MANAGED HIGH YIELD FUND INC, POS 8C, 1997-10-02

MANAGED HIGH YIELD FUND INC
POS 8C, 1997-10-02

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<PAGE>
As filed with the Securities and Exchange Commission on October 2, 1997

Securities Act File No. 33-69260
Investment Company Act File No. 811-7804

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

---------------------
FORM N-2

Registration Statement Under the Securities Act of 1933 /X/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 5 /X/
and
Registration Statement Under the Investment Company Act of 1940 /X/
Amendment No. 5 /X/
(Check appropriate box or boxes)

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

MANAGED HIGH YIELD FUND INC.
(Exact name of Registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code: (212) 713-2000

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

DIANNE E. O'DONNELL, ESQ.
Vice President and Secretary
MANAGED HIGH YIELD FUND INC.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)

---------------------
Copies to:

ROBERT A. WITTIE, ESQ. ANDREW NOVAK, ESQ.
JENNIFER R. GONZALEZ, ESQ. MITCHELL HUTCHINS ASSET
KIRKPATRICK & LOCKHART LLP MANAGEMENT INC.
1800 Massachusetts Avenue, N.W. 1285 Avenue of the Americas
Washington, D.C. 20036-1800 New York, New York 10019

-----------

If any of the securities being registered on this Form are to be

offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: [ X ]

It is proposed that this filing will become effective (check
appropriate box)
[X] when declared effective pursuant to Section 8(c)

This Registration Statement relates to the registration of an
indeterminate number of shares solely for market-making transactions.

================================================================================

<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 mitigate
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 Inc. ('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 14, 1997
was $ . 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 December 1, 1997 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 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 December 1, 1997.

<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>
STOCKHOLDER 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.............................................................................. 0.44%
----
Total Annual Expenses.................................................................... 1.34%
----
----
</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. 'Other Expenses'

have been estimated based upon expenses actually incurred for the fiscal
year ended July 31, 1997.

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>
$14 $ 42 $ 72 $ 157
</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.

<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.

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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 mitigate 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 Inc. ('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
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<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 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
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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, 1997, Mitchell
Hutchins served as investment adviser or sub-adviser to registered
investment companies with separate portfolios having aggregate assets
of approximately $ 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.

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.

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.

9
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<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.

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
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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.

Hedging and Related Income Strategies. The Fund may use options, futures
contracts and foreign currency contracts, which entail special risks.
See 'Other Investment Practices--Hedging and Related Income Strategies'
and in the SAI, 'Hedging and Related Income Strategies.'

Lending of Portfolio Securities. The Fund may lend its securities to
qualified broker-dealers or institutional investors in an amount up to

33 1/3% of the Fund's total assets. Lending securities enables the Fund
to earn additional income, but could result in a loss or delay in
recovering these securities.

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
</TABLE>

11
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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............................. As is common with shares of closed-end investment companies, the Fund's
Common Stock has historically traded at a discount to its net asset
value. See 'Trading History.' Whether an investor 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 investor's purchase price for the shares. This market risk is
separate and distinct from the risk that the Fund's net asset value may
decrease. Accordingly, the Common Stock is designed primarily for
long-term investors, and investors should not view the Common Stock 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>

<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 Stockholders for the fiscal year ended July 31, 1997 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 Stockholders.

<TABLE>
<CAPTION>
FOR THE
YEARS ENDED FOR THE PERIOD
JULY 31, DECEMBER 7, 1993+
----------------------------- THROUGH
1997 1996 1995 JULY 31, 1994
------- ------- ------- -----------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period........................... $ 13.25 $ 13.44 $ 13.76 $ 15.00
------- ------- ------- ----------
Net investment income.............. 1.29 1.29 1.40 0.77
Net realized and unrealized gains
(losses) from investments and
foreign currency transactions.... 1.02 (0.16) (0.34) (1.25)
------- ------- ------- ----------
Net increase (decrease) from
investment operations............ 2.31 1.13 1.06 (0.48)
------- ------- ------- ----------
Dividends from net investment
income........................... (1.26) (1.32) (1.38) (0.76)
------- ------- ------- ----------
Net asset value, end of period..... $ 14.30 $ 13.25 $ 13.44 $ 13.76
------- ------- ------- ----------
------- ------- ------- ----------
Per share market value, end of
period........................... $ 13.94 $ 12.50 $ 12.38 $ 12.38
------- ------- ------- ----------
------- ------- ------- ----------

Total investment return:
On net asset value (1).......... 18.26% 8.83% 9.27% (3.00)%
------- ------- ------- ----------
------- ------- ------- ----------

On market value (2)............. 22.59% 12.16% 11.87% (12.76)%
------- ------- ------- ----------
------- ------- ------- ----------

Ratios/Supplemental Data:
Net assets, end of period (000's
omitted)...................... $86,232 $79,904 $81,081 $82,995
Expenses to average net
assets........................ 1.34% 1.25% 1.21% 1.17%*
Net investment income to
average net assets............ 9.39% 9.87% 10.68% 8.27%*
Portfolio turnover rate......... 122% 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 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 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>

<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 stockholders 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 asset management 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 14, 1997, the closing price per
share of Common Stock was $ , the Fund's net asset value per share was
$ and the discount to net asset value was ( )%.

<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>
10/31/95................. $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)
1/31/97.................. 13.375 12.875 13.76 13.70 (2.80) (6.02)
4/30/97.................. 13.625 12.750 13.96 13.65 (2.40) (6.59)
7/31/97.................. 14.375 13.125 14.06 13.85 2.24 (5.23)
10/31/97.................
</TABLE>

<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 mitigate 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. 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.'

HIGH YIELD, HIGH RISK INCOME SECURITIES

The high yield, high risk income securities in which the Fund invests
include bonds, debentures, notes and convertible debt and generally are
unsecured. Most of these debt securities 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

<PAGE>

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, 1997, the Fund had 86.81% of its
dollar weighted average portfolio in debt securities that received a rating from
a NRSRO, and 10.04% 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)--3.46%, AA/Aa--0%, A/A-- 0%, BBB/Baa--0%, BB/Ba--31.66%, B/B--49.94%, and
CCC/Caa--1.75%. It should be noted that this information reflects the average
composition of the Fund's assets during the fiscal year ended July 31, 1997 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 stockholders 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).

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

<PAGE>

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,
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.

<PAGE>

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.

Hedging and Related Income Strategies. 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.

<PAGE>

The Fund may enter into forward currency contracts, buy and sell foreign
currency, debt and equity security index and interest rate futures contracts,
write covered put and call options and buy and sell put and call options on
securities, debt and equity security indices, foreign currencies and such
futures contracts. The Fund may enter into options, futures, forward currency
contracts and 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 liquid securities, marked-to-market daily,
in an amount at least equal to the amount of the commitment. Failure of the
issuer to deliver a security purchased by the Fund on a when-issued or delayed
delivery basis may result in the Fund's incurring a loss or missing an
opportunity to make an alternative investment. Depending on market conditions,
the Fund's when-issued and delayed delivery purchase commitments could cause its
net asset value per share to be more volatile, because such securities may
increase the amount by which the Fund's total assets, including the value of
when-issued and delayed delivery securities held by the Fund, exceed its net
assets.

<PAGE>

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 up to
33 1/3% of its total assets to broker-dealers or institutional investors that
Mitchell Hutchins deems qualified, but only when the borrower maintains
acceptable collateral with the Fund's custodian bank in an amount, marked to
market daily, at least equal to the market value of the securities loaned, plus
accrued interest and dividends. Acceptable collateral is limited to cash, U.S.
government securities and irrevocable letters of credit that meet certain
guidelines established by Mitchell Hutchins. 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 fees in connection with a loan and may pay a negotiated
portion of the interest earned on the cash 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, when regaining such rights is considered to be in the Fund's interest.

Pursuant to procedures adopted by the Fund's Board of Directors governing
the Fund's securities lending program, the Board has approved retention of
PaineWebber to serve as lending agent for the Fund. The Board has also
authorized the payment of fees (including fees calculated as a percentage of
invested cash collateral) to PaineWebber for these services. The Board
periodically reviews all portfolio securities loan transactions for which
PaineWebber acted as lending agent.

PORTFOLIO TURNOVER

The Fund's portfolio turnover rate may vary from year to year and will not
be a limiting factor when Mitchell Hutchins deems portfolio changes appropriate.
Higher portfolio turnover will result in higher Fund expenses, including
brokerage commissions, dealer mark-ups and other transaction costs on the sale

of securities and on reinvestment in other securities. 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, 1997 and July 31, 1996, the Fund's
portfolio turnover rate was 122% and 135%, respectively.

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

<PAGE>

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.

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 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

<PAGE>

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 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.

<PAGE>

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
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.

<PAGE>

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.

Hedging and Related Income Strategies. The use of options, futures
contracts and forward currency contracts also entails special risks. See 'Other
Investment Practices--Hedging and Related Income Strategies' and, in the SAI,
'Hedging and Related Income Strategies.'

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.

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

<PAGE>

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 asset management subsidiary of PaineWebber, which is
a wholly owned subsidiary of Paine Webber Group Inc., a publicly held financial
services holding company. Mitchell Hutchins provides investment advisory and
portfolio management services to investment companies, pension funds and other
institutional, corporate and individual clients. As of October 31, 1997,
Mitchell Hutchins served as investment adviser or sub-adviser to registered
investment companies with separate portfolios having aggregate assets of
approximately $ 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.

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,
1997, July 31, 1996 and July 31, 1995, the Fund's total expenses, stated as a
percentage of average net assets, were 1.34%, 1.25% and 1.21%, respectively.

In accordance with procedures adopted by the Fund's Board of Directors,
brokerage transactions for the Fund may be conducted through PaineWebber or its
affiliates and the Fund may pay fees to PaineWebber for its services as lending
agent in the Fund's portfolio securities lending program.

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.

<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 net long-term capital gain over net
short-term capital loss), realized net short-term capital gain and realized net
gains from foreign currency transactions, if any.

The Fund 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 another
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.

<PAGE>

The automatic reinvestment of dividends and other distributions in shares
of Common Stock does not relieve participants of any income tax that may be
payable on such distributions. See 'Taxation.'

A stockholder 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 or in the Transfer Agent's records. An election to terminate
participation in the Plan, until such election is changed, will be deemed to be
an election by a 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.
Under the Taxpayer Relief Act of 1997 ('Act'), different maximum tax rates apply
to capital gain depending on the taxpayer's holding period and marginal rate of
federal income tax--generally, 28% for gain on capital assets held for more than
one year but not more than 18 months and 20% (10% for taxpayers in the 15%
marginal tax bracket) on capital assets held for more than 18 months. The Act,
however, does not address the application of these rules to distributions by
RICs, including whether a RIC's holding period can be 'passed through' to its
stockholders. Instead, the Act authorizes the issuance of regulations to do so.
Accordingly, stockholders should consult their tax advisers as to the effect of
the Act on distributions by the Fund to them of net capital gain.

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.

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

<PAGE>

portion of the price back as a taxable distribution. 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.

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 subject to federal income tax at
the rates indicated above; provided that any loss realized on a sale or exchange
of shares of Common Stock that were held for six months or less will be treated
as long-term, rather than as short-term, capital loss to the extent of any
capital gain distributions received thereon. A loss realized on a sale or
exchange of shares 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 a requirement applicable to the Fund through the end of its current
taxable year 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

28
<PAGE>
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% 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, 1997:

<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 RIC or result in a
failure to comply with applicable asset coverage requirements, general economic
conditions and such other events or conditions that may have a material effect
on the Fund's ability to consummate such transactions. Under certain
circumstances, it is possible that open market repurchases or tender offers may
constitute a distribution under the Internal Revenue Code to the remaining
stockholders of the Fund. The Board may at any time, however, decide that the
Fund should not repurchase shares or make a tender offer. The Fund may borrow to
finance

<PAGE>

repurchases and tender offers. Interest on such borrowings will reduce the
Fund's net income. 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.

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.

Tendered shares of Common Stock that have been accepted and purchased by
the Fund will be held in the Fund's treasury until retired by the Board of
Directors. If tendered shares are not retired, the Fund may hold, sell or
otherwise dispose of the shares for any lawful corporate purpose as determined
by the Board.

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

<PAGE>

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 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

<PAGE>

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 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
----
<S> <C>
Investment Policies and Restrictions................................................... 1
Hedging and Related Income Strategies.................................................. 5
Directors and Officers................................................................. 14
Control Persons and Principal Holders of Securities.................................... 20
Investment Advisory Arrangements....................................................... 20
Portfolio Transactions................................................................. 21
Net Asset Value of Common Stock........................................................ 23
Taxation............................................................................... 24
Additional Information................................................................. 26
Financial Statements................................................................... 27
</TABLE>

<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 Caa. 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.

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.

<PAGE>

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,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation.
'BB' indicates the lowest 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.

R--The 'r' is attached to highlight derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to non-credit risks. Examples of such obligations are:
securities whose principal or return is indexed to equities, commodities, or
currencies; certain swaps and options; and interest only and principal only
mortgage securities.

<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..................... 16
Special Considerations and Risk Factors........ 20
Management of the Fund......................... 24
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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- --------------------------------------------------------------------------------

(Copyright)1997 PaineWebber Incorporated

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

MANAGED HIGH
YIELD FUND INC.

COMMON STOCK

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

PROSPECTUS

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

PAINEWEBBER INCORPORATED

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

December 1, 1997

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

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

<PAGE>

MANAGED HIGH YIELD FUND INC.

1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019

STATEMENT OF ADDITIONAL INFORMATION

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 stockholders 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 asset management subsidiary of PaineWebber, serves as investment adviser
and administrator of the Fund. This Statement of Additional Information is not a
prospectus and should be read only in conjunction with the Fund's Prospectus,
dated December 1, 1997. 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 December 1, 1997.

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.

<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 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. 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 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 stockholders by the Fund. If the value of a foreign currency
rises

<PAGE>

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.

(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

<PAGE>

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
stockholder approval.

The Fund will not:

(1) 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.

(2) 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.

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.

HEDGING AND RELATED INCOME STRATEGIES

As discussed in the Prospectus, Mitchell Hutchins may use a variety of
financial instruments ('Hedging 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 'Hedging
Transactions.'

Hedging Transactions can be broadly categorized as 'short hedges' and 'long
hedges.' A short hedge is a purchase or sale of a Hedging Instrument intended to
partially or fully 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 Hedging Instrument 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.

<PAGE>

Conversely, a long hedge is a purchase or sale of a Hedging Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge, the Fund takes a position in a Hedging Instrument 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.

Hedging Instruments 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. Hedging Instruments 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 Hedging Instruments have a positive
correlation to price movements of such broad market sectors.

The use of Hedging Instruments is subject to applicable regulations of the
Securities and Exchange Commission ('SEC'), the several options and futures
exchanges upon which they are traded and the Commodity Futures Trading
Commission ('CFTC'). In addition, the Fund's ability to use Hedging Instruments
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 HEDGING STRATEGIES

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

(1) Successful use of most Hedging Instruments 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 Hedging Instruments, there can be no assurance that any particular
hedging strategy adopted will succeed.

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

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(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 Hedging Instrument. Moreover, if the price of the
Hedging Instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would have
been in a better position had it not hedged at all.

(4) As described below, the Fund might be required to maintain assets as
'cover,' maintain segregated accounts or make margin payments when it takes
positions in Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If the Fund were unable to
close out its positions in such Hedging Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. These requirements might impair the Fund's ability
to sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. The Fund's ability to close out a position
in a Hedging Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of 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 HEDGING STRATEGIES

Transactions using Hedging Instruments, other than purchased options,
expose the Fund to an obligation to another party. The Fund will not enter into
any such transactions unless it owns either (1) an offsetting ('covered')
position in securities, currencies or other options, forward currency contracts
or futures contracts or (2) cash or liquid securities, with a value sufficient
at all times to cover its potential obligations to the extent not covered as
provided in (1) above. The Fund will comply with SEC guidelines regarding cover
for hedging transactions and will, if the guidelines so require, set aside cash
or liquid securities in a segregated account with its custodian in the
prescribed amount, marked to market daily.

Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Hedging Instrument 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 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

<PAGE>

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.

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.

<PAGE>

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's portfolio, 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's portfolio, 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, obligations of
the United States or obligations that are fully guaranteed as to principal and
interest by the United States, in an amount generally equal to 10% or less of
the contract value. Margin must also be deposited when writing a call 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, and
initial margin requirements might be increased generally in the future by
regulatory action.

Subsequent 'variation margin' payments are made to and from the futures
broker daily as the value of the futures 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.

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.

<PAGE>

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 (both exchange-traded and OTC) 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 Hedging Instruments involving that currency are available or
such Hedging Instruments are more expensive than certain other Hedging
Instruments. In such cases, the Fund may hedge against price movements in that
currency by entering into Hedging Instruments 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 Hedging Instruments will not correlate perfectly with
movements in the price of the currency being hedged is magnified when this
strategy is used.

The value of Hedging Instruments on foreign currencies depends on the value
of the underlying currency relative to the U.S. dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of such Hedging Instruments, the
Fund could be disadvantaged by having to deal in the odd lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.

There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements

<PAGE>

might take place in the underlying markets that cannot be reflected in the
markets for the Hedging Instruments until they reopen.

Settlement of Hedging Instruments involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the Fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.

COMBINED TRANSACTIONS

The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions and any combination of futures and
options transactions ('component' transactions), instead of a single Hedging
Instrument, as part of a single or combined strategy when, in the opinion of
Mitchell Hutchins, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on Mitchell Hutchins' judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.

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
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

<PAGE>

hedging.' Use of a different foreign currency magnifies the risk that movements
in the price of the Hedging Instrument will not correlate or will correlate
unfavorably with the foreign currency being hedged.

The cost to the Fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When the Fund enters into a forward currency contract, it relies on the 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 liquid securities in a segregated
account.

The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the 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, marked to market daily.

The Fund may use the following Hedging Instruments:

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 exercise price. Options on debt
securities are traded primarily in the OTC market rather than on any of the
several options exchanges.

<PAGE>

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.

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

<PAGE>

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 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.

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**; 50 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 28
investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, AGE AND ADDRESS* WITH THE FUND OTHER DIRECTORSHIPS
- ------------------------- --------------- ------------------------------------------------------------
<S> <C> <C>
Richard Q. Armstrong; 62 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). He was a partner of the New England Consulting
Group (management consulting firm) (December 1992-
September 1993). He was managing director of LVMH U.S.
Corporation (U.S. subsidiary of the French luxury goods
conglomerate, 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 27 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
71 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 28 investment companies
for which Mitchell Hutchins or PaineWebber serves as
investment adviser.

Richard R. Burt; 50 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 27
investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>

<PAGE>

Meyer Feldberg; 55 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
K-III Communications Corporation, Federated Department
Stores, Inc. and Revlon, Inc. Dean Feldberg is a director
or trustee of 27 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment adviser.

George W. Gowen; 68 Director Mr. Gowen is a partner in the law firm 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 27 investment companies for which
Mitchell Hutchins or PaineWebber serves as investment
adviser.

Frederick V. Malek; 60 Director Mr. Malek is chairman of Thayer Capital Partners (merchant
1455 Pennsylvania Avenue, bank). From January 1992 to November 1992, he was campaign
N.W. manager of Bush-Quayle '92. From 1990 to 1992, he was vice
Suite 350 chairman and, from 1989 to 1990, he was president of
Washington, D.C. 20004 Northwest Airlines Inc., NWA Inc. (holding company of
Northwest Airlines Inc.) and Wings Holdings Inc. (holding
company of NWA Inc.). Prior to 1989, he was employed by
the Marriott Corporation (hotels, restaurants, airline
catering and contract feeding), where he most recently was
an executive vice president and president of Marriott
Hotels and Resorts. Mr. Malek is also a director of
American Management Systems, Inc. (management consulting
and computer related services), Automatic Data Processing,
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, AGE AND ADDRESS* WITH THE FUND OTHER DIRECTORSHIPS
- ------------------------- --------------- ------------------------------------------------------------
<S> <C> <C>
Inc., CB Commercial Group, Inc. (real estate services),
Choice Hotels International (hotel and hotel franchising),
FPL Group, Inc. (electric services), Integra, Inc.
(bio-medical), Manor Care, Inc. (health care), National
Educational Corporation and Northwest Airlines Inc. Mr.
Malek is a director or trustee of 27 investment companies
for which Mitchell Hutchins or PaineWebber serves as
investment adviser.

Carl W. Schafer; 61 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), 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 27 investment
companies for which Mitchell Hutchins or PaineWebber
serves as an investment adviser.

Thomas J. Libassi; 38 Vice President Mr. Libassi is a senior vice president and portfolio manager
of Mitchell Hutchins. Prior to May 1994, he was a vice
president of Keystone Custodian Funds Inc. with portfolio

management responsibility. Mr. Libassi is a vice president
of four investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.

Ann E. Moran; 40 Vice President Ms. Moran is a vice president and manager of the mutual fund
and Assistant finance division of Mitchell Hutchins. Ms. Moran is a vice
Treasurer president and assistant treasurer of 28 investment
companies for which Mitchell Hutchins or PaineWebber
serves as investment adviser.

Dianne E. O'Donnell; 45 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 27 investment companies and a
vice president and assistant secretary of one investment
company for which Mitchell Hutchins or PaineWebber serves
as investment adviser.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, AGE AND ADDRESS* WITH THE FUND OTHER DIRECTORSHIPS
- ------------------------- --------------- ------------------------------------------------------------
<S> <C> <C>
Emil Polito; 37 Vice President Mr. Polito is a senior vice president and director of
operations and control for Mitchell Hutchins. From March
1991 to September 1993 he was director of the mutual funds
sales support and service center for Mitchell Hutchins and
PaineWebber. Mr. Polito is a vice president of 28
investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.

Victoria E. Schonfeld; 46 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 27 investment companies and a vice president
and secretary of one investment company for which Mitchell
Hutchins or PaineWebber serves as investment adviser.

Paul H. Schubert; 34 Vice President Mr. Schubert is a first vice president and the director of
and Treasurer the mutual fund finance division of Mitchell Hutchins.
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 treasurer of 28
investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.

Barney A. Taglialatela; 36 Vice President Mr. Taglialatela is a vice president and a manager of the
and Assistant mutual fund finance division of Mitchell Hutchins. Prior
Treasurer to February 1995, he was a manager of the mutual fund
finance division of Kidder Peabody Asset Management, Inc.
Mr. Taglialatela is a vice president and assistant
treasurer of 28 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment adviser.

Mark A. Tincher; 42 Vice President Mr. Tincher is a managing director and chief investment
officer--equities 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 13
investment companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, AGE AND ADDRESS* WITH THE FUND OTHER DIRECTORSHIPS
- ------------------------- --------------- ------------------------------------------------------------
<S> <C> <C>
Keith A. Weller; 36 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 27 investment
companies for which Mitchell Hutchins or PaineWebber
serves as investment adviser.

Ian W. Williams; 40 Vice President Mr. Williams is a vice president and a manager of the mutual
and Assistant fund finance division of Mitchell Hutchins. Prior to June
Treasurer 1992, he was an audit senior accountant with Price
Waterhouse LLP. Mr. Williams is a vice president and
assistant treasurer 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 separate meeting of a
board committee. The chairmen of the audit and contract review committees of
individual funds within the PaineWebber fund complex receive additional
compensation aggregating $15,000 annually from the relevant funds. All directors
are reimbursed for any expenses incurred in attending meetings. Because Mitchell
Hutchins performs substantially all of the services necessary for the operation
of the Fund, the Fund requires no employees. No officer, director or employee of
PaineWebber or Mitchell Hutchins presently receives any compensation from the
Fund for acting as a director or officer.

The table below includes certain information relating to the compensation
of the Fund's current directors who held office with the Fund or with other
PaineWebber funds during the Fund's last fiscal year.

COMPENSATION TABLE+

<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..... $ 1,750 $ 59,873
Richard R. Burt, Director.......... 1,600 51,173
Meyer Feldberg, Director***........ 1,750 96,181
George W. Gowen, Director***....... 1,750 92,431
Frederic V. Malek, Director***..... 1,750 92,431
Carl W. Schafer, Director***....... 1,750 62,307
</TABLE>

(Footnotes on next page)

<PAGE>

(Footnotes from previous page)
- ------------------

+ Only independent members of the board of directors are compensated by the
Fund and identified above; directors who are 'interested persons,' as
defined in the 1940 Act, do not receive compensation.

* Represents fees paid to each director during the fiscal year ended July 31,
1997.

** Represents total compensation paid to each director during the calendar year
ended December 31, 1996; 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 November , 1997, Cede & Co. (the nominee for The Depository Trust
Company) owned of record shares of the Common Stock or % 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 November , 1997, 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
investment company organizations; (15) costs of mailing and tabulating proxies
and costs of meetings of

<PAGE>

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, 1997, July 31, 1996 and July 31, 1995,
the Fund paid or accrued to Mitchell Hutchins $742,432, $720,500 and $710,078,
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 that restricts certain

transactions. For example, employee accounts generally must be maintained at
PaineWebber, personal trades in most securities require pre-clearance and
short-term trading and participation in initial public offerings generally are
prohibited. In addition, the code of ethics puts restrictions on the timing of
personal investing in relation to trades by PaineWebber funds and other Mitchell
Hutchins advisory clients.

PORTFOLIO TRANSACTIONS

Subject to policies established by the Board of Directors, Mitchell
Hutchins will be responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage transactions. In executing
portfolio transactions, Mitchell Hutchins will seek to obtain the best net
results for the Fund, taking into account such factors as the price (including
the applicable dealer spread or brokerage commission), size of order, difficulty
of execution and operational facilities of the firm involved. Generally, debt
securities are traded on the OTC market on a 'net' basis without a stated
commission through dealers acting for their own account and not as brokers.
Prices paid to dealers in principal transactions generally include a 'spread,'
which is the difference between the prices at which the dealer is willing to
purchase and sell a specific security at that time.

The Fund has no obligation to deal with any broker or group of brokers in
the execution of portfolio transactions. The Fund contemplates that, consistent
with obtaining the best net results, brokerage

<PAGE>

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, 1997, July 31,
1996 and July 31, 1995, 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 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.

<PAGE>

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, 1997, July 31, 1996 and July 31, 1995,
Mitchell Hutchins did not direct any brokerage commissions to brokers chosen
because they provide research and analysis. For the fiscal years ended July 31,
1997, July 31, 1996 and July 31, 1995, 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 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.

<PAGE>

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) through the end of its current taxable year, 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. If the Fund failed to qualify for
treatment as a RIC for any taxable year, it would be taxed as an ordinary
corporation on its taxable income for that year (even if that income was
distributed to its stockholders) and all distributions out of its earnings and
profits would be taxable to its stockholders as dividends (that is, ordinary
income).

Dividends and other distributions declared by the Fund in October, November
or December of any year and payable to stockholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by the
stockholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to stockholders for the year in which that December 31st falls.

<PAGE>

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--other than a 'controlled foreign
corporation' (i.e., a foreign corporation in which, on any day during its
taxable year, more than 50% of the total voting power of all voting stock
therein or the total value of all stock therein is owned, directly, indirectly,

or constructively, by 'U.S. shareholders,' defined as U.S. persons that
individually own, directly, indirectly, or constructively, at least 10% of that
voting power) as to which the Fund is a U.S. shareholder (effective after
October 31, 1998)--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 by the Fund to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax--even if those earnings and gain are not
distributed to the Fund. In most instances it will be very difficult, if not
impossible, to make this election because of certain requirements thereof.

Effective for its taxable year beginning August 1, 1998, the Fund may elect
to 'mark to market' its stock in any PFIC. 'Marking-to-market,' in this context,
means including in ordinary income each taxable year the excess, if any, of the
fair market value of the PFIC's stock over the Fund's adjusted basis therein as
of the end of that year. Pursuant to the election, the Fund also will be allowed
to deduct (as an ordinary, not capital, loss) the excess, if any, of its
adjusted basis in PFIC stock over the fair market value thereof as of the
taxable year-end, but only to the extent of any net mark-to-market gains with
respect to that stock included by the Fund for prior taxable years. The Fund's
adjusted basis in each PFIC's stock with respect to which it makes this election

<PAGE>

will be adjusted to reflect the amounts of income included and deductions taken
under the election. Regulations proposed in 1992 would provide a similar
election with respect to the stock of certain PFICs.

HEDGING STRATEGIES

The use of Hedging Strategies, such as selling (writing) and purchasing
options and futures and entering into forward currency contracts, involves

complex rules that will determine for income tax purposes the amount, character
and timing of recognition of the gains and losses the Fund realizes in
connection therewith. These rules also may require the Fund to 'mark to market'
(that is, treat as sold for their fair market value) at the end of each taxable
year certain positions in its portfolio, which may cause the Fund to recognize
income without receiving cash with which to make distributions necessary to
satisfy the Distribution Requirement and 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.

Gains from the disposition of foreign currencies (except certain gains that
may be excluded by future regulations) and gains from options, futures and
forward currency contracts derived by the Fund with respect to its business of
investing in securities or foreign currencies, will 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 so qualify, 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

<PAGE>

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 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.

COUNSEL

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 Stockholders for the fiscal year ended July 31,
1997 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.

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

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
----
<S> <C>
Investment Policies and Restrictions........... 1
Hedging and Related Income Strategies.......... 5
Directors and Officers......................... 14
Control Persons and Principal Holders of
Securities................................... 20
Investment Advisory Arrangements............... 20
Portfolio Transactions......................... 21
Net Asset Value of Common Stock................ 23
Taxation....................................... 24
Additional Information......................... 26
Financial Statements........................... 27
</TABLE>

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

MANAGED HIGH
YIELD FUND INC.

COMMON STOCK

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

STATEMENT OF ADDITIONAL INFORMATION

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

PAINEWEBBER INCORPORATED

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

December 1, 1997

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

<PAGE>

Managed High Yield Fund Inc.
Form N-2 Cross Reference Sheet

<TABLE>
<CAPTION>
Part A
Item Number Caption Prospectus Caption
- ----------- ------- ------------------
<S> <C> <C>
1 Outside Front Cover............................. Outside Front Cover of Prospectus
2 Inside Front and Outside Back Cover Page........ Inside Front and Outside Back Cover
Pages of Prospectus
3 Fee Table and Synopsis.......................... Fund Expenses; Prospectus Summary
4 Financial Highlights............................ Financial Highlights
5 Plan of Distribution............................ The Offering
6 Selling Shareholders............................ Not Applicable
7 Use of Proceeds................................. Use of Proceeds
8 General Description of Registrant............... The Fund; Trading History; Investment
Objective and Policies; Other Investment
Practices; Special Considerations and Risk
Factors; Description of Capital Stock
9 Management...................................... Management of the Fund; Description of Capital
Stock; Custodian, Transfer and Dividend
Disbursing Agent and Registrar
10 Capital Stock, Long-Term Debt and Other
Securities...................................... Dividends and Other Distributions; Dividend
Reinvestment Plan; Taxation; Description of
Capital Stock; Special Considerations and Risk
Factors; Taxation
11 Defaults and Arrears on Senior Securities....... Not Applicable
12 Legal Proceedings............................... Not Applicable
13 Table of Contents of the Statement of
Additional Information.......................... Further Information

<CAPTION>
Part B Statement of
Item Number Caption Additional Information
- ----------- ------- ----------------------
<S> <C> <C>
14 Cover Page...................................... Cover Page
15 Table of Contents............................... Outside Back Cover Page
16 General Information and History................. Not Applicable
17 Investment Objectives and Policies.............. Investment Policies and Restrictions; Hedging
and Related Income Transactions; Portfolio
Transactions

18 Management...................................... Directors and Officers
19 Control Persons and Principal Holders of
Securities...................................... Control Persons and Principal Holders of
Securities

20 Investment Advisory and Other Services.......... Investment Advisory Arrangements; Additional

Information
21 Practices....................................... Portfolio Transactions
22 Tax Status...................................... Taxation
23 Financial Statements............................ Financial Statements
</TABLE>

<PAGE>

PART C -- OTHER INFORMATION

Item 24. Financial Statements and Exhibits

1. Financial Statements:

Included in Part A of the Registration Statement:

a. Financial Highlights for each of the three fiscal
years ended July 31, 1997, and for the period
December 7, 1993 (commencement of operations) to July
31, 1994.

Included in Part B of the Registration Statement through
incorporation by reference from the Annual Report to the
Shareholders, previously filed with the Securities and
Exchange Commission through EDGAR on October 1, 1997
(File No. 33-69260) (Accession No. 0000930413-97-000571):

a. Portfolio of Investments as of July 31, 1997

b. Statement of Assets and Liabilities as of July 31,
1997

c. Statement of Operations for the year ended July 31,
1997

d. Statement of Cash Flows for the fiscal year ended
July 31, 1997

e. Statement of Changes in Net Assets for each of the
two fiscal years in the period ended July 31, 1997

f. Notes to Financial Statements

g. Financial Highlights

h. Report of Ernst & Young LLP, Independent Auditors,
dated September 19, 1997

2. Exhibits:

a. (i) Articles of Incorporation(1)
(ii) Articles of Amendment(2)
(iii) Articles of Amendment(3)
b. (i) Bylaws(4)
(ii) Amendment to Bylaws(5)
c. None

- --------

1 Incorporated by reference to exhibit 1(a) to the initial Registration

Statement on Form N-2 filed September 22, 1993 (File No. 33-69260).

2 Incorporated by reference to exhibit 1(b) to the initial Registration
Statement on Form N-2 filed September 22, 1993 (File No. 33-69260).

3 Incorporated by reference to exhibit 1(c) to Post-Effective Amendment
No. 4 to the Registration Statement on Form N-2 filed October 3, 1996
(File No. 33-69260).

4 Incorporated by reference to exhibit 2 to the initial Registration
Statement on Form N-2 filed September 22, 1993 (File No. 33-69260).

5 Incorporated by reference to exhibit b(ii) to Post-Effective Amendment
No. 2 to the Registration Statement on Form N-2 filed January 20, 1995
(File No. 33-69260).

II-1
<PAGE>

d. Inapplicable
e. Dividend Reinvestment Plan(6)
f. None
g. Investment Advisory and Administration Contract(7)
h. Underwriting Agreement(8)
i. None
j. Custodian Agreement(9)
k. Transfer Agency Agreement(10)
l. Opinion and Consent of Counsel(11(
m. None
n. Consent of Independent Auditors (filed herewith)
o. None
p. Letter of Investment Intent(12)
q. None
r. Financial Data Schedule (filed herewith)

Item 25. Marketing Arrangements

Inapplicable. See note accompanying Item 24.2.h.

Item 26. Other Expenses of Issuance and Distribution

Not applicable to current Post-Effective Amendment; for expenses
incurred in connection with this Registration Statement; see Pre-Effective
Amendment No. 2 to the Registration Statement on Form N-2, SEC File
No. 33-69260, filed November 29, 1993.

Item 27. Persons Controlled by or Under Common Control

None.

- --------

6 Incorporated by reference to exhibit 5 to Post-Effective Amendment No.

2 to the Registration Statement on Form N-2 filed November 29, 1993
(File No. 33-69260).

7 Incorporated by reference to exhibit 5 to Pre-Effective Amendment No. 2
to the Registration Statement on Form N-2 filed November 29, 1993 (File
No. 33-69260).

8 The shares offered by the Prospectus will be offered in order to effect
over-the-counter secondary market transactions by PaineWebber in its
capacity as a dealer and secondary market maker and not pursuant to any
agreement with the Fund. Shares were originally issued in a public
offering pursuant to an Underwriting Agreement, included as exhibit
8(a) to Pre-Effective Amendment No. 2 to the Registration Statement on
Form N-2 filed November 29, 1993 (File No. 33-69260), and a related
document, included as exhibit 8(b) to Pre-Effective Amendment No. 2 to
the Registration Statement on Form N-2 filed November 29, 1993 (File
No. 33-69260).

9 Incorporated by reference to exhibit 10 to Pre-Effective Amendment No.
2 to the Registration Statement on Form N-2 filed November 29, 1993
(File No. 33-69260).

10 Incorporated by reference to exhibit 11 to Pre-Effective Amendment No.
2 to the Registration Statement on Form N-2 filed November 29, 1993
(File No. 33-69260).

11 Incorporated by reference to exhibit 14 to Pre-Effective Amendment No.
2 to the Registration Statement on Form N-2 filed November 29, 1993
(File No. 33-69260).

12 Incorporated by reference to exhibit 16 to Pre-Effective Amendment No.
2 to the Registraiton Statement on Form N-2 filed November 29, 1993
(File No. 33-69260).

II-2
<PAGE>

Item 28. Number of Holders of Securities

Title of Class Number of Record
- -------------- Holders as of
September 30, 1997
------------------

Common Stock, par value 226
$0.001 per share

Item 29. Indemnification

Incorporated by reference to Item 2 of Part C of the initial
Registration Statement on Form N-2 filed November 29, 1993 (File No. 33-69260).

Item 30. Business and Other Connections of Investment Adviser

See "Management of the Fund" in the Prospectus.

Mitchell Hutchins, a Delaware corporation, is a registered investment
adviser and is wholly owned by PaineWebber, which in turn is wholly owned by
Paine Webber Group Inc. Mitchell Hutchins is primarily engaged in the investment
advisory business. Information as to executive officers and directors of
Mitchell Hutchins is included in its Form ADV as filed with the SEC
(Registration number 801-13219) and is incorporated by reference.

Item 31. Location of Accounts and Records

The accounts and records of the Fund are maintained at the office of
the Fund at 1285 Avenue of the Americas, New York, New York 10019, at the office
of its custodian, State Street Bank & Trust Company ("State Street") at One
Heritage Drive, North Quincy, Massachusetts 02171, and at the office of the
Trust's transfer agent, PNC Bank, National Association, c/o PFPC Inc., 103
Bellevue Parkway, Wilmington, Delaware 19809.

Item 32. Management Services

None.

Item 33. Undertakings

The Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of
1933:

(ii) To reflect in the prospectus any acts or
elements arising after the effective date of
the registration statement (or the most
recent post-effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the
information set forth in the registration
statement; and

(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.

(2) That for the purpose of determining any liability under
the Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497 under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(3) That for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.

(4) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.

II-3
<PAGE>

(5) To send by first class mail or other means designed to
ensure equally prompt delivery, within two business days of receipt of
a written or oral request, any Statement of Additional Information.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York, on the 30th day of September, 1997.

MANAGED HIGH YIELD FUND INC.

By: /s/ Dianne E. O'Donnell
--------------------------
Dianne E. O'Donnell
Vice President and Secretary

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Margo N. Alexander President and Director September 30, 1997
---------------------------------------------- (Chief Executive Officer)
Margo N. Alexander *

/s/ E. Garrett Bewkes, Jr. Director and Chairman September 30, 1997
---------------------------------------------- of the Board of Directors
E. Garrett Bewkes, Jr. *

/s/ Richard Q. Armstrong Director September 30, 1997
----------------------------------------------
Richard Q. Armstrong *

/s/ Richard Burt Director September 30, 1997
----------------------------------------------
Richard Burt *

/s/ Mary C. Farrell Director September 30, 1997
----------------------------------------------
Mary C. Farrell *

/s/ Meyer Feldberg Director September 30, 1997
----------------------------------------------
Meyer Feldberg *

/s/ George W. Gowen Director September 30, 1997
----------------------------------------------
George W. Gowen *

/s/ Frederic V. Malek Director September 30, 1997
----------------------------------------------
Frederic V. Malek *

/s/ Carl W. Schafer Director September 30, 1997
----------------------------------------------
Carl W. Schafer *

/s/ Paul H. Schubert Vice President and Treasurer (Chief September 30, 1997
---------------------------------------------- Financial and Accounting Officer)
Paul H. Schubert

</TABLE>

<PAGE>

SIGNATURES (Continued)

* Signature affixed by Robert A. Wittie pursuant to power of attorney
dated May 21, 1996 and incorporated by reference from Post-Effective
Amendment No. 25 to the Registration Statement of PaineWebber RMA
Tax-Free Fund, SEC File No. 2-78310, filed June 27, 1996.

<PAGE>

MANAGED HIGH YIELD FUND INC.

EXHIBIT INDEX

Exhibit Document Description
------- --------------------

<S> <C>

a. (i) Articles of Incorporation [previously filed as exhibit 1(a) to the Registration Statement to
Form N-2 filed September 22, 1993 (File No. 33-69260)]

(ii) Articles of Amendment [previously filed as exhibit 1(b) to the Registration Statement to Form
N-2 filed September 22, 1993 (File No. 33-69260)]

(iii) Articles of Amendment [previously filed as exhibit 1(c) to Post-Effective Amendment No. 4 to
the Registration Statement on Form N-2 filed October 3, 1996 (File No. 33-69260).

b. (i) Bylaws [previously filed as exhibit 2 to the Registration Statement on Form N-2 filed
September 22, 1993 (File No. 33-69260)]

(ii) Amendment to Bylaws [previously filed as exhibit b(ii) to Post-Effective Amendment No. 2 to
the Registration Statement on Form N-2 filed January 20, 1995 (File No. 33-69260)]

c. None

d. Inapplicable

e. Dividend Reinvestment Plan [previously filed as exhibit 5 to Pre-Effective Amendment No. 2 to
the Registration Statement on Form N-2 filed November 29, 1993 (File No. 33-69260)]

f. None

g. Investment Advisory and Administration Contract [previously filed as exhibit 7 to
Pre-Effective Amendment No. 2 to the Registration Statement on Form N-2 filed November 29,
1993 (File No. 33-69260)]

h. None

i. None

j. Custodian Agreement [previously filed as exhibit 10 to Pre-Effective Amendment No. 2 to the
Registration Statement on Form N-2 filed November 29, 1993 (File No. 33-69260)]

k. Transfer Agency Agreement [previously filed as exhibit 11 to Pre-Effective Amendment No. 2 to
the Registration Statement on Form N-2 filed November 29, 1993 (File No. 33-69260)]

l. Opinion and consent of counsel [previously filed as exhibit 14 to the Pre-Effective Amendment
No. 2 to the Registration Statement on Form N-2 filed November 29, 1993 (File No. 33-69260)]

m. None

n. Consent of Independent Auditors (filed herewith)

o. None

p. Letter of Investment Intent [previously filed as exhibit 16 to Pre-Effective Amendment No. 2
to the Registration Statement on Form N-2 filed November 29, 1993 (File No. 33-69260)]

q. None

r. Financial Data Schedule (filed herewith)
</TABLE>

<PAGE>

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Financial
Highlights" in the Propectus and "Auditors" in the Statement of Additional
Information and to the incorporation by reference of our report dated
September 19, 1997, in this Registration Statement (Form N-2 No. 33-69260)
of Managed High Yield Fund Inc.

ERNST & YOUNG LLP

New York, New York
September 29, 1997

<ARTICLE> 6
<CIK> 0000907015
<NAME> MANAGED HIGH YIELD FUND INC.
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 82,785
<INVESTMENTS-AT-VALUE> 85,517
<RECEIVABLES> 2,371
<ASSETS-OTHER> 40
<OTHER-ITEMS-ASSETS> 6
<TOTAL-ASSETS> 87,934
<PAYABLE-FOR-SECURITIES> 1,496
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 206
<TOTAL-LIABILITIES> 1,702
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 90,459
<SHARES-COMMON-STOCK> 6,032
<SHARES-COMMON-PRIOR> 6,032
<ACCUMULATED-NII-CURRENT> 170
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7,130)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,733
<NET-ASSETS> 86,232
<DIVIDEND-INCOME> 31
<INTEREST-INCOME> 8,830
<OTHER-INCOME> 0
<EXPENSES-NET> (1,106)
<NET-INVESTMENT-INCOME> 7,755
<REALIZED-GAINS-CURRENT> 898
<APPREC-INCREASE-CURRENT> 5,275
<NET-CHANGE-FROM-OPS> 13,928
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7,600)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 6,328
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (8,028)
<OVERDISTRIB-NII-PRIOR> (1)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 742
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,106
<AVERAGE-NET-ASSETS> 82,586
<PER-SHARE-NAV-BEGIN> 13.25
<PER-SHARE-NII> 1.29
<PER-SHARE-GAIN-APPREC> 1.02
<PER-SHARE-DIVIDEND> (1.26)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.30
<EXPENSE-RATIO> 1.34
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>