As filed with the Securities and Exchange Commission on February 17, 2000
Registration No.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. ___ [ ] Post-Effective Amendment No. ___
MANAGED HIGH YIELD PLUS FUND INC.
(Exact name of registrant as specified in charter)
51 West 52nd Street
New York, New York 10019-6114
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000
DIANNE E. O'DONNELL, ESQ.
Vice President and Secretary
1285 Avenue of the Americas, 18th Floor
New York, New York 10019
(Name and address of agent for service)
COPIES TO:
ROBERT A. WITTIE, ESQ.
BENJAMIN J. HASKIN, ESQ.
JENNIFER R. GONZALEZ, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036-1800
Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes
effective.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum
Title of Securities Amount Being Offering Price Per Aggregate Offering Amount of
Being Registered Registered Unit(1) Price(1) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($.001 par 6,634,834 10.25 68,007,048.50 $17,953.86
value)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee
in accordance with Rule 457(f) under the Securities Act of 1933 based on the
average high and low prices of Managed High Yield Fund Inc. reported in the
consolidated reporting system on February 14, 2000.
<PAGE>
MANAGED HIGH YIELD PLUS FUND INC.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following papers and documents:
o Cover Sheet
o Contents of Registration Statement
o Form N-14 Cross Reference Sheet
o Letter to Stockholders
o Notice of Special Meeting
o Part A - Proxy Statement/Prospectus
o Part B - Statement of Additional Information
o Part C - Other Information
o Signature Page
o Exhibits
<PAGE>
MANAGED HIGH YIELD PLUS FUND INC.
FORM N-14 CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Part A Item No. and Caption Proxy Statement/Prospectus Caption
- --------------------------- ----------------------------------
<S> <C> <C>
1. Beginning of Registration Statement and Outside Cover Page
Front Cover Page of Prospectus
2. Beginning and Outside Back Cover Page of Cover Page; Table of Contents
Prospectus
3. Fee Table, Synopsis Information, Synopsis; Comparison of Principal Risk Factors;
and Risk Factors Comparison of the Funds
4. Information about the Transaction Proposal: Reorganization of High Yield Fund into
Plus Fund; Additional Information about the
Reorganization; Capitalization
5. Information about the Registrant Comparison of Principal Risk Factors; Comparison
of the Funds; Proposal: Reorganization of High
Yield Fund into Plus Fund; Additional Information
about the Reorganization; Capitalization;
Additional Information About Both Funds; Additional
Information About Plus Fund. See also Annual Report
to Stockholders of Managed High Yield Plus Fund
Inc. for the fiscal year ended May 31, 1999,
previously filed on EDGAR, Accession Number
0001047469-99-029669
6. Information about the Company Being Acquired Comparison of Principal Risk Factors; Comparison of
the Funds; Proposal: Reorganization of High Yield
Fund into Plus Fund; Additional Information about
the Reorganization; Capitalization; Additional
Information About Both Funds. See also the Annual
Report to Stockholders of Managed High Yield Fund
Inc. for the fiscal year ended July 31, 1999,
previously filed on EDGAR, Accession Number
0000930413-99-001250
<PAGE>
MANAGED HIGH YIELD PLUS FUND INC.
FORM N-14 CROSS REFERENCE SHEET
7. Voting Information Introduction
8. Interest of Certain Persons and Experts Not Applicable
9. Additional Information Required for Re-offering Not Applicable
by Persons Deemed to be Underwriters
Statement of Additional Information
Part B Item No. and Caption Caption
- --------------------------- -------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. Additional Information about the Registrant Additional Information About Plus Fund. See also
Annual Report to Stockholders of Managed High Yield
Plus Fund Inc. for the fiscal year ended May 31,
1999, previously filed on EDGAR, Accession Number
0001047469-99-029669.
13. Additional Information about the Company Not Applicable
Being Acquired
14. Financial Statements PRO FORMA Financial Statements for the period ended
January 31, 2000. See also Annual Report to
Stockholders of Managed High Yield Plus Fund for
the fiscal year ended May 31, 1999, previously
filed on EDGAR, Accession Number
0001047469-99-029669; Annual Report to Stockholders
of Managed High Yield Fund for the fiscal year
ended July 31, 1999, previously filed on EDGAR,
Accession Number 0000930413-99-001250.
</TABLE>
Part C
- ------
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
MANAGED HIGH YIELD FUND INC.
51 West 52nd Street
New York, New York 10019-6114
March __, 2000
Dear Stockholder:
Enclosed is a combined proxy statement and prospectus that seeks your
approval of an important proposal for your Fund. YOUR VOTE ON THIS PROPOSAL WILL
HELP DECIDE THE FUND'S FUTURE.
The Board of Directors of Managed High Yield Fund Inc. ("High Yield Fund")
proposes that High Yield Fund reorganize ("merge") into Managed High Yield Plus
Fund Inc. ("Plus Fund"). Under the proposed merger, each stockholder of High
Yield Fund would become a holder of shares of common stock of Plus Fund and High
Yield Fund would be liquidated.
High Yield Fund and Plus Fund are closed-end investment companies listed
on the New York Stock Exchange. The Funds have substantially similar investment
objectives and invest primarily in the same markets. High Yield's investment
objective is high current income while Plus Fund has a primary investment
objective of high income with a secondary objective of capital appreciation.
However, Plus Fund uses leverage to attempt to enhance yield and has the ability
to invest to a greater extent in lower-rated securities. This has enabled Plus
Fund to provide a higher yield than High Yield Fund. High Yield Fund's Board
believes that combining the two Funds will benefit High Yield Fund's
stockholders by providing them economies of scale, the potential to use leverage
to enhance yield and greater investment flexibility. The proposed merger, the
investment policies of the Funds and the use of leverage are described in more
detail in the combined proxy statement/prospectus.
AFTER CAREFUL CONSIDERATION, THE BOARD OF HIGH YIELD FUND HAS UNANIMOUSLY
APPROVED THE PROPOSAL. THE BOARD RECOMMENDS THAT YOU READ THE ENCLOSED MATERIALS
CAREFULLY AND THEN VOTE "FOR" THE MERGER.
The enclosed document describes the proposed merger and compares the two
Funds' investment objectives, operating expenses and performance histories.
Please read the document carefully. I appreciate that the length of the attached
document may be daunting, but we have tried to make it as clear as possible
while meeting all of the legal requirements. We have included a section of
questions and answers that we think will interest most investors. After
reviewing the document, please complete, date and sign your proxy card and
return it in the enclosed postage-paid return envelope.
YOUR VOTE IS VERY IMPORTANT. Please take a moment to review the enclosed
materials and to date, sign and return your proxy card TODAY. Voting your shares
early will permit High Yield Fund to avoid costly follow-up mail and telephone
solicitation.
We have retained an outside firm that specializes in proxy solicitation to
assist us in connection with the proposed merger. If we have not received your
vote as the meeting date approaches, you may receive a telephone call from
Shareholder Communications Corporation to ask for your vote. We hope that their
telephone call does not inconvenience you.
As always, I thank you for being an investor in our funds. We are
committed to serving your interests and appreciate your trust in us.
Very truly yours,
Margo N. Alexander
President
<PAGE>
QUESTIONS & ANSWERS
Q: WHY IS THIS MERGER BEING PROPOSED?
A: High Yield Fund (PHT) stockholders would benefit from the opportunity to
become stockholders of a Fund that has historically traded at a lower discount
in the market and has provided higher income. High Yield Fund has traded at an
average discount of -5.11% since its inception in November 1993 and has traded
at an average discount of -5.70% since Plus Fund's (HYF) inception in June 1998.
Plus Fund has had an average discount of -2.2% since its inception in June 1998.
In addition, High Yield Fund has had an average NAV yield of 11.36% since June
1998 while Plus Fund's NAV yield has averaged 12.54% during the same period. The
total returns based on NAV for High Yield Fund and Plus Fund during the period
June 1998 through January 2000 were -3.85% and -3.37%, respectively. To
summarize, Plus Fund has provided a higher NAV yield, has provided a better
total return and has traded closer to its NAV than has High Yield Fund since
Plus Fund's inception. In addition, both Funds and their stockholders would
benefit from the economies of scale and opportunities for broader
diversification that a larger asset base would provide.
The chart below gives a history of the premium/discount of the two Funds
since their respective inception dates. Since Plus Fund's inception it has
consistently traded closer to its NAV than has High Yield Fund.
Chart:
High Yield Fund vs Plus Fund Premium/Discount
Since Inception through January 31, 2000
Premium/Discount
High Yield Plus
Date Fund Fund
Dec-93 -2.60
Jan-94 -3.80
Feb-94 -2.40
Mar-94 -8.80
Apr-94 -9.40
May-94 -7.70
Jun-94 -5.70
Jul-94 -10.10
Aug-94 -7.20
Sep-94 -13.80
Oct-94 -10.80
Nov-94 -6.50
Dec-94 -6.30
Jan-95 -3.80
Feb-95 -2.80
Mar-95 -6.80
Apr-95 -6.80
May-95 -4.10
Jun-95 -6.20
Jul-95 -7.00
Aug-95 -6.10
Sep-95 -7.40
<PAGE>
Oct-95 -2.10
Nov-95 -3.20
Dec-95 -7.10
Jan-96 -4.90
Feb-96 -7.00
Mar-96 2.40
Apr-96 -7.10
May-96 -9.00
Jun-96 -6.20
Jul-96 -5.70
Aug-96 -4.40
Sep-96 -5.60
Oct-96 -3.30
Nov-96 -6.00
Dec-96 -5.70
Jan-97 -4.00
Feb-97 -2.30
Mar-97 -6.00
Apr-97 -1.10
May-97 -3.40
Jun-97 -1.60
Jul-97 -2.50
Aug-97 -1.80
Sep-97 -3.50
Oct-97 -2.00
Nov-97 -2.10
Dec-97 -0.10
Jan-98 -0.10
Feb-98 0.90
Mar-98 -5.30
Apr-98 -3.90
May-98 -4.80
Jun-98 -5.00 0.00
Jul-98 -5.30 -2.10
Aug-98 -10.60 -10.20
Sep-98 -5.20 0.50
Oct-98 3.40 6.20
Nov-98 -0.10 -0.80
Dec-98 -4.10 -2.80
Jan-99 -3.30 0.20
Feb-99 -2.10 -1.40
Mar-99 -1.70 -2.60
Apr-99 -7.10 -3.90
May-99 -5.40 -0.30
Jun-99 -5.60 0.10
Jul-99 -3.80 -0.70
Aug-99 -2.10 -1.70
Sep-99 -7.30 -2.10
2
<PAGE>
Oct-99 -10.40 -1.90
Nov-99 -17.40 -8.40
Dec-99 -13.50 -8.90
Jan-00 -6.60 -3.00
This chart shows the Funds' historical 12-month NAV yields. This
illustrates the higher income opportunities that have been provided to Plus Fund
stockholders.
Chart:
High Yield Fund vs Plus Fund 12 Month Yield at NAV
Since Inception through January 31, 2000
12 Month
Yield at NAV
Date High Yield Plus Fund
Fund
Nov-94 10.08
Dec-94 10.82
Jan-95 10.99
Feb-95 10.69
Mar-95 11.18
Apr-95 11.02
May-95 10.7
Jun-95 11.1
Jul-95 11.04
Aug-95 10.98
Sep-95 11.14
Oct-95 10.63
Nov-95 11.14
Dec-95 11.6
Jan-96 11.05
Feb-96 11.07
Mar-96 10.07
Apr-96 10.89
May-96 10.91
Jun-96 10.61
Jul-96 10.52
Aug-96 10.23
Sep-96 10.14
Oct-96 9.86
Nov-96 9.87
Dec-96 9.69
Jan-97 9.51
Feb-97 9.25
Mar-97 9.88
Apr-97 9.42
May-97 9.42
Jun-97 9.12
Jul-97 9.04
3
<PAGE>
Aug-97 9.04
Sep-97 9
Oct-97 9.04
Nov-97 9.04
Dec-97 8.84
Jan-98 8.73
Feb-98 8.62
Mar-98 9.12
Apr-98 9.04
May-98 9.21
Jun-98 9.33
Jul-98 9.38
Aug-98 11.08
Sep-98 10.72
Oct-98 10.34
Nov-98 10.18
Dec-98 10.83
Jan-99 10.61
Feb-99 10.67
Mar-99 10.67
Apr-99 11.14
May-99 11.2
Jun-99 11.32 11.07
Jul-99 11.14 12.33
Aug-99 11.2 12.81
Sep-99 12 13.12
Oct-99 12.68 13.36
Nov-99 13.53 14.01
Dec-99 12.6 13.71
Jan-00 11.93 13.04
Q: HOW CAN PLUS FUND ENHANCE ITS YIELD WITH LEVERAGE?
A: Plus Fund can enhance its yield through leverage because the Fund borrows
money at interest rates that generally are lower than the yield it receives on
its investments. For example, Plus Fund's average cost of borrowing for the
12 months ended January 31, 2000 was 5.69% and it had an average yield on
its investments during that period of 11.98%. The Fund and its stockholders
benefit from the incremental yield on the investments purchased with the
proceeds of the borrowings.
OF COURSE, THE USE OF LEVERAGE PRESENTS RISKS. IF THE FUND'S AVERAGE TOTAL
RETURN (THAT IS, YIELD PLUS CAPITAL GAIN OR LOSS) ON THE INVESTMENTS PURCHASED
WITH THE PROCEEDS OF THE BORROWINGS IS LESS THAN ITS AVERAGE COST OF BORROWINGS,
THE FUND'S TOTAL RETURN, AS WELL AS THE AMOUNT AVAILABLE FOR DISTRIBUTION TO
STOCKHOLDERS, WILL BE LOWER THAN IF LEVERAGE HAD NOT BEEN USED.
4
<PAGE>
Q: HOW WILL THE MERGER AFFECT THE FUNDS' EXPENSES?
A: The combined Fund will have a larger asset base than High Yield Fund, and as
a result, its operating expenses (other than interest and related borrowing
expenses) are expected to be a lower percentage of net assets than for High
Yield Fund. Because the combined Fund will use leverage, it will incur interest
expenses that High Yield Fund does not incur and, as a result, overall expenses
will be higher. The use of leverage, however, has enabled Plus Fund to provide
its stockholders with a yield higher than that provided by High Yield Fund.
The following table shows pre-borrowing expenses for the 12 months ended
January 31, 2000 for each Fund and on a PRO FORMA basis for the combined Fund,
along with a comparison of net assets and net asset values. Fee and expense data
is expressed as a percentage of net assets. For more details about fees and
expenses, see Comparison of Funds - Fees and Expenses on page 18 of the combined
proxy statement/prospectus.
- --------------------------------------------------------------------------------
High Yield Fund Plus Fund Combined Fund
Expenses Expenses Expenses
- --------------------------------------------------------------------------------
Investment Advisory
and Administration 0.90% 0.96%(1) 0.96%(1)
Fees
- --------------------------------------------------------------------------------
Other Expenses 0.33% 0.26% 0.25%
- --------------------------------------------------------------------------------
Annual, Pre-Borrowing
Operating Expenses 1.23% 1.22%(2) 1.21%(2)
================================================================================
Net Assets as of
January 31, 2000 $68,227 $377,506 $445,733
(000's)
- --------------------------------------------------------------------------------
Net Asset Value Per $11.31 $11.85 $11.85
Share
- --------------------------------------------------------------------------------
(1) Reflects Plus Fund's outstanding borrowings of approximately 27% of its
total assets (including the amount obtained through leverage) for the 12
months ended January 31, 2000 and assumes the combined Fund would have
borrowed the same percentage of its total assets. Plus Fund pays and the
combined Fund will pay investment advisory and administrative fees at an
annual rate of 0.70% of the Fund's "managed assets" - that is, its total
assets less only those liabilities that are not borrowings. Thus, the
investment advisory and administrative fees increase in relation to the
additional managed assets acquired through leverage.
(2) After giving effect to borrowings of approximately 27% of total assets
(including the amount obtained through leverage) at the same interest rate
as that paid by Plus Fund during the 12 months ended January 31, 2000,
total operating expenses for Plus Fund were 3.46% and, on a PRO FORMA
basis, for the combined Fund would have been 3.45%.
Q: HOW MANY SHARES WILL I RECEIVE IN THE MERGER?
A: If the merger is approved and you participate in High Yield Fund's Dividend
Reinvestment Plan, you will receive full and fractional shares of Plus Fund
having an aggregate net asset value equal to the aggregate net asset value of
the High Yield Fund shares you owned prior to the merger. If you do not
participate in High Yield Fund's Dividend Reinvestment Plan, you will receive
full shares of Plus Fund having a net asset value that (together with cash
received in lieu of fractional shares) equals the aggregate net asset value of
the High Yield Fund shares you owned prior to the merger. Net asset values will
be calculated as of the closing date. Because the exchange of shares is based on
the Funds' net asset values and not their market prices, you may receive Plus
Fund shares with an aggregate market value on the date of the merger that is
higher or lower than the market value of the High Yield Fund shares you
previously held. The reason for this difference is that the market prices of the
shares of the Funds in relation to their net asset values are likely to be
different; I.E., they are likely to trade at different discounts or premiums.
Q: WILL THE MERGER SUBJECT ME TO ANY TAXES?
A: The Merger has been structured as a tax-free transaction, which means no gain
or loss will be recognized by either Fund. In addition, you will recognize no
5
<PAGE>
gain or loss as a result of your acquisition of Plus Fund shares through the
Merger, except with respect to any cash received in lieu of a fractional share
of Plus Fund. If you do not wish to receive Plus Fund shares in the merger, you
are free to sell your High Yield Fund shares prior to the closing (expected to
be on or about ___, 2000).
Q: DO I NEED TO SURRENDER MY SHARE CERTIFICATES NOW?
A: No. Please do not send in any share certificates at this time. High Yield
Fund's transfer agent will mail you instructions and a letter of transmittal for
use in surrendering your share certificate(s) for a certificate representing
Plus Fund shares and, if applicable, cash.
Q: WHAT IS MY BOARD'S RECOMMENDATION?
A: Your Board of Directors recommends a vote "FOR" the merger.
<PAGE>
MANAGED HIGH YIELD FUND INC.
51 West 52nd Street
New York, New York 10019-6114
-----------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
-----------------------
_____ __, 2000
-----------------------
To the Stockholders,
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders
("Meeting") of Managed High Yield Fund Inc. ("High Yield Fund") will be held on
_________ ___, 2000, at 1285 Avenue of the Americas, 14th Floor, New York, New
York, 10019, at [10:00] a.m., Eastern time, for the following purpose:
To approve an Agreement and Plan of Reorganization and
Termination ("Plan") that provides for the reorganization of High Yield
Fund into Managed High Yield Plus Fund Inc.
Stockholders of record as of the close of business on _______ __, 2000,
are entitled to notice of, and to vote at, the Meeting and any adjournment
thereof.
Please execute and return promptly in the enclosed envelope the
accompanying proxy, which is being solicited by the Board of Directors of High
Yield Fund. Returning your proxy promptly is important to ensure a quorum at the
Meeting. You may revoke your proxy at any time before it is exercised by the
subsequent execution and submission of a revised proxy, by giving written notice
of revocation to High Yield Fund at any time before the proxy is exercised or by
voting in person at the Meeting.
By Order of the Board of Directors,
DIANNE E. O'DONNELL
SECRETARY
________ ___, 2000
51 West 52nd Street
New York, New York 10019-6114
<PAGE>
- --------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT
NO MATTER HOW MANY SHARES YOU OWN.
Please indicate your voting instructions on the enclosed proxy card,
sign and date the card and return it in the envelope provided. IF YOU SIGN, DATE
AND RETURN THE PROXY CARD BUT GIVE NO VOTING INSTRUCTIONS, YOUR SHARES WILL BE
VOTED "FOR" THE PROPOSAL DESCRIBED ABOVE. In order to avoid the additional
expense of further solicitation, we ask your cooperation in mailing your proxy
card promptly.
For more information or questions regarding casting your vote for the
Meeting, please call 1-800-[949-8596.]
If we do not receive your completed proxy cards after several weeks,
you may be contacted by our proxy solicitor, Shareholder Communications
Corporation. Our proxy solicitor will remind you to vote your shares.
- --------------------------------------------------------------------------------
<PAGE>
INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may be of
assistance to you and avoid the time and expense to the Fund involved in
validating your vote if you fail to sign your proxy card properly.
1. Individual Accounts: Sign your name exactly as it appears in the
registration on the proxy card.
2. Joint Accounts: Either party may sign, but the name of the party
signing should conform exactly to the name shown in the registration on the
proxy card.
3. All Other Accounts: The capacity of the individual signing the proxy
card should be indicated unless it is reflected in the form of registration. For
example:
REGISTRATION VALID SIGNATURE
------------ ---------------
Corporate Accounts
(1) ABC Corp.............................. ABC Corp.
John Doe, Treasurer
(2) ABC Corp.............................. John Doe, Treasurer
(3) ABC Corp. c/o John Doe, Treasurer..... John Doe
(4) ABC Corp. Profit Sharing Plan......... John Doe, Trustee
Partnership Accounts
Jane B. Smith, Partner
(1) The XYZ Partnership...................
(2) Smith and Jones, Limited Partnership.. Jane B. Smith, General
Partner
Trust Accounts
Jane B. Doe, Trustee
(1) ABC Trust Account.....................
(2) Jane B. Doe, Trustee u/t/d 12/28/78 Jane B. Doe
Custodial or Estate Accounts
(1) John B. Smith, Cust. f/b/o John B.
Smith, Jr., UGMA/UTMA................. John B. Smith
(2) Estate of John B. Smith............... John B. Smith, Jr.,
Executor
<PAGE>
MANAGED HIGH YIELD FUND INC.
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
1-800-647-1568
MANAGED HIGH YIELD PLUS FUND INC.
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
1-800-647-1568
COMBINED PROXY STATEMENT AND PROSPECTUS
Dated: __________ ___, 2000
This document is being furnished in connection with a Special Meeting
of Stockholders of Managed High Yield Fund Inc. ("High Yield Fund"), a Maryland
corporation, to be held on __________ ___, 2000, at 1285 Avenue of the Americas,
14th Floor, New York, NY 10019 at [10:00] a.m., Eastern time (such meeting and
any adjournments thereof are referred to as the "Meeting"). At the Meeting, the
stockholders of High Yield Fund are being asked to consider and approve an
Agreement and Plan of Reorganization and Termination ("Plan") that provides for
the reorganization of High Yield Fund into Managed High Yield Plus Fund Inc.
("Plus Fund"), also a Maryland corporation ("Reorganization"). (High Yield Fund
and Plus Fund are collectively referred to as "Funds.") A form of the Plan is
attached as Appendix A to this Combined Proxy Statement and Prospectus ("Proxy
Statement/Prospectus"). The Board of Directors of High Yield Fund ("Board") has
unanimously approved the Plan as being in the best interests of High Yield Fund
and its stockholders.
Pursuant to the Plan, High Yield Fund will transfer all its assets to
Plus Fund, which will assume all the liabilities of High Yield Fund. Each High
Yield Fund stockholder will receive the number of full shares of Plus Fund
common stock ("Plus Fund Shares"), plus fractional shares for High Yield Fund
stockholders that participate in High Yield Fund's Dividend Reinvestment Plan
and cash in lieu of any fractional shares for all other High Yield Fund
stockholders, having an aggregate net asset value ("NAV") that, on the effective
date of the Reorganization, is equal to the aggregate NAV of the stockholder's
shares of common stock of High Yield Fund. High Yield Fund stockholders will
recognize no gain or loss, except with respect to any cash received in lieu of
fractional Plus Fund Shares.
The NAV of each High Yield Fund stockholder's account with Plus Fund
immediately after the Reorganization, including any cash received in lieu of a
fractional Plus Fund Share, will be the same as the NAV of such stockholder's
High Yield Fund shares immediately prior to the Reorganization. The market price
of the shares of either Fund may be higher or lower than their respective NAVs.
While the total NAV of shares owned by each stockholder after the Reorganization
will be the same, the market value of the Plus Fund Shares that a High Yield
Fund stockholder receives in the Reorganization may be more or less than the
market value of the High Yield Fund shares that such stockholder owns
immediately before the Reorganization.
The Funds are diversified, closed-end management investment companies
with substantially similar investment objectives. Plus Fund's investment
objective is to seek high income and, secondarily, capital appreciation. High
Yield Fund's investment objective is to seek high current income. Both Funds
<PAGE>
seek to achieve their investment objectives by investing primarily in a
diversified portfolio of lower-rated, income-producing debt and related equity
securities. Both Funds may invest in foreign issuers, including foreign issuers
in emerging market countries.
This Proxy Statement/Prospectus sets forth the information that a
stockholder of High Yield Fund should know before voting on the Plan. It should
be read carefully and retained for future reference.
A Statement of Additional Information ("SAI") dated __________ ___,
2000 containing additional information about Plus Fund has been filed with the
Securities and Exchange Commission ("SEC") and is hereby incorporated by
reference in its entirety into this Proxy Statement/Prospectus. The Annual
Report to Stockholders of Plus Fund for the fiscal year ended May 31, 1999, and
the Semi-Annual Report to Stockholders of Plus Fund for the six months ended
November 30, 1999, are on file with the SEC and are incorporated by reference
into this Proxy Statement/Prospectus. The Annual Report to Stockholders of High
Yield Fund for the fiscal year ended July 31, 1999, and the Semi-Annual Report
to Stockholders of High Yield Fund for the six months ended January 31, 1999,
are on file with the SEC and are incorporated by reference into this Proxy
Statement/Prospectus. These documents are available without charge by writing to
Mitchell Hutchins Asset Management Inc., 51 West 52nd Street, New York, NY
10019-6114, or by calling 1-800-647-1568. The SEC maintains a Web site at
http://www.sec.gov that contains the documents described above and other
information about High Yield Fund and Plus Fund. Additional information about
both Funds may also be obtained on the Web at http://www.painewebber.com. The
shares of High Yield Fund and Plus Fund are listed and publicly traded on the
New York Stock Exchange ("NYSE"). Reports, proxy statements and other
information concerning the Funds may be inspected at the offices of the NYSE.
AS WITH ALL INVESTMENT COMPANIES, THE SEC HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
TRUTHFUL OR COMPLETE. TO STATE OTHERWISE IS A CRIME.
<PAGE>
TABLE OF CONTENTS
Section Title Page
INTRODUCTION..................................................................1
SYNOPSIS......................................................................2
COMPARISON OF PRINCIPAL RISK FACTORS..........................................5
Primary Differences in Investment Risks of the Funds.....................5
Leverage.................................................................5
Credit Quality of Securities.............................................7
Risks Common to Both Funds...............................................8
Market Price and Net Asset Value of Shares...........................8
Lower-Rated Debt Securities..........................................8
Investing in Foreign Securities.....................................10
Original Issue Discount, Zero Coupon and Payment-in-Kind
Securities..........................................................11
Call Features.......................................................11
Premium Securities..................................................11
Hedging and Other Strategies Using Derivative Instruments...........11
PROPOSAL: REORGANIZATION OF HIGH YIELD FUND INTO PLUS FUND..................12
Information about the Reorganization....................................12
Board Considerations....................................................12
The Plan................................................................15
COMPARISON OF THE FUNDS......................................................16
Forms of Organization...............................................16
Investment Objectives...............................................16
Investment Policies.................................................16
Investment Limitations..............................................17
Leverage............................................................18
Portfolio Compatibility.............................................18
Fees and Expenses...................................................18
Expense Example.....................................................19
Sales Charges.......................................................19
Trading History- Share Price Data...................................19
Dividends and Other Distributions...................................20
Dividend Reinvestment Plan..........................................21
Management of the Funds.............................................23
Other Service Providers.............................................25
FINANCIAL HIGHLIGHTS.........................................................25
ADDITIONAL INFORMATION ABOUT THE REORGANIZATION..............................27
TERMS OF THE REORGANIZATION.............................................27
DESCRIPTION OF SECURITIES TO BE ISSUED..................................29
DIVIDENDS AND OTHER DISTRIBUTIONS.......................................29
SURRENDER AND EXCHANGE OF HIGH YIELD FUND STOCK CERTIFICATES............29
ACCOUNTING TREATMENT....................................................30
FEDERAL INCOME TAX CONSIDERATIONS.......................................30
CAPITALIZATION...............................................................31
LEGAL MATTERS................................................................31
INFORMATION FILED WITH THE SEC AND NYSE......................................31
INFORMATION ABOUT THE FUNDS' ADVISER AND ADMINISTRATOR.......................32
EXPERTS......................................................................32
STOCKHOLDER PROPOSALS........................................................32
ADDITIONAL INFORMATION ABOUT BOTH FUNDS......................................33
Portfolio Securities....................................................33
Other Investment Practices..............................................35
Temporary and Defensive Strategies and Borrowings.......................38
Certain Anti-Takeover Provisions of the Articles of Incorporation.......38
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Description of Capital Stock............................................39
Taxation................................................................42
APPENDIX A: Form of Agreement and Plan of Reorganization and Termination....A-1
APPENDIX B: Directors and Officers of High Yield Fund and Plus Fund ........B-1
APPENDIX C: Form of Proxy...................................................C-1
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INTRODUCTION
This Proxy Statement/Prospectus is being furnished to stockholders of
High Yield Fund in connection with the solicitation of proxies by the Board for
use at the Meeting. All properly executed and unrevoked proxies received in time
for the Meeting will be voted in accordance with the instructions contained
therein. If no instructions are given, shares represented by proxies will be
voted "FOR" approval of the Plan. The presence in person or by proxy of High
Yield Fund stockholders entitled to cast a majority of all the votes entitled to
be cast at the Meeting will constitute a quorum. If a quorum is not present at
the Meeting or a quorum is present but sufficient votes to approve the proposal
described in this Proxy Statement/Prospectus are not received, the persons named
as proxies may propose one or more adjournments of the Meeting to permit further
solicitation of proxies. Any such adjournment will require the affirmative vote
of a majority of the shares represented at the Meeting in person or by proxy.
The persons named as proxies will vote those proxies that they are entitled to
vote "FOR" the proposal in favor of such an adjournment and will vote those
proxies required to be voted "AGAINST" the proposal against such adjournment.
High Yield Fund intends to mail this Proxy Statement/Prospectus and the
accompanying proxy card on or about __________ ___, 2000.
Approval of the Plan requires the affirmative vote of a majority of the
votes entitled to be cast on the proposal.
Broker non-votes are shares held in "street name" for which the broker
indicates that instructions have not been received from the beneficial owners or
other persons entitled to vote and for which the broker does not have
discretionary voting authority. Abstentions and broker non-votes will be counted
as shares present at the Meeting for quorum purposes but will not be considered
votes cast at the Meeting. Abstentions and broker non-votes are effectively
votes against the Plan because the required affirmative vote is a majority of
the total shares outstanding.
Any person giving a proxy has the power to revoke it at any time prior
to its exercise by executing a superseding proxy or by submitting a written
notice of revocation to the Secretary of High Yield Fund ("Secretary"). To be
effective, such revocation must be received by the Secretary prior to the
Meeting and must indicate the stockholder's name and account number. In
addition, although mere attendance at the Meeting will not revoke a proxy, a
stockholder present at the Meeting may withdraw his or her proxy by voting in
person.
Stockholders of record as of the close of business on __________
___,2000 ("Record Date"), are entitled to vote at the Meeting. On the Record
Date, there were _________ shares of High Yield Fund outstanding. Each
stockholder is entitled to one vote for each full share held and a fractional
vote for each fractional share held. [As of ________, 2000, Mitchell Hutchins
Asset Management Inc. ("Mitchell Hutchins"), the investment adviser of both High
Yield Fund and Plus Fund, did not know of any person who owned beneficially 5%
or more of either Fund's shares.]
High Yield Fund has engaged the services of Shareholder Communications
Corporation ("SCC") to assist it in the solicitation of proxies for the Meeting.
High Yield Fund expects to solicit proxies principally by mail, but it or SCC
may also solicit proxies by telephone, facsimile, e-mail or personal interview.
<PAGE>
High Yield Fund officers and employees of Mitchell Hutchins who assist in the
proxy solicitation will not receive any additional or special compensation for
any such efforts. High Yield Fund and Plus Fund will bear the expenses incurred
in connection with the Reorganization, which are estimated to be $245,000. SCC
will be paid approximately $35,000 for proxy solicitation services. High Yield
Fund will request broker/dealer firms, custodians, nominees and fiduciaries to
forward proxy materials to the beneficial owners of the shares held of record by
such persons. High Yield Fund may reimburse such broker/dealer firms,
custodians, nominees and fiduciaries for their reasonable expenses incurred in
connection with such proxy solicitation.
SYNOPSIS
The following is a summary of certain information relating to the
proposed reorganization, and is qualified by reference to the more complete
information contained elsewhere in the Proxy Statement/Prospectus and the
Appendices attached hereto.
SPECIAL MEETING. This Proxy Statement/Prospectus is being furnished to
stockholders of High Yield Fund in connection with the solicitation of proxies
by the Board for use at the Meeting to be held __________ ___, 2000 at [10:00]
a.m., Eastern time, and any adjournments thereof. At the Meeting, stockholders
will be asked to consider and approve an Agreement and Plan of Reorganization
and Termination ("Plan") that provides for the reorganization of High Yield Fund
into Plus Fund, as described below. Only stockholders of record as of the close
of business on the Record Date, are entitled to vote at the Meeting. Each
stockholder is entitled to one vote for each full share held and a fractional
vote for each fractional share held. All properly executed and unrevoked proxies
received in time for the Meeting will be voted in accordance with the
instructions contained therein. If no instructions are given, shares represented
by proxies will be voted "FOR" approval of the Plan. Any person giving a proxy
has the power to revoke it at any time prior to its exercise by executing a
superseding proxy or by submitting a written notice of revocation to the
Secretary of High Yield Fund.
PROPOSED REORGANIZATION. The Board proposes that High Yield Fund
reorganize into Plus Fund and that High Yield Fund's stockholders become
stockholders of Plus Fund. The shares of outstanding common stock of High Yield
Fund will be converted into an equivalent dollar amount of full shares of common
stock of Plus Fund ("Plus Fund Shares"), plus fractional shares for High Yield
Fund stockholders that participate in High Yield Fund's Dividend Reinvestment
Plan and cash in lieu of any fractional shares for all other High Yield Fund
stockholders computed based on the net asset value ("NAV") per share of each
Fund on the closing date ("Closing Date"). An exchange of High Yield Fund shares
for Plus Fund Shares at NAV may result in High Yield Fund stockholders receiving
Plus Fund Shares with an aggregate market value on the date of the exchange that
is higher or lower than the market value of their shares. The reason for this
difference is that the market prices of the shares of the Funds in relation to
their NAVs are likely to be different; I.E., the Funds' shares are likely to
trade at different discounts or premiums.
No sales charge or fee of any kind will be charged to High Yield Fund
stockholders in connection with their receipt of Plus Fund Shares in the
Reorganization. Neither Fund will recognize any gain or loss for federal income
tax purposes due to the Reorganization. In addition, each High Yield Fund
stockholder will recognize no gain or loss, except with respect to any cash
received in lieu of a fractional share, if any.
The Reorganization is subject to a number of conditions, including
stockholder approval and satisfaction of the terms of the Plan. The Plan may be
terminated and the Reorganization abandoned, whether before or after approval by
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the Fund's stockholders, at any time prior to the Closing Date (i) by the mutual
consent of the Board of Directors of each Fund; (ii) by either Fund (a) if the
other Fund materially breaches any representation, warranty, or covenant
contained in the Plan; (b) if the conditions to that Fund's obligations under
the Plan have not been satisfied or waived; or (c) if that Fund's Board, in its
sole discretion, determines that proceeding with the Reorganization would not be
in the best interests of its stockholders. If the Reorganization has not been
consummated by _______, 2000, the Plan will automatically terminate, unless a
later date is mutually agreed upon by the Board of Directors of each Fund.
THE PLAN. Pursuant to the Plan, High Yield Fund will transfer all its
assets to Plus Fund, which will assume all the liabilities of High Yield Fund,
and each High Yield Fund stockholder will receive the number of full Plus Fund
Shares and either cash or a fractional Plus Fund Share, as appropriate, having
an aggregate NAV that, on the effective date of the Reorganization, is equal to
the aggregate NAV of the stockholder's shares of common stock of High Yield
Fund. Immediately after the Reorganization, the NAV of each High Yield Fund
stockholder's account with Plus Fund, including any cash received in lieu of a
fractional Plus Fund Share, will be the same as the NAV of such stockholder's
High Yield Fund shares immediately prior to the Reorganization. High Yield Fund
stockholders will recognize no gain or loss in connection with the
Reorganization, except with respect to any cash received in lieu of fractional
Plus Fund Shares.
BOARD CONSIDERATIONS RELATING TO THE REORGANIZATION. At their November
11, 1999 and December 17, 1999 meetings, the Boards considered Mitchell
Hutchins' assessments of High Yield Fund and Plus Fund and considered the
potential benefits to each Fund if High Yield Fund were to be reorganized into
Plus Fund. Mitchell Hutchins advised that both Funds' stockholders would benefit
from the economies of scale (I.E., lower operating expense ratios) and
opportunities for broader diversification that a larger asset base would
provide. In addition, Mitchell Hutchins advised that High Yield Fund's
stockholders could benefit from the potential to use leverage to enhance return
and from Plus Fund's more flexible investment parameters. Further, the
Reorganization itself could enhance the ability of securities analysts to follow
Plus Fund because it will eliminate any confusion in the marketplace that
results from two funds with substantially similar names, investment objectives
and policies, being managed by the same investment adviser.
As part of its consideration, High Yield Fund's Board examined a number
of factors with respect to the Reorganization, including: (1) the compatibility
of the Funds' investment objectives, policies and restrictions; (2) the Funds'
respective investment performances; (3) the effect of the Reorganization on the
expense ratio of Plus Fund and that expense ratio relative to High Yield Fund's
current expense ratio; (4) the costs to be incurred by each Fund as a result of
the Reorganization; (5) the tax consequences of the Reorganization; (6) Mitchell
Hutchins' assessment of the likely impact on High Yield Fund's stockholders of
the receipt of Plus Fund Shares at NAV; and (7) the continuity of portfolio
management. The Board also considered the potential benefits of the
Reorganization to other persons, including Mitchell Hutchins and its affiliates.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS. The
investment objectives of High Yield Fund and Plus Fund are substantially
similar. High Yield Fund's investment objective is high current income. The
primary investment objective of Plus Fund is high income, while its secondary
objective is capital appreciation.
Both Funds seek to achieve their investment objectives by investing
primarily in a diversified portfolio of lower-rated, income-producing debt and
related equity securities. Both Funds may invest in foreign issuers, including
foreign issuers in emerging market countries. Each Fund may also engage in
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hedging strategies, such as options, futures and forward currency contracts, to
attempt to reduce the overall risk of its investment portfolio, enhance income,
realize gains or manage the Fund's foreign currency exposure.
The primary differences in the Funds' investment policies are Plus
Fund's use of leverage and its greater flexibility in choosing the credit
quality of its portfolio.
Plus Fund can borrow up to 33 1/3% of its total assets (including the
amount obtained through leverage) for investment purposes. It also may borrow an
additional 5% of its total assets (not including the amount so borrowed) for
temporary or emergency purposes. As of January 31, 2000, Plus Fund's borrowings
represented about 28% of total assets. High Yield Fund can borrow only for
temporary or emergency purposes, and those borrowings are limited to 10% of its
total assets (not including the amount borrowed). Historically, High Yield Fund
generally has not borrowed, and it had no borrowings outstanding as of January
31, 2000.
High Yield Fund's investment policies require that it normally invest
at least 80% of its total assets in securities that are rated BB or B by S&P or
comparably rated by another Rating Agency. Only up to 20% of its total assets
may be invested in securities that are rated either above or below those levels
or that are unrated. Plus Fund's investment policies require that it normally
invest at least 65% of its total assets in securities that are rated at or below
the BB level, or equivalent unrated securities. Unlike High Yield Fund, however,
Plus Fund is not limited in the percentage of its assets that are rated below B
except that only 15% of its assets may be invested in securities that are rated
as low as D (which normally are in default at the time of purchase), and it can
invest up to 35% of its assets in securities that are rated above BB (that is,
securities that are "investment grade").
Although the differences in the two Funds' investment policies give
Plus Fund greater flexibility to adjust the credit quality of its portfolio, the
credit quality of the securities actually held by Plus Fund historically has
been within the range permitted under High Yield Fund's policies. Moreover, Plus
Fund's current ability to invest in the lowest quality securities (CCC and
lower) is somewhat limited by conditions imposed under its outstanding leverage
facility. (SEE Comparison of Principal Risk Factors--Primary Differences in
Investment Risks of the Funds.)
COMPARISON OF PRINCIPAL RISK FACTORS. Both High Yield Fund and Plus
Fund are subject to the risks of investing in U.S. and foreign bond markets.
Plus Fund, however, is also subject to additional risks due to its use of
leverage and due to its ability to invest without limit in securities that are
rated lower than B or the equivalent.
LEVERAGE. Leverage creates risks for stockholders, including the
likelihood of greater volatility in the NAV and market price of shares of Plus
Fund and the risk that fluctuations in interest rates on indebtedness may
adversely affect the return to stockholders. Plus Fund uses leverage; High Yield
Fund does not.
Plus Fund has obtained a secured line of credit pursuant to which it
may borrow up to $200,000,000 for the purpose of making additional investments.
During the twelve months ended January 31, 2000, the Fund has maintained
outstanding borrowings under the line of credit in amounts ranging between
approximately $___________ and $___________. These borrowings have represented
between __% and __% of Plus Fund's total assets. Following the Reorganization,
Plus Fund anticipates increasing its borrowings so as to maintain its leverage
within a range of between 26% and 31% of its increased total assets.
The terms of Plus Fund's line of credit require that it maintain
collateral, segregated with the Fund's custodian and pledged to secure the
Fund's obligations under the line of credit, having a value that at all times is
equal to at least 250% of Plus Fund's outstanding borrowings under the line of
credit and to maintain eligible assets having a value equal to at least 300% of
outstanding borrowings. The required collateral (as well as the assets used to
satisfy the 300% asset coverage requirement) must be comprised of Fund portfolio
assets that satisfy certain eligibility requirements. Subject to certain
conditions, the Fund is able to substitute eligible collateral as necessary in
order to effect portfolio transactions, and Mitchell Hutchins does not believe
that Plus Fund's obligation to maintain collateral will impede the Fund's
ability to manage its assets in accordance with its investment objectives.
To the extent the income or capital appreciation derived from
securities purchased with funds received from leverage exceeds the cost of
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<PAGE>
leverage, the Fund's return will be greater than if leverage had not been used.
Conversely, if the income and 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 stockholders as dividends and other
distributions will be reduced. Even in the latter case, however, Mitchell
Hutchins may decide to maintain Plus Fund's leveraged position if it deems such
action to be appropriate under the circumstances.
CREDIT QUALITY. Plus Fund may invest its entire portfolio in securities
rated lower than B or the equivalent while High Yield Fund is limited to
investing up to 20% of its total assets in such securities.
Conversely, High Yield Fund is also limited to investing up to 20% of
its total assets in securities rated higher than BB or the equivalent, compared
to 35% for Plus Fund. Securities rated below B have greater risks and include
securities in default or at greater risk of default. Plus Fund may invest no
more than 15% of its total assets in securities that are in default at the time
of purchase.
FEDERAL INCOME TAX CONSIDERATIONS. The Funds will not recognize any
gain or loss for federal income tax purposes by reason of the Reorganization.
Plus Fund's acquisition of High Yield Fund's assets ("Assets") in exchange
solely for Plus Fund Shares (and cash in lieu of certain fractional Plus Fund
Shares) and Plus Fund's assumption of High Yield Fund's liabilities, followed by
the PRO RATA distribution of Plus Fund Shares and cash or fractional shares, as
appropriate, to High Yield Fund stockholders constructively in exchange for
their High Yield Fund shares, will qualify as a reorganization within the
meaning of section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended
("Code"), and each Fund will be "a party to a reorganization" within the meaning
of section 368(b) of the Code. Plus Fund's basis for the Assets will be the same
as that of High Yield Fund immediately before the Reorganization, and Plus
Fund's holding period for the Assets will include High Yield Fund's holding
period. A High Yield Fund stockholder's aggregate basis for the Plus Fund Shares
to be received by it in the Reorganization will be the same as the aggregate
basis for its High Yield Fund shares to be constructively surrendered in
exchange for those Plus Fund Shares less the basis of any fractional Plus Fund
Share deemed sold, and its holding period for those Plus Fund Shares will
include its holding period for those High Yield Fund shares, provided the
stockholder held them as capital assets on the Closing Date.
COMPARISON OF PRINCIPAL RISK FACTORS
PRIMARY DIFFERENCES IN INVESTMENT RISKS OF THE FUNDS
High Yield Fund and Plus Fund invest in substantially similar
securities in the U.S. and foreign bond markets and they are subject to
substantially the same investment risks. Plus Fund, however, is subject to
additional risks due to its use of leverage and its ability to invest a larger
portion of its portfolio in lower-rated securities.
LEVERAGE
Plus Fund is authorized to borrow money for investment purposes, which
constitutes leverage. Leverage is a speculative technique that increases Plus
Fund's exposure to risk of capital loss but that also creates an opportunity for
an increased return for Plus Fund's stockholders. Plus Fund can also borrow
money for temporary or emergency purposes. By contrast, High Yield Fund can only
borrow money for temporary or emergency purposes.
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Plus Fund may leverage up to 33 1/3% of its total assets (including the
amount obtained through leverage), but its current operating policy is to
maintain borrowings in an amount ranging between approximately 26-31% of total
assets. Pursuant to a Revolving Credit and Security Agreement with Corporate
Receivables Corporation, Citibank, N.A. and Citicorp North America, Inc.
("Credit Agreement"), Plus Fund has obtained a secured line of credit under
which it can borrow up to $200,000,000 for investment purposes. During the
twelve months ended January 31, 2000, the Fund maintained outstanding borrowings
under this line of credit in amounts ranging between approximately $__________
and $____________. These borrowings have represented between approximately __%
and __% of Plus Fund's total assets. As of January 31, 2000, Plus Fund had $167
million in outstanding borrowings, representing about 27% of its total assets.
Following the Reorganization, Plus Fund anticipates increasing its borrowings so
as to maintain its leverage within a range of between 26% and 31% of its
increased total assets.
Pursuant to the Credit Agreement, Plus Fund must maintain collateral,
segregated with the Fund's custodian and pledged to secure the Fund's
obligations under the line of credit, having a value that at all times is equal
to at least 250% of Plus Fund's outstanding borrowings under the line of credit.
Plus Fund also must maintain eligible assets having a value equal to at least
300% of its outstanding borrowings. The required collateral (as well as the
assets used to satisfy the 300% asset coverage requirement) must be comprised of
securities or other assets in the Fund's portfolio that satisfy certain
eligibility requirements. For example, the Fund may not count more than 10% of
its assets invested in securities rated below CCC or the equivalent or more than
40% of its assets invested in securities rated CCC or below or the equivalent
toward either requirement.
Subject to certain conditions, the Fund is able to substitute eligible
collateral as necessary in order to effect portfolio transactions, and Mitchell
Hutchins does not believe that Plus Fund's obligation to maintain collateral
will impede the Fund's ability to manage its assets in accordance with its
investment objectives. Similarly, while the collateral and asset coverage
eligibility requirements could limit the Fund's ability to invest in securities
rated CCC or below or the equivalent, Mitchell Hutchins does not believe that
there will be any practical effect on the Fund's ability to invest in these
low-rated securities to the extent desired by its portfolio managers.
Capital raised through leverage is subject to interest costs, which
could exceed the income and appreciation on the assets purchased with the
proceeds of the leverage. Under the Credit Agreement, Plus Fund pays interest at
a rate that normally is comparable to market commercial paper rates. The Fund
also pays certain other fees in connection with the line of credit, which
increase the cost of borrowing over the stated interest rate. During the year
ended January 31, 2000, Plus Fund paid interest and other fees ranging from
____% to ____% on its outstanding borrowings.
Plus Fund's borrowings under the Agreement and any other transactions
involving Fund indebtedness (other than for temporary or emergency purposes) are
considered "senior securities" for purposes of the Investment Company Act of
1940, as amended ("1940 Act"), and constitute leverage. 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 Plus Fund's investment performance. Successful use of leverage depends
on Mitchell Hutchins' ability to predict correctly interest rates and market
movements. There is no assurance that the use of a leveraging strategy will be
successful during any period in which it is used.
Under the 1940 Act, Plus Fund is not permitted to borrow or otherwise
incur indebtedness constituting senior securities unless immediately thereafter
the Fund has total assets (including the proceeds of the indebtedness) at least
equal to 300% of the amount of the indebtedness. Stated another way, the Fund
may not borrow for investment purposes more than 33 1/3% of its total assets,
including the amount borrowed. The Fund also must maintain this 300% "asset
coverage" for as long as the indebtedness is outstanding. The 1940 Act provides
that the Fund may not declare any cash dividend or other distribution on Plus
Fund Shares, or purchase any Plus Fund Shares (through tender offers or
otherwise), unless it would satisfy this 300% asset coverage after deducting the
amount of the dividend, other distribution or share purchase price, as the case
may be. The 300% asset coverage requirement under the 1940 Act is substantially
the same as the 300% asset coverage requirement that is imposed on Plus Fund
under its Credit Agreement, except that assets used to satisfy the 1940 Act
requirement are not subject to special eligibility requirements.
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CREDIT QUALITY OF SECURITIES
Plus Fund normally invests at least 65% of its total assets in (i)
income producing debt securities that are rated lower than Baa by Moody's
Investors Service, Inc. ("Moody's"), lower than BBB by Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ("S&P"), comparably rated by another
nationally recognized statistical rating organization (collectively with Moody's
and S&P, "Rating Agencies") or, if unrated, determined to be of equivalent
quality by Mitchell Hutchins and (ii) equity securities (including common
stocks, rights, and warrants for equity securities) that are attached to, or are
part of a unit including, such debt securities. Plus Fund may invest up to 15%
of its total assets in securities that are rated as low as D (which normally are
in default at the time of purchase). Plus Fund's ability to invest in securities
rated CCC or lower or the equivalent is somewhat limited by the asset coverage
and other requirements under the Credit Agreement. Mitchell Hutchins does not
believe, however, that these requirements will prevent Plus Fund from investing
to the extent it deems desirable in these lowest rated securities. In addition,
Plus Fund may invest up to 35% of its total assets in investment grade
securities (I.E., securities rated Baa/BBB or higher) 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.
High Yield Fund normally invests at least 80% of its total assets in
securities rated Ba or B by Moody's, BB or B by S&P or comparably rated by
another Rating Agency. The Fund may invest up to 20% of its total assets in
securities rated higher or lower than these levels, including securities rated
as low as D, and in unrated securities that Mitchell Hutchins determines to be
of comparable quality to rated securities in which High Yield Fund can invest.
High Yield Fund also may acquire equity securities when attached to, or as part
of a unit including, debt securities, or in connection with a conversion or
exchange of debt securities. High Yield Fund, however, may not invest in other
equity securities.
For both Funds, 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. Mitchell Hutchins assesses
securities on the basis of the highest rating assigned by any Rating Agency.
Securities rated BB or Ba are considered to be within the "upper tier"
of the high yield, high risk income securities market and securities rated B are
considered to be in the "middle tier" of this market. Securities within these
two tiers constitute the largest portions of this market. Investments in
securities that are rated Ca or lower by Moody's, CC or lower by S&P, and
comparable securities are extremely speculative and involves significant risk.
Securities rated D and comparable unrated securities may be in default at the
time of purchase. These securities frequently do not produce income while they
are outstanding and may require the Funds to bear certain extraordinary expenses
in order to protect and recover their investment. To the extent Plus Fund
pursues its secondary investment objective of capital appreciation through
investment in these securities, its ability to achieve current income for its
stockholders may be diminished.
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RISKS COMMON TO BOTH FUNDS
MARKET PRICE AND NET ASSET VALUE OF SHARES
Shares of closed-end investment companies, such as the Funds,
frequently trade at a discount to their NAVs. Whether an investor will realize
gains or losses upon the sale of shares of either Fund does not depend directly
upon changes in the Fund's NAV, but rather 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 each Fund's shares is determined by such factors
as relative demand for and supply of shares in the market, general market and
economic conditions, changes in the Fund's NAV and other factors beyond the
control of the Fund. This market risk is separate and distinct from the risk
that each Fund's NAV may decrease.
Due to differences in the market price and NAV of the Funds' shares,
High Yield Fund stockholders who exchange their shares for Plus Fund Shares at
NAV may receive Plus Fund Shares with an aggregate market value that is higher
or lower than the market value of their High Yield Fund shares. The reason for
this difference is that the relative market prices of the Funds' shares in
relation to their NAVs are likely to be different; i.e., the Funds' shares are
likely to trade at different discounts or premiums. As of ___________, 2000
shares of High Yield Fund were trading at a discount of __%, compared to __% for
Plus Fund. It is likely, however, that one or both of these discount levels will
change by the Closing Date. For a comparison to the historical trading discounts
and premiums for each Fund's shares, see "Comparison of the Funds - Trading
History - Share Price Data."
The Funds' shares are designed primarily for long-term investors.
Investors in the Funds' shares should not view the Funds as vehicles for trading
purposes.
LOWER-RATED DEBT SECURITIES
Compared to higher-quality debt securities, securities rated below
investment grade, often referred to as "junk bonds," involve greater risk of
default or price changes due to changes in the credit quality of the issuer
because they are generally unsecured and may be subordinated to other creditors'
claims. 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 value of junk
bonds often fluctuates in response to issuer, political or economic developments
and can decline significantly over short periods of time or during periods of
general or regional economic difficulty. During those times, the bonds may be
difficult to value or sell at a fair price. Credit ratings on junk bonds do not
necessarily reflect their actual market risk.
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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 a Fund's net asset value. The Funds do not necessarily dispose of a
security when its rating is reduced below the rating at the time of purchase,
although Mitchell Hutchins monitors 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 Funds' investment
objectives depends 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.
9
<PAGE>
INVESTING IN FOREIGN SECURITIES
Each fund may invest in foreign securities, including securities of
issuers in emerging market countries. Investments in foreign securities may be
affected by, among others, the following factors:
o CURRENCY EXCHANGE RATES - The dollar value of the Funds' investments
denominated in foreign currencies will be affected by changes in the
exchange rates between the dollar and the currencies in which those
investments are traded. Plus Fund may invest up to 15% of its total
assets in foreign-denominated securities, while High Yield Fund is
limited to 10% of its net assets.
o POLITICAL AND ECONOMIC CONDITIONS - The value of the Funds' foreign
investments may be adversely affected by political and social
instability in their home countries and by changes in economic or
taxation policies in those countries.
o REGULATIONS - Foreign companies generally are subject to less stringent
regulations, including financial and accounting controls, than are U.S.
companies. As a result, there generally is less publicly available
information about foreign companies than about U.S. companies. In
addition, certain countries may impose expropriation constraints on the
assets of certain companies.
o MARKETS - The securities markets of other countries are smaller than
U.S. securities markets. As a result, many foreign securities may be
less liquid and their prices may be more volatile than U.S. securities.
The risks described above for foreign securities may be more acute for
the Funds' 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. For example, many
emerging market countries have, in the past, experienced high rates of inflation
or sharply devalued their currencies against the U.S. dollar, thereby causing
the value of investments in companies located in those countries to decline.
Emerging market countries may have policies that restrict investment by
foreigners in those countries, and there is a risk of government expropriation
or nationalization of private property. The possibility of low or non-existent
trading volume in the securities of companies in emerging markets may also
result in a lack of liquidity and in price volatility. Issuers in emerging
markets typically are subject to a greater degree of change in earnings and
business prospects than are companies in developed markets. Transaction costs
are often higher in emerging market countries and there may be additionsl risks
and delays in custody and settlement procedures.
10
<PAGE>
ORIGINAL ISSUE DISCOUNT, ZERO COUPON AND PAYMENT-IN-KIND SECURITIES
The Funds 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. The portion of the OID that accrues each year on
zero coupon and other OID securities in which a Fund invests, and the "interest"
received or accrued on a Fund's PIK securities, must be included in its income
annually. To qualify for tax treatment as a regulated investment company ("RIC")
and to avoid a federal excise tax, each 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. As a result, each
Fund may be unable to purchase additional securities with cash used to make such
distributions, and its current income ultimately may be reduced as a result.
Zero coupon, other OID and PIK securities usually trade at a substantial
discount from their face or par value and will be subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities that make current distributions of interest
in cash.
CALL FEATURES
A substantial portion of the securities held by the Funds may permit
the issuer to "call," or redeem, its securities prior to maturity. If an issuer
were to redeem securities held by a 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.
PREMIUM SECURITIES
The Funds may each invest a substantial portion of their 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 Funds with a higher level of investment income
distributable to stockholders on a current basis than if the Funds purchased
securities bearing current market rates of interest. If such premium securities
are called prior to maturity, the Funds may recognize a capital loss.
HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS
Options, futures contracts, options on futures contracts, forward
currency contracts and interest rate swap transactions are derivatives and their
use entails special risks. The value of "derivatives" - so called because their
value "derives" from the value of an underlying asset, reference rate or index -
may rise or fall more rapidly than other investments. For some derivatives, it
is possible for a Fund to lose more than the amount it invested in the
derivative. If a Fund uses derivatives to adjust or "hedge" the overall risk of
its portfolio, it is possible that the hedge will not succeed. This may happen
for various reasons, including unexpected changes in the value of the
derivatives that are not matched by opposite changes in the value of the rest of
the Fund's portfolio.
11
<PAGE>
PROPOSAL: REORGANIZATION OF HIGH YIELD FUND INTO PLUS
FUND
INFORMATION ABOUT THE REORGANIZATION
Under the Plan, High Yield Fund will reorganize into Plus Fund and High
Yield Fund's stockholders will become stockholders of Plus Fund.
Each High Yield Fund stockholder's shares of High Yield Fund will be
converted into an equivalent dollar amount of full Plus Fund Shares plus
fractional shares for High Yield Fund stockholders that participate in High
Yield Fund's Dividend Reinvestment Plan and cash in lieu of any fractional
shares for all other High Yield Fund stockholders, computed based on the NAV per
share of each Fund on the Closing Date. No sales charge or fee of any kind will
be charged to High Yield Fund stockholders in connection with their receipt of
Plus Fund Shares in the Reorganization. Neither Fund will recognize any gain or
loss for federal income tax purposes as a result of the Reorganization. High
Yield Fund stockholders will recognize no gain or loss except with respect to
any cash received in lieu of fractional Plus Fund Shares.
The Reorganization is expected to occur by __________ ___, 2000, or by
such later date as the parties may agree in writing. The Reorganization is
contingent upon both stockholder approval and each Fund satisfying the terms of
the Plan. Under Maryland law, stockholders of a corporation whose shares are
traded on a national securities exchange, such as the Funds' shares, are not
entitled to demand the fair value of their shares upon a merger; therefore, the
stockholders of the Funds will be bound by the terms of the Reorganization under
the Plan. However, any stockholder of either Fund may sell his or her shares of
common stock on the New York Stock Exchange ("NYSE"). The shares of High Yield
Fund may not be listed on the NYSE or available for trading there for several
days prior to the date of the Reorganization.
After the Closing Date, High Yield Fund would deregister as an
investment company under the 1940 Act and would terminate its separate existence
under Maryland law. In addition, High Yield Fund's shares of common stock would
be removed from listing on the NYSE and withdrawn from registration under the
Securities Exchange Act of 1934, as amended ("Securities Exchange Act").
The Plan may be terminated and the Reorganization abandoned, whether
before or after approval by High Yield Fund's stockholders, at any time prior to
the Closing Date (i) by the mutual consent of the Board of Directors of each
Fund; or (ii) by either Fund (a) if the other Fund materially breaches any
representation, warranty, or covenant contained in the Plan, (b) if the
conditions to that Fund's obligations under the Plan have not been satisfied or
waived, or (c) if that Fund's Board, in its sole discretion, determines that
proceeding with the Reorganization would not be in the best interests of its
stockholders. If the Reorganization has not been consummated by _______, 2000,
the Plan automatically will terminate, unless a later date is mutually agreed
upon by the Board of Directors of each Fund.
BOARD CONSIDERATIONS
The High Yield Fund Board, including the Board Members who are not
"interested persons," as that term is defined in the 1940 Act, of either High
Yield Fund or Plus Fund ("Independent Board Members"), determined that the
Reorganization is in the best interests of High Yield Fund and voted unanimously
to recommend that stockholders approve the Plan.
12
<PAGE>
Consistent with the policies set forth in High Yield Fund's Prospectus,
the Board from time-to-time considers whether it would be in the best interest
of the Fund to take actions designed to eliminate or reduce the discount to NAV
at which the Fund's shares trade and to otherwise enhance stockholder value.
Such actions include a merger with another investment company, conversion to an
open-end investment company, open market share repurchase offers, and tender
offers. After considering various actions to address the trading discount and
maximize stockholder value, High Yield Fund's Board unanimously approved a
proposal to reorganize High Yield Fund into Plus Fund.
At the Boards' November 11, 1999 meetings, Mitchell Hutchins presented
its assessments of High Yield Fund and Plus Fund and suggested that both Funds
could benefit from a merger. The Boards of each Fund considered Mitchell
Hutchins' evaluations and requested that Mitchell Hutchins make a final proposal
at a subsequent board meeting. Mitchell Hutchins recommended the Reorganization
to the Boards of High Yield Fund and Plus Fund at Board meetings held on
December 17, 1999. Mitchell Hutchins advised that both Funds' stockholders would
benefit from the economies of scale (i.e., lower operating expense ratios) and
opportunities for broader diversification that a larger asset base would
provide. They also noted that High Yield Fund's stockholders could additionally
benefit from the ability to use leverage through borrowing. Mitchell Hutchins
also advised that the Reorganization would permit High Yield Fund's stockholders
to gain the added flexibility of Plus Fund's slightly broader investment
parameters. Further, the Reorganization itself could enhance the ability of
securities analysts to follow Plus Fund because it will eliminate any confusion
in the marketplace that results from two funds with substantially similar names,
as well as investment objectives and investment policies, being managed by the
same investment adviser.
As part of its consideration, the High Yield Fund Board examined a
number of factors with respect to the Reorganization, including: (1) the
compatibility of the Funds' investment objectives, policies and restrictions;
(2) the Funds' respective investment performances; (3) the effect of the
Reorganization on the expense ratio of Plus Fund and that expense ratio relative
to High Yield Fund's current expense ratio; (4) the costs to be incurred by each
Fund as a result of the Reorganization; (5) the tax consequences of the
Reorganization; (6) Mitchell Hutchins' assessment of the likely impact on High
Yield Fund's stockholders of the receipt of Plus Fund Shares at NAV; and (7) the
continuity of portfolio management. The Board also considered the potential
benefits of the Reorganization to other persons, including Mitchell Hutchins and
its affiliates.
The Board considered the investment objectives and policies of the
Funds and noted that their portfolios have had substantially similar risk
profiles based on the types of securities the Funds have held. The Board noted
that Plus Fund is subject to greater risk than High Yield Fund because it uses
leverage and may invest to a greater extent in lower-rated securities. The use
of leverage exposes Plus Fund to greater risk (and greater return) than other
investment practices. Despite these differences, the Board concluded that the
Funds' investment objectives and policies are reasonably compatible. Mitchell
Hutchins also informed the Board that it believed that the additional risks of
leverage and of investing in lower-rated securities were warranted by the
opportunity for higher yields.
13
<PAGE>
The Board also took into account the compatibility of the current
portfolio holdings of High Yield Fund and Plus Fund. Mitchell Hutchins informed
the Board that the two Funds' portfolios were sufficiently compatible that no
securities would need to be sold to accommodate the Reorganization. The Board
also considered the level and quality of investment advisory services provided
by Mitchell Hutchins to both Funds and decided that Plus Fund stockholders would
benefit from Mitchell Hutchins' continued supervision of portfolio management
services after the Reorganization.
In addition, the Board considered the historic performance of High
Yield Fund in relation to the performance of Plus Fund. Mitchell Hutchins
advised the Board that, while past performance provides no guarantee of future
results, Plus Fund has provided a greater total return based on net asset value
than High Yield Fund for the year ended January 31, 2000. Mitchell Hutchins
estimated that the yield for Plus Fund was higher as of the same date.
The Board also considered the impact the Reorganization would have on
expenses. In analyzing expenses, the Board evaluated the investment advisory and
administration fees paid by the Funds. High Yield Fund and Plus Fund pay
different advisory and administrative fees at different rates, and they
calculate their fees in different ways. High Yield Fund pays Mitchell Hutchins
investment advisory and administration fees, computed weekly and paid monthly,
of 0.90% of its average weekly net assets. Plus Fund pays Mitchell Hutchins
fees, computed weekly and paid monthly, of 0.70% of its average weekly total
assets minus liabilities other than the aggregate indebtedness constituting
leverage ("Managed Assets"). The investment advisory and administration fees
payable to Mitchell Hutchins when Plus Fund has outstanding borrowings is higher
than when it does not because the fee is calculated as a percentage of Managed
Assets, which include assets purchased with the proceeds of those borrowings.
Mitchell Hutchins indicated to the Board that Plus Fund would likely continue to
borrow about 26-31% of the Fund's total assets (including the amount obtained by
leverage) after the Reorganization, assuming similar market conditions. The
Board recognized that, given the level of Plus Fund's expected borrowings, the
effective investment advisory and administration fee rate would exceed 0.90% of
Plus Fund's weekly net assets. For example, at the level of Plus Fund's average
borrowings for the twelve months ended January 31, 2000 (27% of total assets),
the Fund paid Mitchell Hutchins a fee equal to an effective annual rate of 0.96%
of the Fund's average weekly net assets. The Board recognized that the use of
leverage requires greater allocation of resources within Mitchell Hutchins and
that a slightly higher net advisory fee was therefore appropriate.
In addition to considering the potential increase in the rate of
investment and advisory fees (when expressed as a percentage of net assets), the
Board discussed other expenses paid by High Yield Fund stockholders. Based on
Mitchell Hutchins' preliminary calculations, Mitchell Hutchins estimated that
after the Reorganization, on a PRO FORMA basis, Plus Fund Shares would have
total operating expenses, excluding interest and Reorganization expenses, that
would be a lower percentage of net assets than those of High Yield Fund. The
Board noted, however, the Reorganization would result in an increase in total
annual operating expenses (including interest payments) for High Yield Fund
stockholders. The Board also noted that estimates of the operating expenses of
the combined Fund, as a percentage of net assets, would be lower than that of
either Fund, excluding interest and Reorganization expenses. The Board also
considered Mitchell Hutchins' assessment that the yield for Plus Fund would
likely be higher than that of High Yield Fund and that the relatively higher
14
<PAGE>
yield should serve to offset the effect of the interest expense. For more
information on the comparative fees and expenses of the Funds, see "Comparison
of the Funds -- Fees and Expenses," below.
Mitchell Hutchins advised the Board that each High Yield Fund
stockholder would receive full Plus Fund Shares, plus cash or a fractional Plus
Fund Share, as appropriate, having an aggregate NAV equal to the NAV of his or
her High Yield Fund shares. Due to differences in the market discounts on the
Funds' shares, High Yield Fund stockholders may, however, receive Plus Fund
Shares with an aggregate market value that is higher or lower than the market
value of the shares previously held. The Board noted that, while Mitchell
Hutchins had no reason to believe that the Reorganization would result in High
Yield Fund's stockholders receiving shares with a market discount greater than
they would otherwise have experienced, there could be no assurance that the
market discount to NAV of Plus Fund would not be greater than the market
discount to NAV of High Yield Fund, or that the market discount to NAV of Plus
Fund Shares might not be greater in the future.
Finally, the Board reviewed the principal terms of the Plan and noted
that the securities and other assets held by High Yield Fund at the time of the
Reorganization will be valued at full market value, that the Reorganization
would be tax-free to High Yield Fund, and that High Yield Fund stockholders will
have ownership of a compatible fund. The Board also noted that High Yield Fund
stockholders would recognize no gain or loss, except with respect to any cash
received in lieu of fractional Plus Fund Shares.
On the basis of the information provided to each Board and on each
Board's evaluation of that information, the Boards determined that the proposed
Reorganization will not dilute the interests of stockholders of each Fund and
that it is in the best interest of each Fund. Therefore, each Fund's Board voted
unanimously to approve the Plan, and High Yield Fund's Board voted unanimously
to recommend that High Yield Fund stockholders approve the Plan.
THE PLAN
The Plan provides for the acquisition by Plus Fund of all of High Yield
Fund's assets in exchange for Plus Fund Shares and the assumption by Plus Fund
of all of High Yield Fund's liabilities. High Yield Fund will then distribute to
its stockholders the full Plus Fund Shares plus fractional Plus Fund Shares for
participants in High Yield Fund's Dividend Reinvestment Plan and cash in lieu of
fractional shares for all other stockholders. Each High Yield Fund stockholder
will receive full Plus Fund Shares and a fractional share or cash, as
appropriate, equal in aggregate NAV to the aggregate NAV of the stockholder's
High Yield Fund shares at the time of the Reorganization. These transactions are
scheduled to occur at [4:00] p.m., Eastern time, on _________, 2000, or on such
later date as the conditions to consummation of the Reorganization are
satisfied. High Yield Fund will be liquidated as soon as is practicable after
the Closing Date. See "Additional Information About the Reorganization" below.
High Yield Fund and Plus Fund each will receive an opinion of
Kirkpatrick & Lockhart LLP, their counsel, to the effect that the Reorganization
will constitute a tax-free reorganization within the meaning of section
368(a)(1)(C) of the Code. Accordingly, neither Fund will recognize any gain or
loss for federal income tax purposes as a result of the Reorganization. In
addition, High Yield Fund stockholders would recognize no gain or loss, except
with respect to any cash received in lieu of fractional Plus Fund Shares. To the
extent High Yield Fund sells securities prior to the Closing Date, there may be
net recognized gains or losses to the Fund. Any net recognized gains would
increase the amount of any distribution made to stockholders of High Yield Fund
15
<PAGE>
prior to the Closing Date. See "Additional Information About the Reorganization
- -- Federal Income Tax Considerations" below.
If the Reorganization is not approved by stockholders at the Meeting or
the conditions of the Plan are not met, High Yield Fund will continue to operate
as a separate closed-end fund, and the Board will then consider other options
and alternatives for the future of the Fund. Either Board may, in its
discretion, terminate the Plan prior to Reorganization.
COMPARISON OF THE FUNDS
FORMS OF ORGANIZATION
High Yield Fund and Plus Fund are diversified, closed-end management
investment companies registered under the 1940 Act and organized as Maryland
corporations on June 11, 1993 and April 24, 1998, respectively. High Yield Fund
commenced operations on December 7, 1993 and Plus Fund commenced operations on
June 26, 1998. Both Funds' shares are traded on the NYSE.
The operations of each Fund are governed by its Articles of
Incorporation, Bylaws and Maryland law. The overall direction and supervision of
each Fund is the responsibility of its Board, which has the primary duty of
ensuring that the Fund's general investment policies and programs are adhered to
and that the Fund is properly administered.
INVESTMENT OBJECTIVES
The investment objectives of High Yield Fund and Plus Fund are
substantially similar. High Yield Fund's investment objective is high current
income. The primary investment objective of Plus Fund is high income. Its
secondary objective is capital appreciation. Both Funds seek to achieve their
objective of high income by investing primarily in a diversified portfolio of
lower-rated, income-producing debt and related equity securities. Plus Fund
seeks 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, or as a result of declines in long-term interest rates.
INVESTMENT POLICIES
The primary differences in the investment policies of High Yield Fund
and Plus Fund are Plus Fund's use of leverage and its greater flexibility in
choosing the credit quality of its portfolio securities. Please see "Comparison
of Principal Risk Factors--Primary Differences in Investment Risks of the Funds"
for a comparison of the credit quality of the securities in which the Funds
may invest.
High Yield Fund may invest up to 35% of its net assets in securities of
foreign issuers, including foreign issuers in emerging market countries, with no
more than 10% of its net assets in securities of foreign issuers, that are
denominated and traded in foreign currencies. Plus Fund may invest up to 35% of
total assets in securities of foreign issuers, including foreign issuers in
emerging market countries, but may not invest more than 15% of total assets in
16
<PAGE>
securities denominated in currencies other than the U.S. dollar. Each Fund may
engage in hedging strategies, such as options, futures and forward currency
contracts, to attempt to reduce the overall risk of its investment portfolio,
enhance income, realize gains or manage its foreign currency exposure.
In selecting investments for both Funds, Mitchell Hutchins relies on
the expertise of the Fund's portfolio manager, as well as his team of analysts.
The investment process incorporates 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. Mitchell Hutchins also consults third party research and conducts
company visits as part of this selection process. A security selection process
is done to determine the appropriate type of security (such as lower-rated
bonds, common stock, etc.). Final security selection depends on relative values
based on a company's anticipated cash flow, interest and asset coverage,
leverage and earnings prospects. Mitchell Hutchins' portfolio management team
also uses 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.
INVESTMENT LIMITATIONS
High Yield Fund generally may not purchase securities on margin. Plus
Fund is not restricted in its ability to purchase securities on margin, but in
practice it does not do so to any material extent.
High Yield Fund may not engage in short sales of securities or maintain
a short position, except for short sales "against the box" and short positions
in connection with its use of derivative instruments. Plus Fund is not limited
in its ability to maintain short positions. However, neither Fund currently
engages in short sales.
17
<PAGE>
LEVERAGE
Plus Fund borrows money for investment purposes. Such borrowings
constitute leverage, a speculative technique. The Fund is authorized to utilize
leverage in an amount up to 33 1/3 of its total assets (including the amount
obtained through leverage), but is current operating policy is to maintain
borrowing in an amount equal to approximately 26-31% of total assets. Plus Fund
has obtained a secured line of credit under which it can borrow $200,000,000 for
investment purposes. (See "Comparison of Principal Risk Factors - Primary
Differences in Investment Risks of the Funds.") As of January 31, 2000, Plus
Fund had $167 million in outstanding borrowings under that line of credit,
representing about 27% of its total assets.
Plus Fund and can also engage in leverage through other bank borrowings
or other transactions involving indebtedness, through the issuance of preferred
stock, through reverse repurchase transactions or through dollar rolls. However,
the Fund's ability to use such other leverage is limited by the terms of its
existing line of credit. Plus Fund will not use leverage if it anticipates that
a leveraged capital structure would result in a lower return to stockholders
than the Fund could obtain over time without leverage.
Plus Fund can borrow additional money for temporary or emergency
purposes in an amount not to exceed 5% of its total assets (not including the
amount so borrowed). By contrast, High Yield Fund can borrow money but only for
temporary or emergency purposes and only in an amount not exceeding 10% of its
total assets not including the amount borrowed.
PORTFOLIO COMPATIBILITY
The current portfolio of High Yield Fund, consisting primarily of debt
securities of issuers located in the United States, is substantially compatible
with Plus Fund's portfolio. It is anticipated that none of High Yield Fund's
holdings would need to be sold to accommodate the Reorganization.
FEES AND EXPENSES
The following table describes the fees and expenses that you may pay if
you buy and hold shares of High Yield Fund and Plus Fund. The PRO FORMA
information reflects the anticipated effects of the Reorganization. The
information set forth below is based on the Funds' fees and expenses for the
twelve months ended January 31, 2000.
18
<PAGE>
<TABLE>
<CAPTION>
PLUS FUND
STOCKHOLDER TRANSACTION EXPENSES FOR BOTH FUNDS HIGH YIELD PRO FORMA
FUND PLUS FUND COMBINED
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum Sales Charge (load) Imposed on
Purchases (AS A PERCENTAGE OF OFFERING PRICE).. None(1) None(1) None(1)
Dividend Reinvestment Plan Fees ............... None None None
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- -------------------------------------------------------------------------------------------------------------
Investment Advisory and Administration Fees.. 0.90% 0.96% 0.96%
Interest Payments on Borrowed Funds.......... -- 2.24% 2.24%
Other Expenses(2)............................ 0.33% 0.26% 0.25%
Total Annual Fund Operating Expenses(2)...... 1.23% 3.46% 3.45%
</TABLE>
1 Purchases and sales of Fund shares on the NYSE are likely to be subject to
brokerage fees and related expenses.
2 Note: These figures do not include non-recurring organizational expenses
of $135,835 during Plus Fund's initial fiscal period ended May 31, 1999.
Had such expenses been included, Plus Fund would have incurred ____% and
____% for Other Expenses and Total Annual Expenses, respectively, and
the Plus Fund Pro Forma Combined figures would have reflected ____% and
____% for Other Expenses and Total Annual Expenses, respectively.
EXPENSE EXAMPLE
The following example is intended to help you compare the costs of
investing in Plus Fund, both before and after the Reorganization, with the costs
of investing in shares of High Yield Fund.
The example assumes that you invest $10,000 at net asset value in each
Fund for the time periods indicated. The example also assumes that your
investments each have a 5% return each year and that each Fund's operating
expenses remain the same. Although your actual returns and costs may be higher
or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
=============================================================================================================
<S> <C> <C> <C> <C>
PLUS FUND.................................. $___ $___ $___ $___
HIGH YIELD FUND............................ ___ ___ ___ ___
PLUS FUND PRO FORMA COMBINED............... ___ ___ ___ ___
</TABLE>
SALES CHARGES
PLUS FUND SHARES RECEIVED IN CONNECTION WITH THE REORGANIZATION WILL
NOT BE SUBJECT TO ANY SALE CHARGE.
TRADING HISTORY- SHARE PRICE DATA
The shares of Plus Fund are traded on the NYSE under the symbol "HYF."
The shares of High Yield Fund are traded on the NYSE under the symbol "PHT."
Shares of closed-end management investment companies frequently trade at
discounts from their NAVs, and the Funds' shares have also traded at a discount.
The following tables set forth, in the case of Plus Fund, for each fiscal
quarter since inception and, in the case of High Yield Fund, for each fiscal
quarter within the two most recent fiscal years and each fiscal quarter since
the beginning of the current fiscal year: (a) the per share high and low sales
prices as reported by the NYSE; (b) the NAV per share, based on the Fund's
19
<PAGE>
computation as of 4:00 p.m. on the last NYSE business day for the week
corresponding to the dates on which the respective high and low prices were
recorded; and (c) the discount or premium to NAV represented by the high and low
sales prices shown. The range of NAVs and of premiums and discounts for the
shares during the periods shown may be broader than is shown in this table. On
February ___, 2000, the closing price per share was $_____ and $_____, the NAV
per share was $_____ and $_____ and the discount to NAV was (____)% and (____)%,
for High Yield Fund and Plus Fund, respectively.
<TABLE>
<CAPTION>
(DISCOUNT) OR
CORRESPONDING NET PREMIUM TO NET
PLUS FUND SALES PRICE ASSET VALUES ASSET VALUE
- -----------------------------------------------------------------------------------------------------------------------
Quarter Ended High Low High Low High Low
- ------------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
2/29/00 $_____ $_____ $_____ $_____ ____% _____%
11/30/99 11.75 11.38 11.82 11.65 (0.59) (2.32)
8/31/99 12.63 11.38 12.34 11.97 2.35 (4.93)
5/31/99 12.94 12.13 12.71 12.45 1.81 (2.57)
2/28/99 13.06 12.00 13.01 12.75 0.38 (5.88)
11/30/98 13.63 11.44 12.33 11.92 10.54 (4.03)
8/31/98 15.06 11.75 15.00 13.08 0.40 (10.17)
(DISCOUNT) OR
CORRESPONDING NET PREMIUM TO NET
HIGH YIELD FUND SALES PRICE ASSET VALUES ASSET VALUE
- -----------------------------------------------------------------------------------------------------------------------
Quarter Ended High Low High Low High Low
- ------------- ---- --- ---- --- ---- ---
1/31/00 $ $ $ $ % %
10/31/99 11.38 9.75 11.76 11.15 (3.23) (12.56)
7/31/99 11.50 11.00 12.18 11.82 (5.58) (6.94)
4/30/99 12.13 11.13 12.05 12.12 0.66 (8.17)
1/31/99 12.75 11.63 12.10 12.13 5.37 (4.12)
10/31/98 13.50 11.31 14.19 12.72 (4.86) (11.08)
7/31/98 14.22 13.38 14.51 14.16 (2.00) (5.51)
4/30/98 14.81 13.69 14.55 14.57 1.79 (6.04)
1/31/98 14.44 13.88 14.36 14.22 0.56 (2.39)
10/31/97 14.38 13.56 14.63 14.27 (1.74) (4.95)
</TABLE>
DIVIDENDS AND OTHER DISTRIBUTIONS
High Yield Fund distributes all, and Plus Fund distributes
substantially all, of its net investment income as monthly dividends. The Funds
also annually distribute substantially all 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. Each Fund may make additional distributions, if necessary,
to avoid a 4% federal excise tax on certain undistributed ordinary income and
capital gains.
The Funds' monthly dividends may, from time to time, represent more or
less than the amount of net investment income earned by the
20
<PAGE>
Funds 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 Funds' monthly net income due
to fluctuations or expenses. Undistributed net investment income is reflected in
the Funds' NAV and, accordingly, a Fund's NAV is reduced when dividends are
paid. The dividend rate on each Fund's shares is adjusted from time to time by
each Fund's Board of Directors and varies as a result of the Fund's performance.
DIVIDEND REINVESTMENT PLAN
High Yield Fund and Plus Fund have established Dividend Reinvestment
Plans ("Reinvestment Plans") under which all stockholders whose Fund shares are
registered in their own names, or in the name of PaineWebber Incorporated
("PaineWebber") or its nominee, have all dividends and other distributions on
their shares automatically reinvested in additional shares of the respective
Fund, unless such stockholders elect to receive cash. Stockholders in each Fund
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. Stockholders who hold their
shares in the name of a broker or nominee other than PaineWebber (or its
nominee) should contact such broker or other nominee to determine whether, or
how, they may participate in the Reinvestment Plans. The ability of such
stockholders to participate in the Reinvestment Plans may change if their shares
of the respective Fund are transferred into the name of another broker or
nominee.
The Transfer Agent for each Fund serves as agent for the stockholders
in administering the Reinvestment Plans. After each Fund declares a dividend or
determines to make another distribution, the Transfer Agent, as agent for the
participants, receives the cash payment. However, the basis on which each Fund's
Transfer Agent acquires Fund shares under the Reinvestment Plan differs.
High Yield Fund's Transfer Agent uses the cash that it receives from
dividends paid by the Fund to buy Fund shares in the open market, on the NYSE or
otherwise, for the participants' accounts. Such shares may be purchased at
prices that may be higher or lower than the NAV per share of the Fund at the
time of purchase. The number of shares purchased with each distribution for a
particular stockholder equals the result obtained by dividing the amount of the
distribution payable to that stockholder by the average price per share
(including applicable brokerage commissions) that the Transfer Agent was able to
obtain in the open market. High Yield Fund will not issue any new shares in
connection with its Reinvestment Plan.
Plus Fund's Transfer Agent uses the cash that it receives from
dividends paid by the Fund to 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 NAV 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 invests 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 is determined by dividing the dollar amount of the
dividend by the NAV 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 NAV per share is greater than the market value per share (such
condition being referred to herein as "market discount"), the Transfer Agent
invests the dividend amount in shares acquired on behalf of the participants in
open-market purchases. The number of outstanding shares purchased with each
21
<PAGE>
purchased with each distribution for a particular stockholder equals the result
obtained by dividing the amount of the distribution payable to that stockholder
by the average price per share (including applicable brokerage commissions) that
the Transfer Agent is able to obtain in the open market.
For Plus Fund, if there is a market discount on the dividend payment
date, the Transfer Agent has until the last business day before the next date on
which the shares trade on an "ex-dividend" basis, but in no event more than 30
days after the dividend payment date ("last purchase date"), to invest the
dividend amount in shares acquired in open-market purchases. Since Plus Fund
pays monthly income dividends, the period during which open-market purchases can
be made exists only from the payment date of the dividend through the date
before the next "ex-dividend" date. Typically, this is approximately ten days.
If, before the Transfer Agent has completed its open-market purchases, the
market price of a share exceeds the NAV per share, the average per share
purchase price paid by the Transfer Agent may exceed the Fund's NAV 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, Plus Fund's Reinvestment 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 earlier of the
close of business on the last purchase date or the first day during the purchase
period on which the NAV per share equals or is less than the market price per
share.
Stockholders who participate in Plus Fund's Reinvestment Plan may
receive benefits not available to stockholders who do not participate in the
Reinvestment Plan. If the market price (plus commissions) of Plus Fund Shares is
above their NAV, participants in the Reinvestment Plan receive shares at less
than they could otherwise purchase them and have shares with a cash value
greater than the value of any cash dividends they would have received on their
Plus Fund Shares. If the market price plus commissions is below the NAV,
participants receive dividends in Plus Fund Shares with a NAV greater than the
value of any cash dividends they would have received on their shares. However,
there may be insufficient Plus Fund Shares available in the market to distribute
dividends in shares at prices below the NAV. Also, since Plus Fund does not
redeem its shares, the price on resale may be more or less than the NAV.
Each Fund's Transfer Agent maintains all stockholder accounts in its
Reinvestment Plans and furnishes written confirmations of all transactions in
the accounts, including information needed by stockholders for personal and tax
records. Shares in the account of each Reinvestment Plan participant are
maintained by the Transfer Agent in un-certificated form in the name of the
participant. Each High Yield Fund stockholder's proxy will include those shares
of stock purchased pursuant to its Reinvestment Plan.
There is no charge to participants for reinvesting dividends or other
distributions. The Transfer Agents' fees for the handling of reinvestment of
distributions are paid by the respective Funds. However, each participant pays a
PRO RATA share of brokerage commissions incurred with respect to the Transfer
Agents' open market purchases of Fund shares in connection with the reinvestment
of distributions.
22
<PAGE>
The automatic reinvestment of dividends and other distributions in Fund
shares does not relieve participants of any income tax that may be payable on
such distributions.
A stockholder who has elected to participate in a Reinvestment Plan may
terminate participation in the Reinvestment Plan at any time without penalty,
and stockholders who have previously terminated participation in a Reinvestment
Plan may rejoin it at any time. Changes in elections must be made in writing to
the Transfer Agent and should include the stockholder's name and address as they
appear on the share certificate or in the Transfer Agent's records. An election
to terminate participation in a Reinvestment Plan, until such election is
changed, will be deemed to be an election by a stockholder to take all
subsequent dividends in cash. An election will be effective only for dividends
declared and having a record date at least ten days after the date on which the
election is received.
Each Fund has reserved the right to amend or terminate its Reinvestment
Plan with respect to any dividend if notice of the change is sent to
participants at least 30 days before the record date for such dividend. The
Reinvestment Plans also may be amended or terminated by the Transfer Agent by at
least 30 days' written notice to all participants. All correspondence concerning
the Reinvestment Plans should be directed to the appropriate Fund's Transfer
Agent at PNC Bank, National Association, c/o PFPC Inc., 400 Bellevue Parkway,
Wilmington, Delaware 19809.
MANAGEMENT OF THE FUNDS
The overall management of the business and affairs of each Fund is
vested with its Board of Directors. The members of each Board are the same. Each
Board approves all significant agreements between the respective 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 each Fund
are delegated to its officers and to Mitchell Hutchins, subject to each Fund's
investment objective and policies and to general supervision by the Board of
Directors.
Subject to the supervision of each Fund's Board, Mitchell Hutchins
provides investment advisory and administration services to each Fund pursuant
to an Investment Advisory and Administration Contract dated November 23, 1993
for High Yield Fund and June 22, 1998 for Plus Fund ("Advisory Contracts").
Pursuant to each Advisory Contract, Mitchell Hutchins provides a continuous
investment program for the respective Fund, makes investment decisions and
places orders to buy, sell or hold particular securities. Mitchell Hutchins also
supervises all matters relating to the operation of the Fund and obtains for it
corporate officers, clerical staff, office space, equipment and services.
The portfolio manager responsible for the day-to-day management of both
Funds is James F. Keegan, a senior vice president of Mitchell Hutchins. Mr.
Keegan has been employed by Mitchell Hutchins since March 1996. Prior to March
1996, he was director of fixed income strategy and research of Merrion Group,
L.P. Other members of the Mitchell Hutchins High Income Group provide input on
market outlook, interest rate forecasts, and other considerations pertaining to
high yield, high risk income securities.
23
<PAGE>
High Yield Fund and Plus Fund pay different advisory and administrative
fees at different rates, and they calculate their fees in different ways. High
Yield Fund pays Mitchell Hutchins investment advisory and administration fees,
computed weekly and paid monthly, of 0.90% of its average weekly net assets.
Plus Fund pays Mitchell Hutchins fees, computed weekly and paid monthly, of
0.70% of its Managed Assets. Because the fees are calculated as a percentage of
Managed Assets, and given the level of Plus Fund's current borrowings and its
expectation to maintain borrowings in an amount equal to approximately 26-31% of
its total assets, it is likely that Plus Fund's effective investment advisory
and administration fee rate will continue to exceed 0.90% of its net assets.
Each Fund also incurs 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 each Fund's 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. For the
fiscal years ended July 31, 1999, July 31, 1998 and July 31, 1997, High Yield
Fund's total expenses, stated as a percentage of average net assets, were 1.19%,
1.15% and 1.34%, respectively. For the fiscal period June 26, 1998, through May
31, 1999, total expenses, stated as a percentage of average net assets, were
3.02% for Plus Fund. This figure includes 1.87% related to interest expense for
the period June 26, 1998, through May 31, 1999, representing the cost of
leverage to Plus Fund.
In accordance with procedures adopted by each Fund's Board, brokerage
transactions for each Fund are conducted through PaineWebber or its
affiliates and each Fund pays fees to PaineWebber for its services as lending
agent in each 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.
The Funds have the same directors and officers. Upon the
Reorganization, the directors and officers of Plus Fund will continue as the
directors and officers for the combined Fund. Please see Appendix B for the
names, ages and principal occupations of the current Board Members and Officers
of both Funds.
24
<PAGE>
OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian of both Funds' assets. State Street
Bank and Trust Company employs foreign sub-custodians, approved by each Fund's
Board of Directors, in accordance with applicable requirements under the 1940
Act, to provide custody of each Fund's foreign assets. PNC Bank, National
Association, whose principal business address is 1600 Market Street,
Philadelphia, Pennsylvania 19103, is each Fund's transfer and dividend
disbursing agent and registrar. The Funds also have the same independent
auditor, Ernst & Young LLP, which is located at 787 Seventh Avenue, New York,
New York 10019. Upon completion of the Reorganization, these entities will
continue to provide services to the combined Fund.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you
understand the financial performance of High Yield Fund and Plus Fund. Certain
information reflects financial results for a single share of each Fund.
In the table, "total investment return" represents the rate that an
investor would have earned on the investments in High Yield Fund shares and Plus
Fund Shares, respectively (assuming reinvestment of all dividends and
distributions).
The information has been audited (except as noted) by Ernst & Young
LLP, the Funds' independent auditors, whose reports, along with the Funds'
financial statements, are included in the Funds' Annual Reports to Stockholders.
The Annual Reports may be obtained without charge by calling [1-800-647-1568]
and are incorporated by reference herein.
HIGH YIELD FUND FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding throughout each period is
presented below:
<TABLE>
<CAPTION>
For the Six
Months ended
January 31, 2000 For the Years Ended July 31,
------------------------------------------------------------------
(unaudited) 1999 1998 1997 1996 1995
----------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.. $11.76 $14.18 $14.30 $13.25 $13.44 $13.76
------- ------- ------- ------- ------- ------
Net investment income................. 0.61 1.27 1.25 1.29 1.29 1.40
Net realized and unrealized gains
(losses) on investments .............. (0.43) (2.43) (0.11) 1.02 (0.16) (0.34)
------ ------ ------ ----- ------ ------
Net increase (decrease) from
investment operations................. 0.18 (1.16) 1.14 2.31 1.13 1.06
------ ------ ----- ----- ----- ----
Dividends from net investment income..
(0.63) (1.26) (1.26) (1.26) (1.32) (1.38)
------ ------ ------ ------ ------ ------
Net asset value, end of period........ $11.31 $11.76 $14.18 $14.30 $13.25 $13.44
======= ======= ======= ======= ======= ======
Market value, end of period........... $10.56 $11.31 $13.44 $13.94 $12.50 $12.38
====== ======= ======= ======= ======= ======
Total investment return (1): (0.73)% (6.35)% 5.45% 22.59% 12.16% 11.87%
======== ======= ===== ====== ====== ======
Ratios/Supplemental Data:
Net assets, end of period (000's) $68,227 $70,905 $85,525 $86,232 $79,904 $81,081
<PAGE>
Expenses to average net assets... 1.29%* 1.19% 1.15% 1.34% 1.25% 1.21%
Net investment income to average
net assets....................... 10.58%* 10.34% 8.71% 9.39% 9.87% 10.68%
Portfolio turnover rate.......... 21% 102% 156% 122% 135% 103%
</TABLE>
(1) Total investment return is calculated assuming a purchase of capital stock
at market value on the first day of each period reported and a sale at
market value on the last day of each period reported and assuming
reinvestment of dividends at prices obtained under the Fund's Dividend
Reinvestment Plan. Total investment return does not reflect brokerage
commissions and has not been annualized.
* Annualized
26
<PAGE>
PLUS FUND FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding throughout each period is
presented below:
For the Eight For the Period
Months ended June 26, 1998+
January 31, 2000 through
(unaudited) May 31, 1999
-------------------- -----------------
Net asset value, beginning of period.. $12.31 $15.00
------ ------
Net investment income................. 1.00 1.42
Net realized and unrealized loss
from investment transactions.......... (0.46) (2.83)
------ ------
Net increase (decrease) from
investment operations................. 0.54 (1.41)
---- ------
Dividends from net investment income..
(1.00) (1.24)
------ ------
Net asset value, end of period........ $11.85 $12.35
====== ======
Market value, end of period........... $11.50 $12.31
====== ======
Total investment return (1): 3.12% (9.37)%
======= =======
Ratios/Supplemental Data:
Net assets, end of period (000's) $377,506 $388,929
Expenses to average net assets**. 3.58%* 3.02%*
Net investment income to average
net assets....................... 12.59%* 11.82%*
Portfolio turnover rate.......... 33% 52%
Asset Coverage++................. $3,261 $3,682
- --------------------------
+ Commencement of operations
++ Per $1,000 of bank loans outstanding
* Annualized
** This ratio includes 2.39% and 1.87 % related to interest expense for the
eight months ending January 31, 2000 and for the period June 26, 1998
through May 31, 1999, respectively, which represents the cost of leverage to
the Fund.
(1) Total investment return is calculated assuming a purchase of capital stock
at market value on the first day of each period reported and a sale at
market value on the last day of each period reported and assuming
reinvestment of dividends at prices obtained under the Fund's Dividend
Reinvestment Plan. Total investment return does not reflect brokerage
commissions and has not been annualized.
ADDITIONAL INFORMATION ABOUT THE REORGANIZATION
TERMS OF THE REORGANIZATION
The terms and conditions under which the Reorganization may be
consummated are set forth in the Plan. Significant provisions of the Plan are
27
<PAGE>
summarized below; however, this summary is qualified in its entirety by
reference to the Plan, a copy of which is attached as Appendix A to this Proxy
Statement/Prospectus.
The Plan contemplates (a) Plus Fund acquiring on the Closing Date all
the assets of High Yield Fund in exchange solely for Plus Fund Shares (and cash
in lieu of certain fractional Plus Fund Shares) and Plus Fund's assumption of
all of High Yield Fund's liabilities and (b) the distribution of those shares
and cash to High Yield Fund stockholders. High Yield Fund's assets include all
cash, cash equivalents, securities, receivables (including interest and
dividends receivable), claims and rights of action, rights to register shares
under applicable securities laws, books and records, deferred and prepaid
expenses shown as assets on its books and other property owned by it as of the
close of business on the Closing Date ("Effective Time") (collectively, the
"Assets"). Plus Fund will assume from High Yield Fund all its liabilities,
debts, obligations and duties of whatever kind or nature, whether absolute,
accrued, contingent or otherwise, whether or not arising in the ordinary course
of business, whether or not determinable at the Effective Time and whether or
not referred to in the Plan (collectively, the "Liabilities"); provided,
however, that High Yield Fund will use its best efforts to discharge all of its
known Liabilities prior to the Effective Time. Plus Fund will deliver its shares
(and cash in lieu of certain fractional Plus Fund Shares) to High Yield Fund,
which then will be distributed to High Yield Fund's stockholders.
The value of the Assets to be acquired and the amount of the
Liabilities to be assumed by Plus Fund and the NAV of a share of Plus Fund will
be determined as of the close of regular trading on the NYSE on the Closing
Date. Portfolio securities normally will be valued based on market values
obtained from independent pricing services that use reported last sales prices,
current market quotations or valuations from computerized "matrix" systems that
derive values based on comparable securities. If a market value is not available
from an independent pricing source for a particular security, that security is
valued at a fair value determined by or under the direction of the Funds'
Boards. The amortized cost method generally will be used to value bonds that
will mature in 60 days or less.
On, or as soon as practicable after, the Closing Date, High Yield Fund
will distribute to its stockholders of record as of the Effective Time the Plus
Fund Shares and cash it receives so that each High Yield Fund stockholder will
receive full Plus Fund Shares and cash or a fractional share, as appropriate,
equal in aggregate NAV to the aggregate NAV of the stockholder's High Yield Fund
shares. That distribution will be accomplished by opening accounts on the books
of Plus Fund in the names of High Yield Fund's stockholders and crediting those
accounts with full Plus Fund Shares and cash or a fractional share, as
appropriate, equal in aggregate NAV to the aggregate NAV of the stockholders'
High Yield Fund shares.
Immediately after the Reorganization, each former stockholder of High
Yield Fund will own full Plus Fund Shares and cash or a fractional share, as
appropriate, equal in NAV to the aggregate NAV of that stockholder's shares in
High Yield Fund immediately prior to the Reorganization. The NAV per share of
Plus Fund will not be changed as a result of the Reorganization. Thus, the
Reorganization will not result in a dilution of any stockholder ownership
interest.
28
<PAGE>
DESCRIPTION OF SECURITIES TO BE ISSUED
Pursuant to its Articles of Incorporation and Bylaws, Plus Fund may
issue up to 200,000,000 shares of capital stock, $0.001 par value, having an
aggregate par value of $200,000.
Each share of Plus Fund represents an equal proportionate interest with
other shares in that Fund. Each share has a par value of $0.001 and equal
earnings, assets and voting privileges, except as noted in Plus Fund's SAI. Each
share is entitled to dividends and other distributions out of the income earned
and gain realized on the assets belonging to the Fund as declared by the Board.
Plus Fund Shares entitle their holders to one vote per full share and fractional
votes for fractional shares held. Plus Fund Shares are fully paid and
non-assessable when issued.
DIVIDENDS AND OTHER DISTRIBUTIONS
On or before the Closing Date, High Yield Fund will declare and pay as
a distribution substantially all of its undistributed net investment income, net
capital gain, net short-term capital gain and net gains from foreign currency
transactions to maintain its tax treatment as a RIC.
The consummation of the Reorganization is subject to a number of
conditions set forth in the Plan, some of which may be waived by either Fund. In
addition, the Plan may be amended in any mutually agreeable manner, except that
no amendment may be made subsequent to the Meeting that would have a material
adverse effect on High Yield Fund stockholders' interests.
SURRENDER AND EXCHANGE OF HIGH YIELD FUND STOCK CERTIFICATES
After the Effective Time, each holder of an outstanding certificate or
certificates formerly representing High Yield Fund shares will be entitled to
receive, upon surrender of his or her certificate(s), a certificate representing
the number of Plus Fund Shares distributable with respect to the holder's High
Yield Fund shares. PLEASE DO NOT SEND IN ANY SHARE CERTIFICATES AT THIS TIME.
Promptly after the Effective Time, PNC will mail to each holder of
certificate(s) formerly representing High Yield Fund shares, instructions and a
letter of transmittal for use in surrendering those certificate(s) for a
certificate representing Plus Fund Shares.
From and after the Effective Time, certificates formerly representing
High Yield Fund shares will be deemed for all purposes to evidence ownership of
the number of full Plus Fund Shares and either fractional Plus Fund Shares or
rights to cash in lieu thereof, as applicable, distributable with respect
thereto in the Reorganization, provided that until a holder of such certificate
surrenders it, no dividends payable to the holders of record of Plus Fund Shares
as of any date subsequent to the Effective Time shall be paid to that holder.
Any such dividends will be paid to that holder, without interest, when that
holder surrenders those High Yield Fund Share certificate(s) for exchange.
From and after the Effective Time, there will be no transfers on the
stock transfer books of High Yield Fund. If, after the Effective Time,
certificates representing shares of High Yield Fund shares are presented to Plus
Fund, they will be canceled and exchanged for certificates representing Plus
Fund Shares.
29
<PAGE>
ACCOUNTING TREATMENT
The Reorganization will be accounted for on a tax-free combined basis.
Accordingly, the book cost basis to Plus Fund of the Assets transferred to it by
High Yield Fund will be the same as High Yield Fund's book cost basis of the
Assets.
FEDERAL INCOME TAX CONSIDERATIONS
Each Fund will receive an opinion of Kirkpatrick & Lockhart LLP, its
counsel, substantially to the following effect:
(1) Plus Fund's acquisition of the Assets in exchange solely for full
and fractional Plus Fund Shares (plus cash in lieu of certain
fractional Plus Fund Shares) and Plus Fund's assumption of the
Liabilities, followed by High Yield Fund's distribution of those full
Plus Fund Shares PRO RATA to its stockholders those fractional Plus
Fund Shares to stockholders that participate in the Dividend
Reinvestment Plan and such cash to the remaining stockholders,
constructively in exchange for their High Yield Fund shares, will
qualify as a reorganization within the meaning of section 368(a)(1)(C)
of the Code, and each Fund will be "a party to a reorganization" within
the meaning of section 368(b) of the Code;
(2) High Yield Fund will recognize no gain or loss on its transfer of
the Assets to Plus Fund in exchange solely for Plus Fund Shares (and
cash in lieu of fractional Plus Fund Shares) and Plus Fund's assumption
of the Liabilities or on the subsequent distribution of those shares
and cash to High Yield Fund's stockholders in constructive exchange
for their High Yield Fund shares;
(3) Plus Fund will recognize no gain or loss on its receipt of the
Assets in exchange solely for Plus Fund Shares (plus cash in lieu of
certain fractional Plus Fund Shares) and its assumption of the
Liabilities;
(4) Plus Fund's basis for the Assets will be the same as High Yield
Fund's basis therefor immediately before the Reorganization, and Plus
Fund's holding period for the Assets will include High Yield Fund's
holding period therefor;
(5) A High Yield Fund stockholder will recognize no gain or loss on the
constructive exchange of all its High Yield Fund shares solely for full
Plus Fund Shares and cash or a fractional Plus Fund Share, as
appropriate, pursuant to the Reorganization, except with respect to any
cash received in lieu of a fractional Plus Fund Share; and
(6) A High Yield Fund stockholder's aggregate basis for the Plus Fund
Shares to be received by it in the Reorganization will be the same as
the aggregate basis for its High Yield Fund shares to be constructively
surrendered in exchange for those Plus Fund Shares, decreased by any
cash received, and increased by any gain recognized, on the exchange.
Its holding period for those Plus Fund Shares will include its holding
period for those High Yield Fund shares, provided the stockholder held
them as capital assets on the Closing Date.
The opinion may state that no opinion is expressed as to the effect of
the Reorganization on the Funds or any High Yield Fund stockholder with respect
to any asset as to which any unrealized gain or loss is required to be
recognized for federal income tax purposes at the end of a taxable year (or on
the termination or transfer thereof) under a mark-to-market system of
accounting.
Utilization by Plus Fund after the Reorganization of any
pre-Reorganization capital losses realized by High Yield Fund could be subject
to limitation in future years under the Code.
30
<PAGE>
Stockholders of High Yield Fund should consult their tax advisers
regarding the effect, if any, of the Reorganization in light of their individual
circumstances. Because the foregoing discussion only relates to the federal
income tax consequences of the Reorganization, those stockholders also should
consult their tax advisers as to state and local tax consequences, if any, of
the Reorganization.
CAPITALIZATION
The following table shows the capitalization of High Yield Fund and
Plus Fund as of January 31, 2000, and on a PRO FORMA combined basis as of
January 31, 2000, giving effect to the Reorganization:
PLUS FUND
HIGH YIELD FUND PLUS FUND PRO FORMA COMBINED
--------------- --------- ------------------
Net Assets $68,227,000 $377,506,000 $445,733,000
Shares Outstanding 6,031,667 31,858,628 37,683,554
Net Asset Value Per Share $11.31 $11.85 $11.85
REQUIRED VOTE. The proposal to approve the Plan requires the
affirmative vote of a majority of the votes entitled to be cast on the proposal.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE PLAN OF REORGANIZATION.
----------------------
LEGAL MATTERS
Certain legal matters concerning High Yield Fund and Plus Fund and
their participation in the Reorganization, the issuance of Plus Fund Shares in
connection with the Reorganization and the tax consequences of the
Reorganization will be passed upon by Kirkpatrick & Lockhart LLP, 1800
Massachusetts Avenue, N.W., Washington, D.C. 20036-1800, counsel to High Yield
Fund and Plus Fund.
INFORMATION FILED WITH THE SEC AND NYSE
This Proxy Statement/Prospectus and the related SAI do not contain all
the information set forth in the registration statements and the exhibits
relating thereto and annual reports which High Yield Fund and Plus Fund have
filed with the Securities and Exchange Commission pursuant to the requirements
of the Securities Act of 1933 and the 1940 Act. The SEC file number for High
Yield Fund is 811-7804/33-69260. The SEC file number for Plus Fund is
811-08765/333-5107.
High Yield Fund and Plus Fund are each subject to the informational
requirements of the 1940 Act and the Securities Exchange Act and, in accordance
therewith, each files reports and other information with the SEC. Reports, proxy
statements, registration statements and other information filed by High Yield
Fund and Plus Fund (including the Registration Statement of Plus Fund on Form
N-14 of which this Proxy Statement/Prospectus is a part) may be inspected
without charge and copied at the public reference facilities maintained by the
SEC at Room 1014, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549,
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and at the following regional offices of the SEC: 7 World Trade Center, New
York, NY 10048; and 500 West Madison Street, 14th floor, Chicago, IL 60661.
Copies of such material may also be obtained from the Public Reference Room of
the SEC, Office of Consumer Affairs and Information Services at 450 Fifth
Street, N.W., Washington, DC 20549 at the prescribed rates. The SEC maintains an
Internet web site at http://www.sec.gov that contains information regarding Plus
Fund, High Yield Fund, and other registrants that file electronically with the
SEC.
High Yield Fund and Plus Fund are listed and publicly traded on the
NYSE. If the Reorganization is approved, High Yield Fund will delist from NYSE
and deregister as an investment company under the 1940 Act by filing an
application on Form N-8F with the SEC upon consummation of the Reorganization.
High Yield Fund will also terminate its existence as a Maryland corporation.
Reports, proxy statements and other information concerning both Funds may be
inspected at the offices of NYSE at 11 Wall Street, New York, New York, 10005.
INFORMATION ABOUT THE FUNDS' ADVISER AND ADMINISTRATOR
Mitchell Hutchins serves as investment adviser and administrator to
both High Yield Fund and Plus Fund. Mitchell Hutchins is located at 51 West 52nd
Street, New York, New York 10019-6114. As of January 31, 2000, Mitchell Hutchins
was adviser or sub-adviser of 33 investment companies with 76 separate
portfolios and aggregate assets of approximately $52.7 billion, including High
Yield Fund and Plus Fund, and encompassing a broad range of investment
objectives.
Mitchell Hutchins is an indirect wholly owned subsidiary of
PaineWebber, which in turn is an indirect wholly owned subsidiary of Paine
Webber Group, a publicly owned financial services holding company.
EXPERTS
The audited financial statements of High Yield Fund and Plus Fund
incorporated by reference herein and included in High Yield Fund's Annual Report
to Stockholders for the fiscal year ended July 31, 1999, and in Plus Fund's
Annual Report to Stockholders for the fiscal year ended May 31, 1999,
respectively, have each been audited by Ernst & Young LLP, independent auditors,
whose reports thereon are included in the Funds' respective Annual Reports to
Stockholders. These financial statements have been incorporated herein by
reference in reliance on Ernst & Young LLP's reports given on its authority as
experts in auditing and accounting.
STOCKHOLDER PROPOSALS
High Yield Fund will continue to hold annual meetings only if the
Reorganization is not approved. If the Reorganization is approved, High Yield
Fund will be liquidated. Any stockholder who wishes to submit proposals to be
considered at the next annual stockholders' meeting (if held) must submit such
proposal to the Fund at 51 West 52nd Street, New York, New York 10019-6114. In
order to be considered at that meeting, stockholder proposals must be received
by the Fund no later than June 1, 2000 and must satisfy other requirements of
the federal securities laws.
Plus Fund will continue to hold annual meetings whether or not the
Reorganization is approved. Any stockholder who wishes to submit proposals to be
considered at the next annual stockholders' meeting must submit such proposal to
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the Fund at 51 West 52nd Street, New York, New York 10019-6114. In order to be
considered at that meeting, stockholder proposals must be received by the Fund
no later than March 30, 2000 and must satisfy other requirements of the federal
securities laws.
ADDITIONAL INFORMATION ABOUT BOTH FUNDS
PORTFOLIO SECURITIES
The following summarizes some of the characteristics of securities in
which the Funds may invest. See the SAI for more information.
DEBT OBLIGATIONS; LOWER-RATED SECURITIES. The lower-rated securities in
which the Funds may 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 Rating Agencies to be predominantly speculative, with limited
protection of interest and principal payments. The lower-rated securities in
which the Funds 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.
In order for a 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
Funds may also be limited in their ability to enforce their rights and may incur
greater costs in enforcing their rights in the event an issuer becomes the
subject of bankruptcy proceedings. In addition, the Funds may be required to
participate in a restructuring of the obligation.
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The Funds are also 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 Funds participate in negotiations of any exchange offer or plan of
reorganization with respect to the issuer of these securities, the Funds may be
restricted from disposing of the securities that they hold until the exchange
offer or reorganization of the bankrupt issuer is completed. In addition, even
if an exchange offer is made or plan of reorganization is adopted for these
bankrupt issuers, securities or other assets received by the Funds as a part of
an exchange offer or plan of reorganization may have a lower value or income
potential than may have been anticipated when the investment was made. Moreover,
any securities that the Funds receive upon completion of an exchange offer or
plan of reorganization may be restricted as to resale.
Some or all of the securities in which the Funds may 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 a Fund's NAV. 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, 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 Funds. 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 Funds receive
for its lower-rated income securities to be reduced. In addition, the Funds may
experience difficulty in liquidating a portion of their portfolios when
necessary to meet the Funds' 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 Funds' portfolio instruments than in the case of instruments trading in a
more liquid market.
CORPORATE LOANS. The Funds 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
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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 Funds 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, a Fund may have difficulty liquidating and valuing the 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 Funds' investments in Corporate Loans normally are through assignments of or
participations in all or a portion of another lender's interest in a Corporate
Loan. Participations typically result in the Funds having a contractual
relationship only with the lender, not with the borrower. In a participation,
the Funds are 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 Funds might not directly benefit from any collateral
supporting the Corporate Loan. As a result, the Funds assume the credit risk of
both the borrower and the lender that sold the participation. If the lender
becomes insolvent, the Funds 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 Funds are entitled to receive payments directly
from the borrower and, therefore, do not depend on the assigning lender to pass
those payments on to the Funds. However, in an assignment, the Funds may have
greater direct responsibilities with respect to collection of principal and
interest and the enforcement of its rights.
EQUITY SECURITIES. High Yield Fund may acquire equity securities
(including common stocks, rights and warrants for equity and debt securities)
only when they are attached to debt securities or as part of a unit including
debt securities, or in connection with a conversion or exchange of debt
securities. Plus Fund may invest in these equity securities as well as in 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). These equity securities may 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.
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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.
OTHER INVESTMENT PRACTICES
The Funds may engage in the following investment practices, each of
which may involve certain risks.
LENDING OF PORTFOLIO SECURITIES. Each 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 Funds' 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,
including shares of other investment companies. In determining whether to lend
securities to a particular broker-dealer or institutional investor, Mitchell
Hutchins considers, and during the period of the loan monitors, relevant facts
and circumstances, including the creditworthiness of the borrower. Each Fund
retains authority to terminate any of its loans at any time. Each 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. Each Fund receives amounts equivalent to any dividends,
interest or other distributions on the securities loaned. Each 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 each Fund's interest.
Pursuant to procedures adopted by each Fund's Board of Directors
governing each Fund's securities lending program, PaineWebber has been retained
to serve as lending agent for each Fund. Each Board has also authorized the
payment of fees, calculated as a percentage of each Fund's securities lending
revenues, to PaineWebber for these services. Each Board periodically reviews the
portfolio securities loan transactions for which PaineWebber acts as lending
agent.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Fund may purchase
debt securities on a "when-issued" basis or may purchase or sell debt securities
on a "delayed delivery" basis, i.e., for issuance or delivery to the Fund later
than the normal settlement date for such securities at a stated price and yield.
The Funds generally do not pay for such securities or start earning interest on
them until they are received. However, when a Fund undertakes a when-issued or
delayed delivery obligation, it immediately assumes the risks of ownership,
including the risk of price fluctuation. When a Fund agrees to purchase
securities on a when-issued or delayed delivery basis, its custodian sets 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 a 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, a Fund's when-
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issued and delayed delivery purchase commitments could cause its NAV 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.
FORWARD COMMITMENTS. Each 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, a 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 a Fund will generally enter into forward
commitments with the intention of acquiring portfolio securities, each Fund may
dispose of a commitment prior to settlement if Mitchell Hutchins deems it
appropriate to do so. Each Fund may realize short-term capital gains or losses
upon the sale of forward commitments.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements.
Repurchase agreements are transactions in which a Fund purchases securities and
simultaneously commits to resell the securities to the seller at an agreed-upon
date or upon demand and at a price reflecting a market rate of interest
unrelated to the coupon rate or maturity of the purchased securities. Although
repurchase agreements carry certain risks not associated with direct investments
in securities, including possible decline in the market value of the underlying
securities and delays and costs to a Fund if the other party to the repurchase
agreement becomes bankrupt, the Fund enters 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 each Fund
invests may, when purchased, be illiquid or may subsequently become illiquid.
The term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which a Fund has valued the securities and includes,
among other things, purchased over-the-counter ("OTC") options, repurchase
agreements maturing in more than seven days, certain loan participations and
assignments, and restricted securities other than those Mitchell Hutchins has
determined are liquid pursuant to guidelines established by the Fund's Board of
Directors. To the extent a Fund invests in illiquid securities, the Fund may not
be able to readily liquidate such investments, and would have to sell other
investments if necessary to raise cash to meet its obligations.
Each Board of Directors has delegated the function of making day-to-day
determinations of liquidity to Mitchell Hutchins pursuant to guidelines approved
by each Board. Mitchell Hutchins will take into account a number of factors in
reaching liquidity decisions, including (1) the frequency of trades for the
security, (2) the number of dealers that make quotes for the security, (3) the
number of dealers that have undertaken to make a market in the security, (4) the
number of other potential purchasers for the security and (5) the nature of the
security and how trading is effected (e.g., the time needed to sell the
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security, how bids are solicited, and the mechanics of transfer). Mitchell
Hutchins will monitor the liquidity of restricted securities in each Fund's
portfolio and report periodically on such decisions to each Board of Directors.
HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS. Each 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, realize gains or manage
the Fund's foreign currency exposure. A 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.
Each 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. A 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.
Each 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, a 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. A 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.
Each 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 a 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 a 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 a 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 a 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.
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New financial products and risk management techniques continue to be
developed. Each Fund may use these new products and techniques to the extent
consistent with its investment objectives and with regulatory and federal tax
considerations.
TEMPORARY AND DEFENSIVE STRATEGIES AND BORROWINGS
Each Fund may implement various temporary or defensive strategies at
times when Mitchell Hutchins determines that conditions in the markets make
pursuing the Fund's basic investment strategy inconsistent with the best
interests of its stockholders. When unusual market or economic conditions occur,
Plus Fund may, for temporary defensive purposes, invest up to 100% of its total
assets or, for liquidity purposes, invest up to 35% of its total assets, in
securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities, certificates of deposit, bankers' acceptances or other bank
obligations, commercial paper or other income securities deemed by Mitchell
Hutchins to be consistent with a defensive posture, or it may hold cash. At such
times, Mitchell Hutchins may temporarily implement various alternative
strategies for High Yield Fund, designed primarily to reduce fluctuations in the
value of the Fund's assets. In implementing these "defensive" strategies, High
Yield Fund may invest in money market instruments of all types and
higher-quality debt securities. These strategies may include an increase in the
portion of the Funds' assets invested in higher-quality debt securities, which
generally have lower yields than do lower-rated securities.
In addition to its authority to use leverage up to an amount equal to
33 1/3% of its total assets (including the amount of leverage), Plus 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). High Yield Fund
also may borrow money for temporary or emergency purposes (e.g., clearance of
transactions or payments of dividends to stockholders) in an amount not
exceeding 10% of the value of the Fund's total assets (not including the amount
borrowed).
CERTAIN ANTI-TAKEOVER PROVISIONS OF THE ARTICLES OF INCORPORATION
Each 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 each Fund's Articles of Incorporation, the affirmative vote of the holders
of at least a majority of the votes entitled to be cast is required for the
consolidation of the Fund with another corporation, a merger of the Fund with or
into another corporation (except for certain mergers in which the Fund is the
successor), a statutory share exchange in which the Fund is not the successor, a
sale or transfer of all or substantially all of the Fund's assets, the
dissolution of the Fund and any amendment to the Fund's Articles of
Incorporation. In addition, the affirmative vote of the holders of at least 66
2/3% (which is higher than that required under Maryland law or the 1940 Act) of
the outstanding shares of a 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:
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(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 $l,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
each Fund (a "Principal Stockholder"). A similar vote also would be required for
any amendment of the Articles of Incorporation to convert a Fund to an
open-end investment company by making any class of each 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 each Fund, on file with the SEC, for the full text
of these provisions.
The provisions of the Articles of Incorporation described above and
each Fund's right to repurchase or make a tender offer for its shares could have
the effect of depriving the stockholders of opportunities to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of each Fund in a tender offer or similar transaction.
See "Additional Information About Both Funds-Stock 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
Stockholder. They provide, however, the advantage of potentially requiring
persons seeking control of a Fund to negotiate with its management regarding the
price to be paid and facilitating the continuity of the Fund's management,
investment objective and policies. Each Fund's Board of Directors has considered
the foregoing anti-takeover provisions and concluded that they are in the best
interests of the Fund and its stockholders.
DESCRIPTION OF CAPITAL STOCK
Plus Fund is authorized to issue 200 million shares of capital stock,
$0.001 par value. High Yield Fund is authorized to issue 100 million shares of
capital stock, $0.001 par value, all of which currently is classified as common
stock. The Board of Directors of each 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 each Fund's Articles of Incorporation and
Bylaws.
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COMMON STOCK. Each Fund's shares of common stock have no preemptive,
conversion, exchange or redemption rights. Each share has equal voting,
dividend, distribution and liquidation rights. The outstanding shares of common
stock are fully paid and non-assessable. Stockholders are entitled to one vote
per share, with fractional votes for fractional shares. 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, each Fund
normally is required to hold an annual meeting of stockholders in each year. If
a Fund is converted to an open-end investment company or if for any other reason
the Fund's shares are no longer listed on the NYSE (or any other national
securities exchange the rules of which require annual meetings of stockholders),
the Fund may decide not to hold annual meetings of stockholders.
Any additional offerings of the common stock, if made, will require
approval of the relevant Fund's Board of Directors and will be subject to the
requirement of the 1940 Act that shares may not be sold at a price below the
then current net asset value, exclusive of underwriting discounts and
commissions, except, among other things, in connection with an offering to
existing stockholders or with the consent of a majority of the holders of the
Fund's outstanding voting securities.
The following chart indicates the shares of the common stock
outstanding for each Fund as of January 31, 2000:
<TABLE>
<CAPTION>
Amount Outstanding
Amount Held by Exclusive of Amount
Registrant or for Its Held by Registrant or
Fund Title of Class Amount Authorized Account for Its Account
---- -------------- ----------------- -------- ---------------
<S> <C> <C> <C> <C>
Plus Fund Common Stock 200,000,000 0 31,858,628
High Yield Fund Common Stock 100,000,000 0 6,031,667
</TABLE>
STOCK REPURCHASES AND TENDER OFFERS. In recognition of the possibility
that the common stock might trade at a discount from NAV and that any such
discount may not be in the best interest of stockholders, each Fund's Board of
Directors has determined that it will from time to time consider taking action
to attempt to reduce or eliminate any discount. To that end, each Board may, in
consultation with Mitchell Hutchins, from time to time consider action either to
repurchase Fund shares in the open market or to make a tender offer for Fund
shares at their NAV. Each Board currently intends at least annually to consider
making such open market repurchases or tender offers and at such time may
consider such factors as the market price of the Fund's shares, the NAV of the
shares, the liquidity of the assets of the Fund, whether such transactions would
impair the Fund's status as a RIC or result in a failure to comply with
applicable asset coverage requirements, general economic conditions and such
other events or conditions that may have a material effect on the Fund's ability
to consummate such transactions. Under certain circumstances, it is possible
that open market repurchases or tender offers may constitute distributions under
the Code to the remaining stockholders of the Fund. Each Board may at any time,
however, decide that the Fund should not repurchase shares or make a tender
offer. Each Fund may borrow to finance repurchases and tender offers. Interest
on such borrowings will reduce the Fund's net income.
40
<PAGE>
There is no assurance that repurchases or tender offers will result in
Fund shares trading at a price that is equal or close to its net asset value per
share. The market price of a Fund's shares will be determined by, among other
things, the relative demand for and supply of such shares in the market, each
Fund's investment performance, each Fund's dividends and yield and investor
perception of each Fund's overall attractiveness as an investment as compared
with other investment alternatives. Nevertheless, the fact that each Fund's
shares may be the subject of tender offers at NAV from time to time may reduce
the spread that might otherwise exist between the market price of the common
stock and NAV 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 NAV in conjunction with a possible tender
offer.
Although each Board of Directors believes that stock repurchases and
tender offers generally would have a favorable effect on the market price of the
common stock, it should be recognized that a Fund's acquisition of shares of the
common stock would decrease each Fund's total assets and, therefore, have the
effect of increasing each Fund's expense ratio. In addition, such acquisition
would have the effect of decreasing asset coverage with respect to any leverage
being used by Plus Fund. Because of the nature of each Fund's investment
objective, policies and portfolio, under current market conditions, Mitchell
Hutchins anticipates that repurchases and tender offers generally should not
have a material, adverse effect on a Fund's investment performance and that
Mitchell Hutchins generally should not have any material difficulty in disposing
of portfolio securities in order to consummate stock repurchases and tender
offers; however, this may not always be the case.
Any tender offer made by a Fund for shares of the common stock
generally would be at a price equal to the NAV of the shares on a date
subsequent to the Fund's receipt of all tenders. Each offer would be made, and
the stockholders would be notified, in accordance with the requirements of the
Exchange Act and the 1940 Act, either by publication or mailing or both. Each
offering document would contain such information as is prescribed by such laws
and the rules and regulations promulgated thereunder. Each person tendering
shares would pay to the Fund's Transfer Agent a service charge to help defray
certain costs, including the processing of tender forms, effecting payment,
postage and handling. Any such service charge would be paid directly by the
tendering stockholder and would not be deducted from the proceeds of the
purchase. The Fund's Transfer Agent would receive the fee as an offset to these
costs. The Fund expects that the costs of effecting a tender offer would exceed
the aggregate of all service charges received from those who tender their
shares. Costs associated with the tender would be charged against capital.
Tendered shares of common stock that have been accepted and purchased
by a Fund will be held in the Fund's treasury until retired by a Board of
Directors. If tendered shares are not retired, the Fund may hold, sell or
otherwise dispose of the shares for any lawful corporate purpose as determined
by each Board.
CONVERSION TO OPEN-END INVESTMENT COMPANY. Each Fund's Board of
Directors will consider from time to time whether it would be in the best
interests of the Fund and its stockholders to convert the Fund to an open-end
investment company. If a Board of Directors determines that such a conversion
would be in the best interests of the Fund and its stockholders and is
consistent with the 1940 Act, the Board will submit to the Fund's stockholders,
41
<PAGE>
at the next succeeding annual or special meeting, a proposal to amend the Fund's
Articles of Incorporation to so convert the Fund. Such amendment would provide
that, upon its adoption by the holders of at least a majority of the Fund's
outstanding shares entitled to vote thereon, the Fund would convert from a
closed-end to an open-end investment company. If a Fund converted to an open-end
investment company, it would be able to continuously issue and offer for sale
shares of common stock, 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 NAV per share. In such event, the Fund could be required to liquidate
portfolio securities to meet requests for redemption, the common stock would no
longer be listed on the NYSE and certain investment policies of each Fund would
require amendment. Plus Fund would also be required to redeem any outstanding
preferred stock and any indebtedness not constituting bank loans, which could
eliminate or alter Plus Fund's leveraged capital structure.
In considering whether to propose that a Fund convert to an open-end
investment company, the relevant Board of Directors will consider various
factors, including, without limitation, the potential benefits and detriments to
the Fund and its stockholders 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 objective and policies. In the
event of a conversion to an open-end investment company, a Fund may charge fees
in connection with the sale or redemption of its shares. There can be no
assurance that either Board will conclude that such a conversion is in the best
interest of the Fund or its stockholders. As an open-end investment company, a
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 NAV. If payment is
made in securities, a stockholder may incur brokerage expenses in converting
these securities into cash.
TAXATION
Each Fund intends to continue to qualify for treatment as a RIC. For
each taxable year that a Fund so qualifies, the Fund (but not its stockholders)
will be relieved of federal income tax on the 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 stockholders.
Dividends from a Fund's investment company taxable income (whether
received in cash or reinvested in additional Fund shares) generally are taxable
to stockholders as ordinary income to the extent of the Fund's earnings and
profits. Distributions of a Fund's net capital gain (whether received in cash or
reinvested in additional Fund shares) are taxable to stockholders as long-term
capital gain, regardless of how long they have held their Fund shares.
A participant in either Reinvestment Plan will be treated as having
received a distribution in the amount of the cash used to purchase Fund shares
on his or her behalf, including a PRO RATA portion of the brokerage fees
incurred by the Transfer Agent. Distributions by a Fund to stockholders in any
year that exceed its earnings and profits generally may be applied by each
stockholder against his or her basis for Fund shares and will be taxable to any
stockholder only to the extent the distributions to the stockholder exceed
42
<PAGE>
the stockholder's basis for his or her Fund shares.
An investor should be aware that, if Fund 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. Stockholders 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 Funds.
Each Fund notifies its stockholders following the end of each calendar
year of the amounts of dividends and capital gain distributions it paid (or
deemed paid) that year.
Upon a sale or exchange of Fund shares (including a sale pursuant to a
share repurchase or tender offer by a Fund), a stockholder 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 stockholder's hands and (2) if the shares have been held for more than one
year, will be long-term capital gain or loss; provided that any loss realized on
a sale or exchange of Fund shares that were held for six months or less will be
treated as a long-term, rather than as a short-term, capital loss to the extent
of any capital gain distributions received thereon. A loss realized on a sale or
exchange of Fund shares will be disallowed to the extent those shares are
replaced by other Fund 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 a Reinvestment
Plan). In that event, the basis of the replacement shares will be adjusted to
reflect the disallowed loss.
Each Fund may acquire zero coupon or other securities issued with
original issue discount ("OID"). As holders of such securities, a 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 it during the
year. A Fund also must include in gross income each year any "interest"
distributed in the form of additional securities on payment-in-kind securities.
Because each 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% excise tax (see "Taxation" in the SAI), a 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 Funds' cash assets or from the proceeds of sales of portfolio securities, if
necessary. A Fund may realize capital gains or losses from those sales, which
would increase or decrease their investment company taxable income and/or net
capital gain.
Each Fund is required to withhold 31% of all dividends, capital gain
distributions and repurchase proceeds payable to any individuals and certain
other noncorporate stockholders who do not provide the Fund with a correct
43
<PAGE>
taxpayer identification number. Each Fund is also required to withhold 31% of
all dividends and capital gain distributions payable to those stockholders who
otherwise are subject to backup withholding.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Funds and their stockholders. There may
be other federal, state or local tax considerations applicable to a particular
stockholder. Stockholders are urged to consult their tax advisers.
44
<PAGE>
APPENDIX A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION ("Agreement")
is made as of _______, 2000, between Managed High Yield Plus Fund Inc.
("Acquiring Fund") and Managed High Yield Fund Inc. ("Target"), both Maryland
corporations. (Acquiring Fund and Target are sometimes referred to herein
individually as a "Fund" and collectively as the "Funds.")
The Funds desire to effect a reorganization described in section
368(a)(1)(C) of the Internal Revenue Code of 1986, as amended ("Code"), and
intend this Agreement to be, and adopt it as, a "plan of reorganization" within
the meaning of the regulations under section 368 of the Code ("Regulations").
The reorganization will involve the transfer to Acquiring Fund of Target's
assets in exchange solely for voting shares of common stock in Acquiring Fund,
par value $0.001 per share ("Acquiring Fund Shares"), and the assumption by
Acquiring Fund of Target's liabilities, followed by the constructive
distribution of the Acquiring Fund Shares PRO RATA to the holders of shares of
common stock in Target ("Target Shares") in exchange therefor, all on the terms
and conditions set forth herein. The foregoing transactions are referred to
herein collectively as the "Reorganization."
Each Fund is a closed-end fund with a single class of shares that are
currently purchased and sold on the New York Stock Exchange ("NYSE").
In consideration of the mutual promises contained herein, the parties
agree as follows:
1. PLAN OF REORGANIZATION AND TERMINATION
1.1. Target agrees to assign, sell, convey, transfer, and deliver all
of its assets described in paragraph 1.2("Assets") to Acquiring Fund. Acquiring
Fund agrees in exchange therefor -
(a) to issue and deliver to Target the number of full Acquiring
Fund Shares (plus fractional Acquiring Fund shares (rounded to the third
decimal place) for Stockholders (as defined in paragraph 1.5) that at
the Effective Time (as defined in paragraph 3.1), participate in
Target's Dividend Reinvestment Plan ("DRP Stockholders") and cash in
lieu of any fractional shares with respect to Stockholders that are not
DRP Stockholders), determined by dividing the net value of Target
(computed as set forth in paragraph 2.1) by the net asset value ("NAV")
of an Acquiring Fund Share (computed as set forth in paragraph 2.2), and
(b) to assume all of Target's liabilities described in paragraph
1.3 ("Liabilities").
Such transactions shall take place at the Closing (as defined in paragraph 3.1).
1.2. The Assets shall include, without limitation, all cash, cash
equivalents, securities, receivables (including interest and dividends
receivable), claims and rights of action, rights to register shares under
applicable securities laws, books and records, deferred and prepaid expenses
shown as assets on Target's books, and other property owned by Target at the
Effective Time.
1.3. The Liabilities shall include (except as otherwise provided herein)
all of Target's liabilities, debts, obligations, and duties of whatever kind or
nature, whether absolute, accrued, contingent, or otherwise, whether or not
arising in the ordinary course of business, whether or not determinable at the
Effective Time, and whether or not specifically referred to in this Agreement.
<PAGE>
Notwithstanding the foregoing, Target agrees to use its best efforts to
discharge all its known Liabilities before the Effective Time.
1.4. At or immediately before the Effective Time, Target shall declare
and pay to its stockholders a dividend and/or other distribution in an amount
large enough so that it will have distributed substantially all (and in any
event not less than 90%) of its investment company taxable income (computed
without regard to any deduction for dividends paid) and substantially all of its
realized net capital gain, if any, for its current taxable year through the
Effective Time.
1.5. At the Effective Time (or as soon thereafter as is reasonably
practicable), Target shall distribute the Acquiring Fund Shares and cash it
receives pursuant to paragraph 1.1 to its stockholders of record, determined as
of the Effective Time (each a "Stockholder" and collectively "Stockholders"), in
constructive exchange for their Target Shares. Such distribution shall be
accomplished by Acquiring Fund's transfer agent's opening accounts on Acquiring
Fund's share transfer books in the Stockholders' names and transferring such
Acquiring Fund Shares thereto. Each Stockholder's account shall be credited with
the respective PRO RATA number of full Acquiring Fund Shares (plus fractional
Acquiring Fund shares (rounded to the third decimal point) for DRP Stockholders
and cash in lieu of any fractional Acquiring Fund Shares for all other
Stockholders) due that Stockholder. All outstanding Target Shares, including any
represented by certificates, shall simultaneously be canceled on Target's share
transfer books.
1.6. Acquiring Fund shall not issue certificates representing Acquiring
Fund Shares in connection with such distribution. After the Effective Time, each
holder of an outstanding certificate or certificates formerly representing
Target shares ("Old Certificate(s)") will be entitled to receive, upon surrender
of his or her Old Certificate(s), a certificate representing the Acquiring Fund
Shares distributable with respect to such holder's Target Shares. Promptly after
the Effective Time, the Transfer Agent shall mail to each holder of Old
Certificate(s) instructions and a letter of transmittal for use in surrendering
those certificate(s) for a certificate representing the Acquiring Fund Shares
and cash in lieu of any fractional Acquiring Fund Shares if appropriate.
Although from and after the Effective Time, Old Certificates will be deemed for
all purposes to evidence ownership of Acquiring Fund Shares distributable with
respect thereto in the Reorganization, until a holder of Old Certificate(s)
surrenders them, no dividends payable to the holders of record of Acquiring Fund
Shares as of any date subsequent to the Effective Time shall be paid to such
holder. If, after the Effective Time, Old Certificates are presented to
Acquiring Fund, such certificates will be canceled and exchanged for
certificates representing the number of distributable Acquiring Fund shares with
respect thereto in the Reorganization.
1.7. As soon as reasonably practicable after distribution of the
Acquiring Fund Shares pursuant to paragraph 1.5, but in all events within twelve
months after the Effective Time, Target shall be terminated and any further
actions shall be taken in connection therewith as required by applicable law.
1.8. Any reporting responsibility of Target to a public authority is and
shall remain its responsibility up to and including the date on which it is
terminated.
1.9. Any transfer taxes payable on issuance of Acquiring Fund Shares in
a name other than that of the registered holder on Target's books of the Target
Shares constructively exchanged therefor shall be paid by the person to whom
such Acquiring Fund Shares are to be issued, as a condition of such transfer.
2. VALUATION
2.1. For purposes of paragraph 1.1(a), Target's net value shall be (a)
the value of the Assets computed as of the close of regular trading on the NYSE
on the date of the Closing ("Valuation Time"), using the valuation procedures
set forth in Target's most recent annual report to its stockholders, less (b)
the amount of the Liabilities as of the Valuation Time.
2.2. For purposes of paragraph 1.1(a), the NAV of an Acquiring Fund
Share shall be computed as of the Valuation Time, using the valuation procedures
set forth in Acquiring Fund's most recent annual report to its stockholders.
2.3. All computations pursuant to paragraphs 2.1 and 2.2 shall be made
by or under the direction of Mitchell Hutchins Asset Management Inc.
A-2
<PAGE>
3. CLOSING AND EFFECTIVE TIME
3.1. The Reorganization, together with related acts necessary to
consummate the same ("Closing"), shall occur at the Funds' principal office on
________, 2000, or at such other place and/or on such other date as to which the
Funds may agree. All acts taking place at the Closing shall be deemed to take
place simultaneously as of the close of business on the date thereof or at such
other time as to which the Funds may agree ("Effective Time"). If, immediately
before the Valuation Time, (a) the NYSE is closed to trading or trading thereon
is restricted or (b) trading or the reporting of trading on the NYSE or
elsewhere is disrupted, so that accurate appraisal of the net value of Target
and the NAV of an Acquiring Fund Share is impracticable, the Effective Time
shall be postponed until the first business day after the day when such trading
shall have been fully resumed and such reporting shall have been restored.
3.2. Target's fund accounting and pricing agent shall deliver at the
Closing a certificate of an authorized officer verifying that the information
(including adjusted basis and holding period, by lot) concerning the Assets
transferred by Target to Acquiring Fund, as reflected on Acquiring Fund's books
immediately following the Closing, does or will conform to such information on
Target's books immediately before the Closing. Target's custodian shall deliver
at the Closing a certificate of an authorized officer stating that (a) the
Assets held by the custodian will be transferred to Acquiring Fund at the
Effective Time and (b) all necessary taxes in conjunction with the delivery of
the Assets, including all applicable federal and state stock transfer stamps, if
any, have been paid or provision for payment has been made.
3.3. Target shall deliver to Acquiring Fund at the Closing a list of the
names and addresses of the Stockholders and the number of outstanding Target
Shares owned by each Stockholder, all as of the Effective Time, certified by
Target's Secretary or Assistant Secretary. Acquiring Fund's transfer agent shall
deliver at the Closing a certificate as to the opening on Acquiring Fund's share
transfer books of accounts in the Stockholders' names. Acquiring Fund shall
issue and deliver a confirmation to Target evidencing the Acquiring Fund Shares
to be credited to Target at the Effective Time or provide evidence satisfactory
to Target that such Acquiring Fund Shares have been credited to Target's account
on Acquiring Fund's books. At the Closing, each Fund shall deliver to the other
such bills of sale, checks, assignments, stock certificates, receipts, or other
documents as the other Fund or its counsel may reasonably request.
3.4. Each Fund shall deliver to the other at the Closing a certificate
executed in its name by its President or a Vice President in form and substance
satisfactory to the recipient and dated the Effective Time, to the effect that
the representations and warranties it made in this Agreement are true and
correct at the Effective Time except as they may be affected by the transactions
contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1. Target represents and warrants as follows:
4.1.1. Target is a corporation that is duly organized, validly
existing, and in good standing under the laws of the State of Maryland;
and a copy of its Articles of Incorporation is on file with the
Department of Assessments and Taxation of that state;
4.1.2. Target is duly registered as a closed-end management
investment company under the Investment Company Act of 1940, as amended
("1940 Act"), and such registration will be in full force and effect at
the Effective Time;
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<PAGE>
4.1.3. Target is duly registered under the Securities Exchange Act
of 1934, as amended ("1934 Act") , and such registration will be in full
force and effect at the Effective Time;
4.1.4. At the Closing, Target will have good and marketable title
to the Assets and full right, power, and authority to sell, assign,
transfer, and deliver the Assets free of any liens or other
encumbrances; and upon delivery and payment for the Assets, Acquiring
Fund will acquire good and marketable title thereto;
4.1.5. Target is not in violation of, and the execution and
delivery of this Agreement and consummation of the transactions
contemplated hereby will not conflict with or violate, Maryland law or
any provision of Target's Articles of Incorporation or By-Laws or of any
agreement, instrument, lease, or other undertaking to which Target is a
party or by which it is bound or result in the acceleration of any
obligation, or the imposition of any penalty, under any agreement,
judgment, or decree to which Target is a party or by which it is bound,
except as previously disclosed in writing to and accepted by Acquiring
Fund;
4.1.6. Except as otherwise disclosed in writing to and accepted by
Acquiring Fund, all material contracts and other commitments of or
applicable to Target (other than this Agreement and investment
contracts, including options, futures, and forward contracts) will be
terminated, or provision for discharge of any liabilities of Target
thereunder will be made, at or prior to the Effective Time, without
either Fund's incurring any liability or penalty with respect thereto
and without diminishing or releasing any rights Target may have had with
respect to actions taken or omitted or to be taken by any other party
thereto prior to the Closing;
4.1.7. Except as otherwise disclosed in writing to and accepted by
Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently
pending or (to Target's knowledge) threatened against Target or any of
its properties or assets that, if adversely determined, would materially
and adversely affect its financial condition or the conduct of its
business; and Target knows of no facts that might form the basis for the
institution of any such litigation, proceeding, or investigation and is
not a party to or subject to the provisions of any order, decree, or
judgment of any court or governmental body that materially or adversely
affects its business or its ability to consummate the transactions
contemplated hereby;
4.1.8. The execution, delivery, and performance of this Agreement
have been duly authorized as of the date hereof by all necessary action
on the part of Target's board of directors, which has made the
determinations required by Rule 17a-8(a) under the 1940 Act; and,
subject to approval by Target's stockholders, this Agreement constitutes
a valid and legally binding obligation of Target, enforceable in
accordance with its terms, except as the same may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium,
and similar laws relating to or affecting creditors' rights and by
general principles of equity;
4.1.9. At the Effective Time, the performance of this Agreement
shall have been duly authorized by all necessary action by Target's
stockholders;
4.1.10. No governmental consents, approvals, authorizations, or
filings are required under the Securities Act of 1933, as amended ("1933
Act"), the 1934 Act, or the 1940 Act, for the execution or performance
of this Agreement by Target, except for (a) the filing with the
Securities and Exchange Commission ("SEC") of a registration statement
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<PAGE>
by Acquiring Fund on Form N-14 relating to the Acquiring Fund Shares
issuable hereunder, and any supplement or amendment thereto
("Registration Statement"), including therein a prospectus/proxy
statement ("Proxy Statement"), and (b) such consents, approvals,
authorizations, and filings as have been made or received or as may be
required subsequent to the Effective Time;
4.1.11. On the effective date of the Registration Statement, at the
time of the stockholders' meeting referred to in paragraph 5.2, and at
the Effective Time, the Proxy Statement will (a) comply in all material
respects with the applicable provisions of the 1933 Act, the 1934 Act,
and the 1940 Act and the rules and regulations thereunder and (b) not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which such
statements were made, not misleading; provided that the foregoing shall
not apply to statements in or omissions from the Proxy Statement made in
reliance on and in conformity with information furnished by Acquiring
Fund for use therein;
4.1.12. The Liabilities were incurred by Target in the ordinary
course of its business and are associated with the Assets; and there are
no Liabilities other than liabilities disclosed or provided for in
Target's financial statements referred to in paragraph 4.1.17 and
liabilities incurred by Target in the ordinary course of its business
subsequent to July 31, 1999, or otherwise previously disclosed to
Acquiring Fund, none of which has been materially adverse to the
business, assets, or results of Target operations;
4.1.13. Target qualified for treatment as a regulated investment
company under Subchapter M of the Code ("RIC") for each past taxable
year since it commenced operations and will continue to meet all the
requirements for such qualification for its current taxable year; it has
no earnings and profits accumulated in any taxable year in which the
provisions of Subchapter M did not apply to it; and the Assets will be
invested at all times through the Effective Time in a manner that
ensures compliance with the foregoing;
4.1.14. Target is not under the jurisdiction of a court in a
proceeding under Title 11 of the United States Code or similar case
within the meaning of section 368(a)(3)(A) of the Code;
4.1.15. Not more than 25% of the value of Target's total assets
(excluding cash, cash items, and U.S. government securities) is invested
in the stock and securities of any one issuer, and not more than 50% of
the value of such assets is invested in the stock and securities of five
or fewer issuers;
4.1.16. Target's federal income tax returns, and all applicable
state and local tax returns, for all taxable years through and including
the taxable year ended July 31, 1998, have been timely filed and all
taxes payable pursuant to such returns have been timely paid; and
4.1.17. Target's financial statements for the year ended July 31,
1999, to be delivered to Acquiring Fund, fairly represent Target's
financial position as of that date and the results of its operations and
changes in its net assets for the year then ended.
4.2. Acquiring Fund represents and warrants as follows:
4.2.1. Acquiring Fund is a corporation that is duly organized,
validly existing, and in good standing under the laws of the State of
Maryland; and a copy of its Articles of Incorporation is on file with
the State Department of Assessments and Taxation of that state;
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4.2.2. Acquiring Fund is duly registered as a closed-end
management investment company under the 1940 Act, and such registration
will be in full force and effect at the Effective Time;
4.2.3. Acquiring Fund is duly registered under the 1934 Act, and
such registration will be in full force and effect at the Effective
Time;
4.2.4. No consideration other than Acquiring Fund Shares (and
Acquiring Fund's assumption of the Liabilities) will be issued in
exchange for the Assets in the Reorganization;
4.2.5. The Acquiring Fund Shares to be issued and delivered to
Target hereunder will, at the Effective Time, have been duly authorized
and, when issued and delivered as provided herein, will be duly and
validly issued and outstanding shares of Acquiring Fund, fully paid and
non-assessable;
4.2.6. Acquiring Fund's prospectus and statement of additional
information included on Form N-14 conform in all material respects to
the applicable requirements of the 1933 Act and the 1940 Act and the
rules and regulations thereunder and do not include any untrue statement
of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading;
4.2.7. Acquiring Fund is not in violation of, and the execution
and delivery of this Agreement and consummation of the transactions
contemplated hereby will not conflict with or violate, Maryland law or
any provision of Acquiring Fund's Articles of Incorporation or Amended
and Restated Bylaws or of any provision of any agreement, instrument,
lease, or other undertaking to which Acquiring Fund is a party or by
which it is bound or result in the acceleration of any obligation, or
the imposition of any penalty, under any agreement, judgment, or decree
to which Acquiring Fund is a party or by which it is bound, except as
previously disclosed in writing to and accepted by Target;
4.2.8. Except as otherwise disclosed in writing to and accepted by
Target, no litigation, administrative proceeding, or investigation of or
before any court or governmental body is presently pending or (to
Acquiring Fund's knowledge) threatened against Acquiring Fund or any of
its properties or assets that, if adversely determined, would materially
and adversely affect its financial condition or the conduct of its
business; and Acquiring Fund knows of no facts that might form the basis
for the institution of any such litigation, proceeding, or investigation
and is not a party to or subject to the provisions of any order, decree,
or judgment of any court or governmental body that materially or
adversely affects its business or its ability to consummate the
transactions contemplated hereby;
4.2.9. The execution, delivery, and performance of this Agreement
have been duly authorized as of the date hereof by all necessary action
on the part of Acquiring Fund's board of directors (together with
Target's board of directors, the "Boards"), which has made the
determinations required by Rule 17a-8(a) under the 1940 Act; and this
Agreement constitutes a valid and legally binding obligation of
Acquiring Fund, enforceable in accordance with its terms, except as the
same may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and similar laws relating to or affecting
creditors' rights and by general principles of equity;
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4.2.10. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the 1934 Act, or the 1940 Act,
for the execution or performance of this Agreement by Acquiring Fund,
except for (a) the filing with the SEC of the Registration Statement and
(b) such consents, approvals, authorizations, and filings as have been
made or received or as may be required subsequent to the Effective Time;
4.2.11. On the effective date of the Registration Statement, at the
time of the stockholders' meeting referred to in paragraph 5.2, and at
the Effective Time, the Proxy Statement will (a) comply in all material
respects with the applicable provisions of the 1933 Act, the 1934 Act,
and the 1940 Act and the rules and regulations thereunder and (b) not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which such
statements were made, not misleading; provided that the foregoing shall
not apply to statements in or omissions from the Proxy Statement made in
reliance on and in conformity with information furnished by Target for
use therein;
4.2.12. Acquiring Fund qualified for treatment as a RIC for each
past taxable year since it commenced operations and will continue to
meet all the requirements for such qualification for its current taxable
year; it intends to continue to meet all such requirements for the next
taxable year; and it has no earnings and profits accumulated in any
taxable year in which the provisions of Subchapter M of the Code did not
apply to it;
4.2.13. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization other than in the
ordinary course of business pursuant to its Dividend Reinvestment Plan;
nor does Acquiring Fund have any plan or intention to redeem or
otherwise reacquire any Acquiring Fund Shares issued to the
Stockholders pursuant to the Reorganization;
4.2.14. Following the Reorganization, Acquiring Fund (a) will
continue Target's "historic business" (within the meaning of section
1.368-1(d)(2) of the Regulations) and (b) will use a significant portion
of Target's "historic business assets" (within the meaning of section
1.368-1(d)(3) of the Regulations) in a business; furthermore, Acquiring
Fund (c) has no plan or intention to sell or otherwise dispose of any of
the Assets, except for dispositions made in the ordinary course of that
business and dispositions necessary to maintain its status as a RIC, and
(d) expects to retain substantially all the Assets in the same form as
it receives them in the Reorganization, unless and until subsequent
investment circumstances suggest the desirability of change or it
becomes necessary to make dispositions thereof to maintain such status;
4.2.15. There is no plan or intention for Acquiring Fund to be
dissolved or merged into another corporation or a business trust or any
"fund" thereof (within the meaning of section 851(g)(2) of the Code)
following the Reorganization;
4.2.16. Immediately after the Reorganization, (a) not more than 25%
of the value of Acquiring Fund's total assets (excluding cash, cash
items, and U.S. government securities) will be invested in the stock and
securities of any one issuer and (b) not more than 50% of the value of
such assets will be invested in the stock and securities of five or
fewer issuers;
4.2.17. Acquiring Fund does not directly or indirectly own, nor at
the Effective Time will it directly or indirectly own, nor has it
directly or indirectly owned, at any time during the past five years,
any shares of Target;
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4.2.18. Acquiring Fund's federal income tax returns, and all
applicable state and local tax returns, for all taxable years through
and including the taxable year ended May 31, 1999, have been timely
filed and all taxes payable pursuant to such returns have been timely
paid; and
4.2.19. Acquiring Fund's financial statements for the year ended
May 31, 1999, to be delivered to Target, fairly represent Acquiring
Fund's financial position as of that date and the results of its
operations and changes in its net assets for the year then ended.
4.3. Each Fund represents and warrants as follows:
4.3.1. The fair market value of the Acquiring Fund Shares received
by each Stockholder will be approximately equal to the fair market value
of its Target Shares constructively surrendered in exchange therefor;
4.3.2. Its management is unaware of any plan or intention of
Stockholders to sell or otherwise dispose of (a) any portion of their
Target Shares before the Reorganization to any person related (within
the meaning of section 1.368-1(e)(3) of the Regulations) to either Fund
or (b) any portion of the Acquiring Fund Shares to be received by them
in the Reorganization to any person related (within such meaning) to
Acquiring Fund;
4.3.3. The Stockholders will pay their own expenses, if any,
incurred in connection with the Reorganization;
4.3.4. Immediately following consummation of the Reorganization,
Acquiring Fund will hold substantially the same assets and be subject to
substantially the same liabilities that Target held or was subject to
immediately prior thereto (in addition to the assets and liabilities
Acquiring Fund then held or was subject to), plus any liabilities and
expenses of the parties incurred in connection with the Reorganization;
4.3.5. The fair market value of the Assets on a going concern
basis will equal or exceed the Liabilities to be assumed by Acquiring
Fund and those to which the Assets are subject;
4.3.6. There is no intercompany indebtedness between the Funds
that was issued or acquired, or will be settled, at a discount;
4.3.7. Pursuant to the Reorganization, Target will transfer to
Acquiring Fund, and Acquiring Fund will acquire, at least 90% of the
fair market value of the net assets, and at least 70% of the fair market
value of the gross assets, held by Target immediately before the
Reorganization. For the purposes of this representation, any amounts (a)
paid by Target to Stockholders who receive cash or other property
(whether in lieu of fractional shares or otherwise) and (b) used by
Target to pay its Reorganization expenses and to make redemptions and
distributions immediately before the Reorganization (except
distributions made to conform to its policy of distributing all or
substantially all of its income and gains to avoid the obligation to pay
federal income tax and/or the excise tax under section 4982 of the Code)
will be included as assets held thereby immediately before the
Reorganization;
4.3.8. None of the compensation received by any Stockholder who is
an employee of or service provider to Target will be separate
consideration for, or allocable to, any of the Target Shares held by
such Stockholder; none of the Acquiring Fund Shares received by any such
Stockholder will be separate consideration for, or allocable to, any
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employment agreement, investment advisory agreement, or other service
agreement; and the consideration paid to any such Stockholder will be
for services actually rendered and will be commensurate with amounts
paid to third parties bargaining at arm's-length for similar services;
4.3.9. Cash is being distributed to the Stockholders that are not
DRP Stockholders in lieu of fractional Acquiring Fund Shares solely to
save Acquiring Fund the expense and inconvenience of issuing and
transferring fractional shares to those stockholders; that distribution
does not represent separately bargained-for consideration in the
Reorganization. The total cash consideration paid to those Stockholders
instead of issuing fractional Acquiring Fund Shares will not exceed 1%
of the total consideration that will be issued to them in exchange for
their Target Shares; and the fractional share interests of the
Stockholders will be aggregated, and no Stockholder will receive cash in
an amount equal to or greater than the value of one full Acquiring Fund
Share;
4.3.10. Immediately after the Reorganization, the Stockholders will
not own shares constituting "control" (within the meaning of section
304(c) of the Code) of Acquiring Fund; and
4.3.11. Neither Fund will be reimbursed for any expenses incurred
by it or on its behalf in connection with the Reorganization unless
those expenses are solely and directly related to the Reorganization
(determined in accordance with the guidelines set forth in Rev. Rul.
73-54, 1973-1 C.B. 187) ("Reorganization Expenses").
5. COVENANTS
5.1. Each Fund covenants to operate its respective business in the
ordinary course between the date hereof and the Closing, it being understood
that -
(a) such ordinary course will include declaring and paying
customary dividends and other distributions and changes in operations
contemplated by each Fund's normal business activities, and
(b) each Fund will retain exclusive control of the composition of
its portfolio until the Closing; provided that (1) Target shall not
dispose of more than an insignificant portion of its historic business
assets during such period without Acquiring Fund's prior consent and (2)
if Target's stockholders approve this Agreement (and the transactions
contemplated hereby), then between the date of such approval and the
Closing, the Funds shall coordinate their respective portfolios so that
the transfer of the Assets to Acquiring Fund will not cause it to fail
to be in compliance with all of its investment policies and restrictions
immediately after the Closing.
5.2. Target covenants to call a stockholders' meeting to consider and
act on this Agreement and to take all other action necessary to obtain approval
of the transactions contemplated hereby.
5.3. Target covenants that the Acquiring Fund Shares to be delivered
hereunder are not being acquired for the purpose of making any distribution
thereof, other than in accordance with the terms hereof.
5.4. Target covenants that it will assist Acquiring Fund in obtaining
information Acquiring Fund reasonably requests concerning the beneficial
ownership of Target Shares.
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5.5. Target covenants that its books and records (including all books
and records required to be maintained under the 1940 Act and the rules and
regulations thereunder) will be turned over to Acquiring Fund at the Closing.
5.6. Each Fund covenants to cooperate in preparing the Proxy Statement
in compliance with applicable federal and state securities laws.
5.7. Each Fund covenants that it will, from time to time, as and when
requested by the other Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take or cause to
be taken such further action, as the other Fund may deem necessary or desirable
in order to vest in, and confirm to, (a) Acquiring Fund, title to and possession
of all the Assets, and (b) Target, title to and possession of the Acquiring Fund
Shares to be delivered hereunder, and otherwise to carry out the intent and
purpose hereof.
5.8. Acquiring Fund covenants to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act, the 1940 Act, and
such state securities laws it may deem appropriate to continue its operations
after the Effective Time.
5.9. Subject to this Agreement, each Fund covenants to take or cause to
be taken all actions, and to do or cause to be done all things, reasonably
necessary, proper, or advisable to consummate and effectuate the transactions
contemplated hereby.
6. CONDITIONS PRECEDENT
Each Fund's obligations hereunder shall be subject to (a) performance by
the other Fund of all its obligations to be performed hereunder at or before the
Effective Time, (b) all representations and warranties of the other Fund
contained herein being true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated
hereby, as of the Effective Time, with the same force and effect as if made at
and as of the Effective Time, and (c) the following further conditions that, at
or before the Effective Time:
6.1. This Agreement and the transactions contemplated hereby shall have
been duly adopted and approved by each Board and shall have been approved by
Target's stockholders in accordance with its Articles of Incorporation, its
By-laws, and applicable law.
6.2. All necessary filings shall have been made with the SEC and state
securities authorities, and no order or directive shall have been received that
any other or further action is required to permit the parties to carry out the
transactions contemplated hereby. The Registration Statement shall have become
effective under the 1933 Act, no stop orders suspending the effectiveness
thereof shall have been issued, and the SEC shall not have issued an unfavorable
report with respect to the Reorganization under section 25(b) of the 1940 Act
nor instituted any proceedings seeking to enjoin consummation of the
transactions contemplated hereby under section 25(c) of the 1940 Act. All
consents, orders, and permits of federal, state, and local regulatory
authorities (including the SEC and state securities authorities) deemed
necessary by either Fund to permit consummation, in all material respects, of
the transactions contemplated hereby shall have been obtained, except where
failure to obtain same would not involve a risk of a material adverse effect on
either Fund's assets or properties, provided that either Fund may for itself
waive any of such conditions.
6.3. At the Effective Time, no action, suit, or other proceeding shall
be pending before any court or governmental agency in which it is sought to
restrain or prohibit, or to obtain damages or other relief in connection with,
the transactions contemplated hereby.
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6.4. Target shall have received an opinion of Kirkpatrick & Lockhart LLP
("Counsel") substantially to the effect that:
6.4.1. Acquiring Fund is a corporation that is duly organized,
validly existing, and in good standing under the laws of the State of
Maryland with power under its Articles of Incorporation to own all its
properties and assets and, to the knowledge of Counsel, to carry on its
business as presently conducted;
6.4.2. This Agreement (a) has been duly authorized, executed, and
delivered by Acquiring Fund and (b) assuming due authorization,
execution, and delivery of this Agreement by Target, is a valid and
legally binding obligation of Acquiring Fund, enforceable in accordance
with its terms, except as the same may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium, and similar
laws relating to or affecting creditors' rights and by general
principles of equity;
6.4.3. The Acquiring Fund Shares to be issued and distributed to
the Stockholders under this Agreement, assuming their due delivery as
contemplated by this Agreement, will be duly authorized, validly issued
and outstanding, and fully paid and non-assessable;
6.4.4. The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not,
materially violate Acquiring Fund's Articles of Incorporation or Amended
and Restated Bylaws or any provision of any agreement (known to Counsel,
without any independent inquiry or investigation) to which Acquiring
Fund is a party or by which it is bound or (to the knowledge of Counsel,
without any independent inquiry or investigation) result in the
acceleration of any obligation, or the imposition of any penalty, under
any agreement, judgment, or decree to which Acquiring Fund is a party or
by which it is bound, except as set forth in such opinion or as
previously disclosed in writing to and accepted by Target;
6.4.5. To the knowledge of Counsel (without any independent inquiry
or investigation), no consent, approval, authorization, or order of any
court or governmental authority is required for the consummation by
Acquiring Fund of the transactions contemplated herein, except those
obtained under the 1933 Act, the 1934 Act, and the 1940 Act, and those
that may be required under state securities laws;
6.4.6. Acquiring Fund is registered with the SEC as an investment
company, and to the knowledge of Counsel no order has been issued or
proceeding instituted to suspend such registration; and
6.4.7. To the knowledge of Counsel (without any independent
inquiry or investigation), (a) no litigation, administrative proceeding,
or investigation of or before any court or governmental body is pending
or threatened as to Acquiring Fund or any of its properties or assets
and (b) Acquiring Fund is not a party to or subject to the provisions of
any order, decree, or judgment of any court or governmental body that
materially and adversely affects its business, except as set forth in
such opinion or as otherwise disclosed in writing to and accepted by
Target.
In rendering such opinion, Counsel may (1) rely, as to matters governed by the
laws of the State of Maryland, on an opinion of competent Maryland counsel, (2)
make assumptions regarding the authenticity, genuineness, and/or conformity of
documents and copies thereof without independent verification thereof, (3) limit
such opinion to applicable federal and state law, and (4) define the word
"knowledge" and related terms to mean the knowledge of attorneys then with
Counsel who have devoted substantive attention to matters directly related to
this Agreement and the Reorganization.
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6.5. Acquiring Fund shall have received an opinion of Counsel
substantially to the effect that:
6.5.1. Target is a corporation that is duly organized, validly
existing, and in good standing under the laws of the State of Maryland
with power under its Articles of Incorporation to own all its properties
and assets and, to the knowledge of Counsel, to carry on its business as
presently conducted;
6.5.2. This Agreement (a) has been duly authorized, executed, and
delivered by Target and (b) assuming due authorization, execution, and
delivery of this Agreement by Acquiring Fund, is a valid and legally
binding obligation of Target, enforceable in accordance with its terms,
except as the same may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium, and similar laws relating to or
affecting creditors' rights and by general principles of equity;
6.5.3. The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not,
materially violate Target's Articles of Incorporation or By-Laws or any
provision of any agreement (known to Counsel, without any independent
inquiry or investigation) to which Target is a party or by which it is
bound or (to the knowledge of Counsel, without any independent inquiry
or investigation) result in the acceleration of any obligation, or the
imposition of any penalty, under any agreement, judgment, or decree to
which Target is a party or by which it is bound, except as set forth in
such opinion or as previously disclosed in writing to and accepted by
Acquiring Fund;
6.5.4. To the knowledge of Counsel (without any independent inquiry
or investigation), no consent, approval, authorization, or order of any
court or governmental authority is required for the consummation by
Target of the transactions contemplated herein, except those obtained
under the 1933 Act, the 1934 Act, and the 1940 Act, and those that may
be required under state securities laws;
6.5.5. Target is registered with the SEC as an investment company,
and to the knowledge of Counsel no order has been issued or proceeding
instituted to suspend such registration; and
6.5.6. To the knowledge of Counsel (without any independent
inquiry or investigation), (a) no litigation, administrative proceeding,
or investigation of or before any court or governmental body is pending
or threatened as to Target or any of its properties or assets and (b)
Target is not a party to or subject to the provisions of any order,
decree, or judgment of any court or governmental body that materially
and adversely affects Target's business, except as set forth in such
opinion or as otherwise disclosed in writing to and accepted by
Acquiring Fund.
In rendering such opinion, Counsel may (1) rely, as to matters governed by the
laws of the State of Maryland, on an opinion of competent Maryland counsel, (2)
make assumptions regarding the authenticity, genuineness, and/or conformity of
documents and copies thereof without independent verification thereof, (3) limit
such opinion to applicable federal and state law, and (4) define the word
"knowledge" and related terms to mean the knowledge of attorneys then with
Counsel who have devoted substantive attention to matters directly related to
this Agreement and the Reorganization.
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6.6. Each Fund shall have received an opinion of Counsel, addressed to
and in form and substance satisfactory to it, as to the federal income tax
consequences mentioned below ("Tax Opinion"). In rendering the Tax Opinion,
Counsel may rely as to factual matters, exclusively and without independent
verification, on the representations made in this Agreement (which shall be
treated for those purposes as being made to Counsel) or in separate letters
addressed to Counsel and the certificates delivered pursuant to paragraph 3.4.
The Tax Opinion shall be substantially to the effect that, based on the facts
and assumptions stated therein and conditioned on consummation of the
Reorganization in accordance with this Agreement, for federal income tax
purposes:
6.6.1. Acquiring Fund's acquisition of the Assets in exchange
solely for full and fractional Acquiring Fund Shares (plus cash in lieu
of fractional shares) and Acquiring Fund's assumption of the
Liabilities, followed by Target's distribution of those full Acquiring
Fund Shares PRO RATA to the Stockholders, those fractional Acquiring
Fund Shares to DRP Stockholders, and such cash to the remaining
Stockholders, constructively in exchange for their Target Shares, will
qualify as a reorganization within the meaning of section 368(a)(1)(C)
of the Code, and each Fund will be "a party to a reorganization" within
the meaning of section 368(b) of the Code;
6.6.2. Target will recognize no gain or loss on the transfer of the
Assets to Acquiring Fund in exchange solely for Acquiring Fund Shares
(plus cash in lieu of fractional shares) and Acquiring Fund's assumption
of the Liabilities or on the subsequent distribution of those shares and
cash to the Stockholders in constructive exchange for their Target
Shares;
6.6.3. Acquiring Fund will recognize no gain or loss on its receipt
of the Assets in exchange solely for Acquiring Fund Shares (plus cash in
lieu of fractional shares) and its assumption of the Liabilities;
6.6.4. Acquiring Fund's basis for the Assets will be the same as
Target's basis therefor immediately before the Reorganization, and
Acquiring Fund's holding period for the Assets will include Target's
holding period therefor;
6.6.5. A Stockholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring Fund
Shares, except with respect to cash received in lieu of a fractional
Acquiring Fund share pursuant to the Reorganization; and
6.6.6. A Stockholder's aggregate basis for the Acquiring Fund
Shares to be received by it in the Reorganization will be the same as
the aggregate basis for its Target Shares to be constructively
surrendered in exchange for those Acquiring Fund Shares, decreased by
any cash received, and increased by any gain recognized, on the
exchange; and its holding period for those Acquiring Fund Shares will
include its holding period for those Target Shares, provided the
Stockholder held them as capital assets at the Effective Time.
Notwithstanding subparagraphs 6.6.2 and 6.6.4, the Tax Opinion may state that no
opinion is expressed as to the effect of the Reorganization on the Funds or any
Stockholder with respect to any asset as to which any unrealized gain or loss is
required to be recognized for federal income tax purposes at the end of a
taxable year (or on the termination or transfer thereof) under a mark-to-market
system of accounting.
At any time before the Closing, either Fund may waive any of the foregoing
conditions (except that set forth in paragraph 6.1) if, in the judgment of its
Board, such waiver will not have a material adverse effect on its stockholders'
interests.
7. BROKERAGE FEES AND EXPENSES
7.1. Each Fund represents and warrants to the other that there are no
brokers or finders entitled to receive any payments in connection with the
transactions provided for herein.
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7.2. Each Fund will bear its own Reorganization Expenses.
8. ENTIRE AGREEMENT; NO SURVIVAL
Neither party has made any representation, warranty, or covenant not set
forth herein, and this Agreement constitutes the entire agreement between the
parties. The representations, warranties, and covenants contained herein or in
any document delivered pursuant hereto or in connection herewith shall not
survive the Closing.
9. TERMINATION OF AGREEMENT
This Agreement may be terminated at any time at or prior to the
Effective Time, whether before or after approval by Target's stockholders:
9.1. By either Fund (a) in the event of the other Fund's material breach
of any representation, warranty, or covenant contained herein to be performed at
or prior to the Effective Time, (b) if a condition to its obligations has not
been met and it reasonably appears that such condition will not or cannot be
met, (c) if its Board, in the Board's sole discretion, determines that
proceeding with the Reorganization would not be in the best interest of its
stockholders, or (d) if the Closing has not occurred on or before _________,
2000; or
9.2. By the parties' mutual agreement.
In the event of termination under paragraphs 9.1(c) or (d) or 9.2, there shall
be no liability for damages on the part of either Fund, or its directors or
officers, to the other Fund.
10. AMENDMENT
This Agreement may be amended, modified, or supplemented at any time,
notwithstanding approval thereof by Target's stockholders, in any manner
mutually agreed upon in writing by the parties; provided that following such
approval no such amendment shall have a material adverse effect on the
Stockholders' interests.
11. MISCELLANEOUS
11.1. This Agreement shall be governed by and construed in accordance
with the internal laws of the State of Maryland; provided that, in the case of
any conflict between such laws and the federal securities laws, the latter shall
govern.
11.2. Nothing expressed or implied herein is intended or shall be
construed to confer upon or give any person, firm, trust, or corporation other
than the parties and their respective successors and assigns any rights or
remedies under or by reason of this Agreement.
11.3. This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement, and shall become effective
when one or more counterparts have been executed by each Fund and delivered to
the other party hereto. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
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IN WITNESS WHEREOF, each party has caused this Agreement to be executed
and delivered by its duly authorized officers as of the day and year first
written above.
ATTEST: MANAGED HIGH YIELD FUND INC.
- --------------------------- By: -----------------------------
Secretary President
ATTEST: MANAGED HIGH YIELD PLUS FUND INC.
--------------------------- By: -----------------------------
Secretary President
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APPENDIX B
BOARD MEMBERS AND OFFICERS OF MANAGED HIGH YIELD AND MANAGED HIGH YIELD PLUS
The following is a list of the present Board Members and the Officers of
both Funds, their ages, business addresses and a description of their principal
occupations during the past five years:
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH FUND OTHER DIRECTORSHIPS
- ---------------------- -------------- --------------------
Margo N. Alexander**; 52 Director and Mrs. Alexander is chairman
President (since March 1999), chief
executive officer and a
director of Mitchell Hutchins
(since January 1995) and also
an executive vice president
and a director of PaineWebber
Incorporated ("PaineWebber")
(since March 1984). Mrs.
Alexander is president and a
director or trustee of 32
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Richard Q. Armstrong; 64 Director Mr. Armstrong is chairman and
R.Q.A. Enterprises principal of R.Q.A Enterprises
One Old Church Road (management consulting firm)
Unit #6 (since April 1991 and
Greenwich, CT 06830 principal occupation since
March 1995). Mr. Armstrong was
chairman of the board, chief
executive officer and co-owner of
Adirondack Beverages (producer and
distributor of soft drinks and
sparkling/still waters) (October
1993-March 1995). He was a partner
of the New England Consulting Group
(management consulting firm)
(December 1992-September 1993). He
was managing director of LVMH U.S.
Corporation (U.S. subsidiary of the
French luxury goods conglomerate,
Louis Vuitton Moet Hennessey
Corporation) (1987-1991) and
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<PAGE>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH FUND OTHER DIRECTORSHIPS
- ---------------------- -------------- --------------------
chairman of its wine and spirits
subsidiary, Schieffelin & Somerset
Company (1987-1991). Mr. Armstrong
is a director or trustee of 31
investment companies for which
Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
E. Garrett Bewkes, Jr.**; 73 Director and Mr. Bewkes is a director of
Chairman of Paine Webber Group Inc. ("PW
the Board Group") (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. Mr.
Bewkes is a director or
trustee of 35 investment
companies for which Mitchell
Hutchins, PaineWebber or one
of their affiliates serves as
investment adviser.
Richard R. Burt; 53 Director Mr. Burt is chairman of IEP
1275 Pennsylvania Ave., Advisors, LLP (international
N.W., Washington, D.C. 20004 investments and consulting
firm) (since March 1994) and a
partner of McKinsey & Company
(management consulting firm) (since
1991). He is also a director of
Archer-Daniels-Midland Co.
(agricultural commodities),
Hollinger International Co.
(publishing), Homestake Mining
Corp. (gold mining) and Weirton
Steel Corp (makes and finishes
steel products) (since April 1996)
and vice chairman of Anchor Gaming
(provides technology to gaming and
wagering industry) (since July
1999). He was the chief negotiator
in the Strategic Arms Reduction
B-2
<PAGE>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH FUND OTHER DIRECTORSHIPS
- ---------------------- -------------- --------------------
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 31 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Mary C. Farrell**; 50 Director Ms. Farrell is a managing
director, senior investment
strategist and member of the
Investment Policy Committee of
PaineWebber. Ms. Farrell
joined PaineWebber in 1982.
She is a member of the
Financial Women's Association
and Women's Economic
Roundtable and appears as a
regular panelist on Wall
$treet Week with Louis
Rukeyser. She also serves on
the Board of Overseers of New
York University's Stern School
of Business. Ms. Farrell is a
director or trustee of 30
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Meyer Feldberg; 57 Director Mr. Feldberg is Dean and
Columbia University Professor of Management of the
101 Uris Hall Graduate School of Business,
New York, New York 10027 Columbia University. Prior to
1989, he was president of the
Illinois Institute of Technology.
Dean Feldberg is also a director of
Primedia Inc. (publishing),
Federated Department Stores, Inc.
(operator of department stores) and
Revlon, Inc. (cosmetics). Dean
Feldberg is a director or trustee
of 34 investment companies for
which Mitchell Hutchins,
PaineWebber or one of their
affiliates serves as investment
adviser.
B-3
<PAGE>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH FUND OTHER DIRECTORSHIPS
- ---------------------- -------------- --------------------
George W. Gowen; 70 Director Mr. Gowen is a partner in the
666 Third Avenue law firm of Dunnington,
New York, New York 10017 Bartholow & Miller. Prior to
May 1994, he was a partner in the
law firm of Fryer, Ross & Gowen.
Mr. Gowen is a director or trustee
of 34 investment companies for
which Mitchell Hutchins,
PaineWebber or one of their
affiliates serves as investment
adviser.
Frederic V. Malek; 63 Director Mr. Malek is chairman of
1455 Pennsylvania Avenue, N.W. Thayer Capital Partners
Suite 350 (merchant bank) and chairman
Washington, D.C. 20004 of Thayer Hotel Investors II
and Lodging Opportunities Fund
(hotel investment
partnerships). From January
1992 to November 1992, he was
campaign manager of
Bush-Quayle `92. From 1990 to
1992, he was vice chairman
and, from 1989 to 1990, he was
president of Northwest
Airlines Inc. and NWA Inc.
(holding company of Northwest
Airlines 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 Aegis
Communications, Inc.
(tele-services), American
Management Systems, Inc.
(management consulting and
computer-related services),
Automatic Data Processing,
Inc. (computing services), CB
Richard Ellis, Inc. (real
estate services), FPL Group,
Inc. (electric services),
Global Vacation Group (packaged
vacations), HCR/Manor Care, Inc.
(health care), SAGA Systems, Inc.
and Northwest Airlines Inc. Mr
Malek is a director or trustee
of 31 investment companies for
B-4
<PAGE>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH FUND OTHER DIRECTORSHIPS
- ---------------------- -------------- --------------------
which Mitchell Hutchins,
PaineWebber or one of their
affiliates serves as
investment adviser.
Carl W. Schafer; 64 Director Mr. Schafer is president of
66 Witherspoon Street the Atlantic Foundation
#1100 (charitable foundation
Princeton, NJ 08542 supporting mainly
oceanographic exploration and
research). He also is a
director of Labor Ready, Inc.
(temporary employment),
Roadway Express, Inc.
(trucking), The Guardian Group
of Mutual Funds, the Harding,
Loevner Funds, E.I.I. Realty
Trust (investment company),
Evans Systems, Inc. (motor
fuels, convenience store and
diversified company),
Electronic Clearing House,
Inc. (financial transactions
processing), Frontier Oil
Corporation and Nutraceutix,
Inc. (biotechnology company).
Prior to January 1993, he was
chairman of the Investment
Advisory Committee of the
Howard Hughes Medical
Institute. Mr. Schafer is a
director or trustee of 31
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Brian M. Storms**; 45 Director Mr. Storms is president and
chief operating officer of
Mitchell Hutchins (since March
1999). Mr. Storms was
president of Prudential
Investments (1996-1999).
Prior to joining prudential,
he was a managing director at
Fidelity Investments. Mr.
Storms is a director or
trustee of 31 investment
companies for which Mitchell
Hutchins, PaineWebber or one
of their affiliates serves as
investment adviser.
B-5
<PAGE>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH FUND OTHER DIRECTORSHIPS
- ---------------------- -------------- --------------------
James F. Keegan; 39 Vice President Mr. Keegan is a senior vice
president and a portfolio manager
of Mitchell Hutchins. Prior to
March 1996, he was director of
fixed income strategy and research
of Merrion Group, L.P. From 1987 to
1994, he was a vice president of
global investment management of
Bankers Trust. Mr. Keegan is a vice
president of four investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
John J. Lee; 31 Vice President Mr. Lee is a vice president
and and a manager of the mutual
Assistant fund finance department of
Treasurer Mitchell Hutchins. Prior to
September 1997, he was an audit
manager in the financial services
practice of Ernst & Young LLP.
Mr. Lee is a vice president
and assistant treasurer of 32
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Dennis McCauley; 53 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 22
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Ann E. Moran; 42 Vice President Ms. Moran is a vice president
and and a manager of the mutual
Assistant fund finance department of
Treasurer Mitchell Hutchins. Ms. Moran
is a vice president and assistant
treasurer of 32 investment
companies for which Mitchell
Hutchins, PaineWebber or one of
their affiliates serves as
investment adviser.
Dianne E. O'Donnell; 47 Vice President Ms. O'Donnell is a senior vice
and president and deputy general
Secretary counsel of Mitchell Hutchins.
Ms. O'Donnell is a vice
B-6
<PAGE>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH FUND OTHER DIRECTORSHIPS
- ---------------------- -------------- --------------------
president and secretary of 31
investment companies and a
vice president and assistant
secretary of one investment
company for which Mitchell
Hutchins, PaineWebber or one
of their affiliates serves as
investment adviser.
Emil Polito; 39 Vice President Mr. Polito is a senior vice
president and director of
operations and control for
Mitchell Hutchins. Mr. Polito
is a vice president of 32
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Victoria E. Schonfeld; 49 Vice President Ms. Schonfeld is a managing
director and general counsel
of Mitchell Hutchins since May
1994 and a senior vice
president of PaineWebber
Incorporated since July 1995.
Ms. Schonfeld is a vice
president of 31 investment
companies and a vice president
and secretary of one
investment company for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Paul H. Schubert; 37 Vice President Mr. Schubert is a senior vice
and Treasurer president and the director of
the mutual fund finance
department of Mitchell
Hutchins. Mr. Schubert is a
vice president and treasurer
of 32 investment companies for
which Mitchell Hutchins,
PaineWebber or one of their
affiliates serves as
investment adviser.
Barney A. Taglialatela; 39 Vice President Mr. Taglialatela is a vice
and president and a manager of the
Assistant mutual fund finance department
Treasurer of Mitchell Hutchins. Prior to
February 1995, he was a
manager of the mutual fund
finance division of Kidder
Peabody Asset Management,
B-7
<PAGE>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH FUND OTHER DIRECTORSHIPS
- ---------------------- -------------- --------------------
Inc. Mr. Taglialatela is a
vice president and assistant
treasurer of 32 investment
companies for which Mitchell
Hutchins, PaineWebber or one
of their affiliates serves as
investment adviser.
Keith A. Weller, 38 Vice President Mr. Weller is a first vice
and president and associate
Assistant general counsel of Mitchell
Secretary Hutchins. Prior to May 1995,
he was an attorney in private
practice. Mr. Weller is a
vice president and assistant
secretary of 31 investment
companies for which Mitchell
Hutchins, PaineWebber or one
of their affiliates serves as
investment adviser.
- -------------
* 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, Ms. Farrell, and Mr. Storms 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.
B-8
<PAGE>
PROXY PROXY
APPENDIX C
MANAGED HIGH YIELD FUND INC.
SPECIAL MEETING OF SHAREHOLDERS
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF MANAGED
HIGH YIELD FUND INC. The undersigned hereby appoints as proxies ANDREW S. NOVAK
and VICTORIA DRAKE and each of them (with the power of substitution) to vote for
the undersigned all shares of common stock of the undersigned in Managed High
Yield Fund Inc. at the above referenced meeting and any adjournment thereof,
with all the power the undersigned would have if personally present. The shares
represented by this proxy will be voted as instructed below. UNLESS INDICATED TO
THE CONTRARY, THIS PROXY SHALL BE DEEMED TO GRANT AUTHORITY TO VOTE "FOR" THE
PROPOSAL RELATING TO MANAGED HIGH YIELD FUND INC.
YOUR VOTE IS IMPORTANT
Please date and sign this proxy on the reverse side and return it in the
enclosed envelope to PFPC Inc., P. O. Box 9426, Wilmington, DE 19809-9038.
PFPC Inc. has been engaged to forward the enclosed proxy material and to
tabulate proxies returned by mail.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL. PLEASE INDICATE
YOUR VOTE BY FILLING IN THE BOX COMPLETELY. EXAMPLE:
PROPOSAL: FOR AGAINST ABSTAIN
Approval of the Agreement and Plan of
Reorganization and Termination that / / / / / /
provides for the reorganization of
Managed High Yield Fund Inc. into
Managed High Yield Plus Fund Inc.
PLEASE DATE AND SIGN THE REVERSE SIDE OF THIS CARD.
C-1
<PAGE>
YOUR VOTE IS IMPORTANT.
PLEASE DATE AND SIGN THIS PROXY BELOW AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE.
This proxy will not be voted unless it is dated
and signed exactly as instructed. If shares are
held by an individual, sign your name exactly as
it appears on this card. If shares are held
jointly, either party may sign, but the name of
the party signing should conform exactly to the
name shown on this proxy card. If shares are held
by a corporation, partnership or similar account,
the name and the capacity of the individual
signing the proxy card should be indicated unless
it is reflected in the form of registration. For
example: "ABC Corp., John Doe, Treasurer."
Sign exactly as name appears hereon
_____________________________________________________(L.S.)
Signature
_____________________________________________________(L.S.)
Signature (if held jointly)
Date ________________________________________________, 2000
PLEASE MARK YOUR VOTE ON THE REVERSE SIDE OF THIS CARD.
C-2
<PAGE>
MANAGED HIGH YIELD PLUS FUND INC.
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relates specifically to the
proposed Reorganization wherein Managed High Yield Plus Fund Inc. ("Plus Fund")
would acquire all of the assets of the Managed High Yield Fund Inc. ("High Yield
Fund") in exchange solely for shares of Plus Fund and the assumption by Plus
Fund of all of High Yield Fund's liabilities.
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly
owned subsidiary of PaineWebber, serves as investment adviser and administrator
to Plus Fund and High Yield Fund. This Statement of Additional Information is
not a prospectus and should be read only in conjunction with the Proxy
Statement/Prospectus dated February ___, 2000, relating to the above-referenced
matter. A copy of the Proxy Statement/Prospectus may be obtained without charge
by calling toll-free [___________]. This Statement of Additional Information is
dated ________ ___, 2000.
TABLE OF CONTENTS
PAGE
----
Investment Objectives and Policies.............................................2
Hedging and Other Strategies Using Derivative Instruments.....................21
Directors and Officers........................................................31
Control Persons And Principal Holders Of Securities...........................32
Investment Advisory Arrangements..............................................32
Custodian And Independent Auditors............................................34
Portfolio Transactions........................................................34
Taxation......................................................................37
Additional Information........................................................40
Ratings Information...........................................................41
Pro Forma Financials..........................................................43
<PAGE>
The following supplements the information contained in the Proxy
Statement/Prospectus concerning Managed High Yield Plus Fund Inc. ("Plus Fund"
or "Fund").
INVESTMENT OBJECTIVES AND POLICIES
LEVERAGE
Plus 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 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 Plus Fund can earn on the longer-term
portfolio investments that it makes with the proceeds obtained through the
leverage. Thus, the stockholders would benefit from an incremental return.
However, if the differential between the return on Plus 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 NAV of the shares will reflect the resulting decline in the value of a
larger aggregate amount of portfolio assets than Plus Fund would hold if it had
not leveraged. Thus, leveraging exaggerates changes in the value and in the
yield on Plus Fund's portfolio. This, in turn, may result in greater volatility
of both the NAV 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, Plus 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 stockholders as dividends and other
distributions will be reduced. Nevertheless, Mitchell Hutchins may determine to
maintain Plus Fund's leveraged position if it deems such action to be
appropriate under the circumstances. As discussed under "Proposal-Board
Considerations" in the Proxy Statement/Prospectus the investment advisory and
administrative fee payable to Mitchell Hutchins during periods in which Plus
Fund is using leverage will be higher than when it is not doing so because the
fee is calculated as a percentage of Managed Assets, which include assets
purchased with leverage.
Plus 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 Plus 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, Plus 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.
Plus Fund may also issue preferred stock or debt securities. The
issuance of debt securities or preferred stock by the Fund would involve
offering expenses and other costs, including dividends or interest payments,
which would be borne by the stockholders. The terms of any borrowing, other Fund
indebtedness or preferred stock issued by Plus Fund may impose asset coverage
requirements, dividend limitations and voting right requirements on the Fund
that are more stringent than those imposed under the Investment Company Act of
1940 ("1940 Act"). Such terms also may impose special restrictions on Plus
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 Plus Fund. For example, limitations on Plus Fund's ability to
pay dividends or make other distributions could impair its ability to maintain
its qualification for treatment as a regulated investment company for federal
tax purposes.
The 1940 Act imposes a 200% asset coverage requirement with respect to
any preferred stock that Plus Fund may issue. Immediately after any such
issuance, Plus 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% of the liquidation value of the outstanding preferred stock (i.e.,
such liquidation value may not exceed 50% of Plus Fund's total assets, including
the proceeds of the preferred stock and any outstanding indebtedness
constituting senior securities). Following the issuance of preferred stock, Plus
2
<PAGE>
Fund would not be permitted to declare any cash dividend or other distribution
on its shares or purchase any of the shares (through tender offers or
otherwise), unless it would satisfy this 200% asset coverage after deducting the
amount of the dividend, other distribution, or share purchase price, as the case
may be. If Plus 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 imposed by the 1940 Act (a fund
is not permitted to 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) 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 Plus Fund's Board of Directors. Also,
under certain circumstances, the holders of any senior securities that are in
default may be entitled to elect a majority of the Board.
For further information about leveraging, see "Comparison of Principal
Risk Factors--Primary Differences in the Investment Risks of the Funds" in the
Proxy Statement/Prospectus."
YIELD FACTORS AND CREDIT 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 bonds by S&P and Moody's is included in this SAI.
The Fund may use these ratings in determining whether to purchase, sell or hold
a security. Credit ratings attempt to evaluate the safety of principal and
interest payments, but they do not evaluate the volatility of a bond's value or
its liquidity and do not guarantee the performance of the issuer. Rating
Agencies may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial condition may be better
or worse than the rating indicates. There is a risk that Rating Agencies may
downgrade a bond's rating. Subsequent to a bond's purchase by the Fund, it may
cease to be rated or its rating may be reduced below the minimum rating required
for purchase by the Fund. 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,
bonds with the same maturity, interest rate and rating may have different market
prices. Mitchell Hutchins will consider such an event in determining whether the
Fund should continue to hold the bond.
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 a
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.
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 are dependent on a variety of factors, including
general money market conditions, general conditions in the bond market, the
financial condition of the issuer, the size of the offering, the maturity of the
obligation and its rating. There is a wide variation in the quality of bonds,
both within a particular classification and between classifications. An issuer's
obligations under its bonds are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of bond holders or
other creditors of an issuer; litigation or other conditions may also adversely
affect the power or ability of issuers to meet their obligations for the payment
of interest and principal on their bonds.
Investment grade bonds are rated in one of the four highest rating
categories by Moody's or S&P, comparably rated by another Rating Agency or, if
unrated, determined by Mitchell Hutchins to be of comparable quality. Moody's
considers bonds rated Baa (its lowest investment grade rating) to have
speculative characteristics. This means that changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case for higher-rated bonds.
High yield bonds (commonly known as "junk bonds") are non-investment grade
bonds. This means they are rated Ba or lower by Moody's, BB or lower by S&P,
3
<PAGE>
comparably rated by another Rating Agency or determined by Mitchell Hutchins to
be of comparable quality. The Fund's investments in non-investment grade bonds
entail greater risk than its investments in higher-rated bonds. Non-investment
grade bonds are considered predominantly speculative with respect to the
issuer's ability to pay interest and repay principal and may involve significant
risk exposure to adverse conditions. Non-investment grade bonds generally offer
a higher current yield than that available for investment grade issues; however,
they involve higher risks, in that they are especially sensitive to adverse
changes in general economic conditions and in the industries in which the
issuers are engaged, to changes in the financial condition of the issuers and to
price fluctuations in response to changes in interest rates. During periods of
economic downturn or rising interest rates, highly leveraged issuers may
experience financial stress which could adversely affect their ability to make
payments of interest and principal and increase the possibility of default. In
addition, such issuers may not have more traditional methods of financing
available to them and may be unable to repay debt at maturity by refinancing.
The risk of loss due to default by such issuers is significantly greater because
such securities frequently are unsecured by collateral and will not receive
payment until more senior claims are paid in full.
The market for non-investment grade bonds, especially those of foreign
issuers, has expanded rapidly in recent years, which has been a period of
generally expanding growth and lower inflation. These securities will be
susceptible to greater risk when economic growth slows or reverses and when
inflation increases or deflation occurs. This has been reflected in recent
volatility in emerging market securities. In the past, many lower rated bonds
experienced substantial price declines reflecting an expectation that many
issuers of such securities might experience financial difficulties. As a result,
the yields on lower rated bonds rose dramatically. However, those higher yields
did not reflect the value of the income stream that holders of such securities
expected. Rather, they reflected the risk that holders of such securities could
lose a substantial portion of their value due to the issuers' financial
restructurings or defaults by the issuers. There can be no assurance that those
declines will not recur.
The market for non-investment grade bonds generally is thinner and less
active than that for higher quality securities, which may limit the Fund's
ability to sell such securities at fair value in response to changes in the
economy or financial markets. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values and
liquidity of non-investment grade bonds, especially in a thinly traded market.
SPECIAL CHARACTERISTICS OF FOREIGN AND EMERGING MARKET SECURITIES
GENERAL. The costs attributable to and risks of 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, individual foreign economies may differ favorably or
4
<PAGE>
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 position. In those European countries that have begun using
the Euro as a common currency unit, individual national economies may be
adversely affected by the inability of national governments to use monetary
policy to address their own economic or political concerns.
Securities of many foreign companies may be less liquid and their prices
more volatile than securities of comparable U.S. companies. From time to time
foreign securities may be difficult to liquidate rapidly without significantly
depressing the price of such securities. Transactions in foreign securities may
be subject to less efficient settlement practices. 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. 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 markets 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.
Emerging market countries typically have economic and political systems
that are less fully developed and can be expected to be less stable than those
of developed countries. Emerging market countries may have policies that
restrict investment by foreigners, and there is a higher risk of government
expropriation or nationalization of private property. The possibility of low or
nonexistent trading volume in the securities of companies in emerging markets
also may 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.
INVESTMENT AND REPATRIATION RESTRICTIONS. Foreign investment in the
securities markets of several emerging market countries is restricted or
controlled to varying degrees. These restrictions may limit the Fund's
investment in these countries and may increase its expenses. For example,
certain countries may require governmental approval prior to investments by
foreign persons in a particular company or industry sector or limit investment
by foreign persons to only a specific class of securities of a company, which
may have less advantageous terms (including price) than securities of the
company available for purchase by nationals. Certain countries may restrict or
prohibit investment opportunities in issuers or industries deemed important to
national interests. In addition, the repatriation of both investment income and
capital from some emerging market countries is subject to restrictions, such as
the need for certain government consents. Even where there is no outright
restriction on repatriation of capital, the mechanics of repatriation may affect
certain aspects of the Fund's operations. These restrictions may in the future
make it undesirable to invest in the countries to which they apply. In addition,
if there is a deterioration in a country's balance of payments or for other
reasons, a country may impose restrictions on foreign capital remittances
abroad. The Fund could be adversely affected by delays in, or a refusal to
grant, any required governmental approval for repatriation, as well as by the
application to it of other restrictions on investments.
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If, because of restrictions on repatriation or conversion, the Fund were
unable to distribute substantially all of its net investment income and capital
gains within applicable time periods, the Fund could be subject to federal
income and excise taxes that would not otherwise be incurred and could cease to
qualify for the favorable tax treatment afforded to regulated investment
companies under the Internal Revenue Code. In such case, it would become subject
to federal income tax on all of its net income and gains. To avoid these adverse
consequences, the Fund might be required to distribute amounts that are greater
than the total amount of cash it actually receives. These distributions would
have to be made from the Fund's cash assets or, if necessary, from the proceeds
of sales of portfolio securities. The Fund would not be able to purchase
additional securities with cash used to make such distributions, and its current
income and the value of its shares might ultimately be reduced as a result.
SOCIAL, POLITICAL AND ECONOMIC FACTORS. Many emerging market countries may
be subject to a greater degree of social, political and economic instability
than is the case in the United States. Any change in the leadership or policies
of these countries may halt the expansion of or reverse any liberalization of
foreign investment policies now occurring. Such instability may result from,
among other things, the following: (i) authoritarian governments or military
involvement in political and economic decision making, and changes in government
through extra-constitutional means; (ii) popular unrest associated with demands
for improved political, economic and social conditions; (iii) internal
insurgencies; (iv) hostile relations with neighboring countries; and (v) ethnic,
religious and racial disaffection. Such social, political and economic
instability could significantly disrupt the financial markets in those countries
and elsewhere and could adversely affect the value of the Fund's assets. In
addition, there may be the possibility of asset expropriations or future
confiscatory levels of taxation affecting the Fund.
The economies of many emerging markets are heavily dependent upon
international trade and are accordingly affected by protective trade barriers
and the economic conditions of their trading partners, principally the United
States, Japan, China and the European Union. The enactment by the United States
or other principal trading partners of protectionist trade legislation,
reduction of foreign investment in the local economies and general declines in
the international securities markets could have a significant adverse effect
upon the securities markets of these countries. In addition, the economies of
some countries are vulnerable to weakness in world prices for their commodity
exports.
Many foreign and emerging market securities are not registered with the
Securities and Exchange Commission ("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.
In addition, existing laws and regulations are often inconsistently
applied. As legal systems in some of the emerging market countries develop,
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foreign investors may be adversely affected by new laws and regulations, changes
to existing laws and regulations and preemption of local laws and regulations by
national laws. In circumstances where adequate laws exist, it may not be
possible to obtain swift and equitable enforcement of the law.
SOVEREIGN DEBT. Sovereign debt includes bonds that are issued by foreign
governments or their agencies, instrumentalities or political subdivisions or by
foreign central banks. Sovereign debt also may be issued by quasi-governmental
entities that are owned by foreign governments but are not backed by their full
faith and credit or general taxing powers. Investment in sovereign debt involves
special risks. The issuer of the debt or the governmental authorities that
control the repayment of the debt may be unable or unwilling to repay principal
and/or interest when due in accordance with the terms of such debt, and the
funds may have limited legal recourse in the event of a default.
Sovereign debt differs from debt obligations issued by private entities in
that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is, therefore, limited. Political conditions,
especially a sovereign entity's willingness to meet the terms of its debt
obligations, are of considerable significance. Also, there can be no assurance
that the holders of commercial bank loans to the same sovereign entity may not
contest payments to the holders of sovereign debt in the event of default under
commercial bank loan agreements.
A sovereign debtor's willingness or ability to pay interest and repay
principal in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which a
sovereign debtor may be subject. A country whose exports are concentrated in a
few commodities could be vulnerable to a decline in the international price of
such commodities. Increased protectionism on the part of a country's trading
partners, or political changes in those countries, could also adversely affect
its exports. Such events could diminish a country's trade account surplus, if
any, or the credit standing of a particular local government or agency. Another
factor bearing on the ability of a country to repay sovereign debt is the level
of the country's international reserves. Fluctuations in the level of these
reserves can affect the amount of foreign exchange readily available for
external debt payments and, thus, could have a bearing on the capacity of the
country to make payments on its sovereign debt.
The occurrence of political, social or diplomatic changes in one or more
of the countries issuing sovereign debt could adversely affect the Fund's
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their sovereign debt. While the Fund's portfolio is managed in a manner that is
intended to minimize the exposure to such risks, there can be no assurance that
adverse political changes will not cause the Fund to suffer a loss of interest
or principal on any of its sovereign debt holdings.
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
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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.
ASSET-BACKED SECURITIES
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 revolving credit (credit card)
agreements. Such assets are securitized through the use of trusts or special
purpose corporations. Payments or distributions of principal and income may be
guaranteed up to a certain amount and for a certain time period by a letter of
credit or pool insurance policy issued by a financial institution unaffiliated
with the issuer, or other credit enhancements may be present.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are debt or pass-through securities that are
backed by specific types of assets. These 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
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mortgage-backed securities are 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
domestic mortgage-backed securities are sponsored or issued by private entities,
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. 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,
Plus 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.
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 certificate holders 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.
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PRIVATE MORTGAGE-BACKED SECURITIES. Mortgage-backed securities issued by
Private Mortgage Lenders are structured similarly to the pass-through
certificates and collateralized mortgage obligations ("CMOs") issued or
guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac. Such mortgage-backed
securities may be supported by pools of U.S. government or agency insured or
guaranteed mortgage loans or by other mortgage-backed securities issued by a
government agency or instrumentality, but they generally are supported by pools
of conventional (I.E., non-government guaranteed or insured) mortgage loans.
Since such mortgage-backed securities normally are not guaranteed by an entity
having the credit standing of Ginnie Mae, Fannie Mae and Freddie Mac, they
normally are structured with one or more types of credit enhancement. See
"--TYPES OF CREDIT ENHANCEMENt" below. These credit enhancements do not protect
investors from changes in market value.
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. CMOs involve
special risks, and evaluating them requires special knowledge.
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
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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 certificate
holders 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 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
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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.
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 certificate holders 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
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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. The value of securities with longer average lives
generally fluctuates more widely in response to changes in interest rates than
the value of securities with shorter average lives. 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.
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 Plus 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
the Fund change in ways that Mitchell Hutchins does not anticipate, the Fund's
ability to meet its investment objectives may be reduced.
ADDITIONAL INFORMATION ON ADJUSTABLE RATE MORTGAGE- AND FLOATING RATE
MORTGAGE-BACKED SECURITIES. Adjustable rate mortgage-backed securities
(sometimes referred to as "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.
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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 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."
Duration incorporates the debt security's yield, coupon interest payments, final
maturity and call features into one measure and is one of the fundamental tools
used by Mitchell Hutchins in portfolio selection and yield curve positioning for
the Fund's debt investments. 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.
Duration takes the length of the time intervals between the present time
and the time that the interest and principal payments are scheduled or, in the
case of a callable debt security, expected to be made, and weights them by the
present values of the cash to be received at each future point in time. For any
fixed income security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. 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.
Duration allows Mitchell Hutchins to make certain predictions as to the
effect that changes in the level of interest rates will have on the value of the
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Fund's portfolio of debt securities. For example, when the level of interest
rates increases by 1%, a debt security having a positive duration of three years
generally will decrease by approximately 3%. Thus, if Mitchell Hutchins
calculates the duration of the Fund's portfolio of debt securities as three
years, it normally would expect the portfolio to change in value by
approximately 3% for every 1% change in the level of interest rates. However,
various factors, such as changes in anticipated prepayment rates, qualitative
considerations and market supply and demand, can cause particular securities to
respond somewhat differently to changes in interest rates than indicated in the
above example. Moreover, in the case of mortgage-backed and other complex
securities, duration calculations are estimates and are not precise. This is
particularly true during periods of market volatility. Accordingly, the net
asset value of a fund's portfolio of debt securities may vary in relation to
interest rates by a greater or lesser percentage than indicated by the above
example.
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
uses 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
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
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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.
Before conversion, convertible securities have characteristics similar to
non-convertible debt securities in that they ordinarily provide a stable stream
of income with generally higher yields than those of common stocks of the same
or similar issuers. Convertible securities rank senior to common stock in a
corporation's capital structure but are usually subordinated to comparable
non-convertible securities. 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 or other obligations from a bank or securities dealer (or its
affiliate) 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 maintains 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 is accrued as interest and included in the Fund's net
investment income.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to the Fund if the other party to
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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 receives and monitors the creditworthiness of such
institutions under the Board's general supervision.
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. 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
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Fund may repurchase any OTC option it writes at a maximum price to be calculated
by a formula set forth in the option agreement. The cover for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the intrinsic
value of the option.
MUNICIPAL OBLIGATIONS
Municipal obligations generally include debt obligations issued to obtain
funds for various public purposes as well as certain industrial development
bonds issued by or on behalf of public authorities. Municipal obligations are
classified as general obligation bonds, revenue bonds and notes. General
obligation bonds are supported by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from the revenue derived from a particular facility or class of
facilities, or, in some cases, from the proceeds of a special excise or other
specific revenue source, but not from general taxing power. Industrial
development bonds, in most cases, are revenue bonds that generally do not carry
the pledge of the credit of the issuing municipality, but generally are
guaranteed by the corporate entity on whose behalf they are issued. Notes are
short-term instruments which are obligations of the issuing municipalities or
agencies and normally are sold in anticipation of a bond sale, collection of
taxes or receipt of other revenues. Municipal obligations include municipal
lease/purchase agreements which are similar to installment purchase contracts
for property or equipment issued by municipalities.
Municipal obligations bear fixed, floating or variable rates of interest.
Certain municipal obligations are subject to redemption at a date earlier than
their stated maturity pursuant to call options, which may be separated from the
related municipal obligations and purchased and sold separately. The Fund also
may acquire call options on specific municipal obligations. The Fund generally
would purchase these call options to protect the Fund from the issuer of the
related municipal obligation redeeming, or other holder of the call option from
calling away, the municipal obligation before maturity.
While, in general, municipal obligations are tax-exempt securities having
relatively low yields as compared to taxable, non-municipal obligations of
similar quality, certain municipal obligations are taxable obligations, offering
yields comparable to, and in some cases greater than, the yields available on
other permissible Fund investments. The portion of dividends received by
stockholders from the Fund that is attributable to interest income received by
the Fund from municipal obligations will not be exempt from federal income tax.
PRIVATE PLACEMENTS
The Fund may invest in securities that are sold in private placement
transactions between their issuers and their purchasers and that are neither
listed on an exchange nor traded in the OTC secondary market. In many cases,
privately placed securities will be subject to contractual or legal restrictions
on transfer. As a result of the absence of a public trading market, privately
placed securities may in turn be less liquid and more difficult to value than
publicly traded securities. Although privately placed securities may be resold
in privately negotiated transactions, the prices realized from the sales could,
due to illiquidity, be less than those originally paid by the Fund or less than
if such securities were more widely traded. In addition, issuers whose
securities are not publicly traded may not be subject to the disclosure and
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other investor protection requirements that may be applicable if their
securities were publicly traded. If any privately placed securities held by the
Fund are required to be registered under the securities laws of one or more
jurisdictions before being resold, the Fund may be required to bear the expenses
of registration.
MONEY MARKET INSTRUMENTS
The Fund may invest in money market instruments which may include
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, obligations of foreign and domestic banks or other depository
institutions, commercial paper, short-term corporate obligations and repurchase
agreements secured by any of the foregoing.
Certificates of deposit are negotiable certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time. Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Bankers'
acceptances are credit instruments evidencing the obligation of a bank to pay a
draft drawn on it by a customer. These instruments reflect the obligation both
of the bank and the drawer to pay the face amount of the instrument upon
maturity. Other short-term bank obligations may include uninsured, direct
obligations bearing fixed, floating or variable interest rates.
Commercial paper consists of short-term, unsecured promissory notes issued
to finance short-term credit needs. Other short-term corporate obligations
include variable amount master demand notes, which are obligations that permit
the Fund to invest fluctuating amounts at varying rates of interest pursuant to
direct arrangements between the Fund, as lender, and the borrower. These notes
permit daily changes in the amounts borrowed. There generally is no established
secondary market for these obligations, although they are redeemable at face
value, plus accrued interest, at any time.
SHORT SALES "AGAINST THE BOX"
The Fund may engage in short sales of securities it owns or has the right
to acquire at no added cost through conversion or exchange of other securities
it owns (short sales "against the box"). To make delivery to the purchaser in a
short sale, the executing broker borrows the securities being sold short on
behalf of the Fund, and the Fund is obligated to replace the securities borrowed
at a date in the future. When the Fund sells short, it establishes a margin
account with the broker effecting the short sale and deposits collateral with
the broker. In addition, the Fund maintains, in a segregated account with its
custodian, securities that could be used to cover the short sale. The Fund
incurs transaction costs, including interest expense, in connection with
opening, maintaining and closing short sales "against the box."
The Fund might make a short sale "against the box" in order to hedge
against market risks when Mitchell Hutchins believes that the price of a
security may decline, thereby causing a decline in the value of a security owned
by the Fund or a security convertible into or exchangeable for a security owned
by the Fund. In such case, any loss in the Fund's long position after the short
sale should be reduced by a corresponding gain in the short position.
Conversely, any gain in the long position after the short sale should be reduced
by a corresponding loss in the short position. The extent to which gains or
losses in the long position are reduced will depend upon the amount of the
securities sold short relative to the amount of the securities the Fund owns,
either directly or indirectly, and in the case where the Fund owns convertible
securities, changes in the investment values or conversion premiums of such
securities.
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INVESTMENT LIMITATIONS
FUNDAMENTAL LIMITATIONS. The following fundamental investment limitations
cannot be changed without the affirmative vote of the lesser of (a) more than
50% of the outstanding shares of the Fund or (b) 67% or more of the shares
present at a stockholders' meeting if more than 50% of the outstanding shares
are represented at the meeting in person or by proxy. If a percentage
restriction is adhered to at the time of an investment or transaction, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or the amount of total assets will not be considered a
violation of any of the following limitations or of any of the Fund's investment
policies.
The Fund will not:
(1) purchase securities of any one issuer if, as a result,
more than 5% of the Fund's total assets would be invested in securities of
that issuer or the Fund would own or hold more than 10% of the outstanding
voting securities of that issuer, except that up to 25% of the Fund's
total assets may be invested without regard to this limitation, and except
that this limitation does not apply to securities issued or guaranteed by
the U.S. government, its agencies and instrumentalities or to securities
issued by other investment companies.
The following interpretation applies to, but is 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.
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(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 Proxy
Statement/Prospectus and this Statement of Additional Information are not
fundamental and may be changed with approval of the Board of Directors and
without a stockholder vote.
HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS
Mitchell Hutchins may use a variety of financial instruments ("Derivative
Instruments"), including certain options, futures contracts (sometimes referred
to as "futures"), options on futures contracts and forward currency contracts to
attempt to hedge the Fund's portfolio and to attempt to enhance income or to
realize gains. Mitchell Hutchins also may attempt to hedge the Fund's portfolio
through the use of swap transactions. The Fund may enter into transactions using
one or more types of Derivatives Instruments under which the full value of its
portfolio is at risk. Under normal circumstances, however, the Fund's use of
these instruments will place at risk a much smaller portion of its assets. The
Fund may use the following Derivative Instruments:
OPTIONS ON DEBT AND EQUITY SECURITIES AND FOREIGN CURRENCIES. A call
option is a short-term contract pursuant to which the purchaser of the option,
in return for a premium, has the right to buy the security or currency
underlying the option at a specified price at any time during the term, or upon
the expiration, of the option. The writer of a call option, who receives the
premium, has the obligation, upon exercise of the option, to deliver the
underlying security or currency against payment of the exercise price. A put
option is a similar contract that gives its purchaser, in return for a premium,
the right to sell the underlying security or currency at a specified price
during the option term. The writer of a put option, who receives the premium,
has the obligation, upon timely exercise of the option, to buy the underlying
security or currency at the exercise price.
OPTIONS ON INDICES OF DEBT AND EQUITY SECURITIES. A securities 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
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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. A securities 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 strategies using Derivative Instruments can be broadly categorized
as "short hedges" and "long hedges." A short hedge is a purchase or sale of a
Derivative Instrument intended partially or fully to offset potential declines
in the value of one or more investments held in the Fund's portfolio. Thus, in a
short hedge, the Fund takes a position in a Derivative Instrument whose price is
expected to move in the opposite direction of the price of the investment being
hedged. For example, the Fund might purchase a put option on a security to hedge
against a potential decline in the value of that security. If the price of the
security declined below the exercise price of the put, the Fund could exercise
the put and thus limit its loss below the exercise price to the premium paid
plus transaction costs. In the alternative, because the value of the put option
can be expected to increase as the value of the underlying security declines,
the Fund might be able to close out the put option and realize a gain to offset
the decline in the value of the security.
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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 SEC, the several options and futures exchanges upon which they are traded
and the Commodity Futures Trading Commission ("CFTC"). In addition, the Fund's
ability to use Derivative Instruments may be limited by tax considerations. See
"Taxation."
In addition to the products, strategies and risks described below and in the
Proxy Statement/Prospectus, Mitchell Hutchins may discover additional
opportunities in connection with Derivative Instruments and with hedging, income
and gain strategies. These new opportunities may become available as regulatory
authorities broaden the range of permitted transactions and as new Derivative
Instruments and techniques are developed. Mitchell Hutchins may utilize these
opportunities for the Fund to the extent that they are consistent with the
Fund's investment objective and permitted by its investment limitations and
applicable regulatory authorities. The Fund's Proxy Statement/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 Proxy Statement/Prospectus.
SPECIAL RISKS OF STRATEGIES USING DERIVATIVE INSTRUMENTS
The use of Derivative Instruments involves special considerations and
risks, as described below. Risks pertaining to particular Derivative Instruments
are described in the sections that follow.
(1) Successful use of most Derivative Instruments depends upon Mitchell
Hutchins' ability to predict movements of the overall securities, currency or
interest rate 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
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used in a short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors affecting the markets in which Derivative Instruments
are traded rather than the value of the investments being hedged. The
effectiveness of hedges using Derivative Instruments on indices will depend on
the degree of correlation between price movements in the index and price
movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly
or partially offsetting the negative effect of unfavorable price movements in
the investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if the Fund entered into a
short hedge because Mitchell Hutchins projected a decline in the price of a
security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Derivative Instrument. Moreover, if the price of the
Derivative Instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would have
been in a better position had it not hedged at all.
(4) As described below, the Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
(i.e., Derivative Instruments other than purchased options). If the Fund were
unable to close out its positions in such Derivative Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the position expired or matured. These requirements might impair the
Fund's ability to sell a portfolio security or make an investment at a time when
it would otherwise be favorable to do so, or require that the Fund sell a
portfolio security at a disadvantageous time. The Fund's ability to close out a
position in a Derivative Instrument prior to expiration or maturity depends on
the existence of a liquid secondary market or, in the absence of such a market,
the ability and willingness of a counterparty to enter into a transaction
closing out the position. Therefore, there is no assurance that any position in
a Derivative Instrument can be closed out at a time and price that is favorable
to the Fund.
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS
Transactions using Derivative Instruments, other than purchased options,
expose the Fund to an obligation to another party. The Fund will not enter into
any such transactions unless it owns either (1) an offsetting ("covered")
position in securities, currencies or other options, forward currency contracts
or futures contracts or (2) cash or liquid securities, with a value sufficient
at all times to cover its potential obligations to the extent not covered as
provided in (1) above. The Fund will comply with SEC guidelines regarding cover
for such transactions and will, if the guidelines so require, set aside cash or
liquid securities in a segregated account with its custodian in the prescribed
amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Derivative Instrument is open, unless they are
replaced with similar assets. As a result, the committing of a large portion of
the Fund's assets to cover positions or to segregated accounts could impede
portfolio management or the Fund's ability to meet current obligations.
OPTIONS
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The Fund may purchase put and call options, and write (sell) covered put
and call options, on debt and equity securities and foreign currencies. The
purchase of call options may serve as a long hedge, and the purchase of put
options may serve as a short hedge. Writing covered put or call options can
enable the Fund to enhance income by reason of the premiums paid by the
purchases of such options. In addition, writing covered put options may serve as
a limited long hedge because increases in the value of the hedged investment
would be offset to the extent of the premium received for writing the option.
However, if the market price of the security underlying a covered put option
declines to less than the exercise price of the option, minus the premium
received, the Fund would expect to suffer a loss. Writing covered call options
may serve as a limited short hedge, because declines 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 the section entitled "Investment Objectives and
Policies--Illiquid Securities."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Generally, OTC options on foreign currencies and debt
securities are European-style options. This means that the option is only
exercisable immediately prior to its expiration. This is in contrast to
American-style options, which are exercisable at any time prior to the
expiration date of the option. There are also other types of options exercisable
on 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.
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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 may serve as a long hedge, and the sale of futures or
the purchase of put options thereon may serve as a short hedge. Writing covered
call options on futures contracts may serve as a limited short hedge, using a
strategy similar to that used for writing covered call options on securities,
currencies or indices. Similarly, writing put options on futures contracts may
serve as a limited long hedge.
Futures strategies also can be used to manage the average duration of the
Fund's portfolio. If Mitchell Hutchins wishes to shorten the average duration of
the Fund's portfolio, the Fund may sell an interest rate futures contract or a
call option thereon, or purchase a put option on that futures contract. If
Mitchell Hutchins wishes to lengthen the average duration of the Fund's
portfolio, the Fund may buy an interest rate or futures contract or a call
option thereon or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit with the futures
broker through which the transaction was effected, "initial margin" consisting
of cash, obligations of the United States or obligations that are fully
guaranteed as to principal and interest by the United States, in an amount
generally equal to 10% or less of the contract value. Margin must also be
deposited when writing a call option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in the
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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 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
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The Fund may use options on foreign currencies, as described above, and
forward currency contracts, as described below, to hedge against movements in
the values of the foreign currencies in which portfolio securities are
denominated and to attempt to enhance income or to realize gains. Currency
hedges can protect against price movements in a security the Fund owns or
intends to acquire that are attributable to changes in the value of the currency
in which it is denominated. Such hedges do not, however, protect against price
movements in the securities that are attributable to other causes.
The Fund might seek to hedge against changes in the value of a particular
currency when no Derivative Instruments on that currency are available or such
Derivative Instruments are more expensive than certain other Derivative
Instruments. In such cases, the Fund may hedge against price movements in that
currency by entering into transactions using Derivative Instruments on another
currency or basket of currencies, the value of which Mitchell Hutchins believes
will have a positive correlation to the value of the currency being hedged. The
risk that movements in the price of the Derivative Instrument will not correlate
perfectly with movements in the price of the currency being hedged is magnified
when this strategy is used.
The value of Derivative Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Derivative
Instruments, the Fund could be disadvantaged by having to deal in the odd-lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Derivative Instruments until they reopen.
Settlement of Derivative Instruments involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the Fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
COMBINED TRANSACTIONS
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions and any combination of futures and
options transactions (each a "component" transaction), 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
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each of its component transactions. Although combined transactions are normally
entered into based on Mitchell Hutchins' judgment that the combined strategies
will reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
GUIDELINE FOR FUTURES AND OPTIONS
To the extent that the Fund enters into futures contracts, options on
futures positions and options on foreign currencies traded on a commodities
exchange, which are not for BONA FIDE hedging purposes (as defined by the CFTC),
the aggregate initial margin and premiums on these positions (excluding the
amount by which options are "in-the-money") may not exceed 5% of the Fund's net
assets. This guideline may be modified by the Fund's Board of Directors without
a stockholder 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
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<PAGE>
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the counterparty. Thus, there can be no assurance
that the Fund will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the counterparty, the Fund might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Fund would continue
to be subject to market risk with respect to the position, and would continue to
be required to maintain a position in the securities or currencies that are the
subject of the hedge or to maintain cash or liquid securities in a segregated
account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts or maintain a net
exposure to such contracts only if (1) the consummation of the contracts would
not obligate the Fund to deliver an amount of foreign currency in excess of the
value of the position being hedged by such contracts or (2) the Fund maintains
cash or liquid securities in a segregated account in an amount not less than the
value of its total assets committed to the consummation of the contract and not
covered as provided in (1) above, as marked to market daily.
SWAP TRANSACTIONS
The Fund may enter into interest rate swap transactions. Swap transactions
include caps, floors and collars. Interest rate swap transactions involve an
agreement between two parties to exchange payments that are based, respectively,
on variable and fixed rates of interest and that are calculated on the basis of
a specified amount of principal ("notional principal amount") for a specified
period of time. Interest rate cap and floor transactions involve an agreement
between two parties in which one party agrees to make payments to its
counterparty when a designated market interest rate goes above (in the case of a
cap) or below (in the case of a floor) a designated level on predetermined dates
or during a specified time period. Interest rate collar transactions involve an
agreement between two parties in which payments are made when a designated
market interest rate either goes above a designated level or goes below a
designated floor level on predetermined dates or during a specified time period.
The Fund would enter into swap transactions to preserve a return or spread
on a particular investment or portion of its portfolio or to protect against any
increase in the price of securities it anticipates purchasing at a later date.
The Fund would use these transactions as a hedge and not as a speculative
investment. Interest rate swap transactions are subject to risks comparable to
those described above with respect to other Derivative Instruments.
The Fund may enter into interest rate swaps, caps, floors and collars on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest rate
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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.
DIRECTORS AND OFFICERS
The Fund pays its Directors who are not "interested persons" of the Fund
$1,000 annually and up to $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 each receive
additional compensation aggregating $15,000 annually from the relevant funds.
All Directors are reimbursed for any expenses incurred in attending meetings.
Because Mitchell Hutchins performs substantially all of the services necessary
for the operation of the Fund, the Fund requires no employees. No officer,
director or employee of PaineWebber or Mitchell Hutchins presently receives any
compensation from the Fund for acting as a director or officer.
The table below includes certain information relating to the compensation
of the Fund's Directors.
COMPENSATION TABLE^
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM THE FUND AND THE FUND
NAME OF PERSONS POSITION FROM THE FUND* COMPLEX**
Richard Q. Armstrong, Director $1,327 [ ]
Richard R. Burt, Director $1,297 [ ]
Meyer Feldberg, Director $1,816 [ ]
George W. Gowen, Director $1,327 [ ]
Frederic Malek, Director $1,327 [ ]
Carl W. Schafer, Director $1,327 [ ]
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- --------
^ 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 fees paid to each director during the fiscal period ended May 31,
1999 by the Fund.
** Represents total compensation paid to each Director during the calendar year
ended December 31, 1999; no fund within the complex has a bonus, pension,
profit sharing or retirement plan.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of _____, 2000, Cede & Co. (the nominee for The Depository Trust
Company) owned of record ____ shares or ___% of the outstanding shares. To the
knowledge of the Fund, no person is the beneficial owner of 5% or more of its
shares. As of ______, 2000, the Directors and officers of the Fund beneficially
owned less than 1% of the outstanding Fund shares.
INVESTMENT ADVISORY ARRANGEMENTS
Mitchell Hutchins is the Fund's investment adviser and administrator
pursuant to a contract dated June 22, 1998 ("Advisory Contract"). 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.
Pursuant to the Advisory Contract, Mitchell Hutchins provides a continuous
investment program for the Fund and makes investment decisions and places orders
to buy, sell or hold particular securities. As administrator, Mitchell Hutchins
supervises all matters relating to the operation of the Fund and 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,
stockholders and regulatory authorities.
The Advisory Contract between Mitchell Hutchins and the Fund provides
Mitchell Hutchins with a fee, computed weekly and payable 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"). 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.
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
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Fund and any losses incurred in connection therewith; (2) fees payable to and
expenses incurred on behalf of the Fund by Mitchell Hutchins; (3) organizational
and offering expenses of the Fund, whether or not advanced by Mitchell Hutchins;
(4) filing fees and expenses relating to the registration and qualification of
the Fund's shares and the Fund under federal securities laws and/or state laws
and maintaining such registration and qualifications; (5) fees and salaries
payable to Fund's directors and officers who are not interested persons of the
Fund or Mitchell Hutchins; (6) all expenses incurred in connection with the
Fund's directors' services, including travel expenses; (7) taxes (including any
income or franchise taxes) and governmental fees; (8) costs of any liability,
uncollectible items of deposit and any other insurance or fidelity bonds; (9)
any costs, expenses or losses arising out of a liability of or claims for
damages or other relief asserted against the Fund for violation of any law; (10)
legal, accounting and auditing expenses, including legal fees of special counsel
for those directors of the Fund who are not interested persons of the Fund; (11)
charges of custodians, transfer agents and other agents (including any lending
agent); (12) costs of preparing share certificates; (13) expenses of setting in
type and printing prospectuses and supplements thereto, statements of additional
information and supplements thereto, reports and proxy materials for existing
shareholders; (14) costs of mailing prospectuses and supplements thereto,
statements of additional information and supplements thereto, reports and proxy
materials to existing shareholders; (15) any extraordinary expenses (including
fees and disbursements of counsel, costs of actions, suits or proceedings to
which the Fund is a party and the expenses the Fund may incur as a result of its
legal obligation to provide indemnification to its officers, directors, agents
and shareholders) incurred by the Fund; (16) fees, voluntary assessments and
other expenses incurred in connection with membership in investment company
organizations; (17) costs of mailing and tabulating proxies and costs of
meetings of shareholders, the Board and any committees thereof; (18) the costs
of investment company literature and other publications provided by the Fund to
its directors and officers; (19) costs of mailing, stationery and communications
equipment; (20) expenses incident to any dividend reinvestment plan; (21)
changes and expenses of any outside pricing service used to value portfolio
securities; (22) interest on borrowings of the Fund; (23) fees and expenses of
listing and maintaining any listing of the Fund's shares on any national
securities exchange; and (24) costs and expenses (including rating agency fees)
associated with the issuance of any preferred stock.
The Advisory Contract was approved by the Fund's Board and by a majority
of the Directors who are not parties to the Advisory Contract or interested
persons of any such party ("Independent Directors") on May 13, 1998 and by its
initial shareholder on June 22, 1998. Unless sooner terminated, the Advisory
Contract will continue automatically for successive annual periods, provided
that such continuance is specifically approved at least annually (1) by a
majority vote of the Independent Directors cast in person at a meeting called
for the purpose of voting on such approval; and (2) by the Board or by vote of a
majority of the Fund's outstanding voting securities.
Under the Advisory Contract, Mitchell Hutchins is not liable for any error
of judgment or mistake of law or for any loss suffered by the Fund in connection
with the Advisory Contract, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of Mitchell Hutchins in the
performance of its duties or from reckless disregard of its duties and
obligations under the Advisory Contract. The Advisory Contract is terminable by
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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.
For the fiscal year ended May 31, 1999, the Fund paid or accrued to
Mitchell Hutchins investment advisory and administration fees totaling $322,
661.
CUSTODIAN AND INDEPENDENT AUDITORS
State Street Bank and Trust Company ("State Street"), One Heritage Drive,
North Quincy, Massachusetts 02171, serves as custodian of the Fund's assets. As
custodian of the Fund, State Street responsibility's include the safekeeping of
securities, cash and other assets of the Fund; settling portfolio purchases and
sales; identifying and collecting portfolio income; and performing portfolio
accounting functions. State Street also employs foreign sub-custodians approved
by the Board of Directors, in accordance with applicable requirements under the
1940 Act, to provide custody of the Fund's foreign assets. Ernst & Young LLP
("Ernst & Young"), 787 Seventh Avenue, New York, New York 10019, serves as the
Fund's independent auditors. As independent auditors, Ernst & Young reviews the
books and records of the Fund. Moreover, it advises management on accounting
issues. Ernst and Young also issues audit reports to the Board of Directors,
stockholders, and the SEC.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors, Mitchell
Hutchins is responsible for the execution of the Fund's portfolio transactions
and the allocation of brokerage transactions. In executing portfolio
transactions, Mitchell Hutchins seeks 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 adopted procedures in conformity with Rule 17e-1 under
the 1940 Act to ensure that all brokerage commissions paid to Mitchell Hutchins
34
<PAGE>
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. For the fiscal year ended May 31, 1999, the Fund did
not pay any commissions to FCMs.
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 does not enter into any
explicit soft dollar arrangements relating to principal transactions and does
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 advisers 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 are 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
35
<PAGE>
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 are
beneficial to the Fund.
The Fund does 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.
For the fiscal year ended May 31, 1999, Mitchell Hutchins did not direct
any brokerage commissions to brokers chosen because they provided research and
analysis. For the fiscal year ended May 31, 1999, Managed High Yield Plus paid
no brokerage commissions.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate was 52% for the fiscal period June 26,
1998 (commencement of operations) to May 31, 1999. Portfolio turnover may vary
from year to year and will not be a limiting factor when Mitchell Hutchins deems
portfolio changes appropriate. Higher portfolio turnover (100% or more) will
result in higher Fund expenses, including brokerage commissions, dealer mark-ups
and other transaction costs on the sale of securities and on reinvestment in
other securities. The portfolio turnover rate is calculated by dividing the
lesser of a 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.
NET ASSET VALUE OF SHARES
The net asset value of the Fund's shares is determined weekly as of the
close of regular trading on the New York Stock Exchange, Inc. ("NYSE") on the
last day of the week on which the NYSE is open for trading. The net asset value
of the shares also is determined monthly at the close of regular trading on the
NYSE on the last day of the month on which the NYSE is open for trading. The net
asset value per share is computed by dividing the value of the securities held
by the Fund plus any cash or other assets (including interest and dividends
accrued but not yet received and earned discount) minus all liabilities
(including accrued expenses) by the total number of shares outstanding at such
time.
When market quotations are readily available, the Fund's debt securities
are valued based upon those quotations. When market quotations for options and
futures positions held by the Fund are readily available, those positions are
valued based upon such quotations. Market quotations generally are not available
for options traded in the OTC market. When market quotations for options or
futures positions are not readily available, they are valued at fair value as
determined in good faith by or under the direction of the Board of Directors.
36
<PAGE>
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) are 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.
TAXATION
GENERAL
The following discussion of federal income tax consequences is for general
information only. 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.
37
<PAGE>
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code of 1986 ("Code"), the Fund must
distribute to its stockholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net investment
income, net short-term capital gain and net gains from certain foreign currency
transactions) ("Distribution Requirement") and must meet several additional
requirements. These requirements include the following: (1) the Fund must derive
at least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in securities or those currencies ("Income Requirement");
(2) at the close of each quarter of the Fund's taxable year, at least 50% of the
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 Stockholders) and all distributions out of its earnings and
profits would be taxable to its Stockholders 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 stockholders of record on a date
in any of those months will be deemed to have been paid by the Fund and received
by the stockholders 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 stockholders 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 stockholders. 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 stockholder
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 Fund shares by the difference between the included income and such
share of the Fund tax.
A portion of the dividends from the Fund's investment company taxable
income (whether paid in cash or reinvested in additional shares) may be eligible
for the dividends-received deduction allowed to corporations. The eligible
portion may not exceed the aggregate dividends the Fund receives from U.S.
corporations. However, dividends received by a corporate stockholder 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 of common stock and preferred stock
outstanding, it intends to designate distributions made to each such class in
38
<PAGE>
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. Stockholders 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.
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. Stockholders," 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 Stockholders. 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 Stockholders. 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.
39
<PAGE>
STRATEGIES USING DERIVATIVE INSTRUMENTS
Strategies using Derivative Instruments, such as selling (writing) and
purchasing options and futures and entering into forward currency contracts,
involve complex rules that will determine for income tax purposes the amount,
character and timing of recognition of the gains and losses the Fund realizes in
connection therewith. These rules also may require the Fund to "mark to market"
(that is, treat as sold for their fair market value) at the end of each taxable
year certain positions in its portfolio, which may cause the Fund to recognize
income and/or gain without receiving cash with which to make distributions
necessary to satisfy the Distribution Requirement and avoid imposition of the
Excise Tax. Gains from the disposition of foreign currencies (except certain
gains that may be excluded by future regulations), and gains from options,
futures and forward currency contracts derived by the Fund with respect to its
business of investing in securities or foreign currencies, will qualify as
permissible income under the Income Requirement.
If the Fund has an "appreciated financial position"--generally, an
interest (including an interest through an option, futures or forward currency
contract, or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis--and enters into a "constructive sale" of the same or
substantially similar property, the Fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract or futures or forward currency contract entered into by the
Fund or a related person with respect to the same or substantially similar
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale.
ADDITIONAL INFORMATION
STOCK REPURCHASES AND TENDERS
The Fund's Board of Directors may authorize the Fund to tender for its
shares to reduce or eliminate the discount to net asset value at which the
Fund's shares might trade. Even if a tender offer has been made, it will be the
Board's announced policy, which may be changed by the Board, not to accept
tenders or effect repurchases (or, if a tender offer has not been made, not to
initiate a tender offer) if (1) such transactions, if consummated, would (a)
result in the delisting of the Common Stock 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 stockholders, thus causing its
income to be fully taxed at the corporate level in addition to the taxation of
stockholders 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 objective and policies in order to repurchase its shares;
or (3) there is, in the Board's judgment, any (a) material legal action or
40
<PAGE>
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 stockholders if shares were repurchased. The Board of Directors may
modify these conditions in light of experience.
RATINGS INFORMATION
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
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 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 shortcomings; C. Bonds which are rated C
are the lowest rated class of bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through 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 that generic rating category.
41
<PAGE>
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P. 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. A
subordinated debt or preferred stock obligation rated C is currently highly
vulnerable to nonpayment. 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. A C also will be assigned to a
preferred stock issue in arrears on dividends or sinking fund payments, but that
is currently paying. 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 S&P 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.
CI. The rating CI is reserved for income bonds on which no interest is
being paid.
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.
42
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<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 2000 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
MANAGED HIGH MANAGED HIGH
Principal YIELD PLUS FUND YIELD FUND COMBINED
Amount
(combined) Maturity Interest
(000) Dates Rates Value Value Value
- -------------- ---------------- ----------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Corporate Bonds - 126.80%
Automotive - 2.14%
$5,250 HDA Parts Systems Incorporated 08/01/05 12.000 % $4,072,500 $678,750 $4,751,250
4,750 JL French Automotive Castings** 06/01/09 11.500 4,040,000 757,500 4,797,500
--------------------------------------------
8,112,500 1,436,250 9,548,750
--------------------------------------------
Cable - 15.73%
13,000 21st Century Telecom Group Incorporated 02/15/08 12.250 + 8,190,000 682,500 8,872,500
7,000 Charter Communications Holdings 04/01/09 10.000 6,930,000 0 6,930,000
15,250 Knology Holdings Incorporated 10/15/07 11.875 + 8,844,375 1,335,000 10,179,375
6,000 NTL Incorporated 10/01/08 11.500 5,300,000 1,060,000 6,360,000
13,575 Park 'N View Incorporated 05/15/08 13.000 8,381,250 1,800,000 10,181,250
11,250 RCN Corporation 10/15/07 11.125 + 6,900,000 862,500 7,762,500
5,000 UIH Australia/Pacific Incorporated 05/15/06 14.000 + 2,580,000 1,720,000 4,300,000
9,250 United Pan Europe** 08/01/09 10.875 4,714,250 327,000 5,041,250
19,250 United Pan Europe** 08/01/09 - 11/01/09 12.500 to 13.375+ 10,137,000 354,250 10,491,250
--------------------------------------------
61,976,875 8,141,250 70,118,125
--------------------------------------------
Chemicals - 2.69%
7,500 Lyondell Chemical Company 05/01/07 9.875 6,698,000 689,500 7,387,500
4,500 ZSC Specialty** 07/01/09 11.000 4,080,000 510,000 4,590,000
--------------------------------------------
10,778,000 1,199,500 11,977,500
--------------------------------------------
Communications - Fixed - 28.80%
9,687 Alestra S.A.** 05/15/06 12.125 8,752,153 1,007,500 9,759,653
5,000 Allegiance Telecom Incorporated 05/15/08 12.875 5,650,000 0 5,650,000
9,250 Barak ITC 11/15/07 12.500 + 4,340,000 840,000 5,180,000
2,500 Carrier1 International S.A.# 02/15/09 13.250 2,520,000 280,000 2,800,000
4,543 Esprit Telecom Group PLC 06/15/08 10.875 3,882,200 388,220 4,270,420
5,250 Flag Limited 01/30/08 8.250 4,550,000 227,500 4,777,500
2,000 Focal Communication Corporation 01/15/00 11.875 2,040,000 0 2,040,000
5,000 Global Crossing Holdings Limited** 11/15/09 9.500 4,825,000 0 4,825,000
6,500 GlobeNet Communications Group** 07/15/07 13.000 5,880,000 490,000 6,370,000
7,000 GST Equipment Funding Incorporated 05/01/07 13.250 6,000,000 1,000,000 7,000,000
7,750 GT Group Telecom Incorporated 02/01/10 1.000 4,126,875 0 4,126,875
9,150 Hyperion Telecommunications Incorporated 11/01/07 12.000 8,040,625 1,475,000 9,515,625
3,000 ICG Services Incorporated 02/15/08 10.000 1,120,000 565,000 1,685,000
4,025 Intelcom Group USA Incorporated 09/15/05 1.000 3,662,750 0 3,662,750
5,640 KMC Telecom Holdings Incorporated 05/15/09 13.500 5,140,000 500,000 5,640,000
5,750 Metromedia Fiber Network Incorporated 11/15/08 10.000 5,012,500 751,875 5,764,375
5,550 NEXTLINK Communications Incorporated 06/01/09 10.750 5,163,437 428,188 5,591,625
8,500 NorthEast Optic Network Incorporated 08/15/08 12.750 8,882,500 0 8,882,500
8,475 Pathnet Incorporated 04/15/08 12.250 4,933,500 660,000 5,593,500
5,000 Tele1 Europe BV** 05/15/09 13.000 4,916,250 258,750 5,175,000
11,000 Viatel Incorporated 04/15/08 12.500 + 5,800,000 580,000 6,380,000
9,750 Williams Communications Group 10/01/09 10.875 8,497,500 1,545,000 10,042,500
4,000 World Access Incorporated 01/15/08 13.250 3,180,625 454,375 3,635,000
--------------------------------------------
116,915,915 11,451,408 128,367,323
--------------------------------------------
Communications - Mobile - 7.75%
1,000 Crown Castle International Corporation 08/01/11 9.500 0 605,000 605,000
7,000 ICO Global Communications Limited#(b) 08/01/05 15.000 3,185,000 245,000 3,430,000
7,500 Nextel Communications Incorporated 02/15/08 9.950 + 3,462,500 1,731,250 5,193,750
14,000 Nextel International Incorporated 04/15/08 12.125 + 7,812,500 937,500 8,750,000
7,875 PTC International Finance** 12/01/09 11.250 7,462,500 373,125 7,835,625
10,625 Spectrasite Holdings Incorporated 04/15/09 11.250 + 6,162,500 0 6,162,500
2,500 Voicestream Wire** 11/15/09 10.375 2,562,500 0 2,562,500
--------------------------------------------
30,647,500 3,891,875 34,539,375
--------------------------------------------
43
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 2000 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
MANAGED HIGH MANAGED HIGH
Principal YIELD PLUS FUND YIELD FUND COMBINED
Amount
(combined) Maturity Interest
(000) Dates Rates Value Value Value
- -------------------------------------------------------------------------- ----------- ----------------------------------------
Corporate Bonds -(continued)
Consumer Manufacturing - 3.30%
$5,250 Commemorative Brands Incorporated 01/15/07 11.000 % $2,200,000 $687,500 $2,887,500
5,500 Decora Industries Incorporated 05/01/05 11.000 3,870,000 860,000 4,730,000
4,000 Desa International Incorporated 12/15/07 9.875 3,040,000 0 3,040,000
4,250 Jafra Cosmetics International Incorporated 05/01/08 11.750 4,037,500 0 4,037,500
--------------------------------------------
13,147,500 1,547,500 14,695,000
--------------------------------------------
Energy - 7.86%
1,650 GulfMark Offshore Incorporated 06/01/08 8.750 1,518,000 0 1,518,000
4,500 Key Energy Services Incorporated 01/15/09 14.000 4,360,000 545,000 4,905,000
5,000 Northern Offshore ASA 05/15/05 10.000 2,360,000 590,000 2,950,000
8,791 Orion Refining Corporation** 12/01/03 15.000 7,396,966 514,603 7,911,569
3,000 Pride International Incorporated 06/01/09 10.000 2,700,000 300,000 3,000,000
7,250 R & B Falcon Corporation 12/15/08 9.500 5,606,250 1,462,500 7,068,750
8,250 Tesoro Petroleum Corporation 07/01/08 9.000 6,975,000 697,500 7,672,500
--------------------------------------------
30,916,216 4,109,603 35,025,819
--------------------------------------------
Finance - 5.43%
6,488 Airplanes Pass-Through Trust 03/15/19 10.875 4,466,937 1,340,081 5,807,018
5,000 Morgan Stanley Aircraft Finance 03/15/23 8.700 4,275,000 0 4,275,000
6,250 Olympic Financial Limited 03/15/07 11.500 5,733,750 781,875 6,515,625
13,000 Signet Capital Trust I 08/15/27 9.500 4,290,000 0 4,290,000
5,550 Superior National Insurance Group 12/01/17 10.750 3,030,000 300,000 3,330,000
--------------------------------------------
21,795,687 2,421,956 24,217,643
--------------------------------------------
Food & Beverage - 4.94%
8,125 Iowa Select Farms L.P.** 12/01/05 10.750 3,250,000 812,500 4,062,500
16,625 Mrs Field's Holdings Company Incorporated**# 12/01/05 14.000 + 8,890,000 420,000 9,310,000
1,000 Mrs Field's Original Cookies Incorporated** 12/01/04 10.125 0 800,000 800,000
8,808 Packaged Ice Incorporated 02/01/05 9.750 6,504,120 1,335,000 7,839,120
--------------------------------------------
18,644,120 3,367,500 22,011,620
--------------------------------------------
Gaming - 2.06%
4,250 Hollywood Casino Corporation 05/01/07 11.250 4,100,000 256,250 4,356,250
5,125 Park Place Entertainment Corporation 12/15/05 7.875 4,359,063 471,250 4,830,313
--------------------------------------------
8,459,063 727,500 9,186,563
--------------------------------------------
General Industrial - 5.04%
7,000 Aqua Chemical Incorporated 07/01/08 11.250 3,710,000 0 3,710,000
8,250 Blount Incorporated** 08/01/09 13.000 7,931,250 793,125 8,724,375
3,750 J.B. Poindexter & Company Incorporated 05/15/04 12.500 2,835,000 708,750 3,543,750
8,000 Sabreliner Corporation** 06/15/08 11.000 5,670,000 810,000 6,480,000
--------------------------------------------
20,146,250 2,311,875 22,458,125
--------------------------------------------
Healthcare - 2.33%
4,000 Fresenius Medical Care Capital Trust 02/01/08 7.875 2,685,000 895,000 3,580,000
4,000 Tenet Healthcare Corporation 12/01/08 8.125 3,228,750 461,250 3,690,000
3,000 Triad Hospitals Holdings Incorporated** 05/15/09 11.000 2,794,500 310,500 3,105,000
--------------------------------------------
8,708,250 1,666,750 10,375,000
--------------------------------------------
Hotels & Lodging - 2.35%
4,650 Host Marriott L.P. 02/15/06 8.375 4,301,250 0 4,301,250
2,875 Signature Resorts Incorporated 05/15/06 9.250 1,926,250 0 1,926,250
6,322 Silverleaf Resorts Incorporated 04/01/08 10.500 3,398,240 837,500 4,235,740
--------------------------------------------
9,625,740 837,500 10,463,240
--------------------------------------------
Media- 0.40%
3,250 Inter Act Systems Incorporated(b) 08/01/03 14.000 1,375,000 412,500 1,787,500
--------------------------------------------
Metals - 1.24%
7,250 Metal Management Incorporated 05/15/08 10.000 4,560,000 950,000 5,510,000
--------------------------------------------
Real Estate - 1.67%
9,400 American Architectural Products Corporation 12/01/07 11.750 3,360,000 400,000 3,760,000
4,075 D.R. Horton Incorporated 02/01/09 8.000 3,235,375 452,500 3,687,875
--------------------------------------------
6,595,375 852,500 7,447,875
--------------------------------------------
44
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 2000 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
MANAGED HIGH MANAGED HIGH
Principal YIELD PLUS FUND YIELD FUND COMBINED
Amount
(combined) Maturity Interest
(000) Dates Rates Value Value Value
- -------------- ---------------- ----------- ----------------------------------------
Corporate Bonds - (concluded)
Restaurants - 1.11%
$6,230 American Restaurant Group Incorporated 02/15/03 11.500 % $4,370,300 $598,125 $4,968,425
--------------------------------------------
Retail - 3.18%
7,210 Advance Holding Corporation 04/15/09 12.875 + 2,999,800 821,500 3,821,300
5,350 Advance Stores Company Incorporated 04/15/08 10.250 3,956,000 645,000 4,601,000
6,000 Ames Department Stores Incorporated 04/15/06 10.000 5,252,500 477,500 5,730,000
--------------------------------------------
12,208,300 1,944,000 14,152,300
--------------------------------------------
Service - 8.83%
8,500 Allied Waste North America Incorporated** 08/01/09 10.000 6,525,000 870,000 7,395,000
6,995 American Eco Corporation 05/15/08 9.625 2,937,550 490,000 3,427,550
6,750 Ameriserve Food Distribution Incorporated 07/15/07 10.125 2,328,750 0 2,328,750
7,135 Atlantic Express Transportation Corporation 02/01/04 10.750 6,193,450 727,500 6,920,950
8,750 Budget Group Incorporated 04/01/06 9.125 7,110,625 917,500 8,028,125
4,000 Nationwide Credit Incorporated 01/15/08 10.250 2,520,000 0 2,520,000
5,750 Premier Graphics Incorporated 12/01/05 11.500 2,137,500 450,000 2,587,500
6,500 Waste Systems International Incorporated# 01/15/06 11.500 5,197,500 945,000 6,142,500
--------------------------------------------
34,950,375 4,400,000 39,350,375
--------------------------------------------
Supermarkets & Drugstores - 1.29%
6,000 The Pantry Incorporated 10/15/07 10.250 5,760,000 0 5,760,000
--------------------------------------------
Technology - 12.21%
7,000 Ampex Corporation* 03/15/03 12.000 6,532,500 502,500 7,035,000
4,000 Chippac International Limited** 08/01/09 12.750 3,622,500 517,500 4,140,000
8,000 Earthwatch Incorporated**# 07/15/07 13.000 + 5,600,000 0 5,600,000
6,690 Fairchild Semiconductor Corporation 03/15/07 10.125 6,015,000 691,725 6,706,725
3,000 Globix Corporation 02/01/10 12.500 3,030,000 0 3,030,000
8,500 Intersil Corporation**# 08/15/09 13.250 8,400,000 1,120,000 9,520,000
4,750 SCG Holdings Corporation** 08/01/09 12.000 4,515,625 531,250 5,046,875
5,775 Verio Incorporated 12/01/08 11.250 5,525,563 523,750 6,049,313
13,000 Wam! Net Incorporated 03/01/05 13.250 + 6,160,000 1,120,000 7,280,000
--------------------------------------------
49,401,188 5,006,725 54,407,913
--------------------------------------------
Transportation - 4.85%
1,465 Eletson Holdings Incorporated 11/15/03 9.250 1,274,550 0 1,274,550
8,000 Equimar Shipholdings Limited 07/01/07 9.875 4,290,000 990,000 5,280,000
1,250 Navigator Gas Transport PLC**# 06/30/07 12.000 0 37,500 37,500
6,000 Millenium Seacarriers Incorporated 07/15/05 12.000 3,420,000 0 3,420,000
6,750 Stena AB 06/15/07 8.750 5,125,000 410,000 5,535,000
10,000 TFM S.A. de C.V. 06/15/09 11.750 + 5,747,500 302,500 6,050,000
--------------------------------------------
19,857,050 1,740,000 21,597,050
--------------------------------------------
Utilities - 1.62%
5,500 AES Corporation 06/01/09 9.500 4,975,000 497,500 5,472,500
1,750 Panda Funding Corporation 08/20/12 11.625 1,314,423 436,490 1,750,913
--------------------------------------------
6,289,423 933,990 7,223,413
--------------------------------------------
Total Corporate Bonds (cost - $560,029,486, $69,008,986, $629,038,472) 505,240,626 59,948,306 565,188,932
--------------------------------------------
Convertible Bonds - 0.50%
Communications - Fixed- 0.05%
215 GST Telecommunications Incorporated 12/15/05 13.875 0 204,250 204,250
--------------------------------------------
Service - 0.45%
2,496 Waste Systems International Incorporated** 05/13/05 7.000 1,215,000 807,079 2,022,079
--------------------------------------------
Total Convertible Bonds (cost - $1,194,375, $1,183,711, $2,378,086) 1,215,000 1,011,329 2,226,329
--------------------------------------------
45
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 2000 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
MANAGED HIGH MANAGED HIGH
Number YIELD PLUS FUND YIELD FUND COMBINED
of Shares
(combined)
- --------------
Value Value Value
--------------------------------------------
Common Stock(a) - 1.66%
Cable- 0.00%
2,000 Knology Holdings Incorporated 0 $10,500 $10,500
--------------------------------------------
Communications - Fixed - 0.96%
110,549 Viatel Incorporated $4,083,404 0 4,083,404
12,568 World Access Incorporated 189,698 27,100 216,798
--------------------------------------------
4,273,102 27,100 4,300,202
--------------------------------------------
Food & Beverage - 0.04%
40,949 Packaged Ice Incorporated 130,208 59,182 189,390
--------------------------------------------
Gaming- 0.01%
10,000 Hollywood Casino Corporation 0 42,500 42,500
--------------------------------------------
Media- 0.11%
2,000 MediaNews Group Incorporated 0 500,000 500,000
--------------------------------------------
Retail- 0.08%
47,500 Samuel Jewelers Incorporated* 0 368,125 368,125
--------------------------------------------
Service - 0.27%
289,744 Waste Systems International Incorporated 970,509 224,685 1,195,194
--------------------------------------------
Technology - 0.17%
239,676 Ampex Corporation* 325,000 453,947 778,947
--------------------------------------------
Total Common Stock (cost - $4,865,535, $1,211,625, $6,077,160) 5,698,819 1,686,038 7,384,857
--------------------------------------------
Preferred Stock(a) - 3.18%
Cable - 0.98%
4,714 21st Century Telecommunications Group Incorporated** 4,384,020 0 4,384,020
--------------------------------------------
Communications - Fixed 0.56%
2750 ICG Holdings Corporation 2,502,500 0 2,502,500
--------------------------------------------
Communications - Mobile - 0.95%
4,192 Crown Castle International Corporation 4,254,880 0 4,254,880
--------------------------------------------
Energy - 0.02%
104,029 Orion Refining Corporation 56,869 14,183 71,052
--------------------------------------------
Media - 0.36%
6,500 InterAct systems Incorporated** 1,250,000 375,000 1,625,000
--------------------------------------------
Paper & Packaging - 0.20%
7,935 Packaging Corporation of America 872,850 0 872,850
--------------------------------------------
Restaurants- 0.11%
592 American Restaurant Group Incorporated 0 473,600 473,600
--------------------------------------------
Total Preferred Stock (cost - $10,212,394, $1,177,870, $11,390,264) 13,321,119 862,783 14,183,902
--------------------------------------------
46
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 2000 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
MANAGED HIGH MANAGED HIGH
YIELD PLUS FUND YIELD FUND COMBINED
Number
of Warrants Maturity Interest
(combined) Dates Rates Value Value Value
- -------------- ---------------- ----------- ----------------------------------------
Warrants(a) - 1.33%
Cable - 0.44%
3,500 21st Century Telecommunications Group Incorporated $962,500 0 $962,500
14,575 Park 'N View Incorporated 791,375 $156,000 947,375
2,000 UIH Australia Pacific Incorporated 0 60,000 60,000
--------------------------------------------
1,753,875 216,000 1,969,875
--------------------------------------------
Communications - Fixed - 0.23%
8,475 Pathnet Incorporated 74,750 10,000 84,750
5,000 Tele1 Europe BV** 902,500 47,500 950,000
--------------------------------------------
977,250 57,500 1,034,750
--------------------------------------------
Communications - Mobile 0.00%
1,750 McCaw International Limited 0 5,250 5,250
--------------------------------------------
Energy - 0.05%
4,500 Key Energy Services Incorporated 200,000 25,000 225,000
--------------------------------------------
Financial Services 0.00%
750 Olympic Financial Limited 0 750 750
--------------------------------------------
Media- 0.04%
6,500 InterAct Electronic Marketing Incorporated 50 15 65
6,500 InterAct Systems Incorporated 125,000 37,500 162,500
--------------------------------------------
125,050 37,515 162,565
--------------------------------------------
Restaurants- 0.00%
500 American Restaurants Group Incorporated 0 5 5
--------------------------------------------
Service - 0.02%
97,500 Waste Systems International Incorporated** 61,875 11,250 73,125
--------------------------------------------
Technology - 0.55%
800 Electronic Retailing Systems International Incorporated 0 800 800
8,500 Intersil Corporation 1,875,000 250,000 2,125,000
30,000 Wam! Net Incorporated 264,000 66,000 330,000
--------------------------------------------
2,139,000 316,800 2,455,800
--------------------------------------------
Transportation - 0.00%
6,000 Millenium Seacarriers Incorporated 750 0 750
--------------------------------------------
Total Warrants (cost - $188, $85,134, $85,322) 5,257,800 670,070 5,927,870
--------------------------------------------
47
<PAGE>
Principal
Amount
(combined)
(000) Repurchase Agreements - 2.18%
- --------------
$7,595 Repurchase Agreement dated 01/31/2000 with Zions Bank,
collateralized by $7,865,000 U.S. Treasury Notes, 5.500%
due 07/31/2001 (value-$7,747,025);
proceeds; $7,596,198 02/01/00 5.680 % 7,595,000 0 7,595,000
--------------------------------------------
2,128 Repurchase Agreement dated 01/31/2000 with Zions Bank,
collateralized by $2,160,000 U.S. Treasury Notes, 5.500%
due 08/31/2001 (value-$2,175,012);
proceeds; $2,128,336 02/01/00 5.680 0 2,128,000 2,128,000
--------------------------------------------
Total Repurchase Agreements (Cost - $7,595,000, $2,128,000, $9,723,000) -- 7,595,000 2,128,000 9,723,000
--------------------------------------------
Total Investments (Cost - $583,896,978, 135.65% 538,328,364 66,306,526 604,634,890
$74,795,326, $658,692,304)
Liabilities in excess of other assets -35.65% (160,822,811) 1,920,609 (158,902,202)
--------------------------------------------
Net Assets 100.00% $377,505,553 $68,227,135 $445,732,688
============================================
</TABLE>
- --------------------------------------------
# Security represents a unit which is composed of the stated bond
with attached warrants or common stock.
+ Denotes a step-up bond or zero coupon bond that converts to the
noted fixed rate at a designated future date.
* Illiquid securities representing 1.84% of combined net assets.
These securities are valued at fair value as determined in good
faith by a valuation committee under the direction of the Funds'
board of directors.
** Security exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt
from registration, normally to qualified institutional buyers.
(a) Non-income producing securities.
(b) Bond interest in default
See accompanying notes to pro forma financial statements
48
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA STATEMENT OF ASSETS AND LIABILITIES JANUARY 31, 2000 (UNAUDITED)
Managed High Managed High Combined
Yield Plus Fund Yield Fund
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at value (cost - $583,896,978,
$74,795,326, and $658,692,304, respectively) .......... $538,328,364 $ 66,306,526 $604,634,890
Cash .................................................... 0 14,113 14,113
Receivables for investments sold......................... 5,593,260 646,250 6,239,510
Interest receivable...................................... 12,153,394 1,429,610 13,583,004
Interest receivable on swap contract..................... 459,607 0 459,607
Unrealized appreciation on interest rate swap............ 20,325 0 20,325
--------------- --------------- ------------
Total assets ............................................ 556,554,950 68,396,499 624,951,449
--------------- --------------- ------------
LIABILITIES
Bank loan payable ....................................... 167,000,000 0 167,000,000
Payable for investments purchased........................ 9,552,222 13,154 9,565,376
Payable for interest on bank loan........................ 945,434 0 945,434
Payable to investment adviser and administrator......... 325,503 52,568 378,071
Accrued expenses and other liabilities................... 1,226,238 103,642 1,329,880
--------------- --------------- ------------
Total liabilities........................................ 179,049,397 169,364 179,218,761
--------------- --------------- ------------
NET ASSETS
Capital Stock-$0.001 par value; 200,000,000
shares authorized (31,858,651, 6,031,667,
and 37,616,221 shares outstanding, respectively)....... 474,998,612 90,447,851 565,446,463
Undistributed net investment income...................... 5,727,200 131,923 5,859,123
Accumulated net realized loss from investment
transactions.......................................... (57,671,970) (13,863,839) (71,535,809)
Net unrealized depreciation of investments and
interest rate swap..................................... (45,548,289) (8,488,800) (54,037,089)
--------------- --------------- ------------
Net assets applicable to shares outstanding.............. $377,505,553 $ 68,227,135 $445,732,688
=============== =============== ============
Net asset value per share................................ $11.85 $11.31 $11.85
====== ====== ======
</TABLE>
See accompanying notes to pro forma financial statements
49
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA STATEMENT OF OPERATIONS
For the Twelve Months Ended January 31, 2000 (unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
Managed High Managed High
Yield Plus Fund Yield Fund Adjustments Combined
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest $61,710,622 $ 8,243,842 $ 3,246,492 (a) $ 73,200,956
------------------ ----------------- -------------- --------------
EXPENSES:
Bank loan interest expense...................... 8,591,719 0 1,650,000 (a) 10,241,719
Investment advisory and administration fees..... 3,703,061 634,026 61,331 (b) 4,398,418
Transfer agency fees and expenses............... 16,934 11,622 0 28,556
Custody and accounting.......................... 326,484 42,430 15,000 (c) 383,914
Reports and notices to shareholders............. 72,543 45,716 (30,000)(d) 88,259
Legal and audit................................. 392,975 58,954 (58,954)(d) 392,975
Amortization of organizational expenses......... 45,053 0 0 45,053
Trustees' fees and expenses..................... 11,040 10,303 (10,303)(d) 11,040
Other expenses.................................. 107,760 63,129 (20,000)(d) 150,889
------------------ ----------------- -------------- --------------
13,267,569 866,180 1,607,074 15,740,823
------------------ ----------------- -------------- --------------
Net investment income........................... 48,443,053 7,377,662 1,639,418 57,460,133
------------------ ----------------- -------------- --------------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM
INVESTMENT TRANSACTIONS:
Net realized losses from:
Investment transactions..................... (42,248,727) (5,032,949) (47,281,676)
Net change in unrealized
appreciation/depreciation of:
Investments..................................... 13,889,843 (408,158) 13,481,685
------------------ ----------------- --------------
Net realized and unrealized losses from
investment transactions ......................... (28,358,884) (5,441,107) (33,799,991)
------------------ ----------------- -------------- --------------
Net increase in net assets resulting from
operations.................................. $20,084,169 $1,936,555 $ 1,639,418 $23,660,142
================== ================= ============== ==============
</TABLE>
------------
(a) Reflects the anticipated additional income generated and interest
expense incurred after the merger, through leverage of Managed High
Yield's assets.
(b) Reflects increase in fees charged on the leveraged assets of the
Managed High Yield Plus Fund.
(c) Reflects the anticipated additional custody charges after the merger,
as a result of additional leverage.
(d) Reflects the anticipated savings of the merger.
See accompanying notes to pro forma financial statements
50
<PAGE>
Notes To Pro Forma Combined Financial Statements (Unaudited)
Basis of Presentation:
Subject to the approval of the Plan of Reorganization by the stockholders of
Managed High Yield Fund Inc. ("High Yield Fund"), Managed High Yield Plus Fund
Inc. ("Plus Fund") would acquire the assets of High Yield Fund in exchange
solely for the assumption by Plus Fund of High Yield Fund's liabilities and
shares of Plus Fund that correspond to the outstanding shares of High Yield
Fund. The number of shares to be received would be based on the relative net
asset value of High Yield Fund shares and Plus Fund shares on the effective date
of the Plan of Reorganization and High Yield Fund will be terminated as soon as
practicable thereafter.
The pro forma combined financial statements reflect the financial position of
High Yield Fund and Plus Fund at January 31, 2000 and the combined results of
operations of High Yield Fund and Plus Fund for the year ended January 31, 2000.
As a result of the plan of reorganization, the investment advisory and
administration fee may increase due to the fee schedule of Plus Fund being based
on total assets minus liabilities other than the aggregate indebtedness
constituting leverage. As closed-end funds, High Yield Fund and Plus Fund
currently pay no Rule 12b-1 distribution or service fees. Other fixed expenses
will be reduced due to the elimination of duplicate expenses. In addition, the
pro forma combined statement of assets and liabilities has not been adjusted as
a result of the proposed transaction because such adjustment would not be
material. IT IS ESTIMATED THAT THE COST OF APPROXIMATELY $245,000 ASSOCIATED
WITH THE MERGER WILL BE CHARGED TO EACH FUND SO THAT EACH FUND BEARS ITS OWN
EXPENSES OF THE REORGANIZATION. These costs are not included in the pro forma
statement of operations since they are not recurring.
The pro forma combined financial statements are presented for the information of
the reader and may not necessarily be representative of what the actual combined
financial statements would have been had the Plan of Reorganization occurred on
January 31, 2000. The pro forma combined financial statements should be read in
conjunction with the historical financial statements of the constituent Funds
included in or incorporated by reference in the statement of additional
information.
Significant Accounting Policies:
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which may require the use of management accruals
and estimates. These unaudited financial statements reflect all adjustments
which are, in the opinion of management, necessary to a fair statement of the
results for the interim period presented. The Fund's Common Stock is listed on
the New York Stock Exchange under the symbol HYF. The following is a summary of
significant accounting policies followed by the Fund.
VALUATION OF INVESTMENTS-The Fund calculates its net asset value based on the
current market value for its portfolio securities. The Fund normally obtains
market values for its securities from independent pricing sources and
broker-dealers. Independent pricing sources use last reported sale prices,
current market quotations or valuations from computerized "matrix" systems that
derive values based on comparable securities. Securities traded in the
over-the-counter ("OTC") market and listed on The Nasdaq Stock Market,
Inc.("Nasdaq") normally are valued at the last sale price on the Nasdaq prior to
valuation. Other OTC securities are valued at the last bid price available prior
to valuation. Securities which are listed on U.S. and foreign stock exchanges
normally are valued at the last sale price on the day the securities are valued
or, lacking any sales on such day, at the last available bid price. In cases
where securities are traded on more than one exchange, the securities are valued
on the exchange designated as the primary market by Mitchell Hutchins Asset
Management Incorporated ("Mitchell Hutchins"), a wholly owned asset management
subsidiary of PaineWebber Incorporated ("PaineWebber") and investment adviser
and administrator of the Fund. If a market value is not available from an
independent pricing source for a particular security, that security is valued at
fair value as determined in good faith by or under the direction of the Fund's
board of directors (the "board"). The amortized cost method of valuation, which
approximates market value, generally is used to value short-term debt
instruments with sixty days or less remaining to maturity, unless the board
determines that this does not represent fair value. All investments quoted in
foreign currencies will be valued daily in U.S. dollars on the basis of the
foreign currency exchange rates prevailing at the time such valuation is
determined by the Fund's custodian.
REPURCHASE AGREEMENTS-The Fund's custodian takes possession of the collateral
pledged for investments in repurchase agreements. The underlying collateral is
valued daily on a mark-to-market basis to ensure that the value, including
accrued interest, is at least equal to the repurchase price. In the event of
default of the obligation to repurchase, the Fund has the right to liquidate the
collateral and apply the proceeds in satisfaction of the obligation. Under
certain circumstances, in the event of default or bankruptcy by the other party
to the agreement, realization and/or retention of the collateral may be subject
to legal proceedings. The Fund occasionally participates in joint repurchase
agreement transactions with other funds managed by Mitchell Hutchins.
51
<PAGE>
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME-Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions are calculated using the identified cost method. Interest income is
recorded on an accrual basis. Discounts are accreted and premiums are amortized
as adjustments to interest income and the identified cost of investments.
DIVIDENDS AND DISTRIBUTIONS-Dividends and distributions to stockholders are
recorded on the ex-dividend date. Dividends from net investment income and
distributions from net realized capital gains are determined in accordance with
federal income tax regulations which may differ from generally accepted
accounting principles. These "book/tax" differences are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
the federal tax basis treatment; temporary differences do not require
reclassification.
BORROWINGS-The Fund has a $200 million dollar committed credit facility
("facility"). Under the terms of the facility, the Fund borrows at the London
Interbank Overnight Rate ("LIBOR") plus facility and administrative fees. In
addition, the Fund pays a liquidity fee on the unused portion of the facility.
The Fund may borrow up to 33 1/3% of its total assets up to the committed
amount. In accordance with the terms of the debt agreement, the Fund pledges
assets as collateral for the bank loan.
52
<PAGE>
PART C. OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
Article Twelfth of the Managed High Yield Plus Fund Inc.'s ("Plus Fund"
or "Fund") Articles of Incorporation, incorporated by reference as exhibit 1 to
this Registration Statement, and Article IX of the Fund's Amended and Restated
Bylaws, incorporated by reference as exhibit 2 to this Registration Statement,
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 any director or officer of the Fund against any
liability to the Fund or its Stockholders 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 with Mitchell Hutchins Asset
Management Inc. ("Mitchell Hutchins") filed as exhibit 6 to this Registration
Statement 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 filed as exhibit 7 to this
Registration Statement provides that the Fund and Mitchell Hutchins, jointly and
severally, will indemnify each Underwriter and its directors, officers,
employees and agents, and each person, if any, who controls such underwriter
within the meaning of Section 15 of the Securities Act of 1933 ("1933 Act") and
section 20 of the Securities and Exchange Act of 1934 from and against all
losses, claims, liabilities, expenses and damages to which any of them may
become subject arising out of any alleged untrue statement of material fact in
any preliminary prospectus, the Registration Statement filed on N-2 or the
prospectus or any amendment or supplement thereto or in any sales materials or
any application or other document executed by or on behalf of the Fund filed in
any jurisdiction in order to qualify the shares of Managed High Yield Plus Fund
Inc. under the securities laws thereof or filed with the SEC, or the alleged
<PAGE>
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 a Registration Statement shall be indemnified by the
Underwriter to the same extent as set out above, but only insofar as any
liability arises out of any untrue statement or omission made in reliance on and
in conformity with information furnished to the Fund by the Underwriter
expressly for use in the preparation of the documents in which the statement or
omission is made or alleged to be made.
Insofar as indemnification for liabilities arising under the 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 that 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 any 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 16. EXHIBITS.
(1) Articles of Incorporation 1/
(2) (a) Amended and Restated Bylaws 2/
(b) Amendment to Amended and Restated Bylaws dated January 18,
2000 (filed herewith)
(3) Voting Trust Agreements - None
(4) A copy of the form of Agreement and Plan of Reorganization and
Termination is attached as Appendix A to the Prospectus contained in
the Registration Statement.
(5) (a) Specimen of Share Certificate 2/
(b) Dividend Reinvestment Plan 2/
(c) Portions of the Articles of Incorporation and the By-laws of
the Registrant defining the rights of holders of common stock
of the Registrant 3/
(6) Investment Advisory and Administration Contract (filed herewith)
(7) (a) Underwriting Agreement (filed herewith)
(b) Amended and Restated Master Agreement among Underwriters
(filed herewith)
(c) Amended and Restated Master Selected Dealer Agreement
(filed herewith)
(8) Bonus, profit sharing or pension plans - None
<PAGE>
(9) Custodian Agreement (filed herewith)
(10) Not Applicable
(11) Opinion and consent of Kirkpatrick & Lockhart LLP regarding the
legality of securities being registered (filed herewith)
(12) Opinion and Consent of Kirkpatrick & Lockhart LLP regarding certain tax
matters in connection with Managed High Yield Plus Fund Inc., and
Managed High Yield Fund Inc. (to be filed)
(13) (a) Transfer Agency Agreement (filed herewith)
(b) Revolving Credit and Security Agreement (filed herewith)
(c) Amendment to Revolving Credit and Security Agreement (filed
herewith)
(14) Consent of Independent Auditors (filed herewith)
(15) Financial statements omitted from part B - None
(16) Powers of Attorney 4/
- -----------------------------
1/ Incorporated by reference from the Registration Statement on Form N-2 as
filed May 24, 1998.
2/ Incorporated by reference to the Pre-Effective Amendment No. 2 to the
Registration Statement on Form N-2, filed June 24, 1998.
3/ Incorporated by reference from Article VI of Registrant's Articles of
Incorporation and from Articles II and VI of the Amended and Restated
By-laws.
4/ Incorporated by reference from Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-2 as filed May 26, 1998.
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant agrees that prior to any public
re-offering of the securities registered through the use of the prospectus which
is a part of this Registration Statement by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c) of the Securities Act of
1933, the re-offering prospectus will contain the information called for by the
applicable registration form for re-offering by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
<PAGE>
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new Registration Statement for
the securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement on Form N-14 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 17th day of February, 2000.
MANAGED HIGH YIELD PLUS FUND INC.
By: /s/ Dianne E. O'Donnell
---------------------------------------
Dianne E. O'Donnell
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form N-14 has been signed below by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Margo N. Alexander
- ------------------------------------ President and Director February 17, 2000
Margo N. Alexander * (Chief Executive Officer)
/s/ E. Garrett Bewkes, Jr.
- ------------------------------------ Director and Chairman February 17, 2000
E. Garrett Bewkes, Jr. * of the Board of Directors
/s/ Richard Q. Armstrong
- ------------------------------------ Director February 17, 2000
Richard Q. Armstrong *
/s/ Richard R. Burt
- ------------------------------------ Director February 17, 2000
Richard R. Burt *
/s/ Mary C. Farrell
- ------------------------------------ Director February 17, 2000
Mary C. Farrell *
/s/ Meyer Feldberg
- ------------------------------------ Director February 17, 2000
Meyer Feldberg *
/s/ George W. Gowen
- ------------------------------------ Director February 17, 2000
George W. Gowen *
/s/ Frederic V. Malek
- ------------------------------------ Director February 17, 2000
Frederic V. Malek *
/s/ Carl W. Schafer
- ------------------------------------ Director February 17, 2000
Carl W. Schafer *
/s/ Brian M. Storms
- ------------------------------------ Director February 17, 2000
Brian M. Storms **
/s/ Paul H. Schubert
- ------------------------------------ Vice President and Treasurer February 17, 2000
Paul H. Schubert (Chief Financial and Accounting
Officer)
</TABLE>
<PAGE>
* Signatures affixed by Robert A. Wittie pursuant to powers of attorney
dated May 13, 1998 and incorporated by reference from Pre-Effective Amendment
No. 1 to the registration statement on Form N-2 of Managed High Yield Plus Fund,
SEC File 333-5107 and 811-08765, filed May 26, 1998.
** Signature affixed by Robert A. Wittie pursuant to powers of attorney
dated May 14, 1999 and incorporated by reference from Post-Effective Amendment
No. 18 to the registration statement of PaineWebber Financial Services Growth
Fund Inc., SEC File 33-33231 and 811-4587, filed June 1, 1999.
<PAGE>
EXHIBIT INDEX
(1) Articles of Incorporation 1/
(2) (a) Amended and Restated Bylaws 2/
(b) Amendment to Amended and Restated Bylaws dated January 18,
2000 (filed herewith)
(3) Voting Trust Agreements - None
(4) A copy of the form of Agreement and Plan of Reorganization and
Termination is attached as Appendix A to the Prospectus contained in
the Registration Statement.
(5) (a) Specimen of Share Certificate 2/
(b) Dividend Reinvestment Plan 2/
(c) Portions of the Articles of Incorporation and the By-laws of
the Registrant defining the rights of holders of common stock
of the Registrant 3/
(6) Investment Advisory and Administration Contract (filed herewith)
(7) (a) Underwriting Agreement (filed herewith)
(b) Amended and Restated Master Agreement among Underwriters
(filed herewith)
(c) Amended and Restated Master Selected Dealer Agreement (filed
herewith)
(8) Bonus, profit sharing or pension plans - None
(9) Custodian Agreement (filed herewith)
(10) Not Applicable
(11) Opinion and consent of Kirkpatrick & Lockhart LLP regarding the
legality of securities being registered (filed herewith)
(12) Opinion and Consent of Kirkpatrick & Lockhart LLP regarding certain tax
matters in connection with Managed High Yield Plus Fund Inc., and
Managed High Yield Fund Inc. (to be filed)
(13) (a) Transfer Agency Agreement (filed herewith)
(b) Revolving Credit and Security Agreement (filed herewith)
(c) Amendment to Revolving Credit and Security Agreement (filed
herewith)
(14) Consent of Independent Auditors (filed herewith)
(15) Financial statements omitted from part B - None
(16) Powers of Attorney 4/
<PAGE>
- -----------------------------
1/ Incorporated by reference from the Registration Statement on Form N-2
as filed May 24, 1998.
2/ Incorporated by reference to the Pre-Effective Amendment No. 2 to the
Registration Statement on Form N-2, filed June 24, 1998.
3/ Incorporated by reference from Article VI of Registrant's Articles of
Incorporation and from Articles II and VI of the Amended and Restated
By-laws.
4/ Incorporated by reference from Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-2 as filed May 26, 1998.
Exhibit No. 2(b)
AMENDEMENT TO AMENDED AND RESTATED BYLAWS
MANAGED HIGH YIELD PLUS FUND INC.
CERTIFICATE OF VICE PRESIDENT AND SECRETARY
I, Dianne E. O'Donnell, Vice President and Secretary of Managed High
Yield Plus Fund Inc. ("Fund"), hereby certify that, at a duly convened meeting
of the Board of Directors of the Fund held on December 17, 1999 the Directors
adopted the following resolutions:
RESOLVED, that it is advisable and in the best interests
of the Fund and its stockholders to amend Article II, Section 2
of the Fund's Amended and Restated Bylaws to read as follows:
Special meetings of the stockholders may be called
by the Secretary upon the written request of the
holders of shares entitled to vote a majority of
all the votes entitled to be cast at such meeting,
provided that (1) such request shall state the
purposes of such meeting and the matters proposed
to be acted on, and (2) the stockholders
requesting such meeting shall have paid to the
Corporation the reasonably estimated cost of
preparing and mailing the notice thereof, which
the Secretary shall determine.
; and be it further
RESOLVED, that it is advisable and in the best interests
of the Fund and its stockholders to amend the second sentence
of Article II, Section 4 of the Fund's Amended and Restated
Bylaws to read as follows:
Subject to the rules established by the Chairman
of the stockholders' meeting, in the absence of a
quorum, the holders of a majority of shares
entitled to vote at the meeting and present in
person or by proxy, or, if no stockholder entitled
to vote is present in person or by proxy, any
officer present entitled to preside or act as
secretary of such meeting may adjourn the meeting
without determining the date of the new meeting or
from time to time without further notice to a date
not more than 120 days after the original record
date.
; and be it further
RESOLVED, that it is advisable and in the best interests
of the Fund and its stockholders to amend the Fund's Amended
and Restated Bylaws to create Article II, Section 11, which
will read as follows:
Section 11. Organization. At every meeting of
stockholders, the Chairman of the Board, if there
be one, shall conduct the meeting or, in the case
of vacancy in office or absence of the Chairman of
the Board, one of the following present shall
conduct the meeting in the order stated: the Vice
Chairman, if there be one, the President, Vice
Presidents, in their order of rank and seniority,
or, in the absence of such Director or officers, a
Chairman chosen by the stockholders entitled to
cast a majority of the votes which all
stockholders present in person or by proxy are
entitled to cast, shall act as Chairman, and the
Secretary, or in his or her absence, an assistant
secretary, or in the absence of both the Secretary
and assistant secretaries, a person appointed by
the Chairman shall act as Secretary of the
meeting. The order of business and all other
matters of procedure at any meeting of
stockholders shall be determined by the Chairman
<PAGE>
of the meeting. The Chairman of the meeting may
prescribe such rules, regulations and procedures
and take such action as, in the discretion of such
Chairman, are appropriate for the proper conduct
of the meeting, including, without limitation, (a)
restricting admission to the time set for the
commencement of the meeting; (b) limiting
attendance at the meeting to stockholders of
record of the Corporation, their duly authorized
proxies or other such persons as the Chairman of
the meeting may determine; (c) limiting
participation at the meeting on any matter to
stockholders of record of the Corporation entitled
to vote on any such matter, their duly authorized
proxies or other such persons as the Chairman of
the meeting may determine; (d) limiting the time
allotted to questions or comments by participants;
(e) maintaining order and security at the meeting;
and (f) recessing or adjourning the meeting to a
later date, time and place announced by the
Chairman of the meeting. Unless otherwise
determined by the Chairman of the meeting,
meetings of stockholders shall not be required to
be held in accordance with the rules of
parliamentary procedure.
Dated: January 18, 2000
--------------------
By: /s/ Dianne E. O'Donnell
----------------------------
Dianne E. O'Donnell
Vice President and Secretary
Managed High Yield Plus Fund Inc.
New York, New York (ss)
Subscribed and sworn before me this 18th day of January, 2000.
/s/ Victoria Drake
--------------------
Notary Public
Victoria Drake
Notary Public, State of New York
No. 31-5060750
Qualified in New York County
Commission Expires May 20, 2000
Exhibit No. 6
INVESTMENT ADVISORY AND ADMINISTRATION CONTRACT
Contract made as of June 22, 1998 between MANAGED HIGH YIELD PLUS FUND
INC., a Maryland corporation ("Fund"), and MITCHELL HUTCHINS ASSET MANAGEMENT
INC. ("Mitchell Hutchins"), a Delaware corporation registered as a broker-dealer
under the Securities Exchange Act of 1934, as amended ("1934 Act"), and as an
investment adviser under the Investment Advisers Act of 1940, as amended.
WHEREAS the Fund is registered under the Investment Company Act of 1940,
as amended ("1940 Act"), as a closed-end, diversified management investment
company, and intends to register shares of its common stock ("Shares") for sale
to the public under the Securities Act of 1933, as amended ("1933 Act"); and
WHEREAS the Fund desires to retain Mitchell Hutchins as investment adviser
and administrator to furnish certain administrative, investment advisory and
portfolio management services to the Fund, and Mitchell Hutchins is willing to
furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Fund hereby appoints Mitchell Hutchins as investment
adviser and administrator of the Fund for the period and on the terms set forth
in this Contract. Mitchell Hutchins accepts such appointment and agrees to
render the services herein set forth, for the compensation herein provided.
2. DUTIES AS INVESTMENT ADVISER.
(a) Subject to the supervision of the Fund's board of directors ("Board"),
Mitchell Hutchins will provide a continuous investment program for the Fund,
including investment research and management with respect to all securities and
investments and cash equivalents in the Fund. Mitchell Hutchins will determine
from time to time what securities and other investments will be purchased,
retained or sold by the Fund.
(b) Mitchell Hutchins agrees that in placing orders with brokers, it will
attempt to obtain the best net result in terms of price and execution; provided
that Mitchell Hutchins may, in its discretion, use brokers who provide the Fund
with research, analysis, advice and similar services to execute portfolio
transactions on behalf of the Fund, and Mitchell Hutchins may pay to those
brokers in return for brokerage and research services a higher commission than
may be charged by other brokers, subject to Mitchell Hutchins' determining in
good faith that such commission is reasonable in terms either of the particular
transaction or of the overall responsibility of Mitchell Hutchins to the Fund
and its other clients and that the total commissions paid by such Series will be
<PAGE>
reasonable in relation to the benefits to the Fund over the long term. In no
instance will portfolio securities be purchased from or sold to Mitchell
Hutchins, or any affiliated person thereof, except in accordance with the
federal securities laws and the rules and regulations thereunder. Whenever
Mitchell Hutchins simultaneously places orders to purchase or sell the same
security on behalf of the Fund and one or more other accounts advised by
Mitchell Hutchins, such orders will be allocated as to price and amount among
all such accounts in a manner believed to be equitable to each account. The Fund
recognizes that in some cases this procedure may adversely affect the results
obtained for the Fund.
(c) Mitchell Hutchins will oversee the maintenance of all books and
records with respect to the securities transactions of the Fund, and will
furnish the Board with such periodic and special reports as the Board reasonably
may request. In compliance with the requirements of Rule 31a-3 under the 1940
Act, Mitchell Hutchins hereby agrees that all records which it maintains for the
Fund are the property of the Fund, agrees to preserve for the periods prescribed
by Rule 31a-2 under the 1940 Act any records which it maintains for the Fund and
which are required to be maintained by Rule 31a-1 under the 1940 Act and further
agrees to surrender promptly to the Fund any records which it maintains for the
Fund upon request by the Fund.
(d) Mitchell Hutchins will oversee the computation of the net asset value
and the net income of the Fund as described in the currently effective
registration statement of the Fund under the 1933 Act and the 1940 Act and any
amendments or supplements thereto ("Registration Statement") or as more
frequently requested by the Board.
-2-
<PAGE>
(e) The Fund hereby authorizes Mitchell Hutchins and any entity or person
associated with Mitchell Hutchins which is a member of a national securities
exchange to effect any transaction on such exchange for the account of the Fund,
which transaction is permitted by Section 11(a) of the 1934 Act, and the Fund
hereby consents to the retention of compensation by Mitchell Hutchins or any
person or entity associated with Mitchell Hutchins.
3. DUTIES AS ADMINISTRATOR. Mitchell Hutchins will administer the affairs
of the Fund subject to the supervision of the Board and the following
understandings:
(a) Mitchell Hutchins will supervise all aspects of the operations of the
Fund, including oversight of transfer agency, custodial and accounting services,
except as hereinafter set forth; provided, however, that nothing herein
contained shall be deemed to relieve or deprive the Board of its responsibility
for and control of the conduct of the affairs of the Fund.
(b) Mitchell Hutchins will provide the Fund with such corporate,
administrative and clerical personnel (including officers of the Fund) and
services as are reasonably deemed necessary or advisable by the Board, including
the maintenance of certain books and records of the Fund.
(c) Mitchell Hutchins will arrange, but not pay, for the periodic
preparation, updating, filing and dissemination (as applicable) of the Fund's
Registration Statement, proxy material, tax returns and required reports to the
Fund's shareholders and the Securities and Exchange Commission and other
appropriate federal or state regulatory authorities.
(d) Mitchell Hutchins will provide the Fund with, or obtain for it,
adequate office space and all necessary office equipment and services, including
telephone service, heat, utilities, stationery supplies and similar items.
(e) Mitchell Hutchins will provide the Board on a regular basis with
economic and investment analyses and reports and make available to the Board
upon request any economic, statistical and investment services normally
available to institutional or other customers of Mitchell Hutchins.
4. FURTHER DUTIES. In all matters relating to the performance of this
Contract, Mitchell Hutchins will act in conformity with the Articles of
Incorporation, By-Laws and Registration Statement of the Fund and with the
instructions and directions of the Board and will comply with the requirements
of the 1940 Act, the rules thereunder, and all other applicable federal and
state laws and regulations.
5. DELEGATION OF MITCHELL HUTCHINS' DUTIES AS INVESTMENT ADVISER AND
ADMINISTRATOR. Mitchell Hutchins may enter into one or more contracts
("Sub-Advisory or Sub-Administration Contracts") with a sub-adviser or
sub-administrator in which Mitchell Hutchins delegates to such sub-adviser or
sub-administrator any or all its duties specified in Paragraphs 2 and 3 of this
Contract, provided that each Sub-Advisory or Sub-Administration Contract imposes
on the sub-adviser or sub-administrator bound thereby all applicable duties and
conditions to which Mitchell Hutchins is subject by Paragraphs 2, 3 and 4 of
this Contract, and further provided that each Sub-Advisory or Sub-Administration
Contract meets all requirements of the 1940 Act and rules thereunder.
6. SERVICES NOT EXCLUSIVE. The services furnished by Mitchell Hutchins
hereunder are not to be deemed exclusive and Mitchell Hutchins shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired thereby. Nothing in this Contract shall limit or restrict the
right of any director, officer or employee of Mitchell Hutchins, who may also be
a director, officer or employee of the Fund, to engage in any other business or
to devote his or her time and attention in part to the management or other
aspects of any other business, whether of a similar nature or a dissimilar
nature.
7. EXPENSES.
--------
(a) During the term of this Contract, the Fund will bear all expenses, not
specifically assumed by Mitchell Hutchins, incurred in its operations and the
offering of its Shares or any preferred stock.
(b) Expenses borne by the Fund will include but not be limited to the
following (which shall be in addition to the fees payable to and expenses
incurred on behalf of the Fund by Mitchell Hutchins under the Contract): (i) the
cost (including brokerage commissions) of securities purchased or sold by the
Fund and any losses incurred in connection therewith; (ii) fees payable to and
expenses incurred on behalf of the Fund by Mitchell Hutchins under this
Contract; (iii) organizational and offering expenses of the Fund, whether or not
advanced by Mitchell Hutchins; (iv) filing fees and expenses relating to the
registrations and qualification of the Fund's shares and the Fund under federal
and/or state securities laws and maintaining such registration and
qualifications; (v) fees and salaries payable to the Fund's directors and
officers who are not interested persons of the Fund or Mitchell Hutchins; (vi)
all expenses incurred in connection with the Fund's directors' services,
-3-
<PAGE>
including travel expenses; (vii) taxes (including any income or franchise taxes)
and governmental fees; (viii) costs of any liability, uncollectible items of
deposit and other insurance and fidelity bonds; (ix) any costs, expenses or
losses arising out of a liability of or claim for damages or other relief
asserted against the Fund for violation of any law; (x) legal, accounting and
auditing expenses, including legal fees of special counsel for those directors
of the Fund who are not interested persons of the Fund; (xi) charges of
custodians, transfer agents and other agents (including any lending agent);
(xii) costs of preparing share certificates; (xiii) expenses of setting in type
and printing prospectuses and supplements thereto, statements of additional
information and supplements thereto, reports and proxy materials for existing
shareholders; (xiv) costs of mailing prospectuses and supplements thereto,
statements of additional information and supplements thereto, reports and proxy
materials to existing shareholders; (xv) any extraordinary expenses (including
fees and disbursements of counsel, costs of actions, suits or proceedings to
which the Fund is a party and the expenses the Fund may incur as a result of its
legal obligation to provide indemnification to its officers, directors, agents
and shareholders) incurred by the Fund; (xvi) fees, voluntary assessments and
other expenses incurred in connection with membership in investment company
organizations; (xvii) the cost of mailing and tabulating proxies and costs of
meetings of shareholders, the Board and any committees thereof; (xviii) the cost
of investment company literature and other publications provided by the Fund to
its directors and officers; (xix) costs of mailing, stationery and
communications equipment; (xx) expenses incident to any dividend reinvestment
plan; (xxi) charges and expenses of any outside pricing service used to value
portfolio securities; (xxii) interest on borrowings of the Fund; (xxiii) fees
and expenses of listing and maintaining any listing of the Fund's Shares on any
national securities exchange; and (xxiv) costs and expenses (including rating
agency fees) associated with the issuance of any preferred stock.
(c) Mitchell Hutchins will assume the cost of any compensation for
services provided to the Fund received by the officers of the Fund and by those
directors who are interested persons of the Fund.
(d) The payment or assumption by Mitchell Hutchins of any expenses of the
Fund that Mitchell Hutchins is not required by this Contract to pay or assume
shall not obligate Mitchell Hutchins to pay or assume the same or any similar
expense of the Fund on any subsequent occasion.
8. COMPENSATION.
------------
(a) For the services provided and the expenses assumed pursuant to this
Contract, the Fund will pay to Mitchell Hutchins a fee, computed weekly and paid
monthly, at an annual rate of 0.70% of the Fund's average weekly total assets
minus liabilities other than the Fund's aggregate indebtedness constituting
leverage.
(b) The fee shall be computed weekly and paid monthly to Mitchell Hutchins
on or before the first business day of the next succeeding calendar month.
(c) If this Contract becomes effective or terminates before the end of any
month, the fee for the period from the effective day to the end of the month or
from the beginning of such month to the date of termination, as the case may be,
shall be prorated according to the proportion which such period bears to the
full month in which such effectiveness or termination occurs.
9. LIMITATION OF LIABILITY OF MITCHELL HUTCHINS. Mitchell Hutchins and its
delegates, including any Sub-Adviser or Sub-Administrator to the Fund, shall not
be liable for any error of judgment or mistake of law or for any loss suffered
-4-
<PAGE>
by the Fund or any of its shareholders, in connection with the matters to which
this Contract relates, except to the extent that such a loss results from
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its obligations
and duties under this Contract. Any person, even though also an officer,
director, employee, or agent of Mitchell Hutchins, who may be or become an
officer, director, employee or agent of the Fund shall be deemed, when rendering
services to the Fund or acting with respect to any business of the Fund, to be
rendering such service to or acting solely for the Fund and not as an officer,
director, employee, or agent or one under the control or direction of Mitchell
Hutchins even though paid by it.
10. DURATION AND TERMINATION.
------------------------
(a) This Contract shall become effective upon the date hereinabove written
provided that, this Contract shall not take effect unless it has first been
approved (i) by a vote of a majority of those directors of the Fund who are not
parties to this Contract or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval, and (ii) by vote
of a majority of the Fund's outstanding voting securities.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for two years from its effective date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of those directors of the Fund who
are not parties to this Contract or interested persons of any such party, cast
in person at a meeting called for the purpose of voting on such approval, and
(ii) by the Board or by vote of a majority of the outstanding voting securities
of the Fund.
(c) Notwithstanding the foregoing, this Contract may be terminated at any
time, without the payment of any penalty, by vote of the Board or by a vote of a
majority of the outstanding voting securities of the Fund on sixty days' written
notice to Mitchell Hutchins or by Mitchell Hutchins at any time, without the
payment of any penalty, on sixty days' written notice to the Fund. This Contract
will automatically terminate in the event of its assignment.
11. AMENDMENT OF THIS CONTRACT. No provision of this Contract may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Contract shall be
effective until approved by vote of a majority of the Fund's outstanding voting
securities.
12. GOVERNING LAW. This Contract shall be construed in accordance with the
laws of the State of Delaware, without giving effect to the conflicts of laws
principles thereof, and in accordance with the 1940 Act. To the extent that the
applicable laws of the State of Delaware conflict with the applicable provisions
of the 1940 Act, the latter shall control.
13. MISCELLANEOUS. The captions in this Contract are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
-5-
<PAGE>
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors. As used in this Contract,
the terms "majority of the outstanding voting securities," "affiliated person,"
"interested person," "assignment," "broker," "investment adviser," "national
securities exchange," "net assets," "prospectus," "sale," "sell" and "security"
shall have the same meaning as such terms have in the 1940 Act, subject to such
exemption as may be granted by the Securities and Exchange Commission by any
rule, regulation or order. Where the effect of a requirement of the 1940 Act
reflected in any provision of this Contract is relaxed by a rule, regulation or
order of the Securities and Exchange Commission, whether of special or general
application, such provision shall be deemed to incorporate the effect of such
rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated as of the day and year first above
written.
Attest: MANAGED HIGH YIELD PLUS FUND INC.
/s/ Jennifer Farrell By /s/ Dianne E. O'Donnell
- ------------------------ -----------------------------------
Attest: MITCHELL HUTCHINS ASSET MANAGEMENT INC.
/s/ Andrew S. Novak By /s/ Victoria Schonfeld
- ------------------------ ----------------------------------
-6-
Exhibit No. 7(a)
26,700,000 SHARES*
OF COMMON STOCK
MANAGED HIGH YIELD PLUS FUND INC.
UNDERWRITING AGREEMENT
June 24, 1998
PAINEWEBBER INCORPORATED
as Representative of the Several Underwriters
named in Schedule 1 hereto
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
Managed High Yield Plus Fund Inc., a Maryland corporation (the
"Fund"), proposes to issue and sell to you and the other underwriters named in
Schedule 1 hereto (the "Underwriters"), for whom you are acting as
representative (the "Representative"), up to 26,700,000 shares of its common
stock (the "Firm Shares"), par value $.001 per share (the "Common Shares"). In
-----------------------
* Plus an optin to purchase, in the aggregate, up to 4,005,000 additional
Commmon Shares to cover over-allotments.
<PAGE>
addition, the Fund hereby grants to the Underwriters an option (the "Option") to
purchase up to an additional 4,005,000 of its Common Shares (the "Option
Shares") solely for the purpose of covering over-allotments. The Firm Shares and
the Option Shares are referred to collectively herein as the "Shares."
Mitchell Hutchins Asset Management Inc., a Delaware corporation (the
"Investment Adviser"), will act as the Fund's investment adviser and
administrator pursuant to an Investment Advisory and Administration Agreement by
and between the Fund and the Investment Adviser, dated as of June 22, 1998 (the
"Investment Advisory Agreement"). State Street Bank and Trust Company ("State
Street") will act as the custodian (the "Custodian") of the Fund's cash and
portfolio assets pursuant to a custody agreement, dated as of June 22, 1998 (the
"Custody Agreement"). PNC Bank, National Association, will act as the Fund's
dividend disbursing agent, transfer agent and registrar (the "Transfer Agent")
pursuant to a transfer agency agreement, dated June 22, 1998 (the "Transfer
Agency Agreement").
The Fund and the Investment Adviser each hereby confirms as follows
their agreements with the Representative and the several other Underwriters.
1. SALE AND PURCHASE; COMPENSATION
-------------------------------
(a) The Fund will issue and sell to each Underwriter, and each
Underwriter will purchase from the Fund, the number of Firm Shares opposite such
Underwriter's name in Schedule 1 hereto, at the purchase price of $15.00 per
share of Common Shares.
(b) The Fund grants to the Underwriters the Option to purchase
all or any part of the Option Shares for the same consideration per share as for
the Firm Shares. The Option may be exercised only to cover over-allotments in
the sales of the Firm Shares by the Underwriters. The number of Option Shares
(adjusted by the Representative to eliminate fractions) to be purchased by each
Underwriter will be the same percentage of the aggregate number of Option Shares
being sold as such Underwriter is obligated to purchase of the Firm Shares. Such
Option may be exercised in whole or in part, only to cover over-allotments, at
any time or from time to time on or before the 45th day after the date of this
Underwriting Agreement, upon written or telefacsimile notice (the "Option Shares
Notice") from the Representative to the Fund no later than 12:00 noon, New York
City time, at least two and not more than five business days before the date
2
<PAGE>
specified for closing in the Option Shares Notice (the "Option Shares Closing
Date"), setting forth the number of Option Shares to be purchased and the time
and date of such purchase. Upon delivery and receipt of the Option Shares
Notice, the Fund will issue and sell to each Underwriter, and each Underwriter
will purchase from the Fund, on the Option Shares Closing Date, its portion of
the number of Option Shares set forth in the Option Shares Notice.
(c) The obligations of the Underwriters under this
Underwriting Agreement are several and not joint and are undertaken on the basis
of the representations and are subject to the conditions set forth in this
Underwriting Agreement.
(d) The Investment Adviser agrees to make the payments to the
Underwriters when and as required by Section 2 hereof.
2. PAYMENT AND DELIVERY. Delivery by the Fund of the Firm Shares
(the "Firm Shares Closing") to the Representative for the accounts of the
Underwriters against payment of the purchase price by wire transfer of Federal
Funds or similar same day funds to the Fund for the Firm Shares, will take place
at the offices of PaineWebber Incorporated, 1285 Avenue of the Americas, New
York, New York, or through the facilities of the Depository Trust Company or
another mutually agreeable facility, at 9:00 a.m., New York City time, on the
third business day following the date of this Underwriting Agreement, or at such
time on such other date, not later than ten business days after the date of this
Underwriting Agreement, as may be agreed on by the Fund and the Representative
(the "Firm Shares Closing Date").
If and to the extent that the Option is exercised, delivery of the
Option Shares and payment by the Underwriters (in the manner specified above)
will take place at the offices or through the facilities specified above for the
Firm Shares Closing at the time and date (which may be the Firm Shares Closing
Date) specified in the Option Shares Notice. Any Option Shares Closing Date may
not be later than three business days following the exercise of the related
Option. The Firm Shares Closing Date and any Option Shares Closing Date are
called the "Closing Dates."
Certificates evidencing Common Shares will be in definitive form (or
temporary form acceptable to the New York Stock Exchange), registered in such
names and in such denominations as the Representative requests at least three
full business days before the Firm Shares Closing Date or, in the case of Option
Shares, on the day of notice of exercise of the Option as described in Section
3
<PAGE>
1(b), and will be made available to the Representative for checking and
packaging, at a place in New York City designated by the Representative, at
least one full business day before the relevant Closing Date.
Simultaneous with delivery to the Underwriters of and payment by the
Underwriters for (i) Firm Shares on the Firm Shares Closing Date and (ii) Option
Shares on the Option Shares Closing Date, PaineWebber Incorporated
("PaineWebber") will pay to the Underwriters an amount equal to 5% of the
purchase price per Share for each Share to be purchased by the Underwriters on
such date by wire transfer of Federal Funds or similar same-day funds on such
Firm Shares Closing Date or Option Shares Closing Date, as the case may be, to
the order of PaineWebber Incorporated.
3. REGISTRATION STATEMENT AND PROSPECTUS; PUBLIC OFFERING. The Fund
has filed with the Securities and Exchange Commission (the "Commission"),
pursuant to the Securities Act of 1933, as amended (the "Securities Act"), the
Investment Company Act of 1940, as amended (the "Investment Company Act"), and
the published rules and regulations adopted by the Commission under the
Securities Act (the "Securities Act Rules") and the Investment Company Act (the
"Investment Company Act Rules"), a Notification of Registration on Form N-8A
(the "Notification" pursuant to Section 8 of the Investment Company Act and a
registration statement on Form N-2 (File Nos. 333-51017 and 811-08765) relating
to the Shares (the "registration statement"), including a preliminary prospectus
(including any preliminary statement of additional information), and such
amendments to such registration statement as may have been required to the date
of this Underwriting Agreement. The preliminary prospectus (including any
preliminary statement of additional information) is to be used in connection
with the offering and sale of the Shares. The term "Preliminary Prospectus" as
used herein means any preliminary prospectus (including any preliminary
statement of additional information) included at any time as a part of the
registration statement and any preliminary prospectus (including any preliminary
statement of additional information) omitted therefrom pursuant to the
Securities Act Rules.
The Fund has furnished the Representative copies of such
registration statement, each amendment to such registration statement filed by
the Fund with the Commission and the Preliminary Prospectus filed by the Fund
with the Commission or used by the Fund. If the registration statement has not
become effective, a further amendment (the "Final Amendment") to such
registration statement, including the forms of final prospectus (including any
4
<PAGE>
final statement of additional information), necessary to permit such
registration statement to become effective will promptly be filed by the Fund
with the Commission. If such registration statement has become effective and any
prospectus (including any statement of additional information) contained therein
omits certain information at the time of effectiveness pursuant to Rule 430A of
the Securities Act Rules, a final prospectus (the "Rule 430A Prospectus")
containing such omitted information will be filed by the Fund with the
Commission in accordance with Rule 497(h) of the Securities Act Rules. The
registration statement as amended at the time it becomes or became effective
(the "Effective Date"), including financial statements and all exhibits, and any
information deemed to be included by Rule 430A, is called the "Registration
Statement." The term "Prospectus" means the prospectus (including any statement
of additional information) in the form in which it is first filed with the
Commission pursuant to Rule 497(b), (h) or (j) of the Securities Act Rules, as
the case may be.
The Fund and the Investment Adviser understand that the Underwriters
propose to make a public offering of the Firm Shares, as described in the
Prospectus, as soon after the Effective Date (or, if later, after the date this
Underwriting Agreement is signed) as the Representative deems advisable. The
Fund and the Investment Adviser confirm that the Underwriters and dealers have
been authorized to distribute the Preliminary Prospectus relating to the Shares
included in Pre-Effective Amendment No. 1 to the registration statement and are
authorized to distribute the Prospectus and any amendments or supplements
thereto.
4. REPRESENTATIONS.
---------------
(a) Each of the Fund and the Investment Adviser jointly and
severally represents to each Underwriter as follows:
(i) On (A) the Effective Date and the date on which the
Prospectus is first filed with the Commission pursuant to Rule 497(b), (h)
or (j) of the Securities Act Rules, as the case may be, (B) the date on
which any post-effective amendment to the Registration Statement (except
any post-effective amendment which is filed with the Commission after the
later of (x) one year from the date of this Underwriting Agreement or (y)
the date on which the distribution of the Shares is completed) became or
becomes effective or any amendment or supplement to the Prospectus was or
is filed with the Commission and (C) the Closing Dates, the Registration
Statement, the Prospectus and any such amendment or supplement thereto and
the Notification complied or will comply in all material respects with the
5
<PAGE>
requirements of the Securities Act, the Investment Company Act, the
Securities Act Rules and the Investment Company Act Rules, as the case may
be. On the Effective Date and on the date that any post-effective
amendment to the Registration Statement (except any post-effective
amendment which is filed with the Commission after the later of (x) one
year from the date of this Underwriting Agreement or (y) the date on which
the distribution of the Shares is completed) became or becomes effective,
neither the Registration Statement nor any such amendment did or will
contain any untrue statement of a material fact or omit to state a
material fact required to be stated in it or necessary to make the
statements in it not misleading. At the Effective Date and, if applicable,
the date the Prospectus or any amendment or supplement to the Prospectus
was or is filed with the Commission and at the Closing Dates, the
Prospectus did not or will not, as the case may be, contain any untrue
statement of a material fact or omit to state a material fact required to
be stated in it or necessary to make the statements in it, in light of the
circumstances under which they were made, not misleading. The foregoing
representations in this Section 4(a)(i) do not apply to statements or
omissions relating to the Underwriters made in reliance on and in
conformity with information furnished in writing to the Fund by the
Representative expressly for use in the Registration Statement, the
Prospectus, or any amendments or supplements thereto.
(ii) The Fund has been duly organized, is validly
existing and in good standing as a corporation under the laws of the State
of Maryland, with full power and authority to conduct all the activities
conducted by it, to own or lease all assets owned or leased by it and to
conduct its business as described in the Registration Statement and
Prospectus, and the Fund is duly licensed and qualified to do business and
in good standing as a foreign corporation or otherwise in each
jurisdiction in which its ownership or leasing of property or its
conducting of business requires such qualification, except where the
failure to be so qualified or be in good standing would not have a
material adverse effect on the Fund, and the Fund owns, possesses or has
obtained and currently maintains all governmental licenses, permits,
consents, orders, approvals and other authorizations, whether foreign or
domestic, necessary to carry on its business as contemplated in the
6
<PAGE>
Prospectus. The Fund has no subsidiaries.
(iii) The capitalization of the Fund is as set forth in
the Registration Statement and the Prospectus. The Common Shares of the
Fund conform in all material respects to the description of them in the
Prospectus. All the outstanding Common Shares have been duly authorized
and are validly issued, fully paid and nonassessable. The Shares to be
issued and delivered to and paid for by the Underwriters in accordance
with this Underwriting Agreement against payment therefor as provided by
this Underwriting Agreement have been duly authorized and when issued and
delivered to the Underwriters will have been validly issued and will be
fully paid and nonassessable. No person is entitled to any preemptive or
other similar rights with respect to the Shares.
(iv) The Fund is duly registered with the Commission
under the Investment Company Act as a diversified, closed-end management
investment company, and, subject to the filing of the Final Amendment, if
not already filed, all action under the Securities Act, the Investment
Company Act, the Securities Act Rules and the Investment Company Act
Rules, as the case may be, necessary to make the public offering and
consummate the sale of the Shares as provided in this Underwriting
Agreement has or will have been taken by the Fund.
(v) The Fund has full power and authority to enter into
each of the Underwriting Agreement, the Investment Advisory Agreement, the
Custody Agreement and the Transfer Agency Agreement (collectively, the
"Fund Agreements") and to perform all of the terms and provisions hereof
and thereof to be carried out by it and (A) each Fund Agreement has been
duly and validly authorized, executed and delivered by the Fund, (B) each
Fund Agreement does not violate in any material respect any of the
applicable provisions of the Investment Company Act, the Investment
Advisers Act of 1940 (the "Advisers Act"), the Investment Company Act
Rules and the rules and regulations adopted by the Commission under the
Advisers Act (the "Advisers Act Rules"), as the case may be, and (C)
assuming due authorization, execution and delivery by the other parties
thereto, each Fund Agreement constitutes the legal, valid and binding
7
<PAGE>
obligation of the Fund enforceable in accordance with its terms, (1)
subject, as to enforcement, to applicable bankruptcy, insolvency and
similar laws affecting creditors' rights generally and to general
equitable principles (regardless of whether enforcement is sought in a
proceeding in equity or at law) and (2) except as rights to indemnity
thereunder may be limited by federal or state securities laws.
(vi) None of (A) the execution and delivery by the Fund
of the Fund Agreements, (B) the issue and sale by the Fund of the Shares
as contemplated by this Underwriting Agreement and (C) the performance by
the Fund of its obligations under the Fund Agreements or consummation by
the Fund of the other transactions contemplated by the Fund Agreements
conflicts with or will conflict with, or results or will result in a
breach of, the Articles of Incorporation or the By-laws of the Fund or any
agreement or instrument to which the Fund is a party or by which the Fund
is bound, or any law, rule or regulation, or order of any court,
governmental instrumentality, securities exchange or association or
arbitrator, whether foreign or domestic, applicable to the Fund, other
than state or foreign securities or "blue sky" laws applicable in
connection with the purchase and distribution of the Shares by the
Underwriters pursuant to this Underwriting Agreement.
(vii) The Fund is not currently in breach of, or in
default under, any written agreement or instrument to which it is a party
or by which it or its property is bound or affected.
(viii) No person has any right to the registration of
any securities of the Fund because of the filing of the registration
statement.
(ix) No consent, approval, authorization or order of any
court or governmental agency or body or securities exchange or
association, whether foreign or domestic, is required by the Fund for the
consummation by the Fund of the transactions to be performed by the Fund
or the performance by the Fund of all the terms and provisions to be
performed by or on behalf of it in each case as contemplated in the Fund
Agreements, except such as (A) have been obtained under the Securities
8
<PAGE>
Act, the Investment Company Act, the Advisers Act, the Securities Act
Rules, the Investment Company Act Rules, and the Advisers Act Rules, and
(B) may be required by the New York Stock Exchange or under state or
foreign securities or "blue sky" laws, in connection with the purchase and
distribution of the Shares by the Underwriters pursuant to this
Underwriting Agreement.
(x) The Shares are duly authorized for listing, subject
to official notice of issuance, on the New York Stock Exchange and the
Fund's Registration Statement on Form 8-A, under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), has become effective.
(xi) Ernst & Young LLP, whose report appears in the
Prospectus, are independent public accountants with respect to the Fund as
required by the Securities Act, the Investment Company Act, the Securities
Act Rules and the Investment Company Act Rules.
(xii) The statement of assets and liabilities included
in the Registration Statement and the Prospectus presents fairly in all
material respects, in accordance with generally accepted accounting
principles in the United States applied on a consistent basis, the
financial position of the Fund as at the date indicated.
(xiii) The Fund will maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (A)
transactions are executed in accordance with management's general or
specific authorization; (B) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets;
(C) access to assets is permitted only in accordance with management's
general or specific authorization; and (D) the recorded accountability for
assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xiv) Since the date as of which information is given in
the Registration Statement and the Prospectus, except as otherwise stated
9
<PAGE>
therein, (A) there has been no material adverse change in the condition,
financial or otherwise, business affairs or business prospects of the
Fund, whether or not arising in the ordinary course of business, (B) there
have been no transactions entered into by the Fund other than those in the
ordinary course of its business and (C) there has been no dividend or
distribution of any kind declared, paid or made on any class of its
capital shares.
(xv) There is no action, suit or proceeding before or by
any court, commission, regulatory body, administrative agency or other
governmental agency or body, foreign or domestic, now pending, or, to the
knowledge of the Fund, threatened against or affecting the Fund, which (A)
might result in any material adverse change in the condition, financial or
otherwise, business affairs or business prospects of the Fund or might
materially adversely affect the properties or assets of the Fund or (B) is
of a character required to be described in the Registration Statement or
the Prospectus; and there are no contracts, franchises or other documents
that are of a character required to be described in, or that are required
to be filed as exhibits to, the Registration Statement that have not been
described or filed as required.
(xvi) Except for stabilization transactions conducted by
the Underwriters, and except for tender offers, Share repurchases and the
issuance or purchase of Shares pursuant to the Fund's dividend
reinvestment plan ("DRP") effected following the date on which the
distribution of the Shares is completed in accordance with the policies of
the Fund as set forth in the Prospectus, the Fund has not taken and will
not take, directly or indirectly, any action designed or which might be
reasonably expected to cause or result in, or which will constitute,
stabilization or manipulation of the price of the Common Shares.
(xvii) The Fund intends to direct the investment of the
proceeds of the offering of the Shares in such a manner as to comply with
the requirements of Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code").
10
<PAGE>
(xviii) To the knowledge of the Fund after due inquiry,
no advertising, sales literature or other promotional materials (excluding
broker kits, which include the broker fact sheet, road show slides or road
show tapes) were authorized or prepared by or on behalf of the Fund and
the Investment Adviser or any representative thereof for use in connection
with the public offering or sale of the Shares other than the definitive
client brochure, a draft of which was filed with the NASD on May 19, 1998,
and final investor prospecting letters, drafts of which were filed with
the NASD on June 8, 1998 (collectively, the "sales materials"); the sales
materials complied and comply in all material respects with the applicable
requirements of the Securities Act, the Securities Act Rules and the rules
and interpretations of the NASD; and no broker kits, road show slides,
road show tapes or sales materials authorized or prepared by the Fund or
authorized or prepared on behalf of the Fund by the Investment Adviser or
any representative thereof for use in connection with the public offering
or sale of the Shares contained or contains any untrue statement of a
material fact or omitted or omits to state any material fact required to
be stated therein or necessary in order to make the statements therein not
misleading.
(b) The Investment Adviser represents to each Underwriter as
follows:
(i) The Investment Adviser has been duly organized, is
validly existing and in good standing as a corporation under the laws of
the State of Delaware with full power and authority to conduct all of the
activities conducted by it, to own or lease all of the assets owned or
leased by it and to conduct its business as described in the Registration
Statement and Prospectus, and the Investment Adviser is duly licensed and
qualified as a foreign corporation and in good standing in each
jurisdiction in which it is required to be so qualified, except to the
extent that failure to be so qualified or be in good standing would not
have a material adverse affect on the Investment Adviser; and the
Investment Adviser owns, possesses or has obtained and currently maintains
all governmental licenses, permits, consents, orders, approvals and other
authorizations, whether foreign or domestic, necessary to carry on its
business as contemplated in the Registration Statement and the Prospectus.
11
<PAGE>
(ii) The Investment Adviser is (A) duly registered as an
investment adviser under the Advisers Act and (B) not prohibited by the
Advisers Act, the Investment Company Act, the Advisers Act Rules or the
Investment Company Act Rules from acting as the investment adviser for the
Fund as contemplated by the Investment Advisory Agreement, the
Registration Statement and the Prospectus.
(iii) The Investment Adviser has full power and
authority to enter into each of this Underwriting Agreement and the
Investment Advisory Agreement and to carry out all the terms and
provisions hereof and thereof to be carried out by it, and each such
agreement has been duly and validly authorized, executed and delivered by
the Investment Adviser; each of the Investment Advisory Agreement and this
Underwriting Agreement does not violate in any material respect any of the
applicable provisions of the Investment Company Act, the Advisers Act, the
Investment Company Act Rules and the Advisers Act Rules; and assuming due
authorization, execution and delivery by the other parties thereto, each
of this Underwriting Agreement and the Investment Advisory Agreement
constitutes a legal, valid and binding obligation of the Investment
Adviser, enforceable in accordance with its terms, (1) subject, as to
enforcement, to applicable bankruptcy, insolvency and similar laws
affecting creditors' rights generally and to general equitable principles
(regardless of whether enforcement is sought in a proceeding in equity or
at law) and (2) except as rights to indemnity thereunder may be limited by
federal or state securities laws.
(iv) Neither (A) the execution and delivery by the
Investment Adviser of the Underwriting Agreement or the Investment
Advisory Agreement by the Investment Adviser nor (B) the consummation by
the Investment Adviser of the transactions contemplated by, or the
performance of its obligations under such agreements conflicts or will
conflict with, or results or will result in a breach of, the Articles of
Incorporation or By-Laws of the Investment Adviser or any agreement or
instrument to which the Investment Adviser is a party or by which the
Investment Adviser is bound, or any law, rule or regulation, or order of
any court, governmental instrumentality, securities exchange or
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association or arbitrator, whether foreign or domestic, applicable to the
Investment Adviser.
(v) No consent, approval, authorization or order of any
court, governmental agency or body or securities exchange or association,
whether foreign or domestic, is required for the consummation of the
transactions contemplated in, or the performance by the Investment Adviser
of its obligations under, the Underwriting Agreement or the Investment
Advisory Agreement, as the case may be, except such as (A) have been
obtained under the Investment Company Act, the Advisers Act, the
Securities Act, the Investment Company Act Rules, the Advisers Act Rules
and the Securities Act Rules, and (B) may be required by the New York
Stock Exchange or under state or foreign securities or "blue sky" laws, in
connection with the purchase and distribution of the Shares by the
Underwriters pursuant to this Underwriting Agreement.
(vi) The description of the Investment Adviser and its
business in the Registration Statement and the Prospectus complies with
the requirements of the Securities Act, the Investment Company Act, the
Securities Act Rules and the Investment Company Act Rules and does not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein not misleading.
(vii) There is no action, suit or proceeding before or
by any court, commission, regulatory body, administrative agency or other
governmental agency or body, foreign or domestic, now pending or, to the
knowledge of the Investment Adviser, threatened against or affecting the
Investment Adviser of a nature required to be disclosed in the
Registration Statement or Prospectus or that might result in any material
adverse change in the condition, financial or otherwise, business affairs
or business prospects of the Investment Adviser or the ability of the
Investment Adviser to fulfill its respective obligations under the
Underwriting Agreement or under the Investment Advisory Agreement.
(viii) Except for stabilization activities conducted by
the Underwriters and except for tender offers, Share repurchases and the
issuance or purchase of Shares pursuant to the Fund's dividend
13
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reinvestment plan ("DRP") effected following the date on which the
distribution of the Shares is completed in accordance with the policies of
the Fund as set forth in the Prospectus, the Investment Adviser has not
taken and will not take, directly or indirectly, any action designed, or
which might reasonably be expected to cause or result in, or which will
constitute, stabilization or manipulation of the price of the Common
Shares.
5. AGREEMENTS OF THE PARTIES.
-------------------------
(a) If the registration statement relating to the Shares has
not yet become effective, the Fund will promptly file the Final Amendment, if
not previously filed, with the Commission, and will use its best efforts to
cause such registration statement to become effective and, as soon as the Fund
is advised, will advise the Representative when the Registration Statement or
any amendment thereto has become effective. If the Registration Statement has
become effective and the Prospectus contained therein omits certain information
at the time of effectiveness pursuant to Rule 430A of the Securities Act Rules,
the Fund will file a 430A Prospectus pursuant to Rule 497(h) of the Securities
Act Rules as promptly as practicable, but no later than the second business day
following the earlier of the date of the determination of the offering price of
the Shares or the date the Prospectus is first used after the Effective Date. If
the Registration Statement has become effective and the Prospectus contained
therein does not so omit such information, the Fund will file a Prospectus
pursuant to Rule 497(b) or (j) of the Securities Act Rules as promptly as
practicable, but no later than the fifth business day following the date of the
later of the Effective Date or the commencement of the public offering of the
Shares after the Effective Date. In either case, the Fund will provide the
Representative satisfactory evidence of the filing. The Fund will not file with
the Commission any Prospectus or any other amendment (except any post-effective
amendment which is filed with the Commission after the later of (x) one year
from the date of this Underwriting Agreement or (y) the date on which
distribution of the Shares is completed) or supplement to the Registration
Statement or the Prospectus unless a copy has first been submitted to the
Representative a reasonable time before its filing and the Representative has
not objected to it in writing within a reasonable time after receiving the copy.
(b) For the period of three years from the date hereof, the
Fund will advise the Representative promptly (1) of the issuance by the
Commission of any order in respect of the Fund or the Investment Adviser which
14
<PAGE>
relates to the Fund, or which relates to any arrangements or proposed
arrangements involving the Fund or the Investment Adviser, (2) of the initiation
or threatening of any proceedings for, or receipt by the Fund of any notice with
respect to, the suspension of the qualification of the Shares for sale in any
jurisdiction or the issuance of any order by the Commission suspending the
effectiveness of the Registration Statement, (3) of receipt by the Fund, or any
representative or attorney of the Fund, of any other communication from the
Commission relating to the Fund, the Registration Statement, the Notification,
any Preliminary Prospectus, the Prospectus or to the transactions contemplated
by this Underwriting Agreement and (4) the issuance by any court, regulatory
body, administrative agency or other governmental agency or body, whether
foreign or domestic, of any order, ruling or decree, or the threat to initiate
any proceedings with respect thereto, regarding the Fund, which relates to the
Fund or any arrangements or proposed arrangements involving the Fund. The Fund
will make every reasonable effort to prevent the issuance of any order
suspending the effectiveness of the Registration Statement and, if any such
order is issued, to obtain its lifting as soon as possible.
(c) If not delivered prior to the date of this Underwriting
Agreement, the Fund will deliver to the Representative, without charge, a signed
copy of the registration statement and the Notification and of any amendments
(except any post-effective amendment which is filed with the Commission after
the later of (x) one year from the date of this Underwriting Agreement or (y)
the date on which the distribution of the Shares is completed) to either the
Registration Statement or the Notification (including all exhibits filed with
any such document) and as many conformed copies of the registration statement
and any amendments thereto (except any post-effective amendment which is filed
with the Commission after the later of (x) one year from the date of this
Underwriting Agreement or (y) the date on which the distribution of the Shares
is completed) (excluding exhibits) as the Representative may reasonably request.
(d) During such period as a prospectus is required by law to
be delivered by an underwriter or a dealer, the Fund will deliver, without
charge, to the Representative, the Underwriters and any dealers, at such office
or offices as the Representative may designate, as many copies of the Prospectus
as the Representative may reasonably request, and, if any event occurs during
such period as a result of which it is necessary to amend or supplement the
Prospectus, in order to make the statements therein, in light of the
circumstances existing when such prospectus is delivered to a purchaser of
Shares, not misleading in any material respect, or if during such period it is
15
<PAGE>
necessary to amend or supplement the prospectus to comply with the Securities
Act, the Investment Company Act, the Securities Act Rules or the Investment
Company Act Rules, the Fund promptly will prepare, submit to the Representative,
file with the Commission and deliver, without charge, to the Underwriters and to
dealers (whose names and addresses the Representative will furnish to the Fund)
to whom Shares may have been sold by the Underwriters, and to other dealers on
request, amendments or supplements to the Prospectus so that the statements in
such Prospectus, as so amended or supplemented, will not, in light of the
circumstances existing when such Prospectus is delivered to a purchaser, be
misleading in any material respect and will comply with the Securities Act, the
Investment Company Act, the Securities Act Rules and the Investment Company Act
Rules. Delivery by the Underwriters of any such amendments or supplements to the
Prospectus will not constitute a waiver of any of the conditions in Section 6
hereof.
(e) The Fund will make generally available to holders of the
Fund's securities, as soon as practicable but in no event later than the last
day of the 18th full calendar month following the calendar quarter in which the
Effective Date falls, an earnings statement, if applicable, satisfying the
provisions of Section 11(a) of the Securities Act and, at the option of the
Fund, Rule 158 of the Securities Act Rules.
(f) The Fund will take such actions as the Representative
reasonably requests in order to qualify the Shares for offer and sale under the
securities or "blue sky" laws of such jurisdictions as the Representative
reasonably designates; provided that the Fund shall not be required in
connection therewith or as a condition thereof to qualify as a foreign
corporation or to execute a general consent to service of process in any
jurisdiction.
(g) If the transactions contemplated by this Underwriting
Agreement are consummated, PaineWebber will pay all costs and expenses incident
to the performance of the obligations of the Fund under this Underwriting
Agreement, including but not limited to costs and expenses of or relating to (1)
the preparation, printing and filing of the registration statement and exhibits
to it, each Preliminary Prospectus, the Prospectus and all amendments and
supplements thereto, (2) the issuance of the Shares and the preparation and
delivery of certificates for the Shares, (3) the registration or qualification
of the Shares for offer and sale under the securities or "blue sky" laws of the
jurisdictions referred to in the foregoing paragraph, including the fees and
disbursements of counsel for the Underwriters in that connection, and the
preparation and printing of preliminary and supplemental "blue sky" memoranda,
16
<PAGE>
(4) the furnishing (including costs of design, production, shipping and mailing)
to the Underwriters and dealers of copies of each Preliminary Prospectus
relating to the Shares, the sales materials, the Prospectus, and all amendments
or supplements to the Prospectus, and of the other documents required by this
Section to be so furnished, (5) the filing requirements of the National
Association of Securities Dealers, Inc., in connection with its review of the
financing, including filing fees and the fees, disbursements and other charges
of counsel for the Underwriters in that connection, (6) all transfer taxes, if
any, with respect to the sale and delivery of the Shares to the Underwriters,
(7) the listing of the Shares on the New York Stock Exchange, and (8) the
transfer agent for the Shares.
(h) If the transactions contemplated by this Underwriting
Agreement are not consummated, except as otherwise provided herein, no party
will be under any liability to any other party, except that (1) if this
Underwriting Agreement is terminated by (x) the Fund or the Investment Adviser
pursuant to any of the provisions hereof (otherwise than pursuant to Section 9
hereof) or (y) by the Representative or the Underwriters because of any
inability, failure or refusal on the part of the Fund or the Investment Adviser
to comply with its terms or because any of the conditions in Section 6 are not
satisfied, PaineWebber and the Investment Adviser, jointly and severally, will
reimburse the Underwriters for all out-of-pocket expenses (including the
reasonable fees, disbursements and other charges of their counsel) reasonably
incurred by them in connection with the proposed purchase and sale of the Shares
and (2) no Underwriter who has failed or refused to purchase the Shares agreed
to be purchased by it under this Underwriting Agreement, in breach of its
obligations pursuant to this Underwriting Agreement, will be relieved of
liability to the Fund and the Investment Adviser and the other Underwriters for
damages occasioned by its default.
(i) Without the prior written consent of the Representative,
the Fund will not offer, sell or register with the Commission, or announce an
offering of, any equity securities of the Fund, within 180 days after the
Effective Date, except for the Shares as described in the Prospectus and any
issuances of Common Shares pursuant to the dividend reinvestment plan
established by the Fund.
(j) The Fund will use its best efforts to list the Shares on
the New York Stock Exchange and comply with the rules and regulations of such
exchange.
(k) The Fund will direct the investment of the net proceeds of
the offering of the Shares in such a manner as to comply with the investment
17
<PAGE>
objective and policies of the Fund as described in the Prospectus.
6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of
the Underwriters to purchase the Shares are subject to the accuracy on the date
of this Underwriting Agreement, and on the Closing Dates, of the representations
of the Fund and the Investment Adviser in this Underwriting Agreement, to the
accuracy and completeness of all statements made by the Fund or the Investment
Adviser or any of their respective officers in any certificate delivered to the
Representative or their counsel pursuant to this Underwriting Agreement, to
performance by the Fund and the Investment Adviser of their respective
obligations under this Underwriting Agreement and to each of the following
additional conditions:
(a) The registration statement must have become effective by
5:30 p.m., New York City time, on the date of this Underwriting Agreement or
such later date and time as the Representative consents to in writing. The
Prospectus must have been filed in accordance with Rule 497(b), (h) or (j), as
the case may be, of the Securities Act Rules.
(b) No order suspending the effectiveness of the Registration
Statement may be in effect and no proceedings for such purpose may be pending
before or, to the knowledge of counsel to the Underwriters, threatened by the
Commission, and any requests for additional information on the part of the
Commission (to be included in the Registration Statement or the Prospectus or
otherwise) must be complied with or waived to the reasonable satisfaction of the
Representative.
(c) Since the dates as of which information is given in the
Registration Statement and the Prospectus, (1) there must not have been any
material change in the Common Shares or liabilities of the Fund except as set
forth in or contemplated by the Prospectus; (2) there must not have been any
material adverse change in the general affairs, prospects, management, business,
financial condition or results of operations of the Fund or the Investment
Adviser whether or not arising from transactions in the ordinary course of
business as set forth in or contemplated by the Prospectus; (3) the Fund must
not have sustained any material loss or interference with its business from any
court or from legislative or other governmental action, order or decree, whether
foreign or domestic, or from any other occurrence not described in the
Registration Statement and Prospectus; and (4) there must not have occurred any
event that makes untrue or incorrect in any material respect any statement or
information contained in the Registration Statement or Prospectus or that is not
18
<PAGE>
reflected in the Registration Statement or Prospectus but should be reflected
therein in order to make the statements or information therein (in the case of
the Prospectus, in light of the circumstances in which they were made) not
misleading in any material respect; if, in the judgment of the Representative,
any such development referred to in clause (1), (2), (3) or (4) of this
paragraph (c) makes it impracticable or inadvisable to consummate the sale and
delivery of the Shares pursuant to the Underwriting Agreement by the
Underwriters, at the initial public offering price of the Shares.
(d) The Representative must have received on each Closing Date
a certificate, dated such date, of a President or Vice-President and the chief
financial or accounting officer of each of the Fund and the Investment Adviser
certifying that (1) the signers have carefully examined the Registration
Statement, the Prospectus, and this Underwriting Agreement, (2) the
representations of the Fund (with respect to the certificates from such Fund
officers) and the representations of the Investment Adviser (with respect to the
certificates from such officers of the Investment Adviser) in this Underwriting
Agreement are accurate on and as of the date of the certificate, (3) there has
not been any material adverse change in the general affairs, prospects,
management, business, financial condition or results of operations of the Fund
(with respect to the certificates from such Fund officers) or the Investment
Adviser (with respect to the certificates from such officers of the Investment
Adviser), which change would materially and adversely affect the ability of the
Fund or the Investment Adviser, as the case may be, to fulfill its obligations
under this Underwriting Agreement or the Investment Advisory Agreement, whether
or not arising from transactions in the ordinary course of business, (4) with
respect to the Fund only, to the knowledge of such officers after reasonable
investigation, no order suspending the effectiveness of the Registration
Statement, prohibiting the sale of any of the Shares or having a material
adverse effect on the Fund has been issued and no proceedings for any such
purpose are pending before or threatened by the Commission or any other
regulatory body, whether foreign or domestic, (5) to the knowledge of the
officers of the Investment Adviser, after reasonable investigation, no order
having an adverse effect on the ability of the Investment Adviser to fulfill its
obligations under this Underwriting Agreement or the Investment Advisory
Agreement, as the case may be, has been issued and no proceedings for any such
purpose are pending before or threatened by the Commission or any other
regulatory body, whether foreign or domestic, and (6) each of the Fund (with
respect to the certificates from such Fund officers) and the Investment Adviser
(with respect to the certificates from such officers of the Investment Adviser)
has performed all of its respective agreements that this Underwriting Agreement
requires it to perform by such Closing Date.
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<PAGE>
(e) The Representative must receive on each Closing Date the
opinions dated such Closing Date substantially in the form of Annexes A and B to
this Underwriting Agreement from the counsel identified in each such Annex.
(f) The Representative must receive on each Closing Date from
Skadden, Arps, Slate, Meagher & Flom LLP or its affiliates, their counsel, an
opinion dated such Closing Date with respect to the Fund, the Shares, the
Registration Statement and the Prospectus, this Underwriting Agreement and the
form and sufficiency of all proceedings taken in connection with the sale and
delivery of the Shares. Such opinion and proceedings shall fulfill the
requirements of this Section 6(f) only if such opinion and proceedings are
satisfactory in all respects to the Representative. The Fund and the Investment
Adviser must have furnished to such counsel such documents as counsel may
reasonably request for the purpose of enabling them to render such opinion.
(g) The Representative must receive on the date this
Underwriting Agreement is signed and delivered by the Representative a signed
letter, dated such date, substantially in the form of Annex C to this
Underwriting Agreement from the firm of accountants designated in such Annex.
The Representative also must receive on each Closing Date a signed letter from
such accountants, dated such Closing Date, confirming on the basis of a review
in accordance with the procedures set forth in their earlier letter that nothing
has come to their attention during the period from a date not more than five
business days before the date of this Underwriting Agreement, specified in the
letter, to a date not more than five business days before such Closing Date,
that would require any change in their letter referred to in the foregoing
sentence.
All opinions, letters, evidence and certificates mentioned
above or elsewhere in this Underwriting Agreement will comply only if they are
in form and scope reasonably satisfactory to counsel for the Representative,
provided that any such documents, forms of which are annexed hereto, shall be
deemed satisfactory to such counsel if substantially in such form.
7. INDEMNIFICATION AND CONTRIBUTION.
--------------------------------
(a) Each of the Fund and the Investment Adviser, jointly and
severally, will indemnify and hold harmless each Underwriter, the directors,
officers, employees and agents of such Underwriter and each person, if any, who
controls such Underwriter within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act from and against any and all losses, claims,
20
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liabilities, expenses and damages (including, but not limited to, any and all
investigative, legal and other expenses reasonably incurred in connection with,
and any and all amounts paid in settlement of, any action, suit or proceeding
between any of the indemnified parties and any indemnifying parties or between
any indemnified party and any third party, or otherwise, or any claim asserted),
to which such Underwriter or any such person, or any of them, may become subject
under the Securities Act, the Exchange Act, the Investment Company Act, the
Advisers Act or other federal or state statutory law or regulation, at common
law or otherwise, whether foreign or domestic, insofar as such losses, claims,
liabilities, expenses or damages arise out of or are based on (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, the Preliminary Prospectus, the Prospectus, the sales
materials, or any amendment or supplement to the Registration Statement, the
Preliminary Prospectus, the Prospectus, the sales materials or in any documents
filed under the Exchange Act and deemed to be incorporated by reference into the
Registration Statement, the Preliminary Prospectus, the Prospectus, or in any
application or other document executed by or on behalf of the Fund or based on
written information furnished by or on behalf of the Fund filed in any
jurisdiction in order to qualify the Shares under the securities laws thereof or
filed with the Commission, (ii) the omission or alleged omission to state, in
any or all such documents, a material fact required to be stated therein or
necessary to make the statements therein not misleading or (iii) any act or
failure to act or any alleged act or failure to act by such Underwriter in
connection with, or relating in any manner to, the Shares or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, liability, expense or damage arising out of or based upon matters
covered by clause (i) or (ii) above (provided, however, that neither the Fund
nor the Investment Adviser shall be liable under this clause (iii) to the extent
it is finally judicially determined by a court of competent jurisdiction that
such loss, claim, liability, expense or damage resulted directly from any such
acts or failures to act undertaken or omitted to be taken by such Underwriter
through its gross negligence, bad faith or willful misconduct); provided that
neither the Fund nor the Investment Adviser will be liable to the extent that
such losses, claims, liabilities, expenses or damages are based on an untrue
statement or omission or alleged untrue statement or omission made in reliance
on and in conformity with information furnished in writing to the Fund by the
Representative on behalf of Underwriters expressly for inclusion in the
Registration Statement, the Preliminary Prospectus or the Prospectus. This
indemnity agreement will be in addition to any liability that the Fund or the
Investment Adviser might otherwise have.
21
<PAGE>
(b) Each Underwriter will indemnify and hold harmless the Fund
and the Investment Adviser, each person, if any, who controls the Fund or the
Investment Adviser within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, each director of the Fund and each officer of
the Fund who signs the Registration Statement to the same extent as the
foregoing indemnity from the Fund or the Investment Adviser to the Underwriter,
but only insofar as losses, claims, liabilities, expenses or damages arise out
of or are based on any untrue statement or omission or alleged untrue statement
or omission made in reliance on and in conformity with information relating to
such Underwriter furnished in writing to the Fund by such Underwriter expressly
for use in the Registration Statement, the Preliminary Prospectus or Prospectus.
This indemnity will be in addition to any liability that such Underwriter might
otherwise have; provided, however, that in no case shall such Underwriter be
liable or responsible for any amount in excess of the fees and commissions
received by the Underwriter.
(c) Any party that proposes to assert the right to be
indemnified under this Section 7 will, promptly after receipt of notice of
commencement of any action against such party in respect of which a claim is to
be made against an indemnifying party or parties under this Section 7, notify
each such indemnifying party of the commencement of such action, enclosing a
copy of all papers served, but the omission to so notify such indemnifying party
will not relieve it from any liability that it may have to any indemnified party
under the foregoing provision of this Section 7 unless, and only to the extent
that, such omission results in the forfeiture of substantive rights or defenses
by the indemnifying party. If any such action is brought against any indemnified
party and it notifies the indemnifying party of its commencement, the
indemnifying party will be entitled to participate in and, to the extent that it
elects by delivering written notice to the indemnified party promptly after
receiving notice of the commencement of the action from the indemnified party,
jointly with any other indemnifying party similarly notified, to assume the
defense of the action, with counsel satisfactory to the indemnified party, and
after notice from the indemnifying party to the indemnified party of its
election to assume the defense, the indemnifying party will not be liable to the
indemnified party for any legal or other expenses except as provided below and
except for the reasonable costs of investigation subsequently incurred by the
indemnified party in connection with the defense. The indemnified party will
have the right to employ its own counsel in any such action, but the fees,
disbursements and other charges of such counsel will be at the expense of such
indemnified party unless (1) the employment of counsel by the indemnified party
22
<PAGE>
has been authorized in writing by the indemnifying party, (2) the indemnified
party has reasonably concluded (based on the advice of counsel) that there may
be legal defenses available to it or other indemnified parties that are
different from or in addition to those available to the indemnifying party (3) a
conflict or potential conflict exists (based on advice of counsel to the
indemnified party) between the indemnified party and the indemnifying party (in
which case the indemnifying party will not have the right to direct the defense
of such action on behalf of the indemnified party) or (4) the indemnifying party
has not in fact employed counsel to assume the defense of such action within a
reasonable time after receiving notice of the commencement of the action, in
each of which cases the reasonable fees disbursements and other charges of
counsel will be at the expense of the indemnifying party or parties. Subject to
the requirements of Investment Company Act Release No. 11330, all such fees,
disbursements and other charges will be reimbursed by the indemnifying party
promptly as they are incurred. It is understood that the indemnifying party or
parties shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the reasonable fees, disbursements and
other charges of more than one separate firm admitted to practice in such
jurisdiction at any one time for all such indemnified party or parties. An
indemnifying party will not be liable for any settlement of any action or claim
effected without its written consent (which consent will not be unreasonably
withheld). No indemnifying party shall, without the prior written consent of
each indemnified party, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action or proceeding relating to
the matters contemplated by this Section 7 (whether or not any indemnified party
is a party thereto), unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising or
that may arise out of such claim, action or proceeding.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 7 is
applicable in accordance with its terms but for any reason is held to be
unavailable from the Fund, the Investment Adviser or the Underwriters, the Fund,
the Investment Adviser and the Underwriters will contribute to the total losses,
claims, liabilities, expenses and damages (including any investigative, legal
and other expenses reasonably incurred in connection with, and any amount paid
in settlement of, any action, suit or proceeding or any claim asserted, but
after deducting any contribution received by the Fund and the Investment Adviser
from persons other than the Underwriter, such as persons who control the Fund or
the Investment Adviser within the meaning of the Securities Act or the Exchange
Act, officers of the Fund who signed the Registration Statement and directors of
the Fund, who may also be liable for contribution) to which the Fund, the
23
<PAGE>
Investment Adviser and the Underwriters may be subject in such proportion as
shall be appropriate to reflect the relative benefits received by the Fund and
the Investment Adviser on the one hand and the Underwriters on the other. The
relative benefits received by the Fund and the Investment Adviser (treated
jointly for this purpose as one person) on the one hand and the Underwriters on
the other hand shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Fund bear
to the total fees and commissions received by the Underwriters. If, but only if,
the allocation provided by the foregoing sentence is not permitted by applicable
law, the allocation of contribution shall be made in such proportion as is
appropriate to reflect not only such relative benefits referred to in the
foregoing sentence but also the relative fault of the Fund and the Investment
Adviser (treated jointly for this purpose as one person) on the one hand and the
Underwriters on the other hand in connection with respect to the statements or
omissions or alleged statements or omissions that resulted in the losses,
claims, liabilities, expenses or damages (including any investigative, legal or
other expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted), as well as
any other relevant equitable considerations appropriate in the circumstances.
Such relative fault of the parties shall be determined by reference to whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Fund, the Investment Adviser or the Underwriters, the intent of the parties and
their relative knowledge, access to information and opportunity to correct or
prevent such statement or omission and any other equitable considerations
appropriate in the circumstances. The Fund, the Investment Adviser and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 7(d) were to be determined by pro rata allocation or by
any other method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an indemnified
party as a result of the loss, claim, liability, expense or damage , or action
in respect thereof, referred to above in this Section 7(d) shall be deemed to
include, for purposes of this Section 7(d) any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding any other provisions of
this Section 7(d), the Underwriters shall not be required to contribute any
amount in excess of the fees and commissions received by it and no person found
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) will be entitled to contribution from any person who was not
24
<PAGE>
guilty of such fraudulent misrepresentation. For purposes of this Section 7(d),
any person who controls a party to this Agreement within the meaning of the
Securities Act will have the same rights to contribution as that party, and each
trustee of the Fund and each officer of the Fund who signed the Registration
Statement will have the same rights to contribution as the Fund, subject in each
case to the provisions hereof. Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action against such party in
respect of which a claim for contribution may be made under this Section 7(d),
notify such party or parties from whom contribution may be sought, but the
omission so to notify will not relieve the party or parties from whom
contribution may be sought from any other obligation it or they may have under
this Section 7(d). No party will be liable for contribution with respect to any
action or claim settled without its written consent (which consent shall not be
unreasonably withheld).
(e) Notwithstanding any other provisions in this Section 7, no
party shall be entitled to indemnification or contribution under this Agreement
against any loss, claim, liability, expense or damage arising by reason of such
person's willful misfeasance, bad faith or gross negligence in the performance
of its duties hereunder, or by reason of such person's reckless disregard of
such person's obligations and duties hereunder.
(f) The Fund and the Investment Adviser acknowledge that the
statements with respect to stabilization on the second page of and under the
caption "Underwriting" in the Preliminary Prospectus and in the Prospectus
constitute the only information furnished in writing to the Fund by the
Representative on behalf of the Underwriters expressly for use in such document.
8. TERMINATION. This Underwriting Agreement may be terminated by the
Representative by notifying the Fund at any time:
(a) before the later of the effectiveness of the Registration
Statement and the time when any of the Shares are first generally offered
pursuant to the Underwriting Agreement by the Representative to dealers by
letter or telegram;
(b) at or before any Closing Date if, in the sole judgment of
the Representative, payment for and delivery of any Shares is rendered
impracticable or inadvisable because (1) trading in the equity securities of the
Fund is suspended by the Commission or by the principal exchange that lists the
Shares, (2) additional material governmental restrictions, not in force on the
date of this Underwriting Agreement, have been imposed upon trading in
securities or trading has been suspended on any U.S. securities exchange, (3) a
general banking moratorium has been established by U.S. federal or New York
25
<PAGE>
authorities or (4) any outbreak or material escalation of hostilities or other
calamity or crisis occurs, the effect of which is such as to make it
impracticable to market any of the Shares; or
(c) at or before any Closing Date, if any of the conditions
specified in Section 6 have not been fulfilled when and as required by this
Underwriting Agreement.
9. SUBSTITUTION OF UNDERWRITERS. If one or more of the Underwriters
fails (other than for a reason sufficient to justify the termination of this
Underwriting Agreement) to purchase on any Closing Date the Shares agreed to be
purchased on such Closing Date by such Underwriter or Underwriters, the
Representative may find one or more substitute underwriters to purchase such
Shares or make such other arrangements as the Representative deems advisable, or
one or more of the remaining Underwriters may agree to purchase such Shares in
such proportions as may be approved by the Representative, in each case upon the
terms set forth in this Underwriting Agreement. If no such arrangements have
been made within 36 hours after such Closing Date, and
(a) the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date does not exceed 10% of the Shares that the
Underwriters are obligated to purchase on such Closing Date, each of the
nondefaulting Underwriters will be obligated to purchase such Shares on the
terms set forth in this Underwriting Agreement in proportion to their respective
obligations under this Underwriting Agreement, or
(b) the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date exceeds 10% of the Shares to be purchased by
all the Underwriters on such Closing Date, the Fund will be entitled to an
additional period of 24 hours within which to find one or more substitute
underwriters reasonably satisfactory to the Representative to purchase such
Shares on the terms set forth in this Underwriting Agreement.
In any such case, either the Representative or the Fund will have
the right to postpone the applicable Closing Date for not more than five
business days in order that necessary changes and arrangements (including any
necessary amendments or supplements to the Registration Statement or the
Prospectus) may be effected by the Representative and the Fund. If the number of
Shares to be purchased on such Closing Date by such defaulting Underwriter or
Underwriters exceeds 10% of the Shares that the Underwriters are obligated to
26
<PAGE>
purchase on such Closing Date, and none of the nondefaulting Underwriters or the
Fund makes arrangements pursuant to this Section within the period stated for
the purchase of the Shares that the defaulting Underwriters agreed to purchase,
this Underwriting Agreement will terminate without liability on the part of any
nondefaulting Underwriter, the Fund or the Investment Adviser, except as
provided in Sections 5(g) and 7 hereof. This Section will not affect the
liability of any defaulting Underwriter to the Fund or the nondefaulting
Underwriters arising out of such default. A substitute underwriter will become a
Underwriter for all purposes of this Underwriting Agreement.
10. MISCELLANEOUS.
-------------
(a) The reimbursement, indemnification and contribution
agreements in Sections 5(g) and 7 hereof and the representations of the Fund,
the Investment Adviser and the Underwriters in this Underwriting Agreement will
remain in full force and effect regardless of any termination of this
Underwriting Agreement. The reimbursement, indemnification and contribution
agreements in Sections 5(g) and 7 hereof and the representations and agreements
of the Fund, the Investment Adviser and the Underwriters in this Underwriting
Agreement shall survive the Closing Dates and shall remain in full force and
effect regardless of any investigation made by or on behalf of any Underwriter,
the Fund, the Investment Adviser or any controlling person and delivery of and
payment for the Shares.
(b) This Underwriting Agreement is for the benefit of the
Underwriters, the Fund, the Investment Adviser and their successors and assigns,
and, to the extent expressed in this Underwriting Agreement, for the benefit of
persons controlling any of the Underwriters, the Fund, the Investment Adviser
and directors and officers of the Fund and the Investment Adviser, and their
respective successors and assigns, and no other person, partnership, association
or corporation will acquire or have any right under or by virtue of this
Underwriting Agreement. The term "successors and assigns" does not include any
purchaser of the Shares from any Underwriter merely because of such purchase.
(c) All notices and communications under this Underwriting
Agreement will be in writing, effective only on receipt and mailed or delivered,
by messenger, facsimile transmission or otherwise, to the Representative in care
of PaineWebber Incorporated, Attn: Financial Institutions Group, 1285 Avenue of
the Americas, New York, New York 10019, to the Fund at 1285 Avenue of the
Americas, New York, New York 10019 and to the Investment Adviser at 1285 Avenue
of the Americas, New York, New York 10019.
27
<PAGE>
(d) Any action required or permitted to be taken by the
Representative under this Underwriting Agreement may be taken by them jointly
through PaineWebber Incorporated.
(e) This Underwriting Agreement may be signed in multiple
counterparts that taken as a whole constitute one agreement.
(f) This Underwriting Agreement will be governed by and
construed in accordance with the laws of the State of New York without reference
to choice of law principles thereof.
28
<PAGE>
Please confirm that the foregoing correctly sets forth the
agreement between us.
Very truly yours,
Managed High Yield Plus Fund Inc.
By: /s/ Thomas J. Libassi
------------------------------------
Name: Thomas J. Libassi
Title: Vice President
Mitchell Hutchins Asset Management Inc.
By: /s/ Paul Schubert
------------------------------------
Name: Paul Schubert
Title: Senior Vice President
Confirmed:
PaineWebber Incorporated
As Representative of the Underwriters
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
By: PaineWebber Incorporated
By: /s/ Oscar J. Junquera
---------------------------------
Name: Oscar J. Junquera
Title: Managing Director
Acting on behalf of itself
and the Underwriters
named in Schedule 1
29
<PAGE>
SCHEDULE 1
NAME NUMBER OF FIRM SHARES
TO BE PURCHASED
PaineWebber Incorporated.................... 19,150,000
ABN AMRO Chicago Corporation................ 350,000
BT Alex. Brown Incorporated................. 350,000
CIBC Oppenheimer Corp....................... 350,000
A.G. Edwards & Sons, Inc.................... 350,000
Advest, Inc................................. 175,000
Robert W. Baird & Co. Incorporated.......... 175,000
Crowell, Weedon & Co........................ 175,000
Dain Rauscher Wessels....................... 175,000
Everen Securities, Inc...................... 175,000
Fahnestock & Co. Inc........................ 175,000
First Albany Corporation.................... 175,000
Fifth Third/The Ohio Company................ 175,000
First of Michigan Corporation............... 175,000
Interstate/Johnson Lane Corporation......... 175,000
Janney Montgomery Scott Inc................. 175,000
Josephthal & Co. Inc........................ 175,000
McDonald & Company Securities, Inc.......... 175,000
Morgan Keegan & Company, Inc................ 175,000
Pacific Growth Equities, Inc................ 175,000
Parker/Hunter Incorporated.................. 175,000
Pennsylvania Merchant Group................. 175,000
Piper Jaffray Inc........................... 175,000
Ragen Mackenzie Incorporated................ 175,000
The Robinson-Humphrey Company, LLC.......... 175,000
Roney Capital Markets....................... 175,000
Stifel, Nicolaus & Company, Incorporated.... 175,000
Sutro & Co. Incorporated.................... 175,000
Tucker Anthony Incorporated................. 175,000
C.E. Unterberg, Towbin...................... 175,000
30
<PAGE>
Wedbush Morgan Securities, Inc.............. 175,000
Allen & Company of Florida, Inc............. 100,000
George K. Baum & Company.................... 100,000
Huntleigh Securities Corporation............ 100,000
C.L. King & Associates, Inc................. 100,000
John G. Kinnard & Company, Incorporated..... 100,000
Mesirow Financial, Inc...................... 100,000
Miller, Johnson & Kuehn, Inc................ 100,000
Moors & Cabot, Inc.......................... 100,000
North Coast Securities Corporation.......... 100,000
David A. Noyes & Company.................... 100,000
Paulson Investment Company, Incorporated.... 100,000
The Seidler Companies Incorporated.......... 100,000
Southwest Securities, Inc................... 100,000
M.L. Stern & Co., Inc....................... 100,000
TD Securities (USA) Inc..................... 100,000
Torrey Pines Securities, Inc................ 100,000
-------
Total 26,700,000
==========
31
<PAGE>
ANNEX A
FORM OF OPINION OF
KIRKPATRICK & LOCKHART LLP REGARDING THE FUND
1. The Registration Statement and all post-effective amendments,
if any, are effective under the Securities Act and no stop order with respect
thereto has been issued and no proceeding for that purpose has been instituted
or, to the best of our knowledge, is threatened by the Commission. Any filing of
the Prospectus or any supplements thereto required under Rule 497 of the
Securities Act Rules prior to the date hereof have been made in the manner and
within the time required by such rule.
2. The Fund has been duly organized, is validly existing and in
good standing as a corporation under the laws of the State of Maryland, with
full power and authority to conduct all the activities conducted by it, to own
or lease all assets owned or leased by it and to conduct its business as
described in the Registration Statement and Prospectus, and the Fund is duly
licensed and qualified to do business and in good standing as a foreign
corporation or otherwise in each jurisdiction in which its ownership or leasing
of property or its conducting of business requires such qualification, except
where the failure to be so qualified or be in good standing would not have a
material adverse effect on the Fund, and the Fund owns, possesses or has
obtained and currently maintains all governmental licenses, permits, consents,
orders, approvals and other authorizations necessary to carry on its business as
contemplated in the Prospectus. The Fund has no subsidiaries.
3. The Common Shares of the Fund conform in all respects to the
description of them in the Prospectus. All the outstanding Common Shares have
been duly authorized and are validly issued, fully paid and nonassessable. The
Common Shares to be issued and delivered to and paid for by the Underwriters in
accordance with the Underwriting Agreement against payment therefor as provided
by the Underwriting Agreement have been duly authorized and when issued and
delivered to the Underwriters will have been validly issued and will be fully
paid and nonassessable. No person is entitled to any preemptive or other similar
rights with respect to the Common Shares.
4. The Fund is duly registered with the Commission under the
Investment Company Act as a diversified, closed-end management investment
<PAGE>
company and all action under the Securities Act, the Investment Company Act, the
Securities Act Rules and the Investment Company Act Rules, as the case may be,
necessary to make the public offering and consummate the sale of the Common
Shares as provided in the Underwriting Agreement has or will have been taken by
the Fund.
5. The Fund has full power and authority to enter into each of
the Underwriting Agreement, the Investment Advisory Agreement, the Custody
Agreement, and the Transfer Agency Agreement (collectively, the "Fund
Agreements") and to perform all of the terms and provisions thereof to be
carried out by it and (A) each Fund Agreement has been duly and validly
authorized, executed and delivered by the Fund, (B) each Fund Agreement does not
violate in any material respect any of the applicable provisions of the
Investment Company Act, the Advisers Act , the Investment Company Act Rules and
the Advisers Act Rules, as the case may be, and (C) assuming due authorization,
execution and delivery by the other parties thereto, each Fund Agreement
constitutes the legal, valid and binding obligation of the Fund enforceable in
accordance with its terms, (1) subject, as to enforcement, to applicable
bankruptcy, insolvency and similar laws affecting creditors' rights generally
and to general equitable principles (regardless of whether enforcement is sought
in a proceeding in equity or at law) and (2) as rights to indemnity thereunder
may be limited by federal or state securities laws.
6. None of (A) the execution and delivery by the Fund of the Fund
Agreements, (B) the issue and sale by the Fund of the Common Shares as
contemplated by the Underwriting Agreement and (C) the performance by the Fund
of its obligations under the Fund Agreements or consummation by the Fund of the
other transactions contemplated by the Fund Agreements conflicts with or will
conflict with, or results or will result in a breach of, the Articles of
Incorporation or the By-laws of the Fund or any agreement or instrument to which
the Fund is a party or by which the Fund is bound, or any law, rule or
regulation, or order of any court, governmental instrumentality, securities
exchange or association or arbitrator, whether foreign or domestic, applicable
to the Fund, except that we express no opinion as to the securities or "blue
sky" laws applicable in connection with the purchase and distribution of the
Common Shares by the Underwriters pursuant to the Underwriting Agreement.
7. The Fund is not currently in breach of, or in default under,
any written agreement or instrument to which it is a party or by which it or its
property is bound or affected.
A-2
<PAGE>
8. No consent, approval, authorization or order of any court or
governmental agency or body or securities exchange or association is required by
the Fund for the consummation by the Fund of the transactions to be performed by
the Fund or the performance by the Fund of all the terms and provisions to be
performed by or on behalf of it in each case as contemplated in the Fund
Agreements, except such as (A) have been obtained under the Securities Act, the
Investment Company Act, the Advisers Act, the Securities Act Rules, the
Investment Company Act Rules and the Advisers Act Rules and (B) may be required
by the New York Stock Exchange or under state securities or "blue sky" laws in
connection with the purchase and distribution of the Common Shares by the
Underwriters pursuant to the Underwriting Agreement.
9. The Common Shares have been approved for listing on the New
York Stock Exchange, subject to official notice of issuance, and the Fund's
Registration Statement on Form 8-A under the 1934 Act is effective.
10. The form of the certificates for the Common Shares conform to
the requirements of Maryland law.
11. There is no action, suit or proceeding before or by any
court, commission, regulatory body, administrative agency or other governmental
agency or body, foreign or domestic, now pending or, to our knowledge,
threatened against or affecting the Fund, which is required to be disclosed in
the Prospectus that is not disclosed in the Prospectus, and there are no
contracts, franchises or other documents that are of a character required to be
described in, or that are required to be filed as exhibits to, the Registration
Statement that have not been described or filed as required.
12. The Fund does not require any tax or other rulings to enable
it to qualify as a regulated investment company under Subchapter M of the Code.
13. The section in the Prospectus entitled "Taxation" is a fair
summary of the principal United States federal income tax rules applicable to
the Fund and to the purchase, ownership and disposition of the Common Shares.
14. The Registration Statement (except the financial statements
and schedules and other financial data included therein as to which we express
no view), at the time it became effective, and the Prospectus (except as
aforesaid), as of the date thereof, complied as to form in all material respects
A-3
<PAGE>
to the requirements of the Securities Act, the Investment Company Act and the
rules and regulations of the Commission thereunder.
In rendering our opinion, we have relied, as to factual matters,
upon the attached written certificates and statements of officers of the Fund.
In connection with the registration of the Common Shares, we have
advised the Fund as to the requirements of the Securities Act, the Investment
Company Act and the applicable rules and regulations of the Commission
thereunder and have rendered other legal advice and assistance to the Fund in
the course of its preparation of the Registration Statement, the Prospectus and
sales materials. Rendering such assistance involved, among other things,
discussions and inquiries concerning various legal and related subjects and
reviews of certain corporate records, documents and proceedings. We also
participated in conferences with representatives of the Fund and its accountants
at which the contents of the Registration Statement, Prospectus, sales materials
and related matters were discussed. With your permission, we have not
undertaken, except as otherwise indicated herein, to determine independently,
and do not assume any responsibility for, the accuracy, completeness or fairness
of the statements in the Registration Statement, Prospectus or sales materials.
On the basis of the information which was developed in the course of the
performance of the services referred to above, no information has come to our
attention that would lead us to believe that the Registration Statement, at the
time it became effective, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus, as of its
date and as of such Closing Date, or the sales materials, as of its date and of
such Closing Date, contained or contains an untrue statement of a material fact
or omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or that any amendment or supplement to the Prospectus, as
of its date, and as of such Closing Date, contained any untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements in the Prospectus, in the light of the circumstances under
which they were made, not misleading (except the financial statements, schedules
and other financial data included therein, as to which we express no view).
A-4
<PAGE>
ANNEX B
FORM OF OPINION OF
VICTORIA E. SCHONEFELD REGARDING INVESTMENT ADVISER
1. The Investment Adviser has been duly organized, is validly
existing and in good standing as a corporation under the laws of the State of
Delaware incorporation with full power and authority to conduct all of the
activities conducted by it, to own or lease all of the assets owned or leased by
it and to conduct its business as described in the Registration Statement and
Prospectus, and the Investment Adviser is duly licensed and qualified as a
foreign corporation and in good standing in each other jurisdiction in which it
is required to be so qualified, except where the failure to be so qualified or
be in good standing would not have a material adverse effect on the Investment
Adviser, and the Investment Adviser owns, possesses or has obtained and
currently maintains all governmental licenses, permits, consents, orders,
approvals and other authorizations, whether foreign or domestic, necessary for
the Investment Adviser to carry on its business as contemplated in the
Registration Statement and the Prospectus.
2. The Investment Adviser is duly registered as an investment
adviser under the Advisers Act and is not prohibited by the Advisers Act, the
Investment Company Act, the Advisers Act Rules or the Investment Company Act
Rules from acting as investment adviser for the Fund as contemplated by the
Investment Advisory Agreement, the Registration Statement and the Prospectus.
3. The Investment Adviser has full power and authority to enter
into each of the Underwriting Agreement and the Investment Advisory Agreement
and to carry out all the terms and provisions thereof to be carried out by it,
and each such agreement has been duly and validly authorized, executed and
delivered by the Investment Adviser; each of the Investment Advisory Agreement
and the Underwriting Agreement does not violate in any material respect any of
the applicable provisions of the Investment Company Act, the Advisers Act, the
Investment Company Act Rules and the Advisers Act Rules; and assuming due
authorization, execution and delivery by the other parties thereto, each of the
Underwriting Agreement and the Investment Advisory Agreement constitutes a
legal, valid and binding obligation of the Investment Adviser, enforceable in
accordance with its terms, (1) subject, as to enforcement, to applicable
B-1
<PAGE>
bankruptcy, insolvency and similar laws affecting creditors' rights generally
and to general equitable principles (regardless of whether enforcement is sought
in a proceeding in equity or at law) and (2) as rights to indemnity thereunder
may be limited by federal or state securities laws.
4. Neither (A) the execution and delivery by the Investment
Adviser of the Underwriting Agreement or the Investment Advisory Agreement nor
(B) the consummation by the Investment Adviser of the transactions contemplated
by, or the performance of its obligations under such agreements conflicts or
will conflict with, or results or will result in a breach of, the Articles of
Incorporation or By-Laws of the Investment Adviser or any agreement or
instrument to which the Investment Adviser is a party or by which the Investment
Adviser is bound, or any law, rule or regulation, or order of any court,
governmental instrumentality, securities exchange or association or arbitrator,
whether foreign or domestic, applicable to the Investment Adviser.
5. No consent, approval, authorization or order of any court,
governmental agency or body or securities exchange or association is required
for the consummation of the transactions contemplated in, or the performance by
the Investment Adviser of its obligations under, the Underwriting Agreement or
the Investment Advisory Agreement, as the case may be, except such as (A) have
been obtained under the Investment Company Act, the Advisers Act, the Securities
Act, the Investment Company Act Rules, the Advisers Act Rules and the Securities
Act Rules and (B) may be required by the New York Stock Exchange or under state
securities or "blue sky" laws in connection with the purchase and distribution
of the Common Shares by the Underwriters pursuant to the Underwriting Agreement.
6. The description of the Investment Adviser and its business in
the Registration Statement and the Prospectus complies with the requirements of
the Securities Act, the Investment Company Act, the Securities Act Rules and the
Investment Company Act Rules and does not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading.
7. There is no action, suit or proceeding before or by any court,
commission, regulatory body, administrative agency or other governmental agency
or body, foreign or domestic, now pending or, to our knowledge, threatened
against or affecting the Investment Adviser of a nature required to be disclosed
in the Registration Statement or Prospectus or that might result in any material
adverse change in the condition, financial or otherwise, business affairs or
B-2
<PAGE>
business prospects of the Investment Adviser or the ability of the Investment
Adviser to fulfill its respective obligations under the Underwriting Agreement
or under the Investment Advisory Agreement.
8. The Registration Statement (except the financial statements
and schedules and other financial data included therein as to which we express
no view), at the time it became effective, and the Prospectus (except as
aforesaid), as of the date thereof, appeared on their face to be appropriately
responsive in all material respects to the requirements of the Securities Act,
the Investment Company Act and the rules and regulations of the Commission
thereunder.
In rendering our opinion, we have relied, as to factual matters,
upon the attached written certificates and statements of officers of the
Investment Adviser.
In connection with the registration of the Common Shares, we have
advised the Investment Adviser as to the requirements of the Securities Act, the
Investment Company Act and the applicable rules and regulations of the
Commission thereunder and have rendered other legal advice and assistance to the
Investment Adviser in the course of the preparation of the Registration
Statement, the Prospectus and the sales materials. Rendering such assistance
involved, among other things, discussions and inquiries concerning various legal
and related subjects and reviews of certain corporate records, documents and
proceedings. We also participated in conferences with representatives of the
Fund and its accountants and the Investment Adviser at which the contents of the
Registration Statement, Prospectus, sales materials and related matters were
discussed. With your permission, we have not undertaken, except as otherwise
indicated herein, to determine independently, and do not assume any
responsibility for, the accuracy, completeness or fairness of the statements in
the Registration Statement, Prospectus or sales materials. On the basis of the
information which was developed in the course of the performance of the services
referred to above, no information has come to our attention that would lead us
to believe that the Registration Statement, at the time it became effective,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or that the Prospectus, as of its date and as of such Closing
Date, or the sales materials, as of its date and as of such Closing Date,
contained or contains an untrue statement of a material fact or omitted or omits
to state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading, or
that any amendment or supplement to the Prospectus, as of its date, and as of
such Closing Date, contained any untrue statement of a material fact or omitted
B-3
<PAGE>
or omits to state a material fact necessary in order to make the statements in
the Prospectus, in the light of the circumstances under which they were made,
not misleading (except the financial statements, schedules and other financial
data included therein, as to which we express no view).
B-4
<PAGE>
ANNEX C
FORM OF ACCOUNTANT'S LETTER
June _, 1998
Ladies and Gentlemen:
We have audited the statement of assets, liabilities and capital
of Managed High Yield Plus Fund Inc. (the "Fund") as of June _, 1998 included in
the Registration Statement on Form N-2 filed by the Fund under the Securities
Act of 1933 (the "Act") (File No. 333-51017) and under the Investment Company
Act of 1940 (the "1940 Act") (File No. 811-08765); such statement and our report
with respect to such statement are included in the Registration Statement; we
are independent public accountants with respect to the Fund within the meaning
of the Act and the applicable rules and regulations thereunder.
1. In our opinion, the statement of assets, liabilities and
capital included in the Registration Statement and audited by us complies as to
form in all respects with the applicable accounting requirements of the Act, the
1940 Act and the respective rules and regulations thereunder.
2. For purposes of this letter we have read the minutes of all
meetings of the Shareholders, the Board of Directors and all Committees of the
Board of Directors of the Fund as set forth in the minute books at the offices
of the Fund, officials of the Fund having advised us that the minutes of all
such meetings through __________ ___, 1998, were set forth therein.
3. Fund officials have advised us that no financial statements as
of any date subsequent to ___________ ___, 1998, are available. We have made
inquiries of certain officials of the Fund who have responsibility for financial
and accounting matters regarding whether there was any change at __________ ___,
1998, in the capital shares or net assets of the Fund as compared with amounts
shown in the __________ ___, 1998 statement of assets, liabilities and capital
included in the Registration Statement, except for changes that the Registration
C-1
<PAGE>
Statement discloses have occurred or may occur. On the basis of our inquiries
and our reading of the minutes as described in Paragraph 3, nothing came to our
attention that caused us to believe that there were any such changes.
The foregoing procedures do not constitute an audit made in
accordance with generally accepted auditing standards. Accordingly, we make no
representations as to the sufficiency of the foregoing procedures for your
purposes.
4. This letter is solely for the information of the addressees
and to assist the underwriters in conducting and documenting their investigation
of the affairs of the Fund in connection with the offering of the securities
covered by the Registration Statement, and is not to be used, circulated, quoted
or otherwise referred to within or without the underwriting group for any other
purpose, including but not limited to the registration, purchase or sale of
securities, nor is it to be filed with or referred to in whole or in part in the
Registration Statement or any other document, except that reference may be made
to it in the underwriting agreement or in any list of closing documents
pertaining to the offering of the securities covered by the Registration
Statement.
Very truly yours,
-----------------------------
C-2
Exhibit No. 7(b)
AMENDED AND RESTATED MASTER AGREEMENT
AMONG UNDERWRITERS
June 11, 1984
Paine Weber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Gentlemen:
1. GENERAL. We understand that PaineWebber Incorporated ("PWI") is
entering into this Agreement in counterparts with us and other firms who may be
underwriters for issues of securities for which PWI is acting as Representative
or one of the Representatives of the several underwriters. This Agreement shall
apply to any offering of securities in which we elect to act as an underwriter
after receipt of a telegram, telex or other form of written communication
("Written Communication") from PWI stating the identity of the issuer and, if
different from the issuer, the seller or sellers of such securities, the
securities proposed to be offered, whether the underwriters are afforded an
option to purchase additional securities to cover over-allotments, the price to
underwriters, public offering price and date, interest rate, if any, and other
variables, the amount of our proposed participation and the names of the other
Representative, if any, and that our participation as an underwriter in the
proposed offering shall be subject to the provisions of this Agreement. Upon our
telegraphic acceptance of such Written Communication we shall become one of the
underwriters of such issue for the amount specified in the Written
Communication, and this Agreement shall become binding upon us and the
Representatives with respect to such offering. The obligations of each
underwriter shall be several and not joint. The issuer of the securities offered
in any offering of securities made pursuant to this Agreement is hereinafter
referred to as the "Company", and such securities are hereinafter called the
"Securities". The seller or sellers of the Securities (including, if applicable,
the Company) are hereinafter referred to collectively as the "Seller". All
references herein to "you" or the "Representatives" shall include PWI and the
other firms, if any, which are named as Representatives in the Written
Communication. The Securities to be offered in any offering may but need not be
registered in a shelf registration pursuant to Rule 415 under the Securities Act
of 1933 (the "Securities Act"). The following provisions of this Agreement shall
apply separately to each individual offering of Securities.
2. UNDERWRITING ARRANGEMENTS. The Representatives shall determine which
signatories to this Agreement will be invited to become underwriters for the
Securities. Changes may be made by the Representatives in those who are to be
underwriters and in the respective amounts of Securities to be purchased by
them, but the amount of Securities to be purchased by us as set forth in the
Written Communication to us will not be changed without our consent except as
provided herein or in the underwriting agreement (the "Underwriting Agreement")
with the Seller covering the Securities. We authorize you on our behalf to
execute and deliver the Underwriting Agreement in such form as you determine and
to take such action as you deem advisable in connection with the performance of
<PAGE>
the Underwriting Agreement and this Agreement and the purchase, carrying, sale
and distribution of the Securities, including the election to exercise any
option to purchase additional Securities to cover over-allotments if so
provided. The parties on whose behalf you execute the Underwriting Agreement are
hereinafter called the "Underwriters". You may waive performance or satisfaction
by the Seller of certain of its obligations or conditions included in the
Underwriting Agreement, if in your judgment such waiver will not have a material
adverse effect upon the interests of the Underwriters. It is understood that, if
so specified in the Written Communication for the issue, arrangements may be
made for the sale of Securities by the Seller pursuant to delayed delivery
contracts. Such Securities are hereinafter referred to as "Delayed Delivery
Securities", and such contracts as "Delayed Delivery Contracts". References
herein to delayed delivery and Delayed Delivery Contracts apply only to
offerings in which delayed delivery is authorized. The term "underwriting
obligation", as used in this Agreement with respect to any Underwriter, shall
refer to the principal amount or number of shares of the Securities which such
Underwriter is obligated to purchase pursuant to the provisions of the
Underwriting Agreement, without regard to any reduction in such obligation as a
result of Delayed Delivery Contracts which are entered into by the Seller.
As compensation for your services we will pay a management fee as
specified in the Written Communication for the issue (without deduction in
respect of Delayed Delivery Securities), and you may charge our account
therefor. If there is more than one Representative, such compensation will be
divided among the Representatives in such proportions as they determine.
3. PROSPECTUS AND REGISTRATION STATEMENT. You will furnish to us as soon
as possible copies of the prospectus or supplemented prospectus to be used in
connection with the offering of the Securities. As used herein with respect to
an offering of Securities registered under the Securities Act, "Prospectus"
means the form of prospectus (including any supplements) authorized for use in
connection with such offering, and "Registration Statement" means the
registration statement, as amended, filed under the Securities Act pursuant to
which the Securities are registered under the Securities Act. As used herein
with respect to an offering of Securities not registered under the Securities
Act, "Prospectus" or "Registration Statement" means the form of final offering
circular (including any supplements) authorized for use in connection with such
offering and "preliminary prospectus" means any preliminary offering circular
authorized for use in connection with such offering. We consent to being named
in the prospectus as one of the Underwriters of the Securities.
4. PUBLIC OFFERING. (a) In connection with the public offering of the
Securities, we authorize you, in your discretion
(i) to determine the time of the initial public offering, to change
the public offering price and the concessions and discounts to dealers
after the initial public offering, to furnish the Company with the
information to be included in the Registration Statement or Prospectus
with respect to the terms of offering, and to determine all matters
relating to advertising and communications with dealers or others;
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<PAGE>
(ii) to reserve for sale to dealers selected by you ("Selected
Dealers") and to others, and to reserve for sale pursuant to Delayed
Delivery Contracts (including Delayed Delivery Contracts arranged by you
through Selected Dealers), all or any part of our Securities, which
reservations for sales to others and for sales pursuant to Delayed
Delivery Contracts not arranged through Selected Dealers are to be as
nearly as practicable in proportion to the respective underwriting
obligations of the Underwriters, unless you agree to a smaller proportion
at the request of any Underwriter, and such other reservations to be in
such proportions as you determine, and, from time to time, to add to the
reserved Securities any Securities retained by us remaining unsold and to
release to us any of our Securities reserved but not sold;
(iii) to sell reserved Securities, as nearly as practicable in
proportion to the respective reservations, to Selected Dealers at the
public offering price less the Selected Dealers' concession and to others
at the public offering price; and
(iv) to buy Securities for our account from Selected Dealers at the
public offering price less such amount not in excess of the Selected
Dealers' concession as you determine.
If, in accordance with the terms of offering set forth in the Prospectus,
the offering of the Securities is not at a fixed price but at varying prices set
by individual Underwriters based on market prices or at negotiated prices, the
provisions of clause (i) above relating to your right to change the public
offering price and concessions and discounts to dealers shall not apply, and
other references in this Section and elsewhere in this Agreement to the public
offering price or Selected Dealers' concession shall be deemed to mean the
prices and concessions determined by you from time to time in your discretion.
Sales of Securities between Underwriters may be made with your prior
consent, or as you deem advisable for Blue Sky purposes.
After advice from you that the Securities are released for public
offering, we will offer to the public in conformity with the terms of offering
set forth in the Prospectus such of our Securities as you advise us are not
reserved.
Any Securities sold by us (otherwise than through you) which you purchase
in the open market for the account of any Underwriter will be repurchased by us
on demand at a price equal to the total cost of such purchase including any
taxes on redelivery, commissions, accrued interest and dividends. Securities
delivered on such repurchase need not be the identical certificates so
purchased. In lieu of such action you may in your discretion sell for our
account the Securities so purchased and debit or credit our account for the loss
or profit resulting from such sale, or charge our account with an amount not in
excess of the Selected Dealers' concession with respect to such Securities.
(b) We authorize you to act on our behalf in making all arrangements for
the solicitation of offers to purchase Delayed Delivery Securities from the
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<PAGE>
Seller pursuant to Delayed Delivery Contracts and we agree that all such
arrangements will be made only through you, directly or through Selected Dealers
(including Underwriters acting as Selected Dealers) to whom you may pay a
commission as provided in the Prospectus and herein.
The obligation of each of the Underwriters to purchase and pay for
Securities as set forth in the Underwriting Agreement shall be reduced in the
proportion provided for therein, except that (i) as to any Delayed Delivery
Contract determined by you, in your discretion, to have been directed and
allocated by a purchaser to a particular Underwriter, such obligation of such
Underwriters shall be reduced by the amount of Delayed Delivery Securities
covered thereby, (ii) as to any Delayed Delivery Contracts for which
arrangements are made through Selected Dealers, such obligation of each
Underwriter shall be reduced as nearly as practicable in the proportion
determined by you that the amount of Securities of such Underwriter reserved and
sold pursuant to Delayed Delivery Contracts arranged through Selected Dealers
bears to the total Securities so reserved and sold, and (iii) such reductions
shall be rounded, as you shall determine, to the nearest $1,000 principal amount
or whole share of the Securities.
The fee payable to each Underwriter with respect to Delayed Delivery
Securities pursuant to the Underwriting Agreement shall be credited to the
account of such Underwriter based upon the amount by which such Underwriter's
underwriting obligation is reduced as specified in the preceding paragraph.
If the amount of Delayed Delivery Securities applied to reduce an
Underwriter's underwriting obligation and the amount of Securities sold by or
for the account of such Underwriter exceeds such Underwriter's underwriting
obligation, there shall be credited to such Underwriter in connection with such
excess amount of Securities only the amount of the Selected Dealers' concession
with respect thereto.
The commissions payable to Selected Dealers in respect of Delayed Delivery
Contracts arranged through them shall be charged to each Underwriter in the
proportion which the amount of Securities of such Underwriter reserved and sold
pursuant to Delayed Delivery Contracts arranged through Selected Dealers bears
to the total Securities so reserved and sold.
5. PAYMENT AND DELIVERY. We authorize you to make payment on our behalf to
the Seller of the purchase price of our Securities, to take delivery of our
Securities, registered as you may direct in order to facilitate deliveries, and
to deliver our reserved Securities against sales. At your request we will pay
you, as you direct, (i) an amount equal to the public offering price, less the
selling concession, of either our Securities or our unreserved Securities or
(ii) the amount set forth or indicated in the Written Communication with respect
to the Securities, and such payment will be credited to our account and applied
to the payment of the purchase price. After you receive payment for reserved
Securities sold for our account, you will remit to us the purchase price (if
any) paid by us for such Securities and credit or debit our account with the
difference between the sale prices and the purchase price thereof. You will
deliver to us our unreserved Securities promptly, and our reserved but unsold
Securities, against payment of the purchase price therefor (except in the case
of Securities for which payment has previously been made), as soon as
practicable after the termination of the provisions referred to in Section 9,
except that if the aggregate amount of reserved but unsold Securities upon such
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<PAGE>
termination does not exceed 10% of the total amount of the Securities, you may
in your discretion sell such reserved but unsold Securities for the accounts of
the several Underwriters as soon as practicable after such termination, at such
prices and in such manner as you determine. Unless we promptly give you written
instructions otherwise, if transactions in the Securities may be settled through
the facilities of The Depository Trust Company, payment for and delivery of
securities purchased by us will be made through such facilities, if we are a
member, or if we are not a member, settlement may be made through our ordinary
correspondent who is a member.
6. AUTHORITY TO BORROW. In connection with the purchase or carrying of our
Securities or other securities purchased for our account, we authorize you, in
your discretion, to advance your funds for our account, charging current
interest rates, to arrange loans for our account, and in connection therewith to
execute and deliver any notes or other instruments and hold or pledge as
security any of our Securities or such other securities. Any lender may rely
upon your instructions in all matters relating to any such loan. Any Securities
or such other securities held by you for our account may be delivered to us for
carrying purposes, and if so delivered will be redelivered to you upon demand.
7. STABILIZATION AND OVER-ALLOTMENT. We authorize you, in your discretion,
to make purchases and sales of Securities, any other securities of the Company
of the same class and series and any other securities of the Company which you
may designate in the open market or otherwise, for long or short account, on
such terms as you deem advisable, and, in arranging sales, to over-allot and
cover any such over-allotment, at your discretion, by purchasing Securities,
exercising the over-allotment option, if any, indicated in the Written
Communication, or both. Such purchases and sales and over-allotments will be
made for the accounts of the Underwriters as nearly as practicable in proportion
to their respective underwriting obligations. It is understood that you may have
made purchases of securities of the Company for stabilizing purposes prior to
the time when we become one of the Underwriters, and we agree that any
securities so purchased shall be treated as having been purchased for the
respective accounts of the Underwriters pursuant to the foregoing authorization.
We authorize you, in your discretion, to cover any short position incurred
pursuant to this Section by purchasing securities on such terms as you deem
advisable. At no time will our net commitment under the foregoing provisions of
this Section exceed 15% of our underwriting obligation. Solely for purposes of
the immediately preceding sentence, our "underwriting obligation" shall be
deemed to exclude any Securities which we are obligated to purchase solely by
virtue of the exercise of an over-allotment option. We will on demand take up at
cost any securities so purchased and deliver any securities so sold or
over-allotted for our account, and, if any other Underwriter defaults in its
corresponding obligation, we will assume our proportionate share of such
obligation without relieving the defaulting Underwriter from liability. Upon
request, we will advise you of the Securities retained by us and unsold and will
sell to you for the account of one or more of the Underwriters such of our
unsold Securities and at such price, not less than the net price to Selected
Dealers nor more than the public offering price, as you determine.
8. OPEN MARKET TRANSACTIONS. We and you agree not to bid for, purchase,
attempt to induce others to purchase, or sell, directly or indirectly, any
Securities, any other securities of the Company of the same class and series and
any other securities of the Company which you may designate, except as brokers
-5-
<PAGE>
pursuant to unsolicited orders and as otherwise provided in this Agreement. If
the Securities are common stock or securities convertible into common stock, we
and you also agree not to effect, or attempt to induce others to effect,
directly or indirectly, any transactions in or relating to put or call options
on any stock of the Company, except to the extent permitted by Rule 10b-6 under
the Securities Exchange Act of 1934 (the "Exchange Act") as interpreted by the
Securities and Exchange Commission. An opening uncovered writing transaction in
options to acquire Securities for our account or for the account of any customer
shall be deemed, for purposes of the preceding sentence, to be a transaction
effected by us in or relating to put or call options on stock of the Company not
permitted by Rule 10b-6. The term "opening uncovered writing transaction" means
an opening sale transaction where the seller intends to become a writer of an
option to purchase stock which it does not own or have the right to acquire upon
exercise of conversion or option rights.
9. TERMINATION AS TO AN OFFERING. The provisions of the last two
paragraphs of Section 4(a), the first sentence of Section 7, and Section 8 will
terminate at the close of business on the thirtieth day after the date of the
initial public offering of the Securities, unless sooner terminated as
hereinafter provided. You may terminate such provision as to such offering at
any time by notice to us to the effect that the offering provisions of this
Agreement as to such offering are terminated.
10. EXPENSES AND SETTLEMENT. You may charge our account with any transfer
taxes on sales made by you of Securities purchased by us under the Underwriting
Agreement and with our proportionate shares (based upon our underwriting
obligation) of all other expenses incurred by you under this Agreement or in
connection with the purchase, carrying, sale or distribution of the Securities.
The accounts hereunder will be settled as promptly as practicable after the
termination of the provisions referred to in Section 9, but you may reserve such
amount as you deem advisable for additional expenses. Your determination of the
amount to be paid to or by us will be conclusive. You may at any time make
partial distributions of credit balances or call for payment of debit balances.
Any of our funds in your hands may be held with your general funds without
accountability for interest. Notwithstanding any settlement, we will remain
liable for any taxes on transfers for our account, and for our proportionate
share (based upon our underwriting obligation) of all expenses and liabilities
which may be incurred by or for the accounts of the Underwriters.
11. DEFAULT BY UNDERWRITERS. Default by one or more Underwriters hereunder
or under the Underwriting Agreement will not release the other Underwriters from
their obligations or affect the liability of any defaulting Underwriter to the
other Underwriters for damages resulting from such default. If one or more
Underwriters default under the Underwriting Agreement, you may arrange for the
purchase by others, including nondefaulting Underwriters, of Securities not
taken up by the defaulting Underwriter or Underwriters.
12. POSITION OF REPRESENTATIVES. You will be under no liability to us for
any act or omission except for obligations expressly assumed by you herein, and
no obligations on your part will be implied or inferred herefrom. Your authority
hereunder and under the Underwriting Agreement may be exercised by you jointly
or by PWI. The rights and liabilities of the Underwriters are several and not
joint, and nothing will constitute the Underwriters a partnership, association
or separate entity.
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<PAGE>
If for Federal income tax purposes the Underwriters should be deemed to
constitute a partnership then each Underwriter elects to be excluded from the
application of Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue Code
of 1954, as amended. You, as Representatives of the several Underwriters, are
authorized, in your discretion, to execute on behalf of the Underwriters such
evidence of such election as may be required by the Internal Revenue Service.
13. INDEMNIFICATION. We will indemnify and hold harmless each other
Underwriter and each person, if any, who controls such Underwriter within the
meaning of Section 15 of the Securities Act to the extent and upon the terms
upon which each Underwriter agrees to indemnify the Company and any other Seller
in the Underwriting Agreement.
14. CONTRIBUTION. Each Underwriter (including you) will pay upon your
request, as contribution, its proportionate share, based upon its underwriting
obligation, of any losses, claims, damages or liabilities, joint or several,
paid or incurred by any Underwriter to any person other than an Underwriter,
arising out of or based upon any untrue statement or alleged untrue statement of
any material fact contained in the Registration Statement, the Prospectus, any
amendment or supplement thereto or any related preliminary prospectus or any
other selling or advertising material approved by you for use by the
Underwriters in connection with the sale of the Securities, or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading (other than an untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by an Underwriter specifically for use therein); and will pay such
proportionate share of any legal or other expenses reasonably incurred by you or
with your consent in connection with investigating or defending against any such
loss, claim, damage or liability, or any action or proceeding (including any
action or proceeding brought by a governmental or regulatory body) in respect
thereof. In determining the amount of any Underwriter's obligation under this
Section, appropriate adjustment may be made by you to reflect any amounts
received by any one or more Underwriters in respect of such claim from the
Company or any other Seller pursuant to the Underwriting Agreement or otherwise.
There shall be credited against any amount paid or payable by us pursuant to
this Section any loss, damage, liability or expense which is incurred by us as a
result of any such claim asserted against us, and if such loss, claim, damage,
liability or expense is incurred by us subsequent to any payment by us pursuant
to this Section, appropriate provision shall be made to effect such credit, by
refund or otherwise. If any such claim is asserted, you may take such action in
connection therewith as you deem necessary or desirable, including retention of
counsel for the Underwriters, and in your discretion separate counsel for any
particular Underwriter or group of Underwriters, and the fees and disbursements
of any counsel so retained by you shall be included in the amounts payable
pursuant to this Section. In determining amounts payable pursuant to this
Section, any loss, claim, damage, liability or expense incurred by any person
controlling any Underwriter within the meaning of Section 15 of the Securities
Act which has been incurred by reason of such control relationship shall be
deemed to have been incurred by such Underwriter. Any Underwriter may elect to
retain at its own expense its own counsel. You may settle or consent to the
settlement of any such claim, on advice of counsel retained by you, with the
approval of a majority in interest of the Underwriters. Whenever you receive
notice of the assertion of any claim to which the provisions of this Section
would be applicable, you will give prompt notice thereof to each Underwriter.
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<PAGE>
You will also furnish each Underwriter with periodic reports, at such times as
you deem appropriate, as to the status of such claim and the action taken by you
in connection therewith. If any Underwriter or Underwriters default in their
obligation to make any payments under this Section, each nondefaulting
Underwriter shall be obligated to pay its proportionate share of all defaulted
payments, based upon such Underwriter's underwriting obligation as related to
the underwriting obligations of all nondefaulting Underwriters.
15. REPORTS AND BLUE SKY MATTERS. We authorize you to file with the
Securities and Exchange Commission and any other governmental agency any reports
required in connection with any transactions effected by you for our account
pursuant to this Agreement, and we will furnish any information needed for such
reports. If you effect stabilizing purchases pursuant to Section 7, you will
notify us promptly of the initiation and termination thereof. If stabilization
is effected we will file with you, c/o PWI, not later than the fifth full
business day following the termination of stabilization, any report required to
be filed pursuant to Rule 17a-2 under the Exchange Act. You will not have any
responsibility with respect to the right of any Underwriter or other person to
sell the Securities in any jurisdiction, notwithstanding any information you may
furnish in that connection.
16. REPRESENTATIONS AND AGREEMENTS. (a) You represent that you are a
member in good standing of the National Association of Securities Dealers, Inc.
(the "NASD"), and we represent that we are either a member in good standing of
the NASD or a foreign dealer not eligible for membership. If we are such a
member we agree that in making sale of the Securities we will comply with all
applicable rules of the NASD, including, without limitation, the NASD's
interpretation with Respect to Free-Riding and Withholding and Section 24 of
Article III of the Rules of Fair Practice. If we are such a foreign dealer, we
agree not to offer or sell any Securities in the United States of America except
through you and in making sales of Securities outside the United States of
America we agree to comply as though we were a member with such interpretation
and Sections 8, 24 and 36 of Article III of the NASD's Rules of Fair Practice
and to comply with Section 25 of such Article III as it applies to a nonmember
broker or dealer in a foreign country.
(b) We understand that it is our responsibility to examine the
Registration Statement, the Prospectus, any amendment or supplement thereto
relating to the offering of the Securities, any preliminary prospectus and the
material, if any, incorporated by reference therein and we will familiarize
ourselves with the terms of the Securities and the other terms of the offering
thereof which are to be reflected in the Prospectus and the Written
Communication with respect thereto. You are authorized, with the approval of
counsel for the Underwriters, to approve on our behalf any amendments or
supplements to the Registration Statement or the Prospectus.
(c) We confirm that the information that we have given or are deemed to
have given in response to the Master Underwriters' Questionnaire attached as
Exhibit A hereto (which information has been furnished to the Company for use in
the Registration Statement or the Prospectus) is correct. We will notify you
immediately of any development before the termination of this Agreement under
Section 9 as to the offering of the Securities which makes untrue or incomplete
any information that we have given or are deemed to have given in response to
the Master Underwriters' Questionnaire.
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<PAGE>
(d) Unless we have promptly notified you in writing otherwise, our name as
it should appear in the Prospectus and our address are set forth on the
signature page hereof.
(e)(i) If the Securities are being registered under the Securities Act, we
represent that we are familiar with Rule 15c2-8 under the Exchange Act
relating to the distribution of preliminary and final prospectuses and
agree that we will comply therewith; we agree to keep an accurate record
of the distribution (including dates, number of copies and persons to whom
sent) by us of copies of the Registration Statement, the Prospectus or any
preliminary prospectus (or any amendment or supplement to any thereof),
and promptly upon request by you, to bring all subsequent changes to the
attention of anyone to whom such material shall have been distributed; and
we agree to furnish to persons who receive a confirmation of sale a copy
of the Prospectus filed pursuant to Rule 424(b) or Rule 424(c) under the
Securities Act.
(ii) If the Securities will not be registered under the Securities
Act, we agree that we will deliver all preliminary and final offering
circulars required for compliance with the applicable laws and regulations
governing the use and distribution of offering circulars by underwriters,
and, to the extent consistent with such laws and regulations, we confirm
that we have delivered and agree that we will deliver all preliminary and
final offering circulars which would be required if the provisions of Rule
15c2-8 under the Exchange Act applied to this offering.
(f) If the Securities are being registered under the Securities Act, we
agree that, if we are advised by you that the Company was not, immediately prior
to the filing of the Registration Statement, subject to the requirements of
Section 13(a) or 15(d) of the Exchange Act, we will not, without your consent,
sell any of the Securities to an account over which we exercise discretionary
authority.
17. MISCELLANEOUS. (a) This Agreement may be terminated by either party
hereto upon five business days' written notice to the other party; PROVIDED that
with respect to any offering of Securities for which a Written Communication was
sent by you and accepted by us prior to such notice, this Agreement shall remain
in full force and effect as to such offering and shall terminate with respect to
such offering in accordance with the provisions of Section 9. This Agreement may
be supplemented or amended by you by written notice thereof to us, and any such
supplement or amendment to this Agreement shall be effective with respect to any
offering of securities to which this Agreement applies after the date of such
supplement or amendment. Each reference to "this Agreement" herein shall, as
appropriate, be to this Agreement as so amended and supplemented.
(a) This Agreement and the terms and conditions set forth herein with
respect to any offering of Securities together with such supplementary terms and
conditions with respect to such offering as may be contained in any Written
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Communication from you to us in connection therewith shall be governed by, and
construed in accordance with, the laws of the State of New York.
Very truly yours,
(Name of Firm)
By
-----------------------
Confirmed, as of the date first above written
PAINE WEBBER INCORPORATED
By
-----------------------
Vice President
<PAGE>
EXHIBIT A
PaineWebber Incorporated
MASTER UNDERWRITERS' QUESTIONNAIRE
The terms used herein and not otherwise defined shall have the meanings
assigned thereto in the Amended and Restated Master Agreement Among Underwriters
dated June 11, 1984, between you and PaineWebber Incorporated ("PWI"). Reference
will be made to this Master Underwriters' Questionnaire in each Written
Communication described in Section I of the Amended and Restated Master
Agreement Among Underwriters received by you from PWI in connection with
offerings of securities in which PWI is acting as Representative or the manager
of the Representatives of the several Underwriters. Your telegraphic acceptance
of any such Written Communication should respond to this Master Underwriters'
Questionnaire.
Except as indicated in your telegraphic acceptance of our Written
Communication with respect to the Securities:
(1) neither you nor any of your directors, officers, partners or branch
managers has (nor have you or they had within the last three years) a material
relationship (as "material" is defined in Regulation C under the Securities Act)
with the Company or its parent (if any), nor are you an affiliate of (within the
meaning of the By-laws of the NASD), controlled by, controlling or under common
control with the Company;
(2) neither you nor any of your partners, officers, directors or branch
managers, separately or as a group, owns of record or beneficially more than 5%
of any class of voting securities of the Company or its parent (if any);
(3) if the Securities are to be issued under an indenture to be qualified
under the Trust Indenture Act of 1939;
(a) neither you nor any of your directors, officers or partners is an
affiliate (as defined in Rule 0-2 under the Trust Indenture Act of 1939)
of the Trustee, or its parent (if any) and neither the Trustee nor its
parent (if any) nor any of their directors or executive officers is a
director, officer, partner, employee, appointee or representative of
yours;
(b) neither you nor any of your directors, partners or executive officers,
separately or as a group, owns beneficially more than 1% of any class of
voting securities of the Trustee or its parent (if any); and
(c) if you are a corporation, you do not have outstanding nor have you
assumed or guaranteed any securities otherwise than in your corporate
name, and neither the Trustee nor its parent (if any) is a holder of such
securities;
A-1
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(4) other than as is, or is to be, stated in the Registration Statement,
the PWI Amended and Restated Master Agreement Among Underwriters, the PWI
Amended and Restated Master Selected Dealer Agreement, or the Underwriting
Agreement relating to the proposed offering, you do not know of or have reason
to believe that (a) there are any discounts or commissions to be allowed or paid
to underwriters or any other items that would be deemed by the NASD to
constitute underwriting compensation for purposes of the NASD's Rules of Fair
Practice, (b) there are any discounts or commissions to be allowed or paid to
dealers, including all cash, securities, contracts, or other considerations to
be received by any dealer in connection with the sale of the Securities, (c)
there is an intention to over-allot or (d) the price of any security may be
stabilized to facilitate the offering of the Securities;
(5) your proposed commitment to purchase Securities will not result in a
violation of the financial responsibility requirements of Section 15(c)(3) of
the Exchange Act or the rules and regulations thereunder, including Rule 15c3-1,
or any provisions of the applicable rules of the NASD or of any securities
exchange to which you are subject or any restrictions imposed upon you by the
NASD or any such exchange;
(6) neither you nor any related person (as defined by the NASD) has (a)
purchased any warrants, options or other securities of the Company within the
preceding 12 months or (b) had any other dealings with the Company within the
preceding 12 months as to which documents or other information is required to be
furnished to the NASD, and, except as stated in the Registration Statement, you
have no knowledge of any private placement of the Company's Securities within
the preceding 18 months;
(7) you have not prepared nor had prepared for you any report or
memorandum for external use in connection with the proposed offering of the
Securities, and if the Registration Statement is on Form S-1, you have not
prepared any engineering, management or similar reports or memoranda relating to
broad aspects of the business, operations or products of the Company within the
past 12 months (except for reports solely comprised of recommendations to buy,
sell or hold the securities of the Company, unless such recommendations have
changed within the past six months). (If any such report or memorandum has been
prepared furnish to PWI (a) four copies thereof and (b) a statement as to the
actual or proposed use, identifying (i) each class of persons (institutional
mailing lists, retail clients, etc.) who have received or will receive the
report or memorandum, (ii) the number of copies distributed to each such class
and (iii) the period of distribution.);
(8) if the Written Communication states that the Company is subject to
regulation under the Public Utility Holding Company Act of 1935 (the "Holding
Company Act"), you are not a "holding company", or an "affiliate", or a
"subsidiary company" of a "public utility company" or "holding company", each as
defined in the Holding Company Act; and
(9) if the Written Communication states that the Company is subject to
regulation under the Holding Company Act, to the best of your knowledge, you are
not a party to any proceeding being conducted by the Securities and Exchange
A-2
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Commission pursuant to any of the Acts administered by it, which is required to
be disclosed in the Registration Statement or Prospectus or which would
disqualify you from purchasing the Securities.
A-3
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[Letterhead of PaineWebber Incorporated]
NOTICE
------
To: All persons party with PaineWebber
Incorporated ("PaineWebber") to the
Amended and Restated Master Agreement
Among Underwriters (the "Agreement")
dated June 11, 1984
Pursuant to Section 17(a) of the Agreement, PaineWebber hereby notifies you
that effective as of this date, the following provisions of the Agreement are
amended:
(1) The fifth sentence of Section 7 is hereby amended by deleting the
percentage "15%" and inserting in its place "20%" so, that as so
amended, such sentence shall read in its entirety as follows: "At
no time will our net commitment under the foregoing provisions of
this Section exceed 20% of our underwriting obligation."
(2) The first sentence of Section 9 is hereby amended by deleting the word
"thirtieth" and inserting in its place the word "forty fifth" so, that as so
amended, such sentence shall read in its entirety as follows: "The provisions of
the last two paragraphs of Section 4(a), the first sentece of Section 7, and
Section 8 will terminate at the close of business on the forty fifth day after
the date of the initial public offering of the Securities, unless sooner
terminated as hereinafter provided."
Please acknowledge your receipt of this Notice by signing the enclosed copy
of this Notice where indicated and returning it to: PaineWebber Incorporated,
1285 Avenue of the Americas, New York, New York 10019, Attention: _____________
Very truly yours,
PAINEWEBBER INCORPORATED
By:_____________________
Acknowledged and Received:
_________________________
[Print Name of Firm]
By:______________________
Title:
Exhibit No. 7(c)
AMENDED AND RESTATED MASTER SELECTED DEALER AGREEMENT
June 11, 1984
Paine Webber Incorporated
1285 Avenue of Americas
New York, New York 10019
Gentlemen:
1. GENERAL. We understand that PaineWebber Incorporated ("PW") is entering
into this Agreement with us and other firms who may be offered the right to
purchase as principal a portion of securities being distributed to the public.
The terms and conditions of this Agreement shall be applicable to any public
offering of securities ("Securities") wherein PW (acting for its own account or
for the account of any underwriting or similar group or syndicate) is
responsible for managing or otherwise implementing the sale of the Securities to
selected dealers ("Selected Dealers") and has expressly informed us that such
terms and conditions shall be applicable. Any such offering of Securities to us
as a Selected Dealer is hereinafter called an "Offering". In the case of any
Offering in which you are acting for the account of any underwriting or similar
group or syndicate ("Underwriters"), the terms and conditions of this Agreement
shall be for the benefit of, and binding upon, such Underwriters, including, in
the case of any Offering in which you are acting with others as representatives
of Underwriters, such other representatives. The term "preliminary prospectus"
means, in the case of an Offering registered under the Securities Act of 1933
(the "Securities Act"), any preliminary prospectus relating to an Offering of
Securities or any preliminary prospectus supplement together with a prospectus
relating to an Offering of Securities and, in the case of an Offering not
registered under the Securities Act, any preliminary offering circular relating
to an Offering of Securities or any preliminary offering circular supplement
together with an offering circular relating to an Offering of Securities; the
term "Prospectus" means in the case of an Offering registered under the
Securities Act of 1933 (the "Securities Act"), the prospectus, together with the
final prospectus supplement, if any, relating to such Offering of Securities,
filed pursuant to Rule 424(b) or Rule 424(c) under the Securities Act and, in
the case of an Offering not registered under the Securities Act, the final
offering circular, including any supplements, relating to such Offering of
Securities.
2. CONDITIONS OF OFFERING; ACCEPTANCE AND PURCHASE. Any Offering will be
subject to delivery of the Securities and their acceptance by you and any other
Underwriters may be subject to the approval of all legal matters by counsel and
the satisfaction of other conditions, and may be made on the basis of
reservation of Securities or an allotment against subscription. You will advise
us by telegram, telex or other form of written communication ("Written
Communication") of the particular method and supplementary terms and conditions
(including, without limitation, the information as to prices and offering date
referred to in Section 3(b)) of any Offering in which we are invited to
participate. To the extent such supplementary terms and conditions are
inconsistent with any provision herein, such terms and conditions shall
supersede any such provision. Unless otherwise indicated in any such Written
Communication, acceptances and other communications by us with respect to any
<PAGE>
Offering should be sent to PaineWebber Incorporated, 1285 Avenue of the
Americas, New York, New York 10019. You reserve the right to reject any
acceptance in whole or in part. Payment for Securities purchased by us is to be
made at such office as you may designate, at the public offering price, or, if
you shall so advise us, at such price less the concession to dealers or at the
price set forth or indicated in a Written Communication, on such date as you
shall determine, on one day's prior notice to us, by certified or official bank
check in New York Clearing House funds payable to the order of PaineWebber
Incorporated, against delivery of certificates evidencing such Securities. If
payment is made for Securities purchased by us at the public offering price, the
concession to which we shall be entitled will be paid to us upon termination of
the provisions of Section 3(b) with respect to such Securities.
Unless we promptly give you written instructions otherwise, if
transactions in the Securities may be settled through the facilities of The
Depository Trust Company, payment for and delivery of Securities purchased by us
will be made through such facilities if we are a member, or if we are not a
member, settlement may be made through our ordinary correspondent who is a
member.
3. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. (a) PROSPECTUSES. You shall
provide us with such number of copies of each preliminary prospectus, the
Prospectus and any supplement thereto relating to each Offering as we may
reasonably request. If the Securities will be registered under the Securities
Act, we represent that we are familiar with Rule 15c2-8 under the Exchange Act
relating to the distribution of preliminary and final prospectuses and agree
that we will comply therewith; we agree to keep an accurate record of our
distribution (including dates, number of copies and persons to whom sent) of
copies of the Prospectus or any preliminary prospectus (or any amendment or
supplement to any thereof), and promptly upon request by you, to bring all
subsequent changes to the attention of anyone to whom such material shall have
been furnished; and we agree to furnish to persons who receive a confirmation of
sale a copy of the Prospectus filed pursuant to Rule 424(b) or Rule 424(c) under
the Securities Act. If the Securities will not be registered under the
Securities Act, we agree that we will deliver all preliminary and final offering
circulars required for compliance with the applicable laws and regulations
governing the use and distribution of the offering circulars by underwriters,
and, to the extent consistent with such laws and regulations, we confirm that we
have delivered and agree that we will deliver all preliminary and final offering
circulars which would be required if the provisions of Rule l5c2-8 under the
Exchange Act applied to this offering. We agree that in purchasing Securities in
an Offering we will rely upon no statements whatsoever, written or oral, other
than the statements in the Prospectus delivered to us by you. We will not be
authorized by the issuer or other seller of Securities offered pursuant to a
Prospectus or by any Underwriters to give any information or to make any
representation not contained in the Prospectus in connection with the sale of
such Securities.
(b) OFFER AND SALE OF THE PUBLIC. With respect to any Offering of
Securities, you will inform us by a Written Communication of the public offering
price, the selling concession, the reallowance (if any) to dealers and the time
when we may commence selling Securities to the public. After such public
offering has commenced, you may change the public offering price, the selling
concession and the reallowance to dealers. With respect to each Offering of
Securities, until the provisions of this Section 3(b) shall be terminated
pursuant to Section 4, we agree to offer Securities to the public only at the
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<PAGE>
public offering price, except that if a reallowance is in effect, a reallowance
from the public offering price not in excess of such reallowance may be allowed
as consideration for services rendered in distribution to dealers who are
actually engaged in the investment banking or securities business, who execute
the written agreement prescribed by Section 24(c) of Article III of the Rules of
Fair Practice of the National Association of Securities Dealers, Inc. (the
"NASD"), and who are either members in good standing of the NASD or foreign
brokers or dealers not eligible for membership in the NASD who represent to us
that they will promptly reoffer such Securities at the public offering price and
will abide by the conditions with respect to foreign brokers and dealers set
forth in Section 3(e).
(c) STABILIZATION AND OVER-ALLOTMENT. You may, with respect to any
Offering, be authorized to over-allot in arranging sales to Selected Dealers, to
purchase and sell Securities, any other securities of the issuer of the
Securities of the same class and series and any other securities of such issuer
that you may designate for long or short account and to stabilize or maintain
the market price of the Securities. We agree to advise you from time to time
upon request, prior to the termination of the provisions of Section 3 (b) with
respect to any Offering, of the amount of Securities purchased by us hereunder
remaining unsold and we will, upon your request, sell to you, for the accounts
of the Underwriters, such amount of Securities as you may designate, at the
public offering price thereof less an amount to be determined by you not in
excess of the concession to dealers. In the event that prior to the later of (i)
the termination of the provisions of Section 3(b) with respect to any Offering,
or (ii) the covering by you of any short position created by you in connection
with such Offering for your account or the account of one or more Underwriters,
you purchase or contract to purchase for the account of any of the Underwriters,
in the open market or otherwise, any Securities theretofore delivered to us, you
reserve the right to withhold the above-mentioned concession to dealers on such
Securities if sold to us at the public offering price, or if such concession has
been allowed to us through our purchase at a net price, we agree to repay such
commission upon your demand, plus in each case any taxes on redelivery,
commissions, accrued interest and dividends paid in connection with such
purchase or contract to purchase.
(d) OPEN MARKET TRANSACTIONS. We agree not to bid for, purchase, attempt
to purchase, or sell, directly or indirectly, any Securities, any other
securities of the issuer of the Securities of the same class and series or any
other securities of such issuer as you may designate, except as brokers pursuant
to unsolicited orders and as otherwise provided in this Agreement. If the
Securities are common stock or securities convertible into common stock, we
agree not to effect, or attempt to induce others to effect, directly or
indirectly, any transactions in or relating to put or call options on any stock
of such issuer, except to the extent permitted by Rule 10b-6 under the Exchange
Act as interpreted by the Securities and Exchange Commission. An opening
uncovered writing transaction in options to acquire Securities for our account
or for the account of any customer shall be deemed, for purposes of the
preceding sentence, to be a transaction effected by us in or relating to put or
call options on stock of the Company not permitted by Rule 10b-6. The term
"opening uncovered writing transaction" means an opening sale transaction where
the seller intends to become a writer of an option to purchase stock which it
does not own or have the right to acquire upon exercise of conversion or option
rights.
-3-
<PAGE>
(e) NASD. We represent that we are actually engaged in the investment
banking or securities business and we are either a member in good standing of
the NASD, or, if not such a member, a foreign dealer not eligible for
membership. If we are such a member we agree that in making sales of the
Securities we will comply with all applicable rules of the NASD, including,
without limitation, the NASD's Interpretation with Respect to Fee-Riding and
Withholding and Section 24 of Article III of the Rules of Fair Practice. If we
are such a foreign dealer, we agree not to offer or sell any Securities in the
United States of America except through you and in making sales of Securities
outside the United States of America we agree to comply as though we were a
member with such Interpretation and Sections 8, 24 and 36 of Article III of the
NASD's Rules of Fair Practice and to comply with Section 25 of such Article III
as it applies to a nonmember broker or dealer in a foreign country.
(f) RELATIONSHIP AMONG UNDERWRITERS AND SELECTED DEALERS. You may buy
Securities from or sell Securities to any Underwriter or Selected Dealer and,
with your consent, the Underwriters (if any) and the Selected Dealers may
purchase Securities from and sell Securities to each other at the public
offering price less all or any part of the concession. We are not authorized to
act as agent for you or any Underwriter or the issuer or other seller of any
Securities in offering Securities to the public or otherwise. Nothing contained
herein or in any Written Communication from you shall constitute the Selected
Dealers partners with you or any Underwriter or with one another. Neither you
nor any Underwriter shall be under any obligation to us except for obligations
assumed hereby or in any Written Communication from you in connection with any
Offering. In connection with any Offering, we agree to pay our proportionate
share of any claim, demand or liability asserted against us, and the other
Selected Dealers or any of them, or against you or the Underwriters, if any,
based on any claim that such Selected Dealers or any of them constitute an
association, unincorporated business or other separate entity, including in each
case our proportionate share of any expense incurred in defending against any
such claim, demand or liability.
(g) BLUE SKY LAWS. Upon application to you, you will inform us as to the
jurisdictions in which you believe the Securities have been qualified for sale
under the respective securities of "blue sky" laws of such jurisdictions. We
understand and agree that compliance with the securities or "blue sky" laws in
each jurisdiction in which we shall offer or sell any of the Securities shall be
our sole responsibility and that you assume no responsibility or obligations as
to the eligibility of the Securities for sale or our right to sell the
Securities in any jurisdiction.
(h) COMPLIANCE WITH LAW. We agree that in selling Securities pursuant to
any Offering (which agreement shall also be for the benefit of the issuer or
other seller of such Securities) we will comply with the applicable provisions
of the Securities Act and the Exchange Act, the applicable rules and regulations
of the Securities and Exchange Commission thereunder, the applicable rules and
regulations of the NASD and the applicable rules and regulations of any
securities exchange having jurisdiction over the Offering. You shall have full
authority to take such action as you may deem advisable in respect of all
matters pertaining to any Offering. Neither you nor any Underwriter shall be
under any liability to us, except for lack of good faith and for obligations
expressly assumed by you in this Agreement; PROVIDED, however, that nothing in
this sentence shall be deemed to relieve you from any liability imposed by the
Securities Act.
-4-
<PAGE>
4. TERMINATION; SUPPLEMENTS AND AMENDMENTS. This agreement may be
terminated by either party hereto upon five business days' written notice to the
other party; PROVIDED that with respect to any Offering for which a Written
Communication was sent and accepted prior to such notice, this Agreement as it
applies to such Offering shall remain in full force and effect and shall
terminate with respect to such Offering in accordance with the last sentence of
this Section. This Agreement may be supplemented or amended by you by written
notice thereof to us, and any such supplement or amendment to this Agreement
shall be effective with respect to any Offering to which this Agreement applies
after the date of such supplement or amendment. Each reference to "this
Agreement" herein shall, as appropriate, be to this Agreement as so amended and
supplemented. The terms and conditions set forth in Sections 3(b) and (d) with
regard to any Offering will terminate at the close of business on the thirtieth
day after the date of the initial public offering of the Securities to which
such Offering relates, but such terms and conditions, upon notice to us, may be
terminated by you at any time.
5. SUCCESSORS AND ASSIGNS. This Agreement shall be binding on, and inure
to the benefit of, the parties hereto and other persons specified or indicated
in Section 1, and the respective successors and assigns of each of them.
6. GOVERNING LAW. This Agreement and the terms and conditions set forth
herein with respect to any Offering together with such supplementary terms and
conditions with respect to such Offering as may be contained in any Written
Communication from you to us in connection therewith shall be governed by, and
construed in accordance with, the laws of the State of New York.
By signing this Agreement we confirm that our subscription to, or our
acceptance of any reservation of, any Securities pursuant to an Offering shall
constitute (i) acceptance of and agreement to other terms and conditions of this
Agreement (as supplemented and amended pursuant to Section 4) together with and
subject to any supplementary terms and conditions contained in any Written
Communication from you in connection with such Offering, all of which shall
constitute a binding agreement between us and you, individually or as
representative of any Underwriters, (ii) confirmation that our representations
and warranties set forth in Section 3 are true and correct at that time and
(iii) confirmation that our agreements set forth in Sections 2 and 3 have been
and will be fully performed by us to the extent and at the times required
thereby.
Very truly yours,
(Name of Firm)
By
-------------------
Confirmed, as of the date first above written.
PAINEWEBBER INCORPORATED.
By
---------------------
Vice President
<PAGE>
[Letterhead of PaineWebber Incorporated]
NOTICE
------
To: All persons party with
PaineWebber Incorporated ("PaineWebber")
to the Amended and Restated Master Selected
Dealer Agreement (the "Agreement"),
dated June 11, 1984
Pursuant to Section 4 of the Agreement, PaineWebber hereby notifies you
that effective as of this date, the following provision of the Agreement is
amended:
The fourth sentence of Section 4 is hereby amended by deleting the
word "thirtieth" and inserting in its place the word "forty-fifth" so,
that as so amended, such sentence shall read in its entirety as
follows: "The terms and conditions set forth in Sections 3(b) and (d)
with regard to any Offering will terminate at the close of business on
the forty fifth day after the date of the initial public offering of
the Securities to which such Offering relates, but such terms and
conditions, upon notice to us, may be terminated by you at any time."
Please acknowledge your receipt of this Notice by signing the enclosed copy
of this Notice where indicated and returning it to: PaineWebber Incorporated,
1285 Avenue of the Americas, New York, New York 10019, Attention: _____________
Very truly yours,
PAINEWEBBER INCORPORATED
By:_____________________
Acknowledged and Received:
_________________________
[Print Name of Firm]
By:______________________
Title:
Exhibit No. 9
CUSTODIAN CONTRACT
This Contract between Managed High Yield Plus Fund Inc., a corporation
organized and existing under the laws of Maryland, having its principal place of
business at 1285 Avenue of the Americas, New York, New York 10019 hereinafter
called the "Fund", and State Street Bank and Trust Company, a Massachusetts
trust company, having its principal place of business at 225 Franklin Street,
Boston, Massachusetts, 02110, hereinafter called the "Custodian",
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT
-----------------------------------------------------
The Fund hereby employs the Custodian as the custodian of its assets,
including securities which it desires to be held in places within the United
States ("domestic securities") and securities it desires to be held outside the
United States ("foreign securities") pursuant to the provisions of the Articles
of Incorporation. The Fund agrees to deliver to the Custodian all securities and
cash owned by it, and all payments of income, payments of principal or capital
distributions received by it with respect to all securities owned by the Fund
from time to time, and the cash consideration received by it for such new or
treasury shares of capital stock ("Shares") of the Fund as may be issued or sold
from time to time. The Custodian shall not be responsible for any property of
the Fund held or received by the Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 4),
the Custodian shall from time to time employ one or more sub-custodians located
in the United States, but only in accordance with an applicable vote by the
Board of Directors of the Fund, and provided that the Custodian shall have no
more or less responsibility or liability to the Fund on account of any actions
or omissions of any sub-custodian so employed than any such sub-custodian has to
the Custodian. The Custodian may employ as sub-custodian for the Fund's foreign
securities and other assets the foreign banking institutions and foreign
securities depositories designated in Schedule A hereto but only in accordance
with the provisions of Article 3.
For purposes of this Contract, "delivery" of domestic securities or
foreign securities shall include the acquisition of a security entitlement (as
that term is defined in the Massachusetts Uniform Commercial Code ("MA UCC")).
2. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD BY THE
CUSTODIAN IN THE UNITED STATES
2.1 HOLDING SECURITIES. The Custodian shall hold and physically segregate for
the account of the Fund all non-cash property, to be held by it in the
United States including all domestic securities owned by the Fund, other
than (a) securities which are maintained pursuant to Section 2.10 in a
<PAGE>
clearing agency which acts as a securities depository or in a book-entry
system authorized by the U.S. Department of the Treasury and certain
federal agencies (each, a "U.S. Securities System") and (b) commercial
paper of an issuer for which State Street Bank and Trust Company acts as
issuing and paying agent ("Direct Paper") which is deposited and/or
maintained in the Direct Paper System of the Custodian (the "Direct Paper
System") pursuant to Section 2.11.
To the extent that State Street holds Fund assets constituting
"financial assets" for purposes of the MA UCC, the Custodian shall
maintain those financial assets in an account established under this
Contract as security entitlements in favor of the Fund.
2.2 DELIVERY OF SECURITIES. The Custodian shall release and deliver domestic
securities owned by the Fund maintained by the Custodian directly or
indirectly in a U.S. Securities System account of the Custodian or in the
Custodian's Direct Paper book entry system account ("Direct Paper System
Account") only upon receipt of Proper Instructions, which may be
continuing instructions when deemed appropriate by the parties, and only
in the following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a U.S. Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities of the Fund;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of
the Fund or into the name of any nominee or nominees of the Custodian
or into the name or nominee name of any agent appointed pursuant to
Section 2.9 or into the name or nominee name of any sub-custodian
appointed pursuant to Article 1; or for exchange for a different
number of bonds, certificates or other evidence representing the same
aggregate face amount or number of units; provided that, in any such
case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Fund, to the
broker or its clearing agent, against a receipt, for examination in
accordance with "street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or liability for any
2
<PAGE>
loss arising from the delivery of such securities prior to receiving
payment for such securities except as may arise from the Custodian's
own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of
the securities of the issuer of such securities, or pursuant to
provisions for conversion contained in such securities, or pursuant
to any deposit agreement; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar
securities or the surrender of interim receipts or temporary
securities for definitive securities; provided that, in any such
case, the new securities and cash, if any, are to be delivered to the
Custodian;
10) For delivery in connection with any loans of securities made by the
Fund, BUT ONLY against receipt of adequate collateral as agreed upon
from time to time by the Custodian and the Fund, which may be in the
form of cash or obligations issued by the United States government,
its agencies or instrumentalities, except that in connection with any
loans for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S. Department of
the Treasury, the Custodian will not be held liable or responsible
for the delivery of securities owned by the Fund prior to the receipt
of such collateral;
11) For delivery as security in connection with any borrowings by the
Fund requiring a pledge of assets by the Fund, but only against
receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any agreement among
the Fund, the Custodian and a broker-dealer registered under the
Securities Exchange Act of 1934 (the "Exchange Act") and a member of
The National Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange, or of
any similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any agreement among
the Fund, the Custodian, and a Futures Commission Merchant registered
under the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any Contract
Market, or any similar organization or organizations, regarding
account deposits in connection with transactions by the Fund;
14) For any other proper corporate purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution of
the Board of Directors or of the Executive Committee signed by an
officer and certified by the Secretary or an Assistant Secretary,
3
<PAGE>
specifying the securities of the Fund to be delivered, setting forth
the purpose for which such delivery is to be made, declaring such
purpose to be a proper corporate purpose, and naming the person or
persons to whom delivery of such securities shall be made.
2.3 REGISTRATION OF SECURITIES. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the Fund
or in the name of any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund, unless
the Fund has authorized in writing the appointment of a nominee to be used
in common with other registered investment companies having the same
investment adviser as the Fund, or in the name or nominee name of any
agent appointed pursuant to Section 2.9 or in the name or nominee name of
any sub-custodian appointed pursuant to Article 1. All securities accepted
by the Custodian on behalf of the Fund under the terms of this Contract
shall be in "street name" or other good delivery form. If, however, the
Fund directs the Custodian to maintain securities in "street name", the
Custodian shall utilize its best efforts only to timely collect income due
the Fund on such securities and to notify the Fund on a best efforts basis
only of relevant corporate actions including, without limitation, pendency
of calls, maturities, tender or exchange offers.
2.4 BANK ACCOUNTS. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund, subject
only to draft or order by the Custodian acting pursuant to the terms of
this Contract, and shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for the account of the
Fund, other than cash maintained by the Fund in a bank account established
and used in accordance with Rule 17f-3 under the Investment Company Act of
1940. Funds held by the Custodian for the Fund may be deposited by it to
its credit as Custodian in the Banking Department of the Custodian or in
such other banks or trust companies as it may in its discretion deem
necessary or desirable; PROVIDED, however, that every such bank or trust
company shall be qualified to act as a custodian under the Investment
Company Act of 1940 and that each such bank or trust company and the funds
to be deposited with each such bank or trust company shall be approved by
vote of a majority of the Board of Directors of the Fund. Such funds shall
be deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
2.5 AVAILABILITY OF FEDERAL FUNDS. Upon mutual agreement between the Fund and
the Custodian, the Custodian shall, upon the receipt of Proper
Instructions, make federal funds available to the Fund as of specified
times agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of the Fund which are
deposited into the Fund's account.
2.6 COLLECTION OF INCOME. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to domestic registered securities held hereunder to which the
Fund shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and
other payments with respect to United States bearer domestic securities
4
<PAGE>
if, on the date of payment by the issuer, such securities are held by the
Custodian or its agent thereof and shall credit such income, as collected,
to the Fund's custodian account. Without limiting the generality of the
foregoing, the Custodian shall detach and present for payment all coupons
and other income items requiring presentation as and when they become due
and shall collect interest when due on securities held hereunder. Income
due the Fund on United States securities loaned pursuant to the provisions
of Section 2.2 (10) shall be the responsibility of the Fund. The Custodian
will have no duty or responsibility in connection therewith, other than to
provide the Fund with such information or data as may be necessary to
assist the Fund in arranging for the timely delivery to the Custodian of
the income to which the Fund is properly entitled.
2.7 PAYMENT OF FUND MONIES. Upon receipt of Proper Instructions, which may be
continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out monies of the Fund in the following cases only:
1) Upon the purchase of domestic securities, options, futures contracts
or options on futures contracts for the account of the Fund but only
(a) against the delivery of such securities or evidence of title to
such options, futures contracts or options on futures contracts to
the Custodian (or any bank, banking firm or trust company doing
business in the United States or abroad which is qualified under the
Investment Company Act of 1940, as amended, to act as a custodian and
has been designated by the Custodian as its agent for this purpose)
registered in the name of the Fund or in the name of a nominee of the
Custodian referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a U.S.
Securities System, in accordance with the conditions set forth in
Section 2.10 hereof; (c) in the case of a purchase involving the
Direct Paper System, in accordance with the conditions set forth in
Section 2.11; (d) in the case of repurchase agreements entered into
between the Fund and the Custodian, or another bank, or a
broker-dealer which is a member of NASD, (i) against delivery of the
securities either in certificate form or through an entry crediting
the Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt evidencing
purchase by the Fund of securities owned by the Custodian along with
written evidence of the agreement by the Custodian to repurchase such
securities from the Fund or (e) for transfer to a time deposit
account of the Fund in any bank, whether domestic or foreign; such
transfer may be effected prior to receipt of a confirmation from a
broker and/or the applicable bank pursuant to Proper Instructions as
defined in Article 4;
2) In connection with conversion, exchange or surrender of securities
owned by the Fund as set forth in Section 2.2 hereof;
3) For the payment of any expense or liability incurred by the Fund,
including but not limited to the following payments for the account
of the Fund: interest, taxes, management, accounting, transfer agent
and legal fees, and operating expenses of the Fund whether or not
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such expenses are to be in whole or part capitalized or treated as
deferred expenses;
4) For the payment of any dividends declared pursuant to the governing
documents of the Fund;
5) For payment of the amount of dividends received in respect of
securities sold short;
6) For any other proper purpose, BUT ONLY upon receipt of, in addition
to Proper Instructions, a certified copy of a resolution of the Board
of Directors or of the Executive Committee of the Fund signed by an
officer of the Fund and certified by its Secretary or an Assistant
Secretary, specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such purpose
to be a proper purpose, and naming the person or persons to whom such
payment is to be made.
2.8 LIABILITY FOR PAYMENT IN ADVANCE OF RECEIPT OF SECURITIES PURCHASED.
Except as specifically stated otherwise in this Contract, in any and every
case where payment for purchase of domestic securities for the account of
the Fund is made by the Custodian in advance of receipt of the securities
purchased in the absence of specific written instructions from the Fund to
so pay in advance, the Custodian shall be absolutely liable to the Fund
for such securities to the same extent as if the securities had been
received by the Custodian.
2.9 APPOINTMENT OF AGENTS. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent to carry out such of
the provisions of this Article 2 as the Custodian may from time to time
direct; provided, however, that the appointment of any agent shall not
relieve the Custodian of its responsibilities or liabilities hereunder.
2.10 DEPOSIT OF FUND ASSETS IN U.S. SECURITIES SYSTEMS. The Custodian may
maintain domestic securities owned by the Fund in a clearing agency
registered with the Securities and Exchange Commission under Section 17A
of the Exchange Act, which acts as a securities depository, or in a U.S.
Securities System in accordance with applicable Federal Reserve Board and
Securities and Exchange Commission rules and regulations, if any, and
subject to the following provisions:
1) The Custodian may maintain domestic securities of the Fund indirectly
in a U.S. Securities System provided that such securities are
represented in an account ("Account") of the Custodian in the U.S.
Securities System which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise for
customers;
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2) The records of the Custodian with respect to domestic securities of
the Fund which are maintained in a U.S. Securities System shall
identify by book-entry those securities belonging to the Fund;
3) The Custodian shall pay for domestic securities purchased for the
account of the Fund upon (i) receipt of advice from the U.S.
Securities System that such securities have been transferred to the
Account, and (ii) the making of an entry on the records of the
Custodian to reflect such payment and transfer for the account of the
Fund. The Custodian shall transfer domestic securities sold for the
account of the Fund upon (i) receipt of advice from the U.S.
Securities System that payment for such securities has been
transferred to the Account, and (ii) the making of an entry on the
records of the Custodian to reflect such transfer and payment for the
account of the Fund. Copies of all advices from the U.S. Securities
System of transfers of domestic securities for the account of the
Fund shall identify the Fund, be maintained for the Fund by the
Custodian and be provided to the Fund at its request. Upon request,
the Custodian shall furnish the Fund confirmation of each transfer to
or from the account of the Fund in the form of a written advice or
notice and shall furnish to the Fund copies of daily transaction
sheets reflecting each day's transactions in the U.S. Securities
System for the account of the Fund;
4) The Custodian shall provide the Fund with any report obtained by the
Custodian on the U.S. Securities System's accounting system, internal
accounting control and procedures for safeguarding domestic
securities deposited in the U.S. Securities System;
5) The Custodian shall have received the initial certificate required by
Article 12 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to the
Fund resulting from use of the U.S. Securities System by reason of
any negligence, misfeasance or misconduct of the Custodian or any of
its agents or of any of its or their employees or from failure of the
Custodian or any such agent to enforce effectively such rights as it
may have against the U.S. Securities System; at the election of the
Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claim against the U.S. Securities
System or any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent that the
Fund has not been made whole for any such loss or damage.
2.11 FUND ASSETS HELD IN THE CUSTODIAN'S DIRECT PAPER SYSTEM. The Custodian may
maintain securities owned by the Fund in the Direct Paper System of the
Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System
will be effected in the absence of Proper Instructions;
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2) The Custodian may keep securities of the Fund in the Direct Paper
System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the Fund
which are maintained in the Direct Paper System shall identify by
book-entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the account of
the Fund upon the making of an entry on the records of the Custodian
to reflect such payment and transfer of securities to the account of
the Fund. The Custodian shall transfer securities sold for the
account of the Fund upon the making of an entry on the records of the
Custodian to reflect such transfer and receipt of payment for the
account of the Fund;
5) The Custodian shall furnish the Fund confirmation of each transfer to
or from the account of the Fund, in the form of a written advice or
notice, of Direct Paper on the next business day following such
transfer and shall furnish to the Fund copies of daily transaction
sheets reflecting each day's transaction in the U.S. Securities
System for the account of the Fund;
6) The Custodian shall provide the Fund with any report on its system of
internal accounting control as the Fund may reasonably request from
time to time.
2.12 SEGREGATED ACCOUNT. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for
and on behalf of the Fund, into which account or accounts may be
transferred cash and/or securities, including securities maintained in an
account by the Custodian pursuant to Section 2.10 hereof, (i) in
accordance with the provisions of any agreement among the Fund, the
Custodian and a broker-dealer registered under the Exchange Act and a
member of the NASD (or any futures commission merchant registered under
the Commodity Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities
exchange (or the Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by
the Fund, (ii) for purposes of segregating cash or government securities
in connection with options purchased, sold or written by the Fund or
commodity futures contracts or options thereon purchased or sold by the
Fund, (iii) for the purposes of compliance by the Fund with the procedures
required by Investment Company Act Release No. 10666, or any subsequent
release or releases of the Securities and Exchange Commission relating to
the maintenance of segregated accounts by registered investment companies
and (iv) for other proper corporate purposes, but only, in the case of
clause (iv), upon receipt of, in addition to Proper Instructions, a
certified copy of a resolution of the Board of Directors or of the
Executive Committee signed by an officer of the Fund and certified by the
Secretary or an Assistant Secretary, setting forth the purpose or purposes
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of such segregated account and declaring such purposes to be proper
corporate purposes.
2.13 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to domestic securities of the Fund held by it and in connection
with transfers of such securities.
2.14 PROXIES. The Custodian shall, with respect to the domestic securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Fund or a nominee of the Fund, all proxies, without indication of the
manner in which such proxies are to be voted, and shall promptly deliver
to the Fund such proxies, all proxy soliciting materials and all notices
relating to such securities.
2.15 COMMUNICATIONS RELATING TO FUND SECURITIES. Subject to the provisions of
Section 2.3, the Custodian shall transmit promptly to the Fund all written
information (including, without limitation, pendency of calls and
maturities of domestic securities and expirations of rights in connection
therewith and notices of exercise of call and put options written by the
Fund and the maturity of futures contracts purchased or sold by the Fund)
received by the Custodian from issuers of the domestic securities being
held for the Fund. With respect to tender or exchange offers, the
Custodian shall transmit promptly to the Fund all written information
received by the Custodian from issuers of the domestic securities whose
tender or exchange is sought and from the party (or his agents) making the
tender or exchange offer. If the Fund desires to take action with respect
to any tender offer, exchange offer or any other similar transaction, the
Fund shall notify the Custodian at least three business days prior to the
date on which the Custodian is to take such action.
2.16 REPORTS TO FUND BY INDEPENDENT PUBLIC ACCOUNTANTS. The Custodian shall
provide the Fund, at such times as the Fund may reasonably require, with
reports by independent public accountants on the accounting system,
internal accounting control and procedures for safeguarding securities,
futures contracts and options on futures contracts, including domestic
securities deposited and/or maintained in a U.S. Securities System,
relating to the services provided by the Custodian under this Contract;
such reports, shall be of sufficient scope and in sufficient detail, as
may reasonably be required by the Fund, to provide reasonable assurance
that any material inadequacies would be disclosed by such examination,
and, if there are no such inadequacies, the reports shall so state.
3. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD
OUTSIDE OF THE UNITED STATES
3.1 APPOINTMENT OF FOREIGN SUB-CUSTODIANS. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Fund's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories
designated on Schedule A hereto ("foreign sub-custodians"). Upon receipt
of "Proper Instructions", as defined in Section 4 of this Contract,
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together with a certified resolution of the Fund's Board of Directors, the
Custodian and the Fund may agree to amend Schedule A hereto from time to
time to designate additional foreign banking institutions and foreign
securities depositories to act as sub-custodian. Upon receipt of Proper
Instructions, the Fund may instruct the Custodian to cease the employment
of any one or more such sub-custodians for maintaining custody of the
Fund's assets.
3.2 ASSETS TO BE HELD. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under
the Investment Company Act of 1940, and (b) cash and cash equivalents in
such amounts as the Custodian or the Fund may determine to be reasonably
necessary to effect the Fund's foreign securities transactions. The
Custodian shall identify on its books as belonging to the Fund, the
foreign securities of the Fund held by each foreign sub-custodian.
3.3 FOREIGN SECURITIES SYSTEMS. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Funds shall be
maintained indirectly in a clearing agency which acts as a securities
depository or in a book-entry system for the central handling of
securities located outside of the United States (each, a "Foreign
Securities System") only through arrangements implemented by the foreign
banking institutions serving as sub-custodians pursuant to the terms
hereof (Foreign Securities Systems and U.S. Securities Systems are
collectively referred to herein as the "Securities Systems"). Where
possible, such arrangements shall include entry into agreements containing
the provisions set forth in Section 3.5 hereof.
3.4 HOLDING SECURITIES. The Custodian may maintain securities and other
non-cash property for all of its customers, including the Fund, indirectly
with a foreign sub-custodian in a single account that is identified as
belonging to the Custodian for the benefit of its customers, provided
however, that (i) the records of the Custodian with respect to securities
and other non-cash property of the Fund which are maintained in such
account shall identify by book-entry those securities and other non-cash
property belonging to the Fund and (ii) the Custodian shall require that
securities and other non-cash property so held by the Foreign
Sub-custodian be held separately from any assets of the Foreign
Sub-custodian or of others.
3.5 AGREEMENTS WITH FOREIGN BANKING INSTITUTIONS. Each agreement with a
foreign banking institution shall provide that: (a) the Fund's assets will
not be subject to any right, charge, security interest, lien or claim of
any kind in favor of the foreign banking institution or its creditors or
agent, except a claim of payment for their safe custody or administration;
(b) beneficial ownership of the Fund's assets will be freely transferable
without the payment of money or value other than for custody or
administration; (c) adequate records will be maintained identifying the
assets as belonging to the Fund; (d) officers of or auditors employed by,
or other representatives of the Custodian, including to the extent
permitted under applicable law the independent public accountants for the
Fund, will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the
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Custodian; and (e) assets of the Fund held by the foreign sub-custodian
will be subject only to the instructions of the Custodian or its agents.
3.6 ACCESS OF INDEPENDENT ACCOUNTANTS OF THE FUND. Upon request of the Fund,
the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of
any foreign banking institution employed as a foreign sub-custodian
insofar as such books and records relate to the performance of such
foreign banking institution under its agreement with the Custodian.
3.7 REPORTS BY CUSTODIAN. The Custodian will supply to the Fund from time to
time, as mutually agreed upon, statements in respect of the securities and
other assets of the Fund held by foreign sub-custodians, including but not
limited to an identification of entities having possession of the Fund's
securities and other assets and advices or notifications of any transfers
of securities to or from each custodial account maintained by a foreign
banking institution for the Custodian on behalf of the Fund indicating, as
to securities acquired for the Fund, the identity of the entity having
physical possession of such securities.
3.8 TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT. (a) Except as otherwise provided
in paragraph (b) of this Section 3.8, the provision of Sections 2.2 and
2.7 of this Contract shall apply, mutatis mutandis to the foreign
securities of the Fund held outside the United States by foreign
sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of the Fund
and delivery of securities maintained for the account of the Fund may be
effected in accordance with the customary established securities trading
or securities processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without limitation,
delivering securities to the purchaser thereof or to a dealer therefor (or
an agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from such
purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may be
maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of this Contract, and the Fund agrees to hold any
such nominee harmless from any liability as a holder of record of such
securities.
3.9 LIABILITY OF FOREIGN SUB-CUSTODIANS. Each agreement pursuant to which the
Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the
Custodian and each Fund from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the institution's
performance of such obligations. At the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with respect to
any claims against a foreign banking institution as a consequence of any
such loss, damage, cost, expense, liability or claim if and to the extent
that the Fund has not been made whole for any such loss, damage, cost,
expense, liability or claim.
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3.10 LIABILITY OF CUSTODIAN. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Contract and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by paragraph 3.13 hereof, the Custodian shall not be liable
for any loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism or any loss where the sub-custodian has otherwise exercised
reasonable care. Notwithstanding the foregoing provisions of this
paragraph 3.10, in delegating custody duties to State Street London Ltd.,
the Custodian shall not be relieved of any responsibility to the Fund for
any loss due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization, insurrection,
civil strife or armed hostilities) or (b) other losses (excluding a
bankruptcy or insolvency of State Street London Ltd. not caused by
political risk) due to Acts of God, nuclear incident or other losses under
circumstances where the Custodian and State Street London Ltd. have
exercised reasonable care.
3.11 REIMBURSEMENT FOR ADVANCES. If the Fund requires the Custodian, its
affiliates, subsidiaries or agents, to advance cash or securities for any
purpose including but not limited to securities settlements, foreign
exchange contracts and assumed settlement for the benefit of the Fund
including the purchase or sale of foreign exchange or of contracts for
foreign exchange, or in the event that the Custodian or its nominee shall
incur or be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract, except
such as may arise from its or its nominee's own negligent action,
negligent failure to act or willful misconduct, any property at any time
held for the account of the Fund shall be security therefor and should the
Fund fail to repay the Custodian promptly, the Custodian shall be entitled
to utilize available cash and to dispose of such Funds assets to the
extent necessary to obtain reimbursement.
3.12 MONITORING RESPONSIBILITIES. The Custodian shall furnish annually to the
Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection with
the initial approval of this Contract. In addition, the Custodian will
promptly inform the Fund in the event that the Custodian learns of a
material adverse change in the financial condition of a foreign
sub-custodian or any material loss of the assets of the Fund.
3.13 BRANCHES OF U.S. BANKS. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of the
Funds assets are maintained in a foreign branch of a banking institution
which is a "bank" as defined by Section 2(a)(5) of the Investment Company
Act of 1940 meeting the qualification set forth in Section 26(a) of said
Act. The appointment of any such branch as a sub-custodian shall be
governed by paragraph 1 of this Contract.
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(b) Cash held for the Fund in the United Kingdom shall be maintained in an
interest bearing account established for the Fund with the Custodian's
London branch, which account shall be subject to the direction of the
Custodian, State Street London Ltd. or both.
3.14 TAX LAW. The Custodian shall have no responsibility or liability for any
obligations now or hereafter imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of the United States of America or
any state or political subdivision thereof. It shall be the responsibility
of the Fund to notify the Custodian of the obligations imposed on the Fund
or the Custodian as custodian of the Fund by the tax law of jurisdictions
other than those mentioned in the above sentence, including responsibility
for withholding and other taxes, assessments or other governmental
charges, certifications and governmental reporting. The sole
responsibility of the Custodian with regard to such tax law shall be to
use reasonable efforts to assist the Fund with respect to any claim for
exemption or refund under the tax law of jurisdictions for which the Fund
has provided such information.
3.15 FOREIGN EXCHANGE TRANSACTIONS. (a) Upon receipt of Proper Instructions,
the Custodian shall settle foreign exchange contracts or options to
purchase and sell foreign currencies for spot and future delivery on
behalf of and for the account of the Fund with such brokers, banks or
trust companies other than the Custodian ("Currency Brokers") as the Fund
may determine and direct pursuant to Proper Instructions or as the
Custodian may select (Transactions Other Than As Principal").
(b) The Custodian shall not be obligated to enter into foreign exchange
transactions as principal ("Transactions As Principal"). However, if the
Custodian has made available to the Fund its services as a principal in
foreign exchange transactions and, subject to any separate agreement
between the parties relating to such transaction, the Custodian shall
enter into foreign exchange contracts or options to purchase and sell
foreign currencies for spot and future delivery on behalf of and for the
account of the Fund, with the Custodian as principal.
(c) If, in a Transaction Other Than As Principal, a Currency Broker is
selected by the Fund, the Custodian shall have no duty with respect to the
selection of the Currency Broker, or so long as the Custodian acts as in
accordance with Proper Instructions, for the failure of such Currency
Broker to comply with the terms of any contract or option. If, in a
Transaction Other Than As Principal, the Currency Broker is selected by
the Custodian or if the Custodian enters into a Transaction As Principal,
the Custodian shall be responsible for the selection of the Currency
Broker and the failure of such Currency Broker to comply with the terms of
any contract or option.
(d) In Transactions Other Than As Principal and Transactions As Principal,
the Custodian shall be responsible for any transfer of cash, the
transmission of instructions to and from a Currency Broker, if any, the
safekeeping of all certificates and other documents and agreements
evidencing or relating to such foreign exchange transactions and the
maintenance of proper records as set forth in Section 8 of this Contract.
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4. PROPER INSTRUCTIONS
Proper Instructions as used herein means a writing signed or initialed by
one or more person or persons as the Board of Directors shall have from time to
time authorized. Each such writing shall set forth the specific transaction or
type of transaction involved, including a specific statement of the purpose for
which such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in writing.
Proper Instructions may include communications effected directly between
electro-mechanical or electronic devices provided that the Fund and the
Custodian agree to security procedures, including but not limited to, the
security procedure selected by the Fund in the Funds Transfer Addendum attached
hereto. For purposes of this Section, Proper Instructions shall include
instructions received by the Custodian pursuant to any three-party agreement
which requires a segregated asset account in accordance with Section 2.12.
5. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority from the
Fund:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Contract, PROVIDED that all such payments shall be accounted for to
the Fund;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Fund, checks, drafts and
other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Fund except as
otherwise directed by the Board of Directors of the Fund.
6. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper reasonably believed
by it to be genuine and to have been properly executed by or on behalf of the
Fund. The Custodian may receive and accept a certified copy of a vote of the
Board of Directors of the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any determination or of
any action by the Board of Directors pursuant to the Articles of Incorporation
as described in such vote, and such vote may be considered as in full force and
effect until receipt by the Custodian of written notice to the contrary.
7. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND CALCULATION
OF NET ASSET VALUE AND NET INCOME
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The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Directors of the Fund to keep
the books of account of the Fund and/or compute the net asset value per share of
the outstanding shares of the Fund or, if directed in writing to do so by the
Fund, shall itself keep such books of account and/or compute such net asset
value per share. If so directed, the Custodian shall also calculate weekly the
net income of the Fund as described in the Fund's currently effective prospectus
and shall advise the Fund and the Transfer Agent weekly of the total amounts of
such net income and, if instructed in writing by an officer of the Fund to do
so, shall advise the Transfer Agent periodically of the division of such net
income among its various components. The calculations of the net asset value per
share and the weekly income of the Fund shall be made at the time or times
described from time to time in the Fund's currently effective prospectus.
8. RECORDS
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.
All such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Fund and employees and agents of
the Securities and Exchange Commission. The Custodian shall, at the Fund's
request, supply the Fund with a tabulation of securities owned by the Fund and
held by the Custodian and shall, when requested to do so by the Fund and for
such compensation as shall be agreed upon between the Fund and the Custodian,
include certificate numbers in such tabulations.
9. OPINION OF FUND'S INDEPENDENT ACCOUNTANT
The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to its activities hereunder in connection
with the preparation of the Fund's Form N-2, and Form N-SAR or other annual
reports to the Securities and Exchange Commission and with respect to any other
requirements of such Commission.
10. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund and the Custodian.
11. RESPONSIBILITY OF CUSTODIAN
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
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including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Fund for any
action taken or omitted by it in good faith without negligence. It shall be
entitled to rely on and may act upon advice of counsel (who may be counsel for
the Fund) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice.
Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a sub-custodian or agent,
the Custodian shall be without liability to the Fund for any loss, liability,
claim or expense resulting from or caused by; (i) events or circumstances beyond
the reasonable control of the Custodian or any sub-custodian or Securities
System or any agent or nominee of any of the foregoing, including, without
limitation, nationalization or expropriation, imposition of currency controls or
restrictions, the interruption, suspension or restriction of trading on or the
closure of any securities market, power or other mechanical or technological
failures or interruptions, computer viruses or communications disruptions, acts
of war or terrorism, riots, revolutions, work stoppages, natural disasters or
other similar events or acts; (ii) errors by the Fund in its instructions to the
Custodian provided such instructions have been in accordance with this Contract;
(iii) the insolvency of or acts or omissions by a Securities System; (iv) any
delay or failure of any broker, agent or intermediary, central bank or other
commercially prevalent payment or clearing system to deliver to the Custodian's
sub-custodian or agent securities purchased or in the remittance or payment made
in connection with securities sold; (v) any delay or failure of any company,
corporation, or other body in charge or registering or transferring securities
in the name of the Custodian, the Fund, the Custodian's sub-custodians, nominees
or agents or any consequential losses arising out of such delay or failure to
transfer such securities including non-receipt of bonus, dividends and rights
and other accretions or benefits; (vi) delays or inability to perform its duties
due to any disorder in market infrastructure with respect to any particular
security or Securities System; and (vii) any provision of any present or future
law or regulation or order of the United States of America, or any state
thereof, or any other country, or political subdivision thereof or of any court
of competent jurisdiction.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution to the same extent as set forth with respect to
sub-custodians generally in this Contract.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements, foreign exchange contracts and assumed settlement) or
in the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
16
<PAGE>
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the Fund shall be security
therefor and should the Fund fail to repay the Custodian promptly, the Custodian
shall be entitled to utilize available cash and to dispose of the Fund assets to
the extent necessary to obtain reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
12. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT
This Contract shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however that the Custodian shall not act under Section 2.10 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Board of Directors of the Fund has approved the initial use
of a particular Securities System, as required by Rule 17f-4 under the
Investment Company Act of 1940, as amended and that the Custodian shall not act
under Section 2.11 hereof in the absence of receipt of an initial certificate of
the Secretary or an Assistant Secretary that the Board of Directors has approved
the initial use of the Direct Paper System; provided further, however, that the
Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Articles of
Incorporation, and further provided, that the Fund may at any time by action of
its Board of Directors (i) substitute another bank or trust company for the
Custodian by giving notice as described above to the Custodian, or (ii)
immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the Currency or
upon the happening of a like event at the direction of an appropriate regulatory
agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements.
13. SUCCESSOR CUSTODIAN
If a successor custodian shall be appointed by the Board of Directors of
the Fund, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities then held by it hereunder and shall transfer to an
account of the successor custodian all of the Fund's securities held in a
Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
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In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts or New York, New York, of its own
selection, having an aggregate capital, surplus, and undivided profits, as shown
by its last published report, of not less than $25,000,000, all securities,
funds and other properties held by the Custodian and all instruments held by the
Custodian relative thereto and all other property held by it under this Contract
and to transfer to an account of such successor custodian all of the Fund's
securities held in any Securities System. Thereafter, such bank or trust company
shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
14. INTERPRETIVE AND ADDITIONAL PROVISIONS
In connection with the operation of this Contract, the Custodian and the
Fund, may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation of the Fund. No interpretive or additional
provisions made as provided in the preceding sentence shall be deemed to be an
amendment of this Contract.
15. MASSACHUSETTS LAW TO APPLY
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
16. PRIOR CONTRACTS
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets.
17. REPRODUCTION OF DOCUMENTS
This Contract and all schedules, exhibits, attachments and amendments
hereto may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process. The parties hereto
all/each agree that any such reproduction shall be admissible in evidence as the
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<PAGE>
original itself in any judicial or administrative proceeding, whether or not the
original is in existence and whether or not such reproduction was made by a
party in the regular course of business, and that any enlargement, facsimile or
further reproduction of such reproduction shall likewise be admissible in
evidence.
18. SHAREHOLDER COMMUNICATIONS ELECTION
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Fund as consenting to disclosure
of this information for all securities owned by the Fund or any funds or
accounts established by the Fund. For the Fund's protection, the Rule prohibits
the requesting company from using the Fund's name and address for any purpose
other than corporate communications. Please indicate below whether the Fund
consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions.
NO [ ] The Custodian is not authorized to release the Fund's name,
address, and share positions.
19. LIMITATION OF LIABILITY
The Custodian agrees that the Contract may only be enforced against the
assets of the Fund or the particular Portfolio of the Fund.
20. DATA ACCESS SERVICES ADDENDUM
The Custodian and the Fund agree to be bound by the terms of the Data Access
Services Addendum attached hereto.
21. YEAR 2000.
The Custodian will take reasonable steps to ensure that its products (and
those of its third-party suppliers) reflect the available state of the art
technology to offer products that are Year 2000-compliant, INCLUDING, but not
limited to, century recognition of dates, calculations that correctly compute
same-century and multi-century formulas and date values, and interface values
19
<PAGE>
that reflect the date issues arising between now and the next one hundred years.
If any changes are required, the Custodian will make the changes to its products
at no cost to the Fund and in a commercially reasonable time frame and will
require third-party suppliers to do likewise.
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<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 22nd day of June, 1998.
ATTEST MANAGED HIGH YIELD PLUS FUND INC.
/s/ Keith A. Weller By: /s/ Dianne E. O'Donnell
- ------------------------ -------------------------------
Name: Keith A. Weller Name: Dianne E. O'Donnell
Title: Vice President and Title: Vice President
Assistant Secretary
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ Thomas M. Lenz By: /s/ Ronald E. Logue
- ------------------------ -------------------------------
Thomas M. Lenz Ronald E. Logue
Vice President Executive Vice President
EXHIBIT 11
KIRKPATRICK & LOCKHART LLP
1800 MASSACHUSETTS AVENUE, NW.
2ND FLOOR
WASHINGTON, D.C. 20036-1800
TELEPHONE (202) 778-9000
FACSIMILE (202) 778-9100
WWW.KL.COM
ROBERT A. WITTIE
(202) 778-9066
[email protected]
January 24, 2000
Managed High Yield Plus Fund Inc.
51 West 52nd Street
New York, New York 10019-6114
Ladies and Gentlemen:
You have requested our opinion, as counsel to Managed High Yield Plus
Fund Inc. ("Acquiring Fund"), a Maryland corporation, as to certain matters
regarding the issuance of Shares of the corporation in connection with the
reorganization of Managed High Yield Fund Inc. ("Acquired Fund"), a Maryland
corporation, into Acquiring Fund, as provided for in the Agreement and Plan of
Reorganization and Termination between Acquiring Fund and Acquired Fund
("Plan"). The Plan provides for Acquired Fund to transfer all of its assets to
Acquiring Fund in exchange solely for the issuance of Shares and Acquiring
Fund's assumption of the liabilities of Acquired Fund. (As used in this letter,
the term "Shares" means the shares of common stock in Acquiring Fund to be
issued in connection with the Plan.)
As such counsel, we have examined certified or other copies, believed by
us to be genuine, of the Acquiring Fund's Articles of Incorporation dated April
24, 1998, Amended and Restated Bylaws, and such other documents relating to its
organization and operation as we have deemed relevant to our opinion, as set
forth herein. Our opinion is limited to the laws and facts in existence on the
date hereof, and it is further limited to the laws (other than the conflict of
law rules) of the State of Maryland that in our experience are normally
applicable to the issuance of shares of common stock by corporations and to the
Securities Act of 1933, as amended ("1933 Act"), the Investment Company Act of
1940, as amended ("1940 Act") and the rules and regulations of the Securities
and Exchange Commission ("SEC") thereunder.
<PAGE>
Managed High Yield Plus Fund Inc.
January 24, 2000
Page 2
Based on the foregoing, we are of the opinion that the issuance of the
Shares has been duly authorized by the Acquiring Fund; and that, when issued and
sold in accordance with the terms contemplated by Acquiring Fund's registration
statement on Form N-14 ("Registration Statement"), including receipt by
Acquiring Fund of full payment for the Shares and compliance with the 1933 Act
and the 1940 Act, the Shares will have been legally issued, fully paid, and
non-assessable.
We hereby consent to this opinion accompanying the Registration
Statement when it is filed with the SEC and to the reference to our firm in the
Registration Statement.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By: /s/ Robert A. Wittie
------------------------
Robert A. Wittie
Exhibit No. 13(a)
TRANSFER AGENCY SERVICES AGREEMENT
----------------------------------
THIS AGREEMENT is made as of June 22, 1998 by and between PNC BANK,
NATIONAL ASSOCIATION, a national banking association ("PNC"), and MANAGED HIGH
YIELD PLUS FUND INC., a Maryland corporation (the "Fund").
W I T N E S S E T H:
WHEREAS, the Fund is registered as a closed-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Fund wishes to retain PNC to serve as transfer agent,
registrar, dividend disbursing agent and shareholder servicing agent to the Fund
and PNC wishes to furnish such services.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. DEFINITIONS. AS USED IN THIS AGREEMENT:
(A) "1933 ACT" means the Securities Act of 1933, as amended.
(B) "1934 ACT" means the Securities Exchange Act of 1934, as amended.
(C) "AUTHORIZED PERSON" means any officer of the Fund and any other
person duly authorized by the Fund's Board of Directors to give Oral
Instructions and Written Instructions on behalf of the Fund and
listed on the Authorized Persons Appendix attached hereto and made a
part hereof or any amendment thereto as may be received by PNC. An
Authorized Person's scope of authority may be limited by the Fund by
setting forth such limitation in the Authorized Persons Appendix.
(D) "CEA" means the Commodities Exchange Act, as amended.
<PAGE>
(E) "ORAL INSTRUCTIONS" mean oral instructions received by PNC from an
Authorized Person.
(F) "SEC" means the Securities and Exchange Commission.
(G) "SECURITIES LAWS" mean the 1933 Act, the 1934 Act, the 1940 Act and
the CEA.
(H) "SHARES" mean the shares of common stock of the Fund.
(I) "WRITTEN INSTRUCTIONS" mean written instructions signed by an
Authorized Person and received by PNC. The instructions may be
delivered by hand, mail, tested telegram, cable, telex or facsimile
sending device.
2. APPOINTMENT. The Fund hereby appoints PNC to serve as transfer agent,
registrar, dividend disbursing agent and shareholder servicing agent to
the Fund in accordance with the terms set forth in this Agreement. PNC
accepts such appointment and agrees to furnish such services.
3. DELIVERY OF DOCUMENTS. The Fund has provided or, where applicable, will
provide PNC with the following:
(A) Certified or authenticated copies of the resolutions of the Fund's
Board of Directors, approving the appointment of PNC or its
affiliates to provide services to the Fund and approving this
Agreement;
(B) A copy of the Fund's Registration Statement on Form N-2 under the
1933 Act and the 1940 Act filed with the SEC;
(C) A copy of the Fund's advisory agreement;
(D) A copy of the Fund's underwriting agreement;
(E) A copy of the Fund's administration agreement; and
(F) Copies (certified or authenticated where applicable) of any and all
amendments or supplements to the foregoing.
4. COMPLIANCE WITH RULES AND REGULATIONS. PNC undertakes to comply with all
applicable requirements of the Securities Laws and any laws, rules and
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<PAGE>
regulations of governmental authorities having jurisdiction with respect
to the duties to be performed by PNC hereunder. Except as specifically set
forth herein, PNC assumes no responsibility for such compliance by the
Fund.
5. INSTRUCTIONS.
------------
(A) Unless otherwise provided in this Agreement, PNC shall act only upon
Oral Instructions and Written Instructions.
(B) PNC shall be entitled to rely upon any Oral Instructions and Written
Instructions it receives from an Authorized Person pursuant to this
Agreement. PNC may assume that any Oral Instruction or Written
Instruction received hereunder is not in any way inconsistent with
the provisions of organizational documents or of any vote, resolution
or proceeding of the Fund's Board of Directors or of the Fund's
shareholders, unless and until PNC receives Written Instructions to
the contrary.
(C) The Fund agrees to forward to PNC Written Instructions confirming
Oral Instructions so that PNC receives the Written Instructions by
the close of business on the next business day after such Oral
Instructions are received. The fact that such confirming Written
Instructions are not received by PNC shall in no way invalidate the
transactions or enforceability of the transactions authorized by the
Oral Instructions. Where Oral Instructions or Written Instructions
reasonably appear to have been received from an Authorized Person,
PNC shall incur no liability to the Fund in acting upon such Oral
Instructions or Written Instructions provided that PNC's actions
comply with the other provisions of this Agreement.
3
<PAGE>
6. RIGHT TO RECEIVE ADVICE.
-----------------------
(A) ADVICE OF THE FUND. If PNC is in doubt as to any action it should or
should not take, PNC may request directions or advice, including Oral
Instructions or Written Instructions, from the Fund.
(B) ADVICE OF COUNSEL. If PNC shall be in doubt as to any question of law
pertaining to any action it should or should not take, PNC may
request advice at its own cost from such counsel of its own choosing
(who may be counsel for the Fund, the Fund's investment adviser or
PNC, at the option of PNC).
(C) CONFLICTING ADVICE. In the event of a conflict between directions,
advice or Oral Instructions or Written Instructions PNC receives from
the Fund, and the advice it receives from counsel, PNC may rely upon
and follow the advice of counsel. In the event PNC so relies on the
advice of counsel, PNC remains liable for any action or omission on
the part of PNC which constitutes willful misfeasance, bad faith,
negligence or reckless disregard by PNC of any duties, obligations or
responsibilities set forth in this Agreement.
(D) PROTECTION OF PNC. PNC shall be protected in any action it takes or
does not take in reliance upon directions, advice or Oral
Instructions or Written Instructions it receives from the Fund or
from counsel and which PNC believes, in good faith, to be consistent
with those directions, advice or Oral Instructions or Written
Instructions. Nothing in this section shall be construed so as to
impose an obligation upon PNC (i) to seek such directions, advice or
Oral Instructions or Written Instructions, or (ii) to act in
accordance with such directions, advice or Oral Instructions or
Written Instructions unless, under the terms of other provisions of
this Agreement, the same is a condition of PNC's properly taking or
not taking such action. Nothing in this subsection shall excuse PNC
when an action or omission on the part of PNC constitutes willful
misfeasance, bad faith, negligence or reckless disregard by PNC of
any duties, obligations or responsibilities set forth in this
Agreement.
4
<PAGE>
7. RECORDS; VISITS. PNC shall prepare and maintain in complete and accurate
form all books and records necessary for it to serve as transfer agent,
registrar, dividend disbursing agent and shareholder servicing agent to
the Fund, including (a) all those records required to be prepared and
maintained by the Fund under the 1940 Act, by other applicable Securities
Laws, rules and regulations and by state laws and (b) such books and
records as are necessary for PNC to perform all of the services it agrees
to provide in this Agreement. The books and records pertaining to the
Fund, which are in the possession or under the control of PNC, shall be
the property of the Fund. The Fund and Authorized Persons shall have
access to such books and records in the possession or under the control of
PNC at all times during PNC's normal business hours. Upon the reasonable
request of the Fund, copies of any such books and records in the
possession or under the control of PNC shall be provided by PNC to the
Fund or to an Authorized Person. Upon reasonable notice by the Fund, PNC
shall make available during regular business hours its facilities and
premises employed in connection with its performance of this Agreement for
reasonable visits by the Fund, any agent or person designated by the Fund
or any regulatory agency having authority over the Fund.
8. CONFIDENTIALITY. PNC agrees to keep confidential all records of the Fund
and information relating to the Fund and its shareholders (past, present
5
<PAGE>
and future), its investment adviser, PaineWebber Incorporated or any other
principal underwriter for the Fund unless the release of such records or
information is otherwise consented to, in writing, by the Fund prior to
its release. The Fund agrees that such consent shall not be unreasonably
withheld and may not be withheld where PNC may be exposed to civil or
criminal contempt proceedings or when required to divulge such information
or records to duly constituted authorities.
9. COOPERATION WITH ACCOUNTANTS. PNC shall cooperate with the Fund's
independent public accountants and shall take all reasonable actions in
the performance of its obligations under this Agreement to ensure that the
necessary information is made available to such accountants for the
expression of their opinion, as required by the Fund.
10. DISASTER RECOVERY. PNC shall enter into and shall maintain in effect
with appropriate parties one or more agreements making reasonable
provisions for periodic backup of computer files and data with respect to
the Fund and emergency use of electronic data processing equipment to the
extent appropriate equipment is available. In the event of equipment
failures, PNC shall, at no additional expense to the Fund, take reasonable
steps to minimize service interruptions. PNC shall have no liability with
respect to the loss of data or service interruptions caused by equipment
failure, provided such loss or interruption is not caused by PNC's own
willful misfeasance, bad faith, negligence or reckless disregard of its
duties or obligations under this Agreement and provided further that PNC
has complied with this Paragraph 10.
11. COMPENSATION. As compensation for services rendered by PNC during the term
of this Agreement, the Fund will pay to PNC a fee or fees as may be agreed
to from time to time in writing by the Fund and PNC.
6
<PAGE>
12. INDEMNIFICATION.
---------------
(A) The Fund agrees to indemnify and hold harmless PNC and its affiliates
from all taxes, charges, expenses, assessments, claims and
liabilities (including, without limitation, liabilities arising under
the Securities Laws and any state and foreign securities and blue sky
laws, and amendments thereto), and expenses, including (without
limitation) reasonable attorneys' fees and disbursements, arising
directly or indirectly from (i) any action or omission to act which
PNC takes (a) at the request or on the direction of or in reliance on
the advice of the Fund or (b) upon Oral Instructions or Written
Instructions or (ii) the acceptance, processing and/or negotiation of
checks or other methods utilized for the purchase of Shares. Neither
PNC, nor any of its affiliates, shall be indemnified against any
liability (or any expenses incident to such liability) arising out of
PNC's or its affiliates' own willful misfeasance, bad faith,
negligence or reckless disregard of its duties and obligations under
this Agreement. The Fund's liability to PNC for PNC's acceptance,
processing and/or negotiation of checks or other methods utilized for
the purchase of Shares shall be limited to the extent of the Fund's
policy(es) of insurance that provide for coverage of such liability,
and the Fund's insurance coverage shall take precedence.
(B) PNC agrees to indemnify and hold harmless the Fund from all taxes,
charges, expenses, assessment, penalties, claims and liabilities
arising from PNC's obligations pursuant to this Agreement (including,
without limitation, liabilities arising under the Securities Laws,
and any state and foreign securities and blue sky laws, and
amendments thereto) and expenses, including (without limitation)
reasonable attorneys' fees and disbursements arising directly or
indirectly out of PNC's or its nominee's own willful misfeasance, bad
faith, negligence or reckless disregard of its duties and obligations
under this Agreement.
7
<PAGE>
(C) In order that the indemnification provisions contained in this
Paragraph 12 shall apply, upon the assertion of a claim for which
either party may be required to indemnify the other, the party
seeking indemnification shall promptly notify the other party of such
assertion, and shall keep the other party advised with respect to all
developments concerning such claim. The party who may be required to
indemnify shall have the option to participate with the party seeking
indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any
compromise or settlement in any case in which the other party may be
required to indemnify it except with the other party's prior written
consent.
(D) The members of the Board of the Fund, its officers and shareholders
shall not be liable for any obligations of the Fund under this
Agreement, and PNC agrees that in asserting any rights or claims
under this Agreement, it shall look only to the assets and property
of the Fund in settlement of such rights or claims and not to such
members of the Board, its officers and shareholders.
13. RESPONSIBILITY OF PNC.
---------------------
(A) PNC shall be under no duty to take any action on behalf of the Fund
except as specifically set forth herein or as may be specifically
agreed to by PNC in writing. PNC shall be obligated to exercise care
and diligence in the performance of its duties hereunder, to act in
good faith and to use its best efforts in performing services
provided for under this Agreement. PNC shall be liable for any
8
<PAGE>
damages arising out of PNC's failure to perform its duties under this
Agreement to the extent such damages arise out of PNC's willful
misfeasance, bad faith, negligence or reckless disregard of such
duties.
(B) Without limiting the generality of the foregoing or of any other
provision of this Agreement, PNC shall not be under any duty or
obligation to inquire into and shall not be liable for (A) the
validity or invalidity or authority or lack thereof of any Oral
Instruction or Written Instruction, notice or other instrument which
conforms to the applicable requirements of this Agreement, and which
PNC reasonably believes to be genuine; or (B) subject to Section 10,
delays or errors or loss of data occurring by reason of circumstances
beyond PNC's control, including acts of civil or military authority,
national emergencies, labor difficulties, fire, flood, catastrophe,
acts of God, insurrection, war, riots or failure of the mails,
transportation, communication or power supply.
(C) Notwithstanding anything in this Agreement to the contrary, neither
PNC nor its affiliates shall be liable to the Fund for any
consequential, special or indirect losses or damages which the Fund
may incur or suffer by or as a consequence of PNC's or its
affiliates' performance of the services provided hereunder, whether
or not the likelihood of such losses or damages was known by PNC or
its affiliates.
14. INSURANCE. PNC shall maintain insurance of the types and in the amounts
deemed by it to be appropriate. To the extent that policies of insurance
may provide for coverage of claims for liability or indemnity by the
parties set forth in this Agreement, the contracts of insurance shall take
precedence, and no provision of this Agreement shall be construed to
relieve an insurer of any obligation to pay claims to the Fund, PNC or
other insured party which would otherwise be a covered claim in the
absence of any provision of this Agreement.
9
<PAGE>
15. SECURITY
--------
(A) PNC represents and warrants that, to the best of its knowledge, the
various procedures and systems which PNC has implemented with regard
to the safeguarding from loss or damage attributable to fire, theft
or any other cause (including provision for twenty-four hours a day
restricted access) of the Fund's blank checks, certificates, records
and other data and PNC's equipment, facilities and other property
used in the performance of its obligations hereunder are adequate,
and that it will make such changes therein from time to time as in
its judgment are required for the secure performance of its
obligations hereunder. PNC shall review such systems and procedures
on a periodic basis, and the Fund shall have reasonable access to
review these systems and procedures.
(B) Y2K Compliance. PNC further represents and warrants that any and all
electronic data processing systems and programs that it uses or
retains in connection with the provision of services hereunder will
be year 2000 compliant.
16. DESCRIPTION OF SERVICES
------------------------
(A) Services Provided on an Ongoing Basis by PNC to the Fund.
(i) Establish and maintain proper shareholder registrations;
(ii) Countersign certificates of stock;
(iii) Provide toll-free lines for direct shareholder use, plus
customer liaison staff for on-line inquiry response;
(iv) Provide periodic shareholder lists, outstanding share
calculations and statistics;
(v) Prepare and mail required calendar and taxable year-end tax
10
<PAGE>
and statement information (including forms 1099-DIV and 1099-B
and accompanying statements); and
(vi) Periodic mailing of shareholder account information and Fund
financial reports.
(B) SERVICES PROVIDED BY PNC UNDER ORAL OR WRITTEN INSTRUCTIONS OF THE
FUND.
---------------------------------------------------------------------
(i) Accept, post and perform shareholder transfers;
(ii) Pay dividends and other distributions; and
(iii) Issue and cancel Share certificates.
(C) TRANSACTIONS NOT REQUIRING INSTRUCTIONS. In the absence of contrary
Written Instructions, PNC is authorized to take the following
actions:
(i) TRANSFER OF SHARES; UNCERTIFICATED SECURITIES. Where a
shareholder does not hold a certificate representing the
number of Shares in his account and provides PNC with
instructions for the transfer of such Shares which include a
signature guaranteed by a national bank or registered
broker/dealer and such other appropriate documentation to
permit a transfer, then PNC shall register such Shares and
shall deliver them pursuant to instructions received from the
transferor, pursuant to the rules of the exchange upon which
Shares are listed, the rules and regulations of the SEC, and
the law of the State of Maryland relating to the transfer of
shares of common stock.
(ii) STOCK CERTIFICATES. If at any time the Fund issues stock
certificates, the following provisions will apply:
(a) The Fund will supply PNC with a sufficient supply of
stock certificates representing Shares, in the form
approved from time to time by the Board of Directors of
the Fund, and, from time to time, shall replenish such
supply upon request of PNC. Such stock certificates
11
<PAGE>
shall be properly signed, manually or by facsimile
signature, by the duly authorized officers of the Fund
and shall bear the corporate seal or facsimile thereof
of the Fund, and notwithstanding the death, resignation
or removal of any officer of the Fund, such executed
certificates bearing the manual or facsimile signature
of such officer shall remain valid and may be issued to
Shareholders until PNC is otherwise directed by Written
Instructions.
(b) PNC shall place a stop notice against any certificate
reported to be lost or stolen and shall comply with all
applicable federal regulatory requirements for
reporting such loss or alleged misappropriation. In the
case of the loss or destruction of any certificate
representing Shares, no new certificate shall be issued
in lieu thereof, unless there shall first have been
furnished: (i) an appropriate bond of indemnity issued
by the surety company approved by PNC and (ii) a
completed release and indemnification agreement, signed
by the Shareholder to protect the Fund and PNC.
(c) Upon receipt of signed stock certificates, which shall
be in proper form for transfer, and upon cancellation
or destruction thereof, PNC shall countersign, register
and issue new certificates for the same number of
Shares and shall deliver them pursuant to instructions
received from the transferor, the rules of the exchange
12
<PAGE>
upon which Shares are listed, the rules and regulations
of the SEC, and the law of the State of Maryland
relating to the transfer of shares of common stock.
(d) Upon receipt of the stock certificates, which shall be
in proper form for transfer, together with the
Shareholder's instructions to hold such stock
certificates for safekeeping, PNC shall reduce such
Shares to uncertificated status, while retaining the
appropriate registration in the name of the Shareholder
upon the transfer books.
(e) Upon receipt of Written Instructions from a Shareholder
of uncertified securities for a certificate in the
number of shares in his account, PNC will issue such
stock certificates and deliver them to the Shareholder.
(D) TENDER AGENT SERVICES. The terms and conditions of any tender offer
by the Fund to purchase its Shares shall be set forth in the form of
document entitled "Offer to Purchase" and in the related form of
"Letter of Transmittal," which together constitute the "Offer" and
shall be forwarded to PNC by the Fund when applicable. In the event
any tender offer is made, and if so requested by the Fund, PNC shall
provide the following services in its capacity as a tender agent to
the Fund:
(i) Establish accounts with respect to the Shares at the
Depository Trust Company for purposes of the Offer within two
business days after the date of the Offer to Purchase.
(ii) Receive all Letters of Transmittal and the accompanying stock
certificates sent or delivered at the addresses set forth in
the Offer. Accept a Notice of Guaranteed Delivery presented by
hand, mail, telegram, telex or facsimile transmission from an
13
<PAGE>
Eligible Institution which sets forth the name of the
tendering shareholder, the number of Shares tendered, and that
a Letter of Transmittal with the stock certificates will be
presented as required under the Offer to Purchase;
(iii) Accept provisionally those tenders evidencing some deficiency
in execution. Make a reasonable attempt to inform the
presenters of the need for fulfillment of requirements. Make
any such tenders remaining deficient at the time of expiration
available for review by the Fund on the business day
immediately succeeding the Expiration Date, as defined in the
Offer to Purchase, and act in accordance with the Fund's
instructions regarding the disposition.
(iv) Accept tenders in cases where the Shares are registered in two
or more names only if signed by all named holders.
(v) Accept tenders signed by persons acting in a fiduciary or
representative capacity only if such capacity is shown on the
Letter of Transmittal and proper evidence of their authority
to act is submitted.
(vi) Accept tenders from persons other than the registered
shareholder provided that normal transfer requirements,
including any applicable transfer taxes as set forth in the
Letter of Transmittal, are fulfilled.
(vii) Accept partial tenders of Shares where so indicated in the
appropriate section of the Letter of Transmittal. Split up and
return untendered Shares to the holder as promptly as
practicable.
14
<PAGE>
(viii) Record on a daily log the Letters of Transmittal and stock
certificates and confirmations of book-entry transfer
received, maintain such Letters of Transmittal and stock
certificates and confirmations in a secure place, and prepare
control ledgers of Letters of Transmittal and stock
certificates and confirmations by item and number of Shares
tendered.
(ix) Review Letters of Transmittal to determine if the box
captioned "Description of Shares Tendered" is filled in or
completed with a preprinted label and the box captioned "Sign
Here" has been executed on the first line.
(x) Handle withdrawals of tendered Shares, the return of
certificates for tendered Shares not accepted by the Fund, and
payment for tendered Shares which the Fund has accepted, in
accordance with the Fund's specific instructions given to PNC,
and consistently with the terms of the Offer to Purchase and
Letter of Transmittal; provided, that no payment for tendered
Shares shall be required until the Fund has deposited with PNC
all necessary funds (which the Fund agrees to do promptly
after the Fund's acceptance of tenders as described in the
Offer to Purchase).
(xi) Prepare and file tax forms.
(xii) Respond to inquiries from the Fund's shareholders and others
in regard to the mechanics of tendering Shares (or, as
appropriate, refer such inquiries to the Information Agent).
(xiii) Prepare a final list of all persons whose tenders are
accepted, and the number of Shares tendered.
15
<PAGE>
(xiv) Notify the Fund with respect to any Shares received
subsequent to the Expiration Date (as defined in the Offer to
Purchase) and accept instructions provided on behalf of the
Fund with respect to the disposition of such Shares.
(E) CANCELLATION AND REISSUANCE OF SHARES. Upon receipt of appropriate
notification of cancellation and reissuance, PNC shall cancel,
reissue and credit the account of the investor or other recordholder
with Shares in accordance with standard industry practice.
(F) DIVIDENDS AND DISTRIBUTIONS. Upon receipt of a resolution of the
Fund's Board of Directors authorizing the declaration and payment of
dividends and distributions, PNC shall issue the dividends and
distributions in cash, or, if the resolution so provides, pay such
dividends and distributions in Shares. Such issuance or payment shall
be made after deduction and payment of the required amount of funds
to be withheld in accordance with any applicable tax laws or other
laws, rules or regulations. PNC shall mail to the Fund's shareholders
and the IRS and other appropriate taxing authorities such tax forms,
or permissible substitute forms, and other information relating to
dividends and distributions paid by the Fund (including designations
of the portions of distributions of net capital gain that are 20%
rate gain distributions and 28% rate gain distributions pursuant to
IRS Notice 97-64) as are required to be filed and mailed by
applicable law, rule or regulation within the time required thereby.
PNC shall prepare, maintain and file with the IRS and other
appropriate taxing authorities reports relating to all dividends
above a stipulated amount paid by the Fund to its shareholders as
required by tax or other laws, rules or regulations
16
<PAGE>
Pursuant to Written Instructions, PNC may arrange for the direct
payment of cash dividends and distributions to shareholders by the
Fund's custodian, instead of PNC Bank disbursing such funds to the
shareholder after receipt from the Fund's custodian.
PNC shall maintain and file with the United States Internal Revenue
Service and other appropriate taxing authorities reports relating to
all dividends above a stipulated amount (currently $10.00 accumulated
yearly dividends) paid by the Fund to its shareholders as required by
tax or other law, rule or regulation.
In accordance with the Prospectus and such procedures and controls as
are mutually agreed upon from time to time by and among the Fund, PNC
and the Fund's Custodian, PNC shall process applications from
Shareholders relating to the Fund's Dividend Reinvestment Plan
("Dividend Reinvestment Plan") and will effect purchases of Shares in
connection with and pursuant to the Dividend Reinvestment Plan.
(G) COMMUNICATIONS TO SHAREHOLDERS. Upon timely Written Instructions,
PNC shall mail all communications by the Fund to its shareholders,
including:
(i) Reports to shareholders;
(ii) Confirmations of purchases and sales of fund shares;
(iii) Monthly or quarterly statements;
(iv) Dividend and distribution notices;
(v) Proxy material; and
17
<PAGE>
(vi) Tax form information.
If requested by the Fund, PNC will prepare and certify shareholder
lists in conjunction with proxy solicitations, receive and tabulate
the proxy cards for the meetings of the Fund's shareholders, and
supply personnel to serve as inspectors of election.
(H) RECORDS. PNC shall maintain records of the accounts for each
shareholder showing the following information:
(i) Name, address and United States Tax Identification or Social
Security number;
(ii) Number and class of shares held and number and class of shares
for which certificates, if any, have been issued, including
certificate numbers and denominations;
(iii) Historical information regarding the account of each
shareholder, including dividends and distributions paid, their
character (e.g. ordinary income, net capital gain (including
20% rate gain and 28% rate gain), exempt-interest, foreign tax
credit and dividends received deduction eligible) for federal
income tax purposes and the date and price (where applicable)
for all transactions in a shareholder's account;
(iv) Any stop or restraining order placed against a shareholder's
account;
(v) Any correspondence relating to the current maintenance of a
shareholder's account;
(vi) Information with respect to withholdings; and
(vii) Any information required in order for the transfer agent to
perform any calculations contemplated or required by this
Agreement.
(I) SHAREHOLDER INSPECTION OF STOCK RECORDS. Upon requests from Fund
shareholders to inspect stock records, PNC will notify the Fund and
require instructions granting or denying each such request.
Unless PNC has acted contrary to the Fund's instructions, the Fund
agrees to release PNC from any liability for refusal of permission
for a particular shareholder to inspect the Fund's shareholder
records.
18
<PAGE>
(J) WITHDRAWAL OF SHARES AND CANCELLATION OF CERTIFICATES. Upon receipt
of Written Instructions, PNC shall cancel outstanding certificates
surrendered by the Fund to reduce the total amount of outstanding
shares by the number of shares surrendered by the Fund.
17. AUTHORIZED SHARES. The Fund's authorized capital stock consists of Two
Hundred Million (200,000,000) shares of Common Stock, par value $.001 per
Share. PNC shall record issues of all Shares and shall notify the Fund in
case any proposed issue of Shares by the Fund shall result in an
over-issue as defined by Section 8-210(a) of Article 8 of the Maryland
Uniform Commercial Code. In case any issue of Shares would result in such
an over-issue, PNC shall refuse to issue such Shares and shall not
countersign and issue certificates for such Shares.
18. DURATION AND TERMINATION.
------------------------
(A) This Agreement shall be effective on the date first above written
and shall continue in effect for an initial period of two (2) years
("Initial Term"). Upon the expiration of the Initial Term, this
Agreement shall automatically renew for successive terms of one (1)
year ("Renewal Terms"); provided, that this Agreement may be
terminated by either party during a Renewal Term upon written
notice given at least ninety (90) days prior to termination.
During either the Initial Term or the Renewal Terms, this Agreement
may also be terminated on an earlier date by either party for cause.
(B) With respect to the Fund, cause includes, but is not limited to,
(i) PNC's material breach of this Agreement causing it to fail to
substantially perform its duties under this Agreement. In order
19
<PAGE>
for such material breach to constitute "cause" under this
Paragraph, PNC must receive written notice from the Fund specifying
the material breach and PNC shall not have corrected such breach
within a 15-day period; (ii) financial difficulties of PNC
evidenced by the authorization or commencement of a voluntary or
involuntary bankruptcy under the U.S. Bankruptcy Code or any
applicable bankruptcy or similar law, or under any applicable law
of any jurisdiction relating to the liquidation or reorganization
of debt, the appointment of a receiver or to the modification or
alleviation of the rights of creditors; and (iii) issuance of an
administrative or court order against PNC with regard to the
material violation or alleged material violation of the Securities
Laws or other applicable laws related to its business of performing
transfer agency services;
(C) With respect to PNC, cause includes, but is not limited to, the
failure of the Fund to pay the compensation set forth in writing
pursuant to Paragraph 11 of this Agreement.
(D) Any notice of termination for cause in conformity with subparagraphs
(a), (b) and (c) of this Paragraph by the Fund shall be effective
thirty (30) days from the date of any such notice. Any notice of
termination for cause by PNC shall be effective 90 days from the date
of such notice.
(E) Upon the termination hereof, the Fund shall pay to PNC such
compensation as may be due for the period prior to the date of such
termination. In the event that the Fund designates a successor to any
of PNC's obligations under this Agreement, PNC shall, at the
direction and expense of the Fund, transfer to such successor all
relevant books, records and other data established or maintained by
PNC hereunder including, a certified list of the shareholders of the
20
<PAGE>
Fund with name, address, and if provided, taxpayer identification or
Social Security number, and a complete record of the account of each
shareholder. To the extent that PNC incurs expenses related to a
transfer of responsibilities to a successor, other than expenses
involved in PNC's providing the Fund's books and records described in
the preceding sentence to the successors, PNC shall be entitled to be
reimbursed for such extraordinary expenses, including any
out-of-pocket expenses reasonably incurred by PNC in connection with
the transfer.
(F) Any termination effected pursuant to this Paragraph shall not affect
the rights and obligations of the parties under Paragraph 12 hereof.
(G) Notwithstanding the foregoing, this Agreement shall terminate with
respect to the Fund upon the liquidation, merger, or other
dissolution of the Fund or upon the Fund's ceasing to be a registered
investment company.
19. REGISTRATION AS A TRANSFER AGENT. PNC represents that it is currently
registered with the appropriate federal agency for the registration of
transfer agents, or is otherwise permitted to lawfully conduct its
activities without such registration and that it will remain so registered
or able to so conduct such activities for the duration of this Agreement.
PNC agrees that it will promptly notify the Fund in the event of any
material change in its status as a registered transfer agent. Should PNC
fail to be registered with the SEC as a transfer agent at any time during
this Agreement, and such failure to register does not permit PNC to
lawfully conduct its activities, the Fund may, on written notice to PNC,
terminate this Agreement upon five days written notice to PNC.
20. NOTICES. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex
or facsimile sending device. Notices shall be addressed (a) if to PNC, c/o
PFPC Inc. at 400 Bellevue Parkway, Wilmington, Delaware 19809; (b) if to
21
<PAGE>
the Fund, at the address of the Fund, Attn: President or (c) if to neither
of the foregoing, at such other address as shall have been given by like
notice to the sender of any such notice or other communication by the
other party. If notice is sent by confirming telegram, cable, telex or
facsimile sending device during regular business hours, it shall be deemed
to have been given immediately; if sent during a time other than regular
business hours, such notice shall be deemed to have been given at the
opening of the next business day. If notice is sent by first-class mail,
it shall be deemed to have been given three days after it has been mailed.
If notice is sent by messenger, it shall be deemed to have been given on
the day it is delivered. All postage, cable, telegram, telex, and
facsimile sending device charges arising from the sending of a notice
hereunder shall be paid by the sender.
21. AMENDMENTS. This Agreement, or any term thereof, may be changed or waived
only by a written amendment, signed by the party against whom enforcement
of such change or waiver is sought.
22. DELEGATION; ASSIGNMENT. PNC may assign its rights and delegate its duties
hereunder to any wholly-owned direct or indirect subsidiary of PNC Bank,
National Association or PNC Bank Corp., provided that (i) PNC gives the
Fund thirty (30) days' prior written notice; (ii) the delegate (or
assignee) is qualified to act as a transfer agent and registrar with
respect to securities listed on any national securities exchange on which
Shares of the Fund are listed ("Exchange"); (iii) if required by the
Exchange, PNC shall give notice of the delegation to the Exchange; (iv)
the delegate (or assignee) agrees with PNC and the Fund to comply with all
relevant provisions of the Securities Laws; and (v) PNC and such delegate
(or assignee) promptly provide such information
22
<PAGE>
as the Fund may request, and respond to such questions as the Fund may
ask, relative to the delegation (or assignment), including (without
limitation) the capabilities of the delegate (or assignee). The assignment
and delegation of any of PNC's duties under this paragraph shall not
relieve PNC of any of its responsibilities or liabilities under this
Agreement.
23. COUNTERPARTS. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
24. FURTHER ACTIONS. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
25. MISCELLANEOUS.
-------------
(A) ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding between the parties and supersedes all prior agreements
and understandings relating to the subject matter hereof, provided
that the parties may embody in one or more separate documents their
agreement, if any, with respect to delegated duties and Oral
Instructions.
(B) CAPTIONS. The captions in this Agreement are included for convenience
of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
(C) GOVERNING LAW. This Agreement shall be deemed to be a contract made
in Delaware and governed by Delaware law, without regard to
principles of conflicts of law.
23
<PAGE>
(D) PARTIAL INVALIDITY. If any provision of this Agreement shall be held
or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
(E) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
(F) FACSIMILE SIGNATURES. The facsimile signature of any party to this
Agreement shall constitute the valid and binding execution hereof by
such party.
24
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written. PNC BANK, NATIONAL
ASSOCIATION
BY: /s/ Robert J. Perlsweig
-------------------------------
Robert J. Perlsweig
TITLE: Vice President
-----------------------------
MANAGED HIGH YIELD PLUS FUND INC.
BY: /s/ Dianne E. O'Donnell
--------------------------------
TITLE: Vice President and Secretary
-----------------------------
25
<PAGE>
AUTHORIZED PERSONS APPENDIX
NAME (TYPE) SIGNATURE
- ------------------------------ ------------------------------
- ------------------------------ ------------------------------
- ------------------------------ ------------------------------
- ------------------------------ ------------------------------
- ------------------------------ ------------------------------
- ------------------------------ ------------------------------
- ------------------------------ ------------------------------
- ------------------------------ ------------------------------
- ------------------------------ ------------------------------
26
Exhibit 13(b)
REVOLVING CREDIT AND SECURITY AGREEMENT
among
MANAGED HIGH YIELD PLUS FUND INC.,
as Borrower
CORPORATE RECEIVABLES CORPORATION,
as Lender
CITIBANK, N.A.,
as Secondary Lender
and
CITICORP NORTH AMERICA, INC.,
as Agent
Dated as of October 23, 1998
==============================================================================
[Type VII-C]
<PAGE>
TABLE OF CONTENTS
ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION.............................
DEFINITIONS...............................................................1
SECTION I.02. RULES OF CONSTRUCTION......................................22
SECTION I.03. COMPUTATION OF TIME PERIODS................................22
ARTICLE II ADVANCES TO THE BORROWER.........................................23
SECTION I.04. ADVANCE FACILITY...........................................23
SECTION I.05. MAKING OF ADVANCES.........................................23
SECTION I.06. ADVANCE NOTES..............................................24
SECTION I.07. MATURITY OF THE ADVANCES...................................24
SECTION I.08. PREPAYMENT OF THE ADVANCES.................................25
SECTION I.09. YIELD......................................................26
SECTION I.10. INCREASED COSTS............................................26
SECTION I.11. COMPENSATION...............................................27
SECTION I.12. ADDITIONAL YIELD ON EURODOLLAR RATE ADVANCES...............27
SECTION I.13. TERMINATION OR REDUCTION OF THE TOTAL COMMITMENT...........27
SECTION I.14. RESCISSION OR RETURN OF PAYMENT............................28
SECTION I.15. FEES PAYABLE BY BORROWER...................................28
SECTION I.16. POST DEFAULT INTEREST......................................28
SECTION I.17. PAYMENTS...................................................28
SECTION I.18. BORROWER'S OBLIGATIONS ABSOLUTE............................29
ARTICLE III CONDITIONS PRECEDENT............................................29
SECTION I.19. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS
AGREEMENT................................................................29
SECTION I.20. CONDITIONS PRECEDENT TO ALL ADVANCES.......................31
<PAGE>
ARTICLE IV REPRESENTATIONS AND WARRANTIES...................................31
SECTION I.21. REPRESENTATIONS AND WARRANTIES OF THE BORROWER.............31
ARTICLE V COVENANTS.........................................................34
SECTION I.22. AFFIRMATIVE COVENANTS OF THE BORROWER......................34
SECTION I.23. NEGATIVE COVENANTS OF THE BORROWER.........................38
ARTICLE VI EVENTS OF DEFAULT................................................40
SECTION I.24. EVENTS OF DEFAULT..........................................40
ARTICLE VII PLEDGE OF ASSIGNED COLLATERAL; RIGHTS OF THE AGENT..............43
SECTION I.25. SECURITY INTERESTS.........................................43
SECTION I.26. SUBSTITUTION OF COLLATERAL AND RELEASE OF SECURITY
INTEREST.................................................................44
SECTION I.27. APPLICATION OF PROCEEDS....................................45
SECTION I.28. RIGHTS AND REMEDIES UPON EVENT OF DEFAULT..................46
SECTION I.29. REMEDIES CUMULATIVE........................................46
SECTION I.30. ENFORCEMENT OF REMEDIES UNDER THE CUSTODIAL AGREEMENT......47
ARTICLE VIII THE AGENT......................................................47
SECTION I.31. AUTHORIZATION AND ACTION...................................47
SECTION I.32. AGENT'S RELIANCE, ETC......................................47
ARTICLE IX MISCELLANEOUS....................................................48
SECTION I.33. NO WAIVER; MODIFICATIONS IN WRITING........................48
SECTION I.34. NOTICES, ETC...............................................48
SECTION I.35. TAXES......................................................50
SECTION I.36. COSTS AND EXPENSES; INDEMNIFICATION........................51
SECTION I.37. EXECUTION IN COUNTERPARTS..................................52
SECTION I.38. ASSIGNABILITY..............................................52
SECTION I.39. GOVERNING LAW..............................................53
2
<PAGE>
SECTION I.40. SEVERABILITY OF PROVISIONS.................................53
SECTION I.41. CONFIDENTIALITY............................................53
SECTION I.42. MERGER.....................................................55
SECTION I.43. NO PROCEEDINGS.............................................55
SECTION I.44. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.................55
SECTION I.45. SUBMISSION TO JURISDICTION; WAIVERS........................55
SECTION I.46. WAIVER OF JURY TRIAL.......................................56
SCHEDULES
Schedule I Form of Investor Report
Schedule II Form of Weekly Portfolio Report
Schedule III List of Approved Assets
EXHIBITS
EXHIBIT A Form of Advance Note
EXHIBIT B Form of Notice of Borrowing
EXHIBIT C Form of Assignment and Acceptance
<PAGE>
REVOLVING CREDIT AND SECURITY AGREEMENT
REVOLVING CREDIT AND SECURITY AGREEMENT, dated as of October 23,
1998 among CORPORATE RECEIVABLES CORPORATION, CITIBANK, N.A. and the other
Secondary Lenders (as hereinafter defined) from time to time parties hereto,
CITICORP NORTH AMERICA, INC., as agent for the Lender (as hereinafter defined)
and the Secondary Lenders (in such capacity, together with its successors and
assigns, the "Agent") and MANAGED HIGH YIELD PLUS FUND INC. (together with its
permitted successors and assigns, the "Borrower").
W I T N E S S E T H:
WHEREAS, the Borrower desires that the Lender and the Secondary
Lenders from time to time make advances to the Borrower on the terms and subject
to the conditions set forth in this Agreement;
WHEREAS, the Lender and the Secondary Lenders are willing to make
such advances to the Borrower for such purposes on the terms and subject to the
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS AND RULES OF CONSTRUCTION
DEFINITIONS.
As used in this Agreement, the following terms shall have the
meanings indicated:
"ADVANCE" shall mean each borrowing by the Borrower pursuant to
Article II.
"ADVANCE NOTE" shall mean each promissory note issued by the
Borrower to the Lender and each Secondary Lender evidencing the Advances made to
the Borrower by the Lender and each Secondary Lender, substantially in the form
of Exhibit A hereto, as the same may from time to time be amended, supplemented,
waived or modified.
"ADVERSE CLAIM" means any Lien or other right, claim, or encumbrance
in, of or on any Person's assets or properties in favor of any other Person,
other than any such Lien, right, claim or encumbrance of any Secured Party
created by or pursuant to this Agreement.
<PAGE>
"ADVISER" means Mitchell Hutchins Asset Management Inc., together
with its permitted successors and assigns.
"ADVISORY AGREEMENT" means the Investment Advisory and
Administration Contract dated as of June 22, 1998 between the Adviser and the
Borrower, as the same may be amended, supplemented, waived or modified as
permitted under the Program Documents.
"AFFILIATE" shall mean, in respect of a referenced Person (a)
another Person controlling, controlled by or under common control with such
referenced Person (which in the case of Corporate Receivables Corporation and
the Agent, shall also include any Person who has a relationship to the Agent
comparable to that of Corporate Receivables Corporation) or (b) any officer
(exclusive of a "ministerial officer" with no authority to bind a Person),
director of or partner in the referenced Person. The terms "control,"
"controlling," "controlled" and the like shall mean the direct or indirect
possession of the power to direct or cause the direction of the management or
policies of a Person or the disposition of its assets or properties, whether
through ownership, by contract, arrangement or understanding, or otherwise.
"AGENT" shall have the meaning assigned to such term in the
introduction to this Agreement.
"AGENT'S ACCOUNT" means the special account (account number
40517805, ABA No. 021000089) of the Agent maintained at the office of Citibank
at its Principal Office or to such other account as the Agent shall designate in
writing to the Borrower.
"AGGREGATE CUSTODIAN'S ADVANCE AMOUNT" shall mean the sum of (i) the
aggregate unpaid Dollar amount of all Custodian's Overdraft Advances of cash,
(ii) the aggregate Asset Value of all Custodian's Overdraft Advances of
securities to the extent not reimbursed by the Borrower, and (iii) the accrued
and unpaid interest, if any, on the amounts set forth above.
"AGREEMENT" shall mean this Agreement, as the same may from time to
time be amended, supplemented, waived or modified.
"ALTERNATE BASE RATE" means a fluctuating interest rate per annum as
shall be in effect from time to time, which rate shall be at all times equal to
the highest of:
(a) the Base Rate;
(b) one-half of one percent above the latest three-week moving
average of secondary market morning offering rates in the United States
for three-month certificates of deposit of major United States money
market banks, such three-week moving average being determined weekly on
each Monday (or, if such day is not a Business Day, on the next succeeding
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Business Day) for the three-week period ending on the previous Friday by
Citibank on the basis of such rates reported by certificate of deposit
dealers to and published by the Federal Reserve Bank of New York or, if
such publication shall be suspended or terminated, on the basis of
quotations for such rates received by Citibank from three New York
certificate of deposit dealers of recognized standing selected by
Citibank, in either case adjusted to the nearest 1/16 of one percent or,
if there is no nearest 1/16 of one percent, to the next higher 1/16 of one
percent; and
(c) one half of one percent per annum above the Federal Funds Rate.
"APPLICABLE LAW" shall mean any Law of any Authority, including,
without limitation, all Federal and state banking or securities laws, to which
the Person in question is subject or by which it or any of its property is
bound.
"APPLICABLE MARGIN" means, with respect to the Eurodollar Rate, .50%
per annum; PROVIDED, HOWEVER, that during the continuance of any Event of
Default the "Applicable Margin" shall be 1.50% per annum.
"APPROVED ASSETS" shall mean the Assets specified on Schedule III
hereto, as supplemented or amended upon the agreement of the Agent and the
Borrower.
"ASSET PURCHASE AGREEMENT" means the Asset Purchase Agreement
entered into by a Secondary Lender (other than Citibank) concurrently with the
Assignment and Acceptance pursuant to which it became party to this Agreement.
"ASSET VALUE" shall mean, as of any day of determination (a) in
respect of Cash, the amount of such Cash, and (b) in respect of any other Asset,
the Value of such Asset computed in the manner as such Value is required to be
computed by the Borrower in accordance with the Prospectus of the Borrower and
in accordance with Applicable Law, including without limitation the rules,
regulations and interpretations of the SEC under the Investment Company Act;
PROVIDED, that the Asset Value of any Asset shall be net of all of the
Borrower's obligations to pay any unpaid portion of the purchase price thereof.
"ASSETS" means a collective reference to all items which would be
classified as an "asset" on the balance sheet of the Borrower in accordance with
GAAP.
"ASSIGNED COLLATERAL" shall have the meaning assigned to such
term in Section 7.01.
"ASSIGNEE RATE" means in respect of any Advance for any Settlement
Period an interest rate per annum equal to the Applicable Margin above the
Eurodollar Rate for such Settlement Period; PROVIDED, HOWEVER, that in case of:
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(i) any Settlement Period on or prior to the first day of
which a Secondary Lender or Lender (other than CRC) shall have notified
the Agent that the introduction of or any change in or in the
interpretation of any law or regulation makes it unlawful, or any central
bank or other governmental authority asserts that it is unlawful, for such
Secondary Lender or Lender to fund such Advance at the Assignee Rate set
forth above (and such Secondary Lender or Lender shall not have
subsequently notified the Agent that such circumstances no longer exist),
(ii) any Settlement Period of one to (and including) 27 days,
(iii) any Settlement Period as to which the Agent does not
receive notice, by no later than 12:00 noon (New York City time) on the
third Business Day preceding the first day of such Settlement Period, that
such Advances will not be funded by issuance of commercial paper, or
(iv) any Settlement Period for which the aggregate principal
amount of the outstanding Advances is less than $500,000,
the "Assignee Rate" for such Settlement Period shall be an interest rate per
annum equal to the Alternate Base Rate in effect on the first day of such
Settlement Period; PROVIDED, HOWEVER, that for any Advance for which Yield will
be calculated by reference to the Assignee Rate for any Settlement Period, the
"Assignee Rate" for such Settlement Period shall be an interest rate per annum
equal to the Alternate Base Rate in effect on the first day of such Settlement
Period if the Agent receives a written request from the Borrower prior to the
third Business Day preceding the first day of such Settlement Period that the
Assignee Rate be determined by reference to the Alternate Base Rate.
"ASSIGNMENT AND ACCEPTANCE" means the Assignment and Acceptance, in
substantially the form of Exhibit C hereto, entered into by a Secondary Lender,
an Eligible Assignee and the Agent, pursuant to which such Eligible Assignee may
become a party to this Agreement.
"AUTHORITY" shall mean any governmental or quasi-governmental
authority, whether executive, legislative, judicial, administrative or other, or
any combination thereof, including, without limitation, any Federal, state,
territorial, county, municipal or other government or governmental or
quasi-governmental agency, arbitrator, board, body, branch, bureau, commission,
corporation, court, department, instrumentality, master, mediator, panel,
referee, system or other political unit or subdivision or other entity of any of
the foregoing, whether domestic or foreign.
"BASE RATE" shall mean the rate of interest from time to time
announced publicly by Citibank at its Principal Office as its base rate. The
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Base Rate is a reference rate and does not necessarily represent the lowest or
best rate actually charged to any customer of Citibank.
"BENEFIT ARRANGEMENT" shall mean at any time an employee benefit
plan within the meaning of Section 3(3) of ERISA which is not a Plan or a
Multiemployer Plan and which is maintained or otherwise contributed to by any
member of the ERISA Group.
"BORROWER" shall have the meaning assigned to such term in the
introduction to this Agreement.
"BORROWER OBLIGATIONS" shall mean the payment of all indebtedness,
whether absolute, fixed or contingent, at any time or from time to time owing by
the Borrower to any Secured Party under or in connection with this Agreement,
the Advance Notes, the Asset Purchase Agreement or any other Program Document,
including without limitation, all amounts payable by the Borrower in respect of
the Advances, with interest thereon, and the amounts payable under Sections
2.06, 2.07, 2.08, 2.09, 2.11, 2.12, 2.13, 7.04(b), 9.03 and 9.04 of this
Agreement.
"BORROWER'S ACCOUNT" shall mean Account No. 5217-060-2 and ABA No.
011000028 maintained with State Street Bank and Trust Company, or such other
account as the Borrower shall designate in writing to the Agent.
"BORROWING BASE" shall mean on the date any determination thereof is
made, an amount equal to the aggregate Asset Value of all Eligible Collateral
reduced by the aggregate Asset Value of all Eligible Collateral in which the
Agent does not have a valid and perfected first priority security interest free
and clear of Adverse Claims.
"BORROWING BASE TEST" shall mean as of any date of determination
that the Borrowing Base shall be at least equal to the product of (i) Credits
Outstanding and (ii) 2.5.
"BORROWING DATE" shall have the meaning assigned to such term in
Section 2.02.
"BUSINESS DAY" shall mean any day on which (i) banks are not
authorized or required to close in New York City, and (ii) if this definition of
"Business Day" is utilized in connection with a Eurodollar Advance, dealings are
carried out in the London interbank market.
"CASH" shall mean a demand deposit of United States currency
immediately available on the day in question in an account maintained by the
Custodian.
"CITIBANK" shall mean Citibank, N.A.
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"CLOSING DATE" shall mean the first date on which the conditions
precedent specified in Article III shall have been fully satisfied.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"COLLATERAL ACCOUNT" shall have the meaning assigned to such term in
the Control Agreement.
"CONTROL AGREEMENT" means the Control Agreement, dated as of the
date hereof among the Borrower, the Agent and the Custodian, as the same may
from time to time be amended, supplemented, waived or modified.
"COMMITTED ADVANCE" shall have the meaning assigned to such term in
Section 2.02(b).
"CRC" shall mean Corporate Receivables Corporation together with its
successors and assigns that constitute special purpose entities that issue
commercial paper notes or other debt securities.
"CREDITS OUTSTANDING" shall mean at any time a determination thereof
is made, an amount equal to (i) the outstanding principal amount of all
Advances, and (ii) the unpaid Yield accrued and to accrue on the outstanding
Advances until the last day of the next succeeding calendar month for such
Advances computed by reference to the Assignee Rate for a thirty (30) day period
in effect as of the time of determination.
"CUSTODIAN" shall mean State Street Bank and Trust Company, as
custodian and securities intermediary under the Custodial Agreement and the
Control Agreement, together with its permitted successors and assigns.
"CUSTODIAN'S OVERDRAFT ADVANCES" shall mean any advance of cash or
securities by the Custodian pursuant to the Custodial Agreement.
"CUSTODIAL AGREEMENT" shall mean the Custodian Contract dated as of
June 22, 1998 between the Borrower and the Custodian, as the same may from time
to time be amended, supplemented, waived or modified as permitted under the
Program Documents.
"DEBT" shall mean with respect to any Person, at any date, without
duplication, (i) all obligations of such Person for borrowed money, including
without limitation, reimbursement obligations relating to letters of credit,
(ii) all obligations of such Person evidenced by bonds, debentures, notes or
other similar instruments, (iii) all obligations of such Person to pay the
deferred purchase price of property or services, (iv) all obligations of such
Person as lessee which are capitalized in accordance with GAAP, (v) all Debt of
others secured by a Lien on any asset of such Person, whether or not such Debt
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is assumed by such Person, (vi) payment obligations, fixed or contingent, under
investment, financial derivative or similar contracts (other than covered short
sales); (vii) all Debt of others Guaranteed by such Person, and (viii) to the
extent not otherwise included, all items which in accordance with GAAP would be
included in determining total liabilities as shown on the liability side of such
Person's balance sheet.
"DEFAULT" shall mean any event which, with the passage of time, the
giving of notice, or both, would constitute an Event of Default.
"DERIVATIVES TRANSACTION" shall mean any financial futures contract,
exchange traded or OTC option, forward currency contract, swap, swaption,
collar, floor, cap and other agreement of a similar nature.
"DISTRESSED ASSET" means any Asset (i) which is the subject of a
bankruptcy, insolvency, liquidation or other similar proceedings or in the case
of any Loan Asset the related Obligor is the subject of any such proceeding,
(ii) which is to the actual knowledge of the Adviser or the Borrower, in default
as to payment of principal or interest or otherwise under the instruments or
agreements under which they were issued or in the case of any Loan Asset under
the applicable Loan Documents, (iii) if such Asset is a Loan Asset (x) in
respect of which there is a breach of a material provision of the related Loan
Documents or a "default" or "event of default" has occurred and is continuing
under the Related Loan Documents, or (y) which is otherwise classified by the
Borrower as "non-performing" pursuant to GAAP, or (iv) which is rated lower than
"Caa3" by Moody's or lower than "CCC-" by S&P or which, if unrated, are in the
reasonable judgment of the Adviser of equivalent credit quality.
"DOLLARS" and "$" mean lawful money of the United States of
America.
"ELIGIBLE ASSET" shall mean any Asset which the Borrower is
permitted to purchase in accordance with the Investment Policies and
Restrictions which the Borrower owns free and clear of all Adverse Claims (other
than Permitted Liens); PROVIDED, that such Asset:
(i) does not constitute a Derivatives Transaction, Illiquid
Asset or an Asset which is the subject of a Derivatives Transaction,
reverse repurchase agreement, dollar roll or a securities lending
transaction;
(ii) if it is a Loan Asset, such Asset constitutes an Eligible
Loan Asset which is not a subparticipation; and
(iii) if it is not an Approved Asset, is not of a type that the
Agent reasonably determines upon at least five (5) Business Days' prior
written notice to the Borrower is no longer acceptable to be included as
an Eligible Asset.
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"ELIGIBLE ASSIGNEE" means Citicorp North America, Inc., Citibank,
any of their respective Affiliates, any Person managed by Citibank, Citicorp
North America, Inc. or any of their respective Affiliates, or any financial or
other institution acceptable to the Agent.
"ELIGIBLE COLLATERAL" shall mean at any time the Assigned Collateral
(a) which constitutes Eligible Assets, and (b) which does not constitute a
repurchase agreement or a Loan Asset.
"ELIGIBLE LOAN ASSET" at any time means a Loan Asset:
(i) which is a syndicated term loan under which the interest
payable on the principal amount thereof by the related Obligor is payable
in cash and which is part of a senior credit facility with an aggregate
outstanding principal amount of all loans under such facility on the
Origination Date of such Loan Asset of at least $25,000,000;
(ii) under which (A) if the Transaction Agent is a bank, the
current deposit rating of the Transaction Agent or its controlling
Affiliate is no less than "A-" from S&P and "A3" from Moody's, and (B) if
the Transaction Agent is not a bank, the medium and long term corporate
debt obligations of such Transaction Agent are rated no less than "A-"
from S&P and "A3" from Moody's;
(iii) which relates to Loan Documents in which the Borrower's
interest (direct or participating) in the aggregate outstanding principal
amount of all loans thereunder is no greater than 33-1/3%;
(iv) which is not subordinated (pursuant to contractual
provisions or otherwise) to the prior payment of any other liabilities or
any equity interests of the related Obligor;
(v) which has a scheduled final maturity date no later than
the tenth (10th) anniversary after the related Origination Date;
(vi) which is not a revolving loan or any other type of
instrument, the Loan Documents for which provide that the Borrower has a
continuing obligation to advance any amount or otherwise extend credit to
the Obligor after the date the Borrower funded its interest in such Loan
Asset;
(vii) if it is a Distressed Asset, the underlying loans are
fully collateralized by a first priority perfected security interest in
assets or properties of the related Obligor;
(viii) in which, to the best of the Borrower's knowledge, the
Borrower's interest in all collateral security therefor and principal and
interest payments thereunder is no less than pro rata and pari passu with
all other lenders thereunder and participants therein;
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(ix) which, if the Borrower is a participant therein, was
purchased from a selling institution which is either (A) a bank (or a
Section 20 Affiliate of a controlling parent bank), which bank has a
current deposit rating no less than "A-" from S&P and "A3" from Moody's,
or (B) not a bank, and the medium and long term corporate debt obligations
of which are rated no less than "A-" from S&P and "A3" from Moody's; and
(x) the related Loan Documents require the Obligor to make all
payments in respect of such Loan Asset free and clear of and without any
deduction for any and all present or future taxes, levies, imposts,
deductions, charges and withholdings, excluding taxes imposed on net
income and all income and franchise taxes of the United States and any
political subdivision thereof.
"EQUITY SECURITIES" shall mean common and preferred stock, including
without limitation common stock purchase warrants and rights, equity interests
in trusts, partnerships, joint ventures or similar enterprises and depositary
receipts, but excluding equity securities that are attached to, or part of a
unit with debt securities.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations promulgated and rulings
issued thereunder.
"ERISA GROUP" shall mean the Borrower and all members of a
controlled group of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with the Borrower, are
treated as a single employer under Section 414 of the Internal Revenue Code.
"EUROCURRENCY LIABILITIES" shall have the meaning assigned to such
term in Regulation D of the Board of Governors of the Federal Reserve System, as
in effect from time to time.
"EURODOLLAR ADDITIONAL YIELD" means additional Yield on the
outstanding principal of each Advance during the Settlement Period in respect of
such Advance in respect of which Yield is computed by reference to the
Eurodollar Rate, for such Settlement Period, at a rate per annum equal at all
times during such Settlement Period to the remainder obtained by subtracting (i)
the Eurodollar Rate for such Settlement Period from (ii) the rate obtained by
dividing such Eurodollar Rate referred to in clause (i) above by that percentage
equal to one-hundred percent (100%) minus the Eurodollar Rate Reserve Percentage
of the Lender or a Secondary Lender, as applicable to an Advance, for such
Settlement Period.
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"EURODOLLAR RATE" means, for any Advance for any Settlement Period,
an interest rate per annum equal to the rate per annum at which deposits in
Dollars are offered by the principal office of Citibank in London, England to
prime banks in the London interbank market at 11:00 A.M. (London time) two (2)
Business Days before the first day of such Settlement Period in an amount
substantially equal to the outstanding principal amount of such Advance on such
first day and for a period equal to such Settlement Period.
"EURODOLLAR RATE ADVANCE" shall mean an Advance the Yield on which
is computed with reference to the Eurodollar Rate.
"EURODOLLAR RATE RESERVE PERCENTAGE" for any Settlement Period for
any Eurodollar Rate Advance shall mean the reserve percentage applicable during
such Settlement Period under regulations issued from time to time by the Board
of Governors of the Federal Reserve System (or any successor) (or if more than
one such percentage shall be applicable, the daily average of such percentages
for those days in such Settlement Period during which any such percentage shall
be so applicable) for determining the maximum reserve requirement (including,
without limitation, any emergency, supplemental or other marginal reserve
requirement) for the Lender or any Secondary Lender, if applicable to an
Advance, with respect to liabilities or assets consisting of or including
Eurocurrency Liabilities (or any other category of liabilities that includes
deposits by reference to which the interest rate on Eurocurrency Liabilities is
determined) having a term comparable to such Settlement Period.
"EVENT OF DEFAULT" shall mean any of the events, acts or occurrences
set forth in Section 6.01.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC thereunder, all as from time
to time in effect, or any successor law, rules or regulations, and any reference
to any statutory or regulatory provision shall be deemed to be a reference to
any successor statutory or regulatory provision.
"FEDERAL FUNDS RATE" shall mean, for any period, a fluctuating
interest rate per annum equal for each day during such period to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers, as published for such
day (or, if such day is not a Business Day, for the next preceding Business Day)
by the Federal Reserve Bank of New York, or, if such rate is not so published
for any day which is a Business Day, the average of the quotations for such day
on such transactions received by Citibank from three Federal funds brokers of
recognized standing selected by it.
"FEE LETTER" shall mean that certain letter agreement dated the date
hereof between the Borrower and the Agent, as the same may from time to time be
amended, supplemented, waived or modified.
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"FOREIGN ASSET" shall mean any Asset issued or Guaranteed by a
Person organized outside of the United States and in the case of any Loan Asset
the related Obligor is organized outside of the United States.
"GAAP" shall mean generally accepted accounting principles in the
United States, in effect from time to time, consistently applied.
"GOVERNMENTAL AUTHORIZATIONS" shall mean all franchises, permits,
licenses, approvals, consents and other authorizations of all Authorities.
"GOVERNMENTAL FILINGS" shall mean all filings, including franchise
and similar tax filings, and the payment of all fees, assessments, interests and
penalties associated with such filing with all Authorities.
"GUARANTEE" by any Person shall mean any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt or other
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Debt or other obligation (whether arising by virtue of
partnership arrangements, by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for the purpose of assuring in any
other manner the obligee of such Debt or other obligation of the payment thereof
or to protect such obligee against loss in respect thereof (in whole or in
part); PROVIDED that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"ILLIQUID ASSET" means as of any date, any Asset for which the Value
of such Asset is not readily ascertainable from a recognized independent source
in the market for such Asset.
"INDUSTRY CLASS" shall mean the Credit Suisse First Boston High
Yield Index and, to the extent such index is no longer published, each industry
class specified in Moody's industry classifications.
"INTERNAL REVENUE CODE" shall mean the Internal Revenue Code of
1986, as amended or any successor statute.
"INVESTMENT COMPANY ACT" shall mean the Investment Company Act of
1940, as amended, and the rules and regulations of the SEC thereunder, all as
from time to time in effect, or any successor law, rules or regulations, and any
reference to any statutory or regulatory provision shall be deemed to be a
reference to any successor statutory or regulatory provision.
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"INVESTMENT POLICIES AND RESTRICTIONS" shall mean the provisions
dealing with investment policies, distributions, investment restrictions, tender
offers, repurchases, leverage and diversified status as set forth in the
Borrower's Prospectus in effect on the Closing Date, or as modified as permitted
under this Agreement.
"INVESTOR REPORT" shall mean the Investor Report of the Borrower
substantially in the form of Schedule I hereto.
"LAW" shall mean any action, code, consent decree, constitution,
decree, directive, enactment, guideline, law, injunction, interpretation,
judgment, order, ordinance, policy statement, proclamation, promulgation,
regulation, requirement, rule, rule of law, rule of public policy, statute, or
writ of any Authority.
"LENDER" shall mean CRC, together with all Persons which acquire any
interest in any Advance under the Asset Purchase Agreement.
"LENDER RATE" for each day during a Settlement Period any Advance
means to the extent the Lender funds such Advance on such day by issuing
commercial paper notes, the per annum rate equivalent to the weighted average of
the per annum rates paid or payable by the Lender from time to time as interest
on or otherwise (by means of interest rate hedges or otherwise) in respect of
those commercial paper notes issued by the Lender that are reasonably allocated,
in whole or in part, by the Agent (on behalf of the Lender) to fund the making
or maintenance of such Advance on such day as determined by the Agent (on behalf
of the Lender) and reported to the Borrower, which rates shall reflect and give
effect to the commissions of placement agents (which shall not exceed 0.05% per
annum of the face amount of the commercial paper notes) and dealers in respect
of such commercial paper notes, to the extent such commissions are allocated, in
whole or in part, to such commercial paper notes by the Agent on behalf of the
Lender; PROVIDED, HOWEVER, that if any component of such rate is a discount
rate, in calculating the "Lender Rate" for such day the Agent shall for such
component use the rate resulting from converting such discount rate to an
interest bearing equivalent rate per annum.
"LENDER TERMINATION DATE" shall mean the date which is the earliest
to occur of (i) the date which is one (1) Business Day prior to the Secondary
Lender Stated Expiration Date, and (ii) the date on which the Total Commitment
shall terminate pursuant to Section 2.10 or Section 6.01.
"LETTER AGREEMENT" shall mean the Letter Agreement dated as of the
date hereof from the Adviser to the Agent on behalf of the Secured Parties, as
the same may from time to time be amended, supplemented, waived or modified.
"LIEN" shall mean any mortgage, pledge, hypothecation, assignment,
deposit arrangement, encumbrance, lien or security interest (statutory or
other), priority or other security agreement of any kind or nature whatsoever
(including, without limitation, any conditional sale or other title retention
agreement, any financing lease having substantially the same economic effect as
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any of the foregoing, and the filing of any effective financing statement under
the UCC or comparable law of any jurisdiction).
"LIQUIDATION FEE" means, in respect of any Advance for any
Settlement Period during which the principal on such Advance is repaid by the
Borrower in whole or in part, the amount, if any, by which (i) the additional
Yield (calculated without taking into account any Liquidation Fee or any
shortened duration of such Settlement Period) which would have accrued during
such Settlement Period on the reduction of the outstanding principal amount of
such Advance relating to such Settlement Period had such reductions remained as
outstanding principal, exceeds (ii) that income, if any, received by the
Lender's investing the proceeds of such reductions of principal.
"LOAN ASSET" shall mean a direct or participation or
subparticipation interest in or assignment or novation of a loan made to a
corporate borrower by one or more commercial banks or other financial
institutions, as described in the Prospectus in effect on the Closing Date under
the heading "Corporate Loans".
"LOAN DOCUMENTS" means with respect to any Loan Asset, each loan
agreement, promissory note, collateral security agreement and any other document
evidencing, securing or executed in connection with such Loan Asset, including
without limitation, the agreements and instruments in respect of which the
Borrower acquired such Loan Asset.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the
ability of the Borrower, the Adviser, or the Custodian to fully perform its
obligations under this Agreement or any other Program Document, (ii) any Secured
Party's right, title and interest in the Assigned Collateral and the Related
Security or on the rights and remedies of any Secured Party under any Program
Document, or (iii) the business, financial condition, operations of the
Borrower, or (iv) a significant portion of the Assets or properties of the
Borrower.
"MATURITY DATE" shall mean (i) with respect to any Advance made by
the Lender, the Lender Termination Date (or if such day is not a Business Day,
the Business Day immediately preceding such date) or such earlier date as
provided in Section 6.01, and (ii) with respect to any Advance made by a
Secondary Lender, including the Committed Advance, the date which is four (4)
years after the Borrowing Date of such Advance (or if such day is not a Business
Day, the Business Day immediately preceding such date) or such earlier date as
provided in Section 6.01.
"MOODY'S" shall mean Moody's Investors Service, Inc., together with
its successors.
"MULTIEMPLOYER PLAN" shall mean at any time an employee pension
benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any
member of the ERISA Group is then making or accruing an obligation to make
contributions or has within the preceding five plan years made contributions,
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including for these purposes any Person which ceased to be a member of the ERISA
Group during such five year period.
"NET ASSET VALUE" shall mean, with respect to the Borrower, as of
the date any determination thereof is made, the net asset value of the Borrower
computed in the manner such net asset value is required to be computed by the
Borrower in its reports to its shareholders.
"NET ELIGIBLE ASSET VALUE" shall mean on the date any determination
thereof is made, an amount equal to the aggregate Asset Value of all Eligible
Assets reduced by the sum (without duplication) of:
(i) the amount by which the aggregate Asset Value of all
Eligible Assets (other than U.S. Government Securities and money market
mutual funds) issued, Guaranteed or owing by any Person (together with all
Affiliates of such Person), other than the three Persons (together with
all Affiliates of such Person) that have the highest amounts of aggregate
Asset Value of all Eligible Assets relating to them (the "Three Largest
Obligors"), exceeds five percent (5%) of the aggregate Asset Value of all
Eligible Assets;
(ii) the amount by which the aggregate Asset Value of all
Eligible Assets (other than U.S. Government Securities and money market
mutual funds) issued, Guaranteed or owing by any of the Three Largest
Obligors exceeds eight percent (8%) of the aggregate Asset Value of all
Eligible Assets;
(iii) the amount by which the aggregate Asset Value of all
Eligible Assets which constitute shares of any single money market mutual
fund exceeds twenty percent (20%) of the aggregate Asset Value of all
Eligible Assets;
(iv) the amount by which the aggregate Asset Value of all
Eligible Assets (other than U.S. Government Securities) issued, Guaranteed
or owing by Persons in a single Industry Class, other than the one
Industry Class with the highest amounts of the aggregate Asset Value of
all Eligible Assets attributable to it (the "Largest Industry"), exceeds
twenty percent (20%) of the aggregate Asset Value of all Eligible Assets;
(v) the amount by which the aggregate Asset Value of all
Eligible Assets (other than U.S. Government Securities) issued, Guaranteed
or owing by all Persons in the Largest Industry exceeds twenty-five
percent (25%) of the aggregate Asset Value of all Eligible Assets;
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(vi) the amount by which the aggregate Asset Value of all
Eligible Assets which constitute Single Market Source Assets exceeds
twenty-five percent (25%) of the aggregate Asset Value of all Eligible
Assets;
(vii) the amount by which the aggregate Asset Value of all
Eligible Assets which constitute Foreign Assets exceeds thirty-five
percent (35%) of the aggregate Asset Value of all Eligible Assets;
(viii)the amount by which the aggregate Asset Value of all
Eligible Assets which are denominated or payable in a currency other than
Dollars exceeds fifteen percent (15%) of the aggregate Asset Value of all
Eligible Assets;
(ix) the amount by which the aggregate Asset Value of all
Eligible Assets issued, Guaranteed or owing by Persons organized under the
laws of any single jurisdiction which is not an OECD Country exceeds five
percent (5%) of the aggregate Asset Value of all Eligible Assets;
(x) the amount by which the aggregate Asset Value of all
Eligible Assets issued, Guaranteed or owing by Persons organized under the
laws of all jurisdictions that are not OECD Countries exceeds fifteen
percent (15%) of the aggregate Asset Value of all Eligible Assets;
(xi) the amount by which the aggregate Asset Value of all
Eligible Assets which constitute Distressed Assets exceeds ten percent
(10%) of the aggregate Asset Value of all Eligible Assets;
(xii) the amount by which the aggregate Asset Value of all
Eligible Assets which constitute Distressed Assets issued, Guaranteed or
owing by any single Person (together with all Affiliates of such Person)
exceeds three percent (3%) of the aggregate Asset Value of all Eligible
Assets;
(xiii)the amount by which the aggregate Asset Value of all
Eligible Assets which as of any date of determination constitute a
Distressed Asset or which are rated "Caa" by Moody's or "CCC" by S&P or,
if unrated, are in the judgment of the Adviser of equivalent credit
quality exceeds forty percent (40%) of the aggregate Asset Value of all
Eligible Assets;
(xiv) the amount by which the aggregate Asset Value of all
Eligible Assets which constitute Equity Securities exceeds twenty percent
(20%) of the aggregate Asset Value of all Eligible Assets;
(xv) the amount by which the aggregate Asset Value of all
Eligible Assets which constitute Equity Securities issued by any single
Person
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exceeds three percent (3%) of the aggregate Asset Value of all Eligible
Assets; and
(xvi) the Aggregate Custodian's Advance Amount.
"NOTICE OF BORROWING" shall have the meaning assigned to such term
in Section 2.02.
"NOTICE OF EXCLUSIVE CONTROL" shall have the meaning assigned to
such term in the Control Agreement.
"OBLIGOR" shall mean in respect of any Loan Asset, the Person
primarily obligated under the related Loan Documents to repay the loan or
extension of credit which is the subject of such Loan Asset.
"ORIGINATION DATE" shall mean in respect of any Loan Asset the
initial date on which the proceeds of the loan or other extension of credit
which is the subject of such Loan Asset was advanced to the Obligor under the
related Loan Documents.
"OECD COUNTRY" means Israel and any country which is a member of the
Organization for Economic Cooperation and Development which has a sovereign
credit rating for "foreign currency" of at least "AA-" and "Aa3" from S&P and
Moody's, respectively.
"PERCENTAGE" of any Secondary Lender means, (a) with respect to
Citibank, the percentage set forth on the signature page to this Agreement, or
such amount as reduced by any Assignment and Acceptance entered into with an
Eligible Assignee, or (b) with respect to a Secondary Lender that has entered
into an Assignment and Acceptance, the amount set forth therein as such
Secondary Lender's Percentage, or such amount as reduced by an Assignment and
Acceptance entered into between such Secondary Lender and an Eligible Assignee.
"PERMITTED DEBT" shall mean (i) Debt arising under this Agreement or
the other Program Documents to the Secured Parties, (ii) accrued expenses and
current trade accounts payable incurred in the ordinary course of the Borrower's
business which are not overdue for a period of more than thirty (30) days or
which are being contested in good faith by appropriate proceedings, (iii) Debt
in favor of the Custodian relating to Custodian Overdraft Advances incurred in
the ordinary course of the Borrower's business, (iv) Debt in respect of
judgments or awards that have been in force for less than the applicable period
for taking an appeal so long as such judgments or awards do not constitute an
Event of Default and so long as execution is not levied thereunder or in respect
of which the Borrower (A) shall at the time in good faith be diligently
prosecuting an appeal or proceeding for review and in respect of which a stay of
execution shall have been obtained pending such appeal or review or (B) shall
have obtained an unsecured performance bond in respect of such judgment or
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award, and (v) Debt (other than Debt for borrowed money) arising in connection
with transactions in the ordinary course of the Borrower's business in
connection with its purchasing of securities, Derivatives Transactions, reverse
repurchase agreements or dollar rolls to the extent such transactions are
permitted under the Investment Company Act and the Borrower's Investment
Policies and Restrictions.
"PERMITTED LIENS" shall mean in respect of any Asset of the Borrower
(i) Liens for taxes, assessments or other governmental charges or levies not at
the time delinquent or being diligently contested in good faith by appropriate
proceedings and for which adequate reserves in accordance with GAAP shall have
been set aside on the Borrower's books, (ii) Liens of the Custodian securing the
Custodian's Overdraft Advances, and (iii) Liens incidental to the conduct of the
Borrower's business securing the performance of fee and expense obligations to
the Custodian and other similar agents which are providing services in respect
of the Borrower's Assets arising in the ordinary course of the Borrower's
business.
"PERSON" shall mean an individual or a corporation (including a
business trust), partnership, trust, incorporated or unincorporated association,
joint stock company, limited liability company, government (or an agency or
political subdivision thereof) or other entity of any kind.
"PLAN" shall mean at any time an employee pension benefit plan
(other than a Multiemployer Plan) which is covered by Title IV of ERISA or
subject to the minimum funding standards under Section 412 of the Internal
Revenue Code and either (i) is maintained, or contributed to, by any member of
the ERISA Group for employees of any member of the ERISA Group or (ii) has at
any time within the preceding five years been maintained, or contributed to, by
any Person which was at such time a member of the ERISA Group for employees of
any Person which was at such time a member of the ERISA Group.
"POST-DEFAULT RATE" shall mean in respect of all amounts payable to
any Secured Party under any Program Document not paid when due (whether at
stated maturity, by acceleration or otherwise), including, without limitation,
the principal and Yield on any Advance not paid when due, a rate per annum
during the period commencing on the due date until such amount is paid in full
equal to the Alternative Base Rate as in effect from time to time plus two
percent (2%).
"PRINCIPAL OFFICE" shall mean the principal office of Citibank
presently located at 399 Park Avenue, New York, New York.
"PRIVATE AUTHORIZATIONS" shall mean all franchises, permits,
licenses, approvals, consents and other authorizations of all Persons (other
than Authorities) including, without limitation, those with respect to
trademarks, service marks, trade names, copyrights, computer software programs,
technical and other know-how.
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"PROCEEDS" shall have, with reference to any asset or property, the
meaning assigned to it under the UCC and, in any event, shall include, but not
be limited to, any and all amounts from time to time paid or payable under or in
connection with such asset or property.
"PROGRAM DOCUMENTS" shall mean this Agreement, the Advance Notes,
the Letter Agreement, the Asset Purchase Agreement, the Control Agreement,
Advisory Agreement, the Custodial Agreement, the Fee Letter and the other
agreements, documents and instruments entered into or delivered in connection
herewith or therewith.
"PROSPECTUS" shall mean with respect to the Borrower the prospectus
filed with the SEC as a part of the Borrower's registration statement on Form
N-2, as amended (or any successor SEC form), and shall include, without
limitation, the related statement of additional information included in such
registration statement.
"REGULATION T" shall mean Regulation T of the Board of Governors of
the Federal Reserve System, as in effect from time to time.
"REGULATION U" shall mean Regulation U of the Board of Governors of
the Federal Reserve System, as in effect from time to time.
"REGULATION X" shall mean Regulation X of the Board of Governors of
the Federal Reserve System, as in effect from time to time.
"RELATED SECURITY" shall have the meaning assigned to such term
in Section 7.01.
"S&P" shall mean Standard & Poor's Ratings Group, together with its
successors.
"SEC" shall mean the Securities and Exchange Commission or any other
governmental authority of the United States of America at the time
administrating the Securities Act, the Investment Company Act or the Exchange
Act.
"SECONDARY LENDER COMMITMENT" shall mean (a) with respect to
Citibank, an amount equal to the Total Commitment, as such amount shall be
reduced by any Assignment and Acceptance entered into between Citibank and an
Eligible Assignee, or (b) with respect to a Secondary Lender that has entered
into an Assignment and Acceptance, the amount set forth therein as such
Secondary Lender's "Secondary Lender Commitment", in each case as such amount
may be reduced by an Assignment and Acceptance entered into between such
Secondary Lender and an Eligible Assignee, and as may be further reduced (or
terminated) pursuant to the next sentence. Any reduction (or termination) of the
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Total Commitment pursuant to the terms of this Agreement shall reduce ratably
(or terminate) each Secondary Lender's Secondary Lender Commitment.
"SECONDARY LENDER STATED EXPIRATION DATE" shall mean October 22,
1999, UNLESS, prior to such date (or the date so extended pursuant to this
clause), upon the Borrower's request, made not more than forty-five (45) days
nor less than thirty (30) days prior to the then current Secondary Lender Stated
Expiration Date, one or more Secondary Lenders having 100% of the Total
Commitment shall in their sole discretion consent, which consent shall be given
not less than ten (10) days prior to the then current Secondary Lender Stated
Expiration Date (the date any such consent is given, the "Extension Date"), to
the extension of the Secondary Lender Stated Expiration Date to the date
occurring 364 days after such Extension Date; PROVIDED, HOWEVER, that any
failure of any Secondary Lender to respond to the Borrower's request for such
extension shall be deemed a denial of such request by such Secondary Lender.
"SECONDARY LENDER TERMINATION DATE" shall mean the earlier of (a)
the Secondary Lender Stated Expiration Date, and (b) the date the Total
Commitment shall terminate pursuant to Section 2.10 or Section 6.01.
"SECTION 20 AFFILIATE" means an Affiliate of a Federal Reserve
member bank which engages principally in the securities business, to the extent
allowed under and pursuant to Section 20 of the Glass-Steagall Act, as amended.
"SECONDARY LENDERS" shall mean Citibank and each Eligible Assignee
that becomes a party to this Agreement pursuant to Section 9.06.
"SECURED PARTIES" shall mean the Agent, the Lender, the Secondary
Lenders and their respective successors and assigns.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended,
and the rules and regulations of the SEC thereunder, all as from time to time in
effect, or any successor law, rules or regulations, and any reference to any
statutory or regulatory provisions shall be deemed to be a reference to any
successor statutory or regulatory provision.
"SETTLEMENT DATE" shall mean the date which is two (2) Business Days
after the end of each Settlement Period.
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"SETTLEMENT PERIOD" shall mean in respect of any Advance:
(a) in the case of any Settlement Period in respect of which
Yield is computed by reference to the Lender Rate, the period
beginning on the date such Advance was made and ending on the last
day of the calendar month in which such Advance was made and
thereafter each successive period commencing on the first day of
each calendar month during the term of this Agreement and ending on
the last day of such calendar month during the term of this
Agreement; PROVIDED, HOWEVER, that in the case of any Settlement
Period for any Advance which commences before the Maturity Date for
such Advance and would otherwise end on a date occurring after such
Maturity Date, such Settlement Period shall end on such Maturity
Date;
(b) in the case of any Settlement Period in respect of which
Yield is computed by reference to the Assignee Rate, the period
beginning on the date such Advance was made and ending on the last
day of the calendar month in which such Advance was made and
thereafter each successive period commencing on the first day of
each calendar month during the term of this Agreement and ending on
the last day of such calendar month during the term of this
Agreement; PROVIDED, HOWEVER, that any Settlement Period which is
other than the monthly Settlement Period shall be of such duration
as shall be selected by the Agent; and
(c) in the case of any Settlement Period in respect of which
Yield is computed by reference to the Alternate Base Rate, such
Settlement Period shall be of such duration as shall be selected by
the Agent.
"SINGLE MARKET SOURCE ASSET" shall mean any Asset for which Value is
only readily ascertainable by one (1) recognized independent broker dealer or
recognized independent pricing service in the market for such Asset which broker
dealers or pricing services have been approved by the Adviser in accordance with
the guidelines established by the Borrower's Board of Directors.
"TOTAL COMMITMENT" shall mean $200,000,000 as such amount may be
reduced pursuant to Section 2.10. References to the unused portion of the Total
Commitment shall mean, at any time, the Total Commitment then in effect, minus
the outstanding principal amount of the Advances.
"TOTAL ELIGIBLE ASSET COVERAGE TEST" shall mean as of any day of
determination, and after giving effect to all transactions on such day, that the
Credits Outstanding are less than or equal to 33 1/3% of the Net Eligible Asset
Value.
"TRANSACTION AGENT" means a commercial bank, insurance company,
finance company or other financial institution that is acting as agent under the
Loan Documents relating to any Loan Asset.
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"UCC" shall mean the Uniform Commercial Code, as from time to time
in effect in the applicable jurisdictions.
"U.S. GOVERNMENT SECURITIES" shall mean any securities which are
direct obligations of, or obligations the principal and interest on are
unconditionally guaranteed by the United States of America.
"VALUE" shall have the meaning assigned to such term in Section
2(a)(41) of the Investment Company Act.
"WEEKLY PORTFOLIO REPORT" shall have the meaning assigned to such
term in Section 5.01(e)(vii).
"YEAR 2000 PROBLEM" shall have the meaning assigned to such term in
Section 4.01(p).
"YIELD" means for each Advance for each Settlement Period:
(i) for each day during such Settlement Period to the extent such
Advance will be funded on such day by CRC through the issuance of
commercial paper notes,
LR x P + LF
---
360
(ii) for each day during such Settlement Period to the extent such
Advance will be funded on such day by the Secondary Lenders or the
Lenders, other than CRC,
AR x P
---
360
where:
AR = the Assignee Rate for such Advance for
such Settlement Period
P = the outstanding principal amount of such
Advance on such day
LR = the Lender Rate for such Advance on such
day
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LF = the Liquidation Fee, if any, for such
Advance for such Settlement Period;
PROVIDED, FURTHER, that Yield for any Advance shall not be considered paid by
any distribution to the extent that at any time all or a portion of such
distribution is rescinded or must otherwise be returned for any reason.
SECTION I.02. RULES OF CONSTRUCTION.
For all purposes of this Agreement, except as otherwise expressly
provided or unless the context otherwise requires:
Singular words shall connote the plural as well as the singular, and
vice versa (except as indicated), as may be appropriate.
The words "herein," "hereof" and "hereunder" and other words of
similar import used herein refer to this Agreement as a whole and not to any
particular appendix, article, schedule, section, paragraph, clause, exhibit or
other subdivision.
The headings, subheadings and table of contents set forth in this
Agreement are solely for convenience of reference and shall not constitute a
part of this Agreement nor shall they affect the meaning, construction or effect
of any provision hereof.
References in this Agreement to "including" shall mean including
without limiting the generality of any description preceding such term, and for
purposes hereof the rule of ejusdem generis shall not be applicable to limit a
general statement, followed by or referable to an enumeration of specific
matters, to matters similar to those specifically mentioned.
Each of the parties to this Agreement and its counsel have reviewed
and revised, or requested revisions to, this Agreement, and the usual rule of
construction that any ambiguities are to be resolved against the drafting party
shall be inapplicable in the construction and interpretation of this Agreement.
SECTION I.03. COMPUTATION OF TIME PERIODS.
Unless otherwise stated in this Agreement, in the computation of a
period of time from a specified date to a later specified date, the word "from"
means "from and including" and the words "to" and "until" both mean "to but
excluding".
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ARTICLE II
ADVANCES TO THE BORROWER
SECTION I.04. ADVANCE FACILITY.
On the terms and conditions hereinafter set forth, including without
limitation, Sections 3.01 and 3.02, CRC may, in its sole discretion, make
Advances to the Borrower on any Borrowing Date from the date hereof to the
Lender Termination Date. On the terms and conditions hereinafter set forth,
including without limitation, Sections 3.01 and 3.02 and during the period from
the date hereof to the Secondary Lender Termination Date, the Secondary Lenders
shall make Advances to the Borrower, ratably in accordance with their respective
Secondary Lender Commitments, to the extent CRC has determined not to make such
Advance. Under no circumstances shall CRC or any Secondary Lender make any such
Advance, to the extent that after giving effect to the making of such Advance
the aggregate principal amount of all outstanding Advances would exceed the
Total Commitment.
SECTION I.05. MAKING OF ADVANCES.
(a) The Borrower shall give the Agent written notice (which notice
shall be irrevocable and effective only upon receipt by the Agent) of each
request for an Advance (each such request a "Notice of Borrowing") not later
than 12:00 noon (New York City time) on the day which is three (3) Business Days
prior to the proposed borrowing date, which notice shall specify (i) the
proposed borrowing date therefor (each such date, a "Borrowing Date"), and (ii)
the principal amount of the proposed Advance. Any such Notice of Borrowing shall
be substantially in the form of Exhibit B hereto, dated the date such request is
being made, and otherwise appropriately completed. Each Advance shall be in a
principal amount of at least $1,000,000 and in integral multiples of $1,000,000
in excess thereof. During the period prior to the Lender Termination Date, CRC
shall promptly notify the Agent whether it has determined to make a proposed
Advance and the Agent shall promptly thereafter notify the Borrower whether CRC
has determined to make such Advance. If CRC has determined not to make a
proposed Advance or if the Lender Termination Date has occurred prior to the
Secondary Lender Termination Date, the Agent shall promptly send notice of the
proposed Advance to all of the Secondary Lenders concurrently by telecopier,
telex or cable specifying the Borrowing Date for such Advance, each Secondary
Lender's Percentage multiplied by the principal amount of such Advance and
whether the Yield for such Advance is calculated based on the Eurodollar Rate or
the Alternate Base Rate. On any Borrowing Date CRC or the Secondary Lenders
shall, subject to the terms and conditions of this Agreement, make available to
the Borrower at the Borrower's Account the principal amount of the requested
Advance in immediately available funds. To the extent not covered by Section
2.08, the Borrower shall indemnify CRC, each Secondary Lender and the Agent
against any loss or expense incurred by them as a result of any failure by the
Borrower to accept any Advance requested in a Notice of Borrowing or as a result
of the failure of the Borrower to receive any Advance requested in a Notice of
Borrowing as a result of the failure of any condition precedent to the making of
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such Advance to be satisfied, including, without limitation, any loss or expense
incurred by reason of the liquidation or reemployment of funds acquired or
requested to fund such Advance.
(b) The parties hereto agree that on the Maturity Date of the
Advances made by CRC (the "CRC Maturity Date") so long as no Default or Event of
Default shall have occurred and be continuing on such date, and subject to the
other terms and conditions of this Agreement (other than the obligation to
deliver a Notice of Borrowing), the Secondary Lenders shall make an Advance (the
"Committed Advance") on such date in a principal amount equal to the outstanding
principal amount of the Advances funded by CRC, unless on or prior to the Second
Business Day preceding the CRC Maturity Date the Borrower has delivered a
written notice to the Agent stating that it has elected not to receive such
Committed Advance. Notwithstanding anything in this Agreement to the contrary,
the principal amount of such Committed Advance shall be made ratably by the
Secondary Lenders to the Agent's Account and shall constitute a payment in full
by the Borrower in respect of the outstanding principal amount of the Advances
maturing on the CRC Maturity Date and shall be applied by the Agent on the CRC
Maturity Date to the outstanding principal amount of the Advances made by CRC.
SECTION I.06. ADVANCE NOTES.
(a) All Advances by CRC and each Secondary Lender to the Borrower
shall be evidenced by separate Advance Notes, with appropriate insertions, which
shall (i) be payable to CRC and each Secondary Lender and provide for the
payment of the unpaid principal amount of the Advances evidenced thereby on the
Maturity Date for such Advances, (ii) require that the Borrower pay Yield on the
outstanding principal amount as provided in Section 2.06 hereof, and (iii) be
entitled to the benefits of this Agreement and the other Program Documents. The
date and principal amount of each Advance and of each repayment of principal
thereon shall be recorded by CRC or the Secondary Lenders, as the case may be,
or their designee on Schedule I attached to CRC's or such Secondary Lender's
Advance Note and the aggregate unpaid principal amount shown on such schedules
shall be rebuttable presumptive evidence of the principal amount owing and
unpaid on the Advances. The failure to record or any error in recording any such
amount on such schedule shall not, however, limit or otherwise affect the
obligations of the Borrower hereunder or under any Advance Note to repay the
principal amount of the Advances together with all Yield thereon.
(b) The Borrower agrees that upon any Eligible Assignee becoming a
Secondary Lender hereunder in accordance with Section 9.06, it shall promptly
upon the request of the Agent execute and deliver an Advance Note payable to the
order of such Secondary Lender and otherwise appropriately completed.
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SECTION I.07. MATURITY OF THE ADVANCES.
It is understood and agreed that the principal amount of and the
unpaid Yield on each outstanding Advance shall be due and payable on the
Maturity Date for such Advance.
SECTION I.08. PREPAYMENT OF THE ADVANCES.
(a) It is understood and agreed that the Borrower shall have the
right at any time and from time to time, upon not less than three (3) Business
Days' prior written or telephonic notice (in the case of telephonic notice,
promptly confirmed in writing) to the Agent specifying the date and amount of
such prepayment, to prepay all or a portion of the outstanding Advances,
together with unpaid Yield thereon, on a Business Day; PROVIDED, that any such
prepayment, if a partial prepayment, shall be an integral multiple of $1,000,000
with a minimum amount of $1,000,000.
(b) If at any time the Borrower does not comply with the Borrowing
Base Test, the Borrower shall, no later than the close of business on the next
Business Day following the occurrence of such compliance shortfall: (i) either
(x) transfer into the Collateral Account additional Eligible Collateral having
an Asset Value at least sufficient to cause the aggregate Asset Value of the
Assigned Collateral to satisfy the Borrowing Base Test; or (y) prepay Advances
in a principal amount (and pay the Yield thereon) at least sufficient to cause
the aggregate Asset Value of the Assigned Collateral to satisfy the Borrowing
Base Test, and (ii) deliver to Agent a certificate, signed by an authorized
officer of the Borrower, that (x) specifies the amount of the compliance
shortfall; (y) specifies the identity and Asset Value of the additional Eligible
Collateral transferred, or the principal amount of Advances prepaid, as
applicable; and (z) certifies that such compliance shortfall has been cured.
(c) If at any time the Borrower does not comply with the Total
Eligible Asset Coverage Test, the Borrower shall: (i) no later than the close of
business on the fifth Business Day following the occurrence of such compliance
shortfall either (A) acquire additional Eligible Assets having an Asset Value at
least sufficient to cause Credits Outstanding to be less than or equal to
32-1/3% of the Net Eligible Asset Value, as determined on the second Business
Day after the occurrence of such compliance shortfall, or (B) prepay Advances in
a principal amount (and pay the Yield thereon) at least sufficient to cause
Credits Outstanding to be less than or equal to 32-1/3% of the Net Eligible
Asset Value, as determined on the second Business Day after the occurrence of
such compliance shortfall; and (ii) no later than the close of business on the
second Business Day following the occurrence of such compliance shortfall,
deliver to the Agent a certificate, signed by an authorized officer of the
Borrower, that certifies (1) the amount of the compliance shortfall, (2)
specifies whether the Borrower shall either (x) prepay the Advances in
accordance with clause (B) above, or (y) acquire additional Eligible Assets in
accordance with clause (A) above and specifying the identity and Asset Value of
the Eligible Assets for which the Borrower has entered into corrective trades in
order to satisfy the requirements of clause (A) of this Section 2.05(c), and (3)
certifies that the requirements of this Section 2.05(c) shall be satisfied on or
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prior to the fifth Business Day following the occurrence of such compliance
shortfall.
(d) The amount of each prepayment under this Section 2.05 shall be applied to
the Advances in the order in which such Advances were made.
SECTION I.09. YIELD.
The Borrower hereby agrees to pay the Yield computed with reference
to the principal amount of each Advance outstanding from time to time. Yield
accruing in respect of any Advance for any Settlement Period shall be due and
payable on the Settlement Date immediately succeeding such Settlement Period and
as required by Section 2.05. It is the intention of the parties hereto that the
Yield on the Advances shall not exceed the maximum rate permissible under
applicable law. Accordingly, anything herein or in any Advance Note to the
contrary notwithstanding, in the event any Yield is charged to, collected from
or received from or on behalf of the Borrower by the Lender or the Secondary
Lenders pursuant hereto or thereto in excess of such maximum lawful rate, then
the excess of such payment over that maximum shall be applied first to the
payment of amounts owing by the Borrower to the Lender, the Secondary Lenders
and the Agent under the Program Documents (other than in respect of principal
and Yield on Advances) and then to the reduction of the outstanding principal
balance of the Advances.
SECTION I.10. INCREASED COSTS.
If, due to either (i) the introduction of or any change (other than
any change by way of imposition or increase of reserve requirements reflected in
the Eurodollar Rate Reserve Percentage) in or in the interpretation of any
Applicable Law or (ii) the compliance with any guideline or request from any
central bank or other Authority (whether or not having the force of law), there
shall be any increase in the cost to the Lender or any Secondary Lender or any
of their respective Affiliates (each an "Affected Person") of agreeing to make
or making, funding or maintaining Eurodollar Rate Advances to the Borrower, then
the Borrower shall from time to time, upon demand by the Lender or such
Secondary Lender pay to the Agent for the account of the Lender or such
Secondary Lender additional amounts sufficient to compensate the Lender or such
Secondary Lender for such increased cost. A certificate as to the amount of such
increased cost, submitted to the Borrower by the Lender or such Secondary
Lender, shall be conclusive and binding for all purposes, absent manifest error.
If an Affected Person determines that compliance with any Applicable
Law or request from any central bank or other Authority charged with the
interpretation or administration thereof (whether or not having the force of
law) affects or would affect the amount of capital required or expected to be
maintained by such Affected Person and that the amount of such capital is
increased by or based upon the existence of such Affected Person's commitment
under the Program Documents or upon such Affected Person's making, funding or
maintaining Advances, then, upon demand of such Affected Person (with a copy of
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such demand to the Agent), the Borrower shall immediately pay to the Agent for
the account of such Affected Person, from time to time as specified by such
Affected Person, additional amounts sufficient to compensate such Affected
Person in light of the circumstances. A certificate setting forth in reasonable
detail such amounts submitted to the Borrower by such Affected Person shall be
conclusive and binding for all purposes, absent manifest error.
SECTION I.11. COMPENSATION.
The Borrower shall compensate the Lender and each Secondary Lender,
upon its written request (which request shall set forth the basis for requesting
such amounts), for all reasonable losses, expenses and liabilities (including,
without limitation, any interest paid by the Lender and each Secondary Lender to
lenders of funds borrowed by it to make or carry its Eurodollar Rate Advances
and any loss sustained by the Lender or any such Secondary Lender in connection
with the re-employment of such funds, but excluding any loss of anticipated
profit), which the Lender or any such Secondary Lender may sustain: (i) if for
any reason (other than a default by the Lender or such Secondary Lender) a
borrowing of any Eurodollar Rate Advance by the Borrower does not occur on a
date specified therefor in the Notice of Borrowing (whether or not withdrawn),
(ii) if any prepayment of any of the Borrower's Eurodollar Rate Advances occurs
on a date which is not the last day of a Settlement Period applicable thereto,
(iii) if any prepayment of any of the Borrower's Eurodollar Rate Advances is not
made on any date specified in a notice of prepayment given by the applicable
Borrower, or (iv) as a consequence of any other default by the Borrower to repay
its Eurodollar Rate Advances when required by the terms of this Agreement.
SECTION I.12. ADDITIONAL YIELD ON EURODOLLAR RATE ADVANCES.
If the Lender or any Secondary Lender shall be required under
regulations of the Board of Governors of the Federal Reserve System to maintain
reserves with respect to liabilities or assets consisting of or including
Eurocurrency Liabilities, the Borrower shall pay to the Lender or such Secondary
Lender Eurodollar Additional Yield on the principal amount of each outstanding
Advance on each date on which Yield is payable on such Advance. Such Eurodollar
Additional Yield shall be determined by the Lender or such Secondary Lender and
notified to the Borrower through the Agent within thirty (30) days after any
Interest payment is made with respect to which such additional Yield is
requested. A certificate as to such Eurodollar Additional Yield submitted to the
Borrower and the Agent shall be conclusive and binding for all purposes, absent
manifest error.
SECTION I.13. TERMINATION OR REDUCTION OF THE TOTAL
Commitment.
The Borrower may at any time, upon thirty (30) days prior written
notice to the Agent terminate in whole or reduce in part the unused portion of
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the Total Commitment; PROVIDED, that each such partial reduction of the Total
Commitment shall be in an amount equal to at least $5,000,000 or an integral
multiple thereof.
SECTION I.14. RESCISSION OR RETURN OF PAYMENT.
The Borrower further agrees that, if at any time all or any part of
any payment theretofore made by it to any Secured Party or their designees is or
must be rescinded or returned for any reason whatsoever (including, without
limitation, the insolvency, bankruptcy or reorganization of the Borrower or any
of its affiliates), the obligation of the Borrower to make such payment to such
Secured Party shall, for the purposes of this Agreement, to the extent that such
payment is or must be rescinded or returned, be deemed to have continued in
existence and this Agreement shall continue to be effective or be reinstated, as
the case may be, as to such obligations, all as though such payment had not been
made.
SECTION I.15. FEES PAYABLE BY BORROWER.
The Borrower agrees to pay the Agent such fees as are set forth in
the Fee Letter.
SECTION I.16. POST DEFAULT INTEREST.
The Borrower hereby promises to pay interest on the unpaid principal
amount of each Advance and any other amount payable by the Borrower hereunder,
in each case, which shall not be paid in full when due, for the period
commencing on the due date thereof until but not including the date the same is
paid in full at the Post-Default Rate. Interest payable at the Post-Default Rate
shall be payable on the Agent's demand.
SECTION I.17. PAYMENTS.
(a) All amounts owing and payable by the Borrower to the Agent, the
Lender or any Secondary Lender, in respect of the Advances, including, without
limitation, the principal thereof, Yield, fees, expenses or other amounts
payable under the Program Documents, shall be paid in Dollars, in immediately
available funds by wire transfer initiated on or prior to 11:00 a.m. (New York
City time) on the date due without counterclaim, setoff, deduction, defense,
abatement, suspension or deferment to the Agent's Account. Any payment initiated
after 11:00 a.m. (New York City time) on any day shall be deemed to have been
made on the next Business Day for all purposes of this Agreement.
(b) All computations of interest at the Post-Default Rate and all
computations of Yield, fees and other amounts hereunder shall be made on the
basis of a year of 360 days for the actual number of days elapsed. Whenever any
payment to be made hereunder shall be due on a day other than a Business Day,
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such payment shall be made on the next succeeding Business Day and such
extension of time shall be included in the computation of such payment.
(c) Upon receipt of funds deposited into the Agent's Account, the Agent shall
distribute such funds, FIRST to the Lender and the Secondary Lenders in payment
in full of all accrued and unpaid Yield owing to the Lender and Secondary
Lenders, SECOND to the Lender, the Secondary Lenders or the Agent in payment of
any other fees or other amounts owed by the Borrower to the Lender, the
Secondary Lender and the Agent under this Agreement and the other Program
Documents (other than in respect of the principal amount of the Advances), and
THIRD to the payment of the principal amount of the Advances.
(d) The Agent shall, on or prior to 12:00 Noon (New York City time)
on the Business Day immediately preceding each Settlement Date, notify the
Borrower of the Yield, Fees and other amounts due and payable on such Settlement
Date.
SECTION I.18. BORROWER'S OBLIGATIONS ABSOLUTE.
The Borrower's obligations under this Agreement and under the other
Program Documents shall be absolute, unconditional and irrevocable, and shall be
paid strictly in accordance with the terms hereof and thereof, under any and all
circumstances and irrespective of any setoff, counterclaim or defense to payment
which the Borrower may have or have had against the Agent, the Lender any
Secondary Lender or any other Person.
ARTICLE III
CONDITIONS PRECEDENT
SECTION I.19. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF
THIS AGREEMENT.
The effectiveness of this Agreement and the Lender's and the
Secondary Lenders' obligations hereunder shall be subject to the conditions
precedent that the Agent shall have received on or before the initial Borrowing
Date the following, each (unless otherwise indicated) in form and substance
reasonably satisfactory to the Agent in sufficient copies for the Lender and the
Secondary Lenders:
(a) each of the Program Documents duly executed and delivered by the
parties thereto;
(b) the Prospectus, as in effect on the Closing Date;
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(c) the signed opinions of counsel to the Borrower, and the Adviser
addressed to the Agent, the Lender and each Secondary Lender as to such matters
as the Agent, the Lender and each Secondary Lender shall have reasonably
requested;
(d) an Advance Note duly executed and completed by the Borrower to
the Lender and each Secondary Lender, which shall be in full force and effect;
(e) all Governmental Authorizations, Private Authorizations and
Governmental Filings, if any, which may be required in connection with the
transactions contemplated by the Program Documents;
(f) a certificate of the Secretary or Assistant Secretary of each of
the Borrower and the Adviser certifying (i) as to its certificate of
incorporation and by-laws, (ii) as to any resolutions of its Board of Directors
approving this Agreement and the other Program Documents to which it is a party
and the transactions contemplated hereby and thereby, (iii) that its
representations and warranties set forth in the Program Documents are true and
correct, and (iv) the incumbency and specimen signature of each of its officers
authorized to execute the Program Documents;
(g) acknowledgment copies or time stamped receipt copies of proper
financing statements, duly filed on or before the date of such initial borrowing
under the UCC in all jurisdictions necessary in order to perfect the interests
in the Assigned Collateral contemplated by this Agreement;
(h) acknowledgment copies or time stamped receipt copies of proper
financing statements, if any, necessary to release all security interests and
other rights of any Person in the Eligible Assets of the Borrower previously
granted by the Borrower;
(i) the Agent shall have received a pro-forma Investor Report, which
shall evidence compliance with the terms of the Program Documents after giving
effect to the initial borrowing of Advances under this Agreement;
(j) the Agent shall have received the fees to be received by it on
or prior to the Closing Date under the Fee Letter;
(k) the results of a recent search by a Person satisfactory to the
Agent of all UCC lien filings with respect to the Borrower, and such results
shall be satisfactory to the Agent; and
(l) the Agent shall have received from the Borrower such other
instruments, certificates and documents as the Agent shall have reasonably
requested, all in form and substance satisfactory to the Agent.
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SECTION I.20. CONDITIONS PRECEDENT TO ALL ADVANCES.
The obligation of the Lender and the Secondary Lenders to make any
Advance (including the initial Advance) on any Borrowing Date shall be subject
to the fulfillment of the following conditions:
(a) each of the representations and warranties of the Borrower, the
Custodian and the Adviser contained in this Agreement, the Letter Agreement and
the other Program Documents shall be true and correct as of such date;
(b) no Default or Event of Default shall have occurred and be
continuing at or prior to the time of the making of such Advance or shall result
from the making of such Advance;
(c) the conditions precedent set forth in Section 3.01 shall have
been fully satisfied;
(d) immediately after giving effect to such Advance the Borrower
shall be in compliance with each of the Borrowing Base Test and the Total
Eligible Asset Coverage Test;
(e) immediately after the making of any such Advance, the aggregate
outstanding principal amount of all Advances shall not exceed the Total
Commitment; and
(f) the Agent shall have received such other instruments,
certificates and documents as the Agent or the Lender shall reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION I.21. REPRESENTATIONS AND WARRANTIES OF THE
Borrower.
The Borrower represents and warrants to each of the Secured Parties
on and as of the Closing Date, each Borrowing Date, each date Assets are
credited to or removed from the Collateral Account and the last day of each
Settlement Period, as follows:
(a) the Borrower is duly organized and validly existing in good
standing under the laws of the State of Maryland, with full corporate power and
authority to own and operate its assets and properties, conduct the business in
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which it is now engaged and to execute and deliver and perform its obligations
under this Agreement and the other Program Documents to which it is a party;
(b) the Borrower is duly qualified to do business and is in good
standing in each jurisdiction in which the nature of its business, assets and
properties, including, without limitation, the performance of its obligations
under this Agreement and the other Program Documents to which it is a party,
requires such qualification;
(c) the execution, delivery and performance by the Borrower of the
Program Documents to which it is a party and the other instruments and
agreements contemplated thereby are within its corporate powers and have been
duly authorized by all requisite corporate action by the Borrower and have been
duly executed and delivered by the Borrower and constitute the legal, valid and
binding obligations of the Borrower enforceable against the Borrower in
accordance with their respective terms;
(d) neither the execution and delivery by the Borrower of this
Agreement, the other Program Documents to which it is a party, or any instrument
or agreement referred to herein or therein, or contemplated hereby or thereby,
nor the consummation of the transactions herein or therein contemplated, nor
compliance with the terms, conditions and provisions hereof or thereof by it,
will (i) conflict with, or result in a breach or violation of, or constitute a
default under its certificate of incorporation or by-laws or other
organizational documents, (ii) conflict with or contravene any Applicable Law or
any contractual restriction binding on or affecting the Borrower or any of its
Assets, (iii) result in a breach or violation of, or constitute a default under,
or permit the acceleration of any obligation or liability in, or but for any
requirement of the giving of notice or the passage of time (or both) would
constitute such a conflict with, breach or violation of, or default under, or
permit any such acceleration in, any contractual obligation or any agreement or
document to which it is a party or by which it or any of its properties is bound
(or to which any such obligation, agreement or document relates), or (iv) result
in any Adverse Claim upon any Asset of the Borrower;
(e) the Borrower has obtained all necessary Governmental
Authorizations and Private Authorizations, and made all Governmental Filings
necessary for the execution, delivery and performance by the Borrower of this
Agreement, the other Program Documents to which it is a party and the agreements
and instruments contemplated hereby or thereby, and no Governmental
Authorization, Private Authorization or Governmental Filing which have not been
obtained or made, is required to be obtained or made by it in connection with
the execution, delivery or performance of this Agreement and the other Program
Documents;
(f) this Agreement and the Control Agreement and the actions
required to be taken pursuant to the terms hereof are effective to create and
perfect in the Agent for the benefit of the Secured Parties a perfected security
interest in the Assigned Collateral free and clear of all Adverse Claims;
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(g) each Asset of the Borrower which constitutes Assigned Collateral
is an Eligible Asset; the Borrower owns each such Eligible Asset free and clear
of Adverse Claims (other than Permitted Liens); and as of the initial Borrowing
Date and at all times thereafter, the Agent has a first priority perfected
security interest in the Assigned Collateral free and clear of all Adverse
Claims and no actions, except as have been taken, are necessary to perfect or
protect such security interest;
(h) no effective financing statements or other instruments similar
in effect covering any Asset of the Borrower is on file in any recording office,
except those filed in favor of the Agent pursuant to this Agreement;
(i) the Borrower's principal place of business and chief executive
office is at the address referred to in Section 5.01(d);
(j) there are no pending or, to the best of the Borrower's
knowledge, threatened investigations, actions, suits or proceedings involving
the Borrower which give rise to a reasonable possibility of a Material Adverse
Effect;
(k) the Borrower is registered as a diversified, closed-end
management investment company as such term is used in the Investment Company Act
and is in compliance in all material respects with the Investment Policies and
Restrictions;
(l) the Prospectus, each Investor Report, each Weekly Portfolio
Report, each Notice of Borrowing and all other written information, reports and
statements (with respect to which, other than the Investor Report the Weekly
Portfolio Report and each Notice of Borrowing, shall be taken as a whole)
provided by or on behalf of the Borrower to any Secured Party for purposes of or
in connection with this Agreement, the other Program Documents or the
transactions contemplated hereby or thereby is, and all such information
hereafter provided by or on behalf of the Borrower to any Secured Party will be
true, correct and complete in all material respects on the date such information
is stated or certified and no such information contains, or will contain, any
material misrepresentation or any omission to state therein matters necessary to
make the statements made therein not misleading in any material respect when
considered in its entirety;
(m) the Borrower is in compliance in all material respects with
Applicable Law, including, without limitation, the Securities Act and the
Investment Company Act;
(n) the Borrower is not a member of an ERISA Group and has no
Benefit Arrangement, Plan or Multiemployer Plan subject to ERISA;
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(o) on each Borrowing Date and immediately after the making of each
Advance itis in full compliance with the Borrowing Base Test and the Total
Eligible Asset Coverage Test and the other conditions specified in Section 3.02;
(p) the Borrower has reasonably determined that the Adviser has
developed a program to address, on a timely basis (and in any event prior to
December 31, 1999) and in all material respects, the risk that computer
applications used in connection with the business and operations of the Borrower
by the Adviser or by any of the Borrower's other material service providers may
not properly perform date-sensitive functions involving certain dates prior to,
during and after the year 2000 (the "Year 2000 Problem") and the Year 2000
Problem will not result in any Default or Event of Default by the Borrower and
does not give rise to a reasonable possibility of a Material Adverse Effect;
(q) the Borrower will qualify as a "regulated investment company"
within the meaning of the Internal Revenue Code, and as such its income is not,
and will not be, subject to income tax at the corporate level under the Internal
Revenue Code;
(r) the Borrower has filed all United States Federal income tax
returns and all other material tax returns which are required to be filed by it,
if any, and has paid all taxes due pursuant to such returns, if any, or pursuant
to any assessment received by the Borrower, except for any taxes or assessments
which are being contested in good faith by appropriate proceedings and with
respect thereto adequate reserves have been established in accordance with GAAP
and which could otherwise not give rise to a reasonable possibility of a
Material Adverse Effect; and the charges, accruals and reserves on the books of
the Borrower in respect of taxes or other governmental charges, if any, are, in
the opinion of the Borrower, adequate; and
(s) the statement of assets and liabilities of the Borrower as at
June 18, 1998, certified by Ernst & Young LLP, independent auditors, fairly
presents in conformity with GAAP the financial position of the Borrower at such
date and since such date there has been no material adverse change in the
business, financial condition or results of operations of the Borrower.
ARTICLE V
COVENANTS
SECTION I.22. AFFIRMATIVE COVENANTS OF THE BORROWER.
The Borrower covenants and agrees that it shall:
(a) (i) duly observe, comply with and conform to all requirements of
Applicable Law relative to the conduct of its business or to its Assets,
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including without limitation the Investment Company Act, to the extent failure
to so observe, comply or conform does not give rise to a reasonable possibility
of a Material Adverse Effect, (ii) preserve and keep in full force and effect
the legal existence of the Borrower and the rights, privileges, qualifications
and franchises of the Borrower, and (iii) obtain, maintain and keep in full
force and effect all Governmental Authorizations, Private Authorizations and
Governmental Filings which are necessary to properly carry out its business and
the transactions contemplated to be performed by the Borrower under this
Agreement and the other Program Documents;
(b) cause to be computed, paid and discharged when due all taxes,
assessments and other governmental charges or levies imposed upon it, or upon
any income or Assets of the Borrower, prior to the day on which penalties are
attached thereto, unless and to the extent that the same shall be contested in
good faith by appropriate proceedings and with respect to which adequate
reserves have been established on the books of the Borrower in accordance with
GAAP and which could not otherwise give rise to a reasonable possibility of a
Material Adverse Effect;
(c) promptly, at its expense, execute and deliver such further
instruments and take such further action in order to establish and protect the
rights, interests and remedies created, or intended to be created, in favor of
the Secured Parties, including, without limitation, all such actions which are
necessary or advisable to maintain and protect the Secured Parties' security
interest in the Related Security (other than as to perfection) and the Secured
Parties' first priority perfected security interest in the Assigned Collateral;
(d) keep its principal place of business and chief executive office
at the address of the Borrower set forth in Section 9.02 or, upon thirty (30)
days' prior written notice to the Agent, at any other locations in jurisdictions
where all actions reasonably requested by the Agent to protect and perfect the
Secured Parties' security interest in the Assigned Collateral have been taken
and completed;
(e) provide to the Agent (with enough additional copies for the
Lender and each Secondary Lender):
(i) as soon as available, and in any event within seventy-five
(75) days after the end of each fiscal year of the Borrower, a statement
of assets and liabilities of the Borrower as at the end of such fiscal
year, and statements of operations and of changes in net assets of the
Borrower for such fiscal year, and a portfolio of investments as of the
end of such fiscal year, with an audit report thereon issued by Ernst &
Young LLP or other independent auditors of nationally recognized standing,
together with the comparable report for the prior fiscal year;
(ii) as soon as available, and in any event within seventy-five
(75) days after the end of each first semi-annual fiscal period of the
Borrower, a statement of assets and liabilities of the Borrower as at the
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end of such period, a statement of operations and of changes in net assets
of the Borrower for such period, and a portfolio of investments as of the
end of such period, all certified (subject to normal year-end adjustment)
as to fairness of presentation in all material respects by the treasurer,
chief financial officer or controller of the Borrower;
(iii) simultaneously with the delivery of each set of financial
statements referred to in clause (i) above, a statement of the firm of
independent auditors which reported on such statements to the effect that
nothing has come to its attention to cause it to believe that any Default
or Event of Default existed on the date of such statements;
(iv) as soon as possible, and in any event within five (5) days
of the occurrence of any Default or Event of Default, a certificate of the
treasurer, the chief financial officer or the chief accounting officer of
the Borrower setting forth the details thereof and the action which the
Borrower is taking or proposes to take with respect thereto;
(v) promptly upon the mailing thereof to the shareholders of
the Borrower generally, copies of all financial statements, reports and
proxy statements so mailed;
(vi) promptly upon the filing thereof, copies of all
registration statements (other than the exhibits thereto and any
registration statements on Form S-8 or its equivalent) and annual and
semi-annual reports which the Borrower shall have filed with the SEC;
(vii) on or before Monday of each week, weekly portfolio
reports and weekly covenant compliance certificates in substantially the
form of Schedule II attached hereto (each a "Weekly Portfolio Report")
with respect to the immediately preceding calendar week, signed by an
authorized officer of the Borrower;
(viii)on or before the tenth (10th) Business Day of each
calendar month or more frequently as the Agent shall reasonably request
(which may be daily), an Investor Report substantially in the form of
Schedule I hereto, together with a certificate of the Borrower in
substantially the form of Annex A to the Investor Report;
(ix) from time to time upon the request of the Agent, the
Borrower shall, or shall cause the Custodian to deliver a report
identifying the locations of any Assigned Collateral which is in the
possession of or is maintained in securities accounts with an agent or
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sub-custodian of the Custodian which report shall specify the Assigned
Collateral held by each such agent or sub-custodian;
(x) promptly upon its receipt of and contemporaneously with its
giving of any notice relating to the termination of the Custodial
Agreement or the Control Agreement, copies of any such notice; and
(xi) from time to time such additional information regarding
the financial position or business of the Borrower as the Agent may
reasonably request;
(f) maintain in force with financially sound and reputable insurers,
policies with respect to its assets and property and business against such risks
and contingencies and in such amounts as are customary in the case of closed-end
funds, engaged in similar lines of business of comparable size and financial
strength and as may be required by the SEC;
(g) remain at all times a diversified, closed-end investment company
for the purposes of the Investment Company Act and continue to engage in
business of the same general type as now conducted by the Borrower, and will
preserve, renew and keep in full force and effect its corporate existence and
rights, privileges and franchises necessary or desirable in the normal conduct
of business and will at all times remain registered under the Investment Company
Act;
(h) annually (or more frequently as the Agent, for itself and as
agent for the Secured Parties may require after the occurrence of and during the
continuance of a Default or an Event of Default) and at the sole cost and
expense of the Borrower
(i) cause Ernst & Young LLP, or another independent auditor of
nationally recognized standing selected by the Borrower and reasonably
satisfactory to the Agent, to enter the premises of the Borrower and any Person
to whom the Borrower delegates all or any portion of its duties under any
Program Document (including, without limitation, the Custodian) and examine and
audit the books, records and accounts of the Borrower relating to its business,
financial condition, operations and the Borrower's performance under the Program
Documents, (ii) permit such accounting firm to discuss the Borrower's affairs
and finances with the officers, partners, employees and accountants of any of
them, (iii) cause such auditing firm to provide to the Agent, for itself and as
agent for the Secured Parties, with a certified report in respect of the
foregoing, which shall be in form and scope reasonably satisfactory to the
Agent, for itself and as agent for the Secured Parties, and (iv) authorize such
accounting firm to discuss such affairs, finances and performance with
representatives of the Agent and its designees; it being understood that such
annual audit and report of such independent auditors may be coordinated with the
Borrower's regular annual audit by the Borrower's auditors;
(i) permit the Agent or any Person designated by the Agent to, upon
reasonable advance notice and during normal hours, visit and inspect at
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reasonable intervals its books, records and accounts relating to its business,
financial condition, operations and its performance under the Program Documents
and to discuss the foregoing with the officers, partners, employees and
accountants of the Borrower, all as often as the Agent may reasonably request.
(j) at all times comply with the Borrowing Base Test and the Total
Eligible Asset Coverage Test and at all times comply in all material respects
with the Investment Policies and Restrictions;
(k) the Borrower shall warrant and defend each of the Secured
Parties' right and interest in and to the Assigned Collateral and the Related
Security against all Adverse Claims of all Persons whomsoever;
(l) the Borrower shall at all times cause the Custodian to have and
maintain in its custody and control Assigned Collateral in accordance with the
terms of the Custodial Agreement and the Control Agreement and shall at all
times cause all Eligible Assets of the Borrower to be custodied with the
Custodian or a sub-custodian pursuant to the Custodial Agreement;
(m) promptly give notice in writing to the Agent of all litigation,
arbitration proceedings and regulatory proceedings affecting the Borrower or the
Assets of the Borrower, except such proceedings which could not give rise to a
reasonable possibility of a Material Adverse Effect;
(n) keep proper books of record and account in which full, true and
correct entries shall be made of all dealings and transactions in relation to
its business and activities in accordance with the requirements of the SEC; and
(o) except as consented to by the Agent (which consent shall not be
unreasonably withheld), at all times maintain Mitchell Hutchins Asset Management
Inc. as the Borrower's investment adviser; PROVIDED, that the Agent shall in no
event be obligated to consent to any change of the Adviser unless such successor
investment adviser has entered into a letter agreement with the Agent
substantially identical to the Letter Agreement.
SECTION I.23. NEGATIVE COVENANTS OF THE BORROWER.
The Borrower covenants and agrees that the Borrower shall not:
(a) enter into any agreement containing any provision which would be
violated or breached by the performance of its obligations under any Program
Document;
(b) engage in any line of business not contemplated by the
Prospectus;
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(c) create, assume or suffer to exist any Debt, except for Permitted
Debt;
(d) adopt or carry out any plan of liquidation, partial liquidation,
reorganization, incorporation, recapitalization, merger or consolidation nor
sell, transfer or otherwise dispose of all or any substantial portion of its
assets, without the prior written consent of the Agent;
(e) make any (i) payment to any Person except to the extent such
payment is made pursuant to the terms of the Program Documents or such payment
is made in the ordinary course of the Borrower's business, or (ii) advance or
other extension of credit to any Person, except as expressly contemplated by the
Investment Policies and Restrictions;
(f) permit or consent to a change of the Custodian or cancel or
terminate the Custodial Agreement or the Control Agreement, or request, consent
or agree to any such cancellation or termination except with the prior written
consent of the Agent (which consent shall not be unreasonably withheld);
(g) without the prior written consent of the Agent (which consent
shall not be unreasonably withheld), permit or consent to any material
amendment, modification or waiver of the Custodial Agreement;
(h) without the prior written consent of the Agent (which consent
shall not be unreasonably withheld), take any action inconsistent in any
material respect with the Investment Policies and Restrictions;
(i) be a member of an ERISA Group or have any Benefit Arrangement,
Plan or Multiemployer Plan subject to ERISA;
(j) permit any change in the Investment Policies and Restrictions in
effect on the Closing Date without the prior written consent of the Agent (which
consent shall not be unreasonably withheld);
(k) create, assume or suffer to exist any Lien on any Asset now
owned or hereafter acquired by it (including without limitation the Assigned
Collateral and the Related Security), except in the case of all Assets other
than the Assigned Collateral and the Related Security, for Permitted Liens or
any Liens incurred in the ordinary course of the Borrower's business arising out
of reverse repurchase agreements, dollar rolls, Derivative Transactions and
securities lending transactions;
(l) issue any Equity Securities constituting "senior securities", as
such term is defined and used in the Investment Company Act;
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(m) extend credit to others for the purpose of buying or carrying
any "margin stock" in such a manner as to violate Regulation T, Regulation U or
Regulation X;
(n) make any distributions, dividends or other payments on account
of its capital stock to, redemptions and open-market stock repurchases of, or
tender offers for, its capital stock from, its shareholders: (i) during the
continuance of any Event of Default; (ii) at any time that Borrower is not in
compliance with the Total Eligible Asset Coverage Test; or (iii) if any Default
or Event of Default would be caused thereby;
(o) change its name (i) without giving the Agent at least thirty
(30) days prior written notice, and (ii) unless all actions necessary and
appropriate to protect and perfect the Secured Parties' security interest in the
Assigned Collateral have been taken and completed;
(p) permit the Aggregate Custodian's Advance Amount to at any time
exceed $40,000,000;
(q) after the Borrower has received written notice of delivery by
the Agent to the Custodian of a Notice of Exclusive Control, unless such Notice
of Exclusive Control is revoked in writing by the Agent, give any instruction to
the Custodian in respect of the Assigned Collateral without the prior written
consent of the Agent; or
(r) permit the aggregate Asset Value of all Eligible Collateral that
does not constitute "margin stock" within the meaning of Regulation U of the
Board of Governors of the Federal Reserve System to be less than Credits
Outstanding.
ARTICLE VI
EVENTS OF DEFAULT
SECTION I.24. EVENTS OF DEFAULT.
If any of the following events (each an "Event of Default") shall
occur:
(a) the Borrower shall fail to comply with Section 2.05(b) or
Section 2.05(c);
(b) the Borrower shall fail to make or cause to be made in the
manner and when due any payment (other than any payment contemplated by clauses
(b) or (c) of Section 2.05)to be made or to be caused to be made by it under
this Agreement, any Advance Note, the Fee Letter, the Control Agreement or the
Custodial Agreement and such failure shall continue for five (5) Business Days;
or
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(c) the Borrower shall fail to comply with (i) clause (k) of Section
5.02 and such failure shall continue for two (2) Business Days, or (ii) clauses
(g) or (o) of Section 5.01 or clauses (c), (d), (e), (f), (g), (j) or (l) of
Section 5.02; or
(d) (i) the Borrower shall fail to perform or observe any other
term, covenant or agreement on its part to be performed or observed under this
Agreement, Fee Letter or any other Program Document, (ii) the Custodian shall
fail to perform or observe any term, covenant or agreement on its part to be
performed or observed under the Control Agreement, or (iii) the Custodian shall
fail to perform or observe any term, covenant or agreement on its part to be
performed under the Custodial Agreement and such failure either (A) gives rise
to a Material Adverse Effect, or (B)(x) is of a material nature, (y) the
Borrower has actual knowledge of such failure, and (z) such failure is capable
of being cured and is not cured, and such failure described in clauses (i), (ii)
or (iii) above shall continue for ten (10) Business Days; or
(e) any representation or warranty made or deemed made by the
Borrower or the Custodian under or in connection with this Agreement or any
other Program Document or any other certificate, information or report delivered
by or on behalf of the Borrower or the Custodian shall be deemed to have been
false or incorrect in any material respect when made or deemed made or
delivered; or
(f) the Agent shall for any reason cease to have a valid and
perfected first priority security interest in the Assigned Collateral free and
clear of all Adverse Claims; or
(g) the Borrower, the Adviser or the Custodian shall generally not
pay its debts as such debts become due, or shall admit in writing its inability
to pay its debts generally, or shall make a general assignment for the benefit
of creditors; or any proceeding shall be instituted by or against the Borrower,
the Adviser or the Custodian seeking to adjudicate it a bankrupt or insolvent,
or seeking liquidation, winding up reorganization, arrangement, adjustment,
protection, relief, or composition of it or its debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors, or seeking the
entry of an order for relief or the appointment of a receiver, trustee,
custodian or other similar official for it or for any substantial part of its
property and, in the case of any such proceeding instituted against it (but not
instituted by it), either such proceeding shall remain undismissed or unstayed
for a period of thirty (30) days, or any of the actions sought in such
proceeding (including an order for relief against, or the appointment of a
receiver, trustee, custodian or other similar official for, it or for any
substantial part of its property) shall occur; or the Borrower, the Adviser or
the Custodian shall take any corporate action to authorize any of the actions
set forth above in this subsection; or
(h) as of the end of any calendar month after the Closing Date, the
Net Asset Value of the Borrower shall have decreased by twenty-five percent
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(25%) or more from the Net Asset Value of the Borrower as of the end of the
immediately preceding calendar month; or
(i) any provision of any Program Document which is material to the
Secured Parties' right to repayment of the Borrower Obligations and their
remedies in respect thereof shall cease to be a legal, valid and binding
obligation of any of the parties purported to be bound thereby, enforceable in
accordance with its respective terms or the Borrower, the Adviser or the
Custodian shall so assert in writing; or
(j) any judgment or order, or any series of judgments or orders,
shall have been entered against the Borrower, provided that (i) such judgments
or orders shall aggregate to $1,000,000 or more, and (ii) enforcement actions
have been commenced with respect thereto and have not been dismissed for ten
(10) Business Days; or
(k) either (1) State Street Bank and Trust Company shall at any time
cease to serve as Custodian under the Custodial Agreement or the Control
Agreement, unless a successor thereto reasonably satisfactory to the Agent shall
have assumed the duties of the Custodian thereunder and in accordance with the
terms of the Program Documents, or (2) the Custodian or the Borrower shall have
given notice of the termination of the Custodial Agreement or the Control
Agreement; PROVIDED, HOWEVER, that such event specified in clause (2) above
shall not constitute an Event of Default if prior to the fifth (5th) Business
Day immediately preceding the effective date of such termination a successor
custodian reasonably satisfactory to the Agent shall have been appointed as
custodian under the Custodial Agreement and shall have assumed the obligations
of the Custodian under the Control Agreement; or
(l) any event or condition shall occur which results in the
acceleration of the maturity of any Debt of the Borrower which Debt in the
aggregate is at least $1,000,000 or enables (or, with the giving of notice or
lapse of time or both would enable) the holder of such Debt or any Person acting
on such holder's behalf to accelerate the maturity thereof; or
(m) any change in Law shall be proposed by an Authority with
jurisdiction to enact or promulgate the same or shall be enacted or promulgated
which could significantly limit the ability of the Agent, or any Secured Party
to foreclose upon its interest in, or in the event of such foreclosure to
dispose of, the Assigned Collateral or to be granted the security interest in
Assigned Collateral as contemplated by the Program Documents; or
(n) all of the following occur: (i) the Adviser shall sell or
otherwise dispose of all or substantially all of its assets, or consolidate with
or merge into any other entity unless it is the survivor (each, an "Adviser
Transfer"); (ii) such Adviser Transfer shall result in a change in the then
current portfolio manager for the Borrower; and (iii) the Agent shall not have
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consented to such Adviser Transfer within one hundred twenty (120) days
following the date of such Adviser Transfer; or
(o) the Advisory Agreement in effect on the Closing Date shall be
(i) amended, waived or otherwise modified in any material respect, or (ii) shall
be terminated in either case without the prior written consent of the Agent
(which consent shall not be unreasonably withheld);
(p) if Mitchell Hutchins Asset Management Inc. is not the current
investment adviser for the Borrower, there shall not be in full force and effect
a letter agreement substantially identical to the Letter Agreement between the
Agent and such successor investment adviser;
then, and in any such event, in addition to all rights and remedies specified in
this Agreement, including without limitation, Article VII, and the rights and
remedies of a secured party under Applicable Law including, without limitation
the UCC, the Agent may, by notice to the Borrower, declare the Lender
Termination Date and the Secondary Lender Termination Date to have occurred and
declare the outstanding Advances to be due and payable (in which case the Lender
Termination Date, the Secondary Lender Termination Date and the Maturity Date
shall be deemed to have occurred); PROVIDED, that, upon the occurrence of any
event (without any requirement for the passage of time or the giving of notice,
or both) described in subsection (g) of this Section 6.01, the Lender
Termination Date, the Secondary Lender Termination Date and the Maturity Date
shall be deemed to have automatically occurred.
ARTICLE VII
PLEDGE OF ASSIGNED COLLATERAL; RIGHTS OF THE AGENT
SECTION I.25. SECURITY INTERESTS.
As collateral security for the prompt, complete and unconditional
payment and performance of all of the Borrower Obligations, the Borrower hereby
pledges, hypothecates, assigns, transfers, sets over and delivers to the Agent
for the benefit of the Secured Parties and grants to the Agent for the benefit
of the Secured Parties a continuing Lien upon and security interest in, all of
the Borrower's right, title and interest in, to and under the following assets
and properties whether now owned or hereafter acquired (the items specified in
clauses (i), (ii), (iii) and (vii) below, collectively, the "Assigned
Collateral", and the items specified in clauses (iv), (v) and (vi) below,
collectively, the "Related Security"):
(i) all investment property from time to time credited to the
Collateral Account including all security entitlements with respect
thereto;
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(ii) the Collateral Account;
(iii) all interest, dividends, stock dividends, stock splits,
distributions and other money or property of any kind distributed in
respect of the assets, investments and property described in clause (i)
above;
(iv) all rights and remedies of the Borrower under the
Custodial Agreement in respect of the assets, investments and property
described in clause (i) above;
(v) all security interests, liens, property, guaranties,
insurance and other agreements or arrangements of whatever character from
time to time supporting or securing payment of the assets, investments and
property described in clause (i) above;
(vi) all books, records and other information (including,
without limitation, computer programs, tapes, discs, punch cards, data
processing software and related property and rights) relating to the
Assets described in clause (i) above; and
(vii) all Proceeds of any and all of the foregoing.
SECTION I.26. SUBSTITUTION OF COLLATERAL AND RELEASE OF
SECURITY INTEREST.
(a) So long as no Default or Event of Default shall have occurred
and be continuing or would occur as a consequence of such sale or disposition,
the Borrower may originate entitlement orders with respect to the Collateral
Account and may sell or dispose of or substitute Assigned Collateral in
accordance with the terms of this Agreement and the Control Agreement.
(b) After the Lender Termination Date and the Secondary Lender
Termination Date when all Borrower Obligations have been paid in full, the
Secured Parties at the request of the Borrower shall promptly and in any event
within twenty (20) days after such request execute, deliver and file such
instruments as the Borrower shall reasonably request in order to reassign,
release or terminate its security interest in the Assigned Collateral. Any and
all actions under this Section 7.02 shall be without any recourse to, or
representation or warranty by, the Agent or any Secured Party (except for a
representation that such Assigned Collateral is free and clear of Liens created
by or arising through the Secured Parties) and shall be at the sole cost and
expense of the Borrower.
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SECTION I.27. APPLICATION OF PROCEEDS.
(a) After the occurrence of an Event of Default, all amounts
received in respect of the Borrower Obligations, including all Proceeds
resulting from the sale or other disposition of the Assigned Collateral or the
Related Security shall be applied by the Agent in the following order and
priority:
FIRST, to the payment of all amounts advanced or expended by the
Agent and all costs and expenses incurred by the Agent in connection with the
enforcement of the Secured Parties rights and remedies under the Program
Documents;
SECOND, to the extent funds are remaining after the above
application, to the Lenders and the Secondary Lenders to the payment of all
accrued and unpaid Yield on all outstanding Advances on a pro-rata basis
according to the amount of accrued Yield owing to each Lender and Secondary
Lender;
THIRD, to the extent funds are remaining after the above
applications, to the Secured Parties to the payment of all fees payable under
the Fee Letter on a pro rata basis according to the amount of such fees owing to
each Secured Party;
FOURTH, to the extent funds are remaining after the above
applications, to the Lenders and the Secondary Lenders to the payment of the
principal amount of each outstanding Advance on a pro-rata basis according to
the amount of principal owing to each Lender and Secondary Lender;
FIFTH, to the extent funds are remaining after the above
applications, to the Secured Parties to the payment of all other amounts payable
to the Secured Parties pursuant to this Agreement and the other Program
Documents on a pro rata basis according to the amounts owed to each Secured
Party.
The Agent shall, after the final payment in full of all
Advances and all other Borrower Obligations, remit the remaining excess Proceeds
which it had received from the sale or disposition of the Assigned Collateral
and the Related Security to the Borrower.
(b) For purposes of determining the application to be made of such
monies andother cash proceeds by the Agent to the Lender and the Secondary
Lenders pursuant to this Section 7.03, the Agent may rely exclusively upon a
certificate or other statement the Lender or such Secondary Lender, as the case
may be, setting forth in reasonable detail the Lender's and such Secondary
Lender's amount then owing to the Lender and such Secondary Lender, as the case
may be. The Agent shall not be liable for any application of funds in accordance
with any certificate or direction delivered pursuant to this Section 7.03;
PROVIDED, HOWEVER, that no application of funds in accordance with any
certificate delivered pursuant to this Section 7.03 shall be deemed to restrict
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or limit the right of any party to contest with the purported obligee its
respective liability in respect of the amount set forth in such certificate.
SECTION I.28. RIGHTS AND REMEDIES UPON EVENT OF DEFAULT.
(a) The Agent (for itself and on behalf of the other Secured
Parties) shall have all of the rights and remedies of a secured party under the
UCC and other Applicable Law. Upon the occurrence and during the continuance of
an Event of Default, the Agent or its designees may (i) deliver a Notice of
Exclusive Control to the Custodian; (ii) instruct the Custodian to deliver any
or all of the Assigned Collateral to the Agent or its designees and otherwise
give all instructions and entitlement orders to the Custodian regarding the
Assigned Collateral; (iii) sell or otherwise dispose of the Assigned Collateral,
all without judicial process or proceedings; (iv) take control of the Proceeds
of any such Assigned Collateral and the Related Security; (v) exercise any
consensual or voting rights in respect of the Assigned Collateral and the
Related Security; (vi) release, make extensions, discharges, exchanges or
substitutions for, or surrender all or any part of the Assigned Collateral or
the Related Security; (vii) to the extent that the Borrower does not perform its
obligations under Section 7.06, enforce the Borrower's rights and remedies under
the Custodial Agreement with respect to the Assigned Collateral and the Related
Security; (viii) institute and prosecute legal and equitable proceedings to
enforce collection of, or realize upon, any of the Assigned Collateral and the
Related Security; and/or (ix) endorse the name of the Borrower upon any items of
payment relating to the Assigned Collateral and the Related Security or upon any
proof of claim in bankruptcy against an account debtor. For purposes of taking
the actions described in Subsections (i) through (ix) of this Section 7.04(a)
the Borrower hereby irrevocably appoints the Agent as its attorney-in-fact
(which appointment being coupled with an interest is irrevocable while any of
the Borrower Obligations remain unpaid), with power of substitution, in the name
of the Agent or in the name of the Borrower or otherwise, for the use and
benefit of the Agent, but at the cost and expense of the Borrower and without
notice to the Borrower.
(b) All sums paid or advanced by the Agent in connection with the
foregoing and all costs and expenses (including, without limitation, reasonable
attorneys' fees and expenses) incurred in connection therewith, together with
interest thereon at the Post-Default Rate from the date of payment until repaid
in full, shall be paid by the Borrower to the Agent on demand and shall
constitute and become a part of the Borrower Obligations secured hereby.
SECTION I.29. REMEDIES CUMULATIVE.
Each right, power, and remedy of the Agent and the other Secured
Parties, or any of them, as provided for in this Agreement or in the other
Program Documents or now or hereafter existing at law or in equity or by statute
or otherwise shall be cumulative and concurrent and shall be in addition to
every other right, power, or remedy provided for in this Agreement or in the
other Program Documents or now or hereafter existing at law or in equity or by
statute or otherwise, and the exercise or beginning of the exercise by the Agent
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or any other Secured Party of any one or more of such rights, powers, or
remedies shall not preclude the simultaneous or later exercise by such Persons
of any or all such other rights, powers, or remedies.
SECTION I.30. ENFORCEMENT OF REMEDIES UNDER THE CUSTODIAL AGREEMENT.
The Borrower agrees that it shall upon the request of the Agent (and
at the Borrower's own expense) diligently enforce the rights and remedies under
the Custodial Agreement and at law or equity against the Custodian for the
breach by the Custodian of any term, covenant or agreement thereunder relating
to or affecting any Assigned Collateral or any Related Security. In enforcing
such rights and remedies the Borrower shall exercise the same degree and care
that it would exercise if this Agreement had not been entered into; PROVIDED,
that the Borrower shall not, in enforcing such rights and remedies, settle any
claim against the Custodian without the prior written consent of the Agent
(which consent shall not be unreasonably withheld).
ARTICLE VIII
THE AGENT
SECTION I.31. AUTHORIZATION AND ACTION.
The Lender and each of the Secondary Lenders hereby irrevocably
appoints and authorizes the Agent to take such action as agent on its behalf and
to exercise such powers under this Agreement and the other Program Documents as
are delegated to the Agent by the terms hereof and thereof, together with such
powers as are reasonably incidental thereto. As to any matters not expressly
provided for by this Agreement or the other Program Documents, the Agent shall
not be required to exercise any discretion or take any action, but shall be
required to act or to refrain from acting (and shall be fully protected in so
acting or refraining from acting) upon the instructions of the Lender or the
Secondary Lenders; PROVIDED, HOWEVER, that the Agent shall not be required to
take any action which exposes the Agent to personal liability or which is
contrary to this Agreement, the other Program Documents or Applicable Law. The
Lender and each Secondary Lender agrees that in any instance in which the
Program Documents provide that the Agent's consent may not be unreasonably
withheld, provide for the exercise of the Agent's reasonable discretion, or
provide to a similar effect, it shall not in its instructions to the Agent
withhold its consent or exercise its discretion in an unreasonable manner.
SECTION I.32. AGENT'S RELIANCE, ETC.
Neither the Agent nor any of its directors, officers, agents or
employees shall be liable for any action taken or omitted to be taken by it or
them under or in connection with this Agreement or any of the other Program
Documents, except for its or their own gross negligence or willful misconduct.
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Without limiting the generality of the foregoing, the Agent: (i) may consult
with legal counsel (including counsel for the Borrower or the Adviser and
independent public accountants and other experts selected by it and shall not be
liable for any action taken or omitted to be taken in good faith by it in
accordance with the advice of such counsel, accountants or experts; (ii) makes
no warranty or representation to the Lender or any Secondary Lender and shall
not be responsible to the Lender or any Secondary Lender for any statements,
warranties or representations (whether written or oral) made in or in connection
with this Agreement or the other Program Documents; (iii) shall not have any
duty to ascertain or to inquire as to the performance or observance of any of
the terms, covenants or conditions of this Agreement or the other Program
Documents on the part of the Borrower, the Adviser, the Custodian or any other
Person or to inspect the property (including the books and records) of the
Borrower or the Adviser; (iv) shall not be responsible to the Lender or any
Secondary Lender for the due execution, legality, validity, enforceability,
genuineness, sufficiency or value of this Agreement, the other Program Documents
or any other instrument or document furnished pursuant hereto or thereto; and
(v) shall incur no liability under or in respect of this Agreement or any other
Program Document by acting upon any notice, consent, certificate or other
instrument or writing (which may be by telecopier, telegram, cable or telex)
believed by it to be genuine and signed or sent by the proper party or parties.
ARTICLE IX
MISCELLANEOUS
SECTION I.33. NO WAIVER; MODIFICATIONS IN WRITING.
No failure or delay on the part of the Agent, the Lender or any
Secondary Lender exercising any right, power or remedy hereunder or with respect
to the Advances shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right, power or remedy preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
The remedies provided for herein are cumulative and are not exclusive of any
remedies that may be available to the Lender or any Secondary Lender, at law or
in equity. No amendment, modification, supplement, termination or waiver of this
Agreement shall be effective unless the same shall be in writing and signed by
the Borrower, the Agent, the Lender and the Secondary Lenders. Any waiver of any
provision of this Agreement, and any consent to any departure by the Borrower
from the terms of any provision of this Agreement, shall be effective only in
the specific instance and for the specific purpose for which given. No notice to
or demand on the Borrower in any case shall entitle the Borrower to any other or
further notice or demand in similar or other circumstances.
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SECTION I.34. NOTICES, ETC.
Except where telephonic instructions are authorized herein to be
given, all notices, demands, instructions and other communications required or
permitted to be given to or made upon any party hereto shall be in writing and
shall be personally delivered or sent by registered, certified or express mail,
postage prepaid, or by prepaid telegram (with messenger delivery specified in
the case of a telegram), or by facsimile transmission, or by prepaid courier
service, and shall be deemed to be given for purposes of this Agreement on the
day that such writing is received by the intended recipient thereof in
accordance with the provisions of this Section 9.02. Unless otherwise specified
in a notice sent or delivered in accordance with the foregoing provisions of
this Section 9.02, notices, demands, instructions and other communications in
writing shall be given to or made upon the respective parties hereto at their
respective addresses (or to their respective facsimile numbers) indicated below,
and, in the case of telephonic instructions or notices, by calling the telephone
number or numbers indicated for such party below:
If to the Lender: Corporate Receivables Corporation
c/o Citicorp North America, Inc.
450 Mamaroneck Avenue
Harrison, New York 10528
Attention: U.S. Securitization
Telephone No. (914)899-7122
Facsimile No. (914)899-7890
If to the Agent: Citicorp North America, Inc.
U.S. Securitization
450 Mamaroneck Avenue
Harrison, New York 10528
Attention: U.S. Securitization
Telephone No. (914) 899-7122
Facsimile No. (914) 899-7890
If to Citibank: Citibank, N.A.
399 Park Avenue
New York, New York 10043
Attention: Maximization Unit
Telephone No.: (212) 559-0754
Facsimile No.: (212) 758-6272
If to the Borrower: Managed High Yield Plus Fund Inc.
1285 Avenue of the Americas
New York, New York 10019
Attention: Paul H. Schubert, Treasurer
Telephone No.: (212) 713-3041
Facsimile No.: (212) 713-9991
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With a copy to: Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
Attention: Dianne E. O'Donnell,
Senior Vice President
Telephone No.: (212) 713-2712
Facsimile No.: (212) 713-1374
SECTION I.35. TAXES.
(a) Any and all payments by the Borrower under this Agreement, the
Advance Notes or any other Program Document shall be made, in accordance with
this Agreement, free and clear of and without deduction for any and all present
or future taxes, levies, imposts, deductions, charges or withholdings, and all
liabilities with respect thereto, excluding, in the case of the Secured Parties,
(i) United States federal withholding taxes and (ii) income and franchise taxes
imposed on it by any taxing Authority in any jurisdiction which asserts
jurisdiction to impose such taxes on the basis of contacts which the Secured
Party in question maintains with such jurisdiction other than contacts arising
out of the execution, delivery or performance of the Program Documents or the
transactions contemplated thereby (all such non-excluded taxes, levies, imposts,
deductions, charges, withholdings and liabilities being hereinafter referred to
as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from
or in respect of any sum payable hereunder, under any Advance Note or under any
other Program Document to any Secured Party, (i) the sum payable shall be
increased as may be necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this Section
9.03) such Secured Party receives an amount equal to the sum it would have
received had no such deductions been made, (ii) the Borrower shall make such
deductions and (iii) the Borrower shall pay the full amount deducted to the
relevant taxation authority or other authority in accordance with Applicable
Law.
(b) In addition, the Borrower agrees to pay any present or future
stamp or documentary taxes or any other excise or property taxes, charges or
similar levies which arise from any payment made by the Borrower hereunder,
under the Advance Notes or under any other Program Document or from the
execution, delivery or registration of, or otherwise with respect to, this
Agreement, the Advance Note or under any other Program Document (hereinafter
referred to as "Other Taxes").
(c) The Borrower will indemnify the Secured Party for the full
amount of Taxes or Other Taxes (including, without limitation, any Taxes or
Other Taxes imposed by any jurisdiction on amounts payable under this Section
9.03) paid by any Secured Party in respect of the Borrower and any liability
(including penalties, interest and expenses) arising therefrom or with respect
thereto. This indemnification shall be made within thirty (30) days from the
date the Secured Party makes written demand therefor to the Borrower.
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(d) Within thirty (30) days after the date of any payment of Taxes
or Other Taxes, the Borrower will furnish to the Agent the original or a
certified copy of a receipt evidencing payment thereof.
(e) Without prejudice to the survival of any other agreement of the
Borrower hereunder, the agreement and obligations of the Borrower contained in
this Section 9.03 shall survive the payment in full of principal and Yield
hereunder and under the Advance Notes.
SECTION I.36. COSTS AND EXPENSES; INDEMNIFICATION.
(a) The Borrower agrees to promptly pay on demand all costs and
expenses of each of the Agent, CRC and Citibank in connection with the
preparation, review, negotiation, reproduction, execution, delivery,
administration, modification and amendment of this Agreement, the Advance Notes
or any other Program Document, including, without limitation, the reasonable
fees and disbursements of counsel for the Agent, CRC and Citibank with respect
thereto and with respect to advising the Agent, CRC and Citibank as to its
rights, remedies and responsibilities under this Agreement and the other Program
Documents, UCC filing fees and any periodic auditing expenses; PROVIDED,
HOWEVER, that, with respect to the fees of counsel to the Agent, CRC and
Citibank in connection with services rendered by such counsel on or prior to the
Closing Date, the Borrower shall only be responsible for such counsel fees to
the extent such fees do not exceed $75,000 plus all reasonable out-of-pocket
costs and expenses. The Borrower further agrees to pay on demand all costs and
expenses of the Secured Parties (including, without limitation, the fees and
disbursements of counsel), in connection with the enforcement (whether through
negotiations, legal proceedings or otherwise) of this Agreement, the Advance
Notes and the other Program Documents.
(b) The Borrower agrees to indemnify and hold harmless each Secured
Party and each of their Affiliates and the respective officers, directors,
employees, agents, managers of, and any Person controlling any of the foregoing
(each, an "Indemnified Party") from and against any and all claims, damages,
losses, liabilities, obligations, expenses, penalties, actions, suits, judgments
and disbursements of any kind or nature whatsoever, (including, without
limitation, the reasonable fees and disbursements of counsel) (collectively the
"Liabilities") that may be incurred by or asserted or awarded against any
Indemnified Party, in each case arising out of or in connection with or by
reason of the execution, delivery, enforcement, performance, administration of
or otherwise arising out of or incurred in connection with this Agreement or any
other Program Document or any transaction contemplated hereby or thereby (and
regardless of whether or not any such transactions are consummated), including,
without limitation any such Liability that is incurred or arises out of or in
connection with, or by reason of any one or more of the following: (i)
preparation for a defense of, any investigation, litigation or proceeding
arising out of, related to or in connection with this Agreement or any other
Program Document or any of the transactions contemplated hereby or thereby; (ii)
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any breach or alleged breach of any covenant by the Borrower or the Custodian
contained in any Program Document; (iii) any representation or warranty made or
deemed made by the Borrower or the Custodian contained in any Program Document
or in any certificate, statement or report delivered in connection therewith is,
or is alleged to be, false or misleading; (iv) any failure by the Borrower or
the Custodian to comply with any Applicable Law or contractual obligation
binding upon it; (v) any failure to vest in the Secured Parties a first priority
perfected security interest in all of the Assigned Collateral; (vi) any action
or omission, not expressly authorized by the Program Documents, by the Borrower,
the Adviser or the Custodian, which has the effect of reducing or impairing the
Assigned Collateral, any of the Related Security or the rights of the Agent or
the Secured Parties with respect thereto; (vii) any Default or Event of Default;
and (viii) any transactions related to the funding, carrying or repayment of the
outstanding principal amount of the Advances in connection with the Program
Documents; EXCEPT to the extent any such Liability is found in a final,
non-appealable judgment by a court of competent jurisdiction to have resulted
from such Indemnified Party's gross negligence or willful misconduct.
SECTION I.37. EXECUTION IN COUNTERPARTS.
This Agreement may be executed in any number of counterparts and by
different parties hereto on separate counterparts, each of which counterparts,
when so executed and delivered, shall be deemed to be an original and all of
which counterparts, taken together, shall constitute but one and the same
Agreement.
SECTION I.38. ASSIGNABILITY.
(a) This Agreement and the Lender's rights and obligations herein
(including the outstanding Advances) shall be assignable by the Lender and its
successors and assigns; PROVIDED, that without the prior written consent of the
Borrower (which consent shall not be unreasonably withheld) the Lender shall not
assign its rights and obligations to any Person other than to a U.S. Affiliate
of the Agent or pursuant to the Asset Purchase Agreement. Each such assignor
shall notify the Agent and the Borrower of any such assignment. Each such
assignor may, in connection with the assignment or participation, disclose to
the assignee or participant any information relating to the Borrower, including
the Assigned Collateral, furnished to such assignor by or on behalf of the
Borrower or by the Agent; PROVIDED that, prior to any such disclosure, the
assignee or participant agrees to preserve the confidentiality of any
confidential information relating to the Borrower received by it from any of the
foregoing entities.
(b) Each Secondary Lender may, with the consent of the Borrower
(which consent shall not be unreasonably withheld or delayed), assign to any
Eligible Assignee or to any other Secondary Lender all or a portion of its
rights and obligations under this Agreement (including, without limitation, all
or a portion of its Secondary Lender Commitment and the outstanding Advances or
interests therein owned by it). The parties to each such assignment shall
52
<PAGE>
execute and deliver to the Agent an Assignment and Acceptance. In addition,
Citibank or any of its Affiliates may assign any of its rights (including,
without limitation, rights to payment of principal and Yield on the Advances)
under this Agreement to any Federal Reserve Bank without notice to or consent of
the Borrower or the Agent.
(c) This Agreement and the rights and obligations of the Agent
herein shall be assignable by the Agent and its successors and assigns;
PROVIDED, that without the prior written consent of the Borrower (which consent
shall not be unreasonably withheld) the Agent shall not assign its obligations
to any Person other than a U.S. Affiliate of the Agent.
(d) The Borrower may not assign its rights or obligations hereunder
or any interest herein without the prior written consent of the Agent.
(e) The Borrower acknowledges and agrees that the Secondary Lender's
source of funds may derive in part from its participants. Accordingly,
references in Sections 2.06, 2.07, 2.08, 2.09, 9.03 and 9.04 and the other terms
and provisions of this Agreement and the other Program Documents to rates,
determinations, reserve and capital adequacy requirements, expenses, increased
costs, reduced receipts and the like as they pertain to the Secondary Lenders
shall be deemed also to include those of each of its participants; PROVIDED,
that the Borrower shall not be required to reimburse a participant of a
Secondary Lender pursuant to Sections 2.06, 2.07, 2.08, 2.09, 9.03 and 9.04 in
an amount in excess of the amount that would have been payable to such Secondary
Lender had such participation not been made.
SECTION I.39. GOVERNING LAW.
THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS
OF THE STATE OF NEW YORK, AND FOR ALL PURPOSES SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE.
SECTION I.40. SEVERABILITY OF PROVISIONS.
Any provision of this Agreement which is prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without invalidating the remaining
provisions hereof or affecting the validity or enforceability of such provision
in any other jurisdiction.
SECTION I.41. CONFIDENTIALITY.
(a) The Borrower agrees that it shall and shall cause each of its
Affiliates (i) to keep this Agreement and the other Program Documents, the
proposal relating to the structure of the facility contemplated by this
Agreement and the other Program Documents (the "Facility"), any analyses,
53
<PAGE>
computer models, information or document prepared by the Agent, Citibank or any
of their respective Affiliates in connection with the Facility, the Agent's or
its Affiliate's written reports to the Borrower, the Adviser or any of their
respective Affiliates and any related written information (collectively, the
"Product Information") confidential and to disclose Product Information only to
those of its officers, employees, agents, accountants, legal counsel and other
representatives (collectively, the "Borrower Representatives") who have a need
to know such Product Information for the purpose of assisting in the
negotiation, completion and administration of the Facility; (ii) to use the
Product Information only in connection with the Facility and not for any other
purpose; and (iii) to cause the Borrower Representatives to comply with the
provisions of this Section 9.09 and to be responsible for any failure of any
Borrower Representative to so comply.
The provisions of this Section 9.09(a) shall not apply to any
Product Information that is a matter of general public knowledge or that has
heretofore been made available to the public by any Person other than the
Borrower, the Adviser, any of their respective Affiliates or any Borrower
Representative or that is required to be disclosed by Applicable Law or is
requested by any Authority with jurisdiction over the Borrower, the Adviser or
any of their respective Affiliates.
(b) Each of the Secured Parties agrees (i) to keep all non-public
information with respect to the Borrower and the Adviser and their respective
Affiliates which such Secured Party receives pursuant to the Program Documents
(collectively, the "Borrower Information") confidential and to disclose Borrower
Information only to those of its officers, employees, agents, accountants, legal
counsel and other representatives of the Secured Parties (collectively, the
"Secured Party Representatives") and to S&P, and Moody's which, in each case,
may have a need to know or review such Borrower Information for the purpose of
assisting in the negotiation, completion, administration and evaluation of the
Facility; (ii) to use the Borrower Information only in connection with the
Facility and not for any other purpose; and (iii) to cause its related Secured
Party Representatives to comply with the provisions of this Section 9.09(b).
The provisions of this Section 9.09(b) shall not apply to any
Borrower Information that is a matter of general public knowledge or that has
heretofore been made available to the public by any Person other than such
Secured Party Representative or that is required to be disclosed by Applicable
Law or is requested by any Authority with jurisdiction over any Secured Party or
Secured Party Representative or any of its Affiliates.
Notwithstanding the foregoing, the Borrower Information may be
disclosed by any Secured Party Entity to permitted assignees and participants
and potential assignees and participants in the Facility to the extent such
disclosure is made pursuant to a written agreement of confidentiality
substantially similar to this Section 9.09(b).
54
<PAGE>
SECTION I.42. MERGER.
The Program Documents taken as a whole incorporate the entire
agreement between the parties thereto concerning the subject matter thereof. The
Program Documents supersede any prior agreements among the parties relating to
the subject matter thereof.
SECTION I.43. NO PROCEEDINGS.
Each of the Borrower, the Agent, the Secondary Lenders, each
assignee of any Advance or any interest therein and each entity which enters
into a commitment to make Advances to the Borrower hereunder hereby agrees that
it will not institute against CRC any proceeding of the type referred to in
Section 6.01(g) so long as any commercial paper or other senior indebtedness
issued by CRC shall be outstanding or there shall not have elapsed one year plus
one day since the last day on which any such commercial paper or other senior
indebtedness shall have been outstanding.
SECTION I.44. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
All representation and warranties made hereunder, in the other
Program Documents and in any document, certificate or statement delivered
pursuant hereto or thereto or in connection herewith or therewith shall survive
the execution and delivery of this Agreement and the making of the Advances
hereunder.
SECTION I.45. SUBMISSION TO JURISDICTION; WAIVERS.
The Borrower hereby irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement or the other Program Documents to which it
is a party, or for recognition and enforcement of any judgment in respect
thereof, to the non-exclusive general jurisdiction of the courts of the State of
New York, the courts of the United States of America for the Southern District
of New York, and the appellate courts of any of them;
(b) consents that any such action or proceeding may be brought in
any of such courts and waives any objection that it may now or hereafter have to
the venue of any such action or proceeding in any such court or that such action
or proceeding was brought in an inconvenient court and agrees not to plead or
claim the same;
(c) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail (or
any substantially similar form of mail), postage prepaid, to the Borrower at its
address set forth in Section 9.02 or at such other address as may be permitted
thereunder;
55
<PAGE>
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the right
to sue in any other jurisdiction or court; and
(e) waives, to the maximum extent not prohibited by law, any right
it may have to claim or recover in any legal action or proceeding referred to in
this Section any special, exemplary, punitive or consequential damages, unless
such liability arises from the gross negligence or willful misconduct of the
Person against whom the claim is asserted.
SECTION I.46. WAIVER OF JURY TRIAL.
EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY
WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS
AGREEMENT OR ANY OTHER PROGRAM DOCUMENT OR FOR ANY COUNTERCLAIM THEREIN OR
RELATING THERETO.
56
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.
CORPORATE RECEIVABLES CORPORATION,
as Lender
By: Citicorp North America, Inc.,
its Managing Agent
By:/s/ Marc B. Adelman
----------------------------------------
Name: Marc B. Adelman
Title: Vice President
CITICORP NORTH AMERICA, INC.,
as Agent
By:/s/ Marc B. Adelman
----------------------------------------
Name: Marc B. Adelman
Title: Vice President
CITIBANK, N.A.,
as Secondary Lender
By:/s/ Marc B. Adelman
----------------------------------------
Name: Marc B. Adelman
Title: Authorized Signatory
Percentage: 100%
MANAGED HIGH YIELD PLUS FUND INC.,
as Borrower
By:/s/ Paul Schubert
----------------------------------------
Name: Paul Schubert
Title: Vice President and Treasurer
<PAGE>
SCHEDULE III
APPROVED ASSETS
(i) Cash and cash equivalents, including certificates of deposit, bankers'
acceptances and other bank obligations, commercial paper, money market mutual
funds and other, comparable short-term debt instruments and securities;
(ii) Bonds, debentures, notes, Eligible Loans and securities, issued by U.S. or
foreign, private or governmental or other public issuers, whether denominated in
U.S. dollars or in foreign or multi-national currencies, and whether sold at a
discount or bearing interest payable in cash or in additional securities;
(iii) Common and preferred stocks and securities that are convertible into or
may be exchanged for them, whether or not attached to or part of units with debt
obligations, issued by U.S. or foreign issuers and whether denominated in U.S.
dollars or in foreign or multi-national currencies;
(iv) Mortgage-backed and asset-backed securities; and
(v) Repurchase agreements.
<PAGE>
EXHIBIT A
[FORM OF ADVANCE NOTE]
$------------ ------,----
FOR VALUE RECEIVED, on the Maturity Date (as defined in the Advance
Agreement hereinafter referred to) of each Advance made by the [INSERT NAME OF
LENDER OR SECONDARY LENDER] (together with its successors and permitted assigns
the ["Lender"] ["Secondary Lender"]) to the undersigned (the "Borrower")
pursuant to the Credit Agreement (defined below), the Borrower hereby promises
to pay to the [Lender] [Secondary Lender] the unpaid principal amount of each
such Advance, in immediately available funds and in lawful money of the United
States of America, and to pay Yield on the unpaid balance of said principal
amount from the Borrowing Date thereof, until the principal amount thereof shall
have been paid in full, in like funds and money, as provided in said Credit
Agreement for Advances made by the [Lender] [Secondary Lender]. Capitalized
terms used in this promissory note unless otherwise defined herein shall have
the meaning assigned to such terms in the Credit Agreement.
This promissory note is an Advance Note referred to in the Revolving
Credit and Security Agreement dated as of October 23, 1998 (as from time to time
amended, the "Credit Agreement") among the Borrower, [the Lender] [Secondary
Lender], the other banks and financial institutions parties thereto and Citicorp
North America, Inc., as agent. The date and principal amount of each Advance
made to the Borrower and of each repayment of principal thereon shall be
recorded by the [Lender] [Secondary Lender] or its designee on Schedule I
attached to this Advance Note, and the aggregate unpaid principal amount shown
on such schedule shall be rebuttable presumptive evidence of the principal
amount owing and unpaid on the Advances made by the [Lender] [Secondary Lender].
The failure to record or any error in recording any such amount on such schedule
shall not, however, limit or otherwise affect the obligations of the Borrower
hereunder or under the Credit Agreement to repay the principal amount of the
Advances together with all Yield accrued thereon.
THIS PROMISSORY NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK.
MANAGED HIGH YIELD PLUS FUND INC.
By: ___________________________
Name:
Title:
<PAGE>
SCHEDULE I
TO EXHIBIT A
This Advance Note evidences Advances made by [INSERT NAME OF LENDER
OR SECONDARY LENDER], (the ["Lender"] ["Secondary Lender"]) under the Revolving
Credit and Security Agreement dated as of October 23, 1998 among Managed High
Yield Plus Fund Inc., the [Lender] [Secondary Lender], the other banks and
financial institutions parties thereto and Citicorp North America, Inc., as
agent in the principal amounts and on the dates set forth below, subject to the
payments and prepayments of principal set forth below:
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT AMOUNT PAID BALANCE NOTATION
DATE ADVANCED OR PREPAID OUTSTANDING BY
- ---- -------- ----------- ----------- --------
<PAGE>
EXHIBIT B
---------
MANAGED HIGH YIELD PLUS FUND INC.
[ADDRESS]
Citicorp North America, Inc.,
as Agent
[ADDRESS]
NOTICE OF BORROWING
-------------------
This Notice of Borrowing is made pursuant to Section 2.02 of that
certain Revolving Credit and Security Agreement dated as of October 23, 1998,
among CORPORATE RECEIVABLES CORPORATION, as lender (the "Lender"), CITIBANK,
N.A. the other banks parties thereto, CITICORP NORTH AMERICA, INC., as agent
and MANAGED HIGH YIELD PLUS FUND INC., as borrower (the "Borrower") (as the same
may from time to time be amended, supplemented, waived or modified, the "Credit
Agreement"). Unless otherwise defined herein, capitalized terms used herein have
the meanings assigned to those terms in the Credit Agreement.
1. The Borrower hereby requests that on (the "Borrowing Date") it
receive an advance under the Credit Agreement in the principal amount of
_____________Dollars ($_____).
2. The Borrower hereby gives notice of its request for such Advance
to the Agent pursuant to Section 2.02 of the Credit Agreement and requests the
Lender or the Secondary Lenders to remit, or cause to be remitted, the proceeds
thereof to [the Borrower's Account] [SPECIFY OTHER ACCOUNT, IF APPLICABLE].
3. The Borrower certifies that (i) the representations and
warranties of the Borrower contained or reaffirmed in Section 4.01 of the Credit
Agreement are true and correct in all material respects on and as of the date
hereof to the same extent as though made on and as of the date hereof (except to
the extent such representations and warranties expressly relate to any earlier
date); (ii) no Default or Event of Default has occurred and is continuing under
the Credit Agreement or will result from the proposed borrowing; (iii) the
Borrower has performed in all material respects all agreements and satisfied all
conditions under the Credit Agreement to be performed by it on or before the
date hereof, (iv) the conditions precedent to the making of the proposed Advance
set forth in Article III of the Credit Agreement have been fully satisfied and
(v) immediately after giving effect to such advance the Borrowing Base Test and
the Total Eligible Asset Test will be complied with.
<PAGE>
I
WITNESS my hand on this ____ day of ___________, ____.
MANAGED HIGH YIELD PLUS FUND INC.,
By: __________________________
Name:
Title:
<PAGE>
EXHIBIT C
---------
ASSIGNMENT AND ACCEPTANCE
Reference is made to the Revolving Credit and Security Agreement dated as
of October 23, 1998 (as amended, supplemented or otherwise modified from time to
time, the "Credit Agreement") among CORPORATE RECEIVABLES CORPORATION (together
with its successors and assigns, the "Lender"), CITIBANK, N.A. (Citibank, N.A.,
together with the other banks and financial institutions from time to time
parties to the Credit Agreement, the "Secondary Lenders"), CITICORP NORTH
AMERICA, INC., as agent for the under and the Secondary Lenders (in such
capacity, together with its successors and assigns, the "Agent") and MANAGED
HIGH YIELD PLUS FUND INC. (together with its permitted successors and assigns,
the "Borrower"). Terms defined in the Credit Agreement are used herein with the
same meaning.
The "Assignor" and the "Assignee" referred to on Schedule I hereto agree
as follows:
1. As of the Effective Date (as defined below), the Assignor hereby
absolutely and unconditionally sells and assigns, without recourse, to the
Assignee, and the Assignee hereby purchases and assumes, without recourse to
or representation of any kind (except as set forth below) from Assignor, an
interest in and to the Assignor's rights and obligations under the Credit
Agreement and under the other Program Documents equal to the percentage
interest specified on Schedule I hereto, including the Assignor's Secondary
Lender Commitment and Percentage and the Assignor's portion of the
outstanding principal amount of the Advances (such rights and obligations
assigned hereby being the "Assigned Interests"). After giving effect to such
sale, assignment and assumption, the Assignee's "Secondary Lender Commitment"
and the Assignee's "Percentage" will be as set forth on Schedule I hereto.
2. The Assignor (i) represents and warrants that immediately prior to the
Effective Date it is the legal and beneficial owner of the Assigned Interest
free and clear of any Adverse Claim created by the Assignor; (ii) makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with the
Program Documents or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of, or the perfection or priority of any
lien or security or ownership interest created or purported to be created
under or in connection with, the Program Documents or any other instrument or
document furnished pursuant thereto or the condition or value of the Assigned
Interest, Assigned Collateral, Related Security or any interest therein; and
(iii) makes no representation or warranty and assumes no responsibility with
respect to the condition (financial or otherwise) of any of the Borrower, the
Agent, the Custodian, the Adviser or any other person, or the performance or
observance by any Person of any of its obligations under any Program Document
or any instrument or document furnished pursuant thereto.
3. The Assignee (i) confirms that it has received a copy of the Credit
Agreement and the other Program Documents, together with copies of any
<PAGE>
financial statements delivered pursuant to Sections 5.01 of the Credit
Agreement and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into this
Assignment and Acceptance; (ii) agrees that it will, independently and
without reliance upon the Agent, the Assignor, the Lender or any other
Secondary Lender and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking
or not taking action under or in connection with any of the Program
Documents; (iii) confirms that it is an Eligible Assignee; (iv) appoints and
authorizes the Agent to take such action as agent on its behalf and to
exercise such powers and discretion under the Program Documents as are
delegated to the Agent by the terms thereof, together with such powers and
discretion as are reasonably incidental thereto; (v) agrees that it will
perform in accordance with their terms all of the obligations that by the
terms of the Program Documents are required to be performed by it as a
Secondary Lender; (vi) confirms that the assignment hereunder complies with
any applicable legal requirements including the Securities Act of 1933, as
amended; (vii) confirms that such Assignee is a United States Person (as
defined in Section 7701 (a)(30) of the Internal Revenue Code) or that such
Assignee shall have provided the Agent with two Internal Revenue Service
forms 4224 (or a successor form) certifying that the income from the Assigned
Interest is effectively connected with the conduct of such Person's trade or
business in the United States; and (viii) confirms that such Assignee is not
a partnership, grantor trust or S corporation (as such terms are defined in
the Internal Revenue Code).
4. Following the execution of this Assignment and Acceptance, it will be
delivered to the Agent for acceptance and recording by the Agent. The
effective date for this Assignment and Acceptance (the "Effective Date")
shall be the date of acceptance hereof by the Agent, unless a later effective
date is specified on Schedule I hereto.
5. Upon such acceptance and recording by the Agent, as of the Effective
Date, (i) the Assignee shall be a party to and bound by the provisions of the
Credit Agreement and, to the extent provided in this Assignment and
Acceptance, have the rights and obligations of a Secondary Lender thereunder
and under any other Program Document and (ii) the Assignor shall, to the
extent provided in this Assignment and Acceptance, relinquish its rights and
be released from its obligations under the Credit Agreement and under any
other Program Document.
6. Upon such acceptance and recording by the Agent, from and after the
Effective Date, the Agent shall make all payments under the Credit Agreement
in respect of the Assigned Interest to the Assignee. The Assignor and
Assignee shall make all appropriate adjustments in payments under the Credit
Agreement and the Assigned Interests for periods prior to the Effective Date
directly between themselves.
7. This Assignment and Acceptance shall be governed by, and construed in
accordance with, the laws of the State of New York.
8. This Assignment and Acceptance may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each
<PAGE>
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement. Delivery of an
executed counterpart of Schedule I to this Assignment and Acceptance by
telecopier shall be effective as a delivery of a manually executed
counterpart of this Assignment and Acceptance.
IN WITNESS WHEREOF, the Assignor and the Assignee have caused Schedule I
to this Assignment and Acceptance to be executed by their officers thereunto
duly authorized as of the date specified thereon.
<PAGE>
Schedule I
Percentage interest
transferred by Assignor: ____%
Assignee's "Secondary Lender Commitment": $____
Assignee's "Percentage" ____%
Assignor: [INSERT NAME OF ASSIGNOR],
as Assignor,
By: ___________________________
Authorized Signatory,
Assignee: [INSERT NAME OF ASSIGNEE]
as Assignee
By: ___________________________
Authorized Signatory
Accepted, Consented to and
Acknowledged this ___ day of
- ---------------------, -----
CITICORP NORTH AMERICA, INC.,
as Agent
By: _____________________________
Authorized Signatory
MANAGED HIGH YIELD PLUS FUND INC.
By: _____________________________
Authorized Signatory
Exhibit No. 13(c)
AGREEMENT OF AMENDMENT
----------------------
Dated as of October 13, 1999
Reference is made to that certain Revolving Credit and Security Agreement
dated as of October 23, 1998 (the "Credit Agreement") among Managed High Yield
Plus Fund Inc. (the "Borrower"), Corporate Receivables Corporation, Citibank,
N.A. (the "Secondary Lender") and Citicorp North America, Inc., as agent (the
"Agent"). Capitalized terms used and not defined herein shall have the meanings
assigned to them in the Credit Agreement.
The parties hereto agree that, effective as of the date hereof, the
definition of the term "Secondary Lender Stated Expiration Date" set forth in
Section 1.01 of the Credit Agreement is hereby amended by replacing the date
"October 22, 1999" set forth therein with the date "October 20, 2000".
This Agreement of Amendment may be executed in any number of counterparts,
each of which when so executed shall be deemed to be an original and all of
which when taken together shall constitute one and the same agreement.
THIS AGREEMENT OF AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed and delivered by their duly authorized officers as of the date first
above written.
CITICORP NORTH AMERICA, INC., CITIBANK, N.A.
as Agent as Secondary Lender
By: /s/ Marc B. Adelman By: /s/ Marc B. Adelman
----------------------------- -----------------------
Name: MARC B. ADELMAN Name: MARC B. ADELMAN
Title: VICE PRESIDENT Title: VICE PRESIDENT
CORPORATE RECEIVABLES CORPORATION MANAGED HIGH YIELD PLUS FUND INC.,
By: Citicorp North America, Inc., as Borrower
its Managing Agent
By: /s/ Marc B. Adelman By: /s/ Paul Schubert
----------------------------- ---------------------
Name: MARC B. ADELMAN Name: PAUL SCHUBERT
Title: Vice President Title: Vice President & Treasurer
EXHIBIT 14
ERNST & YOUNG LLP
- ------------------------------------------------------------------------------
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Other
Service Providers", "Financial Highlights" and "Experts" in the Combined Proxy
Statement and Prospectus and "Custodian and Independent Auditors" in the
Statement of Additional Information and to the incorporation by reference of our
reports dated September 20, 1999 with respect to Managed High Yield Fund, Inc.
and July 22, 1999 with respect to Managed High Yield Plus Fund, Inc., in this
Registration Statement on Form N-14 of Managed High Yield Plus Fund, Inc.
/s/ Ernst & Young LLP
---------------------------------
ERNST & YOUNG LLP
New York, New York
February 15, 2000
