MANAGED HIGH YIELD PLUS FUND INC, N-2/A, 1998-05-26

MANAGED HIGH YIELD PLUS FUND INC
N-2/A, 1998-05-26

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<PAGE>

As filed with the Securities and Exchange Commission on May 26, 1998
Securities Act File No. 333-51017
Investment Company Act File No. 811-08765
================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

---------------------
FORM N-2
Registration Statement Under the Securities Act of 1933 [X]
Pre-Effective Amendment No. 1 [X]
Post-Effective Amendment No.
and
Registration Statement Under the Investment Company Act of 1940 [X]
Amendment No. 1 [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

=======================================================================================================================
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 4,600,000 $15.00 $69,000,000 $20,355
value)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Includes 600,000 shares which may be offered by the Underwriters
pursuant to an option to cover over allotments.
(2) 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

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

Part B Statement of
Item Number Caption Additional Information
----------- ------- ----------------------
<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>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED MAY 26, 1998
SHARES
MANAGED HIGH YIELD PLUS FUND INC.
------------

Managed High Yield Plus Fund Inc. ("Fund") is a newly organized, diversified,
closed-end management investment company. The Fund's primary investment
objective is to seek high income. Its secondary investment objective is to seek
capital appreciation. The Fund will seek to achieve these objectives by
investing primarily in a professionally managed, diversified portfolio of
lower-rated, income-producing debt and related equity securities. 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 Fund has applied to list the Shares 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 , 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>
===============================================================================
Price to Sales Proceeds to
Public Load (1) Fund (2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....................................... $15.00 NONE $15.00
- -------------------------------------------------------------------------------
Total........................................... $ NONE $
- -------------------------------------------------------------------------------
Total Assuming Full Exercise of Over-Allotment
Option (3)..................................... $ NONE $
===============================================================================
</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 , 1998.

------------

PAINEWEBBER INCORPORATED

------------

THE DATE OF THIS PROSPECTUS IS JUNE , 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 employed. 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) Mitchell Hutchins (not the Fund) will pay a commission to the Underwriters
from its own assets in the amount of % 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 60-day option granted by the Fund to the
Underwriters to purchase up to additional Shares, on the same terms,
solely to cover over-allotments. See "Underwriting."

2
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and in the Statement
of Additional Information ("SAI"). Investors should carefully consider
information set forth under the heading "Special Considerations and Risk
Factors" below.

The Fund................ Managed High Yield Plus Fund Inc. ("Fund") is a newly
organized, diversified, closed-end management
investment company. See "The Fund."

The Offering............ The Fund is offering shares of common stock, par
value $.001 per share ("Shares"), through a group of
underwriters ("Underwriters") led by 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 sale of Shares in this offering,
Mitchell Hutchins (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

3
<PAGE>

Hutchins expects may appreciate in value as a result
of favorable developments affecting the business or
prospects of the issuer, which may improve the
issuer's financial condition and credit rating, or
as a result of declines in long-term interest rates.

Lower-rated debt securities (commonly known as "junk
bonds") are subject to special risks, including
greater price volatility and a greater risk of loss
of principal and non-payment of 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.

Mitchell Hutchins believes that the lower-rated
securities markets offer opportunities for active
management to increase portfolio value. In selecting
investments for the Fund, Mitchell Hutchins will
rely on the expertise of the Fund's portfolio
manager, as well as his team of analysts. The
investment process will incorporate three key steps:
industry selection, company selection and security
selection. Industry selection consists of an
analysis of economic factors, industry dynamics and
yield spreads to determine which sectors of the
market are the most attractive for investment.
Company selection combines Mitchell Hutchins'
proprietary financial forecasting model with
fundamental credit analysis to determine which
companies are the most attractive investment
candidates. Consulting third party research and
conducting company visits are also key components in
this selection process. A security selection process
is done to determine the appropriate type of
security (such as lower-rated bond, common stock,
etc.). Final security selection will depend on
relative values based on a company's anticipated
cash flow, interest and asset coverage, leverage and
earnings prospects. Mitchell Hutchins' portfolio
management team will also utilize a disciplined sell
strategy under which a security will be sold when
the income or total return potential declines
relative to its risk level, or when the security
becomes overvalued when compared to its industry.

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, and lending of portfolio securities, and may
purchase illiquid securities, and when-issued and
delayed delivery securities. The Fund may also
invest in derivative instruments, including options,
futures contracts, swaps and forward currency
contracts.

The Fund may implement various temporary, defensive
strategies at times when Mitchell Hutchins
determines that conditions in the markets make
pursuing the Fund's basic investment strategy
inconsistent with the best interests of its
Shareholders. For example, when changing economic
conditions or other factors cause the yield
difference between lower-rated and higher-rated
securities to narrow, the Fund may purchase higher-
rated securities if Mitchell Hutchins believes that
the risk of loss of income and principal may be
reduced substantially with only a relatively small
reduction in yield. In addition, under unusual
market or economic conditions or for temporary or
defensive or liquidity purposes, the Fund may invest
up to 100% of its total assets in higher-rated debt
securities, such as

5
<PAGE>

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.

See "Investment Objectives and Policies," "Other
Investment Practices," "Special Considerations and
Risk Factors" and "Taxation." See also "Appendix--
Description of Bond Ratings."

Investment Adviser and
Administrator.......... Mitchell Hutchins, a wholly owned asset management
subsidiary of PaineWebber, serves as the Fund's
investment adviser and administrator. Mitchell
Hutchins provides investment advisory and portfolio
management services to investment companies, pension
funds and other institutional, corporate and
individual clients. As of April 30, 1998, Mitchell
Hutchins served as investment adviser or sub-adviser
to 31 registered investment companies with 68
separate portfolios having aggregate assets of
approximately $39.3 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 Fund has applied to list the Shares 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."

6
<PAGE>

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 of the Fund through PaineWebber
in this offering will have an investment option
consisting of the right to reinvest the net proceeds
from a sale 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. 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

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

9
<PAGE>

indebtedness or in the dividend rates on any
preferred stock issued by the Fund may adversely
affect the return to Shareholders. To the extent the
income or capital appreciation derived from
securities purchased with funds received from
leverage exceeds the cost of leverage, the Fund's
return will be greater than if leverage had not been
used. Conversely, if the income or capital
appreciation from the securities purchased with such
funds is not sufficient to cover the cost of
leverage, the return to the Fund will be less than
if leverage had not been used, and therefore the
amount available for distribution to Shareholders as
dividends and other distributions will be reduced.
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.

10
<PAGE>

Hedging and Other Strategies Involving Derivative
Instruments. The Fund may invest in derivative
instruments which entail special risks. See "Other
Investment Practices--Hedging and Other Strategies
Using Derivative Instruments" and in the SAI,
"Hedging and Other Strategies Using Derivative
Instruments."

Market Price and Net Asset Value of Shares. 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," and "Description of Capital Stock."

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......................... 0.70%
Interest Payments on Borrowed Funds................................. None
Other Expenses...................................................... 0.32%
----
Total Annual Expenses.............................................. 1.02%
====
</TABLE>
- --------

(1) See "Management of the Fund" for additional information. In the event the
Fund utilizes leverage by borrowing in an amount equal to approximately 25%
of the Fund's total assets (including the amount obtained from leverage),
it is estimated that, as a percentage of net assets attributable to the
Shares, the Investment Advisory and Administrative Fee would be 0.93%,
Interest Payments on Borrowed Funds (assuming an annualized interest rate
of 6.15% would be 2.05%, Other Expenses would be 0.32% and Total Annual
Fund Expenses would be 3.30%. "Other Expenses" have been estimated. The
Fund may utilize leverage up to 33 1/3% of the Fund's total assets
(including the amount obtained from the leverage). See "Special
Considerations and Risk Factors--Leverage" and "Other Investment Policies--
Leverage."

EXAMPLE

An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Fund, assuming (i) a 5% annual return and (ii)
reinvestment of all dividends and other distributions at net asset value:

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Assuming No Leverage............... $10 $ 30 $ 52 $114
Assuming 25% Leverage.............. $33 $100 $168 $351
</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 the Example of
a 5% annual return and reinvestment at net asset value are required by
regulations of the Securities and Exchange Commission ("SEC") applicable to all
closed-end investment companies; the assumed 5% annual return is not a
prediction of, and does not represent, the projected or actual performance of
the Shares. In addition, while this Example assumes reinvestment of all
dividends and other distributions at net asset value, participants in the
Fund's Dividend Reinvestment Plan will receive Shares at the market price in
effect at that time if that price is lower than net asset value.

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 six months from the closing of the initial public offering.
Pending such investment, the proceeds may be invested in U.S. dollar-
denominated, high quality, short-term instruments. A portion of the Fund's
organizational expenses has been advanced by Mitchell Hutchins and will be
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, Mitchell
Hutchins (not the Fund) will pay a commission to the Underwriters from its own
assets. Mitchell Hutchins (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.

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.

13
<PAGE>

consists of an analysis of economic factors, industry dynamics and yield
spreads to determine which sectors of the market are the most attractive for
investment. Company selection combines Mitchell Hutchins' proprietary
financial forecasting model with fundamental credit analysis to determine
which companies are the most attractive investment candidates. Consulting
third party research and conducting company visits are also key components in
this selection process. A security selection process is done to determine the
appropriate type of security (such as lower-rated bond, common stock, etc.).
Final security selection will depend on relative values based on a company's
anticipated cash flow, interest and asset coverage, leverage and earnings
prospects. Mitchell Hutchins' portfolio management team will also utilize a
disciplined sell strategy under which a security will be sold when the 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.

15
<PAGE>

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--
Asset-Backed Securities" and "--Mortgage Backed Securities" in the SAI.

TEMPORARY AND DEFENSIVE STRATEGIES

The Fund may implement various temporary "defensive" strategies at times
when Mitchell Hutchins determines that conditions in the markets make pursuing
the Fund's basic investment strategy inconsistent with the best interests of
its Shareholders. For example, when changing economic conditions or other
factors cause the yield difference between lower-rated and higher-rated
securities to narrow, the Fund may purchase higher-rated securities if
Mitchell Hutchins believes that the risk of loss of income and principal may
be reduced substantially with only a relatively small reduction in yield. In
addition, under unusual market or economic conditions or for temporary or
defensive or liquidity purposes, the Fund may invest up to 100% of its total
assets in securities issued or guaranteed by the U.S. government or its
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 employed.

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 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.

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 "Investment Policies and
Restrictions--Leverage" in the SAI.

19
<PAGE>

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 on demand and
at a price reflecting a market rate of interest unrelated to the coupon rate
or maturity of the purchased securities. Although repurchase agreements carry
certain risks not associated with direct investments in securities, including
possible decline in the market value of the underlying securities and delays
and costs to the Fund if the other party to the repurchase agreement becomes
bankrupt, the Fund intends to enter into repurchase agreements only with
banks, 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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<PAGE>

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 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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<PAGE>

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 such shares in the market, general market and economic
conditions, changes in the Fund's net asset

value and other factors beyond the control of the Fund. 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. 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 employed.

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.

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.

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 distribution on
the Shares, or purchase any of its Shares (through tender offers or
otherwise), unless it would satisfy this 300% asset coverage after deducting
the amount of the dividend, 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 distribution on its Shares or
purchase any of its Shares (through tender offers or otherwise), unless it
would satisfy this 200% asset coverage after deducting the amount of the
dividend, 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. 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 registered 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 either 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 of 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 OID and zero coupon 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, 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.

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<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 June ,
1998 ("Advisory Contract"). Mitchell Hutchins' principal business address is
1285 Avenue of the Americas, New York, New York 10019. Mitchell Hutchins is a
wholly owned asset management subsidiary of PaineWebber, which is a wholly
owned subsidiary of Paine Webber Group Inc., a publicly held financial
services holding company. Mitchell Hutchins provides investment advisory and
portfolio management services to investment companies, pension funds and other
institutional, corporate and individual clients. As of April 30, 1998,
Mitchell Hutchins served as investment adviser or sub-adviser to 31 registered
investment companies with 68 separate portfolios having aggregate assets of
approximately $39.3 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
obtains 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 financial
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 stockholder meetings, fees and expenses relating to
registration of the Shares, taxes and governmental fees, fees and expenses of
the directors, costs of obtaining insurance, expenses of printing and
distributing stockholder materials, organizational expenses and extraordinary
expenses, including costs or losses in any litigation.

In accordance with procedures adopted by the 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
$936 million in high-yield assets, as of April 30, 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 of Directors 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), 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 serves as agent for the Shareholders in administering the
Plan. After the Fund declares a dividend or determines to make any other
distribution, the Transfer Agent, as agent for the

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 a "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 is 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 pays a pro rata share of brokerage commissions
incurred with respect to the Transfer Agent's open market purchases of Shares
in connection with the reinvestment of 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."

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<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 of the Fund at less than they could otherwise
purchase them and will have Shares with a cash value greater than the value of
any cash 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 make 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 distributions in cash.
An election will be effective only for distributions declared and having a
record date at least ten days after the date on which the election is
received.

Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan with
respect to any dividend 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 Fund 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 Fund shares) are taxable to its Shareholders
as long-term capital gain, regardless of how long they have held their Fund
shares. Under the Taxpayer Relief Act of 1997, different maximum tax rates
apply to a non-corporate taxpayer's net capital gain depending on the
taxpayer's holding period and marginal rate of federal income tax--generally,
28% for gain recognized on capital assets held for more than one year but not
more than 18 months and 20% (10% for taxpayers in the 15% marginal tax
bracket) for gain recognized on capital assets held for more than 18 months.
The Fund may divide each net capital gain distribution into a 28% rate gain
distribution and a 20% rate gain distribution (in accordance with the Fund's
holding periods for the securities it sold that generated the distributed
gain), in which event its Shareholders must treat those portions accordingly.
For a discussion of the allocation of distributions of net capital gains
between Shareholders and holders of any preferred stock that the Fund might
issue, see, "Taxation" in the SAI.

33
<PAGE>

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 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.

34
<PAGE>

The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Fund and its Shareholders. See the SAI
for a further discussion. There may be other federal, state or local tax
considerations applicable to a particular investor. Prospective stockholders
are urged to consult their tax advisers.

UNDERWRITING

The Underwriters named below (the "Underwriters"), acting through
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 (the "Underwriting Agreement"), to purchase from the Fund the number
of Shares set forth opposite their respective names. The Underwriters are
committed to purchase Shares if any are purchased.

<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITERS SHARES
------------ ------ ---
<S> <C> <C> <C>
PaineWebber Incorporated...................................
----
Total..................................................
====
</TABLE>

The Fund has granted to the Underwriters an option, exercisable for 60 days
from the date of this Prospectus to purchase up to an additional Shares to
cover over-allotments, if any, at the initial offering price. The Underwriters
may exercise such option solely for the purpose of covering over-allotments
incurred in the sale 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,
Mitchell Hutchins (not the Fund) from its own assets has agreed to pay a
commission to the Underwriters in the amount of $ per Share ( % of the
public offering price per Share) or an aggregate amount of $ ($ assuming
full exercise of the over-allotment option) for all Shares covered by this
Prospectus. Such payment will be the legal obligation of Mitchell Hutchins and
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 $ per Share from such payment received from
Mitchell Hutchins to selected dealers who sell the Shares and that such
dealers may reallow a concession of up to $ 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 Fund has applied to list its Shares 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.

35
<PAGE>

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
Shares during a period of time following the initial offering date. Included
in these actions is the withholding of the concession and other payments to
dealers in connection with Shares which were sold by such dealers and which
are repurchased for the account of the Underwriters during such period. In
addition, physical delivery of certificates representing Shares is required to
transfer ownership Shares for a certain period. 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 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 makes
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 the delivery of the
Shares is rendered impracticable or inadvisable because (1) trading in the
equity securities of the Fund is suspended by the SEC, by an exchange that
lists the Shares, or by the National Association of Securities Dealers
Automated Quotation National Market System, (2) additional material
governmental restrictions, not in force on the date of the Underwriting
Agreement, have been imposed upon trading in securities generally or trading
in securities generally has been suspended on any U.S. securities exchange, or
a general banking moratorium has been established by Federal or New York
authorities, or (3) any outbreak or material escalation of hostilities or
other calamity or crisis occurs, the effect of which is such as to make it
impracticable to market any or all of the Shares. The Underwriting Agreement
also may be terminated if any of the conditions specified in the Underwriting
Agreement have not been fulfilled when and as required by such agreement.

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."

36
<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.

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 of the Fund through PaineWebber in this offering will
have an investment option consisting of the right to reinvest the net proceeds
from a sale 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, if the following 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

37
<PAGE>

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 from any income tax that may be payable on the
sale.

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 stockholders of the Fund. The Board may
at any time, however, decide that the Fund should not repurchase Shares or
make a tender offer. The Fund may borrow to finance repurchases and tender
offers. Interest on such borrowings will reduce the Fund's net income. See
"Additional Information--Share Repurchases and Tenders" in the SAI.

There is no assurance that 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

38
<PAGE>

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.

CONVERSION TO OPEN-END INVESTMENT COMPANY

The Fund's 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 stockholders to amend the
Articles of Incorporation. These provisions of the Articles of Incorporation
may be regarded as "anti-takeover" provisions. Under Maryland law and the
Fund's Articles of Incorporation, the affirmative vote of the holders of at
least a majority of the votes entitled to be cast is required for the
consolidation of the Fund with another corporation, a merger of the Fund with
or into another corporation (except for certain mergers in which the Fund is
the

39
<PAGE>

successor), a statutory share exchange in which the Fund is not the successor,
a sale or transfer of all or substantially all of the Fund's assets, the
dissolution of the Fund and any amendment to the Fund's Articles of
Incorporation. In addition, the affirmative vote of the holders of at least 66
2/3% (which is higher than that required under Maryland law or the 1940 Act)
of the outstanding shares of the Fund's capital stock is required generally to
authorize any of the following transactions or to amend the provisions of the
Articles of Incorporation relating to such transactions:

(1) merger, consolidation or statutory share exchange of the Fund with or
into any other corporation;

(2) issuance of any securities of the Fund to any person or entity for
cash;

(3) sale, lease or exchange of all or any substantial part of the assets
of the Fund to any entity or person (except assets having an aggregate
market value of less than $1,000,000); or

(4) sale, lease or exchange to the Fund, in exchange for securities of
the Fund, of any assets of any entity or person (except assets having an
aggregate fair market value of less than $1,000,000)

if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of more than 5% of the outstanding shares of
the Fund (a "Principal Shareholder"). A similar vote also would be required
for any amendment of the Articles of Incorporation to convert the Fund to an
open-end investment company by making any class of the Fund's capital stock a
"redeemable security," as that term is defined in the 1940 Act. Such vote
would not be required with respect to any of the foregoing transactions,
however, when, under certain conditions, the Board of Directors approves the
transaction, although in certain cases involving merger, consolidation or
statutory share exchange or sale of all or substantially all of the Fund's
assets or the conversion of the Fund to an open-end investment company, the
affirmative vote of the holders of a majority of the outstanding shares of the
Fund's capital stock would nevertheless be required. Reference is made to the
Articles of Incorporation of the Fund, on file with the SEC, for the full text
of these provisions.

The provisions of the Articles of Incorporation described above and the
Fund's right to repurchase or make a tender offer for its Shares could have
the effect of depriving the Shareholders of opportunities to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund in a tender offer or similar
transaction. See "Description of Capital Stock--Share Repurchases and Tender
Offers." The overall effect of these provisions is to render more difficult
the accomplishment of a merger or the assumption of control by a Principal
Shareholder. They provide, however, the advantage of potentially requiring
persons seeking control of the Fund to negotiate with its management regarding
the price to be paid and facilitating the continuity of the Fund's management,
investment objectives and policies. The Fund's Board 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 employs foreign sub-custodians, approved by the
Fund's 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, is the Fund's transfer and dividend
disbursing agent and registrar.

40
<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.......................................
Hedging and Other Strategies Using Derivative Instruments..................
Directors and Officers.....................................................
Control Persons and Principal Holders of Securities........................
Investment Advisory Arrangements...........................................
Portfolio Transactions.....................................................
Net Asset Value Shares.....................................................
Market Data................................................................
Taxation...................................................................
Additional Information.....................................................
Independent Auditor's Report...............................................
Statement of Assets, Liabilities and Capital...............................
</TABLE>

41
<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.

42
<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

43
<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.

44
<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 Consideration 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............................................... 37
Custodian, Transfer and Dividend
Disbursing Agent and Registrar............................................ 40
Further Information........................................................ 41
Appendix................................................................... 42
</TABLE>

---------------

UNTIL , 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.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

MANAGED HIGH YIELD
PLUS FUND INC.

---------------

PROSPECTUS

---------------

PAINEWEBBER INCORPORATED

---------------

, 1998

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT +
+CONSTITUTE A PROSPECTUS. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION

PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION

DATED MAY 26, 1998

MANAGED HIGH YIELD PLUS FUND INC.

1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019

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, serves as investment adviser and
administrator of the Fund. This Statement of Additional Information is not a
prospectus and should be read only in conjunction with the Fund's Prospectus,
dated June , 1998. Capitalized terms not otherwise defined herein have the
same meanings as in the Prospectus. A copy of the Prospectus may be obtained by
calling your investment executive or by calling toll-free (800) 852-4750.

The date of this Statement of Additional Information is June 1998.

INVESTMENT POLICIES AND RESTRICTIONS

The following supplements the information contained in the Prospectus
concerning the Fund's investment policies and limitations.

YIELD FACTORS AND RATINGS

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

2
<PAGE>

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 ("ARM") securities are mortgage-backed
securities that represent a right to receive interest payments at a rate that
is adjusted to reflect the interest earned on a pool of mortgage loans bearing
variable or adjustable rates of interest (such mortgage loans are referred to
as "ARMs"). Floating rate mortgage-backed securities are classes of mortgage-
backed securities that have been structured to represent the right to receive
interest payments at rates that fluctuate in accordance with an index but that
generally are supported by pools comprised of fixed-rate mortgage loans.
Because the interest rates on ARM and floating rate mortgage-backed securities
are reset in response to changes in a specified market index, the values of
such securities tend to be less sensitive to interest rate fluctuations than
the values of fixed-rate securities. As a result, during periods of rising
interest rates, ARM securities generally do not decrease in value as much as
fixed rate securities. Conversely, during periods of declining rates, ARM
securities generally do not increase in value as much as fixed rate
securities. ARM securities represent a right to receive interest payments at a
rate that is adjusted to reflect the interest earned on a pool of ARMs. ARMs
generally specify that the borrower's mortgage interest rate may not be
adjusted above a specified lifetime maximum rate or, in some cases, below a
minimum lifetime rate. In addition, certain ARMs specify limitations on the
maximum amount by which the mortgage interest rate may adjust for any single
adjustment period. ARMs also may limit changes in the maximum amount by which
the borrower's monthly payment may adjust for any single adjustment period. In
the event that a monthly payment is not sufficient to pay the interest
accruing on the ARM, any such excess interest is added to the mortgage loan
("negative amortization"), which is repaid through future payments. If the
monthly payment exceeds the sum of the interest accrued at the applicable
mortgage interest rate and the principal payment that would have been
necessary to amortize the outstanding principal balance over the remaining
term of the loan, the excess reduces the principal balance of the ARM.
Borrowers under ARMs experiencing negative amortization may take longer to
build up their equity in the underlying property and may be more likely to
default.

ARMs also may be subject to a greater rate of prepayments in a declining
interest rate environment. For example, during a period of declining interest
rates, prepayments on ARMs could increase because the availability of fixed
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 secured by the issuer's pledge of its faith, credit and
taxing power for the payment of principal and interest. Revenue bonds are
payable from the revenue derived from a particular facility or class of
facilities, or, in some cases, from the proceeds of a special excise or other
specific revenue source, but not from general taxing power. Industrial
development bonds, in most cases, are revenue bonds that generally do not
carry the pledge of the credit of the issuing municipality, but generally are
guaranteed by the corporate entity on whose behalf they are

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issued. Notes are short-term instruments which are obligations of the issuing
municipalities or agencies and are sold in anticipation of a bond sale,
collection of taxes or receipt of other revenues. Municipal obligations
include municipal lease/purchase agreements which are similar to installment
purchase contracts for property or equipment issued by municipalities.

Municipal obligations bear fixed, floating or variable rates of interest.
Certain municipal obligations are subject to redemption at a date earlier than
their stated maturity pursuant to call options, which may be separated from
the related municipal obligations and purchased and sold separately. The Fund
also may acquire call options on specific municipal obligations. The Fund
generally would purchase these call options to protect the Fund from the
issuer of the related municipal obligation redeeming, or other holder of the
call option from calling away, the municipal obligation before maturity.

While, in general, municipal obligations are tax-exempt securities having
relatively low yields as compared to taxable, non-municipal obligations of
similar quality, certain municipal obligations are taxable obligations,
offering yields comparable to, and in some cases greater than, the yields
available on other permissible Fund investments. 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.

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

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<PAGE>

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.

(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

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<PAGE>

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 exercise of the option during the option term, to buy the
underlying security or currency at the exercise price.

Options on Indices of Debt Securities. An index assigns relative values to
the securities included in the index and fluctuates with changes in the market
values of such securities. Index options operate in the same way as more
traditional options except that exercises of index options are effected with
cash payments and do not involve delivery of securities. Thus, upon exercise
of an index option, the purchaser will realize, and the writer will pay, an
amount based on the difference between the exercise price and the closing
price of the index.

Debt and Equity Security Index Futures Contracts. An index futures contract
is a bilateral agreement pursuant to which one party agrees to accept, and the
other party agrees to make, delivery of an amount of cash equal to a specified
dollar amount times the difference between the index value at the close of
trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the securities comprising the index
is made; generally contracts are closed out prior to the expiration date of
the contract.

Debt Security and Currency Futures Contracts. A debt security futures
contract is a bilateral agreement pursuant to which one party agrees to
accept, and the other party agrees to make, delivery of the specific type of
debt security or currency called for in the contract at a specified future
time and at a specified price. Although such futures contracts by their terms
call for actual delivery or acceptance of debt securities or currency, in most
cases the contracts are closed out before the settlement date without the
making or taking of delivery.

Options on Futures Contracts. Options on futures contracts are similar to
options on securities, except that an option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security or
currency, at a specified price at any time during the option term. Upon
exercise of the option, the delivery of the futures position to the holder of
the option will be accompanied by delivery of the accumulated balance that
represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the future. The writer of an option, upon
exercise, will assume a short position in the case of a call, and a long
position in the case of put.

Forward Currency Contracts. A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by
the parties, at a price set at the time the contract is entered into.

GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS

Hedging Transactions can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Derivative Instrument
intended partially or fully to offset potential declines in the value of one
or more investments held in the Fund's portfolio. Thus, in a short hedge, the
Fund takes a position in a Derivative Instrument whose price is expected to
move in the opposite direction of the price of the investment being hedged.
For example, the Fund might purchase a put option on a security to hedge
against a potential decline in the value of that security. If the price of the
security declined below the exercise price of the put, the Fund could exercise
the put and thus limit its loss below the exercise price to the premium paid
plus transaction costs. In the alternative, because the value of the put
option can be expected to increase as the value of the

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<PAGE>

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 will be limited by tax considerations. See "Taxation."

In addition to the products, strategies and risks described below and in the
Prospectus, Mitchell Hutchins may discover additional opportunities in
connection with Derivative Instruments. These new opportunities may become
available as regulatory authorities broaden the range of permitted
transactions and as Derivative Instruments and techniques are developed.
Mitchell Hutchins may utilize these opportunities to the extent that they are
consistent with the Fund's investment objectives and permitted by the Fund's
investment limitations and applicable regulatory authorities. The Fund's
Prospectus or Statement of Additional Information will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.

SPECIAL RISKS OF STRATEGIES USING DERIVATIVE INSTRUMENTS

The use of Derivative Instruments involves special considerations and risks,
as described below. Risks pertaining to particular Derivative Instruments are
described in the sections that follow.

(1) Successful use of most Derivative Instruments depends upon Mitchell
Hutchins' ability to predict movements of the overall securities, currencies
and interest rate or currency exchange markets, which requires different
skills than predicting changes in the prices of individual securities. While
Mitchell Hutchins is experienced in the use of Derivative Instruments, there
can be no assurance that any particular hedging strategy adopted will succeed.

(2) There might be imperfect correlation, or even no correlation, between
price movements of a Derivative Instrument and price movements of the
investments being hedged. For example, if the value of a Derivative Instrument
used in a short hedge increased by less than the decline in value of the
hedged investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors affecting the markets in which
Derivative Instruments are traded rather than the value of the investments
being hedged. The effectiveness of hedges using Derivative Instruments on
indices will depend on the degree of correlation between price movements in
the index and price movements in the securities being hedged.

(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also

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<PAGE>

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 redemption
requests or other current obligations.

OPTIONS

The Fund may purchase put and call options, and write (sell) covered put and
call options, on debt and equity securities and foreign currencies. The
purchase of call options may serve as a long hedge, and the purchase of put
options serve as a short hedge. Writing covered put or call options can enable
the Fund to enhance income by reason of the premiums paid by the purchases of
such options. In addition, writing covered put options may serve as a limited
long hedge because increases in the value of the hedged investment would be
offset to the extent of the premium received for writing the option. However,
if the market price of the security underlying a covered put option declines
to less than the exercise price of the option, minus the premium received, the
Fund would expect to suffer a loss. Writing covered call options may serve as
a limited short hedge, because declines in the value of the hedged investment
would be offset to the extent of the premium received for writing the option.
However, if the security or currency appreciates to a price higher than the
exercise price of the call option, it can be expected that the option will be
exercised and the Fund will be obligated to sell the security or currency 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

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<PAGE>

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.

FUTURES

The Fund may purchase and sell interest rate, debt and equity security index
and foreign currency futures and options thereon. The purchase of futures or
call options thereon can serve as a long hedge, and the sale of futures or the
purchase of put options thereon can serve as a short hedge. Writing covered
call options on futures contracts can serve as a limited short hedge, using a
strategy similar to that used for writing covered call options on securities,
currencies or indices. Similarly, writing put options on futures contracts can
serve as a limited long hedge.

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<PAGE>

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.

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

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<PAGE>

markets. This participation also might cause temporary price distortions. In
addition, activities of large traders in both the futures and securities
markets involving arbitrage, "program trading" and other investment strategies
might result in temporary price distortions.

FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS

The Fund may use options on foreign currencies, as described above, and
forward currency contracts, as described below, to hedge against movements in
the values of the foreign currencies in which portfolio securities are
denominated. Such currency hedges can protect against price movements in a
security the Fund owns or intends to acquire that are attributable to changes
in the value of the currency in which it is denominated. Such hedges do not,
however, protect against price movements in the securities that are
attributable to other causes.

The Fund might seek to hedge against changes in the value of a particular
currency when no Derivative Instruments on that currency are available or such
Derivative Instruments are more expensive than certain other Derivative
Instruments. In such cases, the Fund may hedge against price movements in that
currency by entering into transactions using Derivative Instruments on another
currency or basket of currencies, the value of which Mitchell Hutchins
believes will have a positive correlation to the value of the currency being
hedged. The 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 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.

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<PAGE>

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 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.

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.

19
<PAGE>

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 hedging strategies.

The Fund may enter into interest rate swaps, caps, floors and collars on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest
rate swaps on a net basis, i.e., the two payment streams are netted out, with
the Fund receiving or paying, as the case may be, only the net amount of the
two payments. Inasmuch as these swap transactions are entered into for good
faith hedging purposes and inasmuch as segregated accounts will be established
with respect to such transactions, Mitchell Hutchins and the Fund believe such
obligations do not constitute senior securities and, accordingly, will not
treat them as being subject to its borrowing restrictions. The net amount of
the excess, if any, of the Fund's obligations over its entitlements with
respect to each interest rate swap will be accrued on a daily basis and
appropriate Fund assets having an aggregate net asset value at least equal to
the accrued excess will be maintained in a segregated account by a custodian
that satisfies the requirements of the 1940 Act. The Fund also will establish
and maintain such segregated accounts with respect to its total obligations
under any interest rate swaps that are not entered into on a net basis and
with respect to any interest rate caps, floors and collars that are written by
the Fund.

The Fund will enter into swap transactions only with banks, 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 30 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 is
also a director of HiLo Automotive,
Inc. He 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 29 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 30 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 American Publishing
Company and Archer-Daniels-Midland Co.
(agricultural commodities). 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 29 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 29 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 K-III
Communications Corporation, Federated
Department Stores, Inc. and Revlon,
Inc. Dean Feldberg is a director or
trustee of 29 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 29
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),
Integra, Inc. (bio-medical), Manor
Care, Inc. (health care), National
Education Corporation and Northwest
Airlines Inc. Mr Malek is a director
or trustee of 29 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 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), Wainoco 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 28
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
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 six 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>
Dennis McCauley, 51 Vice President Mr. McCauley is a managing director
and chief investment officer-fixed
income of Mitchell Hutchins. Prior to
December 1994, he was director of
fixed income investments of IBM
Corporation. Mr. McCauley is a vice
president of 20 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 30 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 29
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 30 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 29 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 30 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 president
Taglialatela; 37 Assistant Treasurer 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 30 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 president
Assistant Secretary 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
29 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 and a
Assistant Treasurer manager of the mutual fund finance
division of Mitchell Hutchins. Mr.
Williams is a vice president and
assistant treasurer of 30 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.

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........................ $2,550 $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>

25
<PAGE>

- --------
+ 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 May 22, 1998, Mitchell Hutchins owned of record 100% of the
outstanding Shares of the Fund, and none of the Directors and officers of the
Fund beneficially owned any of the outstanding Shares of the Fund.

INVESTMENT ADVISORY ARRANGEMENTS

Mitchell Hutchins is the Fund's investment adviser and administrator
pursuant to a contract dated , 1998 with the Fund ("Advisory
Contract"). Pursuant to the Advisory Contract, Mitchell Hutchins 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) expenses incurred on
behalf of the Fund by Mitchell Hutchins; (3) 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 Shares under federal
securities laws and/or state laws and maintaining such registration and
qualifications; (5) fees and salaries payable to Directors and officers who
are not interested persons of the Fund or Mitchell Hutchins; (6) all expenses
incurred in connection with the 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; expenses of printing and distributing reports to Shareholders;
(15) 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; (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 to Directors and officers; (19)
costs of mailing, stationery and communications equipment; (19) expenses
incident to any dividend reinvestment plan; (20) changes and expenses of any
outside pricing service used to value portfolio securities; (21) interest
charges on borrowings; (22) fees and expenses of maintaining any listing of
the Fund's Shares on the NYSE or any national securities exchange; and (23)
costs and expenses (including Rating Agency fees) associated with the issuance
of any preferred stock.

26
<PAGE>

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 , 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 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.

27
<PAGE>

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.

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.

28
<PAGE>

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.

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.

29
<PAGE>

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
forecast 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.

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]

Standard
Rate of Return Deviation
<S> <C>
6.56........................... 11.92
6.31........................... 11.79
6.07........................... 11.66
5.84........................... 11.52
5.62........................... 11.39
5.41........................... 11.26
5.22........................... 11.12
5.04........................... 10.99
4.87........................... 10.85
4.72........................... 10.71
4.59........................... 10.57
4.48........................... 10.43
4.39........................... 10.29
4.33........................... 10.15
4.29........................... 10.00
4.28........................... 9.86
4.29........................... 9.71
4.33........................... 9.56
4.39........................... 9.42
4.47........................... 9.27
4.58........................... 9.12
</TABLE>

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

31
<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 Fund shares) may be eligible
for the dividends-received deduction allowed to corporations. The eligible
portion may not exceed the aggregate dividends the Fund receives from U.S.
corporations. However, dividends received by a corporate Shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the 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.

32
<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.

HEDGING STRATEGIES

The use of Hedging Strategies, such as selling (writing) and purchasing
options and futures and entering into forward currency contracts, involves
complex rules that will determine for income tax purposes the amount,
character and timing of recognition of the gains and losses the Fund realizes
in connection therewith. These rules also may require the Fund to "mark to
market" (that is, treat as sold for their fair market value) at the end of
each taxable year certain positions in its portfolio, which may cause the Fund
to recognize income 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.

34
<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 , 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 , 1998, in conformity with
generally accepted accounting principles.

New York, New York

, 1998

35
<PAGE>

MANAGED HIGH YIELD PLUS FUND INC.

STATEMENT OF ASSETS, LIABILITIES AND CAPITAL

, 1998
ASSETS
<TABLE>
<S> <C>
Cash................................................................ $
Deferred organization expenses (Note 1).............................
------
Total Assets......................................................
LIABILITIES
Accrued expenses (Note 1)...........................................
------
NET ASSETS.............................................................. $
======
CAPITAL
Common Stock, par value $.001 per share: Shares authorized;
Shares issued
and outstanding (Note 1).......................................... $
Paid in Capital in excess of par....................................
------
Total Capital--Equivalent of $15.00 net asset value per share of
common stock $
(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 shares for $ on ,
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.

Mitchell Hutchins (not the Fund) will pay the Underwriters' commissions and
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.

36
<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
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................... 12
Directors and Officers...................................................... 21
Control Persons and Principal Holders of Securities......................... 26
Investment Advisory Arrangements............................................ 26
Portfolio Transactions...................................................... 27
Net Asset Value of Shares................................................... 28
Market Data................................................................. 29
Taxation.................................................................... 31
Additional Information...................................................... 34
Independent Auditor's Report................................................ 35
Statement of Assets, Liabilities and Capital................................ 36
</TABLE>

----------------

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(C) 1998 PaineWebber Incorporated
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

MANAGED HIGH
YIELD PLUS FUND INC.

----------------

STATEMENT OF ADDITIONAL INFORMATION

----------------

PAINEWEBBER INCORPORATED

----------------

June , 1998

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART C -- OTHER INFORMATION

Item 24. Financial Statements and Exhibits

1. Financial Statements:

Report of Independent Auditors (to be filed)
Statement of Assets and Liabilities (to be filed)

2. Exhibits:

a. Articles of Incorporation (previously filed)

b. Bylaws (previously filed)

c. None

d. None

e. Dividend Reinvestment Plan (to be filed)

f. None

g. Investment Advisory and Administration Contract (to be
filed)

h. Underwriting Agreement (to be filed)

i. None

j. Custodian Agreement (to be filed)

k. Transfer Agency Agreement (to be filed)

l. Opinion and Consents of Counsel (to be filed)

m. None

n. Consent of Independent Auditors (to be filed)

o. None

p. Letter of Investment Intent (to be filed)

q. None

r. Financial Data Schedule (to be filed)

Item 25. Marketing Arrangements

See Section 5 of the Underwriting Agreement to be filed as exhibit
2(h) to this Registration Statement.

Item 26. Other Expenses of Issuance and Distribution

The following table sets forth the expenses to be incurred in
connection with the offering described in this Registration Statement:

Securities and Exchange Commission Fees.................. $ 20,355
New York Stock Exchange, Inc. Listing Fees...............
National Association of Securities Dealers, Inc. Fees.... 7,400
Printing and Engraving Expenses..........................
Legal Fees...............................................
Accounting Expenses......................................
Miscellaneous Expenses...................................

Total...................................... -------
$
=======

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 May 22, 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(h)
provides that Mitchell Hutchins shall not be liable for any error of judgment or
mistake of law or for loss suffered by the Fund in connection with the matters
to which the Advisory Contract relates except a loss resulting from the willful
misfeasance, bad faith or gross neglect of Mitchell Hutchins in the performance
of its duties or from reckless disregard of its obligations and duties under the
Advisory Contract.

Section 7 of the Underwriting Agreement to be filed as exhibit 2(i)
provides that the Fund and Mitchell Hutchins jointly and severally will
indemnify the Underwriter and its directors, officers, employees and agents
against all liabilities to which any of them may become subject arising out of
any alleged untrue statement of material fact in any preliminary prospectus,
this Registration Statement or the Prospectus or any amendment or supplement
thereto, or the alleged omission to state in any such document a material fact
required to be stated in it or necessary to make the statements therein not
misleading. The Underwriting Agreement further provides that Mitchell Hutchins
and each officer or director of the Fund who signs the Registration Statement
shall be indemnified by the Underwriter to the same extent as set out above, but
only insofar as any liability arises out of nay statement or omission made in
reliance on and in conformity with information furnished to the Fund by the
Underwriter expressly for use in the preparation of the documents in which the
statement or omission is made or alleged to be made.

Insofar as indemnification for liabilities arising under the
Securities Act of 1933 ("1933 Act") may be provided to directors, officers and
controlling persons of the Fund, pursuant to the foregoing provisions or
otherwise, the Fund has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Fund of expenses incurred or
paid by a director, officer or controlling person of the Fund in connection with
the successful defense of nay action, suit or proceeding or payment pursuant to
any insurance policy) is asserted against the Fund by such director, officer or
controlling person in connection with the securities being registered, the Fund
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.

Item 30. Business and Other Connections of Investment Adviser

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. 1 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 26th day of May, 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 May 26, 1998
- ------------------------- (Chief Executive Officer)
Margo N. Alexander

/s/ E. Garrett Bewkes, Jr. Director and Chairman May 26, 1998
- ------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr.

/s/ Richard Q. Armstrong Director May 26, 1998
- -------------------------
Richard Q. Armstrong

/s/ Richard R. Burt Director May 26, 1998
- -------------------------
Richard R. Burt

/s/ Mary C. Farrell Director May 26, 1998
- -------------------------
Mary C. Farrell

/s/ Meyer Feldberg Director May 26, 1998
- -------------------------
Meyer Feldberg

/s/ George W. Gowen Director May 26, 1998
- -------------------------
George W. Gowen

/s/ Frederic V. Malek Director May 26, 1998
- -------------------------
Frederic V. Malek

/s/ Carl W. Schafer Director May 26, 1998
- -------------------------
Carl W. Schafer

/s/ Paul H. Schubert Vice President and Treasurer (Chief May 26, 1998
- ------------------------- Financial and Accounting Officer)
Paul H. Schubert

<PAGE>

POWER OF ATTORNEY

I, Richard Q. Armstrong, Director of the Board of Directors of Managed High
Yield Plus Fund Inc. (the "Fund"), hereby constitute and appoint Arthur Brown,
Elinor Gammon, Scott Griff, Dianne E. O'Donnell, Victoria E. Schonfeld and
Robert Wittie, and each of them singly, my true and lawful attorneys, with full
power to them to sign for me, and in my capacity as Director of the Board of
Directors for the Fund, any and all amendments to each of the particular
registration statements of the Fund, and all instruments necessary or desirable
in connection therewith, filed with the Securities and Exchange Commission,
hereby ratifying and confirming my signature as it may be signed by said
attorneys to any and all amendments to said registration statements.