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(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:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] 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 follow-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,
/s/ Brian M. Storms
Brian M. Storms
President
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PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
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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 https://vote.proxy-direct.com on
the World Wide Web and follow the on-screen instructions.
You may also call 1-800-597-7836 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.
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:
<TABLE>
<CAPTION>
REGISTRATION VALID SIGNATURE
------------ ---------------
<S> <C>
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
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
</TABLE>
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PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
1-800-647-1568
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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.
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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 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.
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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 also is asking the Fund's shareholders to
approve a new investment advisory and administration contract with Mitchell
Hutchins that incorporates 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.
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
3
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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 ("Investment Company 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).
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.
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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 asset management subsidiaries of PaineWebber Incorporated
("PaineWebber"), a wholly owned indirect subsidiary of UBS AG. UBS AG, with
headquarters in Zurich, Switzerland, is an internationally diversified
organization with 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 a recognized index defines either as
financial services companies or companies that provide services to the
financial services industry. 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.
Further information about DSI is set forth in Appendix E.
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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 Investment Company 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.
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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.
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 at present a diversified mutual fund under section 5(b)(1) of
the Investment Company 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. (These
limitations do not apply to securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, or to securities issued by
other investment companies.) The Fund's diversified status is reflected in a
fundamental investment limitation that tracks the requirements for a
diversified fund under section 5(b)(1) of the Investment Company Act. The
Board recommends elimination of this fundamental investment limitation and
amendment of the Fund's fundamental policy to change its status to a non-
diversified fund under section 5(b)(2) of the Investment Company Act. 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. These Internal Revenue Code limitations do not apply to securities
issued or guaranteed by the U.S. government, its agencies or
instrumentalities, or to securities issued by other investment companies.
7
<PAGE>
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.
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 Investment
Company 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, such as the proposed appointment
of DSI to serve as sub-adviser that is included as Proposal 1(b) in this Proxy
Statement. 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.
8
<PAGE>
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 one or more 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 to appoint any sub-adviser that is affiliated with Mitchell
Hutchins as that term is used in the Investment Company 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 OF PROPOSED SUB-ADVISER APPROVAL
POLICY
The Board believes that it is in the best interests of the Fund's
shareholders to approve the proposed Sub-Adviser Approval Policy because doing
so will permit the Board to act more quickly and with less expense to the Fund
to appoint one or more unaffiliated sub-advisers when the Board and Mitchell
Hutchins believe that the appointment would benefit the Fund and its
shareholders.
Without the proposed Sub-Advisor Approval Policy, the Fund must solicit
shareholder approval when the Board and Mitchell Hutchins replace or add sub-
advisers. While Rule 15a-4 under the Investment Company 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.
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.
9
<PAGE>
Finally, the Board believes that shareholders' interests will be protected
under the Sub-Adviser Approval Policy because the Board will oversee the sub-
adviser selection process 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-adviser. 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.
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. Mrs. 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 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 of Mitchell Hutchins
(since March 1999). Mr. Storms was president of Prudential Investments (1996-
1999). Prior to joining Prudential, he was a managing director at Fidelity
Investments. Mr. Storms 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.
THOMAS DISBROW; age 34, vice president and assistant treasurer. Mr. Disbrow
is a first vice president and a senior manager of the mutual fund finance
department of Mitchell Hutchins. Prior to November 1999, he was a vice
president of Zweig/Glaser Advisers. Mr. Disbrow 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.
AMY R. DOBERMAN; age 38, vice president. Ms. Doberman is a 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.
10
<PAGE>
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. Mr. Holmgren 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 39, 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. Mr. Holmgren 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,
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 for
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 of 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 annual
or other regular 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
11
<PAGE>
materials or presented at the meeting. Moreover, inclusion or presentation 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 presented 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,
Dianne E. O'Donnell,
Secretary
November 30, 2000
12
<PAGE>
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:
<TABLE>
<CAPTION>
NAME AND NUMBER AND PERCENTAGE OF SHARES
ADDRESS BENEFICIALLY OWNED AS OF OCTOBER 31, 2000
-------- ----------------------------------------------
<S> <C> <C>
James Holtman 118,070 Class Y shares 6.92% of Class Y shares
</TABLE>
----------------
The shareholder listed may be contacted c/o Mitchell Hutchins Asset Management
Inc., 51 West 52nd Street, New York, NY 10019/6114.
A-1
<PAGE>
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 ("Investment Company 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
B-1
<PAGE>
reasonably may request. In compliance with the requirements of Rule 31a-3
under the Investment Company Act, Mitchell Hutchins hereby agrees that all
records which it maintains for the Fund are the property of the Fund, agrees
to preserve for the periods prescribed by Rule 31a-2 under the Investment
Company Act any records which it maintains for the Fund and which are required
to be maintained by Rule 31a-l under the Investment Company 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 Investment Company 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 Investment Company 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
B-2
<PAGE>
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 Investment Company
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 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
B-3
<PAGE>
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.
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 Sub-Administrator 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
B-4
<PAGE>
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.
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 Investment Company Act,
provided, however, that to the extent that the applicable laws of the State of
New York conflict with the applicable provisions of the Investment Company
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
Investment Company 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 Investment Company 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 __________________________________
B-5
<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. UBS AG, with headquarters in Zurich,
Switzerland, is an internationally diversified organization with 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 and president Same
</TABLE>
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- 0.75% of average daily net $ 88,718,634
100 Fund assets
(a series of Mitchell Hutchins
Securities Trust)
PaineWebber Enhanced S&P 500 0.40% of average daily net 20,501,763
Fund assets
(a series of Mitchell Hutchins
Securities Trust)
PaineWebber Growth Fund 0.75% of average daily net 572,798,818
(a series of PaineWebber assets
Olympus Fund)
PaineWebber Growth and Income 0.70% of average daily net 1,064,835,044
Fund assets
(a series of PaineWebber
America Fund)
PaineWebber Mid Cap Fund 1.00% of average daily net 219,488,012
(a series of PaineWebber assets
Managed Assets Trust)
PaineWebber Small Cap Fund 1.00% of average daily net 69,814,261
(a series of PaineWebber assets
Olympus Fund)
PaineWebber S&P 500 Index Fund 0.20% of average daily net 89,407,932
(a series of PaineWebber Index assets
Trust)
PaineWebber Strategy Fund 0.75% of average daily net 1,546,770,896
(a series of PaineWebber assets
Managed Investments Trust)
PaineWebber Tax-Managed Equity 0.75% of average daily net 46,497,363
Fund assets
(a series of PaineWebber
Managed Investments Trust)
</TABLE>
C-1
<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 ("Investment Company 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 Investment Company 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
D-1
<PAGE>
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
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 Investment Company 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
Investment Company 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 Investment Company Act any
records that it maintains for the Fund and that are required to be maintained
by Rule 31a-1 under the Investment Company 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 Investment Company 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.
D-2
<PAGE>
(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 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 Investment Company
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 Investment Company 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 Investment
Company 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.
D-3
<PAGE>
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.
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
Investment Company 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 Investment Company 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 Investment Company Act, subject to such
exemption as may be granted by the SEC by any rule, regulation or order. Where
D-4
<PAGE>
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-5
<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
New York, New York 10019-6114
Attest:
By: By:
---------------------------------- ----------------------------------
Name: Name:
Title: Title:
DSI INTERNATIONAL
MANAGEMENT, INC.
301 Merritt 7
Norwalk, CT 06851
Attest:
By: By:
---------------------------------- ----------------------------------
Name: Name:
Title: Title:
D-6
<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. President, chief executive officer Same
Holmgren and a director
John J. Executive vice president, chief Same
Holmgren, operating officer, a portfolio manager
Jr. and a director
Michael Director and managing director Same
Holmgren
Julian F. Director Officer of Mitchell Hutchins Asset
Sluyters Management Inc.
Brian M. Director Officer of Mitchell Hutchins Asset
Storms 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 0.35% of average daily net assets $88,718,634
Nasdaq-100 Fund
(a series of Mitchell
Hutchins Securities
Trust)
PaineWebber Enhanced S&P 0.20% of average daily net assets 20,501,763
500 Fund
(a series of Mitchell
Hutchins Securities
Trust)
</TABLE>
E-1
<PAGE>
APPENDIX X
PROXY PROXY
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
SPECIAL MEETING OF SHAREHOLDERS - JANUARY 11, 2001
This proxy is being solicited for 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 Fund at the
Special Meeting of Shareholders to be held at 10:00 a.m., Eastern time, on
January 11, 2001 at 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.
VOTE VIA THE INTERNET:
https://vote.proxy-direct.com
VOTE VIA THE TELEPHONE: 1-800-597-7836
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CONTROL NUMBER:
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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."
---------------------------------------
Signature
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Signature (if held jointly)
, 2000
---------------------------------
Date 11271PFS
PLEASE MARK YOUR VOTE ON THE REVERSE SIDE OF THIS CARD.
<PAGE>
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. Please
indicate your vote by filling in the box completely. EXAMPLE: [X]
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
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. [ ] [ ] [ ]
</TABLE>
PLEASE DATE AND SIGN THE REVERSE SIDE OF THIS CARD.
11271PFS
<PAGE>
Appendix Y
Your Proxy Vote is Important!
---------
And now you can Vote your Proxy
on the PHONE or on
the INTERNET.
[graphic] It saves Money! Telephone and Internet voting saves postage costs.
Savings which can help to minimize fund expenses.
It saves Time! Telephone and Internet voting is instantaneous - 24
hours a day.
It's Easy! Just follow these simple steps:
1. Read your proxy statement and have it at hand.
2. Call toll-free 1-800-597-7836 for automated instructions,
or go to website: https://vote.proxy-direct.com.
-----------------------------
3. Enter your 14 digit Control Number from your Proxy Card.
4. Follow the recorded or on-screen directions.
5. Do not mail your Proxy Card when you vote by phone or
---
internet.
6. If you have any questions regarding the meeting agenda or
the execution of your proxy, please call. 1-887-651-8848.
