<PAGE>
As filed with the Securities and Exchange Commission on June 24,1998
Securities Act File No. 333-51017
Investment Company Act File No. 811-08765
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM N-2
Registration Statement Under the Securities Act of 1933 [X]
Pre-Effective Amendment No. 2 [X]
Post-Effective Amendment No.
and
Registration Statement Under the Investment Company Act of 1940 [X]
Amendment No. 2 [X]
(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.
Vice-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.
ROBERT A. WITTIE, ESQ. THOMAS A. HALE, ESQ.
KIRKPATRICK & LOCKHART LLP SKADDEN, ARPS, SLATE MEAGHER &
1800 Massachusetts Avenue, N.W. FLOM (ILLINOIS)
Washington, D.C. 20036-1800 333 West Wacker Drive
Chicago, Illinois 60606
--------------------
Approximate date of proposed public offering:
As soon as practicable after this Registration Statement becomes effective.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=======================================================================================================================
Proposed Proposed
Amount Maximum Maximum
Title of Being Offering Price Aggregate Amount of
Securities Being Registered Registered(1) Per Unit Offering Price Registration Fee(2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($.001 par 30,705,000 $15.00 $46,475,000 $135,869.63
value)
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</TABLE>
(1) Includes 4,005,000 shares which may be offered by the Underwriters
pursuant to an option to cover over allotments.
(2) Of which $20,355 was previously paid.
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
<TABLE>
<CAPTION>
Part A
Item Number Caption Prospectus Caption
----------- ------- ------------------
<S> <C> <C>
1 Outside Front Cover............................. Outside Front Cover Page
2 Inside Front and Outside Back Cover Page........ Inside Front and Outside Back Cover Page
3 Fee Table and Synopsis.......................... Fund 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
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 Securities....... Not Applicable
12 Legal Proceedings............................... Not Applicable
13 Table of Contents of the Statement of
Additional Information.......................... Further Information
<CAPTION>
Part B Statement of
Item Number Caption Additional Information
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<S> <C> <C>
14 Cover Page...................................... Cover Page
15 Table of Contents............................... Table of Contents
16 General Information and History................. Not Applicable
17 Investment Objectives and Policies.............. Investment Policies and Restrictions; Hedging
and Other Strategies Using Derivative
Instruments; Portfolio Transactions
18 Management...................................... Directors and Officers
19 Control Persons and Principal Holders of
Securities...................................... Control Persons and Principal Holders of
Securities
20 Investment Advisory and Other Services.......... Directors and Officers; Investment Advisory
Arrangements; Additional Information; see also
Management of the Fund and Custodian, Transfer
and Dividend Disbursing Agent and Registrar in
the Prospectus
21 Brokerage Allocation and Other Practices........ Portfolio Transactions
22 Tax Status...................................... Taxation
23 Financial Statements............................ Report of Independent Auditors; Statement of
Assets, Liabilities and Capital
</TABLE>
<PAGE>
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.
Under normal market conditions, 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 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. Up to 35% of the Fund's total assets
may be invested in securities of foreign issuers, including issuers in
emerging market countries, but no more than 15% of the Fund's total assets may
be invested in securities that are denominated in currencies other than the
U.S. dollar. SEE "SPECIAL CONSIDERATIONS AND RISK FACTORS."
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 Shares have been approved for listing, subject to notice of issuance, on
the New York Stock Exchange under the symbol "HYF." 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 100 Shares ($1,500).
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 June 24, 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) 852-4750.
(Continued on following page)
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES 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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Price to Sales Proceeds to
Public Load (1) Fund (2)
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<S> <C> <C> <C>
Per Share....................................... $15.00 NONE $15.00
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Total........................................... $ NONE $
- -------------------------------------------------------------------------------
Total Assuming Full Exercise of Over-Allotment
Option (3)..................................... $ NONE $
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</TABLE>
(Footnotes on following page)
----------------
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 June 30, 1998.
----------------
PAINEWEBBER INCORPORATED
----------------
THE DATE OF THIS PROSPECTUS IS JUNE 24, 1998.
<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. SEE "UNDERWRITING."
----------------
(Continued from cover page)
The Fund expects to use leverage through bank borrowings or other
transactions involving indebtedness or through the issuance of preferred
stock. Initially, the Fund intends to borrow an 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 use leverage if it anticipates that a leveraged capital structure
would result in a lower return to Shareholders than the Fund could obtain over
time without leverage. Leverage creates an opportunity for increased income
and capital appreciation for Shareholders, but at the same time, it creates
special risks. There can be no assurance that a leveraging strategy will be
successful during any period in which it is used. SEE "OTHER INVESTMENT
PRACTICES--LEVERAGE."
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. It 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.
----------------
(Footnotes from cover page)
(1) PaineWebber Incorporated (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 expenses payable by the Fund, estimated at
$ , which will be expensed during the first year of the Fund's
operations.
(3) Assuming exercise in full of the 45-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>
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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 PaineWebber
Incorporated ("PaineWebber"). The Underwriters have
been granted an option to purchase up to
additional Shares solely to cover over-allotments,
if any. The initial public offering price is $15 per
Share. The minimum investment in the offering is 100
Shares ($1,500). 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 the sale of Shares in this offering,
PaineWebber (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
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. Under
normal market conditions, 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
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 (collectively with Moody's and
S&P, "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 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 rating, or as a result of
declines in long-term interest rates.
- --------------------------------------------------------------------------------
3
<PAGE>
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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 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.
In certain market conditions, Mitchell Hutchins may
determine that securities rated investment grade
(i.e., at least Baa by Moody's or BBB by S&P or
comparably rated by another Rating Agency) offer
significant opportunities for high income and
capital appreciation with only a relatively small
reduction in yield. In such conditions, the Fund may
invest less than 65% of its toal assets in lower-
rated, income producing debt and related equity
securities.
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 bonds, 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 income or total return potential declines
relative to its risk level, or when the security
becomes overvalued when compared to its industry.
The Fund expects to use leverage through bank
borrowings or other transactions involving
indebtedness or through the issuance of preferred
stock. Initially, the Fund intends to borrow an
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 use
leverage if it anticipates that a leveraged capital
structure would result in a lower
- --------------------------------------------------------------------------------
4
<PAGE>
return to Shareholders than the Fund could obtain
over time without leverage. Leverage creates an
opportunity for increased income and capital
appreciation for Shareholders, but at the same time,
it creates special risks. There can be no assurance
that a leveraging strategy will be successful during
any period in which it is used. See "Other
Investment Practices--Leverage."
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 or
comparable issuers (issuers whose debt securities
are lower-rated or who 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
these securities have a potential for capital
appreciation.
The Fund may also engage in other investment
practices, including forward commitments, repurchase
agreements, reverse repurchase agreements, dollar
rolls, lending of portfolio securities and short
sales "against the box," 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 or 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. When unusual market or economic
conditions occur, the Fund may, for temporary
defensive purposes, invest up to 100% of its total
assets, or for liquidity purposes, invest up to 35%
of its total assets, in higher-rated debt
securities, such as securities issued or guaranteed
by the U.S. government or its agencies or
instrumentalities, certificates of deposit,
5
<PAGE>
- --------------------------------------------------------------------------------
bankers' acceptances or other bank obligations,
commercial paper, or other income securities deemed
by Mitchell Hutchins to be consistent with a
defensive posture, or it may hold cash.
See "Investment Objectives and Policies," "Other
Investment Practices," "Special Considerations and
Risk Factors," "Taxation" and "Investment Policies
and Restrictions" in the SAI.
Investment Adviser and
Administrator.......... Mitchell Hutchins, a wholly owned asset management
subsidiary of PaineWebber, will serve 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 May 31, 1998, Mitchell
Hutchins served as investment adviser or sub-adviser
to 31 registered investment companies with 68
separate portfolios having aggregate assets of
approximately $39.7 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
0.70% of the Fund's average weekly total assets
minus liabilities other than the aggregate
indebtedness constituting leverage ("Managed
Assets"). 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."
Listing................. The Shares have been approved for listing, subject to
notice of issuance, on the New York Stock Exchange
("NYSE") under the symbol "HYF." Prior to this
offering, there has been no market for the Shares.
Dividends and Other
Distributions.......... The Fund intends to distribute substantially all 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."
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6
<PAGE>
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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), will 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, if the Shares are trading at or above
net asset value, issued by the Fund. 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
Option.................
Purchasers of Shares through PaineWebber in this
offering will have an investment option consisting
of the right to reinvest the net proceeds from a
sale at the market price of such Shares (the
"Original Shares") in any Class A shares of one of
the PaineWebber Family of Mutual Funds ("Eligible
Class A Shares") at its net asset value, without the
imposition of the initial sales charge, provided
that four conditions are satisfied. First, the
Original Shares must have either been acquired in
this offering or be Shares representing reinvested
dividends from those Shares. Second, the Original
Shares must have been continuously maintained in a
PaineWebber securities account. Third, the sale of
the Original Shares must be made through PaineWebber
at least one year after the completion of this
offering. Fourth, the net proceeds from the sale of
Original Shares must be reinvested immediately in
Eligible Class A Shares and there must be a minimum
purchase of $1,500 to be eligible for the investment
option. The reinvestment of net proceeds from the
sale of Original Shares will not relieve the selling
Shareholder of any income tax that may be payable on
the sale. See "Mutual Fund Investment Option."
Share Repurchases and
Tender Offers;
Conversion to Open-End
Fund................... 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, 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 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
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7
<PAGE>
- --------------------------------------------------------------------------------
Fund and its Shareholders to convert the Fund to an
open-end investment company, but there can be no
assurance that the Board of Directors will conclude
that such a conversion is in those best interests.
See "Description of Capital Stock."
Special Considerations
and Risk Factors....... General. 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. 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 negative publicity or investor perceptions.
During periods of economic downturn, 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 default in payment of interest or principal
by such issuers is significantly greater because
lower-rated securities frequently are unsecured and
subordinated to the prior payment of senior
indebtedness. In order for the Fund to enforce its
rights in the event of a default on lower-rated
securities, the Fund may be required to take
possession of and manage collateral securing the
issuer's obligations. This 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
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
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 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 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.
Some or all of the securities in which the Fund
invests may be illiquid when purchased or
subsequently may become illiquid. 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 may have to sell other investments if necessary
to raise cash to meet its obligations. 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.
It may be more difficult to determine the fair value
of illiquid securities for purposes of computing the
Fund's net asset value. See "Investment Objectives
and Policies."
Original Issue Discount, Zero Coupon and Payment-in-
Kind Securities. The Fund may invest in discount
securities, including zero coupon securities, other
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.
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
indebtedness or in the dividend rates on any
preferred stock issued by the Fund may adversely
affect the return to Shareholders. To the
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
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.
Even 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.
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 "Other
Investment Practices--Leverage" and "Management of
the Fund."
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.
Investments in securities that are denominated in
foreign currencies are subject to the risk that
changes in foreign exchange rates may reduce the
U.S. dollar value of those securities. These risks
may be more acute with respect to the Fund's
investments in emerging market countries. The
special risks of foreign investing 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.
Hedging and Other Strategies Involving Derivative
Instruments. The Fund may invest in derivative
instruments which entail special risks.
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
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. Shares of
closed-end management investment companies
frequently trade at a discount from their net asset
value. 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, and it may be greater
for investors who purchase Shares in the initial
public offering and who expect to sell their Shares
soon after the completion thereof. Accordingly, the
Shares are designed primarily for long-term
investors. 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 "Description of
Capital Stock."
The net 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."
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--Anti-Takeover Provisions," and "Description
of Capital Stock--Certain Anti-Takeover Provisions
of the Articles of Incorporation."
- --------------------------------------------------------------------------------
11
<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.
<TABLE>
<S> <C>
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......................... 0.93%
Interest Payments on Borrowed Funds................................. 2.05%
Other Expenses...................................................... 0.16%
----
Total Annual Expenses.............................................. 3.14%
====
</TABLE>
- --------
(1) See "Management of the Fund" for additional information. The table above
assumes that the Fund will utilize leverage by borrowing in an amount equal
to approximately 25% of the Fund's total assets (including the amount
obtained from leverage) at an annualized interest rate of 6.15%. If the
Fund does not use any leverage, the Fund anticipates that its annual
operating expenses (as a percentage of net assets attributable to the
Shares) would be approximately as follows: Investment Advisory and
Administrative Fees)-- 0.70%; Interest Payments on Borrowed Funds --0.00%;
Other Expenses --0.16%; and Total Annual Expenses -- 0.86%. "Interest
Payments on Borrowed Funds" and "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, (ii)
reinvestment of all dividends and other distributions at net asset value and
(iii) that the Fund will utilize leverage by borrowing in an amount equal to
approximately 25% of the Fund's total assets (including the amount obtained
from leverage) at an annualized interest rate of 6.15%:
<TABLE>
<S> <C> <C> <C> <C>
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
$ 32 $ 96 $ 164 $ 343
</TABLE>
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 after the first year of the Fund's operations to reflect the absence of
organizational expenses). The above tables and the assumption in this 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 if that price is lower than net asset value. In the event
the Fund does not utilize any leverage, an investor, would pay the following
expenses based on the assumptions in this Example: One Year -- $9; Three Years
- -- $27; Five Years -- $47 and Ten Years -- $104.
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.
12
<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 expenses estimated at $ . The proceeds will be invested in
accordance with the Fund's investment objectives and policies during a period
not to exceed three 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
paid by the Fund upon completion of the initial public offering. There is no
sales load or underwriting discount imposed on sales of Shares in the initial
public offering. In connection with sales of Shares in this offering,
PaineWebber (not the Fund) will pay a commission to the Underwriters from its
own assets. PaineWebber (not the Fund) will bear the costs relating to the
expenses of this offering. 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. Under normal market conditions, 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. By seeking to achieve both of its investment
objectives, the Fund will seek to obtain high income plus capital appreciation
for its Shareholders.
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.
In certain market conditions, Mitchell Hutchins may determine that
securities rated investment grade (i.e., at least Baa by Moody's or BBB by S&P
or comparably rated by another Rating Agency) offer significant opportunities
for high income and capital appreciation with only a relatively small
reduction in yield. In such conditions, the Fund may invest less than 65% of
its toal assets in lower-rated, income producing debt and related equity
securities.
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
13
<PAGE>
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 bonds, 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 income
or total return potential declines relative to its risk level, or when the
security becomes overvalued when compared to its industry.
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
who 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.
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.
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.
PORTFOLIO SECURITIES
The following summarizes some of the characteristics of the principal
securities in which the Fund may invest. See the Statement of Additional
Information for more information.
Debt Obligations; Lower-Rated Securities. The lower-rated securities in
which the Fund will invest are debt obligations, including bonds, debentures,
notes, corporate loans and similar instruments and securities, and are
generally unsecured. Mortgage and asset-backed securities are types of debt
obligations, and income-producing, non-convertible preferred stocks may be
treated as debt obligations for the Fund's investment purposes. Debt
obligations are used by private and public issuers to borrow money from
investors. The issuer pays the investor a fixed or variable rate of interest
and normally must repay the amount borrowed on or before maturity. Debt
obligations are subject to varying degrees of risk of loss, and the prices
(i.e., market values) of debt obligations fluctuate to varying degrees in
response to changes in market interest rates.
Investments in lower-rated securities are subject to a greater price
volatility and a greater risk of loss than higher-rated investments and are
considered by the Rating Agencies to be predominantly speculative,
14
<PAGE>
with limited protection of interest and principal payments. The lower-rated
securities in which the Fund may invest include securities that are in default
or that face the risk of default with respect to payments of 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 negative
publicity or investor perceptions. During periods of economic downturn, issuers
of lower-rated income securities, especially highly leveraged issuers, may
experience financial stress that 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. See "Special
Considerations and Risk Factors--Certain Risks Associated with Investments in
Lower-Rated Securities."
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.
For more information about the markets for lower-rated securities, including
historical performance information, see "Market Data" in the SAI.
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 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.
Original Issue Discount, Zero Coupon and Payment-in-Kind Securities. The
Fund may invest in discount securities, including zero coupon securities,
other securities issued with OID and PIK securities.
15
<PAGE>
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. Because the Fund must include the return on zero coupon, OID and
PIK securities as taxable income, the Fund considers these securities to be
income-producing for purposes of computing whether at least 65% of the Fund's
total assets are invested in lower-rated, income-producing debt and related
equity securities.
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 they may be subject to greater risk of loss of
principal and interest. There are, however, some significant differences
between Corporate Loans and other lower-rated securities. Corporate Loan
obligations are frequently secured by collateral pledged by the borrower, and
investors in Corporate Loans frequently benefit from 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 collateral) 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 variable rates that are set at a specified
"spread" above a base lending rate, such as the prime rate of a U.S. bank,
which may fluctuate on a day-to-day basis, or above an established index, such
as the London Interbank Offered Rate ("LIBOR"), which is adjusted at set
intervals (typically 30 days, but generally not more than one year).
Consequently, the value of Corporate Loans held by the Fund may be expected to
fluctuate less in response to changes in market interest rates than would
fixed-rate securities. However, the secondary market for Corporate Loans is
not as well developed as the secondary market for other lower-rated
securities, and reliable valuation information about Corporate Loans may be
harder to obtain. Therefore, the Fund may have difficulty liquidating and
valuing and Corporate Loans that it holds.
Generally, Corporate Loans are originated through a lending syndicate in
which a bank acts as an administrative agent on behalf of the other lenders to
negotiate the loan terms and assumes certain loan servicing responsibilities.
The Fund's investments in Corporate Loans normally will be through assignments
of or participations in all or a portion of another 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. However, in an
assignment, the Fund may have greater direct responsibilities with respect to
collection of principal and interest and the enforcement of its rights.
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-
16
<PAGE>
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. Foreign mortgage-
backed securities may be issued by mortgage banks and other private or
governmental entities outside the United States and are supported by interests
in foreign real estate. New types of mortgage- and asset-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- and
asset-backed securities that Mitchell Hutchins believes may assist in
achieving its investment objectives. Similarly, the Fund may invest in
mortgage-backed securities issued by new or existing governmental or private
issuers other than those identified herein.
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 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.
For additional information, see "Investment Policies and Restrictions--
Mortgage- and Asset-Backed Securities" in the SAI.
TEMPORARY AND DEFENSIVE STRATEGIES
The Fund may implement various temporary or 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. When unusual market or economic conditions occur, the Fund
may, for temporary defensive purposes, invest up to 100% of its total assets,
or for liquidity purposes, invest up to 35% of its total assets, in securities
issued or guaranteed by the U.S. government or its agencies or
instrumentalities, certificates of deposit, bankers' acceptances or other bank
obligations, commercial paper or other income securities deemed by Mitchell
Hutchins to be consistent with a defensive posture, or it may hold cash. These
strategies may include an increase in the portion of the Fund's assets
invested in higher-quality debt securities,
17
<PAGE>
which generally have lower yields than do lower-rated securities. It is
impossible to predict when, or for how long, the Fund will use these
alternative strategies. In addition to its authority to use 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., settlement and
clearance of securities transactions and payments of dividends to common or
any preferred 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 use leverage through bank borrowings and other
transactions involving indebtedness or through the issuance of preferred
stock. Initially, the Fund intends to borrow an 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 use leverage if it anticipates that a leveraged capital structure
would result in a lower return to Shareholders than the Fund could obtain over
time without leverage. The Fund also may borrow up to an additional 5% of its
total assets (not including the amount so borrowed) for temporary purposes,
including the settlement and clearance of securities transactions, which
otherwise might require untimely dispositions of Fund securities, and the
payment of dividends to common or any preferred stockholders. 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 reverse repurchase transactions or engage in
dollar rolls. In a reverse repurchase agreement, the Fund sells securities to
a bank, securities dealer or one of their respective affiliates and agrees to
repurchase them on demand or on a specified future date and at a specified
price. Reverse repurchase agreements involve the risk that the buyer of the
securities sold by the Fund might be unable to deliver them when the Fund
seeks to repurchase. If the buyer of the securities under the 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 the 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 that decision. In a dollar roll, the Fund sells mortgage-
backed or other securities for delivery on the next regular settlement date
and, simultaneously, contracts to purchase substantially identical securities
for delivery on a later settlement date.
Leverage creates an opportunity for increased income and capital
appreciation for the Shareholders, but at the same time, it creates special
risks. Leverage is a speculative technique in that it will increase the Fund's
exposure to capital risk. Successful use of leverage depends on Mitchell
Hutchins' ability to predict correctly interest rates and market movements,
and there is no assurance that the use of a leveraging strategy will be
successful during any period in which it is used.
The premise underlying the use of leverage is that the costs of leveraging
generally will be based on short-term rates, which normally will be lower than
the return (including the potential for capital appreciation) that
18
<PAGE>
the Fund can earn on the longer-term portfolio investments that it makes with
the proceeds obtained through the leverage. Thus, the Shareholders would
benefit from an incremental return. However, if the differential between the
return on the Fund's investments and the cost of leverage were to narrow, the
incremental benefit would be reduced and could be eliminated or even become
negative. Furthermore, if long-term rates rise, the net asset value of the
Shares will reflect the resulting decline in the value of a larger aggregate
amount of portfolio assets than the Fund would hold if it had not leveraged.
Thus, leveraging exaggerates changes in the value and in the yield on the
Fund's portfolio. This, in turn, may result in greater volatility of both the
net asset value and the market price of the Shares.
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 payable to Mitchell
Hutchins during periods in which the Fund is using 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.
Assuming 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 6.15% 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 1.54%.
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.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return (net of ex-
penses)............................. (10)% (5)% 0 % 5% 10%
Corresponding Share Return........... (15.38)% (8.72)% (2.05)% 4.62% 11.28%
</TABLE>
Until the Fund incurs indebtedness 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. The Fund's willingness to
use leverage and the extent to which it uses it at any time will depend on
many factors, the most important of which are investment outlook, market
conditions and interest rates.
For further information about leveraging, see "Special Considerations and
Risk Factors--Leverage."
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FORWARD COMMITMENTS
The Fund may make contracts to purchase securities for a fixed price at a
future date beyond the customary settlement time ("forward commitments")
without its doing so being considered leverage 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 that it owns.
Forward commitments involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date. This 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 and simultaneously commits
to resell the securities to the seller at an agreed-upon date or upon 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, securities dealers or their respective affiliates
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 be illiquid
when purchased or, subsequently, may 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 that 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 those investments and may have to sell
other investments or borrow to raise cash to meet its obligations.
In making day-to-day determinations of liquidity pursuant to guidelines
approved by the Fund's Board, Mitchell Hutchins will take into account a
number of factors, 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.
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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.
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 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 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 swap
transactions only with banks and recognized securities dealers or their
respective affiliates that are 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 derivative
instruments and strategies involves certain special risks, including (1) the
fact that skills needed to use 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 new products and techniques to the extent
consistent with its investment objectives and with 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
21
<PAGE>
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
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, 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 a 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, calculated as a percentage of the Fund's securities lending revenues, to
PaineWebber for these services. The Board periodically will review the
portfolio securities loan transactions for which PaineWebber acts 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 (100% or more) 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 and may result in more short-term capital gains. 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.
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SPECIAL CONSIDERATIONS AND RISK FACTORS
Market Price and Net Asset Value of Shares. Shares of closed-end investment
companies such as the Fund frequently trade at a discount to their net asset
values. Whether an investor will realize gains or losses upon the sale of
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. The
market price of Shares is determined by such factors as relative demand for
and supply of 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. This market risk is separate and distinct from the risk that the
Fund's net asset value may decrease. It may be greater for investors who
purchase Shares in the initial public offering and who expect to sell their
Shares soon after the completion thereof. Accordingly, the Shares are designed
primarily for long-term investors. Investors in the Shares should not view the
Fund as a vehicle for trading purposes.
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 will be below investment grade quality. 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 issuers of these securities to make payments of
interest and principal. The inability (or perceived inability) of these 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 the 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 at times find it more difficult 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, 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 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
23
<PAGE>
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 a Rating Agency
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 in a Rating Agency's rating of any income security or 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 objectives.
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.
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 for investments in income securities with longer
maturities than for investments in income securities with shorter maturities.
The secondary market prices of lower-rated 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
securities.
In order for the Fund to enforce its rights in the event of a default on
lower-rated securities, the Fund may be required to take possession of and
manage collateral securing the issuer's obligations. This 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. In addition, the Fund may be required to
participate in a restructuring of the obligation.
Some or all of the securities in which the Fund will invest 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.
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, and that market may be less liquid than the market
for higher-rated income securities, even under normal economic conditions. As
a result,
24
<PAGE>
during periods of high demand in the lower-rated securities market, it may be
difficult to acquire lower-rated securities that are 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 that 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.
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.
Leverage. Borrowings or other transactions involving Fund indebtedness
(other than for temporary or emergency purposes) and any preferred stock
issued by the Fund all would be considered "senior securities" for purposes of
the 1940 Act and would constitute leverage. Leverage creates an opportunity
for an increased return to Shareholders, but it is a speculative technique in
that it will increase the Fund's exposure to capital risk. Unless the income
and capital appreciation, if any, on assets acquired with borrowed funds or
other leverage proceeds exceed the cost of the leverage, the use of leverage
will diminish the Fund's investment performance. Successful use of leverage
depends on Mitchell Hutchins' ability to predict correctly interest rates and
market movements, and there is no assurance that the use of a leveraging
strategy will be successful during any period in which it is used.
Capital raised through leverage will be subject to interest costs or
dividend payments, which could exceed the income and appreciation on the
assets purchased with the proceeds of the leverage. The Fund may also be
required to pay fees in connection with borrowings (such as loan syndication
fees or commitment and administrative fees in connection with a line of
credit), and it might be required to maintain minimum average balances with a
bank lender, either of which would increase the cost of borrowing over the
stated interest rate. The issuance of debt securities or preferred stock by
the Fund would involve offering expenses and other costs, including dividends
or interest payments, which would be borne by the Shareholders.
Under the 1940 Act, the Fund is not permitted to borrow or otherwise incur
indebtedness constituting senior securities unless immediately thereafter the
Fund has total assets (including the proceeds of the indebtedness) at least
equal to 300% of the amount of the indebtedness. Stated another way, the Fund
may not borrow for investment purposes more than 33 1/3% of its total assets,
including the amount borrowed. The Fund also must maintain this 300% "asset
coverage" for as long as the indebtedness is outstanding. The 1940 Act
provides that the Fund may not declare any cash dividend or other distribution
on the Shares, or purchase any of the Shares (through tender offers or
otherwise), unless it would satisfy this 300% asset coverage after deducting
the amount of the dividend, other distribution or Share purchase price, as the
case may be.
The 1940 Act imposes a similar 200% asset coverage requirement with respect
to any preferred stock that the Fund may issue. Immediately after any such
issuance, the Fund's total assets (including the proceeds of the preferred
stock and of any indebtedness constituting senior securities) must be at least
equal to 200%
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<PAGE>
of the liquidation value of the outstanding preferred stock (i.e., such
liquidation value may not exceed 50% of the Fund's total assets, including the
proceeds of the preferred stock and any outstanding indebtedness constituting
senior securities). Following the issuance of preferred stock, the Fund would
not be permitted to declare any cash dividend or other distribution on the
Shares or purchase any of the Shares (through tender offers or otherwise),
unless it would satisfy this 200% asset coverage after deducting the amount of
the dividend, other distribution, or Share purchase price, as the case may be.
If the Fund were to have senior securities in the form of both indebtedness
and preferred stock outstanding at the same time, it would be subject to the
300% asset coverage requirement with respect to the amount of the indebtedness
and the 200% asset coverage requirement with respect to the preferred stock.
Under the 1940 Act, holders of any outstanding preferred stock, voting
separately as a single class, must be entitled to elect at least two members
of the Fund's Board of Directors. Also, under certain circumstances, the
holders of any senior securities that are in default may be entitled to elect
a majority of the Board.
The terms of any borrowing, other Fund indebtedness or preferred stock
issued by the Fund may impose asset coverage requirements, dividend
limitations and voting right requirements on the Fund that are more stringent
than those imposed under the 1940 Act. Such terms also may impose special
restrictions on the Fund's portfolio composition or on its use of various
investment techniques or strategies. The Fund also might be further limited in
any of these respects by guidelines established by any Rating Agencies that
issue ratings for debt securities or preferred stock issued by the Fund. These
requirements may have an adverse effect on the Fund. For example, limitations
on the Fund's ability to pay dividends or make other distributions could
impair its ability to maintain its qualification as a regulated investment
company for federal tax purposes. To the extent necessary, the Fund intends to
repay indebtedness or to purchase or redeem preferred stock to maintain the
required asset coverage. Doing so may require the Fund to liquidate portfolio
securities at a time when it would not otherwise be desirable to do so.
Nevertheless, it is not anticipated that the 1940 Act requirements, the terms
of any senior securities or the Rating Agency guidelines will impede Mitchell
Hutchins in managing the Fund's portfolio in accordance with the Fund's
investment objectives and policies.
For additional information about leverage, see "Other Investment Practices--
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 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
26
<PAGE>
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 obligations involve special risks. The
issuer of the obligation or the governmental authorities that control the
repayment of the obligation may be unable or unwilling to pay interest and
repay principal when due in accordance with the terms of the obligation, 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.
The foregoing risks may be more acute with respect to the Fund's investments
in emerging market countries. 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 or non-existent trading volume in the
securities of companies in emerging 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 portion of the original issue discount that
accrues each year on zero coupon and other OID securities in which the Fund
invests, and the "interest" received or accrued on the Fund's PIK securities,
must be included in the Fund's income annually. Accordingly, to qualify for
tax treatment as a regulated investment company and to avoid a federal 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, other OID and PIK 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.
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
27
<PAGE>
redeem securities held by the Fund during a time of declining interest rates,
the Fund probably would not 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 prior to maturity, the Fund may recognize a
capital loss.
Certain Risks Associated With Mortgage- and Asset-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 income
securities from declining 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- or asset-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 the 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. The markets for foreign mortgage-backed securities are
substantially smaller than U.S. markets. Foreign mortgage-backed securities
are structured differently than domestic mortgage-backed securities, but they
normally present substantially similar risks, as well as the other risks
normally associated with foreign 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 objectives. 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.
28
<PAGE>
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."
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 ("Board"). The Board 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.
Subject to the supervision of the Board, investment advisory and
administration services will be provided to the Fund by Mitchell Hutchins
pursuant to an Investment Advisory and Administration Contract dated as of
June 22, 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 May 31,
1998, Mitchell Hutchins served as investment adviser or sub-adviser to 31
registered investment companies with 68 separate portfolios having aggregate
assets of approximately $39.7 billion.
29
<PAGE>
Pursuant to the Advisory Contract, Mitchell Hutchins will provide a
continuous investment program for the Fund and makes investment decisions and
places orders to buy, sell or hold particular securities. Mitchell Hutchins
also will supervise all matters relating to the operation of the Fund and
obtain for it corporate officers, clerical staff, office space, equipment and
services. 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 0.70% of the Fund's average weekly total assets minus the sum of accrued
liabilities other than the aggregate indebtedness constituting leverage
("Managed Assets"). 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 shareholder 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 shareholder materials, organizational expenses and extraordinary
expenses, including costs or losses in any litigation.
In accordance with procedures adopted by the Board, 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.
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 the
same analysts who select stocks for the array of equity mutual funds managed
by Mitchell Hutchins. The same management team is responsible for managing
$896 million in high-yield assets, as of May 31, 1998, for the following
funds: PaineWebber High Income Fund, Managed High Yield Fund Inc., the
offshore PaineWebber High Income Fund, PaineWebber Strategic Income Fund and
All-American Term Trust Inc.
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 Jenny 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. Mr. Kane joined Mitchell Hutchins as an analyst in 1995 and
is a
30
<PAGE>
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 may make additional distributions if necessary
to avoid a 4% federal excise tax on certain undistributed income and capital
gain. See "Taxation" in the SAI. The Fund may change the foregoing
distribution policy if its experience indicates, or if its Board determines,
that a change is desirable for any reason.
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 and will vary as
a 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), will 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 are
transferred into the name of another broker or nominee.
The Transfer Agent will serve 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
31
<PAGE>
participants, receives the cash payment. Whenever the Fund declares an income
dividend or a capital gain distribution (collectively referred to in this
section 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 unissued but authorized Shares from the Fund
("newly issued Shares") or (ii) by purchase of outstanding Shares on the open
market, on the NYSE or elsewhere ("open-market purchases"). If, on the
dividend payment date, 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 (but in no event less than 95% of
the then current market price per Share) on the date the Shares are issued.
If, on the dividend payment date, the net asset value per Share is greater
than the market value per Share (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 an "ex-dividend" basis, but 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
exceeds the net asset value per Share, the average per Share purchase price
paid by the Transfer Agent may exceed the Fund's net asset value per Share,
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 will maintain all Shareholder accounts
in the Plan and will furnish 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 will be 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.
There will be no charge to participants for reinvesting dividends. The
Transfer Agent's fees for the handling of reinvestment of dividends will be
paid by the Fund. However, each participant will pay 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 dividends.
The automatic reinvestment of dividends in Shares will not relieve
participants of any income tax that may be payable on such dividends. See
"Taxation."
32
<PAGE>
Shareholders who participate in the Plan may receive benefits not available
to Shareholders who do not participate in the Plan. If the market price (plus
commissions) of the Shares is above their net asset value, participants in the
Plan will receive Shares at less than they could otherwise purchase them and
will have Shares with a cash value greater than the value of any cash
dividends they would have received on their Shares. If the market price plus
commissions is below the net asset value, participants will receive dividends
in Shares with a net asset value greater than the value of any cash dividends
they would have received on their Shares. However, there may be insufficient
Shares available in the market to distribute dividends 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 dividends in cash. An
election will be effective only for dividends 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 if notice of the change is sent to Plan participants
at least 30 days before the record date for such dividend. 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., 400 Bellevue Parkway, Wilmington, Delaware 19809.
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 it
distributes to its Shareholders.
Dividends from the Fund's investment company taxable income (whether
received in cash or reinvested in additional Shares) 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 Shares) are taxable to its Shareholders as
long-term capital gain, regardless of how long they have held their 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. For a discussion of the
allocation of distributions of net capital gain between Shareholders and
holders of any preferred stock that the Fund might issue, see "Taxation" in
the SAI.
A participant in the Plan will be treated as having received a distribution
in the amount of (1) in the case of open-market purchases, the cash used to
purchase Shares on his or her behalf, including a pro rata portion
33
<PAGE>
of the brokerage fees incurred by the Transfer Agent, and (2) in the case of
newly issued Shares, the fair market value of those Shares credited to the
participant's account. 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 Shareholder
exceed his or her basis for the 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 will notify 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
will designate the portions thereof subject to the different maximum rates of
tax applicable to non-corporate taxpayers' 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 OID. As a
holder of such securities, the Fund must include in its gross income the OID
that accrues on the securities during the taxable year, even if it receives no
corresponding payment on them during the year. The Fund also must include in
its gross income each year any "interest" it receives 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 OID and other non-cash income, to satisfy the
distribution requirement imposed on RICs and to avoid imposition of a 4%
federal 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.
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 Shareholders
are urged to consult their tax advisers.
34
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), acting through
PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New York
10019, as their representative, have severally agreed, subject to the terms
and conditions of the Underwriting Agreement with the Fund and Mitchell
Hutchins ("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.
<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITERS SHARES
------------ ------
<S> <C>
PaineWebber Incorporated...........................................
ABN AMRO Chicago Corporation.......................................
BT Alex. Brown Incorporated........................................
CIBC Oppenheimer Corp..............................................
A.G. Edwards & Sons, Inc...........................................
Advest, Inc........................................................
Robert W. Baird & Co. Incorporated.................................
Crowell, Weedon & Co...............................................
Dain Rauscher Wessels..............................................
Everen Securities, Inc.............................................
Fahnestock & Co. Inc...............................................
First Albany Corporation...........................................
Fifth Third/The Ohio Company.......................................
First of Michigan Corporation......................................
Interstate/Johnson Lane Corporation................................
Janney Montgomery Scott Inc........................................
Josephthal & Co. Inc...............................................
McDonald & Company Securities, Inc.................................
Morgan Keegan & Company, Inc.......................................
Pacific Growth Equities, Inc.......................................
Parker/Hunter Incorporated.........................................
Pennsylvania Merchant Group........................................
Piper Jaffray Inc..................................................
Ragen Mackenzie Incorporated.......................................
The Robinson-Humphrey Company, LLC.................................
Roney Capital Markets..............................................
Stifel, Nicolaus & Company, Incorporated...........................
Sutro & Co. Incorporated...........................................
Tucker Anthony Incorporated........................................
C.E. Unterberg, Towbin.............................................
Wedbush Morgan Securities, Inc.....................................
Allen & Company of Florida, Inc....................................
George K. Baum & Company...........................................
Huntleigh Securities Corporation...................................
C.L. King & Associates, Inc........................................
John G. Kinnard & Company, Incorporated............................
Mesirow Financial, Inc.............................................
Miller, Johnson & Kuehn, Inc.......................................
Moors & Cabot, Inc.................................................
North Coast Securities Corporation.................................
David A. Noyes & Company...........................................
</TABLE>
35
<PAGE>
<TABLE>
<S> <C>
Paulson Investment Company, Incorporated.............................
The Seidler Companies Incorporated...................................
Southwest Securities, Inc............................................
M.L. Stern & Co., Inc................................................
TD Securities (USA) Inc..............................................
Torrey Pines Securities, Inc.........................................
----
Total................................................................
====
</TABLE>
The Fund has granted to the Underwriters an option, exercisable for 45 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 of 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 the additional Shares
proportionate to such Underwriter's initial commitment.
As set forth in the notes to the table on the cover page of this Prospectus,
PaineWebber (not the Fund) from its own assets has agreed to pay a commission
to the Underwriters in the amount of $0.75 per Share (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 PaineWebber and will
be made out of its own assets and will not in any way represent an obligation
of the Fund or its Shareholders. PaineWebber has advised the Fund that the
Underwriters may pay up to $0.45 per Share from such payment received from
PaineWebber to selected dealers who sell the Shares and that such dealers may
reallow a concession of up to $0.10 per Share to certain other dealers who
sell Shares.
Prior to this offering, there has been no public market for the Shares or
any other securities of the Fund. The Shares have been approved for listing,
subject to notice of issuance, on the NYSE under the symbol "HYF." 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
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 equity securities of
the Fund, other than Shares as contemplated by this Prospectus, for a period
of 180 days after the date of the Underwriting Agreement without the prior
written consent of PaineWebber.
The Underwriters may take certain actions to discourage short-term trading
of 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 of Shares for a certain period. Until the
distribution of Shares is completed, rules of the SEC may limit the ability of
the Underwriters and certain selling group members to bid for and purchase the
Shares. As an exception to these rules, the Underwriters are permitted to
engage in certain transactions that stabilize the price of the Shares. Such
transactions consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Shares. If the Underwriters create a short
position
36
<PAGE>
in the Shares in connection with the offering, i.e., if they sell more Shares
than are set forth on the cover page of this Prospectus, then the Underwriters
may reduce that short position by purchasing Shares in the open market. The
Underwriters may also elect to reduce any short position by exercising all or
a part of the over-allotment option described above. In general, purchases of
a security for the purpose of stabilization or to reduce a short position
could cause the price of the security to be higher than it might be in the
absence of such purchases. In addition, the Underwriters may impose "penalty
bids" under contractual arrangements with dealers participating in the
offering whereby it may reclaim the selling concession with respect to Shares
distributed in the offering but subsequently purchased for the account of the
Underwriters in the open market. Neither the Fund nor the Underwriters make
any representation or prediction as to the direction or magnitude of any
effect that the transactions described above may have on the price of the
Shares. In addition, neither the Fund nor the Underwriters make any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
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 PaineWebber, payment for and delivery of the
Shares is rendered impracticable or inadvisable because (1) trading in the
equity securities of the Fund is suspended by the SEC or by the principal
exchange that lists the Shares, (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, (3) a general
banking moratorium has been established by U.S. federal or New York
authorities, or (4) 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.
Mitchell Hutchins, the Fund's investment adviser and administrator, is a
wholly owned asset management subsidiary of PaineWebber. The Fund anticipates
that the 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" herein
and "Portfolio Transactions" in the SAI. PaineWebber also will serve as the
Fund's securities lending agent under its securities lending program. See
"Other Investment Practices--Lending of Portfolio Securities."
37
<PAGE>
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
fiscal year. If the Fund is converted to an open-end investment company or if
for any other reason the Shares are no longer listed on the NYSE (or any other
national securities exchange the rules of which require annual meetings of
Shareholders), 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 Plan, as it may be amended from time to time.
See "Dividends and Other Distributions; Dividend Reinvestment Plan." Other
offerings of Shares, if made, will require approval of the Fund's Board 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.
MUTUAL FUND INVESTMENT OPTION
Purchasers of Shares through PaineWebber in this offering will have an
investment option consisting of the right to reinvest the net proceeds from a
sale at the market price of such Shares (the "Original Shares") in any Class A
shares of one of the PaineWebber Family of Mutual Funds ("Eligible Class A
Shares") at its net asset value, without the imposition of the initial sales
charge, provided that four conditions are satisfied. First, the Original
Shares must have either been acquired in this offering or be Shares
representing reinvested dividends from Shares acquired in this offering.
Second, the Original Shares must have been continuously maintained in a
PaineWebber securities account. Third, the sale of the Original Shares must be
made through PaineWebber at least one year after the completion of this
offering. Fourth, the net proceeds from the sale of Original Shares must be
reinvested immediately in Eligible Class A Shares and there must be a minimum
purchase of $1,500 to be eligible for the investment option. The reinvestment
of net proceeds from the sale of Original Shares will not relieve the selling
Shareholder of any income tax that may be payable on the sale. PaineWebber has
not undertaken to make a secondary market in the Shares or to purchase Shares
from Shareholders in order to enable them to exercise this mutual fund
investment option.
38
<PAGE>
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 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 currently intends, in consultation with
Mitchell Hutchins, from time to time consider action either to repurchase
Shares in the open market or to make a tender offer for Shares at their net
asset value. In considering such actions, the Board may consider such factors
as the market price of the Shares, the net asset value of the Shares, the
liquidity of the Fund's assets, 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 shareholders 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 the Board will decide to take either of these
actions or that, if undertaken, either Share 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 the Shares will be determined by,
among other things, the relative demand for and supply of 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 believes that
Share 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 would decrease the Fund's total assets and, therefore,
have the effect of increasing the Fund's expense ratio and decreasing asset
coverage with respect to any leverage being used by the Fund.
Any tender offer made by the Fund for 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 by 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. 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.
39
<PAGE>
CONVERSION TO OPEN-END INVESTMENT COMPANY
The Board also may 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 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 an
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
would 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 Shares for sale, 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 be required to
redeem any outstanding preferred stock and any indebtedness not constituting
bank loans, which could eliminate or alter the Fund's leveraged capital
structure.
In considering whether to propose that the Fund convert to an open-end
investment company, the Board would 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 shareholders 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, person, entity or group;
40
<PAGE>
(2) issuance of any securities of the Fund to any corporation, person,
entity or group or entity for cash;
(3) sale, lease or exchange of all or any substantial part of the assets
of the Fund to corporation, person, entity or group 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 corporation, person, entity or group (except
assets having an aggregate fair market value of less than $1,000,000)
if such corporation, person entity or group (within the meaning of the
Securities Exchange Act of 1934), 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 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, 225 Franklin Street, Boston,
Massachusetts 02101, will serve as custodian of the Fund's assets. State
Street Bank and Trust Company will employ foreign sub-custodians, approved by
the Board, 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 1600 Market Street, Philadelphia,
Pennsylvania 19103, will be the Fund's transfer and dividend disbursing agent
and registrar.
41
<PAGE>
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:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions....................................... 1
Hedging and Other Strategies Using Derivative Instruments.................. 13
Directors and Officers..................................................... 21
Control Persons and Principal Holders of Securities........................ 26
Investment Advisory Arrangements........................................... 26
Portfolio Transactions..................................................... 27
Net Asset Value Shares..................................................... 29
Market Data................................................................ 30
Taxation................................................................... 31
Additional Information..................................................... 34
Independent Auditor's Report............................................... 35
Statement of Assets, Liabilities and Capital............................... 36
</TABLE>
42
<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.
43
<PAGE>
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
44
<PAGE>
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.
45
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND
OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE FUND SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
Fund Expenses.............................................................. 12
The Fund................................................................... 13
Use of Proceeds............................................................ 13
Investment Objectives and Policies......................................... 13
Other Investment Practices................................................. 18
Special Considerations and Risk Factors.................................... 23
Management of the Fund..................................................... 29
Dividends and Other Distributions;
Dividend Reinvestment Plan................................................ 31
Taxation................................................................... 33
Underwriting............................................................... 35
Description of Capital Stock............................................... 38
Custodian, Transfer and Dividend
Disbursing Agent and Registrar............................................ 41
Further Information........................................................ 42
Appendix................................................................... 43
</TABLE>
---------------
UNTIL JULY 20, 1998, 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.
SHARES
MANAGED HIGH YIELD
PLUS FUND INC.
---------------
PROSPECTUS
---------------
PAINEWEBBER INCORPORATED
---------------
JUNE , 1998
================================================================================
(C)1998 PaineWebber Incorporated
<PAGE>
MANAGED HIGH YIELD PLUS FUND INC.
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
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"), through a group of underwriters ("Underwriters") led by
PaineWebber Incorporated ("PaineWebber"). The Underwriters have been granted
an option to purchase up to additional Shares 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 100
Shares ($1,500).
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly
owned asset management subsidiary of PaineWebber, will serve 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 24, 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) 852-4750.
The date of this Statement of Additional Information is June 24, 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
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"),
Moody's Investors Service, Inc. ("Moody's"), and other nationally recognized
statistical rating organizations (collectively with Moody's and S&P, "Rating
Agencies") are private services that provide ratings of the credit quality of
debt obligations (bonds) and certain other securities. 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
<PAGE>
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.
SPECIAL CHARACTERISTICS OF FOREIGN AND EMERGING MARKET SECURITIES
General. 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, and gains realized, 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 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.
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.
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
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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 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.
MORTGAGE- AND ASSET-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
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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 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.
Asset-backed securities have structural characteristics similar to mortgage-
backed securities. 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.
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
semiannually 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
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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.
Commercial Mortgage-Backed Securities. Commercial mortgage-backed securities
generally are multi-class debt or pass-through certificates secured by
mortgage loans on commercial properties. 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 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.
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
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inverse interest-only 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
the underlying assets to make payments, mortgage- and asset-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.
Investments in Subordinated Securities. The Fund may invest in subordinated
classes of senior-subordinated securities ("Subordinated Securities").
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- or asset-backed securities arising out of the same
pool of assets. The holders of Subordinated Securities typically are
compensated with a higher stated yield than are the holders of more senior
securities. On the other hand, Subordinated Securities typically subject the
holder to greater risk than senior securities and tend to be rated in a lower
rating category, and frequently a substantially lower rating category, than
the senior securities issued in respect of the same pool of assets.
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- or asset-backed securities.
Special Characteristics of Mortgage- and Asset-Backed Securities. The yield
characteristics of mortgage- and asset-backed securities differ from those of
traditional 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 interest rates and may benefit less than other
fixed-income securities from declining interest rates because of the risk of
prepayment.
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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 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
mortgage loans at competitive interest rates may encourage mortgagors to
"lock-in" at a
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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 foreign 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 and simultaneously commits to resell those securities to the seller
at an agreed-upon date or upon demand and at a price reflecting a market rate
of interest unrelated to the coupon rate or maturity of the purchased
securities. The Fund will maintain custody of the underlying securities prior
to their repurchase; thus, the obligation of the seller 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 seller will be required to provide
additional collateral so that at all times the collateral will be 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 paid by the Fund upon acquisition will be 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, securities dealers or their respective
affiliates in transactions believed by Mitchell Hutchins to present minimal
credit risks in accordance with guidelines established by the Fund's Board.
Mitchell Hutchins will receive and monitor the creditworthiness of such
institutions under the Board's general supervision.
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ILLIQUID SECURITIES
The Fund may invest without limit in illiquid securities, which for this
purpose 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.
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 traded 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.
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 supported by the issuer's pledge of its full 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
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issued. Notes are short-term instruments which are obligations of the issuing
municipalities or agencies and normally 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. The portion of dividends
received by Shareholders from the Fund that is attributable to interest income
received by the Fund from municipal obligations will not be exempt from
federal income tax.
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, obligations of foreign and domestic banks or other
depository institutions, commercial paper, short-term corporate obligations
and repurchase agreements secured by any of the foregoing.
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 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. Other short-term bank 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. There generally is no
established secondary market for these obligations, although they are
redeemable at face value, plus accrued interest, at any time.
SHORT SALES "AGAINST THE BOX"
The Fund may engage in short sales of securities it owns or has the right to
acquire at no added cost through conversion or exchange of other securities it
owns (short sales "against the box"). To make delivery to the purchaser in a
short sale, the executing broker borrows the securities being sold short on
behalf of the Fund, and the Fund is obligated to replace the securities
borrowed at a date in the future. When the Fund sells short, it establishes a
margin account with the broker effecting the short sale and deposits
collateral with the broker. In addition, the Fund maintains, in a segregated
account with its custodian, securities that could be used to cover the short
sale. The Fund incurs transaction costs, including interest expense, in
connection with opening, maintaining and closing short sales "against the
box."
The Fund might make a short sale "against the box" in order to hedge against
market risks when Mitchell Hutchins believes that the price of a security may
decline, thereby causing a decline in the value of a security owned by the
Fund or a security convertible into or exchangeable for a security owned by
the Fund. In such case, any loss in the Fund's long position after the short
sale should be reduced by a corresponding gain in the
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short position. Conversely, any gain in the long position after the short sale
should be reduced by a corresponding loss in the short position. The extent to
which gains or losses in the long position are reduced will depend upon the
amount of the securities sold short relative to the amount of the securities
the Fund owns, either directly or indirectly, and in the case where the Fund
owns convertible securities, changes in the investment values or conversion
premiums of such securities.
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 or (b) 67% or more of the 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.
The following interpretation applies to, but it not a part of, this
fundamental restriction: Mortgage- and asset-backed securities will not
be considered to have been issued by the same issuer by reason of the
securities having the same sponsor, and mortgage- and asset-backed
securities issued by a finance or other special purpose subsidiary that
are not guaranteed by the parent company will be considered to be issued
by a separate issuer from the parent company.
(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 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.
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(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.
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 and without a
Shareholder vote.
HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS
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 and Equity 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 timely exercise of the option, 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 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.
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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 strategies using Derivative Instruments 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
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 may 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, currency or
interest rate or 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.
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(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 counterparty to enter into a
transaction 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 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 may 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
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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 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
"Investment Policies and Restrictions--Illiquid Securities."
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
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 counterparty
(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 counterparty to make or take delivery of the underlying investment upon
exercise of the option. Failure by the counterparty 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'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 counterparty, or by a
transaction in the secondary market if any such market exists. Although the
Fund will enter into OTC options only with counterparties 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 counterparty, the Fund might be unable to close out an OTC option
position at any time prior to its expiration. The Fund will enter into OTC
option transactions only with counterparties deemed creditworthy by Mitchell
Hutchins.
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.
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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 may serve as a long hedge, and the sale of futures or the
purchase of put options thereon may serve as a short hedge. Writing covered
call options on futures contracts may 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 may
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.
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.
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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 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 and to attempt to enhance income or to realize gains. 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 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 (each a "component" transactions), instead of a single
Derivative Instrument, as part of a single or combined strategy when, in the
opinion of Mitchell
18
<PAGE>
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 a Shareholder vote. Adoption of this guideline does not
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
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.
19
<PAGE>
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 one party agrees to make
payments to its 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 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 derivative instruments.
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, securities
dealers and their respective affiliates believed by Mitchell Hutchins to
present minimal credit risks in accordance with guidelines established by the
Fund's Board. 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.
20
<PAGE>
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:
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE FUND OTHER DIRECTORSHIPS
- ---------------------- ------------- --------------------
<S> <C> <C>
Margo N. Alexander**; 51 Director and President Mrs. Alexander is president, chief
executive officer and a director of
Mitchell Hutchins (since January 1995)
and also an executive vice president
and a director of PaineWebber. Mrs.
Alexander is president and a director
or trustee of 31 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Richard Q. Armstrong; 62 Director Mr. Armstrong is chairman and
78 West Brother Drive principal of RQA Enterprises
Greenwich, CT 06830 (management consulting firm) (since
April 1991 and principal occupation
since March 1995). Mr. Armstrong was
chairman of the board, chief executive
officer and co-owner of Adirondack
Beverages (producer and distributor of
soft drinks and sparkling/still
waters) (October 1993-March 1995). He
was a partner of the New England
Consulting Group (management
consulting firm) (December 1992-
September 1993). He was managing
director of LVMH U.S. Corporation
(U.S. subsidiary of the French luxury
goods conglomerate, Louis Vuitton Moet
Hennessey Corporation) (1987-1991) and
chairman of its wine and spirits
subsidiary, Schieffelin & Somerset
Company (1987-1991). Mr. Armstrong is
a director or trustee of 30 investment
companies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
E. Garrett Bewkes, Jr.**; 71 Director and Mr. Bewkes is a director of Paine
Chairman of the Webber Group Inc. ("PW Group")
Board of Directors (holding company of PaineWebber and
Mitchell Hutchins). Prior to December
1995, he was a consultant to PW Group.
Prior to 1988, he was chairman of the
board, president and chief executive
officer of American Bakeries Company.
Mr. Bewkes is a director of Interstate
Bakeries Corporation and NaPro
BioTherapeutics, Inc. Mr. Bewkes is a
director of trustee of 31 investment
companies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE FUND OTHER DIRECTORSHIPS
- ---------------------- ------------- --------------------
<S> <C> <C>
Richard R. Burt; 51 Director Mr. Burt is chairman of IEP Advisors,
1275 Pennsylvania Ave., Inc. (international investments and
N.W.Washington, D.C. 20004 consulting firm)
(since March 1994) and a partner of
McKinsey & Company (management
consulting firm) (since 1991). He is
also a director of Archer-Daniels-
Midland Co. (agricultural,
commodities), Hollinger International
Co., Homestake Mining Corp.,
Powerhouse Technologies Inc. and
Wierton Steel Corp. He was the chief
negotiator in the Strategic Arms
Reduction Talks with the former Soviet
Union (1989-1991) and the U.S.
Ambassador to the Federal Republic of
Germany (1985-1989). Mr. Burt is a
director or trustee of 30 investment
companies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
Mary C. Farrell**; 48 Director Ms. Farrell is a managing director,
senior investment strategist and
member of the Investment Policy
Committee of PaineWebber. Ms. Farrell
joined PaineWebber in 1982. She is a
member of the Financial Women's
Association and Women's Economic
Roundtable and appears as a regular
panelist on Wall $treet Week with
Louis Rukeyser. She also serves on the
Board of Overseers of New York
University's Stern School of Business.
Ms. Farrell is a director or trustee
of 30 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Meyer Feldberg; 56 Director Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of
101 Uris Hall Business, Columbia University. Prior
New York, New York 10027 to 1989, he was president of the
Illinois Institute of Technology. Dean
Feldberg is also a director of
Premedia Inc., Federated Department
Stores, Inc. and Revlon, Inc. Dean
Feldberg is a director or trustee of
30 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
George W. Gowen; 68 Director Mr. Gowen is a partner in the law firm
666 Third Avenue of Dunnington, Bartholow & Miller.
New York, New York 10017 Prior to may 1994, he was a partner in
the law firm of Fryer, Ross & Gowen.
Mr. Gowen is a director of Columbia
Real Estate Investments, Inc.
Mr. Gowen is a director or trustee of
30 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE FUND OTHER DIRECTORSHIPS
- ---------------------- ------------- --------------------
<S> <C> <C>
Frederic V. Malek; 61 Director Mr. Malek is chairman of Thayer
1445 Pennsylvania Avenue, Capital Partners (merchant bank). From
N.W. January 1992 to November 1992, he was
Suite 350 campaign manager of Bush-Quayle 92.
Washington, D.C. 20004 From 1990 to 1992, he was vice
chairman and, from 1989 to 1990, he
was president of Northwest Airlines
Inc., NWA Inc. (holding company of
Northwest Airlines Inc.) and Wings
Holdings Inc. (holding company of NWA
Inc.). Prior to 1989, he was employed
by the Marriott Corporation (hotels,
restaurants, airline catering and
contract feeding), where he most
recently was an executive vice
president and president of Marriott
Hotels and Resorts. Mr. Malek is also
a director of American Management
Systems, Inc. (management consulting
and computer-related services),
Automatic Data Processing Inc., CB
Commercial Group, Inc. (real estate
services), Choice Hotels International
(hotel and hotel franchising), FPL
Group, Inc. (electric services), Manor
Care, Inc. (health care) and Northwest
Airlines Inc. Mr Malek is a director
or trustee of 30 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Carl W. Schafer; 61 Director Mr. Schafer is president of the
P.O. Box 1164 Atlantic Foundation (charitable
Princeton, NJ 08542 foundation supporting mainly
oceanographic exploration and research).
He also is a director of Base Ten
Systems, Inc. (software), Roadway
Express, Inc. (trucking), The Guardian
Group of Mutual Funds, Evans Systems,
Inc. (a motor fuels, convenience store
and diversified company), Electronic
Clearing House, Inc. (financial
transactions processing), Frontier Oil
Corporation and Nutraceutix, Inc.
(biotechnology). Prior to January
1993, Mr. Schafer was chairman of the
Investment Advisory Committee of the
Howard Hughes Medical Institute. Mr.
Schafer is a director or trustee of 30
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
John J. Lee; 29 Vice President and Mr. Lee is vice president and manager
Assistant Treasurer of the mutual fund finance division of
Mitchell Hutchins. Prior to September
1997, he was an audit manager in the
financial services practice of Ernst &
Young LLP. Mr. Lee is a vice president
and assistant treasurer of 30
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH THE FUND OTHER DIRECTORSHIPS
- ---------------------- ------------- --------------------
<S> <C> <C>
Thomas J. Libassi; 39 Vice President Mr. Libassi is a senior vice president
and portfolio manager of Mitchell
Hutchins. Prior to May 1994, he was a
vice president of Keystone Custodian
Funds Inc. with portfolio management
responsibility. Mr. Libassi is a vice
president of seven investment
companies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
Ann E. Moran; 40 Vice President and Ms. Moran is a vice president and a
Assistant Treasurer manager of the mutual fund finance
division of Mitchell Hutchins. Ms.
Moran is a vice president and
assistant treasurer of 31 investment
companies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
Dianne E. O'Donnell; 45 Vice President and Ms. O'Donnell is a senior vice
Secretary president and deputy general counsel
of Mitchell Hutchins. Ms. O'Donnell is
a vice president and secretary of 30
investment companies and vice
president and assistant secretary for
one investment company which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Emil Polito; 37 Vice President Mr. Polito is a senior vice president
and director of operations and control
for Mitchell Hutchins. From March 1991
to September 1993 he was director of
the mutual funds sales support and
service center for Mitchell Hutchins
and PaineWebber. Mr. Polito is a vice
president for 31 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Victoria E. Schonfeld; 48 Vice President Ms. Schonfeld is a managing director
and general counsel of Mitchell
Hutchins. Prior to May 1994, she was a
partner in the law firm of Arnold &
Porter. Ms. Schonfeld is a vice
president of 30 investment companies
and vice president and secretary for
one investment company for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Paul H. Schubert; 35 Vice President Mr. Schubert is a senior vice
and Treasurer president and the director of the
mutual fund finance division of
Mitchell Hutchins. From August 1992 to
August 1994, he was a vice president
of BlackRock Financial Management L.P.
Mr. Schubert is a vice president and
treasurer of 31 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS*; POSITION BUSINESS EXPERIENCE;
AGE WITH THE FUND OTHER DIRECTORSHIPS
- ------------------ ------------- --------------------
<S> <C> <C>
Barney A. Vice President and Mr. Taglialatela is a vice
Taglialatela; 37 Assistant Treasurer president and a manager of the
mutual fund finance division of
Mitchell Hutchins. Prior to
February 1995, he was a manager of
the mutual fund finance division of
Kidder Peabody Asset Management
Inc. Mr. Taglialatela is a vice
president and assistant treasurer
of 31 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Keith A. Weller, 36 Vice President and Mr. Weller is a first vice
Assistant Secretary president and associate general
counsel of Mitchell Hutchins. Prior
to May 1995, he was an attorney in
private practice. Mr. Weller is a
vice president and assistant
secretary of 30 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Ian W. Williams; 40 Vice President and Mr. Williams is a vice president
Assistant Treasurer and a manager of the mutual fund
finance division of Mitchell
Hutchins. Mr. Williams is a vice
president and assistant treasurer
of 31 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>
- --------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of the
Fund as defined in the 1940 Act by virtue of their positions with Mitchell
Hutchins, PaineWebber and/or PW Group.
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 each 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.
25
<PAGE>
The table below includes certain information relating to the compensation of
the Fund's Directors.
COMPENSATION TABLE+
<TABLE>
<CAPTION>
TOTAL
ESTIMATED COMPENSATION
AGGREGATE FROM THE
COMPENSATION FUND AND THE
FROM THE FUND
NAME OF PERSONS POSITION FUND COMPLEX*
------------------------ ------------ ------------
<S> <C> <C>
Richard Q. Armstrong, Director.................. $1,750 $ 94,885
Richard R. Burt, Director....................... $1,750 $ 87,085
Meyer Feldberg, Director........................ $2,402 $117,853
George W. Gowen, Director....................... $1,750 $101,567
Frederic Malek, Director........................ $1,750 $ 95,845
Carl W. Schafer, Director....................... $1,750 $ 94,885
</TABLE>
- --------
+ 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.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of June 24, 1998, Mitchell Hutchins owned of record 100% of the
outstanding Shares, and none of the Directors and officers of the Fund
beneficially owned any of the outstanding Shares.
INVESTMENT ADVISORY ARRANGEMENTS
Mitchell Hutchins is the Fund's investment adviser and administrator
pursuant to a contract dated as of June 22, 1998 with the Fund ("Advisory
Contract"). Pursuant to the Advisory Contract, Mitchell Hutchins will provide
a continuous investment program for the Fund and make investment decisions and
place orders to buy, sell or hold particular securities. As administrator,
Mitchell Hutchins will supervise all matters relating to the operation of the
Fund and obtain 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, 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) fees payable to and
expenses incurred on behalf of the Fund by Mitchell Hutchins; (3)
organizational and offering expenses of the Fund, whether or not advanced by
Mitchell Hutchins; (4) filing fees and expenses relating to the registration
and qualification of the Fund's shares and the Fund under federal securities
laws and/or state laws and maintaining such registration and qualifications;
(5) fees and salaries payable to Fund's directors and officers who are not
interested persons of the Fund or Mitchell Hutchins; (6) all expenses incurred
in connection with the Fund's directors' services, including travel expenses;
(7) taxes (including any income or franchise taxes) and governmental fees; (8)
costs of any liability, uncollectible items of deposit and any other insurance
or fidelity bonds; (9) 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; (10) legal, accounting and auditing expenses,
including legal fees of special counsel for those directors of the Fund who
are not interested persons of the Fund; (11) charges of custodians, transfer
agents and other agents (including any lending agent); (12) costs of preparing
share certificates; (13) expenses of setting in type and printing prospectuses
and supplements thereto, statements of additional information and supplements
thereto, reports and proxy materials for existing shareholders; (14) costs of
mailing prospectuses and supplements thereto, statements of additional
information and supplements thereto, reports and proxy materials to existing
shareholders; (15) any extraordinary expenses (including fees and
disbursements of counsel, costs of actions,
26
<PAGE>
suits or proceedings to which the Fund is a party and the expenses the Fund
may incur as a result of its legal obligation to provide indemnification to
its officers, directors, agents and shareholders) incurred by the Fund; (16)
fees, voluntary assessments and other expenses incurred in connection with
membership in investment company organizations; (17) costs of mailing and
tabulating proxies and costs of meetings of shareholders, the Board and any
committees thereof; (18) the costs of investment company literature and other
publications provided by the Fund to its directors and officers; (19) costs of
mailing, stationery and communications equipment; (20) expenses incident to
any dividend reinvestment plan; (21) changes and expenses of any outside
pricing service used to value portfolio securities; (22) interest on
borrowings of the Fund; (23) fees and expenses of listing and maintaining any
listing of the Fund's Shares on any national securities exchange; and (24)
costs and expenses (including rating agency fees) associated with the issuance
of any preferred stock.
The Advisory Contract was approved by the Fund's Board 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 May 13, 1998 and by its
initial Shareholder on June 22, 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 or by vote of
a majority of the Fund's outstanding voting securities.
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 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
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<PAGE>
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,
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.
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<PAGE>
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 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.
29
<PAGE>
MARKET DATA
The market for lower-rated, high yield bonds grew significantly in the early
1980's, primarily to provide access to the capital markets for small, new or
troubled companies. Some companies used these markets to raise cash in order
to buy other corporations through highly leveraged transactions. Currently,
the market continues to expand with some of America's most well known and
respected companies issuing lower-rated, high yield bonds to finance expansion
or growth, and some smaller, growing companies using such bonds to raise cash
for research and development or for investment in new technologies. Due to the
strong economy over the last several years, lower-rated securities have
experienced improving credit quality and lower default rates. Of course, past
performance is no indication of future results.
Mitchell Hutchins views the market for lower-rated, high yield bonds as much
more liquid and less speculative than it was in the 1980s. According to DLJ
Research, the outstanding principal amount of lower-rated securities has
increased from approximately $30 billion in 1980 to approximately $520 billion
in April, 1998.
The DLJ Research data indicates that outstanding principal amounts of lower
rated securities of U.S. issuers at year-ends in 1977, 1978, 1979, 1980, 1981,
1982, 1983, 1984, 1985, 1986, 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994,
1995, 1996, 1997 and through April 16, 1998 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, respectively. These measures are historical only
and are not intended to predict future trends or results.
As reported by DLJ Research and 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 and 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. These measures are historical only and are not
intended to predict future trends or results.
Interest rates have fallen dramatically in recent years, and PaineWebber has
forecasted that interest rates on long-term U.S. Treasury bonds will approach
5% by the turn of the century. PaineWebber's outlook for interest rates
suggests that high yield bonds may be attractive for both income and total
return. With the bullish stock market in its eighth year, investors looking
for ways to reduce their exposure to stocks while maintaining the opportunity
for growth may consider investing in lower-rated, high yield bonds. According
to data provided by the Investment Company Institute, approximately $45
billion was invested in bond and income funds in 1997, roughly four times the
amount in 1996. Almost $17 billion of that went into high yield bond funds.
DLJ Research data indicates that, as measured by the S&P 500 Index and by
the DLJ High Yield Index, high yield securities have on average for the period
1980-1997 provided 80% of the returns of stocks with just 53% of the
volatility. The S&P 500 Index is an unmanaged weighted index comprising 500
widely held common stocks varying in composition and is unavailable for
investment. The DLJ High Yield Index is an unmanaged index representative of
the high yield market and is unavailable for investment. The DLJ High Yield
Index is comprised of high yield private securities and 144A securities with
registration rights and average credit ratings of BB/B by S&P. Neither of
these indices is indicative of the Fund's performance. These results are
historical only and are not intended to predict future trends or results.
The DLJ Research data indicates that the average annual returns for 1980
through 1997 for the S&P 500 Index and the DLJ High Yield Index were 17.13%
and 13.71%, respectively. The volatility (as measured by standard deviation)
for the same time periods was 17.24% and 9.19%, respectively. These measures
are historical only and are not intended to predict future trends or results.
An investment in the Fund is one way in which an investor can add exposure
to higher-yielding, higher risk income securities to his or her portfolio. The
data contained in the following graph indicates that adding higher yielding,
higher risk income securities to a portfolio of investment grade bonds may
actually increase the portfolio's total return potential while reducing the
portfolio's volatility.
30
<PAGE>
DIVERSIFICATION
100% Lehman Brothers Aggregate Bond Index vs. 100% CSFB High Yield Index
1-1-86 to 12-31-97
[GRAPH APPEARS HERE]
This graph is shown for illustrative purposes only and does not represent
the Fund's performance. The Lehman Brothers 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 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.
The above graph represents the hypothetical performance of a portfolio mix
of lower-rated bonds and investment grade bonds over the past 12 years. A
portfolio invested 100% in investment grade bonds produced a return of
approximately 9% with the indicated level of volatility. Moving 30% of assets
to lower-rated, high yield bonds (see the point farthest left on the curve)
increased total return to nearly 10% while actually reducing volatility. A
portfolio invested 100% in lower-rated, high yield bonds returned over 11% but
significantly increased volatility and risk. This graph is historical only and
is not intended to predict future trends or results.
TAXATION
GENERAL
The following discussion of federal income tax consequences is for general
information only. Prospective investors should consult their tax advisors
regarding the specific federal tax consequences of purchasing, holding and
disposing of Shares, as well as the effects thereon of state, local and
foreign tax laws and any proposed tax law changes.
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
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<PAGE>
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 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 that does not represent more than 10% of the
issuer's outstanding voting securities; 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.
If the Fund retains any net capital gain (the excess of net long-term
capital gain over net short-term capital loss), it may designate the retained
amount as undistributed capital gains in a notice to its Shareholders. If the
Fund makes such a designation, it will be required to pay federal income tax
at the rate of 35% on the undistributed gains ("Fund tax") and each
Shareholder subject to federal income tax (1) will be required to include in
income, as long-term capital gains, his or her proportionate share of the
undistributed gains, (2) will be allowed a credit or refund, as the case may
be, for his or her proportionate share of the Fund tax and (3) will increase
the tax basis of his or her Shares by the difference between the included
income and such share of the Fund tax.
A portion of the dividends from the Fund's investment company taxable income
(whether paid in cash or reinvested in additional 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 federal alternative minimum tax. It is not expected that a
significant portion of the Fund's dividends will qualify for this deduction.
If the Fund has both Shares (i.e., common stock) and preferred stock
outstanding, it intends to designate distributions made to each such class in
any year as consisting of no more than the class's proportionate share of
particular types of income based on the total distributions paid to each class
for the year, including distributions out of net capital gain.
Income from investments in foreign securities, and gains realized thereon,
may be subject to foreign withholding or other taxes. Tax conventions between
certain countries and the United States may reduce or eliminate foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors. Shareholders 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
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.
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<PAGE>
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--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--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 by the qualified electing fund. In most instances it
will be very difficult, if not impossible, to make this election because of
certain requirements for making the election.
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.
STRATEGIES USING DERIVATIVE INSTRUMENTS
Strategies using Derivative Instruments, such as selling (writing) and
purchasing options and futures and entering into forward currency contracts,
involve 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 and/or gain 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 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.
33
<PAGE>
ADDITIONAL INFORMATION
STOCK REPURCHASES AND TENDERS
As discussed in the Prospectus, the Fund's Board may repurchase Shares or
make a tender offer for Shares in an effort to reduce or eliminate the
discount to net asset value at which the 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
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.
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<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholder and Board of Directors
Managed High Yield Plus Fund Inc.
We have audited the accompanying statement of assets, liabilities and
capital of Managed High Yield Plus Fund Inc. as of June 18, 1998. This
statement of assets, liabilities and capital is the responsibility of the
Fund's management. Our responsibility is to express an opinion on this
statement of assets, liabilities and capital based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether this statement of assets,
liabilities and capital is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statement of assets, liabilities and capital. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall statement of assets, liabilities
and capital presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the statement of assets, liabilities and capital referred to
above presents fairly, in all material respects, the financial position of
Managed High Yield Plus Fund Inc. at June 18, 1998, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
June 22, 1998
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<PAGE>
MANAGED HIGH YIELD PLUS FUND INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
ASSETS JUNE 18, 1998
<TABLE>
<S> <C>
Cash.............................................................. $100,020
Deferred organization expenses (Note 1)........................... 55,000
--------
Total Assets....................................................
LIABILITIES
Accrued expenses (Note 1)......................................... 55,000
--------
NET ASSETS............................................................ $100,020
========
CAPITAL
Common Stock, par value $.001 per share: 200,000,000 Shares
authorized; 6,668 Shares
issued and outstanding (Note 1)................................. $ 7
Paid in Capital in excess of par.................................. 100,013
--------
Total Capital--Equivalent of $15.00 net asset value per share of
common stock $100,020
(Note 1)....................................................... ========
</TABLE>
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 6,668 shares for $100,020 on May 12,
1998 and on June 18, 1998.
On April 3, 1998, Statement of Position 98-5 was issued. Effective for
fiscal years beginning after December 15, 1998, the Statement of Position
requires that remaining unamortized organization costs on the Fund's statement
of assets and liabilities be written off. Deferred organization expenses have
been deferred and will be amortized using a straight line method over a period
not to exceed one year from the date the Fund commences operations.
PaineWebber Incorporated (not the Fund) will pay the Underwriters'
commissions and the offering costs incurred in connection with the public
offering of the Fund's shares.
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 0.70%
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.
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<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THE PROSPECTUS OR IN THIS STATEMENT OF ADDITIONAL INFORMATION, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND OR THE UNDERWRITERS. NEITHER THE DELIVERY
OF THE PROSPECTUS OR THIS STATEMENT OF ADDITIONAL INFORMATION, NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE FUND SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS ANY DATE SUBSEQUENT TO ITS
DATE. 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 REGISTERED SECURITIES TO WHICH THE PROSPECTUS
RELATES. THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT
CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions........................................ 1
Hedging and Other Strategies Using Derivative Instruments................... 13
Directors and Officers...................................................... 21
Control Persons and Principal Holders of Securities......................... 26
Investment Advisory Arrangements............................................ 26
Portfolio Transactions...................................................... 27
Net Asset Value of Shares................................................... 29
Market Data................................................................. 30
Taxation.................................................................... 31
Additional Information...................................................... 34
Report of Independent Auditor............................................... 35
Statement of Assets, Liabilities and Capital................................ 36
</TABLE>
----------------
(C) 1998 PaineWebber Incorporated
SHARES
MANAGED HIGH
YIELD PLUS FUND INC.
----------------
STATEMENT OF ADDITIONAL INFORMATION
----------------
PAINEWEBBER INCORPORATED
----------------
June 24, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART C -- OTHER INFORMATION
Item 24. Financial Statements and Exhibits
1. Financial Statements:
Report of Independent Auditors (filed herewith)
Statement of Assets and Liabilities (filed herewith)
2. Exhibits:
a. Articles of Incorporation (previously filed)
b. Amended and Restated Bylaws (filed herewith)
c. None
d. Specimen of Share Certificate (filed herewith)
e. Dividend Reinvestment Plan (filed herewith)
f. None
g. Form of Investment Advisory and Administration Contract
(filed herewith)
h. (1) Form of Underwriting Agreement (filed herewith)
(2) Form of Amended and Restated Master Agreement Among
Underwriters (filed herewith)
(3) Form of Amended and Restated Master Selected Dealer
Agreement (filed herewith)
i. None
j. Form of Custodian Agreement (filed herewith)
k. Transfer Agency Agreement (filed herewith)
l. Opinion and Consent of Counsel (filed herewith)
m. None
n. Consent of Independent Auditors (to be filed)
o. None
p. (1) Letter of Investment Intent dated May 13, 1998 (filed
herewith)
(2) Letter of Investment Intent dated June 19, 1998 (filed
herewith)
q. None
r. None
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:
<TABLE>
<S> <C>
Securities and Exchange Commission Fees.................. $135,869.63
New York Stock Exchange, Inc. Listing Fees............... 174,657.50
National Association of Securities Dealers, Inc. Fees.... 38,500
Printing and Engraving Expenses.......................... 70,000
Legal Fees............................................... 150,000
Accounting Expenses...................................... 0
Miscellaneous Expenses................................... 2,000
Total...................................... -----------
$500,937.13
===========
</TABLE>
Item 27. Persons Controlled by or Under Common Control
II-1
<PAGE>
The Paine Webber Group Inc. subsidiaries that are in the securities or
investment advisory business are identified in the current Form BD filed by
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 June 24, 1998
-------------- -------------
Shares of Common Stock, One
par 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(g)
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(h)
provides that the Fund and Mitchell Hutchins jointly and severally will
indemnify each 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 in any sales materials or any application or other document excepted
by or on behalf of the Fund filed in any jurisdiction in order to qualify the
shares under the securities laws thereof or filed with the SEC, 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 any untrue 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
II-2
<PAGE>
See "Management of the Fund" in the Prospectus.
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
Pre-Effective Amendment No. 2 to its 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 June, 1998.
MANAGED HIGH YIELD PLUS FUND INC.
By: /s/ Dianne E. O'Donnell
---------------------------------
Dianne E. O'Donnell
Vice President and Secretary
Signature Title Date
- --------- ----- ----
/s/ Margo N. Alexander President and Director June 24, 1998
- ------------------------- (Chief Executive Officer)
Margo N. Alexander
/s/ E. Garrett Bewkes, Jr. Director and Chairman June 24, 1998
- ------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr.
/s/ Richard Q. Armstrong Director June 24, 1998
- -------------------------
Richard Q. Armstrong
/s/ Richard R. Burt Director June 24, 1998
- -------------------------
Richard R. Burt
/s/ Mary C. Farrell Director June 24, 1998
- -------------------------
Mary C. Farrell
/s/ Meyer Feldberg Director June 24, 1998
- -------------------------
Meyer Feldberg
/s/ George W. Gowen Director June 24, 1998
- -------------------------
George W. Gowen
/s/ Frederic V. Malek Director June 24, 1998
- -------------------------
Frederic V. Malek
/s/ Carl W. Schafer Director June 24, 1998
- -------------------------
Carl W. Schafer
/s/ Paul H. Schubert Vice President and Treasurer (Chief June 24, 1998
- ------------------------- Financial and Accounting Officer)
Paul H. Schubert
<PAGE>
MANAGED HIGH YIELD PLUS FUND INC.
EXHIBIT INDEX
Exhibit Document Description
- ------- --------------------
a. Articles of Incorporation (previously filed)
b. Amended and Restated Bylaws (filed herewith)
c. None
d. Specimen of Share Certificate (filed herewith)
e. Dividend Reinvestment Plan (filed herewith)
f. None
g. Form of Investment Advisory and Administration Contract (filed
herewith)
h. (1) Form of Underwriting Agreement (filed herewith)
(2) Form of Amended and Restated Master Agreement Among Underwriters
(filed herewith)
(3) Form of Amended and Restated Master Selected Dealer Agreement
(filed herewith)
i. None
j. Form of Custodian Agreement (filed herewith)
k. Transfer Agency Agreement (filed herewith)
l. Opinion and Consent of Counsel (filed herewith)
m. None
n. Consent of Independent Auditors (filed herewith)
o. None
p. (1) Letter of Investment Intent dated May 13, 1998 (filed herewith)
(2) Letter of Investment Intent dated June 19, 1998 (filed
herewith)
q. None
r. None
<PAGE>
MANAGED HIGH YIELD PLUS FUND INC.
A Maryland Corporation
AMENDED AND RESTATED BYLAWS
June 22, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
--------- ----------------------
Section 9. Nomination.................................................... 3
--------- ----------
Section 10. Shareholder Proposal......................................... 4
---------- --------------------
ARTICLE III........................................................................ 5
- -----------
BOARD OF DIRECTORS........................................................ 5
------------------
Section 1. Powers........................................................ 5
--------- ------
Section 2. Number and Term of Directors.................................. 5
--------- ----------------------------
Section 3. Election...................................................... 5
--------- --------
Section 4. Vacancies and Newly Created Directorships..................... 5
--------- -----------------------------------------
Section 5. Removal....................................................... 6
--------- -------
Section 6. Chairman of the Board......................................... 6
--------- ---------------------
Section 7. Annual and Regular Meetings................................... 6
--------- ---------------------------
Section 8. Special Meetings.............................................. 6
--------- ----------------
Section 9. Waiver of Notice.............................................. 6
--------- ----------------
Section 10. Quorum and Voting............................................ 6
---------- -----------------
Section 11. Action Without a Meeting..................................... 7
---------- ------------------------
Section 12. Compensation of Directors.................................... 7
---------- -------------------------
ARTICLE IV........................................................................ 7
- ----------
COMMITTEES............................................................... 7
----------
Section 1. Organization................................................. 7
--------- ------------
Section 2. Executive Committee.......................................... 7
--------- -------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 3. Proceedings and Quorum....................................... 7
--------- ----------------------
Section 4. Other Committees............................................. 7
--------- ----------------
ARTICLE V......................................................................... 8
- ---------
OFFICERS................................................................. 8
--------
Section 1. General...................................................... 8
--------- -------
Section 2. Election, Tenure and Qualifications.......................... 8
--------- -----------------------------------
Section 3. Vacancies and Newly Created Officers......................... 8
--------- ------------------------------------
Section 4. Removal and Resignation...................................... 8
--------- -----------------------
Section 5. President.................................................... 8
--------- ---------
Section 6. Vice President............................................... 9
--------- --------------
Section 7. Treasurer and Assistant Treasurers........................... 9
--------- ----------------------------------
Section 8. Secretary and Assistant Secretaries.......................... 9
--------- -----------------------------------
Section 9. Subordinate Officers......................................... 9
--------- --------------------
Section 10. Remuneration................................................ 10
---------- ------------
Section 11. Surety Bond................................................. 10
---------- -----------
ARTICLE VI........................................................................ 10
- ----------
CAPITAL STOCK............................................................ 10
-------------
Section 1. Certificates of Stock........................................ 10
--------- ---------------------
Section 2. Transfer of Shares........................................... 10
--------- ------------------
Section 3. Stock Ledgers................................................ 11
--------- -------------
Section 4. Transfer Agents and Registrars............................... 11
--------- ------------------------------
Section 5. Fixing of Record Date........................................ 11
--------- ---------------------
Section 6. Lost, Stolen or Destroyed Certificates....................... 11
--------- --------------------------------------
ARTICLE VII....................................................................... 11
- -----------
FISCAL YEAR AND ACCOUNTANT............................................... 11
--------------------------
Section 1. Fiscal Year.................................................. 11
--------- -----------
Section 2. Accountant................................................... 11
--------- ----------
ARTICLE VIII...................................................................... 12
- ------------
CUSTODY OF SECURITIES.................................................... 12
---------------------
Section 1. Employment of a Custodian.................................... 12
--------- -------------------------
Section 2. Termination of Custodian Agreement........................... 12
--------- ----------------------------------
Section 3. Other Arrangements........................................... 12
--------- ------------------
ARTICLE IX........................................................................ 12
- ----------
INDEMNIFICATION AND INSURANCE............................................ 12
-----------------------------
Section 1. Indemnification of Officers, Directors, Employees and
--------- -----------------------------------------------------
Agents...................................................... 12
------
Section 2. Insurance of Officers, Directors, Employees and Agents....... 13
--------- ------------------------------------------------------
Section 3. Amendment.................................................... 13
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE X......................................................................... 13
- ---------
AMENDMENTS............................................................... 13
----------
Section 1. General...................................................... 13
--------- -------
Section 2. By Stockholders Only......................................... 13
--------- --------------------
</TABLE>
<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
<PAGE>
to the Corporation the reasonably estimated cost of preparing and mailing the
notice thereof, which the Secretary shall determine and specify to such
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.
2
<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.
Section 9. Nomination. Subject to the rights of holders of any class or series
- --------- ----------
stock having a preference over the Corporation's common stock as to
dividends or upon liquidation, nominations for the election of directors may
be made by the Board of Directors or a committee
3
<PAGE>
appointed by the Board of Directors or by any stockholder entitled to vote in
the election of directors. However, any stockholder entitled to vote in the
election of directors at a meeting may nominate a director only by notice in
writing delivered or mailed by first class United States mail, postage prepaid,
to the Secretary of the Corporation, and received by the Secretary not less than
(i) with respect to any nomination to be introduced at an annual meeting of
stockholders, one hundred and twenty days in advance of the date of the
Corporation's proxy statement released to stockholders in connection with the
previous year's annual meeting, and (ii) with respect to any nomination to be
introduced at a special meeting of stockholders, the close of business on the
seventh day following the date on which notice of such meeting is first given to
stockholders. Each such notice shall set forth: (a) the name and address of the
stockholder who intends to make the nomination and of the person or persons to
be nominated; (b) a representation that the stockholder is a holder of record of
stock of the Corporation entitled to vote at such meeting and intends to appear
in person or by proxy at the meeting to nominate the person or persons specified
in the notice; (c) the class and number of shares of stock held of record, owned
beneficially and represented by proxy by such stockholder as of the record date
for the meeting (if such date shall then have been made publicly available) and
as of the date of such notice. The chairperson of the meeting may refuse to
acknowledge a nomination by any stockholder that is not made in compliance with
the foregoing procedure.
Section 10. Stockholder Proposal. Any stockholder who is entitled to vote in the
- ---------- --------------------
election of directors and who meets the requirements of the proxy rules under
the Securities Exchange Act of 1934, as amended, may submit to the Board of
Directors proposals to be considered for submission to the stockholders of the
Corporation for their vote. The introduction of any stockholder proposal that
the Board of Directors decides should be voted on by the stockholders of the
Corporation, shall be made by notice in writing delivered or mailed by first
class United States mail, postage prepaid, to the Secretary of the Corporation,
and received by the Secretary not less than (i) with respect to any proposal to
be introduced at an annual meeting of stockholders, one hundred and twenty days
in advance of the date of the Corporation's proxy statement released to
stockholders in connection with the previous year's annual meeting, and (ii)
with respect to any proposal to be introduced at a special meeting of
stockholders, the close of business on the seventh day following the date on
which notice of such meeting is first given to stockholders. Each such notice
shall set forth: (a) the proposal to be introduced; (b) the name and address of
the stockholder who intends to make the proposal; (c) a representation that the
stockholder intends to appear in person or by proxy at the meeting to introduce
the proposal or proposals, specified in the notice; and (d) the class and number
of shares of stock held of record, owned beneficially and represented by proxy
by such stockholder as of the record date for the meeting (if such date shall
then have been made publicly available) and as of the date of such notice. The
chairperson of the meeting may refuse to acknowledge the introduction of any
stockholder proposal not made in compliance with the foregoing procedure.
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
4
<PAGE>
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
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
5
<PAGE>
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
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.
6
<PAGE>
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.
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.
7
<PAGE>
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 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.
8
<PAGE>
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
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.
9
<PAGE>
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
----------
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
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
10
<PAGE>
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.
ARTICLE VII
-----------
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
11
<PAGE>
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
------------
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 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
----------
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
12
<PAGE>
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
Maryland General Corporate Law 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.
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.
13
<PAGE>
TEMPORARY CERTIFICATE - EXCHANGEABLE FOR
DEFINITIVE ENGRAVED CERTIFICATE WHEN READY FOR DELIVERY
COMMON STOCK COMMON STOCK
- ---------------------------------- ----------------------------------
: SHARES : : SHARES :
: : : :
: : : :
: : : :
: : : :
- ---------------------------------- ----------------------------------
THIS CERTIFICATE IS TRANSFERABLE IN CUSIP 561911 10 8
PHILADELPHIA, PA OR SEE REVERSE FOR CERTAIN DEFINITIONS
NEW YORK, NY
MANAGED HIGH YIELD PLUS FUND INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
- --------------------------------------------------------------------------------
: :
: THIS CERTIFIES that :
: :
: :
: :
: :
: :
: is the owner of :
: :
- --------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE OF $0.001 OF
MANAGED HIGH YIELD PLUS FUND INC.
(hereinafter called the "Corporation") transferable only on the books of the
Corporation by the registered holder hereof in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
is not valid until countersigned by the Transfer Agent and registered by the
Registrar or its designated agent Registrar.
IN WITNESS WHEREOF, the Corporation has caused the facsimile signatures of
its duly authorized officers and its facsimile seal to be affixed hereto.
Dated: [SEAL OF MANAGED [SIDE BAR]
HIGH YIELD PLUS FUND COUNTERSIGNED AND REGISTERED:
INC.] PNC Bank, National Association
(Philadelphia, PA)
TRANSFER AGENT
AND REGISTRAR
AUTHORIZED SIGNATURE
/s/ Margo Alexander /s/ Paul Schubert
---------------------------- ----------------------------
President Vice President and Treasurer
<PAGE>
MANAGED HIGH YIELD PLUS FUND INC.
The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof of the
Corporation, and the qualifications, limitations, or restrictions of such
preferences and/or rights. Such request may be made to the Corporation or the
transfer agent.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
TEN ENT - as tenants by the entireties ----------
JT TEN - as joint tenants with right (Cust)
of survivorship and not as -------------------
tenants in common (Minor)
under Uniform Gifts
to Minors Act
-------------------
(State)
UNIF TRSFR MIN ACT - Custodian
----------
(Cust)
-------------------
(Minor)
under Uniform
Transfers to
Minors Act
-------------------
(State)
Additional abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and transfer unto
----------------
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER OF
ASSIGNEE
- --------------------------------
: :
: :
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print or typewrite name and address including postal zip code of
assignee)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares of Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
--------------------------------------
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated,
---------------------------
--------------------------------------------
Signatures(s)
NOTICE: The signature(s) to this assignment
must correspond with the name as written
upon the face of the Certificate, in every
particular, without alteration or
enlargement, or any change whatsoever.
Signature Guaranteed By:
--------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF LOST, STOLEN, MULTILATED OR DESTROYED,
THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE
OF A REPLACEMENT CERTIFICATE.
<PAGE>
MANAGED HIGH YIELD PLUS FUND INC.
DIVIDEND REINVESTMENT PLAN
PNC Bank, National Association ("Plan Agent") will act as Plan Agent for
shareholders who have not elected in writing to receive dividends and
distributions in cash (each a "Participant"), will open an account for each
Participant under the Dividend Reinvestment Plan ("Plan") in the same name as
their then current Shares are registered, and will put the Plan into effect for
each Participant as of the first record date for a dividend or capital gains
distribution.
Whenever the Fund declares a dividend or distribution with respect to the
common stock of the Fund ("Shares"), each Participant will receive such
dividends and distributions in additional Shares, including fractional Shares
acquired by the Plan Agent and credited to each Participant's account. If on
the payment date for a cash dividend or distribution, the net asset value is
equal to or less than the market price per Share plus estimated brokerage
commissions, the Plan Agent shall automatically receive such Shares, including
fractions, for each Participant's account. Except in the circumstances
described in the next paragraph, the number of additional Shares to be credited
to each Participant's account shall be determined by dividing the dollar amount
of the dividend or distribution payable on their Shares by the greater of the
net asset value per Share determined as of the date of purchase or 95% of the
then current market price per Share on the payment date.
Should the net asset value per Share exceed the market price per Share plus
estimated brokerage commissions on the payment date for a cash dividend or
distribution, the Plan Agent or a broker-dealer selected by the Plan Agent shall
endeavor, for a purchase period lasting until the last business day before the
next date on which the Shares trade on an "ex-dividend" basis, but in no event,
except as provided below, more than 30 days after the dividend payment date, to
apply the amount of such dividend or distribution on each Participant's Shares
(less their pro rata share of brokerage commissions incurred with respect to the
Plan Agent's open-market purchases in connection with the reinvestment of such
dividend or distribution) to purchase Shares on the open market for each
Participant's account. No such purchases may be made more than 30 days after
the payment date for such dividend except where temporary curtailment or
suspension of purchase is necessary to comply with applicable provisions of
federal securities laws. If, at the close of business on any day during the
purchase period the net asset value per Share equals or is less than the market
price per Share plus estimated brokerage commissions, the Plan Agent will not
make any further open-market purchases in connection with the reinvestment of
such dividend or distribution. If the Plan Agent is unable to invest the full
dividend or distribution amount through open-market purchases during the
purchase period, the Plan Agent shall request that, with respect to the
uninvested portion of such dividend or distribution amount, the Fund issue new
Shares at the close of business on the earlier of the last day of the purchase
period or the first day during the purchase period on which the net asset value
per Share equals or is less than the market price per Share, plus estimated
brokerage commissions, such Shares to be issued in accordance with the terms
specified in the third paragraph hereof. These newly issued Shares will be
valued at the then-current market price per Share at the time such Shares are to
be issued.
For purposes of making the dividend reinvestment purchase comparison under
the Plan, (a) the market price of the Shares on a particular date shall be the
last sales price on the New York Stock Exchange (or if the Shares are not listed
on the New York Stock Exchange, such other exchange on which the Shares are
principally traded) on that date, or, if there is no sale on such Exchange (or
if not so listed, in the over-the-counter market) on that date, then the mean
between the closing bid and asked quotations for such Shares on such Exchange on
such date and (b) the net asset value per Share on a particular date shall be
the net asset value per Share most recently calculated by or on behalf of the
Fund. All dividends, distributions and other payments (whether made in cash or
Shares) shall be made net of any applicable withholding tax.
Open-market purchases provided for above may be made on any securities
exchange where the Fund's Shares are traded, in the over-the-counter market or
in negotiated transactions and may be on such terms as to price, delivery and
otherwise as the Plan Agent shall determine. Each Participant's uninvested
funds held by the Plan Agent will not bear interest, and it is understood that,
in any event, the Plan Agent shall have no liability in connection with any
inability to purchase Shares within 30 days after the initial date of such
purchase as herein provided, or with the timing of any purchases effected. The
Plan Agent shall have no responsibility as to the value of the Shares acquired
for each Participant's account. For the purpose of cash investments, the Plan
Agent may commingle each Participant's funds with those of other shareholders of
the Fund for whom the Plan Agent similarly acts as agent, and the average price
(including brokerage commissions) of all Shares purchased by the Plan Agent as
Plan Agent shall be the price per Share allocable to each Participant in
connection therewith.
<PAGE>
The Plan Agent may hold each Participant's Shares acquired pursuant to the
Plan together with the Shares of other shareholders of the Fund acquired
pursuant to the Plan in noncertificated form in the Plan Agent's name or that of
the Plan Agent's nominee. The Plan Agent will forward to each Participant any
proxy solicitation material and will vote any Shares so held for each
Participant only in accordance with the instructions set forth on proxies
returned by the participant to the Fund, Upon a Participant's written request,
the Plan Agent will deliver to the Participant, without charge, a certificate or
certificates for some or all of the whole Shares held in the Participant's
account under the Plan.
The Plan Agent will confirm to each Participant each acquisition made for
their account as soon as practicable but not later than 60 days after the date
thereof. Although each Participant may from time to time have an undivided
fractional interest (computed to three decimal places) in a Share, no
certificates for a fractional Share will be issued. However, dividends and
distributions on fractional Shares will be credited to each Participant's
account. In the event of termination of a Participant's account under the Plan,
the Plan Agent will adjust for any such undivided fractional interest in cash at
the market value of the Shares at the time of termination, less the pro rata
expense of any sale required to make such an adjustment.
Any Share dividends or split Shares distributed by the Fund on Shares held
by the Plan Agent for Participants will be credited to their accounts. In the
event that the Fund makes available to its shareholders rights to purchase
additional Shares or other securities, the Shares held for each Participant
under the Plan will be added to other Shares held by the Participant in
calculating the number of rights to be issued to each Participant.
The Plan Agent's service fee for handling capital gains distributions or
income dividends will be paid by the Fund. Participants will be charged their
pro rata share of brokerage commissions on all open-market purchases.
Each Participant may terminate their account under the Plan by notifying
the Plan Agent in writing. Such termination will be effective immediately if
the Participant's notice is received by the Plan Agent not less than ten days
prior to any dividend or distribution record date, otherwise such termination
will be effective the first trading day after the payment date for such dividend
or distribution with respect to any subsequent dividend or distribution. The
Plan may be terminated by the Plan Agent or the Fund upon notice in writing
mailed to each Participant at least 30 days prior to any record date for the
payment of any dividend or distribution by the Fund. Upon any termination, the
Plan Agent will cause a certificate or certificates for the number of Shares
held for each Participant under the Plan to be delivered to the Participant (or
if the Shares are not then in certificated form, will cause the Shares to be
transferred to the Participant) without charge.
These terms and conditions may be amended or supplemented by the Plan Agent
or the Fund at any time or times but, except when necessary or appropriate to
comply with applicable law or the rules or policies of the Securities and
Exchange Commission or any other regulatory authority, only by mailing to each
Participant appropriate written notice at least 30 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by
each Participant unless, prior to the effective date thereof, the Plan Agent
receives written notice of the termination of their account under the Plan. Any
such amendment may include an appointment by the Plan Agent in its place and
stead of a successor Plan Agent under these terms and conditions, with full
power and authority to perform all or any of the acts to be performed by the
Plan Agent under these terms and conditions. Upon any such appointment of any
Plan Agent for the purpose of receiving dividends and distributions, the Fund
will be authorized to pay to such successor Plan Agent, for each Participant's
account, all dividends and distributions payable on Shares held in their name or
under the Plan for retention or application by such successor Plan Agent as
provided in these terms and conditions.
The Plan Agent shall at all times act in good faith and agrees to use its
best efforts within reasonable limits to ensure the accuracy of all services
performed under this Agreement and to comply with applicable law, but assumes no
responsibility and shall not be liable for loss or damage due to errors unless
such error is caused by the Plan Agent's negligence, bad faith, or willful
misconduct or that of its employees.
These terms and conditions shall be governed by the laws of the State of
Maryland.
<PAGE>
IMPORTANT NOTICE
Please verify the Dividend/Capital Gain Distribution noted on the attached
statement. If you would like to change your option, please contact PFPC Inc.
immediately at 1-800-852-4750.
<PAGE>
INVESTMENT ADVISORY AND ADMINISTRATION CONTRACT
Contract made as of June 22, 1998 between MANAGED HIGH YIELD PLUS FUND
INC., a Maryland corporation ("Fund"), and MITCHELL HUTCHINS ASSET MANAGEMENT
INC. ("Mitchell Hutchins"), a Delaware corporation registered as a broker-dealer
under the Securities Exchange Act of 1934, as amended ("1934 Act"), and as an
investment adviser under the Investment Advisers Act of 1940, as amended.
WHEREAS the Fund is registered under the Investment Company Act of 1940, as
amended ("1940 Act"), as a closed-end, diversified management investment
company, and intends to register shares of its common stock ("Shares") for sale
to the public under the Securities Act of 1933, as amended ("1933 Act"); and
WHEREAS the Fund desires to retain Mitchell Hutchins as investment adviser
and administrator to furnish certain administrative, investment advisory and
portfolio management services to the Fund, and Mitchell Hutchins is willing to
furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints Mitchell Hutchins as investment
-----------
adviser and administrator of the Fund for the period and on the terms set forth
in this Contract. Mitchell Hutchins accepts such appointment and agrees to
render the services herein set forth, for the compensation herein provided.
2. Duties as Investment Adviser.
----------------------------
(a) Subject to the supervision of the Fund's board of directors ("Board"),
Mitchell Hutchins will provide a continuous investment program for the Fund,
including investment research and management with respect to all securities and
investments and cash equivalents in the Fund. Mitchell Hutchins will determine
from time to time what securities and other investments will be purchased,
retained or sold by the Fund.
(b) Mitchell Hutchins agrees that in placing orders with brokers, it will
attempt to obtain the best net result in terms of price and execution; provided
that Mitchell Hutchins may, in its discretion, use brokers who provide the Fund
with research, analysis, advice and similar services to execute portfolio
transactions on behalf of the Fund, and Mitchell Hutchins may pay to those
brokers in return for brokerage and research services a higher commission than
may be charged by other brokers, subject to Mitchell Hutchins' determining in
good faith that such commission is reasonable in terms either of the particular
transaction or of the overall responsibility of Mitchell Hutchins to the Fund
and its other clients and that the total commissions paid by such Series will be
reasonable in relation to the benefits to the Fund over the long term. In no
instance will portfolio securities be purchased from or sold to Mitchell
Hutchins, or any affiliated person thereof, except in accordance with the
federal securities laws and the rules and regulations thereunder. Whenever
Mitchell Hutchins simultaneously places orders to purchase or sell the same
security on behalf of the Fund and one or more other accounts advised by
Mitchell Hutchins, such orders will be
<PAGE>
allocated as to price and amount among all such accounts in a manner believed to
be equitable to each account. The Fund recognizes that in some cases this
procedure may adversely affect the results obtained for the Fund.
(c) Mitchell Hutchins will oversee the maintenance of all books and
records with respect to the securities transactions of the Fund, and will
furnish the Board with such periodic and special reports as the Board reasonably
may request. In compliance with the requirements of Rule 31a-3 under the 1940
Act, Mitchell Hutchins hereby agrees that all records which it maintains for the
Fund are the property of the Fund, agrees to preserve for the periods prescribed
by Rule 31a-2 under the 1940 Act any records which it maintains for the Fund and
which are required to be maintained by Rule 31a-1 under the 1940 Act and further
agrees to surrender promptly to the Fund any records which it maintains for the
Fund upon request by the Fund.
(d) Mitchell Hutchins will oversee the computation of the net asset value
and the net income of the Fund as described in the currently effective
registration statement of the Fund under the 1933 Act and the 1940 Act and any
amendments or supplements thereto ("Registration Statement") or as more
frequently requested by the Board.
(e) The Fund hereby authorizes Mitchell Hutchins and any entity or person
associated with Mitchell Hutchins which is a member of a national securities
exchange to effect any transaction on such exchange for the account of the Fund,
which transaction is permitted by Section 11(a) of the 1934 Act, and the Fund
hereby consents to the retention of compensation by Mitchell Hutchins or any
person or entity associated with Mitchell Hutchins.
3. Duties as Administrator. Mitchell Hutchins will administer the
-----------------------
affairs of the Fund subject to the supervision of the Board and the following
understandings:
(a) Mitchell Hutchins will supervise all aspects of the operations of the
Fund, including oversight of transfer agency, custodial and accounting services,
except as hereinafter set forth; provided, however, that nothing herein
contained shall be deemed to relieve or deprive the Board of its responsibility
for and control of the conduct of the affairs of the Fund.
(b) Mitchell Hutchins will provide the Fund with such corporate,
administrative and clerical personnel (including officers of the Fund) and
services as are reasonably deemed necessary or advisable by the Board, including
the maintenance of certain books and records of the Fund.
(c) Mitchell Hutchins will arrange, but not pay, for the periodic
preparation, updating, filing and dissemination (as applicable) of the Fund's
Registration Statement, proxy material, tax returns and required reports to the
Fund's shareholders and the Securities and Exchange Commission and other
appropriate federal or state regulatory authorities.
(d) Mitchell Hutchins will provide the Fund with, or obtain for it,
adequate office space and all necessary office equipment and services, including
telephone service, heat, utilities, stationery supplies and similar items.
(e) Mitchell Hutchins will provide the Board on a regular basis with
economic and investment analyses and reports and make available to the Board
upon request any economic,
- 2 -
<PAGE>
statistical and investment services normally available to institutional or other
customers of Mitchell Hutchins.
4. Further Duties. In all matters relating to the performance of this
--------------
Contract, Mitchell Hutchins will act in conformity with the Articles of
Incorporation, By-Laws and Registration Statement of the Fund and with the
instructions and directions of the Board and will comply with the requirements
of the 1940 Act, the rules thereunder, and all other applicable federal and
state laws and regulations.
5. Delegation of Mitchell Hutchins' Duties as Investment Adviser and
-----------------------------------------------------------------
Administrator. Mitchell Hutchins may enter into one or more contracts ("Sub-
- -------------
Advisory or Sub-Administration Contracts") with a sub-adviser or sub-
administrator in which Mitchell Hutchins delegates to such sub-adviser or sub-
administrator any or all its duties specified in Paragraphs 2 and 3 of this
Contract, provided that each Sub-Advisory or Sub-Administration Contract imposes
on the sub-adviser or sub-administrator bound thereby all applicable duties and
conditions to which Mitchell Hutchins is subject by Paragraphs 2, 3 and 4 of
this Contract, and further provided that each Sub-Advisory or Sub-Administration
Contract meets all requirements of the 1940 Act and rules thereunder.
6. Services Not Exclusive. The services furnished by Mitchell Hutchins
----------------------
hereunder are not to be deemed exclusive and Mitchell Hutchins shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired thereby. Nothing in this Contract shall limit or restrict the
right of any director, officer or employee of Mitchell Hutchins, who may also be
a director, officer or employee of the Fund, to engage in any other business or
to devote his or her time and attention in part to the management or other
aspects of any other business, whether of a similar nature or a dissimilar
nature.
7. Expenses.
--------
(a) During the term of this Contract, the Fund will bear all expenses, not
specifically assumed by Mitchell Hutchins, incurred in its operations and the
offering of its Shares or any preferred stock.
(b) Expenses borne by the Fund will include but not be limited to the
following (which shall be in addition to the fees payable to and expenses
incurred on behalf of the Fund by Mitchell Hutchins under the Contract): (i)
the cost (including brokerage commissions) of securities purchased or sold by
the Fund and any losses incurred in connection therewith; (ii) fees payable to
and expenses incurred on behalf of the Fund by Mitchell Hutchins under this
Contract; (iii) organizational and offering expenses of the Fund, whether or not
advanced by Mitchell Hutchins; (iv) filing fees and expenses relating to the
registrations and qualification of the Fund's shares and the Fund under federal
and/or state securities laws and maintaining such registration and
qualifications; (v) fees and salaries payable to the Fund's directors and
officers who are not interested persons of the Fund or Mitchell Hutchins; (vi)
all expenses incurred in connection with the Fund's directors' services,
including travel expenses; (vii) taxes (including any income or franchise taxes)
and governmental fees; (viii) costs of any liability, uncollectible items of
deposit and other insurance and fidelity bonds; (ix) any costs, expenses or
losses arising out of a liability of or claim for damages or other relief
asserted against the Fund for violation of any law; (x) legal,
- 3 -
<PAGE>
accounting and auditing expenses, including legal fees of special counsel for
those directors of the Fund who are not interested persons of the Fund; (xi)
charges of custodians, transfer agents and other agents (including any lending
agent); (xii) costs of preparing share certificates; (xiii) expenses of setting
in type and printing prospectuses and supplements thereto, statements of
additional information and supplements thereto, reports and proxy materials for
existing shareholders; (xiv) costs of mailing prospectuses and supplements
thereto, statements of additional information and supplements thereto, reports
and proxy materials to existing shareholders; (xv) any extraordinary expenses
(including fees and disbursements of counsel, costs of actions, suits or
proceedings to which the Fund is a party and the expenses the Fund may incur as
a result of its legal obligation to provide indemnification to its officers,
directors, agents and shareholders) incurred by the Fund; (xvi) fees, voluntary
assessments and other expenses incurred in connection with membership in
investment company organizations; (xvii) the cost of mailing and tabulating
proxies and costs of meetings of shareholders, the Board and any committees
thereof; (xviii) the cost of investment company literature and other
publications provided by the Fund to its directors and officers; (xix) costs of
mailing, stationery and communications equipment; (xx) expenses incident to any
dividend reinvestment plan; (xxi) charges and expenses of any outside pricing
service used to value portfolio securities; (xxii) interest on borrowings of the
Fund; (xxiii) fees and expenses of listing and maintaining any listing of the
Fund's Shares on any national securities exchange; and (xxiv) costs and expenses
(including rating agency fees) associated with the issuance of any preferred
stock.
(c) Mitchell Hutchins will assume the cost of any compensation for
services provided to the Fund received by the officers of the Fund and by those
directors who are interested persons of the Fund.
(d) The payment or assumption by Mitchell Hutchins of any expenses of the
Fund that Mitchell Hutchins is not required by this Contract to pay or assume
shall not obligate Mitchell Hutchins to pay or assume the same or any similar
expense of the Fund on any subsequent occasion.
8. Compensation.
------------
(a) For the services provided and the expenses assumed pursuant to this
Contract, the Fund will pay to Mitchell Hutchins a fee, computed weekly and paid
monthly, at an annual rate of 0.70% of the Fund's average weekly total assets
minus liabilities other than the Fund's aggregate indebtedness constituting
leverage.
(b) The fee shall be computed weekly and paid monthly to Mitchell Hutchins
on or before the first business day of the next succeeding calendar month.
(c) If this Contract becomes effective or terminates before the end of any
month, the fee for the period from the effective day to the end of the month or
from the beginning of such month to the date of termination, as the case may be,
shall be prorated according to the proportion which such period bears to the
full month in which such effectiveness or termination occurs.
9. Limitation of Liability of Mitchell Hutchins. Mitchell Hutchins and
--------------------------------------------
its delegates, including any Sub-Adviser or Sub-Administrator to the Fund, shall
not be liable for any error of
- 4 -
<PAGE>
judgment or mistake of law or for any loss suffered by the Fund or any of its
shareholders, in connection with the matters to which this Contract relates,
except to the extent that such a loss results from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations and duties under this Contract. Any
person, even though also an officer, director, employee, or agent of Mitchell
Hutchins, who may be or become an officer, director, employee or agent of the
Fund shall be deemed, when rendering services to the Fund or acting with respect
to any business of the Fund, to be rendering such service to or acting solely
for the Fund and not as an officer, director, employee, or agent or one under
the control or direction of Mitchell Hutchins even though paid by it.
10. Duration and Termination.
------------------------
(a) This Contract shall become effective upon the date hereinabove written
provided that, this Contract shall not take effect unless it has first been
approved (i) by a vote of a majority of those directors of the Fund who are not
parties to this Contract or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval, and (ii) by vote
of a majority of the Fund's outstanding voting securities.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for two years from the its effective date. Thereafter, if
not terminated, this Contract shall continue automatically for successive
periods of twelve months each, provided that such continuance is specifically
approved at least annually (i) by a vote of a majority of those directors of the
Fund who are not parties to this Contract or interested persons of any such
party, cast in person at a meeting called for the purpose of voting on such
approval, and (ii) by the Board or by vote of a majority of the outstanding
voting securities of the Fund.
(c) Notwithstanding the foregoing, this Contract may be terminated at any
time, without the payment of any penalty, by vote of the Board or by a vote of a
majority of the outstanding voting securities of the Fund on sixty days' written
notice to Mitchell Hutchins or by Mitchell Hutchins at any time, without the
payment of any penalty, on sixty days' written notice to the Fund. This
Contract will automatically terminate in the event of its assignment.
11. Amendment of this Contract. No provision of this Contract may be
--------------------------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Contract shall be
effective until approved by vote of a majority of the Fund's outstanding voting
securities.
12. Governing Law. This Contract shall be construed in accordance with
-------------
the laws of the State of Delaware, without giving effect to the conflicts of
laws principles thereof, and in accordance with the 1940 Act. To the extent
that the applicable laws of the State of Delaware conflict with the applicable
provisions of the 1940 Act, the latter shall control.
13. Miscellaneous. The captions in this Contract are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby.
- 5 -
<PAGE>
This Contract shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors. As used in this Contract, the
terms "majority of the outstanding voting securities," "affiliated person,"
"interested person," "assignment," "broker," "investment adviser," "national
securities exchange," "net assets," "prospectus," "sale," "sell" and "security"
shall have the same meaning as such terms have in the 1940 Act, subject to such
exemption as may be granted by the Securities and Exchange Commission by any
rule, regulation or order. Where the effect of a requirement of the 1940 Act
reflected in any provision of this Contract is relaxed by a rule, regulation or
order of the Securities and Exchange Commission, whether of special or general
application, such provision shall be deemed to incorporate the effect of such
rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated as of the day and year first above
written.
Attest: MANAGED HIGH YIELD PLUS FUND INC.
_____________________________ By _________________________________________
Attest: MITTCHELL HUTCHINS ASSET MANAGEMENT INC.
_____________________________ By _________________________________________
- 6 -
<PAGE>
_____ SHARES/*/
OF COMMON STOCK
MANAGED HIGH YIELD PLUS FUND INC.
UNDERWRITING AGREEMENT
----------------------
June __, 1998
PAINEWEBBER INCORPORATED
as Representative of the Several Underwriters
named in Schedule 1 hereto
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
Managed High Yield Plus Fund Inc., a Maryland corporation (the
"Fund"), proposes to issue and sell to you and the other underwriters named in
Schedule 1 hereto (the "Underwriters"), for whom you are acting as
representative (the "Representative"), up to _____ shares of its common stock
(the "Firm Shares"), par value $.001 per share (the "Common Shares"). In
addition, the Fund hereby grants to the Underwriters an option (the "Option") to
purchase up to an additional
____________________
/*/ Plus an option to purchase, in the aggregate, up to _____ additional
Common Shares to cover over-allotments.
<PAGE>
____ of its Common Shares (the "Option Shares") solely for the purpose of
covering over-allotments. The Firm Shares and the Option Shares are referred to
collectively herein as the "Shares."
Mitchell Hutchins Asset Management Inc., a Delaware corporation (the
"Investment Adviser"), will act as the Fund's investment adviser and
administrator pursuant to an Investment Advisory and Administration Agreement by
and between the Fund and the Investment Adviser, dated as of June 22, 1998 (the
"Investment Advisory Agreement"). State Street Bank and Trust Company ("State
Street") will act as the custodian (the "Custodian") of the Fund's cash and
portfolio assets pursuant to a custody agreement, dated as of June 22, 1998 (the
"Custody Agreement"). PNC Bank, National Association, will act as the Fund's
dividend disbursing agent, transfer agent and registrar (the "Transfer Agent")
pursuant to a transfer agency agreement, dated June 22, 1998 (the "Transfer
Agency Agreement").
The Fund and the Investment Adviser each hereby confirms as follows
their agreements with the Representative and the several other Underwriters.
1. Sale and Purchase; Compensation
-------------------------------
(a) The Fund will issue and sell to each Underwriter, and
each Underwriter will purchase from the Fund, the number of Firm Shares opposite
such Underwriter's name in Schedule 1 hereto, at the purchase price of $15.00
per share of Common Shares.
(b) The Fund grants to the Underwriters the Option to
purchase all or any part of the Option Shares for the same consideration per
share as for the Firm Shares. The Option may be exercised only to cover over-
allotments in the sales of the Firm Shares by the Underwriters. The number of
Option Shares (adjusted by the Representative to eliminate fractions) to be
purchased by each Underwriter will be the same percentage of the aggregate
number of Option Shares being sold as such Underwriter is obligated to purchase
of the Firm Shares. Such Option may be exercised in whole or in part, only to
cover over-allotments, at any time or from time to time on or before the 45th
day after the date of this Underwriting Agreement, upon written or telefacsimile
notice (the "Option Shares Notice") from the Representative to the Fund no later
than 12:00 noon, New York City time, at least two and not more than five
business days before the date specified for closing in the Option Shares Notice
(the "Option Shares Closing Date"), setting forth the number of Option Shares to
be purchased and the time and date of such purchase. Upon delivery and receipt
of the Option Shares Notice, the Fund will issue and sell to each Underwriter,
and each Underwriter will purchase from the Fund, on the
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<PAGE>
Option Shares Closing Date, its portion of the number of Option Shares set forth
in the Option Shares Notice.
(c) The obligations of the Underwriters under this Underwriting
Agreement are several and not joint and are undertaken on the basis of the
representations and are subject to the conditions set forth in this Underwriting
Agreement.
(d) The Investment Adviser agrees to make the payments to the
Underwriters when and as required by Section 2 hereof.
2. Payment and Delivery. Delivery by the Fund of the Firm Shares
--------------------
(the "Firm Shares Closing") to the Representative for the accounts of the
Underwriters against payment of the purchase price by wire transfer of Federal
Funds or similar same day funds to the Fund for the Firm Shares, will take place
at the offices of PaineWebber Incorporated, 1285 Avenue of the Americas, New
York, New York, or through the facilities of the Depository Trust Company or
another mutually agreeable facility, at 9:00 a.m., New York City time, on the
third business day following the date of this Underwriting Agreement, or at such
time on such other date, not later than ten business days after the date of this
Underwriting Agreement, as may be agreed on by the Fund and the Representative
(the "Firm Shares Closing Date").
If and to the extent that the Option is exercised, delivery of the
Option Shares and payment by the Underwriters (in the manner specified above)
will take place at the offices or through the facilities specified above for the
Firm Shares Closing at the time and date (which may be the Firm Shares Closing
Date) specified in the Option Shares Notice. Any Option Shares Closing Date may
not be later than three business days following the exercise of the related
Option. The Firm Shares Closing Date and any Option Shares Closing Date are
called the "Closing Dates."
Certificates evidencing Common Shares will be in definitive form (or
temporary form acceptable to the New York Stock Exchange), registered in such
names and in such denominations as the Representative requests at least three
full business days before the Firm Shares Closing Date or, in the case of Option
Shares, on the day of notice of exercise of the Option as described in Section
1(b), and will be made available to the Representative for checking and
packaging, at a place in New York City designated by the Representative, at
least one full business day before the relevant Closing Date.
Simultaneous with delivery to the Underwriters of and payment by the
Underwriters for (i) Firm Shares on the Firm Shares Closing Date and (ii) Option
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<PAGE>
Shares on the Option Shares Closing Date, PaineWebber Incorporated
("PaineWebber") will pay to the Underwriters an amount equal to 5% of the
purchase price per Share for each Share to be purchased by the Underwriters on
such date by wire transfer of Federal Funds or similar same-day funds on such
Firm Shares Closing Date or Option Shares Closing Date, as the case may be, to
the order of PaineWebber Incorporated.
3. Registration Statement and Prospectus; Public Offering. The Fund
------------------------------------------------------
has filed with the Securities and Exchange Commission (the "Commission"),
pursuant to the Securities Act of 1933, as amended (the "Securities Act"), the
Investment Company Act of 1940, as amended (the "Investment Company Act"), and
the published rules and regulations adopted by the Commission under the
Securities Act (the "Securities Act Rules") and the Investment Company Act (the
"Investment Company Act Rules"), a Notification of Registration on Form N-8A
(the "Notification" pursuant to Section 8 of the Investment Company Act and a
registration statement on Form N-2 (File Nos. 333-51017 and 811-08765) relating
to the Shares (the "registration statement"), including a preliminary prospectus
(including any preliminary statement of additional information), and such
amendments to such registration statement as may have been required to the date
of this Underwriting Agreement. The preliminary prospectus (including any
preliminary statement of additional information) is to be used in connection
with the offering and sale of the Shares. The term "Preliminary Prospectus" as
used herein means any preliminary prospectus (including any preliminary
statement of additional information) included at any time as a part of the
registration statement and any preliminary prospectus (including any preliminary
statement of additional information) omitted therefrom pursuant to the
Securities Act Rules.
The Fund has furnished the Representative copies of such registration
statement, each amendment to such registration statement filed by the Fund with
the Commission and the Preliminary Prospectus filed by the Fund with the
Commission or used by the Fund. If the registration statement has not become
effective, a further amendment (the "Final Amendment") to such registration
statement, including the forms of final prospectus (including any final
statement of additional information), necessary to permit such registration
statement to become effective will promptly be filed by the Fund with the
Commission. If such registration statement has become effective and any
prospectus (including any statement of additional information) contained therein
omits certain information at the time of effectiveness pursuant to Rule 430A of
the Securities Act Rules, a final prospectus (the "Rule 430A Prospectus")
containing such omitted information will be filed by the Fund with the
Commission in accordance with Rule 497(h) of the Securities Act Rules. The
registration statement as amended at the time it becomes or became effective
(the "Effective
4
<PAGE>
Date"), including financial statements and all exhibits, and any information
deemed to be included by Rule 430A, is called the "Registration Statement." The
term "Prospectus" means the prospectus (including any statement of additional
information) in the form in which it is first filed with the Commission pursuant
to Rule 497(b), (h) or (j) of the Securities Act Rules, as the case may be.
The Fund and the Investment Adviser understand that the Underwriters
propose to make a public offering of the Firm Shares, as described in the
Prospectus, as soon after the Effective Date (or, if later, after the date this
Underwriting Agreement is signed) as the Representative deems advisable. The
Fund and the Investment Adviser confirm that the Underwriters and dealers have
been authorized to distribute the Preliminary Prospectus relating to the Shares
included in Pre-Effective Amendment No. 1 to the registration statement and are
authorized to distribute the Prospectus and any amendments or supplements
thereto.
4. Representations.
---------------
(a) Each of the Fund and the Investment Adviser jointly and
severally represents to each Underwriter as follows:
(i) On (A) the Effective Date and the date on
which the Prospectus is first filed with the Commission pursuant
to Rule 497(b), (h) or (j) of the Securities Act Rules, as the
case may be, (B) the date on which any post-effective amendment
to the Registration Statement (except any post-effective
amendment which is filed with the Commission after the later of
(x) one year from the date of this Underwriting Agreement or (y)
the date on which the distribution of the Shares is completed)
became or becomes effective or any amendment or supplement to the
Prospectus was or is filed with the Commission and (C) the
Closing Dates, the Registration Statement, the Prospectus and any
such amendment or supplement thereto and the Notification
complied or will comply in all material respects with the
requirements of the Securities Act, the Investment Company Act,
the Securities Act Rules and the Investment Company Act Rules, as
the case may be. On the Effective Date and on the date that any
post-effective amendment to the Registration Statement (except
any post-effective amendment which is filed with the Commission
after the later of (x) one year from the date of this
Underwriting Agreement or (y) the date on which the distribution
of the Shares is completed) became or becomes effective, neither
the Registration Statement nor any such amendment did or will
contain any untrue statement of a
5
<PAGE>
material fact or omit to state a material fact required to be
stated in it or necessary to make the statements in it not
misleading. At the Effective Date and, if applicable, the date
the Prospectus or any amendment or supplement to the Prospectus
was or is filed with the Commission and at the Closing Dates, the
Prospectus did not or will not, as the case may be, contain any
untrue statement of a material fact or omit to state a material
fact required to be stated in it or necessary to make the
statements in it, in light of the circumstances under which they
were made, not misleading. The foregoing representations in this
Section 4(a)(i) do not apply to statements or omissions relating
to the Underwriters made in reliance on and in conformity with
information furnished in writing to the Fund by the
Representative expressly for use in the Registration Statement,
the Prospectus, or any amendments or supplements thereto.
(ii) The Fund has been duly organized, is
validly existing and in good standing as a corporation under the
laws of the State of Maryland, with full power and authority to
conduct all the activities conducted by it, to own or lease all
assets owned or leased by it and to conduct its business as
described in the Registration Statement and Prospectus, and the
Fund is duly licensed and qualified to do business and in good
standing as a foreign corporation or otherwise in each
jurisdiction in which its ownership or leasing of property or its
conducting of business requires such qualification, except where
the failure to be so qualified or be in good standing would not
have a material adverse effect on the Fund, and the Fund owns,
possesses or has obtained and currently maintains all
governmental licenses, permits, consents, orders, approvals and
other authorizations, whether foreign or domestic, necessary to
carry on its business as contemplated in the Prospectus. The Fund
has no subsidiaries.
(iii) The capitalization of the Fund is as set forth in the
Registration Statement and the Prospectus. The Common Shares of the Fund
conform in all material respects to the description of them in the
Prospectus. All the outstanding Common Shares have been duly authorized
and are validly issued, fully paid and nonassessable. The Shares to be
issued and delivered to and paid for by the Underwriters in accordance with
this Underwriting Agreement against payment therefor as provided by this
Underwriting Agreement have been duly authorized and when issued and
delivered to the
6
<PAGE>
Underwriters will have been validly issued and will be fully paid
and nonassessable. No person is entitled to any preemptive or
other similar rights with respect to the Shares.
(iv) The Fund is duly registered with the
Commission under the Investment Company Act as a diversified,
closed-end management investment company, and, subject to the
filing of the Final Amendment, if not already filed, all action
under the Securities Act, the Investment Company Act, the
Securities Act Rules and the Investment Company Act Rules, as the
case may be, necessary to make the public offering and consummate
the sale of the Shares as provided in this Underwriting Agreement
has or will have been taken by the Fund.
(v) The Fund has full power and authority to
enter into each of the Underwriting Agreement, the Investment
Advisory Agreement, the Custody Agreement and the Transfer
Agency Agreement (collectively, the "Fund Agreements") and to
perform all of the terms and provisions hereof and thereof to be
carried out by it and (A) each Fund Agreement has been duly and
validly authorized, executed and delivered by the Fund, (B) each
Fund Agreement does not violate in any material respect any of
the applicable provisions of the Investment Company Act, the
Investment Advisers Act of 1940 (the "Advisers Act"), the
Investment Company Act Rules and the rules and regulations
adopted by the Commission under the Advisers Act (the "Advisers
Act Rules"), as the case may be, and (C) assuming due
authorization, execution and delivery by the other parties
thereto, each Fund Agreement constitutes the legal, valid and
binding obligation of the Fund enforceable in accordance with
its terms, (1) subject, as to enforcement, to applicable
bankruptcy, insolvency and similar laws affecting creditors'
rights generally and to general equitable principles (regardless
of whether enforcement is sought in a proceeding in equity or at
law) and (2) except as rights to indemnity thereunder may be
limited by federal or state securities laws.
(vi) None of (A) the execution and delivery by
the Fund of the Fund Agreements, (B) the issue and sale by the
Fund of the Shares as contemplated by this Underwriting Agreement
and (C) the performance by the Fund of its obligations under the
Fund Agreements or consummation by the Fund of the other
transactions contemplated by the Fund Agreements conflicts with
or will conflict
7
<PAGE>
with, or results or will result in a breach of, the Articles of
Incorporation or the By-laws of the Fund or any agreement or
instrument to which the Fund is a party or by which the Fund is
bound, or any law, rule or regulation, or order of any court,
governmental instrumentality, securities exchange or association
or arbitrator, whether foreign or domestic, applicable to the
Fund, other than state or foreign securities or "blue sky" laws
applicable in connection with the purchase and distribution of
the Shares by the Underwriters pursuant to this Underwriting
Agreement.
(vii) The Fund is not currently in breach of, or
in default under, any written agreement or instrument to which it
is a party or by which it or its property is bound or affected.
(viii) No person has any right to the registration
of any securities of the Fund because of the filing of the
registration statement.
(ix) No consent, approval, authorization or
order of any court or governmental agency or body or securities
exchange or association, whether foreign or domestic, is required
by the Fund for the consummation by the Fund of the transactions
to be performed by the Fund or the performance by the Fund of all
the terms and provisions to be performed by or on behalf of it in
each case as contemplated in the Fund Agreements, except such as
(A) have been obtained under the Securities Act, the Investment
Company Act, the Advisers Act, the Securities Act Rules, the
Investment Company Act Rules, and the Advisers Act Rules, and
(B) may be required by the New York Stock Exchange or under state
or foreign securities or "blue sky" laws, in connection with the
purchase and distribution of the Shares by the Underwriters
pursuant to this Underwriting Agreement.
(x) The Shares are duly authorized for listing,
subject to official notice of issuance, on the New York Stock
Exchange and the Fund's Registration Statement on Form 8-A, under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), has become effective.
(xi) Ernst & Young LLP, whose report appears in
the Prospectus, are independent public accountants with respect
to
8
<PAGE>
the Fund as required by the Securities Act, the Investment
Company Act, the Securities Act Rules and the Investment Company
Act Rules.
(xii) The statement of assets and liabilities
included in the Registration Statement and the Prospectus
presents fairly in all material respects, in accordance with
generally accepted accounting principles in the United States
applied on a consistent basis, the financial position of the Fund
as at the date indicated.
(xiii) The Fund will maintain a system of internal
accounting controls sufficient to provide reasonable assurances
that (A) transactions are executed in accordance with
management's general or specific authorization; (B) transactions
are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (C) access
to assets is permitted only in accordance with management's
general or specific authorization; and (D) the recorded
accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect
to any differences.
(xiv) Since the date as of which information is
given in the Registration Statement and the Prospectus, except as
otherwise stated therein, (A) there has been no material adverse
change in the condition, financial or otherwise, business affairs
or business prospects of the Fund, whether or not arising in the
ordinary course of business, (B) there have been no transactions
entered into by the Fund other than those in the ordinary course
of its business and (C) there has been no dividend or
distribution of any kind declared, paid or made on any class of
its capital shares.
(xv) There is no action, suit or proceeding
before or by any court, commission, regulatory body,
administrative agency or other governmental agency or body,
foreign or domestic, now pending, or, to the knowledge of the
Fund, threatened against or affecting the Fund, which (A) might
result in any material adverse change in the condition, financial
or otherwise, business affairs or business prospects of the Fund
or might materially adversely affect the properties or assets of
the Fund or (B) is of a character required to be described in the
Registration Statement or the Prospectus; and there are no
contracts, franchises or other documents that are of a
9
<PAGE>
character required to be described in, or that are required to be
filed as exhibits to, the Registration Statement that have not
been described or filed as required.
(xvi) Except for stabilization transactions
conducted by the Underwriters, and except for tender offers,
Share repurchases and the issuance or purchase of Shares pursuant
to the Fund's dividend reinvestment plan ("DRP") effected
following the date on which the distribution of the Shares is
completed in accordance with the policies of the Fund as set
forth in the Prospectus, the Fund has not taken and will not
take, directly or indirectly, any action designed or which might
be reasonably expected to cause or result in, or which will
constitute, stabilization or manipulation of the price of the
Common Shares.
(xvii) The Fund intends to direct the investment
of the proceeds of the offering of the Shares in such a manner as
to comply with the requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code").
(xviii) To the knowledge of the Fund after due
inquiry, no advertising, sales literature or other promotional
materials (excluding broker kits, which include the broker fact
sheet, road show slides or road show tapes) were authorized or
prepared by or on behalf of the Fund and the Investment Adviser
or any representative thereof for use in connection with the
public offering or sale of the Shares other than the definitive
client brochure drafts of which were filed with the NASD on May
19, 1998 (the "sales materials"); the sales materials complied
and comply in all material respects with the applicable
requirements of the Securities Act, the Securities Act Rules and
the rules and interpretations of the NASD; and no broker kits,
road show slides, road show tapes or sales materials authorized
or prepared by the Fund or authorized or prepared on behalf of
the Fund by the Investment Adviser or any representative thereof
for use in connection with the public offering or sale of the
Shares contained or contains any untrue statement of a material
fact or omitted or omits to state any material fact required to
be stated therein or necessary in order to make the statements
therein not misleading.
10
<PAGE>
(b) The Investment Adviser represents to each Underwriter as
follows:
(i) The Investment Adviser has been duly
organized, is validly existing and in good standing as a
corporation under the laws of the State of Delaware with full
power and authority to conduct all of the activities conducted by
it, to own or lease all of the assets owned or leased by it and
to conduct its business as described in the Registration
Statement and Prospectus, and the Investment Adviser is duly
licensed and qualified as a foreign corporation and in good
standing in each jurisdiction in which it is required to be so
qualified, except to the extent that failure to be so qualified
or be in good standing would not have a material adverse affect
on the Investment Adviser; and the Investment Adviser owns,
possesses or has obtained and currently maintains all
governmental licenses, permits, consents, orders, approvals and
other authorizations, whether foreign or domestic, necessary to
carry on its business as contemplated in the Registration
Statement and the Prospectus.
(ii) The Investment Adviser is (A) duly
registered as an investment adviser under the Advisers Act and
(B) not prohibited by the Advisers Act, the Investment Company
Act, the Advisers Act Rules or the Investment Company Act Rules
from acting as the investment adviser for the Fund as
contemplated by the Investment Advisory Agreement, the
Registration Statement and the Prospectus.
(iii) The Investment Adviser has full power and
authority to enter into each of this Underwriting Agreement and
the Investment Advisory Agreement and to carry out all the terms
and provisions hereof and thereof to be carried out by it, and
each such agreement has been duly and validly authorized,
executed and delivered by the Investment Adviser; each of the
Investment Advisory Agreement and this Underwriting Agreement
does not violate in any material respect any of the applicable
provisions of the Investment Company Act, the Advisers Act, the
Investment Company Act Rules and the Advisers Act Rules; and
assuming due authorization, execution and delivery by the other
parties thereto, each of this Underwriting Agreement and the
Investment Advisory Agreement constitutes a legal, valid and
binding obligation of the Investment Adviser, enforceable in
accordance with its terms, (1) subject, as to enforcement,
11
<PAGE>
to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and to general equitable principles
(regardless of whether enforcement is sought in a proceeding in
equity or at law) and (2) except as rights to indemnity
thereunder may be limited by federal or state securities laws.
(iv) Neither (A) the execution and delivery by
the Investment Adviser of the Underwriting Agreement or the
Investment Advisory Agreement by the Investment Adviser nor (B)
the consummation by the Investment Adviser of the transactions
contemplated by, or the performance of its obligations under
such agreements conflicts or will conflict with, or results or
will result in a breach of, the Articles of Incorporation or By-
Laws of the Investment Adviser or any agreement or instrument to
which the Investment Adviser is a party or by which the
Investment Adviser is bound, or any law, rule or regulation, or
order of any court, governmental instrumentality, securities
exchange or association or arbitrator, whether foreign or
domestic, applicable to the Investment Adviser.
(v) No consent, approval, authorization or
order of any court, governmental agency or body or securities
exchange or association, whether foreign or domestic, is required
for the consummation of the transactions contemplated in, or the
performance by the Investment Adviser of its obligations under,
the Underwriting Agreement or the Investment Advisory Agreement,
as the case may be, except such as (A) have been obtained under
the Investment Company Act, the Advisers Act, the Securities Act,
the Investment Company Act Rules, the Advisers Act Rules and the
Securities Act Rules, and (B) may be required by the New York
Stock Exchange or under state or foreign securities or "blue sky"
laws, in connection with the purchase and distribution of the
Shares by the Underwriters pursuant to this Underwriting
Agreement.
(vi) The description of the Investment Adviser
and its business in the Registration Statement and the Prospectus
complies with the requirements of the Securities Act, the
Investment Company Act, the Securities Act Rules and the
Investment Company Act Rules and does not contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading.
12
<PAGE>
(vii) There is no action, suit or
proceeding before or by any court, commission, regulatory
body, administrative agency or other governmental agency or
body, foreign or domestic, now pending or, to the knowledge
of the Investment Adviser, threatened against or affecting
the Investment Adviser of a nature required to be disclosed
in the Registration Statement or Prospectus or that might
result in any material adverse change in the condition,
financial or otherwise, business affairs or business
prospects of the Investment Adviser or the ability of the
Investment Adviser to fulfill its respective obligations
under the Underwriting Agreement or under the Investment
Advisory Agreement.
(viii) Except for stabilization activities
conducted by the Underwriters and except for tender offers,
Share repurchases and the issuance or purchase of Shares
pursuant to the Fund's dividend reinvestment plan ("DRP")
effected following the date on which the distribution of the
Shares is completed in accordance with the policies of the
Fund as set forth in the Prospectus, the Investment Adviser
has not taken and will not take, directly or indirectly, any
action designed, or which might reasonably be expected to
cause or result in, or which will constitute, stabilization
or manipulation of the price of the Common Shares.
5. Agreements of the Parties.
-------------------------
(a) If the registration statement relating to the Shares has not
yet become effective, the Fund will promptly file the Final Amendment, if not
previously filed, with the Commission, and will use its best efforts to cause
such registration statement to become effective and, as soon as the Fund is
advised, will advise the Representative when the Registration Statement or any
amendment thereto has become effective. If the Registration Statement has become
effective and the Prospectus contained therein omits certain information at the
time of effectiveness pursuant to Rule 430A of the Securities Act Rules, the
Fund will file a 430A Prospectus pursuant to Rule 497(h) of the Securities Act
Rules as promptly as practicable, but no later than the second business day
following the earlier of the date of the determination of the offering price of
the Shares or the date the Prospectus is first used after the Effective Date. If
the Registration Statement has become effective and the Prospectus contained
therein does not so omit such information, the Fund will file a Prospectus
pursuant to Rule 497(b) or (j) of the Securities Act Rules as promptly as
practicable, but no later than the fifth business day following the date of the
later of the Effective Date or the commencement of the public offering of the
13
<PAGE>
Shares after the Effective Date. In either case, the Fund will provide the
Representative satisfactory evidence of the filing. The Fund will not file with
the Commission any Prospectus or any other amendment (except any post-effective
amendment which is filed with the Commission after the later of (x) one year
from the date of this Underwriting Agreement or (y) the date on which
distribution of the Shares is completed) or supplement to the Registration
Statement or the Prospectus unless a copy has first been submitted to the
Representative a reasonable time before its filing and the Representative has
not objected to it in writing within a reasonable time after receiving the copy.
(b) For the period of three years from the date hereof, the Fund
will advise the Representative promptly (1) of the issuance by the Commission of
any order in respect of the Fund or the Investment Adviser which relates to the
Fund, or which relates to any arrangements or proposed arrangements involving
the Fund or the Investment Adviser, (2) of the initiation or threatening of any
proceedings for, or receipt by the Fund of any notice with respect to, the
suspension of the qualification of the Shares for sale in any jurisdiction or
the issuance of any order by the Commission suspending the effectiveness of the
Registration Statement, (3) of receipt by the Fund, or any representative or
attorney of the Fund, of any other communication from the Commission relating to
the Fund, the Registration Statement, the Notification, any Preliminary
Prospectus, the Prospectus or to the transactions contemplated by this
Underwriting Agreement and (4) the issuance by any court, regulatory body,
administrative agency or other governmental agency or body, whether foreign or
domestic, of any order, ruling or decree, or the threat to initiate any
proceedings with respect thereto, regarding the Fund, which relates to the Fund
or any arrangements or proposed arrangements involving the Fund. The Fund will
make every reasonable effort to prevent the issuance of any order suspending the
effectiveness of the Registration Statement and, if any such order is issued, to
obtain its lifting as soon as possible.
(c) If not delivered prior to the date of this Underwriting
Agreement, the Fund will deliver to the Representative, without charge, a signed
copy of the registration statement and the Notification and of any amendments
(except any post-effective amendment which is filed with the Commission after
the later of (x) one year from the date of this Underwriting Agreement or (y)
the date on which the distribution of the Shares is completed) to either the
Registration Statement or the Notification (including all exhibits filed with
any such document) and as many conformed copies of the registration statement
and any amendments thereto (except any post-effective amendment which is filed
with the Commission after the later of (x) one year from the date of this
Underwriting Agreement or (y) the date on
14
<PAGE>
which the distribution of the Shares is completed) (excluding exhibits) as the
Representative may reasonably request.
(d) During such period as a prospectus is required by law to be
delivered by an underwriter or a dealer, the Fund will deliver, without charge,
to the Representative, the Underwriters and any dealers, at such office or
offices as the Representative may designate, as many copies of the Prospectus as
the Representative may reasonably request, and, if any event occurs during such
period as a result of which it is necessary to amend or supplement the
Prospectus, in order to make the statements therein, in light of the
circumstances existing when such prospectus is delivered to a purchaser of
Shares, not misleading in any material respect, or if during such period it is
necessary to amend or supplement the prospectus to comply with the Securities
Act, the Investment Company Act, the Securities Act Rules or the Investment
Company Act Rules, the Fund promptly will prepare, submit to the Representative,
file with the Commission and deliver, without charge, to the Underwriters and to
dealers (whose names and addresses the Representative will furnish to the Fund)
to whom Shares may have been sold by the Underwriters, and to other dealers on
request, amendments or supplements to the Prospectus so that the statements in
such Prospectus, as so amended or supplemented, will not, in light of the
circumstances existing when such Prospectus is delivered to a purchaser, be
misleading in any material respect and will comply with the Securities Act, the
Investment Company Act, the Securities Act Rules and the Investment Company Act
Rules. Delivery by the Underwriters of any such amendments or supplements to the
Prospectus will not constitute a waiver of any of the conditions in Section 6
hereof.
(e) The Fund will make generally available to holders of the
Fund's securities, as soon as practicable but in no event later than the last
day of the 18th full calendar month following the calendar quarter in which the
Effective Date falls, an earnings statement, if applicable, satisfying the
provisions of Section 11(a) of the Securities Act and, at the option of the
Fund, Rule 158 of the Securities Act Rules.
(f) The Fund will take such actions as the Representative
reasonably requests in order to qualify the Shares for offer and sale under the
securities or "blue sky" laws of such jurisdictions as the Representative
reasonably designates; provided that the Fund shall not be required in
connection therewith or as a condition thereof to qualify as a foreign
corporation or to execute a general consent to service of process in any
jurisdiction.
(g) If the transactions contemplated by this Underwriting
Agreement are consummated, PaineWebber will pay all costs and expenses incident
15
<PAGE>
to the performance of the obligations of the Fund under this Underwriting
Agreement, including but not limited to costs and expenses of or relating to (1)
the preparation, printing and filing of the registration statement and exhibits
to it, each Preliminary Prospectus, the Prospectus and all amendments and
supplements thereto, (2) the issuance of the Shares and the preparation and
delivery of certificates for the Shares, (3) the registration or qualification
of the Shares for offer and sale under the securities or "blue sky" laws of the
jurisdictions referred to in the foregoing paragraph, including the fees and
disbursements of counsel for the Underwriters in that connection, and the
preparation and printing of preliminary and supplemental "blue sky" memoranda,
(4) the furnishing (including costs of design, production, shipping and mailing)
to the Underwriters and dealers of copies of each Preliminary Prospectus
relating to the Shares, the sales materials, the Prospectus, and all amendments
or supplements to the Prospectus, and of the other documents required by this
Section to be so furnished, (5) the filing requirements of the National
Association of Securities Dealers, Inc., in connection with its review of the
financing, including filing fees and the fees, disbursements and other charges
of counsel for the Underwriters in that connection, (6) all transfer taxes, if
any, with respect to the sale and delivery of the Shares to the Underwriters,
(7) the listing of the Shares on the New York Stock Exchange, and (8) the
transfer agent for the Shares.
(h) If the transactions contemplated by this Underwriting
Agreement are not consummated, except as otherwise provided herein, no party
will be under any liability to any other party, except that (1) if this
Underwriting Agreement is terminated by (x) the Fund or the Investment Adviser
pursuant to any of the provisions hereof (otherwise than pursuant to Section 9
hereof) or (y) by the Representative or the Underwriters because of any
inability, failure or refusal on the part of the Fund or the Investment Adviser
to comply with its terms or because any of the conditions in Section 6 are not
satisfied, PaineWebber and the Investment Adviser, jointly and severally, will
reimburse the Underwriters for all out-of-pocket expenses (including the
reasonable fees, disbursements and other charges of their counsel) reasonably
incurred by them in connection with the proposed purchase and sale of the Shares
and (2) no Underwriter who has failed or refused to purchase the Shares agreed
to be purchased by it under this Underwriting Agreement, in breach of its
obligations pursuant to this Underwriting Agreement, will be relieved of
liability to the Fund and the Investment Adviser and the other Underwriters for
damages occasioned by its default.
(i) Without the prior written consent of the Representative, the
Fund will not offer, sell or register with the Commission, or announce an
offering of, any equity securities of the Fund, within 180 days after the
Effective Date, except
16
<PAGE>
for the Shares as described in the Prospectus and any issuances of Common Shares
pursuant to the dividend reinvestment plan established by the Fund.
(j) The Fund will use its best efforts to list the Shares on the
New York Stock Exchange and comply with the rules and regulations of such
exchange.
(k) The Fund will direct the investment of the net proceeds of
the offering of the Shares in such a manner as to comply with the investment
objective and policies of the Fund as described in the Prospectus.
6. Conditions of the Underwriters' Obligations. The obligations of
-------------------------------------------
the Underwriters to purchase the Shares are subject to the accuracy on the date
of this Underwriting Agreement, and on the Closing Dates, of the representations
of the Fund and the Investment Adviser in this Underwriting Agreement, to the
accuracy and completeness of all statements made by the Fund or the Investment
Adviser or any of their respective officers in any certificate delivered to the
Representative or their counsel pursuant to this Underwriting Agreement, to
performance by the Fund and the Investment Adviser of their respective
obligations under this Underwriting Agreement and to each of the following
additional conditions:
(a) The registration statement must have become effective by
5:30 p.m., New York City time, on the date of this Underwriting Agreement or
such later date and time as the Representative consents to in writing. The
Prospectus must have been filed in accordance with Rule 497(b), (h) or (j), as
the case may be, of the Securities Act Rules.
(b) No order suspending the effectiveness of the Registration
Statement may be in effect and no proceedings for such purpose may be pending
before or, to the knowledge of counsel to the Underwriters, threatened by the
Commission, and any requests for additional information on the part of the
Commission (to be included in the Registration Statement or the Prospectus or
otherwise) must be complied with or waived to the reasonable satisfaction of the
Representative.
(c) Since the dates as of which information is given in the
Registration Statement and the Prospectus, (1) there must not have been any
material change in the Common Shares or liabilities of the Fund except as set
forth in or contemplated by the Prospectus; (2) there must not have been any
material adverse change in the general affairs, prospects, management, business,
financial condition or results of operations of the Fund or the Investment
Adviser whether or not arising from transactions in the ordinary course of
business as set forth in or contemplated
17
<PAGE>
by the Prospectus; (3) the Fund must not have sustained any material loss or
interference with its business from any court or from legislative or other
governmental action, order or decree, whether foreign or domestic, or from any
other occurrence not described in the Registration Statement and Prospectus; and
(4) there must not have occurred any event that makes untrue or incorrect in any
material respect any statement or information contained in the Registration
Statement or Prospectus or that is not reflected in the Registration Statement
or Prospectus but should be reflected therein in order to make the statements or
information therein (in the case of the Prospectus, in light of the
circumstances in which they were made) not misleading in any material respect;
if, in the judgment of the Representative, any such development referred to in
clause (1), (2), (3) or (4) of this paragraph (c) makes it impracticable or
inadvisable to consummate the sale and delivery of the Shares pursuant to the
Underwriting Agreement by the Underwriters, at the initial public offering price
of the Shares.
(d) The Representative must have received on each Closing Date
a certificate, dated such date, of a President or Vice-President and the chief
financial or accounting officer of each of the Fund and the Investment Adviser
certifying that (1) the signers have carefully examined the Registration
Statement, the Prospectus, and this Underwriting Agreement, (2) the
representations of the Fund (with respect to the certificates from such Fund
officers) and the representations of the Investment Adviser (with respect to the
certificates from such officers of the Investment Adviser) in this Underwriting
Agreement are accurate on and as of the date of the certificate, (3) there has
not been any material adverse change in the general affairs, prospects,
management, business, financial condition or results of operations of the Fund
(with respect to the certificates from such Fund officers) or the Investment
Adviser (with respect to the certificates from such officers of the Investment
Adviser), which change would materially and adversely affect the ability of the
Fund or the Investment Adviser, as the case may be, to fulfill its obligations
under this Underwriting Agreement or the Investment Advisory Agreement, whether
or not arising from transactions in the ordinary course of business, (4) with
respect to the Fund only, to the knowledge of such officers after reasonable
investigation, no order suspending the effectiveness of the Registration
Statement, prohibiting the sale of any of the Shares or having a material
adverse effect on the Fund has been issued and no proceedings for any such
purpose are pending before or threatened by the Commission or any other
regulatory body, whether foreign or domestic, (5) to the knowledge of the
officers of the Investment Adviser, after reasonable investigation, no order
having an adverse effect on the ability of the Investment Adviser to fulfill its
obligations under this Underwriting Agreement or the Investment Advisory
Agreement, as the case may be, has been issued and no proceedings for any such
purpose are pending before or threatened by the Commission or any other
regulatory
18
<PAGE>
body, whether foreign or domestic, and (6) each of the Fund (with respect to the
certificates from such Fund officers) and the Investment Adviser (with respect
to the certificates from such officers of the Investment Adviser) has performed
all of its respective agreements that this Underwriting Agreement requires it to
perform by such Closing Date.
(e) The Representative must receive on each Closing Date the
opinions dated such Closing Date substantially in the form of Annexes A and B to
this Underwriting Agreement from the counsel identified in each such Annex.
(f) The Representative must receive on each Closing Date from
Skadden, Arps, Slate, Meagher & Flom LLP or its affiliates, their counsel, an
opinion dated such Closing Date with respect to the Fund, the Shares, the
Registration Statement and the Prospectus, this Underwriting Agreement and the
form and sufficiency of all proceedings taken in connection with the sale and
delivery of the Shares. Such opinion and proceedings shall fulfill the
requirements of this Section 6(f) only if such opinion and proceedings are
satisfactory in all respects to the Representative. The Fund and the Investment
Adviser must have furnished to such counsel such documents as counsel may
reasonably request for the purpose of enabling them to render such opinion.
(g) The Representative must receive on the date this
Underwriting Agreement is signed and delivered by the Representative a signed
letter, dated such date, substantially in the form of Annex C to this
Underwriting Agreement from the firm of accountants designated in such Annex.
The Representative also must receive on each Closing Date a signed letter from
such accountants, dated such Closing Date, confirming on the basis of a review
in accordance with the procedures set forth in their earlier letter that nothing
has come to their attention during the period from a date not more than five
business days before the date of this Underwriting Agreement, specified in the
letter, to a date not more than five business days before such Closing Date,
that would require any change in their letter referred to in the foregoing
sentence.
All opinions, letters, evidence and certificates mentioned above
or elsewhere in this Underwriting Agreement will comply only if they are in form
and scope reasonably satisfactory to counsel for the Representative, provided
that any such documents, forms of which are annexed hereto, shall be deemed
satisfactory to such counsel if substantially in such form.
7. Indemnification and Contribution.
--------------------------------
19
<PAGE>
(a) Each of the Fund and the Investment Adviser, jointly and
severally, will indemnify and hold harmless each Underwriter, the directors,
officers, employees and agents of such Underwriter and each person, if any, who
controls such Underwriter within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act from and against any and all losses, claims,
liabilities, expenses and damages (including, but not limited to, any and all
investigative, legal and other expenses reasonably incurred in connection with,
and any and all amounts paid in settlement of, any action, suit or proceeding
between any of the indemnified parties and any indemnifying parties or between
any indemnified party and any third party, or otherwise, or any claim asserted),
to which such Underwriter or any such person, or any of them, may become subject
under the Securities Act, the Exchange Act, the Investment Company Act, the
Advisers Act or other federal or state statutory law or regulation, at common
law or otherwise, whether foreign or domestic, insofar as such losses, claims,
liabilities, expenses or damages arise out of or are based on (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, the Preliminary Prospectus, the Prospectus, the sales
materials, or any amendment or supplement to the Registration Statement, the
Preliminary Prospectus, the Prospectus, the sales materials or in any documents
filed under the Exchange Act and deemed to be incorporated by reference into the
Registration Statement, the Preliminary Prospectus, the Prospectus, or in any
application or other document executed by or on behalf of the Fund or based on
written information furnished by or on behalf of the Fund filed in any
jurisdiction in order to qualify the Shares under the securities laws thereof or
filed with the Commission, (ii) the omission or alleged omission to state, in
any or all such documents, a material fact required to be stated therein or
necessary to make the statements therein not misleading or (iii) any act or
failure to act or any alleged act or failure to act by such Underwriter in
connection with, or relating in any manner to, the Shares or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, liability, expense or damage arising out of or based upon matters
covered by clause (i) or (ii) above (provided, however, that neither the Fund
nor the Investment Adviser shall be liable under this clause (iii) to the extent
it is finally judicially determined by a court of competent jurisdiction that
such loss, claim, liability, expense or damage resulted directly from any such
acts or failures to act undertaken or omitted to be taken by such Underwriter
through its gross negligence or willful misconduct); provided that neither the
Fund nor the Investment Adviser will be liable to the extent that such losses,
claims, liabilities, expenses or damages are based on an untrue statement or
omission or alleged untrue statement or omission made in reliance on and in
conformity with information relating to the Underwriter furnished in writing to
the Fund by the Underwriter expressly for inclusion in the Registration
Statement, the Preliminary Prospectus or the Prospectus. This indemni-
20
<PAGE>
ty agreement will be in addition to any liability that the Fund or the
Investment Adviser might otherwise have.
(b) Each Underwriter will indemnify and hold harmless the Fund
and the Investment Adviser, each person, if any, who controls the Fund or the
Investment Adviser within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, each director of the Fund and each officer of
the Fund who signs the Registration Statement to the same extent as the
foregoing indemnity from the Fund or the Investment Adviser to the Underwriter,
but only insofar as losses, claims, liabilities, expenses or damages arise out
of or are based on any untrue statement or omission or alleged untrue statement
or omission made in reliance on and in conformity with information relating to
such Underwriter furnished in writing to the Fund by such Underwriter expressly
for use in the Registration Statement, the Preliminary Prospectus or Prospectus.
This indemnity will be in addition to any liability that such Underwriter might
other wise have; provided, however, that in no case shall such Underwriter be
liable or responsible for any amount in excess of the fees and commissions
received by the Underwriter.
(c) Any party that proposes to assert the right to be
indemnified under this Section 7 will, promptly after receipt of notice of
commencement of any action against such party in respect of which a claim is to
be made against an indemnifying party or parties under this Section 7, notify
each such indemnifying party of the commencement of such action, enclosing a
copy of all papers served, but the omission to so notify such indemnifying party
will not relieve it from any liability that it may have to any indemnified party
under the foregoing provision of this Section 7 unless, and only to the extent
that, such omission results in the forfeiture of substantive rights or defenses
by the indemnifying party. If any such action is brought against any indemnified
party and it notifies the indemnifying party of its commencement, the
indemnifying party will be entitled to participate in and, to the extent that it
elects by delivering written notice to the indemnified party promptly after
receiving notice of the commencement of the action from the indemnified party,
jointly with any other indemnifying party similarly notified, to assume the
defense of the action, with counsel satisfactory to the indemnified party, and
after notice from the indemnifying party to the indemnified party of its
election to assume the defense, the indemnifying party will not be liable to the
indemnified party for any legal or other expenses except as provided below and
except for the reasonable costs of investigation subsequently incurred by the
indemnified party in connection with the defense. The indemnified party will
have the right to employ its own counsel in any such action, but the fees,
disbursements and other charges of such counsel will be at the expense of such
indemnified party unless (1) the employment of counsel by the indemnified party
has been authorized in writing by the indemnifying party, (2) the
21
<PAGE>
indemnified party has reasonably concluded (based on the advice of counsel) that
there may be legal defenses available to it or other indemnified parties that
are different from or in addition to those available to the indemnifying party
(3) a conflict or potential conflict exists (based on advice of counsel to the
indemnified party) between the indemnified party and the indemnifying party (in
which case the indemnifying party will not have the right to direct the defense
of such action on behalf of the indemnified party) or (4) the indemnifying party
has not in fact employed counsel to assume the defense of such action within a
reasonable time after receiving notice of the commencement of the action, in
each of which cases the reasonable fees disbursements and other charges of
counsel will be at the expense of the indemnifying party or parties. All such
fees, disbursements and other charges will be reimbursed by the indemnifying
party promptly as they are incurred. It is understood that the indemnifying
party or parties shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees,
disbursements and other charges of more than one separate firm admitted to
practice in such jurisdiction at any one time for all such indemnified party or
parties. An indemnifying party will not be liable for any settlement of any
action or claim effected without its written consent (which consent will not be
unreasonably withheld). No indemnifying party shall, without the prior written
consent of each indemnified party, settle or compromise or consent to the entry
of any judgment in any pending or threatened claim, action or proceeding
relating to the matters contemplated by this Section 7 (whether or not any
indemnified party is a party thereto), unless such settlement, compromise or
consent includes an unconditional release of each indemnified party from all
liability arising or that may arise out of such claim, action or proceeding.
Notwithstanding any other provision of this Section 7(c), if at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees, disbursements and other charges of counsel, such
indemnifying party agrees that it shall be liable for any settlement effected
without its written consent if (i) such settlement is entered into more than 45
days after receipt by such indemnifying party of the aforesaid request, (ii)
such indemnifying party shall have received notice of terms of such settlement
at least 30 days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 7 is
applicable in accordance with its terms but for any reason is held to be
unavailable from the Fund, the Investment Adviser or the Underwriters, the Fund,
the Investment Adviser and the Underwriters will contribute to the total losses,
claims, liabilities, expenses and damages (including any investigative, legal
and other expenses
22
<PAGE>
reasonably incurred in connection with, and any amount paid in settlement of,
any action, suit or proceeding or any claim asserted, but after deducting any
contribution received by the Fund and the Investment Adviser from persons other
than the Underwriter, such as persons who control the Fund or the Investment
Adviser within the meaning of the Securities Act or the Ex-change Act, officers
of the Fund who signed the Registration Statement and directors of the Fund, who
may also be liable for contribution) to which the Fund, the Investment Adviser
and the Underwriters may be subject in such proportion as shall be appropriate
to reflect the relative benefits received by the Fund and the Investment Adviser
on the one hand and the Underwriters on the other. The relative benefits
received by the Fund and the Investment Adviser (treated jointly for this
purpose as one person) on the one hand and the Underwriters on the other hand
shall be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Fund bear to the total fees
and commissions received by the Underwriters. If, but only if, the allocation
provided by the foregoing sentence is not permitted by applicable law, the
allocation of contribution shall be made in such proportion as is appropriate to
reflect not only such relative benefits referred to in the foregoing sentence
but also the relative fault of the Fund and the Investment Adviser (treated
jointly for this purpose as one person) on the one hand and the Underwriters on
the other hand in connection with respect to the statements or omissions or
alleged statements or omissions that resulted in the losses, claims,
liabilities, expenses or damages (including any investigative, legal or other
expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted), as well as
any other relevant equitable considerations appropriate in the circumstances.
Such relative fault of the parties shall be determined by reference to whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Fund, the Investment Adviser or the Underwriters, the intent of the parties and
their relative knowledge, access to information and opportunity to correct or
prevent such statement or omission and any other equitable considerations
appropriate in the circumstances. The Fund, the Investment Adviser and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 7(d) were to be determined by pro rata allocation or by
any other method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an indemnified
party as a result of the loss, claim, liability, expense or damage, or action in
respect thereof, referred to above in this Section 7(d) shall be deemed to
include, for purposes of this Section 7(d) any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding any other provisions of
this Section 7(d), the Underwriters shall not be required to contribute any
amount in excess of the fees and commissions received by it and no person found
guilty of
23
<PAGE>
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) will be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section 7(d),
any person who controls a party to this Agreement within the meaning of the
Securities Act will have the same rights to contribution as that party, and
each trustee of the Fund and each officer of the Fund who signed the
Registration Statement will have the same rights to contribution as the Fund,
subject in each case to the provisions hereof. Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim for contribution may be
made under this Section 7(d), notify such party or parties from whom
contribution may be sought, but the omission so to notify will not relieve the
party or parties from whom contribution may be sought from any other obligation
it or they may have under this Section 7(d). Except for a settlement entered
into pursuant to the last sentence of Section 7(c) hereof, no party will be
liable for contribution with respect to any action or claim settled without its
written consent (which consent shall not be unreasonably withheld).
(e) Notwithstanding any other provisions in this Section 7, no
party shall be entitled to indemnification or contribution under this Agreement
against any loss, claim, liability, expense or damage arising by reason of such
person's willful misfeasance, bad faith or gross negligence in the performance
of its duties hereunder, or by reason of such person's reckless disregard of
such person's obligations and duties hereunder.
(f) The Fund and the Investment Adviser acknowledge that the
statements with respect to stabilization on the second page of and under the
caption "Underwriting" in the Prospectus constitute the only information
furnished in writing to the Fund by the Representative on behalf of the
Underwriters expressly for use in such document.
8. Termination. This Underwriting Agreement may be terminated by
-----------
the Representative by notifying the Fund at any time:
(a) before the later of the effectiveness of the Registration
Statement and the time when any of the Shares are first generally offered
pursuant to the Underwriting Agreement by the Representative to dealers by
letter or telegram;
(b) at or before any Closing Date if, in the sole judgment of
the Representative, payment for and delivery of any Shares is rendered
impracticable or inadvisable because (1) trading in the equity securities of the
Fund is suspended by the Commission or by the principal exchange that lists the
Shares, (2) additional
24
<PAGE>
material governmental restrictions, not in force on the date of this
Underwriting Agreement, have been imposed upon trading in securities or trading
has been suspended on any U.S. securities exchange, (3) a general banking
moratorium has been established by U.S. federal or New York authorities or (4)
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 of
the Shares; or
(c) at or before any Closing Date, if any of the conditions
specified in Section 6 have not been fulfilled when and as required by this
Underwriting Agreement.
9. Substitution of Underwriters. If one or more of the Underwriters
----------------------------
fails (other than for a reason sufficient to justify the termination of this
Underwriting Agreement) to purchase on any Closing Date the Shares agreed to be
purchased on such Closing Date by such Underwriter or Underwriters, the
Representative may find one or more substitute underwriters to purchase such
Shares or make such other arrangements as the Representative deems advisable, or
one or more of the remaining Underwriters may agree to purchase such Shares in
such proportions as may be approved by the Representative, in each case upon the
terms set forth in this Underwriting Agreement. If no such arrangements have
been made within 36 hours after such Closing Date, and
(a) the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date does not exceed 10% of the Shares that the
Underwriters are obligated to purchase on such Closing Date, each of the
nondefaulting Underwriters will be obligated to purchase such Shares on the
terms set forth in this Underwriting Agreement in proportion to their respective
obligations under this Underwriting Agreement, or
(b) the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date exceeds 10% of the Shares to be purchased by
all the Underwriters on such Closing Date, the Fund will be entitled to an
additional period of 24 hours within which to find one or more substitute
underwriters reasonably satisfactory to the Representative to purchase such
Shares on the terms set forth in this Underwriting Agreement.
In any such case, either the Representative or the Fund will have the
right to postpone the applicable Closing Date for not more than five business
days in order that necessary changes and arrangements (including any necessary
amendments or supplements to the Registration Statement or the Prospectus) may
be effected by the Representative and the Fund. If the number of Shares to be
pur-
25
<PAGE>
chased on such Closing Date by such defaulting Underwriter or Underwriters
exceeds 10% of the Shares that the Underwriters are obligated to purchase on
such Closing Date, and none of the nondefaulting Underwriters or the Fund makes
arrangements pursuant to this Section within the period stated for the purchase
of the Shares that the defaulting Underwriters agreed to purchase, this
Underwriting Agreement will terminate without liability on the part of any
nondefaulting Underwriter, the Fund or the Investment Adviser, except as
provided in Sections 5(g) and 7 hereof. This Section will not affect the
liability of any defaulting Underwriter to the Fund or the nondefaulting
Underwriters arising out of such default. A substitute underwriter will become a
Underwriter for all purposes of this Underwriting Agreement.
10. Miscellaneous.
-------------
(a) The reimbursement, indemnification and contribution
agreements in Sections 5(g) and 7 hereof and the representations of the Fund,
the Investment Adviser and the Underwriters in this Underwriting Agreement will
remain in full force and effect regardless of any termination of this
Underwriting Agreement. The reimbursement, indemnification and contribution
agreements in Sections 5(g) and 7 hereof and the representations and agreements
of the Fund, the Investment Adviser and the Underwriters in this Underwriting
Agreement shall survive the Closing Dates and shall remain in full force and
effect regardless of any investigation made by or on behalf of any Underwriter,
the Fund, the Investment Adviser or any controlling person and delivery of and
payment for the Shares.
(b) This Underwriting Agreement is for the benefit of the
Underwriters, the Fund, the Investment Adviser and their successors and assigns,
and, to the extent expressed in this Underwriting Agreement, for the benefit of
persons controlling any of the Underwriters, the Fund, the Investment Adviser
and directors and officers of the Fund and the Investment Adviser, and their
respective successors and assigns, and no other person, partnership, association
or corporation will acquire or have any right under or by virtue of this
Underwriting Agreement. The term "successors and assigns" does not include any
purchaser of the Shares from any Underwriter merely because of such purchase.
(c) All notices and communications under this Underwriting
Agreement will be in writing, effective only on receipt and mailed or delivered,
by messenger, facsimile transmission or otherwise, to the Representative in care
of PaineWebber Incorporated, Attn: Financial Institutions Group, 1285 Avenue of
the Americas, New York, New York 10019, to the Fund at 1285 Avenue of the
Ameri-
26
<PAGE>
cas, New York, New York 10019 and to the Investment Adviser at 1285 Avenue of
the Americas, New York, New York 10019.
(d) Any action required or permitted to be taken by the
Representative under this Underwriting Agreement may be taken by them jointly
through PaineWebber Incorporated.
(e) This Underwriting Agreement may be signed in multiple
counterparts that taken as a whole constitute one agreement.
(f) This Underwriting Agreement will be governed by and construed
in accordance with the laws of the State of New York without reference to choice
of law principles thereof.
27
<PAGE>
Please confirm that the foregoing correctly sets forth the
agreement between us.
Very truly yours,
Managed High Yield Plus Fund Inc.
By:______________________________
Name:_________________________
Title:________________________
Mitchell Hutchins Asset Management Inc.
By:______________________________
Name:_________________________
Title:________________________
Confirmed:
PaineWebber Incorporated
As Representative of the Underwriters
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
By: PaineWebber Incorporated
By:_____________________________
Name:_______________________
Title:______________________
Acting on behalf of itself
and the Underwriters
named in Schedule 1
28
<PAGE>
SCHEDULE 1
NAME NUMBER OF FIRM SHARES
TO BE PURCHASED
PaineWebber Incorporated......................
Total....................................
____________
29
<PAGE>
AMENDED AND RESTATED MASTER AGREEMENT
AMONG UNDERWRITERS
June 11, 1984
Paine Weber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Gentlemen:
1. GENERAL. We understand that PaineWebber Incorporated ("PWI") is entering
into this Agreement in counterparts with us and other firms who may be
underwriters for issues of securities for which PWI is acting as Representative
or one of the Representatives of the several underwriters. This Agreement shall
apply to any offering of securities in which we elect to act as an underwriter
after receipt of a telegram, telex or other form of written communication
("Written Communication") from PWI stating the identity of the issuer and, if
different from the issuer, the seller or sellers of such securities, the
securities proposed to be offered, whether the underwriters are afforded an
option to purchase additional securities to cover over-allotments, the price to
underwriters, public offering price and date, interest rate, if any, and other
variables, the amount of our proposed participation and the names of the other
Representative, if any, and that our participation as an underwriter in the
proposed offering shall be subject to the provisions of this Agreement. Upon our
telegraphic acceptance of such Written Communication we shall become one of the
underwriters of such issue for the amount specified in the Written
Communication, and this Agreement shall become binding upon us and the
Representatives with respect to such offering. The obligations of each
underwriter shall be several and not joint. The issuer of the securities offered
in any offering of securities made pursuant to this Agreement is hereinafter
referred to as the "Company", and such securities are hereinafter called the
"Securities". The seller or sellers of the Securities (including, if applicable,
the Company) are hereinafter referred to collectively as the "Seller". All
references herein to "you" or the "Representatives" shall include PWI and the
other firms, if any, which are named as Representatives in the Written
Communication. The Securities to be offered in any offering may but need not be
registered in a shelf registration pursuant to Rule 415 under the Securities Act
of 1933 (the "Securities Act"). The following provisions of this Agreement shall
apply separately to each individual offering of Securities.
2. UNDERWRITING ARRANGEMENTS. The Representatives shall determine which
signatories to this Agreement will be invited to become underwriters for the
Securities. Changes may be made by the Representatives in those who are to be
underwriters and in the respective amounts of Securities to be purchased by
them, but the amount of Securities to be purchased by us as set forth in the
Written Communication to us will not be changed without our consent except as
provided herein or in the underwriting agreement (the "Underwriting Agreement")
with the Seller covering the Securities. We authorize you on our behalf to
execute and deliver the Underwriting Agreement in such form as you determine and
to take such action as you deem advisable in connection with the performance of
the Underwriting Agreement and this Agreement and the purchase, carrying, sale
and distribution of the Securities, including the
<PAGE>
election to exercise any option to purchase additional Securities to cover over-
allotments if so provided. The parties on whose behalf you execute the
Underwriting Agreement are hereinafter called the "Underwriters". You may waive
performance or satisfaction by the Seller of certain of its obligations or
conditions included in the Underwriting Agreement, if in your judgment such
waiver will not have a material adverse effect upon the interests of the
Underwriters. It is understood that, if so specified in the Written
Communication for the issue, arrangements may be made for the sale of Securities
by the Seller pursuant to delayed delivery contracts. Such Securities are
hereinafter referred to as "Delayed Delivery Securities", and such contracts as
"Delayed Delivery Contracts". References herein to delayed delivery and Delayed
Delivery Contracts apply only to offerings in which delayed delivery is
authorized. The term "underwriting obligation", as used in this Agreement with
respect to any Underwriter, shall refer to the principal amount or number of
shares of the Securities which such Underwriter is obligated to purchase
pursuant to the provisions of the Underwriting Agreement, without regard to any
reduction in such obligation as a result of Delayed Delivery Contracts which are
entered into by the Seller.
As compensation for your services we will pay a management fee as specified
in the Written Communication for the issue (without deduction in respect of
Delayed Delivery Securities), and you may charge our account therefor. If there
is more than one Representative, such compensation will be divided among the
Representatives in such proportions as they determine.
3. PROSPECTUS AND REGISTRATION STATEMENT. You will furnish to us as soon as
possible copies of the prospectus or supplemented prospectus to be used in
connection with the offering of the Securities. As used herein with respect to
an offering of Securities registered under the Securities Act, "Prospectus"
means the form of prospectus (including any supplements) authorized for use in
connection with such offering, and "Registration Statement" means the
registration statement, as amended, filed under the Securities Act pursuant to
which the Securities are registered under the Securities Act. As used herein
with respect to an offering of Securities not registered under the Securities
Act, "Prospectus" or "Registration Statement" means the form of final offering
circular (including any supplements) authorized for use in connection with such
offering and "preliminary prospectus" means any preliminary offering circular
authorized for use in connection with such offering. We consent to being named
in the prospectus as one of the Underwriters of the Securities.
4. PUBLIC OFFERING. (a) In connection with the public offering of the
Securities, we authorize you, in your discretion
(i) to determine the time of the initial public offering, to change the
public offering price and the concessions and discounts to dealers after
the initial public offering, to furnish the Company with the information to
be included in the Registration Statement or Prospectus with respect to the
terms of offering, and to determine all matters relating to advertising and
communications with dealers or others;
(ii) to reserve for sale to dealers selected by you ("Selected Dealers")
and to others, and to reserve for sale pursuant to Delayed Delivery
Contracts (including
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Delayed Delivery Contracts arranged by you through Selected Dealers), all
or any part of our Securities, which reservations for sales to others and
for sales pursuant to Delayed Delivery Contracts not arranged through
Selected Dealers are to be as nearly as practicable in proportion to the
respective underwriting obligations of the Underwriters, unless you agree
to a smaller proportion at the request of any Underwriter, and such other
reservations to be in such proportions as you determine, and, from time to
time, to add to the reserved Securities any Securities retained by us
remaining unsold and to release to us any of our Securities reserved but
not sold;
(iii) to sell reserved Securities, as nearly as practicable in proportion
to the respective reservations, to Selected Dealers at the public offering
price less the Selected Dealers' concession and to others at the public
offering price; and
(iv) to buy Securities for our account from Selected Dealers at the
public offering price less such amount not in excess of the Selected
Dealers' concession as you determine.
If, in accordance with the terms of offering set forth in the Prospectus,
the offering of the Securities is not at a fixed price but at varying prices set
by individual Underwriters based on market prices or at negotiated prices, the
provisions of clause (i) above relating to your right to change the public
offering price and concessions and discounts to dealers shall not apply, and
other references in this Section and elsewhere in this Agreement to the public
offering price or Selected Dealers' concession shall be deemed to mean the
prices and concessions determined by you from time to time in your discretion.
Sales of Securities between Underwriters may be made with your prior
consent, or as you deem advisable for Blue Sky purposes.
After advice from you that the Securities are released for public offering,
we will offer to the public in conformity with the terms of offering set forth
in the Prospectus such of our Securities as you advise us are not reserved.
Any Securities sold by us (otherwise than through you) which you purchase
in the open market for the account of any Underwriter will be repurchased by us
on demand at a price equal to the total cost of such purchase including any
taxes on redelivery, commissions, accrued interest and dividends. Securities
delivered on such repurchase need not be the identical certificates so
purchased. In lieu of such action you may in your discretion sell for our
account the Securities so purchased and debit or credit our account for the loss
or profit resulting from such sale, or charge our account with an amount not in
excess of the Selected Dealers' concession with respect to such Securities.
(b) We authorize you to act on our behalf in making all arrangements for
the solicitation of offers to purchase Delayed Delivery Securities from the
Seller pursuant to Delayed Delivery Contracts and we agree that all such
arrangements will be made only through you, directly or through Selected Dealers
(including Underwriters acting as Selected Dealers) to whom you may pay a
commission as provided in the Prospectus and herein.
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The obligation of each of the Underwriters to purchase and pay for
Securities as set forth in the Underwriting Agreement shall be reduced in the
proportion provided for therein, except that (i) as to any Delayed Delivery
Contract determined by you, in your discretion, to have been directed and
allocated by a purchaser to a particular Underwriter, such obligation of such
Underwriters shall be reduced by the amount of Delayed Delivery Securities
covered thereby, (ii) as to any Delayed Delivery Contracts for which
arrangements are made through Selected Dealers, such obligation of each
Underwriter shall be reduced as nearly as practicable in the proportion
determined by you that the amount of Securities of such Underwriter reserved and
sold pursuant to Delayed Delivery Contracts arranged through Selected Dealers
bears to the total Securities so reserved and sold, and (iii) such reductions
shall be rounded, as you shall determine, to the nearest $1,000 principal amount
or whole share of the Securities.
The fee payable to each Underwriter with respect to Delayed Delivery
Securities pursuant to the Underwriting Agreement shall be credited to the
account of such Underwriter based upon the amount by which such Underwriter's
underwriting obligation is reduced as specified in the preceding paragraph.
If the amount of Delayed Delivery Securities applied to reduce an
Underwriter's underwriting obligation and the amount of Securities sold by or
for the account of such Underwriter exceeds such Underwriter's underwriting
obligation, there shall be credited to such Underwriter in connection with such
excess amount of Securities only the amount of the Selected Dealers' concession
with respect thereto.
The commissions payable to Selected Dealers in respect of Delayed Delivery
Contracts arranged through them shall be charged to each Underwriter in the
proportion which the amount of Securities of such Underwriter reserved and sold
pursuant to Delayed Delivery Contracts arranged through Selected Dealers bears
to the total Securities so reserved and sold.
5. PAYMENT AND DELIVERY. We authorize you to make payment on our behalf to
the Seller of the purchase price of our Securities, to take delivery of our
Securities, registered as you may direct in order to facilitate deliveries, and
to deliver our reserved Securities against sales. At your request we will pay
you, as you direct, (i) an amount equal to the public offering price, less the
selling concession, of either our Securities or our unreserved Securities or
(ii) the amount set forth or indicated in the Written Communication with respect
to the Securities, and such payment will be credited to our account and applied
to the payment of the purchase price. After you receive payment for reserved
Securities sold for our account, you will remit to us the purchase price (if
any) paid by us for such Securities and credit or debit our account with the
difference between the sale prices and the purchase price thereof. You will
deliver to us our unreserved Securities promptly, and our reserved but unsold
Securities, against payment of the purchase price therefor (except in the case
of Securities for which payment has previously been made), as soon as
practicable after the termination of the provisions referred to in Section 9,
except that if the aggregate amount of reserved but unsold Securities upon such
termination does not exceed 10% of the total amount of the Securities, you may
in your discretion sell such reserved but unsold Securities for the accounts of
the several Underwriters as soon as practicable after such termination, at such
prices and in such manner as you determine. Unless we promptly give you written
instructions otherwise, if transactions in the Securities may be settled through
the facilities of The Depository Trust Company, payment for and delivery of
securities purchased
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by us will be made through such facilities, if we are a member, or if we are not
a member, settlement may be made through our ordinary correspondent who is a
member.
6. AUTHORITY TO BORROW. In connection with the purchase or carrying of our
Securities or other securities purchased for our account, we authorize you, in
your discretion, to advance your funds for our account, charging current
interest rates, to arrange loans for our account, and in connection therewith to
execute and deliver any notes or other instruments and hold or pledge as
security any of our Securities or such other securities. Any lender may rely
upon your instructions in all matters relating to any such loan. Any Securities
or such other securities held by you for our account may be delivered to us for
carrying purposes, and if so delivered will be redelivered to you upon demand.
7. STABILIZATION AND OVER-ALLOTMENT. We authorize you, in your discretion,
to make purchases and sales of Securities, any other securities of the Company
of the same class and series and any other securities of the Company which you
may designate in the open market or otherwise, for long or short account, on
such terms as you deem advisable, and, in arranging sales, to over-allot and
cover any such over-allotment, at your discretion, by purchasing Securities,
exercising the over-allotment option, if any, indicated in the Written
Communication, or both. Such purchases and sales and over-allotments will be
made for the accounts of the Underwriters as nearly as practicable in proportion
to their respective underwriting obligations. It is understood that you may have
made purchases of securities of the Company for stabilizing purposes prior to
the time when we become one of the Underwriters, and we agree that any
securities so purchased shall be treated as having been purchased for the
respective accounts of the Underwriters pursuant to the foregoing authorization.
We authorize you, in your discretion, to cover any short position incurred
pursuant to this Section by purchasing securities on such terms as you deem
advisable. At no time will our net commitment under the foregoing provisions of
this Section exceed 15% of our underwriting obligation. Solely for purposes of
the immediately preceding sentence, our "underwriting obligation" shall be
deemed to exclude any Securities which we are obligated to purchase solely by
virtue of the exercise of an over-allotment option. We will on demand take up at
cost any securities so purchased and deliver any securities so sold or over-
allotted for our account, and, if any other Underwriter defaults in its
corresponding obligation, we will assume our proportionate share of such
obligation without relieving the defaulting Underwriter from liability. Upon
request, we will advise you of the Securities retained by us and unsold and will
sell to you for the account of one or more of the Underwriters such of our
unsold Securities and at such price, not less than the net price to Selected
Dealers nor more than the public offering price, as you determine.
8. OPEN MARKET TRANSACTIONS. We and you agree not to bid for, purchase,
attempt to induce others to purchase, or sell, directly or indirectly, any
Securities, any other securities of the Company of the same class and series and
any other securities of the Company which you may designate, except as brokers
pursuant to unsolicited orders and as otherwise provided in this Agreement. If
the Securities are common stock or securities convertible into common stock, we
and you also agree not to effect, or attempt to induce others to effect,
directly or indirectly, any transactions in or relating to put or call options
on any stock of the Company, except to the extent permitted by Rule 10b-6 under
the Securities Exchange Act of 1934 (the "Exchange Act") as interpreted by the
Securities and Exchange Commission. An opening uncovered writing transaction in
options to acquire Securities for our account or for the account
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<PAGE>
of any customer shall be deemed, for purposes of the preceding sentence, to be a
transaction effected by us in or relating to put or call options on stock of the
Company not permitted by Rule 10b-6. The term "opening uncovered writing
transaction" means an opening sale transaction where the seller intends to
become a writer of an option to purchase stock which it does not own or have the
right to acquire upon exercise of conversion or option rights.
9. TERMINATION AS TO AN OFFERING. The provisions of the last two paragraphs
of Section 4(a), the first sentence of Section 7, and Section 8 will terminate
at the close of business on the thirtieth day after the date of the initial
public offering of the Securities, unless sooner terminated as hereinafter
provided. You may terminate such provision as to such offering at any time by
notice to us to the effect that the offering provisions of this Agreement as to
such offering are terminated.
10. EXPENSES AND SETTLEMENT. You may charge our account with any transfer
taxes on sales made by you of Securities purchased by us under the Underwriting
Agreement and with our proportionate shares (based upon our underwriting
obligation) of all other expenses incurred by you under this Agreement or in
connection with the purchase, carrying, sale or distribution of the Securities.
The accounts hereunder will be settled as promptly as practicable after the
termination of the provisions referred to in Section 9, but you may reserve such
amount as you deem advisable for additional expenses. Your determination of the
amount to be paid to or by us will be conclusive. You may at any time make
partial distributions of credit balances or call for payment of debit balances.
Any of our funds in your hands may be held with your general funds without
accountability for interest. Notwithstanding any settlement, we will remain
liable for any taxes on transfers for our account, and for our proportionate
share (based upon our underwriting obligation) of all expenses and liabilities
which may be incurred by or for the accounts of the Underwriters.
11. DEFAULT BY UNDERWRITERS. Default by one or more Underwriters hereunder
or under the Underwriting Agreement will not release the other Underwriters from
their obligations or affect the liability of any defaulting Underwriter to the
other Underwriters for damages resulting from such default. If one or more
Underwriters default under the Underwriting Agreement, you may arrange for the
purchase by others, including nondefaulting Underwriters, of Securities not
taken up by the defaulting Underwriter or Underwriters.
12. POSITION OF REPRESENTATIVES. You will be under no liability to us for
any act or omission except for obligations expressly assumed by you herein, and
no obligations on your part will be implied or inferred herefrom. Your authority
hereunder and under the Underwriting Agreement may be exercised by you jointly
or by PWI. The rights and liabilities of the Underwriters are several and not
joint, and nothing will constitute the Underwriters a partnership, association
or separate entity.
If for Federal income tax purposes the Underwriters should be deemed to
constitute a partnership then each Underwriter elects to be excluded from the
application of Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue Code
of 1954, as amended. You, as Representatives of the several Underwriters, are
authorized, in your discretion, to execute on behalf of the Underwriters such
evidence of such election as may be required by the Internal Revenue Service.
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13. INDEMNIFICATION. We will indemnify and hold harmless each other
Underwriter and each person, if any, who controls such Underwriter within the
meaning of Section 15 of the Securities Act to the extent and upon the terms
upon which each Underwriter agrees to indemnify the Company and any other Seller
in the Underwriting Agreement.
14. CONTRIBUTION. Each Underwriter (including you) will pay upon your
request, as contribution, its proportionate share, based upon its underwriting
obligation, of any losses, claims, damages or liabilities, joint or several,
paid or incurred by any Underwriter to any person other than an Underwriter,
arising out of or based upon any untrue statement or alleged untrue statement of
any material fact contained in the Registration Statement, the Prospectus, any
amendment or supplement thereto or any related preliminary prospectus or any
other selling or advertising material approved by you for use by the
Underwriters in connection with the sale of the Securities, or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading (other than an untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by an Underwriter specifically for use therein); and will pay such
proportionate share of any legal or other expenses reasonably incurred by you or
with your consent in connection with investigating or defending against any such
loss, claim, damage or liability, or any action or proceeding (including any
action or proceeding brought by a governmental or regulatory body) in respect
thereof. In determining the amount of any Underwriter's obligation under this
Section, appropriate adjustment may be made by you to reflect any amounts
received by any one or more Underwriters in respect of such claim from the
Company or any other Seller pursuant to the Underwriting Agreement or otherwise.
There shall be credited against any amount paid or payable by us pursuant to
this Section any loss, damage, liability or expense which is incurred by us as a
result of any such claim asserted against us, and if such loss, claim, damage,
liability or expense is incurred by us subsequent to any payment by us pursuant
to this Section, appropriate provision shall be made to effect such credit, by
refund or otherwise. If any such claim is asserted, you may take such action in
connection therewith as you deem necessary or desirable, including retention of
counsel for the Underwriters, and in your discretion separate counsel for any
particular Underwriter or group of Underwriters, and the fees and disbursements
of any counsel so retained by you shall be included in the amounts payable
pursuant to this Section. In determining amounts payable pursuant to this
Section, any loss, claim, damage, liability or expense incurred by any person
controlling any Underwriter within the meaning of Section 15 of the Securities
Act which has been incurred by reason of such control relationship shall be
deemed to have been incurred by such Underwriter. Any Underwriter may elect to
retain at its own expense its own counsel. You may settle or consent to the
settlement of any such claim, on advice of counsel retained by you, with the
approval of a majority in interest of the Underwriters. Whenever you receive
notice of the assertion of any claim to which the provisions of this Section
would be applicable, you will give prompt notice thereof to each Underwriter.
You will also furnish each Underwriter with periodic reports, at such times as
you deem appropriate, as to the status of such claim and the action taken by you
in connection therewith. If any Underwriter or Underwriters default in their
obligation to make any payments under this Section, each nondefaulting
Underwriter shall be obligated to pay its proportionate share of all defaulted
payments, based upon such Underwriter's underwriting obligation as related to
the underwriting obligations of all nondefaulting Underwriters.
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15. REPORTS AND BLUE SKY MATTERS. We authorize you to file with the
Securities and Exchange Commission and any other governmental agency any reports
required in connection with any transactions effected by you for our account
pursuant to this Agreement, and we will furnish any information needed for such
reports. If you effect stabilizing purchases pursuant to Section 7, you will
notify us promptly of the initiation and termination thereof. If stabilization
is effected we will file with you, c/o PWI, not later than the fifth full
business day following the termination of stabilization, any report required to
be filed pursuant to Rule 17a-2 under the Exchange Act. You will not have any
responsibility with respect to the right of any Underwriter or other person to
sell the Securities in any jurisdiction, notwithstanding any information you may
furnish in that connection.
16. REPRESENTATIONS AND AGREEMENTS. (a) You represent that you are a
member in good standing of the National Association of Securities Dealers, Inc.
(the "NASD"), and we represent that we are either a member in good standing of
the NASD or a foreign dealer not eligible for membership. If we are such a
member we agree that in making sale of the Securities we will comply with all
applicable rules of the NASD, including, without limitation, the NASD's
interpretation with Respect to Free-Riding and Withholding and Section 24 of
Article III of the Rules of Fair Practice. If we are such a foreign dealer, we
agree not to offer or sell any Securities in the United States of America except
through you and in making sales of Securities outside the United States of
America we agree to comply as though we were a member with such interpretation
and Sections 8, 24 and 36 of Article III of the NASD's Rules of Fair Practice
and to comply with Section 25 of such Article III as it applies to a nonmember
broker or dealer in a foreign country.
(b) We understand that it is our responsibility to examine the Registration
Statement, the Prospectus, any amendment or supplement thereto relating to the
offering of the Securities, any preliminary prospectus and the material, if any,
incorporated by reference therein and we will familiarize ourselves with the
terms of the Securities and the other terms of the offering thereof which are to
be reflected in the Prospectus and the Written Communication with respect
thereto. You are authorized, with the approval of counsel for the Underwriters,
to approve on our behalf any amendments or supplements to the Registration
Statement or the Prospectus.
(c) We confirm that the information that we have given or are deemed to
have given in response to the Master Underwriters' Questionnaire attached as
Exhibit A hereto (which information has been furnished to the Company for use in
the Registration Statement or the Prospectus) is correct. We will notify you
immediately of any development before the termination of this Agreement under
Section 9 as to the offering of the Securities which makes untrue or incomplete
any information that we have given or are deemed to have given in response to
the Master Underwriters' Questionnaire.
(d) Unless we have promptly notified you in writing otherwise, our name as
it should appear in the Prospectus and our address are set forth on the
signature page hereof.
(e)(i) If the Securities are being registered under the Securities Act, we
represent that we are familiar with Rule 15c2-8 under the Exchange Act
relating to the distribution of preliminary and final prospectuses and
agree that we will comply therewith; we agree to keep an accurate record of
the distribution (including dates,
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number of copies and persons to whom sent) by us of copies of the
Registration Statement, the Prospectus or any preliminary prospectus (or
any amendment or supplement to any thereof), and promptly upon request by
you, to bring all subsequent changes to the attention of anyone to whom
such material shall have been distributed; and we agree to furnish to
persons who receive a confirmation of sale a copy of the Prospectus filed
pursuant to Rule 424(b) or Rule 424(c) under the Securities Act.
(ii) If the Securities will not be registered under the Securities Act,
we agree that we will deliver all preliminary and final offering circulars
required for compliance with the applicable laws and regulations governing
the use and distribution of offering circulars by underwriters, and, to the
extent consistent with such laws and regulations, we confirm that we have
delivered and agree that we will deliver all preliminary and final offering
circulars which would be required if the provisions of Rule 15c2-8 under
the Exchange Act applied to this offering.
(f) If the Securities are being registered under the Securities Act, we
agree that, if we are advised by you that the Company was not, immediately prior
to the filing of the Registration Statement, subject to the requirements of
Section 13(a) or 15(d) of the Exchange Act, we will not, without your consent,
sell any of the Securities to an account over which we exercise discretionary
authority.
17. MISCELLANEOUS. (a) This Agreement may be terminated by either party
hereto upon five business days' written notice to the other party; PROVIDED that
with respect to any offering of Securities for which a Written Communication was
sent by you and accepted by us prior to such notice, this Agreement shall remain
in full force and effect as to such offering and shall terminate with respect to
such offering in accordance with the provisions of Section 9. This Agreement may
be supplemented or amended by you by written notice thereof to us, and any such
supplement or amendment to this Agreement shall be effective with respect to any
offering of securities to which this Agreement applies after the date of such
supplement or amendment. Each reference to "this Agreement" herein shall, as
appropriate, be to this Agreement as so amended and supplemented.
(a) This Agreement and the terms and conditions set forth herein with
respect to any offering of Securities together with such supplementary terms and
conditions with respect to such offering as may be contained in any Written
Communication from you to us in connection therewith shall be governed by, and
construed in accordance with, the laws of the State of New York.
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Very truly yours,
(Name of Firm)
By
-------------------------
Confirmed, as of the date first above written
PAINE WEBBER INCORPORATED
By
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Vice President
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EXHIBIT A
PaineWebber Incorporated
MASTER UNDERWRITERS' QUESTIONNAIRE
The terms used herein and not otherwise defined shall have the meanings
assigned thereto in the Amended and Restated Master Agreement Among Underwriters
dated June 11, 1984, between you and PaineWebber Incorporated ("PWI"). Reference
will be made to this Master Underwriters' Questionnaire in each Written
Communication described in Section I of the Amended and Restated Master
Agreement Among Underwriters received by you from PWI in connection with
offerings of securities in which PWI is acting as Representative or the manager
of the Representatives of the several Underwriters. Your telegraphic acceptance
of any such Written Communication should respond to this Master Underwriters'
Questionnaire.
Except as indicated in your telegraphic acceptance of our Written
Communication with respect to the Securities:
(1) neither you nor any of your directors, officers, partners or branch
managers has (nor have you or they had within the last three years) a material
relationship (as "material" is defined in Regulation C under the Securities Act)
with the Company or its parent (if any), nor are you an affiliate of (within the
meaning of the By-laws of the NASD), controlled by, controlling or under common
control with the Company;
(2) neither you nor any of your partners, officers, directors or branch
managers, separately or as a group, owns of record or beneficially more than 5%
of any class of voting securities of the Company or its parent (if any);
(3) if the Securities are to be issued under an indenture to be qualified
under the Trust Indenture Act of 1939;
(a) neither you nor any of your directors, officers or partners is an
affiliate (as defined in Rule 0-2 under the Trust Indenture Act of 1939) of
the Trustee, or its parent (if any) and neither the Trustee nor its parent
(if any) nor any of their directors or executive officers is a director,
officer, partner, employee, appointee or representative of yours;
(b) neither you nor any of your directors, partners or executive officers,
separately or as a group, owns beneficially more than 1% of any class of
voting securities of the Trustee or its parent (if any); and
(c) if you are a corporation, you do not have outstanding nor have you
assumed or guaranteed any securities otherwise than in your corporate name,
and neither the Trustee nor its parent (if any) is a holder of such
securities;
(4) other than as is, or is to be, stated in the Registration Statement,
the PWI Amended and Restated Master Agreement Among Underwriters, the PWI
Amended and Restated Master
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Selected Dealer Agreement, or the Underwriting Agreement relating to the
proposed offering, you do not know of or have reason to believe that (a) there
are any discounts or commissions to be allowed or paid to underwriters or any
other items that would be deemed by the NASD to constitute underwriting
compensation for purposes of the NASD's Rules of Fair Practice, (b) there are
any discounts or commissions to be allowed or paid to dealers, including all
cash, securities, contracts, or other considerations to be received by any
dealer in connection with the sale of the Securities, (c) there is an intention
to over-allot or (d) the price of any security may be stabilized to facilitate
the offering of the Securities;
(5) your proposed commitment to purchase Securities will not result in a
violation of the financial responsibility requirements of Section 15(c)(3) of
the Exchange Act or the rules and regulations thereunder, including Rule 15c3-1,
or any provisions of the applicable rules of the NASD or of any securities
exchange to which you are subject or any restrictions imposed upon you by the
NASD or any such exchange;
(6) neither you nor any related person (as defined by the NASD) has (a)
purchased any warrants, options or other securities of the Company within the
preceding 12 months or (b) had any other dealings with the Company within the
preceding 12 months as to which documents or other information is required to be
furnished to the NASD, and, except as stated in the Registration Statement, you
have no knowledge of any private placement of the Company's Securities within
the preceding 18 months;
(7) you have not prepared nor had prepared for you any report or memorandum
for external use in connection with the proposed offering of the Securities, and
if the Registration Statement is on Form S-1, you have not prepared any
engineering, management or similar reports or memoranda relating to broad
aspects of the business, operations or products of the Company within the past
12 months (except for reports solely comprised of recommendations to buy, sell
or hold the securities of the Company, unless such recommendations have changed
within the past six months). (If any such report or memorandum has been prepared
furnish to PWI (a) four copies thereof and (b) a statement as to the actual or
proposed use, identifying (i) each class of persons (institutional mailing
lists, retail clients, etc.) who have received or will receive the report or
memorandum, (ii) the number of copies distributed to each such class and (iii)
the period of distribution.);
(8) if the Written Communication states that the Company is subject to
regulation under the Public Utility Holding Company Act of 1935 (the "Holding
Company Act"), you are not a "holding company", or an "affiliate", or a
"subsidiary company" of a "public utility company" or "holding company", each as
defined in the Holding Company Act; and
(9) if the Written Communication states that the Company is subject to
regulation under the Holding Company Act, to the best of your knowledge, you are
not a party to any proceeding being conducted by the Securities and Exchange
Commission pursuant to any of the Acts administered by it, which is required to
be disclosed in the Registration Statement or Prospectus or which would
disqualify you from purchasing the Securities.
A-2
<PAGE>
[Letterhead of PaineWebber Incorporated]
NOTICE
------
To: All persons party with PaineWebber
Incorporated ("PaineWebber") to the
Amended and Restated Master Agreement
Among Underwriters (the "Agreement")
dated June 11, 1984
Pursuant to Section 17(a) of the Agreement, PaineWebber hereby notifies you
that effective as of this date, the following provisions of the Agreement are
amended:
(1) The fifth sentence of Section 7 is hereby amended by deleting
the percentage "15%" and inserting in its place "20%" so, that
as so amended, such sentence shall read in its entirety as
follows: "At no time will our net commitment under the
foregoing provisions of this Section exceed 20% of our
underwriting obligation."
(2) The first sentence of Section 9 is hereby amended by deleting
the word "thirtieth" and inserting in its place the word "forty
fifth" so, that as so amended, such sentence shall read in its
entirety as follows: "The provisions of the last two paragraphs
of Section 4(a), the first sentence of Section 7, and Section 8
will terminate at the close of business on the forty fifth day
after the date of the initial public offering of the
Securities, unless sooner terminated as hereinafter provided."
Please acknowledge your receipt of this Notice by signing the enclosed copy
of this Notice where indicated and returning it to: PaineWebber Incorporated,
1285 Avenue of the Americas, New York, New York 10019, Attention:
---------------
Very truly yours,
PAINEWEBBER INCORPORATED
By:
---------------------
Acknowledged and Received:
- -------------------------
[Print Name of Firm]
By
-----------------------
Title:
<PAGE>
AMENDED AND RESTATED MASTER SELECTED DEALER AGREEMENT
June 11, 1984
Paine Webber Incorporated
1285 Avenue of Americas
New York, New York 10019
Gentlemen:
1. GENERAL. We understand that PaineWebber Incorporated ("PW") is entering
into this Agreement with us and other firms who may be offered the right to
purchase as principal a portion of securities being distributed to the public.
The terms and conditions of this Agreement shall be applicable to any public
offering of securities ("Securities") wherein PW (acting for its own account or
for the account of any underwriting or similar group or syndicate) is
responsible for managing or otherwise implementing the sale of the Securities to
selected dealers ("Selected Dealers") and has expressly informed us that such
terms and conditions shall be applicable. Any such offering of Securities to us
as a Selected Dealer is hereinafter called an "Offering". In the case of any
Offering in which you are acting for the account of any underwriting or similar
group or syndicate ("Underwriters"), the terms and conditions of this Agreement
shall be for the benefit of, and binding upon, such Underwriters, including, in
the case of any Offering in which you are acting with others as representatives
of Underwriters, such other representatives. The term "preliminary prospectus"
means, in the case of an Offering registered under the Securities Act of 1933
(the "Securities Act"), any preliminary prospectus relating to an Offering of
Securities or any preliminary prospectus supplement together with a prospectus
relating to an Offering of Securities and, in the case of an Offering not
registered under the Securities Act, any preliminary offering circular relating
to an Offering of Securities or any preliminary offering circular supplement
together with an offering circular relating to an Offering of Securities; the
term "Prospectus" means in the case of an Offering registered under the
Securities Act of 1933 (the "Securities Act"), the prospectus, together with the
final prospectus supplement, if any, relating to such Offering of Securities,
filed pursuant to Rule 424(b) or Rule 424(c) under the Securities Act and, in
the case of an Offering not registered under the Securities Act, the final
offering circular, including any supplements, relating to such Offering of
Securities.
2. CONDITIONS OF OFFERING; ACCEPTANCE AND PURCHASE. Any Offering will be
subject to delivery of the Securities and their acceptance by you and any other
Underwriters may be subject to the approval of all legal matters by counsel and
the satisfaction of other conditions, and may be made on the basis of
reservation of Securities or an allotment against subscription. You will advise
us by telegram, telex or other form of written communication ("Written
Communication") of the particular method and supplementary terms and conditions
(including, without limitation, the information as to prices and offering date
referred to in Section 3(b)) of any Offering in which we are invited to
participate. To the extent such supplementary terms and conditions are
inconsistent with any provision herein, such terms and conditions shall
supersede any such provision. Unless otherwise indicated in any such Written
Communication, acceptances and other communications by us with respect to any
Offering should be sent to PaineWebber Incorporated, 1285 Avenue of the
Americas, New York,
<PAGE>
New York 10019. You reserve the right to reject any acceptance in whole or in
part. Payment for Securities purchased by us is to be made at such office as you
may designate, at the public offering price, or, if you shall so advise us, at
such price less the concession to dealers or at the price set forth or indicated
in a Written Communication, on such date as you shall determine, on one day's
prior notice to us, by certified or official bank check in New York Clearing
House funds payable to the order of PaineWebber Incorporated, against delivery
of certificates evidencing such Securities. If payment is made for Securities
purchased by us at the public offering price, the concession to which we shall
be entitled will be paid to us upon termination of the provisions of Section
3(b) with respect to such Securities.
Unless we promptly give you written instructions otherwise, if transactions
in the Securities may be settled through the facilities of The Depository Trust
Company, payment for and delivery of Securities purchased by us will be made
through such facilities if we are a member, or if we are not a member,
settlement may be made through our ordinary correspondent who is a member.
3. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. (a) PROSPECTUSES. You shall
provide us with such number of copies of each preliminary prospectus, the
Prospectus and any supplement thereto relating to each Offering as we may
reasonably request. If the Securities will be registered under the Securities
Act, we represent that we are familiar with Rule 15c2-8 under the Exchange Act
relating to the distribution of preliminary and final prospectuses and agree
that we will comply therewith; we agree to keep an accurate record of our
distribution (including dates, number of copies and persons to whom sent) of
copies of the Prospectus or any preliminary prospectus (or any amendment or
supplement to any thereof), and promptly upon request by you, to bring all
subsequent changes to the attention of anyone to whom such material shall have
been furnished; and we agree to furnish to persons who receive a confirmation of
sale a copy of the Prospectus filed pursuant to Rule 424(b) or Rule 424(c) under
the Securities Act. If the Securities will not be registered under the
Securities Act, we agree that we will deliver all preliminary and final offering
circulars required for compliance with the applicable laws and regulations
governing the use and distribution of the offering circulars by underwriters,
and, to the extent consistent with such laws and regulations, we confirm that we
have delivered and agree that we will deliver all preliminary and final offering
circulars which would be required if the provisions of Rule l5c2-8 under the
Exchange Act applied to this offering. We agree that in purchasing Securities in
an Offering we will rely upon no statements whatsoever, written or oral, other
than the statements in the Prospectus delivered to us by you. We will not be
authorized by the issuer or other seller of Securities offered pursuant to a
Prospectus or by any Underwriters to give any information or to make any
representation not contained in the Prospectus in connection with the sale of
such Securities.
(b) OFFER AND SALE OF THE PUBLIC. With respect to any Offering of
Securities, you will inform us by a Written Communication of the public offering
price, the selling concession, the reallowance (if any) to dealers and the time
when we may commence selling Securities to the public. After such public
offering has commenced, you may change the public offering price, the selling
concession and the reallowance to dealers. With respect to each Offering of
Securities, until the provisions of this Section 3(b) shall be terminated
pursuant to Section 4, we agree to offer Securities to the public only at the
public offering price, except that if a reallowance is in effect, a reallowance
from the public offering price not in excess of such
-2-
<PAGE>
reallowance may be allowed as consideration for services rendered in
distribution to dealers who are actually engaged in the investment banking or
securities business, who execute the written agreement prescribed by Section
24(c) of Article III of the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. (the "NASD"), and who are either members in good
standing of the NASD or foreign brokers or dealers not eligible for membership
in the NASD who represent to us that they will promptly reoffer such Securities
at the public offering price and will abide by the conditions with respect to
foreign brokers and dealers set forth in Section 3(e).
(c) STABILIZATION AND OVER-ALLOTMENT. You may, with respect to any
Offering, be authorized to over-allot in arranging sales to Selected Dealers, to
purchase and sell Securities, any other securities of the issuer of the
Securities of the same class and series and any other securities of such issuer
that you may designate for long or short account and to stabilize or maintain
the market price of the Securities. We agree to advise you from time to time
upon request, prior to the termination of the provisions of Section 3 (b) with
respect to any Offering, of the amount of Securities purchased by us hereunder
remaining unsold and we will, upon your request, sell to you, for the accounts
of the Underwriters, such amount of Securities as you may designate, at the
public offering price thereof less an amount to be determined by you not in
excess of the concession to dealers. In the event that prior to the later of (i)
the termination of the provisions of Section 3(b) with respect to any Offering,
or (ii) the covering by you of any short position created by you in connection
with such Offering for your account or the account of one or more Underwriters,
you purchase or contract to purchase for the account of any of the Underwriters,
in the open market or otherwise, any Securities theretofore delivered to us, you
reserve the right to withhold the above-mentioned concession to dealers on such
Securities if sold to us at the public offering price, or if such concession has
been allowed to us through our purchase at a net price, we agree to repay such
commission upon your demand, plus in each case any taxes on redelivery,
commissions, accrued interest and dividends paid in connection with such
purchase or contract to purchase.
(d) OPEN MARKET TRANSACTIONS. We agree not to bid for, purchase, attempt
to purchase, or sell, directly or indirectly, any Securities, any other
securities of the issuer of the Securities of the same class and series or any
other securities of such issuer as you may designate, except as brokers pursuant
to unsolicited orders and as otherwise provided in this Agreement. If the
Securities are common stock or securities convertible into common stock, we
agree not to effect, or attempt to induce others to effect, directly or
indirectly, any transactions in or relating to put or call options on any stock
of such issuer, except to the extent permitted by Rule 10b-6 under the Exchange
Act as interpreted by the Securities and Exchange Commission. An opening
uncovered writing transaction in options to acquire Securities for our account
or for the account of any customer shall be deemed, for purposes of the
preceding sentence, to be a transaction effected by us in or relating to put or
call options on stock of the Company not permitted by Rule 10b-6. The term
"opening uncovered writing transaction" means an opening sale transaction where
the seller intends to become a writer of an option to purchase stock which it
does not own or have the right to acquire upon exercise of conversion or option
rights.
(e) NASD. We represent that we are actually engaged in the investment
banking or securities business and we are either a member in good standing of
the NASD, or, if not such a member, a foreign dealer not eligible for
membership. If we are such a member we agree that in
-3-
<PAGE>
making sales of the Securities we will comply with all applicable rules of the
NASD, including, without limitation, the NASD's Interpretation with Respect to
Fee-Riding and Withholding and Section 24 of Article III of the Rules of Fair
Practice. If we are such a foreign dealer, we agree not to offer or sell any
Securities in the United States of America except through you and in making
sales of Securities outside the United States of America we agree to comply as
though we were a member with such Interpretation and Sections 8, 24 and 36 of
Article III of the NASD's Rules of Fair Practice and to comply with Section 25
of such Article III as it applies to a nonmember broker or dealer in a foreign
country.
(f) RELATIONSHIP AMONG UNDERWRITERS AND SELECTED DEALERS. You may buy
Securities from or sell Securities to any Underwriter or Selected Dealer and,
with your consent, the Underwriters (if any) and the Selected Dealers may
purchase Securities from and sell Securities to each other at the public
offering price less all or any part of the concession. We are not authorized to
act as agent for you or any Underwriter or the issuer or other seller of any
Securities in offering Securities to the public or otherwise. Nothing contained
herein or in any Written Communication from you shall constitute the Selected
Dealers partners with you or any Underwriter or with one another. Neither you
nor any Underwriter shall be under any obligation to us except for obligations
assumed hereby or in any Written Communication from you in connection with any
Offering. In connection with any Offering, we agree to pay our proportionate
share of any claim, demand or liability asserted against us, and the other
Selected Dealers or any of them, or against you or the Underwriters, if any,
based on any claim that such Selected Dealers or any of them constitute an
association, unincorporated business or other separate entity, including in each
case our proportionate share of any expense incurred in defending against any
such claim, demand or liability.
(g) BLUE SKY LAWS. Upon application to you, you will inform us as to the
jurisdictions in which you believe the Securities have been qualified for sale
under the respective securities of "blue sky" laws of such jurisdictions. We
understand and agree that compliance with the securities or "blue sky" laws in
each jurisdiction in which we shall offer or sell any of the Securities shall be
our sole responsibility and that you assume no responsibility or obligations as
to the eligibility of the Securities for sale or our right to sell the
Securities in any jurisdiction.
(h) COMPLIANCE WITH LAW. We agree that in selling Securities pursuant to
any Offering (which agreement shall also be for the benefit of the issuer or
other seller of such Securities) we will comply with the applicable provisions
of the Securities Act and the Exchange Act, the applicable rules and regulations
of the Securities and Exchange Commission thereunder, the applicable rules and
regulations of the NASD and the applicable rules and regulations of any
securities exchange having jurisdiction over the Offering. You shall have full
authority to take such action as you may deem advisable in respect of all
matters pertaining to any Offering. Neither you nor any Underwriter shall be
under any liability to us, except for lack of good faith and for obligations
expressly assumed by you in this Agreement; PROVIDED, however, that nothing in
this sentence shall be deemed to relieve you from any liability imposed by the
Securities Act.
4. TERMINATION; SUPPLEMENTS AND AMENDMENTS. This agreement may be
terminated by either party hereto upon five business days' written notice to the
other party; PROVIDED that with respect to any Offering for which a Written
Communication was sent and
-4-
<PAGE>
accepted prior to such notice, this Agreement as it applies to such Offering
shall remain in full force and effect and shall terminate with respect to such
Offering in accordance with the last sentence of this Section. This Agreement
may be supplemented or amended by you by written notice thereof to us, and any
such supplement or amendment to this Agreement shall be effective with respect
to any Offering to which this Agreement applies after the date of such
supplement or amendment. Each reference to "this Agreement" herein shall, as
appropriate, be to this Agreement as so amended and supplemented. The terms and
conditions set forth in Sections 3(b) and (d) with regard to any Offering will
terminate at the close of business on the thirtieth day after the date of the
initial public offering of the Securities to which such Offering relates, but
such terms and conditions, upon notice to us, may be terminated by you at any
time.
5. SUCCESSORS AND ASSIGNS. This Agreement shall be binding on, and inure to
the benefit of, the parties hereto and other persons specified or indicated in
Section 1, and the respective successors and assigns of each of them.
6. GOVERNING LAW. This Agreement and the terms and conditions set fort
herein with respect to any Offering together with such supplementary terms and
conditions with respect to such Offering as may be contained in any Written
Communication from you to us in connection therewith shall be governed by, and
construed in accordance with, the laws of the State of New York.
By signing this Agreement we confirm that our subscription to, or our
acceptance of any reservation of, any Securities pursuant to an Offering shall
constitute (i) acceptance of and agreement to other terms and conditions of this
Agreement (as supplemented and amended pursuant to Section 4) together with and
subject to any supplementary terms and conditions contained in any Written
Communication from you in connection with such Offering, all of which shall
constitute a binding agreement between us and you, individually or as
representative of any Underwriters, (ii) confirmation that our representations
and warranties set forth in Section 3 are true and correct at that time and
(iii) confirmation that our agreements set forth in Sections 2 and 3 have been
and will be fully performed by us to the extent and at the times required
thereby.
Very truly yours,
(Name of Firm)
By
----------------------
Confirmed, as of the date first above written.
PAINEWEBBER INCORPORATED.
By
---------------------
Vice President
-5-
<PAGE>
[Letterhead of PaineWebber Incorporated]
NOTICE
------
To: All persons party with
PaineWebber Incorporated ("PaineWebber")
to the Amended and Restated Master Selected
Dealer Agreement (the "Agreement"),
dated June 11, 1984
Pursuant to Section 4 of the Agreement, PaineWebber hereby notifies you
that effective as of this date, the following provision of the Agreement is
amended:
The fourth sentence of Section 4 is hereby amended by deleting the
word "thirtieth" and inserting in its place the word "forty-fifth"
so, that as so amended, such sentence shall read in its entirety as
follows: "The terms and conditions set forth in Sections 3(b) and (d)
with regard to any Offering will terminate at the close of business
on the forty fifth day after the date of the initial public offering
of the Securities to which such Offering relates, but such terms and
conditions, upon notice to us, may be terminated by you at any time."
Please acknowledge your receipt of this Notice by signing the enclosed copy
of this Notice where indicated and returning it to: PaineWebber Incorporated,
1285 Avenue of the Americas, New York, New York 10019, Attention:
---------------
Very truly yours,
PAINEWEBBER INCORPORATED
By:
----------------------
Acknowledged and Received:
- -------------------------
[Print Name of Firm]
By
-----------------------
Title:
<PAGE>
CUSTODIAN CONTRACT
------------------
This Contract between Managed High Yield Plus Fund Inc., a corporation
organized and existing under the laws of Maryland , having its principal place
of business at 1285 Avenue of the Americas, New York, New York 10019 hereinafter
called the "Fund", and State Street Bank and Trust Company, a Massachusetts
trust company, having its principal place of business at 225 Franklin Street,
Boston, Massachusetts, 02110, hereinafter called the "Custodian",
WITNESSETH: That in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
-----------------------------------------------------
The Fund hereby employs the Custodian as the custodian of its assets,
including securities which it desires to be held in places within the United
States ("domestic securities") and securities it desires to be held outside the
United States ("foreign securities") pursuant to the provisions of the Articles
of Incorporation. The Fund agrees to deliver to the Custodian all securities
and cash owned by it, and all payments of income, payments of principal or
capital distributions received by it with respect to all securities owned by the
Fund from time to time, and the cash consideration received by it for such new
or treasury shares of capital stock ("Shares") of the Fund as may be issued or
sold from time to time. The Custodian shall not be responsible for any property
of the Fund held or received by the Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 4),
the Custodian shall from time to time employ one or more sub-custodians located
in the United States, but only in accordance with an applicable vote by the
Board of Directors of the Fund, and provided that the Custodian shall have no
more or less responsibility or liability to the Fund on account of any actions
or omissions of any sub-custodian so employed than any such sub-custodian has to
the Custodian. The Custodian may employ as sub-custodian for the Fund's foreign
securities and other assets the foreign banking institutions and foreign
securities depositories designated in Schedule A hereto but only in accordance
with the provisions of Article 3.
For purposes of this Contract, "delivery" of domestic securities or foreign
securities shall include the acquisition of a security entitlement (as that term
is defined in the Massachusetts Uniform Commercial Code ("MA UCC")).
2. Duties of the Custodian with Respect to Property of the Fund Held By the
------------------------------------------------------------------------
Custodian in the United States
------------------------------
2.1 Holding Securities. The Custodian shall hold and physically segregate for
------------------
the account of the Fund all non-cash property, to be held by it in the
United States including all domestic securities owned by the Fund, other
than (a) securities which are maintained pursuant to Section 2.10 in a
clearing agency which acts as a securities depository or in a book-entry
<PAGE>
system authorized by the U.S. Department of the Treasury and certain
federal agencies (each, a "U.S. Securities System") and (b) commercial
paper of an issuer for which State Street Bank and Trust Company acts as
issuing and paying agent ("Direct Paper") which is deposited and/or
maintained in the Direct Paper System of the Custodian (the "Direct Paper
System") pursuant to Section 2.11.
To the extent that State Street holds Fund assets constituting
"financial assets" for purposes of the MA UCC, the Custodian shall maintain
those financial assets in an account established under this Contract as
security entitlements in favor of the Fund.
2.2 Delivery of Securities. The Custodian shall release and deliver domestic
----------------------
securities owned by the Fund maintained by the Custodian directly or
indirectly in a U.S. Securities System account of the Custodian or in the
Custodian's Direct Paper book entry system account ("Direct Paper System
Account") only upon receipt of Proper Instructions, which may be continuing
instructions when deemed appropriate by the parties, and only in the
following cases:
1) Upon sale of such securities for the account of the Fund and receipt
of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a U.S. Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities of the Fund;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of the
Fund or into the name of any nominee or nominees of the Custodian or
into the name or nominee name of any agent appointed pursuant to
Section 2.9 or into the name or nominee name of any sub-custodian
appointed pursuant to Article 1; or for exchange for a different
number of bonds, certificates or other evidence representing the same
aggregate face amount or number of units; provided that, in any such
--------
case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Fund, to the
broker or its clearing agent, against a receipt, for examination in
accordance with "street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or liability for any
loss arising from the delivery of such securities
2
<PAGE>
prior to receiving payment for such securities except as may arise
from the Custodian's own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions
for conversion contained in such securities, or pursuant to any
deposit agreement; provided that, in any such case, the new securities
and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities
or the surrender of interim receipts or temporary securities for
definitive securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the
Fund, but only against receipt of adequate collateral as agreed upon
--- ----
from time to time by the Custodian and the Fund, which may be in the
form of cash or obligations issued by the United States government,
its agencies or instrumentalities, except that in connection with any
loans for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S. Department of
the Treasury, the Custodian will not be held liable or responsible for
the delivery of securities owned by the Fund prior to the receipt of
such collateral;
11) For delivery as security in connection with any borrowings by the Fund
requiring a pledge of assets by the Fund, but only against receipt of
--- ----
amounts borrowed;
12) For delivery in accordance with the provisions of any agreement among
the Fund, the Custodian and a broker-dealer registered under the
Securities Exchange Act of 1934 (the "Exchange Act") and a member of
The National Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange, or of
any similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any agreement among
the Fund, the Custodian, and a Futures Commission Merchant registered
under the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any Contract
Market, or any similar organization or organizations, regarding
account deposits in connection with transactions by the Fund;
14) For any other proper corporate purpose, but only upon receipt of, in
--- ----
addition to Proper Instructions, a certified copy of a resolution of
the Board of Directors or of the Executive Committee signed by an
officer and certified by the Secretary or an Assistant Secretary,
specifying the securities of the Fund to be delivered, setting
3
<PAGE>
forth the purpose for which such delivery is to be made, declaring
such purpose to be a proper corporate purpose, and naming the person
or persons to whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
--------------------------
(other than bearer securities) shall be registered in the name of the Fund
or in the name of any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund, unless
------
the Fund has authorized in writing the appointment of a nominee to be used
in common with other registered investment companies having the same
investment adviser as the Fund, or in the name or nominee name of any agent
appointed pursuant to Section 2.9 or in the name or nominee name of any
sub-custodian appointed pursuant to Article 1. All securities accepted by
the Custodian on behalf of the Fund under the terms of this Contract shall
be in "street name" or other good delivery form. If, however, the Fund
directs the Custodian to maintain securities in "street name", the
Custodian shall utilize its best efforts only to timely collect income due
the Fund on such securities and to notify the Fund on a best efforts basis
only of relevant corporate actions including, without limitation, pendency
of calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
-------------
account or accounts in the United States in the name of the Fund, subject
only to draft or order by the Custodian acting pursuant to the terms of
this Contract, and shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for the account of the
Fund, other than cash maintained by the Fund in a bank account established
and used in accordance with Rule 17f-3 under the Investment Company Act of
1940. Funds held by the Custodian for the Fund may be deposited by it to
its credit as Custodian in the Banking Department of the Custodian or in
such other banks or trust companies as it may in its discretion deem
necessary or desirable; provided, however, that every such bank or trust
--------
company shall be qualified to act as a custodian under the Investment
Company Act of 1940 and that each such bank or trust company and the funds
to be deposited with each such bank or trust company shall be approved by
vote of a majority of the Board of Directors of the Fund. Such funds shall
be deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund and
-----------------------------
the Custodian, the Custodian shall, upon the receipt of Proper
Instructions, make federal funds available to the Fund as of specified
times agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of the Fund which are
deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
--------------------
Custodian shall collect on a timely basis all income and other payments
with respect to domestic registered securities held hereunder to which the
Fund shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and
other payments with respect to United States bearer domestic securities if,
on the date of payment by the issuer, such securities are held by the
Custodian or its agent thereof and shall credit
4
<PAGE>
such income, as collected, to the Fund's custodian account. Without
limiting the generality of the foregoing, the Custodian shall detach and
present for payment all coupons and other income items requiring
presentation as and when they become due and shall collect interest when
due on securities held hereunder. Income due the Fund on United States
securities loaned pursuant to the provisions of Section 2.2 (10) shall be
the responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the Fund with
such information or data as may be necessary to assist the Fund in
arranging for the timely delivery to the Custodian of the income to which
the Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions, which may be
----------------------
continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out monies of the Fund in the following cases only:
1) Upon the purchase of domestic securities, options, futures contracts
or options on futures contracts for the account of the Fund but only
(a) against the delivery of such securities or evidence of title to
such options, futures contracts or options on futures contracts to the
Custodian (or any bank, banking firm or trust company doing business
in the United States or abroad which is qualified under the Investment
Company Act of 1940, as amended, to act as a custodian and has been
designated by the Custodian as its agent for this purpose) registered
in the name of the Fund or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper form for transfer; (b)
in the case of a purchase effected through a U.S. Securities System,
in accordance with the conditions set forth in Section 2.10 hereof;
(c) in the case of a purchase involving the Direct Paper System, in
accordance with the conditions set forth in Section 2.11; (d) in the
case of repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer which is a member of
NASD, (i) against delivery of the securities either in certificate
form or through an entry crediting the Custodian's account at the
Federal Reserve Bank with such securities or (ii) against delivery of
the receipt evidencing purchase by the Fund of securities owned by the
Custodian along with written evidence of the agreement by the
Custodian to repurchase such securities from the Fund or (e) for
transfer to a time deposit account of the Fund in any bank, whether
domestic or foreign; such transfer may be effected prior to receipt of
a confirmation from a broker and/or the applicable bank pursuant to
Proper Instructions as defined in Article 4;
2) In connection with conversion, exchange or surrender of securities
owned by the Fund as set forth in Section 2.2 hereof;
3) For the payment of any expense or liability incurred by the Fund,
including but not limited to the following payments for the account of
the Fund: interest, taxes, management, accounting, transfer agent and
legal fees, and operating expenses of the Fund whether or not such
expenses are to be in whole or part capitalized or treated as deferred
expenses;
5
<PAGE>
4) For the payment of any dividends declared pursuant to the governing
documents of the Fund;
5) For payment of the amount of dividends received in respect of
securities sold short;
6) For any other proper purpose, but only upon receipt of, in addition to
--- ----
Proper Instructions, a certified copy of a resolution of the Board of
Directors or of the Executive Committee of the Fund signed by an
officer of the Fund and certified by its Secretary or an Assistant
Secretary, specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such purpose
to be a proper purpose, and naming the person or persons to whom such
payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
-------------------------------------------------------------------
Except as specifically stated otherwise in this Contract, in any and every
case where payment for purchase of domestic securities for the account of
the Fund is made by the Custodian in advance of receipt of the securities
purchased in the absence of specific written instructions from the Fund to
so pay in advance, the Custodian shall be absolutely liable to the Fund for
such securities to the same extent as if the securities had been received
by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
---------------------
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of 1940,
as amended, to act as a custodian, as its agent to carry out such of the
provisions of this Article 2 as the Custodian may from time to time direct;
provided, however, that the appointment of any agent shall not relieve the
--------
Custodian of its responsibilities or liabilities hereunder.
2.10 Deposit of Fund Assets in U.S. Securities Systems. The Custodian may
-------------------------------------------------
maintain domestic securities owned by the Fund in a clearing agency
registered with the Securities and Exchange Commission under Section 17A of
the Exchange Act, which acts as a securities depository, or in a U.S.
Securities System in accordance with applicable Federal Reserve Board and
Securities and Exchange Commission rules and regulations, if any, and
subject to the following provisions:
1) The Custodian may maintain domestic securities of the Fund indirectly
in a U.S. Securities System provided that such securities are
represented in an account ("Account") of the Custodian in the U.S.
Securities System which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise for
customers;
2) The records of the Custodian with respect to domestic securities of
the Fund which are maintained in a U.S. Securities System shall
identify by book-entry those securities belonging to the Fund;
6
<PAGE>
3) The Custodian shall pay for domestic securities purchased for the
account of the Fund upon (i) receipt of advice from the U.S.
Securities System that such securities have been transferred to the
Account, and (ii) the making of an entry on the records of the
Custodian to reflect such payment and transfer for the account of the
Fund. The Custodian shall transfer domestic securities sold for the
account of the Fund upon (i) receipt of advice from the U.S.
Securities System that payment for such securities has been
transferred to the Account, and (ii) the making of an entry on the
records of the Custodian to reflect such transfer and payment for the
account of the Fund. Copies of all advices from the U.S. Securities
System of transfers of domestic securities for the account of the Fund
shall identify the Fund, be maintained for the Fund by the Custodian
and be provided to the Fund at its request. Upon request, the
Custodian shall furnish the Fund confirmation of each transfer to or
from the account of the Fund in the form of a written advice or notice
and shall furnish to the Fund copies of daily transaction sheets
reflecting each day's transactions in the U.S. Securities System for
the account of the Fund;
4) The Custodian shall provide the Fund with any report obtained by the
Custodian on the U.S. Securities System's accounting system, internal
accounting control and procedures for safeguarding domestic securities
deposited in the U.S. Securities System;
5) The Custodian shall have received the initial certificate required by
Article 12 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to the
Fund resulting from use of the U.S. Securities System by reason of any
negligence, misfeasance or misconduct of the Custodian or any of its
agents or of any of its or their employees or from failure of the
Custodian or any such agent to enforce effectively such rights as it
may have against the U.S. Securities System; at the election of the
Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claim against the U.S. Securities System
or any other person which the Custodian may have as a consequence of
any such loss or damage if and to the extent that the Fund has not
been made whole for any such loss or damage.
2.11 Fund Assets Held in the Custodian's Direct Paper System. The Custodian
--------------------------------------------------------
may maintain securities owned by the Fund in the Direct Paper System of the
Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System will
be effected in the absence of Proper Instructions;
2) The Custodian may keep securities of the Fund in the Direct Paper
System only if such securities are represented in an account
("Account") of the Custodian in the
7
<PAGE>
Direct Paper System which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
3) The records of the Custodian with respect to securities of the Fund
which are maintained in the Direct Paper System shall identify by
book-entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the account of
the Fund upon the making of an entry on the records of the Custodian
to reflect such payment and transfer of securities to the account of
the Fund. The Custodian shall transfer securities sold for the
account of the Fund upon the making of an entry on the records of the
Custodian to reflect such transfer and receipt of payment for the
account of the Fund;
5) The Custodian shall furnish the Fund confirmation of each transfer to
or from the account of the Fund, in the form of a written advice or
notice, of Direct Paper on the next business day following such
transfer and shall furnish to the Fund copies of daily transaction
sheets reflecting each day's transaction in the U.S. Securities System
for the account of the Fund;
6) The Custodian shall provide the Fund with any report on its system of
internal accounting control as the Fund may reasonably request from
time to time.
2.12 Segregated Account. The Custodian shall upon receipt of Proper
------------------
Instructions establish and maintain a segregated account or accounts for
and on behalf of the Fund, into which account or accounts may be
transferred cash and/or securities, including securities maintained in an
account by the Custodian pursuant to Section 2.10 hereof, (i) in accordance
with the provisions of any agreement among the Fund, the Custodian and a
broker-dealer registered under the Exchange Act and a member of the NASD
(or any futures commission merchant registered under the Commodity Exchange
Act), relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange (or the
Commodity Futures Trading Commission or any registered contract market), or
of any similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund, (ii) for purposes
of segregating cash or government securities in connection with options
purchased, sold or written by the Fund or commodity futures contracts or
options thereon purchased or sold by the Fund, (iii) for the purposes of
compliance by the Fund with the procedures required by Investment Company
Act Release No. 10666, or any subsequent release or releases of the
Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies and (iv) for other
proper corporate purposes, but only, in the case of clause (iv), upon
--- ----
receipt of, in addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors or of the Executive Committee signed
by an officer of the Fund and certified by the Secretary or an Assistant
Secretary, setting forth the purpose or purposes of such segregated account
and declaring such purposes to be proper corporate purposes.
8
<PAGE>
2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
---------------------------------------
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to domestic securities of the Fund held by it and in connection
with transfers of such securities.
2.14 Proxies. The Custodian shall, with respect to the domestic securities
-------
held hereunder, cause to be promptly executed by the registered holder of
such securities, if the securities are registered otherwise than in the
name of the Fund or a nominee of the Fund, all proxies, without indication
of the manner in which such proxies are to be voted, and shall promptly
deliver to the Fund such proxies, all proxy soliciting materials and all
notices relating to such securities.
2.15 Communications Relating to Fund Securities. Subject to the provisions of
------------------------------------------
Section 2.3, the Custodian shall transmit promptly to the Fund all written
information (including, without limitation, pendency of calls and
maturities of domestic securities and expirations of rights in connection
therewith and notices of exercise of call and put options written by the
Fund and the maturity of futures contracts purchased or sold by the Fund)
received by the Custodian from issuers of the domestic securities being
held for the Fund. With respect to tender or exchange offers, the Custodian
shall transmit promptly to the Fund all written information received by the
Custodian from issuers of the domestic securities whose tender or exchange
is sought and from the party (or his agents) making the tender or exchange
offer. If the Fund desires to take action with respect to any tender offer,
exchange offer or any other similar transaction, the Fund shall notify the
Custodian at least three business days prior to the date on which the
Custodian is to take such action.
2.16 Reports to Fund by Independent Public Accountants The Custodian shall
-------------------------------------------------
provide the Fund, at such times as the Fund may reasonably require, with
reports by independent public accountants on the accounting system,
internal accounting control and procedures for safeguarding securities,
futures contracts and options on futures contracts, including domestic
securities deposited and/or maintained in a U.S. Securities System,
relating to the services provided by the Custodian under this Contract;
such reports, shall be of sufficient scope and in sufficient detail, as may
reasonably be required by the Fund, to provide reasonable assurance that
any material inadequacies would be disclosed by such examination, and, if
there are no such inadequacies, the reports shall so state.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside
-------------------------------------------------------------------------
of the United States
--------------------
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
-------------------------------------
instructs the Custodian to employ as sub-custodians for the Fund's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories designated
on Schedule A hereto ("foreign sub-custodians"). Upon receipt of "Proper
Instructions", as defined in Section 4 of this Contract, together with a
certified resolution of the Fund's Board of Directors, the Custodian and
the Fund may agree to amend Schedule A
9
<PAGE>
hereto from time to time to designate additional foreign banking
institutions and foreign securities depositories to act as sub-custodian.
Upon receipt of Proper Instructions, the Fund may instruct the Custodian to
cease the employment of any one or more such sub-custodians for maintaining
custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
-----------------
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under
the Investment Company Act of 1940, and (b) cash and cash equivalents in
such amounts as the Custodian or the Fund may determine to be reasonably
necessary to effect the Fund's foreign securities transactions. The
Custodian shall identify on its books as belonging to the Fund, the foreign
securities of the Fund held by each foreign sub-custodian.
3.3 Foreign Securities Systems. Except as may otherwise be agreed upon in
--------------------------
writing by the Custodian and the Fund, assets of the Funds shall be
maintained indirectly in a clearing agency which acts as a securities
depository or in a book-entry system for the central handling of securities
located outside of the United States (each, a "Foreign Securities System")
only through arrangements implemented by the foreign banking institutions
serving as sub-custodians pursuant to the terms hereof (Foreign Securities
Systems and U.S. Securities Systems are collectively referred to herein as
the "Securities Systems"). Where possible, such arrangements shall include
entry into agreements containing the provisions set forth in Section 3.5
hereof.
3.4 Holding Securities. The Custodian may maintain securities and other non-
-------------------
cash property for all of its customers, including the Fund, indirectly with
a foreign sub-custodian in a single account that is identified as belonging
to the Custodian for the benefit of its customers, provided however, that
----------------
(i) the records of the Custodian with respect to securities and other non-
cash property of the Fund which are maintained in such account shall
identify by book-entry those securities and other non-cash property
belonging to the Fund and (ii) the Custodian shall require that securities
and other non-cash property so held by the Foreign Sub-custodian be held
separately from any assets of the Foreign Sub-custodian or of others.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
--------------------------------------------
foreign banking institution shall provide that: (a) the Fund's assets will
not be subject to any right, charge, security interest, lien or claim of
any kind in favor of the foreign banking institution or its creditors or
agent, except a claim of payment for their safe custody or administration;
(b) beneficial ownership of the Fund's assets will be freely transferable
without the payment of money or value other than for custody or
administration; (c) adequate records will be maintained identifying the
assets as belonging to the Fund; (d) officers of or auditors employed by,
or other representatives of the Custodian, including to the extent
permitted under applicable law the independent public accountants for the
Fund, will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the Custodian;
and (e) assets of the Fund held by the foreign sub-custodian will be
subject only to the instructions of the Custodian or its agents.
10
<PAGE>
3.6 Access of Independent Accountants of the Fund. Upon request of the Fund,
---------------------------------------------
the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of
any foreign banking institution employed as a foreign sub-custodian insofar
as such books and records relate to the performance of such foreign banking
institution under its agreement with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from time to
--------------------
time, as mutually agreed upon, statements in respect of the securities and
other assets of the Fund held by foreign sub-custodians, including but not
limited to an identification of entities having possession of the Fund's
securities and other assets and advices or notifications of any transfers
of securities to or from each custodial account maintained by a foreign
banking institution for the Custodian on behalf of the Fund indicating, as
to securities acquired for the Fund, the identity of the entity having
physical possession of such securities.
3.8 Transactions in Foreign Custody Account. (a) Except as otherwise
---------------------------------------
provided in paragraph (b) of this Section 3.8, the provision of Sections
2.2 and 2.7 of this Contract shall apply, mutatis mutandis to the foreign
------- --------
securities of the Fund held outside the United States by foreign sub-
custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of the Fund
and delivery of securities maintained for the account of the Fund may be
effected in accordance with the customary established securities trading or
securities processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without limitation,
delivering securities to the purchaser thereof or to a dealer therefor (or
an agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from such
purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may be
maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of this Contract, and the Fund agrees to hold any such
nominee harmless from any liability as a holder of record of such
securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the
-----------------------------------
Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the
Custodian and each Fund from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the institution's
performance of such obligations. At the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with respect to
any claims against a foreign banking institution as a consequence of any
such loss, damage, cost, expense, liability or claim if and to the extent
that the Fund has not been made whole for any such loss, damage, cost,
expense, liability or claim.
11
<PAGE>
3.10 Liability of Custodian. The Custodian shall be liable for the acts or
----------------------
omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Contract and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by paragraph 3.13 hereof, the Custodian shall not be liable
for any loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism or any loss where the sub-custodian has otherwise exercised
reasonable care. Notwithstanding the foregoing provisions of this
paragraph 3.10, in delegating custody duties to State Street London Ltd.,
the Custodian shall not be relieved of any responsibility to the Fund for
any loss due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization, insurrection,
civil strife or armed hostilities) or (b) other losses (excluding a
bankruptcy or insolvency of State Street London Ltd. not caused by
political risk) due to Acts of God, nuclear incident or other losses under
circumstances where the Custodian and State Street London Ltd. have
exercised reasonable care.
3.11 Reimbursement for Advances. If the Fund requires the Custodian, its
--------------------------
affiliates, subsidiaries or agents, to advance cash or securities for any
purpose including but not limited to securities settlements, foreign
exchange contracts and assumed settlement for the benefit of the Fund
including the purchase or sale of foreign exchange or of contracts for
foreign exchange, or in the event that the Custodian or its nominee shall
incur or be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract, except
such as may arise from its or its nominee's own negligent action, negligent
failure to act or willful misconduct, any property at any time held for the
account of the Fund shall be security therefor and should the Fund fail to
repay the Custodian promptly, the Custodian shall be entitled to utilize
available cash and to dispose of such Funds assets to the extent necessary
to obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually to the
---------------------------
Fund, during the month of June, information concerning the foreign sub-
custodians employed by the Custodian. Such information shall be similar in
kind and scope to that furnished to the Fund in connection with the initial
approval of this Contract. In addition, the Custodian will promptly inform
the Fund in the event that the Custodian learns of a material adverse
change in the financial condition of a foreign sub-custodian or any
material loss of the assets of the Fund.
3.13 Branches of U.S. Banks. (a) Except as otherwise set forth in this
----------------------
Contract, the provisions hereof shall not apply where the custody of the
Funds assets are maintained in a foreign branch of a banking institution
which is a "bank" as defined by Section 2(a)(5) of the Investment Company
Act of 1940 meeting the qualification set forth in Section 26(a) of said
Act. The appointment of any such branch as a sub-custodian shall be
governed by paragraph 1 of this Contract.
12
<PAGE>
(b) Cash held for the Fund in the United Kingdom shall be maintained in an
interest bearing account established for the Fund with the Custodian's
London branch, which account shall be subject to the direction of the
Custodian, State Street London Ltd. or both.
3.14 Tax Law. The Custodian shall have no responsibility or liability for any
-------
obligations now or hereafter imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of the United States of America or any
state or political subdivision thereof. It shall be the responsibility of
the Fund to notify the Custodian of the obligations imposed on the Fund or
the Custodian as custodian of the Fund by the tax law of jurisdictions
other than those mentioned in the above sentence, including responsibility
for withholding and other taxes, assessments or other governmental charges,
certifications and governmental reporting. The sole responsibility of the
Custodian with regard to such tax law shall be to use reasonable efforts to
assist the Fund with respect to any claim for exemption or refund under the
tax law of jurisdictions for which the Fund has provided such information.
3.15 Foreign Exchange Transactions. (a) Upon receipt of Proper
------------------------------
Instructions, the Custodian shall settle foreign exchange contracts or
options to purchase and sell foreign currencies for spot and future
delivery on behalf of and for the account of the Fund with such brokers,
banks or trust companies other than the Custodian ("Currency Brokers") as
the Fund may determine and direct pursuant to Proper Instructions or as the
Custodian may select (Transactions Other Than As Principal").
(b) The Custodian shall not be obligated to enter into foreign exchange
transactions as principal ("Transactions As Principal"). However, if the
Custodian has made available to the Fund its services as a principal in
foreign exchange transactions and, subject to any separate agreement
between the parties relating to such transaction, the Custodian shall enter
into foreign exchange contracts or options to purchase and sell foreign
currencies for spot and future delivery on behalf of and for the account of
the Fund, with the Custodian as principal.
(c) If, in a Transaction Other Than As Principal, a Currency Broker is
selected by the Fund, the Custodian shall have no duty with respect to the
selection of the Currency Broker, or so long as the Custodian acts as in
accordance with Proper Instructions, for the failure of such Currency
Broker to comply with the terms of any contract or option. If, in a
Transaction Other Than As Principal, the Currency Broker is selected by the
Custodian or if the Custodian enters into a Transaction As Principal, the
Custodian shall be responsible for the selection of the Currency Broker and
the failure of such Currency Broker to comply with the terms of any
contract or option.
(d) In Transactions Other Than As Principal and Transactions As Principal,
the Custodian shall be responsible for any transfer of cash, the
transmission of instructions to and from a Currency Broker, if any, the
safekeeping of all certificates and other documents and agreements
evidencing or relating to such foreign exchange transactions and the
maintenance of proper records as set forth in Section 8 of this Contract.
13
<PAGE>
4. Proper Instructions
-------------------
Proper Instructions as used herein means a writing signed or initialed by
one or more person or persons as the Board of Directors shall have from time to
time authorized. Each such writing shall set forth the specific transaction or
type of transaction involved, including a specific statement of the purpose for
which such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in
writing. Proper Instructions may include communications effected directly
between electro-mechanical or electronic devices provided that the Fund and the
Custodian agree to security procedures, including but not limited to, the
security procedure selected by the Fund in the Funds Transfer Addendum attached
hereto. For purposes of this Section, Proper Instructions shall include
instructions received by the Custodian pursuant to any three-party agreement
which requires a segregated asset account in accordance with Section 2.12.
5. Actions Permitted without Express Authority
-------------------------------------------
The Custodian may in its discretion, without express authority from the
Fund:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Contract, provided that all such payments shall be accounted for to
--------
the Fund;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Fund, checks, drafts and
other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Fund except as
otherwise directed by the Board of Directors of the Fund.
6. Evidence of Authority
---------------------
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper reasonably believed
by it to be genuine and to have been properly executed by or on behalf of the
Fund. The Custodian may receive and accept a certified copy of a vote of the
Board of Directors of the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any determination or of
any action by the Board of Directors pursuant to the Articles of Incorporation
as described in such vote, and such vote may be considered as in full force and
effect until receipt by the Custodian of written notice to the contrary.
14
<PAGE>
7. Duties of Custodian with Respect to the Books of Account and Calculation of
---------------------------------------------------------------------------
Net Asset Value and Net Income
------------------------------
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Directors of the Fund to keep the
books of account of the Fund and/or compute the net asset value per share of the
outstanding shares of the Fund or, if directed in writing to do so by the Fund,
shall itself keep such books of account and/or compute such net asset value per
share. If so directed, the Custodian shall also calculate weekly the net income
of the Fund as described in the Fund's currently effective prospectus and shall
advise the Fund and the Transfer Agent weekly of the total amounts of such net
income and, if instructed in writing by an officer of the Fund to do so, shall
advise the Transfer Agent periodically of the division of such net income among
its various components. The calculations of the net asset value per share and
the weekly income of the Fund shall be made at the time or times described from
time to time in the Fund's currently effective prospectus.
8. Records
-------
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.
All such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Fund and employees and agents of
the Securities and Exchange Commission. The Custodian shall, at the Fund's
request, supply the Fund with a tabulation of securities owned by the Fund and
held by the Custodian and shall, when requested to do so by the Fund and for
such compensation as shall be agreed upon between the Fund and the Custodian,
include certificate numbers in such tabulations.
9. Opinion of Fund's Independent Accountant
----------------------------------------
The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to its activities hereunder in connection
with the preparation of the Fund's Form N-2, and Form N-SAR or other annual
reports to the Securities and Exchange Commission and with respect to any other
requirements of such Commission.
10. Compensation of Custodian
-------------------------
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund and
the Custodian.
11. Responsibility of Custodian
---------------------------
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto
15
<PAGE>
received by it or delivered by it pursuant to this Contract and shall be held
harmless in acting upon any notice, request, consent, certificate or other
instrument reasonably believed by it to be genuine and to be signed by the
proper party or parties, including any futures commission merchant acting
pursuant to the terms of a three-party futures or options agreement. The
Custodian shall be held to the exercise of reasonable care in carrying out the
provisions of this Contract, but shall be kept indemnified by and shall be
without liability to the Fund for any action taken or omitted by it in good
faith without negligence. It shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Fund) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to such
advice.
Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a sub-custodian or agent,
the Custodian shall be without liability to the Fund for any loss, liability,
claim or expense resulting from or caused by; (i) events or circumstances beyond
the reasonable control of the Custodian or any sub-custodian or Securities
System or any agent or nominee of any of the foregoing, including, without
limitation, nationalization or expropriation, imposition of currency controls or
restrictions, the interruption, suspension or restriction of trading on or the
closure of any securities market, power or other mechanical or technological
failures or interruptions, computer viruses or communications disruptions, acts
of war or terrorism, riots, revolutions, work stoppages, natural disasters or
other similar events or acts; (ii) errors by the Fund in its instructions to the
Custodian provided such instructions have been in accordance with this Contract;
(iii) the insolvency of or acts or omissions by a Securities System; (iv) any
delay or failure of any broker, agent or intermediary, central bank or other
commercially prevalent payment or clearing system to deliver to the Custodian's
sub-custodian or agent securities purchased or in the remittance or payment made
in connection with securities sold; (v) any delay or failure of any company,
corporation, or other body in charge or registering or transferring securities
in the name of the Custodian, the Fund, the Custodian's sub-custodians, nominees
or agents or any consequential losses arising out of such delay or failure to
transfer such securities including non-receipt of bonus, dividends and rights
and other accretions or benefits; (vi) delays or inability to perform its duties
due to any disorder in market infrastructure with respect to any particular
security or Securities System; and (vii) any provision of any present or future
law or regulation or order of the United States of America, or any state
thereof, or any other country, or political subdivision thereof or of any court
of competent jurisdiction.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution to the same extent as set forth with respect to sub-
custodians generally in this Contract.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or agents,
to advance cash or securities for any purpose (including but not limited to
securities settlements, foreign exchange contracts and assumed settlement) or in
the event that the Custodian or its nominee shall incur or be
16
<PAGE>
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the Fund
assets to the extent necessary to obtain reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
12. Effective Period, Termination and Amendment
-------------------------------------------
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than thirty (30)
days after the date of such delivery or mailing; provided, however that the
--------
Custodian shall not act under Section 2.10 hereof in the absence of receipt of
an initial certificate of the Secretary or an Assistant Secretary that the Board
of Directors of the Fund has approved the initial use of a particular Securities
System, as required by Rule 17f-4 under the Investment Company Act of 1940, as
amended and that the Custodian shall not act under Section 2.11 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Board of Directors has approved the initial use of the Direct
Paper System; provided further, however, that the Fund shall not amend or
-------- -------
terminate this Contract in contravention of any applicable federal or state
regulations, or any provision of the Articles of Incorporation, and further
provided, that the Fund may at any time by action of its Board of Directors (i)
substitute another bank or trust company for the Custodian by giving notice as
described above to the Custodian, or (ii) immediately terminate this Contract in
the event of the appointment of a conservator or receiver for the Custodian by
the Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements.
13. Successor Custodian
-------------------
If a successor custodian shall be appointed by the Board of Directors of
the Fund, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities then held by it hereunder and shall transfer to an
account of the successor custodian all of the Fund's securities held in a
Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
17
<PAGE>
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts or New York, New York, of its own
selection, having an aggregate capital, surplus, and undivided profits, as
shown by its last published report, of not less than $25,000,000, all
securities, funds and other properties held by the Custodian and all instruments
held by the Custodian relative thereto and all other property held by it under
this Contract and to transfer to an account of such successor custodian all of
the Fund's securities held in any Securities System. Thereafter, such bank or
trust company shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
14. Interpretive and Additional Provisions
--------------------------------------
In connection with the operation of this Contract, the Custodian and the
Fund, may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
--------
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation of the Fund. No interpretive or additional
provisions made as provided in the preceding sentence shall be deemed to be an
amendment of this Contract.
15. Massachusetts Law to Apply
--------------------------
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
16. Prior Contracts
---------------
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets.
17. Reproduction of Documents
-------------------------
This Contract and all schedules, exhibits, attachments and amendments
hereto may be reproduced by any photographic, photostatic, microfilm, micro-
card, miniature photographic or
18
<PAGE>
other similar process. The parties hereto all/each agree that any such
reproduction shall be admissible in evidence as the original itself in any
judicial or administrative proceeding, whether or not the original is in
existence and whether or not such reproduction was made by a party in the
regular course of business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
18. Shareholder Communications Election
-----------------------------------
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Fund as consenting to disclosure
of this information for all securities owned by the Fund or any funds or
accounts established by the Fund. For the Fund's protection, the Rule prohibits
the requesting company from using the Fund's name and address for any purpose
other than corporate communications. Please indicate below whether the Fund
consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name, address,
and share positions.
NO [ ] The Custodian is not authorized to release the Fund's name,
address, and share positions.
19. Limitation of Liability
-----------------------
The Custodian agrees that the Contract may only be enforced against the
assets of the Fund or the particular Portfolio of the Fund.
20. Data Access Services Addendum
-----------------------------
The Custodian and the Fund agree to be bound by the terms of the Data Access
Services Addendum attached hereto.
21. Year 2000.
----------
The Custodian will take reasonable steps to ensure that its products (and
those of its third-party suppliers) reflect the available state of the art
technology to offer products that are Year 2000-compliant, including, but not
---------
limited to, century recognition of dates, calculations that correctly compute
same-century and multi-century formulas and date values, and interface values
19
<PAGE>
that reflect the date issues arising between now and the next one hundred years.
If any changes are required, the Custodian will make the changes to its products
at no cost to the Fund and in a commercially reasonable time frame and will
require third-party suppliers to do likewise.
20
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the day of , 1998.
ATTEST MANAGED HIGH YIELD PLUS FUND INC.
By:
- --------------------------- ---------------------------
Name: Name:
Title:
ATTEST STATE STREET BANK AND TRUST COMPANY
By:
- --------------------------- ---------------------------
Thomas M. Lenz Ronald E. Logue
Vice President Executive Vice President
21
<PAGE>
TRANSFER AGENCY SERVICES AGREEMENT
----------------------------------
THIS AGREEMENT is made as of June 22, 1998 by and between PNC BANK,
NATIONAL ASSOCIATION, a national banking association ("PNC"), and MANAGED HIGH
YIELD PLUS FUND INC., a Maryland corporation (the "Fund").
W I T N E S S E T H:
WHEREAS, the Fund is registered as a closed-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Fund wishes to retain PNC to serve as transfer agent,
registrar, dividend disbursing agent and shareholder servicing agent to the Fund
and PNC wishes to furnish such services.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Definitions. As Used in this Agreement:
---------------------------------------
(A) "1933 Act" means the Securities Act of 1933, as amended.
----------
(B) "1934 Act" means the Securities Exchange Act of 1934, as amended.
----------
(C) "Authorized Person" means any officer of the Fund and any other person
-------------------
duly authorized by the Fund's Board of Directors to give Oral
Instructions and Written Instructions on behalf of the Fund and listed
on the Authorized Persons Appendix attached hereto and made a part
hereof or any amendment thereto as may be received by PNC. An
Authorized Person's scope of authority may be limited by the Fund by
setting forth such limitation in the Authorized Persons Appendix.
(D) "CEA" means the Commodities Exchange Act, as amended.
-----
(E) "Oral Instructions" mean oral instructions received by PNC from an
-------------------
Authorized
<PAGE>
Person.
(F) "SEC" means the Securities and Exchange Commission.
-----
(G) "Securities Laws" mean the 1933 Act, the 1934 Act, the 1940 Act and
-----------------
the CEA.
(H) "Shares" mean the shares of common stock of the Fund.
--------
(I) "Written Instructions" mean written instructions signed by an
----------------------
Authorized Person and received by PNC. The instructions may be
delivered by hand, mail, tested telegram, cable, telex or facsimile
sending device.
2. Appointment. The Fund hereby appoints PNC to serve as transfer agent,
-----------
registrar, dividend disbursing agent and shareholder servicing agent to the
Fund in accordance with the terms set forth in this Agreement. PNC accepts
such appointment and agrees to furnish such services.
3. Delivery of Documents. The Fund has provided or, where applicable, will
---------------------
provide PNC with the following:
(A) Certified or authenticated copies of the resolutions of the Fund's
Board of Directors, approving the appointment of PNC or its affiliates
to provide services to the Fund and approving this Agreement;
(B) A copy of the Fund's Registration Statement on Form N-2 under the 1933
Act and the 1940 Act filed with the SEC;
(C) A copy of the Fund's advisory agreement;
(D) A copy of the Fund's underwriting agreement;
(E) A copy of the Fund's administration agreement; and
(F) Copies (certified or authenticated where applicable) of any and all
amendments or supplements to the foregoing.
4. Compliance with Rules and Regulations. PNC undertakes to comply with all
-------------------------------------
applicable requirements of the Securities Laws and any laws, rules and
regulations of
2
<PAGE>
governmental authorities having jurisdiction with respect to the duties to
be performed by PNC hereunder. Except as specifically set forth herein, PNC
assumes no responsibility for such compliance by the Fund.
5. Instructions.
------------
(A) Unless otherwise provided in this Agreement, PNC shall act only upon
Oral Instructions and Written Instructions.
(B) PNC shall be entitled to rely upon any Oral Instructions and Written
Instructions it receives from an Authorized Person pursuant to this
Agreement. PNC may assume that any Oral Instruction or Written
Instruction received hereunder is not in any way inconsistent with the
provisions of organizational documents or of any vote, resolution or
proceeding of the Fund's Board of Directors or of the Fund's
shareholders, unless and until PNC receives Written Instructions to
the contrary.
(C) The Fund agrees to forward to PNC Written Instructions confirming Oral
Instructions so that PNC receives the Written Instructions by the
close of business on the next business day after such Oral
Instructions are received. The fact that such confirming Written
Instructions are not received by PNC shall in no way invalidate the
transactions or enforceability of the transactions authorized by the
Oral Instructions. Where Oral Instructions or Written Instructions
reasonably appear to have been received from an Authorized Person, PNC
shall incur no liability to the Fund in acting upon such Oral
Instructions or Written Instructions provided that PNC's actions
comply with the other provisions of this Agreement.
6. Right to Receive Advice.
-----------------------
(A) Advice of the Fund. If PNC is in doubt as to any action it should or
------------------
should not
3
<PAGE>
take, PNC may request directions or advice, including Oral
Instructions or Written Instructions, from the Fund.
(B) Advice of Counsel. If PNC shall be in doubt as to any question of law
-----------------
pertaining to any action it should or should not take, PNC may request
advice at its own cost from such counsel of its own choosing (who may
be counsel for the Fund, the Fund's investment adviser or PNC, at the
option of PNC).
(C) Conflicting Advice. In the event of a conflict between directions,
------------------
advice or Oral Instructions or Written Instructions PNC receives from
the Fund, and the advice it receives from counsel, PNC may rely upon
and follow the advice of counsel. In the event PNC so relies on the
advice of counsel, PNC remains liable for any action or omission on
the part of PNC which constitutes willful misfeasance, bad faith,
negligence or reckless disregard by PNC of any duties, obligations or
responsibilities set forth in this Agreement.
(D) Protection of PNC. PNC shall be protected in any action it takes or
-----------------
does not take in reliance upon directions, advice or Oral Instructions
or Written Instructions it receives from the Fund or from counsel and
which PNC believes, in good faith, to be consistent with those
directions, advice or Oral Instructions or Written Instructions.
Nothing in this section shall be construed so as to impose an
obligation upon PNC (i) to seek such directions, advice or Oral
Instructions or Written Instructions, or (ii) to act in accordance
with such directions, advice or Oral Instructions or Written
Instructions unless, under the terms of other provisions of this
Agreement, the same is a condition of PNC's properly taking or not
taking such action. Nothing in this subsection shall excuse PNC when
an
4
<PAGE>
action or omission on the part of PNC constitutes willful
misfeasance, bad faith, negligence or reckless disregard by PNC of any
duties, obligations or responsibilities set forth in this Agreement.
7. Records; Visits. PNC shall prepare and maintain in complete and accurate
---------------
form all books and records necessary for it to serve as transfer agent,
registrar, dividend disbursing agent and shareholder servicing agent to the
Fund, including (a) all those records required to be prepared and
maintained by the Fund under the 1940 Act, by other applicable Securities
Laws, rules and regulations and by state laws and (b) such books and
records as are necessary for PNC to perform all of the services it agrees
to provide in this Agreement. The books and records pertaining to the
Fund, which are in the possession or under the control of PNC, shall be the
property of the Fund. The Fund and Authorized Persons shall have access to
such books and records in the possession or under the control of PNC at all
times during PNC's normal business hours. Upon the reasonable request of
the Fund, copies of any such books and records in the possession or under
the control of PNC shall be provided by PNC to the Fund or to an Authorized
Person. Upon reasonable notice by the Fund, PNC shall make available
during regular business hours its facilities and premises employed in
connection with its performance of this Agreement for reasonable visits by
the Fund, any agent or person designated by the Fund or any regulatory
agency having authority over the Fund.
8. Confidentiality. PNC agrees to keep confidential all records of the Fund
---------------
and information relating to the Fund and its shareholders (past, present
and future), its investment adviser, PaineWebber Incorporated or any other
principal underwriter for the Fund unless the release of such records or
information is otherwise consented to, in
5
<PAGE>
writing, by the Fund prior to its release. The Fund agrees that such
consent shall not be unreasonably withheld and may not be withheld where
PNC may be exposed to civil or criminal contempt proceedings or when
required to divulge such information or records to duly constituted
authorities.
9. Cooperation with Accountants. PNC shall cooperate with the Fund's
----------------------------
independent public accountants and shall take all reasonable actions in the
performance of its obligations under this Agreement to ensure that the
necessary information is made available to such accountants for the
expression of their opinion, as required by the Fund.
10. Disaster Recovery. PNC shall enter into and shall maintain in effect with
-----------------
appropriate parties one or more agreements making reasonable provisions for
periodic backup of computer files and data with respect to the Fund and
emergency use of electronic data processing equipment to the extent
appropriate equipment is available. In the event of equipment failures,
PNC shall, at no additional expense to the Fund, take reasonable steps to
minimize service interruptions. PNC shall have no liability with respect
to the loss of data or service interruptions caused by equipment failure,
provided such loss or interruption is not caused by PNC's own willful
misfeasance, bad faith, negligence or reckless disregard of its duties or
obligations under this Agreement and provided further that PNC has complied
with this Paragraph 10.
11. Compensation. As compensation for services rendered by PNC during the term
------------
of this Agreement, the Fund will pay to PNC a fee or fees as may be agreed
to from time to time in writing by the Fund and PNC.
12. Indemnification.
---------------
(A) The Fund agrees to indemnify and hold harmless PNC and its affiliates
from all
6
<PAGE>
taxes, charges, expenses, assessments, claims and liabilities
(including, without limitation, liabilities arising under the
Securities Laws and any state and foreign securities and blue sky
laws, and amendments thereto), and expenses, including (without
limitation) reasonable attorneys' fees and disbursements, arising
directly or indirectly from (i) any action or omission to act which
PNC takes (a) at the request or on the direction of or in reliance on
the advice of the Fund or (b) upon Oral Instructions or Written
Instructions or (ii) the acceptance, processing and/or negotiation of
checks or other methods utilized for the purchase of Shares. Neither
PNC, nor any of its affiliates, shall be indemnified against any
liability (or any expenses incident to such liability) arising out of
PNC's or its affiliates' own willful misfeasance, bad faith,
negligence or reckless disregard of its duties and obligations under
this Agreement. The Fund's liability to PNC for PNC's acceptance,
processing and/or negotiation of checks or other methods utilized for
the purchase of Shares shall be limited to the extent of the Fund's
policy(es) of insurance that provide for coverage of such liability,
and the Fund's insurance coverage shall take precedence.
(B) PNC agrees to indemnify and hold harmless the Fund from all taxes,
charges, expenses, assessment, penalties, claims and liabilities
arising from PNC's obligations pursuant to this Agreement (including,
without limitation, liabilities arising under the Securities Laws, and
any state and foreign securities and blue sky laws, and amendments
thereto) and expenses, including (without limitation) reasonable
attorneys' fees and disbursements arising directly or indirectly out
of PNC's or its nominee's own willful misfeasance, bad faith,
negligence or reckless
7
<PAGE>
disregard of its duties and obligations under this Agreement.
(C) In order that the indemnification provisions contained in this
Paragraph 12 shall apply, upon the assertion of a claim for which
either party may be required to indemnify the other, the party seeking
indemnification shall promptly notify the other party of such
assertion, and shall keep the other party advised with respect to all
developments concerning such claim. The party who may be required to
indemnify shall have the option to participate with the party seeking
indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any
compromise or settlement in any case in which the other party may be
required to indemnify it except with the other party's prior written
consent.
(D) The members of the Board of the Fund, its officers and shareholders
shall not be liable for any obligations of the Fund under this
Agreement, and PNC agrees that in asserting any rights or claims under
this Agreement, it shall look only to the assets and property of the
Fund in settlement of such rights or claims and not to such members of
the Board, its officers and shareholders.
13. Responsibility of PNC.
---------------------
(A) PNC shall be under no duty to take any action on behalf of the Fund
except as specifically set forth herein or as may be specifically
agreed to by PNC in writing. PNC shall be obligated to exercise care
and diligence in the performance of its duties hereunder, to act in
good faith and to use its best efforts in performing services provided
for under this Agreement. PNC shall be liable for any damages arising
out of PNC's failure to perform its duties under this Agreement to the
extent such
8
<PAGE>
damages arise out of PNC's willful misfeasance, bad faith, negligence
or reckless disregard of such duties.
(B) Without limiting the generality of the foregoing or of any other
provision of this Agreement, PNC shall not be under any duty or
obligation to inquire into and shall not be liable for (A) the validity
or invalidity or authority or lack thereof of any Oral Instruction or
Written Instruction, notice or other instrument which conforms to the
applicable requirements of this Agreement, and which PNC reasonably
believes to be genuine; or (B) subject to Section 10, delays or errors
or loss of data occurring by reason of circumstances beyond PNC's
control, including acts of civil or military authority, national
emergencies, labor difficulties, fire, flood, catastrophe, acts of God,
insurrection, war, riots or failure of the mails, transportation,
communication or power supply.
(C) Notwithstanding anything in this Agreement to the contrary, neither PNC
nor its affiliates shall be liable to the Fund for any consequential,
special or indirect losses or damages which the Fund may incur or
suffer by or as a consequence of PNC's or its affiliates' performance
of the services provided hereunder, whether or not the likelihood of
such losses or damages was known by PNC or its affiliates.
14. Insurance. PNC shall maintain insurance of the types and in the amounts
---------
deemed by it to be appropriate. To the extent that policies of insurance
may provide for coverage of claims for liability or indemnity by the
parties set forth in this Agreement, the contracts of insurance shall take
precedence, and no provision of this Agreement shall be construed to
relieve an insurer of any obligation to pay claims to the Fund, PNC or
other insured
9
<PAGE>
party which would otherwise be a covered claim in the absence of any
provision of this Agreement.
15. Security
--------
(A) PNC represents and warrants that, to the best of its knowledge, the
various procedures and systems which PNC has implemented with regard
to the safeguarding from loss or damage attributable to fire, theft or
any other cause (including provision for twenty-four hours a day
restricted access) of the Fund's blank checks, certificates, records
and other data and PNC's equipment, facilities and other property used
in the performance of its obligations hereunder are adequate, and that
it will make such changes therein from time to time as in its judgment
are required for the secure performance of its obligations hereunder.
PNC shall review such systems and procedures on a periodic basis, and
the Fund shall have reasonable access to review these systems and
procedures.
(B) Y2K Compliance. PNC further represents and warrants that any and all
electronic data processing systems and programs that it uses or
retains in connection with the provision of services hereunder will be
year 2000 compliant.
16. Description of Services
-----------------------
(A) Services Provided on an Ongoing Basis by PNC to the Fund.
(i) Establish and maintain proper shareholder registrations;
(ii) Countersign certificates of stock;
(iii) Provide toll-free lines for direct shareholder use, plus
customer liaison staff for on-line inquiry response;
(iv) Provide periodic shareholder lists, outstanding share
calculations and statistics;
(v) Prepare and mail required calendar and taxable year-end tax and
statement information (including forms 1099-DIV and 1099-B and
accompanying statements); and
(vi) Periodic mailing of shareholder account information and Fund
financial
10
<PAGE>
reports.
(B) Services Provided by PNC Under Oral or Written Instructions of the
------------------------------------------------------------------
Fund.
----
(i) Accept, post and perform shareholder transfers;
(ii) Pay dividends and other distributions; and
(iii) Issue and cancel Share certificates.
(C) Transactions Not Requiring Instructions. In the absence of contrary
---------------------------------------
Written Instructions, PNC is authorized to take the following actions:
(i) Transfer of Shares; Uncertificated Securities. Where a
----------------------------------------------
shareholder does not hold a certificate representing the number
of Shares in his account and provides PNC with instructions for
the transfer of such Shares which include a signature guaranteed
by a national bank or registered broker/dealer and such other
appropriate documentation to permit a transfer, then PNC shall
register such Shares and shall deliver them pursuant to
instructions received from the transferor, pursuant to the rules
of the exchange upon which Shares are listed, the rules and
regulations of the SEC, and the law of the State of Maryland
relating to the transfer of shares of common stock.
(ii) Stock Certificates. If at any time the Fund issues stock
------------------
certificates, the following provisions will apply:
(a) The Fund will supply PNC with a sufficient supply of stock
certificates representing Shares, in the form approved from
time to time by the Board of Directors of the Fund, and,
from time to time, shall replenish such supply upon request
of PNC. Such stock certificates shall be properly signed,
manually or by facsimile
11
<PAGE>
signature, by the duly authorized officers of the Fund and
shall bear the corporate seal or facsimile thereof of the
Fund, and notwithstanding the death, resignation or removal
of any officer of the Fund, such executed certificates
bearing the manual or facsimile signature of such officer
shall remain valid and may be issued to Shareholders until
PNC is otherwise directed by Written Instructions.
(b) PNC shall place a stop notice against any certificate
reported to be lost or stolen and shall comply with all
applicable federal regulatory requirements for reporting
such loss or alleged misappropriation. In the case of the
loss or destruction of any certificate representing Shares,
no new certificate shall be issued in lieu thereof, unless
there shall first have been furnished: (i) an appropriate
bond of indemnity issued by the surety company approved by
PNC and (ii) a completed release and indemnification
agreement, signed by the Shareholder to protect the Fund and
PNC.
(c) Upon receipt of signed stock certificates, which shall be in
proper form for transfer, and upon cancellation or
destruction thereof, PNC shall countersign, register and
issue new certificates for the same number of Shares and
shall deliver them pursuant to instructions received from
the transferor, the rules of the exchange upon which Shares
are listed, the rules and regulations of the SEC,
12
<PAGE>
and the law of the State of Maryland relating to the
transfer of shares of common stock.
(d) Upon receipt of the stock certificates, which shall be in
proper form for transfer, together with the Shareholder's
instructions to hold such stock certificates for
safekeeping, PNC shall reduce such Shares to uncertificated
status, while retaining the appropriate registration in the
name of the Shareholder upon the transfer books.
(e) Upon receipt of Written Instructions from a Shareholder of
uncertified securities for a certificate in the number of
shares in his account, PNC will issue such stock
certificates and deliver them to the Shareholder.
(D) Tender Agent Services. The terms and conditions of any tender offer
---------------------
by the Fund to purchase its Shares shall be set forth in the form of
document entitled "Offer to Purchase" and in the related form of
"Letter of Transmittal," which together constitute the "Offer" and
shall be forwarded to PNC by the Fund when applicable.
In the event any tender offer is made, and if so requested by the
Fund, PNC shall provide the following services in its capacity as a
tender agent to the Fund:
(i) Establish accounts with respect to the Shares at the Depository
Trust Company for purposes of the Offer within two business
days after the date of the Offer to Purchase.
(ii) Receive all Letters of Transmittal and the accompanying stock
certificates sent or delivered at the addresses set forth in
the Offer. Accept a Notice of
13
<PAGE>
Guaranteed Delivery presented by hand, mail, telegram, telex or
facsimile transmission from an Eligible Institution which sets
forth the name of the tendering shareholder, the number of
Shares tendered, and that a Letter of Transmittal with the
stock certificates will be presented as required under the
Offer to Purchase;
(iii) Accept provisionally those tenders evidencing some deficiency
in execution. Make a reasonable attempt to inform the
presenters of the need for fulfillment of requirements. Make
any such tenders remaining deficient at the time of expiration
available for review by the Fund on the business day
immediately succeeding the Expiration Date, as defined in the
Offer to Purchase, and act in accordance with the Fund's
instructions regarding the disposition.
(iv) Accept tenders in cases where the Shares are registered in two
or more names only if signed by all named holders.
(v) Accept tenders signed by persons acting in a fiduciary or
representative capacity only if such capacity is shown on the
Letter of Transmittal and proper evidence of their authority to
act is submitted.
(vi) Accept tenders from persons other than the registered
shareholder provided that normal transfer requirements,
including any applicable transfer taxes as set forth in the
Letter of Transmittal, are fulfilled.
(vii) Accept partial tenders of Shares where so indicated in the
appropriate section of the Letter of Transmittal. Split up and
return untendered Shares to the holder as promptly as
practicable.
14
<PAGE>
(viii) Record on a daily log the Letters of Transmittal and stock
certificates and confirmations of book-entry transfer received,
maintain such Letters of Transmittal and stock certificates and
confirmations in a secure place, and prepare control ledgers of
Letters of Transmittal and stock certificates and confirmations
by item and number of Shares tendered.
(ix) Review Letters of Transmittal to determine if the box captioned
"Description of Shares Tendered" is filled in or completed with
a preprinted label and the box captioned "Sign Here" has been
executed on the first line.
(x) Handle withdrawals of tendered Shares, the return of
certificates for tendered Shares not accepted by the Fund, and
payment for tendered Shares which the Fund has accepted, in
accordance with the Fund's specific instructions given to PNC,
and consistently with the terms of the Offer to Purchase and
Letter of Transmittal; provided, that no payment for tendered
Shares shall be required until the Fund has deposited with PNC
all necessary funds (which the Fund agrees to do promptly after
the Fund's acceptance of tenders as described in the Offer to
Purchase).
(xi) Prepare and file tax forms.
(xii) Respond to inquiries from the Fund's shareholders and others in
regard to the mechanics of tendering Shares (or, as
appropriate, refer such inquiries to the Information Agent).
(xiii) Prepare a final list of all persons whose tenders are accepted,
and the number of Shares tendered.
15
<PAGE>
(xiv) Notify the Fund with respect to any Shares received subsequent
to the Expiration Date (as defined in the Offer to Purchase)
and accept instructions provided on behalf of the Fund with
respect to the disposition of such Shares.
(E) Cancellation and Reissuance of Shares. Upon receipt of appropriate
-------------------------------------
notification of cancellation and reissuance, PNC shall cancel, reissue
and credit the account of the investor or other recordholder with
Shares in accordance with standard industry practice.
(F) Dividends and Distributions. Upon receipt of a resolution of the
---------------------------
Fund's Board of Directors authorizing the declaration and payment of
dividends and distributions, PNC shall issue the dividends and
distributions in cash, or, if the resolution so provides, pay such
dividends and distributions in Shares. Such issuance or payment shall
be made after deduction and payment of the required amount of funds to
be withheld in accordance with any applicable tax laws or other laws,
rules or regulations. PNC shall mail to the Fund's shareholders and
the IRS and other appropriate taxing authorities such tax forms, or
permissible substitute forms, and other information relating to
dividends and distributions paid by the Fund (including designations
of the portions of distributions of net capital gain that are 20% rate
gain distributions and 28% rate gain distributions pursuant to IRS
Notice 97-64) as are required to be filed and mailed by applicable
law, rule or regulation within the time required thereby. PNC shall
prepare, maintain and file with the IRS and other appropriate taxing
authorities reports relating to all dividends above a stipulated
amount paid by the Fund to its shareholders as
16
<PAGE>
required by tax or other laws, rules or regulations
Pursuant to Written Instructions, PNC may arrange for the direct
payment of cash dividends and distributions to shareholders by the
Fund's custodian, instead of PNC Bank disbursing such funds to the
shareholder after receipt from the Fund's custodian.
PNC shall maintain and file with the United States Internal Revenue
Service and other appropriate taxing authorities reports relating to
all dividends above a stipulated amount (currently $10.00 accumulated
yearly dividends) paid by the Fund to its shareholders as required by
tax or other law, rule or regulation.
In accordance with the Prospectus and such procedures and controls as
are mutually agreed upon from time to time by and among the Fund, PNC
and the Fund's Custodian, PNC shall process applications from
Shareholders relating to the Fund's Dividend Reinvestment Plan
("Dividend Reinvestment Plan") and will effect purchases of Shares in
connection with and pursuant to the Dividend Reinvestment Plan.
(G) Communications to Shareholders. Upon timely Written Instructions, PNC
------------------------------
shall mail all communications by the Fund to its shareholders,
including:
(i) Reports to shareholders;
(ii) Confirmations of purchases and sales of fund shares;
(iii) Monthly or quarterly statements;
(iv) Dividend and distribution notices;
(v) Proxy material; and
(vi) Tax form information.
17
<PAGE>
If requested by the Fund, PNC will prepare and certify shareholder
lists in conjunction with proxy solicitations, receive and tabulate
the proxy cards for the meetings of the Fund's shareholders, and
supply personnel to serve as inspectors of election.
(H) Records. PNC shall maintain records of the accounts for each
-------
shareholder showing the following information:
(i) Name, address and United States Tax Identification or Social
Security number;
(ii) Number and class of shares held and number and class of shares
for which certificates, if any, have been issued, including
certificate numbers and denominations;
(iii) Historical information regarding the account of each
shareholder, including dividends and distributions paid, their
character (e.g. ordinary income, net capital gain (including
20% rate gain and 28% rate gain), exempt-interest, foreign tax
credit and dividends received deduction eligible) for federal
income tax purposes and the date and price (where applicable)
for all transactions in a shareholder's account;
(iv) Any stop or restraining order placed against a shareholder's
account;
(v) Any correspondence relating to the current maintenance of a
shareholder's account;
(vi) Information with respect to withholdings; and
(vii) Any information required in order for the transfer agent to
perform any calculations contemplated or required by this
Agreement.
(I) Shareholder Inspection of Stock Records. Upon requests from Fund
---------------------------------------
shareholders to inspect stock records, PNC will notify the Fund and
require instructions granting or denying each such request.
Unless PNC has acted contrary to the Fund's instructions, the Fund
agrees to release PNC from any liability for refusal of permission for
a particular shareholder to inspect the Fund's shareholder records.
(J) Withdrawal of Shares and Cancellation of Certificates. Upon receipt
-----------------------------------------------------
of Written
18
<PAGE>
Instructions, PNC shall cancel outstanding certificates surrendered by
the Fund to reduce the total amount of outstanding shares by the
number of shares surrendered by the Fund.
17. Authorized Shares. The Fund's authorized capital stock consists of Two
-----------------
Hundred Million (200,000,000) shares of Common Stock, par value $.001 per
Share. PNC shall record issues of all Shares and shall notify the Fund in
case any proposed issue of Shares by the Fund shall result in an over-issue
as defined by Section 8-210(a) of Article 8 of the Maryland Uniform
Commercial Code. In case any issue of Shares would result in such an over-
issue, PNC shall refuse to issue such Shares and shall not countersign and
issue certificates for such Shares.
18. Duration and Termination.
------------------------
(A) This Agreement shall be effective on the date first above written and
shall continue in effect for an initial period of two (2) years
("Initial Term"). Upon the expiration of the Initial Term, this
Agreement shall automatically renew for successive terms of one (1)
year ("Renewal Terms"); provided, that this Agreement may be
terminated by either party during a Renewal Term upon written notice
given at least ninety (90) days prior to termination. During either
the Initial Term or the Renewal Terms, this Agreement may also be
terminated on an earlier date by either party for cause.
(B) With respect to the Fund, cause includes, but is not limited to, (i)
PNC's material breach of this Agreement causing it to fail to
substantially perform its duties under this Agreement. In order for
such material breach to constitute "cause" under this Paragraph, PNC
must receive written notice from the Fund specifying the material
19
<PAGE>
breach and PNC shall not have corrected such breach within a 15-day
period; (ii) financial difficulties of PNC evidenced by the
authorization or commencement of a voluntary or involuntary bankruptcy
under the U.S. Bankruptcy Code or any applicable bankruptcy or similar
law, or under any applicable law of any jurisdiction relating to the
liquidation or reorganization of debt, the appointment of a receiver
or to the modification or alleviation of the rights of creditors; and
(iii) issuance of an administrative or court order against PNC with
regard to the material violation or alleged material violation of the
Securities Laws or other applicable laws related to its business of
performing transfer agency services;
(C) With respect to PNC, cause includes, but is not limited to, the
failure of the Fund to pay the compensation set forth in writing
pursuant to Paragraph 11 of this Agreement.
(D) Any notice of termination for cause in conformity with subparagraphs
(a), (b) and (c) of this Paragraph by the Fund shall be effective
thirty (30) days from the date of any such notice. Any notice of
termination for cause by PNC shall be effective 90 days from the date
of such notice.
(E) Upon the termination hereof, the Fund shall pay to PNC such
compensation as may be due for the period prior to the date of such
termination. In the event that the Fund designates a successor to any
of PNC's obligations under this Agreement, PNC shall, at the direction
and expense of the Fund, transfer to such successor all relevant
books, records and other data established or maintained by PNC
hereunder including, a certified list of the shareholders of the Fund
with name, address, and if provided, taxpayer identification or Social
Security number,
20
<PAGE>
and a complete record of the account of each shareholder. To the
extent that PNC incurs expenses related to a transfer of
responsibilities to a successor, other than expenses involved in PNC's
providing the Fund's books and records described in the preceding
sentence to the successors, PNC shall be entitled to be reimbursed for
such extraordinary expenses, including any out-of-pocket expenses
reasonably incurred by PNC in connection with the transfer.
(F) Any termination effected pursuant to this Paragraph shall not affect
the rights and obligations of the parties under Paragraph 12 hereof.
(G) Notwithstanding the foregoing, this Agreement shall terminate with
respect to the Fund upon the liquidation, merger, or other dissolution
of the Fund or upon the Fund's ceasing to be a registered investment
company.
19. Registration as a Transfer Agent. PNC represents that it is currently
--------------------------------
registered with the appropriate federal agency for the registration of
transfer agents, or is otherwise permitted to lawfully conduct its
activities without such registration and that it will remain so registered
or able to so conduct such activities for the duration of this Agreement.
PNC agrees that it will promptly notify the Fund in the event of any
material change in its status as a registered transfer agent. Should PNC
fail to be registered with the SEC as a transfer agent at any time during
this Agreement, and such failure to register does not permit PNC to
lawfully conduct its activities, the Fund may, on written notice to PNC,
terminate this Agreement upon five days written notice to PNC.
20. Notices. All notices and other communications, including Written
-------
Instructions, shall be in writing or by confirming telegram, cable, telex
or facsimile sending device. Notices shall be addressed (a) if to PNC, c/o
PFPC Inc. at 400 Bellevue Parkway, Wilmington,
21
<PAGE>
Delaware 19809; (b) if to the Fund, at the address of the Fund, Attn:
President or (c) if to neither of the foregoing, at such other address as
shall have been given by like notice to the sender of any such notice or
other communication by the other party. If notice is sent by confirming
telegram, cable, telex or facsimile sending device during regular business
hours, it shall be deemed to have been given immediately; if sent during a
time other than regular business hours, such notice shall be deemed to have
been given at the opening of the next business day. If notice is sent by
first-class mail, it shall be deemed to have been given three days after it
has been mailed. If notice is sent by messenger, it shall be deemed to have
been given on the day it is delivered. All postage, cable, telegram, telex,
and facsimile sending device charges arising from the sending of a notice
hereunder shall be paid by the sender.
21. Amendments. This Agreement, or any term thereof, may be changed or waived
----------
only by a written amendment, signed by the party against whom enforcement
of such change or waiver is sought.
22. Delegation; Assignment. PNC may assign its rights and delegate its duties
----------------------
hereunder to any wholly-owned direct or indirect subsidiary of PNC Bank,
National Association or PNC Bank Corp., provided that (i) PNC gives the
Fund thirty (30) days' prior written notice; (ii) the delegate (or
assignee) is qualified to act as a transfer agent and registrar with
respect to securities listed on any national securities exchange on which
Shares of the Fund are listed ("Exchange"); (iii) if required by the
Exchange, PNC shall give notice of the delegation to the Exchange; (iv) the
delegate (or assignee) agrees with PNC and the Fund to comply with all
relevant provisions of the Securities Laws; and (v) PNC and such delegate
(or assignee) promptly provide such information as the Fund may request,
22
<PAGE>
and respond to such questions as the Fund may ask, relative to the
delegation (or assignment), including (without limitation) the capabilities
of the delegate (or assignee). The assignment and delegation of any of
PNC's duties under this paragraph shall not relieve PNC of any of its
responsibilities or liabilities under this Agreement.
23. Counterparts. This Agreement may be executed in two or more counterparts,
------------
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
24. Further Actions. Each party agrees to perform such further acts and
---------------
execute such further documents as are necessary to effectuate the purposes
hereof.
25. Miscellaneous.
-------------
(A) Entire Agreement. This Agreement embodies the entire agreement and
----------------
understanding between the parties and supersedes all prior agreements
and understandings relating to the subject matter hereof, provided
that the parties may embody in one or more separate documents their
agreement, if any, with respect to delegated duties and Oral
Instructions.
(B) Captions. The captions in this Agreement are included for convenience
--------
of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
(C) Governing Law. This Agreement shall be deemed to be a contract made
-------------
in Delaware and governed by Delaware law, without regard to principles
of conflicts of law.
(D) Partial Invalidity. If any provision of this Agreement shall be held
------------------
or made invalid by a court decision, statute, rule or otherwise, the
remainder of this
23
<PAGE>
Agreement shall not be affected thereby.
(E) Successors and Assigns. This Agreement shall be binding upon and
----------------------
shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
(F) Facsimile Signatures. The facsimile signature of any party to this
--------------------
Agreement shall constitute the valid and binding execution hereof by
such party.
24
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
PNC BANK, NATIONAL ASSOCIATION
By:
-----------------------------------------
Title:
--------------------------------------
MANAGED HIGH YIELD PLUS FUND INC.
By:
-----------------------------------------
Title:
--------------------------------------
25
<PAGE>
AUTHORIZED PERSONS APPENDIX
Name (Type) Signature
- ----------------------------- ---------------------------------
- ----------------------------- ---------------------------------
- ----------------------------- ---------------------------------
- ----------------------------- ---------------------------------
- ----------------------------- ---------------------------------
- ----------------------------- ---------------------------------
- ----------------------------- ---------------------------------
- ----------------------------- ---------------------------------
- ----------------------------- ---------------------------------
26
<PAGE>
KIRKPATRICK & LOCKHART LLP
1800 MASSACHUSETTS AVENUE, N.W.
WASHINGTON, D. C. 20036-1800
TELEPHONE 202-778-9000
June 24, 1998
Managed High Yield Plus Fund Inc.
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
You have requested our opinion, as counsel to Managed High Yield Plus Fund
Inc. ("Company"), as to certain matters regarding the issuance of those shares
of the Company's common stock, par value $.001 per share, that currently are
being registered under the Securities Act of 1933, as amended ("1933 Act")
pursuant to the Company's registration statement on Form N-2 (File No. 333-
51017) (the "Registration Statement") in the amount set forth under "Amount
Being Registered" on the facing page of the Registration Statement ("Shares").
As such counsel, we have examined certified or other copies, believed by us
to be genuine, of the Company's Articles of Incorporation and by-laws and such
resolutions and minutes of meetings of the Company's Board of Directors as we
have deemed relevant to our opinion, as set forth herein. Our opinion is limited
to the laws and facts in existence on the date hereof, and it is further limited
to the laws (other than the conflict of law rules) of the State of Maryland that
in our experience are normally applicable to the issuance of shares by
corporations and to the 1933 Act, the Investment Company Act of 1940, as amended
("1940 Act") and the regulations of the Securities and Exchange Commission
("SEC") thereunder.
Based on the foregoing, we are of the opinion that the issuance of the
Shares has been duly authorized by the Company and that, when issued and sold in
accordance with the terms contemplated by the Registration Statement, including
receipt by the Company of full payment for the Shares and compliance with the
1933 Act and the 1940 Act, the Shares will have been validly issued, fully paid
and non-assessable.
We hereby consent to this opinion being an exhibit to the Registration
Statement when it is filed with the SEC and to the reference to our firm in the
statement of additional information that is being filed as part of the
Registration Statement.
Very truly yours,
/s/ Kirkpatrick & Lockhart LLP
<PAGE>
[Name of Investment Company]
- ----------------------------
[Date]
Page 2
Kirkpatrick & Lockhart LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference made to our firm under the caption "Auditors" in the
Statement of Additional Information and to the use of our report dated June 22,
1998 in this Registration Statement (Form N-2 No. 333-51017) of Managed High
Yield Plus Fund Inc.
ERNST & YOUNG LLP
New York, New York
June 22, 1998
<PAGE>
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, NY 10019
Dianne E. O'Donnell
Senior Vice President
Mitchell Hutchins
May 13, 1998
Managed High Yield Plus Fund Inc.
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
We are writing to confirm the purchase of one (1) share of common stock of
Managed High Yield Plus Fund Inc., which we have purchased from you at a price
of $15. This is to advise you that we have purchased the share for investment
only with no present intention of selling such share, and we do not now have any
intention of selling such share.
Sincerely,
/s/ Dianne E. O'Donnell
Dianne E. O'Donnell
Senior Vice President
<PAGE>
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, NY 10019
Dianne E. O'Donnell
Senior Vice President
Deputy General Counsel
MITCHELL HUTCHINS
June 19, 1998
Managed High Yield Plus Fund Inc.
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
We are writing to confirm the purchase of an additional 6,667 shares of
common stock of Managed High Yield Plus Fund Inc., which we have purchased from
you at a price of $15. This is to advise you that we have purchased these
shares, and the single share that we previously purchased, for investment only
with no present intention of selling any such shares, and we do not now have any
intention of selling any such shares.
Sincerely,
/s/ Dianne E. O'Donnell
Dianne E. O'Donnell
Senior Vice President
