MANAGED HIGH YIELD FUND INC.
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
March 30, 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 Fund'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 and 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 the
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,
/s/ Margo N. Alexander
----------------------
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. Through January 2000, High Yield
Fund traded at an average discount of -5.11% from its inception in November 1993
and traded at an average discount of -5.70% from Plus Fund's (HYF) inception in
June 1998. Plus Fund has had an average discount of -2.2% from its inception in
June 1998 through January 2000. In addition, High Yield Fund has had an average
NAV yield of 11.36% from June 1998 through January 2000, while Plus Fund's NAV
yield has averaged 12.54% during the same period. (The average NAV yield
represents an average of the 12-month NAV yield calculated at the end of each
month; the 12-month NAV yield is calculated by multiplying the month's
distribution by 12 and dividing by the month-end NAV). During the period from
June 1998 through January 2000, the total returns based on NAV were -3.85% for
High Yield Fund and -3.37% for Plus Fund. To summarize, since its inception Plus
Fund has provided a higher NAV yield and a better total return and has traded
closer to its NAV than has High Yield Fund. 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
<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
<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.
<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 represent a smaller percentage of its net assets than
are High Yield Fund's operating expenses. Because the combined Fund will use
leverage, it will incur interest expenses that High Yield Fund does not incur
and, as a result, its 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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
High Yield Fund Plus Fund Plus Fund
Expenses Expenses Pro Forma Combined 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
- --------------------------------------------------------------------------------
</TABLE>
(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%.
2
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
Funds' 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
Funds' shares 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
<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
occur on or about May 26, 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.
3
<PAGE>
MANAGED HIGH YIELD FUND INC.
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
-----------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
April 24, 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
April 24, 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 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 January 25, 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
March 30, 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 1-800-611-7202.
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
(1) The XYZ Partnership................... Jane B. Smith, Partner
(2) Smith and Jones, Limited Partnership.. Jane B. Smith, General
Partner
Trust Accounts
(1) ABC Trust Account..................... Jane B. Doe, Trustee
(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: March 30, 2000
This combined Proxy Statement and Prospectus ("Proxy
Statement/Prospectus") 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 April 24, 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 Proxy Sttement/Prospectus. The Board of Directors
("Board") of High Yield Fund 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 either fractional shares (for High Yield
Fund stockholders that participate in High Yield Fund's Dividend Reinvestment
Plan) or 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
Shares"). 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, however, may be higher or lower than the per share
NAV of that Fund. As a result, 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 the securities of foreign issuers,
including foreign issuers in emerging market countries.
This Proxy Statement/Prospectus sets forth the information that a High
Yield Fund stockholder should know before voting on the Plan. It should be read
carefully and retained for future reference.
A Statement of Additional Information ("SAI") dated March 30, 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 is on file with the SEC and
is 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
1-800-852-4750. 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
Risks Common to Both Funds...............................................7
PROPOSAL: REORGANIZATION OF HIGH YIELD FUND INTO PLUS FUND..................10
Information about the Reorganization....................................10
Board Considerations....................................................10
The Plan................................................................12
COMPARISON OF THE FUNDS......................................................13
Forms of Organization...................................................13
Investment Objectives...................................................13
Investment Policies.....................................................14
Investment Limitations..................................................14
Leverage................................................................14
Portfolio Compatibility.................................................15
Fees and Expenses.......................................................15
Expense Example.........................................................15
Sales Charges...........................................................15
Trading History- Share Price Data.......................................16
Dividends and Other Distributions.......................................16
Dividend Reinvestment Plan..............................................17
Management of the Funds.................................................19
Other Service Providers.................................................20
Calculation of Net Asset Value..........................................20
FINANCIAL HIGHLIGHTS.........................................................20
High Yield Fund Financial Highlights.....................................21
Plus Fund Financial Highlights...........................................21
ADDITIONAL INFORMATION ABOUT THE REORGANIZATION..............................22
Terms of the Reorganization.............................................22
Description of Securities to be Issued..................................22
Dividends and Other Distributions.......................................23
Surrender and Exchange of High Yield Fund Stock Certificates............23
Accounting Treatment....................................................23
Federal Income Tax Considerations.......................................23
CAPITALIZATION...............................................................24
LEGAL MATTERS................................................................24
INFORMATION FILED WITH THE SEC AND NYSE......................................24
INFORMATION ABOUT THE FUNDS' ADVISER AND ADMINISTRATOR.......................25
EXPERTS......................................................................25
STOCKHOLDER PROPOSALS........................................................25
ADDITIONAL INFORMATION ABOUT BOTH FUNDS......................................26
Portfolio Securities....................................................26
Other Investment Practices..............................................28
Temporary and Defensive Strategies and Borrowings.......................30
Certain Anti-Takeover Provisions of the Articles of Incorporation.......31
Description of Capital Stock............................................31
Taxation................................................................34
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
<PAGE>
INTRODUCTION
This combined Proxy Statement and Prospectus ("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 April 4, 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 replacement 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 January 25, 2000
("Record Date"), are entitled to vote at the Meeting. On the Record Date, there
were 6,031,667 outstanding shares of common stock of High Yield Fund ("High
Yield Fund Shares"). Each stockholder is entitled to one vote for each full
share held and a fractional vote for each fractional share held. As of March 1,
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 outstanding shares. As
of that same date, the Directors and officers, as a group, owned less than 1% of
either Fund's outstanding 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 or e-mail. High Yield Fund
<PAGE>
officers and employees of Mitchell Hutchins who assist in the proxy solicitation
will not receive any additional or special compensation for any such efforts.
SCC will be paid approximately $35,000 for proxy solicitation services. High
Yield Fund and Plus Fund will bear the expenses incurred in connection with the
Reorganization, which are estimated to be $245,000. 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 April 24, 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 outstanding High Yield Fund Shares 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)
or cash in lieu of any fractional shares (for all other High Yield Fund
stockholders), all 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 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.
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, High Yield Fund
stockholders will not recognize any gain or loss, except with respect to any
cash received in lieu of a fractional share.
The Reorganization is subject to a number of conditions, including High
Yield Fund 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 High Yield Fund stockholders, at any time prior to the Closing Date:
<PAGE>
(i) by the mutual consent of each Fund's Board of Directors; 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. Unless a later date is
mutually agreed upon by the Board of Directors of each Fund, the Plan will
terminate automatically if the Reorganization has not been consummated by July
31, 2000.
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 High Yield Fund Shares. 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.
2
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 reorganize 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 yield 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 investment 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 the securities of foreign
issuers, including foreign issuers in emerging market countries. Each Fund may
<PAGE>
also 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 the Fund's foreign currency exposure.
Each Fund may also use interest rate swap transactions to attempt to reduce the
overall risk of its investment portfolio.
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 31% 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. Securities rated BB or below are
commonly referred to as "junk bonds." 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). Plus Fund
also 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.)
3
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 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 Plus Fund's
shares 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 maintains 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 12 months ended January 31, 2000, the Fund has maintained outstanding
borrowings under the line of credit in amounts ranging between approximately
$135,000,000 and $175,000,000. These borrowings have represented between 26% and
32% of Plus Fund's total assets. Following the Reorganization, Plus Fund
anticipates maintaining its leverage within a range of 26% to 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 (which may include assets acquired with the proceeds of borrowings) 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. 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
<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 all High Yield Fund's assets in exchange solely for
Plus Fund Shares (and cash in lieu of certain fractional Plus Fund Shares) and
Plus Fund's assumption of all 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 acquired assets will be
the same as that of High Yield Fund immediately before the Reorganization, and
Plus Fund's holding period for the acquired assets will include High Yield
Fund's holding period therefor. A High Yield Fund stockholder's aggregate basis
for the Plus Fund Shares to be received in the Reorganization will be the same
as the aggregate basis for the 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. The stockholder's holding period for
those Plus Fund Shares will include the holding period for those High Yield Fund
Shares, provided the stockholder held them as capital assets on the Closing
Date.
4
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 yield 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.
<PAGE>
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 its
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 12
months ended January 31, 2000, the Fund maintained outstanding borrowings under
this line of credit in amounts ranging between approximately $135,000,000 and
$175,000,000. Those borrowings represented between approximately 26% and 32% of
Plus Fund's total assets. As of January 31, 2000, Plus Fund had $167 million in
outstanding borrowings, representing about 31% of its total assets. Following
the Reorganization, Plus Fund anticipates increasing the dollar amount of its
borrowings so as to maintain its leverage within a range of 26% to 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 (which may include assets acquired with the proceeds of borrowings)
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. 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
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
5.24% to 6.43% on its outstanding borrowings.
5
Plus Fund's borrowings under the Agreement and any other transactions
involving Fund indebtedness (other than borrowings of up to 5% of its total
assets 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 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.
<PAGE>
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 its
portfolio managers deem 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.
6
Securities rated BB or Ba are considered to be within the "upper tier"
of the high yield, high risk ("junk bond") 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 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.
<PAGE>
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 March 17, 2000 High
Yield Fund Shares were trading at a discount of 14.35%, compared to 10.64% for
Plus Fund Shares. 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.
<PAGE>
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.
7
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.
<PAGE>
INVESTING IN FOREIGN AND EMERGING MARKET 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 securities denominated in foreign currencies, 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.
<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 continue to qualify for tax treatment as a regulated investment
company under the Code ("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.
8
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.
9
<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 Shares
and High Yield Fund's stockholders will become stockholders of Plus Fund.
Each High Yield Fund stockholder's High Yield Fund Shares will be
converted into an equivalent dollar amount of full Plus Fund Shares plus
fractional Plus Fund Shares (for High Yield Fund stockholders that participate
in High Yield Fund's Dividend Reinvestment Plan) or cash in lieu of any
fractional Plus Fund Shares (for all other High Yield Fund stockholders), all
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 on or about May 26, 2000, or on
such later date as the parties may agree in writing. The Reorganization is
contingent both upon High Yield Fund stockholder approval and upon each Fund
satisfying the terms of the Plan. Under Maryland law, stockholders of a
corporation, such as High Yield Fund, whose shares are traded on a national
securities exchange are not entitled to demand the fair value of their shares
upon a merger; therefore, High Yield Fund stockholders 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"). High Yield Fund Shares may not be listed on the NYSE or available for
trading there for several days prior to the Closing Date.
After the Closing Date, High Yield Fund will deregister as an
investment company under the 1940 Act and will terminate its separate existence
under Maryland law. In addition, High Yield Fund's shares of common stock will
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. Unless a later date is mutually agreed upon by the Board of
Directors of each Fund, the Plan will terminate automatically, if the
Reorganization has not been consummated by July 31, 2000.
BOARD CONSIDERATIONS
The High Yield Fund Board, including the Directors 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.
<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.
10
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,
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.
<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 provided a greater total return based on net asset value than
High Yield Fund for the year ended January 31, 2000. Mitchell Hutchins indicated
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
investment 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 are
higher than when it does not because the fees are 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 12 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 concluded that, therefore, a slightly higher advisory and
administrative fee rate (when expressed as a percentage of net assets) was
appropriate.
11
In addition to considering the potential increase in the rate of
investment advisory and administrative 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, that 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
the operating expenses of the combined Fund, as a percentage of net assets, were
expected to be lower than that of either Fund, excluding interest and
Reorganization expenses. In addition, the Board considered Mitchell Hutchins'
assessment that the yield of Plus Fund would likely be higher than that of High
Yield Fund and that the relatively higher yield should serve to offset the
<PAGE>
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 would be valued at market value, that the Reorganization would be
tax-free to High Yield Fund, and that High Yield Fund stockholders would 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 would not dilute the interests of stockholders of either Fund and
that it would be 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 High Yield
Fund's assets in exchange for Plus Fund Shares (and cash in lieu of certain
fractional Plus Fund Shares) and the assumption by Plus Fund of all High Yield
Fund's liabilities. High Yield Fund will then distribute full Plus Fund Shares
to all its stockholders, fractional Plus Fund Shares to participants in High
Yield Fund's Dividend Reinvestment Plan and cash in lieu of fractional Plus Fund
Shares to all other stockholders. Each High Yield Fund stockholder will receive
full Plus Fund Shares and either a fractional Plus Fund 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
currently scheduled to occur at 4:00 p.m., Eastern time, on May 26, 2000, or on
such later date as the conditions to consummate 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.
12
Each Fund will receive an opinion from Kirkpatrick & Lockhart LLP, its
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. The
opinion will state that neither Fund will recognize any gain or loss for federal
income tax purposes as a result of the Reorganization and that High Yield Fund
stockholders will 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 prior to the Closing Date.
<PAGE>
See "Additional Information About the Reorganization -- Federal Income Tax
Considerations" below.
If the Reorganization is not approved by High Yield Fund 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.
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.
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 each Fund adheres to its general investment policies and programs
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.
13
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
its total assets in securities of foreign issuers, including foreign issuers in
emerging market countries, but may not invest more than 15% of its total assets
<PAGE>
in 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. Each Fund
may also use interest rate swap transactions to attempt to reduce the overall
risk of its investment portfolio.
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.
<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 its current operating policy which may change at
any time, is to maintain borrowings 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 31% 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.
14
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 so 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
12 months ended January 31, 2000.
<PAGE>
<TABLE>
<CAPTION>
PLUS FUND
STOCKHOLDER TRANSACTION EXPENSES HIGH YIELD PRO FORMA
FUND PLUS FUND COMBINED
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum Sales Charge (load) Imposed on
Purchases...................................... 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.......... N.A. 2.24% 2.24%
Other Expenses(2)............................ 0.33% 0.25% 0.24%
----- ----- -----
Total Annual Fund Operating Expenses(2)...... 1.23% 3.45% 3.44%
</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 $45,053 during Plus Fund's initial fiscal period June 26, 1998 through
May 31, 1999. Had such expenses been included, Plus Fund would have
incurred 0.26% and 3.46% for Other Expenses and Total Annual Fund
Operating Expenses, respectively, and the Plus Fund PRO FORMA Combined
figures would have reflected 0.24% and 3.45% for Other Expenses and Total
Annual Fund Operating 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 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.................................. $349 $1,060 $1,794 $3,731
HIGH YIELD FUND............................ 125 390 676 1,489
PLUS FUND PRO FORMA COMBINED............... 348 1,057 1,789 3,721
</TABLE>
SALES CHARGES
Plus Fund Shares received in connection with the reorganization will
not be subject to any sales charge.
15
TRADING HISTORY- SHARE PRICE DATA
Plus Fund Shres are traded on the NYSE under the symbol "HYF." High
Yield Fund Shares 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
<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
March 17, 2000, the closing price per share was $9.25 and $10.25, the NAV per
share was $10.80 and $11.47 and the discount to NAV was (14.35)% and (10.64)%,
for High Yield Fund and Plus Fund, respectively.
<TABLE>
<CAPTION>
(DISCOUNT) OR
CORRESPONDING PREMIUM TO NET
PLUS FUND SALES PRICE NET ASSET VALUES ASSET VALUE
- -----------------------------------------------------------------------------------------------------------------------
Quarter Ended High Low High Low High Low
- ------------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
2/29/00 $11.63 $10.38 $11.86 $11.99 (1.94)% (13.43)%
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 $10.56 $ 9.06 $11.31 $11.47 (6.63)% (21.01)%
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 Funds in the period
<PAGE>
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
that Fund's Board of Directors and varies as a result of the Fund's performance.
16
DIVIDEND REINVESTMENT PLANS
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 relevant 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 that Fund's Transfer Agent (which in
each case is PNC Bank, National Association, acting through PFPC Inc.) 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 that Fund's
stockholders in administering the Reinvestment Plans. After a Fund declares a
dividend or determines to make another distribution, the Transfer Agent receives
the cash payment as agent for the participants. 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 does 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
differently, depending upon the circumstances described below. It acquires
shares 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 as "market premium"), the Transfer Agent invests the dividend amount
on behalf of the participants in newly issued shares. 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 as "market discount"),
the Transfer Agent invests the dividend amount on behalf of the participants in
shares acquired in open-market purchases. The number of outstanding shares
purchased with each purchased with each distribution for a particular
<PAGE>
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 (were it to continue making
open-market purchases) might exceed the Fund's NAV per share. This would result
in the acquisition of fewer shares than if the dividend had been paid in newly
issued shares on the dividend payment date. Accordingly, 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.
17
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 uncertificated form in the name of the
participant. Each High Yield Fund stockholder's proxy will reflect 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.
<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 is deemed to be an election by
a stockholder to take all subsequent distributions in cash until such election
is changed. 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.
18
MANAGEMENT OF THE FUNDS
The overall management of the business and affairs of each Fund is
vested with its Board of Directors. Each Board approves all significant
agreements between the relevant 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 such Fund's investment objective and
policies and to general supervision by its 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 separate Investment Advisory and Administration Contracts 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 relevant 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 and has been the
Funds' portfolio manager since February 2000. 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.
<PAGE>
High Yield Fund and Plus Fund pay investment 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, Plus Fund's total expenses, stated as a percentage of average net
assets, were 3.02%. This figure includes 1.87% related to interest expense
representing the cost of Plus Fund's leverage.
In accordance with procedures adopted by each Fund's Board, brokerage
transactions for each Fund may be conducted through PaineWebber or its
affiliates, and each Fund pays fees to PaineWebber for its services as lending
agent in such Fund's portfolio securities lending program.
The Funds have the same Directors and officers. Upon completion of 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 directors and officers of
both Funds.
19
<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, acting through PFPC, whose principal business address is 400
Bellevue Parkway, Wilmington, Delaware 19809, 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.
CALCULATION OF NET ASSET VALUE
The net asset value of High Yield Fund's shares is determined weekly as
of the close of regular trading on the NYSE on the last day of the week on which
the NYSE is open for trading. The net asset value of Plus Fund's shares is
determined as of the close of regular trading on the NYSE on each Business Day,
which is defined as each Monday through Friday when the NYSE is open for
trading. The net asset value of both Funds' 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. Each Fund's 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 receivd and earned
discount) minus all liabilities (including accrued expenses) by the total number
of shares outstanding at such time.
FINANCIAL HIGHLIGHTS
The following financial highlights tables are 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 each 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 1-800-852-4750
and are incorporated by reference herein.
20
<PAGE>
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
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
<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.
21
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
<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's 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 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, "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 distribute to
High Yield Fund stockholders.
The value of the Assets, the amount of the Liabilities and the NAV of a
Plus Fund Share will be determined by Mitchell Hutchins 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 will be 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 Plus Fund Share, as
appropriate, to which each stockholder is entitled.
Immediately after the Reorganization, each former stockholder of High
Yield Fund will own full Plus Fund Shares and cash or a fractional Plus Fund
Share, as appropriate, equal in aggregate NAV to the aggregate NAV of that
stockholder's High Yield Fund Shares immediately prior to the Reorganization.
The NAV per share of Plus Fund will not change as a result of the
Reorganization. Thus, the Reorganization will not result in a dilution of any
stockholder ownership interest.
<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 equal voting privileges, except as
noted in Plus Fund's SAI, and each share is equally 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.
22
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(s)
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, the Transfer Agent 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 High Yield Fund Shares are presented to Plus Fund,
they will be canceled and exchanged for certificates representing Plus Fund
Shares.
<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 from 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 all its stockholders, those fractional
Plus Fund Shares PRO RATA to its stockholders that participate in the
Dividend Reinvestment Plan, and that cash PRO RATA to its other
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 certain 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;
23
(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 the stockholder's High Yield Fund Shares
solely for Plus Fund Shares, and cash in lieu of a fractional Plus Fund
Share, where appropriate, pursuant to the Reorganization, except with
respect to that cash; 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.
<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 $68,227,135 $377,505,553 $445,732,688
Shares Outstanding 6,031,667 31,858,628 37,616,198
Net Asset Value Per Share $11.31 $11.85 $11.85
----------------------
LEGAL MATTERS
Certain legal matters concerning each Fund and its 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 each 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.
24
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,
<PAGE>
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. 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.
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.
INFORMATION ABOUT THE FUNDS' INVESTMENT 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 February 29, 2000, Mitchell
Hutchins was adviser or sub-adviser of 31 investment companies with 76 separate
portfolios and aggregate assets of approximately $54.4 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 Inc., a publicly owned financial services holding company.
EXPERTS
The audited financial statements of High Yield Fund and Plus Fund
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 upon Ernst & Young LLP's
reports given on its authority as an expert 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
proposals 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 proposals
<PAGE>
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 March 30, 2000 and must satisfy other requirements of the
federal securities laws.
25
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 Funds' 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 (junk bonds) 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.
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
<PAGE>
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.
26
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
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.
27
<PAGE>
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. Lending securities enables the Funds to earn
additional income, but could result in a loss or delay in recovering these
securities. The borrower of a Fund's portfolio securities must maintain
acceptable collateral with the Fund's custodian 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 other investment companies. A Fund also may reinvest cash collateral
in private investment vehicles similar to money market funds, including one
managed by Mitchell Hutchins. In determining whether to lend securities to a
particular broker-dealer or institutional investor, Mitchell Hutchins will
consider, and during the period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. Each Fund will
retain 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. A Fund will receive 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 the Fund's interest.
Pursuant to procedures adopted by the Boards governing each Fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for each Fund. The Boards have also authorized the payment of fees
(including fees calculated as a percentage of invested cash collateral) to
PaineWebber for these services. Each Board periodically reviews the portfolio
securities loan transactions for which PaineWebber acts as lending agent.
PaineWebber also has been approved as a borrower under each Fund's securities
lending program.
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-
<PAGE>
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.
28
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
<PAGE>
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.
29
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.
<PAGE>
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. Since these
investments provide relatively low income, a defensive position may not be
consistent with achieving the Funds' investment objectives.
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).
30
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:
<PAGE>
(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.
31
<PAGE>
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 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.
<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.
32
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 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,
<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.
33
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
<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 a holder of these 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 them 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% federal 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 Fund's 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 its investment company taxable income and/or net
capital gain.
34
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
<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.
35
<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 (i) 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 (ii) cash
in lieu of any fractional shares with respect to Stockholders that are
not DRP Stockholders, the sum thereof 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.
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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 and, for DRP
Stockholders, fractional Acquiring Fund Shares, rounded to the third decimal
point. Cash in lieu of any fractional Acquiring Fund Shares shall be distributed
to all other Stockholders. 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 the distribution described in paragraph 1.5.
After the Effective Time, each holder of an outstanding certificate or
certificates formerly representing Target shares ("Old Certificate(s)") shall be
entitled to receive, upon surrender of his or her Old Certificate(s), a
certificate representing the Acquiring Fund Shares distributable with respect to
the Target Shares represented by such Old Certificate(s). 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 those Acquiring Fund Shares
and cash in lieu of fractional Acquiring Fund Shares, if appropriate. Although
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 shall be canceled and exchanged for certificates representing the
number of Acquiring Fund shares distributable in the Reorganization with respect
to the Target Shares represented thereby.
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.
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<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
May 26, 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 its Articles of Incorporation are on file with the State
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 is duly registered under the Securities Exchange Act
of 1934, as amended ("1934 Act"), and such registrations will be in full
force and effect at the Effective Time;
<PAGE>
4.1.3. 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;
4.1.4. 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;
A-3
4.1.5. 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;
4.1.6. 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;
4.1.7. 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;
4.1.8. At the Effective Time, the performance of this Agreement
shall have been duly authorized by all necessary action by Target's
stockholders;
4.1.9. 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
<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;
4.1.10. 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;
4.1.11. 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;
A-4
4.1.12. 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;
4.1.13. 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;
4.1.14. 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;
4.1.15. 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
4.1.16. 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 its Articles of Incorporation are on file with the State
Department of Assessments and Taxation of that state;
<PAGE>
4.2.2. Acquiring Fund is duly registered as a closed-end
management investment company under the 1940 Act, and is duly registered
under the 1934 Act, and such registrations will be in full force and
effect at the Effective Time;
4.2.3. 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;
4.2.4. 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;
4.2.5. 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;
4.2.6. 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;
4.2.7. 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;
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4.2.8. 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 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;
<PAGE>
4.2.9. 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;
4.2.10. 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;
4.2.11. 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;
4.2.12. 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;
4.2.13. 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;
4.2.14. 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;
4.2.15. 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;
A-6
4.2.16. 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;
<PAGE>
4.2.17. 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
4.2.18. 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 to Stockholders who receive cash or other property (whether in lieu
of fractional Acquiring Fund 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
A-7
<PAGE>
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.
<PAGE>
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.
A-8
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.
<PAGE>
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;
A-9
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.
<PAGE>
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.
A-10
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.
<PAGE>
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 certain fractional Acquiring Fund Shares) and Acquiring Fund's
assumption of the Liabilities, followed by Target's distribution of
those full Acquiring Fund Shares PRO RATA to all Stockholders, those
fractional Acquiring Fund Shares PRO RATA to DRP Stockholders, and such
cash PRO RATA to the other 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
and cash in lieu of certain fractional Acquiring Fund 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 certain fractional Acquiring Fund 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 the Stockholder's Target Shares solely for
Acquiring Fund Shares, and cash in lieu of a fractional Acquiring Fund
Share, where appropriate, pursuant to the Reorganization, except with
respect to such cash; and
6.6.6. A Stockholder's aggregate basis for the Acquiring Fund
Shares to be received in the Reorganization will be the same as the
aggregate basis for the 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. 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.
A-11
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.
<PAGE>
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 July 31, 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.
A-12
<PAGE>
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: -----------------------------
ATTEST: MANAGED HIGH YIELD PLUS FUND INC.
- ---------------------------- By: -----------------------------
A-13
<PAGE>
APPENDIX B
BOARD MEMBERS AND OFFICERS OF MANAGED HIGH YIELD FUND INC.
AND MANAGED HIGH YIELD PLUS FUND INC.
The following is a list of the present Directors 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**; 53 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 31
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
<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 30
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 34 investment
companies for which Mitchell
Hutchins, PaineWebber or one
of their affiliates serves as
investment adviser.
B-1
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 chairman of
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
<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 30 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 29
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
Meyer Feldberg; 58 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 33 investment companies for
which Mitchell Hutchins,
PaineWebber or one of their
affiliates serves as investment
adviser.
<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 33 investment companies for
which Mitchell Hutchins,
PaineWebber or one of their
affiliates serves as investment
adviser.
B-2
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.
(software company) and Northwest
Airlines Inc. Mr Malek is a
director or trustee of 30
investment companies for
<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 30
investment companies for which
Mitchell Hutchins, PaineWebber
or one of their affiliates
serves as investment adviser.
B-3
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 30 investment
companies for which Mitchell
Hutchins, PaineWebber or one
of their affiliates serves as
investment adviser.
<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. Mr. Keegan
is a vice president of six invest-
ment 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 31
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 31 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
<PAGE>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH FUND OTHER DIRECTORSHIPS
- ---------------------- -------------- --------------------
president and secretary of 30
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.
B-4
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 31
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 30 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 31 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,
<PAGE>
POSITION BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE WITH EACH FUND OTHER DIRECTORSHIPS
- ---------------------- -------------- --------------------
Inc. Mr. Taglialatela is a
vice president and assistant
treasurer of 31 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 30 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-5
<PAGE>
APPENDIX C
MANAGED HIGH YIELD FUND INC.
SPECIAL MEETING OF STOCKHOLDERS - April 24, 2000
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
