AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1998
SECURITIES ACT FILE NO.
INVESTMENT COMPANY ACT FILE NO. 811-8765
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
PRE-EFFECTIVE AMENDMENT NO. |_|
POST-EFFECTIVE AMENDMENT NO.
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
AMENDMENT NO.
(CHECK APPROPRIATE BOX OR BOXES)
---------------------
MANAGED HIGH YIELD PLUS FUND INC.
(Exact name of Registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code: (212) 713-2000
---------------------
DIANNE E. O'DONNELL, ESQ.
President and Secretary
MANAGED HIGH YIELD PLUS FUND INC.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
---------------------
COPIES TO:
ARTHUR J. BROWN, ESQ. THOMAS A. HALE, ESQ.
ROBERT A. WITTIE, ESQ. CHARLES B. TAYLOR, ESQ.
KIRKPATRICK & LOCKHART LLP SKADDEN, ARPS, SLATE
MEAGHER & FLOM 333 West Wacker Drive
1800 Massachusetts Avenue, N.W. Chicago, Illinois 60606
Washington, D.C. 20036-1800
--------------------
Approximate date of proposed public offering: As soon as
practicable after this Registration Statement becomes effective.
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
Proposed Proposed
Amount Maximum Maximum
Title of Being Offering Price Aggregate Amount of
Securities Being Registered(1) Per Unit Offering Registration
Registered Price Fee
- --------------------------------------------------------------------------------
Common Stock 4,000,000 $15.00 $69,000,000 $20,355
($.001 par value)
- --------------------------------------------------------------------------------
(1) Includes 600,000 shares which may be offered by the Underwriters
pursuant to an option to cover over allotments.
The registrant hereby amends this Registration Statement under the
Securities Act of 1933 on such date or dates as may be necessary to delay its
effective date until the registrant shall file a further amendment which
specifically states that this Registration Statement shall hereafter become
effective in accordance with the provisions of Section 8(a) of the Securities
Act of 1933 or until the Registration Statement shall become effective on such
date as the Commission, acting pursuant to said Section 8(a), may determine.
===============================================================================
<PAGE>
MANAGED HIGH YIELD PLUS FUND INC.
FORM N-2 CROSS REFERENCE SHEET
PART A
ITEM NUMBER CAPTION PROSPECTUS CAPTION
----------- ------- ------------------
1 Outside Front Cover.............. Outside Front Cover Page
2 Inside Front and Outside Back Inside Front and Outside Back
Cover Page....................... Cover Page
3 Fee Table and Synopsis........... Expenses; Prospectus Summary
4 Financial Highlights............. Not Applicable
5 Plan of Distribution............. Cover page; Outside Front Cover
Page; Prospectus Summary;
Underwriting
6 Selling Shareholders............. Not Applicable
7 Use of Proceeds.................. Outside Front Cover; Inside
Front Cover; Prospectus
Summary; Use of Proceeds;
Investment Restrictions
8 General Description of Registrant The Fund; Investment Objectives
and Policies; Other Investment
Practices; Special
Considerations and Risk
Factors; Description of Capital
Stock
9 Management....................... Management of the Fund;
Description of Capital Stock;
Custodian, Transfer and
Dividend Disbursing Agent and
Registrar
10 Capital Stock, Long-Term Debt
and Other Securities............. Dividends and Other
Distributions; Dividend
Reinvestment Plan; Taxation;
Description of Capital Stock;
Special Considerations and Risk
Factors
11 Defaults and Arrears on Senior Not Applicable
Securities.......................
12 Legal Proceedings................ Not Applicable
13 Table of Contents of the
Statement of Further Information
Additional Information...........
PART B STATEMENT OF
ITEM NUMBER CAPTION ADDITIONAL INFORMATION
----------- ------- ----------------------
14 Cover Page....................... Cover Page
15 Table of Contents................ Table of Contents
16 General Information and History.. Not Applicable
17 Investment Objectives and Investment Policies and
Policies......................... Restrictions; Hedging and Other
Strategies Using Derivative
Instruments; Portfolio
Transactions
18 Management....................... Directors and Officers
19 Control Persons and Principal
Holders of Securities............ Not Applicable
20 Investment Advisory and Other Investment Advisory
Services......................... Arrangements; Additional
Information
21 Practices........................ Portfolio Transactions
22 Tax Status....................... Taxation
23 Financial Statements............. Not Applicable
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED APRIL 24, 1998
_________________ Shares
MANAGED HIGH YIELD PLUS FUND INC.
____________________
Managed High Yield Plus Fund Inc. ("Fund") is a newly organized,
diversified, closed-end management investment company. The Fund's primary
investment objective is to seek high income. Its secondary investment objective
is to seek capital appreciation. The Fund will seek to achieve these objectives
by investing primarily in a professionally managed, diversified portfolio of
lower-rated, income-producing debt and related equity securities. At least 65%
of the Fund's total assets normally will be invested in: (i) income-producing
debt securities that are rated below investment grade (lower than a Baa rating
by Moody's Investors Service, Inc., lower than a BBB rating by Standard & Poor's
or comparably rated by another nationally recognized rating agency) or that are
unrated and that the Fund's investment adviser, Mitchell Hutchins Asset
Management Inc. ("Mitchell Hutchins"), has determined to be of comparable
quality; and (ii) equity securities (including common stocks and rights and
warrants for equity securities) that are attached to, or are part of a unit
including, such debt securities. Lower-rated securities (commonly known as "junk
bonds") are subject to special risks, including greater price volatility and a
greater risk of loss of principal and non-payment of interest. SEE "SPECIAL
CONSIDERATIONS AND RISK FACTORS." The Fund is designed for investors who are
willing to assume additional risk in return for the potential for high income
and, secondarily, capital appreciation. An investment in the Fund may be
speculative in that it involves a high degree of risk and should not constitute
a complete investment program. Investors should carefully assess the risks
associated with an investment in the Fund. No assurance can be given that the
Fund will achieve its investment objectives.
Mitchell Hutchins will serve as investment adviser and administrator to
the Fund. This Prospectus concisely sets forth certain information an investor
should know before investing and should be retained for future reference. A
Statement of Additional Information ("SAI") dated _______, 1998 has been filed
with the Securities and Exchange Commission and is incorporated by reference in
its entirety into this Prospectus. A Table of Contents for the SAI is set forth
as the last section of this Prospectus. A copy of the SAI can be obtained
without charge by writing to the Fund, by contacting your investment executive
or by calling toll-free (800) 647-1568.
______________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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<S> <C> <C> <C>
Price to Public Sales Load (1) Proceeds to Fund (2)
Per Share......................... $ 15.00 $ None $ 15.00
Total............................. $ $ None $
Total Assuming Full Exercise of
Over-Allotment Option (3)........... $ $ None $
==========================================================================================
(FOOTNOTES ON THE FOLLOWING PAGE)
</TABLE>
The Shares are offered by the Underwriters, subject to prior sale, when, as and
if delivered to and accepted by the Underwriters, and subject to their right to
reject orders in whole or in part. It is expected that delivery of the Shares
will be made in New York City on or about ________, 1998.
[______________________]
The date of this Prospectus is _______, 1998.
[RED HERRING: Information contained herein is subject to completion or
amendment. A registration statement relating to these securities has been filed
with the Securities and Exchange Commission. These securities may not be sold
nor may offers to buy be accepted prior to the time the registration statement
becomes effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solcitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES OF THE
FUND AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE NASDAQ
MARKET OR OTHERWISE. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
________________________________
(CONTINUED FROM COVER PAGE)
The Fund expects to utilize leverage through bank borrowings or other
transactions involving debt or through the issuance of preferred stock. The Fund
intends to utilize leverage in an initial amount equal to approximately 25% of
its total assets, but it may use leverage up to 33 1/3% of its total assets (in
each case including the amount obtained through leverage). The Fund will not
utilize leverage if it anticipates that the Fund's leveraged capital structure
would result in a lower return to Shareholders than that obtainable over time
with an unleveraged capital structure. Use of leverage creates an opportunity
for increased income and capital appreciation for Shareholders but, at the same
time, creates special risks, and there can be no assurance that a leveraging
strategy will be successful during any period in which it is employed. SEE
"SPECIAL CONSIDERATIONS AND RISK FACTORS -LEVERAGE."
The Fund is offering its shares of common stock, par value $.001 per share
("Shares"). Prior to this offering, there has been no market for the Shares. The
Fund has applied to list the Shares on the New York Stock Exchange under the
symbol "___." However, during an initial period which is not expected to exceed
one week from the date of this Prospectus, the Shares will not be listed on any
securities exchange. During such period, the Underwriters do not intend to make
a market in the Shares. Consequently, it is anticipated that an investment in
the Fund will be illiquid during such period. Shares of closed-end management
investment companies frequently trade at discounts from their net asset values,
and the Fund's Shares may also trade at a discount. The risks associated with
this characteristic of closed-end management investment companies may be greater
for investors purchasing Shares in this initial public offering and expecting to
sell their Shares soon after its completion. The minimum investment in this
offering is ___ Shares ($_____).
________________________________
(FOOTNOTES FROM COVER PAGE)
(1) Mitchell Hutchins [or an affiliate] (not the Fund) will pay a commission
to the Underwriters from its own assets in the amount of 5% of the Price
to Public per Share. In connection with the sale of the Shares offered
hereby, the Fund and Mitchell Hutchins have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting organizational and offering expenses payable by the Fund,
estimated at $_______ and $_______, respectively. Offering expenses will
be deducted from net proceeds, and organizational expenses will be
capitalized and amortized against income over a five-year period.
(3) Assuming exercise in full of the 60-day option granted by the Fund to the
Underwriters to purchase up to _______ additional Shares, on the same
terms, solely to cover over-allotments. See "Underwriting."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
MORE DETAILED INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION ("SAI"). INVESTORS SHOULD CAREFULLY CONSIDER
INFORMATION SET FORTH UNDER THE HEADING "SPECIAL CONSIDERATIONS AND RISK
FACTORS" BELOW.
The Fund................... Managed High Yield Plus Fund Inc. ("Fund") is a
newly organized, diversified, closed-end
management investment company. See "The Fund."
The Offering............... The Fund is offering ________ shares of common
stock, par value $.001 per share ("Shares"),
through a group of underwriters
("Underwriters") led by [_________]. The
Underwriters have been granted an option to
purchase up to ________ additional Shares by
____, 1998, solely to cover over-allotments,
if any. The initial public offering price is
$15 per Share. The minimum investment in the
offering is ___ Shares ($_____). See
"Underwriting."
No Sales Charge............ The Shares will be sold during the initial public
offering without any sales load or
underwriting discounts payable by investors or
the Fund. In connection with sale of Shares
in this offering, Mitchell Hutchins [or an
affiliate] (not the Fund) will pay a
commission to the Underwriters from its own
assets. See "Underwriting."
Investment Objectives and The Fund's primary investment objective is to
Policies................... seek high income. Its secondary investment
objective is to seek capital appreciation.
The Fund will seek to achieve these objectives by
investing primarily in a professionally managed,
diversified portfolio of lower-rated,
income-producing debt and related equity
securities. At least 65% of the Fund's total
assets normally will be invested in: (i)
income-producing debt securities that are rated
below investment grade (lower than a Baa rating
by Moody's Investors Service, Inc. ("Moody's"),
lower than a BBB rating by Standard & Poor's, a
division of The McGraw-Hill Companies, Inc.
("S&P"), or comparably rated by another
nationally recognized statistical rating
organization ("Rating Agencies")) or that are
unrated and that the Fund's investment adviser,
Mitchell Hutchins Asset Management Inc.
("Mitchell Hutchins"), has determined to be of
comparable quality; and (ii) equity securities
(including common stocks and rights and warrants
for equity securities) that are attached to, or
are part of a unit including, such debt
securities. The Fund will seek its secondary
objective of capital appreciation by investing
in debt or equity securities that Mitchell
Hutchins expects may appreciate in value as a
result of favorable developments affecting the
business or prospects of the issuer, which may
improve the issuer's financial condition and
credit rating, or as a result of declines in
long-term interest rates.
Lower-rated debt securities (commonly known as
"junk bonds") are subject to special risks,
including greater price volatility and a greater
risk of loss of principal and non-payment of
3
<PAGE>
interest. The determination of whether a
security is in a particular rating category, and
whether the percentage limitations described
above are met, will be made at the time of
investment. Mitchell Hutchins will assess rated
securities on the basis of the highest rating
assigned by any Rating Agency.
The Fund may invest up to 35% of its total assets
in investment grade securities of private or
government issuers, equity securities of
lower-rated issuers, money market instruments
and municipal obligations. Up to 35% of the
Fund's total assets may be invested in
securities of foreign issuers, including issuers
in emerging market countries. However, the Fund
may not invest more than 15% of its total assets
in securities that are denominated in currencies
other than the U.S. dollar. Up to 15% of the
Fund's total assets may be invested in bonds and
equity securities that, at the time of purchase,
are in default or whose issuers are the subject
of bankruptcy proceedings. The Fund may purchase
these securities if Mitchell Hutchins believes
that these securities have a potential for
capital appreciation.
Mitchell Hutchins believes that the lower-rated
securities markets offer opportunities for
active management to increase portfolio value.
In selecting investments for the Fund, Mitchell
Hutchins will rely on the expertise of the
Fund's portfolio manager, as well as his team of
analysts. The investment process will
incorporate three key steps: industry selection,
company selection and security selection.
Industry selection consists of an analysis of
economic factors, industry dynamics and yield
spreads to determine which sectors of the market
are the most attractive for investment. Company
selection combines Mitchell Hutchins'
proprietary financial forecasting model with
fundamental credit analysis to determine which
companies are the most attractive investment
candidates. Consulting third party research and
conducting company visits are also key
components in this selection process. A security
selection process is done to determine the
appropriate type of security (such as
lower-rated bond, common stock, etc.). Final
security selection will depend on relative
values based on a company's anticipated cash
flow, interest and asset coverage, leverage and
earnings prospects. Mitchell Hutchins' portfolio
management team will also utilize a disciplined
sell strategy under which a security will be
sold when the total return potential declines
relative to its risk level.
The Fund expects to utilize leverage through bank
borrowings and other transactions involving debt
or through the issuance of preferred stock. The
Fund intends to use leverage in an initial
amount equal to approximately 25% of its total
assets, but it may use leverage up to 33-1/3% of
its total assets (in each case including the
amount obtained through leverage). The Fund will
not utilize leverage if it anticipates that the
Fund's leveraged capital structure would result
in a lower return to Shareholders than that
obtainable over time with an unleveraged capital
structure. Leverage creates an opportunity for
increased income and capital appreciation but,
at the same time, creates special risks. There
can no assurance that a leveraging strategy will
be successful during any period during which it
4
<PAGE>
is employed. See "Special Considerations and
Risk Factors -Leverage."
The Fund may also engage in other investment
practices, including forward commitments,
repurchase agreements, reverse repurchase
agreements, dollar rolls, and lending of
portfolio securities, and may purchase illiquid
securities, and when-issued and delayed delivery
securities. The Fund may also invest in
derivative instruments, including options,
futures contracts, swaps and forward currency
contracts.
The Fund may implement various temporary, defensive
strategies at times when Mitchell Hutchins
determines that conditions in the markets make
pursuing the Fund's basic investment strategy
inconsistent with the best interests of its
Shareholders. For example, when changing
economic conditions and other factors cause the
yield difference between lower-rated and
higher-rated securities to narrow, the Fund may
purchase higher-rated securities if Mitchell
Hutchins believes that the risk of loss of
income and principal may be reduced
substantially with only a relatively small
reduction in yield. In addition, under unusual
market or economic conditions or for temporary
or defensive or liquidity purposes, the Fund may
invest up to 100% of its total assets in
higher-rated debt securities, such as securities
issued or guaranteed by the U.S. government or
its instrumentalities or agencies, certificates
of deposit, bankers' acceptances or other bank
obligations, commercial paper, or other income
securities deemed by Mitchell Hutchins to be
consistent with the defensive posture, or may
hold it in cash.
See "Investment Objectives and Policies," "Other
Investment Practices," "Special Considerations
and Risk Factors" and "Taxation." See also
"Appendix - Description of Bond Ratings."
Investment Adviser and Mitchell Hutchins, a wholly owned asset
Administrator management subsidiary of PaineWebber, serves
as the Fund's investment adviser and
administrator. Mitchell Hutchins provides
investment advisory and portfolio management
services to investment companies, pension funds
and other institutional, corporate and
individual clients. As of April 30, 1998,
Mitchell Hutchins served as investment adviser
or sub-adviser to ___ registered investment
companies with ___ separate portfolios having
aggregate assets of approximately $____ billion.
As compensation for its services, Mitchell Hutchins
will receive a fee, computed weekly and paid
monthly, in an amount equal to the annual rate
of 0.90% of the Fund's average weekly total
assets minus liabilities other than the
aggregate indebtedness constituting leverage
("Managed Assets"). This fee is higher than fees
paid by other comparable investment companies.
The investment advisory and administrative fee
payable to Mitchell Hutchins during periods in
which the Fund is utilizing leverage will be
higher than when it is not doing so because the
fee is calculated as a percentage of Managed
Assets, which include assets purchased with
leverage. See "Management of the Fund."
5
<PAGE>
Listing.................... The Fund has applied to list the Shares on the
New York Stock Exchange ("NYSE") under the
symbol "___." However, during an initial
period which is not expected to exceed one
week from the date of this Prospectus, the
Fund's Shares will not be listed on any
securities exchange. During such period, the
Underwriters do not intend to make a market in
the Fund's Shares. Consequently, it is
anticipated that an investment in the Fund
will be illiquid during such period. Prior to
this offering, there has been no market for
the Shares.
Dividends and Other The Fund intends to distribute substantially all
Distributions.............. of its net investment income as monthly
dividends. The initial dividend is expected to
be paid approximately 60 days after the
completion of the offering of the Shares. The
Fund anticipates that a monthly dividend may,
from time to time, represent more or less than
the amount of net investment income earned by
the Fund in the period to which the dividend
relates. The Fund also intends to distribute
annually to Shareholders substantially all of
its realized net capital gains, if any. See
"Dividends and Other Distributions; Dividend
Reinvestment Plan."
Dividend Reinvestment Plan. The Fund has established a Dividend Reinvestment
Plan ("Plan") under which all Shareholders
whose Shares are registered in their own
names, or in the name of PaineWebber (or its
nominee), have all dividends and other
distributions on their Shares automatically
reinvested in additional Shares, unless such
Shareholders elect to receive cash.
Additional Shares acquired under the Plan will
be purchased in the open market, on the NYSE
or otherwise, or issued by the Fund if the
Shares are trading at or above net asset
value. Shareholders who hold their shares in
the name of a broker or nominee other than
PaineWebber (or its nominee) should contact
that broker or nominee to determine whether,
or how, they may participate in the Plan. See
"Dividends and Other Distributions; Dividend
Reinvestment Plan."
[Mutual Fund Investment Purchasers of Shares of the Fund through
Option..................... PaineWebber in this offering will have an
investment option consisting of the right to
reinvest the net proceeds from a sale of such
shares (the "Original Shares") in Class A shares
of certain PaineWebber-sponsored open-end mutual
funds ("Eligible Class A Shares") at their net
asset value, without the imposition of the
initial sales charge, if the conditions set
forth below are satisfied. First, the sale of
the Original Shares must be made through
PaineWebber, and the net proceeds therefrom must
be reinvested immediately in Eligible Class A
Shares. Second, the Original Shares must have
either been acquired in this offering or be
Shares representing reinvested dividends from
those Shares. Third, the Original Shares must
have been continuously maintained in a
PaineWebber securities account. Fourth, there
must be a minimum purchase of [$250] to be
eligible for the investment option. See "Mutual
Fund Investment Option."]
Share Repurchases and In recognition of the possibility that the Shares
Tender Offers; Conversion might trade at a discount from net asset value
to Open-End Fund........... and that any such discount may not be in the
best interest of Shareholders, the Fund's Board
of Directors, in consultation with Mitchell
Hutchins, from time to time, may consider the
possibility of making open market Share
repurchases or tender offers. There can be no
6
<PAGE>
assurance that the Board of Directors will
decide to undertake either of these actions or
that, if undertaken, such actions will result in
the Shares trading at a price that is equal or
close to net asset value per share. The Board of
Directors also may consider from time to time
whether it would be in the best interests of the
Fund and its stockholders to convert the Fund to
an open-end investment company. See "Description
of Capital Stock."
Special Considerations and GENERAL. The Fund is designed for investors who
Risk Factors............... are willing to assume additional risk in
return for the potential for high income and,
secondarily, capital appreciation. An investment
in the Fund may be speculative in that it
involves a high degree of risk and should not
constitute a complete investment program. There
is no assurance that the Fund will achieve its
investment objectives. Investors should
carefully consider their ability to assume the
risks of owning shares of an investment company
that invests in lower-rated income securities
before making an investment in the Fund.
CERTAIN RISKS ASSOCIATED WITH INVESTMENTS IN
LOWER-RATED SECURITIES. Most of the securities
in which the Fund will invest will be below
investment grade and considered speculative.
Lower-rated securities generally offer a higher
current yield than that available from
higher-rated issues. However, lower-rated
securities are subject to greater price
volatility and a greater risk of loss of
principal and non-payment of interest than
higher-rated investments.
Lower-rated securities 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. Negative
publicity or investor perceptions may also
adversely affect the values of lower-rated
income securities.
During periods of economic downturn or rising
interest rates, issuers of lower-rated income
securities, especially 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 in payment of
interest or principal by such issuers is
significantly greater because such securities
frequently are unsecured and subordinated to the
prior payment of senior indebtedness. In the
event of a default of such securities, in order
to enforce its rights, the Fund may be required
to take possession of and manage assets securing
the issuer's obligations on such securities,
which may increase the Fund's operating expenses
and adversely affect the Fund's net asset value.
The Fund may also be limited in its ability to
enforce its rights and may incur greater costs
in enforcing its rights in the event an issuer
becomes the subject of bankruptcy proceedings.
Up to 15% of the Fund's total assets may be
comprised of securities whose issuers are in
bankruptcy or that are in default with respect
to principal or interest at the time of
acquisition by the Fund. Investment in these
7
<PAGE>
securities is extremely speculative and involves
significant risk. These securities generally
will not be producing income when they are
purchased by the Fund, and they may require the
Fund to bear certain extraordinary expenses in
order to protect and recover its investment.
Therefore, to the extent the Fund pursues its
secondary investment objective of capital
appreciation through investment in these
securities, the Fund's ability to achieve
current income for its Shareholders may be
diminished.
Debt securities generally are purchased and sold
through dealers who make a market in such
securities for their own accounts. However,
there are fewer dealers in the lower-rated
income securities market, so this market may be
less liquid than the market for higher-rated
income securities, even under normal economic
conditions. The Fund also may not be able
readily to dispose of such securities at an
amount that approximates that at which the Fund
has valued them and would have to sell other
investments if necessary to raise cash to meet
its obligations. As a result, during periods of
high demand in the lower-rated securities
market, it may be difficult to acquire
lower-rated securities appropriate for
investment by the Fund. See "Investment
Objectives and Policies."
Some or all of the securities in which the Fund
invests may, when purchased, be illiquid or may
subsequently become illiquid. In many cases,
lower-rated income securities may be purchased
in private placements and, accordingly, will be
subject to restrictions on resale as a matter of
contract or under the securities laws. It may be
more difficult to determine the fair value of
such securities for purposes of computing the
Fund's net asset value.
LEVERAGE. Leverage creates risks for Shareholders,
including the likelihood of greater volatility
in the net asset value and market price of the
Shares and the risk that fluctuations in
interest rates on borrowings debt or in the
dividend rates on any preferred stock issued by
the Fund may adversely affect the return to
Shareholders. To the extent the income or
capital appreciation derived from securities
purchased with funds received from leverage
exceeds the cost of leverage, the Fund's return
will be greater than if leverage had not been
used. Conversely, if the income or capital
appreciation from the securities purchased with
such funds is not sufficient to cover the cost
of leverage, the return to the Fund will be less
than if leverage had not been used, and
therefore the amount available for distribution
to Shareholders as dividends and other
distributions will be reduced. In the latter
case, Mitchell Hutchins in its best judgment may
nevertheless determine to maintain the Fund's
leveraged position if it deems such action to be
appropriate under the circumstances. See "Other
Investment Policies-Leverage."
FOREIGN INVESTMENTS. Investments in foreign
securities involve risks relating to political
and economic developments abroad, as well as
those that result from the differences between
the regulations to which U.S. and foreign
issuers are subject. These risks may include
expropriation, confiscatory taxation,
withholding taxes on interest, limitations on
the use or transfer of Fund assets, difficulty
8
<PAGE>
in obtaining or enforcing a court judgment
abroad, restrictions on the exchange of
currencies and political or social instability
or diplomatic developments. Moreover, individual
foreign economies may differ favorably or
unfavorably from the U.S. economy in such
respects as growth of gross national product,
rate of inflation, capital reinvestment,
resource self-sufficiency and balance of
payments positions. Securities of many foreign
issuers may be less liquid and their prices more
volatile than those of securities of comparable
U.S. issuers. The costs attributable to foreign
investing that the Fund must bear frequently are
also higher than those attributable to domestic
investing. Transactions in foreign securities
may be subject to less efficient settlement
practices, including extended clearance and
settlement periods.
HEDGING AND OTHER STRATEGIES INVOLVING DERIVATIVE
INSTRUMENTS. The Fund may invest in
derivative instruments which entail special
risks. See "Other Investment Practices --
Hedging and Other Strategies Using Derivative
Instruments" and in the SAI, "Hedging and
Other Strategies Using Derivative Instruments."
MARKET PRICE AND NET ASSET VALUE OF SHARES. The
Fund is a newly organized, diversified,
closed-end management investment company and has
no operating history. Shares of closed-end
management investment companies frequently trade
at a discount from their net asset value. This
risk of loss associated with this characteristic
may be greater for investors purchasing Shares
in the initial public offering and expecting to
sell their Shares soon after the completion
thereof. Whether an investor will realize gains
or losses upon the sale of Shares will not
depend directly upon the Fund's net asset value,
but will depend upon whether the market price of
the Shares at the time of sale is above or below
the investor's purchase price for the Shares.
This market risk is separate and distinct from
the risk that the Fund's net asset value may
decrease. Accordingly, the Shares are designed
primarily for long-term investors, and investors
in Shares should not view the Fund as a vehicle
for trading purposes. See "Special
Considerations and Risk Factors - Market Price
and Net Asset Value of Shares" and a
"Description of Capital Stock."
Thenet asset value of the Fund's Shares will
fluctuate with interest rate changes, as well as
with price changes of the Fund's portfolio
securities, and these fluctuations are likely to
be greater during periods in which the Fund
utilizes a leveraged capital structure. See
"Other Investment Practices-Leverage."
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<PAGE>
ANTI-TAKEOVER PROVISIONS. The Fund's Articles of
Incorporation contain provisions limiting (1)
the ability of other entities or persons to
acquire control of the Fund, (2) the Fund's
freedom to engage in certain transactions and
(3) the ability of the Fund's directors or
Shareholders to amend the Articles of
Incorporation. These provisions of the Articles
of Incorporation may be regarded as
"anti-takeover" provisions. These provisions
could have the effect of depriving the
Shareholders of opportunities to sell their
Shares at a premium over prevailing market
prices by discouraging a third party from
seeking to obtain control of the Fund in a
tender offer or similar transaction. The overall
effect of these provisions is to render more
difficult the accomplishment of a merger or the
assumption of control by a Shareholder who owns
beneficially more than 5% of the Shares. They
provide, however, the advantage of potentially
requiring persons seeking control of the Fund to
negotiate with its management regarding the
price to be paid and facilitating the continuity
of the Fund's management, investment objectives
and policies. See "Special Considerations and
Risk Factors," and "Description of Capital
Stock."
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<PAGE>
FUND EXPENSES
The following tables are intended to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, directly or
indirectly.
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)........ None
Dividend Reinvestment Plan Fees....................... None
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS ATTRIBUTABLE TO
COMMON STOCK) (1).....................................
Investment Advisory and Administration Fees........... 0.90%
Interest Payments on Borrowed Funds................... None
Other Expenses........................................ 0.30%
----
Total Annual Expenses.............................. 1.20%
====
- ---------------
(1) See "Management of the Fund" for additional information. In the event the
Fund utilizes leverage by borrowing in an amount equal to approximately 25% of
the Fund's total assets (including the amount obtained from leverage), it is
estimated that, as a percentage of net assets attributable to the Shares, the
Investment Advisory and Administrative Fee would be [1.20%], Interest Payments
on Borrowed Funds (assuming an annualized interest rate of [X.XX%] would be
[X.XX%], Other Expenses would be [X.XX%] and Total Annual Fund Expenses would be
[1.50%.]. "Other Expenses" have been estimated. The Fund may utilize leverage up
to 33-1/3% of the Fund's total assets (including the amount obtained from the
leverage). See "Special Considerations and Risk Factors-Leverage" and "Other
Investment Policies-Leverage."
EXAMPLE
An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Fund, assuming (i) a 5% annual return and (ii)
reinvestment of all dividends and other distributions at net asset value:
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
Assuming No Leverage..........
Assuming 25% Leverage.........
This Example assumes that the percentage amounts listed under Annual
Expenses remain the same in the years shown (except that Annual Expenses have
been reduced to reflect the completion of organization expense amortization
after five years from the commencement of investment operations). The above
tables and the assumption in the Example of a 5% annual return and reinvestment
at net asset value are required by regulations of the Securities and Exchange
Commission ("SEC") applicable to all closed-end investment companies; the
assumed 5% annual return is not a prediction of, and does not represent, the
projected or actual performance of the Shares. In addition, while this Example
assumes reinvestment of all dividends and other distributions at net asset
value, participants in the Fund's Dividend Reinvestment Plan will receive Shares
at the market price in effect at that time or at net asset value, whichever is
lower.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES,
AND THE FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
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<PAGE>
THE FUND
The Fund is a newly organized, diversified, closed-end management
investment company and has registered as such under the Investment Company Act
of 1940, as amended ("1940 Act"). The Fund was incorporated under the laws of
the State of Maryland on April 24, 1998 and has no operating history. The Fund's
principal office is located at 1285 Avenue of the Americas, New York, New York
10019, and its telephone number is (212) 713-2000.
USE OF PROCEEDS
The proceeds of this initial public offering are estimated at $__________
($____________ if the Underwriters' over-allotment option is exercised in full)
before payment of organizational and offering expenses (estimated at $_________
and $__________, respectively). The proceeds will be invested in accordance with
the Fund's investment objectives and policies during a period not to exceed six
months from the closing of the initial public offering. Pending such investment,
the proceeds may be invested in U.S. dollar-denominated, high quality,
short-term instruments. A portion of the Fund's organizational expenses has been
advanced by Mitchell Hutchins and will be repaid by the Fund upon completion of
the initial public offering. There is no sales load or underwriting discount
imposed on sales Shares in the initial public offering. In connection with sales
of Shares in this offering, Mitchell Hutchins [or its affiliate] (not the Fund)
will pay a commission to the Underwriters from its own assets. See
"Underwriting."
INVESTMENT OBJECTIVES AND POLICIES
The Fund's primary investment objective is to seek high income. Its
secondary investment objective is capital appreciation. The Fund will seek to
achieve these objectives by investing primarily in a professionally managed,
diversified portfolio of lower-rated, income-producing debt and related equity
securities. Normally the Fund will invest at least 65% of its total assets in:
(i) income-producing debt securities that are rated below investment grade
(lower than a Baa rating by Moody's, lower than a BBB rating by S&P or
comparably rated by another Rating Agency) or that are unrated and that Mitchell
Hutchins has determined to be of comparable quality; and (ii) equity securities
(including common stocks and rights and warrants for equity securities) that are
attached to, or are part of a unit including, such debt securities. The Fund
will seek to achieve its secondary objective of capital appreciation by
investing in debt or equity securities that Mitchell Hutchins expects may
appreciate in value as a result of favorable developments affecting the business
or prospects of the issuer which may improve the issuer's financial condition
and credit ratings or as a result of declines in long-term interest rates.
Lower-rated securities (commonly known as "junk bonds") are subject to
special risks, including greater price volatility and a greater risk of loss of
principal and non-payment of interest. The determination of whether a security
is in a particular rating category, and whether the above percentage limitations
are met, will be made at the time of investment and will be based on of the
highest rating assigned by any Rating Agency. The Fund also may invest up to 35%
of its total assets in investment grade debt securities of private and
government issuers, equity securities of lower-rated or comparable issuers
(issuers whose debt securities are lower-rated or issuers that Mitchell Hutchins
determines to be of comparable quality), money market instruments and municipal
obligations. Up to 35% of the Fund's total assets may be invested in securities
of foreign issuers, including issuers in emerging market countries. However, the
Fund may not invest more than 15% of its total assets in securities that are
denominated in currencies other than the U.S. dollar. Up to 15% of the Fund's
total assets may be invested in securities that, at the time of purchase, are in
default or whose issuers are the subject of bankruptcy proceedings. Investment
in these securities is highly speculative and involves significant risk. The
Fund may purchase these securities if Mitchell Hutchins believes that they have
a potential for capital appreciation.
Mitchell Hutchins believes that the lower-rated securities markets offer
opportunities for active management to increase portfolio value. In selecting
investments for the Fund, Mitchell Hutchins will rely on the expertise of the
Fund's portfolio manager, as well as his team of analysts. The investment
process will incorporate three key steps: industry selection, company selection
and security selection. Industry selection consists of an analysis of economic
12
<PAGE>
factors, industry dynamics and yield spreads to determine which sectors of the
market are the most attractive for investment. Company selection combines
Mitchell Hutchins' proprietary financial forecasting model with fundamental
credit analysis to determine which companies are the most attractive investment
candidates. Consulting third party research and conducting company visits are
also key components in this selection process. A security selection process is
done to determine the appropriate type of security (such as lower-rated bond,
common stock, etc.). Final security selection will depend on relative values
based on a company's anticipated cash flow, interest and asset coverage,
leverage and earnings prospects. Mitchell Hutchins' portfolio management team
will also utilize a disciplined sell strategy under which a security will be
sold when the total return potential declines relative to its risk level.
The Fund is designed for investors who are willing to assume additional
risk in return for the potential for high income and, secondarily, capital
appreciation. An investment in the Fund may be speculative in that it involves a
high degree of risk and should not constitute a complete investment program.
There is no assurance that the Fund will achieve its investment objectives.
PORTFOLIO SECURITIES
The following summarizes some of the characteristics of the securities in which
the Fund may invest. See the Statement of Additional Information for more
information.
LOWER-RATED SECURITIES. The lower-rated securities in which the Fund may
invest include bonds, debentures, notes, corporate loans and other debt
instruments and are generally unsecured. Investments in lower-rated income
securities are subject to a greater price volatility and a greater risk of loss
of principal and non-payment of interest than higher-rated investments. See
"Special Considerations and Risk Factors--Certain Risks Associated with
Investments in Lower-Rated Securities."
Lower-rated securities are considered by the Rating Agencies to be
predominantly speculative, with limited protection of interest and principal
payments, and may include securities that are in default or face the risk of
default with respect to principal or interest. Lower-rated securities generally
offer a higher current yield than that available from higher-rated issues.
However, lower-rated securities are subject to 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,
issuers of lower-rated income securities, especially 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 they may be unable to repay debt at maturity by
refinancing. The risk of loss due to payment defaults by these issuers is
significantly greater because lower-rated securities frequently are unsecured
and subordinated to the prior payment of senior indebtedness.
Mitchell Hutchins believes that the lower-rated securities market,
particularly with respect to securities rated BB or B, offers opportunities to
investors who are willing to bear the greater risks of lower-rated securities.
In selecting investments for the Fund, Mitchell Hutchins will seek to identify
issuers and industries that it believes are likely to experience stable or
improving financial conditions. Mitchell Hutchins' analysis may include
consideration of general industry trends, the issuer's experience and managerial
strength, changing financial conditions, borrowing requirements or debt maturity
schedules, the issuer's responsiveness to changes in business conditions and
interest rates, and other terms and conditions. Mitchell Hutchins may also
consider relative values based on anticipated cash flow, interest or dividend
coverage, asset coverage and earnings prospects. Mitchell Hutchins will
regularly assess both the return potential and the degree of risk presented by
the Fund's portfolio investments in order to determine whether to hold or to
dispose of those investments.
EQUITY SECURITIES. The equity securities in which the Fund may invest
include common and preferred stocks and securities that are convertible into
them, including common stock purchase warrants and rights, equity interests in
trusts, partnerships, joint ventures or similar enterprises and depository
receipts. Common stocks represent an ownership interest in a company. Preferred
stock has certain fixed-income features, like debt securities, but is actually
13
<PAGE>
equity in a company. The prices of equity securities generally fluctuate more
than debt securities and reflect changes in a company's financial condition and
in overall market and economic conditions. Common stocks generally represent the
riskiest investment in a company.
Warrants are securities permitting, but not obligating, their holder to
subscribe for other securities. Warrants do not carry with them the right to
dividends or voting rights with respect to the securities that they entitle
their holder to purchase, and they do not represent any rights in the assets of
the issuer. As a result, warrants may be considered more speculative than
certain other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to its expiration date.
CORPORATE LOANS. The Fund may invest in loans extended to corporate
borrowers by commercial banks and other financial institutions ("Corporate
Loans"). As in the case of other lower-rated securities, such Corporate Loans
can be expected to provide higher yields than lower-yielding, higher-rated fixed
income securities but may be subject to greater risk of loss of principal and
income. There are, however, some significant differences between Corporate Loans
and other lower-rated income securities. Corporate Loan obligations are
frequently secured by security interests in the assets of the borrower, and the
holders of Corporate Loans are frequently the beneficiaries of debt service
subordination provisions imposed on the borrower's bondholders. These
arrangements are designed to give Corporate Loan investors preferential
treatment (at least with respect to the pledged assets) over other creditors of
the borrower in the event of its insolvency. Even when these arrangements exist,
however, there can be no assurance that the principal and interest owed on the
Corporate Loans will be repaid in full or that the holders of such Corporate
Loans will not experience delays in receiving payment. Corporate Loans generally
bear interest at rates set at a margin above a generally recognized base lending
rate that may fluctuate on a day-to-day basis, in the case of the prime rate of
a U.S. bank, or which may be adjusted on set dates, typically 30 days but
generally not more than one year, in the case of the London Interbank Offered
Rate ("LIBOR"). Consequently, the value of Corporate Loans held by the Fund may
be expected to fluctuate in response to changes in market interest rates
significantly less than the would fixed-rate securities. However, the secondary
dealer market for Corporate Loans is not as well developed as the secondary
dealer market for other lower-rated securities, and therefore the Fund may have
difficulty liquidating and valuing and Corporate Loans that it holds.
The Fund's investments in Corporate Loans normally will be assignments of
or participations in all or a portion of lender's interest in a Corporate Loan.
Participations typically will result in the Fund having a contractual
relationship only with the lender, not with the borrower. In a participation,
the Fund would be entitled to receive agreed-upon portions of payments of
principal, interest and any loan fees by the lender only when and if those
payments are received. Also, the Fund might not directly benefit from any
collateral supporting the Corporate Loan. As a result, the Fund would assume the
credit risk of both the borrower and the lender that sold the participation. If
the lender becomes insolvent, the Fund might be treated as a general creditor of
the lender and might not benefit from any set-off between the lender and the
borrower. In an assignment, the Fund would be entitled to receive payments
directly from the borrower and, therefore, would not depend on the assigning
lender to pass those payments on to the Fund.
MORTGAGE- AND ASSET-BACKED SECURITIES. Mortgage- and asset-backed
securities are debt or pass-through securities that are backed by specific types
of assets. Mortgage-backed securities represent direct or indirect interests in
pools of underlying mortgage loans that are secured by real property. U.S.
government mortgage-backed securities are issued or guaranteed as to principal
and interest (but not as to market value) by the Ginnie Mae (also know as the
Government National Mortgage Association), Fannie Mae (also known as the Federal
National Mortgage Association), Freddie Mac (also known as the Federal Home Loan
Mortgage Corporation) or other government-sponsored enterprises. Other
mortgage-backed securities are sponsored or issued by private entities,
including investment banking firms and mortgage originators.
Mortgage-backed securities may be composed of one or more classes and may
be structured either as pass-through securities or collateralized debt
obligations. Multiple-class mortgage-backed securities are referred to in this
prospectus as "CMOs." Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive payments out
of the interest and principal on the underlying mortgages. The portions of these
14
<PAGE>
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class. CMOs
involve special risks, and evaluating them requires special knowledge.
When interest rates go down and homeowners refinance their mortgages,
mortgage-backed bonds may be paid off more quickly than investors expect. When
interest rates rise, mortgage-backed bonds may be paid off more slowly than
originally expected. Changes in the rate or "speed" of these prepayments can
cause the value of mortgage-backed securities to fluctuate rapidly.
Asset-backed securities are similar to mortgage-backed securities, except
that the underlying assets are different. These underlying assets may be nearly
any type of financial asset or receivable, such as motor vehicle installment
sales contracts, home equity loans, leases of various types of real and personal
property and receivables from credit cards.
TEMPORARY AND DEFENSIVE STRATEGIES
The Fund may implement various temporary "defensive" strategies at times
when Mitchell Hutchins determines that conditions in the markets make pursuing
the Fund's basic investment strategy inconsistent with the best interests of its
Shareholders. For example, when changing economic conditions and other factors
cause the yield difference between lower-rated and higher-rated securities to
narrow, the Fund may purchase higher-rated securities if Mitchell Hutchins
believes that the risk of loss of income and principal may be reduced
substantially with only a relatively small reduction in yield. In addition,
under unusual market or economic conditions or for temporary or defensive or
liquidity purposes, the Fund may invest up to 100% of its total assets in
securities issued or guaranteed by the U.S. government or its instrumentalities
or agencies, certificates of deposit, bankers' acceptances or other bank
obligations, commercial paper or other income securities deemed by Mitchell
Hutchins to be consistent with the defensive posture, or may hold it in cash.
These strategies may include an increase in the portion of the Fund's assets
invested in higher-quality debt securities. The yield on these securities would
generally be lower than the yield on lower-rated income securities. It is
impossible to predict when, or for how long, the Fund will use these alternative
strategies. In addition to its authority to utilize leverage up to an amount
equal to 33 1/3 (including the amount of leverage), the Fund may borrow money
for temporary or emergency purposes (e.g., clearance of transactions or payments
of dividends to stockholders) in an amount not exceeding 5% of the value of the
Fund's total assets (not including the amount borrowed for this purpose).
OTHER INVESTMENT PRACTICES
The Fund may engage in the following additional investment practices, each
of which may involve certain special risks.
LEVERAGE
The Fund expects to utilize leverage through bank borrowings or other
transactions involving debt or through the issuance of preferred stock. The Fund
intends to utilize leverage in an initial amount equal to approximately 25% of
its total assets, but it may utilize leverage in an amount up to 33-1/3% of its
total assets (in each case including the amount obtained through leverage). The
Fund will not utilize leverage if it anticipates that the Fund's leveraged
capital structure would result in a lower return to Shareholders than that
obtainable over time with an unleveraged capital structure. The Fund also may
borrow an additional 5% of its total assets for temporary purposes, including
the payment of dividends and the settlement of securities transactions which
otherwise may require untimely dispositions of Fund securities. The Fund may
borrow from affiliates of Mitchell Hutchins, provided that the terms of such
borrowings are no less favorable than those available from comparable sources of
funds in the marketplace.
The Fund may borrow through dollar rolls and reverse repurchase
transactions. In a dollar roll, the Fund sells mortgage-backed or other
securities for delivery on the next regular settlement date and, simultaneously,
15
<PAGE>
contracts to purchase substantially identical securities for delivery on a later
settlement date. In a reverse repurchase agreement, the Fund sells securities to
a bank or dealer and agrees to repurchase them on demand or on a specified
future date and at a specified price.
......Leverage creates an opportunity for increased income and capital
appreciation for the Shareholders but, at the same time, creates special risks.
The concept of leveraging is based on the premise that the cost of the assets to
be obtained from leverage will be based on short-term rates which normally will
be lower than the return earned by the Fund on its longer-term portfolio
investments. Since the total assets of the Fund (including the assets obtained
from leverage) are expected to be invested in the higher-yielding portfolio
investments or portfolio investments with the potential for capital
appreciation, Shareholders would be the beneficiaries of the incremental return.
Should the differential between the underlying assets and cost of leverage
narrow, the incremental benefit will be reduced. Furthermore, if long-term rates
rise, the net asset value of the Shares will reflect the resulting decline in
the value of portfolio holdings.
Leveraging exaggerates changes in the value and in the yield on the Fund's
portfolio. This, in turn, may result in greater volatility of net asset value
and market price of the Shares. It also increases the risk that fluctuations in
interest rates on borrowings and short-term debt or in the dividend rates on any
preferred stock may adversely affect the return to the Shareholders. To the
extent the income or capital appreciation derived from securities purchased with
funds received from leverage exceeds the cost of leverage, the Fund's return
will be greater than if leverage had not been used. Conversely, if the income or
capital appreciation from the securities purchased with such funds is not
sufficient to cover the cost of leverage, the return on the Fund will be less
than if leverage had not been used, and therefore the amount available for
distribution to Shareholders as dividends and other distributions will be
reduced. Nevertheless, Mitchell Hutchins may determine to maintain the Fund's
leveraged position if it deems such action to be appropriate under the
circumstances. As discussed under "Management of the Fund," the investment
advisory and administrative fee paid to Mitchell Hutchins will be calculated on
the basis of the Fund's assets, including proceeds of leverage from borrowings
or the issuance of preferred stock.
Assuming the utilization of leverage by borrowings in the amount of
approximately 25% of the Fund's total assets (including the amount borrowed),
and an annual interest rate of [____%] payable on such leverage based on market
rates as of the date of this Prospectus, the annual return that the Fund's
portfolio must experience (net of expenses) in order to cover those interest
payments would be [_____%].
The following table is designed to illustrate the effect on the return to
a Shareholder of the leverage obtained by borrowings in the amount of
approximately 25% of the Fund's total assets, assuming hypothetical annual
returns (net of expenses) of the Fund's portfolio of minus 10% to plus 10%. As
the table shows, the leverage generally increases the return to Shareholders
when portfolio return is positive and greater than the cost of leverage and
decreases the return when the portfolio return is negative or less than the cost
of leverage. The figures appearing in the table are hypothetical and actual
returns may be greater or less than those appearing in the table.
Assumed Portfolio Return (net of expenses) (10)% (5) 0 % 5% 10%
Corresponding Share Return (__)% (__)% (__)% __% __%
Until the Fund borrows or issues preferred stock, the Fund's Shares will
not be leveraged, and the risks and special considerations related to leverage
described in this Prospectus will not apply. Such leveraging of the Shares
cannot be fully achieved until the proceeds resulting from the use of leverage
have been invested in longer-term debt instruments in accordance with the Fund's
investment objectives and policies.
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<PAGE>
FORWARD COMMITMENTS
The Fund may make contracts to purchase securities for a fixed price at a
future date beyond customary settlement time ("forward commitments") if it
holds, and maintains until the settlement date in a segregated account, cash or
liquid securities in an amount sufficient to meet the purchase price, or if it
enters into offsetting contracts for the forward sale of other securities it
owns. Forward commitments involve a risk of loss if the value of the security to
be purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in value of the Fund's other assets. Where such purchases
are made through dealers, the Fund relies on the dealer to consummate the sale.
The dealer's failure to do so may result in the loss to the Fund of an
advantageous yield or price. Although the Fund will generally enter into forward
commitments with the intention of acquiring portfolio securities, the Fund may
dispose of a commitment prior to settlement if Mitchell Hutchins deems it
appropriate to do so. The Fund may realize short-term capital gains or losses
upon the sale of forward commitments.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements. Repurchase agreements are
transactions in which the Fund purchases securities from a bank or recognized
securities dealer and simultaneously commits to resell the securities to the
bank or dealer at an agreed-upon date or on demand and at a price reflecting a
market rate of interest unrelated to the coupon rate or maturity of the
purchased securities. Although repurchase agreements carry certain risks not
associated with direct investments in securities, including possible decline in
the market value of the underlying securities and delays and costs to the Fund
if the other party to the repurchase agreement becomes bankrupt, the Fund
intends to enter into repurchase agreements only with banks and dealers in
transactions believed by Mitchell Hutchins to present minimum credit risks in
accordance with guidelines established by the Fund's Board of Directors.
ILLIQUID SECURITIES
Some or all of the securities in which the Fund will invest may, when
purchased, be illiquid or may subsequently become illiquid. The term "illiquid
securities" for this purpose means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the amount at
which the Fund has valued the securities and includes, among other things,
purchased over-the-counter ("OTC") options, repurchase agreements maturing in
more than seven days, certain loan participations and assignments, and
restricted securities other than those Mitchell Hutchins has determined are
liquid pursuant to guidelines established by the Fund's Board of Directors. To
the extent the Fund invests in illiquid securities, the Fund may not be able to
readily liquidate such investments, and would have to sell other investments if
necessary to raise cash to meet its obligations.
In making day-to-day determinations of liquidity pursuant to guidelines
approved by the Board, Mitchell Hutchins will take into account a number of
factors in reaching liquidity decisions, including (1) the frequency of trades
for the security, (2) the number of dealers that make quotes for the security,
(3) the number of dealers that have undertaken to make a market in the security,
(4) the number of other potential purchasers for the security and (5) the nature
of the security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). Mitchell
Hutchins will monitor the liquidity of restricted securities in the Fund's
portfolio and report periodically on such decisions to the Board of Directors.
HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS
The Fund may attempt to reduce the overall risk of its investments (hedge)
by using options, futures contracts, options on futures contracts, forward
currency contracts and interest rate swap transactions and may use options (both
exchange-traded and OTC), futures contracts, options on futures contracts and
forward currency contracts to attempt to enhance income or to realize gains. The
Fund's ability to use these derivative instruments may be limited by market
conditions, regulatory limits and tax considerations. The SAI contains further
information on these derivative instruments.
17
<PAGE>
The Fund may enter into forward currency contracts, buy and sell foreign
currency, debt and equity security index and interest rate futures contracts,
write covered put and call options and buy and sell put and call options on
securities, debt and equity security indices, foreign currencies and such
futures contracts. The Fund may enter into options, futures, forward currency
contracts and interest rate swap transactions that approximate (but do not
exceed) the full value of its portfolio, at which point up to 100% of the Fund's
portfolio assets would be subject to the risks associated with the use of these
instruments.
The Fund may enter into interest rate swap transactions, including
interest rate swaps and interest rate caps, floors and collars, for hedging or
other risk management purposes. For example, the Fund may enter into interest
rate swap transactions to preserve a return or spread on a particular investment
or portion of its portfolio or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. The Fund will enter
into interest rate swap transactions only with banks and recognized securities
dealers believed by Mitchell Hutchins to present minimal credit risks in
accordance with guidelines established by the Fund's Board of Directors.
The Fund might not employ any of the derivative instruments or strategies
described above, and there can be no assurance that any derivative instrument or
strategy used will succeed. If Mitchell Hutchins incorrectly forecasts interest
rates, currency exchange rates, market values or other economic factors in
utilizing a derivative instrument for the Fund, the Fund might have been in a
better position had it not hedged at all. The use of these derivative
instruments and strategies involves certain special risks, including (1) the
fact that skills needed to use these derivative instruments are different from
those needed to select the Fund's securities, (2) possible imperfect
correlation, or even no correlation, between price movements of these derivative
instruments and price movements of the investments being hedged, (3) the fact
that, while derivative instruments and strategies can reduce the risk of loss,
they can also reduce the opportunity for gain, or even result in losses, by
offsetting favorable price movements in hedged investments and (4) the possible
inability of the Fund to purchase or sell a portfolio security at a time that
otherwise would be favorable for it to do so, or the possible need for the Fund
to sell a portfolio security at a disadvantageous time, due to the need for the
Fund to maintain "cover" or to segregate securities in connection with
derivative instruments and the possible inability of the Fund to close out or to
liquidate its hedged position.
New financial products and risk management techniques continue to be
developed. The Fund may use these instruments and techniques to the extent
consistent with its investment objectives and regulatory and federal tax
considerations.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase debt securities on a "when-issued" basis or may
purchase or sell debt securities on a "delayed delivery" basis, i.e., for
issuance or delivery to the Fund later than the normal settlement date for such
securities at a stated price and yield. The Fund generally would not pay for
such securities or start earning interest on them until they are received.
However, when the Fund undertakes a when-issued or delayed delivery obligation,
it immediately assumes the risks of ownership, including the risk of price
fluctuation. When the Fund agrees to purchase securities on a when-issued or
delayed delivery basis, its custodian will set aside in a segregated account
cash or liquid securities, marked-to-market daily, in an amount at least equal
to the amount of the commitment. Failure of the issuer to deliver a security
purchased by the Fund on a when-issued or delayed delivery basis may result in
the Fund's incurring a loss or missing an opportunity to make an alternative
investment. Depending on market conditions, the Fund's when-issued and delayed
delivery purchase commitments could cause its net asset value per share to be
more volatile, because such securities may increase the amount by which the
Fund's total assets, including the value of when-issued and delayed delivery
securities held by the Fund, exceed its net assets.
LENDING OF PORTFOLIO SECURITIES
The Fund is authorized to lend up to 33 1/3% of its total assets to
broker-dealers or institutional investors that Mitchell Hutchins deems
qualified, but only when the borrower maintains acceptable collateral with the
Fund's custodian bank in an amount, marked to market daily, at least equal to
the market value of the securities loaned, plus accrued interest and dividends.
Acceptable collateral is limited to cash, U.S. government securities and
irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. Each Fund may reinvest any cash collateral in money market
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investments or other short-term liquid investments. In determining whether to
lend securities to a particular broker-dealer or institutional investor,
Mitchell Hutchins will consider, and during the period of the loan will monitor,
all relevant facts and circumstances, including the creditworthiness of the
borrower. The Fund will retain authority to terminate any of its loans at any
time. The Fund may pay reasonable fees in connection with a loan and may pay the
borrower or placing broker a negotiated portion of the interest earned on the
reinvestment of cash held as collateral. The Fund will receive amounts
equivalent to any dividends, interest or other distributions on the securities
loaned. The Fund will regain record ownership of loaned securities to exercise
beneficial rights, such as voting and subscription rights, when regaining such
rights is considered to be in the Fund's interest.
Pursuant to procedures adopted by the Fund's Board of Directors governing
the Fund's securities lending program, PaineWebber has been retained to serve as
lending agent for the Fund. The Board has also authorized the payment of fees
(including fees calculated as a percentage of invested cash collateral) to
PaineWebber for these services. The Board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate may vary from year to year and will not
be a limiting factor when Mitchell Hutchins deems portfolio changes appropriate.
Higher portfolio turnover will result in higher Fund expenses, including
brokerage commissions, dealer mark-ups and other transaction costs on the sale
of securities and on reinvestment in other securities. The portfolio turnover
rate is calculated by dividing the lesser of the Fund's annual sales or
purchases of portfolio securities (exclusive of purchases or sales of securities
whose maturities at the time of acquisition were one year or less) by the
monthly average value of the long-term securities in the portfolio during the
year.
SPECIAL CONSIDERATIONS AND RISK FACTORS
CERTAIN RISKS ASSOCIATED WITH INVESTMENTS IN LOWER-RATED SECURITIES.
Investors should carefully consider their ability to assume the risks of owning
shares of an investment company that invests in lower-rated income securities
before making an investment in the Fund. Most of the securities in which the
Fund will invest are considered to be below investment grade. There is a greater
possibility that adverse changes in the financial condition of the issuer, or in
general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest and
principal. The inability (or perceived inability) of issuers to make timely
payment of interest and principal would likely make the values of securities
held by the Fund more volatile and could limit the Fund's ability to sell its
securities at prices approximating the values the Fund had placed on such
securities. In the absence of a liquid trading market for securities held by it,
the Fund may find it more difficult at times to establish the fair market value
of such securities.
The Fund may invest in securities that are rated Ca or lower by Moody's,
CC or lower by S&P, comparably rated by another Rating Agency or, if unrated,
are determined to be of equivalent quality by Mitchell Hutchins. The Fund also
may invest up to 15% of its total assets in securities that are rated as low as
D by S&P, which are securities in payment default. Moody's and S&P's
descriptions of securities in the lower rating categories, including their
speculative characteristics, are set forth in the Appendix. Investment in these
securities is extremely speculative and involves significant risk. These
securities frequently do not produce income while they are outstanding and may
require the Fund to bear certain extraordinary expenses in order to protect and
recover its investment. Therefore, to the extent the Fund pursues its secondary
investment objective of capital appreciation through investment in these
securities, the Fund's ability to achieve current income for its Shareholders
may be diminished.
The Fund will also be subject to significant uncertainty as to when and in
what manner and for what value the obligations evidenced by securities of
bankrupt issuers will eventually be satisfied (E.G., through a liquidation of
the obligor's assets, an exchange offer or plan of reorganization involving
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these securities or a payment of some amount in satisfaction of the obligation).
If the Fund participates in negotiations with respect to any exchange offer or
plan of reorganization with respect to the issuer of these securities, the Fund
may be restricted from disposing of the securities that it holds until the
exchange offer or reorganization is completed. In addition, even if an exchange
offer is made or plan of reorganization is adopted with respect to the
securities held by the Fund, there can be no assurance that the securities or
other assets received by the Fund in connection with such exchange offer or plan
of reorganization will not have a lower value or income potential than may have
been anticipated when the investment was made. Moreover, any securities received
by the Fund upon completion of an exchange offer or plan of reorganization may
be restricted as to resale.
Securities ratings are based largely on the issuer's historical financial
condition and the Rating Agencies' analysis at the time of rating. Securities
ratings are not a guarantee of quality and may be lowered after the Fund has
acquired the security. Also, Rating Agencies may fail to make timely changes in
credit ratings in response to subsequent events. Consequently, the rating
assigned to any particular security is not necessarily a reflection of the
issuer's current financial condition, which may be better or worse than the
rating would indicate. The rating assigned to a security by Moody's or S&P does
not reflect an assessment of the volatility of the security's market value or of
the liquidity of an investment in the security.
Changes by Rating Agencies in their ratings of any income security and in
the ability of an issuer to make payments of interest and principal may also
affect the value of these investments. Changes in the value of portfolio
securities generally will not affect cash income derived from such securities,
but will affect the Fund's net asset value. The Fund will not necessarily
dispose of a security when its rating is reduced below the rating at the time of
purchase, although Mitchell Hutchins will monitor all investments to determine
whether continued investment is consistent with the Fund's investment objective.
Because of the greater number of investment considerations involved in investing
in lower-rated income securities, the achievement of the Fund's investment
objectives will depend more on Mitchell Hutchins' analytical abilities than
would be the case if it were investing primarily in securities in the higher
rating categories.
Like higher-rated income securities, lower-rated income securities
generally are purchased and sold through dealers who make a market in such
securities for their own accounts. However, there are fewer dealers in the
lower-rated income securities market, which market may be less liquid than the
market for higher-rated income securities, even under normal economic
conditions. As a result, during periods of high demand in the lower-rated
securities market, it may be difficult to acquire lower-rated securities
appropriate for investment by the Fund. Adverse economic conditions and investor
perceptions thereof (whether or not based on economic reality) may impair
liquidity in the lower-rated securities market and may cause the prices the Fund
receives for its lower-rated income securities to be reduced. In addition, the
Fund may experience difficulty in liquidating a portion of its portfolio when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event such as deterioration in the creditworthiness of the issuers.
Under such conditions, judgment may play a greater role in valuing certain of
the Fund's portfolio instruments than in the case of instruments trading in a
more liquid market. In addition, the Fund may incur additional expense to the
extent that it is required to seek recovery upon a default on a portfolio
holding or to participate in the restructuring of the obligation. See
"Investment Objectives and Policies."
The values of lower-rated income securities, like those of other income
securities, generally fluctuate in response to changes in interest rates. Thus,
a decrease in interest rates will generally result in an increase in the value
of such securities. Conversely, during periods of rising interest rates, the
value of such securities will generally decline. These fluctuations can be
expected to be greater with respect to investments in income securities with
longer maturities than investments in securities with shorter maturities. The
secondary market prices of lower-rated income securities are often affected to a
lesser extent by changes in interest rates and to a greater extent by changes in
general economic conditions and business conditions affecting the issuers of
such securities and their respective industries. Negative publicity or investor
perceptions may also adversely affect the values of lower-rated income
securities.
Under adverse market or economic conditions or in the event of adverse
changes in the financial condition of the issuer, the Fund could find it more
difficult to sell lower-rated income securities when Mitchell Hutchins believes
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it advisable to do so or may be able to sell such securities only at prices
lower than if such securities were more widely held. In the event of a default
of such securities, in order to enforce its rights, the Fund may be required to
take possession of and manage assets securing the issuer's obligations on such
securities, which may increase the Fund's operating expenses and adversely
affect the Fund's net asset value. The Fund may also be limited in its ability
to enforce its rights and may incur greater costs in enforcing its rights in the
event an issuer becomes the subject of bankruptcy proceedings.
The market for lower-rated income securities generally is thinner and less
active than that for higher quality securities. This may limit the Fund's
ability to sell such securities at fair value in response to changes in the
economy or the financial markets. Also, during periods of high demand in the
lower-rated securities market, it may be difficult to acquire lower-rated
securities appropriate for investment by the Fund. Adverse economic conditions
or publicity, as well as investor perceptions (whether or not based on economic
reality), may decrease the values and impair the liquidity of lower-rated
securities, especially in a thinly traded market.
Some or all of the securities in which the Fund will invest may, when
purchased, be illiquid or may subsequently become illiquid. The Fund may not be
able readily to dispose of such securities at an amount that approximates that
at which the Fund has valued them and would have to sell other investments if
necessary to raise cash to meet its obligations. In many cases, lower-rated
income securities may be purchased in private placements and, accordingly, will
be subject to restrictions on resale as a matter of contract or under the
securities laws. It may be more difficult to determine the fair value of such
securities for purposes of computing the Fund's net asset value. Although
Mitchell Hutchins attempts to minimize the speculative risks associated with
investments in such securities through diversification, credit analysis and
attention to current trends in interest rates and other factors, investors
should carefully review the investment objectives and policies of the Fund and
consider their ability to assume the investment risks involved before making an
investment.
FOREIGN INVESTMENTS. Investments in foreign securities involve risks
relating to political and economic developments abroad, as well as those that
result from the differences between the regulations to which U.S. and foreign
issuers are subject. These risks may include expropriation, confiscatory
taxation, withholding taxes on interest, limitations on the use or transfer of
Fund assets, difficulty in obtaining or enforcing a court judgment abroad,
restrictions on the exchange of currencies and political or social instability
or diplomatic developments. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Securities of many foreign
issuers may be less liquid and their prices more volatile than those of
securities of comparable U.S. issuers. The costs attributable to foreign
investing that the Fund must bear frequently are also higher than those
attributable to domestic investing. Transactions in foreign securities may be
subject to less efficient settlement practices, including extended clearance and
settlement periods.
In general, less information may be available about foreign companies than
about U.S. companies, and foreign companies are generally not subject to the
same accounting, auditing and financial reporting standards as are U.S.
companies. Foreign securities markets may be less liquid and subject to less
regulation than the U.S. securities markets. The costs of investing outside the
United States frequently are higher than those in the United States. These costs
include relatively higher brokerage commissions and foreign custody expenses.
Investments in foreign government bonds involve special risks. The issuer
of the bond or the governmental authorities that control the repayment of the
bond may be unable or unwilling to pay interest and repay principal when due in
accordance with the terms of the bond, and the Fund may have limited legal
recourse in the event of a default. Political considerations, especially a
sovereign entity's willingness to meet the terms of its debt obligations, are of
considerable importance.
Investing in securities of companies located in emerging markets involves
additional risk. These countries typically have economic and political systems
that are relatively less mature, and can be expected to be less stable, than
those of developed countries. Emerging market countries may have policies that
restrict investment by foreigners in those countries, and there is a risk of
government expropriation or nationalization of private property. The possibility
of low of non-existent trading volume in the securities of companies in emerging
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markets may also result in a lack of liquidity and in price volatility. Issuers
in emerging markets typically are subject to a greater degree of change in
earnings and business prospects than are companies in developed markets.
Currency risk is the risk that changes in foreign exchange rates may
reduce the U.S. dollar value of the Fund's foreign investments. The Fund's share
value may change significantly when investments are denominated in foreign
currencies. Generally, currency exchange rates are determined by supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries. Currency exchange rates can also be affected by the
intervention of the U.S. and foreign governments or central banks, the
imposition of currency controls, speculation or other political or economic
developments inside and outside the United States.
Although Mitchell Hutchins will attempt to minimize the speculative risks
associated with investments in foreign securities through diversification,
credit analysis and attention to current trends in interest rates and other
factors, investors should carefully review the investment objectives and
policies of the Fund and consider their ability to assume the investment risks
involved before making an investment.
CERTAIN RISKS ASSOCIATED WITH ORIGINAL ISSUE DISCOUNT, ZERO COUPON AND
PAYMENT-IN-KIND SECURITIES. The Fund may invest in discount securities,
including zero coupon securities, securities issued with original issue discount
("OID") and payment-in-kind ("PIK") securities. Zero coupon securities pay no
interest to holders prior to maturity. When a zero coupon security is held to
maturity, its entire investment return comes from the difference between its
purchase price and its maturity value. PIK securities may pay interest either in
cash or in the form of additional securities. However, the portion of the
original issue discount that accrues each year on OID and zero coupon
securities, and the "interest" on PIK securities, must be included in the Fund's
income annually. Accordingly, to continue to qualify for tax treatment as a
regulated investment company and to avoid an excise tax (see "Taxation"), the
Fund may be required to distribute as dividends amounts that are greater than
the total amount of cash it actually receives. These distributions must be made
from the Fund's cash assets or, if necessary, from the proceeds of sales of
portfolio securities. The Fund will not be able to purchase additional
income-producing securities with cash used to make such distributions, and its
current income ultimately may be reduced as a result. Zero coupon and
payment-in-kind securities usually trade at a substantial discount from their
face or par value and will be subject to greater fluctuations of market value in
response to changing interest rates than debt obligations of comparable
maturities that make current distributions of interest in cash. Because the Fund
must include the return on zero coupon and PIK securities as taxable income, the
Fund considers these securities to be income-producing for purposes of the
requirement that at least 65% of total assets that it invests in lower-rated
income securities.
CERTAIN RISKS ASSOCIATED WITH CALL FEATURES. A substantial portion of the
securities held by the Fund may permit the issuer at its option to "call," or
redeem, its securities prior to maturity. If an issuer were to redeem securities
held by the Fund during a time of declining interest rates, the Fund would not
likely be able to reinvest the proceeds in securities of comparable quality
providing the same investment return as the securities redeemed. The existence
of a call feature may limit the potential for such a security to increase in
value during periods of declining interest rates.
CERTAIN RISKS ASSOCIATED WITH PREMIUM SECURITIES. The Fund may invest a
substantial portion of its assets in securities bearing coupon rates higher than
prevailing market rates. Such "premium" securities are typically purchased at
prices greater than the principal amounts payable on maturity. As a result, the
purchase of such securities provides the Fund a higher level of investment
income distributable to Shareholders on a current basis than if the Fund
purchased securities bearing current market rates of interest. If such premium
securities are called or sold prior to maturity, the Fund may recognize a
capital loss to the extent the call or sale price is less than the purchase
price. Additionally, the Fund will recognize a capital loss if it holds such
securities to maturity.
CERTAIN RISKS ASSOCIATED WITH MORTGAGE-BACKED SECURITIES. The yield
characteristics of mortgage- and asset-backed securities differ from those of
traditional bonds. Among the major differences are that interest and principal
payments are made more frequently (usually monthly) and that principal may be
prepaid at any time because the underlying mortgage loans or other assets
generally may be prepaid at any time. Generally, prepayments on fixed-rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Mortgage- and asset-backed
securities may also decrease in value as a result of increases in interest rates
and, because of prepayments, may benefit less than other bonds from declining
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interest rates. Reinvestments of prepayments may occur at lower interest rates
than the original investment, thus adversely affecting a Fund's yield. Actual
prepayment experience may cause the yield of a mortgage-backed security to
differ from what was assumed when the Fund purchased the security. Prepayments
at a slower rate than expected may lengthen the effective life of a
mortgage-backed security. The value of securities with longer effective lives
generally fluctuates more widely in response to changes in interest rates than
the value of securities with shorter effective lives.
The market for privately issued mortgage- and asset-backed securities is
smaller and less liquid than the market for U.S. government mortgage-backed
securities. CMO classes may be specially structured in a manner that provides
any of a wide variety of investment characteristics, such as yield, effective
maturity and interest rate sensitivity. As market conditions change, however,
and especially during periods of rapid or unanticipated changes in market
interest rates, the attractiveness of some CMO classes and the ability of the
structure to provide the anticipated investment characteristics may be
significantly reduced. These changes can result in volatility in the market
value, and in some instances reduced liquidity, of the CMO class. Inverse
floating rate CMO classes may be extremely volatile. These classes pay interest
at a rate that decreases when a specified index of market rates increases.
During 1994, the value and liquidity of many mortgage-backed securities
declined sharply due primarily to increases in interest rates. There can be no
assurance that such declines will not recur. The market value of certain
mortgage-backed securities can be extremely volatile and these securities may
become illiquid. Mitchell Hutchins seeks to manage the Fund's investments in
mortgage-backed securities so that the volatility of the Fund's portfolio, taken
as a whole, is consistent with the Fund's investment objective. If market
interest rates or other factors that affect the volatility of securities held by
a Fund change in ways that Mitchell Hutchins does not anticipate, the Fund's
ability to meet its investment objectives may be reduced.
HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS. The use of
options, futures contracts, options on futures contracts, forward currency
contracts and interest rate swap transactions also entails special risks. See
"Other Investment Practices--Hedging and Other Strategies Using Derivative
Instruments" and, in the SAI, "Hedging and Other Strategies Using Derivative
Instruments."
ANTI-TAKEOVER PROVISIONS. The Fund's Articles of Incorporation contain
provisions limiting (1) the ability of other entities or persons to acquire
control of the Fund, (2) the Fund's freedom to engage in certain transactions
and (3) the ability of the Fund's directors or Shareholders to amend the
Articles of Incorporation. These provisions of the Articles of Incorporation may
be regarded as "anti-takeover" provisions. These provisions could have the
effect of depriving the Shareholders of opportunities to sell their shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund in a tender offer or similar transaction. The
overall effect of these provisions is to render more difficult the
accomplishment of a merger or the assumption of control by a Shareholder who
owns beneficially more than 5% of the Shares. They provide, however, the
advantage of potentially requiring persons seeking control of the Fund to
negotiate with its management regarding the price to be paid and facilitating
the continuity of the Fund's management, investment objectives and policies. See
"Description of Capital Stock-- Certain Anti-Takeover Provisions of the Articles
of Incorporation."
MARKET PRICE AND NET ASSET VALUE OF SHARES. Shares of closed-end
investment companies frequently trade at a discount to their net asset values.
The risk of loss associated with this characteristic of closed-end investment
companies may be greater for investors purchasing Shares in the initial public
offering and expecting to sell the Shares soon after the completion thereof.
Whether an investor will realize gains or losses upon the sale Shares will not
depend directly upon changes in the Fund's net asset value, but will depend upon
whether the market price of the Shares at the time of sale is above or below the
investor's purchase price for the Shares. This market risk is separate and
distinct from the risk that the Fund's net asset value may decrease. The market
price of Shares is determined by such factors as relative demand for and supply
of such shares in the market, general market and economic conditions, changes in
the Fund's net asset value and other factors beyond the control of the Fund.
Accordingly, the Shares are designed primarily for long-term investors, and
investors in the Shares should not view the Fund as a vehicle for trading
purposes.
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YEAR 2000 RISK. Like other investment companies, financial and business
organizations and individuals around the world, the Fund could be adversely
affected if the computer systems used by Mitchell Hutchins and the Fund's other
service providers and entities with computer systems that are linked to Fund
records do not properly process and calculate date-related information and data
from and after January 1, 2000. This is commonly known as the "Year 2000 Issue."
Mitchell Hutchins is taking steps to address the Year 2000 Issue with respect to
the computer systems that it uses and to obtain assurances that comparable steps
are being taken by each of the Fund's other major service providers. However,
there can be no assurance that these steps will be sufficient to avoid any
adverse impact on the Fund.
MANAGEMENT OF THE FUND
The overall management of the business and affairs of the Fund is vested
with its Board of Directors. The Board of Directors approves all significant
agreements between the Fund and persons or companies furnishing services to it,
including the Fund's agreements with its investment adviser and administrator,
custodian and transfer and dividend disbursing agent and registrar. The
day-to-day operations of the Fund have been delegated to its officers and to
Mitchell Hutchins, subject to the Fund's investment objectives and policies and
to general supervision by the Board of Directors.
Subject to the supervision of the Fund's Board of Directors, investment
advisory and administration services will be provided to the Fund by Mitchell
Hutchins pursuant to an Investment Advisory and Administration Contract dated
June ___, 1998 ("Advisory Contract"). Mitchell Hutchins' principal business
address is 1285 Avenue of the Americas, New York, New York 10019. Mitchell
Hutchins is a wholly owned asset management subsidiary of PaineWebber, which is
a wholly owned subsidiary of Paine Webber Group Inc., a publicly held financial
services holding company. Mitchell Hutchins provides investment advisory and
portfolio management services to investment companies, pension funds and other
institutional, corporate and individual clients. As of April 30, 1998, Mitchell
Hutchins served as investment adviser or sub-adviser to __ registered investment
companies with __ separate portfolios having aggregate assets of approximately
$____ billion. Of such amount, approximately $____ billion were invested in
lower rated income-producing debt securities and related equity securities.
Pursuant to the Advisory Contract, Mitchell Hutchins provides a continuous
investment program for the Fund and makes investment decisions and places orders
to buy, sell or hold particular securities. Mitchell Hutchins also supervises
all matters relating to the operation of the Fund and obtains for it corporate
officers, clerical staff, office space, equipment and services. As compensation
for its services, Mitchell Hutchins receives a fee, computed weekly and paid
monthly, in an amount equal to the annual rate of 0.90% of the Fund's average
weekly total assets minus the sum of accrued liabilities other than the
aggregate indebtedness constituting financial leverage ("Managed Assets"). This
fee is higher than fees paid by other comparable investment companies. During
periods in which the Fund is utilizing leverage, the investment advisory and
administrative fee payable to Mitchell Hutchins will be higher than if the Fund
did not utilize a leveraged capital structure because the fee is calculated as a
percentage of the Fund's Managed Assets, including those purchased with
leverage.
The Fund will incur various other expenses in its operations, such as
custody and transfer agency fees, brokerage commissions, professional fees,
expenses of board and stockholder meetings, fees and expenses relating to
registration of the Shares, taxes and governmental fees, fees and expenses of
the directors, costs of obtaining insurance, expenses of printing and
distributing stockholder materials, organizational expenses and extraordinary
expenses, including costs or losses in any litigation.
In accordance with procedures adopted by the Fund's Board of Directors,
brokerage transactions for the Fund may be conducted through PaineWebber or its
affiliates and the Fund may pay fees to PaineWebber for its services as lending
agent in the Fund's portfolio securities lending program. Mitchell Hutchins
investment personnel may engage in securities transactions for their own
accounts pursuant to a code of ethics that establishes procedures for personal
investing and restricts certain transactions.
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Under the direction of the portfolio manager, Mitchell Hutchins' team of
analysts will select individual securities for the Fund. Each analyst has
developed expertise in a particular market segment and will work alongside of
the same analysts who select stocks for the array of equity mutual funds managed
by Mitchell Hutchins. The same management team is responsible for PaineWebber
High Income Fund, Managed High Yield Fund Inc. and the offshore PaineWebber High
Income Fund, which together represent approximately $795 million in assets, and
for the lower-rated securities portion of PaineWebber Strategic Income Fund,
which represents approximately $47 million in assets.
Thomas J. Libassi will be responsible for the day-to-day management of
the Fund's portfolio. Mr. Libassi is a senior vice president of Mitchell
Hutchins and has been employed by Mitchell Hutchins since May 1994. Mr.
Libassi has more than 12 years of experience in strategic analysis and
portfolio management. During the eight years prior to May 1994, Mr. Libassi
was employed by Keystone Custodian Funds Inc. as a vice president with
portfolio management responsibility.
Other members of the management team include Jennifer Hutchison, Jiten
Joshi, Bradley Kane and Lori Pollack. Ms. Hutchison joined Mitchell Hutchins in
1996 as a first vice president and analyst. With 10 years of experience in the
leveraged lending markets, Ms. Hutchison covers the telecommunications,
financial services, technology and healthcare industries, as well as various
manufacturing and consumer products. Before joining Mitchell Hutchins, she spent
four years as a loan officer at Credit Lyonnais, where she focused on project
lending for hotels and real estate. Mr. Joshi joined Mitchell Hutchins as an
analyst in 1996 and is a first vice president. With more than six years of
experience analyzing high yield debt, Mr. Joshi covers the emerging markets
sector and specific industries, including paper and forest products, pay
television, energy, chemicals and textiles. Before joining Mitchell Hutchins,
Mr. Joshi spent two years as a high-yield corporate finance associate at Chase
Securities, Inc. Prior to that, he participated in a summer internship in
high-yield finance at Citicorp Securities, Inc. Mr. Kane joined Mitchell
Hutchins as an analyst in 1995 and is a vice president. Mr. Kane covers the
consumer manufacturing, entertainment, media, transportation and retail
industries, and has two and a half years of experience as a high-yield analyst.
In addition, he analyzes fund portfolios to monitor credit quality and sector
allocation. Ms. Pollack joined Mitchell Hutchins as a trader in 1993 and is a
first vice president. With a total of 19 years of trading experience, Ms.
Pollack executes bond and equity trades for the high-yield funds. Before joining
Mitchell Hutchins, she traded equities at Gordon Haskett.
Mitchell Hutchins has established a separate risk management and
performance analysis team, which seeks to ensure that the investment risk of
each of the funds it manages remains within the fund's defined parameters.
Portfolios are constructed and compared to actual monthly fund performance to
identify returns attributable to active management resulting from factors such
as security selection and sector and industry concentration. Of course, this
process will not guarantee that the Fund will achieve its investment objectives.
DIVIDENDS AND OTHER DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund intends to distribute substantially all of its net investment
income as monthly dividends. The Fund will distribute annually to its
Shareholders substantially all of its realized net capital gain (the excess of
net long-term capital gain over net short-term capital loss), realized net
short-term capital gain and realized net gains from foreign currency
transactions, if any.
The Fund anticipates that a monthly dividend may, from time to time,
represent more or less than the amount of net investment income earned by the
Fund in the period to which the dividend relates. Undistributed net investment
income will be available to supplement future dividends, which might otherwise
have been reduced by reason of a decrease in the Fund's monthly net income due
to fluctuations or expenses. Undistributed net investment income will be
reflected in the Fund's net asset value, and, accordingly, distribution thereof
will reduce the Fund's net asset value. The dividend rate on the Shares will be
adjusted from time to time by the Fund's Board of Directors and will vary as a
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result of the performance of the Fund. The Fund expects that it will commence
paying dividends within 60 days of the date of this Prospectus.
DIVIDEND REINVESTMENT PLAN
The Fund has established the Plan under which all Shareholders whose
Shares are registered in their own names, or in the name of PaineWebber (or its
nominee), have all dividends and other distributions on their Shares
automatically reinvested in additional Shares, unless such Shareholders elect to
receive cash. Shareholders may affirmatively elect to receive all dividends and
other distributions in cash paid by check mailed directly to them by PNC Bank,
National Association ("Transfer Agent"), as dividend disbursing agent.
Shareholders who hold their shares in the name of a broker or nominee other than
PaineWebber (or its nominee) should contact that broker or other nominee to
determine whether, or how, they may participate in the Plan. The ability of such
Shareholders to participate in the Plan may change if their shares of the Shares
are transferred into the name of another broker or nominee.
The Transfer Agent serves as agent for the Shareholders in administering
the Plan. After the Fund declares a dividend or determines to make any other
distribution, the Transfer Agent, as agent for the participants, receives the
cash payment. Whenever the Fund declares an income dividend or a capital gain
distribution (collectively referred to as "dividends") payable either in Shares
or in cash, non-participants in the Plan will receive cash and participants in
the Plan will receive the equivalent in Shares. [The Transfer Agent will acquire
Shares for the participants' accounts, depending upon the circumstances
described below, either (i) through receipt of additional unissued but
authorized Shares from the Fund ("newly issued shares") or (ii) by purchase of
outstanding Shares on the open market ("open-market purchases") on the NYSE or
elsewhere. If on the payment date for the dividend, the net asset value per
share is equal to or less than the market price per share plus estimated
brokerage commissions (such condition being referred to herein as "market
premium"), the Transfer Agent will invest the dividend amount in newly issued
shares on behalf of the participants. The number of newly issued shares to be
credited to each participant's account will be determined by dividing the dollar
amount of the dividend by the net asset value per share on the date the shares
are issued, provided that the maximum discount from the then current market
price per share on the date of issuance may not exceed 5%. If on the dividend
payment date the net asset value per share is greater than the market value
(such condition being referred to herein as "market discount"), the Transfer
Agent will invest the dividend amount in Shares acquired on behalf of the
participants in open market purchases.] The number of outstanding shares
purchased with each distribution for a particular Shareholder equals the result
obtained by dividing the amount of the distribution payable to that Shareholder
by the average price per share (including applicable brokerage commissions) that
the Transfer Agent was able to obtain in the open market.
[In the event of a market discount on the dividend payment date, the
Transfer Agent will have until the last business day before the next date on
which the shares trade on a "ex-dividend" basis or in no event more than 30 days
after the dividend payment date (the "last purchase date") to invest the
dividend amount in Shares acquired in open-market purchases. It is contemplated
that the Fund will pay monthly income dividends. Therefore, the period during
which open-market purchases can be made will exist only from the payment date of
the dividend through the date before the next "ex-dividend" date, which
typically will be approximately ten days. If, before the Transfer Agent has
completed its open-market purchases, the market price of a share Shares exceeds
the net asset value per share, the average per share purchase price paid by the
Transfer Agent may exceed the net asset value of the Fund's Shares, resulting in
the acquisition of fewer shares than if the dividend had been paid in newly
issued shares on the dividend payment date. Because of the foregoing difficulty
with respect to open-market purchases, the Plan provides that if the Transfer
Agent is unable to invest the full dividend amount in open-market purchases
during the purchase period or if the market discount shifts to a market premium
during the purchase period, the Transfer Agent will cease making open-market
purchases and will invest the uninvested portion of the dividend amount in newly
issued Shares at the close of business on the last purchase date.] The Transfer
Agent maintains all Shareholder accounts in the Plan and furnishes written
confirmations of all transactions in the accounts, including information needed
by Shareholders for personal and tax records. Shares in the account of each Plan
participant are held by the Transfer Agent in non-certificated form in the name
of the participant, and each Shareholder's proxy will include those Shares
purchased pursuant to the Plan.
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<PAGE>
There is no charge to participants for reinvesting dividends or other
distributions. The Transfer Agent's fees for the handling of reinvestment of
distributions are paid by the Fund. However, each participant pays a pro rata
share of brokerage commissions incurred with respect to the Transfer Agent's
open market purchases of Shares in connection with the reinvestment of
distributions.
The automatic reinvestment of dividends and other distributions in Shares
does not relieve participants of any income tax that may be payable on such
distributions. See "Taxation."
[Shareholders participating in the Plan may receive benefits not available
to Shareholders not participating in the Plan. If the market price (plus
commissions) of the Fund's Shares is above their net asset value, participants
in the Plan will receive Shares of the Fund at less than they could otherwise
purchase them and will have shares with a cash value greater than the value of
any cash distribution they would have received on their shares. If the market
price plus commissions is below the net asset value, participants will receive
distributions in Shares with a net asset value greater than the value of any
cash distribution they would have received on their Shares. However, there may
be insufficient Shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem its
Shares, the price on resale may be more or less than the net asset value.)]
A Shareholder who has elected to participate in the Plan may terminate
participation in the Plan at any time without penalty, and Shareholders who have
previously terminated participation in the Plan may rejoin it at any time.
Changes in elections must be made in writing to the Transfer Agent and should
include the Shareholder's name and address as they appear on the share
certificate or in the Transfer Agent's records. An election to terminate
participation in the Plan, until such election is changed, will be deemed to be
an election by a Shareholder to take all subsequent distributions in cash. An
election will be effective only for distributions declared and having a record
date at least ten days after the date on which the election is received.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan with
respect to any dividend or other distribution if notice of the change is sent to
Plan participants at least 30 days before the record date for such distribution.
The Plan also may be amended or terminated by the Transfer Agent by at least 30
days' written notice to all Plan participants. All correspondence concerning the
Plan should be directed to the Transfer Agent at PNC Bank, National Association,
c/o PFPC Inc., P.O. Box 8950, Wilmington, Delaware 19899.
[MUTUAL FUND INVESTMENT OPTION
Purchasers of Shares of the Fund through PaineWebber in this offering will
have an investment option consisting of the right to reinvest the net proceeds
from a sale of such shares (the "Original Shares") in Class A initial sales
charge shares of certain PaineWebber-sponsored open-end mutual funds ("Eligible
Class A Shares") at their net asset value, without the imposition of the initial
sales charge, if the conditions set forth below are satisfied. First, the sale
of the Original Shares must be made through PaineWebber, and the net proceeds
therefrom must be reinvested immediately in Eligible Class A Shares. Second, the
Original Shares much have either been acquired in this offering or be shares
representing reinvested dividends from Shares acquired in this offering. Third,
the Original Shares must have been continuously maintained in a PaineWebber
securities account. Fourth, there must be a minimum purchase of [$250] to be
eligible for the investment option.]
TAXATION
The Fund intends to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code. For each taxable year that the
Fund so qualifies, the Fund (but not its Shareholders) will be relieved of
federal income tax on that part of its investment company taxable income
(consisting generally of net investment income, net short-term capital gain and
net gains from certain foreign currency transactions) and net capital gain that
is distributed to its Shareholders.
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Dividends from the Fund's investment company taxable income (whether
received in cash or reinvested in additional Fund shares) generally are taxable
to its Shareholders as ordinary income to the extent of the Fund's earnings and
profits. Distributions of the Fund's net capital gain (whether received in cash
or reinvested in additional Fund shares) are taxable to its Shareholders as
long-term capital gain, regardless of how long they have held their Fund shares.
Under the Taxpayer Relief Act of 1997, different maximum tax rates apply to a
non-corporate taxpayer's net capital gain depending on the taxpayer's holding
period and marginal rate of federal income tax--generally, 28% for gain
recognized on capital assets held for more than one year but not more than 18
months and 20% (10% for taxpayers in the 15% marginal tax bracket) for gain
recognized on capital assets held for more than 18 months. The Fund may divide
each net capital gain distribution into a 28% rate gain distribution and a 20%
rate gain distribution (in accordance with the Fund's holding periods for the
securities it sold that generated the distributed gain) in which event its
Shareholders must treat those portions accordingly.
A participant in the Plan will be treated as having received a
distribution in the amount of the cash used to purchase Shares on his or her
behalf, including a pro rata portion of the brokerage fees incurred by the
Transfer Agent. Distributions by the Fund to its Shareholders in any year that
exceed the Fund's earnings and profits generally may be applied by each
Shareholder against his or her basis for the shares and will be taxable to any
Shareholder only to the extent the distributions to the stockholder exceed the
Shareholder's basis for his or her Shares.
An investor should be aware that, if Shares are purchased shortly before
the record date for any dividend or other distribution, the investor will pay
full price for the shares and receive some portion of the price back as a
taxable distribution. Shareholders who are not liable for tax on their income
and whose Shares are not debt-financed are not required to pay tax on dividends
or other distributions they receive from the Fund.
The Fund notifies its Shareholders following the end of each calendar year
of the amounts of dividends and capital gain distributions paid (or deemed paid)
that year. The information regarding capital gain distributions designates the
portions thereof subject to the different maximum rates of tax applicable to
taxpayer's net capital gain as indicated above.
Upon a sale [or exchange] of Shares (including a sale pursuant to a share
repurchase or tender offer by the Fund), a Shareholder generally will recognize
a taxable gain or loss equal to the difference between his or her adjusted basis
for the shares and the amount realized. Any such gain or loss (1) will be
treated as a capital gain or loss if the shares are capital assets in the
Shareholder's hands and (2) if the shares have been held for more than one year,
will be long-term capital gain or loss subject to federal income tax at the
rates indicated above, provided that any loss realized on a sale or exchange of
Shares that were held for six months or less will be treated as long-term,
rather than as short-term, capital loss to the extent of any capital gain
distributions received thereon. A loss realized on a sale or exchange of Shares
will be disallowed to the extent those shares are replaced by other Shares
within a period of 61 days beginning 30 days before and ending 30 days after the
date of disposition of the shares (which could occur, for example, as the result
of participation in the Plan). In that event, the basis of the replacement
shares will be adjusted to reflect the disallowed loss.
The Fund may acquire zero coupon or other securities issued with original
issue discount. As a holder of such securities, the Fund must include in its
gross income the original issue discount that accrues on the securities during
the taxable year, even if it receives no corresponding payment on the securities
during the year. The Fund also must include in its gross income each year any
"interest" distributed in the form of additional securities on PIK securities.
Because the Fund annually must distribute substantially all of its investment
company taxable income, including any accrued original issue discount and other
non-cash income, to satisfy the distribution requirement imposed on RICs and to
avoid imposition of a 4% excise tax (see "Taxation" in the SAI), the Fund may be
required in a particular year to distribute as a dividend an amount that is
greater than the total amount of cash it actually receives. Those distributions
will be made from the Fund's cash assets or from the proceeds of sales of
portfolio securities, if necessary. The Fund may realize capital gains or losses
from those sales, which would increase or decrease its investment company
taxable income and/or net capital gain.
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The Fund is required to withhold 31% of all dividends, capital gain
distributions and repurchase proceeds payable to any individuals and certain
other non-corporate Shareholders who do not provide the Fund with a correct
taxpayer identification number. The Fund is also required to withhold 31% of all
dividends and capital gain distributions payable to such Shareholders who
otherwise are subject to backup withholding.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Fund and its Shareholders. See the SAI
for a further discussion. There may be other federal, state or local tax
considerations applicable to a particular investor. Prospective stockholders are
urged to consult their tax advisers.
UNDERWRITING
The underwriters named below (the "Underwriters"), acting through
[_______________] as their representative (the "Representative") have severally
agreed, subject to the terms and conditions of the Underwriting Agreement with
the Fund and Mitchell Hutchins (the "Underwriting Agreement"), to purchase from
the Fund the number of Shares set forth opposite their respective names. The
Underwriters are committed to purchase all of such shares if any are purchased.
Underwriter Number Of Shares
- ----------- ----------------
[__________________] __________
Total ==========
The Fund has granted to the Underwriters an option, exercisable for 60
days from the date of this Prospectus to purchase up to an additional ________
Shares to cover over-allotments, if any, at the initial offering price. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale Shares offered hereby. To the extent that
the Underwriters exercise this option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase an additional number of
Shares proportionate to such Underwriter's initial commitment.
As set forth in the notes to the table on the cover page of this
Prospectus, Mitchell Hutchins or an affiliate (not the Fund) from its own assets
has agreed to pay a commission to the Underwriters in the amount of $___ per
share Shares (5% of the public offering price per share) or an aggregate amount
of $___________ ($_________ assuming full exercise of the over-allotment option)
for all shares covered by this Prospectus. Such payment will be the legal
obligation of Mitchell Hutchins (or an affiliate) and made out of its own assets
and will not in any way represent an obligation of the Fund or its Shareholders.
The Representative has advised the Fund that the Underwriters may pay up to $___
per share from such payment received from Mitchell Hutchins to certain dealers
who sell the Shares. In addition, the Fund has agreed to pay the Underwriters in
the amount of [$250,000,] in partial reimbursement of their expenses.
Prior to this offering, there has been no public market for the Shares or
any other securities of the Fund. The Fund intends to apply to list its Shares
on the NYSE under the symbol "___." In order to meet the requirements for
listing the Shares on the NYSE, the Underwriters have undertaken to sell lots of
[100] or more Shares to a minimum of [2,000] beneficial holders. The minimum
investment requirement is [100] shares ($[1,500]).
The Fund and Mitchell Hutchins have each agreed to indemnify the several
Underwriters for or to contribute to the losses arising out of certain
liabilities, including liabilities under the 1933 Act, as amended.
The Fund has agreed not to offer or sell any additional Shares in the
Fund, other than as contemplated by this Prospectus, for a period of 180 days
after the date of the Underwriting Agreement without the prior written consent
of the Underwriters.
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<PAGE>
The Underwriters may take certain actions to discourage short-term trading
Shares during a period of time following the initial offering date. Included in
these actions is the withholding of the concession and other payments to dealers
in connection with Shares which were sold by such dealers and which are
repurchased for the account of the Underwriters during such period. In addition,
physical delivery of certificates representing Shares is required to transfer
ownership Shares for a certain period.
Under the terms of and subject to the conditions of the Underwriting
Agreement, the Underwriters are committed to purchase and pay for all Shares
offered hereby if any are purchased. The Underwriting Agreement provides that it
may be terminated at or prior to the closing date for the purchase of the Shares
if, in the judgment of the Representative, payment for the delivery of the
Shares is rendered impracticable or inadvisable because (1) trading in the
equity securities of the Fund is suspended by the SEC, by an exchange that lists
the Shares, or by the National Association of Securities Dealers Automated
Quotation National Market System, (2) additional material governmental
restrictions, not in force on the date of the Underwriting Agreement, have been
imposed upon trading in securities generally or trading in securities generally
has been suspended on any U.S. securities exchange, or a general banking
moratorium has been established by Federal or New York authorities, or (3) any
outbreak or material escalation of hostilities or other calamity or crisis
occurs, the effect of which is such as to make it impracticable to market any or
all of the Shares. The Underwriting Agreement also may be terminated if any of
the conditions specified in the Underwriting Agreement have not been fulfilled
when and as required by such agreement.
The Fund anticipates that the Representative and certain other
Underwriters may from time to time act as brokers or dealers in connection with
the execution of its portfolio transactions after they have ceased to be
Underwriters and, subject to certain restrictions, may act as such brokers while
they are Underwriters. See "Management of the Fund."
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200 million shares of capital stock, $.001
par value. The Board of Directors of the Fund is authorized to classify and
reclassify any unissued shares of capital stock from time to time by setting or
changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or terms and conditions of redemption
of such shares by the Fund. The information contained under this heading is
subject to the provisions contained in the Fund's Articles of Incorporation and
By-Laws.
SHARES
The Shares have no preemptive, conversion, exchange or redemption rights.
Each share has equal voting, dividend, distribution and liquidation rights. The
outstanding Shares are fully paid and non-assessable. Shareholders are entitled
to one vote per Share. All voting rights for the election of Directors are
non-cumulative, which means that the holders of more than 50% of the Shares can
elect 100% of the Directors then nominated for election if they choose to do so
and, in such event, the holders of the remaining Shares will not be able to
elect any Directors.
Under the rules of the NYSE applicable to listed companies, the Fund
normally will be required to hold an annual meeting of Shareholders in each
year. If the Fund is converted to an open-end investment company or if for any
other reason the Fund's shares are no longer listed on the NYSE (or any other
national securities exchange the rules of which require annual meetings of
stockholders), the Fund may decide not to hold annual meetings of Shareholders.
See "Description of Capital Stock--Share Repurchases and Tender Offers."
As of the date of this Prospectus, Mitchell Hutchins owned 100% of the
issued and outstanding Shares, and until such time as the Fund completes the
public offering of the Shares, Mitchell Hutchins will be deemed to be in control
of the Fund under the 1940 Act.
The Fund has no present intention of offering additional Shares, except as
described herein and under the Automatic Dividend Reinvestment Plan, as it may
be amended from time to time. See "Automatic Dividend Reinvestment Plan." Other
offerings of its Shares, if made, will require approval of the Fund's Board of
Directors and will be subject to the requirement of the 1940 Act that shares may
not be sold at a price below the then current net asset value, exclusive of
underwriting discounts and commissions, except, among other things, in
connection with an offering to existing Shareholders or with the consent of a
majority of the holders of the Fund's outstanding voting securities.
SHARE REPURCHASES AND TENDER OFFERS
In recognition of the possibility that the Shares might trade at a
discount from net asset value and that any such discount may not be in the best
interest of Shareholders, the Fund's Board of Directors has determined that it
will from time to time consider taking action to attempt to reduce or eliminate
any discount. To that end, the Board may, in consultation with Mitchell
Hutchins, from time to time consider action either to repurchase shares of the
Shares in the open market or to make a tender offer for shares of the Shares at
their net asset value. The Board currently intends from time to time to consider
making such open market repurchases or tender offers and at such time may
consider such factors as the market price of the Shares, the net asset value of
the Shares, the liquidity of the assets of the Fund, whether such transactions
would impair the Fund's status as a RIC or result in a failure to comply with
applicable asset coverage requirements, general economic conditions and such
other events or conditions that may have a material effect on the Fund's ability
to consummate such transactions. Under certain circumstances, it is possible
that open market repurchases or tender offers may constitute distributions under
the Internal Revenue Code to the remaining stockholders of the Fund. The Board
may at any time, however, decide that the Fund should not repurchase shares or
make a tender offer. The Fund may borrow to finance repurchases and tender
offers. Interest on such borrowings will reduce the Fund's net income. See
"Additional Information--Share Repurchases and Tenders" in the SAI.
There is no assurance that repurchases or tender offers will result in the
Shares trading at a price that is equal or close to its net asset value per
share. The market price of shares of the Shares will be determined by, among
other things, the relative demand for and supply of such shares in the market,
the Fund's investment performance, the Fund's dividends and yield and investor
perception of the Fund's overall attractiveness as an investment as compared
with other investment alternatives. Nevertheless, the fact that the Shares may
be the subject of tender offers at net asset value from time to time may reduce
the spread that might otherwise exist between the market price of the Shares and
net asset value per share. In the opinion of Mitchell Hutchins, sellers may be
less inclined to accept a significant discount if they have a reasonable
expectation of being able to recover net asset value in conjunction with a
possible tender offer.
Although the Board of Directors believes that stock repurchases and tender
offers generally would have a favorable effect on the market price of the
Shares, it should be recognized that the Fund's acquisition of shares of the
Shares would decrease the Fund's total assets and, therefore, have the effect of
increasing the Fund's expense ratio. Because of the nature of the Fund's
investment objectives, policies and portfolio, under current market conditions
Mitchell Hutchins anticipates that repurchases and tender offers generally
should not have a material, adverse effect on the Fund's investment performance
and that Mitchell Hutchins generally should not have any material difficulty in
disposing of portfolio securities in order to consummate stock repurchases and
tender offers; however, this may not always be the case.
Any tender offer made by the Fund for shares of the Shares generally would
be at a price equal to the net asset value of the shares on a date subsequent to
the Fund's receipt of all tenders. Each offer would be made, and the
Shareholders would be notified, in accordance with the requirements of the
Securities Exchange Act of 1934 and the 1940 Act, either by publication or
mailing or both. Each offering document would contain such information as is
prescribed by such laws and the rules and regulations promulgated thereunder.
Each person tendering shares would pay to the Fund's Transfer Agent a service
charge to help defray certain costs, including the processing of tender forms,
effecting payment, postage and handling. Any such service charge would be paid
directly by the tendering Shareholder and would not be deducted from the
proceeds of the purchase. The Fund's Transfer Agent would receive the fee as an
offset to these costs. The Fund expects that the costs of effecting a tender
offer would exceed the aggregate of all service charges received from those who
tender their shares. Costs associated with the tender would be charged against
capital.
Tendered Shares that have been accepted and purchased by the Fund will be
held in the Fund's treasury until retired by the Board of Directors. If tendered
shares are not retired, the Fund may hold, sell or otherwise dispose of the
shares for any lawful corporate purpose as determined by the Board.
CONVERSION TO OPEN-END INVESTMENT COMPANY
The Fund's Board of Directors will consider from time to time whether it
would be in the best interests of the Fund and its Shareholders to convert the
Fund to an open-end investment company. If the Board of Directors determines
that such a conversion would be in the best interests of the Fund and its
Shareholders and is consistent with the 1940 Act, the Board will submit to the
Fund's Shareholders, at the next succeeding annual or special meeting, a
proposal to amend the Fund's Articles of Incorporation to so convert the Fund.
Such amendment would provide that, upon its adoption by the holders of at least
a majority of the Fund's outstanding shares entitled to vote thereon, the Fund
will convert from a closed-end to an open-end investment company. If the Fund
converted to an open-end investment company, it would be able to continuously
issue and offer for sale shares of the Shares, and each such share could be
presented to the Fund at the option of the holder thereof for redemption at a
price based on the then current net asset value per share. In such event, the
Fund could be required to liquidate portfolio securities to meet requests for
redemption, the Shares would no longer be listed on the NYSE and certain
investment policies of the Fund would require amendment. The Fund would also
have to redeem any outstanding preferred stock and any indebtedness not
constituting bank loans, which could eliminate or alter the leveraged capital
structure of the Fund with respect to the Shares.
In considering whether to propose that the Fund convert to an open-end
investment company, the Board of Directors will consider various factors,
including, without limitation, the potential benefits and detriments to the Fund
and its Shareholders of conversion, the potential alternatives and the benefits
and detriments associated therewith, and the feasibility of conversion given,
among other things, the Fund's investment objectives and policies. In the event
of a conversion to an open-end investment company, the Fund may charge fees in
connection with the sale or redemption of its shares. There can be no assurance
that the Board will conclude that such a conversion is in the best interest of
the Fund or its Shareholders. As an open-end investment company, the Fund may
reserve the right to honor any request for redemption by making payment in whole
or in part in securities chosen by the Fund and valued in the same way as they
would be valued for purposes of computing the Fund's net asset value. If payment
is made in securities, a Shareholder may incur brokerage expenses in converting
these securities into cash.
CERTAIN ANTI-TAKEOVER PROVISIONS OF THE ARTICLES OF INCORPORATION
The Fund presently has provisions in its Articles of Incorporation that
have the effect of limiting (1) the ability of other entities or persons to
acquire control of the Fund, (2) the Fund's freedom to engage in certain
transactions and (3) the ability of the Fund's directors or stockholders to
amend the Articles of Incorporation. These provisions of the Articles of
Incorporation may be regarded as "anti-takeover" provisions. Under Maryland law
and the Fund's Articles of Incorporation, the affirmative vote of the holders of
at least a majority of the votes entitled to be cast is required for the
consolidation of the Fund with another corporation, a merger of the Fund with or
into another corporation (except for certain mergers in which the Fund is the
successor), a statutory share exchange in which the Fund is not the successor, a
sale or transfer of all or substantially all of the Fund's assets, the
dissolution of the Fund and any amendment to the Fund's Articles of
Incorporation. In addition, the affirmative vote of the holders of at least 66
2/3% (which is higher than that required under Maryland law or the 1940 Act) of
the outstanding shares of the Fund's capital stock is required generally to
authorize any of the following transactions or to amend the provisions of the
Articles of Incorporation relating to such transactions:
(1) merger, consolidation or statutory share exchange of the Fund with or
into any other corporation;
(2) issuance of any securities of the Fund to any person or entity for
cash;
(3) sale, lease or exchange of all or any substantial part of the assets
of the Fund to any entity or person (except assets having an aggregate market
value of less than $1,000,000); or
(4) sale, lease or exchange to the Fund, in exchange for securities of the
Fund, of any assets of any entity or person (except assets having an aggregate
fair market value of less than $1,000,000)
if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of more than 5% of the outstanding shares of
the Fund (a "Principal Shareholder"). A similar vote also would be required for
any amendment of the Articles of Incorporation to convert the Fund to an
open-end investment company by making any class of the Fund's capital stock a
"redeemable security," as that term is defined in the 1940 Act. Such vote would
not be required with respect to any of the foregoing transactions, however,
when, under certain conditions, the Board of Directors approves the transaction,
although in certain cases involving merger, consolidation or statutory share
exchange or sale of all or substantially all of the Fund's assets or the
conversion of the Fund to an open-end investment company, the affirmative vote
of the holders of a majority of the outstanding shares of the Fund's capital
stock would nevertheless be required. Reference is made to the Articles of
Incorporation of the Fund, on file with the SEC, for the full text of these
provisions.
The provisions of the Articles of Incorporation described above and the
Fund's right to repurchase or make a tender offer for its Shares could have the
effect of depriving the Shareholders of opportunities to sell their shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund in a tender offer or similar transaction. See
"Description of Capital Stock--Share Repurchases and Tender Offers." The overall
effect of these provisions is to render more difficult the accomplishment of a
merger or the assumption of control by a Principal Shareholder. They provide,
however, the advantage of potentially requiring persons seeking control of the
Fund to negotiate with its management regarding the price to be paid and
facilitating the continuity of the Fund's management, investment objectives and
policies. The Fund's Board of Directors has considered the foregoing
anti-takeover provisions and concluded that they are in the best interests of
the Fund and its Shareholders.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND REGISTRAR
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, will serve as custodian of the Fund's assets. State Street
Bank and Trust Company employs foreign sub-custodians, approved by the Fund's
Board of Directors, in accordance with applicable requirements under the 1940
Act, to provide custody of the Fund's foreign assets. PNC Bank, National
Association, whose principal business address is Broad and Chestnut Streets,
Philadelphia, Pennsylvania 19110, is the Fund's transfer and dividend disbursing
agent and registrar.
FURTHER INFORMATION
Further information concerning these securities and the Fund may be found
in the Registration Statement, of which this Prospectus and the Fund's SAI
constitute a part, on file with the SEC.
The Table of Contents for the SAI is as follows:
PAGE
Investment Policies and Restrictions
Hedging and Other Strategies Using Derivative
Instruments
Directors and Officers
Investment Advisory Arrangements
Portfolio Transactions
Net Asset Value Shares
High Yield Market Data
Taxation
Additional Information
<PAGE>
APPENDIX
DESCRIPTION OF BOND RATINGS
DESCRIPTION OF MOODY'S RATINGS FOR CORPORATE AND CONVERTIBLE BONDS:
AAA--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in the Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
BAA--Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA--Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest. Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked short-comings.
CA--Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
NOTE: Moody's applies numerical modifiers "1", "2" and "3" in each generic
rating classification from Aa to Caa. The modifier "1" indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
"2" indicates a mid-range ranking; and the modifier "3" indicates a ranking in
the lower end of its generic rating category.
DESCRIPTION OF S&P RATINGS FOR CORPORATE AND CONVERTIBLE DEBT SECURITIES:
AAA-An obligation rated "AAA" has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA-An obligation rated "AA" differs from the highest-rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A-An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB-An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated "BB", "B", "CCC", "CC", and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and C the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB-An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B-An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC-An obligation rated "CCC" is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC-An obligation rated "CC" is currently highly vulnerable to nonpayment.
C-The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
D-An obligation rated "D" is in payment default. The "D" rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or minus(-)-The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
R-This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk-such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
<PAGE>
1
DC-233432.01
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
[_______] THIS PROSPECTUS DOES NOT ________ SHARES CONSTITUTE AN OFFERING BY THE
FUND OR BY [_________] IN ANY MANAGED HIGH YIELD JURISDICTION IN WHICH SUCH
OFFERING PLUS FUND INC.
MAY NOT LAWFULLY BE MADE.
.
----------------------
--------------------------
TABLE OF CONTENTS
PROSPECTUS
PAGE __________________________
Fund Expenses.....................
Prospectus Summary................
Financial Highlights..............
The Fund..........................
The Offering......................
Use of Proceeds...................
Trading History...................
Investment Objectives and Policies
Other Investment Practices........
Special Consideration and Risk
Factors...........................
Management of the Fund............
Dividends and Other Distributions; _________, 1998
Dividend Reinvestment Plan......
Taxation..........................
Description of Capital Stock......
Custodian, Transfer and Dividend
Disbursing Agent and Registrar..
Further Information...............
Appendix..........................
Until ___, all dealers effecting transactions in the Shares, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to provide a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
- -------------------------------------------------------------------------------
(C)1998 PAINEWEBBER INCORPORATED
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED APRIL 24, 1998
MANAGED HIGH YIELD PLUS FUND INC.
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
Managed High Yield Plus Fund Inc. ("Fund") is a newly organized,
diversified, closed-end management investment company. The Fund's primary
investment objective is to seek high income. Its secondary investment objective
is capital appreciation. No assurance can be given that the Fund will be able to
achieve its investment objectives.
The Fund is offering ________ shares of common stock, par value $.001 per
share ("Shares"), thorough a group of underwriters ("Underwriters") led by
_________________________. The Underwriters have been granted an option to
purchase up to ________ additional Shares by _______, 1998, solely to cover over
allotments, if any. The Shares will be sold during the initial public offering
without any sales charges or underwriting discounts. The initial public offering
price is $15 per Share. The minimum investment in the offering is ___ Shares
($___).
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly
owned asset management subsidiary PaineWebber Incorporated, serves as investment
adviser and administrator of the Fund. This Statement of Additional Information
is not a prospectus and should be read only in conjunction with the Fund's
Prospectus, dated June ____, 1998. Capitalized terms not otherwise defined
herein have the same meanings as in the Prospectus. A copy of the Prospectus may
be obtained by calling your investment executive or by calling toll-free (800)
647-1568.
The date of this Statement of Additional Information is June ____ 1998.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Fund's investment policies and limitations.
YIELD FACTORS AND RATINGS
S&P and Moody's are private services that provide ratings of the credit
quality of debt obligations. A description of the range of ratings assigned to
debt obligations by S&P and Moody's is included in the Appendix to the
Prospectus. The Fund may use these ratings in determining whether to purchase,
sell or hold a security. It should be emphasized, however, that ratings are
general and are not absolute standards of quality. Consequently, debt
obligations with the same maturity, interest rate and rating may have different
market prices. Subsequent to its purchase by the Fund, an issue of debt
obligations may cease to be rated or its rating may be reduced below the minimum
rating required for purchase by the Fund. Mitchell Hutchins will consider such
an event in determining whether the Fund should continue to hold the obligation.
In addition to ratings assigned to individual bond issues, Mitchell
Hutchins analyzes interest rate trends and developments that may affect
individual issuers, including factors such as liquidity, profitability and asset
quality. The yields on bonds and other debt securities in which the Fund invests
are dependent on a variety of factors, including general money market
conditions, general conditions in the bond market, the financial condition of
the issuer, the size of the offering, the maturity of the obligation and its
rating. There is a wide variation in the quality of bonds, both within a
particular classification and between classifications. An issuer's obligations
under its bonds are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of bond holders or other creditors
of an issuer; litigation or other conditions may also adversely affect the power
or ability of issuers to meet their obligations for the payment of interest and
principal on their bonds.
[RED HERRING: Information contained herein is subject to completion or
amendment. A registration statement relating to these securities has been filed
with the Securities and Exchange Commission. These securities may not be sold
nor may offers to buy be accepted prior to the time te registration statement
becomes effective. This Prospectus shall not constitute an offer to sell or the
soliciation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
LEVERAGE
Capital raised through leverage will be subject to interest costs or
dividend payments which may exceed the income and appreciation on the assets
purchased. The Fund also may be required to maintain minimum average balances in
connection with borrowings or to pay a commitment or other fee to maintain a
line of credit; either of these requirements will increase the cost of borrowing
over the stated interest rate. The issuance of additional classes of preferred
stock involves offering expenses and other costs and may limit the Fund's
freedom to pay dividends on Shares or to engage in other activities. Borrowings
and the issuance of a class of preferred stock having priority over the Fund's
Shares create an opportunity for greater return per share, but at the same time
such leverage is a speculative technique in that it will increase the Fund's
exposure to capital risk. Unless the income and appreciation, if any, on assets
acquired with borrowed funds or offering proceeds exceed the cost of borrowing
or issuing additional classes of securities, the use of leverage will diminish
the investment performance of the Fund compared with what it would have been
without leverage.
Certain types of borrowings may result in the Fund being subject to
covenants in credit agreements relating to asset coverage and portfolio
composition requirements. The Fund may be subject to certain restrictions on
investments imposed by guidelines of one or more rating agencies which may issue
ratings for the corporate debt securities or preferred stock issued by the Fund.
These guidelines may impose asset coverage or portfolio composition requirements
that are more stringent than those imposed by the 1940 Act. It is not
anticipated that these covenants or guidelines will impede Mitchell Hutchins
from managing the Fund's portfolio in accordance with the Fund's investment
objectives and policies.
Under the 1940 Act, the Fund is not permitted to incur indebtedness unless
immediately after such incurrence the Fund has an asset coverage of at least
300% of the aggregate outstanding principal balance of indebtedness (i.e., such
indebtedness may not exceed 33-1/3% of the Fund's total assets). Additionally,
under the 1940 Act, the Fund may not declare any dividend or other distribution
upon any class of its capital shares, or purchase any such capital shares,
unless the aggregate indebtedness of the Fund has, at the time of the
declaration of any such dividend or distribution or at the time of any such
purchase, an asset coverage of at least 300% after deducting the amount of such
dividend, distribution, or purchase price, as the case may be. Under the 1940
Act, the Fund is not permitted to issue preferred stock unless immediately after
such issuance the net asset value of the Fund's portfolio is at least 200% of
the liquidation value of the outstanding preferred stock (i.e., such liquidation
value may not exceed 50% of the Fund's total assets). In addition, the Fund is
not permitted to declare any cash dividend or other distribution on its Shares
unless, at the time of such declaration, the net asset value of the Fund's
portfolio (determined after deducting the amount of such dividend or other
distribution) is at least 200% of such liquidation value. If preferred stock is
issued, the Fund intends, to the extent possible, to purchase or redeem
preferred stock from time to time to maintain coverage of any preferred stock of
at least 200%.
The Fund's willingness to borrow money and issue new securities for
investment purposes, and the amount the Fund will borrow or issue, will depend
on many factors, the most important of which are investment outlook, market
conditions and interest rates. Successful use of a leveraging strategy depends
on Mitchell Hutchins' ability to predict correctly interest rates and market
movements, and there is no assurance that a leveraging strategy will be
successful during any period in which it is employed.
FOREIGN SECURITIES
The costs attributable to foreign investing frequently are higher than
those attributable to domestic investing; this is particularly true with respect
to emerging capital markets. For example, the cost of maintaining custody of
foreign securities exceeds custodian costs for domestic securities, and
transaction and settlement costs of foreign investing also frequently are higher
than those attributable to domestic investing. Costs associated with the
exchange of currencies also make foreign investing more expensive than domestic
investing. Investment income on certain foreign securities may be subject to
foreign withholding or other government taxes that could reduce the return of
these securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign tax to which the Fund
would be subject. In addition, substantial limitations may exist in certain
countries with respect to the Fund's ability to repatriate investment capital or
2
<PAGE>
the proceeds of sales of securities. Moreover, legal remedies for defaults and
disputes may have to be pursued in foreign courts, whose procedures differ
substantially from those of U.S. courts. Foreign securities trading practices,
including those involving securities settlement where the Fund's assets may be
released prior to receipt of payment, may expose the Fund to increased risk in
the event of a failed trade or the insolvency of a foreign broker-dealer.
SPECIAL CHARACTERISTICS OF FOREIGN AND EMERGING MARKET SECURITIES
EMERGING MARKET SECURITIES. Many foreign and emerging market securities
are not registered with the SEC, and the issuers of those securities are not
subject to SEC reporting requirements. Accordingly, there may be less publicly
available information concerning foreign issuers of securities held by the Fund
than is available concerning U.S. companies. Disclosure and regulatory standards
in many respects are less stringent in emerging market countries than in U.S.
and other major markets. There also may be a lower level of monitoring and
regulation of emerging markets and the activities of investors in such markets,
and enforcement of existing regulations may be extremely limited. Foreign
companies and, in particular, companies in smaller and emerging capital markets
are not generally subject to uniform accounting, auditing and financial
reporting standards or to other regulatory requirements comparable to those
applicable to U.S. companies. The Fund's net investment income and capital gains
from its foreign investment activities may be subject to non-U.S. withholding
taxes.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have failed to
keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Delays in settlement could result in the temporary
periods when assets of the Fund are uninvested and no return is earned thereon.
The inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result either in losses to the Fund due to subsequent declines in the value of
such portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.
SOVEREIGN DEBT. Sovereign debt differs from debt obligations issued by
private entities in that, generally, remedies for defaults must be pursued in
the courts of the defaulting party. Legal recourse is, therefore, limited
Political conditions, especially a sovereign entity's willingness to meet the
terms of its debt obligations, are of considerable significance. Also, there can
be no assurance that the holders of commercial bank loans to the same sovereign
entity may not contest payments to the holders of sovereign debt in the event of
default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to pay interest and repay
principal in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which a
sovereign debtor may be subject. A country whose exports are concentrated in a
few commodities could be vulnerable to a decline in the international price of
such commodities. Increased protectionism on the part of a country's trading
partners, or political changes in those countries, could also adversely affect
its exports. Such events could diminish a country's trade account surplus, if
any, or the credit standing of a particular local government or agency. Another
factor bearing on the ability of a country to repay sovereign debt is the level
of the country's international reserves. Fluctuations in the level of these
reserves can affect the amount of foreign exchange readily available for
external debt payments and, thus, could have a bearing on the capacity of the
country to make payments on its sovereign debt.
To the extent that a country has a current account deficit (generally when
exports of merchandise and services are less than the country's imports of
merchandise and services plus net transfers (e.g., gifts of currency and goods)
to foreigners), it will need to depend on loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and inflows of foreign investment. The access of a country
to these forms of external funding may not be certain, and a withdrawal of
external funding could adversely affect the capacity of a government to make
payments on its obligations. In addition, the cost of servicing debt obligations
3
<PAGE>
can be affected by a change in international interest rates, since the majority
of these obligations carry interest rates that are adjusted periodically based
upon international rates.
With respect to sovereign debt of emerging market issuers, investors
should be aware that certain emerging market countries are among the largest
debtors to commercial banks and foreign governments. Some emerging market
countries have from time to time declared moratoria on the payment of principal
and interest on external debt.
Some emerging market countries have experienced difficulty in servicing
their sovereign debt on a timely basis which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit agreements
or converting outstanding principal and unpaid interest to Brady Bonds, and
obtaining new credit to finance interest payments. Holders of sovereign debt,
including the Fund, may be requested to participate in the rescheduling of such
debt and to extend further loans to sovereign debtors. The interests of holders
of sovereign debt could be adversely affected in the course of restructuring
arrangements or by certain other factors referred to below. Furthermore, some of
the participants in the secondary market for sovereign debt may also be directly
involved in negotiating the terms of these arrangements and may, therefore, have
access to information not available to other market participants. Obligations
arising from past restructuring agreements may affect the economic performance
and political and social stability of certain issuers of sovereign debt. There
is no bankruptcy proceeding by which sovereign debt on which a sovereign has
defaulted may be collected in whole or in part.
Foreign investment in certain sovereign debt is restricted or controlled
to varying degrees. These restrictions or controls may at times limit or
preclude foreign investment in such sovereign debt and increase the costs and
expenses of the Fund. Certain countries in which the Fund may invest require
governmental approval prior to investments by foreign persons, limit the amount
of investment by foreign persons in a particular issuer, limit the investment by
foreign persons only to a specific class of securities of an issuer that may
have less advantageous rights than the classes available for purchase by
domiciliaries of the countries or impose additional taxes on foreign investors.
Certain issuers may require governmental approval for the repatriation of
investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in a country's balance of
payments the country could impose temporary restrictions on foreign capital
remittances. The Fund could be adversely affected by delays in, or a refusal to
grant, any required governmental approval for repatriation of capital, as well
as by the application to the Fund of any restrictions on investments. Investing
in local markets may require the Fund to adopt special procedures, seek local
government approvals or take other actions, each of which may involve additional
costs to the Fund.
ASSET-BACKED SECURITIES
Asset-backed securities have structural characteristics similar to
mortgage-backed securities, as discussed in more detail below. However, the
underlying assets are not first lien mortgage loans or interests therein, but
include assets such as motor vehicle installment sale contracts, other
installment sale contracts, home equity loans, leases of various types of real
and personal property and receivables from revolving credit (credit card)
agreements. Such assets are securitized through the use of trusts or special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to a certain amount 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.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities represent direct or indirect participations in,
or are secured by and payable from, mortgage loans secured by real property and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. The U.S. government mortgage-backed securities include
mortgage-backed securities issued or guaranteed as to the payment of principal
and interest (but not as to market value) by Ginnie Mae (also known as the
4
<PAGE>
Government National Mortgage Association), Fannie Mae (also known as the Federal
National Mortgage Association) or Freddie Mac (also known as the Federal Home
Loan Mortgage Corporation) or other government-sponsored enterprises. Other
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-government
credit enhancement.
New types of mortgage-backed securities are developed and marketed from
time to time and, consistent with its investment limitations, the Fund expects
to invest in those new types of mortgage-backed securities that Mitchell
Hutchins believes may assist in achieving its investment objective. Similarly,
the Fund may invest in mortgage-backed securities issued by new or existing
governmental or private issuers other than those identified herein.
GINNIE MAE CERTIFICATES. Ginnie Mae guarantees certain mortgage
pass-through certificates ("Ginnie Mae certificates") that are issued by Private
Mortgage Lenders and that represent ownership interests in individual pools of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. Timely payment of interest
and principal is backed by the full faith and credit of the U.S. government.
Each mortgagor's monthly payments to his lending institution on his residential
mortgage are "passed through" to certificateholders such as the Fund. Mortgage
pools consist of whole mortgage loans or participations in loans. The terms and
characteristics of the mortgage instruments are generally uniform within a pool
but may vary among pools. Lending institutions that originate mortgages for the
pools are subject to certain standards, including credit and other underwriting
criteria for individual mortgages included in the pools.
FANNIE MAE CERTIFICATES. Fannie Mae facilitates a national secondary
market in residential mortgage loans insured or guaranteed by U.S. government
agencies and in privately insured or uninsured residential mortgage loans
(sometimes referred to as "conventional mortgage loans" or "conventional loans")
through its mortgage purchase and mortgage-backed securities sales activities.
Fannie Mae issues guaranteed mortgage pass-through certificates ("Fannie Mae
certificates"), which represent pro rata shares of all interest and principal
payments made and owed on the underlying pools. Fannie Mae guarantees timely
payment of interest and principal on Fannie Mae certificates. The Fannie Mae
guarantee is not backed by the full faith and credit of the U.S. government.
FREDDIE MAC CERTIFICATES. Freddie Mac also facilitates a national
secondary market for conventional residential and U.S. government-insured
mortgage loans through its mortgage purchase and mortgage-backed securities
sales activities. Freddie Mac issues two types of mortgage pass-through
securities: mortgage participation certificates ("PCs") and guaranteed mortgage
certificates ("GMCs"). Each PC represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. Freddie Mac generally
guarantees timely monthly payment of interest on PCs and the ultimate payment of
principal, but it also has a PC program under which it guarantees timely payment
of both principal and interest. GMCs also represent a pro rata interest in a
pool of mortgages. These instruments, however, pay interest semi-annually and
return principal once a year in guaranteed minimum payments. The Freddie Mac
guarantee is not backed by the full faith and credit of the U.S. government.
PRIVATE MORTGAGE-BACKED SECURITIES. Mortgage-backed securities issued by
Private Mortgage Lenders are structured similarly to the pass-through
certificates and collateralized mortgage obligations ("CMOs") issued or
guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac. Such mortgage-backed
securities may be supported by pools of U.S. government or agency insured or
guaranteed mortgage loans or by other mortgage-backed securities issued by a
government agency or instrumentality, but they generally are supported by pools
of conventional (I.E., non-government guaranteed or insured) mortgage loans.
Since such mortgage-backed securities normally are not guaranteed by an entity
having the credit standing of Ginnie Mae, Fannie Mae and Freddie Mac, they
normally are structured with one or more types of credit enhancement. See
"--TYPES OF CREDIT ENHANCEMENT" below. These credit enhancements do not protect
investors from changes in market value.
5
<PAGE>
COMMERCIAL MORTGAGE-BACKED SECURITIES. Commercial mortgage-backed
securities generally are multi-class debt or pass-through certificates secured
by mortgage loans on commercial properties. These mortgage-backed securities
generally are structured to provide protection to the senior classes of
investors against potential losses on the underlying mortgage loans. This
protection generally is provided by having the holders of subordinated classes
of securities ("Subordinated Securities") take the first loss if there are
defaults on the underlying commercial mortgage loans. Other protection, which
may benefit all of the classes or particular classes, may include issuer
guarantees, reserve funds, additional Subordinated Securities,
cross-collateralization and over-collateralization.
The Fund may invest in Subordinated Securities issued or sponsored by
commercial banks, savings and loan institutions, mortgage bankers, private
mortgage insurance companies and other non-governmental issuers. Subordinated
Securities have no governmental guarantee, and are subordinated in some manner
as to the payment of principal and/or interest to the holders of more senior
mortgage-backed securities arising out of the same pool of mortgages. The
holders of Subordinated Securities typically are compensated with a higher
stated yield than are the holders of more senior mortgage-backed securities. On
the other hand, Subordinated Securities typically subject the holder to greater
risk than senior mortgage-backed securities and tend to be rated in a lower
rating category, and frequently a substantially lower rating category, than the
senior mortgage-backed securities issued in respect of the same pool of
mortgages. Subordinated Securities generally are likely to be more sensitive to
changes in prepayment and interest rates and the market for such securities may
be less liquid than is the case for traditional fixed-income securities and
senior mortgage-backed securities.
The market for commercial mortgage-backed securities developed more
recently and in terms of total outstanding principal amount of issues is
relatively small compared to the market for residential single-family
mortgage-backed securities. In addition, commercial lending generally is viewed
as exposing the lender to a greater risk of loss than one- to four-family
residential lending. Commercial lending, for example, typically involves larger
loans to single borrowers or groups of related borrowers than residential one-
to four-family mortgage loans. In addition, the repayment of loans secured by
income producing properties typically is dependent upon the successful operation
of the related real estate project and the cash flow generated therefrom.
Consequently, adverse changes in economic conditions and circumstances are more
likely to have an adverse impact on mortgage-backed securities secured by loans
on commercial properties than on those secured by loans on residential
properties.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE
PASS-THROUGHS. CMOs are debt obligations that are collateralized by mortgage
loans or mortgage pass-through securities (such collateral collectively being
called "Mortgage Assets"). CMOs may be issued by Private Mortgage Lenders or by
government entities such as Fannie Mae or Freddie Mac. Multi-class mortgage
pass-through securities are interests in trusts that are comprised of Mortgage
Assets and that have multiple classes similar to those in CMOs. Unless the
context indicates otherwise, references herein to CMOs include multi-class,
mortgage pass-through securities. Payments of principal of, and interest on, the
Mortgage Assets (and in the case of CMOs, any reinvestment income thereon)
provide the funds to pay debt service on the CMOs or to make scheduled
distributions on the multi-class mortgage pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, also referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrued on all classes of a CMO (other than any
principal-only or "PO" class) on a monthly, quarterly or semiannual basis. The
principal and interest on the Mortgage Assets may be allocated among the several
classes of a CMO in many ways. In one structure, payments of principal,
including any principal prepayments, on the Mortgage Assets are applied to the
classes of a CMO in the order of their respective stated maturities or final
distribution dates so that no payment of principal will be made on any class of
the CMO until all other classes having an earlier stated maturity or final
distribution date have been paid in full. In some CMO structures, all or a
portion of the interest attributable to one or more of the CMO classes may be
added to the principal amounts attributable to such classes, rather than passed
through to certificateholders on a current basis, until other classes of the CMO
are paid in full.
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Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier.
Some CMO classes are structured to pay interest at rates that are adjusted
in accordance with a formula, such as a multiple or fraction of the change in a
specified interest rate index, so as to pay at a rate that will be attractive in
certain interest rate environments but not in others. For example, an inverse
floating rate CMO class pays interest at a rate that increases as a specified
interest rate index decreases but decreases as that index increases. For other
CMO classes, the yield may move in the same direction as market interest
rates--I.E., the yield may increase as rates increase and decrease as rates
decrease--but may do so more rapidly or to a greater degree. The market value of
such securities generally is more volatile than that of a fixed rate obligation.
Such interest rate formulas may be combined with other CMO characteristics. For
example, a CMO class may be an inverse interest-only ("IO") class on which the
holders are entitled to receive no payments of principal and are entitled to
receive interest at a rate that will vary inversely with a specified index or a
multiple thereof.
TYPES OF CREDIT ENHANCEMENT. To lessen the effect of failures by obligors
on Mortgage Assets to make payments, mortgage-backed securities may contain
elements of credit enhancement. Such credit enhancement falls into two
categories: (1) liquidity protection and (2) protection against losses resulting
after default by an obligor on the underlying assets and collection of all
amounts recoverable directly from the obligor and through liquidation of the
collateral. Liquidity protection refers to the provision of advances, generally
by the entity administering the pool of assets (usually the bank, savings
association or mortgage banker that transferred the underlying loans to the
issuer of the security), to ensure that the receipt of payments on the
underlying pool occurs in a timely fashion. Protection against losses resulting
after default and liquidation ensures ultimate payment of the obligations on at
least a portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor, from third parties, through various means of structuring the
transaction or through a combination of such approaches. The Fund will not pay
any additional fees for such credit enhancement, although the existence of
credit enhancement may increase the price of a security. Credit enhancements do
not provide protection against changes in the market value of the security.
Examples of credit enhancement arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "spread
accounts" or "reserve funds" (where cash or investments, sometimes funded from a
portion of the payments on the underlying assets, are held in reserve against
future losses) and "over-collateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceed that required to make
payment of the securities and pay any servicing or other fees). The degree of
credit enhancement provided for each issue generally is based on historical
information regarding the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated could adversely affect
the return on an investment in such a security.
SPECIAL CHARACTERISTICS OF MORTGAGE- AND ASSET-BACKED SECURITIES. The
yield characteristics of mortgage- and asset-backed securities differ from those
of traditiona1 debt securities. Among the major differences are that interest
and principal payments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans or
other obligations generally may be prepaid at any time. Prepayments on a pool of
mortgage loans are influenced by a variety of economic, geographic, social and
other factors, including changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and servicing
decisions. Generally, however, prepayments on fixed-rate mortgage loans will
increase during a period of falling interest rates and decrease during a period
of rising interest rates. Similar factors apply to prepayments on asset-backed
securities, but the receivables underlying asset-backed securities generally are
of a shorter maturity and thus less likely to experience substantial
prepayments. Such securities, however, often provide that for a specified time
period the issuers will replace receivables in the pool that are repaid with
comparable obligations. If the issuer is unable to do so, repayment of principal
on the asset-backed securities may commence at an earlier date. Mortgage- and
asset-backed securities may decrease in value as a result of increases in
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interest rates and may benefit less than other fixed-income securities from
declining interest rates because of the risk of prepayment.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice was to assume that prepayments on pools of
fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-backed securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. However, these effects may not be present, or may
differ in degree, if the mortgage loans in the pools have adjustable interest
rates or other special payment terms, such as a prepayment charge. Actual
prepayment experience may cause the yield of mortgage-backed securities to
differ from the assumed average life yield. Reinvestment of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting the yield of the Fund.
ADDITIONAL INFORMATION ON ARM AND FLOATING RATE MORTGAGE-BACKED
SECURITIES. Adjustable rate mortgage ("ARM") securities are mortgage-backed
securities that represent a right to receive interest payments at a rate that is
adjusted to reflect the interest earned on a pool of mortgage loans bearing
variable or adjustable rates of interest (such mortgage loans are referred to as
"ARMs"). Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. Because the
interest rates on ARM and floating rate mortgage-backed securities are reset in
response to changes in a specified market index, the values of such securities
tend to be less sensitive to interest rate fluctuations than the values of
fixed-rate securities. As a result, during periods of rising interest rates, ARM
securities generally do not decrease in value as much as fixed rate securities.
Conversely, during periods of declining rates, ARM securities generally do not
increase in value as much as fixed rate securities. ARM securities represent a
right to receive interest payments at a rate that is adjusted to reflect the
interest earned on a pool of ARMs. ARMs generally specify that the borrower's
mortgage interest rate may not be adjusted above a specified lifetime maximum
rate or, in some cases, below a minimum lifetime rate. In addition, certain ARMs
specify limitations on the maximum amount by which the mortgage interest rate
may adjust for any single adjustment period. ARMs also may limit changes in the
maximum amount by which the borrower's monthly payment may adjust for any single
adjustment period. In the event that a monthly payment is not sufficient to pay
the interest accruing on the ARM, any such excess interest is added to the
mortgage loan ("negative amortization"), which is repaid through future
payments. If the monthly payment exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment that would have been
necessary to amortize the outstanding principal balance over the remaining term
of the loan, the excess reduces the principal balance of the ARM. Borrowers
under ARMs experiencing negative amortization may take longer to build up their
equity in the underlying property and may be more likely to default.
ARMs also may be subject to a greater rate of prepayments in a declining
interest rate environment. For example, during a period of declining interest
rates, prepayments on ARMs could increase because the availability of fixed
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mortgage loans at competitive interest rates may encourage mortgagors to
"lock-in" at a lower interest rate. Conversely, during a period of rising
interest rates, prepayments on ARMs might decrease. The rate of prepayments with
respect to ARMs has fluctuated in recent years.
The rates of interest payable on certain ARMs, and, therefore, on certain
ARM securities, are based on indices, such as the one-year constant maturity
Treasury rate, that reflect changes in market interest rates. Others are based
on indices, such as the 11th District Federal Home Loan Bank Cost of Funds Index
("COFI"), that tend to lag behind changes in market interest rates. The values
of ARM securities supported by ARMs that adjust based on lagging indices tend to
be somewhat more sensitive to interest rate fluctuations than those reflecting
current interest rate levels, although the values of such ARM securities still
tend to be less sensitive to interest rate fluctuations than fixed-rate
securities.
Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. As with ARM
securities, interest rate adjustments on floating rate mortgage-backed
securities may be based on indices that lag behind market interest rates.
Interest rates on floating rate mortgage-backed securities generally are
adjusted monthly. Floating rate mortgage-backed securities are subject to
lifetime interest rate caps, but they generally are not subject to limitations
on monthly or other periodic changes in interest rates or monthly payments.
DURATION
Duration is a measure of the expected life of a fixed income security that
was developed as a more precise alternative to the concept "term to maturity."
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 for a final
payment, taking no account of the pattern of the security's payments prior to
maturity.
For any fixed income security with interest payments occurring prior to
the payment of principal, duration is always less than maturity. For example,
depending upon its coupon and the level of market yields, a Treasury note with a
remaining maturity of five years might have a duration of 4.5 years. For
mortgage-backed and other securities that are subject to prepayments, put or
call features or adjustable coupons, the difference between the remaining stated
maturity and the duration is likely to be much greater.
Futures, options and options on futures have durations that, in general,
are closely related to the duration of the securities that underlie them.
Holding long futures or call option positions will lengthen a security's
duration by approximately the same amount as would holding an equivalent amount
of the underlying securities. Short futures or put options 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 as would selling an equivalent amount of the underlying
securities.
There are some situations in which 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 the standard duration calculation is the case of mortgage-backed
securities. The stated final maturity of such securities is generally 30 years,
but current prepayment rates are critical in determining the securities'
interest rate exposure. In these and other similar situations, Mitchell Hutchins
will use more sophisticated analytical techniques that incorporate the economic
life of a security into the determination of its duration and, therefore, its
interest rate exposure.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities, which are bonds,
debentures, notes, preferred stocks or other securities that may be converted
into or exchanged for a specified amount of common stock of the same or a
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different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest
generally paid or accrued on debt or the dividend 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 in
value than the underlying stock since they have fixed income characteristics,
and (3) provide the potential for capital appreciation if the market price of
the underlying common stock increases. Most convertible securities currently are
issued by U.S. companies, although a substantial Eurodollar convertible
securities market has developed, and the markets for convertible securities
denominated in local currencies are increasing. 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 value of a convertible security is a function of its "investment
value" (determined by its yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and its "conversion value" (the security's worth, at market value, if
converted into the underlying common stock). The investment value of a
convertible security is influenced by changes in interest rates, with investment
value declining as interest rates increase and increasing as interest rates
decline. The credit standing of the issuer and other factors also may have an
effect on the convertible security's investment value. The conversion value of a
convertible security is determined by the market price of the underlying common
stock. If the conversion value is low relative to the investment value, the
price of the convertible security is governed principally by its investment
value. Generally, the conversion value decreases as the convertible security
approaches maturity. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition, a
convertible security generally will sell at a premium over its conversion value
determined by the extent to which investors place value on the right to acquire
the underlying common stock while holding a fixed income security.
A convertible security might be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by the Fund is called for redemption,
the Fund will be required to permit the issuer to redeem the security, convert
it into the underlying common stock or sell it to a third party. Any of these
actions could have an adverse effect on the Fund's ability to achieve its
investment objective.
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund purchases
securities from a bank or recognized securities dealer and simultaneously
commits to resell those securities to the bank or dealer at an agreed-upon date
or on demand and at a price reflecting a market rate of interest unrelated to
the coupon rate or maturity of the purchased securities. The Fund maintains
custody of the underlying securities prior to their repurchase; thus, the
obligation of the bank or securities dealer to pay the repurchase price on the
date agreed to is, in effect, secured by such securities. If the value of such
securities becomes less than the repurchase price, plus any agreed-upon
additional amount, the other party to the agreement is required to provide
additional collateral so that at all times the collateral is at least equal to
the repurchase price, plus any agreed-upon additional amount. The difference
between the total amount to be received upon repurchase of the securities and
the price which was paid by the Fund upon acquisition is accrued as interest and
included in the Fund's net investment income.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to the Fund if the other party to
the repurchase agreement becomes insolvent. The Fund intends to enter into
repurchase agreements only with banks and dealers in transactions believed by
Mitchell Hutchins to present minimal credit risks in accordance with guidelines
established by the Fund's Board of Directors. Mitchell Hutchins will receive and
monitor the creditworthiness of such institutions under the Board's general
supervision.
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REVERSE REPURCHASE AGREEMENTS
As indicated in the Prospectus, the Fund may enter into reverse repurchase
agreements with banks and securities dealers. Such agreements involve the sale
of securities held by the Fund subject to the Fund's agreement to repurchase the
securities at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest. While a reverse repurchase agreement is outstanding,
the Fund will maintain, in a segregated account with its custodian, cash or
liquid securities, marked to market daily, in an amount at least equal to its
obligations under the reverse repurchase agreement.
Reverse repurchase agreements involve the risk that the buyer of the
securities sold by the Fund might be unable to deliver them when that Fund seeks
to repurchase. If the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent the buyer or a trustee or receiver may
receive an extension of time to determine whether to enforce that Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision.
ILLIQUID SECURITIES
Restricted securities are not registered under the Securities Act of 1933
("1933 Act") and may be sold only in privately negotiated transactions or other
exempted transactions or after a 1933 Act registration statement has become
effective. Where registration is required, the Fund may be obligated to pay all
or part of the registration expenses and a considerable period may elapse
between the time of the decision to sell and the time the Fund may be permitted
to sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
also include those that are subject to restrictions contained in the securities
laws of other countries.
However, not all restricted securities are illiquid. To the extent that
foreign securities are freely tradable in the country where they are principally
they are not considered illiquid, even if they are restricted securities in the
United States. In addition, an institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. Institutional investors generally will not seek to
sell these instruments to the general public, but instead will often depend
either on an efficient institutional market in which such unregistered
securities can be readily resold or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not dispositive of
the liquidity of such investments.
Institutional markets for restricted securities also have developed as a
result of Rule 144A. Rule 144A establishes a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers, providing both readily ascertainable values for restricted
securities and the ability to liquidate an investment. Such markets include
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. ("NASD"). An
insufficient number of qualified buyers interested in purchasing Rule
144A-eligible restricted securities held by the Fund, however, could affect
adversely the marketability of such portfolio securities, and the Fund might be
unable to dispose of such securities promptly or at favorable prices.
The Fund may sell OTC options and, in connection therewith, segregate
assets or cover its obligations with respect to OTC options written by the Fund.
The assets used as cover for OTC options written by the Fund will be considered
illiquid unless the OTC options are sold to qualified dealers who agree that the
Fund may repurchase any OTC option it writes at a maximum price to be calculated
by a formula set forth in the option agreement. The cover for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the intrinsic
value of the option.
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MUNICIPAL OBLIGATIONS
Municipal obligations generally include debt obligations issued to obtain
funds for various public purposes as well as certain industrial development
bonds issued by or on behalf of public authorities. Municipal obligations are
classified as general obligation bonds, revenue bonds and notes. General
obligation bonds are secured by the issuer's pledge of its faith, credit and
taxing power for the payment of principal and interest. Revenue bonds are
payable from the revenue derived from a particular facility or class of
facilities, or, in some cases, from the proceeds of a special excise or other
specific revenue source, but not from general taxing power. Industrial
development bonds, in most cases, are revenue bonds that generally do not carry
the pledge of the credit of the issuing municipality, but generally are
guaranteed by the corporate entity on whose behalf they are issued. Notes are
short-term instruments which are obligations of the issuing municipalities or
agencies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. Municipal obligations include municipal
lease/purchase agreements which are similar to installment purchase contracts
for property or equipment issued by municipalities.
Municipal obligations bear fixed, floating or variable rates of interest.
Certain municipal obligations are subject to redemption at a date earlier than
their stated maturity pursuant to call options, which may be separated from the
related municipal obligations and purchased and sold separately. The Fund also
may acquire call options on specific municipal obligations. The Fund generally
would purchase these call options to protect the Fund from the issuer of the
related municipal obligation redeeming, or other holder of the call option from
calling away, the municipal obligation before maturity.
While, in general, municipal obligations are tax-exempt securities having
relatively low yields as compared to taxable, non-municipal obligations of
similar quality, certain municipal obligations are taxable obligations, offering
yields comparable to, and in some cases greater than, the yields available on
other permissible Fund investments. Dividends received by Shareholders from the
Fund that are attributable to interest income received by the Fund from
municipal obligations generally will be subject to Federal income tax. The Fund
may invest in municipal obligations, the ratings of which correspond with the
ratings of other permissible Fund investments.
MONEY MARKET INSTRUMENTS
The Fund may invest in money market instruments which may include
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, certain bank obligations, commercial paper, short-term
corporate obligations and repurchase agreements secured by any of the foregoing.
The Fund may purchase certificates of deposit, time deposits, bankers'
acceptances and other short-term obligations issued by domestic banks, foreign
subsidiaries or foreign branches of domestic banks, domestic and foreign
branches of foreign banks, domestic savings and loan associations and other
banking institutions. With respect to such securities issued by foreign
subsidiaries or foreign branches of domestic banks, and domestic and foreign
branches of foreign banks, the Fund may be subject to additional investment
risks that are different in some respects from those incurred by the Fund, which
invests only in debt obligations of U.S. domestic issuers.
Certificates of deposit are negotiable certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time. Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time (in no event longer than seven days)
at a stated interest rate. Bankers' acceptances are credit instruments
evidencing the obligation of a bank to pay a draft drawn on it by a customer.
These instruments reflect the obligation both of the bank and the drawer to pay
the face amount of the instrument upon maturity. The other short-term
obligations may include uninsured, direct obligations bearing fixed, floating or
variable interest rates. Commercial paper consists of short-term, unsecured
promissory notes issued to finance short-term credit needs. Other short-term
corporate obligations include variable amount master demand notes, which are
obligations that permit the Fund to invest fluctuating amounts at varying rates
of interest pursuant to direct arrangements between the Fund, as lender, and the
borrower. These notes permit daily changes in the amounts borrowed. Because
these obligations are direct lending arrangements between the lender and
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borrower, it is not contemplated that such instruments generally will be traded,
and there generally is no established secondary market for these obligations,
although they are redeemable at face value, plus accrued interest, at any time.
Accordingly, where these obligations are not secured by letters of credit or
other credit support arrangements, the Fund's right to redeem is dependent on
the ability of the borrower to pay principal and interest on demand. Such
obligations frequently are not rated by credit rating agencies, and the Fund may
invest in them only if at the time of an investment the borrower meets the
criteria set forth in the Fund's Statement of Additional Information for other
commercial paper issuers.
INVESTMENT LIMITATIONS
FUNDAMENTAL LIMITATIONS. The following investment limitations cannot be
changed without the affirmative vote of the lesser of (a) more than 50% of the
outstanding shares of the Fund or (b) 67% or more of such shares present at a
Shareholders' meeting if more than 50% of the outstanding shares are represented
at the meeting in person or by proxy. If a percentage restriction is adhered to
at the time of an investment or transaction, a later increase or decrease in
percentage resulting from a change in values of portfolio securities or the
amount of total assets will not be considered a violation of any of the
following limitations or of any of the Fund's investment policies.
The Fund will not:
(1) purchase securities of any one issuer if, as a result, more than 5%
of the Fund's total assets would be invested in securities of that
issuer or the Fund would own or hold more than 10% of the
outstanding voting securities of that issuer, except that up to 25%
of the Fund's total assets may be invested without regard to this
limitation, and except that this limitation does not apply to
securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment
companies.
(2) purchase any security if, as a result of that purchase, 25% or more
of the Fund's total assets would be invested in securities of
issuers having their principal business activities in the same
industry, except that this limitation does not apply to securities
issued or guaranteed by the U.S. government, its agencies or
instrumentalities or to municipal securities.
(3) issue senior securities or borrow money, except as permitted under
the 1940 Act and then not in excess of 33 1/3% of the Fund's total
assets (including the amount of the senior securities issued but
reduced by any liabilities not constituting senior securities) at
the time of the issuance or borrowing, except that the Fund may
borrow up to an additional 5% of its total assets (not including the
amount borrowed) for temporary or emergency purposes.
(4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this
restriction, the acquisition of bonds, debentures, other debt
securities or instruments, or participations or other interests
therein and investments in government obligations, commercial paper,
certificates of deposit, bankers' acceptances or similar instruments
will not be considered the making of a loan.
(5) engage in the business of underwriting securities of other issuers,
except to the extent that the Fund might be considered an
underwriter under the federal securities laws in connection with its
disposition of portfolio securities.
(6) purchase or sell real estate, except that investments in securities
of issuers that invest in real estate and investments in
mortgage-backed securities, mortgage participations or other
instruments supported by interests in real estate are not subject to
this limitation, and except that the Fund may exercise rights under
agreements relating to such securities, including the right to
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enforce security interests and to hold real estate acquired by
reason of such enforcement until that real estate can be liquidated
in an orderly manner.
(7) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the Fund may purchase,
sell or enter into financial options and futures, forward and spot
currency contracts, swap transactions and other financial contracts
or derivative instruments.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are
not fundamental and may be changed by the Fund's Board of Directors without
stockholder approval.
The Fund will not:
(1) purchase securities on margin, except for short-term credit
necessary for clearance of portfolio transactions and except that
the Fund may make margin deposits in connection with its use of
financial options and futures, forward and spot currency contracts,
swap transactions and other financial contracts or derivative
instruments.
(2) engage in short sales of securities or maintain a short position,
except that the Fund may (a) sell short "against the box" and (b)
maintain short positions in connection with its use of financial
options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative
instruments.
All percentage limitations on investments will apply at the time of
investment and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment. Except
for the investment restrictions listed above and the Fund's investment
objectives, the other investment policies described in the Prospectus and this
Statement of Additional Information are not fundamental and may be changed with
approval of the Board of Directors.
HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. As discussed in the
Prospectus, Mitchell Hutchins may use a variety of financial instruments
("Derivative Instruments"), including certain options, futures contracts
(sometimes referred to as "futures"), options on futures contracts and forward
currency contracts to attempt to hedge the Fund's portfolio and to attempt to
enhance income or to realize gains. Mitchell Hutchins also may attempt to hedge
the Fund's portfolio through the use of swap transactions. The Fund may enter
into transactions using one or more types of Derivatives Instruments under which
the full value of its portfolio is at risk. Under normal circumstances, however,
the Fund's use of these instruments will place at risk a much smaller portion of
its assets. The Fund may use the following Derivative Instruments:
OPTIONS ON DEBT SECURITIES AND FOREIGN CURRENCIES. A call option is a
contract pursuant to which the purchaser of the option, in return for a premium,
has the right to buy the security or currency underlying the option at a
specified price at any time during the term, or upon the expiration, of the
option. The writer of a call option, who receives the premium, has the
obligation, upon exercise of the option, to deliver the underlying security or
currency against payment of the exercise price. A put option is a similar
contract that gives its purchaser, in return for a premium, the right to sell
the underlying security or currency at a specified price during the option term.
The writer of a put option, who receives the premium, has the obligation, upon
exercise of the option during the option term, to buy the underlying security or
currency at the exercise price.
OPTIONS ON INDICES OF DEBT SECURITIES. An index assigns relative values to
the securities included in the index and fluctuates with changes in the market
values of such securities. Index options operate in the same way as more
traditional options except that exercises of index options are effected with
cash payments and do not involve delivery of securities. Thus, upon exercise of
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an index option, the purchaser will realize, and the writer will pay, an amount
based on the difference between the exercise price and the closing price of the
index.
DEBT AND EQUITY SECURITY INDEX FUTURES CONTRACTS. An index futures
contract is a bilateral agreement pursuant to which one party agrees to accept,
and the other party agrees to make, delivery of an amount of cash equal to a
specified dollar amount times the difference between the index value at the
close of trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the securities comprising the index
is made; generally contracts are closed out prior to the expiration date of the
contract.
DEBT SECURITY AND CURRENCY FUTURES CONTRACTS. A debt security futures
contract is a bilateral agreement pursuant to which one party agrees to accept,
and the other party agrees to make, delivery of the specific type of debt
security or currency called for in the contract at a specified future time and
at a specified price. Although such futures contracts by their terms call for
actual delivery or acceptance of debt securities or currency, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts are similar to
options on securities, except that an option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security or currency,
at a specified price at any time during the option term. Upon exercise of the
option, the delivery of the futures position to the holder of the option will be
accompanied by delivery of the accumulated balance that represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future. The writer of an option, upon exercise, will assume a short position in
the case of a call, and a long position in the case of put.
FORWARD CURRENCY CONTRACTS. A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into.
GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS. Hedging
Transactions can be broadly categorized as "short hedges" and "long hedges." A
short hedge is a purchase or sale of a Derivative Instrument intended partially
or fully to offset potential declines in the value of one or more investments
held in the Fund's portfolio. Thus, in a short hedge, the Fund takes a position
in a Derivative Instrument whose price is expected to move in the opposite
direction of the price of the investment being hedged. For example, the Fund
might purchase a put option on a security to hedge against a potential decline
in the value of that security. If the price of the security declined below the
exercise price of the put, the Fund could exercise the put and thus limit its
loss below the exercise price to the premium paid plus transaction costs. In the
alternative, because the value of the put option can be expected to increase as
the value of the underlying security declines, the Fund might be able to close
out the put option and realize a gain to offset the decline in the value of the
security.
Conversely, a long hedge is a purchase or sale of a Derivative Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge, the Fund takes a position in a Derivative Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, the Fund might purchase a call option on a
security it intends to purchase in order to hedge against an increase in the
cost of the security. If the price of the security increased above the exercise
price of the call, the Fund could exercise the call and thus limit its
acquisition cost to the exercise price plus the premium paid and transaction
costs. Alternatively, the Fund might be able to offset the price increase by
closing out an appreciated call option and realizing a gain.
Derivative Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that the Fund
owns or intends to acquire. Derivative Instruments on indices, in contrast,
generally are used to hedge against price movements in broad market sectors in
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which the Fund has invested or expects to invest. Derivative Instruments on debt
securities may be used to hedge either individual securities or broad fixed
income market sectors.
The use of Derivative Instruments is subject to applicable regulations of
the Securities and Exchange Commission ("SEC"), the several options and futures
exchanges upon which they are traded and the Commodity Futures Trading
Commission ("CFTC"). In addition, the Fund's ability to use Derivative
Instruments will be limited by tax considerations. See "Taxation."
In addition to the products, strategies and risks described below and in
the Prospectus, Mitchell Hutchins may discover additional opportunities in
connection with Derivative Instruments. These new opportunities may become
available as regulatory authorities broaden the range of permitted transactions
and as Derivative Instruments and techniques are developed. Mitchell Hutchins
may utilize these opportunities to the extent that they are consistent with the
Fund's investment objectives and permitted by the Fund's investment limitations
and applicable regulatory authorities. The Fund's Prospectus or Statement of
Additional Information will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or in
the Prospectus.
SPECIAL RISKS OF STRATEGIES USING DERIVATIVE INSTRUMENTS
The use of Derivative Instruments involves special considerations and
risks, as described below. Risks pertaining to particular Derivative Instruments
are described in the sections that follow.
(1) Successful use of most Derivative Instruments depends upon Mitchell
Hutchins' ability to predict movements of the overall securities, currencies and
interest rate or currency exchange markets, which requires different skills than
predicting changes in the prices of individual securities. While Mitchell
Hutchins is experienced in the use of Derivative Instruments, there can be no
assurance that any particular hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Derivative Instrument and price movements of the
investments being hedged. For example, if the value of a Derivative Instrument
used in a short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors affecting the markets in which Derivative Instruments
are traded rather than the value of the investments being hedged. The
effectiveness of hedges using Derivative Instruments on indices will depend on
the degree of correlation between price movements in the index and price
movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly
or partially offsetting the negative effect of unfavorable price movements in
the investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if the Fund entered into a
short hedge because Mitchell Hutchins projected a decline in the price of a
security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Derivative Instrument. Moreover, if the price of the
Derivative Instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would have
been in a better position had it not hedged at all.
(4) As described below, the Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
(i.e., Derivative Instruments other than purchased options). If the Fund were
unable to close out its positions in such Derivative Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the position expired or matured. These requirements might impair the
Fund's ability to sell a portfolio security or make an investment at a time when
it would otherwise be favorable to do so, or require that the Fund sell a
portfolio security at a disadvantageous time. The Fund's ability to close out a
position in a Derivative Instrument prior to expiration or maturity depends on
the existence of a liquid secondary market or, in the absence of such a market,
the ability and willingness of a counter party to enter into a transaction
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closing out the position. Therefore, there is no assurance that any position in
a Derivative Instrument can be closed out at a time and price that is favorable
to the Fund.
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS
Transactions using Derivative Instruments, other than purchased options,
expose the Fund to an obligation to another party. The Fund will not enter into
any such transactions unless it owns either (1) an offsetting ("covered")
position in securities, currencies or other options, forward currency contracts
or futures contracts or (2) cash or liquid securities, with a value sufficient
at all times to cover its potential obligations to the extent not covered as
provided in (1) above. The Fund will comply with SEC guidelines regarding cover
for such transactions and will, if the guidelines so require, set aside cash or
liquid securities in a segregated account with its custodian in the prescribed
amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Derivative Instrument is open, unless they are
replaced with similar assets. As a result, the committing of a large portion of
the Fund's assets to cover positions or to segregated accounts could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
OPTIONS
The Fund may purchase put and call options, and write (sell) covered put
and call options, on debt and equity securities and foreign currencies. The
purchase of call options may serve as a long hedge, and the purchase of put
options serve as a short hedge. Writing covered put or call options can enable
the Fund to enhance income by reason of the premiums paid by the purchases of
such options. In addition, writing covered put options may serve as a limited
long hedge because increases in the value of the hedged investment would be
offset to the extent of the premium received for writing the option. However, if
the market price of the security underlying a covered put option declines to
less than the exercise price of the option, minus the premium received, the Fund
would expect to suffer a loss. Writing covered call options may serve as a
limited short hedge, because declines in the value of the hedged investment
would be offset to the extent of the premium received for writing the option.
However, if the security or currency appreciates to a price higher than the
exercise price of the call option, it can be expected that the option will be
exercised and the Fund will be obligated to sell the security or currency or at
less than its market value. If the covered call option is an OTC option, the
securities or other assets used as cover would be considered illiquid to the
extent described under "Other Investment Practices--Illiquid Securities" in the
Prospectus.
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Generally, OTC options on foreign currencies and debt
securities are European-style options. This means that the option is only
exercisable immediately prior to its expiration. This is in contrast to
American-style options, which are exercisable at any time prior to the
expiration date of the option. There are also other types of options exercisable
or certain specified dates before expiration. Options that expire unexercised
have no value.
The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize profits or
limit losses on an option position prior to its exercise or expiration.
The Fund may purchase or write both exchange-traded and OTC options.
Exchange markets for options on debt securities and foreign currencies exist but
are relatively new and these instruments are primarily traded on the OTC market.
Exchange-traded options in the United States are issued by a clearing
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organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction. In
contrast, OTC options are contracts between the Fund and its counter party
(usually a securities dealer or a bank) with no clearing organization guarantee.
Thus, when the Fund purchases or writes an OTC option, it relies on the counter
party to make or take delivery of the underlying investment upon exercise of the
option. Failure by the counter party to do so would result in the loss of any
premium paid by the Fund as well as the loss of any expected benefit of the
transaction. [The Fund will enter into OTC option transactions only with counter
parties that have a net worth of at least $20 million.]
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the counter party, or by a
transaction in the secondary market if any such market exists. Although the Fund
will enter into OTC options only with counter parties that are expected to be
capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option position
at a favorable price prior to expiration. In the event of insolvency of the
counter party, the Fund might be unable to close out an OTC option position at
any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by the Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
The Fund may purchase and write put and call options on indices of debt
and equity securities in much the same manner as the more traditional options
discussed above, except that index options may serve as a hedge against overall
fluctuations in the debt securities market (or market sectors) rather than
anticipated increases or decreases in the value of a particular security.
FUTURES
The Fund may purchase and sell interest rate, debt and equity security
index and foreign currency futures and options thereon. The purchase of futures
or call options thereon can serve as a long hedge, and the sale of futures or
the purchase of put options thereon can serve as a short hedge. Writing covered
call options on futures contracts can serve as a limited short hedge, using a
strategy similar to that used for writing covered call options on securities,
currencies or indices. Similarly, writing put options on futures contracts can
serve as a limited long hedge.
Futures strategies also can be used to manage the average duration of the
Fund's portfolio. If Mitchell Hutchins wishes to shorten the average duration of
the Fund's portfolio, the Fund may sell an interest rate futures contract or a
call option thereon, or purchase a put option on that futures contract. If
Mitchell Hutchins wishes to lengthen the average duration of the Fund's
portfolio, the Fund may buy an interest rate or futures contract or a call
option thereon or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit with the futures
broker through which the transaction was effected, "initial margin" consisting
of cash, obligations of the United States or obligations that are fully
guaranteed as to principal and interest by the United States, in an amount
generally equal to 10% or less of the contract value. Margin must also be
deposited when writing a call option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in the
nature of a performance bond or good-faith deposit that is returned to the Fund
at the termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, the
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.
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Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations with respect to or from
a futures broker. When the Fund purchases an option on a future, the premium
paid plus transaction costs is all that is at risk. In contrast, when the Fund
purchases or sells a futures contract or writes a put or call option thereon, it
is subject to daily variation margin calls that could be substantial in the
event of adverse price movements. If the Fund has insufficient cash to meet
daily variation margin requirements, it might need to sell securities at a time
when such sales are disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Fund intends to enter into such transactions only on exchanges or boards of
trade where there appears to be a liquid secondary market. However, there can be
no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If the Fund were unable to liquidate a futures or options position due to
the absence of a liquid secondary market or the imposition of price limits, it
could incur substantial losses. The Fund would continue to be subject to market
risk with respect to the position. In addition, except in the case of purchased
options, the Fund would continue to be required to make daily variation margin
payments and might be required to maintain the position being hedged by the
future or option or to maintain cash or securities in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and options markets are
subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS
The Fund may use options on foreign currencies, as described above, and
forward currency contracts, as described below, to hedge against movements in
the values of the foreign currencies in which portfolio securities are
denominated. Such currency hedges can protect against price movements in a
security the Fund owns or intends to acquire that are attributable to changes in
the value of the currency in which it is denominated. Such hedges do not,
however, protect against price movements in the securities that are attributable
to other causes.
The Fund might seek to hedge against changes in the value of a particular
currency when no Derivative Instruments on that currency are available or such
Derivative Instruments are more expensive than certain other Derivative
Instruments. In such cases, the Fund may hedge against price movements in that
currency by entering into transactions using Derivative Instruments on another
currency or basket of currencies, the value of which Mitchell Hutchins believes
will have a positive correlation to the value of the currency being hedged. The
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risk that movements in the price of the Derivative Instrument will not correlate
perfectly with movements in the price of the currency being hedged is magnified
when this strategy is used.
The value of Derivative Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Derivative
Instruments, the Fund could be disadvantaged by having to deal in the odd-lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Derivative Instruments until they reopen.
Settlement of Derivative Instruments involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the Fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
COMBINED TRANSACTIONS
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions and any combination of futures and
options transactions ("component" transactions), instead of a single Derivative
Instrument, as part of a single or combined strategy when, in the opinion of
Mitchell Hutchins, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on Mitchell Hutchins' judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
GUIDELINE FOR FUTURES AND OPTIONS
To the extent that the Fund enters into futures contracts, options on
futures positions and options on foreign currencies traded on a commodities
exchange, which are not for BONA FIDE hedging purposes (as defined by the CFTC),
the aggregate initial margin and premiums on these positions (excluding the
amount by which options are "in-the-money") may not exceed 5% of the Fund's net
assets. This guideline may be modified by the Fund's Board of Directors without
stockholder vote. Adoption of this guideline cannot be guaranteed to limit the
percentage of the Fund's assets at risk to 5%.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts to purchase or sell
foreign currencies for a fixed amount of U.S. dollars or another foreign
currency. Such transactions may serve as long hedges--for example, the Fund may
purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the Fund intends to acquire.
Forward currency contract transactions may also serve as short hedges--for
example, the Fund may sell a forward currency contract to lock in the U.S.
dollar equivalent of the proceeds from the anticipated sale of a security
denominated in a foreign currency.
As noted above, the Fund also may seek to hedge against changes in the
value of a particular currency by using forward contracts on another foreign
currency or a basket of currencies, the value of which Mitchell Hutchins
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believes will have a positive correlation to the values of the currency being
hedged. In addition, the Fund may use forward currency contracts to shift its
exposure to foreign currency fluctuations from one country to another. For
example, if the Fund owned securities denominated in a foreign currency and
Mitchell Hutchins believed that currency would decline relative to another
currency, it might enter into a forward contract to sell an appropriate amount
of the first foreign currency, with payment to be made in the second foreign
currency. Transactions that use two foreign currencies are sometimes referred to
as "cross hedging." Use of a different foreign currency magnifies the risk that
movements in the price of the Derivative Instrument will not correlate or will
correlate unfavorably with the foreign currency being hedged.
The cost to the Fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When the Fund enters into a forward currency contract, it relies on the
counterparty to make or take delivery of the underlying currency at the maturity
of the contract. Failure by the counterparty to do so would result in the loss
of any expected benefit of the transaction.
As in the case with futures contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the counterparty. Thus, there can be no assurance
that the Fund will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the counterparty, the Fund might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Fund would continue
to be subject to market risk with respect to the position, and would continue to
be required to maintain a position in the securities or currencies that are the
subject of the hedge or to maintain cash or liquid securities in a segregated
account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts or maintain a net
exposure to such contracts only if (1) the consummation of the contracts would
not obligate the Fund to deliver an amount of foreign currency in excess of the
value of the position being hedged by such contracts or (2) the Fund maintains
cash or liquid securities in a segregated account in an amount not less than the
value of its total assets committed to the consummation of the contract and not
covered as provided in (1) above, as marked to market daily.
SWAP TRANSACTIONS
The Fund may enter into interest rate swap transactions. Swap transactions
include caps, floors and collars. Interest rate swap transactions involve an
agreement between two parties to exchange payments that are based, respectively,
on variable and fixed rates of interest and that are calculated on the basis of
a specified amount of principal ("notional principal amount") for a specified
period of time. Interest rate cap and floor transactions involve an agreement
between two parties in which the first party agrees to make payments to the
counterparty when a designated market interest rate goes above (in the case of a
cap) or below (in the case of a floor) a designated level on predetermined dates
or during a specified time period. Interest rate collar transactions involve an
agreement between two parties in which payments are made when a designated
market interest rate either goes above a designated level or goes below a
designated floor level on predetermined dates or during a specified time period.
The Fund would enter into swap transactions to preserve a return or spread on a
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particular investment or portion of its portfolio or to protect against any
increase in the price of securities it anticipates purchasing at a later date.
The Fund would use these transactions as a hedge and not as a speculative
investment. Interest rate swap transactions are subject to risks comparable to
those described above with respect to other hedging strategies.
The Fund may enter into interest rate swaps, caps, floors and collars on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these swap transactions are entered into for good faith
hedging purposes and inasmuch as segregated accounts will be established with
respect to such transactions, Mitchell Hutchins and the Fund believe such
obligations do not constitute senior securities and, accordingly, will not treat
them as being subject to its borrowing restrictions. The net amount of the
excess, if any, of the Fund's obligations over its entitlements with respect to
each interest rate swap will be accrued on a daily basis and appropriate Fund
assets having an aggregate net asset value at least equal to the accrued excess
will be maintained in a segregated account by a custodian that satisfies the
requirements of the 1940 Act. The Fund also will establish and maintain such
segregated accounts with respect to its total obligations under any interest
rate swaps that are not entered into on a net basis and with respect to any
interest rate caps, floors and collars that are written by the Fund.
The Fund will enter into swap transactions only with banks and recognized
securities dealers believed by Mitchell Hutchins to present minimal credit risks
in accordance with guidelines established by the Fund's Board of Directors. If
there is a default by the other party to such a transaction, the Fund will have
to rely on its contractual remedies (which may be limited by bankruptcy,
insolvency or similar laws) pursuant to the agreements related to the
transaction.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. Caps, collars and floors are
more recent innovations for which documentation is less standardized and,
accordingly, they are less liquid than swaps.
DIRECTORS AND OFFICERS
The ages, business addresses and principal occupations during the past
five years of the Directors and executive officers of the Fund are:
[to be completed]
* Unless otherwise indicated, the business address of each listed person is 1285
Avenue of the Americas, New York, New York 10019.
The Fund pays Directors who are not "interested persons" of the Fund
[$1,000] annually and [$150] for each board meeting and for each separate
meeting of a board committee. The chairmen of the audit and contract review
committees of individual funds within the PaineWebber fund complex receive
additional compensation aggregating $15,000 annually from the relevant funds.
All Directors are reimbursed for any expenses incurred in attending meetings.
Because Mitchell Hutchins performs substantially all of the services necessary
for the operation of the Fund, the Fund requires no employees. No officer,
Director or employee of PaineWebber or Mitchell Hutchins presently receives any
compensation from the Fund for acting as a director or officer.
The Directors and officers of the Fund as a group beneficially owned less
than 1% of the total shares of the Fund outstanding as of June ____, 1998.
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The table below includes certain information relating to the compensation
of the Fund's current directors.
COMPENSATION TABLE+
TOTAL
ESTIMATED COMPENSATION
AGGREGATE FROM THE
COMPENSATION FUND AND THE
FROM THE FUND
NAME OF PERSONS POSITION FUND COMPLEX*
- ------------------------ ------------ ------------
[to be completed]
+ Only independent members of the Board of Directors are compensated by the
Fund and identified above; Directors who are "interested persons," as
defined in the 1940 Act, do not receive compensation.
* Represents total compensation paid to each Director during the calendar
year ended December 31, 1997; no fund within the complex has a bonus,
pension, profit sharing or retirement plan.
INVESTMENT ADVISORY ARRANGEMENTS
Mitchell Hutchins is the Fund's investment adviser and administrator
pursuant to a contract dated _____________, 1998 with the Fund ("Advisory
Contract"). Pursuant to the Advisory Contract, Mitchell Hutchins provides a
continuous investment program for the Fund and makes investment decisions and
places orders to buy, sell or hold particular securities. As administrator,
Mitchell Hutchins supervises all matters relating to the operation of the Fund
and obtains for it corporate, administrative and clerical personnel, office
space, equipment and services, including arranging for the periodic preparation,
updating, filing and dissemination of proxy materials, tax returns and reports
to the Fund's Board of Directors, Shareholders and regulatory authorities.
In addition to the payments to Mitchell Hutchins under the Advisory
Contract described above, the Fund pays certain other costs, including (1) the
costs (including brokerage commissions) of securities purchased or sold by the
Fund and any losses incurred in connection therewith; (2) organizational
expenses of the Fund, whether or not advanced by Mitchell Hutchins; (3) filing
fees (other than fees under the Securities Act of 1933 incurred in connection
with the initial public offering of securities) and expenses relating to the
registration and qualification of the Shares under federal securities laws; (4)
fees and salaries payable to Directors who are not interested persons of the
Fund or Mitchell Hutchins; (5) all expenses incurred in connection with the
Directors' services, including travel expenses; (6) taxes (including any income
or franchise taxes) and governmental fees (other than transfer taxes); (7) costs
of any liability, uncollectible items of deposit and any other insurance or
fidelity bonds; (8) any costs, expenses or losses arising out of a liability of
or claims for damages or other relief asserted against the Fund for violation of
any law; (9) legal expenses, including legal fees of special counsel for the
independent Directors; (10) accounting and auditing expenses (other than those
incurred in providing comfort to the underwriters in connection with the initial
public offering of securities); (11) charges of custodians, transfer agents and
other agents; (12) expenses of printing and distributing reports to
Shareholders; (13) any extraordinary expenses (including fees and disbursements
of counsel) incurred by the Fund; (14) fees, voluntary assessments and other
expenses incurred in connection with membership in investment company
organizations; (15) costs of mailing and tabulating proxies and costs of
meetings of Shareholders, the Board and any committees thereof; (16) the costs
of investment company literature and other publications provided to directors
and officers; (17) costs of mailing, stationery and communications equipment;
(18) interest charges on borrowings; and (19) fees and expenses of maintaining
any listing of the Fund's shares on any national securities exchange.
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<PAGE>
The Advisory Contract was approved by the Fund's Board of Directors and by
a majority of the directors who are not parties to the Advisory Contract or
interested persons of any such party ("Independent Directors") on
____________________, 1998 and by its initial stockholder on
___________________, 1998. Unless sooner terminated, the Advisory Contract will
continue automatically for successive annual periods, provided that such
continuance is specifically approved at least annually (1) by a majority vote of
the Independent Directors cast in person at a meeting called for the purpose of
voting on such approval; and (2) by the Board of Directors or by vote of a
majority of the outstanding Shares of the Fund.
Under the Advisory Contract, Mitchell Hutchins is not liable for any error
of judgment or mistake of law or for any loss suffered by the Fund in connection
with the Advisory Contract, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of Mitchell Hutchins in the
performance of its duties or from reckless disregard of its duties and
obligations under the Advisory Contract. The Advisory Contract is terminable by
vote of the Board of Directors or by the holders of a majority of the
outstanding voting securities of the Fund, at any time without penalty, on 60
days' written notice to Mitchell Hutchins. The Advisory Contract may also be
terminated by Mitchell Hutchins on 60 days' written notice to the Fund. The
Advisory Contract terminates automatically upon its assignment.
Mitchell Hutchins personnel may invest in securities for their own
accounts pursuant to a code of ethics that describes the fiduciary duty owed to
shareholders of the PaineWebber funds and other Mitchell Hutchins' advisory
accounts by all Mitchell Hutchins' directors, officers and employees, that
establishes procedures for personal investing and that restricts certain
transactions. For example, employee accounts generally must be maintained at
PaineWebber, personal trades in most securities require pre-clearance and
short-term trading and participation in initial public offerings generally are
prohibited. In addition, the code of ethics puts restrictions on the timing of
personal investing in relation to trades by PaineWebber funds and other Mitchell
Hutchins advisory clients.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors, Mitchell
Hutchins will be responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage transactions. In executing
portfolio transactions, Mitchell Hutchins will seek to obtain the best net
results for the Fund, taking into account such factors as the price (including
the applicable dealer spread or brokerage commission), size of order, difficulty
of execution and operational facilities of the firm involved. Generally, debt
securities are traded on the OTC market on a "net" basis without a stated
commission through dealers acting for their own account and not as brokers.
Prices paid to dealers in principal transactions generally include a "spread,"
which is the difference between the prices at which the dealer is willing to
purchase and sell a specific security at that time.
The Fund has no obligation to deal with any broker or group of brokers in
the execution of portfolio transactions. The Fund contemplates that, consistent
with obtaining the best net results, brokerage transactions may be conducted
through Mitchell Hutchins or any of its affiliates, including PaineWebber. The
Fund's Board of Directors has adopted procedures in conformity with Rule 17e-1
under the 1940 Act to ensure that all brokerage commissions paid to Mitchell
Hutchins or any of its affiliates are reasonable and fair. Specific provisions
in the Advisory Contract authorize Mitchell Hutchins and any affiliate thereof
that is a member of a national securities exchange to effect portfolio
transactions for the Fund on such exchange and to retain compensation in
connection with such transactions. Any such transactions will be effected and
related compensation paid only in accordance with applicable SEC regulations.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs") who receive brokerage commissions for their services. The
Fund's procedures in selecting FCMs to execute the Fund's transactions in
futures contracts, including procedures permitting the use of Mitchell Hutchins
and its affiliates, are similar to those in effect with respect to brokerage
transactions in securities.
Consistent with the Fund's interests and subject to the review of the
Fund's Board of Directors, Mitchell Hutchins may cause the Fund to purchase and
sell portfolio securities through brokers who provide the Fund with research,
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<PAGE>
analysis, advice and similar services. In return for such services, the Fund may
pay to those brokers a higher commission than may be charged by other brokers,
provided that Mitchell Hutchins determines in good faith that such commission is
reasonable in terms either of that particular transaction or of the overall
responsibility of Mitchell Hutchins to the Fund and its other clients and that
the total commissions paid by the Fund will be reasonable in relation to the
benefits to the Fund over the long term. For purchases or sales with
broker-dealer firms which act as principal, Mitchell Hutchins seeks best
execution. Although Mitchell Hutchins may receive certain research or execution
services in connection with these transactions, Mitchell Hutchins will not
purchase securities at a higher price or sell securities at a lower price than
would otherwise be paid if no weight was attributed to the services provided by
the executing dealer. Moreover, Mitchell Hutchins will not enter into any
explicit soft dollar arrangements relating to principal transactions and will
not receive in principal transactions the types of services which could be
purchased for hard dollars. Mitchell Hutchins may engage in agency transactions
in OTC equity and debt securities in return for research and execution services.
These transactions are entered into only in compliance with procedures ensuring
that the transaction (including commissions) is at least as favorable as it
would have been if effected directly with a market-maker that did not provide
research or execution services. These procedures include Mitchell Hutchins
receiving multiple quotes from dealers before executing the transaction on an
agency basis.
Research services furnished by dealers or brokers with or through which
the Fund effects securities transactions may be used by Mitchell Hutchins in
advising other funds or accounts and, conversely, research services furnished to
Mitchell Hutchins by dealers or brokers in connection with other funds or
accounts Mitchell Hutchins advises may be used by Mitchell Hutchins in advising
the Fund. Information and research received from such brokers or dealers will be
in addition to, and not in lieu of, the services required to be performed by
Mitchell Hutchins under the Advisory Contract.
Investment decisions for the Fund and for other investment accounts
managed by Mitchell Hutchins will be made independently of each other in light
of differing considerations for the various accounts. The same investment
decision, however, may occasionally be made for the Fund and one or more such
accounts. In such cases, simultaneous transactions are inevitable. Purchases or
sales are then averaged as to price and allocated between the Fund and such
other account(s) as to amount according to a formula deemed equitable to the
Fund and such account(s). While in some cases this practice could have a
detrimental effect upon the price or value of the security as far as the Fund is
concerned, or upon its ability to complete its entire order, in other cases it
is believed that coordination and the ability to participate in volume
transactions will be beneficial to the Fund.
The Fund will not purchase securities that are offered in underwritings in
which PaineWebber, Mitchell Hutchins or any of their affiliates is a member of
the underwriting or selling group, except pursuant to procedures adopted by the
Fund's Board of Directors pursuant to Rule 10f-3 under the 1940 Act. Among other
things, these procedures require that the commission or spread paid in
connection with such a purchase be reasonable and fair, that the purchase be at
not more than the public offering price prior to the end of the first business
day after the date of the public offering and that PaineWebber, Mitchell
Hutchins and their affiliates not participate in or benefit from the sale to the
Fund.
NET ASSET VALUE OF SHARES
The net asset value of the Shares is determined weekly as of the close of
regular trading on the New York Stock Exchange, Inc. ("NYSE") on the [last day
of the week] on which the NYSE is open for trading. The net asset value of the
Shares also is determined monthly at the close of regular trading on the NYSE on
the [last day of the month] on which the NYSE is open for trading. The net asset
value per Share is computed by dividing the value of the securities held by the
Fund plus any cash or other assets (including interest and dividends accrued but
not yet received and earned discount) minus all liabilities (including accrued
expenses) by the total number of Shares outstanding at such time.
When market quotations are readily available, the Fund's debt securities
are valued based upon those quotations. When market quotations for options and
futures positions held by the Fund are readily available, those positions are
valued based upon such quotations. Market quotations generally are not available
25
<PAGE>
for options traded in the OTC market. When market quotations for options or
futures positions are not readily available, they are valued at fair value as
determined in good faith by or under the direction of the Board of Directors.
When market quotations are not readily available for any of the Fund's debt
securities, such securities are valued based upon appraisals received from a
pricing service using a computerized matrix system, or based upon appraisals
derived from information concerning the security or similar securities received
from recognized dealers in those securities. Notwithstanding the above, debt
securities with maturities of 60 days or less generally are valued at amortized
cost if their original term to maturity was 60 days or less, or by amortizing
the difference between their fair value as of the 61st day prior to maturity and
their maturity value if their original term to maturity exceeded 60 days, unless
in either case the Board of Directors or its delegate determines that this does
not represent fair value.
Securities and other instruments that are listed on U.S. and foreign stock
exchanges and for which market quotations are readily available are valued at
the last sale price on the exchange on which the securities are traded, as of
the close of business on the day the securities are being valued or, lacking any
sales on such day, at the last bid price available. In cases where securities or
other instruments are traded on more than one exchange, such securities or other
instruments generally are valued on the exchange designated by Mitchell Hutchins
under the direction of the Board of Directors as the primary market. Securities
traded in the OTC market and listed on the Nasdaq are valued at the last
available sale price on Nasdaq prior to the time of valuation; other OTC
securities and instruments are valued at the last available bid price prior to
the time of valuation. Other securities and assets for which reliable market
quotations are not readily available (including restricted securities subject to
limitations as to their sale) will be valued at fair value as determined in good
faith by or under the direction of the Board of Directors.
All securities and other assets quoted in foreign currency and forward
currency contracts are valued weekly in U.S. dollars on the basis of the foreign
currency exchange rate prevailing at the time such valuation is determined by
the Fund's custodian. Foreign currency exchange rates are generally determined
prior to the close of the NYSE. Occasionally, events affecting the value of
foreign securities and such exchange rates occur between the time at which they
are determined and the close of the NYSE, which events will not be reflected in
a computation of the Fund's net asset value. If events materially affecting the
value of such securities or assets or currency exchange rates occurred during
such time period, the securities or assets would be valued at their fair value
as determined in good faith by or under the direction of the Board of Directors.
The foreign currency exchange transactions of the Fund conducted on a spot basis
are valued at the spot rate for purchasing or selling currency prevailing on the
foreign exchange market. Under normal market conditions this rate differs from
the prevailing exchange rate by an amount generally less than one-tenth of one
percent due to the costs of converting from one currency to another.
HIGH YIELD MARKET DATA
Over the long term, Mitchell Hutchins believes that adding lower-rated bonds to
a fixed income portfolio may help boost total return and reduce volatility.
Lower-rated bonds generally move in tandem with the investment grade bond
market. This may be favorable when interest rates are falling as it may drive up
bond prices. But under certain circumstances lower-rated bonds may also offer a
cushion when interest rates are rising, as they normally pay high coupons that
can help offset price losses. In fact, depending on the ratio, adding lower
rated bonds to an investment grade portfolio may increase total returns and even
help reduce volatility.
Stability And Total Return
100% Lehman Aggregate vs. 100% CSFB High Yield Index
1-1-86 to 12-31-97
[TABLE]
Stability
Rate of and Total
Return Return
6.56 11.92
6.31 11.79
6.07 11.66
5.84 11.52
5.62 11.39
5.41 11.26
5.22 11.12
5.04 10.99
4.87 10.85
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4.72 10.71
4.59 10.57
4.48 10.43
4.39 10.29
4.33 10.15
4.29 10.00
4.28 9.86
4.29 9.71
4.33 9.56
4.39 9.42
4.47 9.27
4.58 9.12
This graph is shown for illustrative purposes only and does not represent
the Fund's performance. The Lehman Bros. Aggregate Bond Index includes fixed
rate debt issues rated investment grade or higher by Moody's, S&P or Fitch
Investors Service. The CS First Boston High Yield Index consists of bonds in 250
sectors, rated BB and below by S&P or Ba and below by Moody's. Standard
deviation is a statistic used to measure the dispersion of monthly returns of an
index around its average and, as such, is a measure of volatility. The indices
are unmanaged and are not available for investment. Past performance is no
indication of future results.
This graph represents the hypothetical performance of a portfolio mix of
lower rated bonds and investment grade bonds over the past 12 years. At the
lowest point, you can see a portfolio invested 100% in investment grade bonds
produced a return of approximately 9% with the indicated level of volatility.
Adding 30% of high yield bonds to the portfolio (see the point farthest left on
the curve) increased total return to nearly 10% while actually reducing
volatility.
Lower rated securities have experienced improving credit quality, as
measured by CS First Boston. In 1992, the lower rated securities market was made
up of 54.9% B and split B, 34% split BB and above and 11.1% CCC and below. In
1997, the market was made up of 59.8% B and split B, 30.9% split BB and above
and 9.3% CCC and below.
As measured by Donaldson Lufkin & Jenrette ("DLJ") Research, the average
annual returns for 1980 through 1997 for the S&P 500 Index (with 50% leverage on
net assets), the S&P 500 Index without leverage, the DLJ High Yield Index (with
50% leverage on net assets) and the DLJ High Yield Index without leverage were
20.43%, 17.13%, 15.82% and 13.71%, respectively. (DLJ assumed a cost of capital
for the leverage of Fed Funds Rate plus 75 bps.) The volatility (as measured by
standard deviation) for the same time periods was 27.03%, 17.24%, 14.12% and
9.19%, respectively.
The market of outstanding lower rated income securities, as measured by
DLJ Research, has increased over the years. The outstanding principal amounts of
lower rated income securities of U.S. issuers for calendar years 1977, 1978,
1979, 1980, 1981, 1982, 1983, 1984, 1985, 1986, 1987, 1988, 1989, 1990, 1991,
1992, 1993, 1994, 1995, 1996, 1997 and through 4/16/98 were $24, $26, $28, $30,
$32, $35, $41, $57, $81, $136, $181, $206, $242, $ 214, $205, $205, $247, $283,
$308, $363, $467, and $527 billion. New issuance volume for the same time
periods was $1, $1.6, $1.4, $1.4, $1.5, $2.7, $5.8, $14.7, $16.6, $33.2, $30.4,
$31.9, $28.1, $2.3, $15.2, $47.0, $77.1, $42.7, $45.3, $72.1, $133.0, and $60.0
billion.
As reported by DLJ Research, the Altman Default Study, lower rated
security default rates for calendar years 1983, 1984, 1985, 1986, 1987, 1988,
1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996, 1997 were 1.10%, 0.84%, 1.71%,
3.50%, 5.78%, 2.66%, 4.29%, 10.14%, 10.27%, 3.40%, 1.11%, 1.45%, 1.90%, 1.23%,
and 0.84%, respectively. The default loss rates for the same time periods were
0.32%, 0.39%, 0.44%, 2.18%, 1.62%, 1.54%, 1.98%, 7.20%, 4.54%, 2.19%, 0.74%,
0.71%, 0.94%, 0.59%, and 0.38%, respectively. The principal loss rates (the
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senior unsecured debt loss rate) for the same time periods were 29.00%, 46.58%,
25.75%, 62.68%, 27.98%, 58.01%, 46.30%, 70.98%, 44.16%, 64.39%, 66.62%, 48.86%,
49.50%, 48.09% and 45.75%. The spread to worst as measured in basis points was
430, 267, 407, 339, 444, 480, 419, 774, 1058, 589, 490, 391, 444, 467 and 336.
[Prior to the registration statement becoming effective, the Underwriters
or other appropriate party may distribute advertising or other solicitation
material which discusses (i) economic and market conditions and trends
generally; (ii) historical and current conditions and trends in the lower-rated
securities market, and risk and reward potential in such market; (iii)
comparative information, including statistical analysis and performance-related
information, related to lower-rated securities generally and investing in
lower-rated securities; (iv) the special considerations and potential benefits
of investing in closed-end management investment companies; and (v) information
about Mitchell Hutchins and the Fund's portfolio managers, biographical
information about the Fund's portfolio manager and information and commentary on
investment strategy or other matters of general interest to investors.]
TAXATION
GENERAL
In order to qualify for treatment as a regulated investment company
("RIC") under the Internal Revenue Code of 1986 ("Code"), the Fund must
distribute to its Shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net investment
income, net short-term capital gain and net gains from certain foreign currency
transactions) ("Distribution Requirement") and must meet several additional
requirements. These requirements include the following: (1) the Fund must derive
at least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in securities or those currencies ("Income Requirement");
(2) at the close of each quarter of the Fund's taxable year, at least 50% of the
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value of its total assets must be represented by cash and cash items, U.S.
government securities, securities of other RICs and other securities that are
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets; and (3) at the close of each quarter of
the Fund's taxable year, not more than 25% of the value of its total assets may
be invested in securities (other than U.S. government securities or the
securities of other RICs) of any one issuer. If the Fund failed to qualify for
treatment as a RIC for any taxable year, it would be taxed as an ordinary
corporation on its taxable income for that year (even if that income was
distributed to its Shareholders) and all distributions out of its earnings and
profits would be taxable to its Shareholders as dividends (that is, ordinary
income).
Dividends and other distributions declared by the Fund in October,
November or December of any year and payable to Shareholders of record on a date
in any of those months will be deemed to have been paid by the Fund and received
by the Shareholders on December 31st of that year if the distributions are paid
by the Fund during the following January. Accordingly, those distributions will
be taxed to Shareholders for the year in which that December 31st falls.
A portion of the dividends from the Fund's investment company taxable
income (whether paid in cash or reinvested in additional Fund shares) may be
eligible for the dividends-received deduction allowed to corporations. The
eligible portion may not exceed the aggregate dividends the Fund receives from
U.S. corporations. However, dividends received by a corporate Shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the alternative minimum tax. It is not expected that a significant
portion of the Fund's dividends will qualify for this deduction.
Income from investments in foreign securities may be subject to foreign
withholding or other taxes. Shareholders of the Fund will not be able to claim
any foreign tax credit or deduction with respect to those foreign taxes.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
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<PAGE>
income for the one-year period ending on October 31st of that year, plus certain
other amounts. For these purposes, any such income retained by the Fund, and on
which it pays federal income tax, will be treated as having been distributed.
PASSIVE FOREIGN INVESTMENT COMPANIES
The Fund may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation--other than a "controlled foreign
corporation" (i.e., a foreign corporation in which, on any day during its
taxable year, more than 50% of the total voting power of all voting stock
therein or the total value of all stock therein is owned, directly, indirectly,
or constructively, by "U.S. shareholders," defined as U.S. persons that
individually own, directly, indirectly, or constructively, at least 10% of that
voting power) as to which the Fund is a U.S. shareholder (effective after July
31, 1998)--that, in general, meets either of the following tests: (1) at least
75% of its gross income is passive or (2) an average of at least 50% of its
assets produce, or are held for the production of, passive income. Under certain
circumstances, the Fund will be subject to federal income tax on a portion of
any "excess distribution" received on the stock of a PFIC or of any gain on
disposition of that stock (collectively "PFIC income"), plus interest thereon,
even if the Fund distributes the PFIC income as a taxable dividend to its
Shareholders. The balance of the PFIC income will be included in the Fund's
investment company taxable income and, accordingly, will not be taxable to it to
the extent that income is distributed to its Shareholders. If the Fund invests
in a PFIC and elects to treat the PFIC as a "qualified electing fund", then, in
lieu of the foregoing tax and interest obligation, the Fund will be required to
include in income each year its pro rata share of the qualified electing fund's
annual ordinary earnings and net capital gain (the excess of net long-term
capital gain over net short-term capital loss)--which most likely would have to
be distributed by the Fund to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax--even if those earnings and gain are not
distributed to the Fund. In most instances it will be very difficult, if not
impossible, to make this election because of certain of its requirements.
Effective for its taxable year beginning November 1, 1998, the Fund may
elect to "mark to market" its stock in any PFIC. "Marking-to-market", in this
context, means including in ordinary income each taxable year the excess, if
any, of the fair market value of the PFIC's stock over the Fund's adjusted basis
therein as of the end of that year. Pursuant to the election, the Fund also will
be allowed to deduct (as an ordinary, not capital, loss) the excess, if any, of
its adjusted basis in PFIC stock over the fair market value thereof as of the
taxable year-end, but only to the extent of any net mark-to-market gains with
respect to that stock included by the Fund for prior taxable years. The Fund's
adjusted basis in each PFIC's stock with respect to which it makes this election
will be adjusted to reflect the amounts of income included and deductions taken
under the election. Regulations proposed in 1992 would provide a similar
election with respect to the stock of certain PFICs.
HEDGING STRATEGIES
The use of Hedging Strategies, such as selling (writing) and purchasing
options and futures and entering into forward currency contracts, involves
complex rules that will determine for income tax purposes the amount, character
and timing of recognition of the gains and losses the Fund realizes in
connection therewith. [These rules also may require the Fund to "mark to market"
(that is, treat as sold for their fair market value) at the end of each taxable
year certain positions in its portfolio, which may cause the Fund to recognize
income without receiving cash with which to make distributions necessary to
satisfy the Distribution Requirement and avoid imposition of the Excise Tax.]
Gains from the disposition of foreign currencies (except certain gains that may
be excluded by future regulations), and gains from options, futures and forward
currency contracts derived by the Fund with respect to its business of investing
in securities or foreign currencies, will qualify as permissible income under
the Income Requirement.
If the Fund has an "appreciated financial position" - generally, an
interest (including an interest through an option, futures or forward currency
contract, or short sale) with respect to any stock debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis - and enters into a "constructive sale" of the same or
substantially similar property, the Fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract or futures or forward currency contract entered into by the
29
<PAGE>
Fund or a related person with respect to the same or substantially similar
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale.
ADDITIONAL INFORMATION
STOCK REPURCHASES AND TENDERS
As discussed in the Prospectus, the Fund's Board of Directors may tender
for its shares to reduce or eliminate the discount to net asset value at which
the Fund's shares might trade. Even if a tender offer has been made, it will be
the Board's announced policy, which may be changed by the Board, not to accept
tenders or effect repurchases (or, if a tender offer has not been made, not to
initiate a tender offer) if (1) such transactions, if consummated, would (a)
result in the delisting of the Shares from the NYSE (the NYSE having advised the
Fund that it would consider delisting if the aggregate market value of the
outstanding shares is less than $5,000,000, the number of publicly held shares
falls below 600,000 or the number of round-lot holders falls below 1,200) or (b)
impair the Fund's status as a RIC (which would eliminate the Fund's eligibility
to deduct dividends paid to its Shareholders, thus causing its income to be
fully taxed at the corporate level in addition to the taxation of Shareholders
on distributions received from the Fund); (2) the Fund would not be able to
liquidate portfolio securities in an orderly manner and consistent with the
Fund's investment objectives and policies in order to repurchase its shares; or
(3) there is, in the Board's judgment, any (a) material legal action or
proceeding instituted or threatened challenging such transactions or otherwise
materially adversely affecting the Fund, (b) suspension of trading or limitation
on prices of securities generally on the NYSE or any other exchange on which
portfolio securities of the Fund are traded, (c) declaration of a banking
moratorium by federal or state authorities or any suspension of payment by banks
in the United States, New York State or any state in which the Fund invests, (d)
limitation affecting the Fund or the issuers of its portfolio securities imposed
by federal or state authorities on the extension of credit by lending
institutions, (e) commencement of war, armed hostilities or other international
or national calamity directly or indirectly involving the United States or (f)
other events or conditions that would have a material adverse effect on the Fund
or its Shareholders if shares were repurchased. The Board of Directors may
modify these conditions in light of experience.
AUDITORS
[Ernst & Young LLP, 787 Seventh Avenue, New York, NY 10019,] serves as
independent auditors for the Fund.
COUNSEL
Certain legal matters in connection with the Shares offered hereby will be
passed upon for the Fund by Kirkpatrick & Lockhart LLP and for the Underwriters
by Skadden, Arps, Slate, Meagher & Flom LLP, and its affiliated entities.
Kirkpatrick & Lockhart LLP also acts as counsel to Mitchell Hutchins and
PaineWebber in connection with other matters.
30
<PAGE>
INDEPENDENT AUDITOR'S REPORT
31
<PAGE>
MANAGED HIGH YIELD PLUS FUND INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
__________, 1998
ASSETS
Cash .......................................$
Deferred organization expenses (Note 1)....................... _____
Total Assets.............................................
LIABILITIES
Accrued expenses (Note 1)......................................_____
NET ASSETS ........................................................$=====
CAPITAL ........................................................
Common Stock, par value $.10 per share: _______Shares authorized;
_______ Shares issued
and outstanding (Note 1)........................$
Paid in Capital - Equivalent of $15.00 net asset value per share of
common stock (Note 1)................................................_____
Total Capital - Equivalent of $15.00 net asset value per share of
common stock (Note 1)...............................................$=====
NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
NOTE 1. ORGANIZATION
The Fund was incorporated under the laws of Maryland on April 24, 1998 as
a closed-end, diversified management investment company and has had no
operations other than the sale to Mitchell Hutchins Asset Management Inc.
("Mitchell Hutchins") of an aggregate of ___ shares for $___ on _________, 1998.
Deferred organization costs will be amortized on a straight-line basis
over a five-year period beginning with the commencement of operations of the
Fund.
NOTE 2. MANAGEMENT AND ADMINISTRATION ARRANGEMENTS
The Fund has engaged Mitchell Hutchins to provide investment management
and administration services to the Fund. Mitchell Hutchins will receive a
monthly fee for advisory and administration services at an annual rate equal to
.90% of the Fund's average weekly total assets minus accrued liabilities other
than the aggregate indebtedness constituting leverage.
NOTE 3. FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and as
such (and by complying with the applicable provisions of the Internal Revenue
Code of 1986, as amended) will not be subject to Federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders.
32
<PAGE>
- ------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS NOT CONTAINED MANAGED HIGH
IN THE PROSPECTUS OR IN THIS
STATEMENT OF ADDITIONAL INFORMATION YIELD PLUS FUND INC.
IN CONNECTION WITH THE OFFERING
MADE BY THE PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED COMMON STOCK
UPON AS HAVING BEEN AUTHORIZED BY
THE FUND OR ___________. THE
PROSPECTUS AND THIS STATEMENT OF
ADDITIONAL INFORMATION DO NOT _______________
CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE STATEMENT OF ADDITIONAL INFORMATION
REGISTERED SECURITIES TO WHICH THE
PROSPECTUS RELATES. THE PROSPECTUS _______________
AND THIS STATEMENT OF ADDITIONAL
INFORMATION DO NOT CONSTITUTE AN
OFFERING BY THE FUND OR BY
___________ IN ANY JURISDICTION IN [_______________________]
WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
_________________
______________
TABLE OF CONTENTS
____ ____, 1998
Page
----
Investment Policies and
Restrictions..................1
Hedging and Other Strategies
Using Derivative Instruments.......5
Directors and Officers............14
Investment Advisory Arrangements..20
High Yield Market Data............21
Net Asset Value Shares............23
Performance Information
Taxation..........................24
Additional Information............26
______________
(Copyright) 1998 PaineWebber Incorporated
<PAGE>
PART C -- OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements:
Report of Independent Auditors (to be filed)
Statement of Assets and Liabilities (to be filed)
2. Exhibits:
a. Articles of Incorporation (filed herewith)
b. Bylaws (filed herewith)
c. None
d. None
e. Dividend Reinvestment Plan (to be filed)
f. None
g. Investment Advisory and Administration Contract (to be
filed)
h. Underwriting Agreement (to be filed)
i. None
j. Custodian Agreement (to be filed)
k. Transfer Agency Agreement (to be filed)
l. Opinion and Consent of Counsel (to be filed)
m. None
n. Consent of Independent Auditors (to be filed)
o. None
p. Letter of Investment Intent (to be filed)
q. None
r. Financial Data Schedule (to be filed)
ITEM 25. MARKETING ARRANGEMENTS
See Section 5 of the Underwriting Agreement to be filed as exhibit 2(h) to
this Registration Statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses to be incurred in connection
with the offering described in this Registration Statement:
Securities and Exchange Commission Fees............... $ 20,355
New York Stock Exchange, Inc. Listing Fees............
National Association of Securities Dealers, Inc. Fees.
Printing and Engraving Expenses.......................
Legal Fees ....................................
Accounting Expenses...................................
Miscellaneous Expenses................................ -------
Total .................................... $=======
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
The Paine Webber Group Inc. subsidiaries that are in the securities or
investment advisory business are identified in the current Form BD filed by
II-1
<PAGE>
PaineWebber Inc. ("PaineWebber") and such information is incorporated herein
by reference.
Until such time as the Fund completes the public offering of its Common
Stock, Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") will be a
control person of the Fund. Mitchell Hutchins is a wholly owned subsidiary of
PaineWebber, which is in turn a wholly owned subsidiary of Paine Webber Group
Inc., a publicly held financial services holding company that has a number of
direct and indirect subsidiaries.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
Number of Record Shareholders as of
Title Of Class April 24, 1998
-------------- --------------
Shares of Common Stock, par None
value $0.001 per share
ITEM 29. INDEMNIFICATION
Article Twelfth of the Fund's Articles of Incorporation, filed as exhibit
2(a) to this Registration Statement, and Article IX of the Fund's By-Laws, filed
as exhibit 2(b), provide that the Fund shall indemnify its present and past
directors, officers, employees and agents, and persons who are serving or have
served at the Fund's request in similar capacities for, other entities to the
maximum extent permitted by applicable law (including Maryland law and the 1940
Act). Section 2-418(b) of the Maryland General Corporation Law ("Maryland Code")
permits the Fund to indemnify its directors unless it is proved that the act or
omission of the director was material to the cause of action adjudicated in the
proceeding, and (a) the act or omission was committed in bad faith or was the
result of active or deliberate dishonesty or (b) the director actually received
an improper personal benefit in money, property or services or (c) in the case
of a criminal proceeding, the director had reasonable cause to believe the act
or omission was unlawful. Indemnification may be made against judgments,
penalties, fines, settlements and reasonable expenses incurred in connection
with a proceeding, in accordance with the Maryland Code. Pursuant to Section
2-418(j)(1) and Section 4-418(j)(2) of the Maryland Code, the Fund is permitted
to indemnify its officers, employees and agents to the same extent. The
provisions set forth above apply insofar as consistent with Section 17(h) of the
1940 Act, which prohibits indemnification of nay director or officer of the Fund
against any liability to the Fund or its shareholders to which such director or
officer otherwise would be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
Section 9 of the Advisory Contract to be filed as exhibit 2(h) provides
that Mitchell Hutchins shall not be liable for any error of judgment or mistake
of law or for loss suffered by the Fund in connection with the matters to which
the Advisory Contract relates except a loss resulting from the willful
misfeasance, bad faith or gross neglect of Mitchell Hutchins in the performance
of its duties or from reckless disregard of its obligations and duties under the
Advisory Contract.
Section 7 of the Underwriting Agreement to be filed as exhibit 2(i)
provides that the Fund and Mitchell Hutchins jointly and severally will
indemnify the Underwriter and its directors, officers, employees and agents
against all liabilities to which any of them may become subject arising out of
any alleged untrue statement of material fact in any preliminary prospectus,
this Registration Statement or the Prospectus or any amendment or supplement
thereto, or the alleged omission to state in any such document a material fact
required to be stated in it or necessary to make the statements therein not
misleading. The Underwriting Agreement further provides that Mitchell Hutchins
and each officer or director of the Fund who signs the Registration Statement
shall be indemnified by the Underwriter to the same extent as set out above, but
only insofar as any liability arises out of nay statement or omission made in
reliance on and in conformity with information furnished to the Fund by the
Underwriter expressly for use in the preparation of the documents in which the
statement or omission is made or alleged to be made.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 ("1933 Act") may be provided to directors, officers and controlling
persons of the Fund, pursuant to the foregoing provisions or otherwise, the Fund
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the 1933 Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Fund of expenses incurred or paid by a director, officer or
controlling person of the Fund in connection with the successful defense of nay
action, suit or proceeding or payment pursuant to any insurance policy) is
asserted against the Fund by such director, officer or controlling person in
connection with the securities being registered, the Fund will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
See "Management of the Fund" in the Prospectus.
II-2
<PAGE>
Mitchell Hutchins, a Delaware corporation, is a registered investment
adviser and is wholly owned by PaineWebber, which in turn is wholly owned by
Paine Webber Group Inc. Mitchell Hutchins is primarily engaged in the investment
advisory business. Information as to executive officers and directors of
Mitchell Hutchins is included in its Form ADV as filed with the SEC
(Registration number 801-13219) and is incorporated by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Fund are maintained at the office of the
Fund at 1285 Avenue of the Americas, New York, New York 10019, at the office of
its custodian, State Street Bank & Trust Company ("State Street") at One
Heritage Drive, North Quincy, Massachusetts 02171, and at the office of the
Trust's transfer agent, PNC Bank, National Association, c/o PFPC Inc., 103
Bellevue Parkway, Wilmington, Delaware 19809.
ITEM 32. MANAGEMENT SERVICES
None.
ITEM 33. UNDERTAKINGS
(a) The Fund hereby undertakes to suspend the offering of its shares until
it amends its Prospectus if:
(1) subsequent to the effective date of this Registration Statement,
the net asset value per share declines more than 10% from its net asset
value per share as of the effective date of the Registration Statement; or
(2) the net asset value increases to an amount greater than its net
proceeds as stated in the Prospectus.
(b) The Fund hereby undertakes:
(1) For purposes of determining any liability under the 1933 Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Fund under Rule 497(h) under the 1933 Act shall
be deemed to be part of this Registration Statement as of the time it was
declared effective; and
(2) For the purposes of determining any liability under the 1933
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(c) The Fund undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, any Statement of Additional
Information
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York and State of New York, on the 24th day of April, 1998.
MANAGED HIGH YIELD PLUS FUND INC.
By: /s/Dianne E. O'Donnell
---------------------------
Dianne E. O'Donnell
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Dianne E. O'Donnell President and Director April 24, 1998
- ----------------------- (Chief Executive Officer)
Dianne E. O'Donnell
/s/ Paul H.Schubert Vice President and April 24, 1998
- ----------------------- Treasurer (Chief Financial
Paul H. Schubert and Accounting Officer)
<PAGE>
MANAGED HIGH YIELD PLUS FUND INC.
EXHIBIT INDEX
EXHIBIT DOCUMENT DESCRIPTION
- ------- --------------------
a. Articles of Incorporation (filed herewith)
b. Bylaws (filed herewith)
c. None
d. Inapplicable
e. Dividend Reinvestment Plan (to be filed)
f. None
g. Investment Advisory and Administration Contract (to be filed)
h. None
i. None
j. Custodian Agreement (to be filed)
k. Transfer Agency Agreement (to be filed)
l. Opinion and consent of counsel (to be filed)
m. None
n. Consent of Independent Auditors (to be filed)
o. None
p. Letter of Investment Intent (to be filed)
q. None
r. Financial Data Schedule (to be filed)
ARTICLES OF INCORPORATION
OF
MANAGED HIGH YIELD PLUS FUND INC.
FIRST: INCORPORATION: The undersigned, Jennifer R. Gonzalez, whose address
is 1800 Massachusetts Avenue, N.W., Washington, D.C. 20036-1800, being at
least eighteen years of age, does hereby form a corporation under the general
laws of the State of Maryland.
SECOND: NAME OF CORPORATION: The name of the corporation is Managed High
Yield Plus Fund Inc. ("Corporation").
THIRD: CORPORATE PURPOSES: The Corporation is formed for the following
purpose or purposes:
A. To conduct, operate and carry on the business of a closed-end,
management investment company, registered as such with the Securities and
Exchange Commission pursuant to the Investment Company Act of 1940, as amended
("1940 Act"); and
B. To exercise and enjoy all powers, rights, and privileges granted to and
conferred upon corporations by the Maryland General Corporation Law now or
hereafter in force, including, without limitation:
1. To hold, invest, and reinvest the funds of the Corporation,
and to purchase, subscribe for or otherwise acquire, hold
for investment, trade and deal in, sell, assign, negotiate,
transfer, exchange, lend, pledge or otherwise dispose of,
or turn to account or realize upon securities of any
corporation, company, association, trust, firm,
partnership, or other organization however or whenever
established or organized, as well as securities issued by
the United States Government, the government of any state,
municipality, or other political subdivision, foreign
governments, supranational entities, or any other
governmental or quasi-governmental agency, instrumentality,
or entity. For the purposes of these Articles of
Incorporation, as the same may be supplemented or amended
("Articles"), without limiting the generality thereof, the
term "securities" includes: stocks, shares, units of
beneficial interest, partnership interests, leases, bonds,
debentures, time notes and deposits, notes, mortgages, and
any other obligations or evidence of indebtedness; any
certificates, receipts, warrants, options, futures or
forward contracts, or other instruments representing rights
or obligations to receive, purchase, subscribe for or sell
the same, or evidencing or representing any other direct or
indirect right or interest, including all rights of
equitable ownership, in any property or assets; and any
negotiable or non-negotiable instruments including money
market instruments, bank certificates of deposit, finance
paper, commercial paper, bankers' acceptances, and all
types of repurchase and reverse repurchase agreements;
interest rate, currency or other swap contracts or
instruments; and all types of derivative contracts,
derivative instruments and synthetic securities;
<PAGE>
2. To enjoy all rights, powers, and privileges of ownership or
interest in all securities held by the Corporation, including
the right to vote and otherwise act with respect to the
preservation, protection, improvement, and enhancement in
value of all such securities;
3. To issue and sell shares of its own capital stock,
including shares in fractional denominations, and
securities which are convertible or exchangeable, with or
without the payment of additional consideration, into such
capital stock in such amounts and on such terms and for
such amount or kind of consideration (including securities)
now or hereafter permitted by the laws of the State of
Maryland and by these Articles as its Board of Directors
may, and is hereby authorized to, determine;
4. To purchase, repurchase or otherwise acquire, hold, dispose
of, resell, transfer, reissue, or cancel shares of its own
capital stock in any manner and to the extent now or hereafter
permitted by the laws of the State of Maryland and by these
Articles;
5. To transact its business, carry on its operations, have one or
more offices, and exercise all of its corporate powers and
rights in any state, territory, district, and possession of
the United States, and in any foreign country;
6. To aid by further investment any issuer of which the
Corporation holds any obligation or in which it has a
direct or indirect interest, to perform any act designed to
protect, preserve, improve, or enhance the value of such
obligation or interest, and to guarantee or become a surety
on any or all of the contracts, stocks, bonds, notes,
debentures, and obligations of any corporation, company,
trust, association, partnership or firm; and
7. To generally transact any business in connection with or
incidental to its corporate purposes, and to do everything
necessary, suitable, or proper for the accomplishment of such
purposes or for the attainment of any object or furtherance of
any purpose set forth in these Articles, either alone or in
association with others.
C. The foregoing clauses shall be construed both as purposes and powers,
and the foregoing enumeration of specific powers shall not be held to limit or
restrict in any manner the purposes and powers of the Corporation.
D. Incident to meeting the purposes specified above, the Corporation shall
also have the power, without limitation:
1. To make contracts and guarantees, incur liabilities and
borrow money;
2. To sell, lease, exchange, transfer, convey, mortgage, pledge,
and otherwise dispose of any or all of its assets;
-2-
<PAGE>
3. To acquire by purchase, lease or otherwise, and take, receive,
own, hold, use, employ, improve, dispose of and otherwise deal
with any interest in real or personal property, wherever
located; and
4. To buy, sell, and otherwise deal in and with commodities,
indices of commodities or securities, and foreign exchange,
including the purchase and sale of forward contracts, futures
contracts and options on futures contracts related thereto,
subject to any applicable provisions of law.
FOURTH: ADDRESS OF PRINCIPAL OFFICE. The post office address of the
principal office of the Corporation in the State of Maryland is CSC --
Lawyers Incorporating Service Company, 11 East Chase Street, Baltimore,
Maryland 21202.
FIFTH: NAME AND ADDRESS OF RESIDENT AGENT. The name and address of the
resident agent of the Corporation in the State of Maryland is CSC -- Lawyers
Incorporating Service Company, 11 East Chase Street, Baltimore, Maryland
21202.
SIXTH: CAPITAL STOCK.
A. The total number of shares of all classes of stock which the
Corporation has authority to issue is 200,000,000 shares of capital stock, $.001
par value, having an aggregate par value of $200,000.
B. Stockholders shall not have preemptive or preferential rights to
acquire any shares of the capital stock of the Corporation, and any or all of
such shares, whenever authorized, may be issued, or may be reissued and
transferred if such shares have been reacquired and have treasury status, to any
person, firm, corporation, trust, partnership, association or other entity for
such lawful consideration and on such terms as the Board of Directors determines
in its discretion without first offering the shares to any such holder.
C. All shares of the Corporation's authorized capital stock, when issued
for such consideration as the Board of Directors may determine, shall be fully
paid and nonassessable.
D. The Board of Directors of the Corporation may, by articles
supplementary to these Articles adopted pursuant to Section 2-208 of the
Maryland General Corporation Law or a successor provision thereto, classify or
reclassify any unissued capital stock from time to time by setting or changing
any preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or (subject to the purposes of the
Corporation) terms or conditions for the redemption of the stock by the
Corporation. Unless and until the Board of Directors shall provide otherwise
pursuant to the authority granted in this paragraph, all of the authorized
shares of the Corporation's capital stock are designated as Common Stock.
E. No shares of the Corporation's Common Stock shall have any conversion
or exchange rights or privileges or have cumulative voting rights.
F. The dividends and distributions or other payments with respect to the
capital stock of the Corporation, including any class that hereafter may be
created, shall be in such amounts as may be declared from time to time by the
-3-
<PAGE>
Board of Directors, and such dividends and distributions may vary from class to
class to such extent and for such purposes as the Board of Directors may deem
appropriate, including, but not limited to, the purpose of complying with
requirements of regulatory or legislative authorities.
G. Unless otherwise provided in these Articles, on each matter that is
submitted to a vote of the stockholders, each holder of a share of capital stock
of the Corporation shall be entitled to one vote for each such share registered
in such holder's name on the books of the Corporation, irrespective of the class
of such share, and all shares of all classes of capital stock shall vote
together as a single class; provided, however, that, except as otherwise
expressly provided in these Articles, as to any matter with respect to which a
separate vote of any class is required by the 1940 Act (including the rules or
regulations thereunder) or by the Maryland General Corporation Law, voting in
accordance with such requirement shall apply in lieu of a vote of all classes
voting together as a single class.
H. In the event of the liquidation or dissolution of the Corporation, the
holders of the Corporation's Common Stock shall be entitled to receive all the
net assets of the Corporation not attributable to other classes of capital stock
through any preference. The assets so distributed to the stockholders shall be
distributed among such stockholders in proportion to the number of shares of the
class held by them and recorded on the books of the Corporation.
SEVENTH: BOARD OF DIRECTORS: The Corporation shall have at least three
directors; provided that if there is no stock outstanding, the number of
directors may be less than three but not less than one. Dianne E. O'Donnell
shall act as sole director of the Corporation until the first annual meeting or
until her successor is duly chosen and qualified.
EIGHTH: MANAGEMENT OF THE AFFAIRS OF THE CORPORATION.
A. All corporate powers and authority of the Corporation shall be vested
in and exercised by the Board of Directors except as otherwise provided by
statute, these Articles or the Bylaws of the Corporation.
B. The Board of Directors shall have the power to adopt, alter, or repeal
the Bylaws of the Corporation, unless the Bylaws otherwise provide.
C. The Board of Directors shall have the power to determine whether and to
what extent, and at what times and places, and under what conditions and
regulations the accounts and books of the Corporation (other than the stock
ledger) shall be open to inspection by stockholders. No stockholder shall have
any right to inspect any account, book, or document of the Corporation except to
the extent permitted by statute or the Bylaws.
D. The Board of Directors shall have the power to determine, in accordance
with generally accepted accounting principles, the Corporation's net income, its
total assets and liabilities, and the net asset value of the shares of capital
stock of the Corporation. The Board of Directors may delegate such power to any
one or more of the directors or officers of the Corporation, its investment
adviser, administrator, custodian, or depository of the Corporation's assets, or
another agent of the Corporation appointed for such purposes.
-4-
<PAGE>
E. The Board of Directors shall have the power to make distributions,
including dividends, from any legally available funds in such amounts, and in a
manner and to the stockholders of record of such a date, as the Board of
Directors may determine.
NINTH: STOCKHOLDER LIABILITY. The stockholders shall not be liable to any
extent for the payment of any debt of the Corporation.
TENTH: MAJORITY OF VOTES. Except as otherwise provided in these Articles, and
notwithstanding any provision of Maryland law requiring approval by a greater
proportion than a majority of the votes entitled to be cast in order to take or
authorize any action, any action may be taken or authorized by the Corporation
upon the affirmative vote of a majority of the votes entitled to be cast thereon
(or by a majority of the votes entitled to be cast thereon as a separate class).
ELEVENTH: CERTAIN TRANSACTIONS.
A. Notwithstanding any other provision of these Articles, and subject to
the exception provided in Paragraph D of this Article, the transactions
described in Paragraph C of this Article shall require the affirmative vote or
consent of the holders of sixty-six and two-thirds percent (66 2/3%) of the
outstanding shares of the capital stock of the Corporation. Notwithstanding any
other provision in these Articles, such affirmative vote shall be in addition
to, and not in lieu of, the vote or consent of the holders of the stock of the
Corporation otherwise required by law (including without limitation, any
separate vote by class of capital stock that may be required by the 1940 Act or
by the Maryland General Corporation Law), by the terms of any class or series of
stock that is now or hereafter authorized, or by any agreement between the
Corporation and any national securities exchange.
B. For purposes of this Article, the term "Principal Stockholder" shall
mean any corporation, person, or group (within the meaning of Rule 13d-5 under
the Securities Exchange Act of 1934), which is the beneficial owner, directly or
indirectly, of more than five percent of the outstanding shares of the stock of
the Corporation and shall include any affiliate or associate, as such terms are
defined in clause (2) below, of a Principal Stockholder. For the purposes of
this Article, in addition to the shares of stock which a corporation, person,
entity, or group beneficially owns directly, any corporation, person, entity, or
group shall be deemed to be the beneficial owner of any shares of stock of the
Corporation (1) which it has the right to acquire pursuant to any agreement or
upon exercise of conversion rights or warrants, or otherwise or (2) which are
beneficially owned, directly or indirectly (including shares deemed owned
through application of clause (1) above), by any other corporation, person,
entity, or group with which it or its "affiliate" or "associate," as those terms
are defined in Rule 12b-2 under the Securities Exchange Act of 1934, has any
agreement, arrangement, or understanding for the purpose of acquiring, holding,
voting, or disposing of stock of the Corporation, or which is its "affiliate" or
"associate" as so defined. For purposes of this Article, calculation of the
outstanding shares of stock of the Corporation shall not include shares deemed
owned through application of clause (1) above.
C. This Article shall apply to the following transactions:
1. Merger, consolidation or share exchange of the Corporation
with or into any Principal Stockholder;
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<PAGE>
2. Issuance of any securities of the Corporation to any Principal
Stockholder for cash;
3. Sale, lease, or exchange of all or any substantial part of the
assets of the Corporation to any Principal Stockholder (except
assets having an aggregate fair market value of less than
$1,000,000, aggregating for the purposes of such computation
all assets sold, leased, or exchanged in any series of similar
transactions within a twelve-month period);
4. Sale, lease, or exchange to the Corporation, in exchange for
securities of the Corporation, of any assets of any Principal
Stockholder (except assets having an aggregate fair market
value of less than $1,000,000, aggregating for the purposes of
such computation all assets sold, leased, or exchanged in any
series of similar transactions within a twelve-month period);
or
5. Any amendment to these Articles that makes the Common Stock or
any other class of capital stock a "redeemable security" as
that term is defined in the 1940 Act.
D. The provisions of this Article shall not apply to any transaction
described in Paragraph C of this Article if the Board of Directors authorizes
such transaction by an affirmative vote of a majority of the directors,
including a majority of the directors who are not "interested persons" of the
Corporation, as that term is defined in the 1940 Act.
TWELFTH: LIMITATION ON LIABILITY.
A. To the maximum extent permitted by applicable law (including Maryland
law and the 1940 Act) as currently in effect or as may hereafter be amended:
1. No director or officer of the Corporation shall be liable
to the Corporation or its stockholders for money damages;
and
2. The Corporation shall indemnify and advance expenses as
provided in the Bylaws of the Corporation to its present and
past directors, officers, employees and agents, and persons
who are serving or have served at the request of the
Corporation in similar capacities for other entities.
B. No amendment, alteration or repeal of this Article or the adoption,
alteration or amendment of any other provision of these Articles or the Bylaws
of the Corporation inconsistent with this Article, shall adversely affect any
limitation on liability or indemnification of any person under this Article with
respect to any act or failure to act which occurred prior to such amendment,
alteration, repeal or adoption.
THIRTEENTH: RIGHT OF AMENDMENT. Except as set forth below and subject to the
authority granted to the Board of Directors to adopt articles supplementary
pursuant to Article SIXTH hereof, any provision of these Articles may be
amended, altered or repealed only upon the affirmative vote of the holders of a
majority of the outstanding shares of the Corporation. Any amendment, alteration
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<PAGE>
or repeal of Article ELEVENTH, TWELFTH or THIRTEENTH shall require the
affirmative vote or consent of the holders of sixty-six and two-thirds percent
(66 2/3%) of the outstanding shares of the capital stock of the Corporation.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation and
acknowledge the same to be my act on this 23rd day of April, 1998.
/s/ Jennifer R. Gonzalez
-----------------------------------
Jennifer R. Gonzalez
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<PAGE>
MANAGED HIGH YIELD PLUS FUND INC.
A Maryland Corporation
BYLAWS
April 24, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I....................................................................1
NAME OF CORPORATION, LOCATION OF OFFICES AND SEAL......................1
Section 1. Name.......................................................1
Section 2. Principal Offices..........................................1
Section 3. Seal.......................................................1
ARTICLE II...................................................................1
STOCKHOLDERS...........................................................1
Section 1. Annual Meetings............................................1
Section 2. Special Meetings...........................................1
Section 3. Notice of Meetings.........................................2
Section 4. Quorum and Adjournment of Meetings.........................2
Section 5. Voting and Inspectors......................................2
Section 6. Validity of Proxies........................................3
Section 7. Stock Ledger and List of Stockholders......................3
Section 8. Action Without Meeting.....................................3
ARTICLE III..................................................................4
BOARD OF DIRECTORS.....................................................4
Section 1. Powers.....................................................4
Section 2. Number and Term of Directors...............................4
Section 3. Election...................................................4
Section 4. Vacancies and Newly Created Directorships..................5
Section 5. Removal....................................................5
Section 6. Chairman of the Board......................................5
Section 7. Annual and Regular Meetings................................5
Section 8. Special Meetings...........................................6
Section 9. Waiver of Notice...........................................5
Section 10. Quorum and Voting.........................................6
Section 11. Action Without a Meeting..................................6
Section 12. Compensation of Directors.................................6
<PAGE>
ARTICLE IV...................................................................6
COMMITTEES.............................................................6
Section 1. Organization...............................................6
Section 2. Executive Committee........................................6
Section 3. Proceedings and Quorum.....................................6
Section 4. Other Committees...........................................7
ARTICLE V....................................................................7
OFFICERS...............................................................7
Section 1. General....................................................7
Section 2. Election, Tenure and Qualifications........................7
Section 3. Vacancies and Newly Created Officers.......................7
Section 4. Removal and Resignation....................................7
Section 5. President..................................................8
Section 6. Vice President.............................................8
Section 7. Treasurer and Assistant Treasurers.........................9
Section 8. Secretary and Assistant Secretaries........................8
Section 9. Subordinate Officers.......................................9
Section 10. Remuneration..............................................9
Section 11. Surety Bond..............................................10
ARTICLE VI...................................................................9
CAPITAL STOCK..........................................................9
Section 1. Certificates of Stock......................................9
Section 2. Transfer of Shares........................................10
Section 3. Stock Ledgers.............................................11
Section 4. Transfer Agents and Registrars............................10
Section 5. Fixing of Record Date.....................................10
Section 6. Lost, Stolen or Destroyed Certificates....................10
ARTICLE VII.................................................................11
FISCAL YEAR AND ACCOUNTANT............................................11
Section 1. Fiscal Year...............................................12
Section 2. Accountant................................................11
ARTICLE VIII................................................................11
CUSTODY OF SECURITIES.................................................11
Section 1. Employment of a Custodian.................................11
Section 2. Termination of Custodian Agreement........................12
Section 3. Other Arrangements........................................12
ARTICLE IX..................................................................12
<PAGE>
INDEMNIFICATION AND INSURANCE.........................................12
Section 1. Indemnification of Officers, Directors,
Employees and Agents....................................12
Section 2. Insurance of Officers, Directors, Employees and Agents....12
Section 3. Amendment.................................................12
ARTICLE X...................................................................13
AMENDMENTS............................................................13
Section 1. General...................................................13
Section 2. By Stockholders Only......................................13
<PAGE>
BYLAWS
OF
MANAGED HIGH YIELD PLUS FUND INC.
(A MARYLAND CORPORATION)
ARTICLE I
---------
NAME OF CORPORATION,
LOCATION OF OFFICES AND SEAL
SECTION 1. NAME. The name of the Corporation is Managed High Yield Plus
Fund Inc.
SECTION 2. PRINCIPAL OFFICES. The principal office of the Corporation in the
State of Maryland shall be located in the City of Baltimore. The Corporation
may, in addition, establish and maintain such other offices and places of
business as the Board of Directors may, from time to time, determine.
SECTION 3. SEAL. The corporate seal of the Corporation shall be circular in form
and shall bear the name of the Corporation, the year of its incorporation, and
the word "Maryland." The form of the seal shall be subject to alteration by the
Board of Directors and the seal may be used by causing it or a facsimile to be
impressed or affixed or printed or otherwise reproduced. Any officer or director
of the Corporation shall have authority to affix the corporate seal of the
Corporation to any document requiring the same.
ARTICLE II
----------
STOCKHOLDERS
------------
SECTION 1. ANNUAL MEETINGS. An annual meeting of stockholders shall be held as
required and for the purposes prescribed by the Investment Company Act of 1940,
as amended ("1940 Act"), and the laws of the State of Maryland and for the
election of directors and the transaction of such other business as may properly
come before the meeting. Except for the first fiscal year of the Corporation,
the meeting shall be held annually at a time set by the Board of Directors at
the Corporation's principal offices or at such other place within the United
States as the Board of Directors shall select.
SECTION 2. SPECIAL MEETINGS. Special meetings of stockholders may be called at
any time by the Chairman of the Board, President, any Vice President, or by a
majority of the Board of Directors, and shall be held at such time and place as
may be stated in the notice of the meeting.
Special meetings of the stockholders may be called by the Secretary upon
the written request of the holders of shares entitled to vote not less than 25
percent of all the votes entitled to be cast at such meeting, provided that (1)
such request shall state the purposes of such meeting and the matters proposed
to be acted on, and (2) the stockholders requesting such meeting shall have paid
to the Corporation the reasonably estimated cost of preparing and mailing the
notice thereof, which the Secretary shall determine and specify to such
<PAGE>
stockholders. No special meeting shall be called upon the request of
stockholders to consider any matter which is substantially the same as a matter
voted upon at any special meeting of the stockholders held during the preceding
twelve months, unless requested by the holders of a majority of all shares
entitled to be voted at such meeting.
SECTION 3. NOTICE OF MEETINGS. The Secretary shall cause notice of the place,
date and hour, and, in the case of a special meeting, the purpose or purposes
for which the meeting is called, to be mailed, postage prepaid, not less than
ten nor more than ninety days before the date of the meeting, to each
stockholder entitled to vote at such meeting at his or her address as it appears
on the records of the Corporation at the time of such mailing. Notice shall be
deemed to be given when deposited in the United States mail addressed to the
stockholders as aforesaid. Notice of any stockholders' meeting need not be given
to any stockholder who shall sign a written waiver of such notice whether before
or after the time of such meeting, or to any stockholder who is present at such
meeting in person or by proxy. Notice of adjournment of a stockholders' meeting
to another time or place need not be given if such time and place are announced
at the meeting. Irregularities in the notice of any meeting to, or the
nonreceipt of any such notice by, any of the stockholders shall not invalidate
any action otherwise properly taken by or at any such meeting.
SECTION 4. QUORUM AND ADJOURNMENT OF MEETINGS. The presence at any stockholders'
meeting, in person or by proxy, of stockholders entitled to cast a majority of
the votes shall be necessary and sufficient to constitute a quorum for the
transaction of business. In the absence of a quorum, the holders of a majority
of shares entitled to vote at the meeting and present in person or by proxy, or,
if no stockholder entitled to vote is present in person or by proxy, any officer
present entitled to preside or act as secretary of such meeting may adjourn the
meeting without determining the date of the new meeting or from time to time
without further notice to a date not more than 120 days after the original
record date. Any business that might have been transacted at the meeting
originally called may be transacted at any such adjourned meeting at which a
quorum is present.
SECTION 5. VOTING AND INSPECTORS. Except as otherwise provided in the Articles
of Incorporation or by applicable law, at each stockholders' meeting each
stockholder shall be entitled to one vote for each share of stock of the
Corporation validly issued and outstanding and registered in his or her name on
the books of the Corporation on the record date fixed in accordance with Section
5 of Article VI hereof, either in person or by proxy appointed by instrument in
writing subscribed by such stockholder or his or her duly authorized attorney,
except that no shares held by the Corporation shall be entitled to a vote. If no
record date has been fixed, the record date for the determination of
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be the later of the close of business on the day on which notice of the meeting
is mailed or the thirtieth day before the meeting, or, if notice is waived by
all stockholders, at the close of business on the tenth day next preceding the
day on which the meeting is held.
Except as otherwise provided in the Articles of Incorporation or these
Bylaws or as required by provisions of the 1940 Act, all matters shall be
decided by a vote of the majority of the votes validly cast. The vote upon any
question shall be by ballot whenever requested by any person entitled to vote,
but, unless such a request is made, voting may be conducted in any way approved
by the meeting.
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<PAGE>
At any meeting at which there is an election of Directors, the chairman of
the meeting may, and upon the request of the holders of ten percent of the stock
entitled to vote at such election shall, appoint two inspectors of election who
shall first subscribe an oath or affirmation to execute faithfully the duties of
inspectors at such election with strict impartiality and according to the best
of their ability, and shall, after the election, make a certificate of the
result of the vote taken. No candidate for the office of Director shall be
appointed as an inspector.
SECTION 6. VALIDITY OF PROXIES. The right to vote by proxy shall exist only if
the proxy is authorized to act by (1) a written instrument, dated not more than
eleven months prior to the meeting and executed either by the stockholder or by
his or her duly authorized attorney in fact (who may be so authorized by a
writing or by any non-written means permitted by the laws of the State of
Maryland) or (2) such electronic, telephonic, computerized or other alternative
means as may be approved by a resolution adopted by the Directors. All proxies
shall be delivered to the Secretary of the Corporation or to the person acting
as Secretary of the meeting before being voted, who shall decide all questions
concerning qualification of voters, the validity of proxies, and the acceptance
or rejection of votes. If inspectors of election have been appointed by the
chairman of the meeting, such inspectors shall decide all such questions. A
proxy with respect to stock held in the name of two or more persons shall be
valid if executed by one of them unless at or prior to exercise of such proxy
the Corporation receives a specific written notice to the contrary from any one
of them. A proxy purporting to be executed by or on behalf of a stockholder
shall be deemed valid unless challenged at or prior to its exercise.
SECTION 7. STOCK LEDGER AND LIST OF STOCKHOLDERS. It shall be the duty of the
Secretary or Assistant Secretary of the Corporation to cause an original or
duplicate stock ledger to be maintained at the office of the Corporation's
transfer agent. Such stock ledger may be in written form or any other form
capable of being converted into written form within a reasonable time for visual
inspection. Any one or more persons, each of whom has been a stockholder of
record of the Corporation for more than six months next preceding such request,
who owns in the aggregate 5% or more of the outstanding capital stock of the
Corporation, may submit (unless the Corporation at the time of the request
maintains a duplicate stock ledger at its principal office in Maryland) a
written request to any officer of the Corporation or its resident agent in
Maryland for a list of the stockholders of the Corporation. Within 20 days after
such a request, there shall be prepared and filed at the Corporation's principal
office in Maryland a list containing the names and addresses of all stockholders
of the Corporation and the number of shares of each class held by each
stockholder, certified as correct by an officer of the Corporation, by its stock
transfer agent, or by its registrar.
SECTION 8. ACTION WITHOUT MEETING. Any action required or permitted to be taken
by stockholders at a meeting of stockholders may be taken without a meeting if
(1) all stockholders entitled to vote on the matter consent to the action in
writing, (2) all stockholders entitled to notice of the meeting but not entitled
to vote at it sign a written waiver of any right to dissent, and (3) the
consents and waivers are filed with the records of the meetings of stockholders.
Such consent shall be treated for all purposes as a vote at the meeting.
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<PAGE>
ARTICLE III
-----------
BOARD OF DIRECTORS
------------------
SECTION 1. POWERS. Except as otherwise provided by operation of law, by the
Articles of Incorporation, or by these Bylaws, the business and affairs of the
Corporation shall be managed under the direction of and all the powers of the
Corporation shall be exercised by or under authority of its Board of Directors.
SECTION 2. NUMBER AND TERM OF DIRECTORS. Except for the initial Board of
Directors, the Board of Directors shall consist of not fewer than three nor more
than fifteen Directors, as specified by a resolution of a majority of the entire
Board of Directors and at least one member of the Board of Directors shall be a
person who is not an "interested person" of the Corporation, as that term is
defined in the 1940 Act. All other directors may be interested persons of the
Corporation if the requirements of Section 10(d) of the 1940 Act are met by the
Corporation and its investment adviser. Directors need not be stockholders of
the Corporation. All acts done at any meeting of the Directors or by any person
acting as a Director, so long as his or her successor shall not have been duly
elected or appointed, shall, notwithstanding that it be afterwards discovered
that there was some defect in the election of the Directors or of such person
acting as a Director or that they or any of them were disqualified, be as valid
as if the Directors or such other person, as the case may be, had been duly
elected and were or was qualified to be Directors or a Director of the
Corporation. Each Director shall hold office until his or her successor is
elected and qualified or until his or her earlier death, resignation or removal.
SECTION 3. ELECTION. At the first annual meeting of stockholders, Directors
shall be elected by vote of the holders of a majority of the shares present in
person or by proxy and entitled to vote thereon. Thereafter, except as otherwise
provided in these Bylaws, the Directors shall be elected by the stockholders at
a meeting held on a date fixed by the board of Directors. A plurality of all the
votes cast at a meeting at which a quorum is present is sufficient to elect a
Director.
SECTION 4. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. If any vacancies shall
occur in the Board of Directors by reason of death, resignation, removal or
otherwise, or if the authorized number of Directors shall be increased, the
Directors then in office shall continue to act, and such vacancies (if not
previously filled by the stockholders) may be filled by a majority of the
Directors then in office, although less than a quorum, except that a newly
created Directorship may be filled only by a majority vote of the entire Board
of Directors; provided, however, that if the stockholders of any class of the
Corporation's capital stock are entitled separately to elect one or more
directors, a majority of the remaining directors elected by that class (if any)
may fill any vacancy among the number of directors elected by that class;
provided further, however, that, at any time that there are stockholders of the
Corporation, immediately after filling such vacancy at least two-thirds (2/3) of
the Directors then holding office shall have been elected to such office by the
stockholders of the Corporation. In the event that at any time, other than the
time preceding the first annual stockholders' meeting, less than a majority of
the Directors of the Corporation holding office at that time were elected by the
stockholders, a meeting of the stockholders shall be held promptly and in any
event within sixty days for the purpose of electing Directors to fill any
-4-
<PAGE>
existing vacancies in the Board of Directors, unless the Securities and Exchange
Commission shall by order extend such period.
SECTION 5. REMOVAL. At any stockholders' meeting duly called, provided a quorum
is present, the stockholders may remove any director from office (either with or
without cause) and may elect a successor or successors to fill any resulting
vacancies for the unexpired terms of the removed director or directors. A
majority of all votes represented at a meeting is sufficient to remove a
Director for cause.
SECTION 6. CHAIRMAN OF THE BOARD. The Board of Directors may, but shall not be
required to, elect a Chairman of the Board. Any Chairman of the Board shall be
elected from among the Directors of the Corporation and may hold such office
only so long as he or she continues to be a Director. The Chairman, if any,
shall preside at all stockholders' meetings and at all meetings of the Board of
Directors, and may be EX OFFICIO a member of all committees of the Board of
Directors. The Chairman, if any, shall have such powers and perform such duties
as may be assigned from time to time by the Board of Directors.
SECTION 7. ANNUAL AND REGULAR MEETINGS. The annual meeting of the Board of
Directors for choosing officers and transacting other proper business shall be
held at such time and place as the Board may determine. The Board of Directors
from time to time may provide by resolution for the holding of regular meetings
and fix their time and place within or outside the State of Maryland. Except as
otherwise provided in the 1940 Act, notice of such annual and regular meetings
need not be given, provided that notice of any change in the time or place of
such meetings shall be sent promptly to each Director not present at the meeting
at which such change was made, in the manner provided for notice of special
meetings. Except as otherwise provided under the 1940 Act, members of the Board
of Directors or any committee designated thereby may participate in a meeting of
such Board or committee by means of a conference telephone or similar
communications equipment that allows all persons participating in the meeting to
hear each other at the same time.
SECTION 8. SPECIAL MEETINGS. Special meetings of the Board of Directors shall be
held whenever called by the Chairman of the Board, the President (or, in the
absence or disability of the President, by any Vice President), the Treasurer or
by two or more Directors, at the time and place (within or without the State of
Maryland) specified in the respective notice or waivers of notice of such
meetings. Notice of special meetings, stating the time and place, shall be (1)
mailed to each Director at his or her residence or regular place of business at
least three days before the day on which a special meeting is to be held or (2)
delivered to him or her personally or transmitted to him or her by telegraph,
telecopy, telex, cable or wireless at least one day before the meeting.
SECTION 9. WAIVER OF NOTICE. No notice of any meeting need be given to any
Director who is present at the meeting or who waives notice of such meeting in
writing (which waiver shall be filed with the records of such meeting), either
before or after the time of the meeting.
SECTION 10. QUORUM AND VOTING. At all meetings of the Board of Directors, the
presence of one half or more of the number of Directors then in office shall
constitute a quorum for the transaction of business, provided that there shall
-5-
<PAGE>
be present at least two directors. In the absence of a quorum, a majority of the
Directors present may adjourn the meeting, from time to time, until a quorum
shall be present. The action of a majority of the Directors present at a meeting
at which a quorum is present shall be the action of the Board of Directors,
unless concurrence of a greater proportion is required for such action by law,
by the Articles of Incorporation or by these Bylaws.
SECTION 11. ACTION WITHOUT A MEETING. Except as otherwise provided under the
1940 Act, any action required or permitted to be taken at any meeting of the
Board of Directors or of any committee thereof may be taken without a meeting if
a written consent to such action is signed by all members of the Board or of
such committee, as the case may be, and such written consent is filed with the
minutes of proceedings of the Board or committee.
SECTION 12. COMPENSATION OF DIRECTORS. Directors shall be entitled to receive
such compensation from the Corporation for their services as may from time to
time be determined by resolution of the Board of Directors.
ARTICLE IV
----------
COMMITTEES
----------
SECTION 1. ORGANIZATION. By resolution adopted by the Board of Directors, the
Board may designate one or more committees of the Board of Directors, including
an Executive Committee. The Chairmen of such committees shall be elected by the
Board of Directors. Each committee must be comprised of two or more members,
each of whom must be a Director and shall hold committee membership at the
pleasure of the Board. The Board of Directors shall have the power at any time
to change the members of such committees and to fill vacancies in the
committees. The Board may delegate to these committees any of its powers, except
the power to declare a dividend or distribution on stock, authorize the issuance
of stock, recommend to stockholders any action requiring stockholders' approval,
amend these Bylaws, approve any merger or share exchange which does not require
stockholder approval, approve or terminate any contract with an "investment
adviser" or "principal underwriter," as those terms are defined in the 1940 Act,
or to take any other action required by the 1940 Act to be taken by the Board of
Directors.
SECTION 2. EXECUTIVE COMMITTEE. Unless otherwise provided by resolution of the
Board of Directors, when the Board of Directors is not in session, the Executive
Committee, if one is designated by the Board, shall have and may exercise all
powers of the Board of Directors in the management of the business and affairs
of the Corporation that may lawfully be exercised by an Executive Committee. The
President shall automatically be a member of the Executive Committee.
SECTION 3. PROCEEDINGS AND QUORUM. In the absence of an appropriate resolution
of the Board of Directors, each committee may adopt such rules and regulations
governing its proceedings, quorum and manner of acting as it shall deem proper
and desirable. In the event any member of any committee is absent from any
meeting, the members thereof present at the meeting, whether or not they
constitute a quorum, may appoint a member of the Board of Directors to act in
the place of such absent member.
-6-
<PAGE>
SECTION 4. OTHER COMMITTEES. The Board of Directors may appoint other
committees, each consisting of one or more persons, who need not be Directors.
Each such committee shall have such powers and perform such duties as may be
assigned to it from time to time by the Board of Directors, but shall not
exercise any power which may lawfully be exercised only by the Board of
Directors or a committee thereof.
ARTICLE V
---------
OFFICERS
--------
SECTION 1. GENERAL. The officers of the Corporation shall be a President, a
Secretary, and a Treasurer, and may include one or more Vice Presidents,
Assistant Secretaries or Assistant Treasurers, and such other officers as may be
appointed in accordance with the provisions of Section 9 of this Article.
SECTION 2. ELECTION, TENURE AND QUALIFICATIONS. The officers of the Corporation,
except those appointed as provided in Section 9 of this Article V, shall be
elected by the Board of Directors at its first meeting or such subsequent
meetings as shall be held prior to its first annual meeting, and thereafter
annually at its annual meeting. If any officers are not elected at any annual
meeting, such officers may be elected at any subsequent regular or special
meeting of the Board. Except as otherwise provided in this Article V, each
officer elected by the Board of Directors shall hold office until the next
annual meeting of the Board of Directors and until his or her successor shall
have been elected and qualified. Any person may hold one or more offices of the
Corporation except that no one person may serve concurrently as both President
and Vice President. A person who holds more than one office in the Corporation
may not act in more than one capacity to execute, acknowledge, or verify an
instrument required by law to be executed, acknowledged, or verified by more
than one officer. No officer need be a Director.
SECTION 3. VACANCIES AND NEWLY CREATED OFFICERS. If any vacancy shall occur in
any office by reason of death, resignation, removal, disqualification or other
cause, or if any new office shall be created, such vacancies or newly created
offices may be filled by the Board of Directors at any regular or special
meeting or, in the case of any office created pursuant to Section 9 hereof, by
any officer upon whom such power shall have been conferred by the Board of
Directors.
SECTION 4. REMOVAL AND RESIGNATION. Any officer may be removed from office by
the vote of a majority of the members of the Board of Directors given at a
regular meeting or any special meeting called for such purpose, if the Board has
determined the best interests of the Corporation will be served by removal of
that officer. Any officer may resign from office at any time by delivering a
written resignation to the Board of Directors, the President, the Secretary, or
any Assistant Secretary. Unless otherwise specified therein, such resignation
shall take effect upon delivery.
SECTION 5. PRESIDENT. The President shall be the chief executive officer of the
Corporation and, in the absence of the Chairman of the Board or if no Chairman
of the Board has been elected, shall preside at all stockholders' meetings and
at all meetings of the Board of Directors and shall in general exercise the
powers and perform the duties of the Chairman of the Board. Subject to the
supervision of the Board of Directors, the President shall have general charge
of the business, affairs and property of the Corporation and general supervision
-7-
<PAGE>
over its officers, employees and agents. Except as the Board of Directors may
otherwise order, the President may sign in the name and on behalf of the
Corporation all deeds, bonds, contracts, or agreements. The President shall
exercise such other powers and perform such other duties as from time to time
may be assigned by the Board of Directors.
SECTION 6. VICE PRESIDENT. The Board of Directors may from time to time elect
one or more Vice Presidents who shall have such powers and perform such duties
as from time to time may be assigned to them by the Board of Directors or the
President. At the request of, or in the absence or in the event of the
disability of, the President, the Vice President (or, if there are two or more
Vice Presidents, then the senior of the Vice Presidents present and able to act)
may perform all the duties of the President and, when so acting, shall have all
the powers of and be subject to all the restrictions upon the President.
SECTION 7. TREASURER AND ASSISTANT TREASURERS. The Treasurer shall be the
principal financial and accounting officer of the Corporation and shall have
general charge of the finances and books of account of the Corporation. Except
as otherwise provided by the Board of Directors, the Treasurer shall have
general supervision of the funds and property of the Corporation and of the
performance by the Custodian of its duties with respect thereto. The Treasurer
shall render to the Board of Directors, whenever directed by the Board, an
account of the financial condition of the Corporation and of all transactions as
Treasurer; and as soon as possible after the close of each financial year the
Treasurer shall make and submit to the Board of Directors a like report for such
financial year. The Treasurer shall perform all acts incidental to the office of
Treasurer, subject to the control of the Board of Directors.
Any Assistant Treasurer may perform such duties of the Treasurer as the
Treasurer or the Board of Directors may assign, and, in the absence of the
Treasurer, may perform all the duties of the Treasurer.
SECTION 8. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall attend to
the giving and serving of all notices of the Corporation and shall record all
proceedings of the meetings of the stockholders and Directors in books to be
kept for that purpose. The Secretary shall keep in safe custody the seal of the
Corporation, and shall have responsibility for the records of the Corporation,
including the stock books and such other books and papers as the Board of
Directors may direct and such books, reports, certificates and other documents
required by law to be kept, all of which shall at all reasonable times be open
to inspection by any Director. The Secretary shall perform such other duties
which appertain to this office or as may be required by the Board of Directors.
Any Assistant Secretary may perform such duties of the Secretary as the
Secretary or the Board of Directors may assign, and, in the absence of the
Secretary, may perform all the duties of the Secretary.
SECTION 9. SUBORDINATE OFFICERS. The Board of Directors from time to time may
appoint such other officers and agents as it may deem advisable, each of whom
shall have such title, hold office for such period, have such authority and
perform such duties as the Board of Directors may determine. The Board of
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Directors from time to time may delegate to one or more officers or agents the
power to appoint any such subordinate officers or agents and to prescribe their
respective rights, terms of office, authorities and duties. Any officer or agent
appointed in accordance with the provisions of this Section 9 may be removed,
either with or without cause, by any officer upon whom such power of removal
shall have been conferred by the Board of Directors.
SECTION 10. REMUNERATION. The salaries or other compensation of the officers of
the Corporation shall be fixed from time to time by resolution of the Board of
Directors in the manner provided by Section 10 of Article III, except that the
Board of Directors may by resolution delegate to any person or group of persons
the power to fix the salaries or other compensation of any subordinate officers
or agents appointed in accordance with the provisions of Section 9 of this
Article V.
SECTION 11. SURETY BOND. The Board of Directors may require any officer or agent
of the Corporation to execute a bond (including, without limitation, any bond
required by the 1940 Act and the rules and regulations of the Securities and
Exchange Commission promulgated thereunder) to the Corporation in such sum and
with such surety or sureties as the Board of Directors may determine,
conditioned upon the faithful performance of his or her duties to the
Corporation, including responsibility for negligence and for the accounting of
any of the Corporation's property, funds or securities that may come into his or
her hands.
ARTICLE VI
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CAPITAL STOCK
-------------
SECTION 1. CERTIFICATES OF STOCK. The interest of each stockholder of the
Corporation shall be evidenced by certificates for shares of stock in such form
as the Board of Directors may from time to time authorize, provided, however,
the Board of Directors may, in its discretion, authorize the issuance of
non-certificated shares. No certificate shall be valid unless it is signed by
the President or a Vice President and countersigned by the Secretary or an
Assistant Secretary or the Treasurer or an Assistant Treasurer of the
Corporation and sealed with the seal of the Corporation, or bears the facsimile
signatures of such officers and a facsimile of such seal. In case any officer
who shall have signed any such certificate, or whose facsimile signature has
been placed thereon, shall cease to be such an officer (because of death,
resignation or otherwise) before such certificate is issued, such certificate
may be issued and delivered by the Corporation with the same effect as if he or
she were such officer at the date of issue.
In the event that the Board of Directors authorizes the issuance of
non-certificated shares of stock, the Board of Directors may, in its discretion
and at any time, discontinue the issuance of share certificates and may, by
written notice to the registered owners of each certificated share, require the
surrender of share certificates to the Corporation for cancellation. Such
surrender and cancellation shall not affect the ownership of shares of the
Corporation.
SECTION 2. TRANSFER OF SHARES. Shares of the Corporation shall be transferable
on the books of the Corporation by the holder of record thereof in person or by
his or her duly authorized attorney or legal representative (i) upon surrender
and cancellation of a certificate or certificates for the same number of shares
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of the same class, duly endorsed or accompanied by proper instruments of
assignment and transfer, with such proof of the authenticity of the signature as
the Corporation or its agents may reasonably require, or (ii) as otherwise
prescribed by the Board of Directors. The shares of stock of the Corporation may
be freely transferred, and the Board of Directors may, from time to time, adopt
rules and regulations with reference to the method of transfer of the shares of
stock of the Corporation. The Corporation shall be entitled to treat the holder
of record of any share of stock as the absolute owner thereof for all purposes,
and accordingly shall not be bound to recognize any legal, equitable or other
claim or interest in such share on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise expressly
provided by law or the statutes of the State of Maryland.
SECTION 3. STOCK LEDGERS. The stock ledgers of the Corporation, containing the
names and addresses of the stockholders and the number of shares held by them
respectively, shall be kept at the principal offices of the Corporation or, if
the Corporation employs a transfer agent, at the offices of the transfer agent
of the Corporation.
SECTION 4. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may from time
to time appoint or remove transfer agents and registrars of transfers for shares
of stock of the Corporation, and it may appoint the same person as both transfer
agent and registrar. Upon any such appointment being made all certificates
representing shares of capital stock thereafter issued shall be countersigned by
one of such transfer agents or by one of such registrars or by both and shall
not be valid unless so countersigned. If the same person shall be both transfer
agent and registrar, only one countersignature by such person shall be required.
SECTION 5. FIXING OF RECORD DATE. The Board of Directors may fix in advance a
date as a record date for the determination of the stockholders entitled to
notice of or to vote at any stockholders' meeting or any adjournment thereof, or
to express consent to corporate action in writing without a meeting, or to
receive payment of any dividend or other distribution or allotment of any
rights, or to exercise any rights in respect of any change, conversion or
exchange of stock, or for the purpose of any other lawful action, provided that
(1) such record date shall be within ninety days prior to the date on which the
particular action requiring such determination will be taken; (2) the transfer
books shall not be closed for a period longer than twenty days; and (3) in the
case of a meeting of stockholders, the record date shall be at least ten days
before the date of the meeting.
SECTION 6. LOST, STOLEN OR DESTROYED CERTIFICATES. Before issuing a new
certificate for stock of the Corporation alleged to have been lost, stolen or
destroyed, the Board of Directors or any officer authorized by the Board may, in
its discretion, require the owner of the lost, stolen or destroyed certificate
(or his or her legal representative) to give the Corporation a bond or other
indemnity, in such form and in such amount as the Board or any such officer may
direct and with such surety or sureties as may be satisfactory to the Board or
any such officer, sufficient to indemnify the Corporation against any claim that
may be made against it on account of the alleged loss, theft or destruction of
any such certificate or the issuance of such new certificate.
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ARTICLE VII
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FISCAL YEAR AND ACCOUNTANT
--------------------------
SECTION 1. FISCAL YEAR. The fiscal year of the Corporation shall, unless
otherwise ordered by the Board of Directors, be twelve calendar months ending
on the 31st day of May.
SECTION 2. ACCOUNTANT.
A. The Corporation shall employ an independent public accountant or a firm
of independent public accountants as its Accountant to examine the accounts of
the Corporation and to sign and certify financial statements filed by the
Corporation. The Accountant's certificates and reports shall be addressed both
to the Board of Directors and to the stockholders. The employment of the
Accountant shall be conditioned upon the right of the Corporation to terminate
the employment forthwith without any penalty by vote of a majority of the
outstanding voting securities at any stockholders' meeting called for that
purpose.
B. A majority of the members of the Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Corporation shall
select the Accountant at any meeting held within thirty days before or after the
beginning of the fiscal year of the Corporation or before the annual
stockholders' meeting in that year. The selection shall be submitted for
ratification or rejection at the next succeeding annual stockholders' meeting.
If the selection is rejected at that meeting, the Accountant shall be selected
by majority vote of the Corporation's outstanding voting securities, either at
the meeting at which the rejection occurred or at a subsequent meeting of
stockholders called for the purpose of selecting an Accountant.
C. Any vacancy occurring between annual meetings due to the resignation of
the Accountant may be filled by the vote of a majority of the members of the
Board of Directors who are not interested persons.
ARTICLE VIII
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CUSTODY OF SECURITIES
---------------------
SECTION 1. EMPLOYMENT OF A CUSTODIAN. The Corporation shall place and at all
times maintain in the custody of a Custodian (including any sub-custodian for
the Custodian) all funds, securities and similar investments owned by the
Corporation. The Custodian (and any sub-custodian) shall be a bank or trust
company of good standing having an aggregate capital, surplus, and undivided
profits not less than fifty million dollars ($50,000,000) or such other
financial institution or other entity as shall be permitted by rule or order of
the Securities and Exchange Commission. The Custodian shall be appointed from
time to time by the Board of Directors, which shall fix its remuneration.
SECTION 2. TERMINATION OF CUSTODIAN AGREEMENT. Upon termination of the agreement
for services with the Custodian or inability of the Custodian to continue to
serve, the Board of Directors shall promptly appoint a successor Custodian, but
in the event that no successor Custodian can be found who has the required
qualifications and is willing to serve, the Board of Directors shall call as
promptly as possible a special meeting of the stockholders to determine whether
the Corporation shall function without a Custodian or shall be liquidated. If so
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directed by resolution of the Board of Directors or by vote of the holders of a
majority of the outstanding shares of stock of the Corporation, the Custodian
shall deliver and pay over all property of the Corporation held by it as
specified in such vote.
SECTION 3. OTHER ARRANGEMENTS. The Corporation may make such other
arrangements for the custody of its assets (including deposit arrangements)
as may be required by any applicable law, rule or regulation.
ARTICLE IX
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INDEMNIFICATION AND INSURANCE
-----------------------------
SECTION 1. INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS. The
Corporation shall indemnify its present and past directors, officers, employees
and agents, and any persons who are serving or have served at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, or enterprise, to the full extent provided
and allowed by Section 2-418 of the General Corporate Law of Maryland or a
Successor Provision thereto concerning corporations, as amended from time to
time or any other applicable provisions of law. Notwithstanding anything herein
to the contrary, no director, officer, investment adviser or principal
underwriter of the Corporation shall be indemnified in violation of Sections
17(h) and (i) of the 1940 Act. Expenses incurred by any such person in defending
any proceeding to which he or she is a party by reason of service in the
above-referenced capacities shall be paid in advance or reimbursed by the
Corporation to the full extent permitted by law, including Sections 17(h) and
(i) of the 1940 Act.
SECTION 2. INSURANCE OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS. The
Corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against any liability asserted against that person and incurred by
that person in or arising out of his or her position, whether or not the
Corporation would have the power to indemnify him or her against such liability.
SECTION 3. AMENDMENT. No amendment, alteration or repeal of this Article or the
adoption, alteration or amendment of any other provision of the Articles of
Incorporation or Bylaws inconsistent with this Article shall adversely affect
any right or protection of any person under this Article with respect to any act
or failure to act which occurred prior to such amendment, alteration, repeal or
adoption.
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ARTICLE X
---------
AMENDMENTS
----------
SECTION 1. GENERAL. Except as provided in Section 2 of this Article X, all
Bylaws of the Corporation, whether adopted by the Board of Directors or the
stockholders, shall be subject to amendment, alteration or repeal, and new
Bylaws may be made by the affirmative vote of a majority of either: (1) the
holders of record of the outstanding shares of stock of the Corporation entitled
to vote, at any annual or special meeting, the notice or waiver of notice of
which shall have specified or summarized the proposed amendment, alteration,
repeal or new Bylaw; or (2) the Directors, at any regular or special meeting the
notice or waiver of notice of which shall have specified or summarized the
proposed amendment, alteration, repeal or new Bylaw.
SECTION 2. BY STOCKHOLDERS ONLY. No amendment of any section of these Bylaws
shall be made except by the stockholders of the Corporation if the Bylaws
provide that such section may not be amended, altered or repealed except by the
stockholders. From and after the issue or any shares of the capital stock of the
Corporation, no amendment, alteration or repeal of this Article X shall be made
except by the affirmative vote of the holders of either: (a) more than
two-thirds of the Corporation's outstanding shares present at a meeting at which
the holders of more than fifty percent of the outstanding shares are present in
person or by proxy, or (b) more than fifty percent of the Corporation's
outstanding shares.
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