<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
__, 1995
1285 Avenue of the Americas
New York, New York 10019
<PAGE>
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.
- 2 -
<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
__, 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 18, 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 __________ Shares of the Portfolio outstanding and entitled to
vote as of the record date, representing total net assets of approximately
__________. 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.
- 3 -
<PAGE>
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 __%, __% and __%, 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.
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.
- 4 -
<PAGE>
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 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 1
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.
- 5 -
<PAGE>
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.
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. PIMCOs 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 aggregrate assets of
approximately $14.7 billion. The chief executive officers and general partners
of PIMCO are identified in the table below:
CHIEF EXECUTIVE OFFICERS AND GENERAL PARTNERS OF PIMCO
Name Principal Occupation Address
---- -------------------- -------
PIMCO Advisors L.P. General Partner 840 Newport Center Drive
Newport Beach, CA 92660
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<PAGE>
Name Principal Occupation Address
---- -------------------- -------
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
- 7 -
<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
Net Assets as of Annual Rate of Investment
Name of Portfolio June 30, 1995 Fee as a Percentage of Net Assets
- ----------------- ---------------- ----------
<S> <C> <C>
PIMCO FUNDS
- -----------------------------------------------------------------------------
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 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
</TABLE>
- 8 -
<PAGE>
<TABLE>
<CAPTION>
Approximate
Net Assets as of Annual Rate of Investment Advisory
Name of Portfolio June 30, 1995 Fee as a Percentage of Net Assets
- ----------------- ---------------- ----------
<S> <C> <C>
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 Government 34,197,224 Annual rate of 0.30% of average
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
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
</TABLE>
- 9 -
<PAGE>
<TABLE>
<CAPTION>
Approximate
Net Assets as of Annual Rate of Investment Advisory
Name of Portfolio June 30, 1995 Fee as a Percentage of Net Assets
- ----------------- ---------------- ----------
<S> <C> <C>
Multistrategy Bond $ 70,599,801 Annual rate of 0.25% of net
Fund 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
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
</TABLE>
- 10 -
<PAGE>
<TABLE>
<CAPTION>
Approximate
Net Assets as of Annual Rate of Investment Advisory
Name of Portfolio May 31, 1995 Fee as a Percentage of Net Assets
- ----------------- ---------------- ----------
<S> <C> <C>
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 Fund 62,346,944 Annual rate of 0.25% of average
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.
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<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. PIMCO will not enter into 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 through 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 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
- 12 -
<PAGE>
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:
[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. Text that is added or
changed is underlined.
[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.
The dollar rolls are reverse purchase agreements entered into by the
Portfolio would be considered to be borrowings and would be subject to the
Portfolios 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 wold maintain an
offsetting position in securities or repurchase agreements that mature on or
before the settlement date on the related dollar roll or reverse repurchase
agreement. Because the Portfolio would receive interest on the securities or
repurchase agreements in which it invests the transaction proceeds, such
transactions may involve leverage. However, because these securities or
repurchase agreements will mature on or before the settlement date of the
related dollar roll or reverse repurchase
- 13 -
<PAGE>
agreement, Mitchell Hutchins and PIMCO believe that these arbitrage transactions
do not present the risks to the Portfolio 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 Portfolios 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.
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
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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.
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
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<PAGE>
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, 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
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<PAGE>
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 Ratings Group ("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 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
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<PAGE>
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.
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
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<PAGE>
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.
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<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
__, 1995
New York, New York
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<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
<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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.
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.
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<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.
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
By:____________________________________
Name:
Title:
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<PAGE>
PROXY
PAINEWEBBER SERIES TRUST --
GOVERNMENT PORTFOLIO
Special Meeting of Shareholders - 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 of 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 vote "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 below and return it in the enclosed envelope to
PaineWebber Life Insurance Company, Annuity Administration, P.O. Box 10, Des
Moines, IA 50301-9440.
THIS PROXY WILL NOT BE VOTED UNLESS
IT IS DATED AND SIGNED EXACTLY AS INSTRUCTED BELOW
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 in his or her own
name, indicating title. If the Shareholder is a partnership, a partner should
sign in his or her own name, indicating that 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.) Date ________________, 1995
<PAGE>
Please indicate your vote by an "X" in the appropriate box below.
The Board of Trustees recommends a vote "FOR"
1. Approval of a change in the Portfolio's FOR AGAINST ABSTAIN
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. Approval of a Sub-Advisory Agreement FOR AGAINST ABSTAIN
between Mitchell Hutchins Asset Manage-
ment Inc. and Pacific Investment ------ ------- -------
Management Company, with respect to
the assets of the Portfolio.
3. Approval of an amendment to the FOR AGAINST ABSTAIN
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.
