Approval Policy only enables the future appointment of sub-advisers
that are unaffiliated with Mitchell Hutchins. Shareholder approval would
continue to be required to appoint an affiliate of Mitchell Hutchins as
sub-adviser to the Fund. As explained below, shareholders would receive detailed
information regarding any new sub-adviser.
CURRENT SUB-ADVISER APPROVAL PROCESS
Currently, the holders of a majority of the Fund's outstanding shares
must approve any sub-advisory contract between Mitchell Hutchins and another
investment adviser pursuant to which the other adviser provides the Fund with
investment management services. Shareholder approval is required in addition to
approval by the Board and by a majority of the Independent Directors.
PROPOSED SUB-ADVISER APPROVAL POLICY
The proposed Sub-Adviser Approval Policy would permit Mitchell
Hutchins, subject to the approval of the Board, including a majority of the
Independent Directors, to appoint and replace sub-advisers and to enter into and
amend sub-advisory contracts without obtaining shareholder approval. The
Sub-Adviser Approval Policy thus would permit Mitchell Hutchins to change
sub-advisers or sub-advisory arrangements in the following types of situations:
(1) the sub-adviser has a record of substandard performance; (2) the individual
employees responsible for portfolio management of the Fund move from the
sub-adviser to another investment advisory firm; (3) there is a change of
control of the sub-adviser; (4) Mitchell Hutchins decides to diversify the
Fund's management by adding another sub-adviser; and (5) there is a change in
investment style of the Fund. The Sub-Adviser Approval Policy will not be used
7
<PAGE>
to appoint any sub-adviser that is affiliated with Mitchell Hutchins as that
term is used in the 1940 Act or to amend materially any sub-advisory contract
with an affiliated sub-adviser.
Approval of the Sub-Adviser Approval Policy will not affect any of the
requirements under the federal securities laws that govern the Fund, Mitchell
Hutchins, any sub-adviser, or any sub-advisory contract, other than the
requirement to call and hold a meeting of the Fund's shareholders for the
purpose of approving a sub-advisory contract. The Board, including the
Independent Directors, will continue to evaluate and approve all new
sub-advisory contracts between Mitchell Hutchins and any sub-adviser as well as
all changes to existing sub-advisory contracts. In addition, the Fund and
Mitchell Hutchins will be subject to several conditions imposed by the SEC to
ensure that the interests of the Fund's shareholders are adequately protected
whenever Mitchell Hutchins acts under the Sub-Adviser Approval Policy. Finally,
within 90 days of the appointment of a new sub-adviser, the Fund will provide
its shareholders with an information statement that contains substantially the
same information about the sub-adviser, the sub-advisory contract and the
sub-advisory fee that the Fund's shareholders would receive in a proxy
statement. If the Fund's shareholders are not satisfied with the sub-advisory
arrangements that Mitchell Hutchins and the Board implement under the
Sub-Adviser Approval Policy, they would of course be able to exchange or sell
their shares.
Shareholder approval of this Proposal 3 will not change the total
amount of investment advisory fees paid by the Fund to Mitchell Hutchins or
Mitchell Hutchins' duties and responsibilities toward the Fund under the
investment advisory and administration contract.
REASONS FOR REQUESTING SHAREHOLDER APPROVAL
The Board believes that it is in the best interests of the Fund's
shareholders to give Mitchell Hutchins the maximum flexibility to select,
supervise and evaluate sub-advisers without incurring the expense and potential
delay of seeking specific shareholder approval. While Rule 15a-4 under the 1940
Act provides a limited exception to the shareholder approval requirements for an
interim advisory contract, a fund's current advisory contract must be terminated
before the Rule can apply and the Fund's shareholders still must approve both
the resultant interim advisory and sub-advisory contracts no later than 150 days
after their effective date. Thus, even when a change in investment management
arrangements involving one or more sub-advisers can be put into place promptly
on a temporary basis, the Fund must still call and hold a meeting of the Fund's
shareholders, create and distribute proxy materials, and arrange for the
solicitation of voting instructions from shareholders. This process is
time-intensive, slow and costly. These costs are generally borne entirely by the
Fund. If Mitchell Hutchins and the Board can rely on the Sub-Adviser Approval
Policy, the Board would be able to act more quickly and with less expense to
appoint an unaffiliated sub-adviser when the Board and Mitchell Hutchins believe
that the appointment would benefit the Fund and its shareholders.
Also, the Board believes that it is appropriate to vest the selection,
supervision and evaluation of the sub-advisers in Mitchell Hutchins, subject to
review by the Board, in light of Mitchell Hutchins' significant experience and
expertise in this area. The Board believes that investors may choose to invest
in the Fund because of Mitchell Hutchins' experience in this respect.
Finally, the Board will oversee the sub-adviser selection process to
ensure that shareholders' interests are protected whenever Mitchell Hutchins
selects a sub-adviser or modifies a sub-advisory contract. The Board, including
a majority of the Independent Directors, will continue to evaluate and approve
all new sub-advisory contracts as well as any modification to existing
sub-advisory contracts. In each review, the Board will analyze all factors that
it considers to be relevant to the determination, including the nature, quality
and scope of services provided by the sub-advisers. The Board will compare the
investment performance of the assets managed by the sub-adviser with other
accounts with similar investment objectives managed by other advisers and will
review the sub-adviser's compliance with federal securities laws and
regulations. The Board believes that its review will ensure that Mitchell
Hutchins continues to act in the best interests of the Fund and its
shareholders.
8
<PAGE>
REQUIRED VOTE
Approval of Proposal 3 requires the affirmative vote of the lesser of
(1) 67% or more of the shares of the Fund present at the Meeting, if more than
50% of the outstanding shares are represented at the Meeting in person or by
proxy, or (2) more than 50% of the outstanding shares entitled to vote at the
Meeting.
If the Fund's shareholders do not approve the proposed Sub-Adviser
Approval Policy, shareholders will continue to be asked to vote on any changes
in the Fund's sub-advisory arrangements.
THE BOARD RECOMMENDS THAT SHAREHOLDERS
VOTE "FOR" PROPOSAL 3.
----------------------------
INFORMATION ABOUT CERTAIN DIRECTORS AND OFFICERS OF THE FUND
Officers are appointed by the Board and serve at its pleasure.
Information regarding officers and directors of the Fund who are employees or
directors of Mitchell Hutchins, PaineWebber or DSI is provided below.
MARGO N. ALEXANDER; age 53, director. Ms. Alexander is chairman (since
March 1999) and a director of Mitchell Hutchins (since January 1995), and an
executive vice president and a director of PaineWebber (since March 1984). She
was chief executive officer of Mitchell Hutchins from January 1995 to October
2000. Mrs. Alexander is president and a director or trustee of 30 investment
companies for which Mitchell Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.
BRIAN M. STORMS; age 46, director and president. Mr. Storms is chief
executive officer (since October 2000) and president and chief operating officer
of Mitchell Hutchins (since March 1999). Prior to March 1999, he was president
of Prudential Investments (1996-1999). Prior to joining Prudential, he was a
managing director at Fidelity Investments. Mr. Storms is a director or trustee
of 30 investment companies for which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.
AMY R. DOBERMAN; age 38, vice president. Ms. Doberman is senior vice
president and general counsel of Mitchell Hutchins. From December 1996 through
July 2000, she was general counsel of Aeltus Investment Management, Inc. Prior
to working at Aeltus, Ms. Doberman was a Division of Investment Management
Assistant Chief Counsel at the Securities and Exchange Commission. Ms. Doberman
is a vice president of 29 investment companies and a vice president and
secretary of one investment company for which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as investment adviser.
JOHN J. HOLMGREN; age 61, vice president. Mr. Holmgren is a managing
director of Mitchell Hutchins (since August 2000). Mr. Holmgren is also
president, chief executive officer and a director of DSI. He is a vice president
of two investment companies for which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.
JOHN J. HOLMGREN, JR.; age 38, vice president. Mr. Holmgren is a
managing director of Mitchell Hutchins (since August 2000). Mr. Holmgren is also
executive vice president, chief operating officer, a portfolio manager and a
director of DSI. Prior to January 1997, he was president of DSC Data Services,
Inc., a consulting firm. He is a vice president of two investment companies for
which Mitchell Hutchins, PaineWebber or one of their affiliates serves as
investment adviser.
JOHN J. LEE; age 32, vice president and assistant treasurer. Mr. Lee is
a vice president and a manager of the mutual fund finance department of Mitchell
Hutchins. Prior to September 1997, he was an audit manager in the financial
services practice of Ernst & Young LLP. Mr. Lee is a vice president and
assistant treasurer of 30 investment companies for which Mitchell Hutchins,
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<PAGE>
PaineWebber or one of their affiliates serves as investment adviser.
KEVIN J. MAHONEY; age 35, vice president and assistant treasurer. Mr.
Mahoney is a first vice president and a senior manager of the mutual fund
finance department of Mitchell Hutchins. From August 1996 through March 1999, he
was the manager of the mutual fund internal control group of Salomon Smith
Barney. Prior to August 1996, he was an associate and assistant treasurer of
BlackRock Financial Management L.P. Mr. Mahoney is a vice president and
assistant treasurer of 30 investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as investment adviser.
ANN E. MORAN; age 43, vice president and assistant treasurer. Ms. Moran
is a vice president and a manager of the mutual fund finance department of
Mitchell Hutchins. Ms. Moran is a vice president and assistant treasurer of 30
investment companies for which Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
DIANNE E. O'DONNELL; age 48, vice president and secretary. Ms.
O'Donnell is a senior vice president and deputy general counsel of Mitchell
Hutchins. Ms. O'Donnell is a vice president and secretary of 29 investment
companies and a vice president and assistant secretary for one investment
company for which Mitchell Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.
PAUL H. SCHUBERT; age 37, vice president and treasurer. Mr. Schubert is
a senior vice president and the director of the mutual fund finance department
of Mitchell Hutchins. Mr. Schubert is a vice president and treasurer of 30
investment companies for which Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
BARNEY A. TAGLIALATELA; age 39, vice president and assistant treasurer.
Mr. Taglialatela is a vice president and a manager of the mutual fund finance
department of Mitchell Hutchins. Mr. Taglialatela is a vice president and
assistant treasurer of 30 investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as investment adviser.
KEITH A. WELLER; age 39, vice president and assistant secretary. Mr.
Weller is a first vice president and senior associate general counsel of
Mitchell Hutchins. Mr. Weller is a vice president and assistant secretary of 30
investment companies for which Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
OTHER INFORMATION
SHAREHOLDER PROPOSALS. As a general matter, the Fund does not hold
regular annual or other meetings of shareholders. Any shareholder who wishes to
submit proposals to be considered at a special meeting of the Fund's
shareholders should send such proposals to the Fund at 51 West 52nd Street, New
York, New York 10019-6114. Proposals must be received a reasonable period of
time prior to any meeting to be included in the proxy materials. Moreover,
inclusion of such proposals is subject to limitations under the federal
securities laws. Persons named as proxies for any subsequent shareholders'
meeting will vote in their discretion with respect to proposals submitted on an
untimely basis.
OTHER BUSINESS. The Fund's management knows of no other business to be
presented to the Meeting other than the matters set forth in this Proxy
Statement, but should any other matter requiring a vote of the Fund's
shareholders arise, the proxies will vote thereon according to their best
judgment in the interests of the Fund.
By Order of the Board of Directors,
-----------------------------
Secretary
November 30, 2000
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APPENDIX A
As of October 31, 2000, the following shareholder is shown on the Fund's records
as owning more than 5% of a class of its shares:
--------------------------------------------------------------------------------
NUMBER AND PERCENTAGE OF SHARES
NAME AND ADDRESS BENEFICIALLY OWNED AS OF OCTOBER 31, 2000
---------------- -----------------------------------------
--------------------------------------------------------------------------------
118,070 6.92%
James Holtman Class Y shares of Class Y shares
--------------------------------------------------------------------------------
--------------------------------
The shareholder listed may be contacted c/o Mitchell Hutchins Asset Management
Inc., 51 West 52nd Street, New York, NY 10019/6114.
11
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APPENDIX B
FORM OF INVESTMENT ADVISORY AND ADMINISTRATION CONTRACT
Contract made as of _____________, 2001, between PAINEWEBBER FINANCIAL
SERVICES GROWTH FUND INC., a Maryland corporation ("Fund"), and MITCHELL
HUTCHINS ASSET MANAGEMENT INC. ("Mitchell Hutchins"), a Delaware corporation
registered as a broker-dealer under the Securities Exchange Act of 1934, as
amended ("1934 Act"), and as an investment adviser under the Investment Advisers
Act of 1940, as amended,
WHEREAS the Fund is registered under the Investment Company Act of
1940, as amended ("1940 Act"), as an open-end management investment company, and
currently has a single series of shares of common stock, which corresponds to a
distinct portfolio and is known as PaineWebber Financial Services Growth Fund;
and
WHEREAS the Fund desires to retain Mitchell Hutchins as investment
adviser and administrator to furnish certain administrative, investment advisory
and portfolio management services to the Fund with respect to PaineWebber
Financial Services Growth Fund and any other series as to which this Contract
may hereafter be made applicable (each a "Series"), and Mitchell Hutchins is
willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Fund hereby appoints Mitchell Hutchins as
investment adviser and administrator of the Fund and each Series for the period
and on the terms set forth in this Contract. Mitchell Hutchins accepts such
appointment and agrees to render the services herein set forth, for the
compensation herein provided.
2. DUTIES AS INVESTMENT ADVISER.
(a) Subject to the supervision of the Fund's Board of Directors
("Board"), Mitchell Hutchins will provide a continuous investment program for a
Series, including investment research and management with respect to all
securities and investments and cash equivalents in the Series. Mitchell Hutchins
will determine from time to time what securities and other investments will be
purchased, retained or sold by the Series. Mitchell Hutchins may delegate to a
sub-adviser, in whole or in part, Mitchell Hutchins' duty to provide a
continuous investment management program with respect to any Series, including
the provision of investment management services with respect to a portion of the
Series' assets, in accordance with paragraph 5 of this Agreement.
(b) Mitchell Hutchins agrees that in placing orders with brokers, it
will attempt to obtain the best net result in terms of price and execution;
provided that, on behalf of any Series, Mitchell Hutchins may, in its
discretion, use brokers who provide the Series with research, analysis, advice
and similar services to execute portfolio transactions on behalf of the Series,
and Mitchell Hutchins may pay to those brokers in return for brokerage and
research services a higher commission than may be charged by other brokers,
subject to Mitchell Hutchins' determining in good faith that such commission is
reasonable in terms either of the particular transaction or of the overall
responsibility of Mitchell Hutchins to such Series and its other clients and
that the total commissions paid by such Series will be reasonable in relation to
the benefits to the Series over the long term. In no instance will portfolio
securities be purchased from or sold to Mitchell Hutchins, or any affiliated
person thereof, except in accordance with the federal securities laws and the
rules and regulations thereunder, or any applicable exemptive orders. Whenever
Mitchell Hutchins simultaneously places orders to purchase or sell the same
security on behalf of a Series and one or more other accounts advised by
Mitchell Hutchins, such orders will be allocated as to price and amount among
all such accounts in a manner believed to be equitable to each account. The Fund
recognizes that in some cases this procedure may adversely affect the results
obtained for the Series.
(c) Mitchell Hutchins will oversee the maintenance of all books and
records with respect to the securities transactions of each Series, and will
furnish the Board with such periodic and special reports as the Board reasonably
may request. In compliance with the requirements of Rule 31a-3 under the 1940
Act, Mitchell Hutchins hereby agrees that all records which it maintains for the
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Fund are the property of the Fund, agrees to preserve for the periods prescribed
by Rule 31a-2 under the 1940 Act any records which it maintains for the Fund and
which are required to be maintained by Rule 31a-l under the 1940 Act and further
agrees to surrender promptly to the Fund any records which it maintains for the
Fund upon request by the Fund.
(d) Mitchell Hutchins will oversee the computation of the net asset
value and the net income of each Series as described in the currently effective
registration statement of the Fund under the Securities Act of 1933, as amended,
and the 1940 Act and any supplements thereto ("Registration Statement) or as
more frequently requested by the Board.
(e) The Fund hereby authorizes Mitchell Hutchins and any entity or
person associated with Mitchell Hutchins which is a member of a national
securities exchange to effect any transaction on such exchange for the account
of any Series, which transaction is permitted by Section 11(a) of the 1934 Act
and the rules thereunder, and the Fund hereby consents to the retention of
compensation by Mitchell Hutchins or any person or entity associated with
Mitchell Hutchins for such transaction.
3. DUTIES AS ADMINISTRATOR. Mitchell Hutchins will administer the
affairs of the Fund and each Series subject to the supervision of the Board and
the following understandings:
(a) Mitchell Hutchins will supervise all aspects of the operations of
the Fund and each Series, including oversight of transfer agency, custodial and
accounting services, except as hereinafter set forth; provided, however, that
nothing herein contained shall be deemed to relieve or deprive the Board of its
responsibility for and control of the conduct of the affairs of the Fund and
each Series.
(b) Mitchell Hutchins will provide the Fund and each Series with such
corporate, administrative and clerical personnel (including officers of the
Fund) and services as are reasonably deemed necessary or advisable by the Board,
including the maintenance of certain books and records of the Fund and each
Series.
(c) Mitchell Hutchins will arrange, but not pay, for the periodic
preparation, updating, filing and dissemination (as applicable) of the Fund's
Registration Statement, proxy material, tax returns and required reports to each
Series' shareholders and the Securities and Exchange Commission and other
appropriate federal or state regulatory authorities.
(d) Mitchell Hutchins will provide the Fund and each Series with, or
obtain for it, adequate office space and all necessary office equipment and
services, including telephone service, heat, utilities, stationery supplies and
similar items.
(e) Mitchell Hutchins will provide the Board on a regular basis with
economic and investment analyses and reports and make available to the Board
upon request any economic, statistical and investment services normally
available to institutional or other customers of Mitchell Hutchins.
4. FURTHER DUTIES. In all matters relating to the performance of this
Contract, Mitchell Hutchins will act in conformity with the Articles of
Incorporation, By-Laws, and Registration Statement of the Fund and with the
instructions and directions of the Board and will comply with the requirements
of the 1940 Act, the rules thereunder, and all other applicable federal and
state laws and regulations.
5. DELEGATION OF MITCHELL HUTCHINS' DUTIES AS INVESTMENT ADVISER AND
ADMINISTRATOR. With respect to any or all Series, Mitchell Hutchins may enter
into one or more contracts ("Sub-Advisory or Sub-Administration Contract") with
one or more sub-advisers or sub-administrators in which Mitchell Hutchins
delegates to such sub-advisers or sub-administrators any or all of its duties
specified in Paragraphs 2 and 3 of this Contract, provided that each
Sub-Advisory or Sub-Administration Contract imposes on the sub-adviser or
sub-administrator bound thereby all the corresponding duties and conditions to
which Mitchell Hutchins is subject by Paragraphs 2 and 3 of this Contract and
all the duties and conditions of paragraph 4 of this Contract, and further
provided that each Sub-Advisory or Sub-Administration Contract meets all
requirements of the 1940 Act and rules thereunder. Furthermore, to the extent
consistent with the regulations and orders of the Securities and Exchange
Commission, the appointment and engagement of any sub-advisor and delegation to
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it of duties hereunder by Mitchell Hutchins shall be subject only to the
approval of the Fund's Board.
6. SERVICES NOT EXCLUSIVE. The services furnished by Mitchell
Hutchins hereunder are not to be deemed exclusive and Mitchell Hutchins shall be
free to furnish similar services to others so long as its services under this
Contract are not impaired thereby or unless otherwise agreed to by the parties
hereunder in writing. Nothing in this Contract shall limit or restrict the right
of any director, officer or employee of Mitchell Hutchins, who may also be a
Board member, officer or employee of the Fund, to engage in any other business
or to devote his or her time and attention in part to the management or other
aspects of any other business, whether of a similar nature or a dissimilar
nature.
7. EXPENSES.
--------
(a) During the term of this Contract, each Series will bear all
expenses, not specifically assumed by Mitchell Hutchins, incurred in its
operations and the offering of its shares.
(b) Expenses borne by each Series will include but not be limited to
the following (or each Series' proportionate share of the following): (i) the
cost (including brokerage commissions) of securities purchased or sold by the
Series and any losses incurred in connection therewith; (ii) fees payable to and
expenses incurred on behalf of the Series by Mitchell Hutchins under this
Contract; (iii) expenses of organizing the Fund and the Series; (iv) filing fees
and expenses relating to the registrations and qualification of the Series'
shares and the Fund under federal and/or state securities laws and maintaining
such registration and qualifications; (v) fees and salaries payable to the
Fund's Board members and officers who are not interested persons of the Fund or
Mitchell Hutchins; (vi) all expenses incurred in connection with the Board
members' services, including travel expenses; (vii) taxes (including any income
or franchise taxes) and governmental fees; (viii) costs of any liability,
uncollectible items of deposit and other insurance and fidelity bonds; (ix) any
costs, expenses or losses arising out of a liability of or claim for damages or
other relief asserted against the Fund or Series for violation of any law; (x)
legal, accounting and auditing expenses, including legal fees of special counsel
for those Board members of the Fund who are not interested persons of the Fund;
(xi) charges of custodians, transfer agents and other agents; (xii) costs of
preparing share certificates; (xiii) expenses of setting in type and printing
prospectuses and supplements thereto, statements of additional information and
supplements thereto, reports and proxy materials for existing shareholders;
(xiv) costs of mailing prospectuses and supplements thereto, statements of
additional information and supplements thereto, reports and proxy materials to
existing shareholders; (xv) any extraordinary expenses (including fees and
disbursements of counsel, costs of actions, suits or proceedings to which the
Fund is a party and the expenses the Fund may incur as a result of its legal
obligation to provide indemnification to its officers, Board members, agents and
shareholders) incurred by the Fund or Series; (xvi) fees, voluntary assessments
and other expenses incurred in connection with membership in investment company
organizations; (xvii) costs of mailing and tabulating proxies and costs of
meetings of shareholders, the Board and any committees thereof; (xviii) the cost
of investment company literature and other publications provided by the Fund to
its Board members and officers; (xix) costs of mailing, stationery and
communications equipment; (xx) expenses incident to any dividend, withdrawal or
redemption options; (xxi) charges and expenses of any outside pricing service
used to value portfolio securities; (xxii) interest on borrowings of the Fund;
and (xxiii) fees or expenses related to license agreements with respect to
securities indices.
(c) The Fund or a Series may pay directly any expenses incurred by it
in its normal operations and, if any such payment is consented to by Mitchell
Hutchins and acknowledged as otherwise payable by Mitchell Hutchins pursuant to
this Contract, the Series may reduce the fee payable to Mitchell Hutchins
pursuant to Paragraph 8 thereof by such amount. To the extent that such
deductions exceed the fee payable to Mitchell Hutchins on any monthly payment
date, such excess shall be carried forward and deducted in the same manner from
the fee payable on succeeding monthly payment dates.
(d) Mitchell Hutchins will assume the cost of any compensation for
services provided to the Fund received by the officers of the Fund and by those
Board members who are interested persons of the Fund.
(e) The payment or assumption by Mitchell Hutchins of any expenses of
the Fund or a Series that Mitchell Hutchins is not required by this Contract to
pay or assume shall not obligate Mitchell Hutchins to pay or assume the same or
any similar expense of the Fund or a Series on any subsequent occasion.
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8. COMPENSATION.
------------
(a) For the services provided and the expenses assumed pursuant to this
Contract, with respect to PaineWebber Financial Services Growth Fund, the Fund
will pay to Mitchell Hutchins a fee, computed daily and paid monthly, at an
annual rate of 0.70% of average daily net assets of such Series.
(b) For the services provided and the expenses assumed pursuant to this
Contract with respect to any other Series hereafter established, the Fund will
pay to Mitchell Hutchins from the assets of such Series a fee in an amount to be
agreed upon in a written fee agreement ("Fee Agreement") executed by the Fund on
behalf of such Series and by Mitchell Hutchins. All such Fee Agreements shall
provide that they are subject to all terms and conditions of this Contract.
(c) The fee shall be computed daily and paid monthly to Mitchell
Hutchins on or before the first business day of the next succeeding calendar
month.
(d) If this Contract becomes effective or terminates before the end of
any month, the fee for the period from the effective day to the end of the month
or from the beginning of such month to the date of termination, as the case may
be, shall be prorated according to the proportion which such period bears to the
full month in which such effectiveness or termination occurs.
9. LIMITATION OF LIABILITY OF MITCHELL HUTCHINS. Mitchell Hutchins and
its delegates, including any Sub-Adviser or SubAdministrator to any Series or
the Fund, shall not be liable for any error of judgment or mistake of law or for
any loss suffered by any Series, the Fund or any of its shareholders, in
connection with the matters to which this Contract relates, except to the extent
that such a loss results from 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 this Contract. Any person, even though also an
officer, director, employee, or agent of Mitchell Hutchins, who may be or become
an officer, Board member, employee or agent of the Fund shall be deemed, when
rendering services to any Series or the Fund or acting with respect to any
business of such Series or the Fund, to be rendering such service to or acting
solely for the Series or the Fund and not as an officer, director, employee, or
agent or one under the control or direction of Mitchell Hutchins even though
paid by it.
10. DURATION AND TERMINATION.
------------------------
(a) This Contract shall become effective upon the date hereabove
written provided that, with respect to any Series, this Contract shall not take
effect unless it has first been approved (i) by a vote of a majority of those
Board members of the Fund who are not parties to this Contract or interested
persons of any such party ("Independent Board Members") cast in person at a
meeting called for the purpose of voting on such approval, and (ii) by vote of a
majority of that Series' outstanding voting securities.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for two years from the above written date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of the Independent Board Members of
the Fund, cast in person at a meeting called for the purpose of voting on such
approval, and (ii) by the Board or with respect to any given Series by vote of a
majority of the outstanding voting securities of such Series.
(c) Notwithstanding the foregoing, with respect to any Series this
Contract may be terminated at any time, without the payment of any penalty, by
vote of the board or by a vote of a majority of the outstanding voting
securities of such Series on sixty days' written notice to Mitchell Hutchins or
by Mitchell Hutchins at any time, without the payment of any penalty, on sixty
days' written notice to the Fund. Termination of this Contract with respect to
any given Series shall in no way affect the continued validity of this Contract
or the performance thereunder with respect to any other Series. This Contract
will automatically terminate in the event of its assignment.
B-4
<PAGE>
11. AMENDMENT OF THIS CONTRACT. No provision of this Contract may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this contract as to any
given Series shall be effective until approved by vote of a majority of such
Series' outstanding voting securities.
12. GOVERNING LAW. This Contract shall be construed in accordance with
the laws of the State of New York, without giving effect to the conflicts of
laws principles thereof, and in accordance with the 1940 Act, provided, however,
that to the extent that the applicable laws of the State of New York conflict
with the applicable provisions of the 1940 Act, the latter shall control.
13. MISCELLANEOUS. The captions in this Contract are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors. As used in this Contract,
the terms "majority of the outstanding voting securities," "affiliated person,"
"interested person," "assignment," "broker," "investment adviser," "national
securities exchange," "net assets," "prospectus," "sale," "sell" and "security"
shall have the same meaning as such terms have in the 1940 Act, subject to such
exemption as may be granted by the Securities and Exchange Commission by any
rule, regulation or order. Where the effect of a requirement of the 1940 Act
reflected in any provision of this contract is relaxed by a rule, regulation or
order of the Securities and Exchange Commission, whether of special or general
application, such provision shall be deemed to incorporate the effect of such
rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated as of the day and year first above
written.
PAINEWEBBER FINANCIAL SERVICES GROWTH
FUND INC.
Attest: ___________________________ By __________________________________
MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
Attest: ___________________________ By __________________________________
16
<PAGE>
APPENDIX C
ADDITIONAL INFORMATION ABOUT MITCHELL HUTCHINS
Mitchell Hutchins, a Delaware corporation, is a wholly owned asset
management subsidiary of PaineWebber Incorporated, which is a wholly owned
indirect subsidiary of UBS AG, an internationally diversified organization with
headquarters in Zurich, Switzerland and operations in many areas of the
financial services industry. Mitchell Hutchins is located at 51 West 52nd
Street, New York, New York 10019-6114. The principal business offices of
PaineWebber are located at 1285 Avenue of the Americas, New York, New York
10019-6028. The principal business offices of UBS AG are located at
Bahnhofstrasse 45, Zurich, Switzerland. As of October 31, 2000, Mitchell
Hutchins was the adviser or sub-adviser of 31 investment companies with 75
separate portfolios and aggregate assets of approximately $58.3 billion.
Since April 1, 1999 (the beginning of the Fund's most recently
completed fiscal year), purchases and sales of the securities of Paine Webber
Group Inc. (the ultimate parent company of PaineWebber and Mitchell Hutchins
prior to November 3, 2000) or UBS AG by the directors of the Fund did not exceed
1% of the outstanding securities of any class of PW Group or UBS AG.
Mitchell Hutchins also serves as the distributor for the Fund's shares
under a distribution contract that requires Mitchell Hutchins to use its best
efforts to sell the Fund's shares. During its fiscal year ended March 31, 2000,
the Fund paid $66,672 in brokerage commissions to PaineWebber, which represented
3.70% of the aggregate brokerage commissions paid by the Fund during that fiscal
year.
The following is a list of the directors and principal executive
officer of Mitchell Hutchins. The business address of each individual listed
below is 51 West 52nd Street, New York, New York 10019-6114.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
NAME POSITION WITH MITCHELL HUTCHINS PRINCIPAL OCCUPATION
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Margo N. Alexander Chairman and a director Same
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Julian F. Sluyters Director and a managing director Same
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Brian M. Storms Chief executive officer, president and Same
chief operating officer
-------------------------------------------------------------------------------------------------------------
</TABLE>
C-1
<PAGE>
OTHER INVESTMENT COMPANY CLIENTS
Mitchell Hutchins also serves as investment adviser to the following
investment companies, which have investment objectives similar to the Fund's, at
the fee rates set forth below. These investment companies had the indicated net
assets as of September 30, 2000.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
NAME OF FUND ADVISORY FEE RATE APPROXIMATE ASSETS
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------------
PaineWebber Enhanced Nasdaq-100 Fund 0.75% of average daily net assets $ 88,718,634
(a series of Mitchell Hutchins Securities
Trust)
-------------------------------------------------------------------------------------------------------------------------
PaineWebber Enhanced S&P 500 Fund 0.40% of average daily net assets 20,501,763
(a series of Mitchell Hutchins Securities
Trust)
-------------------------------------------------------------------------------------------------------------------------
PaineWebber Growth Fund 0.75% of average daily net assets 572,798,818
(a series of PaineWebber Olympus Fund)
-------------------------------------------------------------------------------------------------------------------------
PaineWebber Growth and Income Fund (a series 0.70% of average daily net assets 1,064,835,044
of PaineWebber America Fund)
-------------------------------------------------------------------------------------------------------------------------
PaineWebber Mid Cap Fund 1.00% of average daily net assets 219,488,012
(a series of PaineWebber Managed Assets Trust)
-------------------------------------------------------------------------------------------------------------------------
PaineWebber Small Cap Fund 1.00% of average daily net assets 69,814,261
(a series of PaineWebber Olympus Fund)
-------------------------------------------------------------------------------------------------------------------------
PaineWebber S&P 500 Index Fund (a series of 0.20% of average daily net assets 89,407,932
PaineWebber Index Trust)
-------------------------------------------------------------------------------------------------------------------------
PaineWebber Strategy Fund 0.75% of average daily net assets 1,546,770,896
(a series of PaineWebber Managed Investments
Trust)
-------------------------------------------------------------------------------------------------------------------------
PaineWebber Tax-Managed Fund 0.75% of average daily net assets 46,497,363
(a series of PaineWebber Managed Investments
Trust)
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-2
<PAGE>
APPENDIX D
FORM OF SUB-ADVISORY CONTRACT
Agreement made as of ______________________, 2001 ("Contract") between
MITCHELL HUTCHINS ASSET MANAGEMENT INC., a Delaware corporation ("Mitchell
Hutchins"), and DSI INTERNATIONAL MANAGEMENT, INC., a Delaware corporation
("Sub-Adviser").
RECITALS
--------
(1) Mitchell Hutchins has entered into an Investment Advisory and
Administration Agreement, dated ______________, 2000 ("Management Agreement"),
with PaineWebber Financial Service Growth Fund Inc. ("Fund"), an open-end
management investment company registered under the Investment Company Act of
1940, as amended ("1940 Act");
(2) The Fund offers for public sale a single distinct series of shares
of common stock, which corresponds to a distinct portfolio and is known as
"PaineWebber Financial Services Growth Fund" ("Series"), and may offer
additional distinct series in the future;
(3) Under the Management Agreement, Mitchell Hutchins has agreed to
provide certain investment advisory and administrative services to the Series;
(4) The Management Agreement permits Mitchell Hutchins to delegate
certain of its duties as investment adviser thereunder to a sub-adviser;
(5) Mitchell Hutchins desires to retain the Sub-Adviser to furnish
certain investment advisory services with respect to PaineWebber Financial
Services Growth Fund; and
(6) The Sub-Adviser is willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, Mitchell Hutchins and the Sub-Adviser agree as follows:
1. APPOINTMENT. Mitchell Hutchins hereby appoints the Sub-Adviser as
an investment sub-adviser with respect to the Series for the period and on the
terms set forth in this Contract. The Sub-Adviser accepts that appointment and
agrees to render the services herein set forth, for the compensation herein
provided.
2. DUTIES AS SUB-ADVISER.
---------------------
(a) Subject to the supervision and direction of the Fund's Board of
Directors ("Board") and review by Mitchell Hutchins, and any written guidelines
adopted by the Board or Mitchell Hutchins, the Sub-Adviser will provide a
continuous investment program for the Series, including investment research and
management with respect to all securities and investments and cash equivalents
in the Series. The Sub-Adviser will determine from time to time what investments
will be purchased, retained or sold by the Series. The Sub-Adviser will be
responsible for placing purchase and sell orders for investments and for other
related transactions. The Sub-Adviser will provide services under this Contract
in accordance with the Series' investment objective, policies and restrictions
as stated in the Fund's currently effective registration statement under the
1940 Act, and any amendments or supplements thereto ("Registration Statement").
(b) The Sub-Adviser agrees that, in placing orders with brokers, it
will obtain the best net result in terms of price and execution; provided that,
on behalf of the Series, the Sub-Adviser may, in its discretion, use brokers who
provide the Sub-Adviser with research, analysis, advice and similar services to
execute portfolio transactions, and the Sub-Adviser may pay to those brokers in
return for brokerage and research services a higher commission than may be
charged by other brokers, subject to the Sub-Adviser's determining in good faith
that such commission is reasonable in terms either of the particular transaction
or of the overall responsibility of the Sub-Adviser to the Series and its other
D-1
<PAGE>
clients and that the total commissions paid by the Series will be reasonable in
relation to the benefits to the Series over the long term. In no instance will
portfolio securities be purchased from or sold to the Sub-Adviser, or any
affiliated person thereof, except in accordance with the federal securities laws
and the rules and regulations thereunder. The Sub-Adviser may aggregate sales
and purchase orders with respect to the assets of the Series with similar orders
being made simultaneously for other accounts advised by the Sub-Adviser or its
affiliates. Whenever the Sub-Adviser simultaneously places orders to purchase or
sell the same security on behalf of the Series and one or more other accounts
advised by the Sub-Adviser, the orders will be allocated as to price and amount
among all such accounts in a manner believed to be equitable over time to each
account. Mitchell Hutchins recognizes that in some cases this procedure may
adversely affect the results obtained for the Series.
(c) The Sub-Adviser will maintain all books and records required to be
maintained pursuant to the 1940 Act and the rules and regulations promulgated
thereunder with respect to actions by the Sub-Adviser on behalf of the Series,
and will furnish the Board and Mitchell Hutchins with such periodic and special
reports as the Board or Mitchell Hutchins reasonably may request. In compliance
with the requirements of Rule 31a-3 under the 1940 Act, the Sub-Adviser hereby
agrees that all records that it maintains for the Series are the property of the
Trust, agrees to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act any records that it maintains for the Fund and that are required to be
maintained by Rule 31a-1 under the 1940 Act, and further agrees to surrender
promptly to the Fund any records that it maintains for the Series upon request
by the Fund.
(d) At such times as shall be reasonably requested by the Board or
Mitchell Hutchins, the Sub-Adviser will provide the Board and Mitchell Hutchins
with economic and investment analyses and reports and make available to the
Board and Mitchell Hutchins any economic, statistical and investment services
that the Sub-Adviser normally makes available to its institutional or other
customers.
(e) In accordance with procedures adopted by the Board, as amended from
time to time, the Sub-Adviser is responsible for assisting in the fair valuation
of all portfolio securities and will use its reasonable efforts to arrange for
the provision of a price from one or more parties independent of the Sub-Adviser
for each portfolio security for which the custodian does not obtain prices in
the ordinary course of business from an automated pricing service.
3. FURTHER DUTIES. In all matters relating to the performance of this
Contract, the Sub-Adviser will act in conformity with the Fund's Articles of
Incorporation, By-Laws and Registration Statement and with the written
instructions and written directions of the Board and Mitchell Hutchins; and will
comply with the requirements of the 1940 Act and the Investment Advisers Act of
1940, as amended ("Advisers Act") and the rules under each, Subchapter M of the
Internal Revenue Code ("Code"), as applicable to regulated investment companies;
and all other federal and state laws and regulations applicable to the Fund and
the Series. Mitchell Hutchins agrees to provide to the Sub-Adviser copies of the
Fund's Articles of Incorporation, By-Laws, Registration Statement, written
instructions and directions of the Board and Mitchell Hutchins, and any
amendments or supplements to any of these materials as soon as practicable after
such materials become available; and further agrees to identify to the
Sub-Adviser in writing any broker-dealers that are affiliated with Mitchell
Hutchins (other than PaineWebber Incorporated and Mitchell Hutchins itself).
4. EXPENSES. During the term of this Contract, the Sub-Adviser will
bear all expenses incurred by it in connection with its services under this
Contract.
5. COMPENSATION.
------------
(a) For the services provided and the expenses assumed by the
Sub-Adviser pursuant to this Contract, Mitchell Hutchins, not the Series, will
pay to the Sub-Adviser a sub-advisory fee, computed daily and paid monthly, at
an annual rate of 0.35% of the Series' average daily net assets.
(b) The fee shall be accrued daily and payable monthly to the
Sub-Adviser on or before the last business day of the next succeeding calendar
month.
(c) If this Contract becomes effective or terminates before the end
of any month, the fee for the period from the effective date to the end of the
month or from the beginning of such month to the date of termination, as the
D-2
<PAGE>
case may be, shall be pro-rated according to the proportion that such period
bears to the full month in which such effectiveness or termination occurs.
6. LIMITATION OF LIABILITY. The Sub-Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Series, the
Fund, its shareholders or by Mitchell Hutchins in connection with the matters to
which this Contract relates, except a loss resulting from 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 this Contract.
Nothing in this paragraph shall be deemed a limitation or waiver of any
obligation or duty that may not by law be limited or waived.
7. REPRESENTATIONS OF SUB-ADVISER. The Sub-Adviser represents, warrants
and agrees as follows:
(a) The Sub-Adviser (i) is registered as an investment adviser under
the Advisers Act and will continue to be so registered for so long as this
Contract remains in effect; (ii) is not prohibited by the 1940 Act or the
Advisers Act from performing the services contemplated by this Contract; (iii)
has met and will seek to continue to meet for so long as this Contract remains
in effect, any other applicable federal or state requirements, or the applicable
requirements of any regulatory or industry self-regulatory agency necessary to
be met in order to perform the services contemplated by this Contract; (iv) has
the authority to enter into and perform the services contemplated by this
Contract; and (v) will promptly notify Mitchell Hutchins of the occurrence of
any event that would disqualify the Sub-Adviser from serving as an investment
adviser of an investment company pursuant to Section 9(a) of the 1940 Act or
otherwise.
(b) The Sub-Adviser has adopted a written code of ethics and
appropriate procedures (collectively, "Code") pursuant to Rule 17j-1 under the
1940 Act. No less frequently than annually, the Sub-Adviser shall furnish the
Board with a written report that (i) describes any issues arising under the Code
since the last report to the Board, including information about material
violations of the Code and sanctions imposed in response to the material
violations, (ii) certifies that the Code adopted is reasonably necessary to
prevent directors and employees, including access persons (as that term is
defined under Rule 17j-1) from future violations of the Code; and (iii) provides
a copy of the current Code together with both a written description of all
material changes to it and a written description of the Code's mechanisms for
compliance with Rule 17j-1 and why the Sub-Adviser believes the Code is
reasonably designed to meet the requirements of Rule 17j-1. Upon request, the
Sub-Adviser agrees to assist Mitchell Hutchins and the Board with all reasonable
requests related to the Code, including providing assurances that it is
complying with its obligations under Rule 17j-1, as it may be amended from time
to time.
(c) The Sub-Adviser has provided Mitchell Hutchins with a copy of its
Form ADV, which as of the date of this Agreement is its Form ADV as most
recently filed with the Securities and Exchange Commission ("SEC") and promptly
will furnish a copy of all amendments to Mitchell Hutchins at least annually.
(d) The Sub-Adviser will notify Mitchell Hutchins of any change of
control of the Sub-Adviser, including any change of its general partners or 25%
shareholders, as applicable, and any changes in the key personnel who are either
the portfolio manager(s) of the Series or senior management of the Sub-Adviser,
in each case prior to, or promptly after, such change.
(e) The Sub-Adviser agrees that neither it, nor any of its
affiliates, will in any way refer directly or indirectly to its relationship
with the Series, the Fund, Mitchell Hutchins or any of their respective
affiliates in offering, marketing or other promotional materials without the
prior express written consent of Mitchell Hutchins.
8. SERVICES NOT EXCLUSIVE. The services furnished by the Sub-Adviser
hereunder are not to be deemed exclusive and the Sub-Adviser shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired thereby or unless otherwise agreed to by the parties hereunder
in writing. Nothing in this Contract shall limit or restrict the right of any
director, officer or employee of the Sub-Adviser, who may also be a Director,
officer or employee of the Fund, to engage in any other business or to devote
his or her time and attention in part to the management or other aspects of any
other business, whether of a similar nature or a dissimilar nature.
D-3
<PAGE>
9. DURATION AND TERMINATION.
------------------------
(a) This Contract shall become effective upon the date first above
written, provided that this Contract shall not take effect unless it has first
been approved: (i) by a vote of a majority of those Directors of the Fund who
are not parties to this Contract or interested persons of any such party
("Independent Directors"), cast in person at a meeting called for the purpose of
voting on such approval, and (ii) by vote of a majority of the Series'
outstanding securities.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for two years from its effective date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually: (i) by a vote of a majority of the Independent Directors, cast
in person at a meeting called for the purpose of voting on such approval, and
(ii) by the Board or by vote of a majority of the outstanding voting securities
of the Series.
(c) Notwithstanding the foregoing, this Contract may be terminated at
any time, without the payment of any penalty, by vote of the Board or by a vote
of a majority of the outstanding voting securities of the Series on 60 days'
written notice to the Sub-Adviser. This Contract may also be terminated, without
the payment of any penalty, by Mitchell Hutchins: (i) upon 120 days' written
notice to the Sub-Adviser; (ii) upon material breach by the Sub-Adviser of any
representations and warranties set forth in Paragraph 7 of this Contract, if
such breach has not been cured within a 20 day period after notice of such
breach; or (iii) immediately if, in the reasonable judgment of Mitchell
Hutchins, the Sub-Adviser becomes unable to discharge its duties and obligations
under this Contract, including circumstances such as financial insolvency of the
Sub-Adviser or other circumstances that could adversely affect the Series. The
Sub-Adviser may terminate this Contract at any time, without the payment of any
penalty, on 120 days written notice to Mitchell Hutchins. This Contract will
terminate automatically in the event of its assignment or upon termination of
the Advisory Contract as it relates to the Series.
10. AMENDMENT OF THIS CONTRACT. No provision of this Contract may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought. No amendment of this Contract shall be
effective until approved by a vote of a majority of the Independent Directors.
11. GOVERNING LAW. This Contract shall be construed in accordance with
the 1940 Act and the laws of the State of New York, without giving effect to the
conflicts of laws principles thereof. To the extent that the applicable laws of
the State of New York conflict with the applicable provisions of the 1940 Act,
the latter shall control.
12. MISCELLANEOUS. The captions in this Contract are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors. As used in this Contract,
the terms "majority of the outstanding voting securities," "affiliated person,"
"interested person," "assignment," "broker," "investment adviser," "net assets,"
"sale," "sell" and "security" shall have the same meaning as such terms have in
the 1940 Act, subject to such exemption as may be granted by the SEC by any
rule, regulation or order. Where the effect of a requirement of the federal
securities laws reflected in any provision of this Contract is made less
restrictive by a rule, regulation or order of the SEC, whether of special or
general application, such provision shall be deemed to incorporate the effect of
such rule, regulation or order. This Contract may be signed in counterparts.
13. NOTICES. Any notice herein required is to be in writing and is
deemed to have been given to the Sub-Adviser or Mitchell Hutchins upon receipt
of the same at their respective addresses set forth below. All written notices
required or permitted to be given under this Contract will be delivered by
personal service, by postage mail - return receipt requested or by facsimile
machine or a similar means of same day delivery which provides evidence of
receipt (with a confirming copy by mail as set forth herein). All notices
provided to Mitchell Hutchins will be sent to the attention of Dianne E.
O'Donnell, Deputy General Counsel. All notices provided to the Sub-Adviser will
be sent to the attention of John J. Holmgren, Jr., Executive Vice President and
Chief Operating Officer of the Sub-Adviser.
[rest of page left intentionally blank]
D-4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their duly authorized signatories as of the date and year first
above written.
MITCHELL HUTCHINS ASSET
MANAGEMENT INC.
51 West 52nd Street
Attest: New York, New York 10019-6114
By:_______________________________ By:_________________________________
Name: Name:
Title: Title:
DSI INTERNATIONAL
MANAGEMENT, INC.
301 Merritt 7
Attest: Norwalk, CT 06851
By:_______________________________ By:_________________________________
Name: Name:
Title: Title:
D-5
<PAGE>
APPENDIX E
ADDITIONAL INFORMATION ABOUT DSI
DSI is a wholly owned asset management subsidiary of PaineWebber
Incorporated ("PaineWebber"), which is a wholly owned indirect subsidiary of UBS
AG, an internationally diversified organization with headquarters in Switzerland
and operations in many areas of the financial services industry. DSI is located
at 301 Merritt 7, Norwalk, Connecticut 06851. The principal business offices of
PaineWebber are located at 1285 Avenue of the Americas, New York, New York
10019-6028. The principal business offices of UBS AG are located at
Bahnhofstrasse 45, Zurich, Switzerland. As of September 30, 2000, DSI had over
$6.6 billion in assets under management. DSI has been in the investment advisory
business since 1988 and has been advising mutual funds since April 2000.
The following is a list of the directors and principal executive
officer of DSI. The business address of each individual listed below is 301
Merritt 7, Norwalk, Connecticut 06851.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
NAME POSITION WITH DSI PRINCIPAL OCCUPATION
---- ----------------- --------------------
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
John J. Holmgren President, chief executive officer Same
and a director
-------------------------------------------------------------------------------------------------------------------
John J. Holmgren, Jr. Executive vice president, chief Same
operating officer, a portfolio
manager and a director
-------------------------------------------------------------------------------------------------------------------
Michael Holmgren Director and managing director Same
-------------------------------------------------------------------------------------------------------------------
Julian F. Sluyters Director Officer of Mitchell Hutchins Asset
Management Inc.
-------------------------------------------------------------------------------------------------------------------
Brian M. Storms Director Officer of Mitchell Hutchins Asset
Management Inc.
-------------------------------------------------------------------------------------------------------------------
</TABLE>
OTHER INVESTMENT COMPANY CLIENTS
DSI also serves as investment sub-adviser to the following investment
companies, which have similar investment objectives to the Fund's, at the fee
rates set forth below. These investment companies had the indicated net assets
as of September 30, 2000.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
NAME OF FUND SUB-ADVISORY FEE RATE APPROXIMATE ASSETS
------------ --------------------- ------------------
<S> <C> <C>
--------------------------------------------------------------------------------------------------------------------
PaineWebber Enhanced Nasdaq-100 Fund (a 0.35% of average daily net assets $ 88,718,634
series of Mitchell Hutchins Securities Trust)
--------------------------------------------------------------------------------------------------------------------
PaineWebber Enhanced S&P 500 Fund 0.20% of average daily net assets 20,501,763
(a series of Mitchell Hutchins Securities
Trust)
--------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
APPENDIX 1
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
SPECIAL MEETING OF SHAREHOLDERS - JANUARY 11, 2001
This proxy is being solicited on behalf of the Board of Directors of PaineWebber Financial Services
Growth Fund Inc. ("Fund") and relates to the proposals indicated below. The undersigned hereby appoints as
proxies SCOTT H. GRIFF and VICTORIA DRAKE and each of them (with the power of substitution) to vote for the
undersigned all shares of common stock of the undersigned in the Fund at the Special Meeting of Shareholders
to be held at a.m., Eastern time, on January 11, 2001, at the offices of the Fund, 1285 Avenue of the
Americas, 14th Floor, New York, New York 10019, and any adjournment thereof ("Meeting"), with all the power
the undersigned would have if personally present. The shares represented by this card will be voted as
instructed. UNLESS INDICATED TO THE CONTRARY, THIS PROXY SHALL BE DEEMED TO GRANT AUTHORITY TO VOTE "FOR" ALL
PROPOSALS RELATING TO THE FUND WITH DISCRETIONARY POWER TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME
BEFORE THE MEETING.
YOUR VOTE IS IMPORTANT
Please date and sign the reverse side of this proxy and return it promptly in the enclosed envelope.
This proxy will not be voted unless it is dated and signed exactly as instructed.
When properly signed, the proxy will be voted as instructed below. If no instruction is given for a
proposal, voting will be made "FOR" that proposal.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" EACH OF THE FOLLOWING PROPOSALS:
<S> <C> <C> <C> <C>
FOR AGAINST ABSTAIN
1(a) Approve a new investment advisory and administration contract
between Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins") and the Fund.
1(b) Approve a new sub-advisory contract between Mitchell Hutchins
and DSI International Management, Inc. ("DSI").
2 Approve amendment of the Fund's fundamental investment
limitations to change its status from diversified to
non-diversified.
3 Approve a policy to permit Mitchell Hutchins and the Fund's Board
of Directors to appoint and replace sub-advisers and to enter into
and amend sub-advisory contracts without further shareholder
approval.
PLEASE DATE AND SIGN THE BACK OF THIS CARD
<PAGE>
If shares are held by an individual, sign your name exactly as it appears on this card. If shares are
held jointly, either party may sign, but the name of the party signing should conform exactly to the name
shown on this card. If shares are held by a corporation, partnership or similar account, the name and the
capacity of the individual signing should be indicated, unless it is reflected in the form of registration.
For example: "ABC Corp. John Doe, Treasurer."
Sign exactly as name appears hereon.
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Signature
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Signature (Joint)
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Date
</TABLE>
