<PAGE>
MANAGED HIGH YIELD FUND INC.
COMMON STOCK
------------------------
Managed High Yield Fund Inc. ('Fund') is a diversified, closed-end
management investment company. The Fund's investment objective is to seek high
current income. In pursuing its investment objective, the Fund seeks to avoid
undue investment risk by investing in a professionally managed, diversified
portfolio of high yield, high risk income securities and, under normal market
conditions, invests at least 80% of its total assets in securities rated Ba or B
by Moody's Investors Service, Inc. ('Moody's'), BB or B by Standard & Poor's
Ratings Service, a division of The McGraw Hill Companies ('S&P'), or comparably
rated by another nationally recognized statistical rating organization
('NRSRO'). The Fund may also invest up to 20% of its total assets in the
aggregate in securities rated higher than Ba or lower than B by Moody's, higher
than BB or lower than B by S&P, securities comparably rated by another NRSRO,
non-rated securities determined by Mitchell Hutchins Asset Management Inc.
('Mitchell Hutchins'), the Fund's investment adviser, to be of comparable
quality to rated securities in which the Fund may invest and other securities
described in this Prospectus. 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. Investments in high yield, high
risk income securities are subject to special risks, including a greater risk of
loss of principal and non-payment of interest. The Fund also may invest up to
35% of its net assets in securities of foreign issuers. THE FUND IS DESIGNED FOR
INVESTORS WILLING TO ASSUME ADDITIONAL RISK IN RETURN FOR THE POTENTIAL FOR HIGH
CURRENT INCOME. INVESTORS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THE FUND. SEE 'SPECIAL CONSIDERATIONS AND RISK FACTORS.' No
assurance can be given that the Fund will achieve its investment objective.
The Fund's common stock ('Common Stock') is listed and traded on the New
York Stock Exchange, Inc. ('NYSE') under the symbol 'PHT.' No additional shares
of Common Stock will be issued in connection with this offering. The Common
Stock may be offered pursuant to this Prospectus from time to time in order to
effect over-the-counter ('OTC') secondary market sales by PaineWebber
Incorporated ('PaineWebber') in its capacity as a dealer and secondary market-
maker at negotiated prices related to prevailing prices on the NYSE at the time
of sale. The closing price for the Common Stock on the NYSE on November 15, 1996
was $12.88. See 'Trading History.' The Fund will not receive any proceeds from
the sale of Common Stock offered pursuant to this Prospectus.
Mitchell Hutchins serves as investment adviser and administrator to the
Fund. This Prospectus concisely sets forth certain information an investor
should know before investing and should be retained for future reference. A
Statement of Additional Information ('SAI') dated November 29, 1996 has been
filed with the Securities and Exchange Commission and is incorporated by
reference in its entirety into this Prospectus. A Table of Contents for the SAI
is set forth as the last section of this Prospectus. A copy of the SAI can be
obtained without charge by writing to the Fund, by contacting your PaineWebber
investment executive or PaineWebber's correspondent firms or by calling
toll-free (800) 852-4750.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------------------
PAINEWEBBER INCORPORATED
--------------------------------------
The date of this Prospectus is November 29, 1996.
<PAGE>
FUND EXPENSES
The following tables are intended to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, directly or
indirectly.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price).............................................. None(1)
Dividend Reinvestment Plan Fees............................................................. None
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS ATTRIBUTABLE TO COMMON STOCK)(2)
Investment Advisory and Administration Fees................................................. 0.90%
Other Expenses.............................................................................. 0.35%
----
Total Annual Expenses.................................................................... 1.25%
----
----
</TABLE>
- ------------------
(1) Prices for shares of Common Stock traded in the OTC secondary market will
reflect ordinary dealer mark-ups.
(2) See 'Management of the Fund' for additional information. The investment
advisory and administration fees payable to the Fund's investment adviser
are greater than those paid by most funds. 'Other Expenses' have been
estimated based upon expenses actually incurred for the fiscal year ended
July 31, 1996.
EXAMPLE
An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Fund, assuming (i) a 5% annual return and (ii)
reinvestment of all dividends and other distributions at net asset value:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- --------------------- ------------------------- ------------------------- -----------------------
<S> <C> <C> <C>
$13 $40 $69 $151
</TABLE>
This Example assumes that the percentage amounts listed under Annual
Expenses remain the same in the years shown (except that Annual Expenses have
been reduced to reflect the completion of organization expense amortization
after five years from the commencement of investment operations). The above
tables and the assumption in the Example of a 5% annual return and reinvestment
at net asset value are required by regulation of the Securities and Exchange
Commission ('SEC') applicable to all closed-end investment companies; the
assumed 5% annual return is not a prediction of, and does not represent, the
projected or actual performance of the Common Stock. In addition, while this
Example assumes reinvestment of all dividends and other distributions at net
asset value, participants in the Fund's Dividend Reinvestment Plan will receive
shares of the Common Stock purchased by the Plan agent at the market price in
effect at that time, which may be at, above or below net asset value.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES,
AND THE FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and in the Statement
of Additional Information ('SAI'). Investors should carefully consider
information set forth under the heading 'Special Risk Considerations' below.
<TABLE>
<S> <C>
The Fund............................. Managed High Yield Fund Inc. ('Fund') is a diversified, closed-end
management investment company. See 'The Fund.'
The Offering......................... No additional shares of the Fund's common stock ('Common Stock') will be
issued in connection with this offering. Shares of Common Stock may be
offered pursuant to this Prospectus from time to time in order to effect
over-the-counter ('OTC') secondary market sales by PaineWebber
Incorporated ('PaineWebber') in its capacity as a dealer and secondary
market-maker at negotiated prices related to prevailing market prices on
the New York Stock Exchange, Inc. ('NYSE') at the time of sale. The
Common Stock is listed and traded on the NYSE under the symbol 'PHT.'
See 'The Offering' and 'Trading History.'
Investment Objective and
Policies........................... The Fund's investment objective is to seek high current income. In
pursuing its investment objective, the Fund seeks to avoid undue
investment risk by investing in a professionally managed, diversified
portfolio of high yield, high risk income securities (commonly known as
'junk bonds') and, under normal market conditions, invests at least 80%
of its total assets in securities rated Ba or B by Moody's Investors
Service, Inc. ('Moody's'), BB or B by Standard & Poor's Ratings Service,
a division of The McGraw Hill Companies ('S&P'), or comparably rated by
another nationally recognized statistical rating organization ('NRSRO').
Securities rated BB or Ba are considered to be within the 'upper tier'
of the high yield, high risk income securities market and securities
rated B are considered to be within the 'middle tier' of this market.
Securities within these two tiers constitute the largest portions of
this market. The Fund may also invest up to 20% of its total assets in
the aggregate in securities rated higher than Ba or lower than B by
Moody's, higher than BB or lower than B by S&P, securities comparably
rated by another NRSRO, non-rated securities determined by Mitchell
Hutchins Asset Management Inc. ('Mitchell Hutchins'), the Fund's
investment adviser, to be of comparable quality to rated securities in
which the Fund may invest and other securities described in this
Prospectus. Under certain market conditions, such higher and lower rated
securities may offer significant opportunities for high current
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
income. 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 will assess
securities on the basis of the highest rating assigned by any NRSRO.
The Fund is designed for investors willing to assume additional risk in
return for the potential for high current income. The Fund is not
intended to be a complete investment program, and there is no assurance
that the Fund will achieve its investment objective. Investments in high
yield, high risk income securities are subject to a greater risk of loss
of principal and non-payment of interest than higher-rated investments.
In selecting investments for the Fund's portfolio, Mitchell Hutchins seeks
to identify issuers and industries that Mitchell Hutchins believes are
likely to experience stable or improving financial conditions. Mitchell
Hutchins believes that this strategy will enhance the Fund's ability to
earn high current income. Mitchell Hutchins' analysis may include
consideration of general industry trends, the issuer's experience and
managerial strength, changing financial conditions, borrowing
requirements or debt maturity schedules, the issuer's responsiveness to
changes in business conditions and interest rates, and other terms and
conditions. Mitchell Hutchins may also consider relative values based on
anticipated cash flow, interest or dividend coverage, asset coverage and
earnings prospects.
The high yield, high risk income securities in which the Fund invests
include bonds, debentures, notes and convertible debt and are generally
unsecured. Most of these debt securities will bear interest at fixed
rates.
The Fund may implement various temporary 'defensive' strategies at times
when Mitchell Hutchins determines that conditions in the markets make
pursuing the Fund's basic investment strategy inconsistent with the best
interests of its stockholders. These strategies may include an increase
in the portion of the Fund's assets invested in higher-quality debt
securities.
The Fund may also engage in other investment practices, including forward
commitments, repurchase agreements, securities lending and strategic
transactions, may purchase illiquid securities, and may purchase
when-issued and delayed delivery securities and securities issued in
private placements. At times, the Fund may acquire preferred securities
and convertible securities, and may acquire equity securities (including
common stocks, warrants and rights)
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
when attached to, or as part of, a unit including fixed income
securities, or in connection with a conversion or exchange of fixed
income securities. The Fund may also invest up to 35% of its net assets
in securities of foreign issuers, with no more than 10% of its net
assets in securities of foreign issuers that are denominated and traded
in foreign currencies.
See 'Investment Objective and Policies,' 'Other Investment Practices,'
'Special Considerations and Risk Factors' and 'Taxation.' See also
'Appendix--Description of Bond Ratings.'
Investment Adviser and
Administrator...................... Mitchell Hutchins, a wholly owned asset management subsidiary of
PaineWebber, serves as the Fund's investment adviser and administrator.
Mitchell Hutchins provides investment advisory and portfolio management
services to investment companies, pension funds and other institutional,
corporate and individual clients. As of October 31, 1996, Mitchell
Hutchins served as investment adviser or sub-adviser to 29 registered
investment companies with 64 separate portfolios having aggregate assets
of approximately $31.0 billion. See 'Management of the Fund.'
Dividends and Other
Distributions...................... The Fund distributes all of its net investment income as monthly
dividends. The Fund anticipates that a monthly dividend may, from time
to time, represent more or less than the amount of net investment income
earned by the Fund in the period to which the dividend relates. The Fund
distributes annually to stockholders substantially all of its realized
net capital gains, if any. See 'Dividends and Other Distributions;
Dividend Reinvestment Plan.'
Dividend Reinvestment Plan........... The Fund has established a Dividend Reinvestment Plan ('Plan') under which
all stockholders whose shares of Common Stock are registered in their
own names, or in the name of PaineWebber (or its nominee), have all
dividends and other distributions on their shares of Common Stock
automatically reinvested in additional shares of Common Stock, unless
such stockholders elect to receive cash. Additional shares of Common
Stock acquired under the Plan are purchased in the open market, on the
NYSE or otherwise, at prices that may be higher or lower than the net
asset value per share at the time of purchase. Stockholders who hold
their shares in the name of a broker or nominee other than PaineWebber
(or its nominee) should contact such broker or nominee to determine
whether, or how, they may participate in the Plan. The Fund will not
issue any
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
new shares of Common Stock in connection with the Plan. See 'Dividends
and Other Distributions; Dividend Reinvestment Plan.'
Stock Repurchases and Tender Offers;
Conversion to
Open-End Fund...................... In recognition of the possibility that the Common Stock might trade at a
discount from net asset value and that any such discount may not be in
the best interest of stockholders, the Fund's Board of Directors, in
consultation with Mitchell Hutchins, currently intends at least annually
to consider the possibility of making open market Common Stock
repurchases or tender offers. There can be no assurance that the Board
of Directors will decide to undertake either of these actions or that,
if undertaken, such actions will result in the Common Stock's trading at
a price that is equal or close to net asset value per share. The Board
of Directors also 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. See 'Description of Capital Stock.'
Special Risk Considerations.......... Certain Risks Associated with Investments in High Yield, High Risk Income
Securities. Investors should carefully consider their ability to assume
the risks of owning shares of an investment company that invests in high
yield, high risk income securities before making an investment in the
Fund. The Fund, under normal market conditions, invests at least 80% of
its total assets in high yield, high risk income securities rated Ba or
B by Moody's, BB or B by S&P or comparably rated by another NRSRO. The
Fund may also invest up to 20% of its total assets in the aggregate in
securities rated higher than Ba or lower than B by Moody's, higher than
BB or lower than B by S&P, securities comparably rated by another NRSRO,
non-rated securities determined by Mitchell Hutchins to be of comparable
quality to rated securities in which the Fund may invest and other
securities described in this Prospectus. Most of the securities in which
the Fund invests are considered to be below investment grade, reflecting
a greater possibility that adverse changes in the financial condition of
the issuer, or in general economic conditions, or both, or an
unanticipated rise in interest rates, may impair the ability of the
issuer to make payments of interest and principal. The inability (or
perceived inability) of issuers to make timely payment of interest and
principal would likely make the values of securities held by the Fund
more volatile and could limit the Fund's ability to sell its securities
at prices approximating the values the Fund had placed on such
securities. In the absence of a liquid trading market for securities
held by it, the Fund may find it more difficult at times to establish
the fair value of such securities.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Securities in the rating categories Ba and below as determined by Moody's
and BB and below as determined by S&P are considered by those agencies
to be predominantly speculative with limited protection of interest and
principal payments, and may include securities that are in default or
face the risk of default with respect to principal or interest. The Fund
may invest in securities that are rated as low as 'D,' which are
securities in payment default. These rating services' descriptions of
securities in the lower rating categories, including their speculative
characteristics, are set forth in the Appendix.
Securities ratings are based largely on the issuer's historical financial
condition and the rating agencies' analysis at the time of rating.
Securities ratings are not a guarantee of quality and may be lowered
after the Fund has acquired the security. Also, rating agencies may fail
to make timely changes in credit ratings in response to subsequent
events. Consequently, the rating assigned to any particular security is
not necessarily a reflection of the issuer's current financial
condition, which may be better or worse than the rating would indicate.
The rating assigned to a security by Moody's or S&P does not reflect an
assessment of the volatility of the security's market value or of the
liquidity of an investment in the security.
Changes by recognized rating services in their ratings of any income
security and in the ability of an issuer to make payments of interest
and principal may also affect the value of these investments. Changes in
the value of portfolio securities generally will not affect cash income
derived from such securities, but will affect the Fund's net asset
value. The Fund will not necessarily dispose of a security when its
rating is reduced below its rating at the time of purchase, although
Mitchell Hutchins will monitor all investments to determine whether
continued investment is consistent with the Fund's investment objective.
Because of the greater number of investment considerations involved in
investing in high yield, high risk income securities, the achievement of
the Fund's investment objective depends more on Mitchell Hutchins'
analytical abilities than would be the case if the Fund were investing
primarily in securities in the higher rating categories.
Lower grade debt securities generally offer a higher current yield than
that available from higher grade issues. However, lower grade securities
are subject to higher risks in that they are especially subject to
adverse changes in general economic conditions and in the industries in
which the issuers are engaged, to changes in the financial condition of
the issuers and to price fluctuation in response to changes in interest
rates. Some of the high yield, high risk income
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
securities in which the Fund may invest are issued to raise funds in
connection with the acquisition of a company, in so-called 'leveraged
buyout' transactions. The highly leveraged capital structure of such
issuers may make them especially vulnerable to adverse changes in
economic conditions. During periods of economic downturn or rising
interest rates, issuers of high yield, high risk income securities,
especially highly leveraged issuers, may experience financial stress,
which could adversely affect their ability to make payments of principal
and interest and increase the possibility of default. In addition, such
issuers may not have more traditional methods of financing available to
them, and may be unable to repay debt at maturity by refinancing. The
risk of loss due to default in payment of interest or principal by such
issuers is significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness.
The market for high yield, high risk income securities has expanded
rapidly in recent years, and its growth paralleled a long economic
expansion. In the past, the prices of many high yield, high risk income
securities declined substantially, reflecting an expectation that many
issuers of such securities might experience financial difficulties. As a
result, the yields on high yield, high risk income securities rose
dramatically. Such higher yields did not reflect the value of the income
stream that holders of such securities expected, but rather the risk
that holders of such securities could lose a substantial portion of
their value as a result of the issuers' financial restructuring or
default. There can be no assurance that such declines will not recur.
The market for high yield, high risk income securities generally is
thinner and less active than that for higher quality securities. This
may limit the Fund's ability to sell such securities at fair value in
response to changes in the economy or the financial markets. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of high yield, high
risk income securities, especially in a thinly traded market.
The values of high yield, high risk income securities, like those of other
income securities, generally fluctuate in response to changes in
interest rates. Thus, a decrease in interest rates will generally result
in an increase in the value of such securities. Conversely, during
periods of rising interest rates, the value of such securities will
generally decline. These fluctuations can be expected to be greater with
respect to investments in income securities with longer maturities than
investments in securities with shorter maturities. The
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
secondary market prices of high yield, high risk income securities are
often affected to a lesser extent by changes in interest rates and to a
greater extent by changes in general economic conditions and business
conditions affecting the issuers of such securities and their respective
industries. Negative publicity or investor perceptions may also
adversely affect the values of high yield, high risk income securities.
Under adverse market or economic conditions or in the event of adverse
changes in the financial condition of the issuer, the Fund could find it
more difficult to sell high yield, high risk income securities when
Mitchell Hutchins believes it advisable to do so or may be able to sell
such securities only at prices lower than if such securities were more
widely held. In the event of a default of such securities, in order to
enforce its rights, the Fund may be required to take possession of and
manage assets securing the issuer's obligations on such securities,
which may increase the Fund's operating expenses and adversely affect
the Fund's net asset value. The Fund may also be limited in its ability
to enforce its rights and may incur greater costs in enforcing its
rights in the event an issuer becomes the subject of bankruptcy
proceedings.
Some or all of the securities in which the Fund invests may, when
purchased, be illiquid or may subsequently become illiquid. The Fund may
not be able readily to dispose of such securities at an amount that
approximates that at which the Fund has valued them and would have to
sell other investments if necessary to raise cash to meet its
obligations. In many cases, high yield, high risk income securities may
be purchased in private placements and, accordingly, will be subject to
restrictions on resale as a matter of contract or under the securities
laws. It may be more difficult to determine the fair value of such
securities for purposes of computing the Fund's net asset value.
Although Mitchell Hutchins attempts to minimize the speculative risks
associated with investments in such securities through diversification,
credit analysis and attention to current trends in interest rates and
other factors, investors should carefully review the investment
objective and policies of the Fund and consider their ability to assume
the investment risks involved before making an investment.
Certain Risks Associated with Original Issue Discount, Zero Coupon and
Payment-in-Kind Securities. The Fund may invest in discount securities,
including certain zero coupon securities of corporate issuers and
payment-in-kind securities. Zero coupon securities pay no interest to
holders prior to maturity, and payment-in-kind securities may pay
interest in the form of additional securities.
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
However, the portion of the original issue discount on the zero coupon
securities that accrues each year and the 'interest' on payment-in-kind
securities must be included in the Fund's income annually. Accordingly,
to continue to qualify for tax treatment as a regulated investment
company and to avoid an excise tax (see 'Taxation'), the Fund may be
required to distribute as dividends amounts that are greater than the
total amount of cash it actually receives. These distributions must be
made from the Fund's cash assets or, if necessary, from the proceeds of
sales of portfolio securities. The Fund will not be able to purchase
additional income-producing securities with cash used to make such
distributions, and its current income ultimately may be reduced as a
result. Zero coupon and payment-in-kind securities usually trade at a
substantial discount from their face or par value and will be subject to
greater fluctuations of market value in response to changing interest
rates than debt obligations of comparable maturities that make current
distributions of interest in cash.
Certain Risks Associated with Call Features. A substantial portion of the
securities held by the Fund may permit the issuer at its option to
'call,' or redeem, its securities prior to maturity. If an issuer were
to redeem securities held by the Fund during a time of declining
interest rates, the Fund would not likely be able to reinvest the
proceeds in securities of comparable quality providing the same
investment return as the securities redeemed.
Certain Risks Associated with Premium Securities. The Fund may invest a
substantial portion of its assets in securities bearing coupon rates
higher than prevailing market rates. Such 'premium' securities are
typically purchased at prices greater than the principal amounts payable
on maturity. Consequently, if such premium securities are called or sold
prior to maturity, the Fund may recognize a capital loss to the extent
the call or sale price is less than the purchase price. Additionally,
the Fund will recognize a capital loss if it holds such securities to
maturity.
Foreign Investments. The Fund may invest up to 35% of its net assets in
securities of foreign issuers with no more than 10% of its net assets in
securities of foreign issuers that are denominated and traded in foreign
currencies. Investments in foreign securities involve risks relating to
political and economic developments abroad, as well as those that result
from the differences between the regulations to which U.S. and foreign
issuers are subject. These risks may include expropriation, confiscatory
taxation, withholding taxes on interest, limitations on the use or
transfer of Fund assets, difficulty in obtaining or enforcing a court
judgment abroad, restrictions on the
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
exchange of currencies and political or social instability or diplomatic
developments. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments
positions. Securities of many foreign issuers may be less liquid and
their prices more volatile than those of securities of comparable U.S.
issuers. The costs attributable to foreign investing that the Fund must
bear frequently are also higher than those attributable to domestic
investing.
Many of the foreign securities that may be held by the Fund will not be
registered with the SEC, and the issuers thereof will not be subject to
SEC reporting requirements. Accordingly, there may be less publicly
available information concerning foreign issuers of securities held by
the Fund than is available concerning U.S. companies. Foreign companies
are not generally subject to uniform accounting, auditing and financial
reporting standards. They also may be subject to less rigorous other
regulatory requirements than those applicable to U.S. companies.
Transactions in foreign securities may be subject to less efficient
settlement practices. Legal remedies for defaults and disputes may have
to be pursued in foreign courts, whose procedures may differ
substantially from those of U.S. courts.
Strategic Transactions. The Fund may use options, futures contracts and
foreign currency contracts, which entail special risks. See 'Other
Investment Practices--Strategic Transactions.'
Lending of Portfolio Securities. The Fund is authorized to lend portfolio
securities with a value of up to 33 1/3% of its total assets taken at
market value (determined at the time of the transaction) to qualified
broker-dealers or institutional investors that Mitchell Hutchins deems
qualified, but only when the borrower maintains acceptable collateral
with the Fund's custodian bank, marked to market daily, in an amount at
least equal to the market value of the securities earned, plus accrued
interest and dividends.
Anti-Takeover Provisions. The Fund's Articles of Incorporation contain
provisions limiting (1) the ability of other entities or persons to
acquire control of the Fund, (2) the Fund's freedom to engage in certain
transactions and (3) the ability of the Fund's directors or stockholders
to amend the Articles of Incorporation. These provisions of the Articles
of Incorporation may be regarded as 'anti-takeover' provisions. These
provisions could have the effect of depriving the 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
the Fund in a tender offer or
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
similar transaction. The overall effect of these provisions is to render
more difficult the accomplishment of a merger or the assumption of
control by a stockholder who owns beneficially more than 5% of the
Common Stock. They provide, however, the advantage of potentially
requiring persons seeking control of the Fund to negotiate with its
management regarding the price to be paid and facilitating the
continuity of the Fund's management, investment objective and policies.
See 'Investment Objective and Policies,' 'Other Investment Practices,'
'Special Considerations and Risk Factors,' 'Taxation' and 'Description
of Capital Stock.'
Market Price and Net Asset Value of
Shares............................. Shares of closed-end investment companies, including the Fund, frequently
trade at a discount to their net asset values. Whether investors will
realize gains or losses upon the sale of shares of the Common Stock will
not depend directly upon the Fund's net asset value, but will depend
upon whether the market price of the Common Stock at the time of sale is
above or below the original purchase price for the shares. This market
risk is separate and distinct from the risk that the Fund's net asset
value may decrease. Accordingly, the Common Stock is designed primarily
for long-term investors, and investors in the Common Stock should not
view the Fund as a vehicle for trading purposes.
See 'Trading History', 'Special Considerations and Risk Factors-- Market
Price and Net Asset Value of Shares' and 'Description of Capital Stock.'
</TABLE>
12
<PAGE>
FINANCIAL HIGHLIGHTS
The table below provides selected per share data and ratios for a share of
Common Stock for the periods shown. This information is supplemented by the
financial statements and accompanying notes appearing in the Fund's Annual
Report to Shareholders for the fiscal year ended July 31, 1996 which are
incorporated by reference into the Fund's SAI and can be obtained by
stockholders upon request. The financial statements and notes, and the financial
information in the table below have been audited by Ernst & Young LLP,
independent auditors, whose report thereon also is included in the Annual Report
to Shareholders.
<TABLE>
<CAPTION>
FOR THE
YEARS ENDED FOR THE PERIOD
JULY 31, DECEMBER 7, 1993+
------------------ THROUGH
1996 1995 JULY 31, 1994
------- ------- -----------------------
<S> <C> <C> <C>
Net asset value, beginning of
period........................... $ 13.44 $ 13.76 $ 15.00
------- ------- ----------
Net investment income.............. 1.29 1.40 0.77
Net realized and unrealized losses
from investment and foreign
currency transactions............ (0.16) (0.34) (1.25)
------- ------- ----------
Net increase (decrease) from
investment operations............ 1.13 1.06 (0.48)
------- ------- ----------
Dividends from net investment
income........................... (1.32) (1.38) (0.76)
------- ------- ----------
Net asset value, end of period..... $ 13.25 $ 13.44 $ 13.76
------- ------- ----------
------- ------- ----------
Per share market value, end of
period........................... $ 12.50 $ 12.38 $ 12.38
------- ------- ----------
------- ------- ----------
Total investment return:
On net asset value (1).......... 8.83% 9.27% (3.00)%
------- ------- ----------
------- ------- ----------
On market value (2)............. 12.16% 11.87% (12.76)%
------- ------- ----------
------- ------- ----------
Ratios/Supplemental Data:
Net assets, end of period (000's
omitted)...................... $79,904 $81,081 $82,995
Ratio of expenses to average net
assets........................ 1.25% 1.21% 1.17%*
Ratio of net investment income
to average net assets......... 9.87% 10.68% 8.27%*
Portfolio turnover rate......... 135% 103% 85%
</TABLE>
- ---------------
<TABLE>
<C> <S>
+ Commencement of operations
* Annualized
(1) Total investment return on net asset value is calculated assuming a purchase of one share of stock at net
asset value on the first day of each period reported and a sale at net asset value on the last day of each
period reported and assuming reinvestment of dividends at prices obtained under the Fund's Dividend
Reinvestment Plan (the 'Plan'). Total investment return on net asset value has not been annualized for
periods of less than one year. Total investment return does not reflect brokerage commissions.
(2) Total investment return on market value is calculated assuming a purchase of one share of 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 Plan. Total investment return on
market value has not been annualized for periods of less than one year. Total investment return does not
reflect brokerage commissions.
</TABLE>
13
<PAGE>
THE FUND
The Fund is a diversified, closed-end management investment company and has
registered as such under the Investment Company Act of 1940, as amended ('1940
Act'). The Fund was incorporated under the laws of the State of Maryland on June
11, 1993 and commenced operations on December 7, 1993. Prior to November 1995,
the name of the Fund was 'PaineWebber Premier High Income Trust Inc.' The Fund
began doing business under the name 'Managed High Yield Fund' in August 1995,
and the shareholders of the Fund approved a formal change of the Fund's name to
'Managed High Yield Fund Inc.' on November 16, 1995. The Fund's principal office
is located at 1285 Avenue of the Americas, New York, New York 10019, and its
telephone number is (212) 713-2000.
THE OFFERING
The Common Stock may be offered pursuant to this Prospectus from time to
time in order to effect OTC secondary market sales by PaineWebber in its
capacity as a dealer and secondary market-maker at negotiated prices related to
prevailing market prices on the NYSE at the time of sale. No additional shares
of Common Stock will be issued in connection with this offering. Costs incurred
in connection with this offering will be paid by PaineWebber. PaineWebber's
principal offices are located at 1285 Avenue of the Americas, New York, New York
10019. Mitchell Hutchins is a wholly owned subsidiary of PaineWebber.
USE OF PROCEEDS
The Fund will not receive any proceeds from the sale of any Common Stock
offered pursuant to this Prospectus. Proceeds received by PaineWebber as a
result of its OTC secondary market sales of the Common Stock will be utilized by
PaineWebber in connection with its secondary market operations and for general
corporate purposes.
TRADING HISTORY
The Common Stock is listed and traded on the NYSE under the symbol 'PHT.'
The following table sets forth for the Common Stock 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 per share net asset values, based on the
Fund's 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 sales prices
were recorded; and (c) the discount or premium to net asset value represented by
the high and low sales prices shown. The range of net asset values and of
premiums and discounts for the Common Stock during the periods shown may be
broader than is shown in this table. On November 15, 1996, the closing price per
share of Common Stock was $12.88, the Fund's net asset value per share was
$13.52 and the discount to net asset value was (4.73)%.
<TABLE>
<CAPTION>
(DISCOUNT) OR
CORRESPONDING PREMIUM TO
SALES PRICE NET ASSET VALUES NET ASSET VALUE
------------------ ---------------- -----------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- ------------------------- ------- ------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
10/31/94................. $ 12.500 $11.125 $13.76 $13.14 (9.16)% (15.33)%
1/31/95.................. 12.375 11.125 12.75 13.15 (2.94) (15.40)
4/30/95.................. 12.750 11.875 13.07 12.59 (2.45) (5.68)
7/31/95.................. 13.000 12.125 13.37 13.13 (2.77) (7.65)
10/31/95................. 13.125 12.125 13.44 13.40 (2.34) (9.51)
1/31/96.................. 13.125 12.000 13.39 12.92 (1.98) (7.12)
4/30/96.................. 12.625 12.000 13.36 13.13 (5.50) (8.61)
7/31/96.................. 12.750 12.125 13.32 13.46 (4.28) (9.92)
10/31/96................. 13.000 12.500 13.58 13.32 (4.27) (6.16)
</TABLE>
14
<PAGE>
The Common Stock has historically traded in the market at prices below net
asset value. See 'Description of Capital Stock--Common Stock Repurchases and
Tender Offers' as to methods that may be undertaken by the Fund to reduce any
discount.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek high current income. In pursuing
its investment objective, the Fund seeks to avoid undue investment risk by
investing in a professionally managed, diversified portfolio of high yield, high
risk income securities (commonly known as 'junk bonds') and, under normal market
conditions, 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 NRSRO. Securities
rated BB or Ba are considered to be within the 'upper tier' of the high yield,
high risk income securities market and securities rated B are considered to be
within the 'middle tier' of this market. Securities within these two tiers
constitute the largest portions of this market. The Fund may also invest up to
20% of its total assets in the aggregate in securities rated higher than Ba or
lower than B by Moody's, higher than BB or lower than B by S&P, securities
comparably rated by another NRSRO, non-rated securities determined by Mitchell
Hutchins to be of comparable quality to rated securities in which the Fund may
invest and other securities described in this Prospectus. Under certain market
conditions, such higher and lower rated securities may offer significant
opportunities for high current income. 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 will assess
securities on the basis of the highest rating assigned by any NRSRO.
The Fund is designed for investors willing to assume additional risk in
return for the potential for high current income. The Fund is not intended to be
a complete investment program, and there is no assurance that the Fund will
achieve its investment objective. Investments in high yield, high risk income
securities are subject to a greater risk of loss of principal and non-payment of
interest than higher-rated investments. See 'Special Considerations and Risk
Factors--Certain Risks Associated with Investments in High Yield, High Risk
Income Securities.'
Mitchell Hutchins believes that current conditions in the high yield, high
risk income securities market, particularly with respect to securities rated BB
or B, offer opportunities to investors willing to bear the risk of high yield
investing. In selecting investments for the Fund's portfolio, Mitchell Hutchins
seeks to identify issuers and industries that Mitchell Hutchins believes are
more likely to experience stable or improving financial conditions. Mitchell
Hutchins believes that this strategy enhances the Fund's ability to earn high
current income. Many corporations are in the process of strengthening, or have
recently improved, their financial positions through cost-cutting, restructuring
or refinancing with lower cost debt. Mitchell Hutchins expects that, if the
economy continues to improve, these factors and others may lead many BB or B
issuers to experience financial improvement and possible credit upgrades.
Mitchell Hutchins seeks to identify issuers that are in the process of
strengthening, or have recently improved, their financial position through
detailed credit research. Mitchell Hutchins' analysis may include consideration
of general industry trends, the issuer's experience and managerial strength,
changing financial conditions, borrowing requirements or debt maturity
schedules, the issuer's responsiveness to changes in business conditions and
interest rates, and other terms and conditions. Mitchell Hutchins may also
consider relative values based on anticipated cash flow, interest or dividend
coverage, asset coverage and earnings prospects.
The Fund may enter into forward commitments, repurchase agreements,
securities lending and strategic transactions, and may purchase when-issued and
delayed delivery securities and securities issued in private placements, which
entail additional risks described below under 'Other Investment Practices.'
15
<PAGE>
HIGH YIELD, HIGH RISK INCOME SECURITIES
The high yield, high risk income securities in which the Fund will invest
include bonds, debentures, notes and convertible debt and will generally be
unsecured. Most of these debt securities will bear interest at fixed rates; the
Fund may also invest in debt securities with floating or variable rates of
interest. At times, the Fund may acquire preferred securities and may acquire
warrants, rights and other equity securities in connection with the purchase of
such high yield, high risk income securities.
During the fiscal year ended July 31, 1996, the Fund had 88.07% of its
dollar weighted average portfolio in debt securities that received a rating from
a NRSRO, and 9.03% of its dollar weighted average portfolio in debt securities
that were not so rated. The Fund had the following percentages of its dollar
weighted average portfolio invested in rated securities: AAA/Aaa (including cash
items)--4.10%, AA/Aa--0%, A/A--0%, BBB/Baa--0%, BB/Ba--30.96%, B/B--51.32%, and
CCC/Caa--1.69%. It should be noted that this information reflects the average
composition of the Fund's assets during the fiscal year ended July 31, 1996 and
is not necessarily representative of the Fund's assets as of the end of that
period, the current fiscal year or at any time in the future.
Discount Securities, Zero Coupon Securities and Payment-in-Kind
Securities. The Fund may at times invest in securities sold at a substantial
discount from their face or par value. Such securities include so-called 'zero
coupon' securities and 'payment-in-kind' securities. Zero coupon securities pay
no cash interest. 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. Payment-in-kind securities allow the issuer, at its option, to
make current interest payments on the securities either in cash or in additional
securities.
Foreign Investments. The Fund may invest up to 35% of its net assets in
securities of foreign issuers, with no more than 10% of its net assets in
securities of foreign issuers that are denominated and traded in foreign
currencies. The Fund also may purchase or sell foreign currencies and foreign
currency forward and futures contracts. See 'Other Investment
Practices--Strategic Transactions' and 'Special Considerations and Risk
Factors--Foreign Investments.'
Premium Securities. The Fund may invest a substantial portion of its
assets in securities bearing coupon rates higher than prevailing market rates.
Such 'premium' securities are typically purchased at prices greater than the
principal amounts payable on maturity. As a result, the purchase of such
securities provides the Fund a higher level of investment income distributable
to shareholders on a current basis than if the Fund purchased securities bearing
current market rates of interest.
DEFENSIVE STRATEGIES AND BORROWINGS
At times, Mitchell Hutchins may judge that conditions in the securities
markets make pursuing the Fund's basic investment strategy inconsistent with the
best interests of its stockholders. At such times, Mitchell Hutchins may
temporarily implement various alternative strategies, primarily designed to
reduce fluctuations in the value of the Fund's assets. In implementing these
'defensive' strategies, the Fund may invest in money market instruments of all
types and higher-quality debt securities. The yield on these securities would
generally be lower than the yield on high yield, high risk income securities. It
is impossible to predict when, or for how long, the Fund will use these
alternative strategies. The Fund may borrow money for temporary or emergency
purposes (e.g., clearance of transactions or payments of dividends to
stockholders) in an amount not exceeding 10% of the value of the Fund's total
assets (not including the amount borrowed).
16
<PAGE>
OTHER INVESTMENT PRACTICES
The Fund may engage in the following additional investment practices, each
of which may involve certain special risks.
Forward Commitments. The Fund may make contracts to purchase securities
for a fixed price at a future date beyond customary settlement time ('forward
commitments') if it holds, and maintains until the settlement date in a
segregated account, cash or liquid securities in an amount sufficient to meet
the purchase price, or if it enters into offsetting contracts for the forward
sale of other securities it owns. Forward commitments involve a risk of loss if
the value of the security to be purchased declines prior to the settlement date,
which risk is in addition to the risk of decline in value of the Fund's other
assets. Where such purchases are made through dealers, the Fund relies on the
dealer to consummate the sale. The dealer's failure to do so may result in the
loss to the Fund of an advantageous yield or price. Although the Fund will
generally enter into forward commitments with the intention of acquiring
portfolio securities, the Fund may dispose of a commitment prior to settlement
if Mitchell Hutchins deems it appropriate to do so. The Fund may realize
short-term capital gains or losses upon the sale of forward commitments.
Repurchase Agreements. The Fund may enter into repurchase agreements.
Repurchase agreements are transactions in which the Fund purchases securities
from a bank or recognized securities dealer and simultaneously commits to resell
the securities to the bank or dealer at an agreed-upon date or on demand and at
a price reflecting a market rate of interest unrelated to the coupon rate or
maturity of the purchased securities. Although repurchase agreements carry
certain risks not associated with direct investments in securities, including
possible decline in the market value of the underlying securities and delays and
costs to the Fund if the other party to the repurchase agreement becomes
bankrupt, the Fund intends to enter into repurchase agreements only with banks
and dealers in transactions believed by Mitchell Hutchins to present minimum
credit risks in accordance with guidelines established by the Fund's Board of
Directors.
Illiquid Securities. Some or all of the securities in which the Fund
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 the Fund has valued the securities and
includes, among other things, purchased OTC options, repurchase agreements
maturing in more than seven days, certain loan participations and assignments,
and restricted securities other than those Mitchell Hutchins has determined are
liquid pursuant to guidelines established by the Fund's Board of Directors. To
the extent the Fund invests in illiquid securities, the Fund may not be able to
readily liquidate such investments, and would have to sell other investments if
necessary to raise cash to meet its obligations.
Illiquid restricted securities may be sold only in privately negotiated
transactions or in public offerings with respect to which a registration
statement is in effect under the Securities Act of 1933 ('1933 Act'). Such
securities also include those that are subject to restrictions contained in the
securities laws of other countries. However, securities that are freely
marketable in the country where they are principally traded, but would not be
freely marketable in the United States, will not be considered illiquid. Where
registration is required, the Fund may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to sell.
While certain restricted securities may be illiquid, not all restricted
securities are illiquid. In recent years a large institutional market has
developed for certain securities that are not registered under the 1933 Act,
17
<PAGE>
including private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments are often restricted
securities because the securities are sold in transactions not requiring
registration. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend either on an
efficient institutional market in which such unregistered securities can be
readily resold or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not dispositive of the
liquidity of such investments.
To facilitate the increased size and liquidity of the institutional markets
for unregistered securities, the SEC has adopted Rule 144A under the 1933 Act.
Rule 144A establishes a 'safe harbor' from the registration requirements of the
1933 Act for resales of certain securities to qualified institutional buyers.
Institutional markets for restricted securities have developed as a result of
Rule 144A, providing both readily ascertainable values for restricted securities
and the ability to liquidate an investment. Such markets include automated
systems for the trading, clearance and settlement of unregistered securities of
domestic and foreign issuers, such as the PORTAL System sponsored by the
National Association of Securities Dealers, Inc. ('NASD'). An insufficient
number of qualified buyers interested in purchasing Rule 144A-eligible
restricted securities held by the Fund, however, could affect adversely the
marketability of such portfolio securities, and the Fund might be unable to
dispose of such securities promptly or at favorable prices.
The Fund may sell OTC options and, in connection therewith, segregate
assets or cover its obligations with respect to OTC options written by the Fund.
The assets used as cover for OTC options written by the Fund will be considered
illiquid unless the OTC options are sold to qualified dealers who agree that the
Fund may repurchase any OTC option it writes at a maximum price to be calculated
by a formula set forth in the option agreement. The cover for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the intrinsic
value of the option.
The Board of Directors has delegated the function of making day-to-day
determinations of liquidity to Mitchell Hutchins pursuant to guidelines approved
by the Board. Mitchell Hutchins will take into account a number of factors in
reaching liquidity decisions, including (1) the frequency of trades for the
security, (2) the number of dealers that make quotes for the security, (3) the
number of dealers that have undertaken to make a market in the security, (4) the
number of other potential purchasers for the security and (5) the nature of the
security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). Mitchell
Hutchins will monitor the liquidity of restricted securities in the Fund's
portfolio and report periodically on such decisions to the Board of Directors.
Private Placements. The Fund may invest in securities that are sold in
private placement transactions between their issuers and their purchasers and
that are neither listed on an exchange nor traded in the OTC secondary market.
In many cases, privately placed securities will be subject to contractual or
legal restrictions on transfer. As a result of the absence of a public trading
market, privately placed securities may in turn be less liquid and more
difficult to value than publicly traded securities. Although privately placed
securities may be resold in privately negotiated transactions, the prices
realized from the sales could, due to illiquidity, be less than those originally
paid by the Fund or less than if such securities were more widely traded. In
addition, issuers whose securities are not publicly traded may not be subject to
the disclosure and other investor protection requirements that may be applicable
if their securities were publicly traded. If any privately placed securities
held by the Fund are required to be registered under the securities laws of one
or more jurisdictions before being resold, the Fund may be required to bear the
expenses of registration.
18
<PAGE>
Strategic Transactions. The Fund may use options (both exchange-traded and
OTC) and forward currency contracts to attempt to enhance income or to realize
gains and 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 protection transactions. The Fund's ability to use
these strategies may be limited by market conditions, regulatory limits and tax
considerations. The SAI contains further information on these strategies.
The Fund may enter into forward currency contracts, buy and sell foreign
currency, debt and equity security index and interest rate futures contracts,
and write covered put and call options and buy and sell put and call options on
securities, debt and equity security indices, foreign currencies and such
futures contracts. The Fund may enter into options, futures, forward currency
contracts and interest rate protection transactions that approximate (but do not
exceed) the full value of its portfolio, at which point up to 100% of the Fund's
portfolio assets would be subject to the risks associated with the use of these
instruments.
The Fund may enter into interest rate protection transactions, including
interest rate swaps and interest rate caps, collars and floors, for hedging or
other risk management purposes. For example, the Fund may enter into interest
rate protection transactions to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any increase in the
price of securities the Fund anticipates purchasing at a later date. The Fund
will enter into interest rate protection transactions only with banks and
recognized securities dealers believed by Mitchell Hutchins to present minimal
credit risks in accordance with guidelines established by the Fund's Board of
Directors.
The Fund might not employ any of the strategies described above, and there
can be no assurance that any strategy used will succeed. If Mitchell Hutchins
incorrectly forecasts interest rates, currency exchange rates, market values or
other economic factors in utilizing a strategy for the Fund, the Fund might have
been in a better position had it not hedged at all. The use of these strategies
involves certain special risks, including (1) the fact that skills needed to use
these instruments are different from those needed to select the Fund's
securities, (2) possible imperfect correlation, or even no correlation, between
price movements of these instruments and price movements of the investments
being hedged, (3) the fact that, while hedging strategies can reduce the risk of
loss, they can also reduce the opportunity for gain, or even result in losses,
by offsetting favorable price movements in hedged investments and (4) the
possible inability of the Fund to purchase or sell a portfolio security at a
time that otherwise would be favorable for it to do so, or the possible need for
the Fund to sell a portfolio security at a disadvantageous time, due to the need
for the Fund to maintain 'cover' or to segregate securities in connection with
hedging transactions and the possible inability of the Fund to close out or to
liquidate its hedged position.
New financial products and risk management techniques continue to be
developed. The Fund may use these instruments and techniques to the extent
consistent with its investment objective and regulatory and federal tax
considerations.
When-Issued and Delayed Delivery Securities. The Fund may purchase debt
securities on a 'when-issued' basis or may purchase or sell debt securities on a
'delayed delivery' basis, i.e., for issuance or delivery to the Fund later than
the normal settlement date for such securities at a stated price and yield. The
Fund generally would not pay for such securities or start earning interest on
them until they are received. However, when the Fund undertakes a when-issued or
delayed delivery obligation, it immediately assumes the risks of ownership,
including the risk of price fluctuation. When the Fund agrees to purchase
securities on a when-issued or delayed delivery basis, its custodian will set
aside in a segregated account cash, or other liquid securities, marked-to-market
daily, in an amount at least equal to the amount of the commitment. Failure of
19
<PAGE>
the issuer to deliver a security purchased by the Fund on a when-issued or
delayed delivery basis may result in the Fund's incurring a loss or missing an
opportunity to make an alternative investment. Depending on market conditions,
the Fund's when-issued and delayed delivery purchase commitments could cause its
net asset value per share to be more volatile, because such securities may
increase the amount by which the Fund's total assets, including the value of
when-issued and delayed delivery securities held by the Fund, exceed its net
assets.
Equity Securities. The Fund may acquire equity securities (including
common stocks, rights and warrants for equity and fixed income securities) when
attached to fixed income securities or as part of a unit including fixed income
securities, or in connection with a conversion or exchange of fixed income
securities. 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.
Lending of Portfolio Securities. The Fund is authorized to lend portfolio
securities with a value of up to 33 1/3% of its total assets taken at market
value (determined at the time of the transaction) to qualified broker-dealers or
institutional investors that Mitchell Hutchins deems qualified, but only when
the borrower maintains acceptable collateral with the Fund's custodian bank,
marked to market daily, in an amount 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. In determining
whether to lend securities to a particular broker-dealer or institutional
investor, Mitchell Hutchins will consider, and during the period of the loan
will monitor, all relevant facts and circumstances, including the
creditworthiness of the borrower. The Fund will retain authority to terminate
any loans at any time. The Fund may pay reasonable administrative and custodial
fees in connection with a loan and may pay a negotiated portion of the interest
earned on the cash or money market instruments held as collateral to the
borrower or placing broker. The Fund will receive reasonable interest on the
loan or a flat fee from the borrower and amounts equivalent to any dividends,
interest or other distributions on the securities loaned. The Fund will regain
record ownership of loaned securities to exercise beneficial rights, such as
voting and subscription rights and rights to dividends, interest or other
distributions, when regaining such rights is considered by Mitchell Hutchins to
be in the Fund's interest.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate may vary from year to year and will not
be a limiting factor when Mitchell Hutchins deems portfolio changes appropriate.
Higher portfolio turnover will result in higher Fund expenses, including
brokerage commissions, dealer mark-ups and other transaction costs on the sale
of securities and on reinvestment in other securities. The portfolio turnover
rate is calculated by dividing the lesser of the Fund's annual sales or
purchases of portfolio securities (exclusive of purchases or sales of securities
whose maturities at the time of acquisition were one year or less) by the
monthly average value of the long-term securities in the portfolio during the
year. For the fiscal years ended July 31, 1996 and July 31, 1995, the Fund's
portfolio turnover rate was 135% and 103%, respectively.
20
<PAGE>
SPECIAL CONSIDERATIONS AND RISK FACTORS
Certain Risks Associated with Investments in High Yield, High Risk Income
Securities. Investors should carefully consider their ability to assume the
risks of owning shares of an investment company that invests in high yield, high
risk income securities before making an investment in the Fund. The Fund, under
normal market conditions, invests at least 80% of its total assets in high
yield, high risk income securities rated Ba or B by Moody's, BB or B by S&P or
comparably rated by another NRSRO. The Fund may also invest up to 20% of its
total assets in the aggregate in securities rated higher than Ba or lower than B
by Moody's, higher than BB or lower than B by S&P, securities comparably rated
by another NRSRO, non-rated securities determined by Mitchell Hutchins to be of
comparable quality to rated securities in which the Fund may invest and other
securities described in this Prospectus. Most of the securities in which the
Fund invests are considered to be below investment grade, reflecting greater
possibility that adverse changes in the financial condition of the issuer, or in
general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest and
principal. The inability (or perceived inability) of issuers to make timely
payment of interest and principal would likely make the values of securities
held by the Fund more volatile and could limit the Fund's ability to sell its
securities at prices approximating the values the Fund had placed on such
securities. In the absence of a liquid trading market for securities held by it,
the Fund may find it more difficult at times to establish the fair market value
of such securities.
Securities in the rating categories Ba or below as determined by Moody's
and BB or below as determined by S&P are considered by those agencies to be
predominantly speculative with limited protection of interest and principal
payments, and may include securities that are in default or face the risk of
default with respect to principal or interest. The Fund may invest in securities
that are rated as low as 'D,' which are securities in payment default. These
rating services' descriptions of securities in the lower rating categories,
including their speculative characteristics, are set forth in Appendix A.
Securities ratings are based largely on the issuer's historical financial
condition and the rating agencies' analysis at the time of rating. Securities
ratings are not a guarantee of quality and may be lowered after the Fund has
acquired the security. Also, rating agencies may fail to make timely changes in
credit ratings in response to subsequent events. Consequently, the rating
assigned to any particular security is not necessarily a reflection of the
issuer's current financial condition, which may be better or worse than the
rating would indicate. The rating assigned to a security by Moody's or S&P does
not reflect an assessment of the volatility of the security's market value or of
the liquidity of an investment in the security.
Changes by NRSROs in their ratings of any income security and in the
ability of an issuer to make payments of interest and principal may also affect
the value of these investments. Changes in the value of portfolio securities
generally will not affect cash income derived from such securities, but will
affect the Fund's net asset value. The Fund will not necessarily dispose of a
security when its rating is reduced below the rating at the time of purchase,
although Mitchell Hutchins will monitor all investments to determine whether
continued investment is consistent with the Fund's investment objective. Because
of the greater number of investment considerations involved in investing in high
yield, high risk income securities, the achievement of the Fund's investment
objective depends more on Mitchell Hutchins' analytical abilities than would be
the case if it were investing primarily in securities in the higher rating
categories.
Lower grade debt securities generally offer a higher current yield than
that available from higher grade issues. However, lower grade securities are
subject to higher risks in that they are especially subject to adverse changes
in general economic conditions and in the industries in which the issuers are
engaged, to changes in the financial condition of the issuers and to price
fluctuation in response to changes in interest rates. Some of
21
<PAGE>
the high yield, high risk income securities in which the Fund may invest are
issued to raise funds in connection with the acquisition of a company, in
so-called 'leveraged buy-out' transactions. The highly leveraged capital
structure of such issuers may make them especially vulnerable to adverse changes
in economic conditions. During periods of economic downturn or rising interest
rates, issuers of high yield, high risk income securities, especially highly
leveraged issuers, may experience financial stress, which could adversely affect
their ability to make payments of principal and interest and increase the
possibility of default. In addition, such issuers may not have more traditional
methods of financing available to them, and may be unable to repay debt at
maturity by refinancing. The risk of loss due to default in payment of interest
or principal by such issuers is significantly greater because such securities
frequently are unsecured and subordinated to the prior payment of senior
indebtedness.
The market for high yield, high risk income securities has expanded rapidly
in recent years, and its growth paralleled a long economic expansion. In the
past, the prices of many high yield, high risk income securities declined
substantially, reflecting an expectation that many issuers of such securities
might experience financial difficulties. As a result, the yields on high yield,
high risk income securities rose dramatically. Such higher yields did not
reflect the value of the income stream that holders of such securities expected,
but rather the risk that holders of such securities could lose a substantial
portion of their value as a result of the issuers' financial restructuring or
default. There can be no assurance that such declines will not recur.
The market for high yield, high risk income securities generally is thinner
and less active than that for higher quality securities. This may limit the
Fund's ability to sell such securities at fair value in response to changes in
the economy or the financial markets. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may also decrease the
values and liquidity of high yield, high risk income securities, especially in a
thinly traded market.
The values of high yield, high risk income securities, like those of other
income securities, generally fluctuate in response to changes in interest rates.
Thus, a decrease in interest rates will generally result in an increase in the
value of such securities. Conversely, during periods of rising interest rates,
the value of such securities will generally decline. These fluctuations can be
expected to be greater with respect to investments in income securities with
longer maturities than investments in securities with shorter maturities. The
secondary market prices of high yield, high risk income securities are often
affected to a lesser extent by changes in interest rates and to a greater extent
by changes in general economic conditions and business conditions affecting the
issuers of such securities and their respective industries. Negative publicity
or investor perceptions may also adversely affect the values of high yield, high
risk income securities.
Under adverse market or economic conditions or in the event of adverse
changes in the financial condition of the issuer, the Fund could find it more
difficult to sell high yield, high risk income securities when Mitchell Hutchins
believes it advisable to do so or may be able to sell such securities only at
prices lower than if such securities were more widely held. In the event of a
default of such securities, in order to enforce its rights, the Fund may be
required to take possession of and manage assets securing the issuer's
obligations on such securities, which may increase the Fund's operating expenses
and adversely affect the Fund's net asset value. The Fund may also be limited in
its ability to enforce its rights and may incur greater costs in enforcing its
rights in the event an issuer becomes the subject of bankruptcy proceedings.
Some or all of the securities in which the Fund invests may, when
purchased, be illiquid or may subsequently become illiquid. The Fund may not be
able readily to dispose of such securities at an amount that approximates that
at which the Fund has valued them and would have to sell other investments if
necessary to raise cash to meet its obligations. In many cases, high yield, high
risk income securities may be
22
<PAGE>
purchased in private placements and, accordingly, will be subject to
restrictions on resale as a matter of contract or under the securities laws. It
may be more difficult to determine the fair value of such securities for
purposes of computing the Fund's net asset value.
Although Mitchell Hutchins attempts to minimize the speculative risks
associated with investments in such securities through diversification, credit
analysis and attention to current trends in interest rates and other factors,
investors should carefully review the investment objective and policies of the
Fund and consider their ability to assume the investment risks involved before
making an investment.
Certain Risks Associated with Original Issue Discount, Zero Coupon and
Payment-in-Kind Securities. The Fund may invest in discount securities,
including certain zero coupon securities of corporate issuers and
payment-in-kind securities. Zero coupon securities pay no interest to holders
prior to maturity, and payment-in-kind securities may pay interest in the form
of additional securities. However, the portion of the original issue discount on
the zero coupon securities that accrues each year and the 'interest' on
payment-in-kind securities must be included in the Fund's income annually.
Accordingly, to continue to qualify for tax treatment as a regulated investment
company and to avoid an excise tax (see 'Taxation'), the Fund may be required to
distribute as dividends amounts that are greater than the total amount of cash
it actually receives. These distributions must be made from the Fund's cash
assets or, if necessary, from the proceeds of sales of portfolio securities. The
Fund will not be able to purchase additional income-producing securities with
cash used to make such distributions, and its current income ultimately may be
reduced as a result. Zero coupon and payment-in-kind securities usually trade at
a substantial discount from their face or par value and will be subject to
greater fluctuations of market value in response to changing interest rates than
debt obligations of comparable maturities that make current distributions of
interest in cash.
Certain Risks Associated with Call Features. A substantial portion of the
securities held by the Fund may permit the issuer at its option to 'call,' or
redeem, its securities prior to maturity. If an issuer were to redeem securities
held by the Fund during a time of declining interest rates, the Fund would not
likely be able to reinvest the proceeds in securities of comparable quality
providing the same investment return as the securities redeemed. The existence
of a call feature may limit the potential for such a security to increase in
value during periods of declining interest rates.
Certain Risks Associated with Premium Securities. The Fund may invest a
substantial portion of its assets in securities bearing coupon rates higher than
prevailing market rates. Such 'premium' securities are typically purchased at
prices greater than the principal amounts payable on maturity. Consequently, if
such premium securities are called or sold prior to maturity, the Fund may
recognize a capital loss to the extent the call or sale price is less than the
purchase price. Additionally, the Fund will recognize a capital loss if it holds
such securities to maturity.
Foreign Investments. The Fund may invest up to 35% of its net assets in
securities of foreign issuers, with no more than 10% of its net assets in
securities of foreign issuers that are denominated and traded in foreign
currencies. Investments in foreign securities involve risks relating to
political and economic developments abroad, as well as those that result from
the differences between the regulations to which U.S. and foreign issuers are
subject. These risks may include expropriation, confiscatory taxation,
withholding taxes on interest, limitations on the use or transfer of Fund
assets, difficulty in obtaining or enforcing a court judgment abroad,
restrictions on the exchange of currencies and political or social instability
or diplomatic developments. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
23
<PAGE>
self-sufficiency and balance of payments positions. Securities of many foreign
issuers may be less liquid and their prices more volatile than those of
securities of comparable U.S. issuers.
Many of the foreign securities that may be held by the Fund will not be
registered with the SEC, and the issuers thereof will not be subject to SEC
reporting requirements. Accordingly, there may be less publicly available
information concerning foreign issuers of securities held by the Fund than is
available concerning U.S. companies. Foreign companies are not generally subject
to uniform accounting, auditing and financial reporting standards. They also may
be subject to less rigorous other regulatory requirements than those applicable
to U.S. companies. Transactions in foreign securities may be subject to less
efficient settlement practices. Legal remedies for defaults and disputes may
have to be pursued in foreign courts, whose procedures may differ substantially
from those of U.S. courts.
The costs attributable to foreign investing that the Fund must bear
frequently are higher than those attributable to domestic investing. For
example, the cost of maintaining custody of foreign securities exceeds custodian
costs for domestic securities, and transaction and settlement costs of foreign
investing also frequently are higher than those attributable to domestic
investing. Costs associated with the exchange of currencies also make foreign
investing more expensive than domestic investing. Investment income on certain
foreign securities in which the Fund may invest may be subject to foreign
withholding or other government taxes that could reduce the return of these
securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign tax to which the Fund
would be subject.
Strategic Transactions. The use of options, futures contracts and forward
currency contracts also entails special risks. See 'Other Investment
Practices--Strategic Transactions' and, in the SAI, 'Strategic Transactions.'
Anti-Takeover Provisions. The Fund's Articles of Incorporation contain
provisions limiting (1) the ability of other entities or persons to acquire
control of the Fund, (2) the Fund's freedom to engage in certain transactions
and (3) the ability of the Fund's directors or stockholders to amend the
Articles of Incorporation. These provisions of the Articles of Incorporation may
be regarded as 'anti-takeover' provisions. These provisions could have the
effect of depriving the 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 the Fund in a tender offer or similar transaction. The
overall effect of these provisions is to render more difficult the
accomplishment of a merger or the assumption of control by a stockholder who
owns beneficially more than 5% of the Common Stock. They provide, however, the
advantage of potentially requiring persons seeking control of the Fund to
negotiate with its management regarding the price to be paid and facilitating
the continuity of the Fund's management, investment objective and policies. See
'Description of Capital Stock-- Certain Anti-Takeover Provisions of the Articles
of Incorporation.'
Market Price and Net Asset Value of Shares. Shares of closed-end
investment companies, including the Fund, frequently trade at a discount to
their net asset values. See 'Trading History.' Whether investors will realize
gains or losses upon the sale of Common Stock will not depend directly upon
changes in the Fund's net asset value, but will depend upon whether the market
price of the Common Stock at the time of sale is above or below the original
purchase price for the shares. This market risk is separate and distinct from
the risk that the Fund's net asset value may decrease. The market price of
shares of the Common Stock is determined by such factors as relative demand for
and supply of such shares in the market, general market and economic conditions,
changes in the Fund's net asset value and other factors beyond the control of
the Fund. Accordingly, the Common Stock is designed primarily for long-term
investors, and investors in the Common Stock should not view the Fund as a
vehicle for trading purposes.
24
<PAGE>
MANAGEMENT OF THE FUND
The overall management of the business and affairs of the Fund is vested
with its Board of Directors. The Board of Directors approves all significant
agreements between the Fund and persons or companies furnishing services to it,
including the Fund's agreements with its investment adviser and administrator,
custodian and transfer and dividend disbursing agent and registrar. The
day-to-day operations of the Fund are delegated to its officers and to Mitchell
Hutchins, subject to the Fund's investment objective and policies and to general
supervision by the Board of Directors.
Subject to the supervision of the Fund's Board of Directors, investment
advisory and administration services will be provided to the Fund by Mitchell
Hutchins pursuant to an Investment Advisory and Administration Contract dated
November 23, 1993 ('Advisory Contract'). Mitchell Hutchins' principal business
address is 1285 Avenue of the Americas, New York, New York 10019. Mitchell
Hutchins is a wholly owned subsidiary of PaineWebber, which is a wholly owned
subsidiary of Paine Webber Group Inc., a publicly held financial services
holding company. Mitchell Hutchins provides investment advisory and portfolio
management services to investment companies, pension funds and other
institutional, corporate and individual clients. As of October 31, 1996,
Mitchell Hutchins served as investment adviser or sub-adviser to 29 registered
investment companies with 64 separate portfolios having aggregate assets of
approximately $31.0 billion.
Pursuant to the Advisory Contract, Mitchell Hutchins provides a continuous
investment program for the Fund and makes investment decisions and places orders
to buy, sell or hold particular securities. Mitchell Hutchins also supervises
all matters relating to the operation of the Fund and obtains for it corporate
officers, clerical staff, office space, equipment and services. As compensation
for its services, Mitchell Hutchins receives a fee, computed weekly and paid
monthly, in an amount equal to the annual rate of 0.90% of the Fund's average
weekly net assets. This fee is greater than the advisory and administration fees
paid by most funds.
The Fund 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
the Common Stock, 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,
1996 and July 31, 1995 and for the fiscal period December 7, 1993 (commencement
of operations) through July 31, 1994, the Fund's total expenses, stated as a
percentage of average net assets, were 1.25%, 1.21% and 1.17%, respectively.
Brokerage transactions for the Fund may be conducted through Mitchell
Hutchins or its affiliates, including PaineWebber. The Fund's Board of Directors
has adopted procedures to ensure that all brokerage commissions paid to Mitchell
Hutchins and its affiliates are fair and reasonable.
Since May 1994, Thomas J. Libassi, a senior vice president of Mitchell
Hutchins, has been responsible for the day-to-day management of the Fund's
portfolio. During the eight years prior to May 1994, Mr. Libassi was employed by
Keystone Custodian Funds Inc. as a vice president with portfolio management
responsibility. Other members of the Mitchell Hutchins' High Income Group
provide input on market outlook, interest rate forecasts, and other
considerations pertaining to high yield, high risk income securities.
Mitchell Hutchins investment personnel may engage in securities
transactions for their own accounts pursuant to a code of ethics that
establishes procedures for personal investing and restricts certain
transactions.
25
<PAGE>
DIVIDENDS AND OTHER DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund distributes all of its net investment income as monthly dividends.
The Fund will distribute annually to its stockholders substantially all of its
realized net capital gain (the excess of long-term capital gain over net
short-term capital loss), realized net short-term capital gain and realized net
gains from foreign currency transactions, if any.
The Fund anticipates that a monthly dividend may, from time to time,
represent more or less than the amount of net investment income earned by the
Fund in the period to which the dividend relates. Undistributed net investment
income will be available to supplement future dividends, which might otherwise
have been reduced by reason of a decrease in the Fund's monthly net income due
to fluctuations or expenses. Undistributed net investment income will be
reflected in the Fund's net asset value, and, accordingly, distribution thereof
will reduce the Fund's net asset value. The dividend rate on the Common Stock
will be adjusted from time to time by the Fund's Board of Directors and will
vary as a result of the performance of the Fund.
DIVIDEND REINVESTMENT PLAN
The Fund has established the Plan under which all stockholders whose shares
of Common Stock are registered in their own names, or in the name of PaineWebber
(or its nominee), have all dividends and other distributions on their shares of
Common Stock automatically reinvested in additional shares of Common Stock,
unless such stockholders elect to receive cash. Stockholders may affirmatively
elect to receive all dividends and other distributions in cash paid by check
mailed directly to them by PNC Bank, National Association ('Transfer Agent'), as
dividend disbursing agent. Stockholders who hold their shares in the name of a
broker or nominee other than PaineWebber (or its nominee) should contact such
broker or other nominee to determine whether, or how, they may participate in
the Plan. The ability of such stockholders to participate in the Plan may change
if their shares of the Common Stock are transferred into the name of another
broker or nominee.
The Transfer Agent serves as agent for the stockholders in administering
the Plan. After the Fund declares a dividend or determines to make a capital
gain distribution, the Transfer Agent, as agent for the participants, receives
the cash payment and uses it to buy shares of Common Stock 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 net asset value per
share of the Common Stock 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. The Fund will not
issue any new shares of Common Stock in connection with the Plan. The Transfer
Agent maintains all stockholder accounts in the Plan 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 Plan
participant are held by the Transfer Agent in non-certificated form in the name
of the participant, and each stockholder's proxy will include those shares of
Common Stock purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends or other
distributions. The Transfer Agent's fees for the handling of reinvestment of
distributions are paid by the Fund. However, each participant pays a pro rata
share of brokerage commissions incurred with respect to the Transfer Agent's
open market purchases of shares of Common Stock in connection with the
reinvestment of distributions.
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<PAGE>
The automatic reinvestment of dividends and other distributions in shares
of Common Stock will not relieve participants of any income tax that may be
payable on such distributions. See 'Taxation.'
A holder who has elected to participate in the Plan may terminate
participation in the Plan at any time without penalty, and stockholders who have
previously terminated participation in the Plan may rejoin it at any time.
Changes in elections must be made in writing to the Transfer Agent and should
include the stockholder's name and address as they appear on the share
certificate. An election to terminate participation in the Plan, until such
election is changed, will be deemed to be an election by a stockholder to take
all subsequent distributions in cash. An election will be effective only for
distributions declared and having a record date at least ten days after the date
on which the election is received.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan with
respect to any dividend or other distribution if notice of the change is sent to
Plan participants at least 30 days before the record date for such distribution.
The Plan also may be amended or terminated by the Transfer Agent by at least 30
days' written notice to all Plan participants. All correspondence concerning the
Plan should be directed to the Transfer Agent at PNC Bank, National Association,
c/o PFPC Inc., P.O. Box 8950, Wilmington, Delaware 19899.
TAXATION
The Fund intends to continue to qualify for treatment as a regulated
investment company ('RIC') under the Internal Revenue Code of 1986. For each
taxable year that the Fund so qualifies, the Fund (but not its stockholders)
will be relieved of federal income tax on that part of its investment company
taxable income (consisting generally of net investment income, net short-term
capital gain and net gains from certain foreign currency transactions) and net
capital gain that is distributed to its stockholders.
Dividends from the Fund's investment company taxable income (whether
received in cash or reinvested in additional Fund shares) generally are taxable
to its stockholders as ordinary income to the extent of the Fund's earnings and
profits. Distributions of the Fund's net capital gain (whether received in cash
or reinvested in additional Fund shares) are taxable to its stockholders as
long-term capital gain, regardless of how long they have held their Fund shares.
A participant in the Plan will be treated as having received a distribution in
the amount of the cash used to purchase shares of Common Stock on his or her
behalf, including a pro rata portion of the brokerage fees incurred by the
Transfer Agent. Distributions by the Fund to its stockholders in any year that
exceed the Fund's earnings and profits generally may be applied by each
stockholder against his or her basis for the shares and will be taxable to any
stockholder only to the extent the distributions to the stockholder exceed the
stockholder's basis for his or her Common Stock. The Fund notifies its
stockholders following the end of each calendar year of the amounts of dividends
and capital gain distributions paid (or deemed paid) that year.
An investor should also be aware that, if shares of Common Stock 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.
Upon a sale or exchange of shares of Common Stock (including a sale
pursuant to a share repurchase or tender offer by the 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 will be treated as a capital gain or loss if the shares are capital
assets in the stockholder's hands and will be a long-term capital gain or loss
if the shares have been held for more than one year; provided that any loss
realized on a sale or exchange of shares of Common Stock that were held for six
months or less also will be treated as long-term, rather than as short-term,
capital loss to the extent of any capital gain distributions received thereon. A
loss
27
<PAGE>
realized on a sale or exchange of shares of Common Stock will be disallowed to
the extent those shares are replaced by other shares of Common Stock within a
period of 61 days beginning 30 days before and ending 30 days after the date of
disposition of the shares (which could occur, for example, as the result of
participation in the Plan). In that event, the basis of the replacement shares
will be adjusted to reflect the disallowed loss.
The Fund may acquire zero coupon or other securities issued with original
issue discount. As a holder of such securities, the Fund must include in its
gross income the original issue discount that accrues on the securities during
the taxable year, even if it receives no corresponding payment on the securities
during the year. The Fund also must include in its gross income each year any
'interest' distributed in the form of additional securities on payment-in-kind
securities. Because the Fund annually must distribute substantially all of its
investment company taxable income, including any accrued original issue discount
and other non-cash income, to satisfy the distribution requirement imposed on
RICs and to avoid imposition of a 4% excise tax (see 'Taxation' in the SAI), the
Fund may be required in a particular year to distribute as a dividend an amount
that is greater than the total amount of cash it actually receives. Those
distributions will be made from the Fund's cash assets or from the proceeds of
sales of portfolio securities, if necessary. The Fund may realize capital gains
or losses from those sales, which would increase or decrease its investment
company taxable income and/or net capital gain. In addition, any such gains may
be realized on the disposition of securities held for less than three months.
Because of the requirement imposed on a RIC that it derive less than 30% of its
gross income each taxable year from the sale or other disposition of securities
or certain options, futures and forward currency contracts held for less than
three months, any such gains would reduce the Fund's ability to sell other
securities, or certain options, futures or forward currency contracts, held for
less than three months that it might wish to sell in the ordinary course of its
portfolio management.
The 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
taxpayer identification number. The Fund is also required to withhold 31% of all
dividends and capital gain distributions payable to such 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 Fund and its stockholders. See the SAI
for a further discussion. There may be other federal, state or local tax
considerations applicable to a particular investor. Prospective stockholders are
urged to consult their tax advisers.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 100 million shares of capital stock, $.001
par value, all of which currently is classified as Common Stock. The Board of
Directors of the Fund is authorized to classify and reclassify any unissued
shares of capital stock from time to time by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or terms and conditions of redemption of such shares
by the Fund. The description of the capital stock and the description under
'Description of Capital Stock--Certain Anti-Takeover Provisions of the Articles
of Incorporation' are subject to the provisions contained in the Fund's Articles
of Incorporation and By-Laws.
COMMON STOCK
Shares of the 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
nonassessable. Stockholders are entitled to one vote per share. All voting
rights for the election of directors are noncumulative, which means that the
holders of more than 50% of the shares can elect 100%
28
<PAGE>
of the directors then nominated for election if they choose to do so and, in
such event, the holders of the remaining shares will not be able to elect any
directors.
Under the rules of the NYSE applicable to listed companies, the Fund
normally is required to hold an annual meeting of stockholders in each year. If
the Fund is converted to an open-end investment company or if for any other
reason the Fund's shares are no longer listed on the NYSE (or any other national
securities exchange the rules of which require annual meetings of stockholders),
the Fund may decide not to hold annual meetings of stockholders. See
'Description of Capital Stock--Stock Repurchases and Tender Offers.'
Any additional offerings of the Common Stock, if made, will require
approval of the Fund's Board of Directors and will be subject to the requirement
of the 1940 Act that shares may not be sold at a price below the then current
net asset value, exclusive of underwriting discounts and commissions, except,
among other things, in connection with an offering to existing 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 as
of October 31, 1996:
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
AMOUNT HELD BY EXCLUSIVE OF AMOUNT
REGISTRANT OR FOR ITS HELD BY REGISTRANT
TITLE OF CLASS AMOUNT AUTHORIZED ACCOUNT OR FOR ITS ACCOUNT
- ------------------------------ ----------------- --------------------- -------------------
<S> <C> <C> <C>
Common Stock.................. 100,000,000 -- 6,031,667
</TABLE>
STOCK REPURCHASES AND TENDER OFFERS
In recognition of the possibility that the Common Stock might trade at a
discount from net asset value and that any such discount may not be in the best
interest of stockholders, the Fund's Board of Directors has determined that it
will from time to time consider taking action to attempt to reduce or eliminate
any discount. To that end, the Board may, in consultation with Mitchell
Hutchins, from time to time consider action either to repurchase shares of the
Common Stock in the open market or to make a tender offer for shares of the
Common Stock at their net asset value. The 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 Common Stock, the
net asset value of the Common Stock, the liquidity of the assets of the Fund,
whether such transactions would impair the Fund's status as a regulated
investment company 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. The Board may at any time, however, decide that the Fund
should not repurchase shares or make a tender offer. See 'Additional
Information--Stock Repurchases and Tenders' in the SAI.
There is no assurance that repurchases or tender offers will result in the
Common Stock's trading at a price that is equal or close to its net asset value
per share. The market price of shares of the Common Stock will be determined by,
among other things, the relative demand for and supply of such shares in the
market, the Fund's investment performance, the Fund's dividends and yield and
investor perception of the Fund's overall attractiveness as an investment as
compared with other investment alternatives. Nevertheless, the fact that the
Common Stock may be the subject of tender offers at net asset value from time to
time may reduce the spread that might otherwise exist between the market price
of the Common
Stock and net asset value per share. In the opinion of Mitchell Hutchins,
sellers may be less inclined to accept a significant discount if they have a
reasonable expectation of being able to recover net asset value in conjunction
with a possible tender offer.
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<PAGE>
Although the 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 the Fund's acquisition of shares of the
Common Stock would decrease the Fund's total assets and, therefore, have the
effect of increasing the Fund's expense ratio. Because of the nature of the
Fund's investment 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 the Fund's investment
performance and that Mitchell Hutchins generally should not have any material
difficulty in disposing of portfolio securities in order to consummate stock
repurchases and tender offers; however, this may not always be the case.
Any tender offer made by the Fund for shares of the Common Stock generally
would be at a price equal to the net asset value of the shares on a date
subsequent to the Fund's receipt of all tenders. Each offer would be made, and
the stockholders would be notified, in accordance with the requirements of the
Securities Exchange Act of 1934 and the 1940 Act, either by publication or
mailing or both. Each offering document would contain such information as is
prescribed by such laws and the rules and regulations promulgated thereunder.
Each person tendering shares would pay to the Fund's Transfer Agent a service
charge to help defray certain costs, including the processing of tender forms,
effecting payment, postage and handling. Any such service charge would be paid
directly by the tendering 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.
CONVERSION TO OPEN-END INVESTMENT COMPANY
The Fund's Board of Directors will consider from time to time whether it
would be in the best interests of the Fund and its stockholders to convert the
Fund to an open-end investment company. If the Board of Directors determines
that such a conversion would be in the best interests of the Fund and its
stockholders and is consistent with the 1940 Act, the Board will submit to the
Fund's stockholders, at the next succeeding annual or special meeting, a
proposal to amend the Fund's Articles of Incorporation to so convert the Fund.
Such amendment would provide that, upon its adoption by the holders of at least
a majority of the Fund's outstanding shares entitled to vote thereon, the Fund
will convert from a closed-end to an open-end investment company. If the Fund
converted to an open-end investment company, it would be able to continuously
issue and offer for sale shares of the 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 net asset value 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 the Fund would require amendment.
In considering whether to propose that the Fund convert to an open-end
investment company, the Board of Directors will consider various factors,
including, without limitation, the potential benefits and detriments to the Fund
and its 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, the Fund may charge fees in
connection with the sale or redemption of its shares. There can be no assurance
that the Board will conclude that such a conversion is in the best interest of
the Fund or its shareholders. As an open-end investment company, the Fund may
reserve the right to honor any request for redemption by making payment in whole
or in part in securities chosen by the Fund and valued in the same way as they
would be valued for
30
<PAGE>
purposes of computing the Fund's net asset value. If payment is made in
securities, a stockholder may incur brokerage expenses in converting these
securities into cash.
CERTAIN ANTI-TAKEOVER PROVISIONS OF THE ARTICLES OF INCORPORATION
The Fund presently has provisions in its Articles of Incorporation that
have the effect of limiting (1) the ability of other entities or persons to
acquire control of the Fund, (2) the Fund's freedom to engage in certain
transactions and (3) the ability of the Fund's directors or stockholders to
amend the Articles of Incorporation. These provisions of the Articles of
Incorporation may be regarded as 'anti-takeover' provisions. Under Maryland law
and the Fund's Articles of Incorporation, the affirmative vote of the holders of
at least a majority of the votes entitled to be cast is required for the
consolidation of the Fund with another corporation, a merger of the Fund with or
into another corporation (except for certain mergers in which the Fund is the
successor), a statutory share exchange in which the Fund is not the successor, a
sale or transfer of all or substantially all of the Fund's assets, the
dissolution of the Fund and any amendment to the Fund's Articles of
Incorporation. In addition, the affirmative vote of the holders of at least
66 2/3% (which is higher than that required under Maryland law or the 1940 Act)
of the outstanding shares of the Fund's capital stock is required generally to
authorize any of the following transactions or to amend the provisions of the
Articles of Incorporation relating to such transactions:
(1) merger, consolidation or statutory share exchange of the Fund with
or into any other corporation;
(2) issuance of any securities of the Fund to any person or entity for
cash;
(3) sale, lease or exchange of all or any substantial part of the
assets of the Fund to any entity or person (except assets having an
aggregate market value of less than $1,000,000); or
(4) sale, lease or exchange to the Fund, in exchange for securities of
the Fund, of any assets of any entity or person (except assets having an
aggregate fair market value of less than $1,000,000)
if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of more than 5% of the outstanding shares of
the Fund (a 'Principal Shareholder'). A similar vote also would be required for
any amendment of the Articles of Incorporation to convert the Fund to an
open-end investment company by making any class of the Fund's capital stock a
'redeemable security,' as that term is defined in the 1940 Act. Such vote would
not be required with respect to any of the foregoing transactions, however,
when, under certain conditions, the Board of Directors approves the transaction,
although in certain cases involving merger, consolidation or statutory share
exchange or sale of all or substantially all of the Fund's assets or the
conversion of the Fund to an open-end investment company, the affirmative vote
of the holders of a majority of the outstanding shares of the Fund's capital
stock would nevertheless be required. Reference is made to the Articles of
Incorporation of the Fund, on file with the SEC, for the full text of these
provisions.
The provisions of the Articles of Incorporation described above and the
Fund's right to repurchase or make a tender offer for its shares could have the
effect of depriving the 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 the Fund in a tender offer or similar transaction. See
'Description of Capital Stock--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 Shareholder. They provide,
however, the advantage of potentially requiring persons seeking control of the
Fund to negotiate with its management regarding the price to be paid and
facilitating the continuity of the Fund's management, investment objective and
policies. The Fund's Board of
31
<PAGE>
Directors has considered the foregoing anti-takeover provisions and concluded
that they are in the best interests of the Fund and its stockholders.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND REGISTRAR
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian of the Fund's assets. State Street Bank
and Trust Company employs foreign sub-custodians, approved by the Fund's Board
of Directors, in accordance with applicable requirements under the 1940 Act, to
provide custody of the Fund's foreign assets. PNC Bank, National Association,
whose principal business address is Broad and Chestnut Streets, Philadelphia,
Pennsylvania 19110, is the Fund's transfer and dividend disbursing agent and
registrar.
FURTHER INFORMATION
Further information concerning these securities and the Fund may be found
in the Registration Statement, of which this Prospectus and the Fund's SAI
constitute a part, on file with the SEC.
The Table of Contents for the SAI is as follows:
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Investment Policies and Restrictions................................................... 1
Strategic Transactions................................................................. 5
Directors and Officers................................................................. 15
Control Persons and Principal Holders of Securities.................................... 21
Investment Advisory Arrangements....................................................... 21
Portfolio Transactions................................................................. 22
Net Asset Value of Common Stock........................................................ 24
Taxation............................................................................... 25
Additional Information................................................................. 27
Financial Statements................................................................... 28
</TABLE>
32
<PAGE>
APPENDIX
DESCRIPTION OF BOND RATINGS
DESCRIPTION OF MOODY'S RATINGS FOR CORPORATE AND CONVERTIBLE BONDS:
AAA--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edged.' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in the Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
BAA--Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA--Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note: Moody's applies numerical modifiers '1', '2' and '3' in each generic
rating classification from Aa to B. The modifier '1' indicates that the security
ranks in the higher end of its generic rating category; the modifier '2'
indicates a mid-range ranking; and the modifier '3' indicates that the issue
ranks in the lower end of its generic rating category.
33
<PAGE>
DESCRIPTION OF S&P RATINGS FOR CORPORATE AND CONVERTIBLE DEBT SECURITIES:
AAA--Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C--Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as
having predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation and
'C' the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
BB--Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B--Debt rated 'B' has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The 'B' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'BB' or 'BB-' rating,
CCC--Debt rated 'CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, it is not likely
to have the capacity to pay interest and repay principal. The 'CCC' rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied 'B' or 'B-' rating.
CC--The rating 'CC' is typically applied to debt subordinated to senior
debt that is assigned an actual or implied 'CCC' rating.
C--The rating 'C' is typically applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI--The rating 'CI' is reserved for income bonds on which no interest is
being paid.
D--Debt rated 'D' is in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. The 'D' rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The ratings from 'AA' to 'CCC' may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.
34
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
PAINEWEBBER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY
PAINEWEBBER IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Expenses.................................. 2
Prospectus Summary............................. 3
Financial Highlights........................... 13
The Fund....................................... 14
The Offering................................... 14
Use of Proceeds................................ 14
Trading History................................ 14
Investment Objective and Policies.............. 15
Other Investment Practices..................... 17
Special Considerations and Risk Factors........ 21
Management of the Fund......................... 25
Dividends and Other Distributions; Dividend
Reinvestment Plan............................ 26
Taxation....................................... 27
Description of Capital Stock................... 28
Custodian, Transfer and Dividend Disbursing
Agent and Registrar.......................... 32
Further Information............................ 32
Appendix....................................... 33
</TABLE>
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MANAGED HIGH
YIELD FUND INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
PAINEWEBBER INCORPORATED
------------------------
November 29, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Copyright)1996 PaineWebber Incorporated
<PAGE>
MANAGED HIGH YIELD FUND INC.
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
Managed High Yield Fund Inc. ('Fund') is a diversified closed-end
management investment company. The Fund's investment objective is to seek high
current income. In pursuing its investment objective, the Fund seeks to avoid
undue investment risk by investing in a professionally managed, diversified
portfolio of high yield, high risk income securities and, under normal market
conditions, invests at least 80% of its total assets in securities rated Ba or B
by Moody's Investors Service, Inc. ('Moody's'), BB or B by Standard & Poor's
Ratings Service, a division of The McGraw Hill Companies ('S&P'), or comparably
rated by another nationally recognized statistical rating organization. No
assurance can be given that the Fund will be able to achieve its investment
objective.
Prior to November 1995, the name of the Fund was 'PaineWebber Premier High
Income Trust Inc.' The Fund began doing business under the name 'Managed High
Yield Fund' in August 1995, and the shareholders of the Fund approved a formal
change of the Fund's name to 'Managed High Yield Fund Inc.' on November 16,
1995.
Shares of the Fund's common stock ('Common Stock') may be offered from time
to time in order to effect over-the-counter ('OTC') secondary market sales by
PaineWebber Incorporated ('PaineWebber') in its capacity as a dealer and
secondary market-maker. PaineWebber may (but is not obligated to) make such a
secondary market.
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), a wholly
owned subsidiary of PaineWebber, serves as investment adviser and administrator
of the Fund. This Statement of Additional Information is not a prospectus and
should be read only in conjunction with the Fund's Prospectus, dated November
29, 1996. Capitalized terms not otherwise defined herein have the same meanings
as in the Prospectus. A copy of the Prospectus may be obtained by calling any
PaineWebber investment executive or correspondent firm or by calling toll-free
(800) 852-4750.
The date of this Statement of Additional Information is November 29, 1996.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Fund's investment policies and limitations.
YIELD FACTORS AND RATINGS
S&P and Moody's are private services that provide ratings of the credit
quality of debt obligations. A description of the range of ratings assigned to
debt obligations by S&P and Moody's is included in the Appendix to the
Prospectus. The Fund may use these ratings in determining whether to purchase,
sell or hold a security. It should be emphasized, however, that ratings are
general and are not absolute standards of quality. Consequently, debt
obligations with the same maturity, interest rate and rating may have different
market prices. Subsequent to its purchase by the Fund, an issue of debt
obligations may cease to be rated or its rating may be reduced below the minimum
rating required for purchase by the Fund. Mitchell Hutchins will consider such
an event in determining whether the Fund should continue to hold the obligation.
<PAGE>
In addition to ratings assigned to individual bond issues, Mitchell
Hutchins analyzes interest rate trends and developments that may affect
individual issuers, including factors such as liquidity, profitability and asset
quality. The yields on bonds and other debt securities in which the Fund invests
are dependent on a variety of factors, including general money market
conditions, general conditions in the bond market, the financial condition of
the issuer, the size of the offering, the maturity of the obligation and its
rating. There is a wide variation in the quality of bonds, both within a
particular classification and between classifications. An issuer's obligations
under its bonds are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of bond holders or other creditors
of an issuer; litigation or other conditions may also adversely affect the power
or ability of issuers to meet their obligations for the payment of interest and
principal on their bonds.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities, which are bonds, debentures,
notes, preferred stocks or other securities that may be converted into or
exchanged for a specified amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest generally paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Convertible securities
have unique investment characteristics in that they generally (1) have higher
yields than common stocks, but lower yields than comparable non-convertible
securities, (2) are less subject to fluctuation in value than the underlying
stock since they have fixed income characteristics, and (3) provide the
potential for capital appreciation if the market price of the underlying common
stock increases. Most convertible securities currently are issued by U.S.
companies, although a substantial Eurodollar convertible securities market has
developed, and the markets for convertible securities denominated in local
currencies are increasing.
The value of a convertible security is a function of its 'investment value'
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
'conversion value' (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally,
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a fixed income security.
A convertible security might be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by the Fund is called for redemption,
the Fund will be required to permit the issuer to redeem the security, convert
it into the underlying common stock or sell it to a third party. Any of these
actions could have an adverse effect on the Fund's ability to achieve its
investment objective.
2
<PAGE>
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund purchases
securities from a bank or recognized securities dealer and simultaneously
commits to resell those securities to the bank or dealer at an agreed-upon date
or on demand and at a price reflecting a market rate of interest unrelated to
the coupon rate or maturity of the purchased securities. The Fund maintains
custody of the underlying securities prior to their repurchase; thus, the
obligation of the bank or securities dealer to pay the repurchase price on the
date agreed to is, in effect, secured by such securities. If the value of such
securities becomes less than the repurchase price, plus any agreed-upon
additional amount, the other party to the agreement is required to provide
additional collateral so that at all times the collateral is at least equal to
the repurchase price, plus any agreed-upon additional amount. The difference
between the total amount to be received upon repurchase of the securities and
the price which was paid by the Fund upon acquisition is accrued as interest and
included in the Fund's net investment income.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to the Fund if the other party to
the repurchase agreement becomes insolvent. The Fund intends to enter into
repurchase agreements only with banks and dealers in transactions believed by
Mitchell Hutchins to present minimal credit risks in accordance with guidelines
established by the Fund's Board of Directors. Mitchell Hutchins will receive and
monitor the creditworthiness of such institutions under the Board's general
supervision.
SHORT SALES 'AGAINST THE BOX'
The Fund may engage in short sales of securities it owns or has the right
to acquire at no added cost through conversion or exchange of other securities
it owns (short sales 'against the box') to defer realization of gains or losses
for tax or other purposes. To make delivery to the purchaser in a short sale,
the executing broker borrows the securities being sold short on behalf of the
Fund, and the Fund is obligated to replace the securities borrowed at a date in
the future. When the Fund sells short, it will establish a margin account with
the broker effecting the short sale, and will deposit collateral with the
broker. In addition, the Fund will segregate with its custodian the securities
that could be used to cover the short sale. The Fund will incur transaction
costs, including interest expense, in connection with opening, maintaining and
closing short sales against the box. The Fund currently does not intend to have
obligations under short sales that at any time during the coming year exceed 5%
of the Fund's net assets.
The Fund might make a short sale 'against the box' in order to hedge
against market risks when Mitchell Hutchins believes that the price of a
security may decline, thereby causing a decline in the value of a security owned
by the Fund or a security convertible into or exchangeable for a security owned
by the Fund, or when Mitchell Hutchins wants to sell a security that the Fund
owns at a current price, but also wishes to defer recognition of gain or loss
for federal income tax purposes. In such case, any loss in the Fund's long
position after the short sale should be reduced by a gain in the short position.
Conversely, any gain in the long position should be reduced by a loss in the
short position. The extent to which gains or losses in the long position are
reduced will depend upon the amount of the securities sold short relative to the
amount of the securities the Fund owns, either directly or indirectly, and in
the case where the Fund owns convertible securities, changes in the investment
values or conversion premiums of such securities.
FOREIGN SECURITIES
As discussed in the Prospectus, the Fund may invest up to 35% of its net
assets in securities of foreign issuers, with no more than 10% of its net assets
in securities of foreign issuers that are denominated and traded in foreign
currencies. As a result, changes in foreign currency exchange rates will affect
the Fund's net
3
<PAGE>
asset value, the value of dividends and interest earned, gains and losses
realized on the sale of securities and net investment income to be distributed
to shareholders by the Fund. If the value of a foreign currency rises against
the U.S. dollar, the value of Fund assets denominated in such currency will
increase; correspondingly, if the value of a foreign currency declines against
the U.S. dollar, the value of Fund assets denominated in such currency will
decrease. The exchange rates between the U.S. dollar and other currencies can be
volatile and are determined by factors such as supply and demand in the currency
exchange markets, international balances of payments, government intervention,
speculation and other economic and political conditions. In addition, some
foreign currency values may be volatile and there is the possibility of
governmental intervention in the currency markets. Any of these factors could
adversely affect the Fund.
INVESTMENT LIMITATIONS
FUNDAMENTAL LIMITATIONS. The following investment limitations cannot be
changed without the affirmative vote of the lesser of (a) more than 50% of the
outstanding shares of the Fund or (b) 67% or more of such shares present at a
stockholders' meeting if more than 50% of the outstanding shares are represented
at the meeting in person or by proxy. If a percentage restriction is adhered to
at the time of an investment or transaction, a later increase or decrease in
percentage resulting from a change in values of portfolio securities or the
amount of total assets will not be considered a violation of any of the
following limitations or of any of the Fund's investment policies.
The Fund will not:
(1) purchase securities of any one issuer if, as a result, more than
5% of the Fund's total assets would be invested in securities of
that issuer or the Fund would own or hold more than 10% of the
outstanding voting securities of that issuer, except that up to
25% of the Fund's total assets may be invested without regard to
this limitation, and except that this limitation does not apply to
securities issued or guaranteed by the U.S. government, its
agencies and instrumentalities or to securities issued by other
investment companies.
(2) purchase any security if, as a result of that purchase, 25% or
more of the Fund's total assets would be invested in securities of
issuers having their principal business activities in the same
industry, except that this limitation does not apply to securities
issued or guaranteed by the U.S. government, its agencies or
instrumentalities or to municipal securities.
(3) issue senior securities or borrow money, except as permitted under
the 1940 Act and then not in excess of 33 1/3% of the Fund's total
assets (including the amount of the senior securities issued but
reduced by any liabilities not constituting senior securities) at
the time of the issuance or borrowing, except that the Fund may
borrow up to an additional 5% of its total assets (not including
the amount borrowed) for temporary or emergency purposes.
(4) make loans, except through loans of portfolio securities or
through repurchase agreements, provided that for purposes of this
restriction, the acquisition of bonds, debentures, other debt
securities or instruments, or participations or other interests
therein and investments in government obligations, commercial
paper, certificates of deposit, bankers' acceptances or similar
instruments will not be considered the making of a loan.
(5) engage in the business of underwriting securities of other
issuers, except to the extent that the Fund might be considered an
underwriter under the federal securities laws in connection with
its disposition of portfolio securities.
4
<PAGE>
(6) purchase or sell real estate, except that investments in
securities of issuers that invest in real estate and investments
in mortgage-backed securities, mortgage participations or other
instruments supported by interests in real estate are not subject
to this limitation, and except that the Fund may exercise rights
under agreements relating to such securities, including the right
to enforce security interests and to hold real estate acquired by
reason of such enforcement until that real estate can be
liquidated in an orderly manner.
(7) purchase or sell physical commodities unless acquired as a result
of owning securities or other instruments, but the Fund may
purchase, sell or enter into financial options and futures,
forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
NON-FUNDAMENTAL INVESTMENT POLICIES. The following investment restrictions
are not fundamental and may be changed by the Fund's Board of Directors without
shareholder approval.
The Fund will not:
(1) mortgage, pledge or hypothecate any assets except in connection
with permitted borrowings or the issuance of senior securities.
(2) purchase securities or margin, except for short-term credit
necessary for clearance of portfolio transactions and except that
the Fund may make margin deposits in connection with its use of
financial options and futures, forward and spot currency
contracts, swap transactions and other financial contracts or
derivative instruments.
(3) engage in short sales of securities or maintain a short position,
except that the Fund may (a) sell short 'against the box' and (b)
maintain short positions in connection with its use of financial
options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative
instruments.
(4) invest in oil, gas or mineral exploration or development programs
or leases, except that investments in securities of issuers that
invest in such programs or leases and investments in asset-backed
securities supported by receivables generated from such programs
or leases are not subject to this prohibition.
All percentage limitations on investments will apply at the time of
investment and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment. Except
for the investment restrictions listed above and the Fund's investment
objective, the other investment policies described in the Prospectus and this
Statement of Additional Information are not fundamental and may be changed with
approval of the Board of Directors.
STRATEGIC TRANSACTIONS
GENERAL DESCRIPTION OF STRATEGIC TRANSACTIONS
As discussed in the Prospectus, Mitchell Hutchins may use a variety of
financial instruments, including certain options, futures contracts (sometimes
referred to as 'futures'), options on futures contracts, forward currency
contracts and interest rate protection transactions, to attempt to hedge the
Fund's portfolio and may use options and forward currency contracts to attempt
to enhance the Fund's income or to realize gains. Transactions in the foregoing
instruments are referred to as 'Strategic Transactions.'
Strategic Transactions that are entered into for hedging or other risk
management purposes can be broadly categorized as 'short hedges' and 'long
hedges.' A short hedge is a purchase or sale intended partially
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or fully to offset potential declines in the value of one or more investments
held in the Fund's portfolio. Thus, in a short hedge, the Fund takes a position
in a Strategic Transaction the price of which is expected to move in the
opposite direction of the price of the investment being hedged. For example, the
Fund might purchase a put option on a security to hedge against a potential
decline in the value of that security. If the price of the security declined
below the exercise price of the put, the Fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transaction
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, the Fund might be
able to close out the put option and realize a gain to offset the decline in the
value of the security.
Conversely, a long hedge is a Strategic Transaction intended partially or
fully to offset potential increases in the acquisition cost of one or more
investments that the Fund intends to acquire. Thus, in a long hedge, the Fund
takes a position in a Strategic Transaction the price of which is expected to
move in the same direction as the price of the prospective investment being
hedged. For example, the Fund might purchase a call option on a security it
intends to purchase in order to hedge against an increase in the cost of the
security. If the price of the security increased above the exercise price of the
call, the Fund could exercise the call and thus limit its acquisition cost to
the exercise price plus the premium paid and transaction costs. Alternatively,
the Fund might be able to offset the price increase by closing out an
appreciated call option and realizing a gain.
Strategic Transactions relating to securities generally are used to hedge
against price movements in one or more particular securities positions that the
Fund owns or intends to acquire. Strategic Transactions relating to debt
securities may be used to hedge either individual securities or broad market
sectors. Stock index options, stock index futures contracts and options on stock
index futures contracts may also be used to hedge broad debt market sectors if
Mitchell Hutchins believes that the price of such Strategic Transactions have a
positive correlation to price movements of such broad market sectors.
The use of Strategic Transactions is subject to applicable regulations of
the Securities and Exchange Commission ('SEC'), the several options and futures
exchanges upon which they are traded and the Commodity Futures Trading
Commission ('CFTC') and may become subject to regulation by various state
regulatory authorities. In addition, the Fund's ability to use Strategic
Transactions will be limited by tax considerations. See 'Taxation.'
In addition to the products, strategies and risks described below, Mitchell
Hutchins expects additional opportunities to develop in connection with options,
futures contracts, forward currency contracts and other hedging techniques.
These new opportunities may become available as Mitchell Hutchins develops new
techniques, as regulatory authorities broaden the range of permitted
transactions and as new options, futures contracts or other techniques are
developed. Mitchell Hutchins may utilize these opportunities to the extent that
they are consistent with the Fund's investment objective and permitted by the
Fund's investment limitations and applicable regulatory authorities.
SPECIAL RISKS OF STRATEGIC TRANSACTIONS
The use of Strategic Transactions involves special considerations and
risks, as described below. Risks pertaining to particular Strategic Transactions
are described in the sections that follow.
(1) Successful use of most Strategic Transactions depends upon Mitchell
Hutchins' ability to predict movements of the overall securities, currencies and
interest rate markets, which requires different skills than predicting changes
in the prices of individual securities. While Mitchell Hutchins is experienced
in the use of Strategic Transactions, there can be no assurance that any
particular hedging strategy adopted will succeed.
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(2) There might be imperfect correlation, or even no correlation, between
price movements of Strategic Transactions and price movements of the investments
being hedged. For example, if the value of Strategic Transactions used in a
short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which Strategic
Transactions are traded. The effectiveness of hedges using Strategic
Transactions on indices will depend on the degree of correlation between price
movements in the index and price movements in the investments being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if the Fund entered into a
short hedge because Mitchell Hutchins projected a decline in the price of a
security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Strategic Transaction. Moreover, if the price of the
Strategic Transaction declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would have
been in a better position had it not hedged at all.
(4) As described below, the Fund might be required to maintain assets as
'cover,' maintain segregated accounts or make margin payments when it takes
positions in Strategic Transactions involving obligations to third parties
(i.e., Strategic Transactions other than purchased options). If the Fund were
unable to close out its positions in such Strategic Transactions, it might be
required to continue to maintain such assets or accounts or make such payments
until the position expired or matured. These requirements might impair the
Fund's ability to sell a portfolio security or make an investment at a time when
it would otherwise be favorable to do so, or require that the Fund sell a
portfolio security at a disadvantageous time. The Fund's ability to close out a
position in a Strategic Transaction prior to expiration or maturity depends on
the existence of a liquid secondary market or, in the absence of such a market,
the ability and willingness of the other party to the transaction ('contra
party') to enter into a transaction closing out the position. Therefore, there
is no assurance that any hedging position can be closed out at a time and price
that is favorable to the Fund.
COVER FOR STRATEGIC TRANSACTIONS
Strategic Transactions, other than purchased options, expose the Fund to an
obligation to another party. The Fund will not enter into any such transactions
unless it owns either (1) an offsetting ('covered') position in securities,
currencies or other options, forward currency contracts or futures contracts or
(2) cash and liquid securities, with a value sufficient at all times to cover
its potential obligations to the extent not covered as provided in (1) above.
The Fund will comply with SEC guidelines regarding cover for such transactions
and will, if the guidelines so require, set aside cash or other liquid
securities in a segregated account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Strategic Transaction is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
the Fund's assets to cover or segregated accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
OPTIONS
The Fund may purchase put and call options, and write (sell) covered call
and put options, on debt securities, on foreign currencies and on indices of
debt and equity securities. The purchase of call options
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serves as a long hedge, and the purchase of put options serves as a short hedge.
Writing covered call options serves as a limited short hedge because declines in
the value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security, currency or index
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the Fund will be obligated to
sell the security, currency or index at less than its market value. If the
covered call option is an OTC option, the securities or other assets used as
cover would be considered illiquid to the extent described under 'Other
Investment Practices--Illiquid Securities' in the Prospectus. Writing covered
put options serves as a limited long hedge because increases in the value of the
hedged investment would be offset to the extent of the premium received for
writing the option. However, if the security, currency or index depreciates to a
price lower than the exercise price of the put option, it can be expected that
the put option will be exercised and the Fund will be obligated to purchase the
security, currency or index at more than its market value.
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised have
no value.
The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize profits or
limit losses on an option position prior to its exercise or expiration.
The Fund may purchase or write both exchange-traded and OTC options.
Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed that, in
effect, guarantees completion of every exchange-traded option transaction. In
contrast, OTC options are contracts between the Fund and its contra party
(usually a securities dealer or a bank) with no clearing organization guarantee.
Thus, when the Fund purchases or writes an OTC option, it relies on the contra
party to make or take delivery of the underlying investment upon exercise of the
option. Failure by the contra party to do so would result in the loss of any
premium paid by the Fund as well as the loss of any expected benefit of the
transaction.
Generally, OTC options on foreign currencies and debt securities are
European style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the Fund
will enter into OTC options only with contra parties that are expected to be
capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option position
at a favorable price prior to expiration. In the event of insolvency of the
contra party, the Fund might be unable to close out an OTC option position at
any time prior to its expiration.
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If the Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by the Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
The Fund may purchase and write put and call options on indices of debt and
equity securities in much the same manner as the more traditional options
discussed above, except that index options may serve as a hedge against overall
fluctuations in the debt securities market (or market sectors) rather than
anticipated increases or decreases in the value of a particular security.
FUTURES AND OPTIONS ON FUTURES
The Fund may purchase and sell interest rate, debt and equity security
index and foreign currency futures and options thereon. The purchase of futures
or call options thereon can serve as a long hedge, and the sale of futures or
the purchase of put options thereon can serve as a short hedge. Writing covered
call options on futures contracts can serve as a limited short hedge, using a
strategy similar to that used for writing covered call options on securities,
currencies or indices. Similarly, writing put options on futures contracts can
serve as a limited long hedge.
Futures strategies also can be used to manage the average duration of the
Fund's portfolio. If Mitchell Hutchins wishes to shorten the average duration of
the Fund, the Fund may sell an interest rate or debt security index futures
contract or a call option thereon, or purchase a put option on that futures
contract. If Mitchell Hutchins wishes to lengthen the average duration of the
Fund, the Fund may buy an interest rate or debt security index futures contract
or a call option thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, 'initial margin' consisting of cash or other liquid
securities, in an amount generally equal to 10% or less of the contract value.
Margin must also be deposited when writing a call or put option on a futures
contract, in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not represent
a borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment.
Subsequent 'variation margin' payments are made to and from the futures
broker daily as the value of the futures or written option position varies, a
process known as 'marking to market.' Variation margin does not involve
borrowing, but rather represents a daily settlement of the Fund's obligations
with respect to an open futures or options position. When the Fund purchases an
option on a future, the premium paid plus transaction costs is all that is at
risk. In contrast, when the Fund purchases or sells a futures contract or writes
an option thereon, it is subject to daily variation margin calls that could be
substantial in the event of adverse price movements. If the Fund has
insufficient cash to meet daily variation margin requirements, it might need to
sell securities at a time when such sales are disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Fund intends to enter into such transactions only on exchanges or boards of
trade where there appears to be a liquid secondary market. However, there can be
no assurance that such a market will exist for a particular contract at a
particular time.
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Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures contract or option on a futures
contract can vary from the previous day's settlement price; once that limit is
reached, no trades may be made that day at a price beyond the limit. Daily price
limits do not limit potential losses because prices could move to the daily
limit for several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures or options on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the future or option or to maintain cash or securities
in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or options might not correlate
perfectly with movements in the prices of the investments being hedged. For
example, all participants in the futures and options markets are subject to
daily variation margin calls and might be compelled to liquidate futures or
options on a futures contract positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, 'program trading' and
other investment strategies might result in temporary price distortions.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS
The Fund may use options and futures on foreign currencies, as described
above, and forward currency contracts, as described below, to hedge against
movements in the values of the foreign currencies in which the Fund's securities
are denominated. Such currency hedges can protect against price movements in a
security that the Fund owns or intends to acquire that are attributable to
changes in the value of the currency in which it is denominated. Such hedges do
not, however, protect against price movements in the securities that are
attributable to other causes.
The Fund might seek to hedge against changes in the value of a particular
currency when no Strategic Transactions involving that currency are available or
such Strategic Transactions are more expensive than certain other Strategic
Transactions. In such cases, the Fund may hedge against price movements in that
currency by entering into Strategic Transactions on another currency or basket
of currencies, the values of which Mitchell Hutchins believes will have a
positive correlation to the value of the currency being hedged. The risk that
movements in the price of the Strategic Transactions will not correlate
perfectly with movements in the price of the currency being hedged is magnified
when this strategy is used.
The value of Strategic Transactions on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Strategic
Transactions, the Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely
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basis. Quotation information generally is representative of very large
transactions in the interbank market and thus might not reflect odd-lot
transactions where rates might be less favorable. The interbank market in
foreign currencies is a global, round-the-clock market. To the extent the U.S.
options or futures markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements might take place in
the underlying markets that cannot be reflected in the markets for the Strategic
Transactions until they reopen.
Settlement of Strategic Transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the Fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
COMBINED TRANSACTIONS
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions and any combination of futures and
options transactions ('component' transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
Mitchell Hutchins, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on Mitchell Hutchins' judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
GUIDELINE FOR FUTURES AND OPTIONS
To the extent that the Fund enters into futures contracts, options on
futures positions and options on foreign currencies traded on a commodities
exchange, which are not for bona fide hedging purposes (as defined by the CFTC),
the aggregate initial margin and premiums on these positions (excluding the
amount by which options are 'in-the-money') may not exceed 5% of the Fund's net
assets. This guideline may be modified by the Fund's Board of Directors without
stockholder vote. Adoption of this guideline cannot be guaranteed to limit the
percentage of the Fund's assets at risk to 5%.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts to purchase or sell
foreign currencies for a fixed amount of U.S. dollars or another foreign
currency. Such transactions may serve as long hedges--for example, the Fund may
purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the Fund intends to acquire.
Forward currency contract transactions may also serve as short hedges--for
example, the Fund may sell a forward currency contract to lock in the U.S.
dollar equivalent of the proceeds from the anticipated sale of a security
denominated in a foreign currency. In addition, the Fund may purchase forward
currency contracts to enhance income when Mitchell Hutchins anticipates that the
foreign currency will appreciate in value, but securities denominated in that
currency do not present attractive investment opportunities.
As noted above, the Fund also may seek to hedge against changes in the
value of a particular currency by using forward contracts on another foreign
currency or a basket of currencies, the value of which Mitchell Hutchins
believes will have a positive correlation to the values of the currency being
hedged. In addition, the Fund may use forward currency contracts to shift its
exposure to foreign currency fluctuations from one country to another. For
example, if the Fund owned securities denominated in a foreign currency and
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Mitchell Hutchins believed that currency would decline relative to another
currency, it might enter into a forward contract to sell an appropriate amount
of the first foreign currency, with payment to be made in the second foreign
currency. Transactions that use two foreign currencies are sometimes referred to
as 'cross hedging.' Use of a different foreign currency magnifies the risk that
movements in the price of the Strategic Transaction will not correlate or will
correlate unfavorably with the foreign currency being hedged.
The cost to the Fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When the Fund enters into a forward currency contract, it relies on the contra
party to make or take delivery of the underlying currency at the maturity of the
contract. Failure by the contra party to do so would result in the loss of any
expected benefit of the transaction.
As in the case with futures contracts, buyers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument bought or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the contra party. Thus, there can be no assurance
that the Fund will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the contra party, the Fund might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Fund would continue
to be subject to market risk with respect to the position, and would continue to
be required to maintain a position in the securities or currencies that are the
subject of the hedge or to maintain cash or securities in a segregated account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward currency contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts or maintain a net
exposure to such contracts only if (1) the consummation of the contracts would
not obligate the Fund to deliver an amount of foreign currency in excess of the
value of the position being hedged by such contracts or (2) the Fund maintains
cash or liquid securities in a segregated account in an amount not less than the
value of its total assets committed to the consummation of the contracts and not
covered as provided in (1) above, as marked to market daily.
The Fund may use the following Strategic Transactions:
OPTIONS ON DEBT SECURITIES AND CURRENCIES--A call option is a contract
pursuant to which the purchaser of the option, in return for a premium, has
the right to buy the security or currency underlying the option at a
specified price at any time during the term, or upon the expiration, of the
option. The writer of a call option, who receives the premium, has the
obligation, upon exercise of the option, to deliver the underlying security
or currency against payment of the exercise price. A put option is a
similar contract that gives its purchaser, in return for a premium, the
right to sell the underlying security or currency at a specified price
during the option term or upon expiration. The writer of a put option, who
receives the premium, has the obligation, upon exercise, to buy the
underlying security or currency at the
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exercise price. Options on debt securities are traded primarily in the OTC
market rather than on any of the several options exchanges.
OPTIONS ON INDICES OF DEBT AND EQUITY SECURITIES--An index assigns
relative values to the securities included in the index and fluctuates with
changes in the market values of such securities. Index options operate in
the same way as more traditional options except that exercises of index
options are effected with cash payments and do not involve delivery of
securities. Thus, upon exercise of an index option, the purchaser will
realize, and the writer will pay, an amount based on the difference between
the exercise price and the closing price of the index.
DEBT AND EQUITY SECURITY INDEX FUTURES CONTRACTS--An index futures
contract is a bilateral agreement pursuant to which one party agrees to
accept, and the other party agrees to make, delivery of an amount of cash
equal to a specified dollar amount times the difference between the index
value at the close of trading of the contract and the price at which the
futures contract is originally struck. No physical delivery of the
securities comprising the index is made; generally contracts are closed out
prior to the expiration date of the contract.
DEBT SECURITY AND CURRENCY FUTURES CONTRACTS--A debt security or
currency futures contract is a bilateral agreement pursuant to which one
party agrees to accept, and the other party agrees to make, delivery of the
specific type of debt security or currency called for in the contract at a
specified future time and at a specified price. Although such futures
contracts by their terms call for actual delivery or acceptance of debt
securities or currency, in most cases the contracts are closed out before
the settlement date without the making or taking of delivery.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar
to options on securities except that an option on a futures contract gives
the purchaser the right, in return for the premium, to assume a position in
a futures contract (a long position if the option is a call and a short
position if the option is a put), rather than to purchase or sell a
security or currency, at a specified price at any time during the option
term. Upon exercise of the option, the delivery of the futures position to
the holder of the option will be accompanied by delivery of the accumulated
balance, which represents the amount by which the market price of the
futures contract exceeds, in the case of a call, or is less than, in the
case of a put, the exercise price of the option on the future. The writer
of an option, upon exercise, will assume a short position in the case of a
call, and a long position in the case of put.
FORWARD CURRENCY CONTRACTS--A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future
date, which may be any fixed number of days from the contract date agreed
upon by the parties, at a price set at the time the contract is entered
into.
INTEREST RATE PROTECTION TRANSACTIONS--The Fund may enter into
interest rate protection transactions, including interest rate swaps and
interest rate caps, collars and floors. Interest rate swap transactions
involve an agreement between two parties to exchange payments that are
based, for example, on variable and fixed rates of interest and that are
calculated on the basis of a specified amount of principal ('notional
principal amount') for a specified period of time. Interest rate cap and
floor transactions involve an agreement between two parties in which the
first party agrees to make payments to the contra party when a designated
market interest rate goes above (in the case of a cap) or below (in the
case of a floor) a designated level on predetermined dates or during a
specified time period. Interest rate collar transactions involve an
agreement between two parties in which payments are made when a designated
market interest rate either goes above a designated level or goes below a
designated floor level on predetermined dates or during a specified time
period.
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The Fund would enter into interest rate protection transactions to preserve
a return or spread on a particular investment or portion of its portfolio, to
protect against any increase in the price of securities the Fund anticipates
purchasing at a later date or to effectively fix the rate of interest that it
pays on one or more borrowings or series of borrowings. The Fund would use these
transactions as a hedge and not as a speculative investment. Interest rate
protection transactions are subject to risks comparable to those described above
with respect to other hedging strategies.
The Fund may enter into interest rate swaps, caps, collars and floors on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest rate
swaps on a net basis (i.e., the two payment streams are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments). Inasmuch as these interest rate protection transactions are entered
into for good faith hedging or other risk management purposes, and inasmuch as
segregated accounts will be established with respect to such transactions,
Mitchell Hutchins and the Fund believe such obligations do not constitute senior
securities and, accordingly, will not treat them as being subject to its
borrowing restrictions. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and an amount of cash or other liquid securities
having an aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by a custodian that satisfies the
requirements of the 1940 Act. The Fund also will establish and maintain such
segregated accounts with respect to its total obligations under any interest
rate swaps that are not entered into on a net basis and with respect to any
interest rate caps, collars and floors that are written by the Fund.
The Fund will enter into interest rate protection transactions only with
banks and recognized securities dealers or their affiliates determined by
Mitchell Hutchins to present minimal credit risks in accordance with guidelines
established by the Fund's Board of Directors. If there is a default by the other
party to such a transaction, the Fund will have to rely on its contractual
remedies (which may be limited by bankruptcy, insolvency or similar laws)
pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. Caps, collars and floors are more
recent innovations for which documentation is less standardized and,
accordingly, they are less liquid than swaps.
14
<PAGE>
DIRECTORS AND OFFICERS
The ages, business addresses and principal occupations during the past five
years of the directors and executive officers of the Fund are:
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, AGE AND ADDRESS* WITH THE FUND OTHER DIRECTORSHIPS
- ------------------------- --------------- ------------------------------------------------------------
<S> <C> <C>
Margo N. Alexander**; 49 Director and Mrs. Alexander is president, chief executive officer and a
President director of Mitchell Hutchins (since January 1995) and an
executive vice president and director of PaineWebber. Mrs.
Alexander is president and a director or trustee of 29
investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Richard Q. Armstrong; 61 Director Mr. Armstrong is chairman and principal of RQA Enterprises
78 West Brother Drive (management consulting firm) (since April 1991 and
Greenwich, CT 06830 principal occupation since March 1995). Mr. Armstrong is
also a director of Hi Lo Automotive, Inc. He was chairman
of the board, chief executive officer and co-owner of
Adirondack Beverages (producer and distributor of soft
drinks and sparkling/still waters) (October 1993-March
1995). Mr. Armstrong 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, Luis Vuitton Moet Hennessey
Corporation) (1987-1991) and chairman of its wine and
spirits subsidiary, Schieffelin & Somerset Company
(1987-1991). Mr. Armstrong is a director or trustee of 28
investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
E. Garrett Bewkes, Jr.**; Director and Mr. Bewkes is a director of Paine Webber Group Inc. ('PW
70 Chairman of Group') (holding company of PaineWebber and Mitchell
the Board of Hutchins). Prior to December 1995, he was a consultant to
Directors PW Group. Prior to 1988, he was chairman of the board,
president and chief executive officer of American Bakeries
Company. Mr. Bewkes is also a director of Interstate
Bakeries Corporation and NaPro BioTherapeutics, Inc. Mr.
Bewkes is a director or trustee of 29 investment companies
for which Mitchell Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, AGE AND ADDRESS* WITH THE FUND OTHER DIRECTORSHIPS
- ------------------------- --------------- ------------------------------------------------------------
<S> <C> <C>
Richard R. Burt; 49 Director Mr. Burt is chairman of International Equity Partners
1101 Connecticut Avenue, (international investments and consulting firm) (since
N.W. March 1994) and a partner of McKinsey & Company
Washington, D.C. 20036 (management consulting firm) (since 1991). He is also a
director of American Publishing Company and
Archer-Daniels-Midland Co. (agricultural commodities). He
was the chief negotiator in the Strategic Arms Reduction
Talks with the former Soviet Union (1989-1991) and the
U.S. Ambassador to the Federal Republic of Germany
(1985-1989). Mr. Burt is a director or trustee of 28
investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Mary C. Farrell**; 46 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 is employed 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 28 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment adviser.
Meyer Feldberg; 54 Director Mr. Feldberg is Dean and Professor of Management of the
Columbia University Graduate School of Business, Columbia University. Prior to
101 Uris Hall 1989, he was president of the Illinois Institute of
New York, New York 10027 Technology. Dean Feldberg is also a director of AMSCO
International Inc. (medical instruments and supplies),
Federated Department Stores, Inc. and New World
Communications Group Incorporated. Dean Feldberg is a
director or trustee of 28 investment companies for which
Mitchell Hutchins or PaineWebber serves as investment
adviser.
George W. Gowen; 67 Director Mr. Gowen is a partner in the law firm Dunnington, Bartholow
666 Third Avenue & Miller. Prior to May 1994, he was a partner in the law
New York, New York 10017 firm of Fryer, Ross & Gowen. Mr. Gowen is a director of
Columbia Real Estate Investments, Inc. Mr. Gowen is a
director or trustee of 28 investment companies for which
Mitchell Hutchins or PaineWebber serves as investment
adviser.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, AGE AND ADDRESS* WITH THE FUND OTHER DIRECTORSHIPS
- ------------------------- --------------- ------------------------------------------------------------
<S> <C> <C>
Frederick V. Malek; 59 Director Mr. Malek is chairman of Thayer Capital Partners (investment
1455 Pennsylvania Avenue, bank) and co-chairman and director of CB Commercial Group
N.W. Inc. (real estate). From January 1992 to November 1992, he
Suite 350 was campaign manager of Bush-Quayle '92. From 1990 to
Washington, D.C. 20004 1992, he was vice chairman and, from 1989 to 1990, he was
president of Northwest Airlines Inc., NWA Inc. (holding
company of Northwest Airlines Inc.) and Wings Holdings
Inc. (holding company of NWA Inc.). Prior to 1989, he was
employed by the Marriot Corporation (hotels, restaurants,
airline catering and contract feeding), where he most
recently was an executive vice president and president of
Marriot Hotels and Resorts. Mr. Malek is also a director
of American Management Systems, Inc. (management
consulting and computer related services), Automatic Data
Processing, Inc., Avis, Inc. (passenger car rental), FPL
Group, Inc. (electric services), National Educational
Corporation and Northwest Airlines Inc. Mr. Malek is a
director or trustee of 28 investment companies for which
Mitchell Hutchins or PaineWebber serves as investment
adviser.
Carl W. Schafer; 60 Director Mr. Schafer is president of the Atlantic Foundation
P.O. Box 1164 (charitable foundation supporting mainly oceanographic
Princeton, NJ 08542 exploration and research). He is a director of Roadway
Express, Inc. (trucking), The Guardian Group of Mutual
Funds, Evans Systems, Inc. (motor fuels, convenience store
and diversified company), Hidden Lake Gold Mines Ltd.,
Electronic Clearing House, Inc. (financial transactions
processing), Wainoco 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 28 investment companies for which Mitchell
Hutchins or PaineWebber serves as an investment adviser.
John R. Torell III; 57 Director Mr. Torell is chairman of Torell Management, Inc. (financial
767 Fifth Avenue advisory firm), chairman of Telesphere Corporation
Suite 4605 (electronic provider of financial information) and a
New York, NY 10153 partner of Zilkha & Company (merchant banking and private
investment company). He is the former chairman and chief
executive officer
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, AGE AND ADDRESS* WITH THE FUND OTHER DIRECTORSHIPS
- ------------------------- --------------- ------------------------------------------------------------
<S> <C> <C>
of Fortune Bancorp (since 1990-1991 and 1990-1994,
respectively), the former chairman, president and chief
executive officer of CalFed, Inc. (savings association)
(1988 to 1989) and former president of Manufacturers
Hanover Corp. (bank) (prior to 1988). Mr. Torell is a
director of American Home Products Corp., New Colt Inc.
(armament manufacturer) and Volt Information Sciences Inc.
Mr. Torell is a director or trustee of 28 investment
companies for which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Teresa M. Boyle; 38 Vice President Ms. Boyle is a first vice president and manager--advisory
administration of Mitchell Hutchins. Prior to November
1993, she was compliance manager of Hyperion Capital
Management, Inc., an investment advisory firm. Prior to
April 1993, Ms. Boyle was a vice president and
manager--legal administration of Mitchell Hutchins. Ms.
Boyle is a vice president of 29 investment companies for
which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Thomas J. Libassi; 37 Vice President Mr. Libassi is a senior vice president and a portfolio
manager of Mitchell Hutchins. Prior to May 1994, he was a
vice president of Keystone Custodian Funds Inc. with
portfolio management responsibility. Mr. Libassi is a vice
president of four investment companies for which Mitchell
Hutchins or PaineWebber serves as investment adviser.
C. William Maher; 35 Vice President Mr. Maher is a first vice president and a senior manager of
and Assistant the mutual fund finance division of Mitchell Hutchins. Mr.
Treasurer Maher is a vice president and assistant treasurer of 29
investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Ann E. Moran; 39 Vice President Ms. Moran is a vice president of Mitchell Hutchins. Ms.
and Assistant Moran is a vice president and assistant treasurer of 29
Treasurer investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Dianne E. O'Donnell; 44 Vice President Ms. O'Donnell is a senior vice president and deputy general
and Secretary counsel of Mitchell Hutchins. Ms. O'Donnell is a vice
president and secretary of 28 investment companies for
which Mitchell Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, AGE AND ADDRESS* WITH THE FUND OTHER DIRECTORSHIPS
- ------------------------- --------------- ------------------------------------------------------------
<S> <C> <C>
Emil Polito; 36 Vice President Mr. Polito is a senior vice president and director of
operations and control for Mitchell Hutchins. From March
1991 to September 1993 he was director of the Mutual Funds
Sales Support and Service Center for Mitchell Hutchins and
PaineWebber. Mr. Polito is vice president of 29 investment
companies for which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Victoria E. Schonfeld; 45 Vice President Ms. Schonfeld is a managing director and general counsel of
Mitchell Hutchins. Prior to May 1994, she was a partner in
the law firm of Arnold & Porter. Ms. Schonfeld is a vice
president of 29 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment adviser.
Paul H. Schubert; 33 Vice President Mr. Schubert is a first vice president and a senior manager
and Assistant of the mutual fund finance division of Mitchell Hutchins.
Treasurer From August 1992 to August 1994, he was a vice president
of BlackRock Financial Management, Inc. Prior to August
1992, he was an audit manager with Ernst & Young LLP. Mr.
Schubert is a vice president and assistant treasurer of 29
investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Julian F. Sluyters; 36 Vice President Mr. Sluyters is a senior vice president and the director of
and Treasurer the mutual fund finance division of Mitchell Hutchins.
Prior to 1991, he was an audit senior manager with Ernst &
Young LLP. Mr. Sluyters is a vice president and treasurer
of 29 investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Mark A. Tincher; 41 Vice President Mr. Tincher is a managing director and chief investment
officer--U.S. equity investments of Mitchell Hutchins.
Prior to March 1995, he was a vice president and directed
the U.S. funds management and equity research areas of
Chase Manhattan Private Bank. Mr. Tincher is a vice
president of 14 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment adviser.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, AGE AND ADDRESS* WITH THE FUND OTHER DIRECTORSHIPS
- ------------------------- --------------- ------------------------------------------------------------
<S> <C> <C>
Gregory K. Todd; 39 Vice President Mr. Todd is a first vice president and senior associate
and Assistant general counsel of Mitchell Hutchins. Prior to 1993, he
Secretary was a partner in the law firm of Shereff, Friedman,
Hoffman & Goodman. Mr. Todd is a vice president and
assistant secretary of nine investment companies and vice
president and secretary of one investment company for
which Mitchell Hutchins or PaineWebber serves as
investment adviser.
Keith A. Weller; 35 Vice President Mr. Weller is a first vice president and associate general
and Assistant counsel of Mitchell Hutchins. Prior to May 1995, he was an
Secretary attorney in private practice. Mr. Weller is a vice
president and assistant secretary of 28 investment
companies for which Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
- ------------------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are 'interested persons' of the
Fund, as defined in the 1940 Act, by virtue of their positions with Mitchell
Hutchins, PaineWebber and/or PW Group.
The Fund pays directors who are not 'interested persons' of the Fund $1,000
annually and $150 for each board meeting and for each meeting of a board
committee (other than committee meetings held on the same day as a board
meeting). Messrs. Feldberg and Torell serve as chairmen of the audit and
contract review committees of individual funds within the PaineWebber fund
complex and receive additional annual compensation aggregating $15,000 each from
the relevant funds. All directors are reimbursed for any expenses incurred in
attending meetings. Because Mitchell Hutchins performs substantially all of the
services necessary for the operation of the Fund, the Fund requires no
employees. No officer, director or employee of PaineWebber or Mitchell Hutchins
presently receives any compensation from the Fund for acting as a director or
officer.
The table below includes certain information relating to the compensation
of the Fund's current directors who held office with the Fund or with other
PaineWebber funds during the Fund's last fiscal year.
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
AGGREGATE FROM THE
COMPENSATION FUND AND THE
FROM THE FUND
NAME OF PERSONS, POSITION FUND* COMPLEX**
- ----------------------------------- ------------ ------------
<S> <C> <C>
Richard Q. Armstrong,
Director......................... $ 2,056 $ 9,000
Richard R. Burt
Director......................... 1,556 7,750
Meyer Feldberg,
Director***...................... 56 106,375
George W. Gowen,
Director***...................... 56 99,750
Frederic V. Malek,
Director***...................... 56 99,750
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C>
Carl W. Schafer,
Director***...................... 56 118,175
John R. Torell III,
Director......................... 2,931 28,125
</TABLE>
- ------------------
Only independent members of the board of directors are compensated by the
Fund and identified above; directors who are 'interested persons,' as
defined in the 1940 Act, do not receive compensation.
* Represents fees paid to each director during the fiscal year ended July 31,
1996.
** Represents total compensation paid to each director during the calendar year
ended December 31, 1995; no fund within the complex has a bonus, pension,
profit sharing or retirement plan.
*** Elected as a director at a shareholder meeting held on April 11, 1996.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of October 31, 1996, Cede & Co. (the nominee for The Depository Trust
Company) owned of record 5,801,994 shares of the Common Stock or 96% of the
outstanding Common Stock. To the knowledge of the Fund, no person is the
beneficial owner of 5% or more of its Common Stock. As of October 31, 1996, the
directors and officers of the Fund beneficially owned less than 1% of the
outstanding shares of Common Stock.
INVESTMENT ADVISORY ARRANGEMENTS
Mitchell Hutchins is the Fund's investment adviser and administrator
pursuant to a contract dated November 23, 1993 with the Fund ('Advisory
Contract'). Pursuant to the Advisory Contract, Mitchell Hutchins provides a
continuous investment program for the Fund and makes investment decisions and
places orders to buy, sell or hold particular securities. As administrator,
Mitchell Hutchins supervises all matters relating to the operation of the Fund
and obtains for it corporate, administrative and clerical personnel, office
space, equipment and services, including arranging for the periodic preparation,
updating, filing and dissemination of proxy materials, tax returns and reports
to the Fund's Board of Directors, stockholders and regulatory authorities.
In addition to the payments to Mitchell Hutchins under the Advisory
Contract described above, the Fund pays certain other costs, including (1) the
costs (including brokerage commissions) of securities purchased or sold by the
Fund and any losses incurred in connection therewith; (2) organizational
expenses of the Fund, whether or not advanced by Mitchell Hutchins; (3) filing
fees (other than fees under the Securities Act of 1933 incurred in connection
with the initial public offering of securities) and expenses relating to the
registration and qualification of the Common Stock under federal securities
laws; (4) fees and salaries payable to directors who are not interested persons
of the Fund or Mitchell Hutchins; (5) all expenses incurred in connection with
the directors' services, including travel expenses; (6) taxes (including any
income or franchise taxes) and governmental fees (other than transfer taxes);
(7) costs of any liability, uncollectible items of deposit and any other
insurance or fidelity bonds; (8) any costs, expenses or losses arising out of a
liability of or claims for damages or other relief asserted against the Fund for
violation of any law; (9) legal expenses, including legal fees of special
counsel for the independent directors; (10) accounting and auditing expenses
(other than those incurred in providing comfort to the underwriters in
connection with the initial public offering of securities); (11) charges of
custodians, transfer agents and other agents; (12) expenses of printing and
distributing reports to stockholders; (13) any extraordinary expenses (including
fees and disbursements of counsel) incurred by the Fund; (14) fees, voluntary
assessments and other expenses incurred in connection with membership in
21
<PAGE>
investment company organizations; (15) costs of mailing and tabulating proxies
and costs of meetings of stockholders, the Board and any committees thereof;
(16) the costs of investment company literature and other publications provided
to directors and officers; (17) costs of mailing, stationery and communications
equipment; (18) interest charges on borrowings; and (19) fees and expenses of
maintaining any listing of the Fund's shares on any national securities
exchange.
The Advisory Contract was approved by the Fund's Board of Directors and by
a majority of the directors who are not parties to the Advisory Contract or
interested persons of any such party ('Independent Directors') on June 23, 1993
and by its initial stockholder on November 23, 1993. Unless sooner terminated,
the Advisory Contract will continue automatically for successive annual periods,
provided that such continuance is specifically approved at least annually (1) by
a majority vote of the Independent Directors cast in person at a meeting called
for the purpose of voting on such approval; and (2) by the Board of Directors or
by vote of a majority of the outstanding Common Stock of the Fund.
Under the Advisory Contract, Mitchell Hutchins is not liable for any error
of judgment or mistake of law or for any loss suffered by the Fund in connection
with the Advisory Contract, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of Mitchell Hutchins in the
performance of its duties or from reckless disregard of its duties and
obligations under the Advisory Contract. The Advisory Contract is terminable by
vote of the Board of Directors or by the holders of a majority of the
outstanding voting securities of the Fund, at any time without penalty, on 60
days' written notice to Mitchell Hutchins. The Advisory Contract may also be
terminated by Mitchell Hutchins on 60 days' written notice to the Fund. The
Advisory Contract terminates automatically upon its assignment.
For the fiscal years ended July 31, 1996 and July 31, 1995 and for the
fiscal period December 7, 1993 (commencement of operations) to July 31, 1994,
the Fund paid or accrued to Mitchell Hutchins $720,500, $710,078 and $504,576,
respectively, in investment advisory and administration fees.
Mitchell Hutchins personnel may invest in securities for their own accounts
pursuant to a code of ethics that describes the fiduciary duty owed to
shareholders of the PaineWebber funds and other Mitchell Hutchins' advisory
accounts by all Mitchell Hutchins' directors, officers and employees, that
establishes procedures for personal investing and restricts certain
transactions. For example, employee accounts generally must be maintained at
PaineWebber, personal trades in most securities require pre-clearance and
short-term trading and participation in initial public offerings generally are
prohibited. In addition, the code of ethics puts restrictions on the timing of
personal investing in relation to trades by PaineWebber funds and other Mitchell
Hutchins advisory clients.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors, Mitchell
Hutchins will be responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage transactions. In executing
portfolio transactions, Mitchell Hutchins will seek to obtain the best net
results for the Fund, taking into account such factors as the price (including
the applicable dealer spread or brokerage commission), size of order, difficulty
of execution and operational facilities of the firm involved. Generally, debt
securities are traded on the OTC market on a 'net' basis without a stated
commission through dealers acting for their own account and not as brokers.
Prices paid to dealers in principal transactions generally include a 'spread,'
which is the difference between the prices at which the dealer is willing to
purchase and sell a specific security at that time.
22
<PAGE>
The Fund has no obligation to deal with any broker or group of brokers in
the execution of portfolio transactions. The Fund contemplates that, consistent
with obtaining the best net results, brokerage transactions may be conducted
through Mitchell Hutchins or any of its affiliates, including PaineWebber. The
Fund's Board of Directors has adopted procedures in conformity with Rule 17e-1
under the 1940 Act to ensure that all brokerage commissions paid to Mitchell
Hutchins or any of its affiliates are reasonable and fair. Specific provisions
in the Advisory Contract authorize Mitchell Hutchins and any affiliate thereof
that is a member of a national securities exchange to effect portfolio
transactions for the Fund on such exchange and to retain compensation in
connection with such transactions. Any such transactions will be effected and
related compensation paid only in accordance with applicable SEC regulations.
Transactions in futures contracts are executed through futures commission
merchants ('FCMs') who receive brokerage commissions for their services. The
Fund's procedures in selecting FCMs to execute the Fund's transactions in
futures contracts, including procedures permitting the use of Mitchell Hutchins
and its affiliates, are similar to those in effect with respect to brokerage
transactions in securities. For the fiscal years ended July 31, 1996 and July
31, 1995 and for the period December 7, 1993 (commencement of operations) to
July 31, 1994, the Fund paid no commissions to FCMs.
Consistent with the Fund's interests and subject to the review of the
Fund's Board of Directors, Mitchell Hutchins may cause the Fund to purchase and
sell portfolio securities through brokers who provide the Fund with research,
analysis, advice and similar services. In return for such services, the Fund may
pay to those brokers a higher commission than may be charged by other brokers,
provided that Mitchell Hutchins determines in good faith that such commission is
reasonable in terms either of that particular transaction or of the overall
responsibility of Mitchell Hutchins to the Fund and its other clients and that
the total commissions paid by the Fund will be reasonable in relation to the
benefits to the Fund over the long term. For purchases or sales with
broker-dealer firms which act as principal, Mitchell Hutchins seeks best
execution. Although Mitchell Hutchins may receive certain research or execution
services in connection with these transactions, Mitchell Hutchins will not
purchase securities at a higher price or sell securities at a lower price than
would otherwise be paid if no weight was attributed to the services provided by
the executing dealer. Moreover, Mitchell Hutchins will not enter into any
explicit soft dollar arrangements relating to principal transactions and will
not receive in principal transactions the types of services which could be
purchased for hard dollars. Mitchell Hutchins may engage in agency transactions
in OTC equity and debt securities in return for research and execution services.
These transactions are entered into only in compliance with procedures ensuring
that the transaction (including commissions) is at least as favorable as it
would have been if effected directly with a market-maker that did not provide
research or execution services. These procedures include Mitchell Hutchins
receiving multiple quotes from dealers before executing the transaction on an
agency basis.
Research services furnished by dealers or brokers with or through which the
Fund effects securities transactions may be used by Mitchell Hutchins in
advising other funds or accounts and, conversely, research services furnished to
Mitchell Hutchins by dealers or brokers in connection with other funds or
accounts Mitchell Hutchins advises may be used by Mitchell Hutchins in advising
the Fund. Information and research received from such brokers or dealers will be
in addition to, and not in lieu of, the services required to be performed by
Mitchell Hutchins under the Advisory Contract.
Investment decisions for the Fund and for other investment accounts managed
by Mitchell Hutchins will be made independently of each other in light of
differing considerations for the various accounts. The same investment decision,
however, may occasionally be made for the Fund and one or more such accounts. In
such cases, simultaneous transactions are inevitable. Purchases or sales are
then averaged as to price and allocated between the Fund and such other
account(s) as to amount according to a formula deemed equitable to the Fund
23
<PAGE>
and such account(s). While in some cases this practice could have a detrimental
effect upon the price or value of the security as far as the Fund is concerned,
or upon its ability to complete its entire order, in other cases it is believed
that coordination and the ability to participate in volume transactions will be
beneficial to the Fund.
The Fund will not purchase securities that are offered in underwritings in
which PaineWebber, Mitchell Hutchins or any of their affiliates is a member of
the underwriting or selling group, except pursuant to procedures adopted by the
Fund's Board of Directors pursuant to Rule 10f-3 under the 1940 Act. Among other
things, these procedures require that the commission or spread paid in
connection with such a purchase be reasonable and fair, that the purchase be at
not more than the public offering price prior to the end of the first business
day after the date of the public offering and that PaineWebber, Mitchell
Hutchins and their affiliates not participate in or benefit from the sale to the
Fund.
For the fiscal years ended July 31, 1996 and July 31, 1995, and for the
period December 7, 1993 (commencement of operations) to July 31, 1994, Mitchell
Hutchins did not direct any brokerage commissions to brokers chosen because they
provide research and analysis. For the fiscal years ended July 31, 1996, July
31, 1995 and for the period December 7, 1993 (commencement of operations) to
July 31, 1994, the Fund paid no brokerage commissions.
NET ASSET VALUE OF COMMON STOCK
The net asset value of the Common Stock is determined weekly as of the
close of regular trading on the New York Stock Exchange, Inc. ('NYSE') on the
last day of the week on which the NYSE is open for trading. The net asset value
of the Common Stock also is determined monthly at the close of regular trading
on the NYSE on the last day of the month on which the NYSE is open for trading.
The net asset value per share of Common Stock is computed by dividing the value
of the securities held by the Fund plus any cash or other assets (including
interest and dividends accrued but not yet received and earned discount) minus
all liabilities (including accrued expenses) by the total number of shares of
Common Stock outstanding at such time.
When market quotations are readily available, the Fund's debt securities
are valued based upon those quotations. When market quotations for options and
futures positions held by the Fund are readily available, those positions are
valued based upon such quotations. Market quotations generally are not available
for options traded in the OTC market. When market quotations for options or
futures positions are not readily available, they are valued at fair value as
determined in good faith by or under the direction of the Board of Directors.
When market quotations are not readily available for any of the Fund's debt
securities, such securities are valued based upon appraisals received from a
pricing service using a computerized matrix system, or based upon appraisals
derived from information concerning the security or similar securities received
from recognized dealers in those securities. Notwithstanding the above, debt
securities with maturities of 60 days or less generally are valued at amortized
cost if their original term to maturity was 60 days or less, or by amortizing
the difference between their fair value as of the 61st day prior to maturity and
their maturity value if their original term to maturity exceeded 60 days, unless
in either case the Board of Directors or its delegate determines that this does
not represent fair value.
Securities and other instruments that are listed on U.S. and foreign stock
exchanges and for which market quotations are readily available are valued at
the last sale price on the exchange on which the securities are traded, as of
the close of business on the day the securities are being valued or, lacking any
sales on such day, at the last bid price available. In cases where securities or
other instruments are traded on more than one exchange, such securities or other
instruments generally are valued on the exchange designated by Mitchell Hutchins
under the direction of the Board of Directors as the primary market. Securities
traded in the OTC
24
<PAGE>
market and listed on the Nasdaq are valued at the last available sale price on
Nasdaq prior to the time of valuation; other OTC securities and instruments are
valued at the last available bid price prior to the time of valuation. Other
securities and assets for which reliable market quotations are not readily
available (including restricted securities subject to limitations as to their
sale) will be valued at fair value as determined in good faith by or under the
direction of the Board of Directors.
All securities and other assets quoted in foreign currency and forward
currency contracts are valued weekly in U.S. dollars on the basis of the foreign
currency exchange rate prevailing at the time such valuation is determined by
the Fund's custodian. Foreign currency exchange rates are generally determined
prior to the close of the NYSE. Occasionally, events affecting the value of
foreign securities and such exchange rates occur between the time at which they
are determined and the close of the NYSE, which events will not be reflected in
a computation of the Fund's net asset value. If events materially affecting the
value of such securities or assets or currency exchange rates occurred during
such time period, the securities or assets would be valued at their fair value
as determined in good faith by or under the direction of the Board of Directors.
The foreign currency exchange transactions of the Fund conducted on a spot basis
are valued at the spot rate for purchasing or selling currency prevailing on the
foreign exchange market. Under normal market conditions this rate differs from
the prevailing exchange rate by an amount generally less than one-tenth of one
percent due to the costs of converting from one currency to another.
TAXATION
GENERAL
In order to continue to qualify for treatment as a regulated investment
company ('RIC') under the Internal Revenue Code of 1986 ('Code'), the Fund must
distribute to its stockholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net investment
income, net short-term capital gain and net gains from certain foreign currency
transactions) ('Distribution Requirement') and must meet several additional
requirements. These requirements include the following: (1) the Fund must derive
at least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in securities or those currencies ('Income Requirement');
(2) the Fund must derive less than 30% of its gross income each taxable year
from the sale or other disposition of securities, or any of the following, that
were held for less than three months--options or futures (other than those on
foreign currencies), or foreign currencies (or options, futures or forward
contracts thereon) that are not directly related to the Fund's principal
business of investing in securities (or options and futures with respect to
securities) ('Short-Short Limitation'); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. government securities, securities of
other RICs and other securities that are limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets;
and (4) at the close of each quarter of the Fund's taxable year, not more than
25% of the value of its total assets may be invested in securities (other than
U.S. government securities or the securities of other RICs) of any one issuer.
Dividends and other distributions declared by the Fund in October, November
or December of any year and payable to stockholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by the
stockholders on December 31 of that year if the distributions are paid by the
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Fund during the following January. Accordingly, those distributions will be
taxed to stockholders for the year in which that December 31st falls.
A portion of the dividends from the Fund's investment company taxable
income (whether paid in cash or reinvested in additional Fund shares) may be
eligible for the dividends-received deduction allowed to corporations. The
eligible portion may not exceed the aggregate dividends the Fund receives from
U.S. corporations. However, dividends received by a corporate stockholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the alternative minimum tax. It is not expected that a significant
portion of the Fund's dividends will qualify for this deduction.
Income from investments in foreign securities may be subject to foreign
withholding or other taxes. Stockholders of the Fund will not be able to claim
any foreign tax credit or deduction with respect to those foreign taxes.
The Fund will be subject to a nondeductible 4% excise tax ('Excise Tax') to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary income for that year and capital gain net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
For these purposes, any such income retained by the Fund, and on which it pays
federal income tax, will be treated as having been distributed.
PASSIVE FOREIGN INVESTMENT COMPANIES
The Fund may invest in the stock of 'passive foreign investment companies'
('PFICs'). A PFIC is a foreign corporation that, in general, meets either of the
following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, the Fund will be subject to
federal income tax on a portion of any 'excess distribution' received on the
stock of a PFIC or of any gain on disposition of that stock (collectively 'PFIC
income'), plus interest thereon, even if the Fund distributes the PFIC income as
a taxable dividend to its stockholders. The balance of the PFIC income will be
included in the Fund's investment company taxable income and, accordingly, will
not be taxable to it to the extent that income is distributed to its
stockholders. If the Fund invests in a PFIC and elects to treat the PFIC as a
'qualified electing fund,' then, in lieu of the foregoing tax and interest
obligation, the Fund will be required to include in income each year its pro
rata share of the qualified electing fund's annual ordinary earnings and net
capital gain (the excess of net long-term capital gain over net short-term
capital loss)--which most likely would have to be distributed to satisfy the
Distribution Requirement and to avoid imposition of the Excise Tax--even if
those earnings and gain are not distributed to the Fund. In most instances it
will be very difficult, if not impossible, to make this election because of
certain requirements thereof.
Pursuant to proposed regulations, a closed-end RIC whose net asset value is
determined and published in a publication of general circulation at least
weekly, such as the Fund, would be entitled to elect to 'mark-to-market' its
stock in certain PFICs. 'Marking-to-market,' in this context, means recognizing
as gain for each taxable year the excess, as of the end of that year, of the
fair market value of each such PFIC's stock over the owner's adjusted basis in
that stock (including mark-to-market gain for each prior year for which an
election was in effect).
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<PAGE>
STRATEGIC TRANSACTIONS
The use of Strategic Transactions, such as selling (writing) and purchasing
options and futures and entering into forward currency contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the gains and losses the Fund realizes in connection
therewith. These rules also may require the Fund to 'mark to market' (that is,
treat as sold for their fair market value) at the end of each taxable year
certain positions in its portfolio, which may cause the Fund to recognize income
without receiving cash with which to make distributions necessary to satisfy the
Distribution Requirement and to avoid imposition of the Excise Tax. In that
event, the Fund might have to liquidate securities to enable it to make the
required distributions, which would cause it to recognize gains or losses and
might affect its ability to satisfy the Short-Short Limitation.
Income from foreign currencies, and income from transactions in options,
futures and forward currency contracts derived by the Fund with respect to its
business of investing in securities or foreign currencies, will be treated as
qualifying income under the Income Requirement. However, income from the
disposition of options and futures contracts (other than those on foreign
currencies) will be subject to the Short-Short Limitation if they are held for
less than three months. Income from the disposition of foreign currencies, and
options, futures and forward contracts on foreign currencies, that are not
directly related to the Fund's principal business of investing in securities (or
options and futures with respect to securities) also will be subject to the
Short-Short Limitation if they are held for less than three months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a 'designated hedge' will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The Fund
will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent the Fund does not qualify for this
treatment, it may be forced to defer the closing out of certain options,
futures, forward currency contracts and foreign currency positions beyond the
time when it otherwise would be advantageous to do so, in order for the Fund to
continue to qualify as a RIC.
ADDITIONAL INFORMATION
STOCK REPURCHASES AND TENDERS
As discussed in the Prospectus, the Fund's Board of Directors may tender
for its shares to reduce or eliminate the discount to net asset value at which
the Fund's shares might trade. Even if a tender offer has been made, it will be
the Board's announced policy, which may be changed by the Board, not to accept
tenders or effect repurchases (or, if a tender offer has not been made, not to
initiate a tender offer) if (1) such transactions, if consummated, would (a)
result in the delisting of the Common Stock from the NYSE (the NYSE having
advised the Fund that it would consider delisting if the aggregate market value
of the outstanding shares is less than $5,000,000, the number of publicly held
shares falls below 600,000 or the number of round-lot holders falls below 1,200)
or (b) impair the Fund's status as a RIC (which would eliminate the Fund's
eligibility to deduct dividends paid to its stockholders, thus causing its
income to be fully taxed at the corporate level in addition to the taxation of
stockholders on distributions received from the Fund); (2) the Fund would not be
able to liquidate portfolio securities in an orderly manner and consistent with
the Fund's investment objective and policies in order to repurchase its shares;
or (3) there is, in the Board's judgment, any (a) material legal action or
proceeding instituted or threatened challenging such
27
<PAGE>
transactions or otherwise materially adversely affecting the Fund, (b)
suspension of trading or limitation on prices of securities generally on the
NYSE or any other exchange on which portfolio securities of the Fund are traded,
(c) declaration of a banking moratorium by federal or state authorities or any
suspension of payment by banks in the United States, New York State or any state
in which the Fund invests, (d) limitation affecting the Fund or the issuers of
its portfolio securities imposed by federal or state authorities on the
extension of credit by lending institutions, (e) commencement of war, armed
hostilities or other international or national calamity directly or indirectly
involving the United States or (f) other events or conditions that would have a
material adverse effect on the Fund or its stockholders if shares were
repurchased. The Board of Directors may modify these conditions in light of
experience.
AUDITORS
Ernst & Young LLP, 787 Seventh Avenue, New York, NY 10019, serves as
independent auditors for the Fund.
LEGAL MATTERS
The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue,
N.W., Washington, D.C. 20036-1800, counsel to the Fund, has passed upon the
legality of the shares offered by the Fund's Prospectus. Kirkpatrick & Lockhart
LLP also acts as counsel to Mitchell Hutchins and PaineWebber in connection with
other matters.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal year ended July 31,
1996 is a separate document supplied with this Statement of Additional
Information, and the financial statements, accompanying notes and report of
independent auditors appearing therein are incorporated by reference in this
Statement of Additional Information.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR PAINEWEBBER. THE PROSPECTUS AND
THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH THE PROSPECTUS RELATES. THE PROSPECTUS AND THIS STATEMENT OF
ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY THE FUND OR BY
PAINEWEBBER IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Investment Policies and Restrictions........... 1
Strategic Transactions......................... 5
Directors and Officers......................... 15
Control Persons and Principal Holders of
Securities................................... 21
Investment Advisory Arrangements............... 21
Portfolio Transactions......................... 22
Net Asset Value of Common Stock................ 24
Taxation....................................... 25
Additional Information......................... 27
Financial Statements........................... 28
</TABLE>
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MANAGED HIGH
YIELD FUND INC.
COMMON STOCK
------------------------
STATEMENT OF ADDITIONAL INFORMATION
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PAINEWEBBER INCORPORATED
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November 29, 1996
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(Copyright)1996 PaineWebber Incorporated
