<PAGE>
GOVERNMENT PORTFOLIO
OF
PAINEWEBBER SERIES TRUST
__________________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
September 21, 1995
To the Shareholders:
A special meeting of the holders of shares of beneficial interest
("Shares") of the Government Portfolio ("Portfolio") series of PaineWebber
Series Trust will be held on September 21, 1995, at 10:00 a.m., Eastern time, at
1285 Avenue of the Americas, 38th Floor, New York, New York 10019, for the
following purposes:
1. To consider a change in the Portfolio's investment objective from "high
current income consistent with the preservation of capital and,
secondarily, capital appreciation" to "total return consisting of
capital appreciation and income";
2. To consider a Sub-Advisory Agreement between Mitchell Hutchins Asset
Management Inc. and Pacific Investment Management Company, with respect
to the assets of the Portfolio;
3. To consider an amendment to the Portfolio's fundamental investment
limitation governing borrowings to increase permissible borrowings from
10% to 33 1/3% of the Portfolio's assets and permit the use of dollar
rolls; and
4. To transact such other business as may properly come before the meeting
or any adjournments thereof.
Shareholders of record at the close of business on August 11, 1995 are
entitled to notice of, and to vote at, the meeting. Your attention is called to
the accompanying Proxy Statement. Regardless of whether you plan to attend the
meeting, PLEASE COMPLETE, DATE AND SIGN THE PROXY CARD AND RETURN IT IN THE
ENCLOSED PREPAID ENVELOPE so that a quorum will be present and a maximum number
of Shares may be voted. If you attend the meeting, you may change your vote, if
desired, at that time.
By Order of the Board of Trustees,
Dianne E. O'Donnell
Secretary
August 21, 1995
1285 Avenue of the Americas
New York, New York 10019
- --------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT
NO MATTER HOW MANY SHARES YOU OWN
Please indicate your voting instructions on the enclosed proxy card, date
and sign 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" each of the proposals noticed above. In order to avoid the additional
expense of further solicitation, we ask your cooperation in mailing in your
proxy card promptly. Unless proxy cards submitted by corporations and
partnerships are signed by the appropriate persons as indicated in the voting
instructions on the proxy card, they will not be voted.
- --------------------------------------------------------------------------------
<PAGE>
GOVERNMENT PORTFOLIO
OF
PAINEWEBBER SERIES TRUST
1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
_______
PROXY STATEMENT
_______
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 21, 1995
August 21, 1995
This Proxy Statement is furnished in connection with the solicitation of
proxies by the board of trustees ("Board") of PaineWebber Series Trust ("Trust")
for use at the special meeting of shareholders of the Government Portfolio
("Portfolio") to be held on September 21, 1995, or any adjournments thereof
("Meeting"). This Proxy Statement will first be mailed to shareholders on or
about August 22, 1995.
The shares of beneficial interest ("Shares") of the Portfolio are currently
sold only to the separate accounts ("Separate Accounts") of PaineWebber Life
Insurance Company, American Republic Insurance Company and American Benefit Life
Insurance Company (collectively, the "Companies") to fund the benefits under
variable annuity contracts ("Contracts") issued by the Companies. In accordance
with their view of applicable law, the Companies will solicit voting
instructions from the owners of Contracts relating to the Portfolio ("Contract
Owners") with respect to the matters set forth in this Proxy Statement. In
connection with the solicitation of voting instructions, the Companies will
furnish a copy of this Proxy Statement to all Contract Owners. The solicitation
of proxies will be made primarily by mail but also may include telephone or oral
communications by regular employees of the Companies, Mitchell Hutchins Asset
Management Inc. ("Mitchell Hutchins") or PaineWebber Incorporated
("PaineWebber"), none of whom will receive any compensation therefor from the
Portfolio. The costs associated with such solicitation and the Meeting will be
borne by the Portfolio.
Contract Owners at the close of business on August 11, 1995 (the "Record
Date") will be entitled to be present and give voting instructions for the
Portfolio at the Meeting, with respect to their Shares owned as of the Record
Date. There were 1,602,985 Shares of the Portfolio outstanding and entitled to
vote as of the record date, representing total net assets of approximately
18,177,851. All Shares of the Portfolio held by the Separate Accounts will be
voted by the Companies in accordance with voting instructions received from
Contract Owners. The Companies will vote Shares of the Portfolio for which no
instructions are received in the same proportion as Shares of the Portfolio for
which instructions have been received.
To the knowledge of the Trust's management, as of the Record Date, no
current trustee of the Trust owned any of the outstanding Shares of the
Portfolio or any other series of the Trust. To the knowledge of the Trust's
management, as of the Record Date, the officers and trustees of the Trust owned,
as a group, less than 1% of the outstanding Shares of the Portfolio or any other
series of the Trust.
On the Record Date, the Separate Accounts of PaineWebber Life Insurance
Company, American Republic Insurance Company and American Benefit Life Insurance
Company owned of record 28.7%, 66.7% and 4.6%, respectively, of the outstanding
Shares of the Portfolio. To the knowledge of the Trust's management, as of the
Record Date, there are no persons owning beneficially more than 5% of the
outstanding Shares of the Portfolio.
Mitchell Hutchins currently serves as the Portfolio's investment adviser
and administrator. Mitchell Hutchins and PaineWebber are located at 1285 Avenue
of the Americas, New York, New York 10019. The Trust has no principal
underwriter.
1
<PAGE>
PROPOSALS SUBMITTED FOR SHAREHOLDER CONSIDERATION
None of the proposals presented herein will be implemented unless all of
the proposals are approved by shareholders. If all proposals are approved, the
name of the Portfolio will be changed to Strategic Fixed Income Portfolio and
certain investment policy changes also will be implemented. These investment
policy changes are identified and discussed below under "Operations of Portfolio
If All Proposals Are Approved." The reasons Mitchell Hutchins believes the
proposed changes are in the best interests of the Portfolio and its shareholders
are discussed below under "Reasons for Proposed Changes."
PROPOSAL 1
CONSIDERATION OF A CHANGE IN THE
PORTFOLIO'S INVESTMENT OBJECTIVE
Currently, the Portfolio primarily seeks high current income consistent
with the preservation of capital and secondarily seeks capital appreciation. In
attempting to achieve its objectives, the Portfolio invests primarily in high
quality U.S. government securities, which include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. government agencies or
instrumentalities. These latter obligations may be backed by the full faith and
credit of the U.S. government or supported primarily or solely by the
creditworthiness of the particular agency or instrumentality. Under normal
market conditions, at least 65% of the Portfolio's total assets is invested in
U.S. government securities. The Portfolio also may invest in certain zero
coupon securities that are U.S. Treasury notes and bonds that have been stripped
of their unmatured interest coupon receipts or interests in such U.S. Treasury
securities or coupons.
At a meeting held on July 20, 1995, the Board considered and approved,
subject to shareholder approval, a recommendation by Mitchell Hutchins that the
Portfolio's investment objective be changed to "total return consisting of
capital appreciation and income." If the new investment objective is approved
by shareholders, the Portfolio will invest in a diversified portfolio of fixed
income securities of varying maturities with a dollar-weighted average portfolio
duration between three and eight years. Portfolio holdings will be concentrated
in areas of the bond market (based on quality, sector coupon and maturity) which
are believed to be relatively undervalued. This investment approach would
contrast with the current approach of high current income in that it is expected
to produce higher long-term returns, but would also be subject to a higher level
of risk, than is currently the case for the Portfolio.
REQUIRED VOTE
- -------------
Change in the Portfolio's investment objective must be approved by a
"majority of the outstanding voting securities," as defined by the Investment
Company Act of 1940 ("1940 Act"), of the Portfolio entitled to vote at the
meeting. As so defined, "majority of the outstanding voting securities" means
the lesser of (i) 67% or more of the shares of the Portfolio present at the
meeting, if at least 50% of the outstanding shares of the Portfolio entitled to
vote at the meeting are present or represented by proxy at the meeting, or (ii)
more than 50% of the outstanding shares of the Portfolio entitled to vote at the
meeting. If the change in the investment objective is not approved by the
shareholders of the Portfolio, the current investment objective for the
Portfolio will remain in effect and none of the other proposed changes will be
implemented.
THE BOARD OF TRUSTEES RECOMMENDS THAT YOU
VOTE "FOR" PROPOSAL 1
2
<PAGE>
PROPOSAL 2
CONSIDERATION OF THE PROPOSED SUB-ADVISORY AGREEMENT
BACKGROUND
- ----------
Mitchell Hutchins serves as the administrator and investment adviser of the
Portfolio pursuant to a contract with the Trust dated April 21, 1988, as
supplemented by an Investment Advisory Fee Agreement dated May 1, 1989
("Advisory Agreement"). The Advisory Agreement was most recently approved by
shareholders of the Trust on April 19, 1990, and its continuance was most
recently approved by the Board of Trustees on June 2, 1995. Under the Advisory
Agreement, Mitchell Hutchins receives a monthly fee at the annual rate of 0.50%
of the Portfolio's average daily net assets. For the fiscal year ended December
31, 1994, the Portfolio paid fees under the Advisory Agreement to Mitchell
Hutchins of approximately $105,843.
At a meeting held on July 20, 1995, the Board, including a majority of the
trustees who are not "interested persons" of the Trust, as defined in the 1940
Act ("Independent Trustees"), considered a recommendation by Mitchell Hutchins
that Pacific Investment Management Company ("PIMCO") be appointed as investment
sub-adviser for the Portfolio. After considering Mitchell Hutchins'
recommendation and other information presented at that meeting, the Board
approved submission of the proposed sub-advisory agreement ("Sub-Advisory
Agreement") to the Portfolio's shareholders at the Meeting, and determined to
recommend that the Portfolio's shareholders approve the proposed Sub-Advisory
Agreement.
DESCRIPTION OF THE PROPOSED SUB-ADVISORY AGREEMENT
- --------------------------------------------------
The Sub-Advisory Agreement with respect to the Portfolio provides that
PIMCO, subject to the supervision of Mitchell Hutchins and the Board, shall
provide a continuous investment program and strategy with respect to the
investments of the Portfolio, including investment research and management, and
will make decisions with respect to and place orders for all purchases and sales
of portfolio securities. Under the Sub-Advisory Agreement, Mitchell Hutchins
(not the Portfolio) will pay PIMCO a monthly fee for its investment advisory
services at an annual rate of 0.25% of the Portfolio's average daily net assets.
The Sub-Advisory Agreement provides that PIMCO will pay for all expenses
incurred by it in connection with its investment advisory services under the
Sub-Advisory Agreement.
If approved by the Shareholders at the Meeting, the Sub-Advisory Agreement
will remain in effect for two years after its effective date and thereafter will
continue from year to year, provided that such continuance is approved annually
(i) by the vote of a majority of the Independent Trustees and (ii) by the Board
or the vote of the holders of a majority of the outstanding Shares of the
Portfolio. The Sub-Advisory Agreement automatically terminates upon its
assignment and is terminable at any time without penalty, by the Board or by the
holders of a majority of the outstanding Shares of the Portfolio on 60 days'
written notice. Either Mitchell Hutchins or PIMCO may terminate the Sub-
Advisory Agreement on 120 days' written notice without penalty. Mitchell
Hutchins may also terminate the Sub-Advisory Agreement (i) upon material breach
by PIMCO of certain of its representations under the Sub-Advisory Agreement or
(ii) in the event that PIMCO is unable to discharge its duties under the Sub-
Advisory Agreement.
The Sub-Advisory Agreement provides that PIMCO will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Portfolio in
connection with the performance of the agreement, except a loss resulting from
willful misfeasance, bad faith, or gross negligence on the part of PIMCO in the
performance of its duties or from reckless disregard of its obligations and
duties under the Sub-Advisory Agreement.
PIMCO makes various representations and warranties in the Sub-Advisory
Agreement, including (i) that it has adopted a written code of ethics which
complies with Rule 17j-1 under the 1940 Act and will certify its compliance with
such code of ethics to Mitchell Hutchins on an annual basis, and (ii) that it is
in compliance with various federal and state laws, including the Investment
Advisers Act of 1940 ("Advisers Act"), as amended.
3
<PAGE>
A copy of the proposed Sub-Advisory Agreement is attached to this Proxy
Statement as Exhibit A.
INFORMATION ABOUT PIMCO
- -----------------------
Pacific Investment Management Company ("PIMCO") is a subsidiary general
partnership of PIMCO Advisors L.P. ("PIMCO Advisors"). A majority interest in
PIMCO Advisors is held by PIMCO Partners, G.P., a general partnership between
Pacific Financial Asset Management Corporation, an indirect wholly owned
subsidiary of Pacific Mutual Life Insurance Company ("Pacific Mutual") and PIMCO
Partners, L.L.C., a limited liability company controlled by the PIMCO Managing
Directors. PIMCO's address is 840 Newport Center Drive, Suite 360, Newport
Beach, California 92660. PIMCO is registered as an investment adviser with the
Securities and Exchange Commission and as a commodity trading advisor with the
Commodity Futures Trading Commission. As of May 31, 1995, PIMCO had
approximately $64.6 billion in assets under management and was adviser or sub-
adviser of 11 investment companies with 32 portfolios and aggregate assets of
approximately $15.1 billion. The chief executive officers and general partners
of PIMCO are identified in the table below:
CHIEF EXECUTIVE OFFICERS AND GENERAL PARTNERS OF PIMCO
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Name Principal Occupation Address
---- -------------------- -------
- --------------------------------------------------------------------------------
<S> <C> <C>
PIMCO Advisors L.P. General Partner 840 Newport Center Drive
Newport Beach, CA 92660
- --------------------------------------------------------------------------------
PIMCO Management, Inc. General Partner 840 Newport Center Drive
Newport Beach, CA 92660
- --------------------------------------------------------------------------------
William S. Thompson Managing Director, 840 Newport Center Drive
Chief Executive Officer Newport Beach, CA 92660
- --------------------------------------------------------------------------------
David H. Edington Managing Director 840 Newport Center Drive
Newport Beach, CA 92660
- --------------------------------------------------------------------------------
William H. Gross Managing Director 840 Newport Center Drive
Newport Beach, CA 92660
- --------------------------------------------------------------------------------
John L. Hague Managing Director 840 Newport Center Drive
Newport Beach, CA 92660
- --------------------------------------------------------------------------------
Brent R. Harris Managing Director 840 Newport Center Drive
Newport Beach, CA 92660
- --------------------------------------------------------------------------------
Dean S. Meiling Managing Director 840 Newport Center Drive
Newport Beach, CA 92660
- --------------------------------------------------------------------------------
James F. Muzzy Managing Director 840 Newport Center Drive
Newport Beach, CA 92660
- --------------------------------------------------------------------------------
William F. Podlich III Managing Director 840 Newport Center Drive
Newport Beach, CA 92660
- --------------------------------------------------------------------------------
William C. Powers Managing Director 840 Newport Center Drive
Newport Beach, CA 92660
- --------------------------------------------------------------------------------
Frank B. Rabinovitch Managing Director 840 Newport Center Drive
Newport Beach, CA 92660
- --------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
The table below sets forth certain information with respect to other investment
portfolios that PIMCO serves as investment adviser or sub-adviser and that have
investment objectives similar to that of the Portfolio.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Approximate Annual Rate of Investment Advisory Fee as
Name of Portfolio Net Assets as of a Percentage of Net Assets
----------------- June 30, 1995 ----------
-------------
- ------------------------------------------------------------------------------------------------
PIMCO FUNDS
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Return Fund $ 8,298,923,935 Annual rate of 0.30% of average
daily net assets up to $150
million, 0.25% of average daily
net assets over $150 million
- ------------------------------------------------------------------------------------------------
International Fund 1,990,978,663 Annual rate of 0.30% of average
daily net assets up to $150
million, 0.25% of average daily
net assets over $150 million
- ------------------------------------------------------------------------------------------------
Low Duration Fund 2,505,180,346 Annual rate of 0.30% of average
daily net assets up to $150
million, 0.25% of average daily
net assets over $150 million
- ------------------------------------------------------------------------------------------------
Foreign Fund 231,462,230 Annual rate of 0.30% of average
daily net assets up to $150
million, 0.25% of average daily
net assets over $150 million
- ------------------------------------------------------------------------------------------------
High Yield Fund 398,237,661 Annual rate of 0.30% of average
daily net assets up to $150
million, 0.25% of average daily
net assets over $150 million
- ------------------------------------------------------------------------------------------------
Low Duration Fund II 191,589,706 Annual rate of 0.30% of average
daily net assets up to $150
million, 0.25% of average daily
net assets over $150 million
- ------------------------------------------------------------------------------------------------
Total Return Fund III 110,977,931 Annual rate of 0.30% of average
daily net assets up to $150
million, 0.25% of average daily
net assets over $150 million
- ------------------------------------------------------------------------------------------------
Short-Term Fund 79,343,229 Annual rate of 0.30% of average
daily net assets up to $150
million, 0.25% of average daily
net assets over $150 million
- ------------------------------------------------------------------------------------------------
Growth Stock Fund 15,630,053 Annual rate of 0.30% of average
daily net assets up to $150
million, 0.25% of average daily
net assets over $150 million
- ------------------------------------------------------------------------------------------------
Long-Term US 34,197,224 Annual rate of 0.30% of average
Government Fund daily net assets up to $150
million, 0.25% of average daily
net assets over $150 million
- -----------------------------------------------------------------------------------------------
Global Fund 86,204,508 Annual rate of 0.30% of average
daily net assets up to $150
million, 0.25% of average daily
net assets over $150 million
- ------------------------------------------------------------------------------------------------
StocksPLUS Fund 67,797,761 Annual rate of 0.45% of average
daily net assets up to $150
million, 0.40% of average daily
net assets over $150 million
- ------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Approximate Annual Rate of Investment Advisory Fee as
Name of Portfolio Net Assets as of a Percentage of Net Assets
----------------- June 30, 1995 ----------
-------------
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
VersaSTYLE Fund 5,569,292 Annual rate of 0.30% of average
daily net assets up to $150
million, 0.25% of average daily
net assets over $150 million
- ------------------------------------------------------------------------------------------------
FRANK RUSSELL INVESTMENT
MANAGEMENT COMPANY
- ------------------------------------------------------------------------------------------------
Fixed Income I Fund 85,118,005 Annual rate of 0.25% of net
assets based on the average of
ending monthly market values
over 3 months, paid in arrears
- ------------------------------------------------------------------------------------------------
Diversified Bond Fund 73,566,139 Annual rate of 0.25% of net
assets based on the average of
ending monthly market values
over 3 months, paid in arrears
- -----------------------------------------------------------------------------------------------
Fixed Income III Fund 71,449,314 Annual rate of 0.25% of net
assets based on the average of
ending monthly market values
over 3 months, paid in arrears
- -----------------------------------------------------------------------------------------------
Multistrategy Bond Fund $ 70,599,801 Annual rate of 0.25% of net
assets based on the average of
ending monthly market values
over 3 months, paid in arrears
- -----------------------------------------------------------------------------------------------
THE HARBOR GROUP
- -----------------------------------------------------------------------------------------------
Harbor Bond Fund 204,596,212 Annual rate of 0.50% of average
daily net assets on first $25
million; 0.375% on average daily
net assets on next $25 million;
0.25% of average daily net
assets over $50 million
- ------------------------------------------------------------------------------------------------
PACIFIC SELECT SERIES TRUST
- ------------------------------------------------------------------------------------------------
Managed Bond Series 86,390,228 Annual rate of 0.50% of average
daily net assets
- ------------------------------------------------------------------------------------------------
Government Securities 37,482,877 Annual rate of 0.50% of average
Series daily net assets
- ------------------------------------------------------------------------------------------------
PIMCO ADVISORS
- ------------------------------------------------------------------------------------------------
Managed Bond & Income 438,357,624 Annual rate of 0.25% of average
Portfolio daily net assets
- ------------------------------------------------------------------------------------------------
Balanced Portfolio 36,480,235 Annual rate of 0.25% of average
daily net assets
- ------------------------------------------------------------------------------------------------
PRUDENTIAL SECURITIES
TARGET PORTFOLIO TRUST
- ------------------------------------------------------------------------------------------------
Intermediate Term Bond 69,583,517 Annual rate of 0.25% of average
Portfolio daily net assets
- ------------------------------------------------------------------------------------------------
Total Return Bond 36,847,515 Annual rate of 0.25% of average
Portfolio daily net assets
- ------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Approximate Annual Rate of Investment Advisory Fee as
Name of Portfolio Net Assets as of a Percentage of Net Assets
----------------- May 31, 1995 ----------
------------
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
PIMCO COMMERCIAL MORTGAGE
SECURITIES TRUST, INC.
- ------------------------------------------------------------------------------------------------
PIMCO Commercial 149,913,692 Annual rate of 0.725% of average
Mortgage Trust weekly net assets paid quarterly
- ------------------------------------------------------------------------------------------------
AMERICAN SKANDIA TRUST
- ------------------------------------------------------------------------------------------------
Total Return Bond $ 91,654,576 Annual rate of 0.30% of average
Portfolio daily net assets on first $150
million; 0.25% of average daily
net assets over $150 million
paid monthly
- ------------------------------------------------------------------------------------------------
FREMONT MUTUAL FUNDS
- ------------------------------------------------------------------------------------------------
Total Return Fund 70,823,814 Annual rate of 0.25% of average
daily net assets
- ------------------------------------------------------------------------------------------------
PAINEWEBBER MANAGED
INVESTMENTS TRUST
- ------------------------------------------------------------------------------------------------
Short-Term U.S. 351,545,106 Annual rate of 0.25% of average
Government Income Fund daily net assets
- ------------------------------------------------------------------------------------------------
PIMCO ADVISORS FUNDS
- ------------------------------------------------------------------------------------------------
High Income Fund 159,413,126 Annual rate of 0.25% of average
daily net assets
- ------------------------------------------------------------------------------------------------
Short-Intermediate Fund 73,057,332 Annual rate of 0.25% of average
daily net assets
- ------------------------------------------------------------------------------------------------
U.S. Government Fund 314,154,166 Annual rate of 0.25% of average
daily net assets
- ------------------------------------------------------------------------------------------------
Total Return Income 62,346,944 Annual rate of 0.25% of average
Fund daily net assets
- --------------------------------------------------------------------------------
</TABLE>
TRUSTEES' CONSIDERATIONS AND RECOMMENDATIONS
- --------------------------------------------
At the meeting held on July 20, 1995, the Board, including the Independent
Trustees, after a full evaluation of the matters described above and with the
advice and assistance of counsel to the Independent Trustees, approved the
proposed Sub-Advisory Agreement. During their deliberations, the Trustees also
reviewed information provided by Mitchell Hutchins and PIMCO relating to the
structure and organization of PIMCO. The Board considered the quality of the
investment sub-advisory services that had been provided by PIMCO to other funds,
and also considered the Portfolio's performance in relation to a selected group
of other funds with similar investment objectives. The Board noted, in
particular, that the advisory fee paid by the Portfolio would remain the same as
before, and determined that the terms of the Sub-Advisory Agreement and the sub-
advisory fee were fair.
7
<PAGE>
The Board also considered the fact that consistent with the interests of
the Portfolio and subject to the review of the Board, the Sub-Adviser may cause
the Portfolio to purchase and sell portfolio securities through brokers who
provide the Sub-Adviser with research, analysis, advice and similar services.
In return for such services, the Portfolio may pay to those brokers a higher
commission than may be charged by other brokers, provided that the Sub-Adviser
determines in good faith that such commission is reasonable in terms either of
that particular transaction or of the overall responsibility of PIMCO to the
Portfolio and its other clients and that the total commissions paid by the
Portfolio will be reasonable in relation to the benefits to the Portfolio over
the long term. Although PIMCO may receive certain research or execution
services in connection with purchases or sales with broker-dealer firms that act
as principal, PIMCO will seek best execution and will not purchase securities at
a higher price or sell securities at a lower price than would otherwise be paid
if no weight was attributed to the services provided by the executing dealer.
PIMCO will not enter any soft dollar arrangements relating to principal
transactions by the Portfolio or receive in such principal transactions the
types of services which could be purchased for hard dollars. Research services
furnished by brokers or dealers through which or with which the Portfolio
effects securities transactions may be used by PIMCO in advising other funds or
accounts it advises and, conversely, research services furnished to PIMCO in
connection with other funds or accounts it advises may be used by PIMCO in
advising the Portfolio. Information and research received from brokers and
dealers will be in addition to, and not in lieu of, the services required to be
performed by PIMCO under the Sub-Advisory Agreement.
REQUIRED VOTE
- -------------
At the Meeting, shareholders of the Portfolio will vote on the proposed
Sub-Advisory Agreement, in accordance with voting instructions received from the
Contract Owners. The Board of Trustees recommends that the shareholders approve
the Sub-Advisory Agreement. The affirmative vote of the holders of a majority
of the outstanding Shares of the Portfolio is required to approve the Sub-
Advisory Agreement. "Majority" for this purpose under the 1940 Act means the
lesser of: (i) 67% of the Shares of the Portfolio represented at the Meeting if
the holders of more than 50% of the outstanding Shares are represented, or (ii)
more than 50% of the outstanding Shares of the Portfolio.
If the Sub-Advisory Agreement is not approved, Mitchell Hutchins will
continue to provide portfolio management services to the Portfolio, the Board of
Trustees will consider whether it should take any other action appropriate to
obtain an investment sub-adviser for the Portfolio and none of the other
proposed changes will be implemented.
THE BOARD OF TRUSTEES RECOMMENDS THAT THE SHAREHOLDERS OF THE
PORTFOLIO VOTE "FOR" THE SUB-ADVISORY AGREEMENT
PROPOSAL 3
CONSIDERATION OF AN AMENDMENT TO THE PORTFOLIO'S FUNDAMENTAL
INVESTMENT LIMITATION TO INCREASE PERMISSIBLE BORROWINGS AND PERMIT
THE USE OF DOLLAR ROLLS
At their July 20, 1995 meeting, the Trust's board of trustees approved,
subject to shareholder approval, an amendment to the Portfolio's fundamental
investment limitations that permits the Portfolio to use leverage in the form of
dollar rolls and that increases the amount of the Portfolio's assets that may be
committed to borrowing. Currently, the Portfolio's fundamental investment
limitation concerning the use of leverage provides as follows:
8
<PAGE>
[The] Portfolio may not:
...issue senior securities or borrow money,
except from banks for temporary purposes and
except for reverse repurchase agreements
provided that the aggregate amount of all such
borrowing does not exceed 10% of the total asset
value of the Portfolio at the time of such
borrowing; provided further that the Portfolio
will not purchase securities while borrowings
(including reverse repurchase agreements) in
excess of 5% of the total asset value of the
Portfolio are outstanding.
The proposed amendment of the Portfolio's fundamental investment limitation
concerning the use of leverage is set forth below:
[The] Portfolio may not:
...issue senior securities or borrow money,
except from banks or through reverse repurchase
agreements and dollar rolls, and then in an
-
aggregate amount not in excess of 33 1/3% of the
Portfolio's total assets (including the amount
of the borrowings and senior securities issued
but reduced by any liabilities not constituting
senior securities) at the time of such
borrowings; except that the Portfolio may borrow
up to an additional 5% of its total assets (not
including the amount borrowed) for temporary or
emergency purposes.
In a dollar roll, the Portfolio would sell mortgage-backed or other
securities for delivery in the current month and simultaneously contract to
repurchase substantially similar securities on a specified future date. In the
case of dollar rolls involving mortgage-backed securities, the mortgage-backed
securities that are repurchased would be of the same type, and would have the
same interest rate and maturity, as those sold but generally would be supported
by different pools of mortgages with substantially similar prepayment
characteristics. The Portfolio would forgo principal and interest paid during
the roll period on the securities sold in a dollar roll, but the Portfolio would
be compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the securities sold. The Portfolio also could be compensated through the
receipt of fee income equivalent to a lower forward price.
In a reverse repurchase agreement, the Portfolio would sell securities to a
bank or dealer and agree to repurchase them at a mutually agreed date and price.
The market value of securities sold under reverse repurchase agreements
typically is greater than the proceeds of the sale, and, accordingly, the market
value of the securities sold is likely to be greater than the value of the
securities in which the Portfolio invests these proceeds. Thus, reverse
repurchase agreements involve the risk that the buyer of the securities sold by
the Fund might be unable to deliver them when the Fund seeks to repurchase. In
the event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Portfolio's
obligation to repurchase the securities, and the Portfolio's use of the proceeds
of the reverse repurchase agreement may effectively be restricted pending such
decision.
At the time the Portfolio enters into a dollar roll or reverse repurchase
agreement, the Portfolio's custodian will segregate cash or liquid, high-grade
debt securities having a value not less than the forward price or repurchase
price (including any accrued interest) for the duration of the dollar roll or
reverse repurchase agreement.
The dollar rolls and reverse purchase agreements entered into by the
Portfolio would be considered to be borrowings and would be subject to the
Portfolio's overall 33 1/3% limitation on borrowings as described above.
However, the dollar rolls and reverse repurchase agreements entered into by the
Portfolio normally would be arbitrage transactions in which the Portfolio would
invest the proceeds of the dollar roll or reverse repurchase agreement in high
quality securities that mature on or before the settlement date on the related
dollar roll or reverse repurchase agreement or in repurchase agreements that
mature in no more than seven
9
<PAGE>
days. Because the Portfolio would be investing the proceeds of its borrowings
and earning interest on those investments, these transactions involve leverage.
However, because the borrowing proceeds would be invested in short-term, high
quality debt securities or repurchase agreements as described above, Mitchell
Hutchins and PIMCO believe that these arbitrage transactions do not present the
risks of volatility of net asset value per share and yield that are associated
with other types of leverage. The Portfolio will not enter into dollar rolls or
reverse repurchase agreements, other than in arbitrage transactions as described
above, in an aggregate amount in excess of 5% of the Portfolio's total assets.
The proposed amendment would permit PIMCO, the proposed sub-adviser, more
investment flexibility in managing the Portfolio's portfolio. As a result, to
the extent consistent with the Portfolio's investment objective, PIMCO could
pursue investment opportunities that it otherwise might be forced to forgo
because of the Portfolio's current fundamental investment limitation. PIMCO
will cause the Portfolio to enter in dollar rolls or reverse repurchase
agreements only when it believes that the transactions will benefit the
Portfolio, after taking into account the related risks.
REQUIRED VOTE
- -------------
The amendment of the Portfolio's fundamental investment limitation must be
approved by a "majority of the outstanding voting securities," as defined by the
1940 Act, of the Portfolio entitled to vote at the meeting. As so defined,
"majority of the outstanding voting securities" means the lesser of (i) 67% or
more of the shares of the Portfolio present at the meeting, if at least 50% of
the outstanding shares of the Portfolio entitled to vote at the meeting are
present or represented by proxy at the meeting, or (ii) more than 50% of the
outstanding shares of the Portfolio entitled to vote at the meeting. If the
amendment of the fundamental investment limitation is not approved by the
shareholders of the Portfolio, the current fundamental investment limitation for
the Portfolio will remain in effect and none of the other proposed changes will
be implemented.
THE BOARD OF TRUSTEES RECOMMENDS THAT YOU
VOTE "FOR" PROPOSAL 3
REASONS FOR PROPOSED CHANGES
In determining to submit the three proposals set forth above for
shareholder approval, and in approving the investment policy changes described
below for the Portfolio, the Board considered Mitchell Hutchins' recommendation
to implement the proposed changes and its belief that the changes will make the
Portfolio more attractive to its existing shareholders and also to potential
investors. Mitchell Hutchins advised the Board that it believed that the
Portfolio, as currently structured, was no longer attractive to the owners of
the variable annuity contracts, who are its exclusive investors. The Portfolio,
which commenced operations on July 5, 1989, has been losing assets since the
fiscal year ended 1992. At that time, the Portfolio had approximately $24
million in assets. By the close of the fiscal year ended December 31, 1994, its
assets had dropped to approximately $17 million. As a result of the decrease in
assets, the Portfolio also has experienced an increase in its expense ratios.
For the fiscal year ended December 31, 1992, its ratio of expenses to average
net assets was 0.76%. That ratio increased to 0.79% for the fiscal year ended
December 31, 1993 and to 0.89% for the fiscal year ended December 31, 1994.
Mitchell Hutchins believes that the decline in Portfolio assets and concomitant
increase in Portfolio expenses will continue if the Portfolio continues its
current operations. In Mitchell Hutchins' opinion, however, the fact that the
Portfolio is conservatively managed and offers relatively low returns is
fundamental to its lack of attractiveness to investors. Because variable
annuities are inherently long term investment vehicles, Mitchell Hutchins
believes that the more appropriate investment vehicles are those that are more
aggressively managed and seek higher returns with the resulting higher risk
levels. Accordingly, Mitchell Hutchins believes that realigning the Portfolio
as described in this Proxy Statement would provide the opportunity for the
variable annuity owner to obtain higher long-term returns and that the resulting
increase in the risk level of the Portfolio is justifiable. If Mitchell
Hutchins is correct in its views, the realigned Portfolio should attract
additional assets and its expense ratios would decline accordingly.
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<PAGE>
OPERATIONS OF PORTFOLIO
IF ALL PROPOSALS ARE APPROVED
If all the proposals described above are approved by the Portfolio's
shareholders, the name of the Portfolio will be changed from "Government
Portfolio" to "Strategic Fixed Income Portfolio" and a number of its investment
policies also will be changed. The investment policy changes that constitute a
significant change in the Portfolio's operations or risks are described below.
CHANGES IN TYPES OF PORTFOLIO SECURITIES. If the proposed changes are
made, the Portfolio will invest in a portfolio of fixed income securities of
varying maturities with a dollar-weighted average portfolio duration between
three and eight years. Portfolio holdings will be concentrated in the areas of
the bond market (based on quality, sector, coupon or maturity) that PIMCO, as
sub-adviser, believes to be relatively undervalued. The Portfolio at present
has no specific average portfolio maturity or duration requirement and is
required, under normal circumstances, to invest at least 65% of its total assets
in U.S. government securities, such as obligations of the U.S. Treasury and
obligations issued or guaranteed by U.S. government agencies or
instrumentalities. If the proposed changes are made, the Portfolio will
continue to be authorized to invest in U.S. government securities, but will be
subject to no specific percentage requirements.
The Portfolio at present may invest up to 35% of its total assets in
obligations of foreign governments and their subdivisions, agencies or
instrumentalities and obligations of supranational organizations such as the
International Bank for Reconstruction and Development ("World Bank"), all of
which may be denominated in foreign currencies. If the proposed changes are
made, the Portfolio will continue to be authorized to invest in these types of
securities, but may not invest more than 10% of its assets in securities
denominated in foreign currencies. The Portfolio also would be permitted to
invest an additional 10% of its assets in Yankee bonds and Eurodollar bonds,
combined.
Additional securities in which the Portfolio will be authorized to invest
if the investment policy changes are implemented include corporate and other
debt obligations, convertible securities, non-government mortgage-backed
securities, asset-backed securities, commercial paper, certificates of deposit,
money market instruments, foreign currency exchange-related securities and loan
participations. The types of securities in which the Portfolio is not currently
authorized to invest are described below.
The Portfolio currently is not authorized to invest in corporate and other
debt obligations that are not U.S. government obligations or those of foreign
governments and their subdivisions. If the proposed changes are implemented,
the Portfolio will be authorized to invest in corporate and other debt
obligations with no percentage limitation. The quality requirements for these
investments are discussed below under "Change in Portfolio Quality
Requirements."
The Portfolio currently is not authorized to invest in convertible
securities. If the proposed changes are implemented, the Portfolio will be
authorized to invest in these securities with no percentage limitation. A
convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the
holder to receive interest paid or accrued on debt or dividends paid on
preferred stock until the convertible security matures or is redeemed, converted
or exchanged. Convertible securities have unique investment characteristics in
that they generally (1) have higher yields than common stocks but lower yields
than comparable non-convertible securities, (2) are less subject to fluctuation
than the underlying stock because they have fixed income characteristics, and
(3) provide the potential for capital appreciation if the market price of the
underlying common stock increases. While no securities investment is without
some risk, investments in convertible securities generally entail less risk than
the issuer's common stock, although the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security sells
above its value as a fixed income security.
The Portfolio presently may invest in mortgage-backed securities of U.S.
government issuers. If the proposed changes are implemented, the Portfolio also
will be able to invest in mortgage-backed securities of non-U.S. government
issuers. Non-government mortgage-backed securities are issued by private
issuers, generally originators of and investors in mortgage loans, including
savings associations, mortgage bankers,
11
<PAGE>
commercial banks, investment bankers and special purpose entities (collectively,
"Private Mortgage Lenders"). Payments of principal and interest (but not the
market value) of such private mortgage-backed securities may be supported by
pools of mortgage loans or other mortgage-backed securities that are guaranteed,
directly or indirectly, by the U.S. government or one of its agencies or
instrumentalities, or they may be issued without any government guarantee of the
underlying mortgage assets but with some form of non-governmental credit
enhancement. The yield characteristics and risks of non-government mortgage-
backed securities are otherwise similar to those of the U.S. government
mortgage-backed securities in which the Portfolio currently may invest.
The Portfolio will be able to invest in asset-backed securities if the
proposed changes are implemented. Asset-backed securities have structural
characteristics similar to those of mortgage-backed securities; however, the
underlying assets are not first-lien mortgages or interests therein, but include
assets such as motor vehicle installment sales contracts, other installment
sales contracts, home equity loans, leases of various types of real and personal
property and receivables from revolving credit (credit card) agreements. These
assets are securitized through the use of trusts or special purpose
corporations. Payments or distributions of principal and interest on asset-
backed securities may be guaranteed up to certain amounts and for a certain time
period by a letter of credit or pool insurance policy issued by a financial
institution unaffiliated with the issuer or other credit enhancements may be
present.
The Portfolio is not currently authorized to invest in loan participations.
If the proposed changes are implemented, the Portfolio may invest in secured or
unsecured fixed or floating rate loans ("Loans") arranged through private
negotiations between a borrowing corporation and one or more financial
institutions ("Lenders"). The Portfolio's investments in Loans are expected in
most instances to be in the form of participations ("Participations") and
assignments ("Assignments") of all or a portion of Loans from third parties.
Participations typically will result in the Portfolio's having a contractual
relationship only with the Lender, not with the borrower. The Portfolio will
have the right to receive payments of principal, interest and any fees to which
it is entitled only from the lender selling the Participation and only upon
receipt by the Lender of the payments from the borrower. In connection with
purchasing Participations, the Portfolio generally has no direct right to
enforce compliance by the borrower with the terms of the loan agreement relating
to the Loan, nor any rights of set-off against the borrower, and the Portfolio
may not benefit directly from any collateral supporting the Loan in which it has
purchased the Participation. As a result, the Portfolio will assume the credit
risk of both the borrower and the Lender that is selling the Participation. In
the event of the insolvency of the Lender selling a Participation, the Portfolio
may be treated as a general creditor of the Lender and may not benefit from any
set-off between the Lender and the borrower. The Portfolio will acquire
Participations only if the lender interpositioned between the Portfolio and the
borrower is determined by PIMCO to be creditworthy.
When the Portfolio purchases Assignments from Lenders, it acquires direct
rights against the borrower on the Loan. However, since Assignments are
arranged through private negotiations between potential assignees and assignors,
the rights and obligations acquired by the Portfolio as the purchaser of an
Assignment may differ from, and be more limited than, those held by the
assigning Lender.
Assignments and Participations are generally not registered under the
Securities Act of 1933 and thus are subject to the Portfolio's limitation on
investment in illiquid securities. Because there is no liquid market for these
securities, the Portfolio anticipates that these securities could be sold only
to a limited number of institutional investors. The lack of a liquid secondary
market will have an adverse impact on the value of these securities and on the
Portfolio's ability to dispose of particular Assignments and Participations when
necessary to meet the Portfolio's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the borrower.
CHANGE IN PORTFOLIO QUALITY REQUIREMENTS. If the proposed changes are
implemented, all securities purchased for the Portfolio will be investment
grade, except that up to 20% of the Portfolio's assets may be rated below
investment grade. In contrast, the Portfolio at present may invest only in
"high quality" debt securities and thus may not purchase any securities that are
rated below investment grade. Investment grade securities are those rated in the
four highest grades assigned by Standard & Poor's ("S&P") (BBB or higher) or
Moody's Investors Service ("Moody's")(Baa or higher) or comparably rated by
another nationally recognized statistical rating organization ("NRSRO"). "High
quality" debt securities are generally considered to be those that are rated in
one of the two highest grades assigned by S&P or Moody's or comparably rated by
another
12
<PAGE>
NRSRO. Unrated securities may be acquired by the Portfolio if Mitchell Hutchins
(PIMCO if the proposed changes are implemented) determines the securities to be
of comparable quality to rated securities that the Portfolio is permitted to
purchase. Moody's considers debt securities rated Baa to have speculative
characteristics. For debt securities rated in the lowest investment grade
category, changes in economic conditions or other circumstances are more likely
to lead to a weakened capacity to make principal and interest payments than is
the case for higher grade debt securities.
If the proposed changes are implemented, the Portfolio will be able to
invest up to 20% of its assets in below investment grade securities, commonly
referred to as "junk bonds." These securities are deemed by the rating
organizations to be predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal and may involve major risk
exposures to adverse conditions. The securities purchased by the Portfolio may
not be rated below B by S&P or Moody's, assigned a comparable rating by another
NRSRO or, if unrated, determined by PIMCO to be of comparable quality. Below
investment grade debt securities generally offer a higher current yield than
that available from higher grade issues, but they involve higher risks in that
they are especially subject to adverse changes in general economic conditions
and in the industries in which the issuers are engaged, to changes in the
financial condition of the issuers and to price fluctuation in response to
changes in interest rates. During periods of economic downturn or rising
interest rates, highly leveraged issuers may experience financial stress which
could adversely affect their ability to make payments of principal and interest
and increase the possibility of default. In addition, such issuers may not have
more traditional methods of financing available to them, and may be unable to
repay debt at maturity by refinancing. The risk of loss due to default by such
issuers is significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness.
The market for lower rated securities has expanded rapidly in recent years,
and its growth paralleled a long economic expansion. In the past, the prices of
many lower rated debt securities declined substantially, reflecting an
expectation that many issuers of such securities might experience financial
difficulties. As a result, the yields on lower rated debt securities rose
dramatically, but these high yields did not reflect the value of the income
stream that holders of the securities expected, but rather the risk that holders
of the securities could lose a substantial portion of their value as a result of
the issuers' financial restructuring or default. There can be no assurance that
such declines will not recur. The market for lower rated debt securities
generally is thinner and less active than that for higher quality securities,
which may limit the Portfolio's ability to sell such securities at fair value in
response to changes in the economy or the financial markets. Adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may also
decrease the values and liquidity of lower rated securities, especially in a
thinly traded market.
USE OF DOLLAR-WEIGHTED PORTFOLIO DURATION. If the proposed changes are
implemented, the Portfolio's total investments will have a dollar-weighted
average portfolio duration between three and eight years. Duration is a measure
of the expected life of a fixed income security and was developed as a more
precise alternative to the concept of "term to maturity." Duration incorporates
a bond's yield, coupon interest payment, final maturity and call features into
one measure. Duration is one of the fundamental tools that PIMCO expects to use
in portfolio selection.
Traditionally, a debt security's "term to maturity" has been used as a
proxy for the sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payments, taking no account of the pattern of the security's payments
prior to maturity. Duration is a measure of the expected life of a fixed income
security on a present value basis. Duration takes the length of the time
intervals between the present time and the time that the interest and principal
payments are scheduled or, in the case of a callable bond, expected to be
received, and weights them by the present values of the cash to be received at
each future point in time. For any fixed income security with interest payments
occurring prior to the payment of principal, duration is always less than
maturity. In general, all other things being equal, the lower the stated or
coupon rate of interest of a fixed income security, the longer the duration of
the security; conversely, the higher the stated or coupon rate of interest of a
fixed income security, the shorter the duration of the security.
13
<PAGE>
Futures contracts, options and options on futures contracts have durations
that, in general, are closely related to the duration of the securities that
underlie these instruments. Holding long futures or call option positions
(backed by a segregated account of cash and cash equivalents) will lengthen the
Portfolio's duration by approximately the same amount that buying an equivalent
amount of the underlying securities would. Short futures or put option
positions have durations roughly equal to the negative duration of the
securities that underlie these positions and have the effect of reducing
portfolio duration by approximately the same amount that selling an equivalent
amount of the underlying securities would.
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The
stated final maturity of such securities is generally 30 years, but current
prepayment rates are more critical in determining the securities' interest rate
exposure. In these and other similar situations, PIMCO will use more
sophisticated analytical techniques that incorporate the economic life of a
security into the determination of its interest rate exposure.
INCREASE IN ILLIQUID SECURITY LIMITATION. At present, the Portfolio may
invest up to 10% of its net assets in illiquid securities. If the proposed
changes are implemented, this limitation would be increased to 15% of the
Portfolio's net assets, and the risks associated with illiquid securities would
be increased for the Portfolio.
Illiquid securities are securities that cannot be disposed of within seven
days in the ordinary course of business at approximately the amount at which the
Portfolio has valued them and includes purchased over the counter ("OTC")
options, certain cover for OTC options, repurchase agreements with maturities in
excess of seven days and securities whose disposition is restricted under the
federal securities laws (other than "Rule 144A" securities that Mitchell
Hutchins determines to be liquid under procedures approved by the Trust's board
of trustees). Illiquid restricted securities may be sold only in privately
negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the Securities Act of 1933 ("1933
Act"). Where registration is required, the Portfolio may be obligated to pay
all or part of the registration expenses and a considerable period may elapse
between the time of the decision to sell and the time the Portfolio may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the Portfolio
might obtain a less favorable price than that which prevailed when it decided to
sell. Rule 144A establishes a "sale harbor" from the registration requirements
of the 1933 Act. Institutional markets for restricted securities have developed
as a result of Rule 144A, providing both readily ascertainable values for
restricted securities and the ability to liquidate an investment to satisfy
share redemption orders. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible securities held by the
Portfolio, however, could affect adversely the marketability of such portfolio
securities and the Portfolio might be unable to dispose of the securities
promptly or at favorable prices.
INVESTMENT IN PAYMENT-IN-KIND SECURITIES. If the proposed changes are
implemented, the Portfolio would be authorized to invest in payment-in-kind
("PIK") securities, which pay interest in the form of additional securities
rather than cash. As is true with respect to the zero coupon bonds in which the
Portfolio currently is authorized to invest and for which a portion of the
original issue discount must be accrued each year as income, this non-cash
income must be included in the annual income of the Portfolio and an amount
equal to the non-cash income must be distributed to the Portfolio's shareholders
at least annually to permit the Portfolio to continue to qualify for pass-
through federal income tax treatment as a regulated investment company. This
amount must be paid from the cash assets of the Portfolio or by liquidation of
portfolio securities, if necessary, at a time when the portfolio may not
otherwise have done so. PIK securities usually trade at a substantial discount
from their face or par value and will be subject to greater fluctuation of
market value in response to changing interest rates than debt obligations of
comparable maturities that make current distributions of interest in cash.
14
<PAGE>
GENERAL INFORMATION
Brokerage Commissions
- ---------------------
PaineWebber is the only affiliated broker of the Portfolio. For the fiscal
year ended December 31, 1994, the Portfolio paid no brokerage commissions to
PaineWebber.
Other Matters to Come Before the Meeting
- ----------------------------------------
The Trust's management does not know of any matters to be presented at the
Meeting other than those described in this Proxy Statement. If other business
should properly come before the Meeting, the proxyholders will vote thereon in
accordance with their best judgment.
Shareholder Proposals
- ---------------------
As a general matter, the Trust does not hold regular annual or other
meetings of shareholders. Any shareholder who wishes to submit proposals to be
considered at a special meeting of the Trust's shareholders should send such
proposals, certified mail-return receipt requested, to the Trust at 1285 Avenue
of the Americas, New York, New York 10019, so as to be received a reasonable
time before the proxy solicitation for that meeting is made. Shareholder
proposals that are submitted in a timely manner will not necessarily be included
in the Trust's proxy materials. Inclusion of such proposals is subject to
limitations under the federal securities laws.
REPORTS TO SHAREHOLDERS
- -----------------------
THE TRUST WILL FURNISH TO SHAREHOLDERS OF THE PORTFOLIO AND TO CONTRACT
OWNERS, WITHOUT CHARGE, A COPY OF THE MOST RECENT ANNUAL REPORT, AND THE MOST
RECENT SEMI-ANNUAL REPORT SUCCEEDING SUCH ANNUAL REPORT, IF ANY, ON REQUEST.
REQUESTS FOR SUCH REPORTS SHOULD BE DIRECTED TO PAINEWEBBER LIFE INSURANCE
COMPANY, ANNUITY ADMINISTRATION, 601 6TH AVENUE, DES MOINES, IOWA OR BY CALLING,
TOLL FREE, 1-800-647-1568.
IN ORDER THAT THE PRESENCE OF A QUORUM AT THE MEETING MAY BE ASSURED,
PROMPT EXECUTION AND RETURN OF THE ENCLOSED PROXY IS REQUESTED. A SELF-
ADDRESSED, POSTAGE-PAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
Dianne E. O'Donnell
Secretary
August 21, 1995
New York, New York
15
<PAGE>
EXHIBIT A
SUB-ADVISORY AGREEMENT
----------------------
Agreement made as of _______________, 1995 ("Agreement") between MITCHELL
HUTCHINS ASSET MANAGEMENT INC., a Delaware corporation ("Mitchell Hutchins"),
and PACIFIC INVESTMENT MANAGEMENT COMPANY, a Delaware general partnership ("Sub-
Adviser").
RECITALS
--------
(1) Mitchell Hutchins has entered into an Investment Advisory and
Administration Contract dated April 21, 1988, as supplemented by an Investment
Advisory and Administration Fee Agreement dated May 1, 1990 (together, referred
to as "Advisory Contract") with PaineWebber Series Trust ("Trust"), an open-end
management investment company registered under the Investment Company Act of
1940, as amended ("1940 Act") with respect to the Strategic Fixed Income
Portfolio ("Portfolio") series of the Trust (formerly named "Government
Portfolio"); and
(2) Mitchell Hutchins wishes to retain the Sub-Adviser to furnish certain
investment advisory services to the Portfolio, and the Sub-Adviser is willing to
furnish those services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties agree as follows:
1. Appointment. Mitchell Hutchins hereby appoints the Sub-Adviser as an
------------
investment sub-adviser with respect to the Portfolio for the period and on the
terms set forth in this Agreement. 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 of and any guidelines adopted by the
Trust's Board of Trustees ("Board") and Mitchell Hutchins, the Sub-Adviser will
provide a continuous investment program for the Portfolio, including investment
research and management. The Sub-Adviser will determine from time to time what
investments will be purchased, retained or sold by the Portfolio. 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 Agreement in accordance with the Portfolio's investment objective, policies
and restrictions as stated in the Trust's 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 Portfolio, the Sub-Adviser may, in its discretion, use brokers who
provide the Sub-Adviser with research, analysis, advice and similar services to
execute portfolio transactions, and the Sub-Adviser may pay to those brokers in
return for brokerage and research services a higher commission than may be
charged by other brokers, subject to the Sub-Adviser's determining in good faith
that such commission is reasonable in terms either of the particular transaction
or of the overall responsibility of the Sub-Adviser to the Portfolio and its
other clients and that the total commissions paid by the Portfolio will be
reasonable
<PAGE>
in relation to the benefits to the Portfolio 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 Portfolio 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 Portfolio 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 Portfolio.
(c) The Sub-Adviser will maintain all books and records required to be
maintained by the Sub-Adviser pursuant to the 1940 Act and the rules and
regulations promulgated thereunder with respect to transactions by the Sub-
Adviser on behalf of the Portfolio, and will furnish the Board and Mitchell
Hutchins with such periodic and special reports as the Board or Mitchell
Hutchins reasonably may request. In compliance with the requirements of Rule
31a-3 under the 1940 Act, the Sub-Adviser hereby agrees that all records which
it maintains for the Portfolio are the property of the Trust, agrees to preserve
for the periods prescribed by Rule 31a-2 under the 1940 Act any records which it
maintains for the Trust and which are required to be maintained by Rule 31a-1
under the 1940 Act, and further agrees to surrender promptly to the Trust any
records which it maintains for the Portfolio upon request by the Trust.
(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 as well as quarterly reports
setting forth the Portfolio's performance and make available to the Board and
Mitchell Hutchins any economic, statistical and investment services normally
available to institutional or other customers of the Sub-Adviser.
(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(s) from a party(ies) 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
---------------
Agreement, the Sub-Adviser will act in conformity with the Trust's Trust
Instrument, By-Laws and currently effective registration statement under the
1940 Act and any amendments or supplements thereto ("Registration Statement")
and with the written instructions and written directions of the Board and
Mitchell Hutchins and will comply with the requirements of the 1940 Act, the
Investment Advisers Act of 1940, as amended ("Advisers Act"), the rules under
each, Subchapter M of the Internal Revenue Code ("Code") as applicable to
regulated investment companies, the diversifications requirements applicable to
the Portfolio under Section 817(h) of the Code and all other applicable federal
and state laws and regulations. Mitchell Hutchins agrees to provide to the Sub-
Adviser copies of the Trust's Trust Instrument, By-Laws, Registration Statement,
written instructions and
<PAGE>
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; provided, however, that the Sub-Adviser's duty under this Agreement
--------- --------
to act in conformity with any document, instruction, or guidelines produced by
the Trust or Mitchell Hutchins shall not arise until it has been delivered to
the Sub-Adviser. Any changes to the objectives, policies or restrictions will
make due allowance for the time within which the Sub-Adviser shall have to come
into compliance.
4. Expenses. During the term of this
---------
Agreement, the Sub-Adviser will bear all expenses incurred by it in connection
with its services under this Agreement. The Sub-Adviser shall not be
responsible for any expenses incurred by the Trust, the Portfolio or Mitchell
Hutchins.
5. Compensation.
-------------
(a) For the services provided and the expenses assumed by the Sub-Adviser
pursuant to this Agreement, Mitchell Hutchins, not the Portfolio, will pay to
the Sub-Adviser a fee, computed daily and payable monthly, at an annual rate of
0.25% of the Portfolio's average daily net assets (computed in the manner
specified in the Advisory Contract), and will provide the Sub-Adviser with a
schedule showing the manner in which the fee was computed.
(b) The fee shall be computed daily and payable monthly to the Sub-Adviser
on or before the last business day of the next succeeding calendar month.
(c) For those periods in which Mitchell Hutchins has agreed to waive all
or a portion of its management fee, Mitchell Hutchins may ask the Sub-Adviser to
waive the same proportion of its fees, but the Sub-Adviser is under no
obligation to do so.
(d) If this Agreement 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 prorated according to the proportion which 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 Portfolio,
the Trust or its shareholders or by Mitchell Hutchins in connection with the
matters to which this Agreement 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
Agreement.
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 Agreement
remains in effect; (ii) is not prohibited by the 1940 Act or the Advisers Act
from performing the services contemplated by this Agreement; (iii) has met, and
will seek to continue to meet for so long as this Agreement 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
<PAGE>
contemplated by this Agreement; (iv) has the authority to enter into and perform
the services contemplated by this Agreement; and (v) will promptly notify
Mitchell Hutchins of the occurrence of any event that would disqualify the Sub-
Adviser from serving as an investment adviser of an investment company pursuant
to Section 9(a) of the 1940 Act or otherwise.
(b) The Sub-Adviser has adopted a written code of ethics complying with
the requirements of Rule 17j-1 under the 1940 Act and will provide Mitchell
Hutchins and the Board with a copy of such code of ethics, together with
evidence of its adoption. Within fifteen days of the end of the last calendar
quarter of each year that this Agreement is in effect, the president or a vice-
president of the Sub-Adviser shall certify to Mitchell Hutchins that the Sub-
Adviser has complied with the requirements of Rule 17j-1 during the previous
year and that there has been no violation of the Sub-Adviser's code of ethics
or, if such a violation has occurred, that appropriate action was taken in
response to such violation. Upon the written request of Mitchell Hutchins, the
Sub-Adviser shall permit Mitchell Hutchins, its employees or its agents to
examine the reports required to be made to the Sub-Adviser by Rule 17j-1(c)(1)
and all other records relevant to the Sub-Adviser's code of ethics.
(c) The Sub-Adviser has provided Mitchell Hutchins with a copy of 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 Portfolio or senior management of the Sub-
Adviser, in each case prior to or promptly after such change.
8. Services Not Exclusive. The Sub-Adviser may act as an investment
-----------------------
adviser to any other person, firm or corporation, and may perform management and
any other services for any other person, association, corporation, firm or other
entity pursuant to any contract or otherwise, and take any action or do anything
in connection therewith or related thereto, except as prohibited by applicable
law; and no such performance of management or other services or taking of any
such action or doing of any such thing shall be in any manner restricted or
otherwise affected by any aspect of any relationship of the Sub-Adviser to or
with the Trust, Portfolio or Mitchell Hutchins or deemed to violate or give rise
to any duty or obligation of the Sub-Adviser to the Trust, Portfolio or Mitchell
Hutchins except as otherwise imposed by law or by this Agreement.
9. Duration and Termination.
-------------------------
(a) This Agreement shall become effective upon the date first above
written, provided that this Agreement shall not take effect unless it has first
been approved (i) by a vote of a majority of those trustees of the Trust who are
not parties to this Agreement or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such approval, and (ii)
by vote of a majority of the Portfolio's outstanding voting securities.
(b) Unless sooner terminated as provided herein, this Agreement shall
continue in effect for two years from its effective date. Thereafter, if not
terminated, this Agreement 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 those trustees of
<PAGE>
the Trust who are not parties to this Agreement or interested persons of any
such party, 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 Portfolio.
(c) Notwithstanding the foregoing, this Agreement 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 Portfolio on 60 days'
written notice to the Sub-Adviser. This Agreement may also be terminated,
without the payment of any penalty, by Mitchell Hutchins: (i) upon 120 days'
written notice to the Sub-Adviser; (ii) immediately upon material breach by the
Sub-Adviser of any of the representations and warranties set forth in Paragraph
7 of this Agreement; or (iii) immediately if, in the reasonable judgment of
Mitchell Hutchins, the Sub-Adviser becomes unable to discharge its duties and
obligations under this Agreement, including circumstances such as financial
insolvency of the Sub-Adviser or other circumstances that could adversely affect
the Portfolio. The Sub-Adviser may terminate this Agreement at any time, without
the payment of any penalty, on 120 days' written notice to Mitchell Hutchins.
This Agreement will terminate automatically in the event of its assignment or
upon termination of the Management Agreement.
10. Amendment of this Agreement. No provision of this Agreement 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. No amendment of this Agreement shall be
effective until approved (i) by a vote of a majority of those trustees of the
Trust who are not parties to this Agreement or interested persons of any such
party, and (ii) by a vote of a majority of the Portfolio's outstanding voting
securities (unless in the case of (ii), the Trust receives an SEC order or No-
Action letter permitting it to modify the Agreement without such vote).
11. Governing Law. This Agreement shall be construed in accordance with
--------------
the 1940 Act and the laws of the State of Delaware, without giving effect to the
conflicts of laws principles thereof. To the extent that the applicable laws of
the State of Delaware conflict with the applicable provisions of the 1940 Act,
the latter shall control.
12. Miscellaneous. The captions in this Agreement 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 Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors. As used in this
Agreement, the terms "majority of the outstanding voting securities,"
"affiliated person," "interested person," "assignment," "broker," "investment
adviser," "net assets," "sale," "sell" and "security" shall have the same
meaning as such terms have in the 1940 Act, subject to such exemption as may be
granted by the SEC by any rule, regulation or order. Where the effect of a
requirement of the federal securities laws reflected in any provision of this
Agreement 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 Agreement may be
signed in counterpart.
<PAGE>
13. Notices. Any written notice herein required to be given to the
--------
Sub-Adviser or Mitchell Hutchins shall be deemed to have been given upon receipt
of the same at their respective addresses set forth below.
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.
Attest: MITCHELL HUTCHINS ASSET MANAGEMENT INC.
1285 Avenue of the Americas
New York, New York 10019
By:____________________________________
Name:
Title:
Attest: PACIFIC INVESTMENT MANAGEMENT COMPANY
840 Newport Center Drive
Suite 360
Newport Beach, California 92660
By: PIMCO Management, Inc.,
its general partner
Name:
Title:
<PAGE>
ANNUITANT: OWNERS(S): CONTRACT:
PROXY
-----
PAINEWEBBER SERIES TRUST
SPECIAL MEETING OF SHAREHOLDERS OF THE GOVERNMENT PORTFOLIO - SEPTEMBER 21, 1995
The undersigned hereby appoints as proxies GREGORY K. TODD and ILENE SHORE and
each of them (with power of substitution), to represent and direct the voting
interest represented by the undersigned held as of the record date at the
aforesaid meeting and any adjournment thereof with all the power the undersigned
would have if personally present. The shares represented by this proxy will be
voted as instructed. Unless indicated to the contrary, this proxy shall be
deemed to grant authority to voted "FOR" all proposals.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF PAINEWEBBER SERIES
TRUST ("TRUST").
YOUR VOTE IS IMPORTANT
Please date and sign this proxy and return it in the enclosed envelope to
PaineWebber Life Insurance Company, Annuity Administration, P.O. Box 10, Des
Moines 1A 50301-9940.
PLEASE INDICATE YOUR VOTE BY AN "X" IN THE APPROPRIATE BOX
BELOW. THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR"
________________________________________________________________________________
GOVERNMENT PORTFOLIO UNITS:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1. Approval of a change in the Portfolio's
investment objective from "high current [_] FOR [_] AGAINST [_] ABSTAIN
income consistent with the preservation
of capital and, secondarily, capital
appreciation" to "total return consisting
of capital appreciation and income."
2. Approval of a Sub-Advisory Agreement between [_] FOR [_] AGAINST [_] ABSTAIN
Mitchell Hutchins Asset Management Inc, and
Pacific Investment Management Company, with
respect to the assets of the Portfolio.
3. Approval of an amendment to the Portfolio's
fundamental investment limitation governing [_] FOR [_] AGAINST [_] ABSTAIN
borrowings to increase permissible borrowings
from 10% to 33 1/3% of the Portfolio's
assets and permit the use of dollar rolls.
</TABLE>
If shares are held jointly, each Shareholder named should sign. If only one
signs, his or her signature will be binding. If the Shareholder is a
corporation, the President or a Vice President should sign his or her own name,
indicating title. If the Shareholder is a partnership, a partner should sign
his or her own name, indicating he or she is a "Partner". If signing is by
attorney, executor, administrator, trustee, or guardian, please give FULL title.
This proxy will not be voted unless it is dated and signed exactly as instructed
above.
SIGN EXACTLY AS NAME(S) APPEARS HEREON.
____________________________________________________ (L.S.)
____________________________________________________ (L.S.)
Dated: ____________, 1995
<PAGE>
ANNUITANT: OWNERS(S): CONTRACT:
PROXY
-----
PAINEWEBBER SERIES TRUST
SPECIAL MEETING OF SHAREHOLDERS OF THE GOVERNMENT PORTFOLIO - SEPTEMBER 21, 1995
The undersigned hereby appoints as proxies GREGORY K. TODD and ILENE SHORE and
each of them (with power of substitution), to represent and direct the voting
interest represented by the undersigned held as of the record date at the
aforesaid meeting and any adjournment thereof with all the power the undersigned
would have if personally present. The shares represented by this proxy will be
voted as instructed. Unless indicated to the contrary, this proxy shall be
deemed to grant authority to voted "FOR" all proposals.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF PAINEWEBBER SERIES
TRUST ("TRUST").
YOUR VOTE IS IMPORTANT
Please date and sign this proxy and return it in the enclosed envelope to
American Benefit Life Insurance Company, Annuity Administration, P.O. Box 12700,
Albany, NY 12214-5552.
PLEASE INDICATE YOUR VOTE BY AN "X" IN THE APPROPRIATE BOX
BELOW. THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR"
________________________________________________________________________________
GOVERNMENT PORTFOLIO UNITS:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1. Approval of a change in the Portfolio's
investment objective from "high current [_] FOR [_] AGAINST [_] ABSTAIN
income consistent with the preservation
of capital and, secondarily, capital
appreciation" to "total return consisting
of capital appreciation and income."
2. Approval of a Sub-Advisory Agreement between [_] FOR [_] AGAINST [_] ABSTAIN
Mitchell Hutchins Asset Management Inc, and
Pacific Investment Management Company, with
respect to the assets of the Portfolio.
3. Approval of an amendment to the Portfolio's
fundamental investment limitation governing [_] FOR [_] AGAINST [_] ABSTAIN
borrowings to increase permissible borrowings
from 10% to 33 1/3% of the Portfolio's
assets and permit the use of dollar rolls.
</TABLE>
If shares are held jointly, each Shareholder named should sign. If only one
signs, his or her signature will be binding. If the Shareholder is a
corporation, the President or a Vice President should sign his or her own name,
indicating title. If the Shareholder is a partnership, a partner should sign
his or her own name, indicating he or she is a "Partner". If signing is by
attorney, executor, administrator, trustee, or guardian, please give FULL title.
This proxy will not be voted unless it is dated and signed exactly as instructed
above.
SIGN EXACTLY AS NAME(S) APPEARS HEREON.
____________________________________________________ (L.S.)
____________________________________________________ (L.S.)
Dated: ____________, 1995
<PAGE>
ANNUITANT: OWNERS(S): CONTRACT:
PROXY
-----
PAINEWEBBER SERIES TRUST
SPECIAL MEETING OF SHAREHOLDERS OF THE GOVERNMENT PORTFOLIO - SEPTEMBER 21, 1995
The undersigned hereby appoints as proxies GREGORY K. TODD and ILENE SHORE and
each of them (with power of substitution), to represent and direct the voting
interest represented by the undersigned held as of the record date at the
aforesaid meeting and any adjournment thereof with all the power the undersigned
would have if personally present. The shares represented by this proxy will be
voted as instructed. Unless indicated to the contrary, this proxy shall be
deemed to grant authority to voted "FOR" all proposals.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF PAINEWEBBER SERIES
TRUST ("TRUST").
YOUR VOTE IS IMPORTANT
Please date and sign this proxy and return it in the enclosed envelope to
American Republic Life Insurance Company, Annuity Administration, P.O. Box 1,
Des Moines 1A 50301-9910.
PLEASE INDICATE YOUR VOTE BY AN "X" IN THE APPROPRIATE BOX
BELOW. THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR"
________________________________________________________________________________
GOVERNMENT PORTFOLIO UNITS:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1. Approval of a change in the Portfolio's
investment objective from "high current [_] FOR [_] AGAINST [_] ABSTAIN
income consistent with the preservation
of capital and, secondarily, capital
appreciation" to "total return consisting
of capital appreciation and income."
2. Approval of a Sub-Advisory Agreement between [_] FOR [_] AGAINST [_] ABSTAIN
Mitchell Hutchins Asset Management Inc, and
Pacific Investment Management Company, with
respect to the assets of the Portfolio.
3. Approval of an amendment to the Portfolio's
fundamental investment limitation governing [_] FOR [_] AGAINST [_] ABSTAIN
borrowings to increase permissible borrowings
from 10% to 33 1/3% of the Portfolio's
assets and permit the use of dollar rolls.
</TABLE>
If shares are held jointly, each Shareholder named should sign. If only one
signs, his or her signature will be binding. If the Shareholder is a
corporation, the President or a Vice President should sign his or her own name,
indicating title. If the Shareholder is a partnership, a partner should sign
his or her own name, indicating he or she is a "Partner". If signing is by
attorney, executor, administrator, trustee, or guardian, please give FULL title.
This proxy will not be voted unless it is dated and signed exactly as instructed
above.
SIGN EXACTLY AS NAME(S) APPEARS HEREON.
____________________________________________________ (L.S.)
____________________________________________________ (L.S.)
Dated: ____________, 1995
